Michael Shulman

Trades to Keep You Ahead of the Recession

by Michael Shulman   12/04/08

These companies are taking cash and hoarding it, and their ability to generate profits for years, not quarters, will be somewhere between crippled and limited -- no IPOs, no mortgage securitization, no private equity deals, no credit card securitization, reduced lending, and so on.

The last shoe to fall -- Citi -- is eventually going to be righted somehow, because it is too big to fail, but shareholders are going to end up with nothing more than tax losses.

4 Short-Side Trades

The market has been rallying based on technicals, not fundamentals, and once Wall Street downgrades earnings prospects for 2009 and 2010, the whole market is coming down.

So, what's an investor to do?

Two things:

1. Be mindful of rallies.

2. Start shorting by purchasing longer-term puts on lousy companies and market segments that the Street is dead wrong about. Or, if you can't stomach the volatility, buy short exchange-traded funds (ETFs).

What looks good?

Among homebuilders, look for companies with weak balance sheets. KB Home (KBH) comes to mind.

As for consumer discretionary stocks, stick with the worst stores. Anyone been to a Sears (SHLD) lately?

Among financials, take a look at Citigroup (C). It is eventually going to break the back of its shareholders.

And if you want to avoid some gut-wrenching volatility, you can buy the financial double-inverse short ETF, the UltraShort Financials ProShares (SKF).

Like I said above, this recession is going to last longer than the Street thinks. And you can make big bucks playing their blind spots on the short side.

---

Michael Shulman is the editor of ChangeWave Shorts. To learn more about him, read his bio here.