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Minyan Mailbag: Short Side Returns

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This is the U.S. financial banking system and it will be defended.

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Toddo,

I'm trying to select the Dow stocks I am going to short for the next leg down. Have we reached the point where defense is now the "crowded" trade with the likes of the King of Defense, Big Mo the Invincible or Coca-Cola (KO) or Johnson & Johnson (JNJ) for that matter?

If the overall Dow prints down 20% from the high in the near term, do you think these get thrown out with the bath water as well? I'm just trying to maximize what little powder I have left for the fight.

Regards,
Minyan Jeff

Minyan Jeff,

I believe that pharma and consumer non-durables will relatively out-perform going forward. Relative is the key word as you can't spend relative performance. And as always, it depends on your time horizon.

The highest potential returns on the short side are likely energy and metals in a deflationary environment, although they remain the best positioned from a long-term secular growth story. It's tricky indeed as there are a lot of crosscurrents.

The most intuitive bet on the short side, I would argue, is the financials, although there will be sharp, painful rallies along the way. In the short-term, that complex is crowded and thus far tougher to game. Plus, they are down a lot and it's dicey piling into 40% bungee declines.

This is the U.S. financial banking system and it will be defended. And if the U.S. cannot push through superconduits and rescue plans, foreign sponsorship will step up as it recently has. Whether they can pull the U.S. up or the U.S. pulls them down is another conversation altogether. It is actually the conversation, albeit one for another time.

I would say this: If you have little powder left in the fight, capital preservation (T-bill backed money markets) should be considered. Prudence isn't sexy but it will serve us in good stead through all kinds of twisty tapes. If you're a trader, pick your spots and stay tight. If you're an investor, cash on hand is a beautiful thang.

Anyhow, hope this helps. As always, it is one man's humble opinion.

-Toddo

R.P.


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