Try This Relative Value Play
If you believe that the stock market (economy) is going to turn around within
the next few months but are afraid to call the bottom, consider a lower risk way
of betting on a stock market rally.
The start of the bear market in the equities began in August of 2000 when
businesses made it clear that they would tighten spending on capital goods. As a
result, semiconductor stocks (down 75%), along with other capital goods stocks,
started their three year downtrend. And, although consumer stocks have also
declined since then (down 40%), it hasn’t been to the same extent since
consumers haven’t cut their spending as much as businesses have; thanks in large
part to increased property values, the consumer has kept the economy from
falling into the abyss. However, a decent rebound in the economy and the stock
market won’t happen until business spending picks up. When this happens, the
first group to benefit will be the semis and the last to benefit will be the
consumers. With this in mind, consider a relative value play:
Sell short the retail holders (RTH) and simultaneously buy the
semiconductor holder (SMH)
The semis have been punished the most and have probably seen their lows but
retailers could see more downside should consumers become more pessimistic about
the future. This gives some downside protection on the play since the RTH will
fall at a faster rate than the SMH. Conversely, the SMH should move up at a
faster rate than RTH allowing for profits to be made on the spread.Â
Developments On The War With Iraq
Turkey will decide by Friday whether or not to accept the aid package
proposed by the US. The two countries depend on each other for several reasons
and some arrangement will be worked out, despite all the rhetoric and haggling.
However, in the slight chance that the US goes ahead without Turkey in the war
with Iraq, there are a few things to consider.
- Saddam will be able to inflict more damage on the key Northern oil fields
since there will be fewer US troops in that region to suppress such
activities. - The allies will only be able to split Iraqi forces in two by attacking
from the west and south. As a result the war could take longer, could cost
more money, and more allied casualties could be expected.
Edward Allen