Back to normal.
The United States won’t default. The federal government is open again—including the Panda cam at the National Zoo. And once again earnings count.
Which at least for the day isn’t good news for U.S. stocks—at least not for the Dow Jones Industrials.
The Dow is down 0.32% as of 1:40 p.m. New York time today. The Standard & Poor’s 500 is up 0.32%.
The main culprits in the Dow’s decline are IBM (IBM) down 6.4%, Goldman Sachs (GS), down 2.6%, and United Health Group (UNH) down 4.97%.
I think we’re seeing two themes re-emerging and one new theme emerging today that are likely to be major drivers of the U.S. market for the next couple of weeks as we move through the meat of earnings season.
First, there’s the slowing economy in China story that investors saw in IBM’s report. The company reported a slight beat on earnings. (At $3.99 a share, they were 3 cents a share better than Wall Street expected.) But IBM also showed a big $1 billion miss on revenue to $23.7 billion versus the $24.8 billion projection. Revenue fell 4.1% year over year
The problem seems to have been China in particular and emerging markets in general. Sales in China were down 22% over all and down 40% in hardware. The drop in hardware sales in China accounted for all of the 5-percentage point drop in emerging market sales. IBM has now missed revenue expectations for the past six quarters, Wall Street analysts noted on the conference call. When, they pointedly asked, can we expect an end to this underperformance? That wasn’t the toughest question that the results raised, however. The report focused at least some analysts’ attention on the role of tactics such as share buybacks in IBM’s recent earnings growth. With buybacks consuming close to 100% of free cash flow, analysts asked, doesn’t IBM need to find more organic growth.
Second, there’s the slowing U.S. economy story that investors saw in the Goldman Sachs report. While third quarter 2013 earnings per share beat the consensus Wall Street estimate of $2.43 a share by a big 45 cents on cost cutting (including a 35% reduction in compensation), revenue was 20% lower than in than in the third quarter of 2012 and at $6.72 billion fell well short of the $7.35 billion average Wall Street estimate. Net revenue from financial advisory services fell 17% from the third quarter of 2012. Net revenues from execution of trades for clients in fixed income, currency and commodities were down 44% from the third quarter of 2012. And although investment-banking revenues were essentially unchanged from the third quarter of 2012, they were down 25% from the second quarter of 2013.
Goldman CEO Lloyd Blankfein told analysts “The third quarter’s results reflected a period of slow client activity. As longer-term U.S. budget issues are resolved, we could see an improvement in corporate and investor sentiment that would help lay the basis for a more sustained recovery.”
“Could.” Not exactly a ringing endorsement of the next quarter.
And that brings me to the third theme for the current earnings season: What are companies going to say about next quarter? We know (well, we don’t but we have estimates from Standard & Poor’s) that the government shutdown and debt ceiling crisis cost the U.S. economy $24 billion. But we don’t know if that estimate is correct or how that cost will be distributed.
Blankfein’s less than confident tone, of course, raises that issue at Goldman but you can see it even more clearly in Stanley Black & Decker’s (SWK) third quarter report from October 16 before the market opened in New York. On the news the shares fell 14.25% on the day as the company missed on revenue for the quarter and then lowered guidance for the full 2013 year that ends with the December quarter. The new guidance looks for earnings per share of $4.90 to $5.00, well below the company’s previous guidance of $5.40 to $5.65.
Of the two reasons for the big cut in guidance, one was company specific and one was something that should worry the whole market. Investors had been looking for improved margins in the company’s security business and they didn’t get it—that’s the company specific problem. But company management also pointed to the impact of the U.S. government shutdown on organic sales growth. And it issued a forecast for 2014 that was as full of hope and lacking conviction as Blankfein’s: “Assuming that the level of volatility and current uncertainty in the markets we serve does not worsen in 2014,” management said, the company expects conditions in 2014 that support expectations for 4% to 6% organic growth.
Not exactly the kind of endorsement on growth that I’d like to see with the S&P 500 near historical highs.
As my grandmother used to say, “If wishes were horses, beggars would ride.”