By  on August 14, 2007

Monday was a tough day to be trading stocks.

Concerns over consumer spending, the impact of the ongoing housing slump and last week's weaker-than-expected same-store sales report had the market in a tizzy. After the dust settled, the major indices had pretty much closed the day flat while the retail sector was up slightly.

Bits of good news had triggered a spike in stock prices earlier in the day: The Federal Reserve added another $2 billion of liquidity to the financial markets.

The move was part of a strategy aimed at quelling worries that the subprime mortgage problems would infect other lending products in the market. The Federal Reserve and the world's central banks already have infused the financial markets with more than $400 billion in liquidity.

In the retail sector, investors picked over a "strong buy" upgrade on shares of Gap Inc., a solid retail sales report from the government (see related story on this page), and a lowered profit outlook from Sears Holdings Corp. In the end, Monday was a bumpy ride with retail stocks surging in the morning session before pulling back by the early afternoon and closing the day with a slight gain.

At the bell, the Dow Jones Industrial Average closed down 0.02 percent to 13,236.53 while the broader S&P 500 shed 0.05 percent to 1,452.92. The S&P Retail Index added 0.2 percent to 471.83.

An hour out of the gate, the Dow had jumped 0.5 percent, or about 65 points, to 13,304, while the S&P Retail Index rose 1.2 percent to 476.25. Some of the big gainers were Aéropostale Inc., BJ's Wholesale Club Inc., Charlotte Russe Holding Corp. and Dress Barn Inc., which watched their stocks rise 8.4, 4.5, 6 and 5.3 percent, respectively.

By the afternoon session, the S&P Retail Index had slowed with a 0.7 percent gain to 473.93. Retail stocks were mixed with some of the earlier gainers pulling back while the rest of the sector seemed to show more red than green. Casual Male Retail Group Inc. was down 5.8 during the early afternoon, while Gottschalks Inc. was off 6 percent on news of executive changes. However, Target Corp. was trading up 1.6 percent and Wal-Mart Stores Inc. was chugging along with a 0.5 percent gain to its stock.At the close, notable gainers included: Aéropostale, up 4.4 percent to $33.50; Kohl's Corp., up 1.8 percent to $59.22, and J.C. Penney Co. Inc., up 1.5 percent to $65.07. Wal-Mart closed the day up 0.2 percent to $46.17 while Target rose 1.5 percent to $63.27. Charlotte Russe and Dress Barn finished up 1.9 percent to $17.21 and 1 percent to $17.43, respectively. BJ's Wholesale Club gained 0.4 percent to $31.24. Casual Male fell 6.2 percent to $10.48, while Gottschalks lost 8 percent to $6.02.

The market reacted to the Federal Reserve's move on Monday to inject another $2 billion into the banking system by buying overnight repurchase agreements. In total, the Federal Reserve has pumped $62 billion into the banking system since Thursday. The Federal Reserve is trying to keep the federal fund target rate at 5.25 percent, the interest rate that banks charge each other for overnight loans.

"It may be all that's required if the injection of credit risk aversion subsides adequately over the near term. In the event of a freezing up of the capital markets [that] adversely affects the real economy, the Fed will cut rates, and a rate cut probably will bring a return to normalcy for the capital markets," said John Lonski, economist at Moody's Investors Service.

The real economy, according to Lonski, is consumer spending, with capital expenditures and hiring activity being two important factors impacting how willing and able consumers are in opening their wallets.

The economist said the "real economy cannot shrug off dysfunctional capital markets indefinitely, and if the Fed continually needs to inject huge amounts of reserves to keep the fed funds rate from rising above 5.25 percent, then chances are the Fed will cut rates [in September]."

A week ago, Lonski pegged a rate cut at 20 percent, but now has raised the percentage to a 60 percent likelihood of a rate cut. He also thinks that the market has overreacted to what it perceives as credit risks.

"The high-yield bond default rate is 1.5 percent, while the long-term average is close to 5 percent," Lonski explained.

If creditor risk aversion stabilizes and subsides over the next few weeks, Lonski predicts that the likelihood of an interest rate cut next month will drop to less than 50 percent. If a rate cut occurs, it is expected on Sept. 18, the day of the next meeting of the Federal Open Market Committee. The FOMC is the monetary policy-making body of the Federal Reserve System.Wall Street also was eyeing Sears Holdings Corp. For the second time in a month, Sears Holdings Corp. on Monday lowered second-quarter earnings guidance and increased the company's share repurchase authorization.

Sears said it now expects second-quarter income for the period ended Aug. 4 to be between $170 million and $185 million, with diluted earnings per share between $1.13 and $1.23. The company previously lowered guidance on July 10 to between $160 million and $200 million, or between $1.06 and $1.32 a diluted share. The consensus estimate among Wall Street analysts at the time was $2.12 a share. Excluding a gain, the company in the same year-ago quarter earned $272 million, or $1.74 a share.

Kmart same-store sales fell by 3.8 percent, while Sears domestic stores were down by 4.3 percent.

As for lowering guidance a second time, the company said that, since its July 10 statement, the company "experienced higher markdowns, most notably within seasonal apparel categories that were largely offset by lower payroll expense, including performance-based compensation and favorable inventory shrink."

Sears said its board approved the repurchase of up to an additional $1.5 billion of the company's common shares, in addition to the $1 billion of shares approved on July 10. In total, the company has an aggregate authorization of $1.52 billion.

Bear Stearns analyst Christine Augustine maintained an "outperform" rating on the company's stock. "We believe Sears is committed to enhancing shareholder return, whether it is through share repurchases, acquisitions, other investments or improving the profitability of the core business. Sears has one of the highest free cash flow yields in the broadlines universe at roughly 8 percent compared to the peer average of about 4 percent," she wrote in a note.

Goldman Sachs analyst Adrianne Shapira said in a note that "a lack of further deterioration in [comps] and a tightening in [the second quarter's] expected EPS range displayed some fundamental stability."

Shares of Sears Holdings ended Monday up 5.6 percent to $140.55.

In other retail sector movement, shares of Gap Inc. rose 2.6 percent to $17.19 following a "strong buy" upgrade from C.L. King analyst Mark Montagna.

In his research note, issued early Monday, Montagna said he also was setting a $20 target price on the stock. "We just upgraded to Neutral on August 7 based on expectations of improved expense controls and merchandise," the analyst said. "We believe the August 9 monthly sales release demonstrated such improvements. We believe the upward potential for margins and sales could propel the stock to outperform our EPS estimates."

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