OCTOBER 2018 DESERT OF THE REAL ECONOMICS INVESTMENT
NEWSLETTER
We are moving into the Fourth Quarter of 2018, a year that
brought good market gains in a streak going back to 2009. Last month’s
newsletter addressed some protective strategies for the eventual pullback. Historically,
October is not one of the stronger months for the stock market. This October
was not much different. Let’s take a look.
A.
DJIA. The Dow began October at 26,500. As of the
30th, it has dropped to 24,541.
B.
S&P 500. The S&P started October at a
little over 2900. It has since fallen to 2,659.
C.
NASDQ. This index stood near 8,000 on October 1
and has since dropped to 6700.
The Russell 2000, a broader index of stocks, got mauled. It
began October at 1,673 and fell to 1477 as of October 30th.
ARE WE THERE YET? ARE WE THERE YET? ARE WE THERE YET? ARE WE
THERE YET?
How many parents have reached over into the backseats of
their cars to slap their bothersome brats into silence when hearing this whine? By relevant analogy, hundreds, perhaps
thousands of market analysts, journalists, economic pundits and Facebook
foghorns are telling us that a major bear market is coming and, by implication,
“are we there yet?” An equal such cohort says that we are not. The Author Rob
hasn’t a clue if “we are there yet?”
What we can do for market downturns is the same thing we do
for market upswings. We develop strategies, improve upon them, and deploy them
when necessary. The problem is that it is relatively easy to make money in an
upwardly moving market. Making money in a downturn requires strong short skills
or expensive money managers.
In the September edition of the Desert of the Real Economics
Investment Newsletter, we addressed strategies for a market downturn such as
using stop-loss orders to protect your gains and trimming your positions and
taking profits. This month we will look at some advanced strategies that are
only suitable for the seasoned investor.
WHAT GOES UP MUST COME DOWN. AND WHAT GOES DOWN MUST COME
UP. BOTH AT ONCE.
Inverse funds are exchange-traded funds that are structured
to move inversely, or opposite of, a particular market index or asset
segment. Let’s look at a couple of
inverse funds.
·
SPDN. This ETF seeks a
return that is -100% inverse of the return of its benchmark index for a single
day. (More about this single-day
issue later.) So, if you predict that the S&P 500 will fall over the course
of the day, you could by this ETF to take advantage of that pullback.
·
CHAD. This ETF seeks
daily investment results, before fees and expenses, of 100% of the inverse of
the performance of the CSI 300 Index. The CSI is a Chinese
stock market index.
Inverse funds can
also be purchased that seek 2x and 3x of their relative index. For example,
SPXL is designed to return -300% of the S&P 500 index. These funds use
leverage to achieve these results.
JUST DON’T BET
THE HOUSE
As in anything in
life and investing, there are risks. A major risk identified earlier is that
they should not be held overnight. Most ETFs are reset daily and unless you are
in a trending market, volatility in the index can lower your returns.
There are also
compounding risks that can occur when inverse ETFs are held over several days of choppy movements and volatility. Here is what can happen:
ETF Daily
Starting Value
|
Benchmark
Return
|
ETF Daily Ending
Value
|
|
Day 1
|
$100
|
+10%
|
$110
|
Day 2
|
$110
|
-10%
|
$99
|
Day 3
|
$99
|
+10%
|
$108.90
|
Day 4
|
$108.90
|
-10%
|
98.01
|
Day 5
|
98.01
|
+10%
|
$107.81
|
Day 6
|
107.81
|
-10%
|
$97.03
|
As you can see, you started out with $100. The index fell three of six days and increased three days. But you lost $2.97 because of the effect of negative compounding.
For the right
investor, inverse and leveraged ETFs can be valuable tools. But for the
inexperienced, they can be open-blade buzz saws.
THE NEW PRODUCTS
JUST KEEP COMING!
In last month’s
newsletter, we announced the development of the Black Box Barometer, an
economic and market direction indicator. The Black Box Barometer uses several
leading indicators to gauge market and economic activity.
Monthly subscriptions
are available at the Desert of the Real Strategic Investments website. The
Black Box Barometer has not yet produced accurate economic and investment
predictions, but it will. By using our alternative facts, our predictions cannot
be wrong. Subscriptions cost $120,000
per month. That sounded like a good round number and it is enough keep our brokers
in the Cook Islands, Somalia,
South Sudan, Mongolia, Uzbekistan and Yemen from winning their lawsuits against
us for unpaid commissions.
Two more market
monitors were incorporated into the Black Box Barometer this month, the Dumber
Neighbor Distribution Derivative and the trump iPhone Irrelevancy Oscillator.
WARREN BUFFFET ON
BUBBLES AND BUBBLE HEADS
Warren Buffet,
one of the most successful and well-known investors
in
America describes an
asset bubble in succinct and humorous terms. In a recent CNBC interview,
entitled “Warren Buffett on why bubbles happen: People
see neighbors 'dumber than they are' getting rich,” describes a bubble as a situation where:
"People
start being interested in something because it's going up, not because they
understand it or anything else. But the guy next door, who they know is dumber
than they are, is getting rich and they aren't," he said. "And their
spouse is saying can't you figure it out, too? It is so contagious. So that's a
permanent part of the system."
Under contract to Desert of the Real Economics Strategic
Investments, our Russian consultant Petrov “Potemkin Village” Vasilovitch, along with his ex-KGB comrades, have developed algorithms to
monitor cell phone call traffic in selected zip codes that have a high
concentration of dumber neighbors. The higher the traffic volume, the closer we
are to the bubble bursting.
