Under Pressure

Walmart, Target, and housing is all starting to crack

Walmart and Target’s earnings were posted this week and their forward guidance has not been very rosy. Target announced their earnings pre-market this morning and saw their stock plummet 25% on the day. Just like Walmart, Target came up short on their earnings estimates and their stock price paid the price. The company stressed that inflation was cutting into their profits. Both companies are seeing outsized expenses in the trucking/fuel and higher staffing costs. We have been watching both of these issues develop over the past year. They are finally coming home to roost.

Inflation is eating away at the profit margins of these retailers and they are beginning to encounter problems passing on higher costs. This is happening at the same time as Consumer Sentiment, as measured by the University of Michigan, is falling off a cliff.

This is the beginning of the demand destruction that will usher in the next recession. We are also starting to see the housing market crack. Housing Starts and building permits were both lower than forecasted. Both were down (-0.2% and -3.2%, respectively) on a month-over-month basis. With the 30-year fixed mortgage rate at 5.3%, more people are being priced out of the market. The rise in rates has been relentless.

There was a big swing into the fear trade today. The dollar was stronger, bonds were bid, and the major stock indices dropped, big time. The rest of the week is going to be important for the market. If it can’t hold it together, we are in for a steeper correction. This is going to be especially tricky because Friday is the option expiration day for the monthly options. This can provide for some wild rides.

Another powerful move that happened today was in oil. Crude was up to $115/barrel this morning before it took a beating once traders began to realize that the demand destruction that Target and Walmart were emphasizing was going to hit trucking companies. Fewer trucks driving the roads delivering goods equals less need for diesel. I’m not one to bet against oil right now, in fact I was looking to get into some 3x ETF put trades but I’m going to put that on hold until I get a better feel for how this could play out. One this is for sure, we are at a dangerous time for the market and could desperately use those money stock numbers from the Fed.