The Looming Bear Market: 5 Steps To Take To Protect Yourself (GLD, SLV, USO, VXX, TZA, FAZ)

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September 19, 2011 10:12am NYSE:FAZ NYSE:GLD

Keith Fitz-Gerald: I just finished a battery of media appearances on Fox  Business, Bloomberg, BNN and CNBC Asia, and without exception I was asked about two things: President  Barack Obama’s jobs bill and the U.S. Federal Reserve’s “QE3.”

The first thing investors and analysts alike want to know  is whether or not the president’s jobs bill will work. The  answer to that question is “no” – not as it stands, anyway.

The second question is whether or not  Fed Chairman  Ben S. Bernanke will further extend the central bank to help the economy. Well,  I do think the Fed will intervene,  but I don’t believe for a second that the central bank’s intervention will help  the U.S. economy.

As a result, we’re likely to see stocks enter into a bear market and retest their March 2009 lows.

I know that’s a terrifying thought. But to be perfectly  honest, there’s nothing President Obama or Bernanke can do at  this point. If companies don’t want to spend the  $2 trillion worth of cash they’re hoarding, there’s very little the  government can do to encourage them to loosen their purse-strings.

That said, I want to give you five specific steps to take to protect yourself from the looming bear market, preserve your sanity  – and  even  profit.

But before I get to that,  you  need to understand the dangers that are fast approaching.

A Roadblock to Recovery

President Obama and Chairman Bernanke can toss all the money  they want at the economy. But no amount of spending can change the fact that we  need the following three things to get our market moving again. They are:

  1. Sustained demand.
  2. A solution to the European sovereign debt crisis.
  3. And a bottom in housing prices.

As it currently stands, the U.S. economy will be lucky to  log 1% growth this year, which is even lower than the anemic 1.5% I predicted  in my annual forecast in January.

That’s pathetic for a nation that spent more than $1.4 trillion of borrowed money on “stimulus.” This lackluster growth is also  evidence that the Obama administration’s $800 billion stimulus plan – and the  Fed’s two rounds of quantitative easing – did absolutely nothing to salvage our  economy.

Citizens are scared silly. Businesses are uncertain. They’re  uncertain of regulatory changes, uncertain of taxes, and uncertain about their  overall economic environment. So they’re doing what rational people do when  confronted with the unknown: They’re hunkering down.

And with good reason.

The typical U.S. family got poorer during the past 10 years  due to a decade-long income decline. Median household income fell to $49,995  last year, and is now 7% below where it was in 2000. The number of people  living in poverty has risen to 15.1%, the highest level since the U.S. Census  began tracking this information in 1959.

It should also be noted that a large portion of that decline  is directly attributable to inflation, which the Fed continues to assert is  “transitory.”

Out of the Fire…

You may be holding out hope that the president’s jobs plan  will help turn things around – but it won’t.

Jobs exist because they create value. You can’t just assume  businesses will hire for the sake of hiring, which is essentially what the  Obama administration’s plan does. There has to be demand. All the employees in  the world won’t do any good if business owners can’t grow their customer base  and their revenue.

This is true for infrastructure as well. Infrastructure  should be built as a means of increasing productivity – not just to put bodies  in motion. That’s something the “bridges and tunnels” crowd doesn’t seem to  understand.

That’s why we have to consider the president’s plan for what  it is – yet another government-sponsored diversion of capital and resources.

As such, there are the usual questions about how President  Obama wants to pay for this. And that’s assuming the plan even manages to get  through Congress, which I don’t believe it will.

I think the jobs bill is dead in the water, and that the  fight over some of its elements will create more uncertainty than jobs. That  will be bad for the economy and even worse for the stock market, which will  react  negatively to the bickering and yet more indecisiveness.

Enter the Fed.

A Five-Step Plan for Dealing with the Looming Bear Market

When the president’s jobs bill fails – just as his previous  attempts to jumpstart the economy with deficit spending failed – and  unemployment rises a year from now if not sooner,  Bernanke will undoubtedly step in with QE3.

Of course, it may not be called QE3. It will  likely be called “Operation Twist,” or some derivation thereof.

But here’s the real rub. Quantitative easing, no  matter what it’s called, is a euphemism for printing money. It is an  attempt to bring down longer-term rates and twist the interest rate curve in  such a way that companies have no choice but to spend money, and investors have  no choice but to take on more risk.

But how low can you go when rates on the short end of the  curve are already near zero? Not very.

I saw this firsthand in Japan. The Japanese government took  rates all the way down to zero – and nobody wanted the money! Japanese  companies wouldn’t spend their cash then any more than U.S. companies will  spend the $2 trillion they’re sitting on  now.

Instead, the government  will be “forced” to spend even more.

So while Bernanke and President Obama are trying to dig  their way out of this mess, they’re really only digging our economy into a  deeper hole.

That’s why  stocks  are  destined to retest the market lows of 2009. I don’t know exactly when but  I intend to help investors safeguard their assets and profit by preparing for  it now – before  it actually happens.

Here’s five steps to get you started:

  1. Sell Strategically: Sell into strength and capture profits using trailing stops that are gradually ratcheted up as the bounce begins. This will help you raise cash (that can be used to buy into the rebound when it eventually happens)
  2. Hedge Your Bets: Use specialized inverse funds to hedge downside risk that will accompany the rollover to the downside and rack up significant gains at the same time.
  3. Consider Alternatives: Buy commodities – most notably gold (NYSE:GLD) and oil (NYSE:USO) – on pullbacks. These alternative assets will help preserve the value of your portfolio as the markets roll over. Their value will accelerate dramatically when the world economy recovers – as it eventually will.
  4. Think Globally: Put new money to work in so-called “glocal” stocks with fortress-like balance sheets, diversified revenue and experienced management. Not only will they help hedge the value of your portfolio, but by concentrating your focus on them you are building in upside potential even if we haven’t hit a bottom. Those offering big dividends are best because that will help you keep pace with the inflation the government debt will ultimately induce.
  5. Stay in the game: I know it’s tempting to bail out given my prognosis for more downside, but attempting to time the markets is a fool’s errand – and never works. You just wind up getting skinned twice – once on the way down and again because you were standing on the sidelines and got left behind when the markets ultimately reverse – which they will.

Related: Direxion Daily Small Cap Bear 3X Shares (NYSE:TZA), Direxion Daily Financial Bear 3X Shares (NYSE:FAZ),  iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX), iShares Silver Trust (NYSE:SLV).

Written By Keith Fitz-Gerald From Money Morning

Keith Fitz-Gerald is the Chief Investment Strategist for Money Map Press, as well as Money Morning with over 500,000 daily readers in 30 countries. He is one of the world’s leading experts on global investing, particularly when it comes to Asia’s emergence as a global powerhouse. Fitz-Gerald’s specialized investment research services, The Money Map Report and the New China Trader, lead the way in financial analysis and investing recommendations for the new economy. Fitz-Gerald is a former professional trade advisor and licensed CTA who advised institutions and qualified individuals on global futures trading and hedging. He is a Fellow of the Kenos Circle, a think tank based in Vienna, Austria, dedicated to the identification of economic and financial trends using the science of complexity. He’s also a regular guest on Fox Business. Fitz-Gerald splits his time between the United States and Japan with his wife and two children and regularly travels the world in search of investment opportunities others don’t yet see or understand.

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