Cash is king again… The bear is now in charge… How to make regular triple-digit gains as stocks get roiled… In the mailbag: “No longer is anything for the taking”…

Stocks got beat up in 2018…

After sinking 9% in December, the S&P 500 ended the year down 6%. That made it the worst year since 2008.

And it wasn’t just U.S. stocks that got smashed.

The Stoxx Europe 600 – which tracks 600 stocks in 17 European countries – plunged 13% last year.

And the MSCI Emerging Market Index – which tracks stocks in 24 emerging market countries – slid 16%.

We’ve been urging you to prepare for a bear market since October…

In the October 11 Daily Cut, we showed you that the best way to protect your wealth from plunging stock prices is to diversify your portfolio outside of the stock market.

As we put it at the time…

The S&P 500 lost about 50% of its value in the 2007-09 bear market. Most portfolios of U.S. stocks went down by roughly that amount as well.

Imagine you’re an investor who hasn’t diversified his portfolio away from stocks. A 50% hit to your wealth is too distressing for most folks to go through. Especially if it’s their retirement savings that are at risk.

But if you’ve, say, only got one-third of your wealth in stocks, the same bear market will translate to roughly a 16% hit to your wealth. That’s not pleasant. But it’s a lot easier to stomach. And it means you’re much more likely to stay invested and catch the next leg up when it comes.

We hope you took our advice at the time. If not, we’ll repeat that recommendation today.

Now is the time to take steps to make sure your wealth is crisis proof. That doesn’t mean panic selling your stocks… It simply means shoring up your defenses against the damage a bear market can wreak on your wealth.

If you haven’t already, make sure and catch up on our Ultimate Crisis Playbook. It lays out the top strategies Bill Bonner, Teeka Tiwari, Doug Casey, and many of our other Legacy experts use to protect their wealth in market downturns… recessions… even depressions and market crashes.

As a Daily Cut reader, you can access it for free here.

But bear markets aren’t all about playing defense…

Regular readers know you can make a lot of money in a bear market if you follow the right strategy…. and the right expert.

That’s why today, we’re sitting down with master trader Jeff Clark.

Jeff is a 30-year veteran trader. He’s been in the trenches through every kind of market. And he’s booked some of his best years when stocks were at their worst.

In 2008, for example – as most investors were losing their shirts – Jeff’s subscribers had the chance to earn more than 100% gains 10 different times. And he’s aiming for more gains like these as this bull market screeches to a halt.

Jeff shares how below… along with his thoughts on why cash is king again. Plus, he details his simple trading plan for the next bear market.

If you’re worried about the end of the nine-year bull market on Wall Street, this is required reading.

Roundtable Q&A With Jeff Clark

Chris Lowe: We just had one of the craziest Christmas weeks in history. On December 24, the S&P 500 dove 2.7%. It was the worst Christmas Eve on record. The next day of trading, the index shot up 5%. That made it the best day-after-Christmas trading day on record.

We’ve continued to see this manic stock market cycle between big losses one day and big gains the next. What does this say about the health of the market?

Jeff Clark: As I just told readers of my Market Minute e-letter, the bull market had a wonderful, long life. But it’s over now. And the bear is in charge.

We may well get a bounce in stocks over the short term. But my view is that stock prices will be lower one year from now than where they are today.

This manic market action reminds me an awful lot of what happened at the end of 2007, when the last bear market on Wall Street kicked off.

The S&P 500 was in bull mode between 2002 and 2007. That bull market peaked on October 9, 2007. But stocks didn’t go straight down from there. Instead, we had a period of wild swings like we’ve been seeing lately.

After the October 2007 peak, we had a 10% selloff on the S&P 500 that ran out of steam at the end of November. Then the index bounced back… and rallied by about 8% going into December.

It was only after that surge that we got the 55% bear market plunge that didn’t bottom until March 2009.

These wild swings are typical bear market behavior. Stocks take a big plunge. Then you get these powerful rallies that whip everybody who dared “go short” – that is, bet on stocks falling – for too long.

Chris: At The Daily Cut, we started urging readers to prepare for a bear market just 12 trading days after the S&P 500 hit its all-time high of 2,934 points.

Back then, the S&P 500 was up 4% on the year. The bulls were still in charge. And the anchors on CNBC were looking ahead to yet another year of gains. But now, the S&P 500 is down 14% from its high.

Jeff: And that’s just the S&P 500 index. Individual stocks in the index are down a lot more.

Take the so-called FAANG stocks – Facebook (FB); Apple (AAPL); Amazon (AMZN); Netflix (NFLX); and Google’s parent, Alphabet (GOOG) – which were high-fliers during the bull market. They’re now down between 18% and 37% from their 2018 highs.

Or look at home builders, which are bellwethers for economic growth. Toll Brothers (TOL) is down 35% from its 2018 high. D.R. Horton (DHI) is down 33% from its high. And Lennar (LEN) is down 44%.

Or take semiconductor makers – another economic bellwether. Advanced Micro Devices (AMD), one of the big chipmakers, is down 44% from its 2018 high.

There’s been a lot of damage already… and a lot of bear market that’s already taken place. It’s just not showing up in the indexes, which is all you’ll hear about from the talking heads on TV.

Chris: Right before the holiday, Deutsche Bank came out with a research note that caught a lot of people’s attention. It showed that cash outperformed all other asset classes – stocks, real estate, commodities, etc. – in 2018.

It’s the first time this has happened since 1931, in the depths of the Great Depression. That sounds pretty bearish to me.

Jeff: That’s right. After almost a decade as one of investors’ most hated assets, all of a sudden, cash is a viable alternative again. It’s all down to the Fed raising interest rates.

In December, the Fed raised short-term interest rates to 2.5%. If you shop around, you can now put your investment dollars into a money market fund and earn a return of 2.25%. That may not sound like much. But it’s been a long time since anybody earned that kind of income on their cash.

Money market funds are types of mutual funds that invest in short-term Treasury bills and other cash-like securities. So you’re getting an essentially risk-free return of more than 2% a year without the rollercoaster ride of the stock market.

For nearly all of the nine-year bull market on Wall Street, you had to do something else with your money to earn a decent return. That meant putting it into stocks.

Now, investors are saying, “Gosh, I can get none of the ups and downs of the stock market, and I can pick up 2%.” That’s still not much. But if the Fed keeps hiking rates, as it says it will, eventually, that’s going to be real competition for stocks.

Chris: What other problems do you see for stocks as we head into 2019?

Jeff: As your readers will probably be aware, corporations have been selling bonds and then using the money to buy back their shares. The numbers are staggering. Last year alone, companies spent $1 trillion on buybacks. It’s a staggering amount.

The reason they’ve been doing this is that buybacks manipulate stock prices higher. When a company buys back its shares it then cancels them. This reduces the share count and pushes up earnings per share on the remaining shares. And all else being equal, that pushes up stock prices. It’s been a big part of what’s been powering the bull market higher.

If you can borrow money for free… and use it to buy back your shares that are paying 1.5% to 2% dividends… it makes all the sense in the world. You eliminate a lot of those dividend expenses. And your earnings per share go up. All is wonderful.

But when it costs you 2% or 3% to issue bonds to fund buying back stocks that pay 1.5% or 2% in dividends, it doesn’t make a lot of sense anymore.

So, companies have eliminated a lot of their stock buyback programs. And in doing so, they’ve eliminated a lot of the demand for stock. That’s not good news for share prices in 2019.

Chris: How should our readers be positioned in their portfolios as we head into 2019?

Jeff: The average bear market loss, peak to trough, is about 30%. But as we saw in 2007-09, when the S&P 500 plunged more than 50% peak to trough, they can be even more severe than that. So you have to look at your portfolio and decide which stocks you’re comfortable owning through a 30%… 40%… or 50% decline.

Think back to 2008. If you had to go through that again, would you be willing to hold the stocks in your portfolio through that sort of a move? If the answer is no, then you want to think of selling your riskiest positions and raising your cash levels.

Chris: What else can folks do to protect their wealth in the next bear market?

Jeff: I had the best year of my trading career in 2008. My readers had the chance to double their money 10 times that year. What made that possible wasn’t necessarily betting on stock prices falling. It was betting on the big moves during that bear market.

Think of a rubber band stretching… and then violently snapping back. The way you want to trade in a bear market is to wait until stocks get hammered and then buy ahead of these wicked two- and three-day rallies that typically follow these big plunges.

Chris: If stocks are trending down in a bear market, how do you avoid taking losses?

Jeff: The trick is to take gains quickly. The “rubber band” can get overstretched on the way up… as well as on the way down. Stocks can go from incredibly oversold to incredibly overbought very quickly. In a bear market, one of the most important things you can do is to shorten your time frames.

You have to be willing to move in and out of positions within days. By making that one change, you can make a lot of money in a bear market.

Chris: This is something a lot of people still don’t get. But as you showed in 2008, bear markets are not necessarily bad news. How do you feel about the prospect of another bear market in 2019?

Jeff: I’m looking forward to it. It’s a big secret of the investment industry, but people make fortunes based on the decisions they make during bear markets. If you’ve got plenty of cash… and a short-term mindset… during a bear market, it’s a wonderful time to make money.

Chris: That’s not a mainstream view. Most investors are terrified of bear markets. They want to sell everything and run for the hills. What’s the average person missing?

Jeff: Unfortunately, most people have no clue about how to navigate a bear market successfully. If you’re buying stocks with borrowed money… or you’re “all in” on high-flying stocks… you’re going to be in big trouble.

The most important thing to remember about bear markets is that they put quality assets on sale. That’s why I’d encourage folks to look at the coming bear market with optimism and plenty of cash.

A bear market is really just a Black Friday sale for stocks.

If you’re a long-term investor, you get the chance to buy quality stocks at dirt-cheap prices. And as you’re waiting for that to happen, you can also trade in and out, as stocks go from oversold to overbought and back again.

If you do those two things, you’ll do just fine when the next bear market strikes.

What to Do Now

Chris here again…

Jeff believes we’re in the early stages of a prolonged bear market.

But as he laid out above, bear markets don’t have to be your mortal enemy as an investor.

By holding plenty of cash… and setting some of your portfolio aside to trade the big bounces… you can turn the next bear market to your advantage.

For more guidance on that, check out Jeff’s trading advice in his Market Minute e-letter.

Three days a week, you’ll hear from Jeff on the short-term setups he’s spotted… and how you can take advantage of them in your own portfolio.

Sign up for free right here.

And be sure to keep tuning into The Daily Cut over the coming weeks, as we continue our 2019 Roundtable Series. I’ll be talking with Teeka Tiwari, Jeff Brown, Dan Denning, E.B. Tucker, Nick Giambruno, Jason Bodner, and Marco Wutzer about the threats and opportunities they see ahead in 2019 and beyond.

If you missed Part I and II with Legacy Research cofounder Bill Bonner, catch up here and here.

In the mailbag: “No longer is anything for the taking”…

Mixed mailbag today, with your fellow readers weighing in on everything from America’s failing empire… to the electric vehicle revolution… to Legacy cofounder Doug Casey’s top secrets for building – and preserving – wealth in any market

I agree with Shawn: “Distance from the failing empire will be important in the years ahead.” And as in the Miranda warning: “Everything you say can and will be used against you!”

– Mary L.

No way, Jose! I’m 82 and haven’t driven a car since November 2009 when I crashed and rolled over three times, sliding off a slippery surface in a curve. Broke my c7 bone and came to within an eighth of an inch of knocking on St. Peter’s Gates up there beyond the Space Station.

I don’t mind the current models that have the backup camera and the digital map that lays out the road in front. But that is all I ever want, should I drive again. The digital world has already destroyed over 90% of people’s privacy rights. And the bloody Communists want to finish us off.

– Peter C.

Dear Mr. Casey: To respond to your thoughts about the wise use of money, I think that we are all here to live wisely to the best of our ability. That is our shared destiny. I don’t think we can do any better than that, and I don’t think that we should do any worse.

I encourage everyone to look at their wonderful faces in the mirror and say, “I love the wise you,” and then to turn this idea around to everyone else in their lives and give them the same kind of inspiration, encouragement, and support they give themselves. It’s a simple but profound expression of why I think we are here. Thank you for your contribution to my efforts to live wisely, especially about money, to the best of my ability.

– Edward R.

Knowledge is power, and it’s accumulated in many different ways. The difficulty is the noise in the background and the media, and the inability to sift out the truth and get the real facts. I used to read four newspapers five days a week, and many business magazines, until I learned it was old news and not really in-depth information that was relevant.

Well now you have the internet, and if you ever Google something, they send you to sites that want to charge you for information. No longer is anything for the taking. I ponder what will happen to people when and if the internet goes dark – or worse, if the entire electrical grid goes dark and people have to go back to basics. How many will survive?

– Jeffrey H.

Are you banking on the electric vehicle revolution reader Peter C. mentioned? Or are you more interested in following Jeff Clark’s trader’s guide for profiting in a bear market? Write us at [email protected].

Until tomorrow…


Chris Lowe
January 2, 2019
Dublin, Ireland