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The holiday shopping season continues to puzzle investors. Will


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pain translate into a broader shortfall for retailers or did the mightiest of vendors simply screw up? On Tuesday, the weight of supporting evidence and investor sentiment favored bigger problems.

Stock proxies posted modest losses led by the retailers and falling semiconductor names. The

Dow Jones Industrial Average

lost 0.4% to 10,430.82, the

S&P 500

dropped 0.4% to 1174.01 and the

Nasdaq Composite

fell 0.5% to 2096.81. Major averages continue to consolidate their gains from the past month, during which the Dow rose 4%, the S&P gained 3.9% and the Comp rose 6.2%.

Among individual movers,

Best Buy

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lost 2.4%,


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dropped 3.4% and Wal-Mart fell 2%. In the chip sector,


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lost 3.2% and

Applied Materials

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dropped 2%.

Steel and other basic materials companies gained as they have for several days on signs of strong demand and the declining dollar.

U.S. Steel

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rose 1.3%,



gained 3.1% and



rallied 4.9%.

Following the pattern of recent weeks,

the dollar fell to another record low against the euro at $1.3336, while yields on the 10-year Treasury rose to 4.36%. Oil ceased its recent rise, dropping 66 cents to $49.10 a barrel at the New York Mercantile Exchange ahead of Wednesday's weekly report on U.S. inventories.

Data Conflict

The big economic data points for the day -- revised third-quarter GDP and November consumer confidence -- appeared to be in conflict. Third-quarter gross domestic product was revised to a 3.9% gain from 3.7%, more than economists had forecast. Among the changes, consumer spending increased at an annual rate of 5.1% in the revised report, up from 4.6% in the initial report. That had bonds down big in the morning as the economy looked to be stronger than previously thought.

Then the Conference Board said its index of consumer sentiment declined to a reading of 90.5 in November, the lowest level since March and contrary to a projected improvement from October. The component of the index measuring consumers' feelings about the future declined to its lowest level since July 2003.

But seeming conflict may be yet more evidence of the squeeze on lower-income consumers. Gasoline prices are 31% higher than a year ago and home heating bills may be as much as 28% higher, according to the Energy Department. Rising gas bills are a much larger portion of each paycheck at the lower end of the economic ladder. And last year's child tax credit rebate checks were a much bigger stimulus, one that didn't reappear in 2004.

According to the Conference Board, sentiment in November actually rose for those making at least $35,000 a year and posted an even bigger increase for those making over $50,000. The index fell dramatically -- to 81.7 from 95.2 -- for those making under $35,000.

In another sign of weakness, the International Council of Shopping Centers reduced its forecasted increase for November retail sales to as low as 2.5% from an earlier projection of as much as 4%. That follows Wal-Mart's announcement that November sales would increase 0.7% instead of a previous forecast for growth as high as 4%. Some of the shortfall at the country's biggest retailer was due to a failed pricing strategy, but the stress on its lower-income customer base also figured in.

Dollar Daze, Continued

It's certainly fair to point out, as many commentators have in recent days, that a decline in the dollar doesn't in and of itself doom the stock market. On the other hand, there is also plenty of evidence that a severe drop in the dollar, or other currencies, has led to horrible stock market performance.

The relevant question for a U.S. investor today, invested in the U.S. stock market with good old U.S. dollars, is how markets have been affected when local currencies crashed. Currency fluctuations are surely not the largest determinant of stock performance over long periods, but in specific places and times, currency has been painfully relevant.

Some of the charts included in

Howard Simons'

piece downplaying the dollar's impact actually help make the point.

Take Mexico. In December 1994, the peso was devalued and

tanked from around 3 to the dollar to 6 and then 8 to the dollar within about a year. And how did Mexican stocks fare in 1995? Very, very badly. Then the peso was stable for a few years and the Mexican market did well. The peso tanked again in 1998 as did Mexican shares.

Sometimes the relationships hold for long periods. Take Japan -- the chart Simons presents shows that the Japanese market in local currency outperformed the S&P 500 in dollars from the early '70s until about 1992. If you look at the


chart of the monthly yen/dollar exchange rate, you see that the huge move occurred from the early '70s through the late '80s. The ratio dropped from $1 buying over 350 yen down to $1 buying just over 100. Since then, the yen/dollar relationship hasn't moved by nearly the same degree and the U.S. market has outperformed.

And sometimes, a little common sense goes a long way. Take the example of Russia. What is by far Russia's largest product? Oil, denominated in good-old U.S. greenbacks. So when the ruble falls vs. the dollar, Russia gets the same benefit that


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gets when the dollar falls vs. the currencies of countries where it is selling the most shoes. It shouldn't surprise anyone that the dollar's ascension vs. the ruble has coincided with good stock performance.

Perhaps the lesson here is one of investment horizons. Over the long haul, a weak currency can be associated with hefty stock gains, but in the short-term currency "dislocations" can have a painful impact on stocks.

For those with a shorter time horizon, and less apocalyptic views of a falling dollar,'s

Bill Snyder looked at how

software firms will benefit from a weaker dollar, while


James Altucher picked Nike,


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Checkpoint Systems



United Stationers



In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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