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Why Investors Should Ignore the Latest Retail Sales Data

By Frank Curzio, editor, Small Stock Specialist
Friday, November 25, 2011

Consumers have been on a massive spending spree this year.  
According to the U.S. Census Bureau, retail sales rose to an all-time record. In October alone, consumers spent over $397 billion, a 6.7% increase from last October. In fact, retail sales set a new record almost every month in 2011, with the exception of May.
This data suggests that the U.S. economy is rocking right along. After all, more than two-thirds of our gross domestic product comes from consumer spending.
However, I'd suggest holding off on buying your favorite retail stock...
You see, this retail sales number is not adjusted for inflation. Also, more than 10% of this figure comes from gasoline sales. In other words, while a rising gasoline prices inflates this number (positive), it also acts as a kind of "tax" on consumers (negative).
Bloomberg and The Wall Street Journal reported 6.7% year-over-year increase in retail sales. But when you strip out inflation and the gas increase, retail sales are up about 1.5% from last year. Given our historically high unemployment rate – and the fact that personal income is sitting at two-year lows – this figure makes a little more sense.
Heading into the holiday season, the retail sales number will probably move a lot higher. That's because some of the biggest retailers like Wal-Mart, Toys "R" Us, and Amazon are aggressively lowering prices on Thanksgiving weekend. According to several retailers, they are doing this to lock in sales early on in a very uncertain macro environment.
This move will result in higher sales, which will make for more positive headlines. However, large discounts will lead to lower margins. In other words, we will likely see stronger retail sales for November and December – combined with weaker earnings for many retail companies.
That's going to be tough on stocks in this sector. The discount retailers (Wal-Mart, Family Dollar, and Dollar General) have been holding up well so far. But specialty retailers like Aeropostale and Abercrombie & Fitch are already suffering.
My advice is to not pay much attention to the headline retail sales number. It will continue to touch record highs in the months ahead. But as earnings get squeezed due to heavy promotional activity, I wouldn't be surprised if most retail stocks push lower in the same time frame.
Good investing,
Frank Curzio

Further Reading:

Approaching the release date of a top-selling video game, shares of one tech stock soared 30%. Using that same guideline, Frank says there's triple-digit gain potential in another highly anticipated video game, due out next year. Read more here: How to Make Good Money Betting on the Best Products in Entertainment History.
One of Frank's favorite long-term trends has already netted readers 19% gains. But "based on the recent trend of new orders," he believes shares of this company could soar. Get the full story here: The World's Biggest Companies Are Going "All-In" on This Trend.

In The Daily Crux
Market Notes
"World Dominators" are holding up... Wal-Mart, Cisco, and Altria are in positive territory over the past month.
Euro plunges to six-week low as investors see no solutions for the European debt crisis.
Big Ag fund DBA breaks out to a 52-week low... sugar, wheat, soybean, and cotton prices are all down 20%-plus this year.
Big tech names are still healthy... Google, Intel, and Qualcomm are up 10% or more in the last three months.
Market Watch
Symbol Price
S&P 500 1161.79 -2.2% -1.6%
Oil (USO) 37.16 -1.8% +6.3%
Gold (GLD) 164.83 -0.3% +22.6%
Silver (SLV) 30.93 -3.0% +15.1%
U.S. Dollar 79.08 +1.1% +0.6%
Euro 1.33 +0.1% +0.1%
Volatility (^VIX) 33.98 +6.3% +64.7%
Gold Stocks (^HUI) 535.48 -2.9% -2.5%
10-Year Yield 1.88 -3.1% -31.9%

World ETFs
Symbol Price
USA (SPY) 116.56 -2.2% +0.4%
S. Korea (EWY) 49.77 -3.8% -6.2%
Canada (EWC) 25.26 -2.9% -11.5%
Japan (EWJ) 8.84 -2.3% -12.5%
S. Africa (EZA) 56.78 -3.0% -13.3%
Singapore (EWS) 10.96 -2.3% -14.2%
Taiwan (EWT) 11.54 -3.6% -15.3%
Israel (ISL) 13.06 -1.0% -18.7%
Lat.America (ILF) 40.57 -3.3% -18.7%
China (FXI) 33.38 -2.7% -21.6%
Russia (TRF) 14.52 -2.0% -27.6%
India (IFN) 20.60 -2.4% -33.8%

Sector ETFs
Symbol Price
Utilities (XLU) 33.26 -1.6% +12.3%
Big Pharma (PPH) 65.71 -1.5% +8.2%
Retail (PMR) 20.10 -1.8% +6.4%
Health Care (IYH) 65.70 -1.3% +5.5%
Consumer Svcs (IYC) 66.66 -1.9% +3.5%
Big Tech (QQQQ) 53.29 -2.3% +3.1%
Internet (HHH) 70.26 -0.9% +0.3%
Real Estate (IYR) 51.42 -2.9% +0.0%
Industrials (IYJ) 58.58 -2.4% -1.2%
Software (PSJ) 22.85 -2.1% -3.6%
Defense (PPA) 16.78 -2.6% -4.0%
Transportation (IYT) 81.41 -2.4% -4.4%
Media (PBS) 12.08 -3.0% -6.4%
Construction (PKB) 10.69 -3.8% -7.5%
Telecom (IYZ) 19.64 -2.6% -7.9%
Insurance (PIC) 13.97 -3.0% -8.6%
Biotech (PBE) 18.29 -1.7% -8.9%
Oil Service (OIH) 113.24 -3.8% -10.1%
Water (PHO) 15.67 -3.2% -10.8%
Basic Mat (IYM) 60.65 -3.2% -11.7%
Financials (IYF) 44.24 -2.9% -14.3%
Semis (PSI) 12.88 -2.8% -14.7%
Nanotech (PXN) 5.85 -2.2% -39.9%
Alt. Energy (PBW) 5.13 -2.1% -46.6%

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