Kohl's Chases High-End Consumers, Competitors Chase Tails

The following post first appeared on Minyanville.

Even as consumers are trading down, Kohl's (KSS) is trading up.

Bloomberg reports the discount retailer is trying to attract higher-end consumers with designer brands such as Vera Wang and Ralph Lauren (RL). Sales at Kohl's have suffered less than at primary competitors Macy's (M) and J.C. Penney (JCP), which have both seen revenues slump alongside weakened consumer spending.

The majority of Kohl's stores are located outside of malls, a factor some analysts say has helped contribute to stronger performance. Struggling consumers are less apt to make trips to shopping centers, where J.C. Penney stashes around 90% of its stores.

Kohl's executives point to the popularity of its chicer brands as evidence it's won acceptance from wealthier consumers. As the economy slows, even higher-income customers are making their way to discount stores like Wal-Mart (WMT) and Costco (COST). This new traffic is boosting sales and helping to make up for lost revenue from big box stores' traditional clientele.

A retail analyst cited by Bloomberg said consumers are drawn to familiar brands during tough economic times. Kohl's, which attributes at least part of its outperformance to a focus on name brands over its own private label, is capitalizing on this trend. It hawks Vera Wang dresses sometimes as low as $100 - a steep enough bargain to open the wallets of even the most cost-conscious shoppers.

By comparison, Penney is focusing on in-house brands, which it can offer at a discount to well known labels. The company recently launched American Living, a home furnishing and clothing collection designed in conjunction with Ralph Lauren. While management projects annual sales to eventually surpass $1 billion, Deutsche Bank's Bill Draher isn't so sure. "American Living is not a brand," he said. "It is two words that mean nothing to the consumer."

As we noted previously, J.C. Penney seems to be charging headlong into a business competitors are exiting via the halls of bankruptcy court. Kohl's, meanwhile, is banking on consumers with more cushion - those better positioned to absorb an economic slump.

Fertilizer Firms Cash In

The following post first appeared on Minyanville.

Not everyone's complaining about the skyrocketing price of food.

Manufacturers of potash, phosphate and other plant additives have seen demand for their products soar. Tight supply has pushed up prices.

The Wall Street Journal reports fertilizer costs have jumped more than any other agricultural input, up 63% from a year ago compared to a 43% increase for fuel and 30% for seeds. Potash -- a rock that's ground up and used to strengthen plants -- has soared from $230 to over $700 per ton. Phosphate prices are also up more than threefold.

According to The Journal, legal price fixing is also partly to blame for higher prices. Legislation dating back to the early 1900s allows producers to effectively collude, using government sanctioned cartels to control export prices.

Canadian firms Potash Corporation of Saskatchewan (POT) and Agrium (AGU), along with Minnesota-based Mosaic (MOS), make up Cantopex, the Canadian cartel. Potash and Mosaic are the last remaining members of the U.S. group, the Phosphate Chemicals Association. The largest American producer of potash, Intrepid Potash (IPI) -- which recently went public -- is not a member of the organization. Even Russia has its own potash cartel, Belarus Potash Corporation.

The push for alternative fuels has squeezed acreage, as farmers replace fallow ground and less profitable crops with corn. Although this pop in demand is partly to blame for higher fertilizer prices, industry experts cite supply constraints as the chief culprit. Decades of weak commodity prices forced manufacturers to ratchet down production capabilities. Now, the structural shift in demand has caught fertilizer producers off guard. Supply-demand dynamics, along with pricing power, has sent prices soaring.

In response, farmers are scrambling to control margins. As feed and other input prices rise, they charge more for meat, chicken and eggs. However, profitability concerns result in a reluctance to invest in larger flocks or new slaughterhouses. Food price inflation is amplified, as supplies aren't rising to meet new demand from developing countries.

Irrespective of commodity market gyrations, demand for crop additives remains high. A recent New York Times article cited the availability of chemical fertilizers as one of the primary reasons much of the developing world has turned the tide against chronic malnutrition. As costs outstrip poor farmers' ability to pay for the additives that increase yields, those advances are threatened. Manufactures around the world are racing to increase production capabilities, but new plants won't come on line for years.

Investors and academics continue the debate over whether commodity prices are operating in a bubble. Speculators, many of whom are large enough to move markets on their own, are contributing to the spike in prices. Meanwhile, consumers in both the developed and developing world face higher prices for what they need most: food and fuel.

InBev Thirsty For Budweiser

This post first appeared on Minyanville.

Budweiser's not just for underage kids anymore.

The Financial Times reported this morning that Belgian beer maker InBev is working on a takeover bid of Anheuser Busch (BUD). The $46 billion deal would create one of the world's largest brewers.

Bud shares are popping today, up almost 7% to an all-time high. InBev, which churns out such brands as Bass, Stella, Hoegarden and Beck's, is reported to be working with JPMorgan Chase (JPM) and Banco Santander to finance the transaction. None of the companies involved commented on the newspaper's report.

InBev made little headway with overtures to Anheuser Busch CEO August Busch IV last fall. New on the job, Busch vowed to fight for his company's independence. The FT reports that InBev now expects him to act in the best interest of the company's shareholders, who stand to book a tidy profit if the deal goes through. The $46 billion price tag values the maker of Budweiser at close to $65 per share, almost a 20% premium to where the stock is trading today.

Beer is the ultimate recession-proof product. Investors often quip that people drink to celebrate during good times and to drown their sorrows in bad, so beer stocks offer a refreshing hedge against economic downturn. Southern Comfort and Jack Daniels aren't a bad choice if things get really ugly, a notion that should fatten up the bottom line at the Brown-Forman Corporation (BFB).

While many avid drinkers would argue that paying $46 billion for a whole bunch of Budweiser is tantamount to carting truckloads of money to the local incinerator, and that Bud is stale, watered-down food coloring, hard data suggests otherwise. Americans guzzled Bud Light more frequently than any other beer last year.

According to Information Resources, a leading provider of consumer spending information, Bud Light generated $1.3 billion in sales in 2007, nearly twice that of Miller Lite - a distant second at $670 million. Taking the bronze medal with $636 million in annual receipts was the King of Beers. With its two top U.S. brands alone, InBev would immediately pick up $2 billion in annual sales with the purchase of Anheuser Busch. That's approximately 10% of what the FT estimates total sales of the merged company would be.

Minyanville's resident booze and gambling expert, Kentucky native Kevin Depew, has written frequently about the merits of owning alcohol stocks during tough times - and conducted extensive research on their lines.

Gamers Open Wallets, Readers Stay On Couch

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Barnes & Noble (BKS) and GameStop (GME) are headed in opposite directions. Heavily dependent on shoppers' waning discretionary dollars, the fate of the two retailers lies squarely in consumers' fickle hands.

According to The Wall Street Journal, Barnes & Noble reported a $2.2 million loss for the quarter ending May 3rd, including an $8.3 million charge stemming from a legal battle in California over the collection of sales tax online. The bookseller also lowered sales estimates for fiscal 2008, but reiterated its view that earnings per share will fall in line with its previous forecast.

The Journal reported earlier this week that Barnes & Noble may be looking to buy Borders Group (BGP), which put itself on the block in March. Regulators are likely to scoff at a merger of the two companies, however, as it would create a book retailer with more than 30% market share.

But pricing power in the world of print may not matter; who reads books these days anyway? Certainly no one between the ages of 12 and 25 - they're too busy playing Grand Theft Auto IV (TTWO) or Guitar Hero (ATVI).

That's good news for GameStop. The purveyor of new and used video games saw profits double from a year ago amid strong demand for new titles like the aforementioned Grand Theft Auto IV and Rock Band. Despite a dip in margins, same-store sales jumped 27% - stronger than the company's own estimates. New video game sales increased 72% from a year prior, while used game sales grew by 27%. GameStop guided earnings for the second quarter at the high end of analysts' estimates.

During tough economic times, consumer preferences play a more significant role in which retailers stay in the black and which ones fold. Investors should expect niche players like GameStop, well positioned despite a sluggish economy, to outperform catch-all electronics stores like Best Buy (BBY).

In contrast to fad products like Crocs (CROX) and Under Armor (UA), video games represent a longer-term trend toward a more interactive entertainment experience. The popularity of games like Guitar Hero and Nintendo's (NTDOY) Wii Fit that force users to get off the couch is evidence of this shift.

And unlike TVs and computers that have relative shelf lives, video games "must" be replaced every six to twelve months when a new release or edition comes out. Final Fantasy, a popular role playing series for the Sony (SNY) PlayStation, is already up to its 13th iteration.

Gamers are a loyal bunch. The ability to buy used games for a fraction of the cost of new ones, even during tough economic times, means they can keep on playing.

Microsoft Spends To Make: Cash back incentive central to company's online strategy.

This post first appeared on Minyanville.

As the technology world awaits the next salvo in the battle for Yahoo (YHOO), Microsoft (MSFT) is steadily advancing its online strategy.

Microsoft, Time Warner (TWX), Newscorp (NWS), Google (GOOG) and now Carl Icahn are all squabbling over the rights to Yahoo's audience. The glut of potential deals, kicked off earlier this year by Microsoft's unsolicited bid for the Internet search company, is getting harder to keep straight.

But it's possible the bidding war was all just misdirection; an elaborate ploy by Microsoft CEO Steve Balmer to disguise an assault on Google's dominance in online search. Today, with the announcement of a pay-per click offering of its own, Balmer may be showing a bit more of his hand.

The Wall Street Journal reports Microsoft is expected to announce the launch of a new service dubbed "Live Search cashback." The program offers users cash back for items purchased using the company's search service. Microsoft is also partnering with retailers Home Depot (HD), Circuit City (CC) and Barnes and Noble (BKS) to expand the products available for the kickback.

Microsoft is eager to chip away at rival Google's lead in Internet search. According to the Financial Times, around 50% of online ad revenue comes via online searches - a business Google dominates with 70% market share.

Balmer appears specifically focused on targeting the online search business. In addition to the release of the new cash back service, in recent days Microsoft has approached Yahoo with a slimmed takeover plan. The company is interested in purchasing Yahoo's Asian assets along and search business. Many analysts argue that without those two components, Yahoo is barely worth the electrons it's printed on.

The battle for supremacy in online search highlights a fundamental change in the online landscape. The rate at which American consumers are switching purchases from brick and mortar to click and order has slowed. Meanwhile, international users are increasingly buying online. The quandary then becomes: Grab domestic customers from rivals with new offerings or strategic takeovers, or ditch the flagging American consumer and head abroad.

Microsoft's recent actions indicate its pursuing both courses. Despite the outlook for a slowing global economy and a domestic one that may not recover in the near-term, opportunities abound in parts of the world where online muscles are just starting to be flexed.

According to InternetWorldStats.com, data compiled by Nielson Ratings shows that North America represents just 17.5% of worldwide Internet usage. Asia, meanwhile, accounts for 37.6% and Europe 27.1%. Over the last decade, both regions have seen usage grow at twice the pace of North America. Africa and the Middle East, despite making up a combined 6.6% of all online eyeballs, have seen usage surge over 1000% in the same period. Not to be outdone, Latin American users, which account for almost 7% of the global total, now go online almost 700% more frequently than in 2000.

While Yahoo's suitors vie for headlines and ownership rights, the real battle is taking place overseas. Global growth may wane, assets may deflate and credit will certainly be destroyed in the years to come, but the transformation of real-time consumer to virtual one is a process no credit crunch can halt.

Pension Funds Blamed For Commodities Spike

This post first appeared on Minyanville.

Yesterday we witnessed farmers taking heat for expensive oil and food. Today we add pension funds to the growing list of scapegoats for the parabolic rise in commodity prices.

Our friends at Marketwatch report that a new research paper links huge influxes of money from pension funds and other institutional investors to the recent spike in the price of oil and food. The authors of the report will appear before a Senate panel to discuss their findings, which allege that pension funds and their ilk have not only moved markets, but cleverly avoided regulatory hurdles designed to limit precisely this type of speculation.

The report traces recent market gyrations to trades made by large investors seeking to capitalize on the movement of baskets of commodities. These bets are "unidirectional and indiscriminate on price," creating upward inertia that overwhelms traditional market forces. Pension funds use Wall Street banks like Lehman Brothers (LEH) and Goldman Sachs (GS) as intermediaries, allowing them to gamble outside their regulatory bandwidth.

Commodity prices are effected by a host of factors, speculation being one of them. And while it's somewhat alarmist to blame the recent run-up on speculation alone, to claim the two are unrelated -- as did the Commodities and Futures Trading Commission -- is irresponsible. The CTFC, like the Federal Reserve and Securities and Exchange Commission before it, is burying its head in the sand and hoping the public buys public relations spin.

Record gas prices stare consumers in the face and food riots are igniting around the world with worrisome frequency. As the world tries to cope with higher prices for the goods it needs most, inflation debates are no longer reserved for economists and fixed income traders. Professor Depew, on the other hand, wonders if the hysteria over inflation might be misguided.

Pension funds are charged with safeguarding the nest egg many Americans depend on to retire. Their actions in the past few months have been anything but commensurate with this responsibility. These quasi-public institutions, like Fannie Mae (FNM) and Freddie Mac (FRE), are the last ones we should see bypassing their regulatory boundaries. Taxpayers will be on the hook if their bets go sour.

Pension funds are throwing money at the hot trade, not unlike retail investors during the dot-com boom, or self-made real estate tycoons during the housing bubble. This is a concerning trend - and one that's indicative of a market that's ahead of itself.

Regulators have a chance to, at the very least, close loopholes that allow these funds to sidestep rules aimed at protecting investments. Vote-hungry bureaucrats are eager to show their "post-subprime" crisis mettle in handling turbulent financial markets. It remains to be seen whether they'll have the gall to intervene before the next bubble bursts.

Banks Bet With Employee Insurance Premiums, Lose.

This post first appeared on Minyanville.

Citigroup (C) can't catch a break, as another bizarre type of structured investment has gone awry. The latest troubled fund, however, has nothing to do with subprime mortgages.

According to The Wall Street Journal, nearly 700 banks hold a total of $117.5 billion in what are known as bank-owned life insurance programs, or BOLIs. Banks take out policies on their employees and collect if the workers die. The income is tax free, leading critics to call the practice a tax shelter.

Banks park the insurance premiums in fixed income investments like Citigroup's Falcon Strategies fund. The fund was marketed to banks and sophisticated retail investors, who claim the opportunity was called a "haven."

Now, the fund having lost nearly 75% of its value, Citi may have to pony up millions to pacify angry investors. The two biggest, Wachovia (WB) and Fifth Third Bank (FITB), have a combined $1.6 billion in exposure - much of which came from the banks' BOLI proceeds. Fifth Third is already suing a broker and insurance company that helped facilitate the investment.

Citi has agreed to reimburse private investors for any losses stemming from Falcon's demise. The bank may end up doing the same for its institutional investors.

Financial markets have become adept at absorbing such news - a potential loss of $1.6 billion just isn't what it used to be. Investors seem convinced government bailouts will soften the blow of the endless parade of imploding investment schemes.

Risk management wasn't just lax for the PhDs and traders dreaming up CDO squareds and credit default swaps. Mispriced risk was endemic, a system-wide malaise caused by the exploitation of nearly limitless easy credit.

While these latest losses may not sink the offending banks, they're a few more hacks at a tree that's not getting any sturdier.


Position in WB

Dairy Farmers Charged With Price Fixing

This post first appeared on Minyanville.

Still smarting from criticism over their role in sky-high food prices, American farmers are now being investigated for price fixing in the dairy markets.

The Wall Street Journal reports the Dairy Farmers of America, or DFA, is being investigated by the Commodity Futures Trading Commission for price manipulation. The DFA, the nation's largest dairy cooperative, is also being sued by farmers and retailers for skewing transactions to generate more profit. Dean Foods (DF), bottler of more milk than any other company in the U.S., is being implicated as well.

The DFA plays an intermediary role in the dairy markets. It picks up raw milk from member farmers and processes it for bottling, or for use as cheese and butter. The processed milk is sold to third party dairy companies and used in its own production facilities.

The federal investigation stems in part from the DFA's role in futures trading activity. According to The Journal, it pays farmers for raw milk based on a complex formula derived in part from futures prices for milk and cheese. Regulators want to know if the DFA engaged in trading that moved prices for its benefit.

The DFA is also being investigated for an under-the-table payment to a former board member. Although the group is cooperating with authorities and admits the payment was in fact made, it claims the current board only recently found out about the "unauthorized transfer of money."

The scandal and alleged market manipulation couldn't come at a worse time for farmers. Similar to big oil companies like Exxon Mobil (XOM) and Chevron (CVX) reaping huge profits on record oil prices, farmers are having a banner crop this year. Many blame high prices on the push for ethanol, while others point to rising demand in developing countries like India and China.

With a hotly contested farm subsidy bill being railroaded through Congress, farmers are under pressure to defend lavish government handouts. Their swollen bottom lines and fallow fields contrast sharply with images of the developing world, where million still don't have enough to eat. Farmers, for their part, argue that without subsidies they wouldn't be able to compete in the global market. Specifically, they point to European farms that are even more heavily supported than America's.

Big Oil executives regularly trek to Capital Hill to defend relationships with the lawmakers that protect their bottom lines. It's not unlikely that big farmers will be the next to take the stand.

When Going Gets Tough, Tough Get More Credit

The following post first appeared on Minyanville.

The only thing more insatiable than American consumers' desire for more credit is lenders' ability to dream up new ways to extend it.

Online auctioneer eBay (EBAY) is teaming up with GE Money (GE) to offer instant credit access to customers using its PayPal payment solution. According to Dow Jones, GE Money CEO Margaret Keane said, "eBay buyers will find deferred payments to be an extremely easy way to buy what they really want now and plan their payments in a way that best fits their budgets." Where exactly these new purchases will fit into those overstretched budgets isn't entirely clear.

In a nod to personal responsibility, eBay expects the new program will encourage buyers to bid on items they otherwise couldn't afford. The company said credit approval can happen in as little as 30 seconds and should lead to "increased sales and higher selling prices." GE will reportedly retain the risk if payments aren't made.

eBay isn't the only retail company getting in on the credit extension act. Retailers like Macy's (M), Kohls (KSS) and Gap (GPS) all offer their own credit cards to facilitate more shopping. But recently, as consumers have struggled to keep up with monthly payments, these once-profitable lending units have been jettisoned. JP Morgan (JPM) now owns Kohls' and Circuit City's (CC) card businesses. Just last week the bank made a deal to buy a piece of Target's (TGT) floundering credit division.

Although the move may boost eBay's sales, it won't help America's debt-dependent economy move toward more sustainable levels of consumption. Having tapped out home equity lines, credit cards and to some degree retirement accounts, consumers now have another way to spend money they don't have.


Position in TGT

Comcast Adds Plaxo To Friends List

This post first appeared on Minyanville.

All social networks are not created equal.

Comcast Corp (CMCSA) announced this morning it would follow a string of media and technology companies down the social networking path. Reuters reports the largest cable TV operator in the U.S. will pay around $175 million for Plaxo, an address book management site.

The price tag seems cheap compared to recent purchases in the online community space. In 2005, News Corporation (NWS) bought the pioneering social network MySpace for $580 million. Last October, Microsoft (MSFT) paid $240 million for a 1.6% stake in Facebook, valuing CEO Mark Zuckerberg's company at around $15 billion. In March, AOL (TWX) grabbed British networking site Bebo for $850 million.

According to The Wall Street Journal, Plaxo already hosts email accounts for Comcast Webmail customers. The company will use Plaxo's platform to increase distribution of its various media offerings and allow customers to share music, videos and photos across all of their electronic devices.

Plaxo draws a distinction between its social network, Pulse, and other sites:

Pulse is not a place to see how many online "friends'" you can collect. It's meant to be a better way for you to stay in touch with the people you actually know and care about - your family, your real-world friends and the people you know from business.

Together, the two companies aim to bring social networking to consumers who may be on the sidelines. Privacy is an ongoing concern for Facebook and MySpace; Plaxo's focus on existing friends and business contacts should help alleviate some of those hang-ups.

The challenge for Comcast -- and indeed for other social network operators -- is to monetize their audience. Internet users are increasingly opposed to clicking on banner and text advertising, squeezing the profits of sites built on this model. But social networks enable users to tell acquaintances about shopping experiences in a variety of ways. The hope is that friends will be more effective brand ambassadors than pop-up ads.

Is Solar Sustainable?

This article first appeared on Minyanville.

Despite being one of the most viable sources of alternative energy, the economics of solar power still don't add up.

Harnessing the sun's rays is more costly than tapping traditional sources like electricity. As a result, the solar industry is built on a shaky structure of government kickbacks and record fuel prices are pressuring regulators to extend tax credits.

Homeowners receive sizeable tax breaks and rebates for solar installations and investors can shelter income with environmentally friendly projects. Corporations can even participate: Google (GOOG) and Safeway (SWY) are making use of their rooftops by installing solar power systems.

But this dependence on rebates is dangerous. Tax revenues are falling and government coffers are being stretched thinner by the day. States offering generous solar rebate programs -- California for example -- could be forced to pull the plug if their finances don't get back on track.

For its part, the solar industry is making strides toward parity - where costs fall in line with dirty burning coal and somewhat cleaner natural gas. With new conversion technologies, slimmer panels and looming carbon regulation solar power may finally start to make fiscal sense.

Investors appear to be weighing the industry's prospects and potential leaders instead of the next spike in oil prices. This bodes well for stocks trading on fundamentals, not news stories.

First Solar (FSLR) manufactures a thin-film semiconductor technology that enhances the conversion of light into power. The company has defied critics that claim its lofty valuations are unsustainable and is one of the few solar stocks in the green this year.

SunPower (SPWR), a spin-off of Cypress Semiconductor (CY), installs solar systems on homes and office buildings. Its consumer business is particularly interesting if parity can be achieved and solar power starts to make sense for the common homeowner.

Speculators and day traders have flocked to companies like Suntech Power (STP), JA Solar (JASO) and LDK Solar (LDK) - all headquartered in China. Environmental concerns and booming infrastructure demand have led many to wonder if developing economies may finally release solar from the shackles of government dependency.

Even more traditional semiconductor companies like MEMC Electronics (WFR) that have embraced solar technologies have been caught up in the craze.

After solid returns in 2007, solar shares have by in large retreated this year. Speculators are moving on to new ground, focusing on agricultural stocks like Potash (POT), Mosaic (MOS) and Agrium (AGU). Investors are increasingly concerned that solar's growth is unsustainable. Deflationists argue that high energy prices are temporary and that solar may again prove to be fool's gold.

History reveals an alarming precedent. The 1973 oil embargo drove investment in solar technology, shepherding costs toward what many believed would be parity. A decade later oil prices collapsed and the industry went into hibernation.

Only recently have venture capitalists and macroeconomic pressures once again smiled on solar.

AIG Latest To Dilute Shareholders

This post first appeared on Minyanville.

American International Group (AIG) isn't likely to agree the worst of the financial crisis has passed.

The world's largest insurer reported a wider-than-expected loss last week and announced plans to raise almost $12 billion in capital. Just days later, former CEO Hank Greenberg lashed out, claiming the company was in the midst of a "crisis."

According to The Wall Street Journal, Greenberg is questioning management's ability to navigate choppy financial waters. AIG has lost billions, most of which is linked to derivative instruments backed by residential mortgages. Despite the company having issued many of the securities prior to his departure in 2005, Greenberg insists management has since lost its credibility.

The 83-year old Greenberg, who ran AIG for 40 years, claims to not be interested in a formal position with the insurer. Instead, he wants to hold management accountable for its failure to protect the company's value during the crisis.

Management reneging on promises has lately emerged as a poignant theme. Just months ago, AIG's management vowed the company wouldn't need to raise outside capital. $12 billion later, amid what Professor Payne accurately called strong demand, it went to the capital well.

Merrill Lynch (MER) CEO John Thain made a similar claim regarding the need -- or lack thereof -- to raise capital just weeks before he did exactly that. Professor Sedacca and banking expert Minyan Peter point out these deals are getting done on increasingly onerous terms. Management seems content to ignore price and grab cash, brushing aside previous claims to the contrary with a simple, "Market conditions have deteriorated further than we could have reasonably expected." Lehman Brothers (LEH), Citigroup (C) and Morgan Stanley (MS) have all raised capital in recent months.

Many see this as evidence of a market repairing itself, with money moving from strong institutions to weak ones. But if shaky Wall Street firms are just selling themselves to other shaky Wall Street firms, someone will be left holding the proverbial bag when this high-stakes game of hot potato is over.

Wal-Mart Readies Report On Earnings

This post first appeared on Minyanville.

After besting same-store sales estimates last week, the world's biggest retailer is about to tell Wall Street how much money it managed to squeeze out of struggling consumers in the first three months of 2008. With its stock up more than 20% this year -- the strongest showing of any Dow component -- Wal-Mart (WMT) reports earnings before the bell tomorrow.

According to Bloomberg, analysts are expecting net income of $2.9 billion, or $0.75 per share, up from $0.68 one year ago. Revenue is predicted to come in at $9.3 billion, a 7.1% increase from last year.

Wal-Mart's CEO, H. Lee Scott, is waging a price war on competitors Sears (SHLD) and Target (TGT). Despite margins being squeezed on both sides -- higher input costs and lower priced goods -- Wal-Mart has managed to capture market share while maintaining strong earnings growth.

Like other retailers, Wal-Mart is also looking to cash in on recently mailed tax rebates. The company plans to cash the stimulus checks free of charge and is offering special discounts to further stretch the government dole out.

Wal-Mart's challenge is not just keeping current customers entrenched, but attracting new ones. Many well-to-do consumers prefer swanky grocery stores like Safeway (SWY), or specialty markets like Whole Foods (WFMI). As economic malaise spreads upward, Wal-Mart would be wise to expand its marketing -- and product offering -- to attract wealthy converts.

Discounted prices or not, everyday consumers wake up with less in their pockets. Wal-Mart may be the preferred repository for shoppers' precious dollars (or euros, or pounds, or pesos), but that doesn't mean there will be enough cash to maintain its impressive performance. It may continue to perform better than competitors, but as Toddo is fond of saying, "You can't spend relative performance."

Housing misconceptions

Mike "Mish" Shedlock points out this morning that the housing bust is not unique to the United States. Spain and Australia, in addition to the U.K. are seeing home prices fall, and pounds and euros are evaporating in the process. Mish is an ardent deflationist, irrespective of the headline-popping rise in the cost of fuel and food.

One comment stood out today in Mish's post -

Because the rise in inflation (money supply and credit) fueled asset prices in the 1990's, the housing bubble from 2001 to 2006, and stocks from 2003 until recently. None of this was properly measured for the simple reason it is impossible to measure the effect of credit inflation on the stock market or housing market.

The misguided hope that housing prices are at or near the bottom ignores the reason for the boom in prices during the earlier part of the decade. As Mish points out, prices were not driven by an increased ability to pay. Instead, unnaturally low interest rates fueled creative lending which fueled speculation which fueled creative lending which fueled speculation.

The chart below courtesy of James Ballenger, shows home prices vs. incomes during the housing bust. Banking on appreciation is wishful thinking as long as banks are wary to lend.



Creative lending is not coming back any time soon, income growth is stagnant, and the economy - by most intelligent measures - is already in recession. Anyone in the market for a home should be patient. Don't try and catch a falling knife. Even if prices don't fall too much further from here, they won't rebound any time soon. There's plenty of time to find the right deal.

Check out our sister site, Cirios Real Estate.

Citi Dumps Dead Weight

The following post first appeared on Minyanville.

Citigroup's (C) new CEO, Vikrim Pandit, inherited a mess. Once the world's largest bank by market capitilization, Citi is still reeling from its vast exposure to the credit markets.

According to The Wall Street Journal, since the start of the credit crisis last year, the company has taken more than $40 billion in writedowns and raised capital to match. Professor Sedacca believes Citi and other banks like Morgan Stanley (MS), Merrill Lynch (MER) and Lehman Brothers (LEH) have only begun the process of repairing their tattered balance sheets.

At its annual investor conference, The Journal reports, Citi's CEO will call for the jettisoning of more than $400 billion in what he calls ''legacy assets. '' Heavily concentrated in its consumer banking division, these assets generate low returns and prop up the bank's stubbornly swollen cost structure.

Pandit will also lay out a three-phased plan to return the bank to profitability: house cleaning to shed underperforming units, streamlining operations and seeking to maximize profits in each business segment. Some analysts have been calling for Pandit to break up the big bank, but his strategy evidences his desire to try restructuring first.

Earlier this year, when it announced a fourth quarter 2007 loss of almost $10 billion, I wrote that Citigroup is representative of the American consumer, lulled to sleep by years of unprecedented prosperity and loathe to acknowledge a ballooning balance sheet supported by fewer and fewer dollars of real income.

Good economic times create excesses. Tough decisions are put off as fat bottom lines reduce the need for painful tradeoffs. Hard times and recessions force banks and consumers alike to slim down, cut costs and rethink priorities.

Lax lending and the resulting asset inflation created simply unsustainable levels of debt. The mortgage boom was the last dying gasp of the great debt expiriment.

Sony Goes Minimalist

This post first appeared on Minyanville.

Sony Corp (SNE) is fighting to retain a top spot in the highly competitive market for consumer electronics, specifically televisions.

Facing higher input costs, a weakening U.S. economy and stronger yen, not to mention fierce competition from Samsung Group and Visio, the company's on the ropes. Once an industry leader, Sony has seen market share whittled away by rivals offering a sharper picture at a more competitive price.

As Professor Reeves points out, given today's universally very good image quality, TV manufacturers are increasingly being forced to compete on price.

Fortunately, The Wall Street Journal reports, Sony's earnings release next week will show strong sales of a TV with a minimalist bent. Engineers in Mexico designed a modest flat screen set, called the Bravia M, that retails for $200 less than the next most affordable model.

Designers used available parts and skimped some on features to achieve the lower price point. Cost-conscious consumers have snatched up Bravia M's faster than the company expected.

Originally aimed at mass-retailers like Wal-Mart (WMT), soon after its release last summer, specialty stores like Best Buy (BBY) and Circuit City (CC) started to demand inventory of the Bravia M.

Shoppers' no-frills preference can easily be attributed to a weaker domestic economy. It also demonstrates how buying behavior is altered by social mood. Forced to make tough buying decisions, consumers will realize that it's possible to survive on fewer dollars, a smaller screen and less of what they've come to deem essential.

So the picture is clear: For now, manufacturers that cut costs without sacrificing quality will find a ready buyership.

Deflation and the Food vs. Fuel Debate

This post first appeared on Minyanville.

Record fuel prices and soaring food costs have intensified the debate over the role of biofuels in U.S. energy policy.

One camp claims dedicating farmland to fuel snatches food from the mouths of the world's hungry in favor of American gas tanks. Ethanol, they argue, is little more than a political mechanism for lining the pockets of farmers and special interest groups with taxpayer money. Its production uses more energy than it saves and only marginally reduces our dependence on foreign oil.

In opposition are those that believe biofuels are just one of many factors contributing to the inflation of food prices. High energy costs and booming demand from China and India are the chief culprits, they argue, because oil touches every aspect of food production and plays a much greater role in determining retail food prices.

Absent from the debate, however, is discussion of why we're in this predicament to begin with.

Let's start with the premise that the so-called mortgage meltdown is a symptom, not the cause of, our current financial crisis. Bad mortgages are indicative of an economy too dependent on credit and lacking enough real cash flow to support the debt service.

Extrapolating this idea to the fuel vs. food debate, reliance on foreign oil is a symptom of an economy whose wants and needs outstrip its ability to produce. We are thus forced to import oil from unstable parts of the globe. True energy independence is only possible if our economy demands less oil.

Taking the analogy a step further, the solution to the credit crisis isn't more regulation or government intervention. Market-driven deleveraging has begun and must continue. It will be a painful -- but necessary -- process for those accustomed to living beyond their means.

Likewise, more subsidies and government programs are not the answer to our energy woes. The widespread deflation of asset prices and a reduction of dependence on material goods is the only long-term solution to our dependence on foreign oil. This is the path to sustainable consumption, one that will eventually bring our propensity to consume back in line with our means to produce.

This readjustment is inevitable. Behind the scenes, beneath the headlines, a much broader and slow-moving migration toward the belief that less is, in fact, more has begun. This concept should be paramount in our pursuit of energy independence. Ironically, the credit crunch has put us well on our way.

Credit Cards Miss Target, Target Won't Miss Credit Cards

This post first appeared on Minyanville.

JPMorgan's (JPM) going shopping again.

Amid pressure from activist investor William Ackman and rising loan defaults, Target (TGT) agreed to sell JP Morgan 47% of its credit card business for $3.6 billion. The Wall Street Journal reports the sale fetched nearly twice the expected price, providing the retailer some much needed capital to open new stores, repay debt and buy back shares.

The division has been a source of angst for management since last September. Ackman and other shareholders pushed for a spin-off of the unit, but no buyers emerged. In March, despite worsening economic conditions, the company saw outstanding credit card loans jump even as defaults inched higher. This trend is particularly troublesome, especially as most financial institutions scale back lending operations. Higher balances and higher losses signal more trouble ahead.

The purchase is not JPMorgan's first foray into the private-labeled credit card business; it already owns portfolios backed by loans issued by Kohl's Corp (KSS) and Circuit City (CC). The bank hopes to cross-sell new customers with other banking products.

Target has followed these and other retailers in jettisoning its credit card business, once a reliable source of profits. During good economic times, consumer loan portfolios are relatively easy to manage. However, as credit conditions deteriorate, losses continue to mount. Higher delinquencies wipe out profits and erode balance sheets. Loan loss reserves tie up precious hoards of cash.

The consumer is increasingly being forced to choose which debt payments to make and which to let slip. The phenomenon of borrowers walking away from mortgages is proof of how significant these decisions are becoming for certain Americans.

The credit bubble produced a buffer zone, a false sense of security facilitating lifestyles that outpaced means. Now, as access to home equity lines, credit cards and all types of debt dries up, previously comfortable consumers are being forced to cut back. The fortunate can simply rein in expenditures, but those who got too far forward on their skis face a steeper slope ahead.

Position in TGT