Three reports were unanimous that sales gained, but to different degrees: Market research firm Retail Metrics Inc. said sales rose 1.1% last month, Thomson Reuters tallied a rise of 0.6% and a tally by International Council of Shopping Centers (ICSC) and Goldman Sachs Group Inc. (NYSE: GS) showed a 0.1% increase.

“Let the retail recovery begin,” said Michael Niemira, chief economist at ICSC. “This is the start of a better performance and better fundamentals.”

Retailers such as Target Corp. (NYSE: TGT), Aeropostale (NYSE: ARO) and Kohl’s Corp. (NYSE: KSS) raised their guidance for the current quarter ending October 31. But the encouragement was reserved as it pertains to the fiscal holiday quarter that starts next month for most retailers. Fundamentals key to consumer confidence – particularly unemployment, which rose to 9.8% last month – are still serious concerns.

“While our outlook for the third quarter has improved, we remain cautious in our expectations for fourth quarter results in both of our business segments,” said Gregg Steinhafel, Target’s chairman, president and chief executive officer.

Of course, retailers didn’t have to do much to beat last year’s September, which was relatively poor.

“You want to be careful how much you’re reading into the improved numbers,” Michael McNamara, vice president for research and analysis at SpendingPulse, an information service by MasterCard Advisors that estimates sales for all forms of payment, including cash, checks and credit cards in an interview with The New York Times.

For instance, jewelry sales increased 1.2% last month, McNamara said, “but that is still about 5% lower than we were in September 2007 and about 10% lower than the sector was in September 2006.”

“In some respects the sector has turned the clock back to 2005 sales,” he said.

While the bleeding at retailers may not have stopped, it has likely slowed as leading indicators such as the financial markets and consumer sentiment show improvement. The Standard & Poor’s 500 Index has risen more than 55% since its March lows, while the Reuters/University of Michigan Index of Consumer Sentiment was up to 73.5, its highest level since the start of 2008.

Among the biggest retail gainers on the stock market today (Thursday) from the news were American Eagle Outfitters (NYSE: AEO), which gained 8.88% to close at $18.14 and Abercrombie & Fitch Co. (NYSE: ANF), up 5.51% to close at $34.46.

Source: Will Rise In September Retail Sales Carry into Holidays?

It has been a tough week if you have anything to do with the world of retail. Just about every company that opened its books to the Street this week got punished for the act.

The list of “disappointing” reports is getting longer by the day.

Lowes (NYSE:LOW) kicked off the week with scary-low figures. Home Depot (NYSE:HD) beat the Street but still got punished after a slew of less-than-stellar economic reports.

Outside of the home-centric sector, shares of Liz Claiborne (NYSE:LIZ) plummeted on Monday after the Standard and Poor’s cut its rating on the unprofitable retailer to B, a two-notch downgrade. The company’s rating now stands five levels below investment grade.

High-end retailer Abercrombie & Fitch (NYSE:ANF) is also deep in negative territory for the week after succumbing to industry pressure and a downgrade from Susquehanna.

Obviously, the market believes a business model that focuses on trendy, expensive clothing is not a place to be during a deep, protracted recession.

And of course, there is Eddie Lampert and his Sears Holding (NYSE:SHLD). While the store may be the hideout of choice for any enslaved husband while his wife shops for new bed linens, fewer of us our purchasing the store’s products.

Shares of the company are down by double-digit proportions today after Sears announced it lost $94 million over the past three months. It is tough to make a profit when revenues are plunging by 10% (12.5 for comparable-store sales).

Essentials only investing

If consumers are not spending their money at the high-end stores or paying to fix up their house, where are they spending it? After all, there is no choice but to spend money on the essentials at the very least.

The key is understanding which retailers are stocked up on the essentials. Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are the first to come to mind.

And guess what… shares of Target are up on the week and Wal-Mart is just slightly in negative territory.

One of the most appealing sectors of the retail market is the ultra-cheap (in price and quality) “dollar store” segment. As the market breaks out its magnifying glass in an attempt to find any signs of so-called green shoots, shares of company’s like Family Dollar (NYSE:FDO) and 99 Cents Only (NYSE:NDN) have dropped from their recent highs.

The discounting is a mistake. Today’s unexpected surge in first-time jobless claims (a jump of 15,000 claims) proves tens of thousands of American consumers are still at risk of losing their jobs. That means they won’t be shelling out their reserves any time soon.

Instead, they will continue their spendthrift shopping.

While there are sectors much more likely to hand you sizeable profits in the near future, no portfolio is healthy unless it is properly diversified.

If you need exposure to the nation’s retail market, look at the big guys like Wal-Mart and Target or the small discount retailers where a buck will buy you just about anything… but a share of the company.

Finally, if you have been playing this sector or have your eye on any big movers, your fellow readers would love to hear about it. Drop us a line and let us know your thoughts.

Source: Dangerous Retail: The Sector That Refuses to Recover

Goldman Sachs Group Inc. (GS) reports tomorrow (Tuesday), while JPMorgan Chase & Co. (JPM) reports Thursday, and Citigroup Inc (C) reports on Friday.

While the chief executives of several of the largest U.S. banks were quick to announce favorable showings for the first two months of the year, analysts are concerned that the strong showings may not have carried over into March, and that the performances of some of these money-centered banks may disappoint.

Contradictions hit the financials last week as diverse reports about Morgan Stanley (MS) and Wells Fargo brought even more confusion to a sector that cannot seem to stay out of the daily headlines. On one hand, analysts expect Morgan Stanley to write down an additional $1.2 billion worth of bonds; subsequently, the firm may suffer its second straight quarterly loss.

On the other hand, Wells Fargo expects earnings to far surpass Wall Street’s projections as its Wachovia Corp. acquisition has enhanced its mortgage-lending capabilities at a time when rates are at historic lows and when the U.S. housing market is showing some signs – be they ever so slight – of rebounding [Indeed, a Money Morning report from just last week made this same point].

Bear in mind that since the financials have led the charge in equities during the past five weeks, investors may be looking for any excuse to take some recent profits.  Intel Corp. (INTC), which reports tomorrow, Google Inc (GOOG), which reports Thursday and General Electric Corp. (GE), which reports Friday, figure to be crucial announcements.

The March inflation gauges highlight the economic calendar, and economists hope that price pressures remain far off of their radar screens.  The retail sales data should lend a bit more insight into the current plight of the consumer.

Market Matters

Alcoa Corp. (AA) kicked off earnings season with more of whimper than a bang.  While the aluminum producing giant lost about $500 million during the quarter, the company expects to benefit from the infrastructure programs promoted in the economic stimulus package – key areas that could enhance demand for its products.  Bed Bath and Beyond Inc. (BBBY) reported better-than-expected quarterly results and even received a favorable analyst upgrade.

With the season set to kick off in a big way in the weeks to come, Thomson Reuters has called for a 37% drop in profits at Standard & Poor’s 500 Index companies, the eighth consecutive quarterly decline (though that prediction came before the Wells announcement).

Economically Speaking

A light week on the calendar still provided plenty of headlines on the economic home front last week.  Corporate executives painted a rather bleak picture of the short-term future for U.S. industry as the Business Roundtable issued a quarterly outlook that turned negative for the first time in its survey’s history.  The majority of those participating expect their companies to experience layoffs and reductions in business spending during the coming six months.

However, Roundtable Chairman Harold McGraw III, who is also the CEO of The McGraw-Hill Cos. Inc. (MHP), expressed confidence in the Obama administration’s ability to generate renewed business activity. McGraw said he also believes the economy may be close to a bottom.

On the other hand, minutes from the latest U.S. Federal Open Market Committee policymaking meeting that U.S. Federal Reserve Chairman Ben S. Bernanke and friends revised their expectations (to the downside) for the economic recovery. While they anticipate that gross domestic product (GDP) will flatten (from its current contraction state) by the end of the year, unemployment is expected to continue its downward spiral well into 2010.

Though initial claims for unemployment benefits surprisingly fell last week, they remain at very high levels, and total claims (those looking for jobs over extended periods) jumped to a record high. While the trade deficit narrowed to its lowest level since November 1999, the improvement is more indicative of the sluggish economy and the reduced global demand for any and all goods and services.

Retailers posted their results of March sales and the numbers were mixed at best.  While Wal-Mart Stores Inc (WMT) had long been the one “steady Eddie” during this economic downturn, the world’s largest retailer reported March sales that missed expectations (though the company does expect its quarterly results to be strong, thanks to a stellar February).  Stores that target teens like Abercrombie & Fitch Co. (ANF), Aeropostale Inc. (ARO) and American Eagle Outfitters (AEO) each posted disappointing numbers, though analysts point out that Easter (and many spring breaks) fall later in the 2009 calendar (April 12 this year versus March 23 a year ago) and most holiday shoppers are waiting until the last minute these days.

Still, more than 50% of those retailers reporting beat Wall Street expectations, and some even issued favorable guidance for the quarter as a whole.  Of note, The TJX Cos. Inc. (TJX) (TJ Maxx and Marshalls) and Penney Co. Inc. (JCP) both posted better-than-expected sales results and increased their outlooks for the three-month period.

Weekly Economic Calendar

Source:  As Earnings Season Heats Up, U.S. Banks Will Make or Break the Stock-Market Rally

Xinhua, China’s state-run news agency, said yesterday that the stimulus package represents “a shift long advocated by analysts of the Chinese economy and by some within the government. It comes amid indications that economic growth, exports and various industries are slowing.”

The decision was announced yesterday by the State Council after Premier Wen Jiabao presided over an executive meeting Wednesday. China reported in late October that its economy grew at a less-than-expected rate of 9% in the third quarter – the fifth straight quarter than growth has slowed, MarketWatch.com reported.

“As the global outlook deteriorates, we expect Chinese macro policy to turn increasingly aggressive,” Merrill Lynch & Co. Inc. (MER) economists T.J. Bond and Ting Lu wrote in a research report Friday. “This is a key theme for China and indeed, the entire Asian region.”

China becomes the latest major country to announce a stimulus package. Governments have been injecting billions of dollars into their economies, as central banks around the world slash interest rates, all in the hope of avoiding a whopper global recession. Just last week, researchers at the International Monetary Fund (IMF) said that world growth would slow to a tepid 2.2% next year, down from the 3.7% growth estimated for this year. The IMF forecast for China slashed the growth rate down to 8.5% next year, down from an earlier projection of 9.3%.

Reports are circulating that the U.S. government may be considering another infusion of its own. The urgency could escalate this week after retailers take center stage and announce their third-quarter earnings. Macy’s Inc. (M), Nordstrom’s Inc. (JWN), Abercrombie & Fitch Co. (ANF) and Wal-Mart Stores Inc. (WMT) all are expected to announce quarterly results.

The retail sales data for October will be released on Friday, though the recent weak sales numbers and earnings announcements should have provided more than fair foreshadowing of the actual monthly results.

Given that consumer spending accounts for 70% of the U.S. economy’s health, don’t anticipate great numbers. And don’t assume these are the worst we’ll see.

Market Matters

With traders predicting a victory by Democrat Barack Obama, the major markets jumped by more than 3% on election day and the Dow Jones Industrial Average closed at a four-week high. International stocks also climbed in anticipation of real “change” coming to the White House.

The euphoria was short-lived, however, as the economic realities returned “the morning after.”  Domestic indexes plunged 10% over the next two sessions in volatile trading.  Cisco Systems Inc. (CSCO), Time Warner Inc. (TWX), and News Corp. (NWS) became the latest companies to disappoint on quarterly earnings.  Likewise, General Motors Corp. (GM) and Ford Motor Co. (F) announced larger than expected losses and dismal sales results for October as execs presented a dire picture of the entire industry.  Circuit City Stores Inc. (CC) started closing stores; Goldman Sachs Group (GS) began handing out pink slips; JP Morgan Chase & Co. (JPM) announced plans to modify mortgage loans for delinquent borrowers.

Weak economic releases (see below) prompted oil prices to plummet again on enhanced recession concerns; the price of gasoline pushed below $2.40 per gallon – reaching its lowest level since early 2007.  For now, inflation does not appear to be a problem.  As for the President-elect, no one ever said it would be easy.  (Then again, optimists note, many of the same fears we face now were present back in 1992 when a relatively unknown Democratic president was elected and his party also controlled Congress. The Dow soared more than 200% during the President Bill Clinton years, the strongest performance in the post-World War II era. We also ended with a budget surplus – but that, at least, may be too much to ask for).

Weekly Market Data

Economic Matters

A hectic week on the economic calendar unfortunately brought little for investors (and the President-elect) to cheer about. The manufacturing sector appears to be in far worse shape than previously thought as the ISM index plunged to its lowest level in 26 years.  Two days later, that same Institute for Supply Management reported that the services sector was weakening, as well. Retailers remained very apprehensive about the holidays and the poorest October sales results since 1969 did nothing to relieve those fears.  JC Penney Co. Inc. (JCP) and Nordstrom’s reduced their earnings projections and only discounter Wal-Mart seemed to benefit from the uncertain times.

As for the highly anticipated unemployment releases, we found that during the month of October, the country shed another 240,000 jobs, its tenth straight month of labor contraction, bringing the year-to-date total losses to 1.2 million. Even worse, the losses appear to be accelerating.

Last month’s unemployment rate skyrocketed to 6.5% (from 6.1% in September) and now stands at its highest level since March 1994. Additionally, recruiting firm Challenger Gray & Christmas reported soaring layoffs (+79%) over the past 12-months, and payroll provider Automated Data Processing (ADP) revealed that the private sector suffered its largest monthly job contraction since December 2001. The dismal labor picture all but confirms a second consecutive quarter of negative growth (GDP), which translates into full-fledged recession. When individuals worry about their jobs, they don’t spend. Retailers suffer, manufacturers suffer, and the overall economy suffers.

We’re already seeing all of this – and there’s more to come.

Overseas, the world’s Central Banks followed in the Federal Reserves’ footsteps by dropping their key lending rates in attempts to jumpstart their respective economies. As Money Morning reported, the ECB (European Central Bank) cut its key interest rate by half a percentage point to 3.25%, while the Bank of England took surprising action by reducing its rate by one-and-a-half percentage points to take it down to 3.0% – an attempt at countering the impact of its rapidly falling housing prices and the ongoing credit crisis.

Weekly Economic Calendar

Source: China Stimulus, Troublesome Retail Earnings Point to Escalating Global Economic Woes

• The Organization of Petroleum Exporting Countries, which produces 40% of the world’s oil, is “very likely” to cut its crude production at its next meeting on Nov. 18, according to the group’s President Chakib Khelil. “The Organization is concerned about the deteriorating economic conditions with contagion risks,” OPEC members said today in a statement. The official production quota for 11 of OPEC’s members is 28.8 million barrels a day. The group exceeded that target by 390,000 barrels a day in September, according to Bloomberg estimates.

• Iceland yesterday (Thursday) took control of Kaupthing, the country’s leading bank, and suspended trading on its stock exchange for two days, as it the island country struggled to overcome a financial crisis that could ultimately result in bankruptcy. Iceland’s Financial Services Authority now has control of all three of the country’s major banks.

• New applications for unemployment benefits dropped from a seven-year high last week, according to the Department of Labor. Initial claims for jobless benefits dropped 20,000 to a seasonally adjusted 478,000. However, the four-week average, a more stable indicator, rose to 482,500 – the highest since October 2001.

• Micron Technology Inc. (MU), the largest domestic producer of memory chips, yesterday (Thursday) announced it would reduce its staff by 15% and scale back production levels. Over-production has flooded the market, pushing memory-chip prices below the cost to produce them, Bloomberg News reported. Micron has racked up $1.9 billion in losses over the past two years.

• National City Corp. (NCC) could be the next bank to get bought out by a larger rival as financial firms look to stabilize their capital positions by buying deposit assets at discount prices. PNC Financial Services (PNC) and Toronto-based Bank of Nova Scotia (BNS) are two of the potential buyers for the regional bank, Forbes reported.

• Abercrombie & Fitch Co. (ANF) and The TJX Cos. Inc. (TJX), parent company of T.J. Maxx and Marshall’s, both lowered their profit outlook as retail sector sales continue to worsen. “Consumers are bracing for recession,” Ken Perkins, president of Retail Metrics, wrote yesterday (Thursday) in a report, Bloomberg News reported. “Credit will continue to be very difficult to come by through the holiday-shopping season, and the jobs market is likely to further deteriorate.”

Source: Global Investing Roundups Friday, October 10th, 2008

Crude oil plunged 8% to close at $106.23 a barrel last week – reaching its lowest level in five months – as the U.S. dollar strengthened to its highest point against the European euro so far this year. Crude oil prices actually declined for six straight days – the longest stretch since they did so from April 30, 2007 to May 7, 2007.

U.S. fuel demand dropped 3.5% during the past four weeks. And unemployment spiked much more than economists had predicted. Even so, oil prices are still 41% higher than they were a year ago.

“Demand destruction and the strength of the dollar are tailor-made to send oil prices lower,” Daniel Flynn, a broker with Alaron Trading Corp. in Chicago, told Bloomberg News. “If it weren’t for the active hurricane season, prices would be below $100.”

Investors looking to hedge against the dollar’s decline earlier this year helped lead crude oil, gold, corn and gasoline to records. The situation reversed over the past month as the dollar rallied against the euro.

But the question now becomes: How will OPEC react?

The Organization of the Petroleum Exporting Countries, the cartel of 13 countries that supply 40% of the world’s oil, are scheduled to meet tomorrow (Tuesday) in Vienna. Iran and Venezuela – two of the perennial wild cards – have called for supply reductions because crude prices have plunged 28% from the record peak of $147.27 reached July 11.

“I think there’s a chance that next week could be very interesting because of the OPEC meeting,” said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta, told Bloomberg. “It doesn’t look like OPEC will cut quotas, but they are likely to try to boost prices with rhetoric.”

Typically, oil and gas prices decline after Labor Day as the return to school means families will be taking fewer vacations, while cooler temperatures translate into reduced energy demand.

The direction that oil prices take this time around, however, could be determined by Saudi Arabia, the world’s largest oil producer and the cartel’s key (most influential) player. Back in June and July, in an effort to blunt the soaring escalation in oil prices, Saudi Arabia opted to unilaterally boost its output by half a million barrels per day.

“Where Saudi Arabia is in this debate is crucially important – that’s our lynch-pin,” Jan Stuart, oil economist at UBS Securities LLC (UBS) in New York, said in a radio interview. Saudi King Abdullah “is on record [as] saying $100 [per barrel] is too high, but that was a little while ago. We don’t know what the Saudis are ready to defend and we do know the Saudis are the ones that would have to do most of the production cutting.”

No matter what happens to oil prices in the near term, the long-term outlook is clear: Over the longer term, oil and gasoline prices are going to rise.

Let’s face it – they have to. We’re talking Econ 101 here. Anytime you increase the demand for a commodity – and don’t increase the supply – the price is going to head higher. And the oil that’s in the ground now around the world is all that there is.

Emerging economies such as China and India will stoke global demand for oil, monopolizing supplies and forcing global petroleum prices higher.

No matter what happens in the interim, the long-term script is set – so invest accordingly.

Looking ahead to the rest of this week, the economic calendar initially appears light. Friday brings two key reports:

• Analysts expect August retail sales data to confirm lackluster consumer activity, though some are hopeful that parents used the last of those tax rebates for some late school shopping.
• And the August Producer Price Index (PPI) also will be over-analyzed as investors determine how declining energy costs will impact the overall inflation picture. The core data may not yet reflect lower oil and gas prices working their ways through other sectors of the economy. (Bear in mind, many economists prefer to focus more on the core numbers, which exclude the volatile food-and-energy prices).

U.S. Federal Reserve policymakers are set to meet again on Sept. 16, so pundits will begin prognosticating in earnest, though most expect central bank policymakers to follow the lead of the European central bankers and stand pat on interest rates.

Market Matters

Last week had the potential to be a “perfect storm” for stock-market bulls.

Hurricane Gustav had very little significant impact on energy platforms in the Gulf and most cities suffered little more than some wind, rain and power outages. Commodity prices continued their freefall and consumers soon should have a few extra bucks in their pockets (in time for the holidays) as gas and food become more affordable. Republicans – historically the party of Wall Street – kicked off their political pep rally with a one-time Democratic leader (turned attack dog) bashing the opposition and a self-described hockey mom rejuvenating the base. Even so, the euphoria never came as some weaker-than-expected economic releases (see below) brought the bears out of hibernation.

Once Gustav was out of the picture (for the most part), oil resumed its decline. A stronger dollar and prospects for weaker global demand have contributed to the dramatic price reversal. Other commodities followed suit as gold, copper, aluminum and steel have experienced similar fates, leading to mixed expectations about the ultimate impact on the domestic economy. On one hand, the lower raw material prices could prove positive for consumers and businesses alike as they lead to lower inflationary fears and the manufacturing of more affordable goods and services. On the other hand, the price plunge could signify lower demand for such goods and services and the stronger dollar makes exports to our global trading partners more expensive at a time when they, too, are struggling. While both scenarios have merit, diminishing inflation should be well received at home and could make the Fed’s challenging job much easier down the road.

Then there’s the financial-services sector. While some analysts expect financials to rebound from their credit-crisis-induced Ice Age, the news of the week gave little indication that the worst is behind them. Goldman Sachs Group Inc. (GS) lowered its rating on Merrill Lynch & Co. Inc. (MER) to “Sell,” on the belief that more write-downs (as if $5.7 billion was not enough) were in the cards. Ospraie Management LP closed one of its primary hedge funds, as some bad calls on commodities resulted in almost a 40% decline in the fund’s value. In fact, hedge funds, in general, are moving more and more out of favor. According to the Hedge Fund Research Inc., during the first six months of the year, only $29 billion in new dollars flowed into these non-traditional assets, compared to almost $120 billion over the same period in 2007. Lehman Brothers Holdings Inc. (LEH) is still attracting suitors; with Korea Development Bank and possibly HSBC Holdings PLC (ADR: HBC) seem to be among the more interested parties.

Outside of financials, Google Inc. (GOOG) announced the development of Chrome, a new Internet browser to compete with Microsoft Corp.’s (MSFT) Internet Explorer.

The auto sector continued its struggles with General Motors Corp. (GM) (-20%), Ford Motor Co. (F) (-27%) and Toyota Motor Corp. (ADR: TM) (-9.4%) all reporting sluggish sales. Troubling retail and labor data (see below) caused major fears about the economy to resurface. As is often the case, bonds were the beneficiary of a flight-to-quality move by investors, meaning the yield on the 10-year fell below 3.7%. Can we still blame light summer volume for the exaggerated price moves? No – not after Labor Day.

Companies with large distribution networks have redesigned their shipping schedules, crafting more efficient routes that accommodated larger truckloads.

The upshot: Gasoline sales tumbled during the first half of the year as domestic demand fell to its lowest level in five years.  In fact, the U.S. Department of Transportation reported that Americans drove almost 5% less in June than a year ago, and also said that the buses, subways and light-rail systems that make up the nation’s public/mass-transit systems climbed by 3.4% in the first quarter of the year.

Lately, U.S. gasoline stations have been forced to adjust their prices (again) after prices at the pump dropped below $3.80 a gallon – a hefty decline from the prices of $4 a gallon and higher that motorists were forced to deal with as the summer driving season began.

Even in China, oil imports dropped substantially in July on shrinking global demand. (It will be interesting to see if – and by how much – the Summer Olympic Games affect these numbers. And even if the games prompt a spike in demand, some analysts are now predicting that a post-Olympic economic “lull” will afflict Mainland China – watch for our analysis of that theory in an upcoming issue of Money Morning).

This energy-price conundrum doesn’t stop there, either, as such geopolitical “wild cards” as the Russian invasion of Georgia continue to whipsaw prices. Even with such tensions, however, energy traders brushed aside concerns about major supply disruptions – not the response we would’ve seen just a few months back. Late last week, in fact, oil prices took cues from the newfound strength in the dollar and dropped below $112 a barrel, a number not even imaginable in mid-July, when crude-oil prices reached a record level of $147.

All’s well on the Energy Front, it seems.

Don’t you believe it (as we’ve said on more than one occasion during the past year).  In the near term, crude-oil prices could well keep declining … but it’s only going to take one “real” scare – a terrorist attack, or some sort of event that creates protracted supply worries – to cause oil prices to spike in a big way.

And in the long run, demand is going to keep rising in such emerging-market countries as China and India. That can only send oil prices higher. [For a related story on oil prices in today’s issue of Money Morning, please click here].

On the Horizon

The July inflation report (Part II) will be reported tomorrow (Tuesday), with the release of the wholesale price gauge, the Producer Price Index (PPI).  Since energy prices have declined in recent weeks, analysts should take these numbers with a grain of salt, as the July data still will reflect the previously higher levels.

Of greater relevance, perhaps, is the Index of Leading Economic Indicators, due out Thursday. The leading indicators often serve as a foreshadowing of future activity so U.S. Federal Reserve Chairman Ben S. Bernanke and friends should take note of that report.

More retailers post earnings this week, including Limited Brands Inc. (LTD), The Gap Inc. (GPS), AnnTaylor Stores Corp. (ANN), and The Home Depot Inc. (HD). By now, however, most investors realize that consumers remain cautious about the economy, and that most related companies (other than discounters) have continued to struggle.  Maybe the lower gas prices will help turn things around for these and other businesses in the coming months – that is, as long as the current trend in energy remains “friendly.” [For a related story on consumer sentiment in today’s issue of Money Morning, please click here.]

We’ve all watched as the once-pristine reputation of former Fed Chairman Alan Greenspan has been tarnished by the credit crisis, and by some of his recent public pronouncements that were aimed at putting the blame on others (possibly impacting book sales). But that’s okay, as investors are now eagerly awaiting the authorized biography of the “real” market maestro – Berkshire Hathaway Inc. (BRK.A, BRK.B) Chairman Warren Buffett. The book, “The Snowball: Warren Buffett and the Business of Life,” published by Bantam Dell Publishing Group, is due on bookstore shelves Sept. 29.

Market Matters

While certain optimistic analysts claimed that the worst of the credit crisis had ended, the latest news from the financial front indicated otherwise.  Swiss banking giant UBS AG (UBS), fresh off $5 billion in new mortgage write-downs, will divide its investment banking and wealth management operations into two separate units – and some analysts believe it may look to sell off the banking arm over the next few years.

Sears’ Craftsmen tools are among the best. Sears’ appliances have always been great values. There was a time when you could go to Sears and get a pound of nails, pound of fudge and a prom dress in one easy trip. The catalog over the years weighed as much as 6 lbs and sold whatever America needed: watches, guitars, baby chicks, bedspreads, power saws, wedding rings, dolls and BB guns. It was an American icon. Sears had it all.

Yet Sears (SHLD) went bankrupt. It is barely limping back from complete oblivion along with Kmart.

Why does a company with good products and prime locations, a huge mail-order business, and status as an anchor store in very successful malls fall so badly it can hardly get to its knees? And why can’t it get back up no matter what it tries?

I think you know already. Remember the “Softer Side of Sears”? Television and print ads promoted the touchable joy of Sears’ fluffy towels, silky blouses and other home goods.

It didn’t work because Sears had long ago spoiled its own brands. The Crafstman tool quality stayed high, and that unit succeeded. But its department store goods like tee shirts, shoes and jewelry went from attractively average to below average over the years. By the 1980s, you could hardly find a clothing item in Sears that even came to the style level of competitors like JC Penney (JCP).

This is the downside of a strong brand. Let it sour enough to stand for something bad, and you will never get it back again.

I bring this up now because turnaround candidates are turning up all over the market thanks to a bad economy. One business after another has stumbled and promised that a new plan and change of management will make it all OK again. Some will make a success of their turnarounds. Some won’t.

Turnarounds are one of my favorite types of investments, but what goes into a good one is not as simple as cutting jobs, closing a few stores or plants and getting back on track.

Before all that… very first of all, you have to wonder if management even knows where the track is.

Talbot’s (ATLB) is a good case of management that did not know where it was headed or what its business was supposed to be. Any customer knew—Talbot’s sold conservative women’s clothes. That was it. While Sears had some lines of excellence going for it, Talbot’s did not have distinctly different departments. To a shopper, the lingerie, women’s casual and women’s dress clothes are all just clothes. If they weren’t all satisfying, the whole store was off. There were no Craftsman tools to be saved, only the core business.

In its women’s clothes niche, Talbot’s had an identity it aimed for—tailored classics. It did it in well-constructed clothes of good quality textiles. It stuck to that.

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But it had a design sense that was decidedly frumpy and constantly falling behind trends. It got worse and worse at being decidedly out of step as time went by. Talbot’s clothes could make Beyonce look thick-waisted and flat-chested. Sales slumped. Management decided to do something about this disaster…

It added men’s and children’s clothes.

Oh momma. If you can’t dress your primary customer, you aren’t going to make it trying to figure out an entirely different market.

For contrast, about three or four years ago, I recommended Abercrombie and Fitch (ANF), a company which mounted a spectacular turnaround. The differences between Abercrombie, Sears and Talbot’s is telling.

Abercrombie, like Sears, was a long-established, iconic American business with a big reputation. It was where the rich and famous shopped for safari, fishing and hunting gear and clothes. Teddy Roosevelt, Katherine Hepburn, Clark Gable… these were the Abercrombie customers. As was Ernest Hemingway, who killed himself with a gun he bought there.

Sales slid over the years and the stores dwindled. In 1976, Abercrombie filed for bankruptcy. Another sporting goods company bought the name and sold outdoor gear. Once again stores grew, but sales faltered. Forbes declared in 1986 that some great names were better off left to die.

But Forbes missed a big point. The name never suffered. Never.

Yes, Abercrombie’s business was badly managed, but the name never tarnished. It still stood for a store that catered to customers who “don’t care about cost but want top quality.” Then The Limited (LTD) bought the chain in 1988 and began repositioning it as an upper-tier teen brand.

That is why Abercrombie and Fitch could be revived … even with a huge change in its target clientele and its merchandise. The name never came to stand for trash. It never stood for unfashionable or cheap. It aimed for teen price ranges, but the very top of what a well-funded teen would pay. To this day, it hardly has sales except at the end of a season. It gets more full-price clothes through its stores than any of its competitors.

Think about reputation when you consider the next turnaround. There are lots of choices coming up. The economy, which is probably in recession, though economists disagree, is certifiably lousy. Lots of good businesses are feeling it. Some need a turnaround.

But some of those “turnarounds” are not victims of the economy. They were already dying businesses and ran out of ways to hide it when the mechanics of inflation or opening new stores (or the equivalent) could no longer create the illusion of growing sales.

Turnaround investing is fun, extremely challenging, and not a little bit dangerous. And the potential is wonderful—both in money and bragging rights. But it’s strictly for the brave and clear minded, because even successful turnarounds can misstep and go backwards before they go up and onwards. Abercrombie was a success story, but it took six years for Abercrombie to increase sales from $48 million to $50 million under The Limited. After that, it exploded upwards. Sales tripled over the next three years.

You can measure a lot of factors in sizing up a turnaround—credit quality, cash flow and burn rates, institutional support, inventory trends, sales per employee trends. They all matter. But the main things to measure before you drag out your calculator has to be done by a human, it is subjective. Ask these questions:

• Does this business now have a clear mission and idea what the business is?
• Does it own a clean brand or reputation in its field that has never been dragged in the mud?

Another important factor is the character of management itself. I liked Office Depot some years ago, another turnaround story, because its management set out a plan that made sense and they stuck to it. Keeping promises is very important.

Source: Looking for a Turnaround – Why Some Succeed Where Others Fail