If You’re Gloomy, Read This

08/07/2008 12:00 am EST

Focus: ETFS

Neil George

Editor-in-Chief, Income Publication and Products, Agora Financial

Neil George, editor of Personal Finance, has an ETF for those who are bearish on the economy.

Nothing is more gut-wrenching than the how-much-did-I-lose thought after another down day in the markets. And that kind of fear has more folks clutched up before they open their monthly statements or log in to their online accounts.

More and more of the stock market is getting whacked based on a number of Challenges—some general, others specific. The prospect for near-term improvement in the broader issues isn’t great, and there are many more hurdles for individual companies to overcome. Credit market woes, consumer anxiety, changing government policies, volatile commodity prices, and a difficult operating environment make it a whole lot more difficult to find the right stocks to buy.

Right now, even the best stocks face broad challenges. The current environment isn’t unlike other tough times such as the 1970s, the late 1980s, or the early part of this decade. Although it might be easy to tell you history repeats itself, the fact is each market mess is characterized by unique factors. Sometimes they’re apparent at the beginning; sometimes they manifest themselves one painful revelation at a time.

The primary concern is the state of the banking and credit market. Mortgages are the start but not the end. Loans to corporations are coming under fire, and now, with new accounting standards that mandate marking values to the real world rather than to computer models or hopeful estimates, we see more trouble looming.

This dread is shared by the Federal Deposit Insurance Corp (FDIC), which is cracking down faster and harder, forcing banks to come cleaner, sooner. The FDIC’s list of troubled banks has quadrupled since the end of 2007, and that list should continue to grow.

Regional banks skipped this first round, flying under the radar while their higher-profile peers were taking the initial hits. But they’re no longer hiding, and their problems are likely to get worse.

The second major concern is consumer spending. Housing market woes are reversing the wealth effect many consumers enjoyed while home prices skyrocketed. According to the Federal Reserve, the net worth of US consumers dropped by nearly $2 trillion in the first few months of this year alone, based largely on the real estate downturn.

Consider as well the impact of energy costs draining away discretionary spending and a tightening in consumer lending; it doesn’t look good for retailers and their suppliers.

But we can profit here via an ETF that appreciates as retail heads south. As ProShares UltraShort Consumer Goods’ (Amex: SZK) underlying index falls, you profit at twice the rate; if things get better, you lose at twice the rate. Buy ProShares UltraShort Consumer Goods under 87. (It was trading just above $70 on Wednesday. UltraShort funds are extremely risky, and you should invest in them only money you’re prepared to lose—Editor.)

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