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Retail Sales Stink. So Why Don't Investors Seem to Care?


Investors go on buying binge just as consumers stop shopping.

It wasn't the most subtle description, but it was pretty accurate: "SALES SUCK."

That's how the Drudge Report characterized the latest data on retail sales on Thursday, which did disappoint. The Commerce Department reported that total retail sales edged down 0.1% in July, undershooting consensus forecasts for a 0.8% increase.

Gluskin Sheff chief economist David Rosenberg wasn't impressed, either. "They were simply awful," Rosenberg wrote in a research note. "We can have all the inventory building in the world but it can't last without a revival in final sales."

But investors weighed in with a curious response: Who cares?

Indeed, the market ignored the lackluster government report altogether. The SPDR S&P Retail (XRT), an exchange-traded fund that tracks the S&P Retail Select Industry Index, finished up Thursday 0.06% at $31.81. Investors have aggressively piled hard into the retailers, with the XRT surging more than 55% in the past 6 months. Top holdings in the ETF include The Gap (GPS), Guess (GES), and J. Crew (JCG), among others.

Market strategists say the surge in retail stocks is explained by investors that have been hunting for bargains in a sector of the market that got crushed. There seemed to be plenty of good deals out there and stock pickers were willing to wager that the consumers would start spending again when these tough times ended, just as they always have.

Some of the biggest gainers among the retailers have been the department stores. Over the past six months, Macy's (M) is up 80% and Dillard's (DDS) is up 144%. The high end has also benefited from the recent gains in the past six months with Tiffany (TIF) up 53%; Nordstrom (JWN) up 124%; and Saks (SKS) up 210%. On the flip side, discounter Wal-Mart (WMT) has gained just 12%.

Bulls say that committing capital to the retailers makes sense, even for the high end stores. We can count on our wealthier, white-shoe neighbors to keep on spending. More generally, they tell us, the jobless recoveries in the early 1990's and early 2000's didn't stop consumers from coming back and powering pretty good gains in retailers and consumer discretionary stocks. When the typical recession ends, the consumer discretionary sector usually benefits.

But this isn't your typical recession. Unemployment remains uncomfortably high and it's probably going higher. Joseph LaVorgna, Chief US economist at Deutsche Bank, sees the unemployment rate at 10% by year-end.

The American consumer is also shouldering a lot of debt right now. In fact, we have never begun an economic recovery with such an elevated level of household debt to disposable income, LaVorgna wrote in a recent research note. Presently, the household debt to income ratio stands at 128%, just below an all-time peak of 131% in the first-quarter of 2008.

Peter Boockvar is the equity strategist at Miller Tabak. He's staying extremely cautious on the American consumer right now.

"I think the headwinds of high unemployment, massive deleveraging and a propensity now to save rather than spend will keep a lid on consumer spending for years to come," Tabak tells Minyanville. "Credit is barely available. Credit card limits are getting cut everywhere and even if consumers wanted to start spending again, the credit card companies will only let them to an extent."

Boockvar adds, "We are far away from seeing what went on from 2003 to 2007 when consumers were tapping their homes for money and credit card companies were giving out easy money and high credit limits."

There has been a generational shift in this country, Boockvar thinks. Just as the Great Depression had a lasting impact on the savings and spending patterns of our parents and grandparents, so too will this historically powerful downturn influence how Americans today think about shelling out money on clothes, gadgets, and toys.

"This is not your ordinary downturn," Boockvar says. "This is not your ordinary recovery. This is a recalibration of the entire US economy, a shift away from a too high heavy reliance on the consumer and more so on exports and business investment."
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