Last month, a few forum pessimists were trumpted the rise in gold prices and in "bear market" mutual funds. Essentially, a bear fund invests on the a future decline in stock values. Prudent Bear is a familiar example.

The problem with bear market funds--bear markets are often short and difficult to time. Some pessimists predicted a market collapse last summer. October received some interest as a popular month for a crash. With less than 45 days until Y2K, the market has yet to nose dive.

When this happens, investors in a bear market fund take losses. For example, since October, this is the performance of Prudent Bear

15-Nov-99 4.06 8-Nov-99 4.07 1-Nov-99 4.09 25-Oct-99 4.25 18-Oct-99 4.56 11-Oct-99 4.83

If you bought Prudent Bear in October, you'd be down 16 percent. If you bought Prudent Bear a year ago, the losses would be roughly 35 percent. And if you purchased in 1995 (inception), you have lost about 17 percent per year for the past four years.

As for gold, predictions of gold rising above $400 (or far more) per ounce have diminished. After making a run to the mid $320 level, the metal has slowly sunk to below $300... again.

There are many possible explanations for the stock market and gold prices. Frankly, I am puzzled at the continued market strength. Betting the bear means taking an aggressive position on falling equities prices (and possibly rising commodity prices). This pessimistic strategy can be very lucrative, provided you have excellent timing. Those who predict the end of the economic expansion prematurely suffer losses... like early fans of Prudent Bear.

Everyone has a different risk tolerance. While I anticipate a recession next year, I'm not sure I want to bet my retirement savings on timing a stock market downturn (or an upturn in gold). Personally, I think a defensive strategy (like short-term T Bills) may be more suitable for the investor who doesn't feel lucky.

-- Ken Decker (kcdecker@worldnet.att.net), November 18, 1999

Answers

Glad I hung tight and glad I didn't purchase gold and I still don't intend on purchaisng gold. Just another funny feeling I have.

-- ~~~~ (~~~@~~~.com), November 18, 1999.

Your point about predictability of a market downturn is well taken, especially considering the many innovative ways TPTB have devised for manipulation of economic information.

The T-bill option works for you, because you anticipate no more than a recession. If we have worse than a recession, your T-bills, which after all are simply 1 and 0's in the digital financial system, may be worthless.

Physical precious metal, real estate, and durable goods and consumables are the only hedge of wealth if we see a collapse of the banking system.

Note also that gold skyrockets when TSHTF. And TS hasn't HTF just yet. Let's revisit the subject in 6 weeks, if the net is still up.

-- a (a@a.a), November 18, 1999.

Whatever is left in the stock market will be lost forever.

But, on the off chance that they can keep it open, I still own 'a few' puts.

-- Me (me@me.me), November 18, 1999.

Just for you my friend Decker.

Here is one from Bob Metcalfe. http://www.infoworld.com/cgi-bin/displayArchive.pl?/99/45/o06- 45.102.htm

"...Akamai was yet another sign. This fine Internet company was founded 14 months ago by people whom I know from around the MIT Laboratory for Computer Science. Akamai generated $1.3 million in revenue for the nine months ending on Sept. 30.

Morgan Stanley priced Akamai's IPO at $26 per share. On the big day, Oct. 29, the 250-employee company's new stock closed at $145 per share, giving it a market cap of around $13 billion, less than Chevron but more than Sears.

The Weird Als who buy Internet IPOs saw interest rates not going up much and must have thought, hey, Akamai is worth five times more than what Morgan Stanley just estimated. This makes me think that investing in Internet stocks is beyond gambling; it's more like rooting for sports teams. So we should ask, "How do you like them Akamais?" "

-- Brooklyn (MSIS@cyberdude.com), November 18, 1999.

Ken:

You are a smart guy and your conservative strategy is very sound advice. People who are not comfortable with the market should absolutely take your advice. Nonetheless...

(1) Your year-over-year comparison is an easy one since we were just pulling out of a nasty case of the flu on 10/98. I started buying the Prudent Bear in May (6 purchases total; most recent will take effect Monday.) I have not put in a ton of cash, but enough to make the game very intersting. I am down approximately 3% to date. I consider this good news since my downside risk is now relatively low due to the short timescales left this year. Admittedly, I left some money on the table, but as Joe Kennedy said, "I'd rather be two months early than one day late." I think a Prudent Bear Purchase right now is looking pretty safe (and could become brilliant).

(2) A few posts back (and dozens of posts over the months), there is discussion of this market. In a nutshell, I am more confident in the downside of this market than I have ever been of the upside of any other market (and I was a major bear through most of '98 with a 91% ROI to show for it.) This market is now at death defying heights. The concept of a soft landing was eliminated by the passing some critical mass of the bubble several years ago.

(3) Dips are short. Bear markets -- real bear markets -- are quite long. Recent estimate I just read said 9 years for the big ones of this century. It took ballpark 26 years to get back to even off the peak of 1929. The DOW didn't move an inch from 1965-81 while the value of a dollar got reamed by double digit inflation.

(4) Those who think a correction is a two month dip followed by a continued rise to the stratosphere are delusional. If you are heading straight off of a cliff and you briefly steer away simply to resume your present trajectory, is this a correction? The definition of a correction must somehow include in it the notion that it stays corrected. The dips along the way have fueled the euphoria. Invincibility is the word on the street. Once everybody is a believer, "blam" the market gets creamed. Greenspan told us this a month ago in brutally blunt terms. (Of course, then he completely recanted in a truly bizarre speech a week later convincing me that somebody "got to him".)

(5) Here's the most surreal part of all. To the extent that the price of the market is a measure of optimism -- the more optimistic you are the more you are willing to pay for stocks -- the instant at which the market reaches the tippy top before the SHTF, we have this strange situation where the optimism, BY DEFINITION, reaches a maximum while the justification for such optimism becomes ZERO. The market is correct on the way up and way down, but it is fundamentally -- FUNDAMENTALLY -- wrong at the tops and bottoms. I guess those 28-year- old Wall St. shills on Moneyline and Cavuto really haven't seen a real correction/bear market before.

In a nutshell, you are mostly right, your advice is good, and now I'm done blowing off steam. Thanks for the help.

Best regards Dave

PS -- I swear you have gone markedly doomer on us in the last few weeks. This reinforces my suspicions that you have new marching orders from TPTB but, hey, we all need to work. I hasten to add, however, that I read everything you write and anything you say beats contributions from the trolls.

-- Dave (aaa@aaa.com), November 18, 1999.

I have also gone with the strategy of minimizing risk through use of money market (my best (lowest risk) short term option for my 401k plan. Too much uncertainty...and too many amateurs in the market for the short term.

-- Mad Monk (madmonk@hawaiian.net), November 18, 1999.

Physical precious metal, real estate, and durable goods and consumables are the only hedge of wealth if we see a collapse of the banking system.

Precious metal will be as worthless as T-bills if TSHTF. Nobody is going to want pretty rocks when they're cold and hungry. Real estate will also lose much of its value with so many dead and so much up for grabs. Durable goods and consumables will be the currency in the new age. Tools, clothing, heavy blankets and outerwear (for cold climates), as well as foods and medicines will be worth far more than pretty rocks.

-- Tod (tod_berg@hotmail.com), November 18, 1999.

Dave,

Thanks. As for any recent trends, I've been very consistent over the past six months. My exit from the market was well-publicized in April-May of this year.

As for your investment in BEARX, I wish you well. I'm not a fan, particularly of the excessive management fees. Really, Dave, over 2.5% on a fund that has lost money every year since inception. I'll give you this, David Tice has some serious stones to charge his investors twice the category average.

I'm confident of a market downside, but I'll be darned if I want to try timing it. Look for a serious relief rally in early 2000. If you really want to short the market, wait until late Spring when we start crunching the Y2K numbers.

The real downside will come from two macro-economic forces. The "boomers" will start retiring in droves from 2005 to 2008. In the shorter term, the flight to quality will reverse if the international recovery can continue... at least in some areas. Personally, I think the bail-out of LTCM will go down in history as a really bad decision.

I'd disagree with your numbers on bear markets, but let me get back to you. I think we'll see a hard correction, but we'll find a bottom.

Buy on the cannon, sell on the trumpets.

-- Ken Decker (kcdecker@worldnet.att.net), November 18, 1999.

Tod said:

Precious metal will be as worthless as T-bills if TSHTF.

If you really believe that, you're extremely stupid. Precious metals have ALWAYS retained value through financial panics.

-- a (a@a.a), November 18, 1999.

As my old mate Andy - Cut & Paste - is having a holiday on the strength of his gold profits (and I understand the weather is quite nice for camping), allow me to post for him:

"Gold's goin' to the Moon, to the Moon. Soon"

-- Asking (Asking@aquestion.com), November 18, 1999.

Real estate will take a dive. That's how the rich got richer during the depression, they purchased foreclosed properties for pennies onthe dollar. When people lose their jobs, they lose their homes and move on. As far as baby boomers retiring in 2005, that depends on if their 401K plan is still intact or their money in the stock market is still there. I have 2 friends about 5 years from retirement, and they lost $60-80,000 this year, they had all their money in one basket. That loss has set them back several more years for retirement.

-- wait and see (wait&see@waitseee.xcom), November 18, 1999.

Tod is right about gold and jewels not being worth jackshit if food is real scares, let along TEOWAWKI. My father told me people in post- war Germany were trading expensive pieces of jewelry for bags of potatos.

-- Ocotillo (peeling@out.===), November 19, 1999.

Minor correction -- I was a bull not a bear last year.

-- Dave (aaa@aaa.com), November 19, 1999.

I know little of finances except that money will always be paper and gold will always be gold.

-- zoobie the nutbag (zoobiezoob@yahoo.com), November 19, 1999.

Regarding Tice. No one is perfect. Bernard Baruch made similar predictions about the market, shorting GM stock in 1927 despite ever increasing losses, noting that not only amatuers, but female amateurs were buying stocks. A shrewd, international financeer, Baruch ended up buying up assets for pennies on the dollar after the crash.

-- jw (jw530@yahoo.com), December 13, 1999.