Good advice, and bad

CNBC comes to the rescue of the confused investor:

With the markets so volatile, many investors might be tempted to head for the exits. But in these nervous times, there are smart moves you can make to protect your portfolio.

CNBC.com asked the experts what they would buy--and sell--in this type of environment. Here's what they're telling us.

Buy: Consumer Electronics

Marc Pado, chief market strategist at Cantor Fitzgerald, says technology-related industries such as software and consumer electronics should do well as corporate spending usually picks up in the fourth quarter. He also believes retailers could be set for a rebound.

"I think we'll test the lows in the next few days," Pado says. "But the two key areas that do well in the fourth quarter are technology and consumer-sensitive areas like retail, which has been badly beaten because everyone has been worried about the consumer." ...

Sell: Homebuilders, Mortgage Lenders*

With the mortgage industry still in turmoil, "a reality check is coming back in for the homebuilders," says David Kotok, chief investment officer at Cumberland Advisors...

What follows is not trading advice, of course. It is incumbent upon you to do your own due diligence. I just want to lay out here what I think the near future holds and what *I* personally am doing about it. It will be a rambling post, because there's a lot to cover, but I don't want to make this a "market blog," even though I'll admit to spending an inordinate amount of time watching the markets recently. I have a real feeling this could be a once-in-a-generation event and I'm loth to miss it.

That said, the first thing I notice about the article is not the recognition of turmoil, but the complete ignoring of its true causes and what its likely effects will be. That leads to a paradox: we are supposed to buy consumer electronics because it has been beaten up, but we're supposed to sell home mortgages for much the same reason. "Everyone is worried about the consumer" because of the second, yet we should presume it's not a problem and buy the first? If they have been borrowing from their houses to afford big screen TVs, where will they get the money to buy more now that mortgages are scarce?

Let's examine, just briefly, everything else they ought to be worried about:

1. The mortgage problem is accelerating. In fact, while we just celebrated the 100th implosion on the Implode-O-Meter a few weeks ago, the number is now 129. That's huge. Really huge.

2. Another German bank has just had to be rescued by the government because of subprime issues. There was a run on Countrywide Bank last week. The SEC is investigating several big banks to see what exposure they have. Where there's smoke, it's safe to assume there's fire. The government always arrives late to the party, but they are often really going to a party.

3. After stating less than 2 weeks ago that subprime was 'contained' and only a catastrophe could cause the Fed to inject itself into the markets, the Fed lowered the discount rate by half a percent and central banks worldwide injected more than half a trillion in new money into the markets. They have also begun purchasing unsaleable paper on long contracts to keep the credit markets from completely locking down.

4. Government bonds are in such demand that interest rates in 30-day paper dropped by more than half just today, while many corporate issues have no bid at all. It is a flight to safety almost unparalled.

The problem is not the consumer**, it is a credit crunch, an acute lack of ability for businesses to borrow and a fear of banks to lend, and it will not be solved by the Fed cutting rates. That means the solution for the investor is not simply buying stocks assuming the consumer can pony up for them, but to focus on companies that don't need to borrow or companies that generate a lot of cash without needing access to a lot of cash. Frankly I like royalty trusts, organizations that own royalty rights, whether in oil (BPT), music (MMTRS), iron ore (MSB) or anything else that creates passive income based on real assets, not fantasies (like hotels or Real estate trusts). I also like small companies like USMO that have established contracts, preferably with large entities, and that throw off a lot of cash***. When cash is dear, the investor should buy companies that generate cash, not consume it. Then you can use that cash to buy whatever else you like. I'm also buying unhedged companies sitting on gold deposits - in fact, I'm buying their warrants, paying for my leverage with time rather than debt. If the Fed creates the number of dollars I expect, everything that is not a dollar is going up - except things like real estate that have gone up already.

Those are for people who insist on buying stocks. But in a market where the future is probably lower than the present, why buy at all? I personally have been building a cash position for months and have the highest proportion of cash presently that I've had in years. I also have two of my four retirement accounts *completely* in cash****. They are not for generating income - they pay almost nothing - but for buying stocks at much lower prices than today.

Now the big question, the one that is popping up more and more: are we headed for a market crash? I don't know, but I would not bet on it and am not betting on it. A lot of folks are busy comparing the present charts to 1929 and 1987, but I find their conclusions less than convincing (charts will tell you everything you need to know except the future) if for no other reason than that I believe the central banks will throw as much money at the markets as is necessary to avoid it*****. There really is a Plunge Protection Team, and they have a big checkbook.

What about the future? I think we have a lot of problems in the markets to work out. I think they are bigger than is being reported, they will last longer than is being reported, and they will be far, far more widespread than is being reported. Remember, Wall Street's job is to SELL YOU STOCKS. That's how they make their money. The vast majority of talkers on financial programs will tell you what to buy, and they will sell it to you, all the way down. Caveat emptor.

Finally, a thing about bears. I am one, but only at current prices. No matter how bad the problems get, they are not the end of the market. They are not the end of the world. They are an opportunity for people who saw and prepared to do very well and an opportunity for fools to get wiped out. Bears do not believe in financial Armegeddon (Jim Cramer's word, not mine) because they want to see people suffer, they simply see it coming and look to preserve themselves and their loved ones from it.

I want to see you preserve yourself from it as well. So don't count on me or what I say, do your own homework and protect your own family. We have a bumpy ride a-coming.

I really, really hope this is the last post I do on this subject.

UPDATE: Finally, I would be remiss if I did not tell you where to learn more for yourself, so here are a few sites and notes:

If you really want to understand the credit problem, Mike Shedlock has the best blog on the web. He's a deflationist (while I am an inflationist) so I don't always agree with him. But where I do not, he is more likely to be right than I. He also links a lot to Minyanville, which has been fantastic lately. Kevin Depew's column "5 Things" is timely and relevant, always.

If you want to understand derivatives, read Jim Sinclair. Avoid the charts unless you really want to learn them seriously and just read him. Sinclair has been a trader and a head of public companies for decades. He knows what he's about.

If you want 'oh-sweet-darwin-it's the-end-of-the-world,' Financial Sense and Dollar Collapse will give it to you. But they will also give you very good analysis. Unfortunately, it's not always easy to learn which authors are chicken littles because they are selling a newsletter (and even a few who are are very good.) But there's a high noise-to-info ratio at both sites, so beware.

OK, you're on your own.

* This really frosts me: why are these guys telling consumers to sell housing companies now? If they were worth a plugged nickel, they would have been screaming 'sell' a year ago. Now that investors have lost 70-100% of their money in these weapons of capital destruction, it's a little late to raise the sell sign. Bah! I guess they needed someone to sell to.

** that is 'a' problem, not 'the' problem.

*** disclaimer: some of these I own, some I have owned, some I will own if they hit my target price. If they go too high too fast, the shares you buy could be mine.

**** That doesn't mean El B has escaped subprime. At least one of them occasionally holds a small position in mortgage-backed repos. Nothing I can do about that; the company simply does not offer a 100% government paper fund. If you can do better than me in that regard, I certainly will not call you names.

***** Of course, now I've jinxed the whole thing.