A fiscal cliff investment strategy

Retail is the sector to play if our elected leaders can't reach a deal.

By Jim Cramer Dec 31, 2012 10:31AM

thestreet logoCash register Hill Street Studios Blend Images Getty ImagesLet's say all goes badly and we go over the cliff. What do you do? Given the mercurial nature of politics, you need a plan that embraces the short-selling or put buying of the segment that would miss numbers anyway, even if the cliff were resolved, so that if we get a blip up on a solution the group can be re-shorted into strength.

That group is retail.

My preferred way to execute this strategy is to sell short or buy puts on the Market Vectors Retail ETF (RTH). Here's why:

First, we know that somebody's going to get hurt: the poor, the middle class or the rich -- maybe all three. They will all react by saving more until the coast is clear. That's terrible for retail, all retail, but especially the dollar stores, which have acted terribly, and the discounters -- think Wal-Mart (WMT) and Target (TGT).

Second, the weather was so bad, and the psyche so negative -- look at retail correlative Consumer Confidence -- that you can't own the strugglers: Best Buy (BBY), Bed Bath &Beyond (BBBY), Kohl's (KSS), or even good ones like Ross Stores (ROST). I would point out that Macy's (M) fares badly in this world, too, with a heavy coat segment that must be discounted.

Finally, I would not trust even the strong home themes, at least for now, because they have run so much: Williams-Sonoma (WSM), Lowe's (LOW) and even one of my big faves, Pier 1 (PIR). I would be quick to cover this cohort, though, simply because it is part of a larger theme that will be hard to dislodge -- the higher price of homes.

All of these would be short-term plays. And if you are worried, I would go long Costco (COST) as a hedge because I believe it is the default play for shoppers.

I would do this trade right away and double down next week if there is a cliff jump because I believe you will get a barrage of number cuts that will make things easy to stay short.

I am making no judgments on the resolution of the cliff itself, just on the quarters to be reported because of a uniquely poor set of circumstances that will hit a reset button on the whole cohort. It can be looked at to the long side once the numbers are through cutting and the inventory is worked down to where gross margins can expand again.

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Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and has no positions in stocks mentioned.



More from TheStreet.com

Dec 31, 2012 12:45PM
A Sharp, The only way to stop the Borrow and Spend cycle is to keep Republicans out of Office. In 2001 we had a $237 billion dollar surplus, the debt to GDP had fallen by 10% under Clintons 1993 Omnibus Debt Reconciliation act, that every Republican voted against and we had a projected 10 year $5 trillion dollar surplus, that would have paid our debt off by today. Instead Republicans took over all the Houses for 6 years, they doubled annual spending increases, they added Entitlements, added agencies, added military spending, added record Discretionary spending, added TARP, added Home land security, added no child left behind and added a failed stimulus package like a cherry on the cake. The cost of these additions was our budget went from $1.9 trillion in 2001 to $3.5 trillion with Bush's last budget in 2009. Federal spending almost doubled under Republicans in 8 short years, and if that wasn't bad enough the Republican tax cuts reduced Federal revenues by 6% of GDP, resulting in a $1.3 trillion dollar deficit in 2009. Tell me why I would want to vote for these imbeciles again ?
Dec 31, 2012 12:38PM
We'll be fine, we always are. The best time to buy is when the most people are crying about the sky falling. Life will go on, higher taxes or not. Good companies will continue to make good profits. The deficit will eventually be reduced. 
Dec 31, 2012 12:30PM

Let's say all goes badly and we go over the cliff. What do you do?


We've already gone over the cliff. It's just becoming clear to those that have been wearing rose colored glasses. We can't expect 3-4% economic growth when our population is growing at 1%. We need to be happy with 2% growth but with automation that the Boomers put in place that means 7-9% perpetual unemployment.  We can print money and tax to redistribute the existing wealth but we're still headed towards a fate much like Europe. We must cut defense spending back to 2000 levels of 3% GDP which will save $160b a year. No more Christian Crusades to protect Israel, Jerusalem or Saudi oil. We'll have enough oil if we focus on alternative energy and quit sailing our Navy around the globe like England, France and Spain did during their empire days. Happy New Year!

Dec 31, 2012 12:14PM
This morning the government announced that Bernanke and the federal reserve board members are actually gods.
Dec 31, 2012 11:53AM
Stocks haven't been a great investment this millenium.  More than likely, their long-term performance will continue to be lackluster for the foreseeable future.

S&P 500

December 31, 1999 - 1415
December 31, 2012 - 1408

Dec 31, 2012 11:51AM
Invest in a comfy handbasket for the ride south.
Dec 31, 2012 11:45AM
Cramer  Our elected LEADERS ? Maybe yours not mine ! Washington could not lead itself out of a toilet bowl about to FLUSH ! So much for LEADERSHIP !
Dec 31, 2012 11:22AM
Buy the bank stocks. Unless you're debt free chances are you still owe them money and will still be paying them......
Dec 31, 2012 11:19AM

MG hit it right on the head: PAY DOWN (OFF) YOUR DEBT ! But split the expense of arming yourself with planting a full garden: Tomatoes, onions, assorted beans, corn (if you have the room) a complete herb selection, lettuce's, ect........

Do it now and don't wait or react to what the Government, farmers, businesses might do; Make your own moves, on your own time line.


You must ask yourself, "Do you have faith in our government to solve this fiscal cliff ? If the answer is NO- better get busy !

Dec 31, 2012 11:17AM
Today the Fed. will be propping up the market as much as possible to try and maintain confidence. With looming higher tax rates on investments, there should be a big sell off if the markets were not being manipulated by big brother, especially when it comes to the dividend paying stocks.
Dec 31, 2012 10:56AM

The best startegy is to hunker down, PAY OFF DEBT.  Buy guns/ammo, specie and foreign stocks.


We cannot continue to Borrow and Spend our way out of debt.  We cannot Tax our way to prosperity.  We cannot Print our way to prosperity either.  Only the imbecile Obama believes this is the road to prosperity.


Do what you want, but in the end Obamanomics will send us into a depression. 

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