Reality Check Part Two

Call this one Reality Check Part Two: a weaker than expected ADP report, along with disappointing earnings guidance from Time Warner and Intel, a big restructuring from Alcoa , and an 11 percent pullback in oil which pulled commodities and commodity stocks down all weighed on the markets today.

It was a broad market pullback, with 5 stocks declining for each 1 advancing, but it was the percentage declines that were more important: most stocks were down 3 to 7 percent.

While defensive names like healthcare and consumer stocks outperformed, they too experienced drops averaging 1 to 3 percent.

Up next: December retail sales out tomorrow, and analysts like Ken Perkins are anticipating poor numbers, characterized by:

1) Deep discounting, which will not me able to overcome the poor economy

2) Margin pressure because deep discounting hurt the bottom line: retail earnings excluding Wal-Mart are expected to drop 27.5 percent (!) in the fourth quarter, according to Retailmetrics.

3) Weak gift card purchases on solvency concerns and a desire to directly buy deeply discounted merchandise

4) Weak online sales, down 4 percent, according to comScore.

5) Poor weather in the form of major storms the final weekend before Christmas.

With the exception of drug stores, which will post modest single-digit gains, every category will be down.

Teen retailers will likely post the biggest overall losses (down 10.9 percent, acc. to Thomson estimates), with only Hot Topic and the Buckle are expected to post modest gains. Abercrombie , in particular, will be hit hard, with losses of 23.5 percent expected. Abercrombie, remember, refused to engage in the deep discounting, hoping to keep the "aspirational theme" of their brands. They have paid a price, though margins may be better than others.

Apparel (down 8.2 percent) will probably post the second-biggest decline in sales, with most (Gap , TJX , Limited) expected to post high single-digit declines.

Department stores (down 7.7 percent) will be almost as bad, with some (JC Penney, Nordstrom and Saks) expected to post double-digit declines.

Even discounters are having a tough time. Wal-Mart is expected to post a 2.8 percent increase (Thomson estimates) in same store sales, but Costco and Target are expected to be down 3.7 and 9.1 percent, respectively.

So the numbers will be ugly, but that is already in the market. The question is whether they will be significantly worse than the ugly numbers expected.

Finally, on Friday we get nonfarm payrolls. One trader noted to me that on the last 6 Thursdays prior to the non-farm payroll report, the S&P 500 was down 21.00, down 53.50, down 44.00, down 38.60, down 17.60 and down 23.40.



Questions? Comments?