What Happened in Dubai?

Last week's news that Dubai World, an arm of the emirate of Dubai, was seeking to reschedule its debt sent some shivers through the market. (As we noted, it didn't take a whole lot to move the market on those days of such low volume.) There were also many misconceptions that arose, in part because news is received so sketchily over a long holiday weekend.

First of all, it wasn't the emirate that is having trouble with its debts; it's a wholly owned but separate corporation. Dubai World bears a similar relationship to the Dubai government that Fannie Mae and Freddie Mac pay to our own, except that its business is investing in real estate rather than buying up mortgages.

Many people had expected that the emirate itself would cover Dubai World's debts if the real estate entity got into fiscal trouble, but that has turned out not to be the case. That shouldn't be so surprising - one reason wholly owned entities are set up in the manner of Dubai World is so that the government is shielded from things like bankruptcy.

Like a lot of locales here in America, Dubai crazily overbuilt during the real estate boom of the past decade. One of seven members of the United Arab Emirates, Dubai tried to build itself into another Hong Kong, a little world power. One specialty was man-made islands, one of which was to have its own Trump Tower had been planned (canceled earlier this year). There was even an indoor ski run along the shores of the Persian Gulf. And like a lot of other places, when the crash hit, Dubai couldn't handle the losses.

So now Dubai World is left with $59 billion in liabilities. That may sound like a lot, but the International Monetary Fund estimates that U.S. and British lenders will lose $1.8 trillion between 2007 and 2010. So it's not Dubai itself that presents a danger, but rather the idea that other governments may follow. But until that happens, this is merely another aspect of the real estate crisis, not a governmental crisis.

Black Friday

Black Friday unofficially kicks off the holiday shopping season, which will be watched even more closely than usual this year as investors looks for hints that the recovery is strengthening. What can we expect today? It depends on who you ask.

The National Retail Federation predicts holiday-season sales to decline 1 percent, to $437.6 billion. But the International Council of Shopping Centers, another industry group, expects holiday sales to rise 1 to 2 percent. The industry research firm IBISWorld forecasts retail sales on Black Friday alone to increase 2.8 percent from last year.

A total of 76.9 million people are expected to hit the stores today, about 52 percent of American consumers, up from 42 percent last year, according to the consulting firm Accenture. As many as 134 million people say they will shop over the weekend — up from the 128 million people who planned to do so last year.

But they're not planning to spend a whole lot of money. The Accenture survey found that 86 percent of shoppers won't buy anything without a 20 percent discount, and a quarter said they won't buy anything less than 50 percent off. The global business advisory firm AlixPartners says that 87 percent of consumers plan to spend the same or less than they did last Christmas.

The National Retail Federation projects that the average shopper will spend $683 this year, or $23 less than last season. Some 26 percent of families plan to spend $500 or more this holiday, down slightly from last year's 27 percent.

But is Black Friday really what we should be watching? Paul Dales of Capital Economics notes that today is not usually the biggest sales day of the season, which is in reality the last Saturday before Christmas. Dales found that since 1992, it has often been the case that stronger Black Friday sales resulted in weaker performance overall. Shoppers who spend more on Black Friday may end up spending even less the rest of the season.

Happy shopping!

Thoughts for Thanksgiving

"Let us remember that, as much has been given us, much will be expected from us, and that true homage comes from the heart as well as from the lips, and shows itself in deeds." - Theodore Roosevelt


"There is one day that is ours. There is one day when all we Americans who are not self-made go back to the old home to eat saleratus biscuits and marvel how much nearer to the porch the old pump looks than it used to. Thanksgiving Day is the one day that is purely American." - O. Henry


"If you count all your assets, you always show a profit." - Robert Quillen

The Fed Looks Ahead

As I mentioned on Monday, the Fed released its Open Market Committee minutes yesterday, a day earlier than usual in deference to the holiday. The key elements of their forecast:

* The U.S. economy is expected to expand by around 2.5 percent to 3.5 percent in 2010. This is up from the Fed's June estimate of 2.1 percent to 3.3 percent.

* Core inflation is expected to rise 1.25 percent in 2010, the same prediction the Fed made in June. That would be an increase from an inflation rate so far in 2009 of minus 0.2 percent.

* The unemployment rate is expected to average between 9.3 percent and 9.7 percent by the fourth quarter of 2010. The earlier forecast had seen unemployment between 9.5 percent and 9.8 percent. That's only a slight improvement from the current rate of 10.2 percent, though, and suggests that unemployment will be a problem for far longer than any of us would like.

The Turkey Economy

The recession has affected a topic near and dear to most of us this week: turkey production. Wholesale turkey prices are down as much as 20 percent due to an oversupply of the big birds, leading to some really great deals at the grocery store. Turkey farmers have also had to deal with higher feed prices - feeding the bird accounts for 70 percent of the cost of raising it. Turkey production is down by roughly 9 percent this year, but that's not been enough to compensate for the decline in consumption.

But it's still a staggering amount of meat. The projection for the fourth quarter of 2009 is that we will produce 1.48 billion pounds of turkey in this country. Fully one-fifth of all the turkey we fix each year is for Thanksgiving.

Overall, the average cost to feed a gathering of ten this year is $42.91, down $1.70 from last year, according to the American Farm Bureau Federation. Just don't skimp on the cranberries: Although poor weather in cranberry-producing states like Massachusetts and Wisconsin has depressed their crop, New Jersey's cranberry production is up 5 percent this year. So those tart red berries on your turkey could very likely be helping our economy.

Short Week Ahead

Thanksgiving Week is here, meaning a short week for the stock market, which will be closed on Thursday and have abbreviated hours on Friday. Even on the days the market is open, volume is expected to be fairly low.

But that doesn't mean there won't be news made. Lower volume means greater opportunity for volatility, so we could see some sizable overall swings in the major indexes. In addition, the usual week's worth of economic reports will be squeezed into the first three days of the week, so the market's reaction to those pieces of news will be compressed as well.

We'll see new consumer confidence numbers on Tuesday, and the Fed's minutes will be released, a day earlier than normal. Then on Wednesday, we'll have durable goods and new home sales figures, plus the new jobless claims, which will also be arriving a day earlier than normal.

That adds up to the possibility of some wild swings on the indexes. But the lower volume means they will likely not be worth paying attention to - even moreso than usual.

Seeing the Future

Unemployment has been a huge problem around the nation, but there's one profession that's actually been benefiting from the recession. A report in the Arizona Republic last month found that psychics have been weathering the downturn quite well. But it's not because their clients are asking the age-old questions of whether they'll find true love; they want to know when the recession will end, and whether they should sell their house.

"I'm seeing many more people that are in real crisis situations," said one astrologer. "They're coming to me with questions about whether they're going to be fired, and with more general questions about when the economy is going to improve. Even my wealthy clients are desperate."

It's certainly difficult for even those of us who work at this full-time to divine what's going to happen next with the economy, but that doesn't mean it's time to throw up your hands and turn to a psychic. We can provide you with a little better forecasting than someone with a crystal ball and a pack of tarot cards. But it's nice to see one sector of the economy thriving.

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.

The Dollar Effect

Monday was a big day for the stock market, with the Dow soaring to a new high for 2009 and closing at its best level in over a year. It was also a big day for gold, with the precious metal climbing above $1100 an ounce.

What's the connection between the two? The weak dollar. A sinking dollar is obviously a key to the rising price of gold, since when the dollar loses value, it takes more of them to buy an ounce of gold - even when nothing happens to gold's underlying price.

But there's also the theory that the weak dollar also bolsters the stock market, for reasons that are less obvious. Any major American company that exports goods - which is most of them - benefits when the dollar is low, and they can make more money for selling their wares overseas. And investors run to the safe haven of the dollar when the markets drop, returning to equities and selling off dollars when the markets rise. It makes sense: As long as the dollar remains depressed, investors are better off putting their assets into other investments, whether that's stocks or gold.

Looking for Mutual Fund Money

There was a fascinating and somewhat scary article in yesterday's New York Times by veteran mutual fund watcher Mark Hulbert, pointing out that even in the bull market of the past few months, inflows into mutual funds have been barely more than a trickle. From the market's bottom on March 9 to the yearly high last month, equity funds took in only $7.8 billion in new money. By contrast, over the five years of bull market from 2002 to 2007, those same funds took in $250 billion.

Hulbert attributes this loss of money to investors who are wary of the stability of this market, and while I respect his credentials as a fund expert, I think he's missing an important point here. Unemployment is over 10 percent, and many of those who still have jobs have seen their employers slash or eliminate 401(k) funding. For most people the primary way they invest in mutual funds is through their 401(k).

If not the biggest reason for the dropoff in mutual fund purchases, that is at least a significant reason. And like so many other things in this screwy economy, it's a vicious circle. Companies won't beef up their employer match again until unemployment goes down and they have to compete for talent again. So we won't return to a free flow of money into the markets until the economy improves - which means we better hope the improvement of the economy isn't dependent on those mutual funds getting hundreds of billions of dollars again.

Fraud Alert

There has been a fake email going around lately, purporting to be from the FDIC warning consumers that their bank has gone under, and they need to click on a link to find out about their deposit insurance. If you get this email in your inbox, delete it immediately. When you click on the provided link, what you're really doing is inviting malware, spyware and adware onto your computer.

The subject line of the e-mail reads "Check your Bank Deposit Insurance Coverage.” The e-mail itself says something like this: "You have received this message because you are a holder of a FDIC-insured bank account. Recently FDIC has officially named the bank you have opened your account with as a failed bank, thus, taking control of its assets." Then you're told to "visit the official FDIC website and perform the following steps to check your Deposit Insurance Coverage," but the link provided is fraudulent.

If your bank fails, and you somehow don't notice, you won't get notified by the FDIC - you'll hear from the bank. Even if you do get an unsolicited email from your bank, remember not to click on any links in it or offer up any personal information.

Buffett's Gamble

Standard & Poor's warned yesterday that they are considering a downgrade to the creditworthiness of Berkshure Hathaway, Warren Buffett's legendary investiment vehicle. Why? Because of Buffett's $34 billion bid for the Burlington Northern Santa Fe railway company. S&P is concerned that the massive outlay could hamper the liquidity of Berkshire Hathaway's core insurance businesses. Berkshire got downgraded eariler this year by the two other main rating agencies, Moody’s and Fitch, after Berkshire's first quarterly loss since 2001.

Berkshire Hathaway already owns 22 percent of Burlington Northern. Buffett famously says his favored time for holding onto a stock is forever, so he must feel that if owning a fifth of a company is good, owning all of it is even better.

But the concerns of the ratings agencies would be familiar to any knowledgeable investor. In a sense, it's just a matter of diversification. Buffett is going to have to take cash out of his existing position to quadruple his position in another holding. It wouldn't be an especially judicious allocation of assets for an individual investor, so why would it necessarily work for Berkshire Hathaway?

At the same time, it's never a good idea to bet against Warren Buffett.

Layoffs at J & J

We got a reminder very close to home yesterday that even though the recession might technically be over, the hard times aren't. Johnson & Johnson announced it was planning to lay off more than 8,000 workers, and even though most of them are expected to be away from the New Brunswick headquarters, it's chilling that one of New Jersey's major employers is still shedding workers.

It's also a reminder that the improvement we've been seeing lately in the jobless figures has resulted from the fact that the number of people losing their jobs has been getting smaller. We haven't seen any growth in employment yet, and we may be a long way from seeing it.

J&J CEO William Weldon tried to put a brave face on all of this and said the move was an attempt to position the company to invest in itself and get even stronger at some point in the future. But he alluded to one of the key issues we've faced in this recovery when he admitted: "Until we get unemployment under control and people feel safe and comfortable, I don't think people are going to be spending in areas where they've spent previously." He said this, mind you, at the exact moment his company was adding to the unemployment numbers.

But he's right: Consumer spending won't really grow until more people have jobs. Jobs won't grow until consumers are able to start spending more. It's a maddening problem.

Buying Season?

As we mentioned at the beginning of last month, October tends to be pretty volatile in the stock market. Measuring the standard deviation of the daily change in the Dow, October has historically been 40 percent more volatile than the other 11 months. And October did turn out to be pretty blah for investors. So maybe we should be glad that we turned the page on the calendar over the weekend.

So what can we expect from November? It's historically been a very good motnh, for a couple of reasons. Many financial institutions mark the end of their fiscal year on October 31, leading many money managers to take a fresh look at the markets starting on November 1 and start buying again. And November has now become the unofficial start of the Christmas season, making it a strong time of year for consumer spending and leading many retailers to post positive numbers.

Add it all together, and November is, historically speaking, the best month of the year for the S&P 500. On average it's gained 1.7 percent in November dating back to 1950. Actually, it's tied with December, which also averages a 1.7 percent gain; if you add up the next three months, November through January, they have historically accounted for more than half of all gains on the stock market. Let's hope we have another season of good cheer ahead of us.

A Very Scary Halloween

Friday was a rough day for the markets. After seven straight months of gains, both the S&P 500 and the Nasdaq broke those streaks by ending October with a loss. After three months of solid gains, the Dow Jones ended October up only 0.45 points - as close to a flat month as you can get.

The spookiest thing about it was how remarkably broad-based the decline was. All 30 stocks in the Dow Jones Industrial Average closed down for the day.

For the NYSE as a whole, 84 percent of the stocks declined, and only 15 percent advanced. The Nasdaq was slightly better: 79 percent of its stocks declined, and 18 percent advanced.

Within the S&P 500, only 18 stocks advanced on the day. That leaves a whopping 482 issues that declined.

That's what you call a marketwide disaster.