What These Two Big Benchmark Stocks Are Telling Us About the Economy Now

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What These Two Big Benchmark Stocks Are
Telling Us About the Economy Now
By Michael Lombardi, MBA for Profit Confidential

Two very confusing signals today about the economy
come courtesy of two big benchmark stocks.

Wal-Mart Stores, Inc. (NYSE/WMT) missed analyst earnings
expectations yesterday. The world's largest retailer earned
2.9% less in its fiscal third quarter of 2011 compared to the
same period of 2010. But here's the important part:

Wal-Mart reported yesterday that sales at its stores open at
least one year rose a pathetic 1.3% in the third quarter.
Sales at Wal-Mart, a company that caters to the lower end
of retail, are growing at a slower pace than American
GDP.

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Now let's move to another big retailer and another
benchmark stock, The Home Depot Inc. (NYSE/HD). The
world's biggest home improvement retailer saw its earning
jump a big 12% in the third quarter of 2011, compared to
same period of last year.

If we look at the all-important same-store sales, we see that
benchmark stock Home Depot reported that stores open
at least one year saw sales grow 3.8% in the U.S. in the third
quarter of 2011, compared to the third quarter of 2010.

Why are same-store sales pathetic at benchmark stock
Wal-Mart (actually a concern), while same-store sales are
rising at benchmark stock Home Depot? Simple answers.

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The persistent high unemployment in the U.S. is having a
huge impact on low-end retail. At the beginning of a
recession, you see consumers cut high-end retail spending
and increase low-end retail spending. But, as the economy
has not turned around, with the underemployment rate at
about 16%, consumers are cutting back on all kinds of
spending, including low-end retail. We clearly see this in
benchmark stock Wal-Mart.

The really important numbers to help us understand what
kind of economic year we will have in 2012 will be the
Christmas 2011 retail sales in the U.S.--and we'll be
watching them like a hawk. Wal-Mart's poor same-store
sales number is another red flag for the U.S. economy.

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As for Home Depot, the real estate market in the U.S. is
still in disarray. People are not upgrading their homes,
because bank financing is hard to get and because
the underlying fear that property prices will fall further
persists. So, what do homeowners do if they are not
upgrading their homes? They improve what they
have...which is why benchmark stock Home Depot's
same-stores sales have risen 3.8%.
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Michael's Personal Notes:
While I see it's not getting much mainstream media attention,
what's happening in California with its finances could turn out to
be of great concern for all of America.

In case you are not familiar with the situation, in June, California
Governor Jerry Brown adopted an $86.0-billion budget. To get
the Democratic-led budget through, the state government
made concessions in its plan, which I call built-in austerity
measures.

If California state revenue falls $1.0 billion, California's two major
universities will need to cut their budgets by $100 million each
(austerity measures). If the state revenue shortfal comes in at
$2.0 billion, the school year will be cut by seven days to save
millions and $248 million in school bus subsidies will vanish (more
austerity measures). These crazy austerity measures type triggers
were built into the state budget to win Republican support for the
budget.

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Here's the bad news...
California is only four months into its current fiscal year
and state tax collections are already off $1.5 billion!
And since the fiscal year started, the state
government has spent $1.7 billion more than it has
budgeted! The austerity measures, although they will
not go into effect until February, look almost certain.

It's ironic that the biggest austerity government cuts
this nation will start to see will come from the state that
lays claim to some of the highest real estate prices in
the world. Looks like this one will play out just like a
Hollywood movie, but without a good ending.

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Where the Market Stands: Where it's Headed:
The Dow Jones Industrial Average opens this morning
up 4.7% for 2011, excluding dividends. I'm convinced
that if it were not for the economic crisis in the
eurozone, the stock market would be trading much
higher. Europe's economic issues are a problem for
American banks that have exposure to bonds issued
by euro countries with high debt levels relative to their
GDP.

We are in an aging bear market rally that started in
March of 2009.
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What He Said:
"Recipe for Catastrophe: To me, the accelerated rate
at which American consumers are spending, coupled
with the drastic decline in the amount of their savings,
is a recipe for a financial catastrophe." Michael
Lombardi in PROFIT CONFIDENTIAL, September 7, 2005.
Michael started talking about and predicting the
financial catastrophe we began experiencing in 2008
long before anyone else.

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