According to Kiplinger, retail sales and consumer spending make up around 70% of the United State's GDP, and the all-important Christmas shopping season continues to grow. Black Friday weekend has turned into a critical indicator of the health of the U.S. economy. With unemployment still high, wage income down and consumer sentiment low, many investors are expecting the worst. However, with such low expectations, some analysts are calling for results that are better than expected. For investors, taking a gamble on the retail situation could be fruitful, in either direction. (For more on retail investing, read The 4 R's Of Investing In Retail.)

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The Bull and Bear Case
There are plenty of reasons for investors to expect a lump of coal this holiday season. One major reason is there is simply not enough money to spend. According to data compiled by the Bureau of Economic Analysis, Americans saved only 3.6% of their disposable personal income in September. This was the lowest amount in almost four years. Faced with stagnant wages and higher gasoline costs, Americans saw their spending money (after inflation and taxes) fall 0.3% this year, according to The Bureau of Economic Analysis data. In addition, the willingness of banks to extend credit continues to slump. The measure of increased willingness of banks to make consumer- installment loans, such as credit cards, currently sits around 18.8% reported by the Federal Reserve. This measure was nearly 29% back in April, when analysts predicted an economic recovery was in order.

On the other hand, according to a report from the National Retail Federation (NRF), more than 152 million people are expected to shop over Black Friday weekend, a 10% increase from last year. A variety of retailers, such as Kohl's (NYSE:KSS) and Macy's (NYSE:M), have introduced earlier shopping hours and deeper discounts to entice consumers. The NRF believes these earlier hours will ultimately bring more consumers into stores. NRF President Matthew Shay said recently in a statement that "many holiday shoppers would rather stay up all night to take advantage of retailers' Black Friday deals rather than set their alarm to wake up the next morning." (For more, see 5 Companies In The Black On Black Friday.)

Betting on the Outcomes
With such headwinds facing the consumers coming into the Black Friday and holiday season, investors wanting to play the retail sector need to do it carefully. Not all retailers are expected to do well this holiday season. Even venerable Wal-mart (NYSE:WMT) is suffering, with CEO Mike Duke saying "[Our] customers remain concerned about jobs and they juggle credit cards, use coupons and forgo eating out and vacations." By using a pair's trade, and shorting the broad sector and going long a few winners, investors can profit from the holiday season.

For the short side, the SPDR S&P Retail (NYSE:XRT) is most liquid and largest way to play the retail sector. The ETF tracks 96 different store operators and is easily available from brokers to short. Investors can also use the ProShares UltraShort Consumer Services (NYSE:SCC), which adds leverage to the mix and includes 53% weighting towards retail establishments.

Retailer Target (NYSE:TGT) could be one of the winners this year and remains the analyst's choice. Receiving a good portion of its revenue from clothing and home-goods sales, these low material costs will benefit the retailer. Cotton prices have fallen about 27% from their peaks. In addition, the retailer's 5% loyalty program and earlier Black Friday shopping hours should boost sales.

The high-end continues to outperform, as income irregularity maintains its presence. For investors, that means adding firms like Nordstrom's (NYSE:JWN) and Saks (NYSE:SKS). While spending by the rich has slowed over the last few months, analysts estimate that spending by the group this holiday season will increase versus last year.

The Bottom Line
With a variety of problems facing the U.S. consumer, the critical holiday shopping season could be a bust. However, some data points to a positive season. By shorting the sector and going long some of the better retailers, investors can profit from whatever the season may hold. (To help you further breakdown retail stocks, check out Analyzing Retail Stocks.)

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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