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August 17, 2007

The REAL Economic and Wealth Trend Indicator - Walmart

(UPDATE: 8/27/07 - The gilded rich are being wooed by, who else, the credit card company thieves under the guise of 'snob appeal'...but wait till you read how.)

When consumers can afford Walmart and their profits are on track, don't worry about the economy. When Walmart cuts it's earnings forecast due to lower than expected earnings, it's time you pay serious attention.  But more telling is 'why' there is an earnings shortfall:

NEW YORK (Reuters) - Wal-Mart Stores Inc. (WMT.N), the world's largest retailer, reported a lower-than-expected quarterly profit and cut its full-year earnings forecast on Tuesday, saying its customers remain under economic pressure. 

NEW YORK (Reuters) The number of U.S. workers signing up for jobless benefits rose unexpectedly to 322,000 last week. It was the highest level in two months but still pointed to a steady job market, Labor Department data on Thursday showed.

(Elliottwave International) "U.S. consumers continue to be under difficult pressure economically. It is no secret that many customers are running out of money toward the end of the month.''

Oh, but those are just the little guys, right? What about consumers who don't shop Wal-Mart? The biggest and wealthiest of them all must be doing all right. Those are the folks who think that paying $600 for a pair of high-end, designer shoes is just so déclassé. Nothing less than $1,000 for a pair of stilettos, say the A-list consumers, according to a recent AP story about rising prices for luxury goods.

Bloomberg has the perfect analogy: "Luxury-goods companies are starting to look like Internet stocks did in the 1990s, if only because indexes designed to track them are proliferating."

I have been watching an interesting trend locally.  The businesses which have catered to the middle class are upscaling, laser-focusing on the wealthy and doing quite well.  Walmart is showing signs of stress yet Coach is in record profits territory.  Our local Pilot Pen Tennis Tournament always advertised itself as a family affair.  Now it advertises for exclusive seating, valet parking, back stage passes to meet the celebrity players.  No more 'fun for the family.'  And I see this every where I look.  Walmart or Coach - no in between.  And this is reflective of our changing 'class' system in this country.  And it will be reflective of your solo practice, too.  No more lower, middle, and upper class.  Just struggling and uber-rich.

It makes sense.  Not since 1927 have the rich been this rich (except briefly in the early 90's).  And we all know what happened just after the rich hit their pinnacle of wealth in 1927 (and the early 90's).

Only twice before over the last century has 5 percent of the national income gone to families in the upper one-one-hundredth of a percent of the income distribution — currently, the almost 15,000 families with incomes of $9.5 million or more a year, according to an analysis of tax returns by the economists Emmanuel Saez at the University of California, Berkeley and Thomas Piketty at the Paris School of Economics.

Such concentration at the very top occurred in 1915 and 1916, as the Gilded Age was ending, and again briefly in the late 1920s, before the stock market crash. Now it is back..., (Article)

How does this impact solos?  As I've posted before, you need to stay lean and mean so you are taking home 75% of every dollar you earn. Only Eat What You Kill. As clients will find it tougher to pay you you have two choices: redesign the criteria for your ideal client as one of the gilded rich or overseas or leaving the U.S. for overseas (and many of the law firms are doing just that which means the pool of clients will shrink proportionally to the number of lawyers vying for their money), deal with corporate clients who are concentrating on rebuilding this country's infrastructure and/or create a service product the average American can afford because you can afford to do it based upon your limited overhead expenses while still supporting yourself very nicely.  And then target those practice areas which will grow as a result of harsh economic times ahead (bankruptcy, creditor's rights, debt collection, etc.).  Or fashion a hybrid of the above. The key is extremely low overhead.  This will give you choices and freedoms.

For those who wonder why I post this type of information?  I'm an optimstic realist.  Give me the straight scoop and, if you are willing to do it, I'll show you how to make it work for you regardless of the challenges.

Links of Interest:

Bankruptcy: The New Blue Chip Practice Area?

Put the Boom in Your Business with Baby Boomers

With Foresight, Solos Can Ride Out Economic Downturns

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Comments

Nneka | Spirituality Blog

Consider this also, there are quite a number of people in middle and lower income brackets who go into hock for those $1000 stilettos and Coach bags. Due to the images on MTV and VH1, there's a generation of folks who don't think that they're in without the bling and they think EVERYBODY has it. They aren't really luxury anymore.

Also, shopping is turning into an American past time, not a necessity. Shoppers are upscaling in every bracket. Why shop at Walmart, when you can shop at Target (with the accent)?

Steve

Susan,

Don't fall for the exaggerated reports of Wal-Mart's demise. Here is something I recently wrote in response to the Reuters story you cite:

More Economics Misreporting
Steven M. Warshawsky

The headline on the Reuters story syndicated all over the world today is "Wal-Mart Hits the Wall: World's largest retailer issues bleak forecast, pointing to cash-squeezed customers, higher fuel prices, interest rates." The accompanying story describes Wal-Mart as "struggling" -- which would carry dire implications for the U.S. economy, because Wal-Mart, which serves 127 million customers every week, "is considered a barometer of the health of the U.S. retail sector." The clear thrust of the article is that Wal-Mart, and hence the U.S. economy, is in trouble.

Really? What the article actually shows is that Wal-Mart's second-quarter sales "were $91.99 billion, up almost 9 percent from a year ago." Moreover, its earnings rose to $3.1 billion, up from $2.08 billion a year ago. So, in reality, sales and profits were higher than last year. These are not the financials of a company that is in trouble.

Yet the takeaway message from the story is that Wal-Mart supposedly faces a "bleak" future. Why? Because Wal-Mart was not quite as profitable as "expected" last quarter, and so the company has "forecast" slightly lower earnings for the rest of the year. In other words, economic predictions are considered more important than actual economic performance in determining the health of the company. Furthermore, predictions that the company will enjoy slightly reduced profits in the future are treated, in essence, as proof that Wall-Mart is losing money and teeters on the brink of disaster, along with the U.S. economy.

This type of reporting -- which is absolutely commonplace throughout the media -- is deeply misleading, indeed irrational. I realize that this is the way that much of the business and financial world thinks (especially among those involved in the stock market). But it still doesn't make sense. Most importantly, voters should not vote and politicians should not pass laws (e.g., minimum wage increases, price controls on energy, trade tariffs, etc.) based on such wrongheaded economic "analysis."

(From AmericanThinker.com)

Susan Cartier Liebel

Steve, as always your comments are excellent and thought provoking. I'm not saying Walmart is in trouble or on the brink of disaster. I'm saying the economic bracket which predominantly frequents those stores is suffering an economic crunch due to other pressures such as mortgagae problems, increased costs of basic goods, utilities, gasoline and more. It will impact the amount of money they spend...and Walmart changing their forecast to reflect this (as well as Home Depot) is an important indicator of the economic health of this country's majority. If more than two thirds of the GNP is the purchasing of consumer goods this does not bode well for this couontry. Again, I'm not worried about Walmart. I'm worried about the 'why' of Walmart's change in earnings forecast. Put all the jigsaw pieces together, including the subprime mortgage implosion...you know where I'm going....and with valid concern.

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