When hedge fund star Ed Lampert announced his bold plan to merge retail giants Sears Roebuck and Kmart in 2004, he downplayed the popular notion that he was really embarking on a massive real estate investment.

"I don't think any retailer should aspire to have its real estate be worth more than its operating business," Lampert proclaimed at the time.

So, what's all that real estate worth now?

The value investors who have championed Lampert all along have to be wondering. Their faith in his ability to spy hidden value is being tested as never before in a market selloff that features a national real estate slump coupled with a consumer spending slowdown.

Shares of Lampert's retail empire, Sears Holdings ( SHLD), were trading down 6.7% to $89.50 on Monday after the company warned of yet another profit disappointment following a weak holiday selling season.

It now expects fourth-quarter earnings of $350 million to $470 million, or $2.59 and $3.48 a share. For the year, it expects earnings of $744 million to $864 million, or $5.13 to $5.96 a share.

Analysts, on average, were projecting fourth-quarter earnings of $4.43 a share and a full-year profit of $6.64 a share.

Sears attributed the disappointment on growing competition, the slowdown in the housing market and consumers' credit fears. A steady deterioration in its sales performance is cutting into profitability, threatening to shut off the spigot of cash flow that investors hoped Lampert would spin into gold.

The company's domestic same-store sales, or sales at stores open at least a year, fell 3.5% during November and December. The Sears chain's domestic same-store sales slipped 2.8%, while Kmart same-store sales dropped 4.2%.

Same-store sales declines are an old story for Sears Holdings, but the profit disappointments are relatively new. A recent series of shortfalls have sent the company's stock plunging by more than 50% since its highs last spring.

Sears Holdings now looks like it was a screaming momentum play for years while many on Wall Street were calling it a value play. One of the company's biggest cheerleaders on Wall Street, Credit Suisse analyst Gary Balter, downgraded the stock Monday to an underperform rating with a $70 price target -- more than a $100 discount to his price targets in 2005.

Given the dramatic shift in sentiment, value investors who fancy themselves contrarians ought to like the stock now more than ever, but such a position will likely require a strong backbone this year. Asset values are increasingly uncertain -- even in commercial real estate -- as the housing balloon that powered the recent U.S. economic expansion deflates.

Moreover, the odds of a recession in 2008 are rising, and the outlook for consumer spending is bleak.

"We believe that consumer spending in 2008 will be even weaker than consumer spending in 2007, credit problems will continue to weigh on the consumer, and the housing market will continue its decline," says Balter.

If Lampert's wager on Sears Holdings was ultimately a bet on real estate values and faith in U.S. consumers, he may be losing on both counts.