Prepare for the Worst and Play the Best

Dell. Wal-Mart. Costco. Intel. Lowe’s. Lucent. Toll Brothers. H&R Block. UPS. The news came out like machine-gun fire.

And these are just some of the high-profile corporations that delivered disappointing results in the past and/or issued warnings for the future.

The Wall Street crowd, however, put on their favorite see-no-evil glasses and ignored the bad news. Instead, they keep pinning everything on one hope — that the “Fed is done hiking interest rates.”

I have to hand it to them. They’re pretty darn good at keeping parties going. So, I wouldn’t be surprised if they manage to drown out the falling profits, the rising inflation, and a slowing economy … for at least a little longer.

But that can’t go on forever. And that’s why you need to have a defensive game plan in place before things start to get ugly.

The way I see it, there are four ways to prepare your portfolio for weakness in the stock market:

#1. Do nothing: Some investors weren’t bothered by the bursting of the tech bubble. Throughout all the turmoil, they just stayed the course.

If you have a really long time horizon and a truly iron-lined stomach, maybe you’re okay with riding out a wipe-out in your portfolio. In that case, this do-nothing, buy-and-hold strategy might work for you.

I, however, am not in that camp. Why would I want to watch my portfolio shrink in value for months or years, when I can steer away from the danger before it happens?

#2. Trim back your stock holdings right now: From time to time, you should take a look at how much of your money is in each of the major investment categories — stocks, bonds, gold, and others.

Whether or not you keep a formal target, you might consider decreasing the amount you have invested in stocks, especially in the vulnerable sectors I’ve been telling you about — like U.S. tech stocks. You could then put the proceeds into something really hot — like cold, hard cash.

Doing this will protect your wealth as the market goes down. Plus, you’ll have money on the sidelines when opportunities present themselves down the line.

#3. Use defensive measures: If you want to stay invested as long as possible, but still want to avoid a downturn, you’ll need to employ a market timing strategy and/or use protective stop losses.

To time the market, I personally use momentum and moving averages. They don’t help me predict the future. But they sure as heck do a good job of telling me what’s going on and helping me discipline my trading.

With protective stop losses, you give your broker a price — below the current price — at which you’d like your shares to be sold. If the stock falls to or through that price, it should trigger an order from your broker to sell the stock at the market.

#4. Hop on a faster train: Depending on how much risk you can handle, one of the first three methods might work for you. However, in my book, the very best way to protect your portfolio is to put more of your money into faster-growing markets.

Last week, the Commerce Department reported that the U.S. economy expanded at an annualized rate of 2.9% in the second quarter. Let me tell you, 2.9% is nothing to get excited about, especially when you compare it to other parts of the world — like China, which surged 11.3% over the same period.

Plus, across the Pacific, I don’t see Asian companies doing what American companies are doing — spewing out profit warnings, hemming and hawing. Quite to the contrary, they’re delivering stunning results. Here are some of last week’s highlights:

Seven Companies
Announcing
Big Profit Surges

Here are just seven that have recently popped onto my screen …

Kingboard Chemical Holdings, the world’s largest maker of electronic laminates, reported an eye-popping 55% jump in sales for the first six months of 2006. Profits jumped to HK$1.07 billion.

Dongfeng Motor Group, China’s third-largest automaker, delivered an impressive 69% surge in first-half earnings. Profits jumped from HK$660 million to HK$1.08 billion from the same period last year.

Dalian Port, the largest shipping terminal operator on China’s northwest coast, saw its first-half profits rise from HK$242 million to HK$375 million — a 55% jump. By the way, the shares have risen 41% so far this year.

China Green Holdings, one of China’s largest suppliers of fruits and vegetables, saw its six-month profits skyrocket 48% to HK$264.55 million. According to the company’s chairman and CEO, Sun Shao-feng, “Demand for green food products has increased as a result of China’s fast expanding economy and rapid urbanization.”

China Life Insurance’s first-half profits rose 72.2% from $658 million to $1.1 billion.

China National Offshore Oil Corporation (CNOOC) reported that revenues gained 43% to a whopping $6 billion for the first six months of 2006. Profits mushroomed 38% to $2.04 billion! That, by the way, was better than the Wall Street crowd was expecting.

Dah Sing Financial Holdings, a banking and insurance conglomerate, delivered a 58% jump in first-half profits. That number dwarfs the results at Citigroup, Chase Manhattan, and Bank of America.

Clearly, ignoring the dynamic opportunities in Asia is a big mistake. Not only can the rewards be much greater overseas, but I also believe that Asia’s rapid growth offers effective insurance against a rapidly slowing U.S. economy.

Best wishes,

Tony

P.S. Martin and his ETF specialists are sending out their hot China recommendation today before the market closes. And they’re using signals that, in recent years, could have grown $5,000 into over $100,000 … or $50,000 into over $1 million.

The deadline is noon today — just four hours from now. So I think it may be too late for online orders. But you can still get on board if you call 1-800-393-1706.