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Poor Christmas Season May Spook Investors

A disappointing Christmas shopping season and poor fourth-quarter earnings reports could cause the year-long spread tightening trend in the credit markets to pause next month, according to some market participants.

A disappointing Christmas shopping season and poor fourth-quarter earnings reports could cause the year-long spread tightening trend in the credit markets to pause next month, according to some market participants. On a micro level, a disappointing season could also affect retailers' spreads. The retail portion of the Banc of America Broad Market Index was 85 basis points over Treasuries, two basis points tighter than the start of the month versus 102bps for the entire index.

The make it or break it time for retailers is the end of December and disappointing results could cause spreads to widen a few basis points in a tight market, said one retail analyst. He added spreads haven't suffered thus far despite weak sales because retailers' balance sheets are in excellent shape, but if poor performance continues, spreads could come under pressure.

The hullabaloo surrounding the disappointing results of Wal-Mart Stores on Black Friday drew a lot of attention to the shopping season and the state of the consumer, said Charles O'Shea, v.p. and senior analyst at Moody's Investors Service. "The focus is there because it's a microcosm of all of the concerns right now... how much energy prices are impacting the consumer, [as well as the impact of] rising interest rates," he added. Any crimping of retailers' balance sheets could have a broader impact on the credit markets in general because of the sheer volume of outstanding debt in the sector. O'Shea, for example, notes large retailers Wal-Mart, Toys "R" Us and Target combined have around $50 billion in debt.

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