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| Index
of Sovereign Society Articles |
| The ABCs
of Portfolio Protection: Time to All-Weatherize Your Investments as TSI
Braces for a Severe Correction |
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| Forty-one
months, and counting… |
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| Complacency
is a dangerous thing in the investment world. With stocks around the globe
trading at either all-time highs or at their highest levels since 2001,
it’s time to brace for a severe market correction, or worse. And history
suggests that the next correction will be sudden and global, as bourses
from New York to Tokyo head south. |
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| An
average, stocks suffer a 15% downturn in bull market cycles. Yet, since
the bear market low of October 2002, the S&P 500 Index has not declined
more than 7%. It’s now up a cumulative 45%. At 41 months and counting,
this rally is over-extended and long overdue for a correction. |
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| Investors
remain complacent in the face of rising geopolitical risk, high oil prices
and rising bond yields. Emerging markets are home to the biggest concentration
of speculative frenzy, up more than 200% since late 2002. Indeed, few stock
markets are cheap in 2006, with the exception of mainland China, German
blue chips and Japanese multinationals. |
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| Markets
are also overvalued globally, so foreign stock market diversification isn’t
likely to protect your portfolio. Since the mid-1990s, international markets
and Wall Street have become increasingly correlated. The last bear market
from 2000 to 2002 painted a sobering picture as international diversification
failed to offset domestic portfolio losses. That means a major sell-off
in the U.S. will force virtually all other markets to head south. |
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| Overconfidence
+ War + The Derivatives Time-Bomb = Surging Volatility |
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| Investors
are alarmingly overconfident. One way to measure this overconfidence is
with the CBOE VIX Index, or Chicago Board Options Exchange Volatility Index.
The VIX is a market sentiment gauge, measuring option-trading “complacency”
based on the S&P 500 Index. When traders are bullish, the VIX declines;
but as traders brace for volatile markets, the VIX tends to rise. The VIX
is now below 11, its lowest level since the mid-1990s, indicating a market
completely unconcerned about downside risk. At the market low in October
2002, the VIX peaked at over 50, suggesting stocks were heavily oversold. |
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| The
Middle East and Asia also threaten the world markets. Bogged down in Iraq
and Afghanistan, the U.S. saber-rattles a defiant Iran over their nuclear
arms and the Israeli-Palestinian conflict is once again a global wild card. |
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| Rising trade
tensions also threaten global markets as China continues to log record
trade surpluses with the U.S. and the EU. Rising protectionist sentiment
may lead to tariffs on Chinese imports. The likely result: a global trade
war that plunges global markets into a tailspin as other countries impose
their own tariffs, thereby curtailing trade flows. That exact scenario
75 years ago helped bring about the Great Depression. |
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| But the biggest
threat to the markets is the US$372 trillion derivatives time bomb. When
this bomb explodes, it could literally unravel the entire global economy.
At the least, a derivatives crisis will likely put an end to the current
bull market cycle. Towards the end of every credit cycle over the last
35 years, a systemic or near-systemic event has spelled disaster for world
markets. |
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The
Sovereign Society, headquartered in Waterford, Ireland, was founded in
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wealth and privacy, lower their taxes and to help improve their personal
freedom and liberty.
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as well as practical safeguards for financial, Internet and personal privacy.
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Yes,
learn what it is that the Sovereign Society can do for you. The Sovereign
Society's highly qualified Council of Experts, consist of carefully chosen
professionals located in select tax and asset havens around the world.
Their experts have spent their careers discovering the best global investments,
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Access
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| The last time
world markets were held hostage by derivatives trading was in August 1998
when the near-demise of hedge fund Long Term Capital Management unleashed
a tsunami of panic selling. In just a few days, Wall Street and international
markets were crushed as LTCM almost went bankrupt, resulting in a stunning
15% plunge for the S&P 500 Index in August. |
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| And in 2006,
the derivatives time bomb is more serious than ever, as hedge funds, insurance
companies and Wall Street banks hold trillions of dollars worth of these
contracts—and no one knows their real market value |
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| The only thing
that prevented a market collapse in 1998 was the intervention of the U.S.
Federal Reserve to inject liquidity—fiat money—into the banking system.
And indeed, the LTCM bailout was the beginning of the Fed’s “easy money”
policy, only now coming to an end. And that spells BIG problems… |
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| Rising
Interest Rates Bring the Derivatives Time Bomb Closer to Detonation |
| The
last time the Fed raised interest rates led to disastrous global consequences.
Rising U.S. interest rates were the “nail in the financial coffin” for
Thailand and other Asian emerging markets in 1997. Credit tightening also
brought down Orange County, California in 1994, leveled the bond market
that same year and knocked several hedge funds out of business. |
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| With the Federal
Reserve now into its 25th month of tightening, the Fed is slowly draining
liquidity from global markets. And the European Central Bank (ECB) and
the Bank of Japan have now joined it in adopting a tight money policy.
In other words, the world’s largest three central banks are simultaneously
cutting off liquidity from the financial markets. The consequences are
completely predictable: highly leveraged investors will be forced to sell,
leading to a cascade of global liquidation of stocks, bonds and real estate. |
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| What’s more,
with every incremental rise in interest rates, the derivatives time bomb
comes closer to detonation. A major share of the derivatives market consists
of credit derivatives—essentially insurance contracts to either augment
or offset losses in bonds. Those who bet on lower interest rates stand
to lose hundreds of billions of dollars. |
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| Anticipating
the Bear, Riding the Bull |
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| The TSI portfolio
continues to log big gains from diversified investments spread across the
markets. Even though we anticipate a market decline, we’re not selling
everything and running for the hills. |
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| The key is
to buy appropriate hedges that will rise in value as the broader market
declines. And beginning this month, we’re adding what I consider the single
best investment product ahead of the next market plunge: the Profunds UltraBear
ProFund Investor Class. It’s an ongoing bet on market declines—and because
you’re purchasing a mutual fund, and not options or futures, you won’t
have to worry about option expiration or throwing more money into a declining
futures contract to increase your margin. |
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| This fund
provides twice the inverse performance of the S&P 500 Index, representing
America’s 500 largest companies. If this broad market declines, you’ll
earn twice that rate of decline; conversely, if the market rises, you’ll
lose twice that sum. In 2002, the last year the S&P 500 declined, the
fund surged 38%. That’s exactly the negative correlation we’re looking
for when markets tank. |
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| For traditional
portfolios invested in stocks and bonds, a maximum 10% allocation for portfolio
hedges is sufficient. If global markets continue to rally, the value of
the reverse index fund will fall, but your other 90% invested in global
markets will easily offset the losses incurred from a bear market bet.
Essentially, this will be your portfolio insurance. |
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The Profunds
UltraBear ProFund Investor (symbol URPIX) requires a US$15,000 minimum
investment.
The fund is
available no-load through most discount brokers. Its CUSIP number is: 743185-878.
Visit Profunds at www.profunds.com. |
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The
Strange Disappearance of 100,000 American Millionaires.
| Last year,
the number of American millionaires fell by 100,000. Yet 200,000
new millionaires showed up overseas. Why? Because hugely profitable
investments are being hidden from you by a cartel of lawyers, regulators
and Wall Street special interests. Like our recommended investments that
gained 797% and 1,794% during the bear market and our other investments
up 85%..117%...177%...225%. Find out what they don't want you to know... |
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| Look Within
TSI for More Bear Market Hedging |
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| Several investments
already in the TSI portfolio provide additional diversification across
asset classes, ensuring negative stock market correlation. |
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| Gold should
also be a part of your bear market strategy. Gold bullion remains in an
exciting bull market and will eventually smash through its 1980 all-time
high of US$850 an ounce cracking US$1,500 or more. This rally, supported
by the best fundamentals and highest degree of macroeconomic uncertainty
in a generation, will likely coincide with a fresh U.S. dollar crisis,
mortgage-backed disaster in real estate and a derivatives-based collapse. |
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| Buy Goldcorp
(NYSE-GG) on intermittent weakness below US$25 a share. Recommended in
TSI 1/05, Goldcorp has rallied 80%, and is still climbing. Goldcorp has
become one of the world’s premier gold mining companies, supported by mind-blowing
earnings, superb management, the lowest production cost per ounce among
major gold producers (US$180/oz. in 2005) and world-class properties through
cunning acquisitions by Ian Telfer, its CEO since January 2005. |
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| Also, with
interest rates on 90-day Treasury bills and money-market funds now approaching
5%, cash is again looking attractive. Make sure your portfolio has sufficient
liquidity to take advantage of the bargains when the markets correct. |
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| Stocks are
rapidly approaching their day of reckoning. Equities should have corrected
at least 15% or more, months ago. The longer this rally continues, the
larger the inevitable correction is likely to be. |
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| Forty-one
months…and counting. |
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| Index
of Sovereign Society Articles |
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