The G20 Met This Weekend

The G20 met this weekend and as best I can tell, they decided to do nothing in particular. All the talk about US Dollar hegemony came to nothing. I don't think this will be too positive for the markets on Monday. However from a technical analysis perspective many "in the know" are calling for a bounce for the next few weeks. I'm not "in the know" so I am continuing to hedge my bets. Long select alternative energy stocks, short just about everything else.

Here is an email I sent out to my friends and family last Thursday with a little more detail on my current strategy:

It's been a crazy few months to say the least since the last time I wrote to this group. As a whole, the US stock market is down about 44% from the peak. I wish I could tell you that it is almost over, but sadly I cannot. I think it will be at least a year, and possibly as late as early 2012 before we finally hit bottom for the stock market. Also, I think the housing market is probably on a similar time-line. As has been the case so far, the market will not go straight down. There will continue to be rallies of false hope as people try to time the bottom. They will fail. I think the Dow will go to at least 6000, and possibly as low as 3000. I think it will be a minimum of 10 years and a maximum of 25 years before the stock market makes a complete recovery to its 2007 highs. I hate to be so pessimistic but I am trying to give people some alternatives to not loosing any more money and possibly make a little back in the process. I know some people have been reluctant to cash out of their 401k's for fear of a 4% early withdraw tax or whatever it is. Huge downside risks remain. 4% could easily be lost tomorrow. If I had to pay a 10% fee to get out of a long position in US or global equities, I would do so happily. Time is of the essence. Another crash could happen today or within a couple weeks.

Before I get to my current portfolio allocation, I want to give a little note about my experience so far throughout this decline. I had never shorted the market before this experience and I had some real growing pains. At one time I was down about 20% from my personal peak last November/December. I got a little too reckless with shorting the market during a couple bounces and took some losses. At this time, I've managed to get back to break-even and am probably up 5% over the last year. I do not mean this to brag or gloat. Far from it. I just want to give you the perspective that if you've had some losses, it is possible to recover. But you must be smart and cannot rely on letting the market recover on its own.

Right now, the market is at a critical point. The S&P500 is within spitting distance of a major support level. If it breaks significantly below 840 again in the next couple of days, it will probably drop another 15% or so before Christmas. There is also a possibility of a bounce that could last anywhere from 2-6 months before it continues downward. I think the bounce is less likely at this point, but it is definitely a possibility. However, my opinion is that to count on a bounce is just gambling at this point. It is not a high probability bet.

On the other hand, there are some alternative energy companies that are starting to look incredibly cheap. I've actually started buying a sizable position in some of these companies to balance out my short position in the market (a position that moves opposite to the market). It is likely that all of the alternative energy stocks I list below will still go down in value over the next few months. However, this is the ONE industry that is pretty much guaranteed to do well in the next couple of years and Obama has explicitly guaranteed his support. I will try to do another post when I decide to take a net long position in alternative energy, probably in then next 12 months. When that happens, there will be a TON of money to be made. I think this is the best hope for those who have lost 40% or more so far in the market so far. The timing will be critical though. I do not want to jump in with both feet too early.

At this point I am taking a fairly balanced position "longs" and "shorts". This is a "hedged" approach that should do OK regardless of which direction the market goes from here. That is to say that the alternative energy stocks should offset the "short" positions if the market goes up from here. And the shorts will hopefully offset any losses from alternative energy stocks over the next few months if, as I project, the market continues to tank. All the alternative energy companies listed are among those I consider best equip to weather the storm.

One of the "shorts" I am listing below is an "Ultra-short Consumer Services" (SCC). Earlier this year I mentioned another Ultra-Short in the real estated industry (SRS). I ended up getting burned on that one because it didn't accurately track the underlying index and wasn't able to meet its objective of providing 2X the inverse returns of the real estate index it tracks. As far as I can tell SCC does a much better job tracking its underlying index. As a note, I am not invested in SCC because I get my short exposure through Put options instead (a much more complex trading vehicle). However I am invested in GRZZX. I do not recommend going 100% short or 100% long. We are in deflation and return OF your capital is more important than a return ON your capital. If you balance your long positions with short positions you should experience much less volatility.

30% Alternative Energy Stocks
FSLR- First Solar, the global solar energy leader by installed cost to the end user.
WFR- MEMC, a solar silicon manufacturer with a huge amount of cash in the bank and still growing quickly
FAN-an ETF for the wind industry
TIMNF- Timminco, an up and coming solar silicon company with a new process that makes solar silicon at half the cost of the bigger players. Timminco is traded on the Canadian exchange.
ABAT- Advanced Battery, a quickly growing lithium ion battery company located in China

30-40% Short equities (these move in the opposite direction as the market)
GRZZX Grizzly Short Mutual fund. This is the best purely short mutual fund that I've been able to find. Unfortunately it has a minimum investment of $10K. If this fits into your price range, I highly recommend it. It seems to be very well managed.
SCC Consumer Services Ultra-short ETF. Careful this one is very volatile. It will double gains if the market continues to slide, but losses will be doubled as well if the market recovers (highly unlikely, in my opinion).
RWM Short Russel 2000 index
SH Short S&P 500 index

30-40% cash, treasuries, yen and fixed income
Cash in a FDIC insured savings account (less than $100K per account. current limit is $250k but that could conceivably change back to $100k with little notice)
FDIC insured CDs
IEF and IEI ETFs that are backed by US treasuries
FXY an ETF backed by Japanese yen

Gold and Silver are a wild card
Currently, my entire IRA is in gold and silver. I've taken massive losses to my IRA because of this. Nevertheless I believe precious metals will recover quickly once the deleveraging is done (sometime in the next year). In the meantime, at this point they look like they could go much lower. Gold could go as low as $550 or so before it finally hits bottom. I have no estimate on how low silver could go. Therefore I think it would be prudent to be conservative with precious metals investment until the prices have signaled a reversal.

Finally, if you haven't been following Mish Shedlock at http://globaleconomicanalysis.blogspot.com I highly recommend you check out his blog. Regularly. At least a couple times a week. It is by far the most accurate analysis on this crisis anywhere. The information presented on his blog is truly invaluable. Mish also manages two funds that have done very well during this crisis. The minimum investment is $150k. A little steep for me but some people or their parents might fit this criteria. If you have the means and don't want to manage your own money, I recommend looking into going with Mish.

Last but not least, I am not a professional investment adviser. This post should not be considered investment advice. This is my perspective and my current approach to investing based on the research I have done. Whatever investment decisions you make (including doing nothing), you do so at your own risk. As they say in the investment community, do your own due diligence.

For full disclosure, I am personally invested in FSLR, WFR, ABAT, TIMNF, FAN, GRZZX, IEF, IEI, FXY, GLD, SLV, and a variety of put options on stocks that i think will continue to decline.