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Bear Market Action Plan

03/20/2008 12:00 am EST


Gary Shilling

Columnist, Forbes

Gary Shilling, publisher of Gary Shilling's Insight, has a 13-point investment plan for a bear market, and he tells which sectors hold up relatively better when the bear roars.

We're convinced that stocks are in a bear market that commenced last October.

Yes, it's puzzling that equity price declines so far have been small in the face of the rapidly expanding cancer in financial markets. But at present, investors believe they're smelling pleasant fragrances in the Garden of Bailout Hopes.

They hope the Federal Reserve will bail out the collapsing credit market, that tax rebates will replace shrinking home equity in fueling consumer spending, that Wall Street houses will rescue the bond insurers who strayed into the subprime-mortgage slime, that federally sponsored mortgage modification, as well as Fannie Mae and Freddie Mac, will help hopeless homeowners and that Asian and Middle Eastern sovereign funds will continue to infuse money to offset Wall Street's persistent write-downs of questionable derivatives.

We look at the bailout attempts as merely shifting deck chairs on the Titanic, and don't expect them to contain the deepening and spreading financial woes and the major recession that will consume 2008 and spread globally. So, we look for the stock decline to resume in earnest, initiated by a negative shock we aren't smart enough to foresee.

In this environment, it's best to prepare for further big stock declines. Of the 13 investment recommendations for 2008 discussed in January (see table below), we favor buying Treasury bonds and the dollar some time soon, but the rest are sell recommendations.

[So], what are the best sectors to own? Let's look at how various groups performed in past bear markets associated with recessions, and then examine how they may do in the current business slump.

None of the industry groups we're considering produced consistent absolute gains in past bear markets.

In consumer staples, soft drinks, foods, and household products stocks rose in more bear markets than they fell, but the reverse was true for broadcasting and retail food chains. Major pharmaceuticals in the health care arena rose in four past bear markets but fell in three and [are] down again this time.

In fact, in the bear market so far from October 2007 through January, only 2% of our 26 industry groups rose-electric utilities and soft drinks.

Losing less money than some stock average is still losing money. Regardless, in the search for safe or, rather, relatively safe havens in bear markets, the better places for a portfolio of long stocks to be in past recessions are electric utilities, soft drinks, foods and household products-utilities and consumer staples, in line with popular sentiment.

Gary Shilling's 2008 Investment Recommendations

  1. Sell or sell short homebuilder stocks and bonds.
  2. If you plan to sell your home, second home or investment houses any time soon, do so yesterday.
  3. Sell short subprime mortgages.
  4. Sell or sell short housing-related stocks.
  5. Sell or sell short consumer discretionary spending companies.
  6. Sell low-grade fixed-income securities.
  7. Sell or avoid most commercial real estate.
  8. Short commodities.
  9. Sell or sell short emerging market equities.
10. Sell emerging country bonds.
11. Buy the dollar before long.
12. Sell or sell short US stocks in general.
13. Buy long Treasury bonds.










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