Thursday, June 5th, 2008...5:30 am
Housing Bust Pair Trade
Laguna Beach, California
- The long and short of your housing bust pair trades,
- Long McCormick, short McCormick – details below,
- Agora Financial’s war chest is opened again and plenty more…
Eric Fry, reporting from Laguna Beach, California…
“Hey I got a pair trade for you,” a friend phoned up the other day. “Buy McCormick and Short McCormick.”
“Brilliant,” your editor replied. “If you get any other really great ideas, call someone else.”
“No, I’m not kidding,” the friend persisted. “You asked the Rude readers for a pair trade that might work if consumer spending slows down, and I’ve got one for you.”
“Okay. Enlighten me.”
“Buy McCormick & Co., the spice company (NYSE: MKC),” the friend explained, “and sell short McCormick & Schmick’s, the operator of high-end seafood restaurants (Nasdaq: MSSR).”
“Very cute,” your editor replied. “Maybe too cute. You realize, of course, that McCormick and Schmick’s is already trading on its 52-week lows. Don’t you think there’s a better restaurant short out there?”
“Maybe,” the friend admitted. “I considered some other candidates. But I like this one. I don’t mind shorting a restaurant stock that’s already struggling.”
“Well, you may be right about that,” your editor agreed. “Last month at the Value Investing Congress, Carlo Cannell, a hedge fund manager who’s a great short-seller, said something like, ‘All restaurant stocks go to zero. It’s just a question of when.’”
“That’s funny,” the friend chuckled. “And it’s not far from the truth. A lot of those stocks do go to zero.”
“I think I know the approximate rationale for your pair trade, by why don’t you tell me anyway?” your editor suggested.
“Well, the short side is obvious,” the friend replied. “If the economy is slowing, people won’t be buying as many $35 plates of Chilean sea bass. Not to mention the fact that restaurant costs are rising across the board, from energy to butter to pasta.”
“Okay, what about the other McCormick?”
“On the long side,” the friend continued, “I like the spice company. I’m thinking that folks will rather spend a few extra cents trying to spice up their bar-b-cued burgers, rather than spend a hundred bucks on a diner out. Cumin and tarragon are affordable luxuries.”
“Alright, sounds good,” your editor replied, “We’ll revisit this trade in a few months and determine whether you are a genius or a numbskull.”
Your editor’s friend was not the only faithful Rude reader to provide a pair trade. As you may recall, last Friday, we announced the latest in our recurring series of Rude Awakening Group Research Projects. Specifically, we asked all readers to submit their suggestions for a “housing bust pair trade.”
We received an interesting assortment of responses, some of which we have presented in the column below…
—- Time To Go Short —-
The “Shameful Secret” That Could Triple Your Money…
“By June 17, One of Wall Street’s Fat Cat Financial Firms Could Be Forced by Law to Reveal Embarrassing Data…That Could Make You up to Three Times Your Money Before the End of 2008…”
They’ve tried to bury it… they’ve tried to “pretty it up”… they may even do it again…but even still, I can show you how you could turn this financial giant’s embarrassing “secret” into a fat, money-tripling gain over the months ahead.
But I have to hear from you by midnight, June 17, or you risk missing out completely. Read the Full Report Right Here
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Housing Bust Pair Trades
Edited by Eric J. Fry
If the housing bust continues busting, and the consumer spending slowdown continues slowing, many companies will suffer. Few will prosper. We’d like to know which companies will be which. If the economy continues slowing, we’d like to identify the likely losers and the possible winners.
But rather than go it alone, we tossed this research project out to the Rude faithful: “Pick one stock to sell short,” we asked, “and one stock to buy, as a way of benefiting either from the housing slowdown or the consumer spending slowdown…or both.”
Reader Charley Orr suggested:
Long – Netflix (Nasdaq: NFLX), which provides stay-at-home (or apartment) affordable entertainment (provided your TV isn’t repo’d). Short – Disney (NYSE: DIS) (or any theme park). Disney theme parks require substantial outlays for travel, food, and entertainment.
Reader William Butler suggested:
The rich will only get richer…
Long: Sotheby’s (BID). Everyone knows that Art is in a bubble, but of course that’s why BID is trading for half it’s October 2007 value. However, the coming slowdown will likely have a disproportionate effect on non-customers! Instead think of BID as half of a duopoly, that is a great franchise with a burgeoning customer base in the Far East, that sells desirable assets that provide a hedge against inflation and a falling Dollar. It has excellent operating margins and limited debts. There is a bearish case, but at $26, it’s worth ignoring.
Short: Warner Music Group (WMG). It’s easy to find consumer companies that will struggle, but harder to find many that don’t entail some significant event risk in shorting. WMG does have restructuring risk, however selling CDs is a lousy business, it’s good artists are leaving and WMG’s interest on its
debt eats up most of its operating income. The stock is up 45% ytd at $8.6. This doesn’t reflect a turn in its business, but just a reaction to 2007 ’s 73% decline.
Reader Joe Miller suggested:
Buy: First Cash Financial Services (Nasdaq: FCFS). Sell: Lehman Bros (NYSE: LEH). Both are in the lending business, but one is essentially a pawn shop, where they are doing very well, especially with the gold & silver jewelry being pawned. The other holds completely worthless paper, and will quite likely go under because of the weight of the worthless mortgages they are stuck with. The fed may help to keep them afloat, but the stockholders will lose out anyway, once Wall Street finds out how little value there is in this company.
Reader Mac Blair suggested:
Long: Chunghwa (NYSE: CHT). Short: Office REITS. Office REIT’s will be hit bad by both the mortgage debacle and the gas price. There will be a demographic move to home offices through IT, eliminating commuting, and turning offices into storage space. Office real estate will tank. The beneficiaries will be IT companies. One I like is Chungwha. They are the Taiwanese monopoly, and have a share in what will be the new fiber optic cable between US and China, which will be even busier when we can’t afford to buy American.
Quint Barker suggested:
Long gold, short copper. Not too dissimilar from your own trade of the decade, but a more direct play on housing, with copper demand serving as a proxy for construction. The obvious risk is that Asian demand and copper mining bottlenecks add risk to the short side.
Reader Sandy Bodner suggested:
Short HD & Low. When people can’t draw any more equity out of homes they are unlikely to do the more intensive remodeling jobs. We need to add decking for a new addition we put on, but the costs are prohibitive, about 5 grand. We will get it done this summer & take money already allocated for the project, but we have savings.
The long shot is on Autozone, (azo), Autonation, Pep Bros. People will need to keep those old cars running and Eddie Lampert is buying these companies as well as Buffet. Those guys turn stones into gold!
This concludes our sampling of pair trades that readers submitted. But just for the sake of espirit de corps, your editor will also contribute a pair trade…tomorrow.
—- Time to Go Long —-
The breakthrough that could put oil refineries out of business…
This tiny company’s private technology refines crude oil as it’s pulled out of the ground
And you can get in on it today for a potential 250% gain this year – but you must act before the “Oil Vacuum” achieves a milestone targeted for no later than July 12, 2008. Grab Your Report Here.
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[Rude Endnote: Yes folks, it’s that time again; the time when our executive publishers open the doors to the entire Agora Financial research war chest for a one off, lifetime price. They only do this a couple of times per year and spots are strictly limited.
The basic low-down is that Addison and Joe pay you to cancel your existing Agora Financial Subscription, then roll you over into the lifetime package. The amount you receive depends on what your current subscriptions are but, for the most part, your looking at a substantial saving and, of course, endless access to every product we offer…for life. (That includes our high-end stuff too, like the Resource Trader Alert and the Energy & Scarcity Investor)
You could say it’s the Rolls-Royce of Agora Financial’s offerings.
If you’re interested in finding out how much you’ll save by rolling your current package into the Reserve, click here.
Until tomorrow…
Cheers,
Joel Bowman
Rude Awakening
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