I recently handicapped the probability of recession at 70% likely based on 5 of the best forward-looking indicators. With today's shockingly low Purchasing Managers' Index [PMI] registering a dismal 47.7, we need to revise the educated "guesstimate."

On 12/18, I awarded 10 percentage points to the "recession camp" based on a 6-month trend of declining PMI readings. On the other hand, since November's number over 50 still pointed to expansion, albeit slower growth, I awarded 10 points to "recession-averted" crowd.

No longer! The PMI below 50 now shifts to an even greater likelihood of a recession... call it 80% likely. In particular, the 47.7 reading is perilously close to the dreaded 47, consistent with the arrival of negative economic growth.

With the probability of recession heading significantly higher, one need not be paralyzed; rather, he/she should be encouraged by the increasing certainty that the Fed will take action to minimize the severity of the downturn. He/she should also be invigorated by sages such as Winston Churchill:

"A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty."

Let's then look upon the likely recession as a Churchill difficulty. What exchange-traded fund opportunities exist?

1. It Worked in 2007... It'll Still be Working in 2008. I've also outlined areas that would continue to show promise. Chief among them? Foreign fixed income via the PowerShares Emerging Mkts Sovereign Debt Fund (PCY) and the SPDR Lehman Intl Treasury Bond ETF (BWX). And let's not forget the commodity boom via the Dow Jones Total Commodity Index (DJP) and the Claymore/Clear Global Timber Index (CUT).

2. New and Potentially Lucrative Uptrends. Two of the newest ETFs seem to buck the overall domestic trend. For example, if one doesn't mind investing in companies that profit from smoking, gambling and liquor distribution or sales, one might consider the FocusShares ISE SINdex Fund (PUF). During the last recession from 10/1/2000-11/30/2001 while the S&P 500 lost 20%, the SINDdex gained 25%. And while I do not have data for the new iShares Global Infrastructure Fund (IGF), it has rallied more than 1% on each of the last 2 days that the Dow has sunk by 100 points or more.

3. International With Income. Here's where the folks at WisdomTree can take a bow. Granted, it is highly unlikely that the international community will "decouple" from a U.S. based recession, the increasing need to find growth abroad is not a passing fancy. The increased risk, however, means that more investors will want an income stream from those worldly allocations. Some of the best income producers include the WisdomTree Communications Fund (DGG), the WisdomTree Materials Fund (DBN) and the WisdomTree Utilities Fund (DBU).

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Gary Gordon

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