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This stock market decline could go down in history as one of the worst crashes of all time, and it gives me no pleasure to see my dire warnings come true. I have dreaded this day as often as I have predicted it.
In July, our Safe Money Report declared the Dow would fall to 7,200. And virtually every day since, our e-mails have warned, nagged, cajoled and shouted the same message from the rooftops.
I prayed it would not come to pass. But now that it’s here, I have a new prayer …
That you are out of danger and ready for the worst;
That the worst will strike swiftly and end swiftly;
That, once we hit bottom, no matter how ugly the future may appear, you, we and others will have the fortitude to reinvest, help get the country back on its feet, and move on to better times.
Today and for the foreseeable future, however, the market is going down. Asian stock markets have crashed this morning. The global economy is sinking rapidly. Deflation is sweeping the globe.
(For more on deflation, be sure not to miss the important alert we sent you October 23, as well as my October 6 issue “Sinking Rapidly into Depression.”)
Yes, our long-standing forecast for this phase of the decline is 7,200 on the Dow. But do not assume that will be the final bottom.
With a global depression striking rapidly … with most U.S. corporations likely to sink into the red … and with many going bankrupt … it would be foolish to expect that any line drawn on any chart can be a reliable barrier to further sharp declines.
In his testimony before Congress yesterday, former Fed Chairman Greenspan confessed that this financial crisis may be the worst in 100 years. If that’s the case, then it’s not beyond the realm of reason to anticipate a stock market decline that’s also among the worst in 100 years.
If you are not ready — if you followed a broker who told you to just “buy, buy, hold, hold” — here’s what to do:
Step 1. Call your broker immediately and tell him to sell HALF of your stocks and stock mutual funds at the market. If he tries to talk you out of it, don’t let him. And if you’d like to be prepared for the counter-arguments he may give you, see my September 30 issue, “Urgent from Martin: Your Last Chance to Act.”
Important: Do not be deterred by any trading halts if they should occur. In a crash, if the Dow Jones Industrials falls 10% prior to 2 PM Eastern Time, the New York Stock Exchange will declare a one-hour trading halt.
Alternatively, if the Dow falls the 10% between 2 PM and 2:30 PM, the NYSE will declare a half-hour trading halt. However, after 2:30 PM, the 10% limit will no longer be in effect. Therefore, even in a worst case scenario, there should be ample opportunity for you to execute your orders to avoid further damage.
Step 2. We may get a sharp rally at any time, especially if the government intervenes. If so, use it as your opportunity to sell the balance. This is where I believe your broker or adviser can be of value to you, helping you set exit price targets (limit orders) and giving you his opinion regarding how much of a rally might be reasonable to expect.
Step 3. If you are working with a money manager, ask if he has strategies specifically designed to profit in bear markets. If the answer is “yes,” switch the amount you and he feel are appropriate to that strategy, erring on the side of more rather than less. If the answer is “no,” ask him to follow steps #1 and #2 above. Then, move your funds to a manager who does deploy bear market strategies.
(For more information on bear market strategies, see Bear Market Defense Forum Transcript Part I and Part II.)
Step 4. Just because your money is in cash, don’t assume that cash is safe. There’s a real chance the global banking bailout will fail.
(For the reasons, see our recent whitepaper submitted to Congress on September 25, “Proposed $700 Billion Bailout Is Too Little, Too Late to End the Debt Crisis; Too Much, Too Soon for the U.S. Bond Market.” Also see our recent Congressional submission, “Many Banks and Thrifts Overly Reliant on ‘Hot Money’ Deposits: Why an FDIC Coverage Increase to $250,000 May Not Stop Bank Runs and Could Cause Other Collateral Damage.”)
If the global bailout does fail, as I fear it will, an international banking holiday could ensue, trapping your cash when you may want or need it the most. To avoid this danger, move as much of your cash as you can to U.S. Treasury bills or a Treasury-only money market fund. (For more information on how to buy Treasury bills, be sure to watch our 1-hour emergency Q&A video and read this recent message from our affiliate.)
Step 5. If you continue to hold stocks that you’re unwilling or unable to sell, carefully consider the instructions in my November 2007 report, “How to Protect Your Stock Portfolio From the Spreading Credit Crunch.”
Step 6. A crisis like this one can be a nightmare for nearly everyone. But crisis is also opportunity — for the country to heal itself and for you to build your wealth.
Investors who have followed our recommendations to use contrarian investments are doing just that right now. The more the market falls, the more money they make. And since markets usually fall faster than they rise, the speed and magnitude of the potential profits are among the greatest of any time in modern history.
In 1929, my father borrowed $500 from his mother and used it to sell short the stock market. He told me that, by the time the market hit bottom, he had close to $100,000. And he didn’t start before the crash; he actually began in April of 1930 after the ’29 crash.
Today, fortunately, you don’t have to short the market to make money in a crash. You can use investments that limit your risk and require no borrowing or margin.
Consider these strategies for a portion of your funds. You can do it on your own. Or, if you’d like some guidance, call or write.
The number of Weiss Research’s inverse ETF trading publication is 800-393-1706. Or, for a managed account program dedicated to bear market investing, call our separate affiliate at 800-814-3045. They can also advise you on how to exit the market in an orderly fashion.
No matter what, do not delay. But also do not act in panic. Your response to this crash should be both prompt and planned; both bold and prudent.
And no matter how bad the future may appear, do not forget what I have been saying from the outset: This is not the end of the world. Our country has been through worse before, and we survived. We will survive this time as well.
Good luck and God bless!
Martin
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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