Stocks turned positive today in afternoon trading after reports that China will buy European bonds. We'll see how this story changes tomorrow.
Mark Dow from Pharo Management says consumer debt is still stifling the economy. This is why Dave Ramsey preaches debt is dumb and cash is king.
Netflix stock continues to stumble as the worst corporate decision since New Coke sent the stock from over $300 a share to $79 today.
Here are the top financial stories of the day:
1) Stocks end higher on reports of help for Europe-From the AP
Stock indexes finished higher Wednesday following reports that China will come to the aid of Europe by investing in a financial rescue fund.
Agence France-Presse reported that China has agreed to invest in Europe's financial rescue fund, which will be used to support struggling countries and banks in the European Union. The Dow Jones industrial average jumped more than 100 points after the report came out in the early afternoon.
Stocks had been mixed for much of the day as investors weighed stronger earnings from Boeing and Corning with uncertainty about the outcome of a key meeting among European leaders.
Top European officials met in Brussels to discuss how to contain the region's debt crisis, which has festered for two years.
One consideration is increasing the power of a financial rescue fund, which
Germany's parliament approved shortly before U.S. stock markets opened.
European officials announced a plan after the U.S. market closed that will require the region's banks to increase their levels of cash to better protect themselves from losses on the Greek bonds they hold.
European governments have been pressing the banks to forgive significant amounts of the Greek government's debt.
"This is a total news and rumor-driven market right now, and everyone's attention is focused on Europe," said Joe Bell, an analyst at Schaeffer's Investment Research.
The Dow Jones industrial average gained 162.42 points, or 1.4 percent, to 11,869.04. Boeing Co. led the way. It rose 4.5 percent after it reported a bigger profit for its latest quarter than analysts expected. It also raised its forecast for 2011 earnings.
The S&P 500 index rose 12.95, or 1.1 percent, to 1,242. The Nasdaq composite added 12.25, or 0.5 percent, to 2,650.67. Amazon.com Inc. slumped 12.7 percent after reporting a 73 percent drop in income. The retailer cited higher costs for expansion.
Strong economic reports also helped send stocks higher. Businesses ordered more heavy machinery and other long-lasting manufactured goods last month, after excluding aircraft orders, which can be volatile. That indicates businesses are still spending on equipment despite worries about a weak economy and Europe's debt problems. Sales of new homes rose in September after falling for four straight months. Lower home prices enticed buyers.
The yield on the 10-year Treasury note rose to 2.21 percent from 2.14 percent late Tuesday as demand diminished for assets perceived to be relatively safe.
Corning Inc. rose 3 percent after reporting a 3 percent increase in income last quarter on stronger sales of glass for flat-panel televisions. Its earnings and revenue beat analysts' expectations.
First Solar Inc. rose 6.6 percent. It reported results a week earlier than expected, and revenue and earnings both improved. That helped the stock recover some of its losses from Tuesday, when it fell
24 percent after the surprise departure of the company's chief executive.
Five stocks rose for every one that fell on the New York Stock Exchange. Volume was slightly above average at 4.8 billion shares.
2) Your Debt: The One Thing Killing the Economy, Says Mark Dow-From The Daily Ticker
"Better-than-expected" has made more than one appearance in the headlines for some of the most recent economic data.
For the month of September:
-New home sales rose 5.7% to levels not seen since April.
-Orders for durable goods, excluding transportation, increased 1.7%, and nondefense goods, excluding aircraft, increased 2.4%.
-Retail sales grew 1%.
-Third-quarter GDP expectations have been revised to nearly 3% ahead of tomorrow's announcement.
But despite this good news, the economy is nowhere near safe territory, says Pharo Management's Mark Dow. "These numbers are very bumpy," he tells The Daily Ticker's Henry Blodget. "We shouldn't look too much quarter to quarter at them. We should look through them a little bit."
Dow may not think we are headed for another recession, but he certainly doesn't believe a recovery is imminent. His best-case scenario for the U.S. economy is to "bump along the bottom," with anemic growth for the next few years.
His slow-growth prediction rests upon one key factor: household debt.
"The underlying structure of demand in this country is very weak. Why? Because we have an overhang of household debt," says Dow. "It is not because the regulations are bad, it's not because Obama is a socialist, or what have you, it is really that the households have too much debt, and until they get out from under that debt they won't be able to generate the top line for companies necessary for them to want to invest."
In addition to the obvious, too much debt is bad because it makes us vulnerable to exogenous shocks like Europe, he notes. (See: Big Europe Summit Won't Solve The Problem, Says Mark Dow)
So what's the solution?
"When you have a debt overhang, the only thing that can cure it is time," he says, while pointing out that not even the Federal Reserve or Congress can fix this mess.
3) How Low Can Netflix Shares Go?-From The Wall Street Journal
Three months ago, the question for Netflix was how big it might one day become. Now investors wonder whether it can pay the bills to get there.
In the latest leg of their spectacular decline, shares in the DVD and video-streaming service fell 35%Tuesday morning to $77. In July they were above $300.
Monday night, Netflix said it expects to lose money "for a few quarters" starting next year. Before the announcement, analysts had expected 2012 earnings to grow 38% from 2011. The message was an attempt to reset expectations after the catastrophic decision to raise prices this summer—which caused subscribers and investors to flee.
The trouble is that Netflix may not be able to invest as much as it would like in order to reinvigorate itself. The company needs to spend heavily on marketing and content to bring domestic subscriber growth back to life and get it started in new overseas markets. Netflix has already committed to spend $3.5 billion on content over the next several years. Overseas expansion will require it to purchase rights one country at a time, along with heavy marketing costs.
But given overseas markets take at least a couple of years to become profitable, Netflix may be forced to hit the brakes if U.S. subscriber growth and cash flow don't turn around quickly. Having spent more than $1 billion on share repurchases since 2007, the company has just $366 million in cash. Adjusted for its $200 million in debt, the cash position is just $166 million. Free cash flow was just $13.8 million in the third quarter and could continue to lag profits as the company's content payments soar.
Where could Netflix get more cash? Considering its limited cash flow, Netflix may not want to borrow much more. And a secondary share offering would be a painful process now that the stock has cratered.
The big hope is that Netflix is on the cusp of making significant profits from its streaming customers—still far less profitable than the aging DVD mail order business. The company says the profit margin from streaming is only about 8% now. But given the largely fixed costs, any subscriber growth would boost the margin.
Investors betting Netflix can pull it off need to believe the subscriber exodus has finally stopped.
Netflix says the rate of departures has declined in the last two weeks and U.S. subscriber growth is expected to resume in December. There's no sign that customers are switching to rival streaming platforms like Amazon, which has a far smaller content offering.
Another plus is that the company says its subscriber acquisition cost is about $15 per account, roughly flat from the second quarter and down 24% from a year ago. That's a sign that the consumer backlash, while painful, never raised the cost of adding fresh customers. And its current content library is probably large enough to attract a decent flow of new subscribers.
So what is Netflix worth? Earnings for 2012 are likely to be deeply depressed, forcing investors to look to 2013. Even if the company returns to roughly this year's level of $4 in earnings per share by then, the current price implies a multiple of 20 times. With doubts about whether the company can afford to invest—let alone succeed—overseas, it's too early for investors to re-subscribe.
But with the market capitalization down to $4 billion, attention will turn to whether a cheaper enough valuation could attract takeover interest. Amazon, for example, is looking for a way to jump ahead in the streaming game. Others could also be interested. That should prevent the stock from being completely shut down.
Quote of the Day from Dave Ramsey.com:
You have enemies? Good. That means you've stood up for something, sometime in your life. — Winston Churchill
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