Bear Market Profits and Bull Market Fortunes by Tony Ciotti

WEISS RESEARCHâ&#x20AC;&#x2122;S Bear Market Profits and Bull Market Fortunes

M ART I N D. W E I SS P H .D.

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Bear Market Profits And Bull Market Fortunes For the past three years, my team and I have repeatedly warned of a real estate collapse, a debt disaster, an economic catastrophe and a great bear market. Now, the time to merely warn of future crises is behind us. They have arrived. They are headline news not just in America, but all over the world. So now, it’s time for us to play a new role — to inspire you to fight back, seize control of your own destiny, and triumph. We want you to be able to harness the many profit opportunities that every bear market offers with confidence, so you can emerge from this crisis with greater wealth than you have today. And we want to help you seize those opportunities sensibly and prudently, preserving what you have now while building upon that foundation for the future. Unfortunately, on Wall Street today, many advisers are little more than professional cheerleaders. They have put millions of investors into stocks and other investments that are at ground zero in this crisis. And now they are hoping against hope that, somehow, those companies will dodge the next bullets. They are hoping that, someday, the stocks will recover most of what they’ve lost. But instead, most of those stocks have just continued plunging, wiping out half or sometimes almost all of the money invested. Meanwhile, on the other side of the spectrum, there are also many advisers who are defeatists, who would have you abandon your desire to profit in this environment; who say you must surrender your dreams for a better life. The Wall Street cheerleaders were obviously wrong, and as we’ll see in a moment, the results of their disastrous investment choices prove it. But the defeatists are also wrong. It is not hard to make money in a bear market. The only reason people believe it’s hard is because they’ve been investing their money in all the wrong places! That’s a terrible shame. Bear markets are legendary for their ability to create solid money-making opportunities. And investors who follow the crowd — or investors who bow out — will miss not one, but two of the greatest profit opportunities of our lifetimes: The opportunity to earn healthy bear market 3

profits now on the way down ... and ... the opportunity to earn solid profits again when markets inevitably touch bottom and turn back up. That’s why my message to you today is one of optimism, encouragement, and empowerment. You can do this. And today I’ll show you how you can do it with confidence. And it all begins with the 11 LAWS for bear market success. Law of Success #1: Protect your capital. It’s easy to look back at the mistakes that big managers like Fisher Investments made and big brokers like Merrill Lynch made and say, “Look! They bought the wrong investments. They screwed up.” True. That was a big mistake. But the bigger mistake they made was not their investment choices or timing. It was in their failure to protect your capital. Act promptly to get rid of losers. Keep a ready store of cash. Remember: Just by keeping what you have you’ll be far ahead of virtually everyone else. Law of Success #2: Use common sense — follow your own instinct! If you can see with your own eyes that a company is going down the tubes, get out. Don’t let a broker or a financial planner talk you out of selling investments that are obviously burning a hole in your portfolio. Law of Success #3: Don’t count on the government to turn the economy around or save sinking investments. The government has already loaned, spent or guaranteed trillions of dollars, and the economy is still sinking. Trillions more are not going to change that trend. Yes, the government can stimulate temporary rallies in the stock market. But when and if it does, use them as opportunities to unload the bad investments you’ve been stuck with. Law of Success #4: Invest exclusively in liquid, heavily traded investments. In other words, stay away from investments that are easy to buy but hard to sell. Beware of mutual funds, annuities, insurance policies or even bank CDs that lock you in with sales fees or penalties. Stay away from thinly-traded small cap stocks, municipal bonds or exoteric plans that can entrap you. It doesn’t matter how good the investment may appear. If you can’t jump out at a moment’s notice, it’s no good for these uncertain times. 4

Law of Success #5: Stay flexible. One of the big mistakes Wall Street managers make is to limit their choices to stocks and be stuck in that mold. So when all stocks fall, there’s no way they can avoid losing money. Instead, expand your horizons beyond traditional investing approaches. As long as it’s based on common sense and as long as you can buy and sell it easily in an ordinary brokerage account, don’t scratch it off your list just because it’s new to you. Law of Success #6: Use investments that move independently of stocks and bonds. For example, currencies, which you can buy through simple instruments such as currency exchange traded funds, plus, gold and commodities, which you can also buy through ETFs (You'll see how in just a moment.). Law of Success #7: Find special situations that go up DESPITE a falling market — companies that are virtually depression-proof. Law of Success #8: Use investments that go up BECAUSE of a falling market, such as inverse ETFs that soar when stocks sink. In fact, inverse ETFs can be such a powerful source of protection and profit that I'll be revealing all of the details for you in a moment ... Law of Success #9: Balance your portfolio. You saw how it was obviously a mistake to place all bets on a bull market without any counterbalancing investments or hedges. Similarly, it could be a mistake to place all your bets on a bear market ... In addition to inverse investments, at the right time, make sure you have some counter-balancing positions ... in special situations companies, plus currencies, gold and even some commodities — all of which can be accessed through ETFs or standard brokerage account investments. Law of Success #10: Don’t fall in love with your investments. Take your profits along the way. Then roll those profits into new opportunities. And, above all ...

Law of Success #11: Be a contrarian and buck the crowd. Looking back, whenever a broker, an adviser, even a friend or relative told you to “buy, buy, buy,” it was the worst possible time to invest. Likewise, looking ahead, when everyone finally throws in the towel and tells you to “sell, sell, sell,” it could be the best time to invest. My father was the ultimate contrarian and it served him well, especially in bear markets. In 1930, when the market had enjoyed a big rally and everyone thought a new bull market had begun, he borrowed $500 from his mother — my grandmother — shorted the market and, by the time the market hit rock bottom two years later, he had over $100,000. What would that be in today’s dollars? More than $1.2 million. He multiplied that $500 two hundred times over. But here’s the other half of the story: In 1933, when thousands of banks were failing and everyone thought the world was coming to an end, he turned bullish and bought big cap stocks with both fists. He bought General Motors, AT&T, General Electric, Sears and many others for pennies on the dollar. The sentiment was so bearish that trading had practically come to a halt. Only 400,000 shares of stock traded that day on the entire New York Stock Exchange, less than one single transaction in today’s market. Yet, it was the best time to buy. You could have done equally well in the major bear markets of the mid 1970s, early 1980s and 1990. That shows the power of contrarian investing! And, as I mention in law four, some of the best contrarian investments for profiting in a bear market are inverse ETFs ...

The ETF Solution: Profit Strategies For a Bear Market Don’t be content with just “weathering the storm.” You can position your portfolio to yield very significant returns right now by utilizing a combination of short and ultra-short ETFs (Exchange Traded Funds). ETFs are among my favorite investment vehicles for this market. They are the only investment vehicles that give you the diversity, simplicity and flexibility you need to maximize your profit potential in any market, foreign or domestic, whether rising or falling. 6

Exchange Traded Funds: Like Mutual Funds ... Only Better They’ve been dubbed “iShares” ... “Spyders” ... “Vipers” ... “The Cubes” ... and “Diamonds.” But whatever you call Exchange Traded Funds (ETF for short), they are the fastest growing investment vehicle in the world today – and it’s easy to see why. Exchange Traded Funds are investment holding companies, whose shares can be bought like any stock. When the investments these companies hold go up, the ETF’s share price rises. When they go down, it falls. With some exceptions, ETFs are typically not designed to beat the performance of a particular index. They’re designed to match it. So, if that’s the case, how do you outperform the market – especially when the market itself is underperforming? It’s simple: There is a vast array of ETFs covering so many industry sectors, countries and regions of the world – giving you so much flexibility to switch – that you have the potential to greatly outperform the market simply by picking the ones with the strongest and most consistent up-trends ... or taking advantage of inverse ETFs – special ETFs designed to go up when a particular stock index or sector goes down. Before I explain how to take advantage of inverse EFTs, let’s briefly look at the benefits of ETFs in general ... Exchange Traded Funds offer you the diversification, convenience and just about everything else you love about mutual funds. In addition, they allow you to: • Avoid the outrageously high minimums that many old-fashioned mutual funds dictate: Since most ETFs allow you to start with as little as $100 or $200, you can diversify your assets across multiple sectors or countries – and even seize the opportunity of a developing trend – without risking your entire nest egg. • Sidestep the loads and marketing fees (called “12b-1”) that ordinary funds demand: Instead of paying a penalty to buy or sell – or, worse, to reimburse the fund’s marketing expenses – you keep your money where it belongs ... in your account.

• Dodge the outrageously high management fees many mutual funds are known for: Costs are minimized, although you do have to pay a broker commission when buying or selling. But if you use a discount or online broker, your brokerage commission can be slashed significantly. • Always know precisely what investments you own: Unlike mutual funds where you won’t know where your money is invested until the information is updated, ETFs tell you precisely what they own and how much every single day – right on their Websites. • Free yourself from the trading limits funds impose: ETFs were made to be flexible. So you can buy and sell whenever you want as often as you want. Trading in and out on a whim or frequently is not recommended. But in today’s rapidly changing markets, ETFs provide you the ability to avoid the buy-and-hold approaches that can often lead to missed opportunities or, worse, debilitating losses. And since all that money remains in your account – not pilfered away by large expenses, fees and penalties – it can compound faster, building your money more quickly. Important point: Because ETFs are stocks, they give you all the flexibility that stocks do. Specifically ... • You can use “stops” to protect your profits or cut a loss. • You can get in more cheaply with limit “buy” orders. • You can even buy options on ETFs. There were roughly 250 ETFs that had options as of a recent count, with many options available on each one. And here's what may be their greatest advantage of all: ETFs are not restricted to the stock market. They cover a wide range of investment opportunities ... 1. If you’re looking for a way to grow your wealth in the strongest economies overseas, you can buy ETFs that own the largest and most liquid stocks in China ... India ... Brazil ... and many other fastgrowing countries or regions. 2. If you’re looking to invest in energy and precious metals, there are ETFs that focus exclusively on energy stocks ... ETFs that are dedicated to mining stocks ... plus ETFs that are tied to the actual commodities themselves – crude oil, gold bullion and silver. 8

3. If you want to diversify across a large number of blue-chip stocks ... or mid-cap stocks ... or small caps for greater safety, just buy one of the many ETFs that mirror the Dow or S&P 500, or the mid-cap index, or the small-cap index. 4. Want to make money as a particular industry rises? You’ll find ETFs that let you diversify your money across tech stocks ... software stocks ... telecommunication stocks ... financial services stocks ... and more. 5. Interested in income-producing investments? ETFs have you covered! You can buy ETFs that own 1-, 2-, 5- or 10-year U.S. government Treasuries ... or ETFs that own strictly stocks paying good dividends. 6. Worried that stocks may tumble? No problem. You can buy ETFs that are designed to go up in value when the Dow, the S&P, the Nasdaq or specific sectors go down. 7. Want to double your bet without doubling your investment? You can now buy ETFs that are designed to go up (or down) twice as fast as the index they track. 8. Seeking protection against a falling dollar? You can now achieve that too, with ETFs tied to specific foreign currencies. No more need to use futures or buy foreign currencies directly. Best of all, you can do all of this without ever leaving your armchair – without ever opening a special account, without ever touching a foreign stock or currency, without ever worrying about the risks of options, futures or margin accounts. All you’re doing is buying the stock of a U.S.-based company with an online trade or a quick call to your regular broker. Clearly, ETFs are possibly the most flexible, most diverse and most convenient investment instrument in the world today. Let’s sum up, while noting a couple more advantages – and disadvantages. 1. Low cost of entry: You can invest in an entire index for the cost of one share of an ETF, plus a small broker commission. 2. Tax efficiency: ETFs have a specialized IRS-qualified strategy that allows your profits to compound without the drag of taxes, thereby helping your wealth multiply even faster.

3. Cost efficiency: Annual fees are often lower than they are for comparable mutual funds. For example, Vanguard Total Stock Market Index has a low expense ratio of 0.15%. But the ETF equivalent, Vanguard Total Stock Market ETF, has an expense ratio of only 0.07%. 4. Flexible trading: Unlike mutual funds, ETFs trade throughout the day so you can buy and sell them when you wish. And unlike many funds, you won’t have to pay any backend fees or penalties upon redemption. Still, there are a few cons you should be aware of ... 1. Dividend risk: The same structure that gives ETFs tax efficiency can also lower their qualified dividend income, or QDI, which can affect investors’ bottom line. 2. Overtrading: Sometimes, it’s so easy to trade ETFs that investors wind up overdoing it, raising their costs and defeating the costefficiency advantage of ETFs. 3. No ETF has a “perfect” model for tracking an index. So although an ETF is designed to match a particular index, there could be differences in its performance and the performance of the index. Similarly, there’s no such thing as a perfect double-leverage model. So although double-leveraged ETFs are designed to move up (or down) at two times the pace of the index they track, they do not necessarily achieve their goal. There can be discrepancies, and those discrepancies can sometimes compound over time.

Inverse ETFs – Your Ace in the Hole With the economy in such dire straits, one question is probably jumping out at you more than any other: How do you protect, or build, your portfolio? In the past, it was complicated. You either had to sell short or you had to use futures markets. And in either case, you could expose yourself to unlimited risk. Today, fortunately, thanks to the advent of the inverse ETF, you can take advantage of a simpler, risk-controlled hedging strategy. You can buy single-leverage ETFs, which are designed to go up 10% for every 10% decline in the index. Or you buy double-leveraged ETFs, designed to go up 20% for every 10% decline. 10

You can even use ETFs to add an extra layer of armor that protects against declines in specific sectors – such as real estate, financials, consumer goods, semiconductors, technology, emerging markets and even China. This allows you to match our hedges more closely to the sectors or styles you’re heavily concentrated in. For example ...  If you own a lot of technology stocks, you could use the inverse ETF with the symbol REW.  If you own a lot of small caps, you could use an inverse small cap ETF such as SDD.  If you own a broadly diversified domestic portfolio, you could use DOG or DXD, which move inversely to the Dow Jones Industrial Average ... or ... SH, SDS or RSW, which move inversely to the S&P 500 Index. And ...  If you’re heavily invested in emerging markets, you could use EUM or EEV. Later in this report, you’ll find additional information on each of these, plus many more. But first, here are the steps you should take: Step 1. Determine how much money you want to set aside for portfolio protection. To help you figure this out, here are some different possibilities to consider: Possibility A. Let’s say you have a $100,000 stock or ETF portfolio that is broadly diversified and approximately matches the performance of the S&P 500. And let’s say you want to protect the entire amount using an inverse ETF that’s single-leveraged – designed to go up 10% for every 10% decline in the S&P 500. Here’s the problem: That could be rather costly. For every dollar in your portfolio, you’d have to invest another dollar in the inverse ETF. And to do that you’d have to come up with another $100,000 to bet on the black. You may think you can’t lose. But the reality is ... • You can’t win either; • You’re incurring costs or commissions; and

• No portfolio protection is perfect. And in the unlikely event of a “double-zero” doomsday scenario, you could wind up losing something on both the red and the black. Possibility B. Instead of full protection, why not settle for half protection? In other words, for every $1 of current value in your portfolio, you’d put up only 50 cents of your money into the inverse ETFs. Assuming a stock portfolio worth $100,000, that would mean investing another $50,000. Possibility C. Use an inverse ETF that gives you double-leverage. Now, to protect half of your $100,000 portfolio, all you would need to invest is $25,000. Assuming your portfolio falls 10% in value, here’s what you would have: An end result of a $10,000 loss in your stock portfolio, a $5,000 gain in your hedge portfolio, a $5,000 loss overall. That cuts your risk of loss in half. Not bad. But can’t you do better than that? Absolutely, as you’ll see with the following steps ... Step 2. Rather than invest new money in the inverse ETFs, raise that money by liquidating one third of your stocks. That way, here’s what you should wind up with: You’ll have $66,667 left in your portfolio, and $33,333 available to invest in an inverse ETF with double-leverage. If the market falls 10%, you’ll have about a $6,667 loss in your portfolio and about a $6,667 gain in your inverse ETF. End result: No loss (except for commissions and costs). This simple step brings you two advantages: First, you won’t have to dig into your cash assets to fund your hedge strategy. And second, you’ll get close to full protection for the balance of your portfolio. Note: No portfolio protection can be perfect because you’ll still have to pay commissions and some costs. And the double-leverage inverse ETFs do not always deliver exactly the full double-leverage they’re designed to provide. Stopping there would achieve your goal of risk protection. But you could do even better – with some additional risk – by following a couple of advanced steps ... Step 3 (advanced). Instead of liquidating one third of your stocks randomly, strictly get rid of the ones that are in the riskiest sectors, while retaining those that are in the strongest sectors. In our regular publications, we tell you which

ones we believe they are. But let’s assume we’re only half right and we get the following results: Overall market: Down 10% Weakest sectors: Down 20% Strongest sectors: Down 5% In this scenario, we’re half right in the sense that the strongest sectors outperform. But we’re also half wrong because, instead of rising as we expected, they still go down, although not as sharply. That would be a reasonable expectation. But even in this situation, you wind up a winner: Since your portfolio is strictly in the strongest sectors, your loss is reduced from 10% to 5%, or only $3,333. Meanwhile, you’re still gaining 10% on your hedges, or $6,667. End result: Despite the market’s overall decline of 10%, you actually come out ahead. Step 4 (more advanced). Assume the same scenario as the previous example. And assume the same steps to liquidate the riskiest sectors while holding the strongest. But, in addition, instead of using strictly an inverse ETF that matches the S&P 500, use inverse ETFs that are designed to make you money when specific sectors are going down, targeting those that we believe to be the weakest. Again, there’s no guarantee that we’re going to be right. But, assuming we’re half way right (as in Step #3), here’s how it would turn out: You’d still have a $3,333 loss in your stock portfolio. But, on the other side of your portfolio – the inverse ETFs – the bad sectors fall 20%. So your doubleleveraged ETFs give you a gain of 40%, or $13,333 (minus commissions and costs, of course). Your net gain overall: $10,000! End result: You’ve turned what could have been a $10,000 loss in your portfolio into a $10,000 gain instead. Now that’s what you call turning lemons into lemonade. 13

Taking the Next Steps Fortunately, virtually all of the ETFs you’ll need are now available for purchase. To help you find the ones that best match your portfolio, we have compiled a complete and current listing for you. Here’s what to do: 1. Use our accompanying table entitled, “Our Comprehensive List of Inverse ETFs.” located at: http://images.moneyandmarkets.com/767/Guide-to-Inverse-ETFs.pdf to download the table as a pdf, or ... http://images.moneyandmarkets.com/767/Guide-to-Inverse-ETFs.xls to download it as an Excel spreadsheet. 2. Search in alphabetical order for the indexes or sectors that you would like to use as hedges, based on our instructions above. 3. In the next column, find the names of the inverse ETFs that match those indexes. 4. In the column “leverage,” please note most are double-leveraged inverse ETFs, which is what we recommend for this strategy. But some single-leveraged inverse ETFs are also available. 5. For the latest chart of these ETFs, enter the symbol at Yahoo! Finance, www.BigCharts.com, or your favorite Web charting program. 6. And, for further information from the provider of each ETF, just click on the name of the ETF in the spreadsheet to view its Web page. Or visit: Profunds at http://www.proshares.com/funds and Rydex at http://www.rydexsgi.com/products/etfs/home/etf_home.rails. 7. Take advantage of the ETFs recommended in your monthly issues of Safe Money – they're specifically chosen for their potential to deliver strong bear market profits. Of course, this takes care of minimizing risk and making profits while the markets go down ... 14

But we want to do more than just weather the current storm – we want to lock in life-changing profits once the recovery begins. History has shown us that two particular profit opportunities outshine all others at the end of a major financial crisis ... The first is the chance to lock-in decades of unmatched interest income with high-quality, long-term government and corporate bonds. Invest in them at the right time and you can pocket reliable yields as high as 15 percent for decades to come!

Your FIRST great recovery Income opportunity: Bonds In every depression or deflation in history, the value of Treasury bonds has gone up dramatically, sometimes even more sharply than stocks. But in this cycle, they already have gone up dramatically. So most investors are asking: “Isn’t it already too late? Haven’t we missed that chance?" However, with the federal deficit exploding, long-term Treasury bonds are going to temporarily plunge in price. And that will be your chance to pick them up at a big discount. That doesn't mean you should invest in long-term Treasury bonds right now. But history suggests that in the near future, there should be a huge opportunity to pick up Treasury bonds at a much lower price, and lock in a very nice yield. So if you’ve missed the first chance to buy Treasury bonds and lock in high yields, you should have another chance. As you can see in this chart, back in the 1930s, yes, the first opportunity to buy bonds was before the crash of ‘29, in this period here. (See first red arrow.)

But in the early 1930s, there was a second big plunge in Treasury bond prices and a second, even better buying opportunity to lock in tremendous yields. (See second arrow.) This cycle should be similar. Plus, the opportunity isn't limited to longterm Treasury bonds. High quality corporate bonds will likely offer just as much income potential. Why bonds before stocks? Two reasons: Investors will be afraid of stocks and hungry for yield. Plus, after such a massive collapse in the economy, it’s going to take time for corporate profits to recover. So investors in their stocks may have to wait a long time before they see growth. Meanwhile, your investment is dead in the water. Not so with bonds. In bonds, while you’re waiting, the company is paying you fat, double-digit yields. It’s paying you to wait. And as soon as people realize that the company isn’t going broke, you could see deeply discounted bond prices surge dramatically in value. In the 1930s, deeply discounted bonds doubled in value within two or three years, sometimes within just a few months. And we’re not talking about stocks. We’re talking about bonds. Will they double in price this time around? It's too soon to say. But if I’m right, you could buy high quality bonds in some of America’s largest, most stable companies for 50 cents on the dollar. You could lock in a yield of upwards of 15 percent per year. On top of that, you could see your bonds surge from 50 to, say, 75 cents on the dollar — maybe in a two-year time period.

That would be a capital gain of 25 percent per year for the two years. If you add the 15 percent interest, you’d be talking about total returns of 40 percent or more. And that's strictly during the bond market recovery period when corporate bonds are bouncing back in price ... If markets stabilize, your total return would settle back at 15 percent — just the interest portion. You could sell it at that point and earn the capital gain. Or you could just sit with it and pocket the 15 percent interest income for years to come. And therein lies your first big income opportunity of the recovery: To buy the highest quality corporate bonds, or even government-guaranteed bonds at bargain-based prices ... to lock in high yields for 30 years to come ... and to do it all in an era when the purchasing power of your money is likely to be stable or even grow! But that will be just the first of the income-boosting opportunities ahead.

Your SECOND great recovery Income opportunity: Dividends The same logic also applies to dividend-paying stocks. If, despite recession, depression, deflation and financial collapse, a company can continue to pay good dividends, that’s the most reliable evidence you could possibly have that the company’s solid, that it’s worthy of your money. And the beauty of it is you can invest with a lot less risk than you would in the best of times. Why less risk? First, because the company will be cheap. So that reduces your downside risk right from the beginning. Second because the company is paying you dividends. That flow of cash into your portfolio also helps cover a lot of downside risk. And third, because the company has just been through the harshest stress tests of all — the test of truly tough times — and it has not only survived as a company, its dividends have also survived. 17

Now, I realize that by the time a plunging market reaches its TRUE bottom most investors will be too frightened to take advantage of it. They’ll still have too many losses in their portfolio. Their confidence will be shot to hell and the dividend paying stocks will be extremely cheap. That’s why it pays to invest as a contrarian, and to do so with confidence. Remember rule number eleven: Be a contrarian and buck the crowd! Take a look at what rock-solid, dividend paying could have done for you throughout the chaos of the 90's, the bursting of the tech bubble, and the bear market that followed ... Procter and Gamble shareholders have received larger and larger dividend checks every year for 52 consecutive years. But you wouldn’t have to go back that far. If you had bought P&G just 15 years earlier, by 2007 you would be earning an effective dividend yield of 11.3 percent, more than twice what you could get on a Treasury bond at that time ... Investors who bought Johnson & Johnson shares 15 years ago received an effective dividend yield of nearly 17 percent ... ... And Investors who bought Altria were getting 18.6 percent. Is it possible that even stalwart, dependable companies will reduce or even suspend their dividends in a depression? Sure, but for us, that’s an opportunity to buy at an even cheaper price. Once the markets touch rock bottom, you’re going to have major opportunities in every sector — technology, energy, and even financial stocks. Buying these stocks for pennies on the dollar you’ll feel like a child in a candy shop. Our challenge is not going to be finding opportunities. The challenge will be to reject the less sweet opportunities.