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There’s no question that 2008 was filled with bad news when it came to the stock market. Just a glance at the major indexes shows how bad the carnage was—the Dow was down 32%, the S&P 500 tumbled 37% and the Nasdaq sank 40% as I write this.
You could have definitely made money trading markets, sectors and stocks affected by bad news in 2008—both long and short—and this will also be the case in 2009. There were a lot of losers last year, but there were also winners if you were willing to bet against conventional wisdom.
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The Bad News Victims—
Profits from Selling Short
The BanksShorting the banks was like shooting fish in a barrel as their problems are very easy to spot in public documents ranging from SEC filings to mortgage origination data.
The Financial Select Sector SPDR (XLF), the ETF representing the sector, is down 54% in 2008, but individual names beat that easily and selected names are down much more—Bear Stearns is gone, Freddie and Fannie are gone, Citigroup (C) is down 71%.
Does this mean the run is over? No. I see another leg down coming among selected names, led by Citi, which not only has problems with its balance sheet but more than $1.2 trillion in off-balance-sheet assets of unknown value at this time.
Keep trading the banks to the bottom. Continue to short Citigroup (), Capital One () and Discover Financial Services () in 2009.
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The Bad News Victims—
Profits from Selling Short
The HomebuildersFrom an economic point of view, no group was hit harder in 2008 than the homebuilders. In past years, when new home starts fell below a rate of 1 million per year, it was a real bottom. We are now at a rate of 622,000 per year and falling, and builder confidence, on a scale of 1-100 is 9 with 50 being the midpoint between optimism and pessimism.
This index has outperformed the market but selected names have completely blown up. For example, Hovnanian () is down 66%, Beazer () 71% and so on. Are there names left to blow up? You bet! I foresee two or three bankruptcies in 2009, and the first one will trigger a meltdown in all these stocks.
Look for housing stocks to be another great “short” trade in 2009. Names like Toll Brothers (), KB Homes () and Hovnanian () could continue to crack.
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The Bad News Victims—
Profits from Selling Short
RestaurantsThe money from the short side began to flow in the third quarter of 2007 and lasted throughout this year. Restaurant outings are arguably the first area of discretionary spending given up by consumers when times get tough.
Ruby Tuesday () is down 83% this year, The Cheesecake Factory () is off 63% and the other victims here are too long to list. Customers trade down before they decide to stay at home and some companies benefit from this phenomenon.
On the short side for 2009, take a look at Sysco () , the largest supplier to all restaurants, which is bound to be hurt more by a reduction in overall spending. The company is almost an ETF for restaurants.
The restaurants still have a ways to go to hit bottom. Continue to look at Sysco (), Yum Brands () and Starbucks () as short opportunities.
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The Bad News Victims—
Profits from Selling Short
RetailPick a retailer and they are all down. But the ones with higher-end and less-necessary items are getting hit harder. The ETF representing this sector, the Retail HOLDRs (), held up better than the market due to a heavy weighting of discounters such as Wal-Mart (), which have done well in the real world and in the market.
ChangeWave survey data shows pending is not getting better, may get worse, so in 2009, expect a wave of bankruptcies and another leg down for the sector.
The consumer has cut back spending. Short the retail stocks like Macys (), Sears () and Bed, Bath and Beyond ().
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The Bad News Victims—
Profits from Selling Short
TechTech is a broad category, but it has taken a hit and will take an even bigger one as one cult name after another legs down in the face of drastically reduced corporate IT spending and reduced consumer electronics purchases.
There are many ETFs and most mirror the general move in the Nasdaq. The best action this year was in selected names—Palm () down 65%, Motorola () 70%, Dell () 55%—and that will be next year, too. Look for companies that are a weak second or third in their market space or overly dependent on discretionary spending by businesses or consumers.
Tech will continue to take a hit in 2009 and make good short trades. I would avoid or short stocks like Dell (), Sun Microsystems () and the Semiconductor HLDRS ().
What about lousy trades? Most of the bad trades this year were based on timing, not fundamentals – although some companies clearly outperformed the market.
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The Bad News Victors—
Where to Go Long for 2009
CommoditiesCommodities hit everyone on the long and the short side this year unless they timed every trade perfectly. Many people went long too late, many people went short too early, me included. I thought commodities would break in Q2 and instead they went up—and they broke much later in the year.
The lesson here is how difficult it is to sort out how much of the price of a specific commodity was dependent on speculators and how much was from real demand. In 2009 I expect core demand to fall, but who knows how much of this is already built into commodity and stock prices.
Bottom line: Given the dollar should weaken by year-end, if there is a bias in the market in 2009, it will be to the upside. Check out the DB Commodity Index Tracking Fu () and the Select Sector SPDR Energy() for potential long-plays this year.
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The Bad News Victors—
Where to Go Long for 2009
Selected RestaurantsMcDonald’s () is going gangbusters and other outfits are doing fine from consumers trading down such as CKE Restaurants (, parent of Hardee’s and Carl’s Jr.) or Darden (, parent of Olive Garden).
When you go long or short one of these outfits, try to understand if they will get more or less traffic due to a reduction in consumer spending.
The play here in 2009 on the long side is Mickey D’s ().
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The Bad News Victors—
Where to Go Long for 2009
The HomebuildersAs I wrote above, they actually outperformed the market and selected names blew up—but timing was critical. The January and summer rallies –which was based on emotion and words (plus some short covering), not economic reality or earnings — killed some positions.
The lesson for 2009 is the same as 2008: Short selected names with very weak balance sheets, like the ones I mentioned on page 3. Avoid the ETFs.
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The Bad News Victors—
Where to Go Long for 2009
The RetailersI told you the overall index outperformed the market—almost surreal behavior that remains unexplained, but it is what it is. So again, selected names worked and others did not, so timing was critical. The same will be true for 2009—stick to the segments such as luxury, sporting goods and women’s apparel.
Set to continue to under-perform: Tiffany & Co.(), Dick’s Sporting Goods (), and Under Armour ().
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The Bad News Victors—Where to Go Long for 2009
AgricultureOh, how so many missed this one. I caved in to the chant "they gotta blow, they gotta blow" too soon and was way early on shorting these companies. And, of course, they started to crack once the market seers had said they were fundamentally different than other stocks.
In one sense, this is true. Even a deep worldwide recession will not stop growth in demand for better and more food—and that means more business for companies such as Potash () and Monsanto (). I am not sure how far up they will go, but I certainly would not short them due to a deep recession.
Both Potash (POT) and Monsanto (MON) look good long in 2009.
Good luck trading in 2009!
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