Two Ways to Short the Tapped-Out Consumer

02/19/2009 11:35 am EST

Focus: OPTIONS

Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of ChangeWave Shorts, says two retailers are vulnerable to consumer cutbacks, but their stock prices don't yet reflect it.

The first stimulus package last summer did everything except drop cash out of helicopters; it was spent in dollar stores and Wal-Marts and gas stations-with most of the money sent overseas to the makers of the products those stores sell and the oil we use to run our cars.

The current stimulus package also has lots of "helicopter" money in the form of cash and tax cuts. But, this time it will be spent on groceries and paying down debt.

The remaining parts of the package will be spent over a period of six to 30 months on already existing government programs that typically employ high-wage employees-and those parts will have limited economic impact.

The current decline in employment is the sharpest since the Great Depression and shows no signs of abating. Simply put, the new stimulus package will slow the rate of unemployment increase, but we will still likely hit 10%-plus by the end of the year.

Why am I so confident that the economy is going to get worse?

Our proprietary ChangeWave Alliance's most recent consumer spending survey data [shows] current and future spending plans are headed down again-and they were awful to begin with.

Best Buy (NYSE: BBY) and Tiffany & Co. (NYSE: TIF) are going to take a big hit and it is time to short these two retailers.

Best Buy has held up better than many retailers, [but] according to our surveys, BBY is barely picking up share from Circuit City's demise.

Overall demand for electronics is falling steeply, [and] there is no new gear on the shelves at Best Buy that require the help of a knowledgeable salesperson-big TVs are now known commodities, etc. So why not shop at a Costco Wholesale (Nasdaq: COST) or Amazon.com (Nasdaq: AMZN) and save money over the big box store markup?

Buy the Best Buy Jan 2010 20 Puts (WBYMD) under $3. (They traded at $2.95 late Wednesday-Editor.) Take your time and use limit orders only. The stock is approaching its 50-day moving average and may bounce off of it to the upside a little bit.

[Tiffany's latest] earnings were very bad-even worse than expected-but that surprise was not great enough to overcome technical support and a justifiable belief that the company will live to fight another day.

I still believe the stock will retest the previous low of $16.75, which could get us a 50%-100% gain in this new short position, long before the puts expire. Buy Tiffany & Co. January 2010 15 Puts (WTFMC) with a Buy Under price of $2.55. (They traded at around $2.70 Wednesday, while the stock closed just below $20-Editor.)

(Editor's note: Selling short by buying put options is only for the most risk-tolerant investors who can afford to lose the money they're putting up in the trade.)

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