These CEOs Cry The Blues As Consumer Spending Pulls Back Again

Consumer spending in the U.S. economy is bleak. Until it picks up, you can’t expect the U.S. economy to see growth; after all, consumer spending does make up 60%-70% of U.S. gross domestic product (GDP).

Wal-Mart Stores, Inc. (WMT), a bellwether stock for consumer spending, reported corporate earnings of $1.24 per share in its fiscal second quarter (ended on July 21). That’s an increase of 5.1% compared to last year—but just like other big public companies, Wal-Mart purchased $1.9 billion worth of its own shares in that quarter to prop up its earnings.

Here’s what the company’s CFO, Charles Holley, had to say about consumer spending in the U.S. economy: “…the retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending…” (Source: Wal-Mart Stores, Inc. press release, August 15, 2013.) With this, the retail giant lowered its net sales and corporate earnings expectations for the year.

Wal-Mart isn’t the only company complaining about poor consumer spending in the U.S. economy.

For its fiscal second quarter (ended August 3), Macy’s, Inc.’s (M) sales declined 0.8% from the same period a year ago. Macy’s Chairman and CEO, Terry J. Lundgren, said:

“…second quarter sales performance was softer than anticipated and we are disappointed with the results. Our performance in the period, in part, reflects consumers’ continuing uncertainty about spending on discretionary items in the current economic environment…” (Source: Macy’s, Inc. second-quarter earnings press release, August 14, 2013.)

If Wal-Mart and Macy’s are complaining about soft sales, this tells me two things: First, retail stocks might not be the best investment right now. The Dow Jones Retail Index is down five percent this month alone. Second, a pullback on consumer spending tells me the U.S. economy isn’t growing as it is perceived to be.

We’ve already seen the first-quarter U.S. GDP revised lower due to weak consumer spending. After hearing from bellwether companies like Wal-Mart and Macy’s on the current status of consumer spending in the U.S. economy, I expect the second-quarter U.S. GDP, initially reported at 1.7%, to also be revised downward.

Michael’s Personal Notes:

Risks in the bond market continue to pile up quickly. Bond investors need to be very careful. They need to be very vigilant about their next step.

Since the beginning of May, yields on long-term U.S. bonds have skyrocketed, as the chart above so clearly shows. The yield on the 30-year U.S. bond has gone up from 2.8% in early May to over 3.8% today.

This is very significant, as yields on long-term U.S. bonds—such as the 30-year bonds—are benchmarks for yields across the bond market. If yields on U.S. bonds go higher, you can bet the same for other kinds of bonds in the bond market as well.

Since the beginning of the financial crisis, we saw investors rush to the bond market because it was considered to be a safe place and because they had bet (correctly) that the Federal Reserve would drop interest rates to help the economy. Bond prices increased significantly under the Federal Reserve’s easy monetary policy.

Now, with conflicting signals from the Federal Reserve, the bond market is a fragile place. Bond investors leaving the market shows they don’t have an appetite for holding bonds in their portfolios as they did a few years back.

If interest rates continue to rise, losses in the bond market are going to be immense. Consider this: Pension funds and insurance companies hold bonds in their portfolios. As the yields continue to increase, they are going to face scrutiny.

Those who are saying the recent dip in the bond market is a great buying point should rethink their options. The risk-to-reward ratio is poor for bond investors.

Disclaimer: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. The opinions in this e-newsletter are just that, opinions of the authors. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose.

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