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This is going to be an ugly day for the markets. But we’re ready. And I hope you are too.
If you’ve been a reader of this column for very long, you know how pessimistic I’ve been about the U.S. stock market. And I think the signs of a slowdown, if not an outright recession, are getting pretty loud and very clear on Wall Street.
So the only questions you should ask yourself at this point are: How much farther will the stock market fall, and how can you protect your portfolio from that drop?
Rest assured, this week’s market action should prove that it’s NOT too late to shield yourself from a painful bear market.
That means much more cash. And it means a far bigger allocation to solid hedges to shield you from the decline, like ETFs that go up when the market is going down.
Plus, you should know that …
The Traditionally “Safe” Stocks May Also Get Hurt.
Modern Times Call for Modern Measures!
The old way to protect your portfolio from economic weakness was loading up on so-called ‘defensive’ stocks, the kind that enjoy stable revenues and profits even under difficult conditions.
The conventional wisdom is that food, tobacco, drugs, liquor, and utility stocks tend to hold their value better, because the demand for their products doesn’t decrease as dramatically as the more economically-sensitive businesses.
That strategy has worked in the past, but the world is a very different place today. And in my opinion, the best places to find stable revenues and profits aren’t the same as they were before.
The new way to invest defensively involves a completely different type of company.
The basic assumption hasn’t changed: You still want to find companies that can hold their value during an economic downturn.
But the real protection is not found in companies with stable revenues, but in companies with growing sales and profits.
And where do you think you’ll find those companies? Well, I’m sure there are some in the U.S., but that is going to be almost as hard as finding a needle in a haystack. Rather …
You’ll Find Most Companies with Growing
Sales and Profits Are Overseas!
The headlines have been packed with companies reporting disappointing earnings. In just the last few days, we’ve heard discouraging words from Merrill Lynch, Intel, Sears, Citigroup, Sony, Target, and on and on and on.
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| Look for companies that garner a lot of sales overseas! |
But hidden in many of those negative earnings projections are lucrative clues directing you to a place where companies are growing their sales and profits.
Here are two examples of what I’m talking about …
Tiffany & Co., the luxury retailer, recently told Wall Street that it would fall short of its $2.30-per-share forecast. The problem? Weak holiday sales. Same-store sales in the U.S. for November and December dropped by a full 2%.
But the real nugget of information was how important foreign shoppers were to Tiffany’s business.
International tourists were spending like crazy at its Manhattan flagship store. The company said holiday sales at that location rose 10% “driven by foreign tourist spending.” And just to prove that it wasn’t simply New Yorkers spending: The seven other Tiffany stores in the New York suburbs saw their sales fall by 10%!
And get this: Revenues at non-U.S. stores increased a whopping 18% to $332 million!
Since Tiffany’s gets more than 40% of its sales overseas, its results would have been horrific without the free-spending Asians.
Meanwhile, big tech companies like International Business Machines (IBM) are demonstrating the same effect. Last Monday, the stock market jumped on some very positive news from IBM. The company said its revenues and earnings were up 10% and 24%, respectively, versus the same period last year.
The Wall Street crowd was just happy that IBM beat expectations. They didn’t bother to pay any attention to the details behind the numbers. If they had, they would have noticed that IBM’s success was from its global business … the American operations stunk.
In fact, according to the company …
“The broad scope of IBM’s global business — led by strong operational performance in Asia, Europe and emerging countries — drove these outstanding results.”
In other words, the only reason IBM is doing well is because of Asia and the falling dollar. That tells me that any company, technology or not, that depends on the U.S. for the majority of its sales is in big trouble.
Those are just two examples, but the key to not only protecting your portfolio but actually making money in 2008 is adopting this new defense strategy of loading up on companies that get a significant if not a majority of their sales from Asia.
Of course, if you’re looking for even stronger investment returns …
Find Companies that Are
Actually Based IN Asia!
Don’t listen to the knuckleheads on CNBC who warn that China will suffer along with the U.S. Sure, their markets will take some sharp hits when the U.S. markets decline, like they did yesterday.
But the fact is that America only buys about 19% of China’s exports, so even a recession here won’t have a major impact on China.
I’m telling you: China is where you’re going to find the ever-elusive “ten-bagger” stocks … the kind of shares that can hand you 1,000%+ returns.
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| China’s exports are not dependent on the U.S., and I expect plenty of economic growth ahead! |
Specifically, make sure you focus on what I call the “Three C’s”: Construction, Cargo, and Chuppies.
Construction: As I told you last week, the biggest construction boom known to mankind is going on in China right now. Skyscrapers, highways, bridges, railroads, dams, power plants, factories … you name it!
Even though I regularly travel to Asia, I am always dumbfounded at how rapidly the skyline can change in just a few months. The construction boom is going to last for decades, and the companies that are landing those contracts are raking it in.
My favorite play: E-House Holdings (EJ).
Cargo: While intelligent people can debate who the big manufacturing winners are in China, one thing that is crystal clear is that those goods have to be shipped overseas. That’s why the railroads, shipping companies, ports, containers, toll road operators, and truckers are making mountains of money.
My favorite play: China Merchants (0144.HK).
Chuppies: Remember the Yuppies? Well the Chuppies, or Chinese yuppies, make the yuppies look like skinflints! I am just blown away by the level of consumption and retail spending whenever I visit Asia.
Look, there are 100 million middle class Chinese today, and that number is expected to DOUBLE by 2010!
My favorite play: LMVH Moet Hennessy Louis Vuitton (LVMUY.PK)
Now, I’m not suggesting that you rush out and buy any of the stocks I mentioned right now. As always, timing is everything. But those are the type of companies that will help you protect and grow your nest-egg during 2008 and beyond.
Best wishes,
Tony
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, Julie Trudeau, and Dinesh Kalera.
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