What to Do if You Own Retail Stocks

Consumer confidence was just released on Friday and it was not encouraging for the state and direction of the U.S. economy. The reading for the November consumer confidence fell to a dismal 64, the weakest level in two years since Hurricane Katrina impacted the economy. The decline in November from 80.6 in October was a disappointment given August was also soft.

 The fact is that, with oil prices near $100.00 a barrel and the decline in the housing market continuing to wipe out material wealth on paper, the fall in consumer confidence should not be a surprise. The fear now is that the weakening in consumer confidence will translate into weak retail sales and we will see if this pans out as we head into the prime-shopping season after Thanksgiving. Watch for the retailers to report the October sales numbers.

 There was also more fear after Federal Reserve Chairman Ben Bernanke suggested, in a speech to Congress, that the country’s economic growth would “slow noticeably” in the current quarter and this will continue as we begin 2008 before rebounding.

 Debt levels are continuing to expand and will become more of a concern going forward as consumers watch their disposable income fall. Many people have fixed budgets and higher financing costs will reduce money available for other purchases.

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 The biggest impact of declining consumer confidence would be on spending, especially on big-ticket items. 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 on your stocks 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 vulnerable should the stock stage a strong rally. A better alternative to shorting would be to buy Put options or initiate Bearish Put Spreads.