Profiting From Irrational Fear; A Little Help Please

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To OTC Journal Members: 

I'm Looking For Some Help

For those of you who don't know it, I've been working on a new publication I'm going to be introducing sometime between now and the end of September.

I've been writing and publishing the OTC Journal, a penny stock focused online newsletter, for nearly 11 years. It's been a lot of fun, and certainly had its ups and downs. I wish there were a few more ups, but the first decade of the 21st Century has proven a difficult decade for stocks.

The timing wasn't great, but penny stocks are a passion of mine, and I found a way to turn it into a livelihood. 

Thinking a little longer term and looking out over the next 10 years, I believe individual investors have a once in a lifetime opportunity to profit from a unique set of circumstances that won't last long.

As many of you know, I have focused a lot of my efforts on China of late, and here's why it's so unique. China is considered by most global investors to be the top global growth driver for the next 10 years. India, Brazil, and parts of Southeast Asia are mentioned in the same conversation, but the growth factors in China still stand alone.

The largest emerging consumer class in the history of the world will be coming out of China over the next 20 years, and I liken it to investing in the growth of the US in about 1960 with about 7.5 times as many people. China will condense 30 years of US growth into 10 years thanks to an accommodating government and the availability of growth capital.

Here's why this is so unique for US investors- the Chinese Investment Banking industry is still extremely immature. Chinese companies are coming to US capital markets where we still do two things very well- Innovate and Finance. The Chinese investment banking community doesn't know how to get it done- yet. 

Consequently, US investors have a window of opportunity to invest in high growth, highly profitable, fully financed China companies that trade on US listings. Today, there are about 600 of them total, and about 200 trading on the AMEX or higher. You don't have to figure out how to buy a China company with a China listing that only trades on a China exchange. 

My new publication will focus on great China based companies. Growth oriented investors will find strong returns over the next ten years in this sector, and I plan to be right in the middle of it.

My new publication is in development right now. Unlike the OTC Journal which has been free to readers all these years, the new property will be a fee based publication, running about $1 a day to subscribers, and coming with a guarantee you will be presented with profitable opportunities, or your money back. OTC Journal readers will be offered a special opportunity to get involved when the time comes.

I'm putting the marketing materials together now, and I could use your help. If you feel you've gotten valuable information or a few good ideas over the years, I'd appreciate a very brief testimonial- just a sentence or two. It could refer to myself, Larry Isen- to the OTC Journal, or to both. We might use it for the pending marketing materials or on the site itself.

In return, I'll provide a free month for anyone willing to help out. Simply send a very brief sentence or two to [email protected], and I'll give you the first month free once we start publishing our new advisory service. I'll give it to you for free whether we use your contribution or not. I'll keep a list of all those who help.

For those of you who are willing to take the time to do this, thanks very much in advance. Your help is greatly appreciated.

Profiting From Irrational Fear

Alan Greenspan, our last Fed Chairman, once described the markets as being "Irrationally Exuberant", which was a fancy way of saying be believed an equity bubble was forming. It would burst 2 years after his comment. In March of 2000 the Dot-Coms starting melting down, and the NASDAQ Composite went from a high of 5000, to a low of 1135 just two years later. That's a giant drop.

Today, I believe we are in a climate that's the opposite side of the spectrum- and "Irrationally Fearful Climate". CNBC, as always, is the poster boy for the investment theme of the day, and guru after guru is being trotted out these days espousing the same mantra- the macro picture- with is another way of saying the Economy, is headed completely into the toilet, and all forms of business are about to experience a giant flushing sound as our economy disappears clockwise down the proverbial Crapper.

Yes, it appears grim right now, and certainly we are likely in some sort of flat period, if not sliding back a bit. Clearly much of the stimulus out of Washington buoyed things for a bit. With most of the stimulus programs running out, the economy is waffling a bit.

Likely this flat period will run its course over the next month or two, and the "green shoots" of growth will return.

Just like investors can become irrationally exuberant and inflate equity bubbles, irrational pessimism can form a fear bubble as well, and we're in a major fear bubble right now. It's irrational if you ask me.

So, how does fear manifest itself in the markets? One very obvious way is by killing stocks, and the smaller the stock, the more it gets killed. Certainly, there are unbelievably cheap small stocks out there right now as equities are being treated like yesterday's garbage. One way to make money off irrational fear is to go long stocks.

However, there's another way irrational fear is expressed- in Bond Yields. As in past periods of time when fear became irrational, bond yields went into the toilet as well. This is because investors pour money into the safe haven of US Treasuries. 

When there's more demand than supply, prices go up. When there's money pouring into bonds, bonds go up in price, and as a consequence, the yield or the "coupon" goes down, as measured by the interest rate "Yield".

You are looking at a chart of the yield on the 10 YR US Treasury Note. This chart dates back to early in '08 as we entered into one of the scariest markets in the last 100 years. The irrational pessimism is measured in the 10 year as the yield gets down to about 1.75% from about 4% in two months. Money was pouring out of equities into the safe haven of bonds.

While investors are not quite ready to believe the world is going to come to an end as in '08, it's still pretty bad, and the 10 YR at 2.6% is one way to measure the fear. 

In late '08, the last extreme fear bubble burst, and the 10 YR went back to a 4% yield in 4 months- that's a giant move in the bond world.

And- how could you have capitalized when that fear bubble burst?- through this ETF, which trades under the symbol TBT. This is an inverse ETF. When bond yields go up, this goes down, and vice versa. When bond yields go down, this goes up.

So, what happens when the world moderates back to a more reasonable viewpoint? People will sell their bonds they bought at an extremely inflated price (low yield), and go back to stocks. 

As you can see from this chart, when investors went back to stocks in 2009, TBT moved from $35 to $60 in the course of 9 months. This is a 2 for 1 inverse bond fund, so the movements are exaggerated in this security. If bonds go down 10% (yields go up), this ETF is likely to go up 20%.

For those of you who were around, I recommended this security in '09, and we made a killing on it. Now is the time to look at it again as we move out of the seasonally weak summer months, back to the generally stronger Q4 for stocks. 

TBT - If you want to bet the Fear Bubble will burst, you want to own TBT.

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