Sam Collins

Endure the Market with ETFs

by Sam Collins   11/12/08

Tuesday's story was one of lots of nasty news. With so many market players absent as a result of the Veterans' Day bond market shutdown, the impact on the major indices was greater than normal.

General Motors (GM) led stocks lower, down 13.1%, hitting lows not seen since 1943. The concern at GM is that the company may not have enough cash to see it through this year. So far, the only thing the pleas for government rescue have created is another bailout controversy.

Former Dow stock American International Group (AIG) fell again as investors tried to understand the impact of an increased injection of cash by the government.

Other financials have found it rough going, too: American Express (AXP) had its application to convert to a bank approved, but the stock fell 6.6% anyhow, and Citigroup (C) announced a plan to prevent foreclosures and the stock fell 3.66%.

Q3 earnings for KKR Financial (KFN), Las Vegas Sands (LVS), Starbucks (SBUX) and TJX Companies (TJX) all missed their targets and fell in price. And Tyco beat estimates, but fell 14.2% after it said that 2009's figures would not match 2008's. Rockwell Automation (ROK) did beat estimates and was rewarded with a gain of 4.3%.

At the close, the Dow Jones Industrial Average (DJI) was down 177 points to 8,694. The S&P 500 (SPX) lost 20 points at 899 and the Nasdaq (NASD) fell 36 points to 1,581.

The New York Stock Exchange traded 1.2 billion shares, with decliners ahead by 4-to-1, and on the Nasdaq, 809 million shares traded with decliners there ahead by 3-to-1.

The December crude oil contract fell to $59.33 a barrel, off $3.08, and the Amex Energy SPDR (XLE) fell $1.44 to $48.58.

The December gold contract dropped $13.70 to close at $372.80 as the pressure of a threatened global recession continued to take its toll. The PHLX Gold/Silver Index (XAU) lost $5.46, closing at $83.62.

What the Markets Are Saying

I described the stages of a bear market to a friend the other day as disbelief, anxiety, fear, terror, panic and finally resignation. He said, "Sounds a bit like the stages of the acceptance of death."

And there are some similarities except that there is life after the bear -- especially for those with some investment capital left after the final sell-off has sapped them of their retirement funds. And planning now must be done over black coffee at McDonald's rather than over one of Starbucks' "Black Apron Exclusives." And yes, the determination to live will produce a young, new bull that will run again.

But how does the investor cope with a market that has fallen more than 40% in just one year and survive to join that new bull in fresh pastures?

My clients have lived to tell the tale by trading both the long and short sides, or so-called "contra" or "inverse" Exchange-Traded Funds (ETFs), or by taking a longer-term inverse (contra) fund as a portfolio hedge. And it's the contras that have insulated them against the big slides.

These are funds that benefit from market declines and advances in price -- some approximately point-for-point and others by a factor of two-times. And they enable you to have all the benefits of shorting the market without the hassles of borrowing stock and incurring margin debt.

Complete guides to ETFs are available from many online sources, as well as the fund providers like iShares, SPDR, PowerShares, ProShares, Tim Middleton's ETF Insider Blog and from our own www.changewave.com.

Today's Trading Landscape

Earnings to be reported include: AdvanSource Biomaterials Corp (ASB), AECOM (ACM), Aegean Marine Petroleum Network (ANW), AFC Enterprises (AFCE), Applied Materials (AMAT), Babcock & Brown Air Ltd (FLY), Computer ESCO Technologies (ESE) and Full House Resorts (FLL).

Gammon Gold (GRS), Giant Interactive Group (GA), Great Basin Gold (GBN), Gushan Environmental Energy Ltd (GU), Harvest Energy Trust (HTE), Impac Mortgage Holdings (IMH), ING Groep NV (ING), Internet Gold (IGLD), ISCO Int'l (ISO) and Macy's (M).

NetApp (NTAP), NetEase.com (NTES), NICE Systems (NICE), Penn West Energy Trust (PWE), Provident Energy Trust (PVX), Ready Mix (RMX), SunLink Health Systems (SSY), Superconductor Technologies (SCON), Technology Solutions Company (TSCC), Progressive Corp (PGR), Thomson Reuters Corp (TRI), TIX Corp (TIXC), Top Image (TISA), TTI Telecom (TTIL), TVI Corp (TVIN) and WuXi PharmaTech Co Ltd (WX).

In terms of economic reports, the U.S. Energy Dept. oil inventories and the API Oil Industry Report are due.

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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.