The intraday rally can be attributed to rumors that AIG would receive some type of bailout, which I personally believe will happen within a few days. I agree with many market participants that the failure of AIG would present significant systemic risk to the global financial system.
However, I do not believe that the propping up of AIG will fix the market's problems. The employment and consumer spending pictures will get much worse before they get better, and I'm seeing far more opportuniities to short stocks than to buy them. I do talk about a lot of 'prospective' trades on this blog, but don't actually make many. This is because we are in an exceedingly unforgiving market. Fortune favors the meek rather than the bold.
Nonetheless, depending on what I see over the next couple of days, I'm looking to take short positions in the following two stocks:
Chicago Mercantile Exchange (CME) >> the global deleveraging will include a marked decrease in trading activity on the part of investment banks and hedge funds, which are shrinking in both numbers and risk-taking activity. With the stock trading at 21X a 2008E EPS number that will likely come down, I see plenty of room for multiple shrinkage. As an added bonus, the current short position in the stock is minimal.
Saks Inc. >> The fallout on Wall Street will have a significant impact on luxury goods spending. Even those who are still employed will see a significant reduction in compensation, and the middle class marginal buyer of these products have disappeared. And remember, there are a lot of other industries (law, accounting, etc.) that are dependent upon Wall Street for business. Saks is not cheap, is carrying too much inventory, and its flagship store which accounts for 20%+ of sales is right in the eye of the NYC hurricane.
For now I'm sitting tight in front of the Fed announcement. I doubt even a 50 basis point rate cut will drive a sustained rally, so I'll consider building my short exposure on a bounce.
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