Buy Wal-Mart or Target?
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Your Daily Profit

May 7, 2009

*****Retail Sales
*****System of Beliefs
*****Return to Risk?

Fellow investor,

Back before Christmas, you may recall I suggested a “Mom cancels Christmas” trade. The idea was that families would attempt to save money by buying gifts for the kids only. After all, most adults learned the truth about Santa a long time ago.

For this trade, I recommending selling out-of-the-money put options on Wal-Mart (NYSE:WMT) and buying puts on the S&P Retail SPDR (XRT). It was my belief that Wal-Mart, a discount retailer, would do well as cost-conscious shoppers went bargain hunting, but the rest of retail would suffer.

I don’t have the exact totals from this trade (initiated in early November, 2008) but it did well. And the basic assumption of the trade – that Wal-Mart would outperform – is still holding true. While most retailers posted less than expected sales declines (which is good), Wal-Mart posted a bigger than expected 5% jump in year over year comps.

For comparisons sake, Target (NYSE:TGT) posted just a 0.3% improvement. 

Both Wal-Mart and Target are good companies and solid stocks, but Wal-Mart has a few more things going for it, including paying a higher dividend (2.20% vs. 1.60%), more store locations throughout North America, expansion into China, pricing leverage with suppliers, and a reputation for beating all competition on price.

*****New jobless claims came in significantly lower than expected. And yes, that is absolutely related to better than expected retail sales numbers and the increase in consumer confidence we’ve seen lately.

As I’ve said, never underestimate the American consumer.

*****If you talk to a gold bug, they’ll rail against the U.S. dollar because it’s backed by faith alone. All it takes is for people to stop believing, and the currency is simply a piece of paper.

Of course, the same can be said of gold. A gold standard is still a system based on belief. People either believe it has value or it doesn’t. It’s not like water or food or gas or land that has a certain easily identifiable value.

Even though economics uses a lot of math and calculators, it is a science that measures a system of beliefs. At its very foundation, an economy is belief system. Participants must believe that their counterparties are honest and share their goals. It is when these basic beliefs are challenged that the system starts to break down. We see this both during tough economic times and interestingly in countries rife with corruption and weak laws to protect property and individual rights.

We’ve seen that dynamic in action during the financial meltdown. Banks knew they hadn’t been honest about their toxic assets, so it was an easy assumption that other banks were doing the same thing. So they simply stopped lending to each other and the global economy ground to a halt.

On an individual level, it is vital that people believe they aren’t about to be fired and that they have earnings upside. Otherwise, they won’t spend a dime. I have criticized government bailouts and TARP and stress tests and the PPIP and loans and FDIC guarantees at length in Daily Profit.

But the bottom line is that all of these steps have restored some level of confidence, of belief, in the U.S. economy. And that’s the single most important condition for a return to economic growth. (And I mean that for the entire world. No matter what the pundits say about BRIC countries and the European Union, the United States of America has had, has, and will continue to have the largest and most influential economy on the planet. Period.)

Of course, it’s not the only necessary condition. A large inventory of unsold homes must get worked off. And banks still have to clean up their balance sheets. But the feeling that we have turned a corner is palpable.

*****Private equity funds are on the prowl for risky assets that have been crushed by the financial crisis and recession. These include loan portfolios of hedge funds and, yes, the toxic mortgage-backed assets on bank balance sheets.

Several of these private equity groups are participating in the Treasury’s Public-Private Investment Program. To discover more, you might want to check out my Special Report on the subject. You can get it HERE at the Top Stock Insights home page.

*****I wrote yesterday about how the current rally has been called a “return to risk” rally. Investors are finally adding risk in the form of stocks. Especially small cap stocks. That’s part of what has propelled the phenomenal gains at my SmallCapInvestor PRO.

But I have heard from some of you that you’re more interested in getting into small caps for your retirements funds and even 401(k) options, so individual stocks are not a viable option, at this time.

Has your financial advisor been talking to you about small cap stock mutual funds?

If your financial advisor hasn’t recommended any small cap funds, you might want to check out what I’ve done in my Recovery Portfolio (as a Daily Profit reader you’re entitled to check it out for free for 2 weeks). You’ll find some great investment ideas for your retirement panning that your financial advisor might not be sharing with you. Here’s a LINK for more details

That’s it for today. I’ll talk to you tomorrow.

Ian Wyatt


Daily Profit

P.S. My mailbox is always open for your thoughts, comments, or questions. Feel free to drop me a line at [email protected].

Posted 05-07-2009 12:13 PM by Ian Wyatt