I hear it a lot from inexperienced Wall Street analysts, bloggers, and money managers who spend little time living in the “real world”.

Here’s what they’re saying: “Gold is way too popular now… It’s near the end of its bull market.” The recommended “action to take” is to cash in your gold profits and move on to something different.

I can tell you that taking this advice is a big mistake. Anyone who believes gold is too popular with the mainstream public simply doesn’t know who the mainstream public is… and they don’t understand how bull markets end.

Sure… gold is up big since it broke out to a new high in September. In just over two months, it has climbed from $950 an ounce to $1,100 an ounce.

Click here to read the rest of Brian Hunt’s analysis of the state of gold, published online at Fleet Street Invest.

After all, most mutual funds, exchange-traded funds (ETFs) and managed accounts offer long-only strategies. And why not? After all, the strategy is simple: These portfolio managers buy securities and hope to take advantage of price appreciation.

But the ongoing financial crisis proved those investors wrong – for several reasons. After all, what do you do in a trendless (sideways) market? And what about a declining market?

In either situation, the profit payoff from a purely long portfolio doesn’t figure to be very large. And that’s no surprise. After all, when bear markets arrive – as they periodically do – long-only money managers are typically limited to raising additional cash, or seeking conservative investments with limited downside, meaning the upside potential is also fairly small. And as investors have seen all too often during the current financial crisis, money managers who insist on “fighting the tape” can often generate big losses for their clients.

That’s where long-short investing strategies come into play.

If the markets head up or down, you’re positioned to profit. And given the wild volatility we’ve witnessed in the last year, any investor not playing both sides of the market, simultaneously, quite frankly, deserves it if they drown their portfolio.”

Unfortunately, many investors have learned their lessons the hard way for the past year and a half as virtually all classes have declined in value, resulting in sizable losses within their portfolios.

“This environment has exposed the flaws in traditional asset allocation theory, Capital Asset Pricing Model (CAPM), or whatever label you choose to put on it,” said Tom Samuels, managing partner of Houston-based Palantir Capital Management Ltd. and manager of the Palantir Fund, a global all-cap long-short mutual fund. “While Markowitz (Harry) and Sharpe (William) still have their firm believers, sophisticated investors are realizing that they cannot achieve true diversification merely by being long a variety of asset classes.”

Samuels believes the majority of long-only returns are influenced by the direction of the overall markets and that long-short investing strategies provide one of the few ways to achieve true portfolio diversification and risk control.

“Long-short represents the only asset class that can effectively handle both sideways and bear markets,” Samuels said. “The asset class allows investors an opportunity to systematically approach the markets and individual risk parameters differently than being long-only.”

The Long and the Short of a Newly Popular Investing Strategy

A long-short money manager has the ability to both buy and sell stocks to help reduce risk during such less-than-optimal investment environments as a trendless market or even a bear market.

The long-short strategy often serves as a hedge from overly bearish markets by allowing investors to take advantage of upside potential (long positions), while also benefiting from downward movements of certain investments (short positions). In choppy markets – like those of today – the strategy can help investors book some gains as they focus more on capital preservation, and not simply appreciation.

In reality, investors should consider incorporating some form of a long-short approach as part of the overall asset allocation of their portfolios, experts say.

Brian Lipton, founder of Gaithersburg, Md.-based YellowWood Financial Advisors Inc., seeks out investments that are not correlated with traditional stocks and bonds. Lipton views long-short investment products as another piece to the portfolio construction puzzle, and has incorporated hedged equity mutual funds as part of a tactical allocation – a way of reducing exposure to the risk of a long-only securities position.

“We realized long ago that we cannot ‘time’ the markets,” said Lipton. “We typically allocate about 20% to 30% of our equity portfolios in a tactical manner. Hedged equity represents a part of that allocation that helps satisfy certain risk elements and, of course, allocations that reduce long-only exposure in this environment have been beneficial. We have found that hedged mutual funds have been a very good choice during periods of intense volatility and could work well during other times as well.

Lipton’s firm uses one fund that goes long on favored positions, short on out-of-favor positions, and another fund that buys equities and hedges them with short positions on various indexes.

“While the latter fund is 100% hedged today, that percentage could change based on their views of the market environment,” Lipton said. “Security selection is still important.”

Hedging Plays: Make Macro Calls, Dodge Market Falls

At Palantir, Samuels looks for opportunities to hedge long positions, while also seeking profits on the short side. In managing his long-short fund, Samuels will make macro calls on the markets and the economy, micro calls on companies he believes to be either under- or overvalued, and also employs market-neutral arbitrage trades by pairing long and short positions in similar securities.

“Right now, we are short the dollar by owning the [PowerShares DB U.S. Dollar Bearish Fund (UDN)], an unlevered ETF that inversely mimics the movements of the U.S. currency,” said Samuels. “That position represents a macro call against the dollar and the ETF shot up dramatically when the Fed announced its intent to aggressively buy Treasuries to lower rates. Additionally, we believe this short trade provides nice cover as some domestic companies may struggle relative to their international counterparts.”

Samuels’ fund is also betting against U.S. Treasuries through short positions in an ETF that tracks long-term government securities.

“Historically, central banks have had mixed records of holding rates down, particularly when their currencies begin to fade,” Samuels said. “Shorting Treasuries provides an opportunity to make money on that macro call, while also serving as a hedge against certain long industrial and consumer-related domestic equities that may struggle in a rising interest rate environment.”

Dave Walker, YellowWood’s director of operations, points out that his firm has begun using a long-short commodities-based fund as a way of employing this non-traditional investment strategy.

“We have been allocating a portion of certain clients’ portfolios into long-only commodities funds for years, but gains and losses have recently come so fast and furious that we chose to move into a hedged product,” Walker said. “We realize we cannot time these markets on a daily basis by investing long or short. But based upon the trends in the global economy and surrounding specific categories of commodities, a hedged commodities fund allows us to participate in this alternative asset with lower risk and volatility. We will trail indices when there is a quick rebound but, more importantly, we expect to curb the downside.”

Market Neutral Pairs

Palantir’s Samuels explains the pairs trading concept through a hypothetical example.

“The market-neutral pair trades entail buying a company in a high-quality security as measured by free cash flow (FCF), low debt, and [solid] profitability, and simultaneously selling a security in the same sector that we perceive to be [of a] lower quality based on these same parameters,” Samuels said. “Let’s say, we liked Intel (INTC) because of where the company is in its product cycle, its low debt position, and its positive cash flow. Conversely, we recognized that [Advanced Micro Devices (AMD)] maintains considerable debt and its last product introduction was under whelming. In this example, we may choose to go long Intel and short AMD.”

Samuels then discusses an environment that has the overall equity market declining by 30%, with Intel and AMD dropping 25% and 35% respectively.

“A properly executed paired trade would have returned 10% to the investor, even as the stock market as a whole lost 30%,” said Samuels. “The long-short manager then has the opportunity to unwind the arbitrage, but only one side at a time, if desired. We may believe AMD is more fairly valued after a drop of 35% and choose to cover our short, while still owning Intel, a high-quality stock that could appreciate should the market rebound. The long-short approach provides us significant flexibility, while the long-only manager has to identify high-quality stocks and then hope that the overall market direction cooperates.”

Client Interaction

YellowWood’s Lipton had not seen sheer panic from his clients – at least not before the Dow Jones Industrial Average recently fell below the 7,000 level.

“For the most part, our clients understand their allocations and we received very few distress calls,” said Lipton. “Nevertheless, we know the concern is there. When the Dow broke below 7,000, some became worried about further significant slides without any apparent market support. We spoke with them more about increasing the hedged positions and they were happy to control the downside better, while giving up a bit of appreciation potential. They were very interested in such investments, particularly given the uncertain environment we are in.”

And these days, a little peace of mind can go a long way.

[Editor's Note: Ron Brounes, CPA, is a regular contributor to Money Morning. A technical financial writer, Brounes, is president of Brounes & Associates, a Houston, Tex.-based consulting firm that provides writing, communications, and educational services for financial services professionals. Back in March, Brounes wrote about how the Obama stimulus package would affect your income taxes.]

Use this Code to “Crack” the Market for Triple Digit Gains… The same mathematical concept that allows the CIA to break codes, now “cracks open” any market or individual stock and predicts – to the penny – where it’ll be trading 30, 60, or 90 days, even two years down the line. Using tools no one else has, this technique has already raked 130%, 153% and 155% gains for its users. It’s no wonder some are calling it “the most powerful financial indicator on earth.” And now it’s being made available to a select group of people. To find out how you could be one of them, Click here

Source: How Long-Short Investing Can Lead to Profits in Today’s Uncertain Markets

[This is the eighth installment of a new series that looks at ways for investors to recover from the U.S. financial crisis. To check out the archive of previous stories in the series, just click here.]

We see this played out everyday as more brokerage firms struggle to survive and unfortunately, we see folks like Madoff facing serious charges.

Here’s how you can take control of your investments:

1.    Understand what the market is doing.

That’s first and foremost. You can invest in a good stock that’s breaking out of a set-up, but if the market direction isn’t behind you, it’s like riding a bike into a fierce wind. You must understand where the market is and where it’s likely to go in the short-term. Then, invest in the best set-ups that will be helped by the market direction. It’s much easier to ride a bike with the wind at your back.

2.    Trade only the best set-ups.

Let’s take a look at NVEC, which triggered a long-side trade last week…

When a stock is moving higher, it doesn’t go straight up. Instead it rises, then has mini-downtrends where it consolidates its gains before moving higher. These mini-downtrends are where it pulls back off of its highs in an orderly manner — often to an area of key support such as its upward trend line and/or 50-day moving average.

We connect the lines of the mini-downtrend. A break above the pink line triggers a trade on the long side. For that reason, NVEC was an ideal long side set-up last week:

On Tuesday morning, NVEC triggered a trade by breaking above the pink line.

By Tuesday’s close, we were already enjoying a gain of 5%. And Wednesday morning, we locked in gains of 8.9% — a nice gain in today’s market in just over 24 hours.

This leads to step #3.

3.    Take your profits when you have them.

While on the surface, a 9% gain may not seem like much, I have to tell you that if you just did one trade like that a week, you’d significantly outperform most brokers, money managers and mutual funds. After all, most of these money handlers are nothing but “Managing To A Benchmark” cookie-cutter indexers that know how to sell but not how to manage. Have you seen what the indexes and mutual funds are down year to date? If your traditional account mimics the indexes, you know you’re working with one.

Just think about it. Let’s say you have a portfolio of $50,000. And you invest in 200 shares of NVEC at 28.22. After selling it at $30.74, you’ve made a profit of $504. Multiply that by 52 and you have a one-year profit of $26,208 or 52%! And that’s just from doing one trade like NVEC a week.

What would a one-year gain of $26,208 do for you? Well, it would easily put you well ahead of what most brokers could do for you.

Stocks may continue to go in the direction we want after we take profits. But for the time being, you are never going to go wrong ringing the register on short-term gains. For example, what if we didn’t lock in our NVEC gains at $30.74? Our gains would have been gone as the stock went right back to where it was when it originally triggered.

Now don’t get us wrong. We aren’t out to get brokers. We know a lot of them and many are very good. But the point we are trying to make is the days of handing your money over and expecting a traditional Wall Streeter to perform are over. To be successful, you have to be in control of your investments. After all, only you have your best interests at heart. As good as your conventional Wall Streeter may be, he’s not able to watch your investments as good as you can.

Source: Quicker, Safer Trades Every Week

The losses among banks, insurers and money managers may spark the next round of writedowns on CDOs after $660 billion in subprime-related losses. They may force lenders to post more reserves against losses after governments worldwide announced $3 trillion in financial-industry rescue packages since last month, according to Barclays Capital.

– Meanwhile, Reuters reports that U.S. banks will need more $700 billion in government cash injections to stay afloat because “banks cannot predict how many of their loans will sour because they do not know how much the economy will shrink, and forecasts of their future losses would only spook investors.”

– The numbers are certainly worrying:

By the numbers, the outlook for banks is troubling. U.S. commercial banks had about $1 trillion of capital as of the end of the second quarter.

That may sound like a lot, but Alpert estimates that banks globally could have a total of $1.25 trillion to $1.5 trillion of writedowns and losses from mortgages, of which perhaps $600 billion have already been recorded.

– Earnings season is upon us. Investors are reacting to the prospect of corporate losses. This from MarketWatch:

U.S. stock futures pointed to a second straight drop on Wednesday on concerns for earnings in a rocky economy, though Apple looked set to buck the trend after the consumer electronics giant was able to sell far more iPhones than expected.

S&P 500 futures fell 20.1 points to 939.20 and Dow industrial futures tumbled 166 points. Futures on the tech-concentrated Nasdaq 100 fell a more modest 15.5 points to 1,277.00.

– Global stock indexes also fell. This from Bloomberg:

The MSCI World Index lost 2.9 percent to 944.07 at 12:02 p.m. in London. The index has lost 40 percent this year and oil has tumbled more than 50 percent from its peak in July as concern deepened government bailouts to save the global banking system won’t avert a recession.

– In the currency markets, the British pound hit a five-year low against the dollar. The euro plumbed a 20-month low against the buck.

– Crude oil prices fell below $70 a barrel on growing fears of a global economic slowdown. OPEC’s scheduled meeting on Friday to discuss output cuts has so far failed to stem oil’s slide.

– A lot of investors are calling a bottom — at least a tentative bottom — in stocks.

– Addison Wiggan and Ian Mathias in The 5 Min. Forecast note that Jeremy Grantham, self-proclaimed “perma-bear” is turning bullish.

Grantham says the time has come for “hesitant and careful buying” of equities. Grantham, who also correctly called a global bubble among all asset classes last year, told his $120 billion worth of clients that this is the quarter to start buying.

“On Oct. 10, we can say that, with the S&P at 900, stocks are cheap in the U.S. and cheaper still overseas. We will, therefore, be steady buyers at these prices. Not necessarily rapid buyers — in fact, probably not — but steady buyers…

“History warns, though, that new lows are more likely than not.

“Fixed income has wide areas of very attractive, aberrant pricing. The dollar and the yen look OK for now, but the pound does not. Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!

“Commodities may have big rallies, but the fundamentals of the next 18 months should wear them down to new two-year lows. As for us in asset allocation, we have made our choice: hesitant and careful buying at these prices and lower.”

Hawaiian Airlines (HE:NYSE) is a perfect example of a “free money” opportunity.

Richard Aster Jr., who runs both the Meridian Growth Fund and Value Fund, added more shares to his long-term position in HE stock. Aster has been buying up HE for years. He holds over 1.4 million shares, valued at $37.8 million.

All of a sudden, John Keeley entered the game. He added a brand-new position of almost 640,000 shares, which he bought for $14.3 million.

Since Wall Street started buying HE early in 2008, HE stock has jumped 22%.

If you were part of my 13F Distribution Plan, and privy to “free money” opportunities, you would have known about the big buys on HE stock. And you’d be up 11% already!

Rest assured that Richard Aster will not let this stock fail if he wants his fund’s average returns to stay in the double digits for clients.

At $50 per share, it’s still a strong buy for you. Its debt is one-third of its assets, and it has very good leverage. Not to mention an annual dividend yield of 4.6%!

Ann Sosnowski
Editor, Safe Haven Investor
Source: Money Managers Are Pumping Up This Airline Stock! 

See, this stock is part of the “13F Disbursement Plan.”

This government-issued plan lets you legally skim money from the cutthroat Wall Street firms who have gotten rich at the expense of ordinary investors like you.

What is the secret to this particular high-dividend stock? Well, two popular money managers have already put over $8.19 million into it since 2007. And they’re bound to buy more shares.

This practically guarantees profits as the big movers and shakers of Wall Street push the stock up and manipulate its price for their own good…. and for their own profit.

Well, now we’re taking their plan and turning it on its head. We’re not just skimming money from these managers… we’re gonna make 12.7% in annual dividends as well!

This also isn’t the only stock that’s being manipulated!

If you join the 13F Disbursement Plan today, you can learn about the other four stocks that Wall Street managers are pushing up for their own profits… and how you can get in on the ground floor of these exciting, safe investments.

Ann Sosnowski

Editor, Safe Haven Investor

U.S. Government Unlocks $35 Billion in “Free Money” Payouts to American Citizens!

The “13F Disbursement Plan” offers you a fantastic wealth-building opportunity with very little risk. It’s safe, simple and, best of all, generates lots of income.

Read on and learn how you can get your share of “free money”…