Why Retail Stocks Continue to Be Risky

The majority of investment newsletters do not like retail stocks. I’m not totally in agreement with that view, but I would be more selective with stock picking in the retail sector. Retail sales in the U.S. are estimated to surge to $389.65 billion in March from $344.24 billion in January, according to the Financial Forecast Center. Yet, if you go forward a few months, retail sales are predicted to fall to $343.09 billion by September 2011. So, let's take a look at what's going on with retail stocks and the economic forces that affect them.The majority of investment newsletters do not like retail stocks. I’m not totally in agreement with that view, but I would be more selective with stock picking in the retail sector. Retail sales in the U.S. are estimated to surge to $389.65 billion in March from $344.24 billion in January, according to the Financial Forecast Center. Yet, if you go forward a few months, retail sales are predicted to fall to $343.09 billion by September 2011.

There continue to be mixed readings. The key is to look for same-store sales growth in retailers that sell non-essential goods. Increases here could mean consumers are spending on goods and services that are non-essential. These include electronics, appliances, furniture, autos, and other big-ticket items.

The uncertainty was clearly reflected in the weak Durable Goods reading, which was a disappointment and, in my view, worrisome. Non-discretionary spending remains a problem. Durable Goods Orders ex-transportation fell a disappointing 3.6% in January, well below the estimate calling for 0.6% growth and down from a revised 3.0% in December. A plus is that the December reading was revised upwards from 0.8%, so we could see a similar revision for the January reading.

Overall, I’m disappointed with the Durable Goods results, which in my view continue to indicate weak demand for non-essential goods and services. Again, until we see sustained improvement in jobs and housing, problems will likely continue to rise.

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Consider that a key driver of the housing market is jobs. We need jobs and security in order to give buyers confidence to assume a mortgage and not worry about losing their jobs and missing payments. And, until we see this, I question how confident homebuyers will be.

The S&P/Case-Shiller Home Price Index of 20 major metropolitan areas in the United States continues to show declines. In December, the index fell one percent from November, with prices declining in 19 of the 20 cities in the index, with the exception of Washington, DC. In fact, 11 of the cities in the index are at the lowest levels since 2006 and 2007.

All eyes will be on the February non-farm payrolls next Friday, which need to be stronger following a disappointing January, when the non-farm jobs report showed the disappointing creation of 36,000 jobs. Economists estimate 172,000 new jobs.

At the end of the day, we need to see the willingness to spend rather than worry about money. Only under this scenario will there be sustained spending.

When people struggle financially, one of the first things to go is the home, along with cars. At this time, there are estimated to be about five million homeowners behind on at least two payments, according to data from foreclosure tracker RealtyTrac Inc. What is more worrying is an estimated 1.2 million homes will be foreclosed this year, above the one million in 2010.

Given the current problems, consumer spending will likely to continue to be soft and this will impact the growth of the GDP.