Stock Market’s Story of the U.S. Consumer Siesta Ahead
Wednesday, July 19th, 2006
By Michael Lombardi, MBA for Profit Confidential
Why is it that we can buy Wal-Mart stock for the same price today as we could have in 1999? We certainly know Wal-Mart is making a lot more money today than it did back then. But, here we are, seven years later, and the shareholders of Wal-Mart have failed to see profits on their stock.
Wal-Mart, at least to me, is much more than a stock. The company is the world’s largest retailer. Last year’s sales were a mind- boggling $315 billion. Depending on whose research report you believe, Wal-Mart accounts for between 7% and 8% of all U.S. sales.
To me, Wal-Mart is a gauge of U.S. retail sales. It’s quite common to see the stock of Wal-Mart move up or down depending on retail sales figures coming out of the U.S. It’s also been quite common of late to see Wal-Mart shares get “hit” when oil prices spike. The company itself has commented on how higher gas prices are negative for the company, because customers who live further away may reconsider their trip to a Wal-Mart location if it gets too expensive to get there.
If Wal-Mart is a leading indicator of how well or how poorly the U.S. retail market is faring (and I believe Wal-Mart represents the U.S. retail industry quite well), we can assume the price action of Wal-Mart stock is negative for U.S. retail sales. I believe Wal- Mart stock is saying there is a problem somewhere ahead for retail spending.
The other day I wrote about how U.S. new home builder stocks are down almost 50% in the past year–a negative indicator for the U.S. construction and new-home industries. Couple this with poor performance we are seeing from Wal-Mart stock and one can only wonder if the U.S. economy is headed for some kind of consumer siesta.
It’s all quite obvious to me: By the summer of 2004, Greenspan had brought interest rates too low. Consumers borrowed their hearts out. Now the Fed has raised interest rates too high, too fast, and consumers simply can’t keep up with their payments. We can see all this in the price action of stocks that benefit from consumer spending or suffer when consumers pull back on their spending. Too bad most investors can’t see these clear signs, because if they did, they would be unloading consumer sensitive stocks instead of waiting for these stocks (home builder and retail stocks in particular) to move up again. “Again” might not happen for some time to come.
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Tags: interest rates, retail sales, retail sector, Wal Mart
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
