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

How To Use Direct Mail Marketing and Websites As A Marketing Solution

Websites served a valuable function pre-2008. Most were set up as a beautiful and fancy on-line brochure. Now, the recession has changed how most people use the web and this has caused a major marketing paradigm shift.

Business websites now must go beyond the brochure stage and actual be a useful tool for web visitors. It is now time to make your website profitable, more meaningful and serve up a great website experience.

Most importantly your website must be found and it must have relevant information based on what your visitors are searching for. It only takes a visitor 3-10 seconds to determine if your website is relevant to their search. Companies need to be strategic and creative with every dollar and leverage the following three strategies. That is where direct mail marketing working in conjunction with a well designed website comes into play.

Building and designing a great website does not do any good if no one stops by to look. A company can develop an entire marketing strategy with email blasts, SEO, pay per click and social media marketing but one of the most directs ways to get the public to stop by is using direct mail marketing.

Have an online only sale to advertise? Send a postcard to a select group informing them to stop by and take a look. Offering closeout deals on certain products or services? Send a mini brochure to past and existing clients directing them to your website for more information.

Direct mail marketing will direct potential buyers to stop by, but don’t forget your website must have direction also.

1. Make it easy to help customers find exactly what they want on the first click. This involves analyzing exactly what your prospect is searching for and give them a page full of relevant information that help them fulfill their desire to learn more about your product.

This often means directing them to a dedicated campaign landing page rather than the homepage. A landing page can be a page on your web site or a specific page designed for just one purpose, but either way it must present relevant, compelling content, using information based on what your prospect is search for.

2. Create a Call-To-Action. Your Call-To-Action helps you achieve the most important function for you that you can hope from your web visitor: creating a conversion! A conversion can be just about anything from making a sale to getting your visitor’s personal information, so that you can continue marketing to them. Getting users to the right page is only half the battle, the next step is showing them what to do once they’re there.

3. Check your success. The previous two strategies won’t do you much good if you aren’t capturing conversion data to know which programs, campaigns and activities are getting you results. This is where web analytic programs come into play. While Google Analytics is free and incredibly comprehensive, there are a number of other places you can find analytics software. Using an analytics program is a necessity as it shows you how to cut the losers, keep pushing the winners and the best thing of all, allows you to test to see what really works.

If your company is looking to increase website attention and draw in more customers, think direct mail marketing. You’ll be glad you did.

Squeezepage 101 – Lessons for the Internet Marketer Wannabe

By definition, squeeze page is a landing page that is made to solicit e-mail addresses from among potential subscribers who would want to opt-in. In the world of direct marketing, having a list of subscribers is a very important tool that any marketer must not do without. On the world of digital technology, having e-mail lists pretty much serves the same purpose.

There is a down side to e-mails since, nowadays, there are much more spam when compared to the real bulk of messages. Most consumers are now wary when it comes to receiving e-mail messages from unknown sources. Squeeze pages were created to allay these fears of being ‘spammed’ or, worse, being sent a virus that would eat up the user’s system.

Experts on online businesses have come up with the idea of squeeze pages that explain the business’ privacy standards and also what the recipient will be getting. It has been observed that online businesses that have squeeze pages have experienced reasonable increases on their visitor-turned-to-subscriber rates. This is the exact reason why more and more online businesses are resorting to squeeze pages.

The general rule to squeeze pages is to keep information and contents concise. The page’s goal is to get e-mail addresses from visitors (any other unrelated or irrelevant information would often drive the visitor away). This is why most squeeze pages do not have hyperlinks or even navigation bars. It’s just one or the other-register or click away.

As an internet marketer, it your duty to convince a casual visitor to opt-in by, primarily, providing their e-mail addresses. Once this is done, an internet marketer has all the opportunities in the world to send marketing messages, establish a relationship with the client, eventually sell something, then maybe even cross sell other products or get some referrals.

Squeeze pages work well with Autoresponders. An autoresponder works by sending out standard response e-mails to all who have sent messages (this buys the person enough time to respond when he is already available). When these two work hand in hand, they can be utilized to present direct download links to obtain some information. Take note that there is a higher opt-in rate to those internet marketers who promise information once the visitor provides an e-mail address. Another good way to spice up squeeze pages is to incorporate some music or videos on them.

To become a successful internet marketer, you must fully utilize squeeze pages. To come up with a convincing squeeze page, just follow these simple guidelines:

1. Keep squeeze pages concise and direct.

2. Make it clear that they can opt-in and also ‘opt-out’.

3. If you could stick to just a single page, do so.

4. Create an opt-in box that would immediately catch the visitor’s attention.

5. Come out straight-tell them that you have no intention of sending any spam messages.

6. Make an offer that people would find hard to refuse.

7. Number all the benefits that they could get by opting-in.

8. Create a headline that ‘tells it all’ and ‘shouts to the world’.

9. Try posting some relevant videos on YouTube that would link to your eye-catching squeeze page.

10. If you are not into technical stuff, you could opt to have squeeze page templates online. Just fill in with all the information that the templates require and your squeeze page is good to go.

There are so many advantages for an internet marketer when he chooses to use a squeeze page. The results may not automatically show but down the road, the income could suddenly start pouring that you would even wonder why it took so long. The list of your visitors would just continue to grow (for as long as they don’t opt-out) and you might eventually convince them on one of those e-mail messages that you constantly send.

It is also important for all internet marketers to keep track of the number of visitors and squeeze pages can lead you back to the visitors’ contact information and you could confirm how much visitors have become clients. As a newbie on Internet marketing, it is necessary to build your reputation. Being professional-looking (even without having a site of your own) could be achieved by having squeeze pages.