The Recession Protection Plan

By Charles Delvalle

Dear Reader,

On Thursday morning, I opened up MarketWatch and read…

U.S. stock futures wilted on Thursday after a fund managed by The Carlyle Group admitted it's close to collapse and statistics showed a decline in retail sales, dragging the dollar below a key level for the first time since 1995 and lifting oil and gold futures

It’s the perfect storm.

The credit crunch is causing all sorts of problems the Fed never anticipated. Had Bernanke known this would happen, I have a feeling he would’ve done something earlier than August.

But he didn’t know it would happen, so he didn’t act. And now we have a whole host of problems to deal with because of it.

So the question becomes, how do YOU make money in this market?

I’m going to be frank with you – it’s going to be tough. You should be willing to get into certain types of investments that you might not have ever tried before. But before we get into that, let’s talk about what we know.

How Recessions Affect the Market

As the economy contracts, earnings go down. And as earnings drop, so does the stock market. But this isn’t the only thing we’re looking at.

Typically when the economy contracts, the Fed hops in to lower interest rates. When they lower short-term rates, it usually pushes down long-term rates, too (20-30 year bonds). But right now, 30-year mortgages are rising even as short-term rates are dropping.

This ends up doing the opposite of what the Fed wants. It tightens long-term lending. And tightened lending is one of those things that helps SLOW the economy, not speed it.

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So it looks like the rate cuts aren’t helping the economy as much as they usually do. And that doesn’t even factor in the worst part - the credit crunch itself.

Leverage has Poisoned the System

You see, banks are highly leveraged (typically 10 to 1). So for every dollar a bank has in house, it has 10 deployed in leveraged investments.

Now what happens when a bank loses $20 billion? That bank has to shut down all leveraged investments tied to the money it lost. If they are leveraged 10 to 1, that means they have to shut down $200 billion in investments! This is HUGE.

You see, banks are expected to lose $400 billion. That means you can expect $4 TRILLION in leveraged investments to get shut down.

Just imagine it: $4 trillion evaporating from the markets. What do you think that would do to stocks, commodities, and financial markets? It’s not pretty.

And that’s why you need a way to really secure yourself from what’s possible.

The first thing you need to do is make shorting stocks your favorite pastime. The trend is down, so make that trend your home boy. In other words, start playing stocks down. In future issues, I’ll talk more about shorting.

If you don’t want to short stocks, you could always get into ETFs such as the Ultra Short QQQQ ETF (QID). This ETF moves up two percent every time the Nasdaq moves down one percent.

Another thing you could do is have a position in precious metals. As more uncertainty hits the financial markets, more and more investors will look for the security gold and silver will offer them. After all, if the entire financial system collapsed tomorrow, gold and silver would still be used as a store of value.

While I happen to think gold and silver are expensive right now, you could still get into small gold and silver explorers that will help you leverage the run metals are having. For more information on that, check out Russell McDougal’s Wednesday IDE articles. Small explorers are his specialty.

The third thing you should do is get into income-paying investments. I’m talking about safe and steady dividend-paying companies such as McDonalds (MCD). Not only do these companies fall less during recessions, but they’re also the first ones to shoot up during a recovery.

Let’s not forget the steady paychecks they provide that could help you offset any price drops you might see. For more information on that, check out Andrew Gordon’s Tuesday issues of IDE.

The last thing you need to do is get out of any investments that have already lost more than 20 percent of their value. This market could easily continue dropping for the next year, so you need to protect your downside.

If you can do all of the things I’ve outlined here, you’ll be able to protect yourself and even make money from this market crash.

To your success,

Charles

P.S. I just started up a new blog and would love for you to check it out. Just go to http://stockcharlie.blogspot.com/. I’ll be giving you my unrestricted opinion on economic developments and the effect politics can have on the markets. Make sure to comment and let me know what you think!

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Market Watch

Ride or Slide: Fording Coal (FDG)

By Charles Delvalle

Bernhard H. wrote an e-mail asking me to take a look at Fording Coal (FDG). I have to admit, I simply had to cover this stock because I love, love, love the coal sector.

Why? Coal is undergoing a little renaissance of sorts. And now that clean coal technologies have become more widespread, electricity companies are embracing coal even more.

Of course, Fording isn’t primarily finding coal for utility companies. A big part of its sales are of coking coal that is used for steel processing. That means this company is vulnerable to a U.S. slowdown (as demand for steel drops).

And it’s already affecting this company. Last quarter, their revenue dropped by 24 percent and earnings dropped by 28 percent. And you can blame dropping coal prices.

What’s funny is that this future slowdown isn’t really reflected in their chart. Since January 22, the stock has jumped 61 percent. There’s a big disconnect here. The fundamentals of the company aren’t reflected in the chart, and that’s never a good thing. Eventually the fundamentals will catch up and this stock could drop.

While I’m bullish on coal in general, right now isn’t the time to jump into this company. So my suggestion is to sit back and watch Fording Coal (FDG) slide.

P.S. Want to see me cover a stock? Send an e-mail to feedback@investorsdailyedge.com

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