Friday, December 14, 2012

A Few Thoughts on Industry Obsolescence Short

When a major, industry-wide change occurs that negative impact the industry, money can be made by taking a position in a group of stocks clustered around a theme. The analysis should start with tracking key industry metrics for individual companies in the industry.

Taking the Banks and S&L in Arizona back in the late 1980s as an example, when Arizonna's real estate is collapsing, just like when oil price and real estate price in Texas was collapsing, banks and S&L often get hit the most. Short sellers should compare total value of equity as % of total assets and track the make up of loan portfolios. Short sellers should also track the Real Estate Nonperforming Assets against Loan-Loss Reserves. If the ratio of total reserves to Nonperforming assets is declining, the Banks are very likely to be in trouble.

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