This frm Money Morning:

In an appearance on NBC’s “Meet the Press” on Sunday, Wal-Mart Stores Inc. (NYSE:WMT) Chief Executive Officer H. Lee Scott Jr. said the recession is changing consumer-buying habits.

What Scott didn’t say is that Wal-Mart is perfectly positioned to capitalize on those changes.
“The No.1 issue today is [consumers'] concern about their job,” Scott said during the nationally televised interview. And because of that concern, Scott said consumers are making some of the following changes:

• In the discounter’s “pharmacy group, we have increases in prescription drugs, but not at the same rate it was. What we’re seeing is an increase in self-treatment.”
• Cash-strapped shoppers also are making different food choices, meaning Wal-Mart is “seeing an increase in food storage as people are cooking more at home.” Consumers are “using leftovers more extensively,” and buying more frozen food.
• Even the owners of small businesses are altering their buying patterns to better manage their cash flow, by shopping more frequently, but by buying less than usual during each visit, Scott said. For instance, restaurant owners stop in more often and buy a day’s supplies at a time, which stretches out that cash flow and reduces spoilage.

At a time when the U.S. retail sector is in the throes of its worst stretch in years, Wal-Mart may be the one retailer that investors want to own. The world’s largest retailer, Wal-Mart last month reported a 10% jump in its third-quarter earnings per share. The company’s sales jumped 10%.

That performance is a big part of the investment case for Wal-Mart: Here we are, a year into a recession, and Wal-Mart, a retailer, is posting a double-digit gain in profits, and a healthy single-digit increase in sales.

This apparently counter-intuitive trend is actually a typical phenomena reserved for market leaders who also enjoy cost leadership in their own industry.

Let me explain.

In any industry – and especially one in which one firm’s wares can be easily substituted by those of a rival (which is very true of retailing) – the key to survival is to have a cost advantage over the competition. As demand falters, the low-cost player is able to under-price its rivals, attract additional traffic, gain market share and thrive, while the weakest players get squeezed right out of the business.

In the retail sector, this is playing out like a Harvard Business School case study.  For November, Wal-Mart’s comparable-store sales increased 3.4%, while most of its competition saw actual sales declines. Even consumer-products king Procter & Gamble Co. (NYSE:PG) is showing that its sales through Wal-Mart are increasing, while sales through other retailers are down.

Wal-Mart’s unrivaled ability to buy in huge volumes allows it to obtain extremely favorable pricing from its suppliers.  If those suppliers want to deal with Wal-Mart, they must accept the razor-thin margins the retailer affords them. Any supplier that even thinks about balking need only remember what happened to Rubbermaid Inc.

Back in the early part of the 1990s, in what is now regarded as a classic example of the market power that Wal-Mart was able to amass, consumer-products giant Rubbermaid Inc. found that rising oil prices were forcing up the cost of the ingot-like plastic balls that served as the raw material for its ubiquitous plastic storage tubs. Following what was then standard industry procedure, Rubbermaid tried to pass those higher expenses along to Wal-Mart in the form of higher product prices.

But Wal-Mart, known for its “falling prices” philosophy, not only balked – it fought back. It not only refused to pay the higher prices, it ordered Rubbermaid to find ways to cut the prices of its wares – even in the face of steeply rising raw materials prices.

When Rubbermaid refused, Wal-Mart slashed the amount of shelf space devoted to the Rubbermaid products, and gave the space to a little-known, privately held firm called Sterilite Corp., which had started life as a maker of plastic shoe heels that had the sad propensity to melt. So Sterilite switched to making plastic containers for the home.

Rubbermaid never recovered, and in 1999 it was forced to merge with Newell Inc. to form Newell Rubbermaid Inc. (NYSE:NWL). Rubbermaid remains the No. 1 maker of plastic storage containers. But after having come out of almost nowhere, Sterilite is today No. 2.

So in addition to being the “channel commander” – with an ability to dictate terms and prices to suppliers – Wal-Mart’s very lean cost structure and high efficiency from its highly-optimized logistics operation allows it to minimize corporate fat like no other and translate those savings into low pricing for its customers. With Wal-Mart’s sophisticated integrated sourcing-and-distribution system, competing on cost across the board against them is simply not possible for any of its competitors.

And consumers know it.

As Wal-Mart CEO Scott noted in his “Meet the Press” interview, even with gasoline prices way down, consumers are hunkering down.  With unemployment already at 6.7% – and rising fast – the increasing ranks of the unemployed and underemployed alike have already slashed their spending.  And even the folks who have kept their jobs are worried – and are acting accordingly.

The drop in home prices and the evisceration of savings and retirement brought on by a bear market that’s vaporized some $6 trillion in shareholder wealth add the final brush strokes to what was already a very dark economic portrait. Consumer confidence has plunged, and consumers are keeping their wallets in their pockets, partly to boost savings.

It’s an environment in which consumers and companies alike are well advised to employ a defensive mindset every bit as aggressive as the Pittsburgh Steelers. But not Wal-Mart. Instead, the retailing giant has gone on the offensive and is attacking the marketplace with the gusto that’s more like the Drew Brees-led New Orleans Saints.

In short, even though so many consumers are employing a back-to-basics mindset, as CEO Scott described, Wal-Mart isn’t sticking with just food and consumer staples. The chain is taking advantage of troubles in the electronics marketplace with the bankruptcy of Circuit City Stores Inc. (OTC:CCTYQ) and is even making huge inroads in electronics against Best Buy Co. Inc. (NYSE:BBY).

For example, Wal-Mart is marketing both the Apple Inc. (Nasdaq:AAPL) iPhone and Google Inc. (Nasdaq:GOOG) G-Phone. It’s also is resorting to proactive advertising of discounts through text messages and other aggressive tactics in order to highlight its discounted merchandise and bring customers to its stores. Needless to say, the strategy is working extremely well.

But what about the change in leadership?  Neither I nor most of the analyst community expected the recent announcement that Scott, 59, would be stepping down as the retail giant’s CEO, effective Feb. 1. But Scott is being succeeded by Michael T. “Mike” Duke, 58, head of the company’s overseas operations, and an executive with substantial global experience. So I am both comforted and optimistic.

I see continuity in Wal-Mart’s core strategies and, if anything, an invigorating shot into Wal-Mart’s overseas strategies.

In fact, this executive shift should play out extremely well for Wal-Mart. With the announcement of its record fourth-quarter sales and earnings back in February, Wal-Mart Stores Inc. (WMT) became the world’s first $100 billion retailer. With an increasing penetration of China, and continued, unabated success even in emerging market countries such as Mexico that have been affected the most by the ongoing U.S. financial-crisis-spawned recession, Wal-Mart is ready to reap the growing benefits of its international foray.

Next year, while the world’s most-advanced economies will be barely growing in the aggregate, emerging economies will post growth of between 3% and 8%, led by China. This should enable the retailer’s overseas sales to climb by as much as 10%, in spite of the global turmoil.

In conclusion, the U.S. recession should translate into increasing market share gains for Wal-Mart here at home, while an increasing penetration into the much-faster-growing economies abroad will help propel both the top and bottom lines for the company. With a Price/Earnings (P/E) ratio of 15 and a very-low EBITDA multiple of only eight, this defensive profit play is poised to continue delivering capital appreciation and market outperformance in the New Year, despite a very difficult backdrop.  Wal-Mart should be a core stock in virtually every portfolio.

ACTION TO TAKE: BUY Wal-Mart Stores Inc. (NYSE:WMT), but do so with some care. Buy half a position today and leave some powder dry to complete the position in the first quarter of the New Year, since volatility will remain with us for some time to come. **

Source: Buy, Sell or Hold: For a Defensive Stock, Wal-Mart Plays a Great Offense

This from Taipan Daily:

Jim O’Neill is the Goldman Sachs economist who invented the BRIC acronym – shorthand for “Brazil, Russia, India, China.”

Now O’Neill thinks the BRIC countries – or rather, the shoppers in these countries – will save the global economy in its great hour of need.

“The BRIC consumer is going to rescue the world,” O’Neill says. There are 2.8 billion of them… and they are “poised to spend more.”

2.8 billion is a pretty big number. (As the old saying goes, anything times a billion is big number.) It’s also important to note that these consumers are quite different from those in the West. Unlike us, they come from very thrifty beginnings. Many of them are preparing to open their wallets for the first time – as opposed to draining the last bit of juice from a close to maxed-out credit card.

“The best hope to keep the global economy growing may be people like Wei Yufang,” Bloomberg reports. “A peasant who farms a small plot beside the mud-brown Huaihe River in central China, Wei has a modest dream: to buy an air conditioner to give her family relief from the dusty heat that each summer envelops Xiaogang (Little Hill) village in Anhui province.”

The Chinese government would like to see many more Wei Yufangs.

It’s slow going getting Chinese consumers to open up, though, because the tendency towards thrift is so strong.

The Urge to Save

Many Chinese routinely save as much as half or even two-thirds of annual income. Fittingly, consumer spending only makes up about 35% of Chinese GDP – roughly half of the total pie share in the United States. This is down from a 50% share in the 1980s.

Part of the reason the Chinese save so much is because there is no social safety net. The prospect of getting sick is especially frightening in China.

Wang Tao, a Beijing-based USB Securities analyst, says that “America’s healthcare problems can’t even compare… Healthcare is so expensive and distorted [in China] that no matter how much you save, if you get sick you’re going to end up poor.”

The Chinese also save mightily to pay for their kids’ educations. As in the United States, college is a big-ticket item there.

A New Generation

Is O’Neill’s BRIC optimism misplaced, then, at least as far as China is concerned? Maybe not.

As it turns out, the one-child rule has created a generation of pampered kids. Doting mothers and fathers bend over backwards for their sons and daughters. Accustomed to being the center of attention – and confident in their odds for long-run success – Chinese kids are thus far more likely to splurge than their parents.

While the parents and grandparents save, in other words, the new generation spends.

China is also working hard to change attitudes towards healthcare and retirement. The gradual construction of a social safety net will have a lubricating effect on willingness to spend, much how FDIC insurance lubricated the long-term expansion of the banking system in the United States.

So as fear of personal disaster loosens its grip, the BRIC purse strings will loosen more too. While the paradigm shift entails U.S. consumers spending less and saving more, the trend for O’Neill’s 2.8 billion is the opposite.

A Painful Transition – But a Necessary One

So what will the world look like when the American consumer hangs up his spurs?

An inability to imagine such a transition is in part what has Wall Street so afraid. Joe and Jane Sixpack have financed the global economy with their buying of “stuff” for so long… with their wallets snapping shut now, how can the world as we know it not end?

Well. The world as we know it is coming to an end. But that doesn’t mean armageddon. It just means we’re on our way to a new place… a new paradigm.

To understand why things will be okay in the long run (and certainly far better than they look now), it’s useful to recall a few things.

• When the system is functioning properly, saving is just spending in another form. (That is to say, higher savings rates are not automatic doom.)
• It’s not impossible to imagine a world where America embraces thrift. It’s just hard to picture after 25 years in the other direction.
• Investors, being utterly lousy at seeing around corners, have a tendency to panic on the cusp of major sea change.

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Saving versus Spending

To address the first point: As Henry Hazlitt pointed out in his excellent text “Economics in One Lesson,” saving is really just spending in another form.

If you put your money in a bank, Hazlitt notes, that capital becomes available for a worthy enterprise to borrow and put to good use. If you put your money in the market – savings as long-term investment – the capital again goes to companies that can make worthy use of it. So there is no reason saved money has to be dead money.

This is how it’s supposed to work – and it generally does work this way in normal times.

As of late 2008 the system has been wrecked by reckless leverage… due to a jamming up of the works banks no longer want to lend, and companies no longer have the financing they need to expand.

But when the system is finally healed – when the leverage toxins are fully flushed – saving will again be as good as spending as far as the health of the economy is concerned. Mortgage payments and bank balances will be recirculated back into the economy, markets will resume their normal function of channeling capital to companies that deserve it, and so on.

In a world where the system functions properly – without the idiotic Greenspan-inspired leverage excesses of recent years – it won’t be so bad if U.S. consumer spending drops dramatically as a percentage of GDP… Especially if consumer spending in the BRIC countries rises up, as O’Neill and others expect it will.

After all, doesn’t it make natural sense? As we who have far more “stuff” than we need cut back on our buying, and those who have not yet bought their first air conditioner step up their buying, the global mix simply changes.

The West’s increased savings can then be put to productive use – perhaps by the multinationals selling consumer goods to the emerging market world, or the companies tasked with repairing and upgrading the West’s tattered infrastructure.

Doom for Some

So picture a world in which BRIC consumer spending (the 2.8 billion again) rises to 50% of GDP on average, while U.S. consumer spending falls below that.

This would not be a disaster. If anything, it would be a far more healthy (and logical) balance of things.

Such a shift would, though, prove a disaster for many consumer-centric industries focused on American appetites. As my colleague Adam Lass likes to point out, binge retail is on its way to becoming a wasteland.

So if a business model is invalidated by the new market landscape, then guess what – that business model is toast, no matter how fervently the participants in that industry wish it not so.

But that’s the whole point of creative destruction.

A free market economy is either dynamic or it is dead. The creative destruction process is vital because it allows resources and capital to shift from one area of the economy to another… not as determined by central planning or government fiat, but in flexible real-time response to how the world is changing.

Economic systems that resist this sort of flexible change – that rely too much on intervention and central planning and resistance to change – wind up stagnated and brittle. Blessed are the flexible, for they shall not be bent out of shape.

The Market Doesn’t See It – Yet

Here and now, in December 2008, the market has no sense of what the world will look like the day after tomorrow.

The market has no true sense of anything now, for that matter, because so many of the normal functions have been broken. The markets now are like a plumbing system in which half the pipes have exploded from the duress of water pressure 10 times normal levels.

When the system gets pushed far enough out of whack by global margin calls and liquidity panic, the valuations stop making sense. Logic takes a time out. The academics who forget this (or foolishly deny it) remain blind to the fact that all their precise theories are grounded in a messy world of buyers and sellers.

So for now we’re still watching the Talking Heads movie (Stop Making Sense). But when the market needle starts swinging back in the “rational” direction – when logic gets a toehold again – I think cooler heads will prevail and a sense of the transition’s aftermath will sink in.

It’s hard, but not impossible, to see a world in which Americans spend a good deal less while others spend a good deal more.

It is also hard, but again not impossible, to see a world in which U.S. consumer savings play a useful role in a properly functioning market system – getting recycled as capital for banks to lend and companies to make wise use of. For now, it’s just a matter of getting from here to there.

Source: Saving and Spending in the 21st Century

During the Great Depression, financially devastated Americans sold turnips along side the road to make ends meet. Today, they merely boot up their computer and sell their junk online.

For proof, I called up an acquaintance that makes her living buying and selling on eBay (NASDAQ:EBAY). She answered the phone sounding like she had just spent the last 48 hours on a runaway treadmill. She was tired and grumpy.

“So how did Cyber Monday treat you,” I asked.

“It was insane. I have more orders than I can handle,” I think she replied. In her tired and mumbling tone, it was hard to know exactly what she said.

I do know she cursed and hung up on me when I told her to hang on to her hat with Green Monday and its huge shopping volumes on the way. Experts are predicting it will be the biggest online retailing day of the year.

Mr. And Mrs. Clause go online

While my auction-dealing friend was overworked and tired, I am sure she is glad for the surge in eBay spending. In all, online retail spending was up by 15% or so on Cyber Monday, the closely monitored first day back to work after the Thanksgiving holiday.

While online retailers like Amazon (NASDAQ:AMZN), Gap (NYSE:GPS) and Best Buy (NYSE:BBY) raked in their share of the $846 million spent last Monday, the Web’s largest auction site saw its selling activity soar. EBay reported a 50% year-over-year increase, thanks to its fixed-price sales surging by over 125% from last year.

When the nation’s economy locks its brakes, one of the first places discount shoppers and money-hungry sellers head is eBay. The site’s foundation is built on allowing individual sellers to unload their unwanted “junk” for cash.

As tens of thousands of Americans hit the unemployment line, they are turning to eBay for a shot at some quick and easy cash. Financially desperate sellers will unload just about anything they can live without in order to pay their winter heating bills, mortgages, and, of course, their burgeoning Christmas debt.

Some more discount buying

Wall Street has hammered eBay’s valuation over the past twelve months. A year ago, shares were trading for nearly $35. Today, the few folks savvy enough to buy are getting their shares for just $13.

Unlike so many other companies trading on the major exchanges, eBay does not have any desperate liquidity issues. It does not have to beg to creditors to extend debt maturities. It will not be diluting shares with a last-ditch attempt to increase capitalization. And most importantly, it is in a position to increase its market depth through strategic acquisitions and in-house development.

I know a lot of folks do not like the company’s management. eBay’s CEO, John Donahoe, has made some controversial decisions and certainly plenty of mistakes, but a company with a significant cash cushion and a near-total lack of debt cannot be overlooked by value-minded investors.

This is one of those plays where you have to put emotions aside and look at the reality of the economic situation and the numbers the company is producing. If a bank or manufacturer could post a balance sheet like eBay’s, investors would be drooling to get in on the action.

The worst is behind eBay and its future looks bright. Take a look at the stock and see if it fits your portfolio. I am positive you will like what you see.

Source: eBay (NASDAQ:EBAY) takes advantage of online spending