Sound Investing in the Coming Bear Market

We are in a bear market. The stock market has essentially moved sideways or down since last July, and while it is not quite 20% below last year’s peaks, just wait. Don’t get trapped in a state of denial. The evidence is glaring-the subprime mortgage and CDO write down debacle, a host of toxic credit and debt derivatives, the banking and financial credit freeze, bursting real estate bubble, pathetically eroding value of the dollar, horrendous federal budget deficits and spending, panicky federal reserve interest rate cuts, the demise of Bear Stearns, ineffectual federal refund stimulus, bond insurers at bankruptcy’s door, an economic recession, consumer spending retrenchment, flat or eroding employment levels, an inflation CPI of +4.3% (5%-8% if including food and energy). Can you say, stagflation? Even sharply reduced interest rates haven’t helped.

The economy runs in cycles. The last real downturn was in the early ’90s. Government leaders, bankers, the media, investors are nervous. A crisis of confidence is unfolding. The excesses of the late ’90s Internet bubble, the recent real estate bubble, and the spread of junk-mortgages foisted off as AAA-rated debt, all need to be washed out of the system before there is a return to normalcy.

Wall Street Won’t Admit to Bear Market

In my book, Full of Bull, I stress the point to never take Wall Street literally. I spend a few chapters decoding the array of misleading and confusing Street directives so investors will not be led astray. One of the most adverse Street influences on sound investing is its eternally favorable stock market bias. You can’t rely on the Street to warn you of a negative outlook or high risk. It terms a falling market as “volatile,” never wanting to utter pessimistic adjectives. A market drop is a “correction,” but a recovery is never called a “mistake.” So far the stock market falloff has lasted 4-6 months, yet the brokerage research investment rating distribution is 49% Buy, 46% Neutral, and just 5% Sell recommendations. Brokerage firms generate commissions by selling to investors new and used stocks and bonds. It’s a conflict of interest. Why would they ever be bearish on the products they want to sell to clients? So don’t expect objective, cautious advice-even in a bear market-from Wall Street. The Street won’t even admit to the recession. The Administration, even the Federal Reserve, is the same, always perceiving the outlook positively. Barron’s summarizes this attitude: “Fundamentally everything’s fine, but, not to worry, it’ll soon get better.”

If you listen to Wall Street, the Administration, Federal Reserve, or the cheerleading media such as CNBC, they all claim we’ll be past these problems and rebounding again by the second half of this year. They’re all pie-eyed optimists. It’s what you’d expect. But I’m telling you, just wait a couple months, the Pollyannaish forecasts will start slipping, pushing the rebound to late this year or even into early ’09. The first bad news is never the last. It’s not a matter of a whether there will be a soft or hard landing for the economy, but rather how hard will be the landing. This is the first consumer spending-related recession since ’91-’92. It may last as long as housing prices are depressed. Election year uncertainties and the bitter medicine forthcoming next year with a new administration are not a pretty picture. Financial institutions will be chary to lend for a long time, with more bad news such as delinquent credit card debt yet to surface. Global corporate earnings are declining. The stock market is still valued at a PE multiple above the long-term trend line, and that’s not reflecting more earnings estimate reductions ahead. It seems to me that the bear market will endure well through this year and next year. Your investing should encompass this wary perspective.

Protect Your Capital

Protection of capital is paramount, especially now during a deteriorating market. Investment capital is too difficult to replace. A 35% drop in value requires a 54% recovery to get back to even. The point is don’t lose; avoid incurring whopping losses. You must assess the downside risk of every investment in your portfolio. Assume essentially the worst. Don’t look to Wall Street to disclose the lowest price potential of stocks under research coverage. Isn’t it curious how research reports indicate the upside price target, but rarely the worst price risk? Derivatives such as stock options, puts and calls, are probably the highest risk investment, given the leverage. Individual common stocks are next. Stock index funds, exchange traded funds, are slightly less dangerous. Diversified mutual funds are lower on the peril scale. After that it’s bonds, followed by cash on the risk spectrum. Take a close look at your investment mix. In the coming bear market, be sure your positions are weighted toward the safe end of the hierarchy.

There are reasons to continue holding stocks in a portfolio, even in a market fall-off. If you’re like me, you own stocks with healthy gains that you want to retain for a number of years in the future. Selling these would incur capital gains taxes, and the tendency is to never get around to repurchasing them later. And if you follow my advice in Full of Bull, they are paying respectable dividends, which represent an important income stream in your financial picture. (Historically, from 1926-2006, some 41% of the total stock market return was derived from dividends, 59% from stock price appreciation-thus, my emphasis on dividend paying stocks.) If these dividend payers were purchased at lower prices, your yield is likely to be maybe around 10% or even higher. You don’t want to give that up. The question is the portion that stocks overall should represent in your portfolio during a bad market. I believe investors should reduce their weighting in stocks by 30%-50%, even if that means giving up some dividend income for a while. It’s all about preserving your capital.

Low-Risk Stock Strategy in a Slumping Market

As the bear market plays out, the potential price decline is more limited in stocks with modest PE multiples and stout dividend yields. For sure, they are not immune to an eroding market. But their risk is far less than high valuation growth stocks. Corporate earnings are a key support factor in this scenario. PE’s don’t mean much if the “E” is not dependable. Earnings stability is a vital underpinning to help moderate stock price downside. The PE ratio can shrink, but not excessively if the starting point is already reasonable, say a PE of 10x to 15x. The stocks to own amidst a deepening recession are ones where profitability is not cyclical, at least where the earnings outlook is immune to current conditions, such as oil and gas pipelines and storage, and ocean shipping. Incidentally, this type of stock is a sound investment during bull markets too.

Dividend yield is the other important buttress. It is an indicator of financial stability, good cash flow, and quality. As I point out in Full of Bull, there is a direct, positive correlation between dividend payout ratios and earnings growth, according to studies such as one by Robert D. Arnott. This is a startling relationship. Over time, the higher the payout, the faster the earnings pace. A $20 stock that pays an $0.80 dividend, a 4% yield, is unlikely to plummet below $10 that is, an 8% yield, if the earnings and cash flow are stable. The worst case scenario is more likely around $12, a 6%-7% yield-the dividend, if safe, provides an effective safety net. And an investor should seriously consider buying more shares at that depressed level.

Consider Other Defensive Strategies

In the current troubled financial outlook, gold, in my view, is a solid investment. During a crisis or a highly uncertain economic period, gold represents a safe-haven. The weakening dollar, financial institution plight, and inflation all point to gold as a means to protect the value of your capital. Exchange traded funds (ETFs) are a particularly easy method by which to own gold as a commodity. They are a pure play, rigorously track the price of gold, are actively traded, and listed on major exchanges. A drawback to gold-related ETFs is that gains are taxed as collectibles, at a maximum of 28% rather that the 15% long-term capital gains tax on stock appreciation.

Shorting stocks is another defensive measure during a major stock market fall-off. But this is more speculative, so it should only represent a tiny portion of your investment portfolio. Betting that a stock will decline carries with it the possibility of infinite losses since stocks can rise forever but only decline to zero. Timing, volatility, even brokerage availability of shares to lend out are issues. Identify industry sectors that will be heavily impacted by the recession or other crosscurrents in the economy. Seek companies that are the most vulnerable. And select stocks with valuations that still have ample room to contract. The process is challenging since the stocks most susceptible to the dangers ahead are obvious and have already collapsed, such as in the home construction, banking and brokerage, and consumer retail sectors. You need to be on the early side and have reasonable insight. In the case of shorting, I would fervently advise cutting your losses if the shares move in the wrong direction and rise by 10%. It’s a tight leash because the risk is so pronounced. Still, shorting is a means to offset declines in your long-term, high quality, value-oriented, dividend-paying stock investments.

Accept and Be Prepared for Bear Market

The most challenging aspect of readying your investment portfolio for a major stock market falloff is recognizing the ominous conditions, the deteriorating stock market, and that there is worse yet to come. The investing element is more straightforward, determining the appropriate, expendable stock positions that can be sold to generate cash. An important goal is to establish a pile of cash, or a liquid equivalent such as a true money market fund, to relish while the rest of the market tanks. Bear markets are deceptive, behaving in a manner that disguises the downward drift. Each time there occurs a precipitous drop, it is followed by a modest recovery. It’s two steps down and one step up, just to keep you confused and to give false hope. Once bear markets are widely identified it’s too late, everything has plummeted. Bear markets move in phases, and in the end, everyone gets hurt. But this painful stage has not yet happened. Right now is about the last chance for you to alter your portfolio and tailor it for the coming bear market.

Stephen McClellan was a Wall Street investment analyst for 32 years, covering high-tech stocks as a supervisory analyst. He was a First Vice President at Merrill Lynch for 18 years, and ranked on the annual Institutional Investor All-American Research Team 19 consecutive times, the Wall Street Journal Poll for 7 years, and is in the Journal’s Hall of Fame. He was a Vice President at Salomon Brothers for 8 years, before that in a similar position at Spencer Trask, and was the industry analyst with the U.S. Department of Commerce before commencing his Wall Street career. Mr. McClellan is a Chartered Financial Analyst (CFA), a member of the New York Society of Security Analysts and the CFA Institute, was President of the New York Computer Industry Analyst Group, and President and Founder of the Software/Services Analyst Group. He has made television appearances on CBS, CNN MoneyLine, CNBC, and Wall Street Week, and given presentations to numerous organizations, conferences, and to companies such as IBM, Apple, Automatic Data Processing, and Electronic Data Systems. Mr. McClellan has published articles in the London Financial Times, New York Times, Forbes, and others. His MBA in Finance is from George Washington University

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Effective Postcard Marketing For a Quick Cash Surge

1. Building awareness using postcards.

Postcard can spread the news of a company just opening its doors. Whether you’ve just located your business in a business park at the most obscure corner where you are unseen by foot or drive by traffic. You can still build awareness of the products or services you provide by using postcards which are inexpensive but a highly effective marketing tool you can use to generate traffic and leads at a very low cost.

2. Increase customer frequency of purchase.

By mailing to your existing customer base you can now begin the process of up selling them or cross selling them on your other products or services. If a customer just purchased a product or service which you are scheduled to install or deliver for them why not offer them an upgraded version of the product or service. You can offer them another more enhanced and expensive version of the product they just purchased and are waiting for delivery on or a lesser price version of the guarantee they did not take you up on initially. You may even be able to get them to sign up for a regular continuity program of the product or service they just purchased. Once the prospect became a customer they have already exhibited signs that they trust your company. By sending them a postcard with the additional upgrades that are available to them you are serving their needs by being informative to other options which exist. This is a great way to getting additional business from them at a time when they are most likely to buy more from you.

3. Reduce marketing costs using postcards.

Postcards are highly effective when it comes to price vs. results or better stated return on your marketing investment. They generate leads of prospects at a very low cost. For small business owners they can afford to conduct an effective targeted marketing campaign. Meeting their marketing plans goals is easily accomplished. With the postcards you can state just the most important point of what needs to be said. Postcards work best when used as a two step sales process. Send out postcards to get the prospects to go to visit your store, a website or call an 800 number to get additional information. You can then begin your sales closing process You will rarely sell your products directly through the use of postcards.

4. Postcards can be very time sensitive.

You can send out a pre-sale announcement with a time sensitive coupon to your existing customer database. For your prospects include this same time sensitive coupon with an exaggerated discount you would not normally provide. The coupon will do two things draw customers to your place of business to take advantage to your offer and give you a tracking mechanism for analyzing your marketing results.

Avoid making these mistakes when marketing with postcards

Most of these mistakes can be easily avoided.

1. Not knowing who your targeted audience is

By not doing an analysis of who your ideal prospect really is you are running the chance that you will not be successful in the marketing efforts you are making. Your prospects are being bombarded by a barrage of marketing messages constantly so statistically you have about three seconds to make your point if you are making your point to the wrong audience you have just wasted you entire marketing plans efforts. So you need to identify your audience then give them the information they need, right then and there, to make a decision to respond to your offer or not.

2. Not putting the proper headline in the postcards to get the attention of your targeted prospects.

If you are targeting a particular audience then state something of great interest and importance to that audience in your headline. For example if you are targeting religious people you may want to have a headline like this: “The Most Important Bible News in 340 Years” in other words speak to your target audience to attract them to your offers.

3. Last mistake that most postcard marketers make is inconsistency in their marketing efforts.

By mailing to a targeted audience more than once you are accomplishing what most direct mail marketers do not. That is reaching your audience with either the same message or similar message again and again. Most marketers send out one postcards and then stop and they don’t repeat the process which leads them to the conclusion that postcards don’t work in their marketing business plan. By mailing more than once you have already surpassed the majority of your competition that only mails once if they mail at all.

Utilizing the simple postcard in your marketing business plan can be a very rewarding and profitable method to target a specific market to get a quick response and influx of customer coming to your place of business bringing in that Quick Cash Surge.