Stocks fell sharply on Wednesday as investors continue to play a cat and mouse game with the Fed.
In short, the market seems to be telling the fed, "If you don't cut interest rates at the September 18th meeting, we will sell-off the markets."
In the short run, I don't believe the market will be satisfied with anything the fed does. If they don't cut rates, the market will react negatively. If they do provide investors with a "token" cut, it will be looked at as not enough. I think the fed already knows this.
In summary, I would look for more volatility and the possibility of a capitulation day. A capitulation is a major washout (down 300-500 points) would set the stage for a major rally into November and December.
Wal-Mart
In every economic downturn business will continue to thrive somewhere. The biggest buying group being squeezed is the middle class. Most people below the middle class are always being squeezed, so to them, the economy is always tough.
In a growing economy many middle class consumers like to portray themselves as "upscale" or "rich". You've seen it. When the economy begins to contract, middle class consumers contract too. Mind you, they don't stop spending, they just spend differently.
For example, when they had cash to burn, you could find many middle class consumers shopping at places like Coach (COH), Macy's (M), and other upscale retailers. When the equity from their homes no longer became a source of funds, they had to re-adjust their spending habits.
Last week I wrote a "Journal" entry entitled, "Wal-Mart: Sorry Merrill, you're wrong again!"- Read Article.
Middle class consumers are like chameleons. They have always shopped at places like Wal-Mart (WMT), but when they "feel" like they have a little wealth, they have a tendency to spend more at upscale retailers. When times get a little tougher, they delay upscale purchases and shop more at Wal-Mart. See, they're just like a chameleons!
The middle class chameleon is changing colors again. This morning, Wal-Mart posted a 3.1 percent increase in same-store sales or sales at stores open at least a year. Analysts were estimating only a 1.5 percent increase.
I knew the Merrill Lynch analyst call on Wal-Mart was wrong because there is nothing in their educational process that emphasizes common sense, psychology, or philosophy.
The CFA (Chartered Financial Analyst) exam emphasizes things like asset valuation, economics, financial statement analysis, quantitative methods, and strategies for applying these techniques to asset valuation models. Obviously, these are very bright people, but so are doctors and engineers, who are among some the worst investors I have ever seen.
On the other hand, some of our more successful investors like Jim Rogers (founded the Quantum Fund with George Soros) studied Philosophy.
