Investing Daily

This isn’t a normal recession. In some ways it feels like it could be the start of a mini-depression. Interest rates for the big borrowers, the banks, are near zero, while the mainstream borrowers either pay much higher rates or can’t get credit at all. 

Small investors, and those unfortunate retired folk on fixed incomes, are seeing their incomes shrink while yields plummet. Many large investors got burned last year as well. Lehman Brothers went under, the long-running Madoff lie was exposed, and traditional stocks and bonds plummeted. Real Estate crashed, and it doesn’t feel like it’s coming back for quite a time to come.

Deflation is the current theme, and it could continue throughout 2009; Treasuries will be the place to be in this case. Or rampant government loan guarantees, spending, stimulation, and money-printing could lead to accelerating inflation; Treasuries are the last place you want to be in this case.

So, where to put your money in 2009? The answer is simpler than you might imagine, but it involves monitoring what I believe to be the most important fundamental. More about that later, but first let’s discuss the reasons why people lose big money.

People lose big money simply because they risk big money. That’s the only way to lose big money. Those folks who lose big money in stocks, or futures, or poker--name the game--invariably took too large a risk on one or two “pots.” They wouldn’t admit they were wrong, and perhaps, despite gains elsewhere, they lost too much of their net worth on a single bet.

The Madoff situation appears different because those people were looking at fake gains. After all, how can one cut losses when no losses are seen? Then why did so many sophisticated Madoff investors lose a substantial portion of their net worth, with some losing just about everything? Certainly it was because he was a charlatan and a crook but if you read the question again you’ll know this isn’t the correct answer.

The correct answer is these people entrusted a substantial portion of their assets, some just about everything, to this one guy. This guy ran a scam, but what if these same people entrusted most of their money to a legitimate money manager who one year made terrible bets? The outcome would have been the same.

Years ago I had two large clients from Russia. This was in 1998 after Russia turned “capitalistic.” One of these clients, he was in the metals business, invited us to visit him in St. Petersburg. When we got there he was gracious and still showed us a once-in-a-lifetime experience, but he told me it wasn’t the full gala he had originally planned.

He had 90 percent of his money in the Russian banks, and between the time of his invitation and the time of our arrival the Ruble collapsed, bringing down a number of Russian banks, including his. The whole economy was in ruins, and many working folk hadn’t been paid in three months or more. My client was virtually wiped out financially.

During that same trip I visited my other client, a Russia-based hedge fund that traded internationally. When we discussed the current state of the Russian economy these guys told me they were fine. They had most of their money overseas, some in the US (with me), in Ireland, London, and no doubt other places they didn’t share with me. Bottom line, they were OK because they didn’t have all their eggs in that single basket.

The lesson here: Diversify, diversify, diversify. Never, ever put your investment nest in just one place. And don’t only be in paper assets; owning physical assets (debt-reduced real estate, gold and silver) also makes sense. Diversifying out of the US dollar into other currencies is a prudent strategy as well.

Now that we’ve discussed Money Management 101, let’s turn to our central question of where to place your money in 2009. The answer to this question comes from one of the preeminent investors of our time, George Soros. Soros’ advice is to follow the money flows, or in other words to go with the prevailing trends. Let me illustrate.

Remember when the world was running out of oil last summer? Nobody I know of forecast oil prices were going to collapse all the way down from $147 to less than $34 in only three months. Yet the money flows suggested just that. All you had to do is take a look at the chart.

Once the oil market broke below its 50-day moving average in July, the chart indicated the money just kept flowing…out. This was quite evident on the chart; just follow the green line. Anyone who fought this market (and there were many who lost big trying to bottom-pick the oil market) was doing just that.

The lesson here is to go with the flow, not against it.

Crude Oil: July 2008 – December 2008

Source: Commodity.com

Despite the recent rally, oil remains below the green line. I won’t get too excited a bottom is in place until it again trades above that line.

The places to put your money in 2009 will be those areas where the money is flowing in. Many of these are moving targets, and you should never be complacent (just holding onto an asset when the money flows are moving against you).

And you have to do your homework. That said, for your consideration, let me present two markets that the money appears to be flowing into at this time, both having recently moved “above the green line.”

Soybeans: July 2008 – January 2009

Source: Commodity.com

Silver: July 2008 – January 2009

Source: Commodity.com

For my subscription based trading service Futures Market Forecaster I’m moving more in the direction of recommending shorter-term momentum plays. My FMF trade recommendations are very specific, sent to subscribers in real time and executable in the marketplace. My trades aren’t disseminated with the benefit of hindsight, but during active markets.

Risk Disclaimer
Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

Hypothetical Performance
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.