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Merrill Lynch bearish on retail stocks

New York — With consumers holding on tight to their wallets and retail sales weakening throughout the summer, Merrill Lynch turned sweepingly bearish on the retail sector, slamming 10 of the nation's best known retailers — from Target to Saks to Neiman Marcus — with downgrades.

Shifting its position on U.S. retailing to a new "defensive" posture, Merrill slapped a "sell" tag on ShopKo, Nordstrom and Dollar Tree and lowered its ratings on seven others, including Target and Costco, to neutral.

"Retail sales have deteriorated sharply since early July," said Merrill analysts. "Our concern is that the resilience of general merchandise sales over the past two years may be cracking. In addition to a possible slowing economy, sales momentum in the second half will be pressured by forecasted poor fall weather, Sept. 11 anniversary disruptions and six fewer Christmas shopping days."

At the same time, Merrill Lynch recognized a handful of "top dog" retailers, those most likely to meet their sales and earnings targets, and kept a "buy" or "strong buy" rating on JCPenney, Kohl's, Wal-Mart and the dollar stores.

Slowing sales, said Merrill, are a major cause for concern, and "sales have deteriorated since early July. While weather has been a factor, especially in August, there appears to be an underlying slowdown in consumer spending. Retailers are saying that traffic is holding up, but discretionary spending is slowing."

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