How do Bears make Money?

[Captain Kremmen]

It seems to me that the stock market is top heavy at the moment, and due for a sharp fall. DJI Stands at 10,424.
How do you invest in the stock market if you are a bear?

[cosmictraveler]

An increase in prices during a primary trend bear market is called a bear market rally.

wiki

[joepistole]

Well I think you are wrong. But if you want to invest as a bear, short the index (e.g. do a short sale on spy). You would be shorting the S&P index. And if you are real bear take all of your money and invest in a leveraged short index like spxu.

For the record, I don't advise it. But if you want to put your money where your politics are, then you would buy ths spxu. Alternatively you could short a cylclical stock like MMM.

But bears are not going to make money in this market. So you have been warned.

[BenTheMan]

It seems to me that the stock market is top heavy at the moment, and due for a sharp fall. DJI Stands at 10,424.
How do you invest in the stock market if you are a bear?

Short sell a Dow tracking ETF, or buy an ETF that shorts the Dow.

This is an ETF that tracks the Dow, and here is one that shorts it.

Short the first one or buy the second, or both.

[joepistole]

Short sell a Dow tracking ETF, or buy an ETF that shorts the Dow.

This is an ETF that tracks the Dow, and here is one that shorts it.

Short the first one or buy the second, or both.

The difference between the Dow and the S&P is about 470 stocks. The DOW is an index of 30 stocks and the S&P is an index of 500 stocks. So if you short the S&P you are getting a shorting a broader index.

[joepistole]

The difference between the DOW and the S&P is about 470 stocks. The DOW is an index of 30 stocks and the S&P (SPY) is an index of 500 stocks. And you can do levered versions, like the DXD. The DXD is a Dow Short. If the Dow goes down 1 the DXD should go up 2.

And I think you bears should go out there a dump all of your money into these shorts as soon as possible. Because I will be taking the other side of those trades and I love to buy at a discount...not to mention taking money away from bears and people on the far right of the political spectrum (often the same people). And you guys have made me a lot of money these last few years. ) So please keep it up.

[Syzygys]

An increase in prices during a primary trend bear market is called a bear market rally.

wiki

That wasn't the question.

now you could also buy put options, that can explode if we really go down. Ther are disadvantages too, you might want to learn about them.

gold usually behaves inversely to the market, so going long gold is also another way of taking advantage of of a market fall.

So let's summarize:

1. Short the index, ETF, like SPX or DJX.
2. Go long an inverse index.(if you can't short)
3. Buy gold.
4. Buy put options.(or sell calls)
5. Stay in cash.

[joepistole]

That wasn't the question.

now you could also buy put options, that can explode if we really go down. Ther are disadvantages too, you might want to learn about them.

gold usually behaves inversely to the market, so going long gold is also another way of taking advantage of of a market fall.

So let's summarize:

1. Short the index, ETF, like SPX or DJX.
2. Go long an inverse index.(if you can't short)
3. Buy gold.
4. Buy put options.(or sell calls)
5. Stay in cash.

But in a deflationary environment, which is what we now face, commodities like gold, real estate prices, etc. will go down too.

[Billy T]

But in a deflationary environment, which is what we now face, commodities like gold, real estate prices, etc. will go down too.

I think that is generally true, but "deflationary environment" usually means negative change in the CPI, which tries to represent the cost of living. Currently a large component of the CPI is the decreasing value of homes. (Food is rapidly rising - fastest rate in 26 years a few months ago.)

Because of fear, uncertainty etc. and lack of confidence in the purchasing power of the dollar, I think it quite possible for commodities (especially gold) to go up during a "deflationary environment." To a large extent China controls commodity prices now. Their demand is not very tightly coupled to US's CPI.

[Syzygys]

I trust the Fed and the government money printers, that the current deflation won't last long.

The Dollar Stores will have to be renamed.

[Billy T]

... The Dollar Stores will have to be renamed.

Not if they sell mint-condition old green dollars to collectors, for $100 in the "new dollars."

[nirakar]

It seems to me that the stock market is top heavy at the moment, and due for a sharp fall. DJI Stands at 10,424.
How do you invest in the stock market if you are a bear?

If you think the Dow is to high then short it or invest in funds that short it.

You can still pick out individual companies that you think will do well even as the Dow declines. Be wary of betting against the Dow if you are also betting on inflation because even if the purchasing power parity value of US corporations falls their value may still increase in nominal dollar figures if their is high inflation.

The kind of Bear I am is betting against the USA's, the EU's and Japan's economies due to high labor costs while not betting against the global economy. I expect dollar inflation eventually either due to the dollar falling relative to the cost of imports or the dollar falling due to the overproduction of dollars.


I can't just bet on the dollar inflating any time soon because I learned from studying Japan's last two decades that any inflationary pressure created by government money creation and rising import costs can be offset by the deflationary pressure of unwinding lending reducing the money supply and the deflationary pressure of further lowering of real estate prices and falling wages.

You can buy corporate bonds from companies you think will not go bankrupt. They are not paying all that much but they pay more than bank interest.

[BenTheMan]

It seems to me that the stock market is top heavy at the moment, and due for a sharp fall. DJI Stands at 10,424.
How do you invest in the stock market if you are a bear?

The difference between the Dow and the S&P is about 470 stocks. The DOW is an index of 30 stocks and the S&P is an index of 500 stocks. So if you short the S&P you are getting a shorting a broader index.

Didn't he ask about the Dow?

[joepistole]

Didn't he ask about the Dow?

He cited the DOW as a measure. His question was about the stockmarket not the DOW.

It seems to me that the stock market is top heavy at the moment, and due for a sharp fall.

How do you invest in the stock market if you are a bear?- Captian Kremmen

[Syzygys]

The OP was just generally interested how people can make money in a bearmarket, what kind of instrument and technics they can use. That was it...

[joepistole]

You making any money yet Captian?

[Captain Kremmen]

I haven't invested any yet.

Problem. I have little capacity for risk.

The stock market price does not reflect the real risks of total collapse.
People desperate for a reasonable rate of interest are switching from banks to stocks and bonds, propping up what should be a much lower share price.

My money is in the bank.
The banks aren't interested in saver's money any more.
I feel I'm being ripped off by the bank, who now instead of lending real money, lend money which is just plucked, theoretically, out of the air.
What do they need real money for?

I see wide fluctuations in the stock market, which to me show a chaotic system.
A chaotic market could show huge rises before the correction.

Possibly, my best action is to realise that I am being screwed, realise that I can do nothing about it, and just sit tight.

[joepistole]

I haven't invested any yet.

Problem. I have little capacity for risk.

The stock market price does not reflect the real risks of total collapse.
People desperate for a reasonable rate of interest are switching from banks to stocks and bonds, propping up what should be a much lower share price.

My money is in the bank.
The banks aren't interested in saver's money any more.
I feel I'm being ripped off by the bank, who now instead of lending real money, lend money which is just plucked, theoretically, out of the air.
What do they need real money for?

I see wide fluctuations in the stock market, which to me show a chaotic system.
A chaotic market could show huge rises before the correction.

Possibly, my best action is to realise that I am being screwed, realise that I can do nothing about it, and just sit tight.

Well you are wise if you choose not to put your money where your politics lie. We came damn near to the end of society as we know it in 2008. It is only natural that the markets remain skittish. I expect you will see some vary wild variations in the market in part because of SEC deregulation which occured under the previous administration. It will take time to restore confidence in our markets.

Today I was very encouraged with the latest GDP numbers and revisions made to previous numbers. The numbers released today indicate that we are on course to recovery. The economic numbers being reported are making a lot of sense. But if you don't like risk, the best place is to keep your money in the bank.

[Captain Kremmen]

Don't you think it is time we went back to some kind of Gold Standard, where money, paper or digital, is propped up with real resources?

My bank is currently offering about 1/2% to 1% on savings for people who are not watching their savings.
By keeping an eye on it and changing yearly, I am getting treble that.
The bank, meanwhile is sending me letters offering me loans at 8%.
I haven't checked my credit rating, but it is probably perfect.

Surely, it is unfair to people investing real money, if the banks are able to lend out money which does not exist?

[joepistole]

Don't you think it is time we went back to some kind of Gold Standard, where money, paper or digital, is propped up with real resources?

NO, there were lots of problems with a commodity backed currency. If we had a commodity based currency, we would have gone over the cliff in 2008. The current financial set up works fairly well. What failed us for the first eight years of this century was our government, president and congress. They deregulated and failed to enforce existing law which resulted in a financial melt down.

There were lessons to be learned after the first Great Depression. And after 70 years certian individuals in government and private industry decided to ignore those learnings...hence the melt down.

My bank is currently offering about 1/2% to 1% on savings for people who are not watching their savings.
By keeping an eye on it and changing yearly, I am getting treble that.
The bank, meanwhile is sending me letters offering me loans at 8%.
I haven't checked my credit rating, but it is probably perfect.

Surely, it is unfair to people investing real money, if the banks are able to lend out money which does not exist?

Banking is inherently risky, that is why they need the backing of the Federal government. But they also play a critical roll in our economy. Banks make money by borrowing at a low rate and lending at a higher rate.

There is a basic rule in finance and it is thus, returns should always equal the risk. So if you want higher returns, you will need to incur additional/higher risk. And if anyone tells you otherwise they are a con artist or just plane stupid.

At the moment interest rates are very low because of the economic crisis. They won't always be this low. But for the next few years, if you don't like risk your return options are going to be pretty limited.

Alternatively, you might want to consider something called master limited partnerships (MLP) which are sold on stock exchanges like stocks but are different is some major ways.

- they usually pay a decent distribution (similar to a dividend) currently distrbutions are running between 6-10 percent depending on the MLP. A distribution represents a percentage of the business cash flow.

- the limited partnership pays no tax on its earnings as long as it distributes a set percentage of its cashflow to the limited partners.

- limited partners (you if you own them) pay no tax on earnings until distributions exceed your investment cost. So your distributions are tax deferred. Distributions are treated as a return of capital until they exceed your investment. I recommend you see an accountant on the accounting and taxation of these investments. But the bottom line is these are tax advantaged...something you will not get with regular dividends.

The bad part or the risk is that you are taking an ownership position in a business. The price of your MLP (master limited partnership) will go up and down in reaction to the market and other business factors.

- if business earnings grow, your distribution should increase over time increasing your return.

So if you want a higher return you might want to consider MLP's. But you should be aware that it does involve more risk than a bank account. With an MLP you are buying an interest in a business for which you are entitled a piece of the earnings.

Below are some MLP's you might want to consider:

Kinder Morgan Pipeline (KMP), Enterprise Product Pipeline (EPD), San Juan Basin Royalty Trust (SJT), Permian Basin Trust (PBT), Prudhoe Bay Royalty Trust (BTP).

And it might be helpful to invest a little at a time. Maybe start with just a few partnerships at a time say 10 or 20 and see how it works.

You may also want to consider prefered stocks like Citi Group prefered...pays 8 percent dividend. But you still have the risk of ownership.

And you may want to consider Exchange Traded Debt, these are traded on the exchanges like stock but do not represent an ownership interest in a company.

An example of an exchange traded debt is Ford Motor Credit. The debt is not secured and it trades under the symbol FCZ and it trades around $22-$24 per unit. And it is currently yielding about 8 plus percent. If Ford Motor Credit goes belly up, you will be an unsecured creditor. If Ford Motor Credit/Ford credit worthiness improves, the price you paid for the debt will go up. Conversely if Ford creditworthiness degrades the price of the debt will go down. As of today I have made about 3 percent capital appreciation in addition to earning over 8 percent in interest (annualized).

But if you are the kind of person who sweats out fluxations in price and will not do the homework required to stay on top of your investments, then you are probably better off keeping it in a bank or a mutual fund that invests in government notes (e.g FOXG). Because markets don't always act rationally. And you need to know when markets are rational and when they are not.

And I would suggest if you chose a more risky investment, to start out small. I would not recommend jumping all in all at once. I have a general rule, if a deal is good today, it will be just as good tomorrow. Don't rush yourself. You need to be diligent and you need to be comfortable.

Best of luck to you, I hope you find an investment that meets your needs. But note, if you make any of these investments, you would not be a bear.