Letter written to a new customer:
Some background is due you so you can understand my proposal towards the end. I came into this business 09.01.1968. The bear market of 69/70 started in May of 69 and it was bad. Then we rallied into the bear market of 73/74 and it was really bad then. By then I had learned a bit more survival tactics and a Fort Worth company called Robintech, saved my bacon. In April of 74 I was the number # 1 producer in the firm. Then we rallied and bottomed in August 1982. That month my wife of 16 years took her PhD, our paid for house, our two boys and divorced me. All I had to do was work and so I did.
The next big decline was October 87 and it was a doozy. We were down around 27% in one day. Fortunately, I had my customers in cash for a move to Weber Hall & Sale from Eppler Guerin and Turner. We dodged that bullet. But we didn’t make any money off it either, because prior to that I was buying deep out of the money puts that expired at the end of each month. I didn’t buy them for that month because I didn’t want any acat problems for my accounts.
Then we went into the Greenspan put decade until 2000/2001 and we did real well on the short side. We then rallied to 2007/08 and in March of 2009, my new wife and I were the wealthiest we had ever been with my aggressive shorting. Unfortunately, we got crossways with each other over the portfolio and lost nearly all of it. I did keep a great wife out of it, but she is my $2M+ baby.
So here we are today, with the DJIA over 22,000. I am going to recommend and ask you to sell nearly all of your portfolio because of that. In time, I would like to buy some gold/silver stocks, but at first these may be one of the few sources of funds in this potentially rapid decline. So, I will wait. The only other thing I would buy here is no more than 5% of your portfolio in some of the 3X leverage bear market etfs. These could reward you nicely while you sit on the sidelines and greatly if we can add to the position as it goes down. That is a big if too!
At these levels, I am looking for a normal pullback decline of 10-12%, 22,019 x 12% = 2,642 points.
22,019 minus 2,642 points is 19,377 on the DJIA. I then look for a black swan to land, any black swan will do. https://www.nyse.com/markets/nyse/trading-info#Circuit_Breakers
Specifically, the circuit-breaker halt for a Level 1 (7%) or Level 2 (13%) decline occurring after 9:30 a.m. Eastern and up to and including 3:25 p.m. Eastern, or in the case of an early scheduled close, 12:25 p.m. Eastern, would result in a trading halt in all stocks for 15 minutes. If the market declined by 20%, triggering a Level 3 circuit-breaker, at any time, trading would be halted for the remainder of the day.
A Level 1 or Level 2 halt can only occur once per trading day. For example, if a Level 1 Market Decline was to occur and trading was halted, following the reopening of trading, the NYSE would not halt the market again unless a Level 2 Market Decline was to occur. Likewise, following the reopening of trading after a Level 2 Market Decline, the NYSE would not halt trading again unless a Level 3 Market Decline were to occur, at which point, trading in all stocks would be halted until the primary market opens the next trading day.
I look for the first day of this decline to be down 20% and in a reasonable time frame. This is where we “might” add to your 3x leverage bear market etfs. This will put us about 19,377-4300=”15,077 at the close of the first day. At this point the DJIA is down about 12% + 20%, so the remaining clearing firms are going to be standing at the gate on the opening of the 2nd day with sell orders in hand to cover their margin accounts, because no one wants to be the next Lehmans or Bear Stearns. So rather quickly we close down another 20% or 4300 points and the market is closed. I doubt we would be able to buy any of your bear market etf at all that day. At the close of business on the 2nd circuit breaker down the limit day we are at 10,777. Are you feeling the pain yet? On day #3, all the tickets that have been coming in from the public, who no longer have brokers, via E-trade, Schwab, Fidelity, 800# mutual fund liquidations, “get me out at the market”, will drive us down another 20%, -4300 more points, to 6,477. At this point in my opinion, THE POWERS THAT BE will suspend trading for up to 7 trading days or more, while they try and get a handle on this.
Your opinion is as good as mine, but I have studied this monster for over 50 years on a daily basis, so give me my due. I believe TPTB will re-open trading with circuit breaker limits on individual stocks, as they should, but they will take them off of the market and let it trade where it will.
These are my 3 prognostications of where we will go:
- From 6477 we sell off intraday to 3800 and close the day 4500-4800.
- From 6477 we sell off intraday to 2000-2100 and close the day 3200-3600.
- From 6477 we sell off intraday to 1000-1500 and close the day 3000 or so.
Which scenario you choose will depend on how many other Charlie Browns took their profits early and walked to the sideline. There will be some at the top and a few in the 12% decline and none in the circuit breaker down the limit days. Bear markets are designed to separate people from their money and clean out the system. This better do it!