WASHINGTON, February 8, 2016 – We continue our rather unpleasantly bearish coverage started in our earlier article, with the Dow now down a staggering 348 points, perched precariously at 15,855.95 or so (it varies by the second), off 2.15 percent. The S&P 500 and the NASDAQ are off similarly but actually worse, with the NAZZ off a catastrophic 120+ points (2.75 percent) at roughly 117.
To sum up what we think has been going on in early 2016 markets, we offer this concluding remark excerpted from a February 8, 2016 article by Yonathan Amselem, which is currently online via the Mises Institute website. (Hat tip to ZeroHedge.)
“The political class has completely disrupted the American structure of production, made American workers uncompetitive, snuffed the life out of entrepreneurs, and burdened the entire nation with a debt obligation the size of Jupiter. The US economy is not the strongest and most durable in the world — it is an unskilled thirty-two-year-old waiter crashing at his parent’s place and trying to pay down an $80,000 international relations degree.”
As an old merchant marine buddy once said to me, “Truer words was never spoke.”
As the market plummets and as we generally must now avoid “buying the dips” in a bearish environment, stocks in a few defensive areas may still be bought, a little at a time, in line with standard bear market truisms that have mostly worked for roughly a century of trading action.
The following defensive areas might not necessarily be regarded as long term in vestments—although some can. But they tend to remain flat to only modestly down when The Powers That Be (TPTB) get overly smart and knock the props out of the market and the economy.
This week’s defensive trading tips
These are dismal times for small investors as well as those who are watching their 401(k)s vanish into thin air with every monthly statement.
While the Maven can’t just step in and halt the mass bloodbath in individual and 401(k) accounts or even in his own, he can offer some standard countermeasures that, historically, have at least staunched the bleeding until the machine-led selling siege is lifted.
Looking back, the general strategy that’s worked well for investors since 2009 has been to buy stocks on “the dips”—those days when stocks take a hit. In a bull market scenario like this one, the idea is to catch bargains before the next move up occurs.
That certainly hasn’t been working lately. Right now, it’s clear that markets are in at least a corrective phase. More likely, we seem to be on the edge of a short term bear market. Worse, if certain key levels don’t hold this week, we may find ourselves in a potentially lengthy secular bear market which is a truly nasty environment for investors.
Hence, the “buy on the dips” strategy needs to do a 180. For now, it’s much wiser to SELL on rallies and AVOID BUYING on dips, with few exceptions. The object is to get portfolios to at least 50 percent cash and to stash the remainder for now in high-yielding large company stocks, decent TERM preferred stocks, and classic defensive stock sectors.
Here are our suggestions, based on defensive maneuvers that have generally worked over the last century. Note: If you’re interested, get into these gradually. When market conditions are really negative, stocks that are cheap today tend to be even cheaper tomorrow.
Consumer non-cyclical stocks. (Examples: grocery stores and food companies; purveyors of liquor, wine and beer; and tobacco companies). No matter what happens, everyone still has to eat. Hence, relatively safe investments in this sector include grocery stores and food companies that pay a dividend and are strong enough to weather tough times; companies that manufacture and sell alcoholic beverages, since, unfortunately, people under stress tend to consume more of these products; and finally, those dreaded tobacco companies, largely because they, too, like those alcoholic beverage purveyors, offer a product that’s very much in demand when hard times hit.
BTW, the Maven isn’t prepared to take a whole lot of moralistic crap about that last selection. This kind of vicious market is where the rubber meets the road. It’s clear that no one in the government or on Wall Street really cares about your portfolio. However, you do. So why should you give a damn what you put in it, liberal pieties aside?
Those evil tobacco companies tend to remain stable in this environment. Plus, they pay whopping dividends and rarely cut them. When dealing with investing, if you are encumbered by moral scruples, PC or otherwise, you don’t belong in the stock market.
Defense stocks. This is a slightly longer term play. Since Obamanation has decimated our armed forces over the past seven plus years, his eventual successor, even if it happens to be a Democrat, is going to have to build this sector up again to some extent. Either that, or just hand over the keys to Washington to Russia and the ISIS collective. ‘Nuff said.
Gold. (Examples include ETFs based on gold indexes, select gold miners, and, for the extremely pessimistic, the yellow stuff itself.) Gold’s classic good times occur when the home currency is being debased and/or when the world and international markets seem to be going to hell. Like now. That’s because gold is viewed by most people as the only true store of value since there’s only so much of it.
This notion hasn’t worked too well for about the last three years. The reason? Central banks, sovereign wealth funds, and TPTB (The Powers That Be) have been manipulating the gold and precious metals markets to keep them flat to down while allowing themselves to buy, sell or trade gold at ridiculously low prices so they can have more and we can have less. But there is a possibility this week, that gold will break out of its long term resistance level. We might be able to catch a wave here.
Utilities. (Including telcos and water.) This is another classic bet, similar to consumer durables. You have to buy food, no matter how bad things get. Plus, you need to keep warm in the winter and cool in the summer. And you also need to communicate with your fellow preppers to make sure you’re all ready for Armageddon. That means you load up on utility stocks and what at least used to be known as telephone companies (telcos or telcons).
Happily, both these sectors tend to pay swell dividends. Hence, even as markets have deteriorated over the past two years, these stocks have been going up. It’s always nice to have a counter-trend in your favor. Plus, those swell dividends don’t hurt either.
Careful, though. When markets at last decide to go up again and when general bond yields start to increase rather than decrease, these high-dividend paying stocks will be among the first to get a haircut. Unfair? Yeah. But when has that ever stopped Mr. Market from doing his thing?
We’re talking government bonds here. Other bonds, including many municipals, are trading too nervously. Long term government bonds, like utilities and telcos, are where people are trying to hide right now. Just don’t chase these too hard.
Not a big investor? Try the long-term government bond ETF known as TLT.
Next: Portfolio triage: What to dump in a bear market.