Financial Options

Just a few thoughts on investing in the current financial situation. Most of this is targeted to people that have already liquidated their stock holdings or were waiting to get into the market. If you're already in stocks, you have a tough decision - is the bottom near or not. If we're at or near a bottom, your best bet is to hold out for a rebound. If we aren't near the bottom, you might want to take your losses and cash out to buy back in closer to the bottom. I lean to thinking we're near bottom, but that is admittedly a guess.

• Gold, silver, etc. We always hear about precious metals as a «flight to quality» whenever the markets get bloody. Precious metals are appropriately a hedge against inflation. The current threat is deflation. That means that anyone moving into gold right now is going to get hit with a double whammy - loss of value from deflation and loss of value when things calm down and all the «flight to quality» money goes back to other assets. Does that mean you can't make money with precious metals? No. You could get lucky and time the market perfectly, but I wouldn't count on it.
• Cash. Until the banking sector settles, cash (including T-bills and cash in FDIC insured bank accounts) is not a bad place to be, especially if you are risk averse. I have a good chunk of my net worth in cash at the moment, essentially all of my liquid net worth. The dollar is, for American citizens, the ultimate «flight to quality.» It's better than gold, unless things get to the point of blood in the streets - in that extremely unlikely case, gold in a Swiss vault isn't going to help much, you'd be better off with canned goods and ammunition.
• Bonds. There are probably some good AAA rated corporate bonds out there that have been sufficiently battered by rumors to make good buys. That said, interest rates are very low right now and bond prices move opposite rates. That means when rates rise, which they will eventually, those bonds will fall in value. There's also enough uncertainty in credit markets that today's top rated company could be junk rated tomorrow, which could cost you big. The same applies to municipals. If you want to go the corporate bond route, look hard at those balance sheets. Treasury bonds are yielding less, but much safer and in this environment, it may be worth the trade-off. But while there is no default risk with Treasury bonds, there is an unusual risk with Treasuries right now - when things calm down, money will leave them heading back to corporate bonds and stocks, yields will rise and prices will drop.
• Stocks and options. Right now most stocks are purely speculative. If you want to play that game, I'd skip stocks and go for options, which are undisguised speculation and offer magnified returns. I made 20% on a paper play on Goldman Sachs call options since Monday morning with a total of about 5 minutes effort. (Unfortunately I hadn't had time to transfer real cash into the account yet, so I was just «virtual trading». If you want to have some fun in distressing times, you might want to give the virtual trading a try.) If you are interested in options, contact me and I'll email you back with a referral that will get you $100 in your account. (I'll also get $100 in mine.) You have to put in $500, so that means you start with a 20% return. You can also virtual trade in the account once it's open to learn the ropes.
• Forex. Currency markets are all over the places with the major currency values up and down as much as 2% in a single day. In fact, they're going from up 2% to down 2% in a single day. That's not really investing, but it is a chance for speculative trading. Start by checking out these three trading systems: Forex Brotherhood, Stealth Forex and Forex Autopilot Winners.
• Countercyclical stocks. Some stocks are less affected by negative swings in the market and a few actually run counter to it. Utilities are good because of their stability, but remember that they often have big credit exposure. Look for utilities with strong balance sheets in terms of available cash and debt ratios. In other sectors, be sure to check the individual stocks for the same things and to check the company's movements compared to the market - you're looking for companies that moved opposite the S&P 500 or (better yet) that moved up with reasonable consistency despite the market. Back to gold...some gold mining stocks have been countercyclical. Some health care industry stocks, especially hospitals, are countercyclical. Other bets to research - entertainment, alcohol and cosmetics - in bad times, people want a cheap way to have a good time for a little while. Again, research, research, research for sound fundamentals and low debt exposure.