Inflation Hedge: Buy Now?

Besides rumors of Microsoft restoking interest in Yahoo, the major news on CNBC today concerned inflation, and no wonder. Prices across the board have been going up. Besides asking what the Fed is going to do about it tomorrow in their interest rate decision, a more important question and one that certainly hits closer to home is how can one prepare for increasing prices?

I know, I know. There's been a rash of articles written lately from how to save money at the pump (car pool, take public transportation, take advantage of gas card offers) to how to save money on food (buy in bulk, frequent lower-end retailers, clip coupons, eat less meat). These are all ways to spend less now, but I haven't run across anyone except for me who is saying “Buy more now!”

I don't mean that you should go out and make frivolous purchases or buy things you'll never use. What I mean is that if you know you're going to make a major purchase in the future, you might save quite a few bucks by buying it in the present. Speaking in a CNBC interview this morning, a spokesperson for Lowe's said that the company is trying to keep costs down to attract consumers but it doesn't know how long it can continue to do that. Copper cable was cited as a commodity that has recently risen sky-high and the company said that it won't be able to contain the price for too much longer. And Lowe's isn't the only boat sailing on the rocky sea of rising prices. Pretty much every business is being affected, most notably the energy-driven transportation stocks.

Buy the goods
So what can one do about it? You can buy now, while prices are still being held artificially low. Let's say you're thinking of adding a room to your house or remodeling your kitchen later this year. Chances are that prices will be much higher in several months compared to where they are currently. If you know what you'll need, you can purchase it now at a savings. (Of course you'll need to pay for it and find a place to store it.)

What about travel? If you know you'll be home for the winter holidays or are thinking of taking a winter cruise, you may want to buy your travel tickets now. Not only will you lock in today's price, but you might be able to spare yourself extra fees that the airlines and cruise companies are starting to impose.

The home electronics category, however, isn't subject to the same rules. As newer technologies replace older ones, prices on outdated merchandise begin to drop. This means that buying a state-of-the-art wide screen TV today may not be such a wise purchase, especially if you're willing to wait for it.

Short the sellers
I've shown you some areas where you might be able to save some dime on your personal purchases but are there retail-oriented stocks out there that might benefit from increasing prices? The answer, unfortunately, is no. Rising prices in a recessionary environment spell trouble for everyone, and common sense says that people will curb their spending across the board. First to go are the middle to high-end stores. Will people still want to shell out $4 for a cup of joe at Starbuck's when they can either make it at home or buy it for a buck at McDonald's? (I've had Mickey D's java and it ain't that bad.) Will they still pay $15/pound for organic beef at Whole Foods or buy USDA Choice at a regular grocery store for half the price?

The writing on the wall is clear. Is there any money to be made in this sector? We shall see. Looking through some of the charts in the sector, I've come up with a list of the best and worst performing stocks. I wouldn't buy any of the better stocks right now, though, since they're all in a slump and look like they may continue their downward trends. But the news isn't all bad as you'll find some great shorting candidates on the worst stock lists.

Major Discount Retailers
Best: Wal-Mart (WMT), BJ's Wholesale (BJ)
Worst: Sear's (SHLD)--hands down the worst stock in this group--a great short play

Deep Discount Retailers
Best: Big Lots (BIG), Fred's (FRED)
Worst: 99cent Stores (NDN), Tuesday Morning (TUES)

Grocery Stores
Best: Kroger (KR)
Worst: Pantry (PTRY), Whole Foods (WFMI)--another great short play

Luxury Retailers
There are no winners in this space. Tiffany's (TIF) broke major support two days ago. Coach (COH), Sotheby's (BID), Saks (SKS), and Nordstrom's (JWN) are all hovering around major support levels.

Mid-Level Retailers
Bad: There's no bright spot here, either. Bon-Ton (BONT), Cost Plus (CPWM), Gottchalk's (GOT), and Kohl's (KSS) are all trading at multi-year lows.
Worst: Macy's (M) and Dillard's (DDS) win worst of breed. Macy's has lost close to 60% of it's value in little over a year, but Dillard's wins the losing game by shedding two-thirds of it's value in less time than that. Both charts are coyote ugly; buying long-term puts on either would be an excellent move.

Conclusion
I really hate to be the constant bearer of bad news, but it looks like we're in for a bumpy ride in the retail consumer staples sector. If you're holding long positions here, I strongly urge you to lighten up or at least put on a hedge. For all you bears out there, this sector--especially the worst stocks--should brighten your day as well as your bottom line.