(This is a follow-up article to The Next Recession)
Whether or not the US has emerged from the The Great Recession of 2008-2009 is not of much interest to me since The Next Recession of 2010 appears similarly fearful. The economic doom and gloom of deleveraging, housing, and regulation are all still in play. Since I last discussed these themes in last month’s article, The Next Recession, unemployment continues its ascent, home-buyer tax credits have been significantly extended, and legislation has moved forward to limit fees that credit cards may levy. With the economy continuing to suffer, the US dollar is looking similarly downtrodden as foreign central banks in resource rich countries have increased interest rates (Norway once, Australia twice). Further, India made a massive purchase of gold, 200 metric tons worth (about $7.5 billion), even though gold is at an all-time high. The fact that one of the world’s most populous countries chose gold over US Treasuries as a safe, multiyear investment, is quite telling.
As much as I believe the US dollar is on a long-term descent, it is entirely possible that a series of bad news will cause investors to panic. Since, the US dollar is still widely seen as a safe haven and a risk free asset among market participants, this panic could cause a temporary upward spike in the US dollar. Even though the dollar is likely to fall in the long run, the interim potential for pain is huge. This is a trade I just haven’t been able to justify. The result is that I am steadfast in my theories, yet weak on ways to profit from them. Until now.
The themes of deleveraging, housing, and regulation can still be played without choosing a direct position for or against the US dollar. Moreover, I also offer two new themes which were outside the scope of my last article: profit margin expectations and global demand growth. The result is five themes (or theses), each of which can be traded without direct exposure to US dollar volatility.
- Deleveraging is a broad economic issue that will continue to impact discretionary spending. Unemployment (and underemployment) continues to rise, and there is a broad shift toward consumer saving. Opportunities exist by shorting certain retailers, automakers/auto industry, durable goods, travel stocks, airlines, hotels, etc. Long positions in certain food, tobacco, alcohol, and other safe stocks might hold up well. I am currently long Phillip Morris International (NYSE:PM).
- The housing oversupply also has ample opportunities as one can short a homebuilder stock directly. Another possibility is to short an ETF that tracks homebuilders; this is the approach I have taken and am currently short ITB. It is also possible to short a bank since banks make consumer home loans, and a wave of foreclosures is approaching. I am currently short CYN.
- Regulation and political shenanigans are driving down the value of the dollar. Without making a direct bet on the US dollar, there are still ways to play this theme. Investors can choose a commodity basket such as DBC or perhaps other currencies. Another option, which can be used to substitute a cash position, is to choose a long-short currency basket, DBV. Finally, another anti-inflation strategy could be to short the bond ETF, AGG. Currently, I have no positions here, but look forward to establishing some.
- Profit margin expectations are too high. For an in-depth analysis, read this article by Bill Hester (of Hussman Funds). The opportunity here can be exploited by shorting the broader stock market. Currently, I am long SDS and GLD. SDS is an ultra-short S&P 500 ETF, and GLD is the gold ETF. The thought here is that the market will fall relative to the strength of the US dollar. Over the past four months, the market has been on the rise, up about 25%. However, the US dollar has fallen about 7.5% relative to other currencies and down 20% relative to gold. Hence, the 25% gain isn’t real. I firmly believe that either the market will fall or inflation will roar, or both. Short the market and long the gold is an ideal combination.
- Global demand is surging. Whether it is China, India, Brazil, or elsewhere, every financial magazine is reporting on this multi-year phenomenon. Ways to capitalize on this theme is simply to be long foreign stocks (on foreign exchanges, not ADRs), ETFs (EFA, EEM, EEB), or commodities/tangible goods. Although I do have international exposure in my portfolio, I have yet to establish a position that directly relates to this theme.
I strongly believe in each of these five themes. Deregulation, housing, regulation, expectations, and global demand are all actionable ideas, and investors have multiple ways to protect themselves during The Recession of 2010.
Disclosures: long PM, SDS, GLD; short ITB, CYN.