A Fiscal-Cliff Strategy

 | Dec 28, 2012 | 8:30 AM EST  | Comments
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Stock quotes in this article:

RTH

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wmt

,

tgt

,

bby

,

bbby

,

kss

,

rost

,

m

,

wsm

,

low

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pir

,

cost

Let's say all goes badly and we go over the cliff. What do you do? Given the mercurial nature of politics, you need a plan that embraces the short-selling or put buying of the segment that would miss numbers anyway, even if the cliff were resolved, so that if we get a blip up on a solution the group can be re-shorted into strength.

That group is retail.

My preferred way to execute this strategy is to sell short or buy puts on the Market Vectors Retail ETF (RTH). Here's why:

First, we know that somebody's going to get hurt: the poor, the middle class or the rich -- maybe all three. They will all react by saving more until the coast is clear. That's terrible for retail, all retail, but especially the dollar stores, which have acted terribly, and the discounters -- think Wal-Mart (WMT) and Target (TGT).

Second, the weather was so bad, and the psyche so negative -- look at retail correlative Consumer Confidence -- that you can't own the strugglers: Best Buy (BBY), Bed Bath & Beyond (BBBY), Kohl's (KSS), or even good ones like Ross Stores (ROST). I would point out that Macy's (M) fares badly in this world, too, with a heavy coat segment that must be discounted.

Finally, I would not trust even the strong home themes, at least for now, because they have run so much: Williams-Sonoma (WSM), Lowe's (LOW) and even one of my big faves, Pier 1 (PIR). I would be quick to cover this cohort, though, simply because it is part of a larger theme that will be hard to dislodge -- the higher price of homes.

All of these would be short-term plays. And if you are worried, I would go long Costco (COST) as a hedge because I believe it is the default play for shoppers.

I would do this trade right into today's action and double down next week if there is a cliff jump because I believe you will get a barrage of number cuts that will make things easy to stay short.

I am making no judgments on the resolution of the cliff itself, just on the quarters to be reported because of a uniquely poor set of circumstances that will hit a reset button on the whole cohort. It can be looked at to the long side once the numbers are through cutting and the inventory is worked down to where gross margins can expand again.

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