A Hard Look at the Economy’s Health

John DVThe markets were down sharply earlier today thanks in part to oil. A barrel of oil today costs around $32. That’s up slightly from the mid-$20s last month, but still an economic death trap.

Everyone knows energy prices have taken a beating. Oil stocks are down over 60% since the summer of 2014 when the Market Vectors Oil Services ETF (NYSE: OIH) topped out at $58. Now it sits at just under $23. And gas hasn’t been this cheap in seven years.

That’s a pretty nasty bear market.

Conventional wisdom is that low energy prices are great for American consumers and help provide a boost to the economy through increased spending.

The problem with conventional wisdom in the markets is that when you do what others are doing, you get what others get: sub-par returns.

Of course, low energy prices don’t affect just Americans, but consumers all over the globe. They should all be stimulating the economy with their spare change. But there’s one clue that Joe Six Pack is feeling economic pain despite low energy prices.

That clue is the performance of shares of Wal-Mart (NYSE: WMT).

In my opinion, Wal-Mart is one of the greatest indicators of the economy’s health because nearly everyone shops there.

Over 260 million people shop at Wal-Mart each week. Eight percent of every U.S. dollar is spent at Wal-Mart and 90% of Americans live within 15 miles of a store.

If you watch CNBC or read Wall Street economic reports, they often have sophisticated models to predict economic strength. They look the part with their slick backed hair and fancy suits. What’s not to believe?

The problem is that these economists live in a bubble. They’re famous for collectively never having predicted a recession before it happened. But rather than rely on job numbers and inflation reports that are heavily manipulated by the government, like most economists do, it’s far easier to look at the performance of a retailing behemoth and project economic strength (or the lack of it).

Back in October, Wal-Mart reported a dud of a quarter and shocked Wall Street with reduced guidance for the coming fiscal year. It was a troubling sign for the economy.

The toll on the stock price was remarkable. Shares of Wal-Mart had the largest single day plunge in three decades. The shocking news came amid news that earnings could drop as much as 12%. Investors had expected the bottom line to grow in the coming year.

Then last week, Wal-Mart missed both its estimates for revenue and earnings per share. Earnings per share were down a staggering 7.5%.

The company has also been dogged by a strong U.S. dollar. As I have mentioned in the past, this is only going to get worse for large, multinational companies. Last year, many market commentators thought the strong dollar would be a passing problem. But as the economy gets worse and growing fears strike the market, the demand for dollars will only increase as a safe haven. I believe this can be a headwind for companies like Wal-Mart for much longer than anticipated.

For Wal-Mart, revenues have been downgraded to flat from the earlier expected 3-4%. Meanwhile, increased expenses, namely higher employee costs, are eating up earnings. Ideally this would help the economy at some expense to the retailer. But as it turns out, while new wage increases are put into effect, many workers had their hours cut by the retailer. Funny how that happens.

We have yet to see how slightly increased wages will help, but if Wal-Mart is simultaneously cutting hours, it can’t help much. As early as two years ago, Forbes reported that the company costs the American taxpayer $6.2 billion in public assistance for its employees each year. That’s about $1 million per Wal-Mart.

That goes a long way to describing the state of the average American.

To make matters worse, Wal-Mart is closing nearly 270 stores, further hitting local economies. 154 of those stores are in America.

This can’t mean anything good.

We already know the average American has been stuck for years, and it doesn’t seem as if lower energy prices have bailed them out.

And now, it’s being reflected in surprisingly poor financial performance by the largest global retailers.

That’s got to be tough for the suits to swallow.

John Del Vecchio
Editor, Forensic Investor 

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Categories: Business Cycle

About Author

In 2007, John Del Vecchio managed a short only portfolio for Ranger Alternatives, L.P. which was later converted into the AdvisorShares Ranger Equity Bear ETF in 2011. Mr. Del Vecchio also launched an earnings quality index used for the Forensic Accounting ETF. He is the co-author of What's Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. Previously, he worked for renowned forensic accountant Dr. Howard Schilit, as well as short seller David Tice.