I am retired and take educated guesses on all things financial.

February 10, 2009

February 10, 2009: Non-conforming Portfolio Tactics For Uncharted Waters

As Margaret Thatcher stated during her reign, "Consensus is the abdication of leadership." Throughout the civilized world, loosely defined as such, a curtain of fear has descended upon many aspects of our lives. Certainly, our lonely planet has faced much worse, but countless media headlines delivered in all formats and the grandstanding of politicians of all stripes have made the present era of instant communications exacerbate worldwide stress.

Thinking outside the box, investors with greenbacks to risk could amuse themselves with a few ETFs that could provide interesting gains through both contrary and deductive reasoning.

I had been toying with putting in place a simple Bizzaro World portfolio. Actually, I have already begun and have named it as such. This is in addition to my Permanent and Speculative Portfolios, both which have undergone a significant makeover since early autumn of 2007. Having an investment climate where almost nothing works, my largest portfolio adjustments since beginning stock and bond adventures around 1971 were both necessary and prudent. With multiple income streams from diverse sources and other asset shields in place, the Bizarro World Portfolio may actually have merit as a super-speculative vehicle. A Bizzaro Portfolio deserves a bizzaro rationale, as follows:

1. What inmates are running the asylum?

With the rest of the world appearing to be waiting for the United States to bail them out of the recession, Russia behaving badly towards Obama, European leaders bickering at every turn, Africa in chaos, South America being the usual lagging question mark, China being China and fires down under, it is observed at this time that the two most important leaders on mother earth at the moment are quasi-socialist Democratic politicians Nancy Pelosi and Harry Reid. They own Obama, based upon their hand-crafted legislation affectionately entitled a stimulus bill. I was going to add our Treasury Secretary as a player, but after Timothy's unconvincing performance in front of the Senate Finance Committee, he does not rate.

So, let the printing presses role! My choice for honoring Ms. Pelosi and Mr. Reid are the iShares' Inflation Protected Government Securities (TIP), ProShares' Double UltraShort 20+ Year US Treasuries (TBT) and the SPDR International Government Inflation Protected Bond ETF (WIP).

2. Will a politician use fear to instill a mandate to legislate and stifle opposition? Will exaggeration occur?

If the answer is yes, my favorite during a route of the market is the ProShares' UltraShort S&P 500 ETF (SSO). When the market tanks for the day (at least 3%), buy this ETF about five minutes before the market closes with a trailing stop 4% lower than your purchase price. Plan on selling it the following day during a significant pop. What we only have to fear is fear, itself. Using fear (or uncertainty) as a political weapon gyrates the markets during or shortly after the time of attack. SSO may be your short duration answer to a short duration political ploy.

3. Can corporate earnings be trusted? Can CEOs be trusted? Can anything in this market be trusted?

If not, forget common stock and head for bonds or preferred stock where you have at least a chance of earning a few bucks and perhaps a little capital appreciation. Although many investors have flocked to treasury bills and the like, I think corporates are a better Bizzaro Portfolio pick. IShares' Investment Grade Corporate Bond ETF (LQD), iShares' Preferred Stock Index Fund ETF (PFF) if you believe financials may actually have value, and PowerShares' High Yield Corporate Bond ETF (PHB) fit the bill.

4. During this well-promoted "worst recession since the Great Depression", can anyone seriously be considering carbon credits, green EFFs, commodities and automobile companies? Are these luxury items as individuals fear for their jobs or worse?

There is a sucker born every minute. Even the Bizzaro Portfolio takes a pass on these, except for iShares' Silver Trust ETF (SLV) or iShares' Gold Trust (IAU). Infrastructure was on my list, but went away after reviewing the muddled mess of the draft stimulus bill.

Some, or maybe none of the above, will work over the long haul. We may see a whiff of deflation, but the money supply and steep index variations provide a reason for unusual portfolio choices. Mixing the above securities in a Bizzaro stew of sorts, adding your own seasonings and zest, may become a tasty treat on your investment menu.

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