Scorched-Earth Policy Could Fry Portfolios: Wal-Mart Stores, Inc. (WMT), J.C. Penney Company, Inc. (JCP)

Page 1 of 2

The market has reacted to the imminent sequestration deadline with a lackadaisical shrug. Although indexes have been hovering around five-year highs, you have to wonder why so few investors seem concerned that terrible gusts of economic headwinds could wipe out many companies’ profitability.

The market is indeed bipolar, but the supposedly smartest professionals are reluctant to make the diagnosis and get clinical about the reality.

Wal-Mart Stores, Inc. (NYSE:WMT)Investors shouldn’t panic and ditch stocks, but it’s time to do some portfolio housecleaning and aim to focus on the best, most well-positioned companies. Read on for why investors should worry, and how to change your investment strategy so you can sleep at night.

Scorched earth and shrinking prospects
Along with still-high levels of unemployment, continued mass layoffs, rising gas prices, payroll tax hikes, and other negative factors, sequestration could send serious ripple effects throughout the public and private sectors. This isn’t simply limited to government agencies and services. Take defense contractors, many of which are publicly traded. The federal government pays out $500 billion every year to such firms, and contractors represent 7.5 million workers.

Regardless of where the money comes from, fewer jobs and slashed consumer incomes can devastate economies. When individuals stop spending, it hurts everyone else’s income and spending power, affecting businesses from mom-and-pop restaurants to maid brigades to gardeners to giant corporations like Wal-Mart Stores, Inc. (NYSE:WMT).

Although paring U.S. debt, reducing government spending, and getting America’s fiscal house in order are all rational goals, a scorched-earth policy is hardly a reasonable path to get there. As far as investors go, it’s time to look beyond today, this month, or next quarter and realize that these tactics threaten many companies’ sales and profits at a time when the economy is still very fragile.

La-la-la, we’re not listening
Traders don’t seem too troubled today; the rest of us should wonder what they’ve been smoking.

Earlier this week, Federal Reserve Chairman Ben Bernanke defended the Fed’s continued unprecedented levels of stimulus given economic negatives like still-high unemployment. In addition, he admonished Congress for its poor handling of the sequestration mess and its potential to hurt GDP.

Interestingly, though, Bernanke also said, “I see no evidence of a stock bubble” despite the fact that the market’s hovering near five-year highs. And this rally has come way before much meaningful recovery as well as during continued economic drags.

Hit rewind, and recall that Fed Chairman Alan Greenspan failed to detect another big bubble: housing. Bernanke didn’t believe there was one, either, right before he was nominated as the next chairman. We’re still digging out of that debacle. His failure to detect came at a time when almost everyone was convinced the artificially pumped-up economy was actually healthy, too.

Bernanke indicated that strong corporate earnings explain the rally mode. That’s not exactly correct. Many of us know that profits are being juiced by many companies through cost-cutting, not actual sales growth.

The strong survive
The overall picture isn’t pretty, particularly when you throw sequestration into the already nasty mix. We shouldn’t give up on stocks, but we should admit that some are heading for a fall and focus our portfolios on the strongest companies with the brightest futures, strong balance sheets, and great leadership.

That also means avoiding value traps at all costs. For example, tidings from J.C. Penney Company, Inc. (NYSE:JCP) and Sears Holdings Corporation (NASDAQ:SHLD) show these two companies are like two drunks tethered together jumping out of a plane. This pair is unlikely to navigate a far more challenging macro climate.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!