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Retail gets hit on Wal-Mart guidance

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The major market averages remain under some selling pressure after this morning's Chicago PMI reading of 48.1% came in below economist's forecast of 53.2% and dipped back below the 50% level, which signals a slowdown at the industrial level.

While the major market averages have recovered from early morning lows, the recovery has been modest.

A more "consumer sensitive" sector as depicted by the S&P Retail Index (RLX.X) 263 -4.6% and Retail HOLDRS (AMEX:RTH) $70.62 -5.08% has retailing stocks under pressure after the world's largest retailer Wal-Mart (NYSE:WMT) $49.03 -4.29% lowered its September same-store sales to up 3-4% versus last week's guidance of "near low end" of 4-6% range and saw full-year EPS of $1.76-$1.78 versus analyst's consensus of $1.79.

That news from Wal-Mart (NYSE:WMT) combined with this morning's release of August consumer spending, which rose a less than expected 0.3% (consensus was for rise of 0.5%) brought sellers to the retailers with broader market weakness in the early morning. Despite a very strong auto sales spending number, real consumer spending rose just 0.1% in August, the weakest growth in three months.

In the meantime, August personal income rose 0.4%, which was just slightly below economist's forecast for a 0.5% gain. Consumer's real disposable income grew 0.2%, boosting the personal savings rate to 3.6% of disposable income.

Economists note the weak growth in both incomes and spending reflects a mid-summer slump, which has raised fears that the economy might be slipping back into recession.

On the consumer spending front, economist Jade Zelnik, chief economist at Greenwich Capital Markets said, "From a monetary policy standpoint, the critical issue is how well consumer outlays will hold up into the holidays, particularly if promotions on motor vehicles begin to lose some of their appeal."

On a broader scale, a quick look at the NYSE and NASDAQ shows volume isn't overly heavy as both markets have now just breached the 890 million share mark. Earlier this morning, program trading curbs went into effect with the Dow Industrials fell 180 points from Friday's close. Since that time, the Dow Industrials (INDU) 7,537 -2.12% have not recovered back to the 7,611.45 level (within 90 points of Friday's 7,701.45 close) and trading curbs are still in, thus volume not as heavy.

Breadth at both the NYSE and NASDAQ is negative with decliners outnumber advancers by a 2 to 1 margin at the big board, while the NASDAQ is also negative at 2 to 1.

The NYSE shows 56 stocks trading new 52-week highs versus 295 stocks at new lows, which is rather "strong" considering NASDAQ shows just 12 stocks at new 52-week highs versus a growing 305 stocks at new lows.

The various sectors we monitor on a daily basis are largely in the red. Gold/Silver (XAU.X) 70.79 +3.17% has built further gains from our 11:00 update, while Biotech as depicted by the Biotechnology Index (BTK.X) 320 +1% with PDLI +2.6%, CEPH +1.76%, GENZ +1.5%, IVGN +2.8%, HGSI +4.9% and CRA +4% leading sector gains.

Jeff Bailey

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