The usual Christmas rush will hold little relief for retailers and a flagging U.S. economy, as the National Retail Federation (NRF) predicts a lackluster holiday shopping season.

The NRF today (Tuesday) released its estimate for the 2008 holiday shopping season. The largest global retail trade association forecast a scant 2.2% increase to $470.7 billion in end-of-year retail purchases.

“Current financial pressures and a lack of confidence in the economy will force shoppers to be very conservative with their holiday spending,” said NRF Chief Economist Rosalind Wells in a statement. “We expect consumers to be frugal this season and less willing to splurge on discretionary items.”

The 2.2% prediction for the 2008 holiday shopping season is the slowest rate of growth in six years since the 1.3% rate of growth during the 2002 holiday shopping season. The rate represents a slight drop from 2007’s increase of 2.4% and half of the 4.4% ten-year average according to NRF data.

“Everything is so volatile and so uncertain,” the NRF’s Wells said in an interview with Reuters prior to the forecast’s release. She added that this year’s projection for the holiday shopping season was one of the most difficult to assemble in her 13-year tenure with the retail trade group.

“I haven’t experienced a time where I’ve seen … a crisis like this,” Wells said.

The American consumer faces a challenging market environment as the labor markets continue to weaken and real incomes decline. Inflation continues to boost the cost of household staples such as food and fuel and domestic budgets are stretched thin.

That’s bad news for a U.S. economy that counts on consumer spending to provide over two-thirds of gross domestic product (GDP). With such a huge slowdown in retail sales, it’s going to take time for the economy to get back on track.

“There are so many indicators that are in recessionary territory already that there is a possibility that we see no growth or slightly negative growth in the next quarter or two into early of next year, and then it takes time for that to turn around,” Wells told Reuters.

Discount retailers, such as Wal-Mart Stores Inc. (WMT), that make value the cornerstone of their product offerings and marketing are likely to fair best during the upcoming months, while specialty retail stores suffer.

News and Related Story Links:

• Bloomberg News:
  Holiday Sales Gain in U.S. May Be Slowest in 6 Years

• MarketWatch:
  Retailers’ holiday could be worst in six years: NRF

• CNNMoney.com:
  Weakest holiday sales since ‘02 seen

• Reuters:
  Holiday sales set for worst gain in 6 years: NRF

Stimulus checks helped send retail sales up 1% in May, the Commerce Department said yesterday (Thursday), bolstering the dollar and lifted the mood on Wall Street.

But the effects may not last, as unemployment continues to rise and crude oil supplies tighten.

Record high gasoline prices padded the report, but purchases still increased in every other sector. Gasoline sales jumped 2.6% last month and have gained 13.8% in the past year. Excluding gasoline, sales still climbed 0.8%.

“Yes, we bought a lot more gasoline as prices skyrocketed,” said Joel Naroff, president and chief economist at Naroff Economics Inc. “But the sales gains may not have kept up with the cost increases. More importantly, you name the good, electronics, appliances, clothing, health care, food or general merchandise and sales rose. We even ate out more.  That is impressive, to say the least.”

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Many economists were impressed by the figures as retail sales rang up $385.4 billion for the month. However, most attributed the growth to the $50 million in economic stimulus payments the U.S. government sent out in May, and analysts are divided on whether their positive effect will continue.

“The full impacts of the rebate checks are still to come as people are still receiving them,” Naroff said. “That holds out hope that consumption will continue to expand through the summer.”

Then again, unemployment is on the rise having reached 5.5% in May, a 0.5% increase from April – the largest monthly increase in 23 years. Initial claims for unemployment benefits rose to 384,000 last week from 359,000 for the week ended June 6.

“This good [retail] report suggests the tax rebates are having an impact,” Mark Zandi, chief economist at Moody’s Economy.com, told Bloomberg in a radio interview. “As these effects fade, the weaker job market will take over.”

Also, after nine months cutting interest rates and lending freely to financial firms hoping to ease the pain of the credit crunch, U.S. Federal Reserve Chairman Ben S. Bernanke is has been phrasing a reversed course to battle inflation.

“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so,” Bernanke said earlier this week. “The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations.”

Coupled with tough talk from the European Central Bank, the message is clear: The U.S. Federal Reserve can no longer afford to stand by and watch the value of the dollar plummet. And if that means the economy and investors limp through the remainder of 2008, so be it.

“The immediate effect from this dramatic shift in policy priorities has been to ‘drain’ visibility, confidence and liquidity from financial markets,” Tullett Prebon economist Lena Komileva wrote this week, according to Fortune. “With monetary policy adopting the role of a risk-driver rather than a source of relief for financial markets, current conditions are actually worse than they were last August when the credit crunch erupted.”

News and Related Story Links:

• Bloomberg:
  U.S. Economy: Retail Sales Gain More Than Forecast

• Fortune:
  Tough love from Bernanke

• AFP:
  US retail sales surge as Americans spend more on gasoline, goods

• Money Morning:
  The Fed’s “Strong Dollar Policy” Actually Isn’t So Strong

• Money Morning:
  How to Survive Stagflation – With a Profit in Your Pocket

The Home Depot Inc. (HD) reported a 66% decline in first-quarter net earnings, the result of what Chief Executive Officer Francis Blake called "worsened" housing and home improvement markets.

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Net earnings for the biggest home-improvement retailer in the United States decreased to $356 million, or 21 cents a share, down from $1.05 billion, or 53 cents a share, the company earned during the same period last year.

Home Depot’s earnings report soured markets yesterday (Tuesday), which opened lower on the news.

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"The home-improvement market remains difficult, but we believe the results show that Home Depot is making early progress in its efforts to refocus," Chris Horvers, an analyst with The Bear Stearns Cos. Inc. (BSC), wrote in a research note today, Bloomberg reported.

Some of those refocusing efforts include closing doors. Earlier this month, Home Depot announced that it will shut down 15 of its core retail stores in a move that will curb operating costs and affect 1,300 employees. The announcement came 7 1/2 months after company CEO Blake said there were no plans to close any core retail stores.

The stores to be closed include: three in Wisconsin, two in Ohio, two in New Jersey, two in Indiana and one each in Kentucky, Louisiana, Minnesota, North Dakota, New York and Vermont.

The company also plans to delay expansion plans, saving $1 billion over the next three years, Blake said on a conference call.

"Home Depot is bouncing back from the problems that (former CEO Robert) Nardelli passed along," Burt Flickinger, managing director at New York-based Strategic Resource Group, said in a Bloomberg Television interview.

Flickinger said that Blake "is doing a great job with his team in rebuilding the business for the future."

Though Home Depot didn’t lower its full-year forecast, Chief Financial Officer Carol Tome said earnings could be at the low end of its forecast.

Such wasn’t the case for its rival, Lowe’s Cos. Inc. (LOW), which after reporting an 18% decline in first-quarter profit, lowered its full-year outlook. The No. 2 home-improvement retailer in the United States said it expects a per-share profit of $1.45 to $1.55 for the year. Previously, its outlook for the fiscal year ending Jan. 30 was pegged at $1.50 to $1.58 a share.

"The external pressures facing our industry will likely persist throughout 2008," said Chief Executive Robert Niblock on a conference call.

Indeed, Home Depot and Lowe’s have a litany of problems in the near future. Gasoline prices are above $3.75 a gallon. Consumer confidence is at its lowest level in almost 28 years, according to Reuters/University of Michigan preliminary index of consumer sentiment released May 16.

Specific to the housing industry, sales of previously owned homes (which comprises 85% of the housing market) fell again in March, the seventh decline in eight months. Those homebuyers are reliable customers for both Home Depot and Lowe’s, as they often buy their homes with renovations and remodeling in mind. 

News and Related Story Links:

• Bloomberg:
  Home Depot Profit Drops 66% on U.S. Housing Slump

• MarketWatch:
  Lowe’s profit falls 18%, hurt by housing market

Both discount retail giant Wal-Mart Stores Inc. (WMT) and high-end fashion bellwether maker Liz Claiborne Inc. (LIZ) reported earnings yesterday (Tuesday), but their vastly divergent results offered glimpse into the often-evasive mind of the American consumer.

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The Bentonville, Ark.-based Wal-Mart, a beacon of blue-collar commercialism known for its low prices and a varied product line that includes clothing, food, and car tires, posted a strong sales numbers. The company posted a quarterly gain with net income that increased 6.9% to $2.8 billion, and diluted earnings per share of 76 cents. [Please click here for a full story on Wal-Mart's earnings in today's issue of Money Morning.]

Meanwhile, the New York-based Liz Claiborne, maker of such top-end products such as Kate Spade handbags and Juicy Couture clothing, reported a loss of $31 million, or 33 cents per share, compared with net income of $16.2 million, or 16 cents, for the same period a year ago.

Indeed, consumers are still spending, but their money is going towards necessities, not luxuries. And with soaring commodity prices putting upward pressure on the costs of all kinds of goods including food and fuel, an increase in total sales volume doesn’t always translate to a fatter bottom line.

Just ask Liz Claiborne – the firm wasn’t able to turn a 4.9% increase in sales for the quarter into profits, causing the company to lower future guidance.

And even with a quarterly gain under its belt, Wal-Mart Chief Executive Officer H. Lee Scott acknowledged "uncertainties about the rest of the year." 

Also yesterday, the Commerce Department announced that U.S. retail sales dropped 0.2% in April, due to a 2.8% decline in auto sales. Excluding autos, retails sales actually gained 0.5%.

"U.S. consumers still have some gas left in the tank, even if it costs more to fill it up," wrote Meny Grauman, an economist for CIBC World Markets Inc., MarketWatch reported.

The 0.2% dip was less than expected, as the median of economist expectations was a decline of 0.3%. Coupled with the increase in retail sales in March, some see this as a sign that the U.S. economy is recovering.

"The worst fears are not being realized," Jay Feldman, an economist at Credit Suisse Holdings Inc. in New York told Bloomberg News. "We still think growth is going to be soft," but billions of dollars in economic stimulus checks on the way to U.S. consumers may "keep us above water," he said.

Retailers are encouraging taxpayers to spend their government-issued windfall. And if they do, those checks could provide a nice bump for second and third quarter retail sales.

But while the economy might be turning a corner, it could still be too soon to jump back into retail stocks.

"At some point, of course, the economy will rebound and so will retail," said Melly Alazraki of BloggingStocks. "The time to get back into this sector will be when the first signs of a recovery appear. But right now, no one is sure when that will happen and the expectation is for at least two more quarters of weak results."

News and Related Story Links:

• Bloomberg News:
  U.S. Economy: Retail Sales Advance, Excluding Autos

• Reuters:
  Bullish retail sales cheer dollar

• MarketWatch:
  U.S. retail sales drop for third month in five

• AFP:
  US retail sales drop as Americans put brake on SUV purchases

• BloggingStocks:
  Liz Claiborne, Wal-Mart beat – time to buy retail?

• Bloomberg News:
  Liz Claiborne Posts a Loss, Lowers Profit Forecast

Investigators from Japan’s Fair Trade Commission raided the offices of Sharp Corp. (OTC: SHCAY) and Hitachi Displays Ltd. yesterday (Thursday), due to suspicions the two were fixing prices of display panels for Nintendo’s popular DS portable game machines, The Wall Street Journal reported.

In related news, a source said that South Korea’s Samsung Electronics Co. Ltd. (PINK: SSNLF) is in the final stages of contract talks with Japan’s Sony Corp. (SNE) about jointly developing a new production line for liquid crystal displays (LCD) for television sets.

The revelation soothed concerns that the Samsung/Sony alliance had hit a rough patch: Early this week, Sony said it was taking a one-third stake in a $3.5 billion LCD plant that Sharp is building to meet the soaring worldwide demand for flat-screen television sets.

Trade Investigation

Investigators for the FTC – Japan’s watchdog for domestic trade matters – searched several offices and factories of both Sharp and Hitachi Displays, commission officials told The Journal. Since sometime in 2005, Hitachi and Sharp were allegedly fixed prices on LCD panels before supplying them to Nintendo Co. Ltd. (OTC: NTDOY) for use in its Nintendo DS consoles, according to media reports.

Sharp and Hitachi Displays are the sole suppliers for the small LCD panels that Nintendo uses in its DS and DS Lite gaming consoles. Sharp started supplying the panels since the DS devices debuted in November 2004, and Hitachi Displays became a secondary supplier a year later. The price-fixing began when Hitachi became a supplier, investigators allege.

According to reports from newspapers in the Asian region, the price-fixing allegations surfaced as part of December 2006 cross-border probes when trade agencies in Japan, Europe and the United States investigated the world’s top panel-display makers for possibly agreeing to limit production as a way of offsetting price declines in the marketplace.

Violators of anti-monopoly laws can be socked with fines equal to 10% of their sales. That sales figure is not known.

None of the three companies involved in yesterday’s raid would comment. Sharp and Hitachi Displays confirmed that the raid took place. A spokeswoman for Sharp told The Journal she couldn’t provide details of the trade allegations, while a spokesman for Hitachi Displays said the raid involved its LCD product line, but couldn’t identify the client involved. A spokesman for Nintendo said it was too early to comment on whether the company would be looking to change suppliers.

The company said it expects to sell 29.5 million DS machines for the fiscal year through March 31.

The Samsung/Sony Alliance

When Sony confirmed it was going to invest a reported $926 million for a 34% stake in a new LCD factory planned by Sharp, analysts immediately concluded that Sony might not cooperate with Samsung in future projects.

However, Sony President Ryoji Chubachi pledged to continue running S-LCD, its joint venture with Samsung.

That may not be the final word, though.

Sony is expected to see sales of its flat-panel TV sets soar between 50% and 100% in the new business year, which starts April 1.

Needless to say, Sony is in desperate straits with regards to securing enough flat panel displays to meet demand.

But Sony and Samsung are direct rivals in the LCD TV market, with Samsung ranked the world’s biggest LCD TV maker last year. Sony and Sharp rank second and third, respectively.
Matsushita Electric Industrial Co. Ltd. – maker of the Panasonic brand – controls one-third of the plasma TV market.

That’s why Sony is taking the one-third stake in the $3.5 billion LCD plant that Sharp is building. Sharp markets the Aquos line of LCD TVs. It plans to take the LCD plant – which would be the world’s largest – into a joint venture: The Osaka-based Sharp will take a 66% stake, while Sony will take the remaining 34%.

The Sony-Sharp alliance is just the latest in a series of linkups taking place among Japan’s flat-panel TV producers, who are trying to balance two competing challenges: The need to secure enough LCD panels to meet the accelerating demand against the desire to keep their capital investments low at a time when flat panel displays are becoming a commodity, inducing steep price declines for the components.

In the face of burgeoning demand and tight supplies for LCD panels, companies are choosing different routes to fill their needs. Late last year, Toshiba Corp. (OTC:TOSBF) decided to buy LCD panels from Sharp. But earlier this month, Panasonic-maker Matsushita said it would spend $2.8 billion to build an LCD plant of its own.

The venture reduces Sony’s reliance on Samsung – currently its main supplier – at a time when LCD TV sales are projected to rise 29% this year, easily outpacing demand growth for rivaling plasma-based TV sets. Both UBS AG (UBS) and Lehman Brothers Holdings Inc. (LEH) predict that the LCD shortage will persist throughout the year.

Worldwide sales of LCD TVs are expected to reach 155 million units by 2012, double the 74.8 million sold in 2007, according to the Japan Electronics and Information Technology Association. Demand for plasma TVs will likely reach 25 million units in 2012, 119% more than the 11.4 million sold last year, the JEITA said.

Sony is expecting to sell 10 million of its Bravia LCD TVs in the current fiscal year, which ends March 31. Projections call for the company to sell between 15 million and 20 million LCD TVs in the fiscal year that starts April 1.

The suggested list price of the TVs range from a low of $800 to a high of about $4,200, according to the Sony Web site.

It has a second LCD joint venture – the one with Samsung that’s known as S-LCD.

Samsung and Sony spent a combined $1.9 billion on the initial production line in that venture, and Samsung is currently ramping up the line on its own, spending another $2.1 billion.
Samsung believes it is still possible to work with Sony on the next-generation production line, and Sony’s Chubachi on Tuesday said his company is willing to consider such a plant with Samsung if Samsung proposes the venture. Apparently some negotiations already are under way.

Experts say that Samsung has benefited from Sony’s brand power and from Sony’s steady demand for the Samsung LCD screens, while the venture provided Sony with a partner to shoulder heavy investment needs at a time when a "go-it-alone" investment strategy is highly risky.

But as Sony diversifies its sources for LCD panels, analysts believe the firm might be able to position itself so it has pricing power over Samsung – even though Samsung was the world’s No. 1 maker of large-size LCD screens last year.

 "Sony had difficulty in securing enough panels, but now it can have bigger power in pricing negotiation" because it has multiple suppliers, said Park Sang-Hyun, an analyst at the Seoul, South Korea-based CJ Investment & Securities Co. Ltd.

LCD makers such as Samsung that already have manufacturing capacity in place will reap big benefits from a booming flat-panel TV market this year, since demand is soaring even though inventories of panels and related components remain low. But there are huge concerns about a production glut in 2009 and 2010 when new factories – such as the Sony/Sharp – begin production.

"The picture could be grim for 2010," CJ Investment’s Park said.

News and Related Story Notes:

• Reuters:
  Sony to own one-third of Sharp’s $3.5 billion LCD plant.

• Money Morning:
  Sharp and Sony Link up in Joint Venture to Make LCD Panels for Burgeoning Flat Panel TV Market.

• The Wall Street Journal:
  Sharp, Hitachi Raided On Price-Fixing Allegation.

• Sharp USA:
  Widescreen Aquos televisions.

• Reuters:
  Global flat TV demand to double by 2012: Japan Group.

• Bloomberg News:
  Sony Will Invest in Sharp Factory to Meet LCD Demand.

• Reuters:
  Samsung finalizing LCD line talks with Sony: Source.

The holiday shopping season has come to a close and while final sales figures won’t be released until mid-January, retailers fear they will fail to meet even the most modest of expectations.

Sales reports released so far have demonstrated that the 2007 holiday shopping season has shown the slowest growth in retail sales in five years. And it seems unlikely that after-Christmas bargain hunters will be able to make up for the lackluster same-store sales results that were posted ahead of the holiday rush.

This is no small matter: The holiday shopping season can account for as much as 60% of a retailer’s sales for the year, so a bad holiday can translate into a lackluster full year. And since consumer spending accounts for between 60% and 70% of U.S. economic activity, a lackadaisical consumer can translate into a stalled economy.

With housing already in a full-fledged downturn, and the financial sector riddled with holes, a reticent consumer couldn’t come along at a worse time for the U.S. market.

Lackluster Predictions

Not that this was wholly unexpected. In September, the National Retail Federation (NRF) released sales expectations for the 2007 holiday shopping season [defined as retail sales occurring in November and December].  Sales were predicted to grow 4%, below the yearly 4.8% average, making 2007 the slowest growth year in the past five years.  However, it appears that holiday sales will not meet those expectations, and will likely even come in a bit lower than expected.

Many retailers are hoping that the large number of gift card purchases this year will give holiday retail sales a last-minute boost. Gift card sales are not recorded until the recipient actually redeems the card for merchandise. 

"Gift card redemption is a huge traffic driver this week," Burt Flickinger, managing director at New York-based Strategic Resource Group, told Bloomberg News. "Otherwise, people would be sitting home unwrapping Christmas and Hanukkah presents, or going to the movies."

Retailers like gift cards for a number of reasons. For one thing, they can drive store traffic – and overall sales. That’s because gift-card recipients often spend more than the face value of the card, making up the rest with their own money.  With more gift cards sold this year than ever before, sales in the week after Christmas should be higher than in previous years.  Stores are doing their best to lure in late shoppers by slashing prices and offering new merchandise.  But prior to Christmas, same-store sales only rose a meager 2.4%, leaving a large shortfall for gift card sales to overcome in just one week.

Online Retailers Score

Online retailers had much better results to report.  Leading ecommerce tracker, comScore Inc. (SCOR), announced that almost $28 billion had been spent online through Dec. 27, representing a 19% increase in sales over the same period in 2006.

"Even as the holiday shopping season winds down after Christmas, we continue to see some relatively strong online spending days," comScore Chairman Gian Fulgoni said in a statement. "For example, the day after Christmas saw online sales of $545 million, more than double the sales on the same day last year. This would appear to indicate that consumers were willing, and able, to take advantage of the attractive late-season promotions and price discounts offered by retailers this year."

Despite the positive gains in online sales, for most consumers the continuing uncertainty behind the subprime mortgage crisis, the shaky housing market, and $3 per gallon pump gasoline led to cautious spending habits this year.

"The ingredients were not there for a blockbuster season," Michael McNamara, vice president, research and analysis of MasterCard Advisors, told MSNBC. "And retailers, in many respects, got the most out of the season that they could, based on the environment."

News and Related Story Links:

• Bloomberg:
  Macy’s, Abercrombie May Get Boost From Gift Cards

• MSNBC:
  After Christmas, shops try to lure scrooges

The day after Thanksgiving, known in retail circles as "Black Friday," marks the unofficial kickoff of the holiday shopping season. The label is supposed to represent the exact day [or close to it] that retailers move "into the black" – become profitable – for the year. It is also the time that investors, analysts, and market pundits alike start speculating in earnest about the success [or failure] of the retail season and determine how to best play the markets.

The holiday shopping season is so closely watched because the fourth quarter – and the holiday shopping season – can account for 50% to 70% of retailers’ sales and profits for the entire year. A bad holiday season can translate into a dismal year.

The recent same-store sales results, Wal-Mart Stores Inc. (WMT) earnings reports, and retail sales announcement all jumpstarted speculation for this season as investors look for a reason to buy or sell retailers [and related equities].  

Of course, every year like clockwork, retailers start out very early in predicting "gloom and doom" for the holiday shopping season – as if to warn those investors and analysts not to be overly optimistic about future revenue. And this year seems to be no different. But could retailers just actually be trying to set expectations low so that they could subsequently surprise us with better-than-expected results?  What moneymaking opportunities exist within their negativity?  Can history serve as any kind of guide for the future?  [Random walk theorists can stop reading here.]  

A Stroll Down Memory Lane

 Investors should remember that the 2006 holiday-shopping season followed this same nay-saying script. Unseasonably warm weather helped retailers forecast weak late-year sales as those winter wardrobes remained on store shelves.  Energy prices hovered above historic norms, though some analysts believed that hedge fund-managers [remember Amaranth?] and other "speculators" were keeping prices artificially high.  Concerned investors bought commodities as a natural hedge against inflation.  The sluggish housing sector persisted and homeowners put off those major purchases until they became more comfortable about a rebound. 

However, when the dust had settled and the calendar clicked over to 2007, the U.S. Commerce Department reported that retail sales activity in December rose by its biggest percentage in five months and, for the entire year, sales had climbed by a very solid 6%.

Furthermore, gift-card revenue isn’t recognized until those cards are "redeemed" [in other words, until the money on the cards is swapped for gifts…. although retailers have had the cash for months], meaning sales activity months later added to the success of the holiday season. Oil prices plunged in the first few weeks of the year as the "unseasonably warm weather" finally was viewed favorably.  In another words, the "gloom and doom" never materialized, the almighty consumer was alive and well in late 2006, and forward-thinking investors took advantage of some strong early year performances within the sector. 

That was Then…This is Now [Or is It?]

For 2007, many retailers are [again] saying the holiday shopping season will severely lag prior years [and the reasons sound quite familiar].  After all, unseasonably warm weather has restricted buyers from updating their fashionable winter wardrobes.  Oil prices have been hitting record setting levels; gasoline selling for more than $3 a gallon has put a major dent in consumer’s pocketbooks, and investors are commodities such as gold as a hedge against inflation.

Despite some earlier-than-normal discounting, retailers ranging from Nordstrom Inc. (JWN) to Macy’s Inc. (M), from Limited Brands Inc. (LTD) to Wal-Mart, reported disappointing same-store sales results in October.  Some claim that housing woes [and now ongoing subprime mortgage woes] will restrict activities as consumers wait for some signs of a rebound.

Retail sales expanded at only a moderate pace in October, leaving analysts to grow increasingly concerned that retailers are facing a sub-par holiday season.

Total retail sales for the month increased 0.2%, which was in line with most estimates, but which represented a significant retreat from the upwardly revised 0.7% gain in September, according to figures released a week ago by the U.S. Commerce Department.

The sales increase was boosted by a 0.8% gain in gas station sales, thanks chiefly by higher prices at the gas pump. Excluding gasoline, retail sales were only up 0.1%  – their smallest gain in four months.

What’s more, consumer confidence is at its lowest level since the immediate aftermath of Hurricane Katrina.

Certain kinds of trucking companies can be excellent "leading indicators" of economic statistics, since they "ship" products purchased ordered by consumers, and also retailer inventories that have been drawn down by sales to consumers.

Trucking company YRC Worldwide Inc. (YRCW) and package-delivery giant FedEx Corp. (FDX) both are experiencing rough market conditions, YRC Chief Executive Officer Bill Zollars said Friday. YRC, based in Overland Park, Kansas, is the largest "less-than-truckload" trucking firm in the U.S. market, operating under such brand names as Yellow Transportation and Roadway. It announced a drop in third-quarter earnings on Oct. 25, citing weakness in the manufacturing, housing and retail sectors, Zollars told Dow Jones Newswires (DJ).

FedEx early Friday cut its earnings guidance for both its fiscal second quarter and the full fiscal year, citing high fuel costs and weak less-than-truckload trends, triggering share declines in the trucking sector. Less-than-truckload carriers consolidate freight for more than one customer in a single truck.

"It’s gotten a little bit worse every month, and unfortunately that continues," Zollars said.

But before shorting all of those retail stocks, investors should remember last year and consider a few other pieces of data.  The jobs market [sans the financial industry] has held up surprisingly well given the current credit concerns.  In October, payroll additions were reported at the strongest level in five months and the unemployment rate stands near historic lows.

Inflation remains a concern, though certain energy analysts claim that speculators may be running amuck, supply issues do not justify the elevated prices, and an early 2008 pullback in oil may again be in the cards.  A weak dollar has suddenly allowed "Made in America" goods to become much more affordable in overseas markets  [at least to international consumers].

You can worry about energy prices, housing prices, the subprime crisis and other such problems, but the bottom line is jobs, says Joel Naroff, President and Chief Economist at Naroff Economic Advisors Inc., an economic-research firm based in Holland, Pa. And since employment remains strong and unemployment remains low, spending this holiday season shouldn’t be the disaster than many naysayers are predicting.

"I think a few of the reservations related to the holiday season are likely to be proven to be overblown," Naroff told Money Morning in an interview last week. "Typically, when it comes to spending – especially holiday spending – it’s really all about jobs, really all about incomes."

The "gift-card syndrome" has changed the nature of the retailing season. It may well spread, or space out, the shopping season. But the bottom line is that retailers still get the money, and that the activity is still there.

Despite the sluggish October same-store-sales numbers, Wal-Mart, the world’s largest retailer, announced strong third-quarter profits and increased its earnings forecasts for the rest of the year.  The U.S. economy, as measured by gross domestic product (GDP), grew by a larger-than-expected 3.9% in the third quarter and consumer spending was considered the primary driving force.  While most analysts expect a slowdown in the coming quarters, many point to the recent U.S. Federal Reserve interest-rate reductions as proof that central bank Chairman Ben S. Bernanke and friends stand prepared to act should any signs of a slowdown [or even worse, signs of a recession] begin to appear.

Is the Sky, Indeed, Falling?

As you can clearly see, the arguments about this year’s holiday shopping season sound like an "I Love Lucy" re-run of the gloomy predictions made last year. And, as we saw, consumers did not go into hibernation in 2006 and the season ended up being pretty decent for retailers [and for many investors, too].

Black Friday will soon be upon us and those deep discounts will go into effect.  Retailers, stop your constant bellyaching.  We’re not buying it again this year.  In other words…Cha Ching [or not].

Ron Brounes, CPA, is a technical financial writer and president of Brounes & Associates (www.ronbrounes.com), a Houston, Texas-based consulting firm that provides writing, communications and educational services for financial services professionals.

News and Related Story Links:

• The Associated Press:
  YRC Sees Weak Trucking Trends.

Retail sales expanded at only a moderate pace in October, and analysts are growing increasingly concerned that retailers are looking at a sub-par holiday season.

Total retail sales for the month increased 0.2%, which was in line with most estimates, but which represented a significant retreat from the upwardly revised 0.7% gain in September, according to figures released yesterday (Wednesday) by the U.S. Commerce Department.

The sales increase was boosted by a 0.8% gain in gas station sales, thanks chiefly by higher prices at the gas pump. Excluding gasoline, retail sales were only up 0.1%  – their smallest gain in four months.

"The consumer continues to shop, though most of the additional money is paying for the higher costs of gasoline and food," Joel Naroff, President and Chief Economist at Naroff Economic Advisors Inc., told Money Morning. "Rising food and energy costs led to significant increases in household spending that basically accounted for all of the gain."

Higher gasoline prices are the direct result of crude oil’s surge towards $100 a barrel. The price of oil has climbed 30% in the last month – and has quadrupled since 2002.

With the U.S. housing market mired in a deep and painful slump, and stringent lending guidelines putting a crimp on borrowing consumer and commercial borrowing, the last thing the U.S. economy needs is the added burden of gasoline at more than $3 a gallon for a prolonged stretch. But to have those negative factors all come together at the start of the all-important holiday shopping season makes the nation’s economic outlook even more dire.

Fourth-quarter retail sales can account for as much as 50% to 70% of a retailer’s sales and profits for the year. So a consumer-spending slowdown at this point could be especially damning, of annual sales and profits. So a consumer backlash at this point would be particularly dramatic. A possible December rate cut by the Federal Reserve would come too late to save the holiday shopping season.

So far, Fed Chairman Ben. S. Bernanke has been walking a tightrope as he tries to balance the specter of rising inflation against the threat of an economic downturn. And there’s no middle ground, for any steps taken toward solving one of the problems is almost certain to exacerbate the other one.

Since consumer spending accounts for 60% to 70% of U.S. economic growth, a downturn in spending could severely impact an economy already significantly scarred by the subprime mortgage meltdown.

The Fed has already reduced its benchmark rate by 75 basis points (three quarters of a percentage point) in the last three months, but the risk of inflation could prevent Bernanke & Co. from taking further action.

"Further sharp increases in crude prices have put a renewed upward pressure on inflation and may impose further restraint on economic activity," Bernanke said in testimony given before Congress Nov. 8.

The Producer Price Index (PPI), an indicator of wholesale prices being paid by businesses, was also released yesterday. It showed a modest 0.1% increase in wholesale prices for the month of October, which suggests only moderate inflation.

Food prices rose 1%. Energy prices fell 0.8% in October after jumping 4.1% in September.  The core PPI, which excludes food and energy prices, remained unchanged from a 0.1% gain in September. The Consumer Price Index (CPI), a slightly more accurate barometer of the inflationary climate, is set for release today (Thursday). It is expected to rise by 0.2%.

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From Staff Reports

The U.S. Commerce Department reported a big jump in September retail sales Thursday, according the Associated Press. The 0.6% increase outpaced projections and doubled the rise in sales seen in August. The positive news warded off much of the recession talk looming over the credit crunch and housing market.

Weak sales in department stores and specialty clothing shops were offset by strong auto sales, which were up 1.2% in September and 3.3% in August. Sales of gasoline in September jumped 2%, after sinking 2.6% the month prior.

The positive report is good news for the economy, but will disappoint some investors hoping for another rate cut.

"This was a solid report that seems to point to continued consumer spending," said Joel Naroff, president of Naroff Economic Advisors Inc., an econometric-research firm based in Holland, Pa. "As a consequence, the chances of a Fed ease on October 31st seem to be fading."

Also, the Labor Department said core prices, which exclude food and energy, rose just 0.1% – less than many analysts anticipated. Fueled by soaring food and energy costs, the overall wholesale inflation figure rose 1.1%. That increase was driven by a 4.1% surge in energy prices in September, and an 8.4% rise in the cost of gasoline. Still, the Federal Reserve and its Chairman Ben S. Bernanke prefer to gauge the core inflationary rate.

News and Related Story Links:

• The Associated Press:
  Retail Sales Jump Up in September.