As many of you probably know by now, consumers took to the shopping malls in record numbers last Friday to take advantage of sales discounts typically offered by retail chain stores on the day after Thanksgiving.
However, you might not know that retailers were forced to offer huge discounts this winter holiday season to lure those shoppers — a decision that will hurt profits considerably.
For example, Kohl's, the fourth-biggest U.S. department store, reduced prices on their jewelry by 60 percent, while electronics superstore Circuit City sold digital cameras for 30 percent less than their normal price.
Meanwhile, Barnes & Noble reduced the prices of their books by as much as 40 percent. Numerous other retailers reportedly cut prices on certain items by as much as 50 percent.
These big discounts significantly reduce profit margins at the nation's major chain stores. This suggests that stock prices for companies in the consumer discretionary sector will likely continue to trend lower over the coming months.
Fortunately, there are now several exchange-traded funds (ETFs) that enable investors to profit from falling stock prices. How? By selling short stocks of companies such as Wal-Mart, Target, and Home Depot. That's right, these ETFs do your shorting for you — in a diversified portfolio of stocks — and thereby eliminate much of the risk that is normally associated with selling short.
As food and energy prices rise, home values have continued to fall and job growth has slowed. My research suggests that retailers have likely already witnessed their best selling days this year and that they will be hard-pressed to lure consumers into continuing to spend beyond their means this holiday season.
Heating oil prices have already risen 65 percent over the past year, while gasoline prices have increased 38 percent. Although crude oil fell slightly over the past two days, supply-demand constraints suggest that energy prices will trend higher over the next couple of months.
Meanwhile, home prices in the U.S. fell in the third quarter by the most in at least two decades. Consumer confidence in future economic conditions has fallen to the lowest level since after Hurricane Katrina in October 2005.
Just last week, Target, the second-biggest U.S. discounter, reported its first profit decline in two years. The retailer said it expects slowing sales growth through the first quarter of next year. Numerous other retailers also have reduced their sales forecasts.
In light of the fact that consumer spending accounts for approximately 70 percent of the U.S.'s total output of goods and services, my investment models continue to indicate that the slowdown in consumer spending will lead to an accompanying slowdown in the U.S. economy over the coming months.
As a result, there's a good chance that the Federal Reserve will continue to lower short-term interest rates next year. In turn, the value of the dollar will likely continue to fall and gold prices will likely continue to trend higher. In addition, I expect stock prices of companies in the utilities sector to rise significantly during the months ahead.
Subscribers to The ETF Strategist are taking advantage of these trends: Six out of seven of my currently recommended ETFs generated investment performance results that ranked in the top 10 percent of the 561 ETFs tracked by Bloomberg during the past month.
That seventh recommendation? It ranked in the top 20 percent of all ETFs.
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