U.S. investors can be excused for feeling as if the sky is falling right now. After all, there are a lot of falling objects crushing investor sentiment, consumer confidence, financial portfolios – and any hope that the U.S. stock market can generate the kind of returns that will ever make investors whole again.
But take heart: Even during a period that seems to be this dark, investors need to remember that all is not lost. Even with the threats that seem to dominate, the world now offers a new investing horizon – filled with new opportunities. Instead of staring into the abyss of an unknown future, investors can profit handsomely by identifying the key capital waves and macro trends and then using that knowledge to rebuild their portfolios from the top down.
Before that portfolio overhaul can begin, however, investors need to understand the specific challenges that they face in today's global stock markets.
The Top 10 Global Threats
There are many serious weights overhanging markets around the world. But there are 10 in particular that have earned a spot on the "short list" of heavyweight challenges. Those threats consist of:
- The potential for America to experience a double-dip recession.
- The debt default of a sovereign nation.
- The potential for contagion in the event of a domino-effect debt default across interconnected European nations.
- The total collapse of the euro and resulting implosion of euro-denominated assets.
- The global repercussions of a faltering Chinese economy, or from social unrest in that emerging Asian giant.
- The threat of deflation across the globe if the recent leveraged bidding-up of assets (especially commodities, stocks and U.S. Treasuries) leads to a rapid unwinding of positions.
- The insolvency of a major money-center bank and an ensuing bank panic.
- Any of the geopolitical powder kegs finally exploding.
- Another man-made ecological disaster, or any major weather-related disasters of epic proportion.
- Or the proverbial "wild card" – essentially something out of left field that no one can anticipate.
Of course, this is just the "short list" of the potential economic, financial and political sledgehammers that could deal the U.S. and global economies a mighty blow. There are many other seemingly lesser potential threats that could still combine into a financial salvo big enough to devastate the hoped-for recovery.
There's a reason to identify and inventory the major issues overhanging the global markets. And it's not to wallow in defeatist misery.
If investors are buried in their analysis of corporate financials, investment fundamentals and specific potentialities, they'll lack vigilance needed to navigate the current market and could end up being crushed by any one of these events. No matter how good your analysis may be, or how excellent any company-specific prospects are, systemic-market movements are like a flood that will sweep away, swamp and then drown anyone who isn't perched on the highest ground.
Four Top Profit Plays
In today's brave new world of interconnected global markets and intertwined economies, investors have to keep to the high ground. Constructing a flood-proof portfolio helps to achieve that objective.
Such a top-down/high-ground strategy provides investors with a big-picture view of where the floods may come from. The beauty of this New Age/post-financial-crisis approach is that it starts as a protective portfolio, instead of requiring the investor to construct protections around positions.
All of the enumerated overhanging weights listed above actually constitute macro-global scenarios around which core positions in your new world portfolio should revolve.
Here are a few examples of how to position your portfolio to reap some profits from what otherwise would crush your investments if you weren't aware that they were even a threat.
- Get Inverted: The potential for a double dip recession requires you to be ready to protect what remains of your portfolio. Know where support levels are in the market and be prepared to pare back your exposure if support levels are violated. Better yet, be prepared to buy any of the inverse-fund-type/exchange-traded-fund (ETF) instruments that offer profit potential when markets decline.
- Get Current on Currencies: The debt default of a European nation and/or the potential demise of the European currency creates an opportunity to diversify part of your portfolio into an asset-class you may never have thought of investing in – despite this investment's extraordinary potential. I'm talking about currency investments – but only those that lack the complication of actually trading currencies directly (which, by the way, is not hard and is actually another excellent portfolio investment vehicle). You can buy an ETF that positions you to profit handsomely if the euro falls in value, which it has been doing.
- Check in on China: The prospect of China's economy slowing down has major implications for almost all of the world's economies and certainly for all the major commodity groups. An investment that would generate potentially solid profits would be a position that stands to appreciate if China's real estate bubble implodes and if its economy cools down considerably. Again, there are ETFs and "put" options on those China-centric ETFs that give investors exposure to what happens in that part of the world.
- Clean Up on the Commodity-Stockpile Closeout: Any investing discussion involving man-made disasters, natural disasters and supply-and-demand factors must also discuss the diversification into commodities. If the big economies of the world slow down, there will be massive sell-off of the commodities that have been stockpiled. These resources and raw materials won't immediately be needed, since global production will slow down considerably, meaning currently carried inventories will be sold off. And if disasters affect the planting, growing or harvesting of seasonal agricultural commodities, there will be investment opportunities there as prices rise due to the supply being impacted. Once again, ETFs afford investors the chance to purchase instruments that trade like stocks and afford them liquid exposure to previously out-of-reach asset classes.
As these four examples demonstrate, it is possible to assemble sky-is-the-limit profit opportunities – even in the face of what is likely the world's most-dour economic outlook since the Great Depression. There's a financial irony at play here: The same interconnectedness that makes possible a sweeping debt contagion will be based on big-picture trends, and will be diversified in such a way as to diminish risk in a big way.
When the Sky's the Limit
But that's just it: By understanding the big global picture, the interconnectedness of these markets and the world in which we now live, observant investors will be able to see the risks – and at the same time understand how to turn those threats into profits when the expected market movements begin.
Another advantage to creating a more macro-global, top-down approach to your portfolio is that these big trends are all accompanied by big capital movements. Known as "capital waves," these massive movements of global capital can be spotted as they develop, as they build, and even as they play out and roll over.
Understanding this simple-but-powerful concept makes it easier to manage your investments if everyone around the world is talking about the very issues that you've constructed your portfolio around.
Once you understand the big picture, it gets increasingly easier to dig into the big haystacks to find that vaunted "needle" – the rocket-fueled company or stock idea that will add additional alpha to the returns on your sky's-the-limit portfolio.
[Editor's Note: Shah Gilani, a retired hedge-fund manager and renowned financial-crisis expert, walks the walk. In a recent Money Morning exposé, Gilani warned that high-frequency traders (HFT) were artificially pumping up market-volume numbers, meaning stocks were extremely susceptible to a downdraft.
When that downdraft came, Gilani was ready – and so were subscribers to his new advisory service: The Capital Wave Forecast. The next morning, because of that market move, investors were up 186% on a short-term euro play, and more than 300% on a call-option play on the VIX volatility index.
Gilani shows investors the monster "capital waves" now forming, will demonstrate how to profit from every one, and will make sure to highlight the market pitfalls that all too often sweep investors away.
Take a moment to check out Gilani's capital-wave-investing strategy – and the profit opportunities that he's watching as a result. And take a look at some of his most-recent essays, which are available free of charge. To read one of his most-popular essays, please click here.]
News and Related Story Links:
- Money Morning News Archive:
News Stories About Capital Waves.
Commodity-Price Drops Signal a Double-Dip Recession Dead Ahead.
- Money Morning Special Research Report:
How Capital Waves Are Creating the Biggest Profit Opportunities in Today's Markets.
Support and Resistance.
- Money Morning News Analysis:
Does the EU Bailout Signal the Euro's Demise?
- Money Morning Special Report:
Despite Spiraling Contagion Fears, Spain Debt Worries Are Overblown.
- Money Morning News Archives:
Articles by Shah Gilani.
- Money Morning Market Analysis:
Dramatic Drops and Short-Covering Rallies Illustrate How Capital Waves Lead to Profits.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.