Important Shopping Season Falling Flat

The current credit and housing markets issues are pressuring consumer confidence. The recent consumer confidence for November from the Conference Board fell to 87.3, down from 95.2 sequentially. It represented the lowest level since an 85.2 reading years ago in October 2005. As I have said in recent commentary, the weakening in consumer confidence could translate into weak retail sales. The biggest impact of declining consumer confidence would be on spending, especially on big-ticket items.

The start to the key shopping season does not look encouraging at this time. Results for November have been mixed so far. Last week, bellwether retailer Target Corporation (NYSE/TGT) warned that its fourth quarter earnings would be short of Wall Street estimates should sales not improve. Based on data from Thomson Financial on 43 retailers, about 22 retailers failed to meet estimates for same-store sales, while 19 beat sales estimates and two were inline.

Retailers reporting disappointing results included The Gap, Inc. (NYSE/GPS), which reported continued declining same-store sales. Others included Limited Brands, Inc. (NYSE/LTD) and Pacific Sunwear of California, Inc. (NASDAQ/PSUN).

If you are currently holding retail stocks, here is what you may want to consider. Given the neutral to negative 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.


Avoid retailers at this time. 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.