Shorting the Double Dip

Includes: BC, HOG, HOV, M
by: Michael Shulman

The double dip is coming - data out Wednesday and Thursday showed the climb out was really a crawl that stalled and the descent may even be underway. Turns out the nation did not lose 5.6 million jobs in the last year, it was 6.9 million. Whoops. Turns out retail sales did not go up in December, they went down. Double whoops. And jobless claims stalled at 444,000 last week - triple whoops? Yes - although that does mean we are going to get a triple dip.

But the double dip is in place, clearly. I have been writing in my service, ChangeWave Shorts, that I am agnostic and can read third grade math and you don't need more than that to see the second half of the year is going to be a great big disappointment to the economic bulls. The market, being a forecasting mechanism, is already sensing this, but has yet to fully grasp the impact on corporate profits of a double dip. And that is why there was such a muted reaction on the Street Thursday and Wednesday to some really bad numbers.

Am I overreacting? Hardly - this data is small beer compared to the big trauma slated for March and April when the home buying season begins - and doesn't happen. Defaults and foreclosures are accelerating and will do so through the middle of 2011; much of the pig in the python - foreclosed homes not yet listed - will be listed in the spring; the Fed begins shrinking its purchases of agency debt, raising interest rates that have already begun to climb; the tax credit for homebuyers ends and it is unlikely it will be extended as it is very politically unpopular; and the market starts forecasting Q4 and the holidays.

There will be noise about a stimulus plan, something independent voters don't want, but the reality is the national economy has a broken engine even a fiscally reckless Congress cannot fix -- home building, home buying, and home ownership, the source of a good deal of employment, a good deal of economic activity and a good deal of national wealth.

What to do? Short the obvious - a continuing fall in national income - start looking at logical shorts based on fundamentals and then check out technicals for the "when." An important part of those fundamentals are balance sheets. As sales stay stagnant or continue to decline, debt service will increase - if debt can be re-financed - as rates rise. Who needs a boat? Short Brunswick (NYSE:BC), decent balance sheet, not great. Who needs a high end motorcycle? Short Harley (NYSE:HOG), totally wrecked balance sheet. Who needs more stuff? Short Macys (NYSE:M), woeful balance sheet. Who needs an expensive home or who can get a mortgage for one? Short Hovnanian (NYSE:HOV), surreal balance sheet. And, of course, short Treasuries as tax collections will be less than expended and Congress may actually pass another futile stimulus package.

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