The only bull market these days seems to be in bailouts. Demand for them is increasing on a daily basis which in itself sinks the odds of a bull market in equities. At least for right now, we got the bailout of all bailouts. The bailout everybody (or nobody?) has been waiting for. I doubt though, that this will be the bailout to end all bailouts (am I the only one getting tired of “bailout” this and “bailout that?), but since it’s approved, what do we do with it?

If you’ve been following ETFguide’s coverage of the labor pains paralleling the bailout proceedings, you are in the loop about the five major flaws that will render the bill worthless (discussed in ETFguide’s ETF Profit Strategy Newsletter, a subscription based publication). In addition, if you carefully read between the lines, you find plenty of pork slipped in the 451-page bailout-bill, called H.R. 1424.

“Pork” are provisions added as “sweeteners” to sway reluctant House members to approve the overall bill. Pork could be considered as a secret congress currency. “I will only vote for this bill, if you include certain benefits”. The pork-portion is estimated to encompass $150 billion, over 20% of the package.

Here is some of the approved pork (you couldn’t even make this up if you tried): Income averaging for amounts received in connection with the Exxon Valdez litigation; Tax incentive program to keep TV productions in the U.S.; Tariff relief for wool producers; Transportation fringe benefit to bicycle commuters; Exemption from tax for wooden arrows: Increase in limit for Puerto Rico rum tax, etc.

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Pork aside, it was nevertheless surprising to see the Dow Jones (AMEX: DIA) correct 455 points or 4.2% directly following the presentation of the bill. The S&P 500 (AMEX: SPY) which boasts a higher exposure to financials, dropped 4.51%. Perhaps intuitively, the public realized the folly of the bill before anyone else did.

After distilling all the available information and cutting to the core of the pertinent facts, we are left with the sobering conclusion that the stock market remains in a down trend. A quick burst of optimism combined with the oversold condition could result in a quick bounce. Any such rally would frizzle away soon. No water pump on earth could have kept the sinking Titanic afloat, no bailout will resurrect the economy.

Over a period of decades we’ve become conditioned to believe that every correction is a new buying opportunity, and this has served us well. But what if things have changed? What you are about to read, is very different from what conventional Wall Street wisdom will tell you. Conventional Wall Street wisdom though has driven three of the biggest and oldest investment brokers into ruin. Perhaps it’s time to adopt a different view.

I’ve used Japan (iShares MSCI Japan – NYSEarca: EWJ) as a window into our future before. In 1975 the Nikkei started soaring from around 5,000 to nearly 40,000. At the crest of Japan’s growth, credit was easily available and overindulgence in credit created a bubble that begged to be pricked. Pricked it was! Since the December 1990 peak, the Nikkei has given up nearly all of its gains and dropped as low as 7,000.

Astute investors will evaluate their investments through a “business lens”.  How does the upside compare to the downside? Upside to conservative investing; you keep your money while everyone else looses their shirt. Downside; you make less money while most make some money. I would rather err on the side of caution.

Gold is often perceived to be a bear market hedge. The SPDR Gold Trust (NYSEarca: GLD) and iShares Gold Trust (AMEX: IAU) reached their highs in March and have been in a down trend since. A few months ago everyone said the economy is stifled by high oil prices. Oil (AMEX: USO) is down, but has the economy benefited? No. Perhaps oil, gold and the economy will go down hand in hand.

If gold can’t reach a new high in this environment, when will it? The fact that it hasn’t, leads me to believe something else is going on. Gold is also an inflation hedge, but is not behaving as such. Despite all the new money being printed to pay for the new-found love of bailouts, prices are going down across the board. Inflation might not be the predominant issue.

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Perhaps we should consider the possibility of a deflationary environment, even a deflationary depression. In such a scenario, gold would lose value (albeit at a slower rate) along with equities, other commodities (PowerShares DB Commodity – AMEX: DBC), real estate (iShares Dow Jones U.S. Real Estate – NYSEarca: IYR) and most bonds, even broad bond ETFs such as the iShares Lehman Aggregate Bond (NYSEarca: AGG) and Vanguard Total Bond (NYSEarca: BND) would be affected.

The safest and most conservative bond options are short term U. S. Treasuries. Long term treasuries (iShares Lehman 20+ Treasury – NYSEarca: TLT and iShares Lehman 7-10 Treasury – NYSEarca: IEF) are interest sensitive. Prices will fall if interest goes up. Short term Treasuries can keep rolling over at higher yields, compensation for price losses. The iShares Lehman Short Treasury (NYSEarca: SHV) and iShares Lehman 1-3 Treasury (NYSEarca: SHY) are easy ways to own short term Treasuries.

If bonds are too boring for you, consider inverse and leveraged inverse performing ETFs. ProShares and Rydex offer viable options. This year’s winner has been the ProShares UltraShort Financial ETF (AMEX: SKF) along with its non-leveraged cousin, the ProShares Short Financials (AMEX: SEF).

The ProShares UltraShort S&P 500 (AMEX: SDS) provides broad, domestic short exposure. Inverse performance is also available on Dow, Nasdaq and Russell chassis. With global ETFs tanking, broad global short ETFs might be worth a look as well. The ProShares UltraShort MSCI EAFE (AMEX: EFU) aims to deliver twice the inverse daily performance of the popular MSCI EAFE index.

Further strategies will be discussed exclusively in our ETF Profit Strategy Newsletter. One thing’s for sure, knowledge about the markets will pay the best dividends in the months and years to come.

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