Shorting XRT to Profit From Consumer Discretionary Stocks' Inevitable Fall

| About: SPDR S&P (XRT)

Research in Motion's (RIMM) demise is no sudden revelation revealed by the company's most recent quarterly report. While investors focused on backwards looking valuation metrics have long argued that the stock represents an undervalued buying opportunity, abundant short sellers have had the upper hand and better grasp of sector fundamentals. Not many companies tied to mobile internet technology have traded at single digit trailing earnings ratios throughout 2011.

The smart phone market continued to boom through economic turmoil in 2008, as price cuts simultaneous to technological advancement kept consumers updating their mobile gadgets. New York Federal Reserve President William Dudley's infamously dubious suggestion that iPad (NASDAQ:AAPL) deflation compensates for higher food and energy prices actually holds a lot of weight in many individual cases, thanks of course to addicted consumer behavior rather than any sort of benefit. The best thing for the U.S. economy would be million dollar iPhones and flatscreen televisions, which would disallow unfit consumers the repeated ability to scrape together enough to feed unhealthy debt-inducing habits.

RIMM has always been a play on corporate America, with popularity limited to that group on a global scale. For price and design preference, Asian smart phone markets are partial to domestically manufactured equipment. RIMM is also getting crushed by competition from Android-based (NASDAQ:GOOG) phones.

Another glaring weakness that RIMM can obviously not overcome forever is the absence of leadership. Though stylistically innovative, nothing technological about RIMM phones has ever inspired others in the sector. When growth is abundant and consumer price consciousness is non-existent, style can profit along with substance. The economic environment has been poor since 2008 and unsuccessful revitalization attempts are now being realized.

RIMM led the market down in 2008 and may be doing so once again. The retail sector is absolutely littered with stocks facing identical problems to Research in Motion: They rely on booming consumer culture in the United States and have no significant foothold elsewhere. Rising costs of goods and services along with declining real income, dwindling private sector employment and out of control government debt should make it apparent to investors that the iconic American consumer is dead.

As explained previously, my focus since early May has been to take advantage of the bursting bubble in consumer discretionary stocks.

From September 19-26, 2008 RIMM fell from $103 to $70 per share, an eerily similar setback to the $9 per share haircut the stock took last week to close under $28. In 2008, the RIMM sell off took place during a choppy week for stock indexes, much like the week ending June 17, 2011. The following week in 2008 was one of the worst in market history as the S&P 500 (NYSEARCA:SPY) lost 10%. The week after that the index lost an additional 20% and RIMM was trading in the $50s.

The contagion stemming from the recent RIMM debacle will most certainly affect stocks dependent on the same culture that can no longer afford Blackberries, companies similarly parasitic to industries led by others and unpopular abroad mostly operate in U.S. shopping malls. Foot Locker (NYSE:FL), JC Penney (NYSE:JCP), Sears (NASDAQ:SHLD), Pacific Sunwear (NASDAQ:PSUN) and other brick and mortar retail outlets for low to middle end mass produced clothing are bankruptcy cases waiting to happen. Higher input costs, competition from more efficient online stores and declining purchasing power from consumers are the perfect recipe for trimming the fat.

Speaking of which, U.S. restaurants face certain struggles as rising food costs cause cash-strapped Americans to eat out less. Dine Equity's (NYSE:DIN) stock chart is another one to take a picture of before imminent bankruptcy and delisting. High-growth restaurant chains priced to continue expansion may have staying power but are currently priced unreasonably. Recent market weakness has only afftected Chipotle Mexican Grill (NYSE:CMG), Panera Bread (NASDAQ:PNRA) and BJ's Restaurants (NASDAQ:BJRI) slightly, leaving the high-flyers plenty of room to fall without landing on the pink sheets. Trendy names of the recent past no longer appealing to today's youth, such as Abercrombie and Fitch (NYSE:ANF) and Aeropostale (NYSE:ARO), also remain highly valued despite vanishing clientele.

Largely because the sector is so consistently overpriced and to gain relatively cheap leveraged exposure, I continue to favor trading puts on the S&P Retail ETF (NYSEARCA:XRT). XLY and RTH also hold shares of a variety of of retailers, but are more focused on sector stalwarts than the broader XRT. Investors preferring to avoid options premiums can capitalize best by selling shares of the most overpriced and dysfunctional businesses, such as DIN, JCP and PSUN, short.

Disclosure: I am short XRT.

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