Roger Nusbaum addresses how to handle a slow significant drop in the S&P 500 that Jeremy Grantham discusses.

Jeremy Grantham: Brace Yourself for a Slow, 40% Drop

in a slower decline – that is, one without panic – diversification would work and correlation would not go up between investments where it is usually low. In this environment I would want to own foreign currency and bonds, different sorts of countries (commodity based, surplus or in their own world), cash and big cap defensive stocks. All of these come to mind as places to overweight. I would also hope that I had positioned the double short fund well going into this to neutralize some of that decline.

… there is really not much need to correctly predict something like that either. Any time the market goes down a little (not the market condition to fear) it could devolve into down a lot (this is the thing to worry about). You can’t know when it will happen so don’t sweat being right, just stay disciplined and hope to miss a chunk of it.

http://seekingalpha.com/article/45722-jeremy-grantham-brace-yourself-for-a-slow-40-drop

What would I do? I don’t know but I do know that this is exactly the situation where having a predefined plan would help a lot. Why do I own this stuff? What do I expect to gain by it? How do I know that conditions have changed and some action is required? What is the exit strategy?

A friend teaches “scenario planning” to major corporate clients. So what are the scenarios? What are the trigger points to know which scenario is actually happening? What actions are called for – either for this scenario or for the transition from one scenario to another?

Current scenario :
key factors, position, change indicators, transition issues

Alternative 1 :

Learn more…

Taking stock of risk
Why global markets are more volatile, and how investors can handle it
.. quotes Jeremy Grantham
http://www.marketwatch.com/news/story/stock-market-volatility-back-should/story.aspx

In his piece This Bull Market’s Got Two More Years, Larry MacDonald seems to be passing along this important financial prediction

BCA Research, one of the more substantive (and expensive) investment advisories, thinks there is another two years to go in the bullish trend (although there could be a retest of August lows in the near term).

The recent shakeout in risky assets should be regarded as no more than “part of the maturing process of the equity bull market.”

http://seekingalpha.com/article/45859-this-bull-market-s-got-two-more-years

Thanks for sharing, Larry. Are we expected to believe that BCA is a credible source because they are expensive?

So what happens to a company that is taken private? Who are some of the take backs? What becomes of them over time? Will they be strong players in the future? Will they be sucked of all cash and meaningful assets? Here’s a short list to watch. We’ll see.

• Chrysler : Cerberus Capital Management
• CB Richard Ellis Group : Blum Capital Partners
  real estate giant restructured and taken public after three years. In three years, CB Richard Ellis’ (CBG) market value has grown 600%, from $1.3 billion to $9.1 billion (as of 8/21/07 BW)
• Sears Roebuck (SHLD) : ESL Investments
  Eddie Lampert consolidated it into bankrupt Kmart, monetized its real estate, and took it public. Four years later, its stock has risen 10 times.
• SSA Global : Infor
  SSA Global was itself a private equity sponsored roll-up of public software companies
  Baan, Ironside, and Epiphany : SSA Global
• Delphi Corp. :
  bankrupt auto parts maker
• Calpine Corp. :
  bankrupt power producer
• ION Media Networks, Inc. : Citadel Investment Group and General Electric’s NBC Universal.
  struggling television operator
• Dollar General and ServiceMaster Co.
  had to delay or reduce debt offerings with PIK features (convertible notes called payment-in-kind)
• United Rentals : Cerberus
  Equipment rental company

In looking for the names to watch I came upon some articles like this BusinessWeek one that defends the practice, but it does admit that there are critics.

Private Equity, Public Gain
Let’s lay to rest the myths about private equity, once and for all. There’s no question PE is a boon to society

… Critics call private equity outfits such as Blackstone (BusinessWeek.com, 7/26/07) the new robber barons, ready to plunder great corporations and leave them in a shambles.

Nothing could be further from the truth. The dynamic leadership of private equity is providing great benefits to corporations, the economy, and society.

http://www.businessweek.com/careers/content/aug2007/ca20070821_995464.htm?campaign_id=rss_daily

Learn more…

Burnham’s Beat: Private Equity’s Software Buying Binge
billburnham.blogs.com/burnhamsbeat/2007/01/private_equitys.html

Distress investors take private equity cues | Reuters
www.reuters.com/article/reutersEdge/idUSN0844208020070809

SO quotes George Soros in his latest.

I have come to distinguish between normal conditions and far-from-equilibrium conditions. In normal conditions, there is a tendency for the participants’ views and the actual state of affairs to converge or, at least, there are mechanisms at work to prevent them from drifting too far apart. I call these conditions “normal,” because that is what our intellectual traditions—including philosophy and scientific method —have prepared us for. I contrast them with far-from- equilibrium conditions, where the participants’ views are far removed from the actual state of affairs and there is no tendency for the two of them to come together.

Thanks, George. This actually helps explain the whole delusions thing. There is a huge disconnect between what seems to be happening – nothing remarkable, business as usual, and reality – the economy is heading for a major train wreck. Why is this so hard to see?

It is like watching an accident happening – all the vivid details in slow-motion. That train is going the wrong way. Can’t be. That is too wrong. It really, really is a very deep hole where it isn’t supposed to be. Crash!#@! Believe it. It really can happen. It really is happening. It isn’t normal, but that doesn’t mean it can’t happen.

Moving right along, then. Now what? Fannie and Freddie do jumbo and alt-A loans? SO says it won’t fix the problem. There are just too many houses. There is too much credit debt that can’t be paid. The Fed may be doing a fine job putting their finger in the dike by stepping up as the lender of last resort to get the commercial paper log jam unstuck. However, the real problem of massive un-repayable credit debit is way beyond that.