Once again the only surprise is that anyone is surprised. Wal-mart (WMT) is dealing with wage stagnation, higher wages and intense price competition from Amazon and other on line retailers. They are being hit on all fronts right now and they have a tough road ahead of them. Wal-Mart serves lower end consumers and they do not shop online. You may recall that Wal-mart went into banking once upon a time specifically because so many of their customers were underbanked. It is doubtful that folks without basic checking accounts will be scooping up prepaid cards to shop online. They are also being hit by the millennials habit of eating out more often as pointed out by Steve Goldstein over at Marketwatch this week. I can tell you that for my adult kids its easier- and less expensive much of the time – to stop for dinner on the way home than to cook for 1 or 2 and then do all the associated clean up. For decades demographic and economic trends have favored Wal-mart. Now they don’t. It will be interesting to see how the company responds.

The worst part is that those most hurt will be the very low end consumers who depended on the company for decent goods at a low price. The company said yesterday that “Fiscal year 2017 will represent our heaviest investment period. Operating income is expected to be impacted by approximately $1.5 billion from the second phase of our previously announced investments in wages and training as well as our commitment to further developing a seamless customer experience. As a result of these investments, we expect earnings per share to decline between 6 and 12 percent in fiscal year 2017, however by fiscal year 2019 we would expect earnings per share to increase by approximately 5 to 10 percent compared to the prior year.” These costs are a result off going to $9 and then $10 an hour as their minimum wage. Those well-meaning souls who want $15 an hour would destroy the company and cause higher prices for the consumers who need the store the most.

It has been hard for me to take the broad market seriously the past few weeks. We have had three bank takeovers in the past three weeks, all for healthy gains. It has gotten so bad that some subscribers were not happy that one deal only made us 25%! The biggest question is how long will this continue? The answer is a long time. We have a group of banks that need to sell and there is some concern that since everyone knows it why would they pay a premium? The simple answer is that for every bank that needs to sell there are three that need to buy in order to grow assets and earnings.

I am starting to see a great deal of value and increasing activist activity in small REITs. The tape is up on the week and the month so I am not rushing to throw buy orders in just yet but next good down session I am ready to pull the trigger on several undervalued names in this space. The large REITs are ridiculously overpriced but the smaller ones outside the indexes and ETFs are cheap. Considering that most REITs are trading for less than the value of the properties that they own they might be considered to be double cheap t current levels.

I am still seeing some interesting 13d filings in discounted closed end funds recently. We have our first forced open ending of a fund after riding an activists coattails and I will not be shocked to see more on the months ahead. I expect this to be a very lucrative area for deep value investors for the next few years. Last week Barrns wrte about the sector saying” With interest rates likely to stay low for the foreseeable future, income investors can’t be blamed for looking for unorthodox ways to boost their returns. Here’s one to consider: Buy a closed-end fund that’s trading at a discount but set to liquidate in a few years at net asset value.

Closed-end funds are actively managed mutual funds that have a fixed number of shares, unlike open-end funds that issue as many new shares as there are buyers for them. Closed-end funds trade on a stock exchange, often at a lower price than the sum total of assets should warrant, especially when those securities are out of favor. Right now, discounts are especially wide—about 10% on average.” Take an undervalued asset class, add activists and good things usually happen.

There will be no Thursday Email next week. By son-in-law has moved way up my list of favorite people in the world by scoring us some playoff tickets. So next Wednesday I will be heading here :

For the Cubs game and then spending Thursday evening with my daughter wining and dining our way around here:

Have a great week everyone!

Tim

I will be back with the Thursday commentary in two weeks. Subscribers will get regular weekend updates sometime Friday provided my flight is on time!