I currently am making modest plays against the market that include: (1) dumping mutual funds (no brainer and finished some time ago), (2) purchase of shares in a gold/silver holding company (trades as CEF), and (3) shorting the market employing the "Prudent Bear Fund" (listed as BEARX, but requires private purchase).

Question: Do any of you out there doing similar moves have an opinion about whether to clear out before "01/01/00" or after? Assuming something less than 9-10, the big bucks could be made after, but the inability to make transactions in a timely manner once the rollover(coaster) occurs has me a little spooked.

Although a little voice in my head says the FUBAR squad may be right, let's keep the "We're all gonna die" to a minimum for a moment here.

PS - I'm going to miss this forum once this thing happens (whatever that means).

-- Dave (aaa@aaa.com), June 22, 1999

Answers

Dave,

Nice 8 digit date you have there (tee hee).

Anyway, back to your topic. I've read several book on whats coming and I would say the consenses is a drop in the Dow from September onward. Lots of of decline this year and continued declines well into the middle of next year (at least). Speculation that the Dow will not get back to the +10K level for years. For additional information on your strategies, I try Maudlin's book, How to profit from the Y2K recession. As to holding obver the rollover, shorting is a risky venture, so shorting over the rollover has to be in you comfort level. Should prove "interesting."

-- Jim Standen (jstanden@ucalgary.ca), June 22, 1999.

The problem lies in the ability of the futures clearing corp and in the ability of the financial institutions that are clearing customer trades, to maintain sufficent equity and orderly markets. As history has shown time and time again the masses all act in unison. Upon the occurance of a significant event there shall be a dearth of buyers and a surplus of sellers in the financial markets. As most are aware of, the excessive credit that has festerd in the financial system has left exposed many investers to devastating market drops. Although an individual may not be employing the use of leverage in his own portfolio, he is exposed to general market risk that has substantial leverage exposure. This exposure will help tp precipitate an even larger drop in invester portfolios that would have been in a rational market. This credit exposure will be a major influence in a disorderly market event. Inordinent market moves due to leveraged playes will find many market participents insolvent. These participents may have taken the other side of your short contract. As there may be a significant number of defaults one may find that his shorts have been uncollectable due to defaults of those financial institutions holding your trade. Many of the mony-center banks (Citycorp, Morgan, BA, BT,BB etc) would become bankrupt should they experience a market index fluctuation of 12% should that swing come in a very short timeframe. The leveraged positions that they hold are often 200 to 300% of working capital. In a disorderly market event these banks may find it impossible to offset there positions and soon find themselves insolvent. To quote one of my favorite buisnessmen of the market crash of 1929, Joe Kennedy, "only a sucker tries to squeeze the last dime out of a trade." Employ a short position but do not try to hold it for too long or you may be the one Joe Kennedy was talking about.

-- PJ (iop4@hotmail.com), June 22, 1999.

Have you considered selling calls? A call option would likely expire worthless if the market drops and you get your cash up front.

Brokers will require assets in your account to show that you can cover if your call is exercised amybe a few blue chips that are likely to propser due to Y2K.

I recall a piece that projected that 15% of businesses will thrive due to Y2K and 15% will fail while most muddle thru and survive, barely. Perhaps it would be an interesting exercise to try and identify who will thrive. (?) Certainly an essential goods supplier, perhaps a Y2K aware domestic oil refiner? Is there one?

Another interesting exercise would be to identify which companies might recover first - retail food distributors? Perhaps selling covered calls on the shares of the 15% that will thrive or using the thrive shares as the collateral for call sales against the indexes.

-- Bill P (porterwn@one.net), June 22, 1999.

IMHO, covered calls don't have much leverage, and naked calls can lose your shirt.

FWIW, DJI Put Leaps for March 2000 with strike price of 90 look attractive to me, but since I don't make investment recomendations, this isn't one. If things go smoothly, or if all trading is halted, I'm out a few hundred per contract. Otherwise, if the DJI tumbles 20%, or 30% or etc, I may pick up a few bucks. Again, this is not an investment recommendation. YMMV.

Jerry

-- Jerry B (skeptic76@erols.com), June 22, 1999.

Based on the information I have today, I will probably hold my shorts into the new year. I don't expect massive problems to develop immediately. I think it will be a more gradual process as oil shortages, etc. begin to appear. I may change my mind late this year, however, depending on what happens.

-- Dave (dannco@hotmail.com), June 22, 1999.

Don't miss what PJ said above.

You have to factor in the credit risk of your counterparty on the other side of the transaction, backed by the exchange that is "guaranteeing" your contract, as well as the securities firms through which you are both transacting your contract.

It seems to me it might turn out like a bet that "breaks the casino" and they just politely usher you to the door rather than pay you off.

Selling a covered call requires you to hold the underlying securities through any crash. A naked call will require extra cash from you if the market takes off again, but then that is exactly what you want to bet it won't do. And can you really withdraw the premium on the call you've sold, _plus_ all your margin? I don't think so.

Most market crashes have been accompanied by uncertainties about transaction clearings and payoffs. In fact, as in 1987, they can be _triggered_ merely by doubts about settlements among some of the big players. Your tiny little winnings might be lost in the head-butting of giant institutions for liquidity and post-crash survival.

First rule of any business: figure out how you're gonna get paid.

If banks go shortly after a market crash, you will be skewered on two fronts: the exchange/broker may freeze all payments, and any check you might get from them can be stuck in a banking meltdown.

Puts are commanding a volatility premium of ~26% these days. In very rough terms, that means the market has already priced in a 26% possible drop over a year's time for you to merely break even. A naked call bet (selling it) looks pretty good then if it is effectively a bet the market won't go UP anywhere near 26% per year, but please factor in the perils of collecting on your winnings (you can bet you'll have to pay if you LOSE on that bet) and it shaves your odds a little to the worse.

I don't know -- you go figure -- maybe play with a little bit of your play money, but don't go looking for the deal that will put you on Easy Street for life. There's too much going on here -- layer upon layer -- to play these games with any trust. We've been talking here about the financial system getting shaken down to its roots, and it it does, there will be trouble at all the derivative levels.

-- jor-el (jor-el@krypton.uni), June 23, 1999.

I am a Polly, so bear with me if I talk too slowly or use poor grammar, remember only a certain chosen few are the smart ones who have "Gotten It" - much like only Linus got it when he camped out waiting for the Great Pumpkin. But this Pumpkin Patch - I mean forum - has so much sincerity the Great Pumpkin is sure to visit next year. But in addition to my sarcasm I have an observation of sorts. In September of 1997 Westergard posted an article commenting on y2k related stocks.

ginnylegs@hotmail.com), June 23, 1999.

Go with long term puts ( say 1/1/2000 DOW 8000 ) and semi-day trade them ( when they double, sell them ) and buy, say 1/1/2000 DOW 7500 puts. You get to pocket 1/2 your investment now, and your risk is only the premium for the options, you Can have your cake and eat it too. Go with a broker that charges $25.00 or less RT, invest only money you don't need, and all the other disclaimers.

-- CT (ct@no.yr), June 23, 1999.