A good article below about buying stocks based on quarterly earnings.
Typical government incompetency-see the last article below.
Here are the top financial stories of the day:
1) Stock market shrugs off weak service sector report-From the AP
Stock indexes managed slight gains Wednesday as investors shrugged off slower growth in the U.S. service sector.
The Institute for Supply Management reported Wednesday that business growth slowed at U.S. service providers in June. Financial companies and health care providers reported the weakest results. On the positive side, June marked the 19th consecutive month of growth at service companies, which employ the majority of American workers.
U.S. stocks opened mixed after a broad sell-off in Europe and another interest rate hike in China.
Major banks fell sharply after Moody's lowered Portugal's credit rating to "junk" status late Tuesday. That raised fresh concerns about the strength of the European financial system and investment banks' exposure to possible bond defaults. Bank of America Corp. lost 2.4 percent. JPMorgan Chase dropped 1.2 percent.
Some investors were surprised that stock indexes held up after the weak economic report. Dorsey Farr, a co-founder of Atlanta investment advisory firm French Wolf & Farr, said attractive stock prices in technology and pharmaceutical companies helped the market rebound.
The Standard & Poor's 500 index rose 1.34 to close at 1,339.22. Rupert Murdoch's News Corp. was among the index's biggest losers, dropping 3.6 percent, as a phone-hacking scandal engulfed one of the media giant's tabloids. Some British legislators called on regulators to block News Corp. from taking over British Sky Broadcasting.
The Dow Jones industrial average rose 56.15 points, or 0.4 percent, to close at 12,626.02. Caterpillar Inc. rose 1.5 percent, the most of any stock in the average, followed by Intel Corp. The Nasdaq added 8.25 points, or 0.3 percent, to 2,834.02.
2) Why You Shouldn't Buy Those Quarterly Earnings Surprises-From the Wall Street Journal
Everyone loves surprises. But perhaps you shouldn't get too excited over them.
This month, market strategists, television commentators and other investing pundits will bombard you with breathless updates on the percentage of companies in the Standard & Poor's 500-stock index that have reported profits even higher than what analysts expected—in Wall Street lingo, a "positive earnings surprise."
The percentage of companies that have beaten expectations often is cited as a barometer of corporate profitability, an indicator of how well the economy as a whole is doing or a predictor of where the stock market is going.
What goes unsaid, however, is that these positive surprises are becoming so common they are nearly universal. They are predetermined in a cynical tango-clinch between companies and the analysts who cover them. And there is no reliable evidence that the stock market as a whole will earn higher returns after periods with more positive surprises.
In the first quarter of 2011, according to Bianco Research, 68% of the companies in the S&P 500 earned more than the consensus, or median, forecast by analysts.
What's more, that quarter was the ninth in a row when at least two-thirds of the companies in the S&P generated positive surprises—and the 50th consecutive quarter in which at least half of the companies surpassed the consensus forecast of their earnings.
Even in the depths of the financial crisis, from the third quarter of 2008 through the first quarter of 2009, between 59% and 66% of companies beat expectations, according to Wharton Research Data Services, or WRDS.
In short, there isn't anything surprising about earnings surprises. They aren't the exception; they are the rule. "All the numbers are gamed at this point," says James A. Bianco, president of Bianco Research.
With trading volumes down on Wall Street and commission rates near record-low levels, brokerage firms are starved for the revenue that stock trading used to provide. Since changes in earnings forecasts encourage many investors to buy or sell, analysts have an incentive to revise their predictions more often. But that hasn't made the forecasts more accurate. On average, according to Denys Glushkov, research director at WRDS, stock analysts are revising their earnings forecasts nearly twice as frequently as they did a decade ago. And while the typical forecast missed the mark by 1% in the 1990s, that margin of error has lately been running at triple that rate.
What's going on here? In what used to be called "lowballing" but now goes by the euphemism of "guidance," an analyst will guesstimate what a company will earn over the next year or calendar quarter. Then the company "walks down" the analyst's forecast by providing a series of progressively lower targets until the analyst's prediction falls slightly below where the actual number is likely to come out.
Voila: The company gets to announce earnings that are better than expected, while the analyst gets to tell his investing clients that his estimate was pretty accurate and conservative to boot.
According to a survey of 269 members by the National Investor Relations Institute, 90% provide guidance in one form or another, most commonly on earnings and revenues over the coming four quarters. No more than 5% offer any guidance on results further than one year into the future.
Refusing to dance this cynical tango isn't always easy. "If you cut back or eliminate guidance, management needs to be prepared for the possibility of more volatility in the stock price and a wider range in analysts' estimates," says Barbara Gasper, head of investor relations at MasterCard, which doesn't give short-term guidance. Instead, it provides three-year targets for sales and profitability, leaving analysts at least partly on their own to form interim forecasts of the company's earnings.
Somehow, the stock has survived.
You might think that positive earnings surprises would be good for future returns of the stock market overall.
Companies that report positive surprises still get a short-term pop in their stock price, even though the smartest investors realize the surprise is a staged event.
In any case, the pop in those stock prices tends to fade over time. And an increase in the proportion of companies reporting positive surprises in one quarter, says Mr. Glushkov of WRDS, "does not have consistent forecasting power for S&P 500 returns in the next quarter."
With analysts playing the guidance game more than ever, their forecasts tell us less than ever about where the stock market is going. So over the next few weeks, don't be fooled into thinking that there is anything surprising about the flood of positive earnings surprises. And don't believe anyone who tries to tell you that these fake surprises mean nothing but good times are ahead for the economy and the stock market.
3) Jobs Study Is Too Late for Debate on Trade-From The Wall Street Journal
As a divided Congress moves closer to a decision on three big international trade pacts, the Labor Department is four years late in delivering a study that is supposed to measure the efficacy of a program to provide extra benefits to workers who lose their jobs through globalization.
The deals with Colombia, South Korea and Panama, which could add billions in exports, are on a knife-edge over disagreements between Republicans and Democrats over Trade Adjustment Assistance, taxpayer funds paid to workers who lose their jobs as a direct result of trade.
The lack of up-to-date government data on how effective the $1 billion-a-year program is at helping the unemployed find well-paying work has hobbled efforts to identify and make improvements.
With the House and Senate called back into session this week, debate will resume over TAA, which provides training, unemployment payments and health-care subsidies to displaced workers. The program came due for renewal at the end of 2010.
The White House, Democratic leaders and some Republicans say the 50-year-old program helps laid-off workers learn new skills and find jobs in more vibrant industries. Conservatives label it an outmoded giveaway with results that don't justify the annual price tag.
TAA has become a proxy for the wider budget war, in which entitlement programs such as Social Security and Medicare as well as less-prominent matters such as financing the U.S. Patent and Trademark Office have come under scrutiny from budget hawks.
Workers who qualify for TAA get up to 156 weeks of unemployment benefits, compared with a maximum of 99 weeks under standard unemployment benefits for workers in high-unemployment states in a program set to expire at the end of this year. TAA also offers assistance with retraining and health benefits that workers not judged to be idled by trade pacts don't get.
On Tuesday, the House Ways and Means committee said it would hold a hearing Thursday to discuss proposed changes to the trade deals.
But the panel, which has jurisdiction over trade in the House, won't discuss renewing the expired TAA program as part of that process, defying President Barack Obama. Mr. Obama says he won't send the trade agreements to Congress for ratification if lawmakers don't renew TAA.
The president has staked his credibility with U.S. businesses on passing the trade deals, placing them at the heart of his plan to double U.S. exports by the end of 2014.
Hiccups over the pacts' passage damage U.S. credibility with trading partners, at times leading them to seek deals elsewhere. Last week, while U.S. lawmakers bickered, a sweeping trade pact between South Korea and the European Union took effect; one between Colombia and Canada takes force in August.
Labor Department officials say their research on TAA, originally due in 2007, won't be ready until the end of the year. That's likely to be after the fate of the proposed U.S. trade deals has been decided, at least until after the 2012 election. Thus far, the TAA study has cost $8.9 million, the Labor Department estimated.
"The data used for the study is long-term data on individual participants, which was collected over several years; therefore completion of the study is a long process," said Department of Labor spokeswoman Gloria Della.
Howard Rosen, resident visiting fellow at the Peterson Institute for International Economics, helped write 2002 reforms to TAA while he was a congressional aide that also called for a comprehensive evaluation of the program, and he has complained about the Labor Department's failure to deliver it.
"We need to make reforms based on what will work, not what will fly" politically, Mr. Rosen said.
Reports from Labor and the Government Accountability Office have led to changes, for example, in improving worker access to the program. Last year, 235,000 workers—or less than 2% of the nation's 14 million unemployed—were receiving benefits under the TAA program at a cost of $975 million.
In 2009, the program was expanded to include service, not just manufacturing workers, who now make up less than one-fifth of TAA recipients.
More than two-thirds of TAA recipients are over age 40 and three-quarters of them hold at most a high-school diploma. Half of all unemployed workers fall into those two categories. TAA-eligible workers' mean annual wages are $34,000, compared with $28,000 for all unemployed people.
The Labor Department reports that two-thirds of TAA program participants find jobs within three months after leaving the program, and 90% stay in those jobs for at least a year.
According to a Labor-sponsored study of TAA applicants in 2008-09, about one-third of eligible workers belong to a trade union; about half of those in the program are union members.
A deal brokered last week by Senate Finance Committee Chairman Sen. Max Baucus (D., Mont.) would make renewal of TAA hinge on cutting the program's cost.
The Congressional Budget Office has yet to fully determine TAA's new cost under the proposal, agreed to by Mr. Baucus, House Ways and Means Committee chairman Rep. Dave Camp (R., Mich.) and White
House economic czar Gene Sperling. The biggest proposed changes are cutting TAA recipients' unemployment benefits, and increasing their contribution to health-care coverage.
The deal envisions a cap of 130 weeks of unemployment, down from the current 156. That compares with a maximum of 26 weeks of jobless benefits for non-TAA recipients, unless they live in a high-unemployment state.
Under the 2009 program, TAA enrollees could deduct 80% of their health-care costs; the deal would reduce that deduction to 72.5%. The deduction would end completely at the end of 2013, when TAA enrollees gain access to benefits under Mr. Obama's health-care overhaul.
A Republican House aide says GOP leaders aren't sure whether the agreement approved by Mr. Camp has the votes needed to pass.
Quote of the Day from Dave Ramsey.com:
You cannot dream yourself into a character: you must hammer and forge yourself into one. — Henry D. Thoreau
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