Thursday, January 8, 2009

Market and Political Comments

Normally, Econblogreview wants to avoid commenting on short-term market moves. The move in Wal-Mart today is notable, however. Wal-Mart is, of course, the largest retailer in the world. It was the top performer in the Dow Industrials last year. Today it announced what on its face is only mildly disappointing sales data but a larger drop in earnings: obviously, margins took a hit. The stock has collapsed about 9% today, vastly underperforming the broad market. When prior leadership is taken out and shot, beware of the market as a whole.

The drumbeat of negative news out of corporations continues. So does the news out of Washington regarding the economy. Pres.-Elect Obama is threatening a kind of permanent recession if Congress doesn't "stimulate" us. Yet by the time the first dollar of "stimulus" is borrowed or printed and then disbursed, the recession will be pushing a year-and-a-half in duration. Most of the "stimulus" won't be disbursed until year 3 or 4 under the type of construction projects being contemplated.

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Getting back to Wal-Mart, a review of Value Line shows that its gross margins had been moving up over the years, from the 22-23% range to about 25%. If its margins shrank back to where they were in the late 1990s, sales will indeed rise but earnings will continue to disappoint. Such is the case for company after company. Procter and Gamble's net profit margin has risen from 10-11% in the late 1990s to 13-14.5% recently.

If behemoths such as the above revert back to their prior highly profitable corporate selves, there will be deflation or no inflation, consumers will benefit, unit sales will be stimulated, and the economy will right itself. There is no need for distortion of the economy by an artificial construction program paid for with borrowed or printed money. The economy is simply adjusting to the distortions of the credit bubble. Government should be sure that its finances are in some sort of order for all sorts of good reasons, such as dealing with a true emergency such as a truly unexpected war, natural disaster, or the like; and should focus on aiding those amongst us who have been especially badly hurt by this recession. Government should also be cognizant that consistency of action is necessary for an economy to function. Instead, the outgoing and incoming administrations are lurching from one stopgap plan to another. This confuses businessman, taxpayers and consumers alike and harms the recovery.

Absent war, pestilence or the like, the only way that Mr. Obama is correct about how bad things will be is if he continues the borrow and spend interventionist regime that Bush, Paulson, Bernanke and Congress have embarked upon over the past year. Unfortunately, investors must keep too many of their two eyes on politicians as well as on businessman.

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