Closing Bell: Stocks Fall Again as Federal Budget Deadline Draws Nearer

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Stocks fell again Friday to close out Septembers first down week as investors fretted over the looming possibility of a government shutdown.

The Dow Jones industrial average (^DJI) lost 70 points, or 0.5 percent, to 15,258, the Standard & Poor's 500 index (^GPSC) fell 7 points, or 0.4 percent, to 1,691 and the Nasdaq composite index (^IXIC) dropped 6 points, or 0.2 percent, to 3,781.

The Senate passed legislation to keep the federal government operating beyond midnight Monday. It remains unclear, however, whether the Democratic-led Senate and the Republican-run House will be able to craft a compromise and rush it to President Barack Obama for his signature before the government has to tell hundreds of thousands of federal workers to stay home, starting Tuesday.

In the latest comments from Fed officials after last week's surprise decision by the central bank to continue its stimulus measures at full power, the president of the Federal Reserve Bank of Chicago, Charles Evans, said the Fed could still start reducing its asset purchases this year based on economic forecasts, but that the decision to wind down stimulus could be pushed into next year

Investors also dealt with mixed economic signals from two new reports Friday.

%VIRTUAL-article-sponsoredlinks%Data from the Commerce Department showed U.S. household spending rose in August rose as incomes increased at their fastest pace in six months, a sign that momentum could be picking up in the U.S. economy despite months of harsh government austerity.

On the other hand a University of Michigan survey showed that consumer confidence declined in September as Americans worried about the possible government shutdown and their own finances. The survey also found that half of households expect no pay increase in the year ahead.

In commodities news, benchmark U.S. crude fell 16 cents to close at $102.87 a barrel, while gold rose rose $15.10 an ounce to $1,339.20.

In corporate news, BlackBerry (BBRY) said it was committed to completing a series of major changes quickly after reporting Friday that it lost $965 million on revenue of $1.6 billion. The troubled smartphone company's financial results were in line with the the figures it released last week, when it warned investors to expect dismal earnings and announced 4,500 layoffs. Fairfax, BlackBerry's largest shareholder, subsequently announced it plans to make an offer for Blackberry and is trying to attract other investors. BlackBerry canceled its conference call with analysts Friday in light of that overture. It gained 1 percent, to close at $8.03.

More Stocks in the News:

  • J.C. Penney (JCP) shares slid almost 14 percent to $8.97 after the struggling retailer said it would raise about $811 million through a stock offering, which means current shares will diminish in value as the pool of public shares grows.
  • Shares of Finish Line (FINL) jumped 9 percent to $24.41 after the company reported a 6 percent jump in second-quarter profits, as the retailer cut costs and sales at comparable stores rose. A deal cut last year with Macy's (M) is helping to drive business.
  • Lumber Liquidators (LL) dropped 5.2 percent to $107.13 after it disclosed that federal authorities had searched its corporate offices in an action related to imports of some wood flooring products.
  • United Continental Holdings (UAL) fell 9.3 percent to $30.91 after it projected third-quarter revenue would come in below Wall Street expectations.
  • Nike (NKE) shares jumped another 4.7 percent to $73.64 after the shoe and apparel company reported a quarterly profit Thursday that was higher than financial analysts expected.
What to Watch Monday:
  • Toyota Motor Corp. (TM) chairman, Takeshi Uchiyamada, speaks at the Economic Club of Washington.
  • The Institute for Supply Management releases its survey of business condition in the Chicago area in September at 9:45 a.m. Eastern time.
  • At 10:30 a.m., the Federal Reserve Bank of Dallas releases its survey of Texas manufacturers for September.
-Compiled from staff and wire reports.

If You Only Know 5 Things About Investing, Make It These
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Closing Bell: Stocks Fall Again as Federal Budget Deadline Draws Nearer

Warren Buffett is a great investor, but what makes him rich is that he's been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.

Most people don't start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That's unfortunate, and there's no way to fix it retroactively. It's a good reminder of how important it is to teach young people to start saving as soon as possible.

Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That's really all there is to it.

The dividend yield we know: It's currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That's totally unknowable.

Earnings multiples reflect people's feelings about the future. And there's just no way to know what people are going to think about the future in the future. How could you?

If someone said, "I think most people will be in a 10% better mood in the year 2023," we'd call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.

Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That's great! And they didn't need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."

Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return -- still short of an index fund.

Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it's not like golf: The spectators have a pretty good chance of humbling the pros.

Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time -- every single time -- there's even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"

Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.

Since 1900 the S&P 500 (^GSPC) has returned about 6% per year, but the average difference between any year's highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.

Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.

The vast majority of financial products are sold by people whose only interest in your wealth is the amount of fees they can sucker you out of.

You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he'll receive, even though it makes him more likely to be wrong.

This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.

"Everything else is cream cheese."
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