Two very confusing signals today about the economy come courtesy of two big benchmark stocks.

Wal-Mart Stores, Inc. (NYSE/WMT) missed analyst earnings expectations yesterday. The world’s largest retailer earned 2.9% less in its fiscal third quarter of 2011 compared to the same period of 2010. But here’s the important part:

Wal-Mart reported yesterday that sales at its stores open at least one year rose a pathetic 1.3% in the third quarter. Sales at Wal-Mart, a company that caters to the lower end of retail, are growing at a slower pace than American GDP.

Now let’s move to another big retailer and another benchmark stock, The Home Depot Inc. (NYSE/HD). The world’s biggest home improvement retailer saw its earning jump a big 12% in the third quarter of 2011, compared to same period of last year.

If we look at the all-important same-store sales, we see that benchmark stock Home Depot reported that stores open at least one year saw sales grow 3.8% in the U.S. in the third quarter of 2011, compared to the third quarter of 2010.

Why are same-store sales pathetic at benchmark stock Wal-Mart (actually a concern), while same-store sales are rising at benchmark stock Home Depot? Simple answers.

The persistent high unemployment in the U.S. is having a huge impact on low-end retail. At the beginning of a recession, you see consumers cut high-end retail spending and increase low-end retail spending. But, as the economy has not turned around, with the underemployment rate at about 16%, consumers are cutting back on all kinds of spending, including low-end retail. We clearly see this in benchmark stock Wal-Mart.

The really important numbers to help us understand what kind of economic year we will have in 2012 will be the Christmas 2011 retail sales in the U.S.—and we’ll be watching them like a hawk. Wal-Mart’s poor same-store sales number is another red flag for the U.S. economy.

As for Home Depot, the real estate market in the U.S. is still in disarray. People are not upgrading their homes, because bank financing is hard to get and because the underlying fear that property prices will fall further persists. So, what do homeowners do if they are not upgrading their homes? They improve what they have…which is why benchmark stock Home Depot’s same-stores sales have risen 3.8%.

Michael’s Personal Notes:

While I see it’s not getting much mainstream media attention, what’s happening in California with its finances could turn out to be of great concern for all of America.

In case you are not familiar with the situation, in June, California Governor Jerry Brown adopted an $86.0-billion budget. To get the Democratic-led budget through, the state government made concessions in its plan, which I call built-in austerity measures.

If California state revenue falls $1.0 billion, California’s two major universities will need to cut their budgets by $100 million each (austerity measures). If the state revenue shortfall comes in at $2.0 billion, the school year will be cut by seven days to save millions and $248 million in school bus subsidies will vanish (more austerity measures). These crazy austerity measures type triggers were built into the state budget to win Republican support for the budget.

Here’s the bad news…

California is only four months into its current fiscal year and state tax collections are already off $1.5 billion! And since the fiscal year started, the state government has spent $1.7 billion more than it has budgeted! The austerity measures, although they will not go into effect until February, look almost certain.

It’s ironic that the biggest austerity government cuts this nation will start to see will come from the state that lays claim to some of the highest real estate prices in the world. Looks like this one will play out just like a Hollywood movie, but without a good ending.

Where the Market Stands: Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 4.7% for 2011, excluding dividends. I’m convinced that if it were not for the economic crisis in the eurozone, the stock market would be trading much higher. Europe’s economic issues are a problem for American banks that have exposure to bonds issued by euro countries with high debt levels relative to their GDP.

We are in an aging bear market rally that started in March of 2009.

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings, is a recipe for a financial catastrophe.” Michael Lombardi in PROFIT CONFIDENTIAL, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

Tags: Bear Market Rally, eurozone, GDP, recession, stock market