How to Prosper in the Midst of a Growing Financial Crisis

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How to Prosper in the Midst of a Growing Financial Crisis

By Porter Stansberry
Thursday, June 26, 2008

Much to the annoyance of the staff who share the ground floor of our Baltimore office with me, when the stock market has a particularly bad day, I launch iTunes on my computer and play the disco-era hit Stayin' Alive at high volume.

Over the last 12 months, stocks have fallen by about 11% on average, as measured by the S&P 500. On the other hand, the new recommendations I've made in my investment advisory during that time show a small average gain – about 4% – during the same period. We're stayin' alive – just barely.

I expected this year would be tough for stocks... Most people simply haven't considered what a huge problem the subprime crisis is because most people don't realize how important the U.S. mortgage market has become to global liquidity.

Ten years ago, the total U.S. mortgage market was about $3.5 trillion, roughly equal to the U.S. Treasury market. Today, the U.S. Treasury market has grown to $4.5 trillion. But the U.S. mortgage market has more than doubled to about $9.5 trillion.

These mortgages, packaged into securities guaranteed by Fannie Mae and Freddie Mac, make up the reserves of financial institutions all over the world.

As these securities fall in price, they're reducing the amount of available outstanding credit globally.

I thought the ongoing mortgage debacle would spill over into the general economy and damage almost all asset prices. I've even recommended betting against some of the more vulnerable companies, which could go bankrupt in the next few years.

But... as I wrote in this DailyWealth article three months ago, the world's best investors actually look forward to bear markets, markets like the one we are experiencing this year. And after 12 years as an investment analyst, I've learned a very important lesson.

I shared that lesson in April, and it's worth repeating today: Stock prices can fall farther than anyone can imagine. If you're patient, it's possible to make stupendous profits in stocks, especially if you're willing to buy when no one else will.

My strategy for long-term success in the midst of a bear market is to position my portfolio in progressively higher-quality stocks – companies that dominate their industries and have huge competitive advantages. Normally, dominant companies are far too expensive to be purchased safely. Investors recognize the advantages these elite businesses have, and bid their shares up accordingly.

Judging by the feedback e-mails I've read, I know more than a few investors have sold most of their stocks to wait out the mortgage debacle in cash, on the sidelines.

That's certainly the safest way to play it. But when I look around the markets and see names like Verizon (VZ), Microsoft (MSFT), and Intel (INTC), selling, in many cases, for less than 10 years' worth of cash from operations, I feel you simply must buy these companies, regardless of how rocky the road might be over the short term. In fact, I'd say if you don't own these stocks, you're not really an investor.

I've used the current market to load my model portfolio with members of America's corporate hall of fame. Buying these legendary corporations at such great prices will ensure you an excellent return over the next five to 10 years – and beyond.

Looking at this portfolio, it's hard to imagine a higher-quality mix of stocks – and most of them are trading at once-in-a-decade low prices. Without the terrible problems in the mortgage and finance sectors, these values wouldn't be available.

And that's why, despite the risk to the market overall, I don't think you should let this bear market scare you. Instead, I recommend you use it to put your cash to work.

Good investing,

Porter Stansberry

Further Reading:

Time for the Famous Nifty Fifty to Soar Again?

Terrible Times Today... Mean Great Profits in Stocks

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THE WORST SECTOR IN AMERICA

This week's biggest stock market winners are the same winners we've been writing about for a long time: Halliburton and National Oilwell Varco – the "oil services."

But how about the stock market's "biggest loser"? Well, you'd be hard-pressed to find a bigger one than the "fat boys" of the interstate – recreational vehicles. Take Winnebago...

Winnebago is America's largest RV maker. It specializes in the big "Class A" gas guzzlers. Your average car weighs around 3,000 pounds. Class As can weigh more than 20,000 pounds and get less than 10 miles per gallon. These numbers aren't making for brisk business right now...

Like a lot of "landfill stuffers," Winnebago has been hit with a perfect storm of high energy prices, a weak economy, and contracting consumer credit. Sales fell 40% in the most recent quarter, and shares have collapsed. If there is an uglier downtrend in the market, we haven't found it.

Someone Will Make a Lot of Money on This Market Anomaly
By Dr. Steve Sjuggerud Wednesday, June 25, 2008

Right now, "investment grade" corporate bonds are as cheap as they've ever been, relative to Treasury bonds. The only time we saw a similar anomaly in the last 50 years was in October 2002. It was a great buy signal...
The Last Time Around, This Asian Stock Market Gained 990%
By Tom Dyson Tuesday, June 24, 2008

In 1987, a new president won power in Taiwan and improved relationships with China... just like we're seeing today. Taiwan's stock market rose from 1,100 to 12,000 between 1987 and 1990. That's a gain of 990% in three years.
The World's Cheapest Stock Market is Ready to Soar
By Tom Dyson Monday, June 23, 2008

It was 1982. The German stock market crumbled in 1962 and had traded sideways ever since. Meanwhile, the German economy had boomed, and companies multiplied their earnings, revenues, and profits.

The situation caught Jim Rogers' eye...
The Greatest Mutual Fund in the World
By Dan Ferris Saturday, June 21, 2008
Don't Hold Gold... Buy This Instead
By Dr. Steve Sjuggerud Friday, June 20, 2008

Some investors are buying South African gold Krugerrands and U.S. gold coins minted yesterday. These coins have no chance of trading at a premium to their melt value – they're in near-infinite supply. The mints can simply make more of them to meet demand.