How to play the coming bear market

A few stocks to short to soften the blow of the next few weeks

Clearly market psychology has changed dramatically over the past few weeks.  The market is down 5% and looks likely to fall much further.

I am hedging my long positions by shorting some stocks that seem likely to fall harder than the rest of the market.  Clearly, the market is being lead down by the housing and financial stocks.  It is probably too late to short the housing stocks, but there is still plenty of room to short some of the financial stocks. 

Goldman Sachs (GS) is down 20% from its high, but could certainly fall much further.  There is so much fear about what their exposure to the sub-prime sludge may be that another 20% fall to around 140-150 is not unlikely.

Blackstone (BX) is another stock in the sweet shot for shorting.  It is down 30% from its IPO, but also could go much lower.  The entire hedge fund model relies on easy money and a healthy stock market- in order to re-IPO the companies they have taken private. 

My favorite short pick right now is Sears.  It is a perfect combination of a hedge fund ( a la Eddie Lampert) and a retailer closely tied to the housing market.  They have fallen about 30% from their high, but have missed earning two quarters in a row and should fall much lower.  It appears that Lampert has again proven the Peter principle - he has risen to the level of his maximum incompetence.  He may have been a great Hedge fund manager, but he has no idea how to turn around a retailer.

Joshua Avram
Joshua Avram: MD, Wash U; BS, Yale. A noted cardiologist, the doctor applies his medical knowledge to his investing in large pharm and biotechs. The doctor has correctly predicted several very exciting biotech acquisitions over the past several years, including the acquisitions of Esperion (Pfizer), Amylin (Bristol Myers) and Imclone (Bristol Myers). The doctor is presently long Novo Nord

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Comments

  • Longo

    August 05, 2007

    I think your short positions are going to get killed. The market is taking an breather and will continue going up. PEs are relatively low, corporate profits are good, and consumer sentiment is strong. A couple of hedge funds might get wiped out, but who cares? That will just keep the rest of them honest.

  • Dave Lloyd

    August 07, 2007

    If you believe that the market is going to continue to tumble, you should short Bear instead of Goldman, but your other positions make sense. You should definitely recognize that there is tremendous risk here and this will likely not work out well for you.

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