Short/Put Ideas

John answered 11 months ago …

So I have to say in today’s market short opportunities are abundant.

But lets get specific. Based on an Economic slowdown in 2008 (that even Bulls like me must now see coming) with the latest employment numbers and so forth. So I am short, short a lot actually:

#1. Pro Shares Ultra Short FTSE/ China 25 (FXP). Keep in mind the Ultra Short gains are double the downward percent. If the stocks trade down 25%, the fund would be up %50 percent. So you only need 20% downside to make %40 profits. Covers China’s top 25 stocks. China’s export manufacturing/export business is driven by the US economy. You can see over the past few years Chinas economic growth is in line with the US economies burst over the same time period. The US accounts for 50% of Chinas exports as China is really a sub-contractor to the west. With a US slowdown and slowing in Europe, China’s manufacturing boom will take a hit. China’s slowdown should pace the US slowdown. Couple with a huge run in 2006-2007 there should be significant downside to China’s extraordinary evaluations this year.

#2. Retail, Retail, and Retail. Retail is the financial sector of 2008. As the economy flourished the past years so has retail. Companies like Tiffany (TIF) who sell high priced items found huge consumer demand from middle and lower class consumers who wanted a piece of luxury. So they would spend $400 on a bag or $200 on jeans from Macys. With the slow down and high gas prices consumers of these classes will have to cut back. And the lower to middle class consumers are the ones who drove the stocks prices of Coach (COH), (TIF) and Macys (M) department stores. The negative sales during the holiday season are only the beginning of the slow down in retail. Although the sector has seen a downturn of late I expect even further decline. When holiday sales numbers are official look for a large round of sell-offs in the retail sector.

A. I am Short Retail ETF (RTH), which includes stocks such as: Best Buy(BBY), Target (TGT), Kohl’s (KSS), Gap (GPS), Home depot (HD) to name a few. This seems like a no brainer with stocks like (HD), (GPS), and (BBY) leading this fund there s reason to believe the fund will perform badly in 08. Bestbuy looks ot have been hit bad buy the holiday season and targets a little more pricey then (WMT) leading consumers away from target to (WMT). (HD) is a mess, new management and they still can not get it, together. Gap Stores seems to be on a one way street to insignificance as their sales continue to slide. Shorting this fund for 2008 looks like a no brainer.

Specific Stocks I am Short

B. (TIF). Tiffany, I just do not believe the stock can perform in a slowdown where their middle class base is cutting back. They make a living on giving the middle and lower class consumer a piece of luxury.

C. (COH). Coach, for the same reason as tiffany. Their stock grew because not only the wealthy like to purchase their products but the middle and lower class as well. Purchases will slow in 2008

D. (M): Macy's and Bloomingdales have seen huge growth with the US economy. With a slow down, $200 jeans at Bloomingdales just doesn’t seem like a priority. The holiday sales show consumers would rather shop at Target and Wal-Mart and look for sales on clothing at Macy’s and Bloomingdales which is not good for the bottom line. Also we have seen even strong consumer demand by European countries can not substitute for week domestic consumer demand.

3. A more risky play yet seemingly ripe for a short is (GME) Game Stop. The stock has gain over 100% this year and trades at over a 40 P/E. Video games have been bucking the week retail sector trend all year. Yet, one can see that $70 video games maybe looking a little to pricey for parents of middle to lower income families. I look for Blockbuster and other rental type outfits to see a boost in video game rentals as kids find another way to play games with out shelling out the $70 a pop. As the holidays have passed, video game sales should start to slow with the economy. Gamestops high evaluations make the stock prime for a retreat. I am not negative on the company just the environment in which it plays. GME should test about $47, if it goes beyond that, look for a significant sell-off.

4. AIG: The insurance conglomerate is facing legal troubles caused by accusations of falsifying economic data. As the case goes on (most experts are looking for a 2-month trial) there should be a coinciding drag on the stock. AIG’s legal woes don’t stop their. Litigation is also coming at insurer like AIG over the sub prime fall out and should continue to plague the stocks future growth. AIG still has significant downside potential and looks to test their lows again. There is just no reason this stock should perform well in 2008 and every reason to believe the downward trend will continue. Financials have taken a beaten already but I am looking for more downturn here. As more and more defaults develop from the housing mess AIG will continue to feel pressure.

As far as when you should enter these positions? For the ETF’s no better time then now. As far as individual stocks: (GME) I would look at now as a good time. AIG (maybe today) and the Retail stocks on any kind of upward movement and I would be shorting. The exact time is a preference for each investor and with your money you should look for the entrance strategy that you feel comfortable with.

I would also spend some time looking at China short opportunities in manufacturing and production based sectors. In the US the financial sector for the most part seems oversold, as the retail sector becomes a new favorite for bears. Although retail has experienced a downturn the sector is not yet oversold leaving short opportunities on the table.

John