Four Stocks: One Economic Story

Last night, two of the biggest retailers in the U.S. increased their estimates of how much money they would make this year.

Wal-Mart Stores, Inc. (NYSE/WMT), the world’s largest retailer, has reported that revenue at stores open at least one-year has increased by 4.3%. Interestingly, Wal-Mart’s CEO Charles Holley was quoted as saying that customer surveys show that Wal-Mart’s customers are now more concerned with employment than fuel and food costs.

At The Home Depot Inc. (NYSE/HD), the company is also increasing its earnings forecast for this year. What are consumers buying at Home Depot? Surprisingly, sales of flowers and cleaning supplies are on the rise. Revenue is increasing at Home Depot. The stock was the best performer on the S&P 500 Index yesterday, up 5.3%.

This morning, Target Corporation (NYSE/TGT), the second biggest U.S. retailer after Wal-Mart, reported that it made 3.7% more in the second quarter of this year on increased revenue, beating analyst expectations.

Finally, Dell Inc. (NYSE/DELL), the second-largest personal-computer maker, reported earnings that fell short of analyst expectations. Sales at Dell rose only one percent in the second quarter. The company cited softer demand from consumers. Dell cut its full-year revenue forecast.

What does all this tell me? Consumers continue to tighten their wallets, increasing spending at the large discount retailers. On the other hand, while desktop computers are not considered big-ticket items, consumers are cutting back on general, non-essential, spending.

Economic analysis would forecast that the current actions of consumers will result in a significant increase in the savings rate, similar to what happened during the Japanese “lost decade.” As fear set in, consumers cut back on spending, increased savings, and ultimately caused contractions in gross domestic product (GDP). The big discount retailers should continue to enjoy increased sales growth.

Michael’s Personal Notes:

Some wise words from my fellow editor Robert Appel that I want to share with my readers…

“Nothing is exactly what it seems. Before the S&P downgrade of the U.S.’ credit rating, China’s internal rating agency had already downgraded U.S. debt by a few days, but the press ignored that, which is ironic because China holds more U.S. debt than anyone else.

Hence, you might think, the person that eats the most hot dogs is likely best qualified to know when the hot dogs they are eating suddenly start to taste funny.

And then there is the double irony in the fact that the S&P itself (as well as all the rating agencies as a group) had been laughed at and belittled by Washington for ‘allowing’ all that toxic debt to be accumulated overseas between 2004 and 2008. But this is more than merely a case of ‘the pot calling the kettle black.’ There is just a hint of revenge (a dish, please recall, best eaten cold) in these antics also.

Then there is the way that Washington handled the Debt Ceiling issue. Wasn’t it just yesterday that the U.S. system was reputed to the best drafted democratic system on the planet, with so many checks and balances (we were told) that nothing really ‘wrong’ could ever happen?

Well, as the world watched, the two leading political parties took the U.S., and the world, to the brink of economic collapse…and for what? At the end of the day nothing structural was solved.”

They increased the U.S. debt ceiling, but there were no firm cuts in U.S. spending…direct cuts to the various government departments or agencies that spend the money…were not announced.

Where the Market Stands; Where it’s Headed:

My sentiment towards the immediate-term direction of the market continues to be positive. There is far too much negativity amongst analysts and investors and for that reason I believe the bear market rally will continue to ride the “wall of worry” higher.

A big contrarian at heart, I’ve never known the stock market to abide by what is expected of it. In fact, 90% to 95% of investors didn’t see the credit crisis coming or the multi-year stock market lows of March 2009 on the horizon. Yes, ultimately, the phase III of the bear market will set it, but it’s all a matter of timing. And I don’t believe the timing is quite right for the stock market to advance directly back to its March 2009 lows. As I have been saying since the beginning of 2011, the bear market rally has more life left in it.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi, PROFIT CONFIDENTIAL, April 8, 2004. “We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.