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A Tale of 2 Companies

Tuesday, August 18, 2015
Money and Markets
You can also access this issue on our website.
Wal-Mart, Home Depot Tell Different Tales of the Health of the American Consumer
Market Roundup
Dow -33.84 to 17,511.34
S&P -5.52 to 2,096.92
NASDAQ -32.35 to 5,059.35
10-YR Yield +0.046 to 2.196%
Gold -$2.30 to $1,116.10
Oil +$0.51 to $42.38

By Mike Larson

How healthy is the American consumer? Everyone on Wall Street is wrestling with that question — and we got two starkly different portraits from today’s key retail earnings reports.

On the one hand, the retailing giant Wal-Mart Stores (WMT) just reported quarterly earnings of $1.08 a share, a sharp decline from $1.21 a share in the year-earlier period. That missed analyst forecasts.

Revenue also barely budged to $120.2 billion, and the firm warned that full-year profit will come in light. Wal-Mart blamed everything from the strong dollar to wage hikes in the U.S. to higher theft rates.

On the other hand, home-improvement retailer Home Depot (HD) gave its shareholders a reason to smile. The company reported $2.23 billion, or $1.73 a share, in profit in the fiscal second quarter. Stripping out two cents in unusual items, you get $1.71 – slightly above Wall Street forecasts.

Revenue of $24.83 billion also beat forecasts. Plus, the company said full-year sales will rise as much as 6% while profit will climb as much as 14%. That 2015 outlook came in hotter than expectations, with online sales and increased sales per location helping to boost results (versus gratuitous new store openings). It also just purchased the building and maintenance supply company Interline for $1.6 billion.

Home Depot is benefiting from the home-renovation trend.

What happened in response? Shares of Wal-Mart dropped 3.4% to a fresh 30-month low. Shares of Home Depot rose 2.6% to a fresh all-time high. Talk about a huge split between winners and losers!

It seems clear to me that Home Depot is benefiting from the gradual, two-steps-forward, one-step-back, recovery in housing. For example, we learned today that housing starts rose 0.2% to a seasonally adjusted annual rate of 1.21 million in July. That was the highest since late 2007.

A resurgence in multifamily construction, and the rise of investor buy-to-renovate-then-rent activity, is also helping the company. That’s all part of the “Renter Nation” trend I wrote about last month.

But Wal-Mart doesn’t focus on housing-related expenditures. It sells a little bit of everything, and it tends to serve lower-and-middle-income Americans. They’ve been left behind in this economic recovery. Unless and until they see meaningfully higher wage growth, Wal-Mart is going to struggle to rack up better sales and profits.

So it really depends on which American consumers you’re talking about. Those at the higher end of the income spectrum, and those who are looking to buy, renovate, or furnish homes, are feeling flush and spending like it. Those at the lower end of the scale, who are struggling to make ends meet, are also spending like it.

I think we need to see everyone pulling together for it to be a bullish sign for U.S. markets and the U.S. economy. And frankly, I’m just not seeing it. So you can add the latest retail earnings to my long list of concerns about stocks.

“It really depends on which American consumer you’re talking about.”

That’s my take. But what’s yours? What’s more convincing to you – the bullish story told by Home Depot or the bearish one told by Wal-Mart?

Is the American consumer healthy, and should you bet on America’s economy? Or is he or she struggling, and should you take a more cautious approach to investing as a result? Be sure to voice your opinion over at the Money and Markets website.

Our Readers Speak

Stocks have been marking time the past several days, with the major averages continuing their pattern of treading water since the beginning of 2015. But many of you appear to believe this won’t continue, which is generally in line with my own views.

Reader J.T.A. said: “I appreciate your letters and insight on the economy. With most of the economic news so negative worldwide, this is the time to be very cautious.

“I have been planning all year to reduce my equity holdings and am waiting for the signal from you before I do any more investing. I plan to go to 100% cash in my IRA by mid-September, if not before.”

Reader Donald L. also weighed in, saying: “The ‘market’ (however you define it) went up for the past five years despite all the various measurement indices of the economy saying the contrary. The triumph of hope over fact ignored the 800 pound gorilla in the room – government policies at all levels.

“Will the forthcoming elections bring relief? Sorry, but I’m betting with those buying put options and negative indices.”

Reader Mule said he’s worried about where stocks head from here too: “I don’t think the market has climbed the old ‘wall of worry’ so much as it has rode a wave of cheap worthless debt money, in spite of continuous negative real economic data. When the worthless paper balloons burst, look out below. The ‘wall of worry’ will get buried.”

But Reader Gary took a slightly more optimistic bent, saying: “Buying great Blue Chip companies will always make you a winner long term. Try Boeing (BA).”

Thanks for sharing. Personally, I see a world where economic growth is rapidly decelerating in many countries … where manufacturing and multinationals continue to face challenges here … where many domestic stocks are underperforming the misleading averages … and where many global stocks are in full meltdown mode.

That’s not exactly fertile ground for huge stock market gains. It’s more likely the kind of environment where a “trap door” could open up at any time, and where caution makes the most sense to me.

Meanwhile, on a different topic, Reader Etoleary said: “The ‘Donald Trump Effect’ that is the non-specific anger of large numbers of our citizens is more broadly based than simply the Republican primary candidates. This to me is becoming a generic sort of index of frustration. Someone should figure out a way to quantify this.”

I appreciate your comments, too. There definitely seems to be dissatisfaction with mainstream politics right now, and it’s leading to a backlash against mainstream candidates. The key question is whether Americans actually vote in large numbers for alternatives like Trump or Bernie Sanders, or stick with what they know at the ballot box (despite their stated discontent).

Did I cover your comments to your satisfaction here? Do you have any more that you’d like to air out? Let me know over at the website when you get a chance.

Other Developments of the Day

BulletChinese stocks resumed their descent overnight, with the benchmark Shanghai Composite Index tanking 6.2%. Almost 6 out of 10 listed stocks dropped by their 10% daily limit amid questions about how much government support will be thrown at the market, how weak the underlying economy is, and how much money investors on margin will yank out of stocks.

BulletThai police are searching for an unidentified man who apparently left a backpack bomb under a bench near the Erawan Shrine in Bangkok. The bomb exploded later, killing at least 20 people in the heavily trafficked area. The country has been facing political turmoil, religious infighting, and other domestic unrest for the last few years, making for a long list of potential perpetrators.

BulletSpeaking of long lists, the one with the name of troubled emerging market nations has Brazil close to the top. The country is experiencing the worst turmoil in decades, thanks to rising unemployment, surging inflation, a collapsing currency, and a major political scandal that could lead to the resignation of President Dilma Rousseff.

The iShares MSCI Brazil Capped ETF (EWZ) has lost a whopping 46% in the last year. In fact, it just undercut its panic low from late 2008, putting it at the lowest level in more than a decade.

BulletLastly, the first two female soldiers in history are graduating from the U.S. Army’s rigorous Ranger School. Soldiers who apply to be Rangers face two months of intense mental and physical training, grueling hikes, sleep deprivation, and more. However, the soldiers won’t yet be able to join front-line infantry regiments because the Army has not opened them up to full female participation yet.

Any thoughts on the latest turmoil in Chinese markets, or Brazil’s? What about the latest bombing, or this milestone in the development of the U.S. Army? Share your comments over at the website when you have a minute.

Until next time,

Mike Larson

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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