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The Bifurcated Retail Sector

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Thursday, November 21, 2013

Stocks stalled out in the last couple of sessions after reaching milestone levels, essentially reflecting a lack of catalysts that could push them over the hump. The key question for the market at present is handicapping the timing of the Taper announcement, with Wednesday’s minutes of the last Fed meeting keeping the December option on the table.

Pre-open sentiment remains positive, despite more weak retail sector earnings results this morning and less than positive data out of China. Sentiment was positive even before this morning’s in-line PPI and Jobless Claims data on the home frontt, but this could be nothing more than a modest reversal at the open after a couple of down sessions that may not be able to sustain itself throughout today’s trading session.

A key private sector gauge of China’s manufacturing sector showed loss of momentum in this key sector of the country’s economy. The preliminary HSBC manufacturing PMI for November came in lower than October’s final reading, though it still remained in expansionary territory. A key source of weakness was on the export orders front, which is surprising given the strong export growth in October following the unexpected decline the month before. Perhaps the renewed signs of weakness in the Euro-zone, a major market for Chinese exporters, has started showing up in Chinese data. The country’s economic growth appeared to have picked pace in Q3, with GDP growth improving from the first half’s pace. But if today’s PMI data is reflective of current trends in the economy, then that improving trend may have stalled out already.

On the earnings front, we have another set of uninspiring retail seector reports this morning. Target (TGT) came short of expectations, though it’s hard to pick the retailer’s outlook for the holiday shopping season as we were able to with Wal-Mart’s (WMT - Free Report) report a few days back. Dollar Tree (DLTR - Free Report) missed expectations on the top- and bottom-lines as well. The Target earnings release isn’t easy to decipher, but the company’s numbers confirm all the disconcerting elements that we heard about from Wal-Mart earlier. What this all boils down to is that the bottom rung of the consumer economy isn’t doing that good. Results from Kohl’s (KSS - Free Report) earlier and Sears today, while not true comparables for Wal-Mart and Target, nevertheless lead in that direction. This is surprising as many of us expected the recent drop in gasoline prices to have been particularly beneficial to that consumer segment.

It is perhaps reasonable not to extrapolate the weak-looking results from these discount retailers to the broader retail space or the entire consumer economy. After all, we know that Macy’s (M - Free Report) and others are a lot more upbeat about their outlook, which means that higher-end consumers are holding out better. That’s nothing new, as we have lived with this bifurcation for a while.

But does it mean that the economy is in good enough shape for the Fed to start tapering its bond purchases? Nobody knows the answer to that question, perhaps not even the Fed. But we will find soon enough as December FOMC meeting is just a few weeks away.

Sheraz Mian
Director of Research

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