2/21/2013 9:45 PM ET|
The dire warning from Wal-Mart
Emails from inside the giant retailer, echoed in its profit report, show how Washington's mess of budget cuts and tax hikes will hurt the economy and hamper the market.
Call it Wal-Mart-gate.
Bloomberg's publication of emails from the vice president of finance and logistics at Wal-Mart Stores (WMT) won't bring down a president, but they were certainly enough to rattle the stock market this past Friday.
And I think those comments continue to hang over stocks and explain a good part of the recent weakness and volatility. Especially since they were echoed in the company's fourth-quarter earnings results released today.
In fact, I think the issue raised by these emails is the single scariest thing hanging over the stock market.
Emails from Wal-Mart? Scarier than the Federal Reserve minutes casting doubt on the U.S. central bank's commitment to economic stimulus via bond buying? Scarier than the currency wars launched by Japan, which have now spread to the pound? Scarier than economic numbers that show the eurozone sinking into recession? Scarier than the bloated balance sheets of the Federal Reserve or the off-balance-sheet debt of China's banks?
Well, in the long run -- say the next year or two -- absolutely not. The issues that I've noted above are the ones that could sink national and global economies in that time frame.
But in the shorter term -- say the next few weeks or couple of months -- absolutely. Those emails are especially scary for U.S. stocks. Right now, with U.S. market indexes near five-year or all-time highs, markets could head one of two ways: into a consolidation that builds a base for a run higher, or into a correction that could take stocks down 7% to 10% in a replay of the spring and fall 2012 corrections.
Why could emails from Wal-Mart help decide which way the market goes in the short run? Because some very big short-term worries could all line up in the next few weeks. Wal-Mart's warning is part of that pattern. Let me explain.
The world from Wal-Mart
In case you've forgotten, here's the really explosive quote from the emails published by Bloomberg: February sales are a "total disaster."
The Wal-Mart vice president went on to say that this had been the worst start to a month he's seen in his seven years with the company.
The worry here -- and the reason that investors and traders took these comments as something more than just Wal-Mart-specific bad news -- is that the February crash in sales was an indicator of damage done to the U.S. economy by the end-of-the-year fiscal cliff chaos and the eventual deal on Jan. 1.
The payroll tax hike
That deal, you'll remember, included the expiration of a 2-percentage-point cut in FICA, the Social Security payroll tax. In order to stimulate the U.S. economy, Washington had cut the Social Security tax to 4.2% from 6.2%. That put extra money into the pockets of every taxpayer, but most emphatically into the pockets of lower-income families. After the deal, the worry was that ending this tax cut would lower spending by these families, and lower it immediately, since the end of the tax cut would result in a reduction in take-home pay, not next month or next quarter, but immediately.
Wal-Mart's bad sales in early February seemed to confirm the reality of these fears. (It didn't help either that, because of the chaos of the fiscal cliff crisis, the Internal Revenue Service had delayed processing of early tax returns. Many Wal-Mart shoppers file early and then use an early refund, or an early tax-refund check from a tax preparer, to make a major purchase or two in the early part of the year.)
The Wal-Mart emails hit the stock market at an especially sensitive time, too. At that point, investors and traders were becoming convinced that the dreaded sequester budget cuts, put into place as part of the debt-ceiling deal in 2011, would kick in and inflict massive blunt-force trauma on government spending. The sequester would impose $1.2 trillion in spending cuts over the next 10 years on everything from the military budget (half of the cuts) to Head Start to low-income housing assistance to emergency preparedness. The Congressional Budget Office has estimated that the sequester would result in the loss of 750,000 jobs in 2013 alone.
And, unless the president and Congress can strike a deal, the sequester cuts start on March 1.
At about that same time, on Feb. 28, investors and traders will also get the second estimate on U.S. gross domestic product for the fourth quarter of 2012. The first estimate, released in January, was disappointing. The U.S. economy actually contracted in the quarter, shrinking 0.1%. Economists had expected weak but positive growth of 1% or so.
GDP growth is often revised upward from the first to second estimate, and, from what I can gather, there's a sizable group on Wall Street that expects that kind of trend reversal on Feb. 28. That would be reassuring, since it would remove some worry that political chaos in Washington might be enough to tip the economy back into recession.
But data that have come out since the first estimate suggest that we might not get a positive revision this time. Actual inventory figures, for example, showing a less-than-estimated drop in inventories, point to the possibility that the first estimate of GDP was actually too high.
Do I need to say that a second estimate showing the GDP shrinking by more than 0.1% in the fourth quarter would reinforce fears that the fiscal cliff and the sequester chaos had inflicted significant damage on the economy?
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Flying too high?
Those fears would come at a sensitive time for U.S. stock markets. With indexes at all-time or five-year highs, investors and traders have begun to worry about valuations and the possibility that the December/January rally has left the market at a peak, with the next step downward.
Investors and traders looking for signs that they should stay in have drawn comfort from the still-reasonable price-to-earnings ratios of U.S. stocks, a standard measure of whether stocks are fairly priced.
Yes, the argument goes, the trailing 12-month price-to-earnings ratio of the Standard & Poor's 500 Index ($INX) has climbed to 17.2 from 15.62 a year ago, but the forward price-to-earnings ratio -- that is the P/E based on projected earnings for 2013 -- is just 13.5, according to FactSet Research Systems.
At that level, the market isn't cheap. But it isn't expensive, either. Not expensive in the "about to peak" sense, anyway. A forward price-to-earnings ratio of 13.5 is above the five-year average of 12.8, according to FactSet. But it is below the 10-year average of 14.2.
So on the basis of this measure of valuation, there's no reason to cut and run.
Of course, forward P/E ratios are only as good as the projections behind them. This one is based on an increase in S&P 500 earnings per share to $112.93 from an estimated $102 a share in 2012.
But what if earnings don't grow by 10% to hit $112.93? Any lag in the earnings growth rate pushes the price-to-earnings ratio of this market further above the five-year average and closer to the 10-year average.
The Wal-Mart indicator
That's why the worries about Wal-Mart's February sales and the impact of the fiscal cliff and the sequester are especially important now. If analysts are right about earnings growth in 2013, then the market has reasonable fundamentals under its recent rally. If, however, the warning signs are meaningful and projected growth for 2013 is too high, then this market is more vulnerable to a correction. (It doesn't help that 2013 increasingly looks like a year when growth will be loaded into the second half of the year, making it especially hard to judge the accuracy of analyst projections over the next few months.)
Wal-Mart's earnings announcement was an early indicator of how badly political chaos in Washington has hurt the economy. The company announced a higher profit in the completed fourth quarter, but -- as in the emails -- warned of weak sales in the current quarter.
This is by no means a final indicator. As we get closer to the actual sequester, I think anxiety will grow and we can expect Wall Street and investors to torture every number looking for clarity.
I don't think clarity can be gotten easily or quickly. This is going to take a while to figure out. And in the meantime, I think you can expect that the market will react to every piece of data that promises an answer.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
- Why Akamai is a smart play in cloud computing
- Look for an opportunity to buy Deere
- Why Cummins is a tough call
- Time to sell Nestlé after stock's big gain
- Why Toyota is a smart yen play
- Yum is still stalled in China
- Why Qualcomm is headed up
- Apple is still a growth stock
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. When in 2010 he started the mutual fund he manages, Jubak Global Equity Fund (JUBAX), he liquidated all his individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this column. The fund did not own shares of any company mentioned in this column as of the end of September. Find a full list of the stocks in the fund as of the end of September on the Jubak Global Equity Fund website.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial
subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website. Click here to find Jubak's most recent articles, blog posts and stock picks.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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January and February sucked.
I wouldn't spend any money until the sequester thingy has been worked out. That's March gone.
And then I wouldn't spend any money until the debt ceiling thingy is worked out. That's April gone.
And I wouldn't spend any money until the IRS tax thingy is worked out. That's May.
It might be June before I feel comfortable enough to be a consumer again. That's two quarters down the tubes. Six months.
Since 70-percent of America's economy is based upon consumer spending, I'd say our dysfunctional government has made another fine mess.
Gas prices don't help the economy, poor leadership in Washington, deficit spending, no plan, Walmart selling junk and Obama taking his 100+ round of golf, Obama care about to hit next year, sequestor, mortgage interest deduction will be eliminated next year, higher taxes.....priceless with this Administration.
Let's not forget Obama's round of golf with a terrific family person - Tiger Woods....
I still can't find anyone in NH that voted for Obamo :) I'm going to keep looking, many voted for him :)
This is a perfect Seinfeld skit...
How's that Change working for you now?
If you all recall, Wall Street, WAL-MART, MICROSOFT, COSTCO, BOEING all Gave this slob money to win the election. Ya'll were up to your eyeballs in Obama's election Financing, so how's that working for ya'll now?
You will Reap what you Sew, let sequester take its place and let the chips fall where they may...
You know all those Obama Phones, the Bankruptcy of Detroit, Stockton and so many more....And now all those EBT Cards.....maybe, just maybe they too may be gone.....
Really now,as I listen to the Media, whine, want more of Obama, cause he went Golfing with Tiger Woods, Are You Kidding Me, has America really sent all these clowns to Washington DC?
Then Democratic Speaker of the house, Nancy Pelosi, in 2009 said of Health Care, " you have to pass it to get to know what's in it" Welllllll, several companies have figured out what's in it....Layoffs, cutting back and having to let people go...But some did it the right way...The CEO's went out to the parking lot, looked at the cars parked in the company lot...Found out who all had Obama - Biden Stickers....When he returned, he instructed his personnel chief to lay off all those that had Obama/Biden stickers on their cars...He said, they most certainly would understand....Sometimes Change takes sacrifice.....Because they voted for change, he might as well start right there send them all home and by allowing those folks to get right at that change.....
How do you suppose that change is working for them now, makes you wonder, huh....
And now don't you worry, more change is coming on March 1st, 2013....I personally cannot wait....With the cutbacks at the Pentagon, maybe David Axlerod can volunteer to fill one of those vacant civilian jobs....Or perhaps He could go to Lybia to fill the Ambassadors position....Yeah, that would be good now, wouldn't it?
All the Possibilities, a wonderment
I don't shop at Walmart much because I just don't like the fact that they are screwing their workers.
The other day I went to a Walmart by my home because it was very late at night and everything else was closed. I was shocked to see the Paul Newmans Coffee price. Walmart had it for $10.58 where as the same package at HEB was $7.59. Attention Walmart shoppers! You are not getting as good of a deal as you think you are by shopping at Walmart.
What happened to the WalMart's Logo made in the USA ?
You voted for Obama and the economy will go down the toilet as He has no idea what to do but waist money on Green Programs, lie and make speeches.
Wal-Mart is a cheap and rotten outfit.
I hope there sales go down a lot.
I don't want there China made junk.
I don't buy the idea that Wal-Mart shoppers are that forward-thinking, or that they're squirreling money away for the sequester. For many of them, gas and cigarettes are the two staples of life. They're also among the few things this socialist president has yet to figure out a way to subsidize. Until we get an entitlement program for gas and smokes, and maybe X-Box games, Wal-Mart is screwed. Couldn't happen to a more predatory company.
Maybe Mr. Obama should have spent his last 4 years working on jobs for Americans in the private sector instead of his health care and Dodd Frank's banking bills! Shameful!!! Keep believing his lies that its not him.
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