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@theMarket: Highway to the Danger Zone

By Bill Schmick
"Highway to the Danger Zone
I'll take you
Right into the Danger Zone"


                        — Kenny Loggins from the movie "Top Gun"

One would think that the world is coming to an end. By Friday morning every headline, every opening sound bite on television and on the radio began with the massive declines experienced by world stock markets this week. Take all this with a grain of salt.

"You never bet on the end of the world," said Art Cashen, the experienced Wall Street veteran and director of floor services for UBS. "That only happens once and the odds of something happening once an eternity are pretty long."

I respect Art and agree with his prognosis. Readers get a grip. This is a correction, a nasty decline for sure, and will, by the end, take away as much as half of the gains you have made since March, 2009. But remember, even if you are still one of those buy and hold, hold-out investors, you are still up 50 percent from the lows.

"But I'm still underwater from what I had in 2007," laments one reader from Connecticut.

For years I have been imploring readers to find a money manager or broker who does not believe in holding a portfolio through thick and thin. It is a recipe for disaster, in my opinion, that only works during certain specific time periods. The first 20 years of this, the 21st century, is not one of those periods. The problem is that only a small handful of investment advisers (less than 5 percent) within the financial services community actually buy and sell. But since it's your money, I would urge you to do the work and find one.

It may not be the end of the world, but at the same time I am not discounting the risks that face us. We are truly accelerating down the highway into an economic danger zone. The continuing weakness in our own economy, the very real possibility of a European bank failure and Greek default, a hard landing in China, plus another half-dozen potential mind fields does not give one a high degree of comfort. When one acknowledges that we lack the leadership, both here and abroad, to handle this dogfight, even Maverick and Goose might panic.

Instead, it is a time to stay calm and focused. Remember, I was here for you through 2008-2009 and if you followed my advice then you did very well. And I'm here for you now.

No one who reads this column consistently should be surprised with the market's recent declines. In last week's column, John Roque, my friend and one of the best technical analysts on Wall Street, clearly indicated that he thought that a decline to 950 on the S&P 500 Index was a strong possibility. I agree with him wholeheartedly. Yet, even at 950, I don't believe it is the end of the world as we know it.

It also does not mean that stocks must go straight down to that 950 level. I expect there will still be some ferocious rallies to the upside, like we experienced the week before last, where the indexes gained 6-7 percent in three days. I advised investors to sell those rallies. If you haven't already taken my advice and reduced your equity holdings, do so on the next bounce and move into cash or bonds.

Some retired investors need to remain in dividend-paying stocks because they are dependent on the income to make ends meet. If you are in that category, then please consider hedging those holdings with covered put options or inverse exchange traded funds.

On a short-term basis, the markets are oversold. I would not be surprised to see another bounce ahead of us but it does not change the overriding trend, which is down, act accordingly.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.



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