To Short or Not to Short
Thursday, September 21st, 2006
By Michael Lombardi, MBA for Profit Confidential
Yesterday I wrote about how the ramifications of the worsening U.S. housing market could be more devastating than most economics think.
Here’s the million dollar question:
Should you short the stocks of the largest U.S. homebuilders?
That’s a question I’m often asked these days. After all, most big home-builder stocks have been in a free fall for months–and the U.S. housing market is only starting to get bad.
Shorting stocks is not for the faint of heart. If you are a conservative investor, you shouldn’t even think of it. If you can afford the risk, I think the housing stocks (only the largest cap ones) are a good bet. But I also think large consumer retail stocks are an even better bet.
Courtesy of Bernanke’s decision to leave interest rates alone the last couple of Fed meetings, the stock market is sensing lower interest rates ahead. And there’s nothing the market loves more than lower rates. The stock market acts like it’s not concerned at all about the slowing economy. It’s just “bring on the lower rates and let’s party!”
The rising Dow Jones Industrial Average is taking all kinds of stocks up with it, including retail and housing stocks. Thank goodness, otherwise housing stocks would have been on a red hot fire sale.
I’ve publicly stated I predict the Dow will soon move to a new record high, beating its previous high set in 2000. But, I also said I see the move as a fake-out to bring retail investors back into the stock market–we are seeing a classical bear trap in the making.
But there’s no escaping the natural effects of a slowing economy. There’s not doubt in my mind that once consumers digest the fact they went from “house rich” to “house poor,” big retail will feel the effects. Hence, retail stocks might actually be a better short than housing stocks. Something to think about.
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Tags: Dow Jones Industrials, stock market, U.S. economy, U.S. housing market
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
