Investing in Retail: Always Sell Wal-Mart

By Adam Lass & Sara Nunnally

Oil Futures: The Bloomberg Interview

Macro Outlook
Wal-Mart has announced that its customer base split three ways: lower-class buyers who need cheap stuff, middle class buyers who like cheap stuff, and upper-class folks… (wait for it)… who want to buy cheap stuff.

Material Profits
By the time we started moving again, we were a full 40 minutes behind schedule.

Back in the waning days of the old century, a mentor of mine in the biz journalism racket used to have a rule of thumb: “Always sell Sears.” Any time they would gin up some good news, like “same-store sales not falling as much this as last,” or, “we have convinced yet another fading celebrity to tout our shapeless ‘Mauvais Couture,’” he would immediately short Sears shares. Simply put, he had complete faith that management would find some way to screw up.

Now that “Hot Eddy” Lampert has taken over the venerable chain of stores so as to leverage their immense real estate holdings, this tenet may or may not hold true. Not to worry, because a victim has stepped forward out of the crowd. And much like Sears, they were probably the strongest player in retail before developing endemic “Stumblitis.”

Allow me to present a new rule for the retail punching bag for the 21st century: Always short Wal-Mart (WMT:NYSE). Over the past several months, we have seen much soul-searching back at the home office in Bentonville, Arkansas as to why it can’t seem to get a grip on things lately.

CEO Lee Scott has held numerous press conferences promising to do better this year than last, when same-store sales were up a mere 3.7%. His team has even looked back over decades of sales figures and proudly announced that their customer base split three ways: lower-class buyers who need cheap stuff, middle-class buyers who like cheap stuff, and upper-class folks… (wait for it) who want to buy cheap stuff.

So how are things breaking for Sam’s kids this year? Analysts predicted same-store sales for February to come in at 1.5%, and then waited breathlessly for the usual “pre-release” report. It never came.

Instead they had to wait till mid-March to find out that the big W swung and missed: February’s same-store increase was a mere 0.9%. The boys in the corner office are blaming “bad winter weather” for the miss. This is rather curious for at least two reasons.

The first is that winter is one of those events that seems to be rather regular. I seem to recall that it came last year, and the year before as well, and the number of snow days seem about par, if even perhaps a little low this year.

The second reason I find their thoughts curious (or perhaps even spurious), is that their big competitor, Target (TGT:NYSE), saw same-store sales jump 5.7%, beating analysts’ estimates of 5.1%.

I’m being coy here: this “cold winter keeps shoppers away” reasoning is pure cr*p. Wal-Mart’s sales are down because they have opened far too many stores, and courted a clientele that was sure to be badly stung when other basic costs rise.

And that’s exactly what is happening right now. Say what you want about inflation being under control or not. In case anyone has missed it, Crude oil is over $60/barrel, gasoline is over $2.25/gallon, and electric bills are still through the roof.

For most Wal-Mart shoppers, that means no second pair of blue jeans, let alone one of those Korean plasma TV’s the big W has been fantasizing it could pawn off on blue-collar American shoppers.

If you happen to be holding shares of Wal-Mart (WMT:NYSE), for Pete’s sake, unload them now, and buy shares of an oil company like Chevron (CVX:NYSE) instead.

Yesterday, I made my way to New York City to make an appearance on Bloomberg. The trip was hampered from the moment I woke up.

Here in Baltimore, we had two or three inches on the ground, and many county schools were closed. I rushed into work to get a head start on traffic and send an e-mail to Material Profits members and MP Wildcatter subscribers letting them know about my trip.

As I made my way to Baltimore’s Penn Station, I was crossing my fingers, hoping my train wasn’t delayed or cancelled.

On board, I had two seats all to myself, and I looked over my notes and oil futures’ charts hashing out my bullish stance in what would be described as “oil’s downtrend.”

Just outside Philadelphia, the train stopped. For about 10 minutes, we sat there. Then the conductor came over the loudspeaker announcing a power outage up ahead. We’d have to retrace our route and get on another track.

After a few choice swear words mumbled under my breath -- which must have been louder than I thought, because the young lady across the isle shot me a look -- I called the producer and told him the situation.

He said, “Thanks for the heads up, but I’m not sure how long we can hold your spot.”

As soon as we pulled into New York’s Penn Station (there are, like, five Penn Stations on this route), I push my way off the train. At least it’s New York, and no one thinks twice about being bumped by someone in a suit and tennis shoes running through the station.

In the car, I call the producer again, and he said, “Don’t worry about make-up and hair, just come directly to the set.”

Whew… I knew he was holding my spot for me, and as I dashed down the escalator in Bloomberg’s super-phat studio (yes, I said phat), I pulled my hair back and painted on some lipstick.

Next, it was into the studio for them to prep my mic, and a quick question on where oil was (at $61.99), and we were on the air.

The last time I came on the show, oil was down near $50, and I called for a bounce to $60 or $62.

We looked at an oil futures chart for April contracts, and I noted a classic rise highlighting the Elliot Wave theory. This theory says that prices move in waves, and that uptrends show five wave “legs” before peaking and retracing with three wave legs.

April oil futures show one leg up starting from the bounce around $50 a barrel, then one leg down -- retracing only slightly the gains from the first leg.

Again, oil futures rose before seeing another slight retracement. In all, that’s four legs of the five-leg wave: up, down, up, down.

Through fall and into winter, we saw oil prices trade fairly range-bound, and that sets up a ridged line of defense. In other words, resistance. But that resistance won’t be at its peak strength until oil reaches $65 a barrel.

Additionally, a down-sloping trend line connecting the highs from last summer to the high point just before the new year, passes directly through the second leg of the Elliot Wave.

What that means is that oil is already breaking out of its down trend. In fact, the fourth leg of the wave actually dropped far enough to test this former down trend, and find support to move higher.

That’s exactly what oil prices did on Wednesday. It didn’t hurt that we saw some bullish supply data that day either.

In the second half of the interview we talked about how investors can play this limited move.

I suggested that because this recent action is bullish, I would continue to hold major oil positions, like Exxon Mobil (XOM:NYSE), ConocoPhillips (COP:NYSE) or Chevron (CVX:NYSE), for the long term, but perhaps take advantage of these short-wave patterns with options.

We took a look at the Energy Select Sector SPDR ETF (XLE:AMEX). We noted how it oscillates around the 50-day Moving Average, and that most times the XLE moves a couple dollars higher once it crosses above the Moving Average, and moves a couple dollars lower once it crosses below the MA.

The XLE has been trading horizontally ever since oil prices have seen a lot of volatility. To me, that means the XLE should continue this pattern so long as oil prices remain a bit unsteady.

This would be a great vehicle to play near-term options. Once the ETF crosses above the 50-day MA, buy calls. Make gains, take gains. Once the ETF crosses below the 50-day MA, buy puts. Make gains, take gains.

That way, you’re augmenting your oil portfolio with these short-term gains, and, with the put options, hedging against a downturn.