Profiting from a Basket of Commercial Real Estate Shorts

by: TraderMark

I created a 3 name basket of shorts in commercial real estate last Friday [Mar 13: Bookkeeping - Beginning to Build a REIT Short Portfolio] - Kimco Realty (NYSE:KIM), Macerich (NYSE:MAC), and Duke Realty (NYSE:DRE). All 3 have fallen 15% or so just in the 2 sessions since I shorted so I am covering about half of each - effectively this trio was a 5% exposure so I am cutting it to about 2.3%. I bought a basket because you never know which one is going to fall the most, but ironically they have fallen all about the same percentage. The only risk here is they fall below $5 and I can no longer put new short exposure on.

I am taking a partial profit in Wynn Resorts (WYNN) and Capital One Financial (NYSE:COF) as well - these are about 7% gains. Instead of breaking out all the trades for these, basically what I have done is noticed COF faded each time it got near $14 the past 3 sessions so I added in good proportion there and cover below $13... WYNN a very similar strategy between low $20s and $18s.

EDIT 11:30 PM: Someone just sent me a message that WYNN priced a stock offering at $19/share - and there ya go.

I plan to hold all 5 positions and trade around them, similar to what I would do with a long position... but instead of buying on dips (as I'd do on a long) and sell on surges (while keeping a core position), I will be selling short on surges and covering on dips. So far so good; as we discussed many times we lacked the ability to short individual names in 2007 and 2008, so we were stuck with very dangerous (and useless long term hedges) Ultrashorts - and our performance should have been far better since we called some enormous drops in casinos, retail, restaurants, financials, Franfredron, and individual stocks like Whole Food Markets (WFMI).

In early 2009 these sectors had already fallen so much that I wanted to find a higher price to begin shorting them... and instead chose to short "quality" companies that were due to fall because of technical reasons - instead of picking companies with poor fundamentals or in bad sectors. After this quick & violent rally, I am refocusing on sticking my shorts on the fundamental stories and it has already paid off in spades. But until (when/if) S&P breaks 741 I will still be darting in and out and taking quick profits when the market gives them to us.

I have no strong feeling on the market here - the backdrop of economy is awful but "hope" can always drive us up. We are in one of those white noise areas where I have little conviction but if the bullish case would be some backfilling and consolidation without breaking S&P 741, before the next leg up. The Federal Reserve meets today and tomorrow and then Obama goes on Jay Leno Thursday night to reassure us that sending all these people out to reassure us is not hiding a very big problem.

Disclosure: Short all names mentioned in fund; short Captial One Financial, Wynn Resorts, Kimco Realty in personal account.