Consumer Spending Bad for Real Estate: SRS

Everything is interconnected in our economy.  For instance, when banks can’t loan money, that affects the growth of technology firms.  Many tech firms depend on bank financing to fund their operations.  It’s one of the reasons rescuing banks has been such an important issue this year.  But this interconnectedness extends beyond the financial and tech sectors.

Families are Downsizing

In the same way, consumer spending affects many areas of the economy.  Let’s take the Smiths, a two-income family.  Mr. Smith was just laid off from his six-figure job.  Mrs. Smith, although still working, does not make as much as Mr. Smith did.  So what do they do?

The Smith family cuts their expenses.  While shopping for Christmas this year, instead of shopping from high-end mail order catalogs, the Smiths will fight the crowds at Wal-Mart for better deals.  Instead of making leisurely trips to the mall, they’ll shop online for the best prices or just not buy anything.  The Smiths won’t be frequenting local or boutique shops, because they can’t afford it anymore.   

Retail Stores are Suffering

The Smiths are not alone.  Today, Bloomberg reported consumer sales have fallen the most in 7 years.  Families like the Smiths are cutting back, but other families are just as worried.  Why spend money when you’re not sure your job will last?  This concern is spreading throughout families who have been forced to downsize.  It’s affecting retail stores the worst.

Black Friday, or the busiest shopping day of the year, is in two days.  Retailers understand the stakes.  This year, it’s not so much about banner years as it is about survival.  Without strong sales, some may have to shutter the windows.  The now-bankrupt retail companies, Linens-n-Things and Circuit City, could be a sign of things to come. 

Commercial Real Estate is Falling

Going back to the interconnectedness of our economy, who else suffers from lost demand at retail stores?  If there are no buyers, then stores can’t pay rent.  If stores can’t pay rent, then landlords get desperate.  Since commercial real estate is so dependent upon occupancy, prices are severely affected during such a downturn.  As you can probably guess, it’s been a difficult year for real estate.  One analyst suggests it will get worse in 2009.
 
If this trend continues, then a short real estate position would be a great way to profit from the decline in commercial real estate.  One such exchange traded fund that gains while real estate loses is UltraShort Real Estate ProShares (SRS).  According to ProShares, SRS “seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse of the daily performance of the Dow Jones U.S. Real Estate Index.”  That means for every dollar commercial real estate goes down, SRS aims to go up two dollars.

Chart Confirms SRS Bullishness

Looking at the chart, UltraShort Real Estate ProShares is in an uptrend.  Since mid-September, SRS has been chopping upward while the U.S. economy has fallen.  It is currently falling to the trendline and there is support in the 110 area.  We expect SRS to bounce in the near future, as Black Friday estimates miss expectations.

As always, we caution you when considering a short position.  Even though you are ‘buying’ SRS, it’s a virtual short.  The market tends toward positive returns and shorting has other limitations that many investors are uncomfortable with.  In addition, this ETF is more volatile than other ETFs we recommend.  If you’re still comfortable with this position and you want to profit if real estate falls further, then go with SRS.
All the best.