Consumer confidence for August fell below 100 for the first time since a 98.3 reading in November 2005. The August reading of 99.6 was well below the estimate of 102.5 and below the comparative reading of 105.5 in August 2005. But, while the decline in consumer confidence has yet to translate into weak retail sales, I get a sense that this may inevitably surface over the next few months heading into the prime-shopping season after Thanksgiving.
The reality is there may be sluggishness in the important fourth quarter shopping season. Given the high oil prices and rising rates, debt levels are expanding and will become more of a concern going forward as consumers watch their disposable income fall. A good majority of people have fixed budgets and higher financing costs will reduce money available for other purchases. We are already seeing this in the cooling housing market.
Bellwether Wal-Mart Stores Inc. (NYSE/WMT), a good indicator of the retail sector, has already blamed high fuel costs for its sluggish sales. And, unless shoppers get some renewed enthusiasm to spend, it may be a tough Q4 coming up for retailers. I expect some heavy discounting to move inventory. Good for the consumer, but this could only mean pressure on operating margins.
If you are currently holding retail stocks, here is what you may want to consider. Given the neutral sentiment towards retail stocks, you could write some covered call options to generate some premium, thus reducing the overall average cost of the stock in question.
If you are negative on the retail sector and want to short, I would suggest you reconsider unless you have a stomach for risk. If you need to short, please place appropriate stop-buys on the short position or you could find yourself sucking air should the stock stage a strong rally. A better alternative to shorting would be to buy Put options or initiate Bearish Put Spreads.