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Enjoy the ‘Trade’, Prepare for the ‘Trend’

We went bullish on the market on Mon. Add ‘less than toxic’ retail sales and a global rate cut, and the ‘Trade’ is no surprise. But the “Trend’ is a different story. Prepare to revisit core shorts…

Slice and dice today’s retail sales results any way you want. I’m not even going to try to drill down how much of retail’s price reaction was due to ‘less than toxic’ sales numbers, or the fact that they came in conjunction with a coordinated global rate cut. Either way, the ‘Trade’ here is a good one. That synch’s well with my partner Keith’s bullish call into the turmoil early this week and started, when he started to deploy cash and buy stocks again.

What we can’t hide, however, is that the ‘Trend’ across channels is not only negative, but is eroding relative to prior months. I’m not trying to be a downer by any means. I just tell it like it is. Discount stores? Ok performance, but rolled over by a full point on a 1, 2 and 3-year basis. Multiply that by 3 and you get the rate of erosion for the department stores.

We’ve had 64 consecutive quarters of growth in consumer spending in the US. Our team here at Research Edge collectively thinks that not only is it going negative, but the duration will be well over a year. Through 2010 is not that tough to model. If consumer spending is negative, core inflation and higher interest rates (impacting housing costs – a component of PCE) eat into the consumer’s wallet then the reality is that the magnitude of a consumption decline is magnified by at least 2-3x for discretionary spending.

Bottom line, I still think that margin, earnings, and cash flow growth expectations for US retail are too high for next year, and unlike other consumer spaces, this one is not particularly cheap. If these names bounce with the market ‘Trade’ then look to step on the gas with key short ideas – DSW, GIL, GES, WRC, BWS, TJX, and ADS, to name a few.