Retail Report Will Be Gassed Up by Automakers

Detroit's zero-rate financing gamble will prop up October's headline number.
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Wednesday's

retail sales report for October will reflect the desperation of automakers to jump-start sales last month. But with short-term psychology ruling the markets, it might not matter.

"The fact that it took incentives to drive people back to dealer lots again is meaningful, but it shows you that the depth of fears and anxieties aren't as deep as people really believe," said Tony Crescenzi, chief bond market strategist at Miller Tabak. In the short term, people will be glad to see sales figures that aren't obviously horrible. "The market's in a mood to think about stronger economic growth," Crescenzi said.

Retail and consumer cyclical stocks rallied Tuesday, ahead of the retail sales report, which will be released by the Commerce Department at 8:30 a.m. EST Wednesday. Buyers also flocked to apparel retailers such as

Gap

(GPS) - Get Report

, which will report sales and earnings on Thursday, and

Federated

(FD)

, which posts its earnings Wednesday. Gap gained 4.6% to $14, while Federated rose 2.7% to $34.80.

Shares of

Home Depot

(HD) - Get Report

soared 7% to $44 after it

said sales rose 15% on earnings that were in line with analysts' expectations. But profit-takers bid down discount giant

Wal-Mart

(WMT) - Get Report

, which slipped 1.04% to $55, despite showing both earnings and sales growth.

Meanwhile, the top three automakers,

General Motors

(GM) - Get Report

, which announced the resignation of an executive Tuesday,

Ford

(F) - Get Report

and

DaimlerChrysler

(DCX)

finished the day higher.

Hard Sell

October's retail sales data will be an important snapshot of consumption. According to a

Bloomberg

survey, the consensus of 50 economists is for overall retail sales in October to rise by 2.5% from September, and by 0.3% excluding autos. Due to the uncertainty surrounding auto sales, there's a large range of forecasts for the overall retail sales number: The lowest estimate calls for a 0.3% increase, and the highest is for 6% growth.

Meanwhile, two reports released Tuesday showed that sales at U.S. chain stores edged higher last week. The Bank of Tokyo-Mitsubishi retail chain store sales index rose 0.6% during the week ended Nov. 10, after a 0.9% rise a week earlier. Separately, Instinet's Redbook Retail Sales Average rose 1.7% in the first week of November from the first week in October.

Any spike in October's retail sales will be perceived as good news, because consumption -- hurt by the economic downturn and political uncertainty -- contributes to two-thirds of overall gross domestic product. But the 0% financing incentives in the auto sector probably will jack up the overall figure, and economists warn that it may not be something to celebrate for the long term.

"Any strength we've seen in the auto sector might not bode well for the future," said Dana Saporta, economist at Stone & McCarthy Research Associates. She expects retail sales to drop by 0.2%, excluding auto sales. The financing incentives are an "expensive proposition for companies and one that cannot be sustained," Saporta said.

Moreover, there's a risk that automakers and other retailers that are offering discounts are "conditioning consumers" to be more price sensitive. "The discounts may come back to haunt retailers down the road in terms of their balance sheets," Saporta added.

GM said Monday that it is extending its discount program, which was to have expired Nov. 18, until Jan. 2. The company's chief market analyst told

The Wall Street Journal

that total U.S. auto sales this year would be slightly above 17 million vehicles, making it the third-best year in history, but that sales are likely to slow in the next two months from the record pace set in October.

Delayed Deprivation

Although GM has decided to extend its discounts, "it's kind of borrowing sales from the future," said Jennifer Rossum, economist at Thomson Financial/IFR. "You're going to see a tremendous falloff in vehicle sales down the road." Rossum expects a 1.1% growth in retail sales for October. As for the core index, excluding autos, she sees a 0.1% growth in sales, amid falling gas prices.

But market strategists say investors may settle for any comfort, as cold as it may be. Also, don't forget that auto production accounts for as much as 10% of all industrial production, said Crescenzi, adding that increased car sales will result in positive "ripple effects" for the economy.

The market is "very reactive" right now, said Brian Belski, fundamental markets strategist at U.S. Bancorp Piper Jaffray, adding that consumer confidence is a "major issue" for the market.

"We have a great deal of momentum led by tech issues that tends to bode well," said Steven Goldman, market strategist at Weeden, "so I think things are already in place going into this data." But as the report will be a mere "piece of the puzzle," Goldman added, it may be "a reason for trading to go on in the first hour. Beyond that

it may not have much significance."