By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Since the start of the year, the debate over the state of the U.S. economy seems to escalate by the day. The ongoing subprime mortgage mess, the resultant credit crunch and daily stories about housing defaults, escalating oil prices and lousy corporate earnings only seem to further fuel the debate.

Of course, we all see the government reports and analyst research notes that seem to contradict one another from one day to the next – and sometimes from one hour to the next.

So here at Money Morning, we thought we’d take a bit of a different approach, and use some of the social indicators that we’ve come across to develop a "Top 10 List" of reasons the U.S. economy may have achieved a new market bottom – though perhaps it’s not yet the ultimate market bottom.

Admittedly, this list is absolutely tongue in cheek. But social indicators do play a huge role in successful investing, even though the scholarly types often consider them little more than slightly disguised voodoo.

Nevertheless, here’s our Top 10 List:

10. Although its company stock is down 14% year-to-date, there are still 172 Starbucks Corp. (SBUX) employees for every citizen of Vatican City.

9.   The world’s three richest men – Warren Buffett ($62 billion), Carlos Slim Helu’ ($60 billion) and Bill Gates ($58 billion) – are worth as much as the combined gross domestic product (GDP) of the world’s 40 poorest countries.

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8.   Chairman and Chief Executive Officer Angelo Mozilo of Countrywide Financial Corp. (CFC), and former executives Charles O. "Chuck" Prince III who was ousted from Citigroup Inc. (C) and E. Stanley "Stan" O’Neal of Merrill Lynch & Co. Inc. (MER), can still make house payments.

7.   Upscale hedge fund managers still prefer Mercedes SUVs for their nannies.

6. Weathermen have a better predictive record than economists.

5.   History shows that recessions wipe out between 20% and 25% of financial assets. Even with the almost $300 billion in financial write-downs we’ve seen so far, we’re still at a mere 5% of the total (depending on which numbers you believe).

4.   Alan Greenspan reportedly makes more money per speech now than he did annually as chairman of the U.S. Federal Reserve.

3.   U.S. Federal Reserve Chairman Ben S. Bernanke still has a job.
                                                          
2.   As of the close yesterday (Wednesday), the Standard & Poor’s 500 Index has only fallen 13% from its intraday peak on Oct. 11, 2007. Like a barber-school trainee, recessions typically clip 25%-30% off the top.

And the number-one reason we haven’t reached the bottom yet:

1.   BusinessWeek has yet to publish a successor issue to their infamous Aug. 13, 1979 cover story that predicted "The Death of Equities." That story preceded one of the greatest bull market runs in history.

News and Related Story Links:

• Money Morning:
  Dear Ben: To Save the U.S. Economy, Here Are the Moves You Need to Make Now

• Money Morning:
  Have We Hit The Bottom?

• Money Morning:
  One Sure-Fire Sign That Gas Prices are Heading Higher

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

With the recent market collapse, the subsequent U.S. Federal Reserve-negotiated sale of The Bear Stearns Cos. Inc. (BSC), and a central bank that’s socializing trillions of dollars in debt in a misguided attempt to "fix" the credit crisis, many investors are very astutely asking: How much worse could this get?

My answer: A lot.

Right now the big concern is whether a potential new financial crisis in Great Britain – spawned by the "St. Patrick’s Day Massacre" – will make the jump across the ocean and infect the U.S. financial markets. Fortunately for us, there are steps investors can take right now to position themselves for profit – and protect themselves from infection should this U.K.-generated contagion reach our shores.

But you have to know where to look and what to buy. And you also have to understand just what’s happening right now. So let me take a moment to tell you just what’s happening.

The "St. Patty’s Day Massacre"

Late Wednesday night, my good friend Jon Markman, a noted financial writer and commentator, pointed out a breaking news story out of London that has yet to really hit on this side of "the pond."

According to a story that appeared overnight in London’s Daily Telegraph, leading broker MF Global Ltd. (MF) informed clients that they’ll need to put up "significantly" more cash to cover derivative positions.

How much more?

Try 260%.

MF Global has had a rough week already, Futures & Options Week reported. It started with the so-called "St. Patrick’s Day Massacre" on Monday, when MF Global shares lost 65% of their value because of "a storm of negative news and inaccurate rumors about credit lines and investors," the F&O financial news service reported.

After starting the week at $16.11, MF Global shares traded as low as $3.64. They’ve subsequently rebounded a bit to close at $9.25, although they’re still well off their 12-month high of $32.20.

Now here’s the rest of the story. MF Global unilaterally increased margins on certain stocks [British small cap and U.S. shares] from 25% to 90% and clients were given until yesterday (Thursday) to either put up the cash or close out their positions.

Here’s why this matters.

Many of the stocks at the top of the list are those preferred by smaller investors. If the institutions and individuals that trade them cannot meet the margin calls, we could see another round of "forced liquidations." In a market environment where the U.S. indices alone are up 400 points one day and down 300 the next, this added downward pressure can’t be good.

If this happens, investors will rush to meet margin calls, and millions of shares could be "dumped" in any way possible. Add that into the ongoing market decline and you’ll understand it if traders are feeling a bit like long-tailed cats in a room full of actively used rocking chairs.

Against such a backdrop, the potential buyers simply turn their heads and the "bid walks away" which is an expression meaning that buyers simply don’t bid. Why should they? They know that they’ll get a better – even lower – price in the future.

So traders have to settle for less.

A lot less.

Unfortunately, this only steepens and accelerates the stock market’s already-existing downward spiral. Once that happens, all bets are off.

Now, bear in mind that what I am describing is the worst of all possible scenarios… a market with millions of shares for sale at a time when there is no liquidity to buy, meaning there are no buyers.

There are no guarantees that this will happen and I, for one, sure as heck hope it doesn’t.

We’ve already seen our fair share of forced liquidations as hedge funds have unloaded for similar reasons here in the United States. But we’ve at least got to consider the possibility in light of what MF Global has told its clients.

All three of Europe’s key indices – the London FTSE 100, Germany’s DAX and France’s CAC 40 – posted only moderate declines yesterday. So it appears that European investors have for now escaped the worst of what I’ve described. Indeed, it’s possible that some of the dumping has probably already taken place. And many European markets are closed tomorrow (Friday) and Monday for a national holiday.

But New York is "taking the book" now and, after the Easter weekend, anything could happen. But there are two key things U.S. investors should keep in mind and watch for:

• First, it remains unclear just how many U.S. stocks MF Global’s clients still hold, or if there still could end up being a spillover into the U.S. markets.
• And second, and perhaps the real question here: Given the fragile state of the U.S. financial markets, as well as many of the U.S. financial firms, how many U.S. firms – if any – will take similar steps with their clients in the coming weeks, drastically shifting margin requirements, forcing stateside investors to pony up big blocks of cash? If that happens, the impact could be quite remarkable, though not fun to watch.

So now the question is this: What’s a U.S. investor to do?

I’ve got a four-point strategy that will keep you out of trouble should either, or both, of these scenarios become reality.

And here’s the bonus: Even if they don’t happen, these strategies are highly effective strategies in the kind of "whipsaw" markets that we’ve been facing of late.

There’s No Such Thing as "Too Careful"

Rule #1: Your Best Offense is a Good Defense: This is the most important rule of all and can prevent a ton of trouble when it comes to growing your assets. After all, if you can’t keep it now, you can’t grow it later. Part of your defensive alignment includes the use of trailing stops. Even though you are convinced that your favorite stocks are the ones that will survive a downturn, there are no guarantees.

Rule #2: Stay "Balanced:" Globally diversified stocks and balanced funds may get hit if the selling starts in earnest, but history has shown that they’re far more stable than those limited to any single market – which is why we’ve been telling readers since last fall to park the bulk of their money in funds of this type.

Rule #3: Seek Help From Hedges: Protect yourself with such investment choices as the Rydex "URSA" [Latin for "bear," as in "bear market"] Inverse S&P 500 Strategy Investment Fund (RYURX), which grows as the Standard & Poor’s 500 Index falls. If you’re more aggressive, there are also some of the so-called "2x" funds, which do the same thing but at twice the rate (and volatility). One example is the ProShares UltraShort Financials (SKF). Funds like this have done well as the financial sector has cratered in recent months.

One caveat: Inverse funds are specialized choices, and while the potential for upside in a down market is tempting, nothing is for certain right now.

And that brings us to the final rule.

Rule #4: Don’t Try to Time the Markets: Especially now. Instead, think "safety and balance" and limit your positions – including the inverse funds – accordingly.

If you follow these rules, you’ll be poised to profit in the long run. And in the short run, no single mistake will wipe you out – even if the lousy markets get the best of those around you.

News and Related Story Notes:

• Futures and Options Week:
  MF Global gets pounded by rumour and conjecture.

• The Daily Telegraph (London):
  MF Global warning adds to market worries.

• Bloomberg News:
  European Stocks Fall; Credit Suisse, BHP, Nokia Lead Declines.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

With the Dow Jones Industrial Average having dropped more than 370 points over recessionary fears on Tuesday, and the much-broader Standard & Poor’s 500 Index having dropped by an equal 3%, it is clear that many investors have stopped thinking about stock-market profits.

But profits are exactly what they should be focusing on – especially now.

Here’s a simple five part recession-investing strategy you can employ to make sure you get your fair share. Think of it as an "Investor Recession Survival Kit."

Let’s take a look at the five key strategies you need to employ.

Recession Survival Rule #1: Sit in an Exit Row. One reason so many investors are getting clobbered is that they’re holding on too long. If you’re sitting in a movie theater and folks start yelling "Fire," you don’t just sit there and watch the action unfold around you. Do that, and you’ll get burned. It’s no different with investing. That’s why trailing stops are always a good idea: They can help you protect your principal and your profits during good markets; and they’re absolute life savers when the going gets really rough – as it’s been lately.

Recession Survival Rule #2: Bet on Income. When the markets lose their mojo, you don’t want to lose yours. Dividends are indisputably the perfect talisman. As interest rates decline, there will be an upward pressure on dividend-paying stocks because investors start reaching for yields. And if all the recession fears turn out to be much ado about nothing, the stocks will rally when the market does anyway. And if inflation continues to escalate – as we’ve been saying that it will – many of the dividend-payers will be able to raise prices for their products and services, which will boost revenue and profits, and also enable them to boost their dividends. In short, this is one of those rare situations where you win under almost every scenario.

Recession Survival Rule #3: Build in Safety. Make built in safety-brakes a permanent part of your portfolio. You can do that with bonds, of course. But a far-easier strategy – and one that packs a potential for profits, to boot – is one in which you allocate up to 50% of your assets in our favorite balanced fund, the Vanguard Wellington (VWELX). Because this fund offers both safety and balance, we include this in the "Base Builder" portion of the portfolios we assemble for our trading-service subscribers. Since 1929, the Vanguard fund has captured 80% or more of the market’s upward moves [including many of the years where there were market gains of 20% or better], even with a "safety-first" balanced blend that’s about 60% stocks and 40% bonds. This asset mix maintains your ability to gain in bull markets, while minimizing your risk during more-bearish trading sessions.

Recession Survival Rule #4: Think booze, bombs, and butts. A beaten-down greenback means that U.S. companies – particularly those with strong export businesses – are trading for bargain prices. And so-called "sin stocks" are at the very top of that list. These include the traditional "snacks-and-smokes" stocks, including tobacco, snack foods, alcohol, and gaming shares. These firms often pay a nice dividend, and are positioned to expand their sales more rapidly than most companies in the current environment – which, of course, will boost the bottom line. We’re also including defense-related issues in this venue, given the current focus on home security, the war in Iraq, and the concerns that additional problems could arise in other parts of the Middle East, with North Korea, or in other portions of Asia. The Bush Administration’s proposed $588 billion defense budget for 2009 includes money for weapons systems being sold by Boeing Co. (BA), Lockheed Martin Corp. (LMT), Northrop Grumman Corp. (NOC) and other manufacturers. Even if the Bush budget plan is modified by Congress as expected, it still shows that U.S. defense spending continues to grow and that the market outlook for defense contractors remains strong. With any of these companies – be it sin stocks, gaming firms, or defense contractors – stick with firms that have lower debt, steady sales growth, and that are posting strong earnings. The best plays will be firms with global operations.

Recession Survival Rule #5: Hedge Your Bets. Professional investors hedge with options, futures and other types of derivatives, but you can achieve this far more easily with such specialized exchange-traded funds (ETFs) as the Rydex Inverse S&P 500 Strategy Inverse Fund (RYURX), which is designed to rise in value by 1% for every 1% the S&P 500 falls. You could also pick up shares in a commodity related ETF or two, and not just the soft stuff, either.

Agricultural funds are appealing, too, because of the emergence of such markets as China, India and South America. The StreetTracks Gold ETF (GLD) offers bullion-based pricing, but without the storage problems and liability of delivery The Deutsche Bank’s Power Shares Agricultural Fund (DBA) is intended to reflect the performance of commodities in the agricultural sector – soybeans (31%), wheat (28%), corn (23%), and sugar (16%). The Van Eck Market Vectors Agribusiness ETF (MOO) reflects the infrastructure of the agriculture industry, focusing on chemicals (34%), agri-product operations (33%), equipment (24%), livestock operations (6%), and ethanol/biodiesel (2%).

When it comes to recession-survival strategies, here’s a final – but important – thought to consider.

When the markets get rough, the temptation is to run for the hills. We undertand. We’ve felt that way, too, at times.

But whatever you do, resist the urge to run.

Studies show that investors who stay in the game and pursue profits using strategies like the one we’ve just outlined tend to capture the biggest returns over time.

Studies also show it’s best to buy when there’s blood in the streets – even if it’s your own.

[Editor's Note: In addition to serving as the Investment Director for both Money Morning and The Money Map Report, Keith Fitz-Gerald is also the editor of the New China Trader service. A professional trader who splits his time between the United States and Japan, Fitz-Gerald's returns for subscribers have run as high as 1,804% in the past three months. For additional info, please click here].

News and Related Story Links:

• Seeking Alpha:
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• TradingMarkets.com:
  Budget Plan Boosts Defense Companies.

• Money Morning:
  Gold Glimmers As Inflation Hedge.

• Money Morning Investment Research Report:
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