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	Recession … What’s New?
	Seven Steps to Profiting in a Bear Market

	MaryEllen Tribby Publisher
	Jedd Canty Business Director
	Jon Lewis Managing Editor
	Nicole Reynolds Marketing
	Jon Herring Editor

	Charles Delvalle
	Andrew M. Gordon
	Dr. Russell McDougal D.D.S.
	Rick Pendergraft
	Chris Johnson

Tuesday, February 5, 2008

A Message from MaryEllen Tribby, Editor of IDE

Dear IDE Reader,

If the 1,500 point drop in the Dow during the first three weeks of January didn’t get the attention of investors, we hope today’s 370 point decline serves as a wakeup call. By every definition we know of, it’s a bear market.

This is no time to ignore the evidence and “hope” for the best. But neither is it a time to run and hide. Prepare properly and a bear market can make you a fortune.

So, how should you invest in a bear market?

Well, fundamentally it’s no different than how you should invest in a bull market. Keep reading and IDE analyst Jon Herring will show you what I mean...

Sincerely,

MaryEllen Tribby
Publisher
Investor’s Daily Edge


	Dr. Russell McDougal

Recession … What’s New?

The word “recession” now spills forth from most all of the economic pundits. That is the consensus prognostication for 2008 and all are looking for ways to escape the coming pain. Is there good reason to be freaking out?

There are several definitions of “recession.” For the purposes of this article, I’ll use the most common one of “two or more consecutive quarters of negative GDP growth.” At times it’s hard to fathom how so many citizens get worked up over a percent or two decline of national production. Is that really a legitimate reason for economic panic? The glass is still 98- or 99-percent full. Or is it?

Trusting government statistics is nothing less than an extreme sport these days. Theirs are the figures that give us the official pronouncements of “recession.” Let’s look at what they’ve brought our way over the recent years.

This chart is from John William’s Shadow Government Statistics report http://www.shadowstats.com/. This site is a must bookmark. The red line shows the officially reported U.S. GDP. The blue line shows GDP calculated on a more historically accurate basis before Big Brother entered into the business of outlandish manipulation of reported data.

Those of us who claim to be smarter than a fifth grader can clearly see two or more consecutive quarters of negative growth repeatedly this decade on the above chart (blue lines). It is because of this chart that I continue to say we’ve been in and out of recession throughout the 2000s. Now we’re heading toward an “officially recognized” recession. That can’t be good. What’s so special about this one that it can’t be denied?

Here’s another really ugly perspective that explains why you’re eating Spam earlier and earlier each month.

In this work of fiction the red line shows government-reported inflation. The blue line shows inflation as it used to be reported in the 1980s. Which do you trust?

GDP and inflation need to be examined together! If you produce five percent more in a given year and true price inflation is also five percent, you’ve made nothing more. If you make less than five-percent more in a given year, you’ve lost ground. Hello.

The above chart shows true inflation in a recent 10- to 12-percent range. There are money printing reasons behind this atrocious figure. They are really gearing up now.

Now, let’s look back at the “recession” argument. If inflation, as measured by rising prices, is greater than productivity (GDP), we are in a period of negative growth. That is recession. Look back at the first chart. The feds tell us we’ve grown as much as four percent annually this decade. One to minus three percent is clearly more representative as shown by the blue line.

Reviewing the second chart will show you rising prices as a direct result of ongoing currency mismanagement. The only growth seen is in expenses. You’ve been living in an actual recession for most of this decade. Let’s hope we’re not soon forced to learn the official definition of a “depression.”

Invest resourcefully,

Rusty

P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

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Seven Steps to Profiting in a Bear Market


Jon Herring

IDE reader DL in Seattle wrote in to ask a question that has been on a lot of readers’ minds:

“From everything I gather, it appears that the U.S. markets are entering bear market territory and that an economic recession is upcoming. Does the Investor’s Daily Edge team believe we are in a bear market and that a recession is imminent? And if so, how should I invest differently?”

I don’t know of an “official” definition of a bear market, although there are a few definitions that are generally accepted. When the market drops 10 percent, it is generally considered a correction. Fifteen percent or more and it’s a bear market. By that definition, we are in a bear market.

Another definition of a bear market is when the S&P 500 (SPX) closes a month below its 20-month moving average. In January, the SPX did just that. The last time the index crossed below this line in the sand was seven years ago.

The technical definition of a recession is two quarters in a row of negative GDP growth. We won’t know if that’s the case until after it has occurred, but it appears likely the U.S. is entering a recession.

But even if we are in a bear market and the early stages of recession, you shouldn’t let that change the way you invest. Generally, you want to do the same things in a bear market as you would in a bull:

Diversify broadly and allocate your holdings across multiple asset classes. Having your entire portfolio in stocks is a bad idea even in a bull market. It’s a horrible idea in a bear market.
Insist on buying truly great companies with a strong competitive advantage at a price that offers a wide margin of safety. In a downtrending market, the converse applies. In that case, it makes sense to allocate part of your portfolio to shorting (or buying puts) on poorly managed and significantly overvalued companies.
Stick to reasonable position sizes. Nothing can destroy your returns faster than taking on a position that is too large. Five percent of your overall portfolio is generally considered the upper limit. Even if you lose 20 percent of this amount, the total effect on your portfolio is only a 1 percent loss.
Mind your stops. Risk management and capital preservation are the keystone of successful investing. You will rarely be able to time your sells near the top. Trailing stops are the best way we know to avoid selling too early ... or worse, too late.
If you are trading for the short or medium term, buy what is hated and sell what is loved. When conditions feel the riskiest, when there is “blood in the streets” and seemingly no bottom in sight, it is usually the best time to buy. And when investors and the media are most bullish, it is usually best to sell.
Avoid trying to catch a falling knife. If you find an undervalued stock in a falling market, wait for a clear uptrend to emerge. If you want to reduce risk even further, break your position size in half or quarters and make your buys over a designated period of time. Buying a full position and then “averaging down” as the price falls is almost always a bad idea.
If the mantra in a bull market is to “buy the dips”, that of a bear market is “sell the rallies”. The market has clearly established a downtrend. And if the fundamentals are any indication, we still have further to fall. If your portfolio is too heavily allocated toward equities, or if you own too many stocks that won’t fare well in a recession, take advantage of the rallies to lighten your load.

I believe we are in the early stages of a bear market and economic recession. And for those who are prepared, that can be a good thing. Bear markets are when some of the market’s greatest fortunes are made, as shortsighted investors drive prices of great companies well below their underlying value. Now is the time for discipline and due diligence ... but it is no time to cut and run.

Respectfully,

Jon Herring

P.S. To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

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