Stock Market: Will it Heed the Warnings?

Stock MarketBoth global and domestic economic reality is setting in, with more earnings warnings and weak economic data, particularly from China. Chinese stocks are currently taking it on the chin.

For the last few quarters, railroad companies have been reporting declining volumes of coal, partially due to a slow U.S. economy but mostly because of cheap natural gas prices. Norfolk Southern Corporation (NYSE/NSC) announced that its third-quarter earnings will be lower than its 2011 third-quarter earnings, mostly due to volume declines of coal and merchandise. Third-quarter revenues are also expected to be down about $120 million from the previous year.

Concerning the stock market, there hasn’t been much of a pullback since the Federal Reserve met expectations with its announcement that there would be a third round of quantitative easing (QE3). And while there have been some meaningful earnings warnings for this upcoming earnings season, there’s an equal amount of good news as well.

Norfolk Southern Corp Chart

Chart courtesy of

NIKE, Inc. (NYSE/NKE), for example, announced another share buyback program, totaling $8.0 billion over the next four years. The company is just wrapping up a $5.0-billion share buyback program, and over the last 10 years, it has purchased some $10.0 billion of its own shares, representing over 167 million shares.

On the stock market, NIKE’s share price hit an all-time record high of $114.81 in May of this year. The stock pulled back with the rest of the stock market, and then made a nice recovery to its current level around $100.00 a share. (See “Stock Market Trading Action Signals Breakout Coming.”)

Nike Inc Chart

Chart courtesy of

We’re going to see more and more of this going into 2013—more share buybacks and more dividend increases. Earnings might not be growing, but they are relatively stable, and instead of investing in new plants, equipment, and employees, corporations would rather just return shareholders’ money and/or reduce their shares outstanding. It’s an effective strategy for corporations to keep stock market investors happy in such an uncertain economy. It’s not necessarily so effective for improving the Main Street economy, and we see this in the job numbers.

Microsoft Corporation (NASDAQ/MSFT) is another big-name company that recently increased its dividend to shareholders. The company announced that it will increase its quarterly dividend to $0.23 per share, up from the previous level of $0.20. Street analysts have been lowering Microsoft’s earnings estimates for upcoming quarters, but the company has the cash to keep stock market investors happy—about $62.0 billion worth or $7.40 per share.

As I’ve been saying, the stock market is a little ahead of economic reality, especially with China’s economic news showing such a dramatic slowing. This earnings season is likely to be like the previous one—choppy with a good degree of restraint in terms of visibility. As for the stock market, investors like to be ahead of the current reality; my outlook is very subdued, because earnings aren’t growing.