Retail in Fantasyland

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Strange days
It takes an awful lot to get Kristin hyper. Our soft-spoken retail sector head (who sits right next to me) isn't prone to using words like "stupid" and "ridiculous," much less spending the morning muttering at her monitor with a murderous glint in her eyes. But a little bit of CNBC's early morning talking-headery was more than enough to set her phasers to kill.

Mine are at the same setting, and for the same reason. (But you're all used to that.)

Stupid is as stupid says
Here's the problem. Wal-Mart (NYSE: WMT) reported a "surprising" month's worth of sales, and upped its guidance. This was hailed by a gaggle of tie-wearing experts as proof that the economy is just fine, and consumer spending is picking up nicely.

Wrong.

Wrong. Wrong. Wrong. Wrong. Wrong. Wrong. Wrong. Stupid. Stupid. Stupid. Stupid. Stupid. Stupid. Stupid.

Wrong data, dumb conclusion
Here's the reality. Wal-Mart's same-store sales increase of 1.4% year over year is less than the rate of inflation these days. According to Wal-Mart, consumers are very concerned about prices, and they're not buying general merchandise. "Overall, apparel and home remain soft. Company research reinforces that customers remain concerned about their finances, especially the cost of living."

Wal-Mart's strength in sales came from people heading to Wal-Mart and Sam's Club for staples like groceries and drugs, meaning consumers likely stiffed their usual, higher-priced sources for these needs.

Finally, the guidance increase (which simply reverses a prior decrease, by the way) comes only because of "improvement in initial margin and expense leverage at the Wal-Mart Stores division." Sounds like Wal-Mart is simply having success passing on inflation to its customers, and is reaping that benefit down the income statement. Sure, it's nice for Wal-Mart shareholders to know they don't have to pay the price for the inflationary pressure unleashed by the Fed's desperate, loose-money policy.

However, this most certainly does not mean that consumers are in good shape, or that the economy is fine.

Proof's all around
A look at the other retailers will tell you that. Abercrombie & Fitch (NYSE: ANF): Comps down. Nordstrom (NYSE: JWN): Comps missed expectations, guidance down. J.C. Penney (NYSE: JCP): Comps down, guidance down. Men's Wearhouse (NYSE: MW): Comps down, guidance down. Gap (NYSE: GPS): Comps down. The list goes on -- Dillard's, Macy's, Chico's FAS, Wet Seal ... Losers outnumber winners by a hefty margin.

Foolish final thought
Fools, this a very solid indication that consumers are heading downmarket and cutting spending. The surprisingly good numbers at discounters TJX and Costco (Nasdaq: COST) support this same conclusion, as do weeks' worth of consumer sentiment data, not to mention the slaughter of housing.

But today, just about every retailer out there is headed up, even though 7% year-over-year comps drops are the most popular item in the stores today. That's nuts. Yes, there are a few bargains out there in retail, and a couple of growth stories that a slowing economy probably won't even derail. (I've been buying, so I can't tell you where I think they are.) But if vast swaths of underperforming, overextended retail stocks keep rising even now that the sales numbers have headed south for the winter, I suggest you think a little bit harder than the vapid cheerleaders currently prodding the herds on Wall Street.

For them, all stocks are good stocks, all news is now good news. Yet again, we're hearing that even if retail sales get soft, that'll be fine too, because it'll just force Bennie and the Inkjets over at the Fed to lower rates yet again. Of such fantasies, major crashes are made.