Shorting the U.S. Consumer

Includes: XRT
by: Danny Furman

Balance sheets of major industrial and financial corporations have been successfully bailed out by high caliber rounds of quantitative easing executed to salvage existing businesses after the market collapse of 2008. From JP Morgan (NYSE:JPM) to Aaple (NASDAQ:AAPL) and IBM to Caterpillar (NYSE:CAT), loads of cash and integration with growing emerging markets are yielding endless opportunities for economies of scale.

QE programs stopped deflationary forces from taking over the U.S. economy, fueling speculation with the availability of interest free loans for institutions with Federal Funds access. Incremental losses of faith in the strength of the dollar across the global economy have pervaded investor mentality, further weakening the purchasing power of the world reserve currency.

At his anxiously anticipated press conference June 22, Fed Chairman Ben Bernanke explained that deflation risk has been eliminated and no additional easing measures would be implemented. While integrated, now unindebted major manufacturers and lenders have largely shored up future success, the iconic United States Consumer depends more on welfare than ever before. Nearly 20% of citizens rely on food stamps to eat and public sector employment has overtaken private sector employment as the driver of the great consumption machine. American's greatest collective asset, housing, has fallen in value throughout efforts to stimulate the economy. Reduction in welfare benefits and elimination of economically unfeasible public programs will most certainly cripple spending at shopping malls and other retail outlets operating primarily or exclusively in the United States. My home state and debt capitol of the world, California, in particular is an area that is already littered with commercial vacancies. For that reason leasing agents such as CB Richard Ellis (CBG) and Grubb & Ellis (GBE), among others, face serious solvency problems that only figure to worsen.

For diversified exposure, cheap leverage and focus on the stock market sector arguably most adversely affected by an end to fiscal stimulus, my money's in July 11 SPDR Retail ETF (NYSEARCA:XRT) $51 puts. A June 22 purchase was my third and maximum allowed by personally set trading rules. Investors hedging long portfolios or net short must always remain objective, which at some point means giving up on a losing bet. On prior occassions I've gotten greedy and "averaged down" thgoughtlessly, only to be taught costly, though valuable lessons. "All in short" to a sane investor means maximum alloted allocation, not putting mortgage (or rent) money on the line. Unlike owning assets, short sales and options plays are outright bets.

I'll be looking to take some profits off the table in coming sessions, but expect to remain short the index via puts for the coming weeks, possibly rolling over into August options.

Disclosure: I am short XRT.