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Sound Investing in the Coming Bear Market

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A crisis of confidence is unfolding. Do you know how to protect your investments? Stephen T. McClellan offers some advice that differs from the standard Wall Street party line.

We are in a bear market. The stock market has essentially moved sideways or down since last July, and while it is not quite 20% below last year’s peaks, just wait. Don’t get trapped in a state of denial. The evidence is glaring—the subprime mortgage and CDO write down debacle, a host of toxic credit and debt derivatives, the banking and financial credit freeze, bursting real estate bubble, pathetically eroding value of the dollar, horrendous federal budget deficits and spending, panicky federal reserve interest rate cuts, the demise of Bear Stearns, ineffectual federal refund stimulus, bond insurers at bankruptcy’s door, an economic recession, consumer spending retrenchment, flat or eroding employment levels, an inflation CPI of +4.3% (5%-8% if including food and energy). Can you say, stagflation? Even sharply reduced interest rates haven’t helped.

The economy runs in cycles. The last real downturn was in the early ‘90s. Government leaders, bankers, the media, investors are nervous. A crisis of confidence is unfolding. The excesses of the late ‘90s Internet bubble, the recent real estate bubble, and the spread of junk-mortgages foisted off as AAA-rated debt, all need to be washed out of the system before there is a return to normalcy.

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