Sam Collins

Benefitting from a Bear Market

by Sam Collins   02/29/08

In different forums yesterday, both President George Bush and Fed Chairman Ben Bernanke said the nation would not head into a recession -- but investors weren't quite as sure about that.

As the Fed chief spoke, fear of inflation and the resulting complications caused an acceleration of selling on all of the nation's exchanges.

But even before then, the economic reports of the morning spoke for the leaders. According to the Commerce Department, for all of 2007, the economy grew at the slowest pace in five years, rising at an inflation-adjusted rate of 2.2% (an adjustment to the original number published late last year).

Worst of all, consumer inflation was revised higher to a 4.1% annualized pace in Q4. Consumer prices rose 3.4% in 2007, while core prices (excluding food and energy costs) increased 2.1% -- both figures are above the Fed's acceptable comfort zone.

Before yesterday's opening, tech stocks looked lower as a result of a nasty report from Sprint Nextel (S) which took a $29.7 billion goodwill impairment charge and canceled its dividend.

The bad news continued when Sears Holdings (SHLD) said its Q4 profit was nearly halved, Deutsche Telecom (DT) said it had another quarterly loss, and Freddie Mac's (FRE) Q4 losses expanded to $2.45 billion from last year's loss of $401 million.

There was, however, at least one bright spot in an otherwise cloudy day, and that was from Apple Inc. (AAPL) whose chief operating officer said the company would meet 2008 targets for iPhone sales. The stock closed higher by $6.75, up 5.7%.

At the close Thursday, the Dow Industrials (DJI) were off 112 points at 12,582. The S&P 500 (SPX) was off 12 points at 1,368 and the Nasdaq (NASD) fell 22 points to close at 2,332.

New York Stock Exchange volume topped 1.4 billion shares and just below 930 million shares traded on the Nasdaq. Breadth on both exchanges ran at a negative 2-to-1.

Crude oil (April contract) gained $2.95 to $102.59, and the Amex Energy SPDR (XLE) gained $1.26, closing at $78.59.

The U.S. dollar tumbled again as gold (April contract) rose $6.50 to end the day at $967.50 per troy ounce. The PHLX Gold/Silver Index (XAU) broke through a big triple-top, advancing $4.75 to $202.59 -- a new record high for the XAU.

What the Markets Are Saying

If you've been reading the Daily Market Outlook for even a short time, then you are already familiar with my rules for successful investing.

First you must determine the overall trend of the market -- bull or bear. This decision is crucial and should be the engine that drives all subsequent decisions.

For example, if you are a bull, you will look forward to pullbacks, no matter how severe, as a great buying opportunity. But if you are a bear, you look forward to rallies as a selling opportunity. Further, as a bear, you will only invest in industries, sectors and stocks that benefit from a bear market.

There are just a few exceptions to that rule but even in the most extraordinary circumstance, I still recommend applying a hedge in the form of written options (i.e., shorted or Sold to Open) to stocks that are members of a sector that is in a negative trend.

We are in a bear market; therefore we will only purchase equities that will benefit from the current economic situation and are in an uptrend. Here are some examples of groups (thought it's not an exhaustive list) that are currently benefitting from the challenging economic situation:

* Precious metals (chiefly gold, silver, platinum and palladium)

* Agricultural chemicals

* Energy, including oil and gas

* Energy equipment

* Contra Exchange-Traded Funds (ETFs)

* Certain high-yielding equities

* Currency-based funds

* Food-based commodities.

The bottom line: You can make money in a bear market but only if you disregard the advice of the masses, avoid trying to pick bottoms and, most importantly, think for yourself -- so think like a bear!

Today's Trading Landscape

Earnings to be reported: Brown-Forman, Companhia Vale do Rio Doce, Magellan Health Services, Mine Safety Appliances, Mirant, Nelnet, Royal Bank of Canada, Service Corp., The Interpublic Companies, The Progressive Corp., Vivendi and WPP Group.

Economic reports due: the January Personal Income (the consensus expects 0.2%) and Spending (the consensus expects 0.2%) reports, core personal consumption and prices, and the Chicago Purchasing Managers Index.

After the close, yesterday Dell (DELL) said that its Q4 profit dropped by 6.5% on a 10% increase in revenues and fell short of analysts' expectations by 5 cents. American International Group (AIG) posted a $5.3 billion Q4 loss due to write-downs for the worst quarterly loss in its history. Stocks appear to be under pressure as a result of these reports.

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