More retailers could follow Woolies as hard times continue

RETAILERS were in August their most positive since November 2007, a recent survey from the Confederation of British Industry (CBI) showed. Only 2 per cent of retailers surveyed by the CBI in August are expecting the situation to get worse, despite high street sales falling for the fourth month running.<br /><br />And indeed, with all the infectious optimism that is out there at the moment, it is no wonder that retailers are becoming more positive about their prospects for the second half of the year and the Christmas sales period, especially compared to the same period last year.<br /><br />At first glance then, it might seem appropriate for contracts for difference (CFDs) traders to view the high-street retailers favourably. They should benefit from the continued improvements to consumer confidence that we are seeing and those that made it through last Christmas without falling in to administration should, in theory, be better placed to make it through what will only be a better retail environment this winter.<br /><br />However, CFD traders should be wary of taking out long positions on the retailers, however optimistic these firms might be about their prospects at the moment. While a positive outlook from management counts for something, optimism is blinding many at the moment. Economic and financial reality is being ignored.<br /><br />The rally in the markets has exceeded most expectations, so much so that many analysts are predicting a strong corrective pullback in the markets in the autumn, perhaps lasting as long as a month to six weeks. Retail is expected to suffer more than most.<br /><br /><strong>COST CUTTING</strong><br />This is for two reasons. Firstly, retailers, like many other British firms, have already trimmed their operations significantly over the first half of 2009. Much of the cost cutting and rationalisation of business models has taken place as the retailers fought to keep themselves above water during the first half of the year and struggled to avoid the fate of Woolworths. The impact fed through into the satisfactory second half results that most of the sector reported back in July, but they face the problem that they can&rsquo;t take much further action if things go wrong for them.<br /><br />Secondly, while footfall (the number of people entering a store) is improving, it is not clear how much this is translating into actual sales. And although consumer confidence has seen a faint revival since the spring, it remains historically low. The unemployment rate is at its highest level since 1996 and the number of unemployed is predicted to continue rising well into 2010, peaking at just over 3m. Data released last week by the Office for National Statistics (ONS) showed that the workless household rate &ndash; the percentage of households in which no adults work &ndash; is at an 10-year high of 16.9 per cent. And one of the first things that the unemployed cut back on is discretionary spending such as clothes, jewellery and other luxury items.<br /><br />For this reason, CFD traders should not be wildly keen on going long on high-street retailers right now, however gung-ho the individual firms might appear to be. While the buying appetite is still there for the market as a whole, sectors are starting to fall out of favour. And one that depends on consumer confidence and actual spending is never going to do well in a period of rising unemployment. <br /><br /><strong>CORRECTIVE PULLBACK</strong><br />Given this, CFD traders could do well to actively short retailers (either the sector or stocks you have chosen after doing research) once the markets have begun a proper corrective pullback. There is likely to be a period of about two months between the start of the market slip and the run-up to Christmas, during which retailers are likely to see their share price slip back. However, a Santa rally &ndash; the traditional boost to the stock markets in the weeks leading up to Christmas &ndash; could reinflate retail stocks and CFD traders going short should not underestimate how powerful this could be.