It was not long ago that I suggested investors sell short the consumer sector. You may not have noticed, as the call came out in the flurry of all the excitement about how great a holiday shopping season we had just concluded. I had also pointed out some of the creative efforts of retailers, which helped that to happen, but there are only so many rabbits this sector can pull out of its hat. Tuesday, as the government reported the latest retail sales data for January, that fact should have once again been apparent. The good news is that you may still have a chance to join the short side, with the SPDR S&P Retail ETF (NYSE: XRT) still fattened 17.7% over the last 52-weeks by its superficial stride. Meanwhile, the SPDR Select Sector Fund - Consumer Discretionary ETF (NYSE: XLY) is up 9.5% over the last 52 weeks, both after adjustment for splits and dividends.
I discussed the January retail sales data in an earlier article . I noted that I expect the meager aggregate industry operational performance to worsen. In summary, my view was that the already disappointing shortfall in retail sales growth was even understated, since December's growth was revised away. Sales ex-autos and gasoline improved 0.6%, despite the December rate being ratcheted higher to +0.6% from no change previously reported. However, rising gasoline prices will burden all consumer spending in the months ahead. Given escalating event risk tied to Iran, gasoline prices should keep their support for at least the near-term. An important reason why the West has shied away from attacking Iran has always been the global economic pressure that would arise from much higher oil and distillate prices, plus comparables. Gasoline price increases will impact the spending of most Americans, especially the under-employed hanging on the fringe of solvency.
In the past, I've noted how the holiday shopping season was synthetically lifted by creative and certainly value-added efforts by savvy retail sector managers and executives. This allowed some retailers to excel in an environment that could not support every player. There is too much capacity for the type of economy I see developing, and so stock-picking skill is necessary today as much as ever in the consumer discretionary space. We've noted the excellent market share stealing efforts of discounters Wal-Mart (NYSE: WMT), Costco (NASDAQ: COST) and some of the dollar stores like Family Dollar (NYSE: FDO) and Dollar Tree (NASDAQ: DLTR). Furthermore, you can see how these operators, primed perfectly for the day, have drawn capital with a simple look at their respective long-term charts.
At the same time, we've recently seen the missteps of others by the same metric, including Sears (NASDAQ: SHLD) and Target (NYSE: TGT). Meanwhile, focused apparel sellers have also produced losers at least as readily as winners, to be kind. Names like Talbots (NYSE: TLB and Wet Seal (NASDAQ: WTSLA) have seen share price dive, while ideas like Ascena Retail Group (NASDAQ: ASNA) do alright. Department stores have highlighted differences in management skill, with Macy's (NYSE: M) doing especially well, as J.C. Penney (NYSE: JCP) fared less successfully. This kind of environment should continue, but the industry on the whole is facing pressure, and I think that is clear by the last two months' retail sales data. Non-store retailers, i.e. internet salesmen, should also continue to pressure brick and mortar operators, despite the latter's efforts to establish competitive e-commerce operations.
Despite the latest data about the labor market showing an improved unemployment rate, excessive unemployment and under-employment remain a drag on consumer spending. Moreover, I expect unemployment to deteriorate anew alongside a turn in the economic tide. I believe the impact of the European recession on the U.S. economy, given 20% of U.S. exports are sold into an increasingly struggling European market, will injure an already vulnerable American economy. Meanwhile, the same old stresses of foreclosure overhang and the profoundly changed lending environment remain drags upon housing and business growth. The last thing the American consumer needs now is to worry about higher gasoline prices and his own personal safety, as the West ratchets up pressure on Iran. Thus, I reiterate my late 2011 suggestion that investors short the retail sector, as this latest economic data supports my argument that the Ugly Economic Secret is indeed out.