COMMENTARY ON RETAILERS

ETFguide.com
Are Retailers a Bargain?Monday December 1, 12:34 pm ET By ETFguide.com

SAN DIEGO (ETFguide.com) - Don't let the crowded stores and the long lines fool you. The 2008 holiday shopping season may turn out to be just the kind that Scrooge would love.

Deep discounts by eager retailers may be ringing in higher sales volume, but in dollar terms, sales are likely to fall. The National Retail Federation estimates that shopper's spent 7.20% more this past weekend compared to last year. However rosy that may sound, it still might not help the sinking stock prices of major consumer retailers.

In the third quarter alone, consumer spending declined by 3.70% on an annualized basis. That was the steepest decline in 25 years. According to some economists, the fourth quarter spending numbers are expected to be even worse.

The performance of stocks in the retailing sector has been a mixed bag.
Over the past year, Macy's (NYSE: M - News), Tiffany (NYSE: TIF - News), and Target (NYSE: TGT - News) have seen their stock prices cut in half whereas Wal-Mart (NYSE: WMT - News) and Family Dollar Stores (NYSE: FDO - News) have bucked the trend by gaining. This is a strong signal that consumers are still spending, but opting to do business with discount retailers.
Consumer demand for big-ticket items has been particularly weak and confounded by a deteriorating job market. The appetite for appliances, automobiles and large-screen televisions is spiraling as October's sagging 6.20% fall in orders for durable goods indicates.

The other problem facing retailers is consumers that have money, aren't spending as much of it. The Conference Board reports that consumer confidence is at 41-year lows.
Exchange-traded funds (ETFs) that follow the sector like the SPDR S&P Retail ETF (AMEX: XRT - News) are off by 44.57% and the S&P Consumer Discretionary Stocks (NYSEArca: XLY - News) are down 36.77%.

XLY contains 81 stocks involved in apparel, leisure, hotels, and restaurants. The three largest holdings in XLY are McDonald's, Comcast, and Walt Disney. The consumer discretionary is less defensive compared to consumer staples (NYSEArca: XLP - News). The latter is the best performing S&P 500 sector so far this year.

XRT is actually a blend of two retailing sub-sectors: Consumer discretionary and consumer staples. Discretionary has a high sector weighting inside XRT (nearly 80%) compared to just 20% for the more defensive staples. Wal-Mart, CVS Caremark, and Target are the top three holdings among the 55 holdings within the ETF.

The Retail HOLDRS (NYSE: RTH - News) is an unmanaged basket of retailing stocks and it follows no particular index or benchmark. This means that RTH is never rebalanced and companies contained within it are not replaced if they merge or go out of business. With only 18 stocks, RTH is far from an accurate measure or benchmark of what's really going on in the retail sector.
Other ETFs, like the PowerShares Dynamic Retail (AMEX: PMR - News) are attempting to outperform traditional benchmarks within the retailing sector. PMR has declined 26.29% this year, which is better than most funds tracking the same area.

As the failure of CircuitCity, Mervyns, and Linen & Things illustrates, surviving in the hyper-competitive retail sector is very difficult right now. More bankruptcies are likely to follow as more companies compete for fewer customers and fewer revenues. We could be entering just the second or third inning of a major shakeup in consumer retailers.

Still, not all is doom and gloom. One of the few bright spots remains a smaller but growing segment known as online retailing.

Unlike their traditional brick-and-mortar counterparts, Website operators don't have the burden of high overhead and overbearing lease obligations. Stocks like Amazon.com, eBay and Yahoo are typically included in this particular group and are included as top holdings within retail oriented ETFs.

**If Recession deepens....retailers could come under new selling pressure...but today many and a few goldies were green.

D