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Retail Sector Faces Uphill Climb in 2009

Bob Blandeburgo — Mon, 20 Jul 2009 15:25:53 +0000

Retail investors had a rough go of things in the first half, but since the March lows of all the markets, the Standard & Poor’s Retail Index is showing progress toward its 52-week high of 427.13.

But don’t expect that to last. A slump in consumer spending and soaring unemployment could both pose a significant threat to retailers going into the 2009 holiday season.

The U.S. unemployment rate hit 9.5% in June and could eclipse 10% by the end of the year, sending the economy into a “jobless recovery.”

In a speech to Congress on May 9, Federal Reserve Chairman Ben Bernanke cited a lack of consumer spending could serve as a constraint on hiring. This could create a paradoxical effect as employment obviously plays a key role in consumers’ spending habits.

Even for the employed, the lessons learned from the worst economic downturn since the Great Depression will resonate with consumers. That has already been evidenced by the U.S. savings rate, which has climbed above 4% for the first time in more than a decade.

In addition to taking money out of the hands of potential customers, soaring unemployment could lead to higher lending standards. As unemployment rises, so too will credit defaults and the cost of credit will increase accordingly.

In the past, consumers have counted on attractive financing promotions for the purchase of big-ticket items such as high-definition televisions and kitchen appliances. But that won’t be the case with tighter credit

“Consumers were also able to spend more because of the easy availability of credit, most notably through mortgage equity withdrawal and they responded by buying more items,” said Deloitte Strategic Advisor Richard Hyman. “These conditions underpinned retail growth for the past 10 years but have now disappeared. However, it’s worse than that. They will clearly not return once the recession is over.”

Of course, tighter credit isn’t just a problem for consumers.

A Brick & Mortar Inventory Crunch for the Holidays?

The potential bankruptcy of commercial lender CIT Group Inc. (NYSE:CIT) could be a major tipping point for businesses that rely heavily on credit. Vendors for retail giants such as Wal-Mart Stores Inc. (NYSE:WMT) and Target Corp. (NYSE: TGT) rely on CIT for factoring – an old form of finance in which the lender pays the vendor for its accounts receivable. If the retailer fails to pay for the goods, the lender assumes the responsibility to pay the vendor.

“Right now our industry is preparing for the fall and winter season,” Kevin M. Burke, president and chief executive of the American Apparel and Footwear Association told The New York Times. “A lot of these orders are going to come to a grinding halt if there is no capital.”
A CIT bankruptcy would be a “double whammy” to stores whose suppliers have already cut the amount of merchandise they are making to better align inventory with the drop in consumer spending, said Burke. If those suppliers lose their sole source of capital, what little merchandise retailers originally ordered might never arrive.
The timing of CIT’s woes is “terrible,” Al Ferrara, a partner in retail and consumer products business of consulting firm BDO Seidman LLC said in a Reuters interview. “Retailers now are basically gearing up for the back-to-school and the fall season.”
An inventory crunch at brick & mortar retailers would give a competitive advantage to online retailers, which have more flexibility and already account for about a third of holiday retail sales.

For brick & mortar retail businesses, managing inventories during the holiday season is a delicate balancing act in which managers must walk a fine line between over- and under-ordering stock.

If retailers overstock, they will be forced to offer even steeper post-holiday discounts than they would like in a desperate bid to unload inventory. But if they don’t stock enough merchandise to meet demand they risk not only missing out on sales, but driving potential customers to online retailers, such as Amazon.com Inc. (Nasdaq: AMZN) whose warehouses are not restricted by the display racks and checkout counters found in brick & mortar stores.

This doesn’t mean brick & mortar retailers will sit idly by this holiday season as Amazon siphons off customers via the Internet. All of the nation’s biggest retail players have their own websites too, but the gap between Amazon and the No. 2 online retailer, Staples Inc. (Nasdaq:SPLS) is huge: Amazon generated $19.2 billion in online revenue in 2008, while Staples generated less than half of that in the same year: $7.7 billion.

While half of the top 10 online revenue generators came from traditional stores, notably absent were brick & mortar discount giants Wal-Mart and Target.

And even Best Buy Co. Inc. (NYSE: BBY), which displays in-store signage promoting an “expanded assortment” of products online for consumers who did not find what they were looking for in the store, came in at just No. 10 on the list.

Shopping for a Silver Lining

While a continued slump in consumer spending would benefit no one, certain retailers are better positioned than others, and could ultimately use adverse economic conditions to turn a profit.

For instance, the aforementioned Amazon.com, which is the world’s largest online retailer, could see a sizeable boost in its web traffic as consumers comb the Internet for bargains.

Companies that have a consumer-friendly economical brand, such as Wal-Mart, will also benefit.

Wal-Mart’s “Save Money, Live Better” slogan is already resonating with consumers, and The No. 1 retailer in the world has gone to great lengths to cement its reputation as the affordable choice for shoppers.

The company has set up a “Save Money, Live Better” website (complete with testimonials of what people are doing with the money they save by shopping at Wal-Mart) and a “Live Better Index,” which includes an interactive map of the United States to show how much money people have saved in each state by shopping at Wal-Mart.

The result of Wal-Mart’s efforts? Holiday sales grew 7% last year, according to the Advertising Research Foundation.

Similarly, same-store sales are consistently rising at discount houses such as Family Dollar Stores Inc. (NYSE: FDO), and Ross Stores Inc. (Nasdaq: ROST), the latter of which has the “Dress for Less” sloganright under its name at every store. On the flip side, stores like Macy’s Inc. (NYSE: M) and Saks Inc. (NYSE: SKS) have reported consistent declines in same-store sales over the past few quarters.

“Needs-driven spending will gravitate towards retailers able to tick the most important consumer boxes like price and convenience,” said Deloitte’s Hyman. “Although it will remain the engine of retail growth, wants-driven spending will slow and consumers will be much more choosy.”

Source: Retail Sector Faces Uphill Climb in 2009

U.S. Housing Market to Remain Shackled by Unemployment, Foreclosures and Tight Lending For the Rest of This Year

Don Miller — Wed, 08 Jul 2009 14:00:31 +0000

In past downturns, it was a resurgent U.S. housing market that led the American economy out of the recessionary doldrums. But U.S. investors shouldn’t expect history to repeat itself this time around.

In fact, the housing sector will likely relinquish the leadership role that it’s played in past recoveries, meaning it won’t provide the fuel needed to end the current recession, says Nariman Behravesh, chief economist at IHS Global Insight (NYSE: IHS) in Lexington, Mass.

‘It’s going to be different this time,” Behravesh said. ‘The pattern this time will be the government kick-starts housing, and then consumer spending comes around to kick-start the economy.”

Just past the 2009 midway mark, the U.S. housing market remains one of the biggest concerns for U.S. investors.

But it’s also the biggest puzzle – thanks to the confusing and often-conflicting array of reports and data that continue to appear.

On one hand, the avalanche of foreclosures continues to drag down home prices in many markets – just as the federal government is taking unprecedented steps to make money available to prospective homebuyers.

On the other hand, however, surging unemployment is keeping buyers on the sidelines, and lenders remain reluctant to loosen their purse strings, and are forcing borrowers to meet stricter credit-quality standards.

The bottom line: The U.S. housing market appears to face a long, hard climb out of the biggest hole it’s occupied since the Great Depression.

That figures to keep the housing market on the mat until mid- 2010 – or even later. Here’s a look at the main factors that will drive the market for the remainder of this year, and for a good part of 2010.

Market Research Creates a Confusing Picture

The U.S. housing market is widely tracked and the resultant data often present a juxtaposition of over-simplified snapshots. It’s a jumble of closely followed reports – some from the U.S. government and the rest from private researchers – that too often can confuse rather than clarify what’s really happening.

Consider some of the most recent reports that – when viewed together – combine to create a contradictory picture of the U.S. housing market:

Sales of newly constructed homes fell unexpectedly in May and were 32.8% below the same month a year ago, the Commerce Department reported during the last week of June. Housing starts are now at their lowest level since 1945.
But housing starts are showing early signs of a turnaround in 33 of the nation’s metro areas, with 140 metro areas showing gains in home prices from a year earlier, according to the Adversity Index compiled by MSNBC and Moody’s Economy.com.
Building permits in May were at a seasonally adjusted annual rate of 518,000, or 4% above the revised April data, but 47% below the 978,000 recorded in 2008.

The reason the market gets this kind of intense scrutiny is simple – the construction of new homes and sales of existing homes is the engine that has powered every U.S. economic recovery since 1960.

New home construction starts began to climb an average of seven months before gross domestic product (GDP) rebounded in each of the past seven contractions. And sales in the residential real estate market jumped about four months before the economy picked up, according to data provided to Bloomberg News by David Berson, chief economist of mortgage insurer PMI Group Inc. (NYSE: PMI).

But the recent data has left some analysts underwhelmed – if not downright puzzled.

In fact, the $8,000 first-time homebuyer tax credit and U.S. President Barack Obama’s $75 billion program to subsidize some mortgage payments haven’t done enough to revive the market, according to Eric Belsky, executive director of Harvard University’s Joint Center for Housing Studies in Cambridge, Mass.

‘It hasn’t been much more than a see-sawing of data,” Belsky toldBloomberg in an interview where he suggested more government intervention will be needed to right the U.S. economy.

‘Housing has led the U.S. economy out of every recession for at least 50 years, and for that to happen again, more stimulus is going to be needed.” Belsky said.

But if the government does intervene again to boost the housing market, you can be sure it will aim most of its ammunition at the underlying causes of the housing slump – namely unemployment, foreclosures and bank lending.

Unemployment Not Letting Up

With prices hitting multi-year lows in some markets, homes may be more affordable than they have been in decades. But if job losses continue, the price tags will become a lot less relevant to potential homebuyers.

As reported previously by Money Morning, unemployment in the United States has soared to its highest rate in a quarter of a century, and is projected to zoom even higher.

At last tally the ‘official” government unemployment stood at 9.5%. Even the White House is admitting that the official rate will hit 10% by the end of the year, underscoring Vice President Joe Biden’s weekend admission that the Obama administration ‘misread” the severity of the nation’s economic problems.

But if you include the people that the government doesn’t even count – such as unemployed farm workers, the idle self-employed, and workers in private homes – the unemployment rate now approaches an astonishing 20%.

And if the rate of unemployment keeps rising at current rates, things could get a lot worse. During five of the past six months, the U.S. jobless rate has increased by about 0.5% per month. Here are the numbers:

January: 7.6%.
February: 8.1%.
March: 8.5%.
April: 8.9%.
May: 9.4%.
June: 9.5%.

Even if the rate of growth were to come down, the official rate seems likely to top 10%. If it grows at 0.45% per month, the official rate will end the year at 12.55%. If it continues to grow at just 0.1% per month, which seems highly improbable, it would still easily pass 10%.

With about 6.5 million people having lost their jobs since the recession began in December 2007, and with millions of others working longer and harder to keep their current positions, the nation’s soaring unemployment rate has the potential to put a paralyzing chill into the U.S. housing market.

“People that are afraid for their jobs are not going to make those purchases and people that are losing their jobs can’t get the loans,” Daniel Penrod, industry analyst for the California Credit Union League in Rancho Cucamonga, Calif., told Reuters.

Foreclosures Continue to Mount

With an inventory of 2.1 million unoccupied houses on the market, the highest foreclosure rate in history is acting as a serious drag on an economic turnaround. And the increasing number of foreclosed homes that will soon come onto the market will continue to depress prices and dampen construction of new properties and re-sales.

According to RealtyTrac Inc., 860,000+ properties were repossessed by lenders last year, up a whopping 64% from 2007.

But that may pale in comparison to 2009. Lawrence Yun, chief economist of the National Association of Realtors told Bloomberg that the number of foreclosures this year may rise to a record 2.5 million.

Ballooning foreclosures have a predictable effect, driving prices lower as banks unload unwanted assets from their books. That may explain why sales of existing homes are rising while new home starts continue to lag.

“Newly constructed homes simply cannot compete with the values found in the existing home market,” Bob Walters, chief economist at Quicken Loans Inc., told Bloomberg.

While foreclosures are affecting prices in most markets around the country, some areas are particularly hard-hit. An astonishing 73% of all existing houses and condos sold in the Las Vegas area last month were foreclosures, up from 56% a year earlier,MDA DataQuick research shows. Foreclosures accounted for 51% all existing-home transactions in California.

Meanwhile, the median price for an existing, single-family detached house in California plummeted 30% to $267,570.

And there are other dark clouds on the horizon.

The number of foreclosures increased to an all-time high of 1.37% of total loans outstanding, while the first-quarter mortgage delinquency rate, which tracks loans over 30 days past due, climbed to a record 9.12%, the Mortgage Bankers Association said.

‘We have to be ready for more waves of foreclosures coming through for at least the next year,” Andrew LePage, an analyst with MDA DataQuick, told Bloomberg. ‘And no one really knows how big those waves are going to be.“

And the numbers of Americans who own homes that are underwater continues to grow.

Remarkably, about 20.4 million of the 93 million houses, condos and co- ops in the U.S. were worth less than their loans as of March 31, according to Seattle-based real estate data service Zillow.com.

As the chart below shows, the decline in the housing market has slashed more than 55% of total homeowner equity since 2005, diminishing the ‘wealth factor” for many homeowners, and forcing them to curtail spending.

And when consumers slash spending, which accounts for almost 70% of all U.S. economic activity, the economy can’t fire on all cylinders.

Mortgage Lending Stifled

Meanwhile, mortgage lending is being held in check by a rise in interest rates and stricter qualifying rules imposed by bankers.

Interest rates on a 30-year mortgage have climbed to 5.42% from a low of 4.78%. The cost of borrowing initially fell in March after the U.S. Federal Reserve said it would purchase as much as $1.25 trillion inmortgage-backed securities. But rates followed U.S. Treasury note yields higher after investors grew concerned that federal spending would fuel inflation.

And even though ‘demand remained at elevated levels” in April, mortgage lending at the 20 big U.S. banks that received Troubled Asset Relief Program (TARP) funding dropped 3% to $114.2 billion, the U.S. Treasury Department said in a June 15 report.

In a separate report, the U.S. Federal Reserve said about 50% of banks actually tightened requirements for prime mortgages in the first quarter, asking for more money down and more collateral. The same number of banks said that they had opted to tighten standards for home equity loans.

‘Six years ago, standards were pretty permissive, and two years ago all you needed was a pulse,” Grant Stern, a mortgage broker and owner of Morningside Mortgage Corp. in Miami Beach, Fla., told Bloomberg.‘Nowadays, even people who have reserves that equal amount of the loan are getting rejected.”

But some analysts say the tighter lending standards are a natural reaction by bankers to the number of defaults seen during the past two years.

‘The risk of lending today is much greater than it was a few years ago, so banks are being more prudent,” said James Chessen, chief economist of the American Bankers Association in Washington, D.C.

‘Hyper-local” Market Means Averages Don’t Apply

Even with all the negative news about the housing market, the bottom line is that the vast majority of U.S. homeowners won’t be selling this year or next.

The typical house is owned for five to seven years, and only about 5% of U.S. housing stock turns over in a single year, meaning only one in 20 homeowners plan to sell this year.

And the very nature of the housing market makes it impossible to generalize about individual markets. Indeed, U.S. housing market data is an amalgamation of reports from a wide range of local markets, which is why it’s so difficult to make any pronouncements about the market’s overall health, says Andrew Waite, a former institutional investor who is now the publisher of a magazine that focuses on real-estate investing.

‘It’s like a weatherman who combines conditions in Nome, Alaska and Clearwater, Florida and issues an ‘average’ national forecast of 45 degrees,” Waite told Money Morning in an interview. ‘Real estate markets are by their very nature ‘hyper-local.’ Averages simply don’t apply.”

Waite is the publisher of the Personal Real Estate Investor, a magazine for investors who buy houses or condos to manage for income or to fix up and sell for a profit.

Real estate is segmented by individual neighborhoods, and is further subdivided by price points and such price-influencing factors as condition, cash flows – and even cap rates on rental properties, Waite says.

The Bottom Line: No Recovery Until 2010

Behravesh, the IHS Global Insight chief economist, says it’s very clear that the American housing market doesn’t have the horsepower this time around to lead the U.S. economy out of its current malaise. In fact, the most recent reports have led some analysts to conclude that the U.S. housing market probably won’t recover until 2010.

The stubborn combination of rising unemployment, home foreclosures, and tight lending means there’s little chance sales will increase enough this year to end the housing recession, Andres Carbacho-Burgos, an economist with Moody’s Economy.com (NYSE: MCO) in West Chester, Pa., told Bloomberg.

‘We have a lousy job market and an excess of around 1 million extra homes that has to be worked off,” he said in an interview. ‘The housing market is not going to hit bottom before mid-2010.”

Source: U.S. Housing Market to Remain Shackled by Unemployment, Foreclosures and Tight Lending For the Rest of This Year

Dollar Tree Set to Surge In a Frugal Future

Contrarian Profits — Tue, 16 Jun 2009 18:28:39 +0000

Consumer deleveraging has barely even started, says Payout Trader editor and Crisis Strategy Alert senior analyst Charles Delvalle. According to the Fed Flow of Funds report released on Wednesday, household debt as a percentage of disposable income has fallen from 123% to 120%. That’s 2004 levels. But it’s a far cry from the 83% level in 1995.

When consumer debt is high, the only way to increase consumer spending is by (a) increasing the consumers’ take home pay or (b) forgiving a portion of consumer debt (which isn’t even guaranteed to prevent a default on that debt).

This year alone, over 2.9 million Americans have lost their jobs. So expecting a better paying job is out of the question. The government is already searching for ways to increase taxes, so we doubt consumers will get any significant tax cuts. And considering Team Obama is so keen to protect the banks, chances are they aren’t going to be pardoning consumer debt.

Let’s be frank. Consumers aren’t making more money this recession. And what money they do have will be spent to pay off their debt. That means discount retailers – the ones that sell everyday items for cheap – will lead the retail sector for some time to come. One of the best is Dollar Tree, Inc. (NASDAQ: DLTR).

U.S. Housing Starts and Permits Revisit Record Lows in April

Mike Caggeso — Tue, 19 May 2009 16:00:37 +0000

U.S. housing starts and permits unexpectedly plummeted to record lows in April, torpedoing hopes of a housing market recovery as well as hopes the overall economy is regaining traction.

Starts for privately owned homes clocked in at a 458,000 annual rate, a 12.8% decline from March’s revised rate of 525,000 and a 54.2% dive from April 2008’s annual rate of 1,001,000 starts, according to a report from the U.S. Department of Commerce.

Meanwhile, building permits for privately owned housing units were applied for at a seasonally adjusted annual rate of 494,000, 3.3% below March’s revised rate of 511,000 and a 50.2% plummet from April 2008’s revised rate of 991,000.

The Commerce Department report also sheds light on the complexity of the housing market’s fallout and path to recovery.

Most strikingly, while starts in the West have dropped 52.9% from last year, they actually rose 42.5% from March 2009. The Northeast, Midwest and South all posted double-digit monthly declines and steeper annual losses.

Also, the drop in building permits isn’t necessarily a bad thing, says Peter Kenny, managing director at Knight Equity Markets. Like the retail sector’s recovery, the first step for the ailing housing market is getting rid of all the houses already on the market, he said.

“There is so much inventory on the market that the sooner we stop building and start eating into existing inventory the better off we’ll be,” Kenny told Reuters.

Affect on Stock Market

For the short term, April’s housing figures won’t help the country’s top home-repair retailers, The Home Depot Inc. (NYSE: HD) and Lowe’s Cos. Inc. (NYSE: LOW).

Each company posted quarterly earnings that beat analysts’ forecasts, but not because they’ve been blessed by a return of consumer demand.

Rather, the retailers discounted items and cut costs across the board.

Earlier this year, Home Depot announced plans to cut 7,000 jobs, freeze officers’ salaries and close some specialty outlets – moves that shed 16.4% from operating costs, Reuters reported.

In April alone, building-material and garden-supply stores, shed 7,500 jobs, according to the U.S. Department of Labor.

The moves have clearly been effective, but also entwined with a bitter irony.

And as long as unemployment continues climbing, there won’t be a consumer base for every element for the housing market, including the merchandise on their shelves.

Source: U.S. Housing Starts and Permits Revisit Record Lows in April

Contrarian Companies Expanding During Gloomy Economy

Adam Lass — Mon, 09 Mar 2009 14:57:33 +0000

Massive unemployment? No problem! Adam Lass of the Taipan Publishing Group says that no one is buying luxury goods right now but he gives us two puts in the retail sector that are playing out well during the crisis.

He also shares a British health care conglomerate that provides aid for troubled times and “sells even better when folks are broke.”

This from Adam:

Buy into Eastern Europe’s depression or just make 114% on ours: It’s your shot to call.

In case you hadn’t noticed, retail is in a bit of a pickle these days. The Conference Board’s latest consumer poll puts their Confidence Index down another 12.4 points, to yet another all-time low at 25.

Keeping in mind that anything below 50 is considered bad, I’d have to say that a score of half that ought to be considered really bad.

No shock there, I suppose, since we are looking at massive unemployment right about now. As of late last week, the official figure had us at 8.1%, a 25-year high water mark for folks who are slowly sinking under water.

And that’s only looking at it percentage-wise. Our population has grown roughly 45% since 1985, and 140% since 1930, so it’s safe to say that there are probably more folks hanging around the corner wasting time then ever before in the history of the country, including the dark days of the Great Depression.

Depressing indeed, but before you start thinking this is another one of Lass’ loads of unalloyed dreck, I actually have found another one of those oddball companies looking to expand during this dismal episode.

But First… More Dreck!

There is an odd thing about the current wreckage. Back in 2000, the majority of American households were involved in the stock market in one way or another. This was the dawn of online investing, when most any shmoe who could type their name with two fingers could get a trading account. Inside the biz, many still refer to the tech boom and ensuing crash as the “March of the Morons.”

Not very nice, but there it is. But don’t fret too much, because this most recent crash was in many ways the exact opposite. This time around, it was the wise guys themselves who sank trillions into unfathomable, unvaluable, and in the end, valueless debt arbitrage. The very folks who should have known better fell deepest into the briar patch.

As a result, mega-discounters like Wal-Mart (WMT:NYSE) are actually reporting modest but significant increases in sales, while high-end outfits Saks (SKS:NYSE), Nordstrom (JWN:NYSE), and Ann Taylor (ANN:NYSE) are reporting withering sales declines.

The folks in the Ann Taylor corner suite at 7 Times Square (one wonders how long they will be able to afford THAT address eh?) are specifically blaming the 20% plunge in Q4 on the fact that a remarkable number of women no longer require the “business attire” that is ANN’s stock in trade. The future is so “volatile” right now (that’s biz slang for “god-awful”) the team at ANN won’t even put out a forecast for next quarter.

If you didn’t turn every $1000 you invested last year into 113 GRAND, you really need to give me the next five minutes of your time…

As the Dow lost 40% of its value in 2008, one unorthodox analyst steered his readers to optimized one-year gains of 6,635%, 10,838%, and 11,359%.

Here’s how to get eight months worth of his biggest gainers for 2009 FREE…

The Two Fashion Items That Sell Even Better When Folks Are Broke

But there is one “wearable” shop that is not pulling in its horns. In fact, it is looking to expand its offerings into Eastern Europe. And yes, they know that the once-and-future Eastern Bloc is melting down as fast as (if not faster than) we are here in the States. In fact, they are counting on it.

I am referring to SSL International PLC (SSL:LN). This Brit healthcare conglomerate has the rights to distribute Dr. Scholl’s foot aids overseas. Just imagine all those sore, tired guys pounding the pavement looking for jobs! But SSL’s real winner in these troubled times is their Durex condoms line.

As per Chief Executive Officer Garry Watts, SSL intends on using the downturn to bump its stake 50% in a unit that distributes contraceptives to Russia and nine other eastern European countries. And that’s just the first kiss, as it were: By 2010 they hope to buy up the entire operation.

Blunt and to the Point

In a recent interview with Bloomberg’s Kari Lundgren and Howard Mustoe, Watts put it rather succinctly: “Russian people aren’t going to stop having sex any more than British people are. We’re not immune from the downturn, but it’s a bit like Pizza Hut: If you’re not going out, then you might be willing to drop a five-pound vibrator ring into your trolley.”

Hey, he said it, not me, folks. Okay, stinky feet and Russian condoms are slightly unsettling thoughts (especially around lunchtime). But Watt’s got a point and he’s grinning when he makes it, which makes him different than 95% of the CEOs I speak with these days, who can barely manage a forced rictus smile.

If this is just too much for you to wrap your mind around, and you still want to grab a piece of the action in the “Retail Space,” you can always pick up some of the puts we are recommending in my own WaveStrength Options Weekly column.

Like I mentioned earlier, no one is buying luxury goods. Thus, our Best Buy (BBY:NYSE) play is up some 40% as I sit to write, while our Disney (DIS:NYSE) play is up 114%.

Source: Pick Me Up a Three-Pack When You Go Out, Dear

Can Wal-Mart (WMT) Lead Retailers out of the Recession Muck?

Christian Hill — Wed, 11 Feb 2009 15:26:07 +0000

With thinning household budgets, deteriorating retirement and home prices taking a nosedive, Wal-Mart (WMT) is a leading recession retailer. But can it clean up the other casualties in its sector? Christian Hill of Investors Daily Edge offers us his advice.

Anyone can look in my closet and tell that I am not much of a shopper. I generally only replace things when they are beyond repair. As my girlfriend likes to point out, I have a pair of jeans from a store that went out of business years ago. Perhaps it’s my Midwest nature, but if they still fit, I’m wearing them. Holes be damned.

Obviously, this means I don’t set foot in malls very often. Usually it is only to redeem the gift cards I get at Christmas.

So, over the past few weekends, armed with my Christmas bounty, I was off to the mall. I could see it in my mind: empty parking lots, and everything 90% off.

We are in a recession after all. And it was far enough after the holidays that the malls would be deserted. I could park right by the door, get in and out without any long lines and not return for another 11 months.

You know what they say about assumptions.

The place was absolutely packed. The parking lot was nearly full, and while it wasn’t a last weekend before Christmas throng of shoppers, there were a startling amount of people with apparently nothing else to do on a beautiful 70 degree Sunday afternoon in Florida.

But we are in a recession. How can this be? Just window shoppers?

Unfortunately, that is very likely. According to the January Business Wire’s Monthly Retail Report, same store sales still fell 1.6 percent in January, but with a very large asterisk.

That large asterisk being Wal-Mart (WMT).

While Wal-Mart saw same-store sales increase 2.1 percent in January, it’s weighting in the Index (53 percent) heavily skewed the final reading.

Take out Wal-Mart, and the rest of the retail landscape isn’t pretty at all.

Gap – 23 percent drop

Saks – 23.7 percent drop

JC Penney – 16.7 percent drop

Unfortunately for retailers, it doesn’t look like they will be turning the corner anytime soon. Faced with a continued slowdown in the economy and shrinking disposable income, it may take 90 percent off sales to get shoppers in the door.

And that’s the flipside of generating foot traffic with such heavy markdowns. With such heavy markdowns, margins must be razor-thin, or just not there. My guess is to move older inventory to make way for the new spring merchandise, many items are being let go at or below cost. This is going to have a serious impact on first quarter earnings figures.

Go long WMT, short just about everything else in the retail sector. You can see the full monthly retail report here.

Source: Can Wal-Mart Lead Other Retailers Out Of The Muck?

U.S. Unemployment May Be A Bigger Problem Than Government Stats Say

Don Miller — Mon, 26 Jan 2009 14:18:05 +0000

The dismal U.S. unemployment numbers have gotten more airtime recently than Jerry Springer. And why not? The numbers are mind-numbing.

A total of 2.6 million jobs lost in 2008 – the most since World War II.
A jobless rate that’s at 7.2% – and climbing.
About 11 million people out of work.

As usual, however, the “official” numbers don’t tell the entire story.

“People say that they know how bad the economy is. But they don’t know how it feels to have the reality hit home,” said Stu Schweitzer, global markets strategist at J.P. Morgan Chase & Co.’s Private Bank (JPM). “It’s not the facts — it’s how the facts feel. And it feels terrible to have so many Americans losing jobs, and so many more likely to follow in the coming months.”

As it did last week with the government’s inflation statistics, Money Morning will now take an in-depth look at how the U.S. jobless situation may be a lot worse than the U.S. government statistics appear to show.

And “how it feels” comes home to roost with a behind-the-scenes look at the dramatic impact those horrific numbers have on the lives of just a few people caught in the crossfire.

Government Unemployment Numbers — Not What They Seem

The official government estimates of the current unemployment problem are staggering in their own right.

791,000 manufacturing jobs were lost in 2008, hitting the auto sector hardest.
260,110 people lost jobs in the financial sector, part of the overall service sector that accounts for some 80% of all employment.
The construction sector shed 899,000 since peaking in September 2006.
The retail sector shed 522,000 jobs for all of 2008.

All told, 2.6 million people lost their jobs in 2008. And, to underscore the accelerating nature of the problem, more than half of those job losses occurred in the final four months of the year. In December, a total of 11.1 million were unemployed. An additional 8 million people were working part time – up sharply from 7.3 million in November.

The average workweek in December fell to 33.3 hours. That’s the lowest average on record, dating back to 1964, and a sign of more job reductions to come since businesses often cut hours before eliminating positions entirely.

Those are the “official” government numbers. But, as a closer look demonstrates, the unemployment figures can be understated – and misleading.
The government actually compiles unemployment figures in six different categories; as you might expect, the numbers tend to minimize the bad news.
The most commonly number quoted in the media is the “official” unemployment rate – known as U3 (the bottom line of the three in the chart below) – which now stands at 7.2%.

But to get the real picture, you have to add both in what the government refers to as “discouraged” workers (U4) and “marginally attached” workers (U5) – those who have stopped looking for work, or who haven’t looked for work recently (represented by the middle line of the three in the chart). That number (U6) depicts an unemployment rate t that’s approaching an eye-popping 14%.

And it gets worse.

If you include the people that the government doesn’t even count – such as unemployed farm workers, the idle self-employed, and workers in private homes – the unemployment rate approaches an astonishing 18% (top line).

In other words, unemployment has insidiously spread to almost one-fifth of the U.S. work force, a number much larger than the single-digit figure commonly bandied about in the press.

If you regard unemployment statistics as an important means of gauging the overall health of a given economy, these “enhanced” statistics paint an ugly picture of just how painful this financial slump has become for the U.S. economy.

Layoffs of this magnitude are more than a mere shot across the bow of the economy; they’re actually a direct hit amid ship – below the water line, meaning that sinking is inevitable.

Fully 70% of all domestic economic activity is powered by consumer spending. People who are unemployed cannot buy homes, don’t shop heavily in retail stores, cut back on groceries, and are loath to take on added risk.

The numbers alone are bad enough. But in America’s heartland, many of the approximately 80% of workers thatarestill working are caught in the grip of unemployment vise as well.

No Runs, No Hits, Many Errors

Not only are record numbers of Americans suffering without jobs – they can’t even tell their troubles to a human being anymore. Most now have to navigate hard-to-use electronic systems, faceless entities that are ill-prepared to help so many people file for much-needed unemployment benefits.

With about 4.5 million Americans collecting jobless benefits, state government web sites and phone systems used to file for benefits are being overwhelmed by sheer numbers.

Electronic unemployment filing systems have crashed in at least three states amid an unprecedented crush of thousands of newly jobless Americans seeking benefits. Other states are adjusting their systems to avoid being next, The Associated Press reported.

Systems in New York, North Carolina and Ohio were shut down completely in early January by heavy volume and technical glitches. Labor officials in several other states are reporting higher-than-normal use.

And even some of the systems that are holding up under the strain are leaving filers on the line for hours before asking them to leave a message.
Still others are giving them the ultimate slap in the face: “We’re sorry, all circuits are busy.”

“Regardless of when you call, be prepared to wait and just hang on. Try not to get frustrated,” Howard Cosgrove, a spokesman for the Wisconsin Department of Workforce Development, told The AP.

To stabilize a phone system that has been overloaded for weeks, his agency boosted its staffing of telephone operators by 25% last month.
“We sympathize, we’re on their side, we’re doing our best to help them out,” he said.

Job Losses Gets Personal for Truckers

Depending on your geographic location, you might not notice when an automobile plant closes – but truckers do.

Any business closing – and the resulting layoffs – represents another loss of steady work for truckers, who are responsible for the movement of about 0% of the nation’s freight, including food and hard goods.

As many as 785 trucking companies with a combined fleet of 39,000 trucks went out of business in the third quarter of last year. Overall, more than 127,000 trucks, or 6.5% of the industry were idled in 2008, Donald Broughton, trucking analyst and managing director of Avondale Partners, told The Los Angeles Times.

That means tens of thousands of drivers previously on company payrolls are now competing with the nation’s independent owner-operators for a piece of a fast-shrinking cargo pie.

Joe Rini, from Grand River, Ohio, recently bid $3,400 to haul a load of building materials to the Pacific Northwest for one of his best customers. Usually, the load would pay $4,400, but with possible competitors in mind, Rini lowered his bid and got the contract.

Still, before he could pick it up, another trucker low-balled him with a bid of $3,000. Rini declined to match.

“I didn’t want to bid that low in the first place,” he told The Times. “I start down that road and I’m out of business.”

Elsewhere, fleet operators who so far have managed to survive are putting increasing pressure on their sales force to maintain revenues.

Despite being in the hauling business since the 1860s, Ventura Transfer Co. of Long Beach, Calif. is feeling the squeeze.

“Gone are the days where you can own a trucking fleet and just rely on the demand of the marketplace,” said Brian Olsen, Ventura Transfer’s chief executive officer.

California Dreamin’ No More

Even though he’s had no trouble so far staying gainfully employed in California, Mike Reilly, a 38-year-old engineering contractor, is leaving his home state’s lemon groves and beaches for the foothills of Denver.

California has often been called the “promised land” since the days of the Gold Rush. But in 2008, many families gave up their California dream and headed elsewhere.

With an unemployment rate of 8.4% in November, and a record 236,000 foreclosures on the books in 2008, the Golden State has lost some of its allure.

Barry Hartz lived in California for 60 years before moving close to his son’s family in Colorado Springs. Despite recent price declines from a glut of foreclosures hitting the market, he laments the escalation of home prices in the early 2000’s, “to the point our kids…could not live in the community where they grew up.”

The number of people leaving California outnumbered those moving in by a net total of 144,000 in the first six months of 2008 – more than any other state, the Associated Press reported. For the first time ever the state could lose a congressional seat.

With the state facing a $42 billion budget deficit, further tax increases and education cuts were the last straw for Reilly, the engineer.

“You see wages go down and the cost of living go up,” he said. Years of rising taxes, unchecked illegal immigration and bumper-to-bumper traffic have convinced him to move on.

What’s Next …

Overall, 48% of all companies downsized in 2008, and a staggering 60% are planning reductions in 2009, according to a Society of Human Resource Management survey.
Economists predict a net total of 1.5 million to 2 million or more jobs will vanish in 2009, and the “official” unemployment rate could hit 9% or 10%, underscoring the challenges that new U.S. President Barack Obama will face and the tough road ahead for job seekers.

Obama has called the jobs losses “a stark reminder of how urgently action is needed” to revive the nation’s staggering economy. His administration is planning a stimulus package costing upwards of $800 billion, consisting of tax cuts and other ways to try to help individuals and businesses.

But unemployment is feeding into a vicious cycle that Washington policymakers are finding difficult to break. The jobless are now forcing almost all U.S. consumers – employed or not – to retrench for an uncertain future.

Source: U.S. Unemployment May be a Bigger Problem Than Government Statistics Say

Mortgage Rates, Scary Jobs Details, Investing in 2009, Russian Gas Dispute, and More!

Addison Wiggin — Tue, 13 Jan 2009 13:00:34 +0000

Mortgage rates plunge to record lows… but are they at the bottom?… Overlooked details from Friday’s jobs news… troubling signs from retail and energy sectors… Rob Parenteau charts a different way to view the S&P… could the worst be over?… Russia/Ukraine gas conflict ends… who “won” the latest resource skirmish… Bill Gross’ sad-but-true guide to 2009… how to invest amid rife market manipulation.

If you’ve got money, credit and patience, today is your cheapest opportunity buy or refinance a house in at least 38 years.

The 30-year fixed-rate mortgage carries a rate of 5.01% this morning, the lowest rate of its kind since at least 1971, when Freddie Mac started keeping track. Since the peak of the credit crisis in late October, the 30-year mortgage has plunged almost 1½ percentage points, even past its 5.8% average this time last year.

Yet mortgage applications are only at a six-year high, according to the American Bankers Association. Rates will probably get even lower, consumers suspect, at least until there are some signs of home price stability here in I.O.U.S.A. We agree. The government has already set a goal of 4.5%, and with news like you’ll read below, the market won’t put up a fight.

Friday’s jobs report was even worse than it seemed. For starters, the retail sector shed 66,600 jobs in December — what should have been the best month of the year. Instead, retailers posted their worst December sales growth since 1969, and cut jobs for the 13th month in a row. If they couldn’t profit during Christmas… ummm… the first quarter of 2009 could be horrible.

Also, we note the world’s top two oil service companies — Schlumberger and Haliburton — have announced their first sizable job cuts of the credit crisis.

“That’s bad,” Byron King somberly explains.

“We already have an aging work force in the energy industry. Over 50% of the work force is eligible to retire within the next 10 years. So it’s imperative that the industry hire and train new people. But SLB and HAL are doing the opposite. If you get rid of the oldsters (they’re old & expensive), you lose the corporate knowledge that you need for training. If you lay off the ‘last hired’ (they’re young and don’t know squat), then you don’t have anyone left to train. Something’s gotta give here…

“It’s not like Schlumberger and Halliburton don’t know this. So would they be laying off people if their forecasts were sunny for the coming months or the next year or two? No. If things looked like they were picking up, they’d keep the people so they have enough work force to do the work. They’re laying off because they see a significant period of slow business. Which if you’re SLB or HAL, means less well drilling. And that’s bad for U.S. energy output. Fewer wells mean, eventually, less output, which means scarcity and higher prices.”

And which companies will profit from such an environment? Look no further than Byron’s Energy & Scarcity Investor.

Elsewhere in the oil patch, Russia’s gas dispute with the Ukraine is over for now. After almost a week without Russia’s precious fuel, the EU essentially forced Ukraine to make a deal. The exact terms of the agreement are yet to be revealed — they may never be — but we feel safe jumping to this conclusion: The whole ordeal began when Russia accused Ukraine of stealing gas and demanded higher prices, and we suspect the Ukraine yielded on at least one of these matters.

“Energy, too, is its own kind of capital,” Dan Denning notes. “Vladimir Putin is reminding everyone of that again. Russia supplies Europe with 25% of its natural gas, and 80% of that gets to Europe via Ukrainian pipelines. The Russians say the gas is being siphoned off illegally and then sold at a higher price. Maybe it is. Maybe it isn’t. Who knows?

“The real issue is control of the energy resource and the network for transporting it. One is no good without the other. Both are critical, and happened to be owned by competing interests. And if you’re at the tail end of a long energy logistics network (like, say, the UK), you’ve got troubles.”

Yet for all the troubles in this world, oil is markedly cheaper today. From around $50 two weeks ago, it’s back to just $38 a barrel this morning.

The Dow ended down 1.6% Friday after another dismal jobs report. For the week, most indexes fell 4-5%. The Nasdaq managed the “best” week of the index bunch, down 3.8%

By one metric, the future shouldn’t be TOO terrible for U.S. equities. Check out this chart, sent over by Rob Parenteau of The Richebacher Letter:

“The contraction of the total value of the equity market relative to GDP,” notes Rob, “has reversed nearly the entire premium introduced during the New Economy bubble years.

“If there is a reversion-to-the-mean process under way with respect to the equity market capitalization-to-GDP ratio, the most violent part of the move must be behind us. Given the severe recession developing before our eyes, however, we are in no rush to be buried beneath a landslide of earnings shortfalls, employment reductions and bankruptcy announcements.

“A fiscal push in early 2009 may help stabilize or improve the near-term earnings growth expectations held by professional equity investors, which are already much lower than those offered by brokerage house equity analysts. But the larger question remains: If financialization is not going to be the growth driver for the U.S. economy, what will take its place? If credit booms and busts are going to be restrained by a stripped-down financial system, especially one that is heavily regulated, what will drive earnings growth?”

In 2009, the savvy investor will “confront the reality that is, not the one that should have been,” opines Bill Gross in his monthly investment outlook.

Gross says the key to profits this year is to “shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy, only do it first: agency-backed mortgages, bank preferred stocks and senior bank debt; Aaa asset-backed securities such as credit card, student loan and auto receivables.

“These have been well-advertised PIMCO strategies over the past six months, but there are others in clear sight. An Obama administration will quickly be confronted by the need to provide those hundreds of billions of dollars to states and large municipalities. Their requests total nearly a trillion dollars and to think California or NYC would be allowed to fail is, well — unthinkable. Municipal bonds then, selling at historically high ratios relative to U.S. Treasuries, offer attractive price appreciation potential, or at the very least a defensiveness with high carry that a 2½% 10-year Treasury cannot…

“As an additional strategy, global bond investors should recognize the value in high-quality investment-grade corporate bonds in many markets. Yields of 6%-plus for intermediate maturities are still common and readily available.”

Dollar buyers seem unfazed by the U.S.’ precarious future. The dollar index rallied steadily through the weekend, from Friday’s low of 81.6 to 83 as we write. The media pundits tell us this morning that the dollar is stronger because Friday’s jobs report wasn’t as wretched as many feared.

So gold is being punished for the dollar’s latest strength. The spot price took a dive at the opening of the New York market today, falling to $830. That’s about $35 short of Friday’s high.

In our mailbox today: A staggering hodgepodge of some truly bad ideas.

“If there must be a refund and/or stimulus check given to the American people,” writes a reader, “then it shouldn’t be for some lousy $500. What is that going to accomplish? If you really want to get things up and running, then give every taxpaying household and those on permanent disability a check for $150,000. Most people would either pay down or pay off their mortgages and other loans, which then, in turn, would help the banks and lending institutions. The money would get back in the system where it needs to be. And if it doesn’t work? Well, at least we had fun trying to jump-start America. Kind of like a last call on the Titanic, eh?”

“Instead of giving that tax rebate,” writes another, “to be used only for American-made products, as your reader mentioned, due to the fact it doesn’t help out most retailers, give every taxpayer $600 in the form of a gift card just like sold at most retail stores these days. Let’s call it a ‘Stimulus Card.’

“The government would issue through a TARP recipient bank (they owe the taxpayers huge already). The card would have no cash value, so can be used only for purchases or deposits on products (food, restaurants, down payment on a car, toys, clothes, ANYTHING — but due to the nature of gift cards, they can’t be banked, so they wouldn’t be used to pay existing bills, just by the nature of the card (most people, including myself, used the last $600 government stimulus check to pay bills, not spend on new items).

“Put an expiration date of three-six months max on them… to be sure people spend them timely. 100% bang for the buck. To prevent mail theft, the card has to be activated from the phone number used on your tax return or by calling and giving information only Uncle Sam knows. If lost or stolen, just call and cancel and government can reissue a new one, just like stores do already. The systems are in place. Now that wasn’t so tough was it?

“Here’s a way,” suggests our last, “to come to grips realistically with the housing foreclosure scenario that is getting worse nationally: Let the federal government put every house that has a mortgage in line for a federal reserve mortgage. The present owner signs over his house to the FRM agency and is relieved of paying off the mortgage, but has the lifetime right to occupy the property as his principal residence, provided he pays all property taxes and maintenance costs to meet neighborhood standards. The homeowner has given up the right to sell or rent or gift or will the property; the FRMA owns the property. The original mortgage lender takes the loss for tax purposes.

“Of course, many tweaks to the above would need to be in order. But the ultimate justice would be that the mortgage lenders have to live up to the market risks, just as the homeowners unable to pay the mortgage loan will have to forego whatever they paid into the date of federal takeover. All such property becomes publicly owned, a national asset against the national debt. My guess is that this kind of bailout would be acceptable to the American public.”

The 5: $150,000 in cash, a $600 gift card and a “free” house. What could possibly go wrong?

Source: Mortgage Rates, Scary Jobs Details, Investing in 2009, Russian Gas Dispute, and More!

No Joy For Tech Investors In 2009

Irwin Greenstein — Wed, 17 Dec 2008 11:52:06 +0000

Tech stocks are certainly not immune to the global downturn, but when Apple’s (Nasdaq:AAPL) sales decline the sector could be in for a dragged-out recession. Coupled with a surprisingly aggressive downturn in semiconductor sales for next year, it could be 2010-2011 before we see any significant opportunities for investors in anything digital.

Starting with PCs, U.S. retail sales of Apple of Apple’s desktop Macs slipped 1% last month over the previous year. At the same time, PCs sales increased 2%. The message on the wall here is that American consumers are going down-market for their computers – scooping up the commodity low-margin models that eat away at the corporate bottom line.

Given that Apple’s slowdown comes during the ramp-up for holiday sales, the projections for early 2009, and perhaps the entire year, are expected to look dismal for its Mac family of desktops.

It seems that during hard times, consumers are willing to forego Apple’s premium pricing strategy in favor of stripped-down models that still provide basic functionality.

The market slump for Macs hit fast and hard. It was only the previous month, October, which shipments had surged 28% from the year before. That dramatic reversal indicates a panic mentality among consumers, which could in fact take all of next year to overcome.

The shift in buying trends not only hurts the manufacturers but the retailers as well.

Yesterday, Best Buy Co. (NYSE:BBY) said it would reduce capital spending and offer buyouts to corporate employees. The electronics retailer posted a 77% drop in quarterly profit over the same period a year ago.

Slashing capital expenditures by 50% next year primarily means that the company would open fewer stores – further eroding revenue projections.

The news was even worse at competitor Circuit City Stores, which filed for bankruptcy last month.

Naturally, semiconductor companies which supply the components to all these products would be hit as well. Unfortunately, even these experts at market predictions got blind-sided by the sudden reversal.

Just as Apple’s Mac sales dropped some 29% in the period of a month, semiconductor revenues hit the skids much faster and longer than originally anticipated.

Worldwide chips sales are expected to decline 16% next year, resulting in the industry’s first-ever two-year sales slide, said research firm Gartner Inc.

The 16% pull back represents a higher revised number from Gartner, which had predicted a drop of 2.2% only last month.

Overall, 2009 is clearly not the year to dive into tech. Even value investing can be precarious right now with no relief in sight for more jobs, more credit and more demand. While this can be a frustrating period for tech investors, it’s much better to sit on the sidelines than stand in a bread line.

Wal-Mart (WMT): An Essential Part Of Any Stock Portfolio

Horacio Marquez — Tue, 16 Dec 2008 12:53:17 +0000

Wal-Mart (NYSE:WMT) is thriving as recession grips the economy. As a cost leader in the retail sector, the company is benefiting from an increase in thrift. And it continues to expand its operations overseas. Horacio Marquez says Wal-Mart should emerge stronger than ever from this crisis, making it an essential part of any stock portfolio.

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