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3 Rules for Today's Markets

Written By Brian Hicks

Posted November 28, 2008

I’ve been asked by several friends, family and readers of this letter…

"What are you doing with your money?"

"Is this the end of the stock market, of America’s empire???"                   

"Are we headed for a great depression?

Or even worse, are we headed for a post-apocalyptic version of Cormac McCarthy’s best selling novel, The Road?"

In the next several pages, I’m going to tell you what I’m doing with my personal investment capital, the precautions I’ve taken, and what I see on the horizon as possibly the greatest investment opportunity this century (hint: we’re getting the opportunity to turn back the clock to 2003).

My Personal Investment Decisions

Rule #1: Protect your cash: That’s how fortunes are made

In July of 2007, I started to raise cash. I began selling my speculative holdings in pretty much all sectors except for energy, biotech and few microcaps and precious metals stocks.

I didn’t have any great insight into coming crisis. I didn’t see it coming. Instead, I couldn’t figure out the direction of the market. As a result, my gut told me that if the market couldn’t figure out which way it wanted to go, neither could I.

You see, on July 19, 2007, the Dow made a new record high. I, like many other market analysts, thought this was confirmation of a new bull market.


DJIA Thanksgiving 2008


After all, by any technical definition, the market had been in a bear market for 7 years. For instance, the NASDAQ topped out at the lofty level of 5000 in March 2000. For 6 of the last 7 years, it’s been trading below 3000.

So I figured it was about time that the broader markets broke out to a new bull.

But after making a new record high in July, the Dow completely broke down.

In the following 9 trading days after breaking above 14,000, the Dow lost 1000 points. It rebounded, only to sell-off 1300 points.

More disconcerting and ominous, some of the intraday moves during this period were massive.

This was about the time of Jim Cramer’s famous rant about how the fixed income market had ceased to exist.

This confirmed the worst. Gold World’s Greg McCoach’s warnings were right! Subprime and housing were about to crash the market and the economy.

I immediately started raising cash.

Rule #2: Go Short… It’s a Bull Market in Reverse

Super trader Ian Cooper told me something last year that has made me a lot of money in the past year. To paraphrase Ian, "Bull markets never end. They simply change asset classes and psychology."

Ian, like Greg McCoach, was spot on. 

If the trend is down, play it for all it’s worth.

In the past 14 months, I’ve played the UltraShort Dow30 ProShares (DXD) a half dozen times. I first played it as a hedge to protect my downside and to protect my long positions when it was clear that the market was in the throes of indecision.

But now I play it for net profit.

Rule #3: Patience Wins the Day: Start Putting Cash to Work

I have recently started putting small amounts of new investment capital to work. I’m building positions in Pfizer (PFE), S&P Biotech ETF (XBI), ProShares Ultra QQQ (QLD) and PowerShares DB Gold Double Long ETN (DGP). I’m going broad to keep risk at a minimum.

I’m buying Pfizer as a defensive play in healthcare. The company is cash rich with $26 billion in the bank. It’s estimated forward p/e is 6.4. Assuming the "e" in the p/e is solid, I see very little downside risk at current levels of $16 per share.

The best part is that Pfizer pays a dividend of 8% at current price levels. In this uncertain market, you want yield that is certain.

Pfizer is part of my Baby Boomer Investment Thesis (BBIT). The first cohort of the baby boomer generation began retiring earlier this year… and there’s no disputing the demand for more medicine.

Pfizer has been out of favor ever since it launched Viagra in 1998. In fact, all of Big Pharma has been out of favor since 1998-1999.

I believe the environment is ripe for a big pharma revival.

The Biotech ETF (XBI) is also a component of my B.B.I.T.

Biotechnology drugs will play an increasing role in addressing the healthcare needs of the aging population.

In general, biotech companies have minimal exposure to the credit and housing crisis. They don’t have any exotic derivatives hidden in the cellar.

Once considered the market’s most speculative industry, biotechnology has become somewhat of a safe haven. Year-to-date, the XBI has returned +2.45%. Small for sure. But when you compare it to the Dow’s loss of 35% YTD, I’ll take it any day.

The Ultra QQQ ProShares is play on the tech-heavy NASDAQ. My thesis on this is that technology will lead this market out of the bear because technology companies are sitting on record cash reserves.

Check this out. The top 10 holdings in the QLD are sitting on $108 billion in cash against $28 billion in debt.

And lastly, I’m long gold through PowerShares DB Gold Double Long ETN (DGP). I’m not going to debate whether owning physical gold is safer than owning a paper certificate for gold.

I’m simply looking for liquidity. And owning DGP gives me a very liquid way to play gold.

Why gold?

With the number of dollars being printed, at some point we will have inflation. And gold is still the best hedge against inflation.

That’s my investment strategy for now.

However, I’m waiting for an opportunity to play our Peak Oil Trade. The price of oil has come down more than 60% since July. We are still believers in Peak Oil… and the recent IEA World Energy Outlook report confirms our thesis that oil supplies are dwindling.

We could be looking at a once-and-a-lifetime opportunity to play oil futures for a 1000-to-1 return. In my next article, I will lay it out for you.

Happy Thanksgiving,

Brian Hicks

P.S. Without a doubt, the best way of making money in this market is by playing options. Fortunately, we have options genius Ian Cooper leading the way… earning our readers (many with little or no experience trading options) unmatched profits. Ian’s track record is simply phenomenal: 29 wins out of 34 trades… 78% average gain… and all with an average hold time of just 11 days. To learn more on how Ian’s doing it, take a read of our new report.