Exporting Jobs, Reshaping the US Economy, And Less Money To Buy Things

Far too many families that once benefited from middle class jobs in industry are now dependent on cobbling together a series of part time jobs in the service sector. The bottom line is that a lot of Americans are just making enough to get by until the next pay check and even be taking out paycheck loans to survive. Walmart warns of a weak outlook because it is pouring more and more money into keeping its market share while accepting a lower and lower profit margin. What Mother never told you about stock investing is that there may be periods in which cash in king, stocks slide steadily downward, and you have to pay the bank to keep your money on deposit. Think of Japan over the last two decades and how increasingly efficient industries had to keep dropping prices to maintain market share and not go bankrupt. This is the business version of treading water and not one of swimming the English Channel. As Walmart warns of a weak outlook long term stock investors may do well to repeat their fundamental analysis of each stock in their portfolio with an eye toward viability in a deflationary world. Luckily many US corporations are sitting on lots of cash which is a great margin of safety when the values of commodities, purchased goods, and wages are falling. It is a bad then when what the economy needs is an increase in the number of jobs at home.

How Bad Is It For Walmart?

Walmart reported an increase of profits from $1.18 a share to $1.24 a share to a total profit of $4.07 Billion. Unfortunately analysts had expect $1.25 a share

Wall Street had expected Wal-Mart to earn profit of $1.25 a share and $118.1 billion in revenue. Instead, the discount giant said net income rose 13% to $4.07 billion, or $1.24 a share, from $4.02 billion, or $1.18 a share. Same store sales fell slightly. Walmart is investing in new facilities and spending money on other strategies to make money and they are treading water. This would have flattened the stock price in normal times. However, the company is predicting two percent growth for the year after an expectation of up to six percent. Sound investment advice right now will be to keep an eye on the economy to see if a recovery boosts sales at retailers like Walmart. If your analysis implies that deflation is on the horizon it may be wise to keep a larger portion of your portfolio as cash, short term securities like 3 month Treasuries, or very short term certificates of deposit.

More Resources

What Will Happen to Interest Rates?

As the expected end of bond purchases drives stocks down it will likely drive interest rates up. The underlying purpose of the bond purchase stimulus program has been to drive interest rates down and keep them there. As the Fed gives up the job of soaking up all of the Treasury notes interest rates will rise. Fed chairman Bernanke has stated that the Fed will proceed slowly so as not to stifle the recovery. Another issue that has come to the fore is that of possible deflation of the US economy . During periods of deflation cash is king. Deflation makes you richer if you have money in the bank and poorer if you have extensive debt. Inflation raises the money value of homes and businesses over time and the debt taken on to purchase them becomes less of an issue. The reverse happens in deflation when homes and businesses become cheaper in relation to cash and debt can become overwhelming. If deflation occurs it is possible that you will need to pay a small amount of interest to the bank in return for them keeping an eye on your money. That is to say, deflation could lead to negative interest rates. As the possible end of bond purchases drives stocks down it also raises the possibility of deflation and the specter of negative interest rates.

Gold Will Become Less Attractive

The Federal Reserve and the nation are fortunate that the world expert on the root causes of the Great Depression took the helm of the Federal Reserve during the worst financial crisis in three quarters of a century. The take home lesson from fundamental analysis of the early 1930’s is that you need to stimulate the economy at times of economic contraction or risk having things get worse. As luck would have it Mr. Bernanke did exactly that and helped the nation avoid a second Great Depression. The stimulus bond program is part of the rescue package for the US economy. However, financial stimulus programs need to come to an end or they threaten to bankrupt the US government by loading on ever-increasing debt. As the end of bond purchases drives stocks down it will also lead to a further fall in gold prices. One is that gold tends to fall when interest rates go up, which will likely happen as the stimulus programs ends. Also, by reducing government spending the nation will more likely come to grips with its debt burden which will lead to fewer folks squirreling away gold as protection against financial collapse. If investing in gold interests you, you may want to wait until the fall is over and there is a bounce.

More Resources