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Somehow, retail sales march forward while consumer confidence takes it on the chin. Without even making a call on the consumer, this trajectory is simply not sustainable.

Here’s the mother of all (facetious) revealing statements by the Hedgeye Retail team today. “When people are more confident, they buy more ‘stuff’, and when they’re less confident, they buy less -- or at least growth in spending slows.” 

Why then, may I ask, does the chart below exist? It shows the gap between (Bloomberg’s) same store sales composite and Consumer Confidence – the latter of which put in a 3-handle this morning for the first time since March 2009.

Simply put, we’re looking at the widest gap between confidence and spending in recent history.

Even if we ignore the gap for a minute -- and assume that because of some kind of secular shift about which I did not get the memo – the trajectory of these two items is just wrong.

The punchline is that either the delta in spending is going to revert back towards the path of consumer confidence (bearish), or confidence levels will sequentially uptick (bullish) to catch up with where the consumer has already decided to go.

There’s a ton of theories we can conjure up – like the weak housing market is keeping money out of new homes, which is giving people a more meaningful pot of gold (even if the aggregate pot is smaller than last year) to spend in stores. Maybe it’s the on-line effect where we continue to see more impulse purchases (ie Amazon Prime). While that's very real, that one’s a stretch as it relates to explaining away anything in the ballpark of what we're seeing today.

Either way, something’s got to give. Be careful what you own here.

We like the franchise US brands that avoid exposure to a meltdown in global markets, like TGT and WMT. We also like names with accelerating growth and RNOA due to company-specific factors, like LIZ, NKE, and AMZN.

On the flip side, we don't like names that are playing catch-up due to lack of investment in their business -- as well as those that have to compete with them. A better way to say that is that we don't like JCP, KSS, M, HBI, GIL, and after the print -- JNY and CRI. We also don't like UA, but for very different reasons. 

Retail: Biggest Spending Divergence Ever - 10 25 2011 10 40 23 AM

Source: Bloomberg