Market Roundup
Dow
17,758.21 (+27.73)
S&P
2,081.72 (+3.14)
NASDAQ
5,083.24 (-12.06)
10-YR Yield
2.32% (-0.02)
Gold
$1,087.70 (-$0.40)
Oil
$45.40 (+$0.28)
If the job market is as strong as the Labor Department says it is …

And the Wall Street “experts” are right about how much buying power consumers get from lower gas prices …

Then why the heck are retailers so weak?

Look at the SPDR S&P Retail ETF (XRT), an equal-weighted ETF that owns 104 leading retail stocks. Or the PowerShares Dynamic Retail Portfolio (PMR), an ETF that owns 30 retailers that meet certain price and earnings momentum, quality, and value screens. You can see they’ve been dramatically underperforming the S&P 500 during the recent bounce, and may be on the verge of rolling back over.

Some individual retail stocks look even more hideous. Take Kohl’s (KSS), off 28% year-to-date. Or Wal-Mart Stores (WMT), off 32%. Or Gap (GPS), down 34%.

These are exactly the kinds of stocks you’d expect to thrive in a “booming” job market, with the cost of necessities like gasoline falling. But instead, the Grinch is paying them an early visit ahead of the upcoming holiday season.

Weakness for retailers doesn’t bode well for the overall economy.

Some of it stems from bad news out of specific companies. I highlighted Wal-Mart’s major warning in October, and it was joined by Gap late yesterday. The operator of its namesake stores, as well as Banana Republic and Old Navy, said same-store sales dropped 3% year-over-year in October. That will force the company to miss third-quarter revenue and profit targets.

But it’s more than that. Analysts took the axe to price targets and sales projections for several department store retailers this week. Their victims included Kohl’s, Dillard’s (DDS) and Macy’s (M).

They cited everything from the threat of online retailers like Amazon.com (AMZN) poaching business to warm weather, which could leave retailers stuck holding too much winter inventory. There’s also a growing consensus that the U.S. just has too many retail chains and stores for a more tight-fisted consumer.

Maybe I’m old-fashioned. But considering how the economists love to tell us the U.S. depends heavily on consumer spending to fuel GDP, this doesn’t sound good for growth.

“There’s a growing consensus that the U.S. just has too many retail chains and stores.”

I believe the technical trading action in the sector is another worrisome sign for the broader markets, too. So if you’re loaded up on stocks on the assumption we’re in for a strong finish to the year, and that the rally off the September lows is an “all clear” signal, I’d keep a close eye on the retailers. They may be pointing to a different outcome.

Now I’d like to hear your take. Should we be worried that the retailers aren’t keeping pace with the S&P 500? Or is it just a sector-specific problem?

Do you own any retail stocks, and if so, how are they working out for you? Are there any sector standouts you think can buck the trend – or particularly vulnerable companies you’d sell the heck out of? Make sure you stop by the Money and Markets website to weigh in.

Our Readers Speak

What will happen the next time a major banking crisis hits? Will the latest efforts to force banks to build up a financial cushion against bad times actually protect taxpayer or depositor funds? Those are a few of the issues you’ve been discussing over at the website.

Reader Bob said: “All the bonds and loans need to take their losses sooner rather than later, and rather than the U.S. taxpayer ‘refinancing’ the deals that the hedge funds and the finance industry pushed to the limit for their own benefit. The politics should not give away equity to the ones that have profited at the cost of the taxpayer.”

Reader Jean added: “The derivatives market is much larger today than it was back in the financial crisis, and the big banks were also allowed to grow much larger. So much for reducing the risk these banks create without hurting the economy and Mr. Taxpayer.

“In essence, it’s all lip service. If Europe blew up, there would be no amount of equity to cover it simply because there isn’t — it’s all debt and too far gone!”

Reader Howard noted another key reason why banks continue to get themselves in trouble: “Not one of these smart guys has felt the full force of the law and the public has been left holding the bag. Send them to jail if we want confidence restored in the system.”

Finally, Reader Gernot R. suggested another way to reduce risk in the banking system — shrink them! His comments:

“The whole discussion of ‘Too big to let fail’ is absurd. These big banks should simply be broken into pieces. Don’t let anybody tell you we need megabanks for megaprojects — that is just B.S. The old syndicated loan mechanism worked just fine.

“Today, if you look at the abomination called Citigroup (C) for example, it makes your hair stand up. These guys are so incompetent, they are a danger to the taxpayer. If they were broken up into about 25 units, you would have some real businesses and the threat to the taxpayer would be gone.”

I appreciate all the input. It’s clear our banking system has only gotten more concentrated in the wake of the financial crisis, and Europe’s mega-banks are even more potentially dangerous than ours.

That means these stocks could be incredibly vulnerable in the event of another major credit market downturn. Considering there are already signs the emerging market/M&A/junk bond/stock buyback bubbles are beginning to burst, that’s something to keep in the back of your mind when you’re considering where to invest your hard-earned dollars.

Any ground I didn’t cover? Additional thoughts you want to add? Here’s the link where you can jump in on the discussion.

Other Developments of the Day

● Easy money has given investors a sugar high … literally. Hedge funds and other fast-money traders have dog-piled into the sweet commodity in recent weeks, driving futures prices up 39% from their August lows.

But futures prices are running far ahead of actual prices in the physical sugar market. That’s a sign some of the run up is basically hedge funds looking for something — ANYTHING — to buy in a commodity market that’s been falling for several years in a row.

● The International Energy Agency piled on with the doom and gloom in energy, saying oil prices will remain subdued through 2020 due to excess supply and lackluster demand growth globally. It cited greater energy efficiency, a shift toward cleaner fuels, and reduced demand growth from emerging markets like China.

● Boston Fed President Eric Rosengren added to the chorus of Fed officials signaling a rate hike in December is increasingly likely. He cited relatively strong economic data, the chase for yield in sectors like commercial real estate, and other factors as reasons to get the hiking process started.

● The leading Republican candidates will go at each other again in a debate hosted by Fox Business News in Milwaukee tonight. Eight candidates will be on stage at the same time, which comes amid background questions focused on Ben Carson and worries that Jeb Bush is fading into the background.

So is Rosengren right, and a rate hike finally coming? What do you think about the IEA’s gloomy oil outlook? And what kind of fireworks or substantive comments do you anticipate in tonight’s debate? Hit up the website and weigh in when you have a chance.

Until next time,

Mike Larson