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Big Short Plays Tied to Government Actions

With mandated benefit cuts, less money will be spent in the economy

   

There’s a lot of economic uncertainty these days with Obamacare’s 21 new taxes that will hit the middle class, real unemployment at 15% and the country headed for a big election. There are also other important changes going on that will affect the stock market going forward, and they are all tied to actions taken by the fine politicians in Washington. Here’s how to profit on some of this nonsense:

Earlier this year, Congress voted to cut back on unemployment benefits. In addition, many of the hardest-hit states no longer qualify for funding for unemployment benefit extensions. There are four tiers of extended unemployment benefits for all states, plus one for states where unemployment was over 10% based on some cockamamie unemployment calculation that bears no resemblance to reality.

This fifth tier has been cancelled in states like California, for allegedly no longer having unemployment greater than 10%. The result is that some 200,000 potential applicants would have received an additional 20 weeks of benefits from the federal government. That’s some 4 million checks resulting in at least $1 billion, if not more, of government money that won’t get spent into the economy.

That’s not all. The government also cut back the number of total weeks a person could receive unemployment. Originally, it was 99 weeks — now, it’s 73 weeks in some states, and 63 weeks in others. That will affect millions. Now, some of these folks will find work but, still, we’re talking billions of dollars that the government was using to buttress American families and get spent into the economy that now vanishes.

Where does that money not get spent now? Consumer staples, primarily. Unemployment checks buy people groceries, toiletries, and other necessities.

There are many ways to play this depending on your outlook. I think this will affect some companies in the short and medium term. On a broad scale, I’d consider shorting or hedging long bets on specific consumer staples ETFs. I know these are considered flight-to-safety stocks, but the truth is that many of these are overvalued as it is. 

PowerShares Dynamic Consumer Staples ETF (NYSE:PSL) contains companies likely to be hit somewhat — General Mills (NYSE:GIS), HJ Heinz (NYSE:HNZ), Kraft Foods (NYSE:KFT) and generally weak growth companies like CVS Caremark (NYSE:CVS) and Procter & Gamble (NYSE:PG).

You can also short food-heavy ETFs like PowerShares Dynamic Food & Beverage ETF (NYSE:PBJ). Think about Target (NYSE:TGT) and Kohl’s (NYSE:KSS) getting fewer of these unemployment dollars, and depending on how bad things get, even Wal-Mart (NYSE:WMT) may be a put-buying candidate.

The best thing to do is to keep an eye on consumer spending reports, as well as household income. If those numbers drop, then you’ll be getting the confirmation signal you need.

Lawrence Meyers does not hold a position in any company mentioned.


Article printed from InvestorPlace Media, http://investorplace.com/2012/07/big-short-plays-tied-to-government-actions/.

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