More Reasons For The Long SMH/Short RTH Spread
In my column
last week, I suggested that investors
consider a relative value play by shorting the Retail
Holders
(
RTH |
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PowerRating) and going long the
Semiconductors
(
SMH |
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News |
PowerRating).
Today, I’d like to further elaborate on this issue.
The basic idea behind this strategy is that although consumer spending has
been steady and has supported the economy so far, business spending is more
likely to spike first. And, should the uncertainty over a war continue, or
should a war become a prolonged affair, businesses seem better
positioned than consumers to weather such a scenario. So rather than just buy
the Semis outright and assume the associated geopolitical risk, why not
simultaneously short the retailers?
For the past three years, businesses have been cost-cutting in an effort to
restore profitability and are now running very lean. And due to the over-investment by businesses in the late 90s, a significant portion of these cuts
have occurred in capital investment, more specifically, investment in
technology. This has left businesses with a very high cash to short-term debt
ratio. It is now becoming apparent that businesses are under-investing and will
need to pick up spending in order to remain competitive over the long term.
In fact, things seem to be picking up already:
Witness this week’s .9% increase in the computers and electronics component of
the stellar Durable goods number. At the same time, consumers will need
businesses to start spending and hiring before they further increase their
current spending levels, which is why I expect sectors like the Semis to pick up
before the Retailers.
Technically, things in the Semis also appear to be setting up for a possible
move as well. Readers should refer to Chris Tyler’s column in the Nightly Day
Traders Report for more info.