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Here's How to Bet with the World's Best Short Seller

By Rob Fannon, editor Phase 1 Investor
Friday, August 28, 2009

In 2007, Jim Chanos became "The World's Best Short Seller." That year, his now-legendary bet against the banking industry earned him a reported $350 million paycheck.
 
This week, Chanos made headlines when he unveiled his latest short-selling target: health care. Here's what he had to say...
Health care is growing now at about 10% per annum in the U.S., versus 3% for the economy. As someone with a sharp pencil and an eye for this kind of thing, this can't last...[it's] the most interesting large group of companies heading for major problems we've seen in a long, long time. 
This might come as a surprise to Growth Stock Wire readers, but I agree with Chanos. Let me explain...
 
Two weeks ago, I wrote it was time to load up on Big Pharma stocks. But I may have jumped the gun. I should've known better than to trust politicians.
 
Remember the plan Big Pharma recently negotiated with President Obama? The world's largest drugmakers pledged $80 billion in cost savings for prescription drugs over 10 years. In exchange, the president conceded government price controls for Medicare drugs and promised not to facilitate channels to import cheaper drugs from Canada.
 
But Congressional Democrats have made it clear this deal is between drugmakers and the White House – not them. Ultimately, lawmakers will have final say on what the reform package includes. And now, White House staff is dropping hints the deal may have been signed in pencil.
 
I think there's an additional round or two of negotiation before Big Pharma declares a political victory. The same is true of the president's preliminary deal with hospitals and deals to come with insurers and doctors.
 
But there's no way to say for sure. And the market hates uncertainty. So it's no surprise money is flowing out of health care stocks faster than every sector but consumer goods.
 
That's the trend Chanos is eager to cash in on. And like Chanos, I think the sector is likely to get cheaper from here. In the near term, "Big Health" stocks – including drugmakers, hospitals, insurers, and medical-device makers – are headed for volatility... and some of them could get wiped out with the stroke of a politician's pen.
 
Over the long term, I believe health care expenses (read "revenue" for Big Health) will continue to grow by double digits in a post-ObamaCare environment. President Obama's first priority for health care reform is coverage for America's 45 million uninsured. No matter how you slice it, 45 million new "paying customers" will add to costs. And medical inflation points to long-term gains in health care stocks.
 
Yet, in the short-term, Congress' tinkering and bickering is likely to push blue-chip health care stocks down another 15%-20% from here. That's not chump change, especially for big caps.
 
If you've got a long-term position in Big Health, expect higher volatility. And don't be surprised to see your brokerage account shrink at least temporarily with all the uncertainty around reform efforts. If you haven't bought yet, sit tight. You'll likely see better prices down the road.
 
Aggressive traders who want to make a bet alongside the world's best short seller should look to buy puts on the Health Care Select Sector SPDR Fund (XLV). The exchange-traded fund holds the largest drug and device makers in the world.
 
Good investing,
 
Rob Fannon




In The Daily Crux
Market Notes
China considers steel limits... concerns about oversupply send ore producers Rio Tinto and BHP lower.
 
Big Canadian banks surge... Toronto-Dominion and Royal Bank of Canada hit new highs.
 
Natural gas falls as much as 7% to seven-year low.
 
Earnings today... Tiffany & Co.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1224.71 +0.3% +11.4%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.19 -0.6% +7.2%
Euro 1.34 +1.4% -11.0%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%