“Words from the Wise” this week comes to you in a shortened format as I do not have access to my normal research resources while on the road in Europe. Although very little commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.

While the Dow Jones Industrial Index and other benchmark indices reached 52-week highs last week and pleased Wall Street, the cartoonists reminded us that worrisome economic issues remained in Main Street …

If This is Recovery, Where Are the Taxes?
Last Business Standing
Stimulus, What Stimulus?
The Reality of Unemployment
Let the Good Times Roll
The Quick Double-Dip Scenario

No one goes into Wal-Mart (WMT) and asks to pay extra sales tax. Thus sales taxes are reasonable barometers for retail sales. This week we look at how taxes are doing in a period of economic recovery. Then we turn our eyes to a very interesting (and sobering) analysis of possible future unemployment rates. This is an anecdote to the happy-face analysis of employment numbers you get from establishment economists. There will be a lot of charts and tables, but I think readers will find it very interesting.

Most dividend investors are influenced by the current yield when they enter a particular stock investment. Dividend growth investors are no different either. It is hard to blame either of these groups, as there is no point in a company that strongly raises its dividend payments, yet it might take up to two decades for the yield on cost to reach any meaningful level. Add in to that the fact that a double digit dividend growth could be supported by a double digit earnings growth only for so long. If the dividend payout ratio was low at the beginning this could extend the strong dividend growth by a few years after earnings growth slows down to a more reasonable level.

Some of the best dividend growth stocks however would always spot a low current yield, coupled with strong dividend growth for many years to come. As some might typically yield 1% or 2 %, they would be completely ignored by most investors. The trick here is that a company that yields 2% today and raises its dividend by 12% every year would double your yield on cost in just 6 years. In most cases such companies' stock prices also tend to follow the changes in the dividend payment, which could lead to strong capital gains over time. Thus, if the stock increased distributions by 12%, it is very likely that the stock price might increase by about 12% as well. This leaves the dividend yield unchanged at 2%, which doesn’t matter much for original investors, who purchased the stock 6 years earlier.

By Brian Sozzi

As to be expected, the Wal-Mart (WMT) operating machine was in full swing in the October quarter (full conference call transcript here). A continued focus on driving productivity throughout the organization, such as reducing the height of inventory in the stores to more efficiently operating the Wal-Mart private truck fleet helped to expand gross margin nicely year over year despite the impact of consumables deflation, resumption of higher energy prices, and aggressive pricing maneuvers.

Wal-Mart (WMT)

Wal-Mart Stores (NYSE: WMT) earned $0.84 per share in the third quarter of fiscal 2010, which ended on 31 October 2009, up from $0.80 in the same quarter of last year.

This post examines Walmart's Income Statement for the quarter and compares the entries on each line to our "look-ahead" estimates. Our target for Net Income in the latest quarter was $0.83 per share, $0.01 less than the reported amount. Fewer shares outstanding caused the difference.

4:25 PM, Nov 12, 2009 --

• NYSE down 92.31 (1.3%) to 7,063.05.
• DJIA down 93.79 (0.9%) to 10,197.
• S&P 500 down 11.3 (1%) to 1,087.
• Nasdaq down 17.9 (0.8%) to 2,149.

GLOBAL SENTIMENT

Sentiment

Stocks fell despite merger news, a better-than-expected earnings report from Wal-Mart (WMT), and data that showed a decline in weekly jobless claims. Wal-Mart is one of only 5 Dow stocks moving higher after the retailer reported a quarterly profit of 84 cents, which beat Street estimates by 3 cents. On the economic front, the latest weekly jobless claims showed some improvement. According to the Labor Department, filings fell by 12,000 to 502,000 in the week ended November 7. Economists were looking for a smaller 4,000 drop. Meanwhile, the tech sector was in focus on news H-P (HPQ) made a bid for 3Com (COMS) and Advanced Micro (AMD) rallied on news of a long-awaited settlement with Intel (INTC).

However, the tech-heavy NASDAQ gave up its early gains and weakness in the commodities markets sent many metals, mining and energy names lower. Crude oil is down $2.52 to $76.76 on bearish weekly inventory data. Gold lost $8.50 to $1106.10 after the buck bounced a bit higher against the euro.

Wal-Mart Stores Inc. (WMT) reported strong fiscal third-quarter earnings of 84 cents per share, which surpassed the Zacks Consensus Estimate of 81 cents. Earnings grew 9.1% year over year from 77 cents recorded in the year-ago quarter, and exceeded management’s guidance of 78 cents to 82 cents per share.

Wal-Mart’s net sales recorded a growth of 1.1% year over year to $98.7 billion, as a 1.2% expansion in Wal-Mart's U.S. segment coupled with a 1.6% increase in the International segment was partially offset by 0.7% decline in the Sam’s Club segment. The growth in International sales was driven by robust performance in the U.K., Mexico and Brazil, but was limited by unfavorable currency fluctuations.

F3Q10 Earnings Call

November 12, 2009; 07:30 am ET

• H-P grabs 3Com, takes on Cisco. Hewlett-Packard (HPQ) agreed to acquire networking-equipment maker 3Com (COMS) for $2.7B, or $7.90/share - a 39% premium to Wednesday's close. With 3Com, H-P - the world's largest PC maker - gains a networking business that competes directly with Cisco's (CSCO) core business of routing and switching, and a strong foothold in China, which accounts for half of 3Com's revenue. Analysts were largely enthusiastic about the deal, saying 3Com was one of the biggest values in the networking space, second only to Cisco in the breadth of its enterprise portfolio. Cisco responded swiftly, saying on its blog that networking acquisitions "only validate the fact that networking is becoming the platform for all forms of communications and (information technology)." H-P also preannounced Q4 EPS of $1.14 vs. consensus of $1.12, and revenue of $30.8B vs. $29.8B. After hours, HPQ was -0.6%, and COMS was +35%.
• UTech buys GE Security for $1.8B. GE (GE) agreed to sell its fire alarm and security systems unit to United Technologies (UTX) for $1.82B in cash, as had been widely speculated. UTX said its customers "will see increased breadth and depth of product offerings" as a result of the deal. The unit includes Edwards Systems Technology, which GE bought for $1.4B from SPX Corp. (SPW) in 2005. The business offers building management systems that help control commercial structures during fires, earthquakes and other emergencies, and would take United "beyond just perimeter and access security," one analyst said.
• Benmosche stays put. AIG (AIG) CEO Robert Benmosche told employees Wednesday in an internal memo he remains "totally committed to leading AIG through its challenges" despite his frustrations with government curbs on compensation at the company. The reassurance came after reports Benmosche might bail after just three months at the helm, saying strict compensation rules made it almost impossible to retain talent. In the memo, he called the pay curbs a "barrier" that "stand in the way of restoring AIG's value" and repaying its debt.
• World banks prop up dollar. Central banks say they've been snapping up dollars this week in an effort to stem its slide and hold down the value of their currencies. While Geithner continues to pay lip service to maintaining a strong dollar, Washington has yet to take any concrete steps to stop the bleeding, which is beneficial to U.S. exports and tourism.
• TARP repayments reduce gov't borrowing. The U.S. will borrow "substantially less" than initially anticipated, with banks already repaying rescue funds and more "significant repayments" ahead, Treasury's Geithner says. Reduced borrowing, a narrowing of the current account deficit, and signs that Americans are saving more all contribute to global confidence that the U.S. can rein in its deficit, he said today in Singapore.
• High oil prices could derail recovery. The IEA revised its 2010 world oil demand forecast slightly higher, but warned that rising crude prices could smother the fragile economic recovery. IEA now expects global oil demand to rise to 86.2M barrels a day, up 140K from October. Rising stock markets, a weak U.S. dollar, and rebounding world economies have driven crude prices up almost 80% this year, despite a persistent overhang in oil inventory which now stands at 60 days of forward cover.
• Foreclosures fall, but for how long? Foreclosures slowed for a third straight month, but remain sharply higher than a year ago. The number of homeowners who received foreclosure notices fell 3% month-on-month to 333K, up 18.9% from the same month in 2008. Rick Sharga of RealtyTrac, which released the report, cautioned the improvement was likely temporary: “It’s good to see that foreclosures have slowed down marginally, but we don’t really think it’s a trend." The firm predicts 3.2-3.4M properties will go into foreclosure in 2009, up from 2.3M in 2008.
• Art auction smokes projections. A very positive art auction at Sotheby's (BID) has some thinking the art-market recession may be on the mend. Sotheby's brought in $134.4M at an auction of post-war and contemporary art Wednesday night in Manhattan, including a smoky sheet of dollar bills by Andy Warhol that went for $43.7M. Total proceeds blew away Sotheby's' internal estimate of $67.9-$97.7M, and also outdid its $125M sale of a year ago. 52 of the 54 works offered found buyers.
• Microsoft strikes back at modders. Microsoft (MSFT) booted as many as 1M players from its Xbox Live gaming service on suspicions they modified their consoles to play illegally downloaded games. The move comes amid this week's release of "Call of Duty: Modern Warfare 2" (ATVI), the most highly-anticipated Xbox game of the year. "All consumers should know that piracy is illegal and that modifying their Xbox 360 console to play pirated discs violates the Xbox Live terms of use, will void their warranty, and result in a ban from Xbox Live," Microsoft said in a statement. It's not clear how Microsoft detected the Xbox rigging.
• Turkeyless Thanksgiving for BofA? Bank of America (BAC) may miss its internal deadline of naming a new CEO by Thanksgiving, due in part to its inability to zero in on a clear frontrunner, and amid worries that the process must be approved by the Fed.
• Mortgage apps rise. Mortgage applications rose 3.2% from a week ago, led by a 11.3% gain in refinancing, which now accounts for 71.5% of all applications, up from 66% last week. MBA said the average 30-year mortgage rate fell to 4.9% from 4.97% in last week's survey. Freddie Mac's weekly survey of mortgage rates comes out at 10:00.

Earnings: Before Open

• AECOM Tech (ACM): FQ4 EPS of $0.48 beats by $0.02. Revenue of $1.63B (-0.2%) in-line. Sees 2010 EPS of $1.90-2.00 vs. $2.03. (PR)
• EnCana (ECA): Q3 EPS of $1.03 misses by $0.14. Revenue of $3.88B (-64.2%) vs. $3.08B. (PR)
• Kohl's (KSS): Q3 EPS of $0.63 beats by $0.02. Revenue of $4.05B (+6.5%) in-line. Sees Q4 EPS of $1.14-1.24 vs. $1.25. (PR)
• Urban Outfitters (URBN): Q3 EPS of $0.36 beats by $0.01. Revenue of $506M (+6%) in-line. Operating margin 19% vs. 17.1% in Q2. (PR)
• Wal-Mart (WMT): Q3 EPS of $0.84 beats by $0.03. Revenue of $98.66B vs. $99.88B. Sees Q4 EPS of $1.08-1.12 vs. $1.12 consensus. "The sales environment continued to be difficult this quarter, but customer traffic is up throughout the company." (PR)

Earnings: Wed. After Close

• Advance Auto Parts (AAP): Q3 EPS of $0.69 beats by $0.03. Revenue of $1.3B (+6%) in-line. Third-quarter same-store sales increased 4.7%. Shares -3.7% AH. (PR)
• Applied Materials (AMAT): FQ4 EPS of $0.13 beats by $0.10. Revenue of $1.5B (-25%) vs. $1.3B. Expects revenue growth of more than 30% in fiscal 2010. Reports "increased net sales and profitability in our semiconductor equipment business, with improved demand and financial performance in all of our segments." Shares +0.7% AH. (PR)
• Computer Sciences (CSC): FQ2 EPS of $1.40 beats by $0.05. Revenue of $4B (-5%) in-line. Shares -2.9% AH. (PR)
• Ctrip.com (CTRP): Q3 EPS of $0.44 (RMB3.03) beats by $0.12. Revenue of $80M (+47%) vs. $72M. Sees Q4 revenue of $100M-104M vs. $75M. Shares +10.5% AH. (PR)
• Green Mountain Coffee Roasters (GMCR): FQ4 EPS of $0.34 beats by $0.01. Revenue of $222M (+65%) vs. $217M. Shares -9.1% AH. (PR)

Today's Markets

Asia markets headed lower Thursday. Europe stocks are flat at midday, and futures are under some selling pressure.

Six straight days of gains for the Dow Jones Industrial Average is impressive, but yesterday's session is the inverse of recent days that began slow or even under pressure only to fight off resistance and close in the plus column. It goes without saying (or writing) that the market needs to take a pit stop, or for some a freefall, to get back to the long-term trend.

Of course, that being said, there is also an underlying angst that the market can't stall or can't afford to be down for too long. Considering how quickly the NASDAQ Composite gave up 5.0% just a couple of weeks ago there is certain fragility to the rally that has been built on very light volume.

Retailers saw a lot of options action Wednesday after Macy's (M) fell 8% after reporting quarterly results, and Wal-Mart (WMT) announced it expects a difficult holiday shopping season. The names with the action will all report earnings this week, including JC Penney (JCP), Wal-Mart and Nordstrom (JWN).

JC Penney's puts are active ahead of 11/13 earnings after Macy's shares got hit on earnings, a close competitor. At 11:46 am, 3,000 December $28 puts were bought and 3,000 December $27 puts were sold in an apparent bearish spread. But there was also a trade of 3,000 December $30 puts at $0.90, below the bid. Shares broek down intraday and the action looks bearish in the options pits. 4X average put volume has traded already.

Not much sarcasm or spin to put on this one; in an increasingly bifurcated U.S. society we are seeing a lot of fraying of the seams. We've been pounding the table on the "real economy" for 2+ years, as the number of Americans on food stamps surges from 1 in 11, to 1 in 9... and now even Costco (COST) is rolling out food stamp programs [Oct 30, 2009: Costco to Roll Out Food Stamps Nationwide] but the country is obsessed with very different measures in calculating our domestic "prosperity".

This line by a Wal-Mart executive will take it's place as a candidate for quote of the year [Sep 1, 2009: China Sovereign Wealth Chairman with Quote of the Year 2009]

Driven by computers that cost more than the average person will earn in their lifetime the investment markets move at light speed. To keep pace hedge funds, mutual funds, institutional investors and multi-billion dollar money managers spend large sums of money on high-tech tools to give them an edge. Throw in some illegal insider trading from big names in the industry and it leaves you wondering what chance does a small individual investor have?

Wal-Mart Stores

Guidance

Analysts are looking for a profit of 81c on revenues of $99.88B. The consensus range is 79c-84c for EPS, and $97.98B-$101.5B for revenue, according to First Call. On August 13, when Wal-Mart reported its Q2 earnings, it gave Q3 and FY09 guidance. The company said it saw Q3 EPS of 78c-82c vs. a consensus at the time of 80c, and raised the lower end of its FY09 EPS view to $3.50-$3.60 from $3.45-$3.60 vs. a consensus of $3.56. Wal-Mart also made forward looking comments on October 22, when it said it saw 1%-2% sales growth this year, and projected its FY10 total capital spending to be in a range of $12.5B-$13.1B, up from approximately $11.5B in FY09. Today, former Wal-Mart CEO and current chairman of the board H. Lee Scott said the company sees a very difficult Christmas selling season, and added that he expects 2010 to look a lot like 2009.

The past ten days have seen a spate of upgrades in the retail sector by some of the biggest firms on the street. First there was Citicorp’s upgrade of Target (TGT) two weeks ago and of course, not to be outdone, Barclays, J.P.Morgan and Credit Suisse all jumped on the wagon with their favorites, including Macy's (M) and Abercrombie & Fitch (ANF).

Retailers did report some surprising increases in sales last week on a year over year basis, albeit still down. Sales are just better than expected and which many attributed to a brief cold snap in parts of the country. Is this a classic example of the institutions calling the top in the market?

Felix Salmon says:

it’s only Ledbetter himself — and CNBC — who is saying that Wal-Mart (WMT) is claiming to save the average American family $3,100 a year. If you look closely at the report, it never actually says that. Instead, Global Insight talks about measuring the “cumulative price impact” of Wal-Mart since 1985. If the average American family has saved $3,100 over that time, that’s about $129 a year, not $3,100. Big difference.