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Consumer Stocks Reverse Gains on Negative News

A report released Tuesday indicates that consumer attitudes have returned to recessionary levels this month. Concern surrounding the ongoing weakness of the labor markets has prompted greater

A report released Tuesday indicates that consumer attitudes have returned to recessionary levels this month. Concern surrounding the ongoing weakness of the labor markets has prompted greater pessimism among U.S. citizens. The broader market seemed to internalize it, falling deep into the red for the day. Consumer cyclical stocks were especially hardhit for the bearing this has on their future. Even companies pushing higher during morning trading as a result of gains or positive news reversed their trajectory by afternoon.

A statement from Moody’s regarding the status of the new four-year labor contracts that will be in effect at Ford (F) and General Motors (GW) helped to bolster shares of U.S. automakers shortly after market-open. The new contract has been up in the air for sometime, as the UAW has argued for more money, but the recent ratification eliminates a major obstacle facing the two companies from receiving a credit rating upgrade. As it stands, both companies currently hold a Ba2 rating, leaving them two steps beneath investment grade.

Recently though, Fitch and Standard & Poor’s have raised their ratings on the companies, which benefitted from major sales growth last month. The new deal would help leverage those gains into profits on a longer timeline, as the current cost structure would not change much and the labor cost increases are minimal and gradual.

The two automakers estimate that the contracts will only raise compensation by 1 percent per hour, which would have a minimal impact and what up until now has been about break-even projections. If the companies could get another credit ratings shift from Moody’s it would help minimize their credit costs and bring them to a point where they could, alongside their healthier sales, begin to take in more of a profit again.

The most recent annual sales, revealed in June, saw both companies surpass their estimate levels for the period. GM saw 30 percent growth while Ford experienced 40 percent improvements. These are convincing statistics not only for a credit upgrade, which would minimize credit costs, but also the potential addition of a dividend for Ford which would help shares.

It did help shares in the morning but the negative news pared gains and both F and GM ended Tuesday in the red. The same could be send for a number of popular clothing retailers like the exercise apparel company, Lululemon (LULU) which added close to ten percent before ending the day nearly four percent lower. Analysts at Janney Montgomery Scott, set a “neutral” rating on the stock when they began coverage on it today. They also set a $57.00 price target on shares, Analysts across the board are losing enthusiasm for LULU in spite of a massive 57.5 percent gain for 2011. The dark turn in consumer attitudes may have been behind the 13 “holds” and two “sells” currently weighing on shares. As of today, there are only six remaining buy or better ratings on the stock.

 Urban Outfitters (URBN) followed a similar trajectory to Lululemon during the session, climbing sharply in morning trading only to end the day lower on minimal news.

One company that announced positive news, Coach Inc. (COH) also slid lower in afternoon trading in spite of announcing a fiscal first quarter profit increase of 14 percent. The earnings exceeded expectations and the company credited growing handbag spending in North America and its men’s sales overseas as drivers of growth. The company’s CEO said they could also expect a strong holiday season, but the negative attitudes permeating the broader market kept shares in the red.



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