WE ARE ALL CONNECTED: Cisco, Walmart, and the World
There is amazing connectivity in the world around us. From Bentonville, AK to Beijing to Silcon Valley, CA, actions in one place have a reaction in another. Specifically, government decisions can have repercussions far beyond their intended effects. When a person starts to realize this, he or she becomes a smarter, more sophisticated investor.
Two recent examples show this clearly and specifically. And more examples are right around the corner, waiting to happen.
The first example involves food stamps. For years R’s have been trying to cut food stamps, believing it to be a costly welfare program. However, when a food stamp enhancement ran out last month, one of the main entities hurt was Walmart (WMT), whose sales are made to millions of food stamp recipients. Other retailers who also cater to “low price shoppers” were similarly hurt. It is likely that the R’s pushing against food stamps were not trying to hurt Walmart They likely had not thought through all the economic effects of cutting food stamps. But what happened, happened. And there is a lesson to be learned there.
Likewise, some D’s were absolutely thrilled by the recent “whistleblowing” of NSA activities by Edward Snowden. However, this revelation had many bad effects, one of which was clearly market related. Both IBM and Cisco (CSCO) reported that their earnings from China were down drastically, because the Snowden episode made China less likely to buy American. That’s right, Snowden made China more suspicious which directly hurt stockholders of IBM, CSCO, and similar companies. Connectivity at its most powerful—and in this case not good power at all.
The most classic example of connectivity is sequestration. Initially agreed on by both the D’s and R’s, it is now heralded by Tea-publicans as an effective tool to cut government spending. But, as almost all agree, sequester is not efficient. Sequestration’s “across the board” methodology creates many unintended, harmful results, both for the economy and for certain stocks. For example, the 2014 version of sequester will hit hard on Defense spending. Many D’s and R’s acknowledge that it will cause a substantial setback to our national defenses.
Defense stocks will also be hurt–perhaps substantially. It is really weird to see many R’s—typically strong supporters of national defense—touting sequestration. But they are. And both our economy and many defense stocks will bear the resultant pain.
In sum, connectivity between politics and the market is here to stay. Its bad effect on individual stocks can readily occur. Moreover, it is not the sole province of either D’s or R’s—both parties must deal with it. But knowledge that such connectivity exists should be taken into consideration by both investors and by our politicians.
Of course, for politicians to do so, they will have to start thinking with their brains, instead of other parts of their anatomy.
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