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Take a Walk on the Short Side

01/24/2008 12:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Update: Mark Skousen tells that since this item was published, he has been stopped out of these short positions.

Mark Skousen, editor of Forecasts & Strategies and Hedge-Fund Trader Alert, blasts the Fed's policy and says there's money to be made by betting against the market.

Foreign markets, which have held up well, finally caught up with the bear market on Wall Street and have sold off sharply in the past two days, while the US market was closed on Monday.

And now Chairman Ben Bernanke and the Federal Reserve have announced an emergency rate cut of 75 basis points down to 3.5%! The Fed has panicked, as I predicted it would, because it was too tight for too long.

I blame this debacle squarely on Fed Chairman Bernanke, who I said on [Larry Kudlow's CNBC] show was a "dangerous" Fed chairman and was too academic for what the job requires. His focus on "inflation targeting" has caused him to keep short-term interest rates too high and, on top of that, he has imposed a tight supply of money to fight price inflation.

Prior to Tuesday's emergency rate cut, the Fed funds target rate was a whole percentage point above the treasury-bill rate, and the adjusted monetary base-the Fed's own checking account-has not grown in six months. The late Milton Friedman has demonstrated time and time again that when the Fed tightens, the economy slows or even falls into a recession.

At the same time, the central banks around the world, especially in emerging markets, adopted an easy-money policy over the past few years that pushed stock markets way above their true value, and now, in sympathy with the United States, foreign markets are coming back down to earth.

What to do? We've been building a strong cash position for some time now. In my short-term trading service, Hedge Fund Trader, we've added protection and even profited by shorting the Standard & Poor's 500. Last week, I added two new short positions on foreign stocks and Chinese stocks by using newly devised Exchange Traded Funds (ETFs). All short positions [were up sharply Tuesday], offsetting any losses in our long positions.

As hedge traders, we've been preparing for this. We've been short the US market for weeks with our ProShares Short S&P 500 (AMEX: SH). [Before Wednesday] we had a short-term gain of 15% here. Raise your sell stop to $67 to protect your profits. (It closed below $67 Wednesday-Editor.)

We also went short both international markets and the China market last week. Those bets are now paying off hugely. Our UltraShort MSCI EAFE ProShares (AMEX: EFU) position already is up 13% in six days. Raise your sell stop to $94 here. (It closed below $95 Wednesday-Editor.)

(Editor's note: Short selling can be extremely risky, especially in volatile markets, and only investors who are prepared to lose money should engage in it.)

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