Investment Strategies in a Risky Environment

Consumer confidence for August came in at 105.0, which was marginally above the estimate of 104.5 but below the 111.9 recorded in July. The positive is the number monthly reading continues to hold above 100 in spite of the economic concerns.

 The retail sales numbers were just above estimates, with retail sales excluding auto rising 0.4% in July versus an estimated 0.3% increase. This was an improvement over the revised 0.2% decline in June. The headline number increased 0.3% in July. This was above the 0.2% estimate and well above the 0.7% decline in June.

 Retailers continue to report mixed results, suggesting some concern on the part of consumers. Higher gasoline prices for shopping trips and higher financing rates for big-ticket items and paying off credit debt are also cutting into the consumer’s disposable income and what they have to spend. A good majority of people have fixed budgets. Of course, as retail sales account for about two-thirds of GDP, it is critical. The soft housing market is also to blame.

 Retail bellwether Wal-Mart Stores, Inc. (NYSE/WMT), a good indicator of the retail sector, reported a 1.9% year-over-year jump in its July same-store sales. This was down from a 2.5% jump in June. Strength in electronics was offset by softness in apparel and home. Wal-Mart expects the trend to continue in the third quarter.

 If you hold 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.