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Seeking Alpha

Tuesday, November 13, 2007

Morning Report: Oil Sliding & Wal-Mart's (NYSE: WMT) Share Grab

(Stocks in this article: NYSE: WMT, NYSE: HD, Nasdaq: NEWS, NYSE: VOD, Nasdaq: FOSL, NYSE: VLO)

A few weeks ago when we warned to sell oil and gold and buy the dollar, we were a bit early, and we looked a bit bad over the short term as both gold and oil bubbled up to their peaks in the days that followed. In this game, being right is important, while being correct in direction and perfect on timing is ingenious; still at a week and a half off, we think did okay. We told you there were catalysts in play that could give oil a short short-term pop, including Turkey, Pakistan, inventory data and storms, but we also forewarned that the medium-term fundamental catalysts would eventually gain traction, those being, the Fed shift to neutral, economic slowing, a likely stabilising dollar, a likely warm winter and OPEC production increase I expected.

I believe OPEC may be handcuffed, and could have its own supply concerns driving production strategy. Or, it could simply be greed driving decision making. The reason I say this is because the Saudi OPEC minister immediately retracted his comment that a hike might result from the pending meeting, after oil prices dropped. Since then though, the EIA reduced its demand forecast, and this has taken over the baton now, leading oil lower.

The biggest news of this week is yet to come, with tomorrow's October retail sales data and the pending PPI and CPI reports, with the inflation message they carry. Clearly, the inflation reading is critical to this market, as it will sway investor expectation for future Fed action.

Today, Wal-Mart (NYSE: WMT) reported quarterly results, and its earnings exceeded its previously downgraded forecast. More important to value creation, this retail leader is engaging in a very interesting and apparently effective strategy.

The skinny...
It's seeking to take market share from rivals by moving forward its holiday sales discounts. If you view holiday sales as a limited quantity, then drawing them in before rivals mark down inventory on Black Friday should be an effective way of stealing market share. However, no arbitrage opportunity, which this is, clearly lasts forever. This should drive a fundamental change in the retail industry eventually, bringing rivals to match Wal-Mart's efforts. Also helping the stock today, the company's full-year forecast is above analysts' view, and that's always a good thing.

Retail industry peer Home Depot (NYSE: HD) did not have much positive to say today in its quarterly report. The worst of it was its reduction in full-year forecast to an expectation of an 11% decline in earnings from continuing operations. Same-store sales fell 6.2% in the quarter, and things don't look to improve any time soon with the housing sector still in the tank and consumers facing rising costs of living.

The International Council of Shopping Centers - UBS posted decent year-over-year same-store sales growth of 2.7%, but we would focus on monthly change to avoid the distraction of weather differences.

Besides the EIA revision for oil demand, a representative of the group noted the possibility for a 20 cent price increase in gasoline by the end of the year. Margin dynamics are thus improving for the refiners as oil price moves lower, while gasoline moves upward. So, I continue to like Valero (NYSE: VLO) and other refiners here. VLO took a hit last week due a fire that should prove a short-term influence only.

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