FEBRUARY 13, 2005

The rally in stocks on Friday that CNBC attributed to rumors of the North Korean dictator stepping asside, I think was more a result of Congress moving closer to tort reform. The Senate passed a class action reform bill that as I understand it will send more of these actions to federal courts which have been less kind to class action suits. This is very business freindly. As you remember the market rallied strongly after the election and I thought at the time that tort reform, tax reform, health care reform, and social security reform all themes Bush articulated in his acceptance speeches and all very corporate and wall street freindly were the reason then. If indeed these measures move closer to fruition, they will provide support to stocks and the dollar as they will have a meaningful impact on corporate America's bottom line.

The only other market to show meaningful net change was gold up $3.30. I don't argue with those that say gold and gold shares have bottomed, I just don't see an imminent broad advance until the economy weakens, China revalues, or we have some kind of financial crises.

I usually never write much about individual stocks.I'm more interested in the macro, the big picture as in general most of a stock's movement is dependent on the overall market. I'm not interested in outperforming or underperforming, only in absolute returns. So let me say right up front these comments should not be construed as advice and are informational only. Now with that common disclaimer out of the way I can't help but comment on Alan Abelson's column in Barrons where he mentions "a shrewd technician friend of his professes to find Walmart intriguing as a great story that's topping out. He warns that should the stock fall below 50-51, a level at which it has gathered support whenever it started to fade in the past year and a half, that would signal the trend is definetly down; he also suggest that for obvious reasons, including its stature and size, the action of Walmart's stock could be a barometer for the consumer, the economy and the market as a whole".

I,ve been following Walmart closely for the last several years exactly for those reasons. From a fundamental point of view I've noticed the following:
Fiscal yr 2000 2001 2002 2003 2004 2005
SameStoreSales% 7.7, 5.1, 6.1, 5, 4, 3
Total Sales% 19.8, 15.6, 13.9, 11.6, 11.5, 11.2

Clearly same store sales are slowing. No surprise then that on the CFO's last appearance on CNBC he said they were going to de-empahasize SSS and focus more on total sales. He acknowledged that their current strategy cannibalizes sales from other stores but they do gain market share. He is right, but this is the first sign of saturation. Secondly, their SSS used to grow at nominal GDP, but in the last few years that has not been the case. Nominal GDP the last three years has been 3.8%, 5.2%, and 6.5%, increasing as their SSS have been declining. The growth in total sales is also slowing albeit very slowly the past few years. This is occuring in spite of all their international expansion and turnaround of SAM's clubs. This shows that the U.S. is still at the core of their operations and maybe the law of large numbers is begining to take effect. It is becoming increasingly a market share game. Unlike many of our other big multinationals, retailers fates are tied to the economy. Walmart's customers, as they have stated are particulary impacted by energy prices. Retailers as a group are one of the most interest sensitive sectors and any upward change in the Chinese Yuan can't be good as it would squeeze profit margins or hurt demand. Finally, S&P is changing the weighting of their indexes to account for actual float, eliminating shares held by governments and insiders. Walmart will be the stock most affected in the index and will reduce its weighting to 1.35% vs 2.16%. Half of this take place at the end of March and the other half at the end of September, I believe. A lot of index holders will have to sell a lot of shares.

Walmart is a well managed company, their pre-tax margin is still rising, but the hill is getting steeper to climb. I agree with Abelson's freind and believe they are a barometer for the consumer, economy and market. When the consumer slows down, one month we will see negative SSS. Twice this year we came close. SSS we up only .5% in Aug and .7% in Nov. Two months, in one year that close to zero, I don't believe has ever happened before. Since the consumer is 70% of the economy, so goes he goes the economy, earnings and the market.
Of course that doesn't have to be tommorrow, next week, or month, but keep a sharp eye out.