Saturday, July 10, 2010

Time to dump retail stocks

Normally I don't recommend stocks, because this is a blog about firm strategies and not about the stock market.

That said, I think now is the time to dump US retail stocks, for three reasons:

  • Many fear the US economy is heading to a double dip recession, reducing consumer discretionary spending. For example, the FT reports that last week brought the largest shift by investors to cash in the past 18 months.
  • The US will eventually have to solve the problem of high fiscal deficits, and the current administration prefers to raise taxes than cut spending (which it itself increased $0.5 trillion in one year.)
  • Employers will be see huge cost increases under ObamaCare, which will be largest in a relative sense for low-wage workers. For example, the White Castle hamburger chain — which pays for most of its employees’ insurance costs — figures that its net income will decline 55% after 2014 due to penalties for its copayments.
Is this a shorting opportunity? There I’m less sure, because I can’t predict the timing of the combined effect. Suffice it to say that I see no upside to retail stocks — at least until a regime change — but lots of downside.

It’s possible that there will be exceptions. For example, perhaps unionized grocery stores with generous benefits that sell basic necessities will escape much damage. However, I’m inclined to say better safe than sorry.

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