Walmart and Altria - Who Knew?

After looking at the list of stocks in 'What Safety Sectors are Really Working? And Which are Hoaxes', and commenting Altria (MO) is one of the few actually holding up, I see even this name has now broken below its 50 day moving average. Even the safe havens are being 'smoked out' (couldn't resist) - quite interesting. MedcoHealth Solutions (MHS) has been an absolute rock and with the change in character in this market now that the technical condition has deteriorated [S&P500 in Worst Condition in Half Decade], this is the type of name I will begin to focus on more.

The problem with most of these save haven consumer based stocks is (a) they still rely on a consumer who is weakening and (b) they are impacted by raw goods inflation. So I don't know why people consider them to be safe havens - this is 1990s thinking; not thinking of a World of Shortages. (I need to trademark that term).

That said nothing but cash really works in a true bear.... ask Sprint (S) or Intel (INTC) shareholders.

I also (cannot believe I am saying this) am intrigued by this Walmart (WMT) [Will There be Anywhere Left to Shop in 2010?]. If the economy is truly going to pot and we start going to a 6,7,8% unemployment rate in the coming two years, Walmart should benefit greatly - I outlined this in 'Target Shoppers Turning into Walmart Shoppers'. So instead of being so facetious we might have an opportunity here.

A lot depends on just "how bad" things get out there. As I've outlined I think it can get very bad - but I could be wrong. I always underestimate the US consumer. But I truly think the house ATM was a large reason for continued strength and impervious attitude (towards spending above their means) of this group. Anyhow Walmart reports Feb 18th - if we see an uptick in earnings/same store sales combined with a downtick in Target, it looks like what was a hunch will become a true trend.

Now with that said the whole retail group has imploded, and the next time we rally (and we will one of these days) it will be a hectic and straight shot up for most names in this sector - a rally which should be sold. Home builders have been doing the same action for well over a year. So once we get past that stage we need to continue to find true buys in this market... hence why Walmart might hold some appeal.

Back to Altria (MO) after poking around this name (I'll be the first to admit I haven't looked at Altria since the late 90s - slow growth companies open to constant litigation is just not my thing), I do see a very interesting situation developing. While US consumption of cigarettes is dropping (slightly), as with everything we want to focus on the long term international consumption factor. And in that light we have an opportunity - Altria is spinning off Philip Morris International this spring (ding ding!).

• Shares of Altria Group Inc. rose Monday as an analyst lifted her price target, saying the upcoming spinoff of Philip Morris International Inc. will enhance the company's value.
• "We see the stock trading up in the coming weeks as the company formally approves the Philip Morris International spinoff on Jan. 30, announces a share buyback and cost restructuring around mid-February and embarks on an investor road-show in early March," Judy Hong wrote in a client note.

Now I have to give props to Cramer as he has nailed this one - MO Ain't Just Blowing Smoke

• This “is among the most treacherous markets I have ever seen in 29 years of trading,” Cramer told viewers Wednesday night. At this point, the Fed is irrelevant, he said. Even if the central bank moved to cut rates aggressively, “there’s so much damage done that Bernanke may have missed his chance.”
• What’s exciting, though, is that Cramer said Altria should announce its break-up plans in two weeks. The split into Philip Morris International and Philip Morris USA has been expected, but Cramer’s prediction is that it could happen as early as this quarter. That will leave a fast-growing international stock and a slower domestic growth company with a nice dividend.

So this increases my interest in Altria as I'd love to get my hands on a secular growth story combined with recession proof theme, combined in one. Interesting story on Reuters I just found (One of the top 10 stories)

Customers Desert Smoke Free Restaurant

• Beijing's first smoke-free restaurant chain faces going out of business after its customers deserted it in droves after the ban was enforced, state media reported on Friday.
• The Chinese are the world's most enthusiastic smokers, with a growing market of more than 350 million, making it a magnet for cigarette companies and a focus of international health concerns.
• The occupancy rate at Meizhou Dongpo, a chain serving the spicy fare of southwest Sichuan province, had dropped to "about 80 percent of that enjoyed by other restaurants across the street" after it banned smoking in October, the China Daily quoted its manager as saying.
• Meizhou Dongpo had trained its waitresses how to discourage people from lighting up, but met resistance from customers who would lock staff out of private dining rooms to sneak a quick puff, Guo said.
• Beijing authorities had written to 30,000 restaurants asking them to put smoking bans in place, but not a single one had taken up the suggestion, the paper said.

Well that's just a trend I have to get behind. Philip Morris International, I await you.

Walmart and Altria - who knew? That said, after this "washout fear low" I am hoping for I do expect a nice bounce coming. We are so far away from any major resistance levels now, since we broke down so badly in such a short time span, that a decent rally should be in the offing. Further, I can only imagine the ire Uncle Ben is receiving so we might see a real surprise - 75 basis? Who knows.

In an overall sense though folks, as I wrote in my piece midweek on the S&P 500 breaking down, we have to change the midset of the past 5 years at this point where buying every dip is the way to go. Now we sell every rally. For how long? Until the market tells us differently. When the S&P 500 begins to make new highs (not all time highs but highs above the previous high point) is when we change attitude. It could be in 3 weeks, 3 months, or 3 years. I don't have an idea.

Much of it depends on how bad this recession gets and how "immune" the rest of the world is. I think the US and UK are done for. Spain is an even more housing addicted country than we are. And we will see a lot of griping in the European Union as some countries are doing ok whereas others need rate cuts. So that central bank authority is really going to be in a tight spot. Japan hasn't recovered in 15 years. Etc.

So as I've been saying, 75% of the world is going into a consumer recession. Whatever growth we get out of the emerging markets (which are in part benefiting from export growth) won't offset that. But it's all about degree. How bad things will get is an open question. I still contend subprime is just the tip of the iceberg.... and as I've been writing since August the mortgage issues will just continue to climb the chain up to Alt A loans, up to prime loans - and throw in the auto loans, credit card loans, consumer loans, student loans and you have a subprime, debtor nation. It appears the past three weeks people are starting to get the picture.

On the other side we will see massive infusions of liquidity (creating a bubble somewhere in 2009-2011), and government bailouts increasing in nature as things get worse. I wrote this on Aug 31, 2007 [Et tu, September?]

Presidential candidates will be jostling to propose bailout after bailout, inciting moral hazard issues up the wazoo.

I repeated it in December [Et tu, 1st Half 2008?]

I expect a lot more programs to "save" the banks, save the poor homeowners, save everyone. More government programs, more bailouts, more money printed out the wazoo at the Federal Reserve, perhaps a surprise cut here or there, perhaps a major discount rate cut. I've said at 2:31 PM Halloween when the Fed signaled they would go back to neutral, forget about it. We are going to mid 3%s by spring 2008 on the Fed funds - the more I see, the more I could be conservative. Maybe low 3%s or 3% by summer 2008. Anything and everything will be on the table to bail out the economy into an election year. That's just the reality folks. The long term be damned, whatever course of action is needed to be taken will be taken.

It's all coming together folks - these folks are shameless, pandering and refuse to address the long term issues in our country or do ANYTHING preventative. Only after the vase is broken do they come together from their respective corners in "bipartisan" fashion, and only when forced to. And their actions will be nearly meaningless. But each of their reactive, meaningless reactionary actions places more burden on our kids, grand kids, and great grand kids. I am only wondering at what point the electorate gets truly outraged at these people. Upper 20% approval rating for Congress and low 30% for President. These people in their ivory tower in Washington just don't get it.

However, I do believe if the market continues to degrade at some point this (below) will be our "saving grace" - if you consider selling off your soul due to terrible decision making a saving grace.

Foreign buyers will be flooding the US market by spring summer 2008- specifically sovereign foreign funds - it has already begun. But this is just the first steps - many US assets will be taken over. This time it is "for real", unlike the fears of Japan taking over in late 80s - petro dollars and massive trade imbalances make for very rich counter parties. In fact this is going to be an issue for many years as we have taken no steps to shore up our systematic issues of unfunded long term liabilities, trade imbalances, and petrol dependence.

But at least it will prop up the stock market... yee haw.

Disclosure: Long MedcoHealth Solutions in fund; no personal position

Comments

[swimjames]

Yes, everything in the USA will be owned by foreigners, whether we like it or not. The 'living large' method employed by most of us will hurt all of us, and housing, medical and educational costs will have to come down. Regarding petro dollars: what will the US do once Saudi Arabia doesn't want to get paid in our currency anymore?

[swimjames]

One more thing to consider if you think inflation is truly 4% (I know for a fact most salaries didn't increase by 4% over the last year):
Current Inflation Rate
4.08%
Released January 16, 2008 for December 2007
Provided by InflationData.com

Consumer price index change of 4.1% for 12 months ended 12/31/07
www.bls.gov/news.relea...

BUT:

Know Your Inflation Rate
2002 to 2007 Percentage Change (published today by Robert Hsu)
Gasoline $1.50 $3.52 +135%
House, L.A. $270,000 $580,000 +115%
Hotel, London $300 $500 +67%
Private College $21,000 $32,000 +52%
Dinner For Two $60 $80 +33%
Laptop Computer $1,200 $800 -33%
50 Inch Plasma T.V. $6,000 $2,500 -58%

and this isn't even considering the inflation in medical costs (hospital stays, operations, lab work & diagnostics and medicines/treatments and nursing homes). This inflation is probably way exceeding the gas inflation rate of 135% over the last 5 years..
Too bad that laptops and plasma TVs that you don't need to live on are the ones that went down in price.