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How to Profit from the Global Recession Stocks Bear Market

Stock-Markets / Stocks Bear Market Feb 04, 2009 - 04:09 PM GMT

By: Money_and_Markets

Stock-Markets

Best Financial Markets Analysis ArticleTony Sagami writes: Dozens of the world's leaders gathered in Davos, Switzerland for the World Economic Forum last week. The main topic was gloom … the spreading global recession … and whose fault it was.

Almost universally …


The Rest of the World Is Blaming Their Economic Woes on Us …

Chinese Premier Wen Jiabao gave a somber forecast for China's economy:

Wen Jiabao squarely blamed the U.S. for China's economic woes.
Wen Jiabao squarely blamed the U.S. for China's economic woes.

“We are facing severe challenges, including notably shrinking external demand, overcapacity in some sectors, difficult business conditions for enterprises, rising unemployment in urban areas and greater downward pressure on economic growth.”

Wen blamed his country's problems on America, saying:

“The global financial crisis would be attributable to inappropriate macroeconomic policies of some economies and their unsustainable model of development characterized by prolonged low savings and high consumption; excessive expansion of financial institutions in blind pursuit of profit — and other excesses.”

Russian Premier Vladimir Putin pointed the same boney finger of blame at the U.S.:

Russia's Putin didn't hold back either. He declared that investment banks, the pride of Wall Street, have virtually disappeared.
Russia's Putin didn't hold back either. He declared that investment banks, the pride of Wall Street, have virtually disappeared.

“The entire economic growth system, where one regional center prints money without respite and consumes material wealth, while another regional center manufactures inexpensive goods … has suffered a major setback.

“Today, investment banks, the pride of Wall Street, have virtually ceased to exist.”

I agree that our spendthrift politicians, home loans to anybody who could fog a mirror, got-to-have-it-today consumer spending, a much-too-easy Federal Reserve Bank, and Wall Street greed are to blame.

The real issue now is:

How Much More Economic Pain Is Yet to Come?

The answer: A whole lot more!

In fact, the usually upbeat International Monetary Fund expects things to get much worse.

The IMF dropped its forecast for global economic growth to a measly 0.5% for 2009 — the weakest pace since World War II. What's more, that's a drastic reduction from the 2.2% growth the IMF had predicted as recently as November.

An IMF spokesperson said:

“Unless stronger financial strains and uncertainties are forcefully addressed, the pernicious feedback loop between real activity and financial markets will intensify, leading to even more toxic effects on global growth.”

Even China, the economic juggernaut, is rapidly slowing down. Fourth quarter growth fell to 6.8%, barely half the 13% growth the Chinese economy enjoyed in 2007.

What This Could Mean For You …

I believe that the primary direction for the world's stock markets, including China's, is downward and that the greatest opportunities for making money will come from bear market bets.

And there are at least three ways for you to get richer from falling stock prices:

Bear market strategy #1: Short selling —

When you buy a stock, you are betting that it will go up. And when you sell a stock 'short,' you are betting that it will go down.

To short sell a stock, your broker loans shares to you. The shares are sold, and the proceeds are credited to your account. Sooner or later you must “close” the short by buying back the same number of shares and returning them to your broker. This is called “covering” your shorts.

If the price drops, you can buy back the stock at the lower price and make a profit on the difference. Conversely, if the price of the stock rises, you have to buy it back at the higher price, and you lose money.

Bear market strategy #2: Inverse funds and ETFs —

There are mutual funds and exchange traded funds (ETFs) that are designed to profit from falling stock prices.

For example, the ProFunds Ultrashort FTSE/Xinhau China 25 (NYSE:FXP) is designed to move twice the inverse of the daily performance of the FTSE/Xinhua China 25 Index. So for every 10% the index drops, the ETF is meant to go up 20%. Of course, the opposite can happen: If the index rises 10%, the ETF could drop 20%.

Bear market strategy #3: Put options —

Investing in put options is a low cost way to profit from falling prices.

A put option contract gives its owner the right, but not the obligation, to sell a specific number of shares of an underlying stock at a specific price within a specific time.

You can buy put options on everything from Microsoft to China Mobile to General Motors.

If the underlying stock's price falls while you own puts, the value of your options will likely go up significantly. What happens if the stock goes up? Then your put options could go down in value, and potentially expire without being worth anything.

The key is that you can only lose as much as you paid for the options, while your profit potential has no ceiling.

Now, I'm not suggesting that you run out and implement any of these three strategies right away. They all entail substantial risk.

But my point is that there are strategies available to help you grow your portfolio even while our world's leaders are busy pointing fingers and spewing out gloom and doom.

Best wishes,

Tony

P.S. For the latest on what's going on in the Asian economics and their markets, be sure to visit my blog .

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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