Walmart; Toys R Us; The Dow is a dollar-weighted index.

We thought it would be beneficial for the readers to change up the column a bit to address more of the broader issues impacting the financial markets and investors. With the format below, it is possible to provide information and insight on a more timely fashion with the intent of helping you reach more informed decisions regarding your financial future. That said, we welcome your comments at www.faganasset.com. This past week Walmart announced plans to expand its online grocery delivery business to approximately 800 stores by the end of this year and to 2200 by the close of next. Walmart plans to charge a flat delivery fee of $9.95 and require a minimum $30 order. Importantly, unlike Amazon there will be no subscription fee.

This move by Walmart will ramp up competition within the already viciously competitive grocery industry, one already marked by razor thin margins. For investors, be careful of this industry and retail on the whole. The United States already has way too much retail space per capita, a number which we expect will shrink drastically over the next decade.

Speaking of shrinking, this past week Toys R Us, once the largest retailer of toys in the United States announced that it plans to sell or close all of its 700 stores remaining in the U.S. amidst declining sales and a mountain of debt, a legacy from the $6.6 billion leveraged buyout in 2006 by Kohlberg Kravis Roberts, Vornado Realty Trust and Bain Capital Partners.

Toys R Us has seen its fortunes shrink as Walmart and then Amazon began selling toys approximately a decade ago, the repercussions of which, as noted above are being felt throughout the retail industry. Committed to leading the industry at almost any cost, Walmart has used toys as a loss leader, continually undercutting its competition, a strategy that left Toys R Us in financial tatters.

Unlike the Standard & Poor’s 500 which is a market capitalization weighted index, the Dow Jones Industrial Average is a dollar-weighted index. The current value as well as the movement from the close of the prior day can be calculated by taking the price per share of a specific component and then dividing that number by the number of stocks in the Dow. The result is that price change of higher priced components such as Boeing and IBM which traded at approximately $330 and $160 per share recently have a greater impact than those of Pfizer and Coca-Cola which recently traded at approximately $36 and $44.

The upshot is that investors should be more concerned with the movement of the S&P 500 than the Dow, which given this fact can be misleading. As noted above the S&P 500 is a market capitalization weighted index or whose components are weighted by their size rather than by their price. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, please call 518-279-1044.