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.

 

 

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95Comments
Dec 31, 2012 10:56AM
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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. 

Dec 31, 2012 11:17AM
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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 11:45AM
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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 11:19AM
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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 12:30PM
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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 1:38PM
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anyone who thinks our problems are due to Obama, and that republicans have the answers is drinking the coolaid......due some fact checking ....the federal deficit and federal budget have been growing exponentially regardless of which party is in power. Both political parties lie to the poeple by telling them that the "current guy" is bad, and if we put "them" into office then they will do something to fix the system, and then when they get into office they continue doing business as usual. So next time you think "your party" has the answers, I suggest you educate yourself and wise up. Until the people rise up and elec a credible third party, nothing is going to change. Washington will continue to spend our childrens future to finance their wasteful ways and misguided priorities set by special interest groups.
Dec 31, 2012 1:18PM
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.......Obama's legacy is a 16 Trillion dollar debt and growing.................

 

Congress is a complete inflexible mess. They vote for their party...not what is good for the country. Insane debt like this is never good and the plan is to increase the debt with marginal  potential cost cutting is completely inadequate.

 

We're going over the fiscal cliff and on Wedesday will probably  have a 400+ point drop and end on Friday being down 1000 points. The plan is to dump stocks today and pick them up for a bargain late this week.

 

Happy New Year's to all...and lets hope the 4-years of Obama passes VERY quickly!!

Dec 31, 2012 11:22AM
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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 11:53AM
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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 12:14PM
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This morning the government announced that Bernanke and the federal reserve board members are actually gods.
Dec 31, 2012 2:47PM
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Compromise is how we got into ths mess. I say NO more and when th debt ceiling debate comes up, vote only to LOWER it and let the cards fall where they may. Any legislator that votes with the main agenda of being reelected, is not fit for office. If over the cliff becomes reality, republicans should take the blame with an eye toward economic recovery at some point and do what they were elected to do. Any politician not willing to risk their political future to do the right thing for the country, is simply a prostitute and void of integrity, which I dont think bothers most of them.

Once the government learns to adopt a mind set of aiding and supporting, guiding, facilitating, instead of CONTROLLING, We will all be better off.

The just announced DEAL is nothing but a deceptive way of maintaining status quo.

Shameful. Also no mention of the already mandated tax increases hidenn in Obamacare. 

Dec 31, 2012 11:51AM
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Invest in a comfy handbasket for the ride south.
Dec 31, 2012 12:38PM
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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 12:45PM
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"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"

Sure, if you only want to look at the idices.  Next time try factoring in dividend payments and their reinvestment.  You do know how compounding works, no?  I've done quite well in the market over the last decade.

Dec 31, 2012 2:37PM
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VL is showing some desperation in his post. Good, he & others that voted for this mess deserve it ! So I won't be the least bit concerned since I've already taken steps to 'glide' down for a soft landing when congress does NOTHING! I'll continue to take care of my own (family & clients)

BTW:  when your hungry & starving due to the drought in the midwest; we'll still feed you- whatever your politics!

Dec 31, 2012 1:43PM
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If all the money spent subsidizing oil via the military in the middle east was spent at home on alternative energy we would be fine in about 10 years ...we could also use army engineers and manpower to improve OUR infrastructure instead of sending them abroad to assist other nations geo political interests.
Dec 31, 2012 2:24PM
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To start we need to reduce the senate and congress by 50%.  Cut their staff by 25% and install a flat tax rate.  There's a quick eight billion a year.  Then maybe just maybe someone will catch our drift.
Dec 31, 2012 2:47PM
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After they make a cliff deal,hows about doing something about the biggest draw on my budget - the rediculous freakin' GAS PRICES !!! Oil over $91 and climbing,gas prices have went up 14 cents in two days here.
Dec 31, 2012 1:57PM
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In a former job I worked for a company that did a lot of business with government. It was such a joke to get orders from them at the very end of their fiscal year and tell them we could not deliver the goods until a month later. They would always say "well can you at least bill me before the end of the month we need to USE up our budget". They never wanted to demonstrate that they could operated "under budget" because then someone might lower their budget. They could cut 10% across the board from every federal branch and it would be like nothing happend to the services provided by our wonderful spend happy government.
Dec 31, 2012 2:13PM
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Got quiet..Lunch time must be over with...?  Boss got a little tougher, huh.
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