Benefits of a Recession.

Welcome to

"StockBreakthroughs Newsletter"

August 5, 2005.

In this issue...

Benefits Of A Recession.

The Technical Definition Of A Recession:

Recession is defined as a period of economic retraction; when the economy actually gets smaller. Generally, two months of decline in the gross domestic product *(GDP)or a sharp rise in the unemployment rate, are red flags that a country is approaching, or in the midst of, such an economic contraction.

*GDP: The Gross Domestic Product [or GDP] is calculated by taking the goods, services,
and products produced overtime and determining their market value. It includes the
income made by foreign residents and corporations working in a country, but does not include the income of residents and corporations that are outside of that country [overseas].

The last large-scale recession in the United States was in the late 70's and early 80's. Gasoline
and energy prices reached levels that had never before been seen, and almost 11% of the nation
was unemployed. The *prime lending rate reached over 21% (compared to 8.5% today.)
Understandably, the housing industry came to a virtual standstill; very few people could afford
mortgages with interest rates at such astronomical heights.

*Prime Rate: The prime rate is the lending interest rate banks charge their most steady,
credit-worthy customers. The prime rate is the same for almost all major banks.

The Results Of A Recession:

Although recession can create severe problems for a nation's economy, it still offers the chance
to make serious money. Before you can effectively invest during a recession, you have to know
how the market behaves during these times. Generally, there are three things that happen:

1. The stock market will get hit first and hardest. The reason for this is simple; during a recession,
household income decreases thus reducing household expenditures. In other words, people are
spending less money. Companies therefore, make less money, resulting in lower earnings and
share prices.

2. Inventories decrease because businesses cut production and draw on their stored resources.
This compounds upon the lack of demand that already is hitting the company, and normally causes unemployment to go up because employers lay off employees that they no longer need.

3. Since work is harder to find, general wages decrease.

This is a very different market than investors are used to dealing with. Most of the people owning
stock and mutual funds today haven't lived through anything resembling a bear market or a slowing economy.

The first, and possibly most important, step you should take when investing during a recession is
to immediately start putting cash aside into a reserve fund especially if you work for someone else.

Because the risk of layoffs drastically increases, the most important thing you can do is keep a roof over you and your family's head. Most certified financial planners agree that an emergency fund should be equal to at least six-months worth of living expenses and kept in a savings account or other investment since you will need immediate access to the cash if you do lose your job.

Once you've taken care of your basic needs, you can turn your attention to your portfolio.

Before you start making financial decisions you should answer two questions:

1. Will the economy turn around sometime during my lifetime?

2. Is Gillette, Coca-Cola, or any other backbone of the economy still going to be in business
in 20 years?

If you answered "Yes" to these two questions, then the best investment strategy should be clear to you immediately. Most investors know that the economy will be fine in the long run, and that huge decline in stock prices is only temporary, yet they are too paralyzed by fear to do anything about it!

The irony in all of this is that at precisely the time when it is wisest and most beneficial to invest, people are unable to either because of lack of money or fear. Recessions may very well be the greatest investment opportunities of a person's lifetime.

If you were given $10,000 to invest in Coca-Cola, when would you want purchase shares? When they were $60 or $35 per share? The wise investor will obviously choose to invest at $35.

What is a testament to Wall Street's stupidity is that during the times when these stocks fall the brokers recommend selling! The time to sell was before the stock price declined! If you believe that the economy of a country will survive, then the short-term bumps in the road shouldn't matter in the slightest.

Take advantage of them! If you do, then a recession is the equivalent of the manager of Saks Fifth Avenue running down the aisles of the store and marking everything 40 to 50% off. If you are smart enough to take advantage of the situation, you will emerge much better after the manager regains his sanity, especially when you realize all of the other shoppers didn't buy the merchandise because they thought something must be "wrong" with it since the price had fallen that suddenly over such a short amount of time.

Yours in Successful Trading,

Ricky Schmidt

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