Retail Stocks’ Value in Danger
Wednesday, January 16th, 2008
By George Leong, B.Comm. for Profit Confidential
In our last visit, I talked about the negative impact of the credit and housing markets, and oil prices, on consumer confidence and spending. Weakness in the employment market is also impacting consumer spending. On Tuesday, investors were greeted with bad news towards the retail sector in the form of the December data.
It appears consumers held back and were cautious towards spending in the key December month. The core retail sales data excluding automobiles fell by 0.4% in December following a one- percent jump in November. It was the worst showing in six months and stoked fears of a pending economic slowdown and potential recession — although some on the Street already believe we are in the early stages of a recession.
The news may force the Federal Reserve to once again cut the Fed Funds rate at the upcoming FOMC meeting on January 29-30. The Goldman Sachs Group, Inc. (NYSE/GS) suggested that the housing and credit issues would erode the economy and said that a recession is coming, but added that a recovery would occur in 2009. GS said the Federal Reserve would eventually cut the Fed Funds rate to 2.50% from the current 4.25% to battle the slowdown. At the January meeting, GS predicts a 50-basis-point cut.
Moreover, since we are in an election year, there could be other tax incentives and programs to help the economy. We are already seeing the candidates for the leadership of both the Democrats and Republicans talking about how they plan to get the economy back on track.
The bottom line is that if you are currently holding retail stocks, you need to be aware that a spending slowdown could erode the value of retail stocks. If you want to hold the stocks for the longer- term, a strategy may be to write some covered call options on your stocks to generate some premium, thus reducing the overall average cost of the stock in question.