Y2K Investing: Prudent Bear a nightmare

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

In April and May of this year, I was criticized for my investment in T Bills. Apparently, some people think T Bills will be worthless next year. I'd rather think of them as an investment backed by the full faith and credit of the U.S. military. (chuckle)

The aggressive pessimists backed strategy of contrarian investing including gold and "bear" mutual funds. After a flurry of activity, gold has dropped below $290 an ounce. The oft recommended Prudent Bear fund (Andy's favorite) was selling at $4.07 a share today. In the past year, BEARX has dropped -31.97% while the S&P 500 is up 25.58%.

Is the market overvalued? Very much so. But a few forum pessimists jumped the gun financially and predicted a market collapse. Big Dog predicted the Dow at 8500 on rollover. Well... we have 29 more days. Armchair guessing doesn't cost much. I do furrow my brow when I hear about folks who have emptied the 401(k) to dump money into metals, short options or bear funds. Yes, folks, it has happened... and it's a very aggressive gamble to bet the IRS won't be around to collect taxes next year. (Or that a retirement fund of nonhybridized seeds will be more valuable than money.)

Of course, this is America and everyone has an economic right to invest in any sort of legal property. If you want to bet contrarian, however, you might want to wait until after a January-February relief rally. As we pass through the rollover, I think they'll be a huge sigh of relief, premature perhaps, but palpable. We may see a market spurt before the economic engine starts to sputter. This will be a killer for those shorting the market... can you say "margin call?"

The patient investor may want to look at 2Q/3Q weakness in planning an investment strategy. As for my personal plans, given the sideways movement in the market, the T's seem pretty safe. I plan to wait and size up the relief rally. Oh, this is not financial advise... just food for thought. (Had to squeeze in a disclaimer.)

-- Ken Decker (kcdecker@worldnet.att.net), December 02, 1999


Unfortunately, Ken, I gotta agree with ya' on this one. The gold predictions didn't pan out, although lets note that what goes down eventually must come up. It's like some wise Wall Street sages have noted (forgot the person's name) "...the market ALWAYS does what it's supposed to do, just NEVER when it's supposed to...". There's a lot of truth in that statement. Better find a field full of four leaf clovers if you're gonna try investing based upon market timing.

Take heart gold bugs. The gold market will return...we just don't know when!

-- haha (haha@haha.com), December 02, 1999.

The markets have been temporarily calmed.



Wednesday November 17, 7:10 pm Eastern Time

Fed's Y2K liquidity measures keep markets calm

By Ross Finley

NEW YORK, Nov 17 (Reuters) - While the Federal Reserve has financial markets guessing whether Tuesday's interest-rate increase may be the last for several months, the central bank has taken great pains to quell fears about year-end liquidity.

The Fed has put in place a series of measures to make sure markets work smoothly when the clocks on the world's computers change over to 2000 and investors decide whether to hold their positions or convert to cash because of fears of technology-related disruptions on the financial markets.

New York Federal Reserve Bank President William McDonough affirmed on Wednesday that the Fed had ``gone a long way'' toward addressing year-end liquidity fears that peaked in August and September of this year.

Analysts, economists, market players and primary dealers -- the firms that conduct securities transactions with the New York Fed -- agreed.

``It's certainly been useful -- it's a valuable backstop to have there. The mere fact that the Fed has been so aggressive has been helpful,'' said Lou Crandall, chief economist at R.H. Wrightson & Associates.

Economists also say market interest in the Fed's new liquidity insurance scheme means investors are approaching the issue calmly rather than with panic.

Until the Fed came to the rescue, many investors said they were content to park money in safe, liquid short-term U.S. Treasuries and keep their money away from riskier assets such as stocks or debt from corporations and government-sponsored agencies. If that occurred, it might have led to a liquidity squeeze similar to what was seen last year at this time.

Instead, stocks have rallied and so-called spread products have also performed rather well.

But many analysts added that the bond market's resilience running into the last quarter before the date changes to 2000 is only partly a result of the Fed's preemptive measures.

Crandall cited the concern several months ago in the corporate bond and mortgage-backed markets about widening of spreads -- which indicated a preference by investors for Treasuries, securities which are much easier to turn over in the event of a crisis.

``We've seen liquidity in lots of other markets hold up,'' Crandall said. ``The corporate bond market had this expectation spreads would widen dramatically and they haven't.''

One of the Fed's main tools in fighting Y2K fears is STRIPs options -- securities that allow dealers to cash in the value of the option on one of three maturity dates offered.

This ability to exchange STRIPs for cash readily if needed is the kind of safety net prudent dealers crave as insurance against a year- end liquidity crunch. The December 30 maturity date, two days before computer clocks change over, has met the highest demand. The other two maturities are December 23 and January 6.

The Fed has auctioned five separate offerings of STRIPs since October 20, all of which have generated widespread interest, according to the New York Fed.

``There has been a tremendous amount of interest in the options auctions that have taken place,'' the New York Fed's McDonough said on Wednesday.

Analysts say that with five of seven STRIPs options auctions already behind them -- totaling just over $370 billion -- many market players who were concerned about cash on hand at year-end have already taken out their respective millennium insurance policies and are now sitting comfortably.

Citing strong demand, the Fed on November 4 added two additional STRIPs auctions to the original total of five and said it could add more if there were a further strengthening in demand.

The Fed has twice increased the amount of securities offered in individual auctions, also citing increased demand. But the amounts offered in the November 17 auctions decreased slightly, indicating the market may be more confident about year-end cash flows.

``In terms of why they were recently cut back, I would say it could reflect a number of things -- perhaps some greater confidence in the market about Y2K itself and how it will go,'' said Spence Hilton, associate vice president at the Federal Reserve Bank of New York.

In addition to the STRIPs auctions, the New York Fed also announced in September that it would begin entering into repurchase transactions with maturities up to 90 days, up from the previous maximum period of 60 days.

The Fed has already tied up approximately $30 billion in long-term repurchase agreements, a further reinforcement against liquidity concerns in the repo market.

``The only risk at this point is customers -- and by that I mean mutual funds having large withdrawals at the end of the term,'' said Marc Wanshel, economist at J.P. Morgan & Co. ``But the dealers, I think, are very comfortable.''

Vincent Verterano, head government bond trader at Nomura Securities International, said the STRIPs options provide good insurance for dealers who need extra liquidity toward year-end. But he underlined that insurance doesn't come for free.

``The Fed's going to make a ton of money on this,'' Verterano said. ``Chances are they (the options) are not going to be exercised.''

The interest rate on options is 150 basis points (1-1/2 percentage points) above the Federal funds rate, now at 5.50 percent, but traders see the insurance as cheap.

Before Wednesday's auction, the total amount the Fed had received in premiums was ``just shy of $5 million -- a little bit more with today's sale,'' Hilton said.

Many traders say that the premium is a small price to pay for what amounts to peace of mind running up to the new year.

In addition to the options auctions, The Fed now accepts a broader range of collateral for its open market repurchase operations. And it introduced in September a special facility to ease pressure on smaller regional banks toward year-end.

Despite the fact few banks have stepped forward and used the facility, Crandall and other analysts acknowledged that the very fact the Fed made the liquidity facility available to small banks if they needed it was a positive step forward.

-- (M@rket.trends), December 02, 1999.

Decker ... Didn't read your whole post . It's basiclly worthless . When the IRS goes down , you can paper the walls of your outhouse with the T-Bills , and rip them down one at a time to use , as I know you won't have even an extra roll of "T" paper ( that is , IF you have any excretment after the first month ! ). SAD !!! Eagle

-- Hal Walker (e999eagle@freewwweb.com), December 02, 1999.

"After a flurry of activity, gold has dropped below $290 an ounce."

........... makes it sound like it started at $340 before the "flurry", and now gold investors are looking at big losses. Neglected to mention that gold bottomed at about $255 and languished in that vicinity for some months before the flurry. Oversight, Ken?

Agree that PruBear is a terrible investment vehicle.

-- alan (foobar@foobar.com), December 02, 1999.

Thanks for the post, Ken. You've taken prudent precautionary action. T-bills are one heck of a lot safer than playing the bubble.

-- TA (sea_spur@yahoo.com), December 02, 1999.

>> When the IRS goes down ... <<

I expect they'll be "up" enough to nab the cash. Even if it takes calling out the National Guard. Even the brass hats of the Pentagon would agree, there is no higher national priority than collecting taxes!

-- Brian McLaughlin (brianm@ims.com), December 02, 1999.

Here we are again....a post or two per day from little kenny decker, the closet doomer who has "plenty of money saved for those high food prices". And for the rest of America - let them eat cake... whatsamatter kenny - have you already saved your corner of the world from y2k, as previously promised in your posts!!! Lots of time on your hands now??? Look in the dictionary for the difference between "advise" and "advice", you nit-wit, arrogant, yuppie twit! Take a hike to the polly forum; I'm sure you would be most welcome there.

-- catfish joe (joe6pack@bottomdweller.net), December 02, 1999.

catfish joe, i do not uderstand what is so wrong with someone saving money. It seems to me that Mr. Decker had to work for his T. bills so what is wrong with this?????? and i do agree that the T-bills are the best way to wait and the side line and then jump into the market with with some cash and get the goodies. But one more time in order TO HAVE< TRUST ME< YOU HAVE TO WOOOOOOOOOORRRRKKKKKKKKKK for it.

-- rena s. (wsch117360@aol.com), December 02, 1999.

"Apparently, some people think T Bills will be worthless next year. I'd rather think of them as an investment backed by the full faith and credit of the U.S. military."

When I first read this, my eyes saw "government" where Decker has written "military", and I saw no difficulty whatsoever in reconciling the two sentences. After rereading it, I was put in mind of a sentence that I believe comes from this book: "The Prince" by Niccolo Machiavelli.

"Gold may not always get you good soldiers, but good soldiers can always get you gold."

Get out of promises to pay (such as gov't/corporate paper) of every kind ASAP. Conceal by burial most of what you have that is valuable, and bury some at a considerable distance from your dwelling. You'll be glad you did. Remember, what uniformed looters can't find, they can't steal.


-- MinnesotaSmith (y2ksafeminnesota@hotmail.com), December 03, 1999.

Ah, Catfish... 28 days left, do try to make a useful contribution before rollover.

And Minnesota... still working on the sense of humor? Good luck with your gold buried in mason jars. Just make sure you don't forget where you hid them. (chuckle) Seen the KIA commercials?

-- Ken Decker (kcdecker@worldnet.att.net), December 03, 1999.

I watch almost no television, Decker, so I have not seen the Kia commercial. How do you think I A) historically found time while working/attending colleges to do serious reading, and B) more recently, do Y2K preps?

On burial: only someone who both A) did not publicly admit the severity of Y2K, and B) had not yet read Sorokin would say what you did about its wisdom. Better to take a chance on nonretrieval by burial, than to "choose" virtual certainity of nonretrieval by abandonment to gov't criminals by leaving it in a safety deposit box or bank.

Only what, 2 more federal Gov't paychecks, and Decker is as unwanted by his employers as Henry Rearden's family was by TPTB after he quit his steel company and disappeared [in "Atlas Shrugged" by Ayn Rand].


-- MinnesotaSmith (y2ksafeminnesota@hotmail.com), December 03, 1999.


As one of those who advocated (and advocates) hedging including Prudent Bear, I'd like to respond.

It was (and is) quite clear that the government and FRB would do anything it could to maintain the status quo. This includes market manipulation. It was (and is) quite clear that equities are overpriced.

It therefor seemed (and seems)to me that the proper action was to get REALLY diversified. Now we are approaching the rollover and I expect that companies and economies which don't make it will be apparent in 4-7 months.

So I sit here quite happily with:

5% Bearx (lost some) 20% Gold mining Stock (made a little) 30% Commodities (made a lot) 30% Money market (made a little) 15% company stock (make a lot)

I believe the market should have already priced in the risk of equities and it has not because of manipulation. It will not fail to price in bankrupticies.

-- ng (ccantprovideemail@none.com), December 03, 1999.


Why would I have any knowledge of your college, work or preparation habits? You seem to have found time to create a web site and launch a small business.

As for your response on burying "valuables," you are simply wrong. To suggest the United States government is about to declare martial law and seize assets is paranoid and delusional. First, even if the government wanted to declare martial law, it does not a fraction of the resources necessary. Second, every officer of the armed forces is sworn to uphold and defend the Constitution of the United States. Having served, I contend many officers (and enlisted) would simply refuse to impose martial law or be party to a coup d'etat. Third, there would be violent resistent from an armed citizenry... from a far larger group than the fringe you represent. Fourth, any attempt to impose martial law would essentially ravage the free market economy of the U.S. Fifth, the the worst case impact of Y2K will be a depression. Period.

Finally, Smith, I have worked in the private, public and nonprofit sectors. I have never recieved a payment from the Federal government except during my tour in the military. As for my employability, rest assured I will be working after rollover. And how will your Y2K business fare? Next time, Smith, learn a lesson from Gary North... always have an Apocalypse just around the corner. It's worked for him and Remnant Review for the past 20 years.

Ng, the government and Federal Reserve have a limited ability to manipulate the marketplace.

Second, if you are an astute investor, you'll realize Bearx has double the normal management fee for its fund category. It is one of the lowest ranked funds in its category and has a "one star" rating from Morningstar. Bear funds have not done well during this bull market... but Prudent Bear is THE WORST bear fund out there. If you want to pay David Tice more to lose your money... it's your call.

-- Ken Decker (kcdecker@worldnet.att.net), December 03, 1999.


I want BEARX for exactly the reason it has underperformed other Bear funds in this market. I still think there has to be a mraket sell off or hyperinfaltion. Most of the other Bear type funds attempt to perform exactly the opposite of the market, e.g. if the market goses down 10% they go up 10%. Rydex URSA is an example. BEARX attempts to leverage market downside to the upside. So 10% down could get 40 or 100% up. Remember a year ago when Tice was the best performing manager in the US? This takes a relatively small portion of my portfolio to protect against downside risk, and I can do other things with the rest.

Plus, Tice's understanding of two factors coincides with mine. That is INTERNUT stocks (I've been doing INTERNET engineering at the enterprise level for 20 years) and Y2K (I've been doing Y2K engineering for 8 years). I would LOVE to be wrong about Y2K, but I don't think it is possible to be wrong about the INTERNUTS. I mean MarthaStewart.com for god sake. No barriers to entry. No profits. There is going to be a shakeout there - it only needs a trigger.

-- ng (cantprovideemail@none.com), December 03, 1999.

There does "have" to be a market sell off... we can achieve more reasonable valuations through a long flat period with modest rises and falls. I'm interesting in the first real waves of boomers cashing out starting in 2005.

As for Bearx, it is an aggressive play to short the market... and it can be profitable. The 2.63% management fee, however, is criminal. I wouldn't pay Warren Buffet that much....

As for the Internet, I think it's catalog shopping for the 21st century. The mail order catalog didn't kill the retail sector, neither will the Internet. It will markets more competitive by providing buyers with better, faster information. And it has already pinched service businesses like brokerage houses and travel agencies. I love booking travel via the Internet... extremely convenient. The overvaluations are due to wild speculation about the profitability of dot com's. When the profits fail to materialize, eventually investors will sour and the weak Internet firms will fail. It's just another gold rush... far more people will end up with an empty pan than a pouch full of nuggets. There are still a few decent buys in the market... but they are hard to find. Too much money chasing too few equities. Call me boring, but I'll collect my interest and wait for the right opportunity. I'd rather not get roasted trying to time the collapse.

-- Ken Decker (kcdecker@worldnet.att.net), December 03, 1999.

Moderation questions? read the FAQ