Sunday, December 1, 2013

Buying into the Holiday Craze? Not So Fast

             It’s been a slow week with the stock market closed on Thursday for Thanksgiving and a shortened day on Friday, but next week could potentially yield large profits.

                All eyes are on the retailers this week, with Black Friday weekend (the number one shopping weekend of the year) drawing to close the pace of the Stock market is going to be determined on how good the results of this weekend were. And unfortunately for those of you holding stocks in retailers like Walmart and Sears I am afraid you are going to be disappointed. Most retailers have been gaming on a good holiday season (especially J.C Penny) unfortunately current numbers show that the holiday season is going to be very slow.  

                The National Retail Federation reported that shoppers, on average, spent 4% less over the holiday weekend then last year. This marks the first decline in consumer spending since 2009, this will come as a shock to most people, considering that with the rising stock market and rising home and car sales most investors thought that retailers were going to have a strong holiday season.  This false feeling sent shares of retailers up, which means it’s the perfect time to purchase Put options on various retail stocks, specifically those of Walmart, J.C Penny, and Sears.

                But before I get into analyzing the weaknesses of the above companies lets discuss why the holiday season has begun so slowly. With the improving economy people should have more free cash to spend on holiday shopping, right? WRONG! It appears that this year consumers are more interested in buying big ticket items such as cars and houses (this may benefit car companies like Ford and GM) this shift to buying big ticket items does cut into how much customers spend at retail stores but what is more destructive to retailers offering bargain prices during the holidays, is that consumers are buying responsibly.

                The whole point of offering large sales at retail stores is that it lures consumers into spending large amounts of money on not only things they need but things they don’t, such as a new T.V, extra presents for their kids, new clothes. This way consumers leave behind twice as much money at retail stores than usual, retailers love this because it instills in peoples mind that they saved money when in truth they saved nothing, they just spent more money than they ever needed to and increased the retailers profit.

                That is the concept of Black Friday, unfortunately for retailers people do not have that extra dollar to throw away on an extra gift or T.V, because that person already used a lot of their free money to buy a new car or a new house. So what happens when consumers feel like they have less money to spend? The answer is they only buy what they need, at the discount prices retailers are offering them. This is what is happening to retailers this holiday season, and it will seriously cut into their profits.

                Another thorn in traditional retailers sides is the continued growth of online retailers and the increased popularity of Cyber Monday (where online retailers offer bargain prices and huge to rival those of traditional retailers) While consumers are spending less money at retailers like Walmart they are spending more money on online stores like Amazon and EBay.  

                ComScore, an internet tracking company reported that online spending was up 17% from last year, and IBM reported that shopping from mobile devices such as smart phones and Tablets jumped 40%. Of course traditional brick and mortar stores have their own online sales; they have nothing on large internet retailers like Amazon.

                Now the numbers do not lie, traditional retailers are losing ground to their online competitors, and this week it is clear that retail stocks will fall, now the question becomes how to capitalize on it. I have chosen to buy weekly Put options on particular retail stocks such as Walmart and J.C Penny, (Put options are options to sell a stock at a certain price, if the stock price falls the value of the options goes up: go to, if you want to learn more about option trading)

                By buying Put options on these large brick and mortar, traditional retailers I am basically betting that the stock in these companies will fall. As for online retailers, by all accounts they should be a good buy, but many like Amazon and Groupon are overvalued and unprofitable. But if you are interested in buying stock in online retailers, I would wait until next year when this buying craze on the market ends and a much needed correction occurs. This way you could buy into companies like Amazon at a cheaper price, because without a doubt online retail is the future.

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I will be posting an article every weekend and looking back at the political and economic events of that week, both personally impacting events and suggestions about my opinions on the future of the market