A 3-Step Market Investing Checklist for the Current Economic Climate

By Marc Lichtenfeld

You don’t need a doctorate in economics from Stanford to realize that the economic climate is tough.

And while I write about financial issues every day, looking for bright spots and profitable opportunities, I have to admit that even I was shocked by what I saw Wednesday night…

Having packed up the family for a trip to the local mall, we arrived to find the place like something out of the Wild West. As in a ghost town. It was eerie how empty the place was.

At one point, I thought I saw tumbleweeds rolling out of Walden Books, blowing through the food court, and stopping at the remnants of a shuttered Z Gallerie.

There were only a handful of people in sight at any one time. Stores sat empty, with neatly arranged merchandise untouched as bored clerks read romance novels or sent text messages.

And yesterday’s latest data reinforced the sad state of the economy…

Not So Much Riding To The Rescue… But Sauntering

According to government statistics, the number of newly laid off workers seeking job benefits rose to 626,000 last week, up from 591,000 the week before. That’s the highest level in nearly 27 years.

Roughly 6.5 million people are currently receiving unemployment benefits. And of course, that figure doesn’t count people who are no longer receiving benefits, or those who are under-employed.

In my last column I wrote about the lack of bipartisan cooperation to pass a stimulus package. But today’s jobless data could well be the catalyst that has forced the two parties to finally get together and pass some legislation - albeit a scaled-back version.

Word has it that the Obama administration has rejigged the aid package for the financial sector one that includes a so-called “bad bank” concept - and is set to announce the plan on Monday.

This could mean one thing for investors…

Beware The Teasing Bear

From a stock market perspective, this could be the driver of a short-term bear market rally. Great news, right?

My advice is that if you want to trade that rally, be my guest. But as prices go higher, be careful not to get sucked in and move much of the cash you might have kept safely on the sidelines into the market.

Bear market rallies can be quick and powerful. And as assets rise, it’s easy to think you’re missing the new bull. But we’re not out of this mess yet, and the markets will likely head lower before carving out a real bottom.

In fact, I expect the S&P 500 to trade in the 600s before this is over.

Profit From A Cliché… A Quick Three-Step Checklist To Investing In This Market

“It’s a stock picker’s market.”

This is a worn out cliché, but fitting for the current market. Simply put, it means there will be stocks that succeed despite the lousy economy and bear market. Here’s a quick three-step checklist of the main features you want to look for when picking stocks at the moment…

• Select stocks with healthy balance sheets. That means lots of cash and little or no debt. The last thing you want to worry about on top of everything else is whether or not your chosen companies will keep their doors open.
• Invest in companies that boast positive cash flow and run efficient operations.
• Lastly, a dividend yield is very desirable in this environment as it gives you a cushion against any declines.

Look To Small Caps And Find Your Own Stimulus

Another good historical fact to keep in mind throughout this downturn is that when the market stabilizes, it’s usually small-cap stocks that lead it higher again.

One stock to consider, using the three-step checklist above, is Electro Rent Corp. (ELRC). The company rents, leases and sells electronic test and measurement equipment such as signal generators and spectrum analyzers.

The company has $62 million in cash, no debt, and trades for just 1.1 times its book value. It pays a juicy dividend yield of 5.7% and should be able to maintain it, given that earnings are expected to grow in fiscal 2009 and 2010.

So don’t wait for (or bank on) Washington to bail us out of this mess. Even as the market stumbles along, companies like Electro Rent (and others) that are still able to grow their earnings and maintain healthy balance sheets should give investors their own personal economic stimulus package. And then maybe the malls won’t be quite so empty.

Hoping your longs go up and your shorts go down.

Stock position: None.