Auszug aus 'Conquer the Crash'

verfasst von ---- ELLI ----, 10.10.2002, 23:00

-->Should You Speculate in Stocks?

- Excerpted from Bob Prechter's Conquer the Crash, Chapter 20


Perhaps the number one precaution to take at the start of a deflationary crash is to make
sure that your investment capital is not invested “long” in stocks, stock mutual funds, stock index
futures, stock options or any other equity-based investment or speculation. That advice alone
should be worth the time you spent to read this book.
In 2000 and 2001, countless Internet stocks fell from $50 or $100 a share to near zero in a
matter of months. In 2001, Enron went from $85 to pennies a share in less than a year. These are
the early casualties of debt, leverage and incautious speculation. Countless investors, including
the managers of insurance companies, pension funds and mutual funds, express great confidence
that their “diverse holdings” will keep major portfolio risk at bay. Aside from piles of
questionable debt, what are those diverse holdings? Stocks, stocks and more stocks. Despite
current optimism that the bull market is back, there will be many more casualties to come when
stock prices turn back down again.
Don’t presume that the Fed will rescue the stock market, either. In theory, the Fed could
declare a support price for certain stocks, but which ones? And how much money would it
commit to buying them? If the Fed were actually to buy equities or stock-index futures, the
temporary result might be a brief rally, but the ultimate result would be a collapse in the value of
the Fed’s own assets when the market turned back down, making the Fed look foolish and
compromising its primary goals, as cited in Chapter 13. It wouldn’t want to keep repeating that
experience. The bankers’ pools of 1929 gave up on this strategy, and so will the Fed if it tries it.
Short Selling Stocks and Trading in Futures and Options
Short selling is a great idea at the onset of a deflationary depression, at least from a
timing standpoint. Shares of vulnerable banks and other financial companies in particular are a
great downside bet. The current stock-market rally, so far a pitifully weak response to record Fed-induced
liquidity in 2001, is providing a great general short-selling opportunity, per all the
evidence in Chapters 6 and 7. You should avoid shorting special situations such as defense and
natural resource stocks, which can move counter-trend, or at least fall less precipitously, when
international tensions rise. Buying “leaps,” which are long-term puts, on stocks and stock indexes
would be a fine speculation. If you do not already know by experience what the terms “short
selling” and “leaps” mean, I recommend that you avoid engaging in these activities.
Unfortunately, there could well be structural risks in dealing with stocks and associated
derivatives during a major retrenchment. Trading stocks, options and futures could be extremely
problematic during a stock market panic. One reason is that trading systems tend to break down
when volume surges and the system’s operators become emotional. When the exchange floor
became a hurricane of paper in 1929, it would sometimes take days to sort out who had bought
and sold what and then determine whether investors and traders could afford to pay for their
positions. You can experience the turmoil vicariously in any good history of the 1929 crash. To
give you a flavor of what goes on, read this description, from one of my subscribers, of the tumult
during a comparatively mild panic forty years ago:
I worked for Merrill Lynch in New York in 1962 during the collapse. I well recall the
failure of the teletype in our office and inexperienced clerks calling in the orders to the
main office. I recall many of the screw-ups: buys called in as sells and vice versa. Some
stocks had nicknames like Bessie (Bethlehem Steel), Peggy (Public Service Electric and
Gas), and I recall the clerks calling in the orders by the stocks’ nicknames and the person
on the other end not knowing what the hell they were talking about. All the while, the
market was collapsing.

Do you think investors and brokers will behave differently now that so much stock
trading is done on-line? I don’t. Do you think the experience will be “smoother” because modern
computers are involved? I don’t. In fact, today’s system — much improved, to be sure — is
nevertheless a recipe for an even bigger mess during a panic. Investors will be so nervous that
they will screw up their orders. Huge volume will clog website servers, disrupting orders entered
on-line. Orders may go in, but confirmations may not come out. A trader might not know if his
sale or purchase went through. Is he in or out? Quote systems will falter at just the wrong time.
Phone lines from you to the broker and from the broker to the floor will be jammed, and some
will go down. Computer technicians will be working overtime while being distracted worrying
about their own investments. Brokers will be operating on little sleep and at peak agitation, since
most brokers are themselves bullish speculators. They will be entering orders wrong. Firms will
begin to enact and enforce tighter restrictions on trading and margin. Price gaps will trigger stops
at prices beyond the ability of some account holders to pay. You, the wise short seller, could
survive all these problems only to discover that your broker has gone bankrupt or has been shut
down by the SEC or that its associated bank has had a computer breakdown or that its assets are
depleted or frozen.
Unless you are prepared for such an environment, don’t get suckered into this maelstrom
thinking that the bear market will be business as usual, just in the other direction. If you want to
try making a killing being short in the collapse, make sure that you are not overexposed. Make
sure that if the system locks up for days or weeks, you will not be in a panic yourself. Make sure
that in a worst-case scenario, the funds you place at risk are funds you could lose.
Inverse Index (“Short”) Mutual Funds
A somewhat more conservative speculation would be to invest in inverse index funds,
also called short funds or bear funds, which are bets on falling stock indexes. These funds go up
in value as stock index futures fall in value, and vice versa. I recommended inverse index funds in
The Dick Davis Digest for both 2000 and 2001, and they beat everything else both years. The
stock market should have several more down years ahead, and bigger ones at that…
Bob Prechter goes on to recommend multiple index funds and managed bear funds - providing
detailed strategic and contact information about each investment opportunity.

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• Auszug aus 'Conquer the Crash' - ---- ELLI ----, 10.10.2002, 23:00