Profit During Bad Times

By Michael Shulman

I spent some time on the phone with five trusted (and trustworthy) guys who are managing money on Wall Street to learn what they are thinking and doing.

The bottom line: What I heard from them is good news for those of us who are buying put options to profit from falling stocks. And if you haven't yet ventured into what I call the "short side," where we're making some nice dough while others are scrambling to protect theirs, there's still plenty of time to get in on the action.

Here's a summary of what I learned from my friends on the Street:

The Hedge Fund Guy -- He's beginning to look at Rogaine ads because he's running out of hair to pull out. Of course, even some of his short-side plays are not working fast enough for his taste. He entered the business three years ago and focused on the financial fundamentals of little companies and now trades a great deal. He is upbeat, but sees only gloom in the market.

The Research Adviser -- He has 14 investment bank/brokerage-type clients and a long-term life sciences focus. The market is confounding him, and his clients are very unhappy with the current environment -- they're not exactly rushing to put more money to work. His clients, however, still live (and invest) by fundamentals.

The Broker/Adviser, Pensions -- He's sitting back. His clients are calm because they have a very long-term perspective. He is a gold and commodities guy -- plus plays on very long-term secular trends. He is relatively unconcerned about markets and focuses on fundamentals as well.

The Broker/Adviser, Individuals -- He's also sitting back, focusing on long-term fundamentals and short-term, short-side opportunities. He still hates the homebuilders and the banks, especially the regionals.

This was the person who first turned me on to the regional banks and homebuilders in the very early days of 2007, leading my ChangeWave Shorts subscribers to gains of 300% in Hovnanian (HOV), 173% in D.R. Horton (DHI), 311% in Centex (CTX) and 223% in Lennar (LEN), among other notable wins. I owe this guy a really nice dinner!

The Trader -- This trader actually manages a small chunk of my personal money, which is up 20%-plus in the past 11 months. He trades volatility using some proprietary math and credit spreads, although he has to apply a bias and it is to the downside -- and he maintains it will remain that way for a while. At lunch a couple of weeks ago, he pooh-poohed a decline in oil prices and gave me the following great data point:

The average American consumes 25 barrels of oil per year. Indian and Chinese people -- and there are many, many more of them -- consume a mere two barrels a year per person.

If Americans cut usage by 20% (down to 20 barrels each) and people in India and China grow at current rates, their annual use will grow to three barrels of oil in a heartbeat and there will be no net decline in the price of oil.

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These five conversations confirmed for me that it's a traders' market with a downside bias that will send companies with poor fundamentals sharply lower from here. And that is great news for us on the short side!

Because it seems that what goes up (i.e., oil) means that something else (i.e., the market) goes down -- and since the world's usage of and need for oil is far from abating anytime soon -- I'm confident in my prediction that there are lots of opportunities ahead in the near future to make big profits during bad times.

Starting Your Short-Side Journey

My wife tells me there's a television show called "What Not to Wear." I am hoping she's not taking down the show details and sending in photos of me, but if I were the host of my own TV show about stocks, I'd be amenable for calling it "What Not to Buy."

For example, thanks to a decrease in consumers' discretionary spending, that sector is quite-fertile ground for stocks you don't want to buy. Toilet paper, gasoline and macaroni and cheese are doing well, and everything else is in trouble.