Several readers have emailed over the past few days requesting some details about the execution of the hedge trades.

The issue is when setting up the hedge by purchasing SH for the short side and mutual funds for the long side, which order do you place first on days when the markets rally sharply?

This certainly was the case on Monday as all major indexes shot into the stratosphere. On Monday morning, you could have placed your (long) mutual fund orders to be filled at that day’s ending prices.

But what about SH? Entering the order and getting it filled early or at mid-day would have exposed you to losses as the market rallied on.

I was caught in that exact position. Due to a prior commitment, I had to leave the office about an hour before the markets closed. At that point, the rally was on and the Dow was up some 300 points and rising. My plan had been to simply enter the short position as close to closing time as possible to limit any adverse price action.

Since that was not possible, I simply postponed any action and will enter my long and short positions on a day when I will be around at closing time.

I suggest you follow a similar pattern so that you don’t enhance the odds of starting your hedge with a slight loss.

Treasury Secretary Geithner fed the bulls yesterday by announcing the details of his latest plan to stimulate the financial system.

Much already has been written about it as the particulars are being dissected in any possible way.

The markets took this as a positive development and off the races we went with all major indexes gaining sharply.

As always, Mish at Global Economics provided some valuable insights as to this new spending plan in “Geithner’s Galling (and Dangerous) Plan For Bad Bank Assets.” If you’re not interested in all the gory details, here’s a summary about five misconceptions:

* The trouble with the economy is that the banks aren’t lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it.
* The banks aren’t lending because their balance sheets are loaded with “bad assets” that the market has temporarily mispriced. The reality: The banks aren’t lending (much) because they have decided to stop making loans to people and companies who can’t pay them back.
* Bad assets are “bad” because the market doesn’t understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are.
* Once we get the “bad assets” off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they’ll sit there and say they are lending while waiting for the economy to bottom.
* Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they’ll be working it off for years.

What it comes down to is that another $1 trillion or so will be poured down this bottomless sinkhole for which the next few generations get to pay as the taxpayers are on the hook for 93% of this plan’s obligations.

Since we do not any influence over the outcome, we have to focus on the effects as far as the market is concerned. Over the next few days, we will see if there will be any follow through to the upside or if this rally is limited in scope.

While our domestic Trend Tracking Index (TTI) is still 5.09% away from signaling a new Buy, we nevertheless have to be prepared to act should this trend continue. Entering via our hedge position is only the first step to gaining market exposure conservatively. We will become more aggressive once the trend line has been crossed to the upside.

Another law suit is brewing as “Supreme Court could cut mutual fund expenses:”

The Court last week said it would hear a case brought against a mutual fund for charging investors too much, and some observers say the decision could set a new standard that will result in lower management fees.

Posner pointed out that Harris charged Oakmark fund investors 1% on the first $2 billion of a fund’s assets. But institutional and other clients were charged roughly 0.5% for the first $500 million and roughly one-third of a percent for everything above. He said this pricing difference was of “particular concern.”

[Emphasis added]

Here you have two judges with opposing views. While I am in favor of lower fees, I believe that each mutual fund company should be able to set their own rates just like any business can charge for goods and services whatever the market allows.

Sliding fee schedules are standard procedure in the financial services industry and having a different set of numbers apply to (large volume) institutional investors compared to (small volume) retail investors seem reasonable as long as they are disclosed to everyone.

We are living in different times now. Only less than 10 years ago, as a mutual fund investor, you did not have the variety of low cost choices as we have now with the proliferation of some 700 ETFs. To me, the answer is simple. If you don’t like a fund for whatever reason (performance or fee structure), you can vote with your feet and go someplace else.

Having the courts decide what a fund company can charge under what circumstances means we’re walking down a very slippery slope with government interference when none is warranted.

Reader Mike pointed to “Dent, Napier and Prechter—Wise to Heed Their Predictions.” If you have not heard any wild predictions lately, you’re in luck. Take a look at some of the highlights:

Harry S. Dent Jr., the author of ‘The Roaring 2000s’, ‘The Roaring 2000’s Investor’, ‘The Next Great Bubble Boom’ and his latest book entitled ‘The Great Depression Ahead’ states that

“The most important cycle change for your wealth, health, life, family, business, and investments is just ahead during the first and last depression you are likely to experience in your lifetime.”

Dent makes it clear that his predictions, while almost always contrary to most economists and expectations, have almost always proved to be correct because his predictions are based on the same sound and quantifiable logic insurance actuaries use with a high degree of accuracy to predict, decades in advance, when people will die.

With that understanding of the basis for his forecasting he goes on to predict (and I paraphrase) that:

Dow will Rebound to 10,000 – 13,200 within 6 Months

A likely massive stimulus plan will bolster the economy somewhat into 2009 for a likely rebound in the Dow to between 10,000 and 13,200. A projected bullish scenario puts the Dow between 12,000 and 13,200 between April and September 2009 if the Treasury rescue plan takes hold with the markets anticipating a recovery. A projected bearish scenario assumes that if the recovery is at best rocky, or at worst that we were to move more into a depression in 2009 than a serious recession, that the Dow would only get back to 10,000 to 11,000 and not last as long.

Oil will Increase to $180 – $215+ by 2010 and then Decline to $40 – $60 by 2015

Oil prices will likely rise to a commodity bubble peak of between $180 and $215, possibly even more, and if not that high then, at an absolute minimum, retest its 2008 high of $147, between late 2009 and mid-2010 unless the economy implodes earlier in 2009. We should then see a major crash in oil prices, beginning in 2010, back into the $40 – $60 range, and possibly even lower, between 2012 and 2015 which will continue for years.

Commodities will Peak between 2009 and mid-2010

Commodities in general, including gold and other precious metals despite their crisis hedge qualities in the past, will likely peak between mid- to late 2009 and mid-2010. It will probably be 2020 or 2023 before we see the next sustained commodity boom and bubble which should last into 2039 – 2040.

Dow will Fall to 3,800 – 4,500 by 2012

The next accelerated stock crash, led by emerging markets, Asian stocks, financial stocks and tech stocks – and finally by oil and commodity stocks – will likely occur between mid- to late 2009 and late 2010, when most of the damage will occur, and continue off and on into mid- to late 2012. The Dow will fall at least to 4,500 and more likely as low as 3,800 by mid-2012, the 1994 low where the stock market bubble first began.

Nasdaq will Fall Below 1,100, its 2002 low, by late 2010 or mid-2012 at the latest.

Market will Rally from 2012 until 2017

A substantial bear market rally will likely occur between around mid-2012 and early to mid-2017 and then a less severe downturn will occur from around mid-2017 into early 2020 or as late as early 2023.

Economy will be in a Depression by 2011

The worst of this next depression is likely to hit between mid-2010 and mid-2013, especially around early 2011, but if the banking system continues to implode a deep downturn or depression could begin sometime in 2009 instead of 2010.

This is just a small sample of the predictions featured in this article. As always, while these may be well researched conclusions, I sure would not bank on any of these events happening within the time frame specified.

If in fact a substantial rally materializes first before the bottom drops out and the Dow falls into the 4,000 range by 2012, it will present a repeat disaster for all of those continuing to buy and hold as they’re hanging on for dear life hoping that a bear market rally is the real thing.

My take is that if any of these predictions are somewhat close, they will present tremendous opportunities for those who are willing to unemotionally follow trends and, at the same time, are disciplined enough to get out when trends end. It bears repeating: Investment discipline is the tool that will guide you through these treacherous conditions.

With the markets having been on a tear since the S$P 500 made a new 12-year low on March 9, the question remains whether this move up is the beginning of a new major trend or simple another bear market hiccup.

Dr. Housing Bubble featured the table on the left showing the magnitude of bear market rallies during the Great Depression. He elaborated as follows:

Some people think that stock market rallies only happen in full on bull markets. That is not the case. In fact, some of the fiercest short term jumps happen when the economy is in utter disarray.

We also have the problem of interpreting math results. For example, everyone was cheering the 40 percent rise of Citigroup this week but forgot to mention that this amounted to 40 cents. You gained 1 quarter, 1 dime, and 1 nickel for each share you owned. The rally we are currently seeing is strictly a technical rally. Don’t fool yourself into thinking otherwise. It is the same as the Great Depression bear market rallies. We will test lows again soon. Maybe once those stress tests are released or when the 1st quarter results are announced starting in April of 2009. For the mean time, enjoy the bear market rally.

The investment community has always been and still is fascinated with trying to pick a bottom, and then ride the gravy train all the way to the top whether it is a bear market rally or not. Of course, getting in at the bottom is nothing but sheer luck as is selling at the exact top.

If you are a buy and hold victim, you are pretty desperate in trying to make up huge losses as fast as you can, which usually leads to bad decisions and even more losses. There is nothing wrong for an aggressive investor to take a chance and jump in early. However, without acknowledgement that an incorrect decision could have been made as well as a plan in place to get out again, before major portfolio damage occurs, is something that most ignore.

The above table shows that bear market rallies can be incredibly powerful and long in duration. They may even generate a buy signal for our domestic Trend Tracking Index (TTI) and get us back in an invested position. Since you can never be sure about the duration of an uptrend, especially given current economic times and circumstances, it is imperative that you have a clear plan in place as to how to deal with market adversity the moment you establish new investment positions.

Neglecting to do so will enhance your odds of seeing your portfolio getting pummeled when the rally runs out of steam, the bear resumes its trend and new lows are being made. These treacherous times are far from being over and if you decide to engage some outside help for portfolio management, be sure to ask the most important question: “What is your exit strategy?”