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The following sectors are areas I would sell or be short:
I believe the US economy will continue to weaken and when the crap hits the fan most/all of the sectors will be blemished. One way to reduce my broad exposure without selling the positions I’m bullish on is to short other sectors.
Housing companies (in the US): even though many of the large US home builders have corrected 50% or more, I still think there is more pain to come. The US is still in the beginning of the housing correction. With the current interest rates (on ARMs) many of the unqualified home owners (that bought when lending conditions were non-restrictive) can’t afford their homes even before they reset to the higher rate. As the housing prices continue to deteriorate, more home owners will find themselves having negative equity. Once they have negative equity, it makes more sense to rent as it takes less money to make a rental payment than it does to make a payment on a large mortgage. Many of these negative equity homeowners will simply cease to pay their mortgages and hand the keys back to the banks. The banks will have to put the homes up for sale as they won’t want to hold the homes given they are finding themselves short of capital. The foreclosed homes will flood the market with more inventory from motivated sellers causing the price of both existing houses and new homes to drop. Be wary of shorting this sector since many of the home builders’ stocks have been badly beaten down in the last year or two and might look attractive to investors at these distressed levels.
Consumer Spending (in the US): this is a broad category for anything that US citizens spend their discretionary money on e.g. cars, retailers, home furnishing, entertainment, hotels, casinos, airlines, restaurants, personal services etc. Now that the housing sector is correcting, homeowners can no longer use their rising home equity as an ATM machine to fund their overspending habits. As the equity in their homes continues to declines, the ability to withdraw funds continues to decrease. With job losses continuing in the manufacturing sector, housing and now banking, there’s going to be less money for people to spend. With the rise of China (in manufacturing) and India (in services), many of the jobs that have been lost are permanent. There will be many more jobs that will also be permanently lost, as neither the US nor Canada can compete with the current wage inequality. Throw in the rapidly rising food and energy prices and the US consumer won’t have a choice; they will have to cut back on discretionary spending.
