MY INVESTMENTS IN PREPARATION OF MAJOR MARKET DECLINES

Following the surprise announcements by Hank Poulsen to Congress in late September/beginning of October of 2008, that if the $700 billion TARP bill is not passed the U.S. would enter something worse than the Great Depression and that "marshall law" would have to be used, as one who follows policy developments, economic activity and the markets intimately, I knew that at that moment the market had not adequately priced in the gravity of the situation, and that stocks would fall much further. [So much for efficient market hypothesis.] I immediately called close family and friends and advised them to sell their losing investments to recognize the benefit for tax purposes. As expected, the DOW rapidly priced in the new info and fell from 11000 to 8000 in short order.

As the DOW neared 7000 in February 2009, some commentators saw an opportunity for a significant bear market buying opportunity. I agreed with that sentiment and went through the tedious process of dwindling down a list of about 50 stocks down to one -- Altria (MO). [I always keep a continually updated list of prospective investment opportunities.] There were many other high growth stocks that I had on that list, and even a couple of beaten up banks (no, not C or BAC), that had I bought in place of MO, I would have gained far more in 2009. Baidu.com (BIDU) was on that list; so was Fifth Third (FITB). Wow! I lost out on some huge gains by not buying these two. But given the severity of the situation, the prudent decision was to invest in safety: to me MO is about as safe as it gets -- people buy cigarettes even in the worst of times, and with its growing international presence, as well as the company's very robust dividend policy and share buyback program, it was the surest thing I could find. [Also note, I only invest in a select few companies at a time -- I do not believe diversification fits my investment goals and investment sentiment].

Those calling for a bear market rally nailed it. From March 2009 through the remainder of the year, the markets ripped off huge gains for investors. As the end of 2009 neared, I waited until I would be counted for the company's last dividend for the year, and then sold MO with a nice gain for the year. [The investments I manage are largely in tax beneficial ROTH IRAs]. My plan at that point was to remain in cash, and wait for a significant pullback in the market before buying again. But in early January, significant chatter picked up on a small company that I had been tracking. A major buying opportunity presented itself, and I made the decision to shift my portfolio into the company. As a result of that decision, my portfolio gained 120% in a matter of a couple weeks putting me well on track to have my best year as an investor; I have been investing since 2001. Because of the risks involved with the company, I am not disclosing the name of the company. I will however, disclose my number two play for the year that I would have put my money into had I not invested in this much smaller enterprise -- Domino's Pizza (DPZ), which is up almost 50% on the year. If the market can remain semi-stable over the next few quarters, I think DPZ can still bring healthy returns to investors even at these levels.

Over the last few years, my investment strategy has necessarily turned short-term in nature as the global markets have convulsed violently, both positively and negatively. I do not see these wild swings ending any time soon. What I do see over the next few years is substantial declines in the markets. In this environment, my investment strategy over the next year is to continue monitoring one small company in particular, as well as a handful of other small companies, and DPZ. I will buy heavily in any one of these companies if I see a significant short-term opportunity. Right now I am in 100% cash.

I monitor market data like a hawk. I have enough info now to conclude that the risks in the market are as severe as ever. I share the opinion of many bearish writers at the Financial Times, the Economist, and the Wall Street Journal -- BIG BIG trouble is ahead. In my opinion, DOW could see 4000 or even lower over the next few years; SP500 may see 400 or lower. If we can avoid total collapse, these levels will present once in a lifetime buying opportunities. Accordingly, I plan to invest heavily in biotechs and nanotechs after each severe decline.

To understand the severity of the situation, we have to understand how we arrived to the point we are at. Some writers go back decades, but I am comfortable going back as far as the Nasdaq bubble that popped earlier this decade. When tech stocks crashed, the U.S. economy soon entered a recession. Rather than allowing the economy to deal with slower growth naturally, the Bush Administration made the decision to artificially create growth through stimulation. Under Bush, taxes were cut and interest rates dropped to record lows; the U.S. was running real negative interest rates from 2002-2005. Loose monetary policies coupled with bad homeownership mortgage policy, created a second bubble in the real estate market.

Making matters far worse, tied to real estate assets were new securitized instruments that enabled banking institutions through their in-house casino-like hedge funds to make enormous bets utilizing obscene levels of debt. At the height of the crisis in 2008, large banks on average were overleveraged at a ratio of 37 to 1, according to a new report. When the bubble popped on the real estate market, a bubble many, many times greater also popped in the asset-backed securities market.

To address the two latest bubbles, another bubble of even greater scale emerged -- U.S. public debt to cover the losses from the private sector.

All economic-market bubbles come to a violent, tragic end. This one will be no different.

Peace

Jeremy