Earnings Losers

This blog has been discussing for a while the effect that earnings reports have on stock prices, and particularly the notion of a company beating its expected earnings. Last month we noted that 61 percent of companies beat their expected earnings, while another 18 percent match expectations. Only 21 percent fall short of their expected earnings, so it's mighty bad news when that happens.

Yesterday, the semiconductor products firm Semtech posted an earnings per share of 19 cents, just 2 cents off the consensus estimate. Wall Street responded by dropping Semtech's stock price by 6 percent. Another big loser was Jacobs Engineering Group, which was expected to report earnings of 68 cents per share, but actually reported only 63 cents per share. For that missing 5 cents, Jacobs lost 11.5 percent of its value.

Overall, for this quarter, the average stock that missed its earnings estimate lost 3.4 percent, while the average stock that beat estimates went up only 1.3 percent. The moral: People expect you to make your earnings estimate, and they'll punish you for missing them.

Buffett Goes Bargain Shopping

Yesterday we mentioned that Wal-Mart had tamped down expectations for its holiday-season sales. Then came word that Warren Buffett, the Oracle of Omaha, had made a sizable investment in Wal-Mart. Buffett nearly doubled his investment in the nation's biggest retailer in the quarter that ended in September.

Wal-Mart would seem to be the ultimate recessionary stock. Not only are its goods famously inexpensive, but they also tend to be the kinds of things that people still need to buy even when they're struggling or out of work. Among its other distinctions, Wal-Mart is the country's largest food retailer. Does Buffett think the recession is going to continue for some time, that we'll all be buying cut-rate goods for the foreseeable future? Let's hope not.

What else is Buffett shopping for? Here are his other purchases for that third quarter:

* Travelers
* Nestle
* Republic Services
* Exxon Mobil

Holiday Forecasts

So we learned this morning that retail sales were up in October, the last month before Black Friday and the kickoff of the holiday shopping season. One more positive note from today's report: The Commerce Department said that inventories at U.S. businesses fell to their lowest level in almost four years in September, signaling that orders might rise as spending picks up.

Here are some of the holiday forecasts that are out there:

* The National Retail Federation predicts a decline in holiday sales of 1.0 percent from last year.

* A survey of chief marketing officers at leading U.S. retailers, taken by BDO Seidman, expects sales on Black Friday and on "Cyber Monday" - the first Monday after Thanksgiving - to be up 1.8 percent.

* Americans expect to spend $638 on holiday gifts, same as last year's holiday season, according to a Gallup poll.

* Wal-Mart expects U.S. sales for the quarter ending in January to be flat to plus-or-minus 1 percent. A year ago, the same sales rose 2.4 percent.

Watching Retail Sales (Now Updated)

The retail sales for October are to be released this morning, and are expected to be a key predictor for the recovery. September's figures dropped by 1.5 percent, but that's a bit misleading, since it includes auto sales, which spiked over the summer with the Cash for Clunkers program. Excluding car sales, retail sales were up 0.5 percent in September, after a 1.0 percent jump in August.

October is an important month to watch as it comes just before the holiday sales period, which gets under way in earnest in November. While September was up from August, the trend was not good; we'll let you know what this morning's figures say about our future.

UPDATE: The October retail figures came out surprisingly good: up 1.4 percent for the month. Economists had forecast the number would be more like 0.9 percent.

But as we've seen so often in this recovery, the signals were mixed. While October struck a positive note, the government's economists revised the September numbers; retail sales had been reported as dropping 1.5 percent, as we noted above, but now the Commerce Department has pegged that September figure at a loss of 2.3 percent. One step up, and one step back.

Good News and Bad

The economic picture in New Jersey continues to move, ever so slowly, in the right direction. The number of initial jobless claims was 11,569 for the week ending Oct. 31, down an almost-imperceptible 203 from the previous week.

At the same time, there was also a story this week about New Jersey being on the brink of collapse. The Pew Center on the States listed our own state as one of ten in the nation that is in danger of economic disaster, because of budget deficits, continuing unemployment, foreclosure rates, and other dire factors. The biggest problem here: Our $44 billion debt. (California was the only state listed in worse peril than New Jersey.)

Of course, these problems are interrelated. If we can get the employment figures moving - not just reducing unemployment, but actually increasing the number of jobs - that's going to make it much easier to wrestle with our budget problems. The economic woes of the state government certainly have many causes, but the best cure for them is a thriving private economy.

The World Is on Fire

While the Dow has been on a tear this week, just completing its sixth positive day in a row, foreign stock markets have been even hotter. Emerging markets have just finished their strongest six days since July, and the average nation in the 82 countries with major equity indexes has seen a pop of more than 33 percent on the year. The S&P 500, by contrast, is up 20 percent.

Of those 82 national indexes, 71 are up on the year. The biggest gainer of them all is Russia, up a whopping 127 percent. The stock markets in the Ukraine, Argentina and Peru are also up more than 100 percent, meaning the value of their markets has doubled within the space of a year.

For many of these nations, the rebounds have been so strong because their losses were so great when their markets collapsed. The Russian market that looks so valuable this year lost some 70 percent of its value in 2008. But looking forward, the opportunities for diversification around the globe look very enticing.

Financial Services Reform

A financial-services reform bill introduced by Connecticut senator Chris Dodd yesterday could have long-term ramifications for the people who provide you with financial advice as well as the entities who oversee them. One of the keys to the legislation is that it would require stockbrokers who act as investment advisers to register as investment advisers and act as fiduciaries - which simply means they must always put the interest of their clients ahead of their own. That is simply good sense, and should be applied to everyone who provides financial advice.

The bill also puts advisers with more than $100 million in assets under the purview of the SEC, as opposed to the current limit of $25 million. Those in the $25 million - $100 million range would fall under the regulatory mechanisms of the individual states, which should help make it easier to find and weed out the bad apples.

And there are steps in there to help prevent another Madoff situation. It would call for investment advisers to use independent custodians - the people actually executing the buying and selling of securities. Bernie Madoff served as his own custodian, which is one reason he was able to hide his nonexistent trades. Investors would also be allowed to sue people who help commit securities fraud.

Some form of the bill is expected to pass in early December. We'll keep you posted.