Luxury Names Will Thrive as the Double Dip Takes Hold

by Michael Shulman | June 3, 2011 11:41 am

I have been writing seemingly forever that there was no recovery and we would see a double dip appear in the second half of this year. And, to quote whomever, “Here we be.”

Is a double dip tradable? Yes, but not in the way you might think. You want to LONG, yes, LONG, a couple of luxury-goods names. And NO, I am not crazy.

First, the double dip is good news for traders if not for investors. A weak economy means a very liberal Federal Reserve through the 2012 election. Lots of cheap money means at the very worst a stagnant market or slowly declining market. The selloff this week was technically overdue and if there were real world issues driving the downturn they are Greece and the postponement of the stress test results for European banks.

Second, people shop for quality during a recession — product quality and brand quality. The birth of the mass market for diamonds took place during the Great Depression when “A Diamond is Forever” became part of the nation’s lexicon of phrases.

Find more option analysis and trading ideas at Options Trading Strategies[1].

The twenty first century version of this is something I have been pounding the table about for almost two years, what I call “The New Frugal.” People buy one Polo shirt with the little man on a horse rather than three cheaper and off-brand tennis shirts. Or a Coach backpack for graduation rather than a “newly fashionable” and ridiculously overpriced steel tennis bracelet. And so on.

And this view of the New Frugal has panned out — luxury good makers Polo Ralph Lauren (NYSE: RL), Tiffany & Company (NYSE: TIF) and Coach (NYSE: COH) have beaten estimates and raised forecasts with more of the same to come in future quarters.

What to trade? I would take two half positions — two sets of call options past another earnings announcement — in two of the three names just mentioned. So, look at calls for October or later. Out-of-the-money calls are always my favorite.

But NOT TODAY. Wait until you see the S&P stop sliding — everything has been trading with the market the past few days, there is a high degree of correlation among big names and the indices. The odds are the S&P 500 will stabilize around 1300 — perhaps as low as 1285 — but I would not go long anything with new money until this slide stops. If the S&P goes as low as 1285 — or even lower — consider these names for a short term bounce with near term out-of-the-money calls as well as the longer term trade I would prefer.

For purposes of disclosure, I have sold puts on Tiffany.

Michael Shulman uses simple trading tactics to make solid, profitable investments in falling stocks in his Short-Side Trader[2] service.

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