Ayax2006 (99.05)

What can we do now?

November 13, 2008 – Comments (2) | RELATED TICKERS: FXF , PHO , IGE

So far I believe that we have only seen the tip of a huge iceberg.  The current economic and investing environment will most likely get worse before it gets better, especially once we see the full picture of the 4th quarter, which is not going to be pretty.  Think about it, who is going to buy a car from the Big 3 if there is uncertainty whether they will be around in 3 months (not to mention the quality/characteristics of their products)?  And who is going to go to the mall and actually buy something meaningful if their jobs may be on the line or if their main "asset" is a big mortgage?  In other words, don't count on the American consumers to keep spending beyond their means, but quite the contrary (deleveraging).  At some point millions of holders of these huge “assets” will realize that the cost of “selling” them back to the bank at face value (i.e., sending the keys in an envelop), where the main cost is basically trashing your credit record, is far smaller than the big benefit of getting rid of a house that is deep under water.  But who is going to care about the credit record once there are millions and millions sharing your low credit rating?   

 

Note that Reuters reported that former Goldman Sachs Chairman (Whitehead) saying that this economic crisis could be “worse than the Depression”.  And according o WSJ, John Thain, (Merrill’s CEO) reportedly said Tuesday that “the slump would more like the 1929 period than the dislocations of 1987, 1998, and 2001.” 

 

So, what can we do now? 

 

In my mind the big question right now is about capital preservation, and where and how to protect our savings, including cash given that the dollar is also at risk?  Sooner or later the buck will adjust to the economic reality, including a big fiscal deficit that keeps growing every day.  And sooner or later China will decide that the cost of holding 1 trillion dollars in reserves is not worth it and will switch to hard assets or investments in its own economy.  Plus China will probably not be the only one. Once this process starts in earnest we can see again some herd behavior…  My guess is that natural resources and precious metals and perhaps TIPS will eventually be wise investments, but so far this strategy has been a losing strategy, and cash has been king.  Perhaps investors should keep part of their cash in "currency shares" (or currency ETFs) to protect against the eventual devaluation of the dollar and waiting for the smoke to clear over the next several months before buying some stocks again.  Probably one of the safer (or less risky?) choices available to small investors is FXF that seeks to track the price of the Swiss Franc, net of trust expenses.   

 

Currency ETFs are similar to money-market funds denominated in foreign currencies, and held by the depository for the trusts.  There are fees (expense ratios are somewhere around 0.4%), but these fees can be partially offset since the funds offer a yield based on interest rates in the corresponding country of the currency it holds. Needless to say, these instruments are also risky and investors should keep diversifying.  FXF is more than 15% below its peak and it is approaching it lowest point since issued in 2006, but the risk/reward is probably better than the alternatives.  

I’d welcome your thoughts and specific strategies/picks (including your recommended short positions) to ride the potential perfect storm ahead of us, meaning putting real $$$ (not only playing CAPS).