Tuesday, October 31, 2006

Stocks Drift after Soft Economic Data

News Article
October 31, 2006

Business Week Online

Stocks Drift after Soft Economic Data

Consumer confidence and Chicago PMI both posted declines in October. Procter & Gamble's third-quarter profit topped analyst expectations

Stocks finished narrowly mixed Tuesday, though off their weakest levels, as consumer confidence and Chicago-area manufacturing activity each registered a downtick for the month. Month-end portfolio adjustments helped support the broader market, says Standard & Poor's Equity Research

On Tuesday, the Dow Jones industrial average slipped 5.77 points, or 0.05%, to 12,080.73. The broader Standard & Poor's 500 index nudged higher 0.01 points, or less than 0.01%, to 1,377.94. The tech-heavy Nasdaq composite rose 2.94 points, or 0.12%, to 2,366.71. NYSE breadth was slightly positive, with 17 issues advancing for every 16 declining. Nasdaq breadth was 16-14 negative. 

Lackluster economic reports were in focus Tuesday. Consumer confidence slipped to 105.4 in October, after jumping to an upwardly revised 105.9 in September. Separately, the Chicago PMI regional manufacturing index dropped to 53.5 in October, from 62.1 in September Meanwhile, the employment cost index rose 1% in the third quarter, its fastest pace in two years, after a 0.9% second-quarter gain. 

The employment figures suggest a tight labor market, some analysts say. "Wage increases are beginning to show a pattern of steady gains, with the year-over-year increase in wages rising for four straight quarters to 3.2% in the third quarter from 2.3% a year ago," says John Ryding, chief U.S. economist at Bear Stearns. 

Looking ahead, Wednesday's economic calendar holds the Institute for Supply Management's index of manufacturing activity. Investors will also be sifting through data on September construction spending and October vehicle sales. 

In earnings news Tuesday, Dow component Procter & Gamble (PG) was lower despite reporting a better-than-expected 33% gain in third-quarter profit and raising its full-year earnings outlook. 

Photographic film icon Eastman Kodak (EK) posted a $37 million loss in the third quarter for its eighth consecutive quarterly loss.

United Airlines parent UAL (UAUA) reported back-to-back quarterly profits for the first time in more than six years. 

Companies set to report earnings Wednesday include Time Warner (TWX), among others. 

On the M&A front, Merck (MRK) agreed to buy biotechnology outfit Sirna Therapeutics (RNAI) for $1.1 billion, or $13 a share. Internet search company Google (GOOG) acquired JotSpot, a California startup that develops online collaboration tools called wikis. 

Elsewhere, Boeing (BA) was modestly lower despite news the aerospace company has secured 100 plane orders in China so far this year. 

The board of IBM (IBM) approved an additional $4 billion in stock buybacks, on top of $2.4 billion for share repurchase left over from a prior authorization. 

Telecommunications company Verizon (VZ) was lower after UBS lowered its recommendation on the stock from buy to neutral. 

In the energy markets, December West Texas Intermediate crude futures rose 37 cents to $58.73 a barrel. Prices fell early amid reports of increased Nigerian output, but buyers stepped in around the $57 level, with short-covering buoying crude into the close, says Action Economics. 

European markets finished mixed, paring earlier gains after the U.S. consumer confidence report. In London, the FTSE-100 index nudged higher 2.3 points, or 0.04%, to 6,129.1. Germany's DAX index added 10.73 points, or 0.17%, to 6,268.92. In Paris, the CAC 40 index fel 13.5 points, or 0.25%, to 5,348.73. 

Asian markets ended slightly higher following a steep decline in oil prices. In Japan, the Nikkei 225 index gained 47.54 points, or 0.29%, to 16,399.39. In Hong Kong, the Hang Seng index advanced 26.8 points, or 0.15%, to 18,324.35. Korea's Kospi index was up 8.44 points, or 0.62%, to 1,364.55. 

Treasury Market

Treasury yields extended their decline after the weak Chicago PMI number and the mild consumer confidence data. The 10-year note rose in price to 102-03/32 for a yield of 4.61%, while the 30-year bond advanced to 96-16/32 for a yield of 4.72%.

Monday, October 30, 2006

The Economy's Housing Problem

News Analysis
October 30, 2006

BusinessWeek Logo

The Economy's Housing Problem

Weak third-quarter GDP numbers came courtesy of the housing slump. Is a real estate-led recession far behind?

Anyone trying to judge the state of the housing sector could be excused for feeling a bit…befuddled. On Oct. 20, Goldman Sachs (GS) issued a report suggesting the worst of the housing downturn could be over, and former Federal Reserve Chairman Alan Greenspan reiterated remarks of his own to a similar effect on Oct. 26 (see BusinessWeek.com, 10/23/06, "Is Housing Out of the Woods?"). Encouraging words, to say the least.

But while analysts and economic eminences see a trough, data reports point to more gloom ahead. In the third quarter, the biggest drop in homebuilding investment since 1991 slowed economic growth to its worst pace in more than three years, an Oct. 27 report showed. New home sales rose in September, but the median price of a new home fell by nearly 10% in the biggest one-year drop since 1970, according to the Census Bureau on Oct. 26 (see BusinessWeek.com, 10/27/06, "The Housing Fire Sale"). And on Oct. 25, the release of September existing home sales slightly missed Wall Street expectations.

It's enough to leave homeowners across the country understandably perplexed (see BusinessWeek, 11/6/06, "Boom! Bust! Boom?"). Should they believe the ex-Fed "Maestro," or the numbers? While the housing slowdown may not wind up crippling the economy the way some pundits feared, many analysts say its effects aren't finished just yet.

How Long a Slump?

"The velocity of the slowdown [in housing] is going to moderate," says Jeff Kleintop, chief investment strategist at PNC Wealth Management (PNC). "But we are still a number of quarters away from a true bottom."

The cooling housing market has already taken a slice out of the economy. Gross domestic product (GDP) expanded at a pace of 1.6% in the third quarter, down from a 2.6% pace in the second quarter, according to the Commerce Dept.'s advance report. Residential investment tumbled at a 17.4% one-year pace from a year earlier, trimming 1.1% from GDP growth. Fed Chairman Ben Bernanke has predicted softening housing would probably subtract 1% from economic expansion in the second half of 2006, and possibly 2007.

Experts are divided over how long the housing weakness will continue and what its effect will be on the overall economy. Troubled homebuilder stocks like D.R. Horton (DHI), Lennar (LEN), Pulte Homes (PHM), and KB Home (KBH) have perked up since their midsummer lows. As for the decline in new home sale prices, "it remains to be seen" what this development implies for consumer spending, according to Thomas Stolper, global markets economist at Goldman Sachs. "The market for now seems to be giving greater attention to the boost to real disposable income from falling gas prices," Stolper says in an Oct. 27 note to clients.

Impact Could Be Wide

Some analysts expect economic growth to start increasing again, until the Fed is forced to raise interest rates yet again sometime next year to rein in inflation. "After the housing construction adjustment has worked through, we look for growth to rise back above potential," says John Ryding, chief U.S. economist at Bear Stearns, in an Oct. 27 dispatch.

On the downside, a drop in mortgage applications for new home purchases may illustrate the depth of the housing decline. Mortgage applications were down 16% from the start of the year through the week ended Oct. 20, observes David Rosenberg, North American economist at Merrill Lynch (MER). "In stock market parlance, if the Dow were down that much, it would barely be above the 9,000 mark right now," Rosenberg says in an Oct. 25 research report. The Fed and the Street will likely have to lower their estimates for fourth-quarter GDP growth, he adds in an Oct. 27 note.

Real-estate softness could have potentially wide-ranging effects on the economy. "A seemingly minor dislocation originating in the housing sector, such as a higher rate of foreclosures, might cascade through the rest of the economy in unforeseen ways—for example, in a collapse in bank earnings or a hiccup in the huge market for securities that back residential mortgages," observes Jeffrey Knight, chief investment officer of global asset allocation at Putnam Investments (MMC), in his most recent market outlook.

Enduring Slowdown

Still, outside of housing, other economic factors are looking up, most analysts say. A drop in oil prices and the stock market's rally to all-time highs have boosted consumer confidence, suggesting stronger retail sales in the fourth quarter than in the third quarter, according to Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.

The housing drop-off could signal investing opportunities elsewhere. Shares of drugmakers like Johnson & Johnson (JNJ) or Pfizer (PFE) might be among the downturn's unwitting beneficiaries, historical patterns suggest. The relative return of pharmaceutical stocks is "extremely negative correlated to housing activity," notes Jack Ablin, chief investment officer at Harris Bank.

In any event, homebuilder stocks skidded in afternoon trading on Oct. 27, and the broader stock market retreated following four consecutive record finishes for the Dow Jones industrial average. The housing slowdown might not derail equity investors' gains, but it's probably still too early to declare the downturn defeated.

Stocks End Mixed amid Oil, Wal-Mart News

News Article
October 30, 2006

Business Week Online

Stocks End Mixed amid Oil, Wal-Mart News

Crude futures slid below $59. Also in focus: Wal-Mart's smallest monthly same-store sales increase in six years

Stocks finished mixed Monday, recovering from opening lows but faltering in the final hour amid tumbling oil prices, new economic data and a retail giant's soft sales report. Traders were adjusting their portfolios for the end of the month and debating whether to join the recent rally, says Standard & Poor's Equity Research.

On Monday, the Dow Jones industrial average edged down 3.92 points, or 0.03%, to 12,086.34. The broader Standard & Poor's 500 index nudged higher 0.59 points, or 0.04%, to 1,377.93. The tech-heavy Nasdaq composite rose 13.15 points, or 0.56%, to 2,363.77, boosted by Yahoo! (YHOO).

NYSE breadth was slightly positive, with 18 issues advancing for every 15 declining. Nasdaq breadth was 17-14 positive.

Oil prices slid Monday after a modest rebound on Friday. In the energy markets, December West Texas Intermediate crude futures fell $2.39 to $58.36 amid skepticism over OPEC's planned output cuts. The move below $60 acted as a catalyst for funds to sell, says S&P.

Economic figures also remained in focus. Personal income rose 0.5% in September, after an upwardly revised 0.4% gain in August, while spending edged up 0.1%. The core PCE deflator, a key inflation gauge, rose 0.2% on the month, for an annualized pace of 2.4%, down from 2.5% in August.

The report may help dissuade the Federal Reserve from raising or lowering interest rates in the near future, some analysts say. The year-over-year drop in inflation "is likely to encourage the Fed to remain on hold at the Dec. 12 FOMC meeting," says John Ryding, chief U.S. economist at Bear Stearns.

Meanwhile, Richmond Federal Reserve President Jeffrey Lacker said the economy is in a transition back to 2.5% to 3% growth and the creation of about 100,000 jobs a month, following Friday's 1.6% third-quarter economic growth reading. He sounded an upbeat note on the housing market.

Tuesday's calendar holds the release of October consumer confidence data, the Chicago PMI regional manufacturing survey for October, and the third-quarter employment cost index.

On the company side Monday, Wal-Mart (WMT) was lower after the retailer said it sees October same-store sales growth of 0.5%, its smallest gain in nearly six years and below last week's forecast.

In earnings news, Verizon (VZ) said its third-quarter profit rose slightly to $1.92 billion, topping analyst expectations.

Health insurer Humana (HUM) said its third-quarter earnings more than tripled on an increase in revenue.

Radio-station operator Clear Channel Communications (CCU) posted 11% lower third-quarter profit on higher expenses, but still topped Street estimates.

Among companies set to report quarterly results Tuesday are Procter & Gamble (PG) and Eastman Kodak (EK).

Elsewhere, Ford (F) was lower as the automaker said it sees North American production down 8% to 12% for the first half of 2007.

Internet media company Yahoo was higher after Merrill Lynch raised its recommendation on the stock from neutral to buy.

Shares of Yum! Brands (YUM) gained after the fast-food company's KFC unit said its restaurants will all switch to a cooking oil with no trans fat by April 2007.

On the M&A front, France's Schneider Electric agreed to acquire American Power Conversion (APCC) in a cash deal valued at $6.1 billion, or $31 per share.

European markets finished lower amid worries about earnings. In London, the FTSE-100 index fell 34.1 points, or 0.55%, to 6,126.8. Germany's DAX index dropped 4.35 points, or 0.07%, to 6,258.19. In Paris, the CAC 40 index was down 33.8 points, or 0.63%, to 5,362.23.

Asian markets ended lower in the wake of Friday's disappointing report on U.S. economic growth. In Japan, the Nikkei 225 index slid 317.22 points, or 1.9%, to 16,351.85. Korea's Kospi index dipped 12.98 points, or 0.95%, to 1,356.11. In Hong Kong, markets were closed for a holiday after the Hang Seng index on Friday lost 56.19 points, or 0.31%, to 18,297.55.

Treasury Market

Treasury yields drifted lower after the PCE data. The 10-year note nudged higher in price to 101-19/32 for a yield of 4.67%, while the 30-year bond rose modestly to 95-18/32 for a yield of 4.78%.

Friday, October 27, 2006

Stocks Fall after Soft GDP Report

News Article
October 27, 2006

Business Week Online

Stocks Fall after Soft GDP Report

Third-quarter economic growth slowed to a weaker-than-expected 1.6% pace. Also in focus: earnings reports from Microsoft and Chevron

Stocks finished lower Friday, a day after the Dow marked its fourth consecutive closing high. With earnings season winding down, investors were weighing an unexpectedly weak report on third-quarter economic growth. Traders were squaring their positions ahead of the weekend, but a key inflation indicator Monday could help stocks rebound, says Standard & Poor's Equity Research.

On Friday, the Dow Jones industrial average fell 73.4 points, or 0.6%, to 12,090.26, pulling back from its best-ever closing level but finishing up 0.8% for the week. The broader Standard & Poor's 500 index dropped 11.74 points, or 0.85%, to 1,377.34, for a weekly gain of 0.7%. The tech-heavy Nasdaq composite slid 28.48 points, or 1.2%, to 2,350.62, up 0.4% on the week, as a Goldman Sachs note saying demand for motherboards is "falling off a cliff" weighed on the tech sector.

NYSE breadth was negative, with 22 issues declining for every 11 advancing. Nasdaq breadth was 20-10 negative.

Economic numbers were in focus at the outset Friday. Third-quarter real gross domestic product (GDP) growth slowed to a 1.6% rate in the Commerce Department's advance report, from 2.6% the previous quarter and 5.6% in the first quarter. The report was weaker than expected, says Action Economics.

The cooling housing market helped drag down overall GDP growth, analysts say. "Coupled with slight disappointments on consumer spending and business investment, this is not positive for near-term growth prospects," says Goldman Sachs.

Still, others noted strength in the underlying details of the report, including consumer spending. "The market kind of overreacted to it at first," says chief investment strategist at PNC Wealth Management. "A pretty weak headline number there raised some concerns, but within the body of the report we find reasons to be a little bit more optimistic."

The Federal Reserve's next move is still more likely to be an interest-rate hike than a cut, some analysts say. "Any expectations of Fed easing at this point would be very premature, in our judgment, as demand growth was fairly solid outside of housing and, partly fueled by real income gains from lower energy prices, we see that demand growth continuing into the fourth quarter," says John Ryding, chief U.S. economist at Bear Stearns.

Also on the economic docket, consumer sentiment rose to 93.6 in the University of Michigan's final October reading, up from the 92.3 preliminary figure and 85.4 final September reading.

The calendar next week holds October employment data, third-quarter figures on employment costs and productivity, and October national business activity surveys.

In corporate news, Microsoft (MSFT) reported a stronger-than-expected 11% earnings increase for the software maker's fiscal first quarter, but its second-quarter guidance was lower than analysts projected.

Oil producer Chevron (CVX) followed Exxon Mobil's (XOM) blowout earnings report with a $5 billion third-quarter profit of its own, exceeding Wall Street estimates.

Meanwhile, server and software maker Sun Microsystems (SUNW) posted a narrow quarterly loss than expected on 17% higher revenue.

Companies set to report quarterly results next week include Eastman Kodak (EK), Procter & Gamble (PG), Qwest (Q), and Verizon (VZ).

On the M&A front, Mexican cement maker Cemex (CX) said it would offer $12.8 billion, including $1.1 billion in debt assumption, for Australian building materials group Rinker (RIN).

In the energy markets, December West Texas Intermediate crude futures rose 39 cents to $60.75 a barrel in choppy action.

European markets finished lower. In London, the FTSE-100 index fell 23.9 points, or 0.39%, to 6,160.9. Germany's DAX index dropped 21.65 points, or 0.34%, to 6,262.54. In Paris, the CAC 40 index skidded 37.76 points, or 0.69%, to 5,396.03.

Asian markets ended lower. In Japan, the Nikkei 225 index slid 142.53 points, or 0.85%, to 16,669.07. In Hong Kong, the Hang Seng index lost 56.19 points, or 0.31%, to 18,297.55. Korea's Kospi index dipped 4.56 points, or 0.33%, to 1,369.09.

Treasury Market

Treasury yields dipped following the weak GDP reading. The 10-year note rose in price to 101-17/32 for a yield of 4.67%, while the 30-year bond advanced to 95-13/32 for a yield of 4.79%.

How the Election Could Move the Markets

News Analysis
October 27, 2006

BusinessWeek Logo

How the Election Could Move the Markets

If Democrats take back Congress, it could spell trouble for the likes of Wal-Mart and Big Pharma—and profits for alternative-energy providers

With less than two weeks to go, it's still anybody's guess which party will come out on top in the Nov. 7 midterm elections. Poll numbers for President Bush and the Republicans remain dismal amid ongoing Iraq violence and the aftermath of an ethics scandal involving former Rep. Mark Foley (R-Fla.), but the GOP may still be able to hold onto one or both houses of Congress, analysts say (see BusinessWeek, 10/16/06, "Graphic: The Election at a Glance"). Either way, some investors are probably worrying what the elections could mean for the markets.

In a USA Today/Gallup poll released Oct. 24, 54% of likely voters said they favored the Democratic candidate in their district, while 41% picked the Republican. This 13 percentage-point gap represented a drop from the prior week, but equaled the advantage Republicans enjoyed two weeks before their sweeping 1994 electoral gains. Still, the GOP should benefit from a relatively small number of vulnerable seats and the overall Republican tilt of the most hotly contested districts, according to Goldman Sachs (GS) economist Chuck Berwick.

Whether it's the donkey or the elephant that emerges triumphant, investors shouldn't get too carried away. A shakeup in the Beltway probably wouldn't shake up a well-diversified portfolio, analysts say. "There's no evidence of a statistically significant relationship between political control of Washington and the stock market," notes Mark Riepe, senior vice-president at the Schwab Center for Investment Research (SCHW). Riepe analyzed the total rate of return for the Standard & Poor's 500 index since 1953 and found differences in partisan power had little impact on broader market direction.

New Discussions

The current campaign season isn't anticipated to be much different. "We are hard-pressed to think of a major stock-market-moving event that is likely to come from the midterm elections," Tobias Levkovich, chief U.S. equity strategist at Citigroup (C), wrote in an Oct. 12 note to clients.

Nevertheless, winds of change in Washington might bring new risks—or some advantages—for a few specific stocks and industries (see BusinessWeek.com, 9/21/06, "A Game Plan for D.C. Gridlock"). While a Democratic majority in either chamber would still face the threat of a Presidential veto, any change in leadership might at least change the topics of discussion on the Hill. Companies in the pharmaceuticals and energy sectors might be affected, analysts say, as could Wal-Mart (WMT).

Among the stocks most widely expected to get hurt by Democratic gains are drugmakers, such as Johnson & Johnson (JNJ) or Pfizer (PFE). If Dems take control of even one house, it would raise the odds Congress might amend the Medicare Part D legislation to let the government negotiate drug prices, according to UBS (UBS) strategist Thomas Doerflinger. Democratic lawmakers probably wouldn't succeed in changing the law during Bush's Presidency, but the pharmaceutical sector would still face a "sentiment risk," Doerflinger wrote in an Oct. 18 report.

Energy Surge

Investors could get particularly nervous if Democrats take both the house and the Senate, according to Peter Morici, a professor at the University of Maryland School of Business who served as chief economist at the U.S. International Trade Commission under President Clinton. "Looking down the road, if people see a Democratic Congress, they will start thinking of a Democratic President," Morici says. "And they'll start thinking of the consequences for the health-care industry."

In the energy sector, changes in Congress might leave both winners and losers. On the one hand, a potential push to repeal oil-industry tax breaks or impose gasoline taxes could have negative implications for oil stocks, such as Exxon Mobil (XOM) or Chevron (CVX), UBS's Doerflinger notes. But, he says, Democrats' preference for cleaner fuels could be bullish for General Electric (GE), which manufactures gas turbines, and for alternative-energy plays like Energy Conversion (ENER), MEMC Electronic Materials (WFR), Cypress Semiconductor (CY), or Diversa (DVSA).

Longtime liberal bugaboo Wal-Mart may also come under pressure. The retail giant has recently increased its contributions to Democrats (see BusinessWeek, 10/2/06, "How Business Is Wooing Democrats"). Still, control of the House would probably encourage Democrats to push legislation making it more difficult for Wal-Mart to get a charter that would allow it to process some financial transactions internally, says Andrew Parmentier, managing director of Washington policy analysis at Friedman Billings Ramsey (FBR).

Under the Microscope

Loan providers could also come under the microscope. Current House Minority Leader Nancy Pelosi (D-Calif.) has listed cutting student loan interest rates in half as something a Democratic House would accomplish within its first 100 hours in office. S&P downgraded shares of Sallie Mae (SLM) to hold on Oct. 9, citing the possibility of adverse legislation.


Tougher rules for adjustable-rate mortgages might also be in the cards in a Democratic Congress. S&P recently downgraded several regional banks that do mortgage-origination business, including FirstMerit (FMER), Commerce Bancorp (), and Wilmington Trust (WL). On the plus side, S&P sees good news for Fannie Mae (FNM) and Freddie Mac (FRM) if new laws push borrowers toward fixed-rate loans.

A variety of other industries could face scrutiny. If the Dems put forth legislation on "Net neutrality," it could hurt telecom companies like AT&T (T), according to Doerflinger. However, he predicts that defense industry would remain strong, even though Halliburton (HAL) could face the risk of Congressional hearings investigating the process by which a subsidiary was awarded contracts for reconstruction and development work in Iraq. "If defense stocks trade down on a Democratic win, we believe it could create a buying opportunity," Doerflinger says.

Whatever happens Nov. 7, analysts say, investors looking to trade on the results shouldn't change their long-term allocations, and they probably shouldn't wait until Election Day. Politics may be tough to predict—remember "Dewey Defeats Truman"—but that doesn't mean Wall Street isn't already trying.

Tuesday, October 24, 2006

Stocks End Mixed as Dow Hits Another High

News Article
October 24, 2006

Business Week Online

Stocks End Mixed as Dow Hits Another High

Investors digested a raft of earnings reports -- and marked time ahead of Wednesday's Fed announcement

Stocks finished mixed Tuesday, paring early gains as the Dow set new all-time closing and intraday highs for the second consecutive day. Earnings reports were in focus amid a quiet economic docket, while investors awaited Wednesday's Federal Reserve policy statement and Friday's report on third-quarter economic growth.

The Dow Jones industrial average rose 10.97 points, or 0.09%, to 12,127.88, its best-ever close, after briefly touching a new intraday record of 12,133.8. The broader Standard & Poor's 500 index nudged higher 0.35 points, or 0.03%, to 1,377.37. The tech-heavy Nasdaq composite fell 10.69 points, or 0.45%, to 2,344.87.

NYSE breadth was positive, with 18 issues advancing for every 15 declining. Nasdaq breadth was 18-13 negative.

The Fed's committee on monetary policy kicked off a two-day meeting Tuesday. Central bankers are widely expected to keep interest rates unchanged, but investors will be watching for any new comments on inflation or the economy in Wednesday's policy statement. Some are wary of a potentially hawkish tone from the Fed on inflation risks, says Standard & Poor's Equity Research.

Policymakers aren't likely to lower rates anytime soon, some analysts say. "Considering that we have the Dow breaking new highs every day and yesterday we just saw the JOC metals break out to a record high, it stands to reason that even the policy doves are not going to be doing anything but sit on their hands near-term," says David Rosenberg, North American analyst at Merrill Lynch, in a research report. "There are just too many crosscurrents."

Along with the Fed statement, Wednesday's calendar holds a fresh set of housing data. Existing home sales are expected to slow 1.6% to a pace of 6.2 million units, says Action Economics.

On the company side Tuesday, investors were sifting through another batch of earnings. Dow component DuPont (DD) was higher after the company swung to a $485 million third-quarter profit, beating analyst estimates.

Meanwhile, Amgen (AMGN) was higher after the biotech company reported a 14% jump in third-quarter profit and boosted its 2006 forecast for the second time this year.

Shares of Lockheed Martin (LMT) gained after the defense contractor posted a 47% jump in third-quarter profit, exceeding Wall Street forecasts.

Oil gaint BP (BP) was up following a 3.6% drop in third-quarter earnings attributed to the company's production difficulties in Alaska.

Telecom equipment maker Lucent Technologies (LU) was higher after the company, set to be acquired by France's Alcatel, reported flat third-quarter earnings.

On the downside, Texas Instruments (TXN) was lower after the chipmaker said third-quarter sales rose 13% to $3.76 billion, less than analysts expected.

Food maker Kraft (KFT) was also lower as third-quarter sales missed Street projections despite an 11% gain in earnings.

Quarterly results were also on tap from Internet retailer Amazon (AMZN). Companies set to report earnings Wednesday include General Motors (GM) and ConocoPhillips (COP).

Elsewhere, coffee retailer Starbucks (SBUX) bought the operator of more than 60 of its Chinese outlets.

Internet search giant Google (GOOG) introduced a customized version of its search engine that is similar to an existing offering from rival Yahoo! (YHOO).

On the analyst front, Ford (F) was higher after Goldman Sachs raised its recommendation on the automaker from sell to neutral.

Shares of Pfizer (PFE) dipped after UBS downgraded the drugmaker from buy to neutral.

In the energy markets, December West Texas Intermediate crude futures rose 54 cents to $59.35 a barrel ahead of Wednesday's inventory report.

European markets finished mixed. In London, the FTSE-100 index rose 16.4 points, or 0.27%, to 6,182.5. Germany's DAX index added 4.61 points, or 0.07%, to 6,247.52. In Paris, the CAC 40 index fell 7.27 points, or 0.13%, to 5,404.54.

Asian markets ended mixed. In Japan, the Nikkei 225 index slipped 8.35 points, or 0.05%, to 16,780.47. In Hong Kong, the Hang Seng index gained 63.56 points, or 0.35%, to 18,153.41. Korea's Kospi index advanced 1.55 points, or 0.11%, to 1,366.5.

Treasury Market

Treasury yields drifted lower as the Fed kicked off its meeting. The 10-year note edged up in price to 100-13/32 for a yield of 4.82%, while the 30-year bond rose modestly to 93-04/32 for a yield of 4.94%.

Monday, October 23, 2006

So Far, So Good for Earnings

News Analysis
October 23, 2006

BusinessWeek Logo

So Far, So Good for Earnings

Despite slowdown worries, analysts expect S&P 500 companies to post their 18th straight quarter of double-digit earnings growth

Wall Street is enjoying another solid batch of corporate profits as the third-quarter earnings season nears its midpoint. As of Oct. 20 the Standard & Poor's 500 index was on track to post its 18th consecutive quarter of double-digit earnings growth. Companies in the index are projected to post an average year-over-year earnings gain of 13.4%, and that figure could go even higher, according to S&P.

A little more than a third of the S&P 500 companies have reported results so far, and 73% of them show quarterly earnings that topped analyst estimates. Financial and energy companies should account for 43% of earnings, S&P projects, though the sectors represent just 31% of the market. Consumer discretionary companies are posting solid gains over last year's soft second half, while information technology lags despite positive surprises from Wall Street darlings Apple (AAPL) and Google (GOOG).

It's no coincidence that stocks have continued climbing in recent weeks amid the upbeat earnings picture. On Oct. 19 the Dow Jones industrial average topped 12,000 and closed at an all-time high of 12,011.81, then retreated the next day (see BusinessWeek.com, 10/19/06, "Dow Marks First Close Above 12,000"). The broader S&P 500 also touched multiyear highs during the week before finishing at 1,368.6 on Oct. 20.

Bears Kept at Bay

Investors will be watching in the week ahead for earnings reports from energy giants Exxon Mobil (XOM) and Chevron (CVX), among others. Meanwhile, profit growth is widely expected to decline in the fourth quarter and into 2007 alongside a cooling U.S. economy. For the current quarter, though, analysts expect investors to keep dodging profit slowdown worries.

"There've been a lot of dire forecasts about declining earnings growth, but it just hasn't happened," says Brian Gendreau, investment strategist at ING Investment Management. "Maybe people are finally realizing this is for real."

Financial companies were on track for a 13.1% year-over-year gain in earnings, according to S&P, despite worries about interest rates and the slowing housing market. Shares of Merrill Lynch (MER) reached a 52-week high on Oct. 17 as the brokerage said its third-quarter profit more than doubled. Bank of America (BAC), JPMorgan (JPM), and Morgan Stanley (MS) also beat expectations, offsetting a shortfall by Goldman Sachs (GS). Citigroup's (C) better-than-expected earnings came on disappointing revenues.

Some of the earnings growth for consumer discretionary stocks follows weakness in 2005 in the aftermath of Hurricane Katrina. Motorcycle maker Harley Davidson (HOG) and fast-food chain giant Yum! Brands (YUM) were among companies impressing the Street this earnings season (see BusinessWeek.com, 10/13/06, "Yum! Growth with Global Flavor"). McDonald's (MCD) posted a 15% earnings increase on Oct. 19 but declined on the session as the results were in line with a pre-announcement a week earlier.

Housing Effects

Despite recent declines in oil prices, the energy sector's upcoming earnings reports could be solid as well. Oil prices fell from $73.94 to $62.91 during the quarter, but in between they reached an all-time peak of $74.80. "While the net may not be a record, it's feasible that the sales will be," says Howard Silverblatt, S&P's senior index analyst.

The basic materials sector may not be able to dodge the fallout from falling commodity prices. Aluminum producer Alcoa (AA) kicked off earnings season with softer-than-expected results, attributed to weak demand from automakers and homebuilders.

The softening housing market could continue to loom large in the quarters ahead as well. On Oct. 20 shares of Caterpillar (CAT) tumbled after the heavy-equipment maker and Dow component reported lackluster earnings and lowered its forecasts through 2008 (see BusinessWeek.com, 10/20/06, "Slower Housing Puts a Dent in Caterpillar").

"Anything that seems to touch housing has been disappointing," says David Chalupnik, head of equities at U.S. Bancorp Asset Management and First American Funds. "That's been the weak spot. Everything else seems to be pretty much on target or better."

Will Tech's Time Come Again?

Information technology is the one sector expected to post lower year-over-year earnings, according to S&P. True, the likes of Apple, IBM (IBM), and Intel (INTC) trumped estimates, but Advanced Micro Devices (AMD), EMC (EMC), and Yahoo! (YHOO) all disappointed the Street (see BusinessWeek.com, 10/19/06, "Apple's Big Mac"). The sector's earnings are expected to recover next year, which will send its 2007 price-to-earnings ratio below 19, notes S&P's Silverblatt. "Is it value or the realization that high-cap technology is no longer a growth industry?" he asks.

Earnings leadership will continue to rotate away from basic materials and energy in coming quarters, others say. "If commodities continue to stay at these prices or lower, the comparisons for the first and second quarter are going to be murderous for these companies," says Ashwani Kaul, chief market strategist at Reuters Estimates. "Look for financials to really step up."

In the meantime, investors still have plenty of third-quarter results to assess. Among companies set to report this week are Ford (F), AT&T (T), General Motors (GM), and Microsoft (MSFT), along with the previously mentioned energy heavyweights. While the current quarter is unlikely to mark the end of the recent profit parade, earnings season may still give the Street a few surprises.

Is Housing Out of the Woods?

News Analysis
October 23, 2006

BusinessWeek Logo

Is Housing Out of the Woods?

A growing chorus of experts says the worst may be over for home sales. But the recovery may not be smooth—or quick

Depending on whom you ask, the winds may already be shifting for the housing market. All year, economists have warned of a bursting housing bubble and its potential impact on economic growth (see BusinessWeek.com, 8/21/06, "Why Housing Looks a Little Rickety"). However, a recent stream of encouraging data has some prominent prognosticators changing their tune.

One of the first in line was Alan Greenspan. As recently as May 18, the former Federal Reserve chairman put an exclamation point on the housing slowdown when he declared, "The boom is over." But now, the "worst may well be over," Greenspan was quoted as saying Oct. 7, after mortgage applications posted their biggest weekly gain since June, 2005.

A growing number of economists and analysts have come around to the ex-Fed chief's view. Some investors may see sunnier skies too, as homebuilding stocks such as Lennar (LEN), DR Horton (DHI), and Pulte Homes (PHM) have rebounded since touching 52-week lows in July. Reports on existing home sales for September, scheduled for release Oct. 25, and new home sales Oct. 26 could shed more light on housing's status.

Leveling Out?

While the most bearish scenarios may be becoming increasingly unlikely, the housing market probably isn't out of the woods yet. Even the most upbeat forecasts call for new-home construction to keep declining nearly as much as it already has so far. Meanwhile, underlying economic figures may contradict their milder headlines.

Greenspan's assessment followed on the heels of Fed Vice-Chairman Donald Kohn's suggestion Oct. 4 that "[housing] starts may be closer to their trough than to their peak." The data since then could give bulls even more reason for guarded optimism. On Oct. 17, the National Association of Home Builders' housing-market index rebounded to 31 from 30 in September, snapping a 12-month decline from 68 a year earlier. A day later, a Commerce Dept. report showed housing starts rose 5.9% in September, to an unexpectedly strong pace of 1.772 million units.

"The point of maximum deterioration in housing activity has probably passed," says Jan Hatzius, chief U.S. economist at Goldman Sachs (GS), in an Oct. 20 report. "The sharp downturn of the past year seems to have brought total housing starts—single-family starts, multi-family starts, and mobile-home shipments—close to the level justified by the underlying demographics."

Permit Plunge

Still, Hatzius comes up with plenty of caveats. Housing activity could drop by another 300,000 housing starts, he projects, as homebuilders work off unwanted inventory and buyers shift from single-family units to multifamily and mobile homes. That would come on top of a decline of 400,000 housing starts already, Hatzius says.

Others maintain that the housing downturn still has a long way to go. "Commentary suggesting housing demand is recovering, based on the latest homebuilder and mortgage applications readings, appears to be more wishful thinking than fact," says Keith Hembre, chief economist at First American Funds, in an Oct. 20 report.

Housing may have stabilized somewhat, but it's probably only temporary, according to David Rosenberg, North American economist at Merrill Lynch (MER). The unexpected September surge in housing starts came alongside a 6.3% drop in building permits to their slowest pace since October, 2001 (see BusinessWeek.com, 9/18/06, "The Housing Bust: Sorry, It Ain't Over Yet"). A decline in building permits has accompanied a rise in housing starts only six times since 2003, according to Rosenberg, and starts fell a month later on five of those occasions.

Grim Futures

Rosenberg also differs with Goldman's Hatzius over demographics. "Our research suggests that this housing cycle does not bottom out until starts reach the 1.3 million mark," Rosenberg said in an Oct. 19 report. "So contrary to popular opinion, we are barely in the fifth inning of this down-cycle on the construction front."

So far, futures traders are sticking with the pessimistic view (see BusinessWeek.com, 10/10/06, "Where Housing Prices Will Fall the Most"). In afternoon trading Oct. 23, investors were predicting declines over the next 12 months in all 10 markets covered by the Chicago Mercantile Exchange's housing contracts. The composite index is seen falling 7% by August, 2007, when the one-year contract expires. That's roughly unchanged from what investors expected a month earlier.

Other derivatives traders may also be betting on a deeper slump for housing. On Oct. 11, the lowest-rated subset of the ABX home-equity index touched its weakest price level since it was launched in January, according to London-based Markit, which created the index with CDS IndexCo. The index tracks a basket of credit default swaps on subprime mortgages and home-equity loans.

Circumspect Bears

In an Oct. 9 speech, San Francisco Fed President Janet Yellen painted a possibly even gloomier picture. Yellen spoke of a major homebuilder who calls Phoenix and Las Vegas "the new 'ghost towns' of the West." According to Yellen, price cuts "appear inevitable."

Still, there are some glimmers of hope for housing demand. Peter Kretzmer, a senior economist at Bank of America (BAC), points to the University of Michigan's latest consumer-sentiment report, in which the share of respondents indicating that it was a good time to buy a house jumped to its highest level in 14 months.

Meanwhile, some economists are becoming more circumspect in their bearishness. In an Oct. 20 note, Richard Berner, chief U.S. economist at Morgan Stanley (MS), says he still believes the housing slowdown is far from over. "Nonetheless, the latest data suggest that the intensity of the housing decline may be fading somewhat, and with it some of the concurrent downward pressure on housing prices," he adds. "If so, one of the biggest perceived risks to the U.S. economy may be smaller than feared."

After years of defying naysayers' predictions, the housing market has finally cooled in recent months, by virtually all accounts. However, the debate over when the current slowdown will end may be just beginning.

Dow Hits Another New High

News Article
October 23, 2006

BusinessWeek Logo

Dow Hits Another New High

AT&T's solid profits countered a wider-than-expected loss from Ford. Also in focus: Wal-Mart's analyst meeting

Stocks finished higher Monday, as the Dow hit another new all-time closing high amid positive Wal-Mart (WMT) news and a torrent of earnings news. Investors were looking ahead to Wednesday's Federal Reserve policy statement and Friday's report on third-quarter economic growth.

The Dow Jones industrial average rose 114.54 points, or 0.95%, to 12,116.91, its best-ever close, after touching a new intraday record of 12,125.16. The broader Standard & Poor's 500 index added 8.42 points, or 0.62%, to 1,377.02. The tech-heavy Nasdaq composite climbed 13.26 points, or 0.57%, to 2,355.56, boosted by Google (GOOG) and Apple (AAPL).

NYSE breadth was positive, with 19 issues advancing for every 14 declining. Nasdaq breadth was 16-15 positive.

Earnings season kicked into high gear Monday. Ford (F) was lower after the automaker reported a wider third-quarter loss of $5.8 billion, missing Wall Street estimates.

Dow component AT&T (T) was modestly higher after the telecom giant beat analyst expectations with a 74% increase in third-quarter profit.

Copier and printer maker Xerox (XRX) posted a sharp increase in third-quarter earnings, topping analyst forecasts.

Oilfield service conglomerate Halliburton (HAL) also trumped projections with a 22% rise in third-quarter profit.

Quarterly results were on tap after the bell from Amgen (AMGN), American Express (AXP), and Texas Instruments (TXN). Among companies due to report Tuesday were Altria (MO) and DuPont (DD).

Other companies reporting this week include General Motors (GM), Exxon Mobil (XOM), Microsoft (MSFT), and Chevron (CVX).

Outside of earnings, Wal-Mart was higher as the retailer said it plans slower expansion in capital spending and retail space in 2007. Separately, the company's attempt to obtain a banking license was reportedly running into opposition from lenders, the Fed, labor unions, and others.

Elsewhere, IBM (IBM) filed two patent infringement lawsuits against Internet retailer Amazon (AMZN).

On the M&A front, private-equity groups were reportedly partnering up to ready offers for newspaper publisher Tribune (TRB).

The economic calendar was relatively quiet Monday, though the week's slate holds the Fed's interest-rate meeting, third-quarter results for gross domestic product, and new and existing September home sales.

In the energy markets, December West Texas Intermediate crude futures fell 52 cents to $58.81 a barrel amid skepticism over whether OPEC will abide by its recent output cut.

European markets finished higher. In London, the FTSE-100 index rose 10.9 points, or 0.18%, to 6,166.1. Germany's DAX index added 40.09 points, or 0.65%, to 6,242.91. In Paris, the CAC 40 index advanced 36.46 points, or 0.68%, to 5,411.46.

Asian markets ended mixed. In Japan, the Nikkei 225 index gained 137.19 points, or 0.82%, to 16,788.82. In Hong Kong, the Hang Seng index lost 23.7 points, or 0.13%, to 18,089.85. Korea's Kospi index nudged higher 0.71 points, or 0.05%, to 1,364.95.

Treasury Market
Treasury prices declined amid speculation the Fed may have to resume increasing rates in 2007, says Standard & Poor's Equity Research. The 10-year note fell in price to 100-13/32 for a yield of 4.83%, while the 30-year bond dropped to 93-03/32 for a yield of 4.95%.

Wednesday, October 18, 2006

Dow Tops 12,000, Then Pulls Back

News Article
October 18, 2006

BusinessWeek Logo

Dow Tops 12,000, Then Pulls Back

Major indexes finished mixed after IBM posted sharply higher earnings. September housing starts unexpectedly rebounded, while the CPI rose 0.2%

Another day, another Wall Street milestone. Stocks finished mixed Wednesday, giving up initial gains after the Dow topped the 12,000 level for its first time ever. Solid earnings reports and a surprising uptick in housing starts countered a report indicating stubborn inflation.

On Wednesday, the Dow Jones industrial average rose 42.66 points, or 0.36%, to 11,992.68, a new all-time closing record. The blue-chip benchmark also touched an all-time intraday high of 12,049.51. The broader Standard & Poor's 500 index nudged added 1.91 points, or 0.14%, to 1,365.96. The tech-heavy Nasdaq composite fell 7.8 points, or 0.33%, to 2,337.15.

Options expiration, technical overbought readings, and the psychological effect of the 12,000 mark all helped limit gains, according to Chris Johnson, managing quantitative analyst at Schaeffer's Investment Research. "It's opportunity selling," Johnson says.

Investors were assessing another round of inflation data Wednesday. The consumer price index (CPI) fell 0.5% in September, while the core CPI, which excludes food and energy, rose 0.2%. The report echoes the pattern of Tuesday's producer price index, with declining gas prices but persistent price gains elsewhere, says Action Economics.

In other economic numbers, housing starts climbed 5.9% to an unexpectedly strong pace of 1.772 million in September, after an upwardly revised 1.674 million rate in August.

The economic docket Thursday holds leading indicators and the Philadelphia Federal Reserve's index of regional manufacturing activity. Weekly jobless claims figures are also on tap.

Strong quarterly results shared the spotlight Wednesday. IBM (IBM) was higher after the computer maker reported a nearly 50% jump in third-quarter profit, trumping analyst expectations.

Fellow Dow component Intel (INTC) was also higher after the chipmaker posted a 35% decline in third-quarter profit, but beat Wall Street forecasts for the first time in three quarters.

Shares of Yahoo! (YHOO) dipped after the Internet media company posted a 38% drop in third-quarter profit, despite hopes of a turnaround next year.

Data-storage provider EMC (EMC) was lower as the company posted a decline in third-quarter profit and said it would slash 1,250 jobs.

In other earnings news, J.P. Morgan (JPM) was lower after the financial institution said third-quarter profit increased 30%.

Companies set to post quarterly results after the closing bell include tech bellwether Apple (AAPL) and online auctioneer eBay (EBAY).

Among companies reporting earnings Thursday are Bank of America (BAC), Coca-Cola (KO), Honeywell (HON), SanDisk (SNDK), and Wyeth (WYE).

Elsewhere, General Motors (GM) has reportedly hired two advisers to ready itself for a possible proxy fight or other hostile action by minority shareholder Kirk Kerkorian.

Meanwhile, cable operator Time Warner Cable announced plans to sell $100 million in Class A shares in an initial public offering. All of the shares are reportedly being sold by part-owner Adelphia Communications. Media conglomerate Time Warner (TWX) controls 84% of the shares of Time Warner Cable, which would list its shares under the ticker "TWC."

In the energy markets, November West Texas Intermediate crude futures fell $1.28 to $57.65 a barrel, after a weekly inventory report showed an unexpectedly large rise in crude supplies.

European markets finished higher. In London, the FTSE-100 index rose 41.8 points, or 0.68%, to 6,150.4. Germany's DAX index climbed 67.68 points, or 1.11%, to 6,182.78. In Paris, the CAC 40 index added 58.3 points, or 1.1%, to 5,361.29.

Asian markets ended higher. In Japan, the Nikkei 225 index gained 41.41 points, or 0.25%, to 16,653. In Hong Kong, the Hang Seng index nudged higher 33.25 points, or 0.18%, to 18,048.09. Korea's Kospi index advanced 2.96 points, or 0.22%, to 1,354.26.

Treasury Market
Treasury yields ticked lower, hovering around the unchanged mark for most of the session after the upbeat housing starts data and nagging CPI gains. The 10-year note edged up in price to 100-28/32 for a yield of 4.76%, while the 30-year bond nudged higher to 93-30/32 for a yield of 4.89%.

Hungry for High Yields

News Analysis
October 18, 2006

BusinessWeek Logo

Hungry for High Yields

Investors aiming for retirement can earn market-beating returns from preferred stocks. But they're volatile, so weigh the risks carefully

An entire generation of retirees will soon be looking for some new sources of income. While the first batch of baby boomers turns 60 this year, another 75 million are poised to hit that milestone over the next two decades. Meanwhile, nearly 37 million Americans are already above the traditional retirement age of 65, according to U.S. census data (see BusinessWeek.com, 10/16/06, "Making Your Parents' Golden Years Shine").

The aging population's hunt for income is one reason a growing number of investors have poured money into preferred stocks. In the past 15 years, the size of the preferred stock market has quadrupled, to about $200 billion, according to Standard & Poor's, though that's a drop in the bucket compared to the $16 trillion stock market and the $5 trillion corporate bond market. In fact, preferred shares offer income-oriented investors some of the advantages of both stocks and bonds.

"Preferreds," as they're often known, are a kind of company stock that carries additional rights beyond those of common stocks (see BusinessWeek.com, 5/12/06, "Preferred Investors"). Ideally, preferreds allow shareholders to grab higher yields than they could find in other asset classes. The shares require less capital outlay than bonds, and their low correlation to other asset classes can help diversify an investors' portfolio.

Still, preferreds can also be complicated, volatile, and risky. Some analysts and financial advisers say investors should stay away from the asset class altogether. "They're often sold to unsophisticated investors because the high dividend sounds attractive, and that makes them easy to sell," says Dan Danford, president of St. Joseph (Mo.) investment advisory firm Family Investment Center.

This week's Five for the Money looks at five tips for wresting income from the preferred stock market without getting burned. As always, investors should do their homework before buying any securities.

1. Know your asset class

Preferreds tend to act more like long-term bonds than like stocks, and they come in a variety of flavors. Investors favor them for their high dividends, which are typically guaranteed. The average yield of the S&P U.S. Preferred Stock index is 6.4%, compared to 5.4% for the Lehman Aggregate bond index and 1.8% for the S&P 500 index.

Just don't buy preferreds expecting capital appreciation, money managers warn. The price return value of the S&P U.S. Preferred Stock Index was essentially unchanged during the three years ended in September, 2006, even as the total return value of the index jumped almost 22%.

Like long-term bonds, preferreds can swing in price based on interest rates or changes in the underlying company's credit rating. Investors who owned preferred shares of General Motors (GM) or Ford (F), for example, saw the value of their holdings tumble when the automakers' credit ratings fell to junk status in 2005 (see BusinessWeek.com, 5/5/05, "GM, Ford Fall on Ratings Downgrade to Junk"). "People have to understand that they're getting a volatile investment," says Tom Meyer, chief executive of Marlton (N.J.)-based Meyer Capital Group. "If they can overlook that and take the coupon, that's fine."

Preferreds can also be a serious commitment. While most are issued with maturities of 30 years or more, some preferreds are perpetual, which means there's no maturity date. The market for preferreds is also less liquid than for common stock, so investors might face a wider spread between buy and ask prices.

"'Long-term' with preferreds tends to mean 'forever,' so you want to be sure you're paid for the risk," says Susan Fulton, president of Bethesda (Md.) investment advisory group WealthTrust FBB.

2. Look at the fine print

Even more than other securities, preferreds require investors to study their prospectuses, or at least hire a financial adviser who will. Each preferred involves a laundry list of variables that could each make the difference between a smart investment and a money-losing one.

First, investors need to know a preferred's "call date." Preferreds typically have provisions that allow the issuing company to "call," or redeem, the shares after a certain period of time. If share prices go above a certain amount (the call price), the issuer may call the shares, sometimes before a shareholder has been drawing yield long enough to make the investment worthwhile. Look for preferreds with call dates at least three years out, analysts say.

Call provisions mean it's not enough for investors to know a preferred's stated yield. For preferreds trading above their call price, investors will also need to calculate relative yield, also known as yield to call. This value is the yield that would be realized on a preferred if it were redeemed on the call date.

Preferreds also differ from each other in how they treat dividends. Investors will want to focus on "cumulative" preferreds, as opposed to their "non-cumulative" brethren. Cumulative preferreds entitle shareholders to receive all current and past dividends before common stock shareholders. Otherwise, management could pay a dividend to common stockholders while skipping a preferred dividend, without ever having to reimburse preferred shareholders for the missed payment.

3. Stay tax-savvy

A dwindling portion of the preferred market can provide tax advantages for well-heeled investors. Dividends from certain preferred stocks are taxed at 15%, the legislatively prescribed rate for "qualified dividend income," or QDI. Non-qualified dividends are taxed at an investor's normal rate, which usually runs much higher.

Preferreds eligible for the QDI can be a good choice for high-income investors, some financial advisers say. "Investors in lower tax brackets shouldn't purchase preferred stocks that carry the 15% federal income tax limit on dividends," says John Seitzer, president and founder of Everest Wealth Management. "They would be paying for a benefit they aren't really using."

Investors not taking advantage of the QDI might want to hold their preferreds in a tax-advantaged account, such as a 401(k) plan or an IRA, some analysts say. "You wouldn't have to worry so much about the volatility of price in there if you plan on holding it long-term," says Bill Schultz, chief investment officer with Bethlehem (Pa.) investment advisory firm McQueen, Ball Assoc.

4. Run a credit check

Like corporate bonds, preferreds are subject to credit risk. Investors will want to find out the credit rating of any preferred they're considering and avoid volatile industries. Preferred stocks have a credit claim that's senior to common stocks but below that of bonds.

As a general rule, investors should stick with preferred shares of companies with high credit ratings, financial advisers say. "You really for the most part do not want to go below triple-B," Meyer says.
Even if a preferred's issuer has a solid credit rating, investors should still watch the company like a hawk. "Remember, at one time the rating agencies gave Enron bonds a good rating," says Don Martin, owner and founder of Los Altos (Calif.)-based Mayflower Capital.

5. Choose carefully

Investors can gain exposure to preferreds either individual or through a closed-end mutual fund. Analysts differ over which is better, so investors should use their own judgment.

Buying individual preferreds incurs a brokerage commission on each trade, while closed-end funds offer broader exposure but charge a management fee, typically between 1% to 2%. The John Hancock Preferred Income III (HPS) fund has a 74% exposure to preferreds as of Aug. 31 and a perfect five-star Morningstar rating. The Cohen & Steers Advantage Income Realty (RLF) and American Select (SLA) funds each also have at least 10% exposure to preferreds and five-star Morningstar ratings.

Brokerages and stock analysis firms generally don't cover preferreds, so the best place to get information on individual stocks is income-security research site QuantumOnline), financial advisers say. The site is run out of Kalispell, Mont., by founder and investment adviser Don Doan.

Financial-services companies are among the most frequent preferred issuers. Steven Huang, manager of the Schwab YieldPlus (SWYSX) fund, likes the series-J preferred shares of Fannie Mae (FNM) and also a preferred issued recently by Freddie Mac (FRE). Jim Branscome, managing director of investment analysis for S&P, points to preferred share classes of closed-end funds General American Investors (GAM) and Source Capital (SOR). Schultz of McQueen, Ball favors a recently issued Merrill Lynch (MER) preferred.

Investors may soon have another preferred option: exchange-traded funds, or ETFs. Barclays Global Investors has filed with the Securities & Exchange Commission to launch an ETF based on the S&P U.S. Preferred Stock index, while PowerShares has filed for two preferred-stock ETFs, both based on Wachovia (WB) indexes.

Either way, preferreds make the most sense as part of a broadly diversified portfolio. "You can't go sell all your bonds or stocks and hoard preferreds," says Srikant Dash, index strategist at S&P.

A preference for preferreds can provide plenty of yield for income-hungry investors, but the asset class also has its pitfalls. Investors who carefully assess which preferred stocks, if any, meet their needs are the most likely to meet their retirement goals.

Tuesday, October 17, 2006

Dow Stumbles in Bid for 12,000

News Article
October 17, 2006

Business Week Online

Dow Stumbles in Bid for 12,000

Core PPI unexpectedly surged 0.6%, while industrial production dropped more than forecast. Earnings remained in focus

Stocks finished lower Tuesday, though off their their weakest levels, as the Dow stumbled in its bid to crack the 12,000 mark. An unexpected increase in a closely watched inflation gauge and a surprisingly steep drop in industrial production offset some solid corporate earnings. Traders were looking ahead to Wednesday's consumer inflation numbers, expected to be mild, says Standard & Poor's Equity Research.

The Dow Jones industrial average slipped 30.58 points, or 0.26%, to 11,950.02, pulling back from Monday's all-time closing high of 11,980.6 and new intraday record of 11,997.09. The broader Standard & Poor's 500 index fell 5 points, or 0.37%, to 1,364.05. The tech-heavy Nasdaq composite dropped 18.89 points, or 0.8%, to 2,344.95, hampered by weakness in semiconductor stocks.

NYSE breadth was negative, with 21 issues declining for every 13 advancing. Nasdaq breadth was 18-11 negative.

A report on wholesale inflation weighed on stocks Tuesday. The producer price index (PPI) fell 1.3% in September on a 22.2% drop in gas prices, but the core PPI, which excludes food and energy, climbed a surprising 0.6%. "The markets will focus on the jump in the core number," says Action Economics.

Some analysts say rising inflation might mean the Federal Reserve isn't done raising rates. "I still think that upside inflation risks dominate, and the Fed may still have work to do," says Richard Berner, Morgan Stanley's chief U.S. economist. "Among the reasons: inflation expectations are elevated and edging higher, slack in the economy has dwindled, and costs are accelerating."

Still, the PPI report doesn't change expectations for Wednesday's consumer price index (CPI) data, other analysts say. "The heavy discounting of vehicle prices over the past two months did not seem to have a significant effect in the core CPI, and therefore this month's rebound also seems unlikely to push the relevant CPI components significantly higher," says Goldman Sachs.

In other economic data, industrial production fell 0.6% in September, a much larger drop than expected, after an upwardly revised flat reading in August. Capacity utilization fell to 81.9% from 82.5%

Meanwhile, the National Association of Home Builders' housing-market index bounced to 31 in October, snapping a 12-month decline from 68 a year earlier and a downwardly revised 30 in September. Wednesday's calendar holds the release of September housing starts.

On the company side, Johnson & Johnson (JNJ) was higher after the health products maker posted a 9% rise in third-quarter profit, beating analyst expectations.

Fellow Dow member United Technologies (UTX) was lower despite a 21% jump in third-quarter profit, which topped Street estimates. The company also warned that a slowing housing market could dampen its 2007 earnings.

Shares of Merrill Lynch (MER) rose after the brokerage said its third-quarter earnings more than doubled.

Dow components Intel (INTC) and IBM (IBM) were set to report earnings after the close, along with Internet bellwether Yahoo! (YHOO) and phone maker Motorola (MOT).

In analyst calls, Intel was lower as Goldman Sachs downgraded the chipmaker from buy to neutral on valuation. Separately, Cowen downgraded Yahoo! from outperform to neutral, but shares of the company rebounded in the final hour.

Companies set to post quarterly results Wednseday include Apple (AAPL), eBay (EBAY) and J.P. Morgan (JPM).

M&A activity also remained in focus Tuesday. Chicago Mercantile Exchange Holdings (CME) reportedly agreed to acquire CBOT Holdings (BOT) in a roughly $8 billion share swap that would a giant global derivatives exchange.

Elsewhere, Wal-Mart (WMT) edged lower amid reports the company has agreed to buy a shopping chain in China for about $1 billion.

In the energy markets, November West Texas Intermediate crude futures fell $1.01 to $58.93 a barrel of ahead of Wednesday's weekly inventory report.

European markets finished lower, breaking a nine-day rally. In London, the FTSE-100 index fell 65.6 points, or 1.06%, to 6,106.8. Germany's DAX index dropped 71.44 points, or 1.15%, to 6,115.1. In Paris, the CAC 40 index was down 58.99 points, or 1.1%, to 5,302.99.

Asian markets ended mixed amid North Korea nuclear worries. In Japan, the Nikkei 225 index shed 81.17 points, or 0.49%, to 16,611.59. In Hong Kong, the Hang Seng index nudged higher 4.64 points, or 0.03%, to 18,014.84. Korea's Kospi index lost 5.42 points, or 0.4%, to 1,351.3.

Treasury Market

Treasury yields slipped following the soft industrial production data, recovering from early lows on the solid NAHB report. Bond traders expect milder inflation data tomorrow, says Action Economics. The 10-year note edged up in price to 100-24/32 for a yield of 4.77%, while the 30-year bond nudged higher to 93-23/32 for a yield of 4.9%.

Monday, October 16, 2006

Getting Your Parents' Finances in Order

News Analysis
October 16, 2006

Business Week Online

Getting Your Parents' Finances in Order

You and your parents can achieve peace of mind by following these helpful tips for dealing with everything from wills to insurance

The upcoming Thanksgiving holiday can be more than a chance for families to get together over turkey and mountains of mashed potatoes. It's also a reminder that while Mom and Dad may still be very much a part of the celebration, they might also be worrying about their nest egg. With the holidays approaching, the best gift of all for your parents might be to help them achieve peace of mind by making sure their finances are in order.

Parents of all ages have a host of complex financial needs, from managing their retirement accounts to estate planning. Such sensitive subjects shouldn't be broached with a mouthful of stuffing. Try setting aside some time on one of the other 364 days of the year to make sure these needs are all met. "Most parents want the gift of time, so planning the time to help them is the real value and what they'll appreciate most," says Patricia Konetzny, a financial planner in Maynard, Mass.

It's a two-way street. Being financially secure also happens to be one of the best gifts parents can bestow upon their children, financial planners say. "If we give them everything they want but become a burden in the future, we haven't really given them anything," says Linda Leitz, owner of Colorado Springs-based Pinnacle Financial Concepts and author of The Ultimate Parenting Map to Money Smart Kids.

Here's what parents should have in place to simplify their financial lives for themselves and their loved ones.

1. Prepare for the worst.
Wills may never be a pleasant subject, but they are a must-have for all adults. Find an attorney to put together a will as well as trust and power-of-attorney documents for your loved ones. Without a will, assets get distributed based on state law rather than according to wishes of the deceased.

If your parents already have wills and other estate-related documents, be sure you and your folks know where they're located. Also ask your parents when they last had their wills reviewed. If it has been more than three to five years or there has been a major change in their financial situation, it's time for a check-up, says Susan Elser, a fee-only financial planner in Indianapolis.

In addition to the typical estate documents, your parents should also have a letter of intent. Courts may look to such letters for guidance, though they typically aren’t legally binding. If your parents don't have a letter of intent, help them make one. It should use simple, everyday language that will make it it easier to have their wishes carried out in case the formal documents are unclear. "Sometimes an individual's desires are muddled in the legalese," points out Adam Leavitt, president of Red Rock Financial Advisory in Tulsa.

2. Name names.
What's in a name? Quite a lot, it turns out. It's a good idea to double-check who is designated as beneficiary on retirement accounts and insurance policies. "Qualified retirement account beneficiary designations cannot be overridden by a will," says Don Martin, owner and founder of Los Altos (Calif.)-based Mayflower Capital. "So if the owner forgot to change the name of the beneficiary to the desired person, then the funds will go to an unintended beneficiary,"

Such a review is particularly important for parents who have divorced and remarried, Martin says. And if someone who was widowed forgets to update beneficiary designations, then their previously deceased spouse's estate would inherit the retirement account. That adds an extra layer of taxes, fees, and hassles.

Trouble can occur even when both parents are still alive and have remained married. Parents who name as a beneficiary in their wills a trust for a child must also change the beneficiary forms for their retirement accounts and life insurance policies. "Otherwise, upon their deaths, the trust won't get funded," says Elaine Scoggins, president of Tampa-based Scoggins Financial.

3. Collect Records.
Many people can barely keep their own files straight, so imagine the challenge of sifting through someone else's during a time of crisis. "Frankly, the administrative specifics after death are more time-consuming and emotionally draining than the 'official' topics," says Mary Clair Allvine, a financial planner with Chicago-based Brownson, Rehmus & Foxworth and author of The Family CFO.

Ask your parents to provide a list of their investment, bank, and insurance accounts, along with contact information and account numbers. Also find out where they keep important documents and assets. Dave Ragan, a financial planner at Denton (Tex.) -based Grunden Financial Advisory, recommends every family have an "I Love You Book." This binder or notebook would include such information as all bank accounts, credit cards, liabilities, assets, and doctors.

What about parents' safe deposit boxes? Parents should "consider giving an adult son or daughter a second key and access privileges to the box," says Mathew Gelfand, president of Bethesda (Md.)-based MDG Financial Advisors. He cautions that this may require a visit to the bank. Moreover, many financial planners suggest moving securities out of safe deposit boxes and into brokerage accounts.

The Internet era has brought with it a proliferation of passwords. These, too, should be kept in a safe place where children can find them if necessary. "Since many people have a variety of online accounts, access to passwords may become critical in a time of emergency," says Penny Marlin, president of Delray (Fla.)-based Marlin Financial.

4. Ensure they've got the right insurance.
Insurance needs differ from person to person, but it's worth a moment to check whether your parents have the policies they need. Parents who qualify should sign up for the new Medicaid prescription drug benefit plan (see BW Online, 05/05/06, "New Medicaid Complications"). Some planners also recommend picking up supplemental health-care insurance.

Long-term care insurance (LTC) may be right for many parents. "Parents over 60 should certainly consider themselves candidates for good LTC coverage," says Wexford (Pa.) financial planner Robert Choiniere. He suggests children think about funding the LTC, because it can help prevent the erosion of the estate they will presumably inherit.

As for homeowner's insurance, make sure the properties your parents think are covered actually are. Mark Gleason, a financial planner with Burbank (Calif.)-based Wescap Management Group, recalls a recent case of fire on a property with two dwellings. "It turned out the insurance only covered the one dwelling that didn't have the fire," he says. Planners also recommend owning an umbrella policy, which offers extra liability insurance in case of auto accidents or lawsuits.

Then there's life insurance. Older parents who don't need their policies should either give them to their children or sell them to a third party, Gleason says. Both options are typically better than simply surrendering the policy and cashing it in, which given the lowest expected value.

5. Check their retirement accounts.
After talking about wills and beneficiaries, asking your parents about IRAs and such should be a snap. Parents over age 70 need to be making their required distributions from IRAs and pension plans. If they're still working, they should fully fund their 401(k) plans up to the level of the employer match. Many planners also recommend Roth IRAs for those who qualify.

Just as with insurance, investment needs will vary. "The main question is: Do they need income from their investments to live on?" asks Argyle (N.Y.)-based financial planner Marjorie Randles. If so, they need to invest in income-producing securities. She uses iShares exchange-traded funds, like the iShares Dividend Index Fund (DVY ), which has a relatively low 0.4% expense ratio.

Still, even older parents should be sure their portfolios are not too conservative. As with any investor, their assets should be diversified across a number of different asset classes. "They may still live a very long time, and growth above the inflation rate should be a part of the portfolio objectives," says Gleason.

Many planners also suggest keeping a cash account for emergency expenses. It should contain at least three months of living expenses, they say. Depending on the economic environment, it might take too long to sell off real estate or other assets, so ready cash can be used to help pay debts, taxes, or deal with any other unexpected costs.

Talking with parents about important financial matters can be easy to put off. But get over your discomfort and sit down with them. You'll be thankful you did—and they will, too.

Search This Blog

Press Mentions

"Goes over the top and stays there to very nice effect."
-- David Carr, The New York Times

"I wasn't fully convinced. But I was interested."
-- Rob Walker, The New York Times

"...as Marc Hogan wrote in Spin..."
-- Maureen Dowd, The New York Times

Blog Archive