Bank on a Bankruptcy

I still see credit issues forcing a bankruptcy in a major homebuilder in the first half of 2009 that will bring the other builders down further. And, it's not just the builders, either. There are related industries that I like to call "cousins"—companies like materials suppliers and building supply retailers.

In fact, I've been looking at Home Depot (HD) for some time now as a short-side candidate.

I've held off because its earnings came out recently and some simpletons saw glimmers of hope in HD's mere 8.3% decrease in same store sales, reduced earnings guidance and no good news to offset this depressing performance. The company is now selling at a premium to other retailers, and I expect it to fall flat, but there's still too much false hope surrounding the stock.

Now, I know there are some eternal optimists out there saying, "But, it can't be that bad. The homebuilders are still building, so they must expect a turnaround, right? RIGHT!?"

Let's put it this way: If they keep building, they don't have to write down the value of the raw property or the work they've got in development, which somewhat protects their balance sheets—and that means they can continue to conform to loan covenants. That's an accounting and loans drive building model.

But, while the bottom drops out of the builders, you don't have to let your portfolio bottom out. By using put options like we do in ChangeWave Shorts, you can play the downside of the market and troubled sectors. With 18 open positions on our Buy List and 17 showing profits, as I said above, I don't like to gloat but I never forget when I'm right—especially with profits this memorable!

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