Hedging for Protection

11/28/2007 12:00 am EST

Focus:

Yiannis Mostrous

Editor, The Capitalist Times

Yiannis Mostrous, editor of The Silk Road Investor, recommends protecting your portfolio in this volatile market, by using specific hedges…

The market’s deterioration remains problematic. Western financial institutions continue to report more balance-sheet trouble. Selling pressure is strong right now, even more so in Asian markets because the rally there from the August lows was spectacular. In other words, there are real profits to be booked.

Unlike in the past, however, funds aren’t being redirected to the so-called safe haven of the US stock market. After all, the US economy and its securitization industry is the source of the current problems.

Seeking safe haven in a stock market with a slowing economy and a financial system coping with significant new challenges is bizarre. But if you don’t want to put your money to work in the “high risk” markets of the East, buy gold and short the US consumer instead.

Asia will suffer in the event of a US-led economic recession, and the region’s stock markets will be affected even more than the region’s economies because they remain in almost total synchronization with Wall Street.

But looking beyond the current situation, Asia is the region of choice for serious long-term investors. It’s leading a great global economic transformation and will be the engine of growth for years to come. And Asia ex-Japan is still enjoying a long-term bull market that commenced at the bottom of the 1998 Asian Crisis.

The events of 10 years ago have proven a fortunate catharsis for Asian economies. The long-term Asia story is founded on the economic reforms, moves toward privatization and commitment to free trade that emerged from the crisis. Asian governments and the region’s economic establishment have since been redefined.

Market sentiment remains grim, but the Portfolio hedges are in full swing and are generating positive results.

If you followed the Nov. 13 China Life Insurance Co (NYSE: LFC) recommendation, you should have been able to short it at around 85. If you were able to short China Life Insurance Co at around 85, your stop-loss should now be at 93.

Last week, I recommended putting more money to work in the Alternative Holdings-Permanent Hedges. Investors long the Silk Portfolio should always have at least some exposure to those hedges.

Continue to short Consumer Discretionary SPDR (AMEX: XLY) and buy iShares Lehman 7-10 Year Treasury Bond (NYSE: IEF).

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