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[Dex]

http://ftalphaville....ocks-drop-desk/

Shop till your stocks drop

Albert Edwards, the Dresdner Kleinwort strategist who is in his element when the markets are stressed, is circulating a nasty little chart, mapping the relationship between the US equity market and retail sales.

It’s self-explanatory, really, although examining the close correlation has taken Edwards back to his youth.

“Having spent three joyful years of my youth working in the Bank of England Economics department with the grand title of ‘Applied Econometrician’ I had the mantra that “correlation does not infer causality” drummed into me.”

“The coincident relationship we show (see chart) between retail and the stockmarket does not infer causality. The same events that are weakening the equity market may also be weakening spending at the same time. However it is intuitively reasonable to suggest that a weak equity market may adversely effect consumer confidence which may, in turn, depress retail spending. The closeness of this relationship is surprising given so much else (eg jobs, wage inflation, interest rates, credit etc) should drive spending.”

“But whereas we know immediately what equity prices are doing, the market only knows about retail spending with a lag. So, given what has happened to the equity market already, it is likely in the weeks ahead we could get news of weak retail spending.”

If Edwards is right, it might be yet another sign this his long-awaited correction is well and truly upon us.

This entry was posted on Wednesday, March 7th, 2007 at 14:56 and is filed under Capital markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

[jawndissedi]

My short position in retailers is second only to my short position in subprime lenders. JWN looks especially vulnerable to me.