Walmart (WMT - Get Report) was already on my "Best Short Ideas" list, and I added Kohl's (KSS - Get Report) and Target (TGT - Get Report) to the roster on Thursday morning.

Some reasons for my bearishness on retail stocks:

  • Higher Energy Prices. Oil prices have rallied dramatically and back to 2014 levels, rising from about $35 a barrel in early 2016 to around $67 Thursday. That's bad news for U.S. retailers, as rising oil prices historically squeeze consumer disposable incomes. That's one reason why I've been consistently raising my short exposure to retail and plan to continue doing so.
  • Higher Interest Rates. A rise in the London Inter-Bank Offered Rate (LIBOR) has recently accelerated. That's bad news for retailers, as many variable-rate consumer debts (particularly mortgages) key off of the LIBOR. This will likely put a damper on mortgage refinancings -- something that many see as an important ingredient for personal-consumption expenditures.

  • Questionable Recent Stock-Price Gains. While some retail stocks have done well since February, it's my view that short-term stock-price movements might not hold much import over the following weeks or months. I'm bearish on the overall U.S. stock market's likely performance for 2018's balance.
  • Risky U.S. Macroeconomics. The U.S. middle class, which supports the retail industry, could see its condition deteriorate going forward. U.S. employment levels will likely peak over the next several months, but inflation and interest rates are rising, which will reduce real disposable incomes. As inflation percolates, businesses could also see a rising costs of goods that will pressure margins.
  • A Challenging Industry. Disruption in the retail space is continuing, if not intensifying. However, after several years of reducing fixed costs, the retail industry has little left to cut.
  • Sears Stinks. I think that Sears Holdings (SHLD) will likely declare bankruptcy in 2018. This, coupled with an acceleration in other store closings, will flood the market with low-priced inventory.

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Position: Short WMT, KSS, TGT