Fear of Iran is inflating gas prices

Tensions with Iran are adding at least 30 cents to a gallon of gasoline in the United States, and experts say gas prices have only just begun to rise.

Gasoline prices have surged over 10% in the last two months, largely tracking the runup in oil prices, which have increased by a similar amount and are now at a 9-month high.

Several factors have caused oil prices to rise, including the sense that the economy is improving and supply disruptions in a handful of minor oil producing nations.

But the biggest factor by far, say analysts, is fear that tensions with Iran will lead to an all-out war that causes a disruption in oil supplies.

"The market right now is fairly well supplied," said John Kingston, director of oil, at the analytics firm Platts. "You've just got a significant fear factor that things could get worse."

Kingston noted that OPEC is actually producing more oil right now than is needed to keep pace with global demand. As such, stockpiles are rising.

Gas spending and prices by state

And thanks to the recession and better fuel efficiency, gasoline demand in the Untied States, the world's largest consumer, is actually the lowest it's been in a decade, according to the Energy Information Administration.

Yet gas and oil prices continue to climb.

The fear is that Iran's 2.2 million barrels a day in exports could be cut off. Iranian oil is already being sanctioned, but so far most is still finding its way to market, just at lower prices.

Worse, there's fear the 17 million barrels a day that flow through the Strait of Hormuz, one fifth of the world's total production, could be disrupted by an Israeli attack.

That's a big reason why gasoline prices in the Untied States averaged $3.37 in January, the highest for any January ever, according to AAA.

"It's a market that's caught fire," said Ben Brockwell, an analyst at the Oil Price Information Service, which collects data for AAA. "And it doesn't look like there's any circuit breakers to stop it."

Indeed, Brockwell noted that while retail prices are up 36 cents a gallon in the last two months, futures prices have risen even higher -- 82 cents over the same time period.

Unless the situation with Iran cools off and future prices decline, consumers will likely see that 35-cent-a-gallon difference in the form of a similarly paired price hike at the pump in a matter of weeks.

Iran's 'distressed' oil to keep flowing - at deep discount

"I definitely think the market is psyching itself up for a new record," he said, referring to the previous high for gasoline, which was $4.11 a gallon set in the summer of 2008. "Probably before memorial day."

That possibility has got a lot of people freaked out. Everyone from the Obama administrations to the American Petroleum Institute has been trying to talk down prices in the last few days.

Many economists say gasoline prices sustained above $4 a gallon couldstunt the growth of the fragile worldwide economy -- a fact which diplomats shuttling to Israel must be well aware.

It's thought the Israelis are considering an attack on Iran as a means to disrupt its nuclear program, which Iran says is for peaceful purposes but many suspect is intended to produce a bomb.

But if Israel can't be persuaded to hold off an attack, $4 gas will look cheap.

"If Israel does hit Iran, all bets are off," said Mike Fitzpatrick, editor-in-chief of Kilduff Report's Energy Overview. "$150 [oil] is the first marker we'll hit."

Oil at $150 a barrel could translate into over $5 a gallon at the pump.

How to Avoid Miscalculating in Small-Cap Investments

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.”

Million-dollar foreclosures rise as rich walk away

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.

See inside 8 multi-million dollar foreclosures

"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.

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.

S&P 500 Gets 9% Cheaper as Record Profit Restores $3.2 Trillion to Stocks

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.

‘Powerful 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.

‘Hard 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 reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; Lu Wang in New York at lwang8@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

Small vs. Large Caps: Does Investing in Small Caps Lead to Higher Returns?

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.

France lifts ban on short-selling

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%.