More Suckers May Be Needed Before Market Tops By Brady Willett
The holiday shopping season starts off with a bang Retail behemoth Wal-Mart reported record one-day sales of $1.25 billion last Friday. At first this may appear to be excellent news for the economy, however, it may not
be wonderful news for investors since most retailers have had to aggressively slash profits in recent weeks to try and drum up demand. As such, price cuts will dent margins. Furthermore, TeleCheck Services, the
nation's largest check authorization company, reported that last Fridays average check totaled $73.64, or 4.6 % less than $77.18 last year. Suffice it to say, more people may be out looking for bargains, but
individually they are spending less.
Heading into this week retail stock will be in focus, and in particular Wal-Mart. WMT is nearing its 52-week high, and should play a key role in deciding the direction
for the markets early this week. As well, K-Mart reports 3Q01 earnings on Tuesday, and investors will be waiting with baited breath for some positive words from new CEO John McDonald.
Exactly how Wal-Mart, a $250 billion company, is able to trade at 32 times
2002 earnings estimates is unbeknownst to me. Consider this: from 1990-1997 Wal-Mart never carried a trailing P/E of more than 20, but since 1998 it has
never seen a P/E of less than 25. As well, WMT's price/book ratio never dared skip above 5 until 1999 – it peaked at 10 last year and is hovering just
over 7 now. Suffice to say, you pay a historically high premium for Wal-Mart shares.
The 'high' valuations seen in Wal-Mart, and countless other stocks, are a
constant reminder that this is not a new bull market, despite the 20+% rule being ignited. Exactly how can a new a bull market begin when valuations are near
record highs, and earnings are in the doldrums? Isn't this why the Nasdaq 5,000 turned out to be a bad idea? Yes, P/E ratios are by no means an
absolute, but when share prices grow at 20% annually and earnings by 10% something eventually has to give…
By contrast, even with stretched valuations Wal-Mart is unlikely to suffer the
same demise as the big three automakers. Reason being is that when GM announces buyer incentive programs others must do the same to stay competitive (everyone gets screwed), but when Wal-Mart cuts prices
competitors just shake their heads and hope their loss leaders drag enough shoppers into their inferior stores. Point being, other companies cannot compete
with Wal-Mart. Period. Wal-Mart is truly the best at what they do (roughly 10% lower prices than K-Mart) and it can 'afford' to cut prices more so than
any other retail company. That said, I don't care to speculate on whether or not Wal-Mart can match earnings estimates (14.5% EPS growth expected over
each of the next 5 years), but I will say that Buffett, and Icahn wouldn't even begin to salivate even if Wal-Mart shares dropped by 50%.
While retail stock will provide early guidance it will be the deluge of key economic reports that determine if the markets 3-week winning streak is
snapped. Of note, consumer confidence on Tuesday should be solid given that the markets are roaring, and auto sales juiced up October retail sales nicely. As
well, the conference boards help wanted index (Thursday), and Chicago PMI on Friday could tweak the bullish aura around stocks; recently better than
expected weekly jobless claims have formed the basis that the labor market has pulled away from collapse, and Chicago manufacturing report is the prelude to
next weeks Nov NAPM reading. Also of importance this week is the Beige Book on Wednesday, and revised GDP on Friday. 3Q01 GDP will, without doubt, be revised lower.
The Elusive 'Top'
How is it possible to accurately predict when this market will top considering that most people (myself included) are befuddled as to why stocks have risen so
strongly in the first place? However, given that the Dow near 10,000, and Nasdaq inching up towards 2,000 there is reason to believe that another sharp
rally will arrive before traders pack it in for the year. The chatter following a solid piercing of 10,000 would be 'ok, stocks have come too far lets take some money off the table'.
It is worth remembering that since October, as evident by MR's monthly fund report, managers have continued to slash their cash holdings. This, more so than the bull/bear readings, is telling us that a
strong advance is becoming increasingly unlikely.
Lastly, the VIX, and put/call ratio support this idea – or that a final blow off rally
is needed to entice the final batch of sidelined-suckers to join in before the next drop…
