Tuesday, February 28, 2012
Many investors seeking big gains look to small-cap stocks. Definitions vary, but “small cap” typically refers to stocks with market capitalizations of between $300 million and $2 billion. These stocks oftentimes represent smaller, fledgling companies, and an investor who buys a large stake in such a company does so with the hope that the company will take off, thus making the investor a large sum of money. Large caps, by contrast, cannot promise such exponential gains; they are stable, to be sure, but their growth is more likely to be steady than marked.
With big potential comes big risk, though. As said, small caps typically represent younger, less established companies, and, needless to say, many more of these companies are destined to become the next Atari than the next Nintendo. The image of an investor breaking the bank on the latest “sure thing” to flop is just as common as that of an investor making a killing off a wise speculation. What can one do to protect their investment while speculating in small caps?
One way to go is to invest in small-cap exclusive mutual funds. It is popularly thought, although perhaps not universally true, that, on average, small caps outpace large caps over time. If that’s true, then investing in a range of small caps via a small-cap exclusive mutual fund should be more lucrative than investing in large-cap funds, and investing in a fund, of course, has the benefit of protecting one from the failure of any one of the companies represented by the fund.
Of course, at the same time, the flip side of investing in a fund is that the failures of companies represented by funds drags down the gains to be had by the successes of the other companies. Small-cap funds are stable, but they do not have the potential for exorbitant success. Therefore, many investors still seek to speculate in individual small caps.
Investment guru John Wilkinson provides some suggestions that may help such a person, saying investors should avoid “the seven deadly sins.” Talented professional traders, says Wilkinson, do not give in to “greed, lust, envy, laziness, gluttony, pride and vengeance.” What does this mean?
For one thing, what we have just said: Spread your money around, not only in small-cap funds but, also, in other types of stock and funds. Greed is wanting too much of a good thing, and those who put all of their capital in one thing risk losing it all. Good investors have to avoid this kind of temptation.
Once your portfolio is diversified, though, you will still want to wisely pick the right individual stocks. Wilkinson’s “seven deadly sins” metaphor indicates, for instance, that investors should avoid lust—the desire to invest in something that simply looks too good to be true, as most such things turn out to be just that, that is, not true.
As may already be clear, Wilkinson’s argument is, in sum, to avoid investing on emotion. Good investors do their research and make decisions based on sound analytical judgments, not hunches about “what feels right.”
Five years after the housing bubble burst, America's wealthiest families are now losing their homes to foreclosure at a faster rate than the rest of the country -- and many of them are doing so voluntarily.
Over 36,000 homes valued at $1 million or more were foreclosed on -- or at least served with a notice of default -- in 2011, according to data compiled by RealtyTrac, which tracks foreclosures. While that's less than 2% of all foreclosures nationwide, it represents a much bigger share of foreclosure activity than in previous years.
"These properties are accounting for a bigger piece of the foreclosure pie," said Daren Blomquist, vice president of RealtyTrac.
Out of all foreclosure activity, the share of foreclosures on properties valued at $1 million or more has risen by 115% since 2007 while the share of multi-million dollar foreclosures -- or homes valued at more than $2 million -- jumped by 273%. Meanwhile, the share of foreclosures on mid-range properties valued between $500,000 and $1 million fell by 21%.
Until recently, many homeowners at the high end of the housing market were able to postpone the foreclosure process, Blomquist explained. With other assets and alternatives, "they had more financial means to hold out against default."
In addition, lenders are typically more amenable to working with homeowners that have other resources, said Ron Shuffield, president of Esslinger-Wooten-Maxwell, a real-estate firm in Miami where homes priced over $1 million represented 9% of all foreclosures last year.
But with a recovery in the housing market still years away, foreclosure has turned out to be a worthwhile option after all. Saddled with bloated mortgages after a long run up in property values, many high-end homeowners have chosen to pursue a "strategic default." Even though they can afford the monthly mortgage payments, they still decide to walk away from their home because they owe more on the property than it is worth.
"In the lower-priced houses you'll see more people defaulting because they can't afford the payments and it's a choice between feeding their family and paying the mortgage on a home that's under water," said Stuart Vener, a national real estate and mortgage expert with the Florida-based Wilshire Holding Group.
"In million-dollar homes, you're looking at people who can afford it, but they have to make a business decision: Does it make sense to make payments on a mortgage when the home is worth less than they owe?" he said. In many cases, it often makes more financial sense to walk away.
At least they can take their time packing up all of their belongings. On average, it takes about 348 days for a foreclosure to be completed, Blomquist said. "They may get almost a year of free housing out of the deal."
But don't expect a few depressed mansions to bring down the neighborhood. A single foreclosure in an otherwise wealthy area is unlikely to impact surrounding values, Blomquist said.
"You're not going to see the weeds growing," Vener added. But there will be an opportunity for buyers to snatch up these impressive houses at bargain basement prices, he said, which could provide a much-needed boost to sales overall. "In a good way, this is going to drive turnover," he said.
Friday, February 24, 2012
Obama to address gas prices, pitch energy policy Obama to address rising gasoline prices in Florida, pitch his multiple-source energy policy
WASHINGTON (AP) -- President Barack Obama is confronting Americans' anxiety over rising gasoline prices by drawing attention to his energy policies and taking credit for rising oil and gas production, a greater mix of energy sources and decreased consumption.
Obama is heading to Florida on Thursday to promote an energy strategy that the administration says will reduce dependence on foreign oil in the long term. But Obama's pitch will also have a subtext: that the federal government can do little to halt the current rise in gasoline prices.
Obama will speak at the University of Miami and tour the school's Industrial Assessment Center, which trains students as industrial energy-efficiency experts. The program is one of 24 across the country.
White House advisers believe Obama needs to address the recent spike in gasoline prices, even though they see it as a cyclical occurrence. The current $3.58 per gallon is the highest price at the pump ever for this time of year.
Obama aides worry that the rise in prices could reverse the country's economic gains and the president's improved political standing. A new Associated Press-GfK poll shows that though Obama's approval rating on the economy has climbed, 58 percent disapprove of what he's doing on gas prices.
Republicans have seized on the issue, citing Obama's decision to reject a permit for a cross-country oil pipeline as evidence of a misguided policy. Former Pennsylvania Sen. Rick Santorum has warned of $5-a-gallon gas, while former House Speaker Newt Gingrich has said he could lower prices to $2.50 a gallon.
White House officials point to increased oil production and decreased consumption as evidence that Obama's policies are working and will lead to greater energy independence in the long run. But they assert there is little Obama — or any president — can do to change the trajectory of prices now.
Despite more domestic oil and less consumption, "these prices are going up, and that tells you that there are other things beyond our control, like unrest in the Middle East or other factors like the growth of emerging countries such as China and India," White House spokesman Jay Carney said Wednesday.
To be sure, oil and gas production has increased during the Obama administration, though the trend began during the presidency of George W. Bush, according to the U.S. Energy Information Administration. The increase has reversed a decline that began in 1986, and the agency projects that by 2020 oil production will reach a level not seen since 1994.
The agency also has reported a drop in petroleum consumption, caused by the economic downturn after the 2008 recession, new efficiencies and changes in consumer behavior.
While in Florida, Obama also plans to raise money, including a $30,000-a-person event at the Windermere, Fla., home of Dallas Mavericks guard Vince Carter. An avid basketball fan, Obama will attend a dinner Thursday at Carter's house just three days before the NBA All-Star Game in nearby Orlando.
Obama also will attend fundraising events at the Biltmore Hotel and at the Coral Gables home of lawyer Chris Korge, a top fundraiser for Hillary Rodham Clinton's 2008 presidential campaign.
Last week, Obama took a three-day West Coast trip and raised about $8 million in eight campaign events.
Thursday, February 23, 2012
Profits in the Standard & Poor's 500 Index are rising faster than its price, leaving the gauge 9 percent cheaper than it was in April even after American equities climbed within 6 points of last year's peak.
The S&P 500 fell 0.3 percent to 1,357.66 yesterday, trimming a rally since October that has added more than $3.2 trillion to share values, according to data compiled by Bloomberg. While the index is 0.4 percent below the 2011 high of 1,363.61, expanding earnings have pushed the price-earnings ratio to 14 from 15.4 in April.
Economic growth that has been slower than any post- recession period since at least the 1940s is keeping investors from paying more for earnings even after stocks doubled in three years. The best January for the S&P 500 in 15 years has coincided with a decline in New York Stock Exchange trading volume to the lowest level since 1999 and record deposits with investment-grade bond funds.
"The world is profoundly underinvested in U.S. equities," Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a phone interview on Feb. 21. His firm manages $300 billion. "The public is bombarded with all these negatives. Greece this, Portugal that, dysfunctional governments. The retail investor is frozen."Topping Estimates
Corporate profits have topped analyst estimates for 12 straight quarters. Analysts that cover companies in the S&P 500 project earnings will rise this year to $104.27 a share, the highest level ever, according to data compiled by Bloomberg. That would represent a 69 percent increase in earnings since 2009, compared with the 22 percent rally in the index in the past two years. Earnings for S&P 500 companies from Priceline.com Inc. to MasterCard Inc. and Lorillard Inc. are estimated to jump 9.6 percent from last year.
The S&P 500 has recovered 24 percent since its low on Oct. 3. Its price-earnings ratio of 14 is near the average level last year and has trailed the five-decade average of 16.4 for the longest stretch since the 13-year period beginning in 1973, according to Bloomberg data.
The S&P 500's valuation shrank as much as 27 percent in 2011 as S&P stripped the U.S. of its AAA credit rating, President Barack Obama and Congress debated deficit cuts and Europe was forced to bail out Greece. The European Central Bank's three-year lending program for banks and the Federal Reserve's pledge to keep benchmark interest rates low through at least 2014 have failed to bolster investor confidence enough to boost valuations.âPowerful Recovery'
"The powerful recovery in earnings thus far has allowed market averages to rise without pushing the P/E higher," David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., said in a Feb. 21 e-mail. His firm oversees $600 billion. "Many investors are either not convinced that this price rally and earnings recovery are for real, or they simply do not care, having been burned too badly in the downturn."
U.S. gross domestic product expanded an average 2.4 percent a quarter in the 2 1/2 years since the recession ended in 2009, data compiled by Bloomberg show. The world's largest economy hasn't had a smaller post-recession recovery rate since at least the 1940s, the data show. In the 2003 bull market, GDP rose 2.7 percent on average, before the S&P 500 surged 102 percent. For the 1982 rally, the rate was 5.7 percent. Equities more than tripled in that cycle.Biggest Swings
Stocks saw unprecedented swings last year as global economic concerns overshadowed S&P 500 fundamentals. The index moved an average 1.3 percent each day from April 2011 through the end of the year, compared with the 50-year average of 0.6 before the September 2008 collapse of Lehman Brothers Holdings Inc., according to data compiled by Bloomberg. The Dow Jones Industrial Average (INDU) alternated between losses and gains of 400 points on four days in August, the longest streak on record.
The swings took a toll on professional and retail investors. A total of 21 percent of 525 global fund categories tracked by Morningstar Inc. topped their benchmark indexes last year, the fewest since at least 1999. A Hedge Fund Research Inc. index (HFRIFWI) of industry performance fell 5.2 percent in 2011, only the third annual loss since 1990 and the biggest decline since 2008, when it plunged 19 percent, according to the Chicago-based firm.
Trading by individuals has been slowing since the 2008 financial crisis. Daily average volume slipped 9 percent last quarter compared with a year ago, according to data from E*Trade (ETFC) Financial Corp., TD Ameritrade Holding Corp. and Charles Schwab Corp. At E*Trade (ETFC), daily trading volume is 35 percent lower than it was at the end of 2008. Revenue-generating trades are down 14 percent in the same period at Schwab.âHard to Jump In'
"When you have a market that has done so well so fast, it's really hard to jump in," Brian Culpepper, a portfolio manager at James Investment Research Inc. in Xenia, Ohio, which oversees $3.2 billion, said in a telephone interview on Feb. 21. "Everybody is pretty skittish right now on this overall rally. There is by far a better chance for the market to head down than there is for heading up here."
Trading (MVOLUSE) at the New York Stock Exchange declined to the lowest level since 1999 last month, with the average volume over the 50 days ending Jan. 25 slowing to 838.4 million shares, according to data compiled by Bloomberg. The value of stock changing hands dropped to $24.9 billion, a 50-day average not seen since at least 2005.
Record-low interest rates have failed to keep investors from putting money in bonds. The S&P 500's earnings yield is at 7.1 percent, close to the highest on record when compared with the 10-year Treasury (USGG10YR) rate, according to data compiled by Bloomberg since 1962. U.S. investment-grade bond mutual funds saw a record $3.3 billion in inflows during the week ended Feb. 15, while American equity funds had outflows of $1.9 billion, according to data by EPFR Global and Bank of America Corp.Unduly Punished
Companies with business focused in the U.S., such as hospital operator Community Health Systems Inc., have been unduly punished, according to Ed Maran, a portfolio manager at Thornburg Investment Management Inc. in Santa Fe, New Mexico, which oversees $80 billion. Community Health trades at 7 times earnings in the past 12 months, compared with the average of 28.5 since it went public in 2000, according to Bloomberg data.
"The uncertainly at the global level probably should not be reflected so greatly in the prices of these types of companies," Maran said. "As long as we have a resolution of the European sovereign debt problem that's orderly, stocks are very cheap relative to other investment alternatives."
To contact the editor responsible for this story: Nick Baker at email@example.com
Wednesday, February 22, 2012
Small vs. Large Caps: Does Investing in Small Caps Lead to Higher Returns?
Although definitions vary, most brokerages consider small-cap investments to be stocks with market capitalizations of between $300 million and $2 billion. The investments are oftentimes viewed as attractive because of their perceived potential for high yield. The old adage, “No pain, no gain” is appropriate here: Because small-cap stocks represent smaller, frequently fledgling companies, the investor in small caps runs the risk of seeing his or her investment evaporate along with an unstable company. On the other hand, these companies present the potential for growth, and with growth comes large gains. Often, small-cap as opposed to large-cap companies are more likely to invest their earnings in expansion as opposed to other concerns. Large-cap stocks, on the other hand, are seen as representing a more stable investment—but one with less potential for exponential growth. You know your stock in a large multinational will likely always be valuable, but you also know that its increase in value is likely to be more steady than marked. The contrast is encapsulated in the popular idea of getting rich off of just the right small-cap stock or fund—in short, making a killing by picking up a small cap just before it becomes a large cap.
Is this conventional wisdom accurate, though? Perhaps not, according to respected analyst John C. Bogle, author of Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor. Bogle’s data suggests that small caps oftentimes do outperform large caps—but not consistently so. Instead, their performance has been cyclical. As Bogle writers,
From 1925 through 1964 - a period of fully 39 years - small caps and large caps provided identical returns. Then, in just four years, through 1968, the small-cap return more than doubled the large-cap return. Virtually that entire margin was lost during the next five years. By 1973, small caps were about at part with large caps for nearly the full half-century. The small caps' reputation was made largely during the 1973-1983 decade. Then, perhaps inevitably, RTM (reversion to the mean) struck again in a fifth cycle. Paralleling the observation of the poet Thomas Fuller in 1650, it was darkest for the large caps just before the dawn, for the sun has shone brightly upon them since 1983.
These recent years have featured balanced small- vs large-cap performance. Given these variable returns, Bogle concludes that “In any event, the relationship between large caps and small caps, if not entirely dominated by RTM, is permeated with the force of market gravity.”
Bogle’s analysis may suggest that the conventional wisdom is more myth than fact. That said, whereas it might be argued that recent diminished returns for small caps suggests that increased publicity for them has leveled the playing field, the intermittent focused success of small caps during shorts periods suggests that the potential is always there. The investor can hope that he or she is on the brink of another strong period for small caps. Therefore, lessened attention to small caps is not necessarily warranted. Moreover, the need for a diversified portfolio will always dictate that a healthy amount of investment in small caps will be necessary.
Thursday, February 16, 2012
LONDON (MarketWatch) -- French regulators said Monday they have lifted a ban on short-selling of 10 financial stocks, which had been in effect since August. The French stock market regulator AMF said in a statement that the ban came to an end Saturday. The ban had applied to BNP Paribas SA , Credit Agricole SA , Societe Generale SA and AXA SA among others. Shares of Credit Agricole fell 3.9% Monday, while Societe Generale dropped 3%, BNP Paribas shed 2.6% and AXA lost 0.6%.
Wednesday, February 15, 2012
Apple Stock Hits $500: Tech Giant’s “Best Days Are Still in the Future,” Former Retail Chief Says
Apple shares topped $500 for the first time Monday morning, trading as high as $503.83 in yet another milestone in a long-running series by the company.As impressive as the past decade has been for Apple, the company's "best days are still in the future," according to Ron Johnson, Apple's former retail chief and current CEO of J.C. Penney.Johnson, who helped build Apple into a retail juggernaut, says the company is poised to keep growing and taking market share because of its intense commitment to "innovation and quality."Apple is "incredible at creating products that people love," he says. "Nobody does hardware better; nobody does software better. Nobody does retail better. And they're just getting started in places like China."While the passing of Steve Jobs leaves a void at the firm, Johnson lauds his former colleagues. Apple has a "huge reservoir of talent," he says, citing CEO Tim Cook and design chief Johnny Ives as notable examples. (See: The Future of Apple Without Steve Jobs)Steve Jobs "built a team that is equally unmatched" and "I expect that team to really excel in the decade ahead," Johnson declares.Supply Chain ConcernsIf there's any knock on Apple these days, it's about concerns with its supply chain and working conditions at Foxconn and other suppliers. (See: The Darker Side of Apple: The Human Cost of Your iProducts)Following a steady drumbeat of criticism, Apple on Monday announced it has asked the Fair Labor Association to "conduct special voluntary audits of Apple's final assembly suppliers, including Foxconn factories in Shenzhen and Chengdu, China." (See: Apple's Sweatshop Problem: 16 Hour Days, ~70 Cents An Hour)Johnson says "a lot of attention" was giving to such issues during his time at Apple. "Apple has great compassion for people who work at partner companies," he says. "It's just a really complex issue [and] hard to control. I'm confident Apple cares deeply about the issues and will address them."Because of its huge market-cap and industry position, Apple can be a leader in these areas, according to corporate governance and labor experts.But all importers must be "deeply concerned" about working conditions in the supply chain, Johnson says. "We've got to pay close attention as best we can to what goes on in every factory where we manufacture products."Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at firstname.lastname@example.org
Tuesday, February 14, 2012
President Obama unveiled a $3.8 trillion budget request Monday that hikes taxes on the rich, spends new money on infrastructure and education, but does little to reform the entitlement programs that pose the biggest long-term threat to the federal budget.
"We built this budget around the idea that our country has always done best when everyone gets a fair shot, everyone does their fair share and everyone plays by the same rules," Obama said in his budget message.
But the budget forecasts a deficit for fiscal year 2012 that will top $1.3 trillion, before falling in 2013 to $901 billion, or 5.5% of gross domestic product.
The deficit projections, which have hovered near $1 trillion for each year of the Obama presidency, mean that Obama will not satisfy his 2009 promise to half the deficit by the end of his first term.
White House officials described the budget as a continuation of two major speeches given recently by the president -- one in Kansas where he promised Americans a "fair shot," and last month's State of the Union.
The budget also offers fresh insight into how the White House plans to comply with last year's Budget Control Act, which allowed Congress to raise the debt ceiling in exchange for caps ondiscretionary spending accounts.
Many of the high profile recommendations made in the budget were first floated by the administration last year as part of a deficit reduction plan rolled out in September.
Spending: The administration is proposing a series of investments focused on infrastructure, education and domestic manufacturing, including old favorites like $30 billion to modernize schools and an additional $30 billion to retain and hire teachers and first responders.
One key element of that plan is a six-year proposal to spend $476 billion on surface transportation, a big increase from current levels, and much more than other proposals lawmakers are considering.
At the same time, the White House had to comply with the spending caps enshrined in the Budget Control Act, which total in the neighborhood of $1 trillion in discretionary spending over a decade.
That means many programs will see their funding cut.
"Every department will feel the impact of these reductions as they cut programs or tighten their belts to free up more resources for areas critical to economic growth," Obama wrote.
Discretionary spending is projected to fall from 8.7% of GDP in 2011 to 5.0% in 2022.
The budget details 210 places where programs will be cut or eliminated, for savings of $24 billion in 2013 and $520 billion over a decade.
For example, the budget eliminates an Air Force satellite system that is "no longer needed to meet mission requirements."
And the budget proposes consolidating the Bureau of Public Debt and the Treasury's Financial Management Service.
The president would also like to cut some mandatory spending, including select farm subsidies and federal employee retirement and health benefits, for savings of $217 billion over a decade.
Military spending will be reduced. The Pentagon plans to spend $487 billion less over 10 years, a course that Secretary of Defense Leon Panetta has already laid out in some detail.
But even with some cuts, annual deficits are still projected to be more than $500 billion every year for the next decade, and the budget would add $7 trillion to the debt held by the public between 2013 and 2022.
Taxes: The budget proposes a tax hike of $1.5 trillion, which includes a provision that will allow the Bush tax cuts to expire for high-income earners, a long-held Obama position.
Obama would like carried interest to be taxed as ordinary income, which means money managers would pay more than double the rate they currently pay on a portion of their compensation.
The budget also incorporates the Buffett Rule, a guideline to ensure that the wealthiest do not pay a lower overall tax rate than those who earn substantially less money.
Specifically, no household making more than $1 million will be a allowed to pay less than 30% of its income in taxes.
It also calls for a year-long extension of the payroll tax cut and unemployment insurance.
In addition, the White House wants to reform the individual tax code in a way that "eliminates inefficient and unfair tax breaks for millionaires while making all tax breaks at least as good for the middle class as for the wealthy."
On corporate taxes, details are scarce, but administration officials said that the president will unveil a plan to reform the corporate tax code later this month.
Entitlements: Because the president's budget does little to address how to curb the growth in entitlement spending, it's unlikely to stabilize deficits beyond the next 10 years.
The budget would cut more than $360 billion from Medicare, Medicaid and other health programs over a decade. But that's a drop in the bucket when compared to the rapid expansion of costs expected for entitlement programs.
"While [Obama's] budget stabilizes debt over the next decade, the real problem arrives thereafter, as entitlement costs spiral out of control and revenues are inadequate to deal with a wave of retiring baby boomers," Pete Domenici and Alice Rivlin, who led their own debt task force, said in a joint statement.
Of course, proposing significant cuts to Medicare and Social Security during an election year is a politically risky move, but by not saying much on the issue, the White House opened itself to criticism.
House Appropriations Committee Chairman Hal Rogers took Obama to task on Monday, saying the proposal "falls exceptionally short" on entitlement spending reform.
"It is imperative that both the President and Congress put greater focus on addressing the exploding costs of these programs," Rogers said. "Without meaningful action in this area, the nation's debt and deficit crisis will continue, increasing the risk to our nation's financial and economic future."
What's next: Obama's budget request is essentially a blueprint of his fiscal priorities -- the programs he would like to fund or cut, the new investments he would make and how he would pay for it all.
But the request is just that -- a request. And it's one that Congress can accept, reject or modify.
Even if Obama's budget is adopted -- which it won't be -- the estimates for deficit reduction may or may not pan out depending on how close to reality the administration's forecasts for unemployment, interest rates and economic growth prove to be.
In any case, Obama's 2013 budget is only the first step in a convoluted process that involves no less than 40 congressional committees, 24 subcommittees, countless hearings and a number of floor votes in the House and Senate.
If all goes well, a formal federal budget for government agencies will be in place by Oct. 1, the start of the 2013 fiscal year.
Monday, February 13, 2012
Last October the Internal Revenue Service (IRS) released a new version of the annual tax forms investors receive from their brokers, called the 1099-B. While the new version will require less effort from investors when filing their taxes, it could also curtail their expected profits.
Previously, brokers were only required to report on the 1099-B certain information relating to the sale of investments, such as the date of the sale and the amount of the sale proceeds, and it was the investors responsibility to figure out how much they paid for stocks that were sold. This made it extremely difficult for many investors, as they were responsible for keeping track of and reporting the cost basis on their tax return.
That changes this year due to the Emergency Economic Stabilization Act of 2008, which shifts the responsibility to the brokers to file the new 1099-B form which will include the cost basis. In addition the expanded form will also report the gain or loss of each transaction and whether or not the transaction was short term or long term.