Retail key to market's direction

By Joe Bel Bruno

Nov. 10, 2008 12 AM PT

Bel Bruno writes for the Associated Press

Wall Street heads into another potentially turbulent week with investors set to pore over a government report on retail sales and earnings from Wal-Mart Stores Inc. to get a better reading on the consumer.

The signs are growing that the deepening economic slowdown has caused Americans to tighten their purse strings. There was fresh evidence last week, when retailers posted the worst October same-store sales data in 35 years. Analysts believe the upcoming holiday shopping season could be among the slowest in decades.

With consumer spending driving more than two-thirds of the U.S. economy, investors will be paying close attention to the earnings outlooks for some of the nation’s biggest retailers. Wal-Mart, the nation’s top retail chain, will post results Thursday. Kohl’s Corp., J.C. Penney Co., Macy’s Inc., and Abercrombie & Fitch Co. are scheduled to report this week as well.

Investors will get an overall picture of consumer spending Friday, when the Commerce Department releases its October retail sales index. The closely watched gauge is expected to show sales dropping 1.2% for the month after falling 1.2% in September. Excluding the battered automobile industry, sales are expected to have fallen 0.9%.

The stock market, still trying to recover from October’s devastating losses, is likely to zigzag as investors react to these reports. This has been the pattern during the last few weeks, with major indexes swinging from one extreme to another in capricious trading.

Many analysts believe this volatility is part of a bottoming-out process. The real test is to see whether investors have already priced in the potential for negative news or whether fear of a protracted recession will trigger another stream of selling.

“The news is going to be really bad, and that shouldn’t be a surprise to investors,” said Peter Cohan, principal of Peter S. Cohan & Associates. “But I’m feeling uncomfortable that the market is a daily mood ring for the economy. The small investors are largely out of the market, and what you end up with is a small number of very large players making decisions.”

Cohan pins the volatility on hedge funds, pension funds and big university endowments unloading stocks to raise collateral and scooping up undervalued stocks to seize opportunities. He believes this will eventually result in a more stable trading environment that will lure retail investors back and add stability to major indexes.

Hedge funds could come to center stage this week if they receive another wave of redemption requests from investors. The upcoming deadline for redemptions, Saturday, could cause further instability in the market, Cohan said.

Wall Street enjoyed its biggest election day rally in history Tuesday but could not keep those gains. It was followed by a two-day loss of nearly 10% in the major indexes, including a 929-point drop in the Dow, as investors turned their focus once more to the economy’s woes.

For the week, the Dow Jones industrial average and broader benchmarks such as the Standard & Poor’s 500 index lost about 4% after surging 10% or more the week before. Technical analysts are keeping a close eye on the chart data this week, with continued concerns that the Dow will test its Oct. 10 intraday low of 7,882.51. It closed the week at 8,943.81.

A number of other reports on tap might give more insight into the economy. On Thursday, Wall Street gets readings on the labor market and trade deficit, followed by a look at consumer sentiment Friday. Trading could be subdued Tuesday, with the bond market and some banks closed for Veterans Day.

Additionally, investors are watching for developments with General Motors Corp., Chrysler and Ford Motor Co., after the automakers met with congressional leaders last week to secure financial help.

Democratic leaders in Congress asked the Bush administration Saturday to provide more aid to the struggling auto industry, which is bleeding cash and jobs because sales have dropped to their lowest level in a quarter-century. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid said in a letter to Treasury Secretary Henry M. Paulson that the administration should consider expanding the $700-billion bailout to include car companies.

“We must safeguard the interests of American taxpayers, protect the hundreds of thousands of automobile workers and retirees, stop the erosion of our manufacturing base, and bolster our economy,” wrote Pelosi, of California, and Reid, of Nevada.

Even more news might be generated out of Washington with the possible selection of a new Treasury secretary by President-elect Barack Obama. He already has said the economy will be the new administration’s top priority, and a Treasury pick could lift stocks.

Among those being considered for the post include former Treasury Secretary Lawrence H. Summers, Federal Reserve Bank of New York President Timothy F. Geithner and former Federal Reserve Chairman Paul A. Volcker.

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At a glance

TODAY

President Bush meets with President-elect Obama.

Weekly Treasury briefing, auction.

Quarterly results are expected from American International Group Inc., Dish Network Corp., Starbucks Corp. and Tyson Foods Inc.

TUESDAY

Veterans Day. The bond market and some banks are closed.

Quarterly results are expected from TJX Cos.

WEDNESDAY

House Financial Services Committee holds a hearing on mortgages.

Quarterly earnings results are expected from Macy’s Inc. and Thomson Reuters Corp.