SURVIVING THE GAME

MARCH 31, 2009

2009 - 24

Up, down, up, down. Here we go again. The rally fizzled and now we consolidate. I expect we will move sideways now for a few months as we digest the gains of March. Good time to sell index straddles :} I see a range of 700-850 on the S&P.

Volatility is still high with VIX at about 43 which translates to high option prices. Good to sell options, not so good to buy.

Lots of commodities displaying similar characteristics. A big bounce off extreme lows, a correction and now......? I suspect sideways action. Look at oil, soybeans, copper, etc.

The uraniums have shown that they are simply market followers, not capable of extending gains on their own. We'll see over time if that changes.

If your looking for a play on the recovery, take a look at the steel ETF's.

DEBT - FRIEND OR FOE ??

We all know there is good debt and bad debt. Good being a mortgage ( if you can afford it ) or working capital for a business, etc. Bad being the no money down, no payments until 2010 on the big screen TV or any credit card not paid off in full each month. If you have access to capital, say equity in your home, should you use it? I contend that there is a place and time to access that money and the time is now.

I believe inflation will return with a vengance. You just can't dump trillions of dollars into peoples lap and not expect it to come back as inflation. Given that belief, here is a strategy to survive the coming interest rate hikes and to prosper from it.

Get rid of your bad debt. Then use good debt to build wealth over the next decade.

You borrow the maximum ( up to 75% ) on your home. You don't want to get into high ratio insured mortgages,etc. DO NOT use a HELOC with floating interest rate. You can get a 10 year term in the 5-5.25% range if you look hard. I suspect inflation will rear its ugly head in 1-2 years. This will drive up interst rates so lock in now for the long term. Now, what to do with all that money?

There are 3 possible outcomes to this strategy.

1) I am right and inflation returns. You have locked in a low interest rate on your debt. You have used the cash and invested in hard assets and are now reaping the rewards.

2) I am wrong and inflation remains stable. No harm. As long as your return equals the interst rate on the debt you are breaking even. I am comfortable saying that I can achieve a 5% return with very little risk.

3) I am wrong and we enter a deflationary spiral. This is the worst of all because you will see your incomes, home, etc decline in value. In a period of deflation, cash is king. Since you have already borrowed on your equity, you are set. you can take advantage of lower prices on hard assets such as real estate using your cash. If home values decline significantly, you will be unable to borrow as much in the future against that asset.

So, I feel there is little risk in pursuing this strategy no matter what the future holds in terms of inflation, interest rates, etc.

What to do with cash.

1) Stuffing it into mutual funds was a long time strategy of PATHETIC, CORRUPT financial planners. You pay interest on the money borrowed, you pay management fees to the mutual fund company so you need to make at least 7% just to break even. Many people followed this strategy and are still paying on the debt and their money hasn't grown a dime in over 10 years. Nice idea if your a mutual fund salesman ( which is what most financial planners are ). Do not follow this strategy.

2) Put it into short term instruments. Yield right now is low so you would be running negative on the cash flow. BUT, if inflation returns and/or interest rates spike you could be yielding more on short term money than the 5% your paying. Not a bad strategy.

3) I suggest spreading into several asset classes weighted mostly to commodities. How long do you think oil will be below $50 per barrel when the many producers require $75+ to break even? You can diversify your money using ETF's. I would avoid buying stocks in oil producers or gold miners, etc. Too much risk of something happening to a single company. Concentrate on the physical commodity, not the producer. Look at oil, gold and other metals, grains, soft commodities such as sugar, cocoa. What is the worst that can happen? These commodities may decline but how far? Some are near 10 year lows, can they really go down much further? Remember, this is real stuff. Stuff we use every day, not some peice of paper that is supposed to represent a percentage ownwership in some company. You can't eat paper but you do eat corn, you do drive a car, etc. Now don't get the impression that I am some commodity nut like Jim Rogers. I woul never suggest going " all-in " on anything. But adding a portfolio of real, hard assets to your holdings will stand you well over time. Heck, you can even look at real estate as a real asset, just make sure your not overpaying for it.

Options Guy