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(NYSE: WMT) and
Target Corporation (NYSE: TGT) have always been at odds with eachother. One popular strategy was to pair trade the two stocks based on the economic environment. Wal-Mart, famous for its low prices, is a popular stock during an economic downturn as people tend to flock to their stores. Conversely, Target tends to attact the middle class far more effectively during an economic boom when they are willing to part with their money more easily.
Many investors using this strategy have been long on Wal-Mart while short on Target during the economic downturn and it has paid off handsomely. Wal-Mart shares have appreciated over 30% in 2008 while Target shares were down over 5% on the year not long ago. However, Target has recently begun to rebound as an end to the economic crisis seems within reach. As a result, investors are now questioning whether or not it is time to switch the play around and look at going long Target while shorting Wal-Mart.
The question now becomes: Is the economic crisis on its way to being solved? Well, the majority of the problems can be traced back to the housing market and many believe that's where a recovery is needed first. Foreclosures not only resulted in a rise in bankruptcies for consumers, but also put pressure on consumer credit. This credit is extremely important to maintaining consumer spending and helping retailers like Wal-Mart. So, is the housing market turning?
Recent Federal bailout packages are expected to give the housing market some breathing room while working to return things to normal. Rising defaults and foreclosures on home loans, spurred by declines in home values, are the cause of the collapse in price and tradeability of the mortgage-backed securities. A $700 billion bailout package put together by the government should help solve those issues by injecting liquidity into this system and encouraging lending once again.
A successful execution of this plan could help the Target/Wal-Mart trade switch, but until then, many investors are likely staying put with their current positions.
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