Five Things You Need to Know: Now, It's Main Street's Turn
While everyone stands around quietly with their hands shoved deep into their pockets waiting for things to "get back to normal,' there is the uneasy feeling that we're never going back to that strange place.
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
1. Now, It's Main Street's Turn
The Dallas Morning News is one of the first large city papers I've run across to plunge headfirst into documenting the spread of Wall Street credit woes to Main Street. Reporter Angela Shah writes in her DMN piece ("Credit Crunch Hurting Entrepreneurs"), "The capital markets crunch has hit Main Street, leaving many entrepreneurs in need of financing in the lurch."
Shah notes that loans that banks would have approved readily a year ago "don't pass muster today." Indeed. "[Alex] Vantarakis' company connects buyers and sellers of small companies, giving him a front-row seat to the turmoil's impact on Main Street. He didn't see it at first, he said, but realizes now that lenders started pulling back on capital around the first of the year, regardless of how solid the underlying business."
Yes, things have changed. This is a different time, and while everyone stands around quietly with their hands shoved deep into their pockets waiting for things to "get back to normal,' there is also the uneasy feeling that we're never going back to that strange place.
2. What Strange Place?
And what strange place is that? The one we were in just 18 months ago, the one BusinessWeek's ill-timed cover referred to as a "low, low, low, low-rate world."
"Money is cheap," the cover story observed. "And some experts say it could stay that way for years."
Feb. 19, 2007
3. Retail ETF's: What's Inside Matters
One consequence of the spread of Wall Street woes to Main Street will be a new bull market in thrift and savings; part voluntary, most of it forced. We are already seeing signs of forced thrift in credit availability. As consumer spending confronts trends in tightening credit now spreading to credit card lenders and personal lines of credit, that forced savings and balance sheet repair will accelerate at an unimaginable pace.
Todd Harrison today in his piece, "The Other Side of Retail Therapy," notes that despite consumer weakness, retail is near all-time highs. Minyan Peter, writing on the Buzz and Banter this morning, remarked that the lack of action in the Retail Holdrs ETF (RTH) is largely because a handful of stocks control all the weighting. Wal-Mart (WMT), Home Depot (HD), Target (TGT) and Walgreens (WAG) together make up nearly 50% of the ETF. Add Lowe's (LOW), Costco (COST) and CVS (CVS) and you have nearly 70% of the basket.
4. Retail: Other Options
There are other options (with varying degrees of liquidity depending on the size you are trading) that target Retail.
The PowerShares Retail Portfolio ETF (PMR) is not equal-weighted, but the concentration in Wal-Mart (WMT) is far less, and there is no exposure to Target (TGT), Home Depot (HD), Lowe's (LOW), Costco (COST) or CVS (CVS). Instead, the top 5 weightings are:
- Wal-Mart (WMT) - 5.4%
- TJX Co's (TJX) - 5.3%
- Autozone (AZO) - 5.2%
- Gap (GPS) - 4.9%
- Safeway (SWY) - 4.9%
Rydex has an equal-weight Consumer Discretionary ETF (RCD) that is interesting. It is weighted based on the S&P Consumer Discretionary sector. Top 5 holdings are Eastman Kodak (EK), Washington Post (WPO), Autozone (AZO), Sears (SHLD) and VF Corp. (VCF).
The SPDR S&P Retail ETF (XRT) is another option. The top 5 holdings are Family Dollar (FD), Kroger (KR) Sally Beauty Holdings (SBH), Blockbuster (BBI) and Costco (COST).
One way to use these ETF's as shorts, especially the HLDRs where the weighting is so extreme, is to strip out the companies you like in proportion to their weightings. For example, I like Kroger (KR) and Family Dollar (FDO), or at least I don' t think they are as vulnerable as other names. So it is possible to synthetically take them out of a short position by going long the stock or using options in proportion to their weightings in the ETF.
But the play I find most interesting is the FTSE NAREIT Retail Index Fund (RTL), which focuses on Retail Real Estate Investment Trusts. The top 5 holdings there are Simon Property Group (SPG), Kimco Realty (KIM), General Growth Properties (GGP), Federal Realty Investment Trust (FRT) and Regency Realty Group (REG).
The problem is that ETF basically trades by appointment. There is virtually no volume. Today, as of publication time, 200 shares have traded. The components are interesting, however, and I am eyeing those components as having the best downside opportunity.
Retailers can actually move higher on store closings and inventory reductions while the cash flow going intto the REITs from malls and retail outlets could be significantly impaired by this time next year given my forecast for a consumer spending decline and sharp increase in personal savings.
5. Daily Socionomic Datapoint: Retail Prison... Literally
A longtime Minyan forwarded me this article yesterday afternoon from The HeraldNews based in Illionis: "Former Prison May Become Tourist Trap." According to the article, a private development group wants to turn the famed Joliet Correctional Center into a mixed-use development featuring retail stores, offices and even residences.
"The plan is to keep the prison structure intact and try to take advantage of its appeal," the article noted. It's an idea whose time has certainly come: a retail prison, not just in the metaphorical sense, but the literal sense.
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