Gerald Celente – Cash-Juiced Markets Ready to Crash? Be Prepared

Based on several century’s of history France and Germany have been hell bent to control Europe and this is the scheme they came up with, full surrender without a shot being fired.. neat eh? The EU was created because German and France thought they were going to control it and Belgium thought Germany and France was going to let them control it.. the “occupied states” are finally seeing what has been going on and realizing they were screwed.

(OK, sometimes crashes are totally the result of people who do really, really stupid things like jumping off buildings, trying to land a trick on a skateboard, or driving in Russia. Eighty-seven percent of those really stupid things can be found on websites with names like “SUPERFAIL” or “HITINTHETENDERS.” These are not our people.)

Crashes are scary, because even if you can see the signposts, they are by no means predictable. This is as true in the markets as it is in any other segment of life. For example, many investors, including some really, truly smart ones, have been saying for some time that the U.S. stock market – one of the most expensive in the world – is due for a crash.

This is something that people have been thinking for years, though. One of the most crowded trades in the market has been on low volatility – i.e., stocks that have tended to move less dramatically than the overall market. Low-volatility plays became an extremely popular way for investors to re-enter the stock market following a crash, and just as popular for Wall Street to sell to these same investors.

This situation manifests itself in some interesting ways. In May, Charles Biello at Pension Partners showed that the P/E of the PowerShares S&P 500 Low Volatility ETF (SPLV) was more than 21, while its high-volatility cousin, the PowerShares S&P 500 High Volatility ETF (SPHB), was 17. As of the beginning of SeptemberPowerShares High Beta ETF had $200 million in assets. Low Vol: $7.4 billion. The lifeboats are crowded.

(Note; Price-to-Earnings Ratio “P/E” is a valuation ratio of a company’s current share price compared to its actual per share earnings over the last 12 months.)

So yes, a crash is coming. The trouble is, we don’t know when. It could be years away. And more importantly, just because one class of stocks will fall doesn’t mean they all have to.

I bring this up as we at mydailyinformer.com tend to talk to our members as often as we can. Recently I was at an event in San Diego and had the opportunity to talk to a large number of people, many of whom were preparing for a market crash by getting out of stocks – which is one perfectly reasonable way to do it. But even if we concede that the conditions for a market crash in the S&P 500 are rather elevated, I would suggest that this is still a crazy reason to get out of the markets writ large.

The other thing to note is the dispersion. In most years, the best-performing asset class outperforms the worst by at least 4000 basis points. So when people talk about an impending market crash, my simple question is, “Which market?”

This is an important question, particularly to U.S.-based investors, where the end-all, be-all for market performance for equities is the S&P 500. Yes, I think for a lot of reasons the S&P 500 is extremely expensive, not least because of the almost complete lack of yield available in fixed income. But the S&P 500, big as it is, measures only a portion of global equities and an even smaller portion of global investment classes.

It is absolutely human nature to worry about crashes, especially with money that you need in the short term. What we at mydailyinformer.com think about, rather than market ebbs and flows, is the avoidance of catastrophic, permanent losses, and the way we do so is by focusing on buying the best companies we can, at prices that we believe offer a good potential for a positive return; and, perhaps paradoxically, not worrying about price movement in the short term – or even the medium term.

We also diversify – but not too much. Here’s something you might not know: According to research from J.P. Morgan, using the universe of companies that were in the Russell 3000 since 1980, about 40% of all companies suffered a permanent decline in excess of 70% from their peak price. Even more surprising is that over that period, more than two-thirds of all companies underperformed the Russell 3000 Index. (The Russell 3000 consists of the largest 3,000 U.S.-traded companies by market capitalization.)

How to Prepare for a Stock Market Crash, Step No. 1: Buy Gold

Owning gold is an excellent hedge against uncertainty in the stock market.

Money Morning Executive Editor Bill Patalon says gold is a “good ‘store of value’ when uncertainty gets out of hand.”

“And we’re definitely deep into what I refer to as the ‘Era of Uncertainty,’” Bill said in March.

Gold’s use as a hedge against stock market crashes is proven, too. Check out how gold held its value during the 2008 financial crisis below…

Between the start of the market crash in May 2008 and its end in March 2009, the Dow lost 49% of its value while gold prices actually rose over 5% in the same time.

2: Short the Broader Market

One of the simplest ways to profit during a market downturn is to short the overall market. While shorting a stock can expose investors to potentially unlimited losses, our strategy avoids the unnecessary risk so you can profit safely…

You see, a traditional short position requires the trader to sell borrowed stock and buy it back at a later date. If the stock’s share price drops, then the trader makes a profit (they sold the borrowed stock at a high price, bought it back at a lower price, and pocketed the difference).

But this strategy can be risky if the stock’s share price goes up.

While the lowest a stock can fall to is zero, there’s theoretically no limit to how high it can climb. The biggest risk for a short seller is the stock’s price rising, requiring them to repurchase the stock at a higher price than what they sold it for. There’s no limit to how high their loss could be.

However, shorting the market doesn’t have to be this risky.

Buying funds that short the overall market is a straightforward way to profit from a downturn without being susceptible to infinite risk. These funds are ones that go up when the stock market crashes.

Own In-Demand Stocks

A stock market crash starts when traders panic during “catastrophic events, an economic crisis, or the collapse of a long-term speculative bubble,” according to Investopedia.

And a speculative bubble is exactly what led to the dot-com crash of 2000.

After the Internet was commercialized in 1995, investors poured money into Internet stocks, even if the actual business behind the stock was unprofitable. Investors were speculating Internet companies would change the economy.

There’s no better example of this speculative betting than the rise of Pets.com, which held its IPO in 2000. The company raised $82 million during its IPO, but the Internet pet supply  company was unprofitable. In 1999, the company only made $619,000, but it spent nearly $12 million on advertising.

This sort of risky speculation drove stock prices to unsustainable heights. The tech-heavy Nasdaq soared 571% between 1995 and its pre-crash peak on March 10, 2000.

When the tech bubble popped, the whole market fell. Pets.com stock collapsed from $14 a share to $0.22 a share by the end of 2000. Between March 2000 and the end of the crash in October 2002, the Nasdaq plummeted 77% as tech stocks plunged. And the tech stock crash dragged down the broader market too, as the Dow fell 36% in the same time period.

But investors who didn’t chase speculative positions and stuck to companies in the most in-demand sectors were protected from the worst of the crash. Some investors even profited during the tech stock crash of 2000.