The S&P 500 marked its best first quarter since 1999, as investors sifted through a flurry of economic reports
The major equity indexes finished modestly lower Friday, but up for the quarter, as investors digested a fresh batch of economic data. End-of-quarter portfolio impacted trading, and volume fell despite a rush of activity in the closing five minutes, says Standard & Poor's MarketScope.
The Dow Jones industrial average fell 41.3 points, or 0.37%, to 11,109.4, despite gains by Honeywell (HON ) and Hewlett-Packard (HPQ ). The Dow gained 3.7% for the first quarter, its best since 2002. The broader Standard & Poor's 500 index slipped 5.43 points, or 0.42%, to 1,294.82, a 3.1% quarterly gain in its best first quarter since 1999. The tech-heavy Nasdaq composite edged lower 1.03 points, or 0.04%, to 2,339.79, ending up 6.1% in its best first quarter since 2000.
Economic data remained a focal point Friday. Factory orders increased 0.2% in February, less than expected. The Chicago Purchasing Managers' index of manufacturing activity rose sharply to 60.4 for March, from February's 54.9 reading. The University of Michigan's final reading on March consumer sentiment was revised unexpectedly higher to 88.9, from the preliminary reading of 86.7.
Earlier, personal income rose 0.3% in February, slightly less than expected, says Action Economics. The price index for consumer spending was flat after a 0.5% gain in January.
Investors will have another busy day of economic data Monday. The Institute of Supply Management's index for March is expected at 57.5, after February's reading of 56.7, says Action Economics. February construction spending is seen rising 0.4%. March vehicle sales are forecast to rise 0.5% to 16.7 million units. The February pending home sales index will also likely draw attention.
In corporate news, activity continued at General Motors (GM). Shares finished higher, after an early decline, on news former unit Delphi announced a restructuring plan. Meanwhile, the automaker reportedly may agree Monday to sell control of its finance unit to investors led by Cerberus Capital Management.
Among other blue-chips, Citigroup (C ) was little changed after falling on news the financial giant was being sued for insider trading in an Australian merger case.
M&A action kept up its recent busy pace. Colgate Palmolive (CL ) reportedly may offer to buy the entire consumer products unit of Pfizer (PFE ). Elsewhere, J.P. Morgan Chase (JPM ) reportedly plans to purchase the entire retail banking unit of Bank of New York (BK ).
Tech bellwether Google (GOOG ) was modestly lower after revealing plans to expand its online advertising into local markets. The Internet search company joins the S&P 500 after the market close.
In the energy markets Friday, May West Texas Intermediate crude oil futures closed down 55 cents at $66.60 a barrel. Profit-taking was behind the decline, says Action Economics.
European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 50.6 points, or 0.84%, to 5,964.6. Germany's DAX index slipped 14.11 points, or 0.24%, to 5,970.08. In Paris, the CAC 40 index dropped 19.25 points, or 0.37%, to 5,220.85.
Asian markets finished mixed. Japan's Nikkei 225 index edged higher 14.32 points, or 0.08%, to 17,059.66. In Hong Kong, the Hang Seng index fell 75.65 points, or 0.48%, to 15,805.04. Korea's Kospi index rallied 21.46 points, or 1.6%, to 1,359.6.
Prices for 10-year Treasury notes closed higher at 97-09/32 with a yield of 4.85%, while 30-year bonds were little changed at 93-28/32 for a yield of 4.89%.
News Analysis BusinessWeek.com March 30, 2006 Link
Soaring Above High-Priced Airfares
Ticket prices seem to go up every time you turn around. Here are some ways to get you where you're going without going broke
Planning to fly this summer? Rising airfares mean most trips will cost more than they did last year. But savvy travelers can still save money -- if they know where to look. Ticket prices are rebounding from their post-September 11 lows. For domestic flights, average fare revenue rose 10.6% in the first two months of the year, according to data from the Air Transport Assn.
Blame this on the rising price of jet fuel (see BW Online, 3/16/06, "A New Spike at the Pump?"). In recent weeks, even discount stalwart Southwest Airlines (LUV ) announced a fare increase. Other carriers like American Airlines (AMR ), United Airlines, Delta Air Lines (DALRQ ), Northwest Airlines (NWACQ ), Continental Airlines (CAL ), AirTran Holdings (AAI ), and US Airways (LCC ) quickly followed suit.
SAVVIER AIRLINES. With peak travel season on the way, rates will move inexorably higher, industry watchers say. "Fares are going to go up one way or the other," says Edward Hasbrouck, author of the travel book series The Practical Nomad. Nor can vacationers count on last-minute deals. Short-notice fares became common in recent years because airlines underestimated demand, Hasbrouck says. They aren't expected to make the same mistake in 2006.
Still, a few tips can help travelers keep transportation costs grounded. This week's Five for the Money looks at how to spend less on airfare on your summer vacation.
1. Book early With last-minute bargains out the window, buy tickets as early as possible. "Generally, you'll get the best prices that way," says Don George, global travel editor with Lonely Planet Publications. Getting tickets early doesn't just give travelers a chance at a lower price. It also might be necessary just to secure a seat. Major carriers trimmed their fleets after September 11, and some planes are still mothballed, industry watchers say.
That means increasingly full flights, especially on popular routes. "If you're flying transcontinental, Los Angeles to New York, you're going to have a full flight," says David Lytle, editorial director of travel information Web site Frommers.com.
2. Shop around When searching for fares, it's best to check a variety of sources. The big travel Web sites like Expedia (EXPE ), Orbitz, and Travelocity (TVLY) can be good places to get a general feel for what a trip might cost. A newer breed of travel Web site provides comparison shopping (see BW Online, 1/14/05, "Online Travel: All Over the Map"). Called aggregators, these "metasearch" sites include Kayak, Mobissimo, QIXO, and SideStep. "Aggregators sniff out different travel sites for the best rates," says David LaHuta, assistant editor with Budget Travel.
Be sure to visit individual airline Web sites as well. A few carriers, including Southwest, don't allow their fares to be published on third-party Web sites. At most airline Web sites, travelers can sign up to get e-mail notification when fares for a particular route drop.
3. Be flexible With airfares rising overall, sometimes getting a good deal will require a change in plans. Lucky travelers who can take their vacations outside of peak seasons should fly in late spring or early fall to get the lowest rates. They'll also avoid the crowds.
For the rest of us, it's about location, location, location. Taking an alternate route can reduce fares considerably. The recently listed fare for a flight from Dallas to Memphis, Tenn., was $370, but it would have cost just $98 to land 130 miles west in Little Rock, Ark., according to BestFares.com CEO Tom Parsons. "Be creative," he says. Consider flying on alternate days. And don't blink at red-eyes. Travelers who can depart on Tuesday, Wednesday, or Thursday, especially late at night or early in the morning, will tend to find cheaper fares.
4. Bundle up Buying a travel package is another way to save. Many Web sites -- including Expedia, Orbitz, and Travelocity -- allow travelers to combine airfare with booking a hotel (see BW Online, 03/02/06, "Travel Tips to Send You Packing"). A package can be an especially good deal for several people traveling together, including families. The savings can start to add up.
5. Keep checking Airlines change rates frequently, so be on the lookout. Some industry watchers say the best sales are on Saturday mornings, while others say to check airline Web Sites early Wednesday for updates. If you spot a bargain, snag it.
Just because you've booked your ticket doesn't mean it's time to stop watching fares. A handful of carriers, including JetBlue Airways (JBLU ), will refund the difference if the price for a flight goes down after purchase. A $25 processing fee might be attached, and the refund probably won't be in cash, but it still might be worth an extra visit to the airline Web site. "Many airlines still quietly will give you a credit that you can use for the future," says Norie Quintos, a senior editor with National Geographic Traveler.
It's going to be a challenging travel season for deal hunters. But vacationers who think ahead will be in for a smoother trip.
The FOMC announced a quarter-point rate hike and hinted that further tightening may be necessary
Stocks finished lower Tuesday, after the Federal Reserve raised interest rates for the 15th straight time, leaving the door open to further tightening and sending Treasury yields higher. Equity investors may have seen the FOMC statement as a cue to take profits, says Standard & Poor's MarketScope.
The Dow Jones industrial average fell 95.57 points, or 0.85%, to 11,154.54. The broader Standard & Poor's 500 index dipped 8.39 points, or 0.64%, to 1,293.22. The tech-heavy Nasdaq composite index declined 11.12 points, or 0.48%, to 2,304.46.
The Fed's interest-rate hike was the focal point Tuesday. The FOMC raised the federal funds rate target 25 basis points to 4.75%, as expected, and said additional policy firming may be required. The rate-setting meeting was Ben Bernanke's first as Fed chairman.
The debate now moves to whether the Fed will top out at 5%, 5.5% or higher, says S&P MarketScope. The futures market has priced in a jump to 5% at the May meeting.
Some analysts find the news disappointing. "It was a fairly hawkish statement and the markets are reacting pretty negatively to that," says Keith Hembre, chief economist with First American Funds. "The basic market reaction was the same to 'may be needed' that it used to be to 'measured.'"
The Fed still has more work to do, other analysts say. "We believe the Fed will move further to contain future inflation risks," says Richard Berner, chief U.S. economist at Morgan Stanley.
Some worry that the Fed's dependence on backward-looking data may cause it to go a rate hike too far. "We're probably getting closer to overshooting," says Bill Larkin, fixed-income portfolio manager at Cabot Money Management. "It's likely that it's going to start to impair economic growth."
An array of economic data was also on tap. Consumer confidence surged in March to 107.2, its highest level since 2002 and much stronger than expected, says Action Economics.
Later in the week are final fourth-quarter gross domestic product, personal income and personal consumption expenditures, and the Chicago Purchasing Manager's index of manufacturing activity.
On the corporate side, M&A activity continued to percolate. Citigroup (C ) and the National Bank of Greece (NBG ) were reportedly vying to acquire Turkish bank Finansbank, in what could be a more than $5 billion deal.
Telecommunications equipment maker Lucent (LU ) and French broadband equipment maker Alcatel (ALA) were moving closer to a proposed merger. The two companies were reportedly working on a plan to allay U.S. national-security concerns.
Of other blue-chips in focus, General Motors (GM) reportedly said it expects North American sales to fall sharply. The automaker also set plans to announce white-collar layoffs, and shares finished lower.
Hewlett-Packard (HPQ) led the Dow downward on a report that analysts and professional money managers are souring on the computer maker's growth prospects. Rival Apple (AAPL ) was lower ahead of a court battle with London-based Apple Corp., the Beatles' record company.
In earnings news, homebuilder Lennar (LEN ) rose modestly after posting 34% higher first-quarter profit, breaking from recent reports of declining new orders at peers like KB Home (KBH ).
On the brokerage front, drugmaker Eli Lilly (LLY ) was lower after downgrades at both Merrill Lynch and Friedman Billings Ramsey.
Internet search giant Google (GOOG ) was higher after reports the tech bellwether has stepped up its lobbying efforts. Separately, the company reportedly filed patent applications related to free wireless Internet access.
In the energy markets Tuesday, May West Texas Intermediate crude oil futures closed up $1.91 at $66.07 a barrel, amid supply concerns related to Nigeria and Iran. Sources also reported technically related buying, says Action Economics.
European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 36.5 points, or 0.61%, to 5,935.7. Germany's DAX index dropped 21.63 points, or 0.37%, to 5,890.63. In Paris, the CAC 40 index slipped 12.45 points, or 0.24%, to 5,149.99.
Asian markets finished higher. Japan's Nikkei 225 index rose 40.14 points, or 0.24%, to 16,690.24. In Hong Kong, the Hang Seng index added 40.71 points, or 0.26%, to 15,856.58. Korea's Kospi index edged higher 0.97 points, or 0.07%, to 1,331.31.
The Fed report sparked a sell-off in Treasuries, driving yields higher. Prices for 10-year Treasury notes finished lower at 97-28/32 with a yield of 4.78%, while 30-year bonds fell to 95-14/32 for a yield of 4.79%.
New home sales dove unexpectedly ahead of next week's FOMC meeting. Meanwhile, Google will join the S&P 500 index
Stocks finished modestly higher in choppy trading Friday, after a weak home sales report sent Treasury yields lower. Caution likely limited gains ahead of next week's two-day FOMC meeting, which starts Monday, says Standard & Poor's MarketScope.
The Dow Jones industrial average edged higher 3.68 points, or 0.09%, to 11,279.97, weighed down by Home Depot (HD ) and ending the week relatively unchanged. The broader Standard & Poor's 500 index added 1.28 points, or 0.1%, to 1,302.95, a loss of 0.3% on the week. The tech-heavy Nasdaq composite index rose 12.67 points, or 0.55%, to 2,312.82, for a weekly gain of 0.3%.
The Fed meeting will be next week's focal point for Wall Street. Another 25 basis point rate hike is in the offing, says Action Economics, especially given a robust outlook for first-quarter growth and the potential for some pass-through of inflation pressures in the months ahead.
On Friday, a big drop in new home sales sparked hopes that interest rates will stop rising soon. "The Fed is going to have to do some serious thinking," says Peter Cardillo, chief market analyst with SW Bach. "We see the markets responding to that today."
New home sales unexpectedly plunged 10.5% in February to 1.1 million units, the Commerce Department said Friday. Separately, durable goods orders rose 2.6% after a revised 8.9% decline in January.
Investors were eyeing news about Google (GOOG ). The Internet search giant was sharply higher on news the company will replace Burlington Resources (BR ) in the S&P 500 index after the close of trading March 31. Rival Yahoo (YHOO ) fell.
M&A activity was also in the spotlight. Lucent (LU ) was higher on reports that French broadband equipment maker Alcatel (ALA ) may buy the telecommunications giant.
In pharmaceuticals, Germany's Bayer (BAY ) AG topped Merck KGaA's hostile bid for fellow German drugmaker Schering (SHR ) AG. The companies are independent of similarly named U.S. outfits Merck (MRK ) and Schering-Plough (SGP ).
Outside deal news, automaker General Motors (GM) remained in focus. Shares were higher after news the company reportedly plans to fire hundreds of its U.S. salaried employees starting March 28.
In earnings news, networking company 3Com (COMS ) was higher after posting a narrower loss for its fiscal third quarter but missing revenue targets.
Handheld device maker Palm (PALM ) rose modestly after forecasting profit this quarter of 22 cents to 23 cents a share, excluding certain items.
Among other companines in the news, doughnut seller Tim Hortons (THI ) was sharply higher in its first day of trading.
In the energy markets Friday, May West Texas Intermediate crude oil futures closed up 35 cents at $64.26 a barrel.
European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 46.2 points, or 0.77%, to 6,036.3. Germany's DAX index added 26.03 points, or 0.44%, to 5,973.14. In Paris, the CAC 40 index gained 23.93 points, or 0.46%, to 5,218.71.
Asian markets finished mixed. Japan's Nikkei 225 index rose 71.5 points, or 0.43%, to 16,560.87. In Hong Kong, the Hang Seng index fell 54.71 points, or 0.35%, to 15,716.46. Korea's Kospi index climbed 8.97 points, or 0.68%, to 1,321.23.
Treasury yields sank on unexpectedly low new home sales and weak underlying durable goods data. Prices for 10-year Treasury notes were higher at 98-22/32 with a yield of 4.67%, while 30-year bonds rose to 96-29/32 for a yield of 4.69%.
A midsession rally proved short-lived after bond yields and crude futures ticked higher
Stocks finished lower in volatile trading Tuesday, following contradictory wholesale inflation data and a speech by Fed Chairman Ben Bernanke that left the door open to further interest-rate hikes. An intraday rally led by semiconductor stocks soon gave way to profit-taking, while bond yields and oil futures rose, says Standard & Poor's MarketScope.
The Dow Jones industrial average fell 39.06 points, or 0.35%, to 11,235.47, weighed down by Alcoa (AA ), Caterpillar (CAT ) and Disney (DIS ). The broader Standard & Poor's 500 index dipped 7.85 points, or 0.6%, to 1,297.23. The tech-heavy Nasdaq composite index stumbled 19.88 points, or 0.86%, to 2,294.23, despite strength in semiconductor stocks like Intel (INTC ) and Advanced Micro Devices (AMD ).
The late-session decline seemed technically driven, because rising bond yields didn't prevent the short-lived rally, says S&P MarketScope. High volume accompanied the losses on the Nasdaq.
The Fed chairman's remarks after Monday's close hung over investors Tuesday. Bernanke told the New York Economic Club that the Fed must watch various economic vital signs when determining interest rates. He did not specifically address the Fed's next interest-rate move.
A mixed wholesale inflation reading did little to quiet interest-rate worries. The producer price index dropped 1.4% in February, the largest decrease in nearly three years, while the core rate rose 0.3%.
Investors should get a bit of a reprieve on the economic front Wednesday, but the calendar picks up again Thursday with February existing home sales and weekly jobless claims numbers.
On the corporate side, General Motors (GM) supported the Dow, climbing about 5% amid hopes the automaker is close to a deal with former subsidiary Delphi and the United Auto Workers union.
In earnings news, software maker Oracle (ORCL ) was lower after the company's 8% sales increase fell below expectations. Shoemaker Nike (NKE ) also dipped before posting a 23% rise in third-quarter earnings after the close.
Technology-licensing company Rambus (RMBS) was higher after lifting its first-quarter revenue guidance from to between $45 million and $48 million. The previous forecast called for a range of $41 million to $43 million.
Outside of tech, retailer Target (TGT) slipped after narrowing its March sales forecast. The company reportedly said it expects same-store sales to rise 1.5% to 2.5%, compared to earlier guidance of 1% to 3%. Rival Wal-Mart (WMT ) was higher.
In legal action, Pepsi's (PEP ) Gatorade unit sued Coca-Cola (KO ) over an ad for rival Powerade sports drinks, claiming the ad was false and deceptive.
Elsewhere, Sirius Satellite Radio (SIRI ) was modestly higher after saying it reached deals with three major record labels over a portable music player. Competitor XM Satellite Radio (XMSR ) fell.
Among other companies in the news, software giant Microsoft (MSFT ) fell after an early rise on reports that it would increase the availability of its Xbox 360 video-game system. Production woes had made the consoles tough to find in stores.
In the energy markets Tuesday, April West Texas Intermediate crude oil futures closed up 15 cents at $60.57 a barrel, ahead of Wednesday's weekly inventory report expected to show an increase of 2.5 million barrels. May crude futures take the lead Wednesday.
European markets finished mixed. In London, the Financial Times-Stock Exchange 100 index fell 0.4 points, or 0.01%, to 5,991.3. Germany's DAX index rose 9.07 points, or 0.15%, to 5,911.86. In Paris, the CAC 40 index added 10.05 points, or 0.2%, to 5,148.56.
Asian markets finished lower. In Hong Kong, the Hang Seng index slipped 7.2 points, or 0.05%, to 15,922.75. Korea's Kospi index fell 10.04 points, or 0.75%, to 1,336.65. Japan's Nikkei 225 index was closed for a national holiday afer Monday rallying 285.07 points, or 1.74%, to 16,624.8.
Treasury yields rose on the inflation data, but pared gains slightly in afternoon trading. Prices for 10-year Treasury notes were lower at 98-09/32 with a yield of 4.71%, while 30-year bonds fell to 96-04/32 for a yield of 4.74%.
News Analysis BusinessWeek.com March 17, 2006 Link
Tax-Savvy Moves for Fundholders
If it's March Madness, it must be tax season. These mutual funds and strategies could save money and put a full-court press on the taxman
The mid-March tip-off of college hoops' annual Madness means more than just great TV. It also means "brackets" -- fans' yearly chance to fill in a labyrinthine betting sheet to track how they think the 64 teams in the tournament will fare. While the word bracket conjures the excitement of college basketball, it also has another, more unpleasant, association at this time of year: the countdown to Apr. 15.
Mutual-fund investors, in particular, may have additional reason to dread this tax season. Fund shareholders' total bill -- covering dividend income and capital gains -- to Uncle Sam jumped from $9.6 billion in the 2004 tax year to an estimated $15.2 billion in 2005, according to a soon-to-be-released report by fund tracker Lipper.
MORE CAPITAL GAINS. Investors who have read their 1099-DIV forms can probably see why. A fund realizes a capital gain when it sells a security for more than its purchase price. If the fund's capital gains outweigh its capital losses in a given accounting year, it must pass the difference along to shareholders. Funds must also pass along any income their securities generate, such as a bond's yield or a stock dividend.
These distributions are taxable, unless the fund is held in a tax-favored account like a 401(k) or IRA. In recent years, bear-market losses helped many funds offset their capital gains, saving shareholders on tax day. The clock ran out on that strategy in 2005, analysts say, meaning more capital gains -- and bigger checks to the taxman.
But fear not. As with college basketball's big dance, there's always next year. This Five for the Money presents BusinessWeek Online's own March bracket of attractive, tax-savvy mutual funds to help investors lighten their load.
1. Consider a tax-managed fund. Sounds obvious, right? Investors trying to trim their tax liabilities should pick funds that seek to do the same. Still, many people assume that avoiding agony at tax time means sacrificing returns.
Not necessarily, recent research finds. Both before and after taxes, tax-managed funds beat their conventional peers in at least half of the 10 years ended in 2004, according to a study last year by Lipper. "Some of these funds are pretty good," says Tom Roseen, a senior research analyst with Lipper.
The Vanguard Group's tax-managed lineup is a good place to start. The Vanguard Tax-Managed Appreciation Fund (VMCAX) has a low 0.14% expense ratio and benchmark-beating returns on a three-, five-, and 10-year basis. "None of Vanguard's tax-managed funds have distributed a capital gain in their history," says Sonya Morris, a fund analyst with investment researcher Morningstar (MORN ).
Eaton Vance Tax Managed Value (EATVX ) has put up impressive numbers of its own. With a 1.21% expense ratio, the fund has three-year and five-year returns that outpace its peers and the S&P 500 index alike. Portfolio manager Michael Mach's turnover rate in some years tops 100%, counterintuitive for a tax-managed fund. "Low turnover has typically been considered a characteristic of tax-efficient funds, but there are exceptions," says Katherine Gallagher, a Standard & Poor's fund analyst.
2. Mind your munis. For fixed-income investors, municipal-bond funds can be a tax-savvy choice. Unlike their taxable counterparts, municipal-bond funds provide yield that's usually exempt from federal income taxes. This income may also be free from state and local taxes, if the investor lives in the state where the bonds were issued.
Municipal-bond funds don't only keep the IRS at bay (see BW Online, 12/26/05, "Income Investing: Don't Come Up Empty-Handed"). Lately, they've also been posting better performance than their taxable brethren. Last year municipal-bond funds posted before-tax returns of 2.63%, compared to 2.06% for taxable fixed-income funds, according to Lipper. "Take in the tax consequence, and all of a sudden muni-bond funds yield quite a bit more," Roseen says.
Again, Vanguard offers a range of low-cost municipal-bond funds, such as Vanguard Intermediate Term Tax-Exempt (VWITX ) and Vanguard High-Yield Tax-Exempt (VWAHX ). Morningstar's Morris also recommends Fidelity Intermediate Municipal Income (FLTMX ) and USAA Tax-Exempt Intermediate-Term (USATX ).
Still, not all municipal-bond funds dodge the alternative minimum tax, which affects a growing number of taxpayers (see BW Online, 1/12/06, "Coping With the Alternative Minimum Tax"). Investors concerned about the AMT should consider funds specifically tailored to avoid it, like Fidelity AMT Tax-Free Money (FIMXX ) or American Century Tax-Free Bond (TWTIX ).
3. Win for losing. Funds with large capital losses to carry forward are less likely to pass on taxable gains. So investors can trim their tax bills by picking funds in out-of-favor categories. Many large-cap growth funds, for example, have built up tax losses (see BW Online, 1/26/06, "Sluggers Among Large-Cap Growth").
One large-cap growth fund with solid performance and plenty of capital losses is Harbor Capital Appreciation (HCAIX ). The fund has posted three-year returns of 19%, slightly ahead of the S&P 500, and has a -3.7% potential capital-gains exposure, according to Morningstar.
Vanguard Growth Equity (VGEQX) has had similar performance, and boasts a whopping -55.4% potential capital-gains exposure. But the fund "can be extremely volatile," says Morris.
4. Look for managers with skin in the game. Having a large stake in a fund gives portfolio managers added reason to be tax-efficient. After all, they have to bear the consequences of any unnecessary capital gains. Thanks to disclosure requirements adopted in 2004, investors can now see to what extent their fund managers are sharing in the fund's after-tax returns.
All the lead managers have significant ownership stakes in Vanguard Primecap Core (VPCCX ), the only Vanguard fund run by the typically tax-savvy Primecap that's still open to new investors. Fairholme (FAIRX ) and Third Avenue Value (TAVFX ) are two other tax-efficient funds where the managers have substantial holdings, says Morris.
Investors might also want to look at Vanguard Windsor II (VWNFX), where manager Jim Barrow of Barrow Hanley has a hefty ownership stake. In addition, Bridgeway Capital Management founder John Montgomery has big holdings in the 10 Bridgeway funds he manages.
5. Track an index. Index funds are inherently more tax-efficient than the typical actively managed fund. Low turnover rates mean portfolios like the Vanguard 500 Index Fund (VFINX ) or Fidelity Spartan 500 Index Fund (FSMKX ) have relatively light potential capital-gains tax exposure. Their returns, especially after taxes and expenses, are usually competitive.
Exchange-traded funds are another index-based option for tax-savvy investors. ETFs like SPRD (SPY ) or the iShares S&P 500 Index Fund (IVV) tend not to pass through capital gains. There are a few exceptions, though, such as StreetTracks Dow Jones Wilshire Small Cap Value (DSV ).
There can be only one winner in the NCAA tournament. But with this wide range of options, any mutual-fund investor should be able to make next tax season a slam dunk.
Manager Ryan Jacob talks about how the Jacob Internet Fund bounced back after the Internet bust -- and how he sees the sector now
Internet companies are making money again, says portfolio manager Ryan Jacob, one of the most visible faces of the late-1990s Web-stock boom. He racked up an otherworldly 225% annualized gain as manager of Kinetics Internet fund (WWWFX ) before launching the Jacob Internet Fund (JAMFX ) in 1999.
Then he got a taste of the bear market -- and the fund suffered a fate similar to other Internet-themed offerings.
After its rocky beginning, though, the $99.2 million Jacob Internet Fund is reaping returns for its investors. Through Feb. 28 it had an average five-year annualized return of 8%, compared with 2.4% for the Standard & Poor's 500-stock index. Its typical peer posted a 4.6% loss over the same period, according to S&P. (The fund has posted an annualized loss of 19.85% since inception in December, 1999.)
PAYING THE PRICE. Broader diversification and more active trading helped the fund regain its winning ways, Jacob says. Jacob expanded the fund's portfolio from between 25 and 30 stocks to between 45 and 50, and became quicker to cut loose overvalued stocks. "I'm a big proponent of high turnover if you're investing in a volatile sector," he says.
Frequent trading carries higher transaction costs, but Jacob says they're outweighed by the portfolio's improved returns. In 2002, the tech-heavy Nasdaq composite index slumped 31.5%, while the Jacob Internet Fund fell less than half that percentage.
Still, the fund is pricy, carrying an expense ratio of 2.64%. And investors who've been there from the start are still hurting. Since inception, the fund has reported a loss of 19.9%.
Jacob recently spoke with BusinessWeek Online reporter Marc Hogan about his fund's performance, Internet consolidation, click fraud, and the impact of new wireless technologies. Edited excerpts from their conversation follow:
The end of the Internet boom was tough on your fund, but your returns have improved since then. How did you bounce back?
We decided we needed to make some changes in the way we situated the portfolio. One of the biggest changes was we decided to add an element of value into the portfolio that we hadn't had in the past. We tried to balance the portfolio more between value and growth rather than just strictly growth.
We also decided to increase the turnover of the fund. That's a little bit controversial because it's conventional wisdom that low turnover is a more prudent course for a manager.
The reality is, in a sector that moves so quickly, it really is an advantage to be more active in your trading. With my previous fund, and very early on with this fund, we would have portfolio turnover somewhere between 20% and 40%.
In the immediate period during the correction, the 2001-02 time frame, our turnover got as high as over 1,000% on an annual basis. Now that was unusual. But it was also a very difficult period. It really helped us be more disciplined in capturing profits and cutting losses.
What's the biggest difference between investing in Internet stocks now compared to the late-90s IPO days?
A vast majority of the Internet companies today are profitable, very much so, and that's a stark contrast to what we saw in the late 1990s. That doesn't mean that valuations don't become an issue from time to time, but inherently the businesses are solid.
Tell me about some of your top holdings.
We've been active in Chinese companies over the past four or five years. They've gone from being larger weightings in the portfolio to smaller. Right now they're a bit heavier.
Today we have about 17% or 18% of the portfolio allocated to various Chinese Internet companies. Long-term, they have bright prospects. Their margins across the board tend to be high, and they have very defensible businesses.
A lot of U.S. companies have attempted unsuccessfully to enter the China market. What has happened in the past year or two is they've had to partner. eBay (EBAY ) bought a company called EachNet to have an auction presence in China. Yahoo! (YHOO ) made a $1 billion investment in Alibaba, a privately held Chinese Internet company.
Sina (SINA ) and Sohu.com (SOHU ) are two of our top holdings right now. They're general-interest portals, analogous to a Yahoo model here in the U.S., and they are considered by far the top two major Internet brands in China.
Sina is the larger. Sohu's interesting in that it also has a burgeoning search business.
Sohu acquired the sponsorship to the Beijing Olympics in 2008. We think this is an underappreciated agreement. The exposure that the Olympics get in China just dwarfs even what we expect here in the U.S. China's looking at this almost like their coming-out party. Sohu has acquired all the Internet rights to the Beijing 2008 Olympics, and there's going to be a tremendous number of monetization opportunities for them associated with that.
Are there any other top holdings you consider noteworthy?
On the value side, we've seen a lot of interesting opportunities in the software space. One of our top holdings is webMethods (WEBM ).
Many of these software companies went through a period during the crash where a lot of their customers went out of a business. A vast majority of them shouldn't even have been public. But there were also a lot of companies that had strong products and were trading at depressed valuations.
WebMethods is one company that has moved away from a minor loss to breakeven, and now they're back to being profitable. They do enterprise-application integration. It's software that basically ties in existing software [programs] in the enterprise so they can all talk to each other.
There has been some consolidation in your sector, from News Corp. (NWS ) acquiring MySpace to Google (GOOG) recently picking up a small Web-based word processor, Writely. Do you expect that to continue, and how does that factor into your strategy?
If there's a lot of acquisition activity, fundamentally it means these sectors are doing well. We had two acquisitions in the past week. We had MatrixOne (MONE ), a small software company that was acquired by French company Dassault Systèmes, and iVillage (IVIL ), which was acquired by NBC Universal (see BW Online, 3/7/06, "NBC Universal Takes an iVillage").
In terms of Internet media, it's an area that's growing, not only participating in a strong advertising market but also taking market share away from traditional channels. You're seeing companies like Scripps (SSP ) buying Shopzilla. You had The New York Times (NYT ) buying About.com.
What's really ironic is these were situations where major Internet companies were also bidding for these properties, and they got outbid. That's telling you the Internet is a critical piece of the advertising pie today, and whether you're an Internet company or a traditional media company you have to have a presence. We expect the acquisition activity to continue.
How does the rising interest rate environment affect Internet companies?
The good news is we're seeing opportunities in the technology and Internet sector, even though the sector is doing well, and being able to pay reasonable valuations. The bad news is that there are some macro trends at work right now that are a little troubling.
Rising rates is one of them. It's good to be aware and cautious, but that's another reason why we're shying away from extreme valuation situations. When we're a little less sure about the macro environment, we tend to be a little more valuation-conscious.
How big an issue do you think click fraud will be for these companies? I noticed that Google wasn't one of your top holdings, and Google recently said it would pay up to $90 million to settle a click-fraud lawsuit.
I'll tell you this. We have increased our positions on Google and Yahoo over the past several weeks. I don't want to give specifics because I have to be careful with disclosure issues, but we're getting more interested at these prices for sure.
In terms of click fraud, it's an issue. From what we gather, it's not insignificant, but generally it's not material. When you look at the companies' businesses and revenues, it's such a minute portion that potentially could be affected that I think it's something to watch, but it's just not really a big factor right now.
For a company the size of Google, $90 million is immaterial. If there were something lurking deeper, then at some point that would have to be disclosed. The fact that they're setting up this settlement the way they are leads one to believe that there isn't some big shoe to drop here.
Are there any other trends you've been noticing in the companies that you follow?
We're starting to get more interested in communications, whether it's wireless or Voice over Internet Protocol. We're positive on new wireless technologies like WiMax. It's the next generation of Wi-Fi (see BW Online, 1/23/06, "The Brave New World of Wireless").
Where Wi-Fi has a range of maybe 300 or 400 feet, WiMax has a range in miles. It could be a game-changer. We've been encouraged that Intel (INTC ) is pushing the WiMax standard hard. Originally, they were expecting to come out with WiMax-enabled chips in 2007. They expect them now by the end of this year.
We own a couple of small companies that basically make WiMax products. One is Airspan Networks (AIRN ), and the other one's Alvarion (ALVR ). They are understood as being pioneers in the WiMax space, and their products are being used in a lot of tests.
There are other advanced wireless technologies out there, but we think WiMax has the best shot of becoming that next-generation standard. But you have to be careful because it's a little early. There are going to be a lot of bumps along the way.
The blue-chip indexes hit their highest levels since May, 2001, after the the Beige Book said the economy is expanding at a "moderate" rate.
Stocks finished higher Wednesday, as the Fed's Beige Book report showed steady economic growth amid contained inflation pressures. Falling oil prices set a positive backdrop, and the markets weathered a recovery in Treasury yields, says Standard & Poor's MarketScope.
The Dow Jones industrial average rose 58.43 points, or 0.52%, to 11,209.77, its highest close since May, 2001, led by Caterpillar (CAT ). The broader Standard & Poor's 500 index added 5.54 points, or 0.43%, to 1,303.02, crossing 1,300 for the first time since May, 2001. The tech-heavy Nasdaq composite index climbed 15.94 points, or 0.69%, to 2,311.84.
Investors were sifting through another set of economic readings Wednesday. The Fed's Beige Book report said the economy continued to expand at a "moderate" pace from mid-January through late February. The report is in line with an interest-rate hike at the FOMC meeting March 28, says Action Economics.
Earlier in the session, import prices fell 0.5% for February, in line with expectations, while the New York Fed's Empire State index jumped to 31.16 in March, well ahead of the 19.0 consensus.
The numbers show under-control inflation and an upbeat manufacturing picture, some economists say. "The focus from the Fed's perspective is likely to be on the nonfuel import price data, where the 12-month inflation rate remains very contained," says John Ryding, chief U.S. economist with Bear Stearns. "The New York Fed's Empire State index suggests manufacturing growth strengthened in early March."
The economic calendar Thursday brings reports on February building permits and housing starts, as well as the monthly consumer price index and weekly jobless claims data. The Philadelphia Fed's index is also on tap.
On the corporate side Wednesday, investment bank Lehman Brothers (LEH) posted a 24% uptick in first-quarter profit, topping analyst estimates. The upside surprise followed a 62% earnings increase reported Tuesday by peer Goldman Sachs (GS ).
Also in earnings, Sears Holdings (SHLD ) surged after reporting that its fourth-quarter earnings nearly doubled. The retail conglomerate was formed last year when Kmart acquired Sears.
Of blue-chips in focus, General Motors (GM) was higher on a report that a group led by private-equity firm Kohlberg, Kravis & Roberts and some banks offered as much as $13 billion to buy a majority stake in the automaker's financing arm. Separately, the United Auto Workers union said it is not near a deal with GM and former subsidiary Delphi.
Chemical maker DuPont (DD) rose after lifting its first-quarter earnings guidance to 80 cents a share from 70 cents a share. The Dow component also said it plans to slash 1,500 jobs.
The nation's biggest railroad operator, Union-Pacific Railroad (UNP), raised its projection for first-quarter earnings to between $1 and $1.10 a share, up from between 80 cents and 90 cents. Shares jumped 6%. The Dow Jones Transportation index, of which Union-Pacific is part, rose 97.06 points, or 2.16%, for an all-time high of 4,591.76.
Tax preparer H&R Block (HRB) was lower after New York Attorney General Eliot Spitzer filed a lawsuit against the company alleging fraudulent business practices.
On the brokerage front, Palm (PALM ) was lower after JP Morgan downgraded the handheld-device maker from overweight to neutral. Blackberry maker Research in Motion (RIMM ) was higher.
Among other companies in the news, electronic giant Sony (SNE ) said it will postpone the release of its PlayStation 3 gaming system, reportedly expected this spring, until November.
In the energy markets Wednesday, April West Texas Intermediate crude oil futures closed down 93 cents at $62.17 a barrel after a weekly inventory report showed a larger-than-expected supply increase of 4.8 billion barrels.
European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 14.5 points, or 0.24%, to 5,965.1. Germany's DAX index rose 27.6 points, or 0.47%, to 5,898.48. In Paris, the CAC 40 index gained 10.77 points, or 0.21%, to 5,127.93.
Asian markets finished higher. Japan's Nikkei 225 index rose 80.68 points, or 0.5%, to 16,319.04. In Hong Kong, the Hang Seng index climbed 200.6 points, or 1.29%, to 15,720.36. Korea's Kospi index added 7.68 points, or 0.58%, to 1,333.98.
Treasury yields ticked higher after the New York Fed's index, then pared gains following the Fed's Beige Book report. Prices for 10-year Treasury notes closed lower at 98-08/32 with a yield of 4.72%, while 30-year bonds fell to 96-02/32 for a yield of 4.75%. The short-covering rally Tuesday failed to attract follow-through buying or shake the underlying sentiment that interest rates have higher to go, says S&P MarketScope.
The blue-chip indexes closed their highest since 2001 after Treasury yields eased from 20-month peaks
Stocks finished higher Tuesday, as good news from a tech bellwether and retreating bond yields helped investors overlook disappointing retail sales data. The investment banking sector led gainers on the back of an upbeat earnings report, while homebuilding and some financial stocks were also strong, says Standard & Poor's MarketScope.
The Dow Jones industrial average rose 75.32 points, or 0.68%, to 11,151.34, its highest close since June, 2001, helped by Alcoa (AA ), Home Depot (HD ) and 3M (MMM ). The broader Standard & Poor's 500 index gained 13.35 points, or 1.04%, to 1,297.48, its best since May, 2001. The tech-heavy Nasdaq composite index rallied 28.87 points, or 1.27%, to 2,295.9.
Tame economic readings ahead might persuade the Federal Reserve to hold at 4.75% to 5%, analysts say. "We expect softer numbers in coming months as the economy loses the boost from the bounceback from the hurricane-depressed fourth quarter," says Jan Hatzius, chief economist with Goldman Sachs.
Richard Berner, chief U.S. economist at Morgan Stanley, says the real risks continue to be either a supply-shock induced spike in energy prices that would hobble growth or higher inflation that would trigger more aggressive Fed tightening. He thinks the Fed may continue its tightening cycle longer than investors had hoped. "We now expect the Fed to increase the federal funds rate to 5.25% by September rather than stop at 5%," he says.
Internet search giant Google (GOOG) added to investors' cheer in the final hours Tuesday. A federal judge sparred with government attorneys over whether a Justice Dept. subpoena for Google's search data would be burdensome.
Investment bank Goldman Sachs (GS ) saw its shares climb after posting 62% higher first-quarter profits, topping Wall Street forecasts. Lehman Brothers (LEH ) rose, as well, ahead of its Wednesday earnings report.
Disappointing guidance from Procter & Gamble (PG) was also in focus. The world's biggest consumer products manufacturer trimmed its third-quarter sales-growth target late Monday.
Among other companies in the news, Comcast (CMCSA ) was reportedly in talks to buy the remaining 40% of E! stock it doesn't already own from Disney (DIS ). Both stocks rose.
Burrito chain Chipotle Mexican Grill (CMG ) surged after reporting unexpectedly strong fourth-quarter earnings of 16 cents a share.
On the brokerage front, Bear Stearns boosted brewer Anheuser-Busch (BUD ) from underperform to peer perform.
Market players eyed the mostly upbeat corporate news amid lackluster economic data. Retail sales fell 1.3% in February, below expectations, says Action Economics. Excluding automobiles, retail sales fell only 0.4%, in line with estimates.
Elsewhere, the fourth-quarter current account deficit hit a record $224.9 billion. January business inventories rose 0.4%, slightly more than expected.
On the economic docket Wednesday, import prices are expected to fall 0.6% for February, while export prices drop 0.2%, says Action Economics. The Fed's Beige Book will also be in focus ahead of the next FOMC meeting on interest rates.
In the energy markets Tuesday, April West Texas Intermediate crude oil futures closed $1.33 higher at $63.10 a barrel amid worries about Iran.
European markets finished mostly higher. In London, the Financial Times-Stock Exchange 100 index edged lower 2.2 points, or 0.04%, to 5,950.6. Germany's DAX index rose 15.72 points, or 0.27%, to 5,870.88. In Paris, the CAC 40 index added 9.69 points, or 0.19%, to 5,117.16.
Asian markets finished lower. Japan's Nikkei 225 index fell 123.15 points, or 0.75%, to 16,238.36. In Hong Kong, the Hang Seng index slipped 22.31 points, or 0.14%, to 15,519.3. Korea's Kospi index lost 11.98 points, or 0.9%, to 1,326.3.
Treasury yields subsided from 20-month highs. Prices for 10-year Treasury notes closed higher at 98-13/32 with a yield of 4.70%, while 30-year bonds rose to 96-20/32 for a yield of 4.71%.
M&A activity included Capital One buying North Fork and McClatchy picking up Knight Ridder
Stocks finished mostly higher Monday amid takeover activity, higher oil prices and rising bond yields. Global market strength helped set a bullish backdrop, says Standard & Poor's MarketScope.
The Dow Jones industrial average slipped 0.32 points, or less than 0.01%, to 11,076.02, weighed down by losses at General Motors (GM ) and McDonald's (MCD ). The broader Standard & Poor's 500 index edged higher 2.55 points, or 0.2%, to 1,284.13. The tech-heavy Nasdaq composite index added 4.99 points, or 0.22%, to 2,267.03.
Recent economic patterns seem likely to persist, some economists say. "We don't think we're at an inflection point yet, a change in the general direction," says David Malpass, chief global economist with Bear Stearns. "In many ways, 2006 trends are a continuation of the 2005 trends," including rising interest rates, solid growth and "grudging" stock gains.
A fresh batch of M&A activity started off the week. Credit card issuer Capital One Financial (COF ) agreed to buy North Fork Bancorp (NFB), the sixth-biggest bank in the New York City area, in a deal valued at roughly $14.6 billion. Capital One shares fell, while North Fork surged.
In the newspaper industry, McClatchy (MNI ) agreed to buy Knight Ridder (KRI ) for $14.6 billion. Rival Gannett (GCI ) posted a slight incrase in revenue for the period ended Feb. 26.
NYSE Group (NYX) climbed amid reports the newly public stock exchange might make a bid for the London Stock Exchange, which is also in talks with the Nasdaq Stock Market (NDAQ ).
In Germany, drugmaker Merck KGaA made a $17.4 billion bid for rival Schering AG (SHR ), which rejected the offer. The attempt supports an outlook for consolidation, says S&P MarketScope. Both drugmakers are independent of similarly named U.S. companies Merck (MRK ) or Schering-Plough (SGP ).
Also in pharmaceuticals, Watson Pharmaceuticals (WPI ) agreed to acquire Andrx (ADRX ) in a $1.9 billion deal.
Outside M&A activity, AstraZeneca (AZN ) was higher after it said a study showed that two years' treatment with its Crestor cholesterol drug reversed plaque build-up in arteries. Abbot Laboratories (ABT ) received regulatory clearance to market its FreeStyle Freedom blood glucose monitoring system for consumer use.
On the brokerage front, Apple (AAPL ) got a boost from Citigroup (C ), which upgraded the computer maker to buy. Chip maker Advanced Micro Devices (AMD ) was downgraded by ThinkEquity from buy to sell and by Punk Ziegel from buy to accumulate.
Among other companies in the news, airplane maker Boeing (BA ) was little changed after a report that it's poised for a turnaround. The economic calendar was quiet after Friday's solid jobs report. On Tuesday, February retail sales are expected to drop 0.7%, says Action Economics, while January business inventories rise 0.3%. The fourth-quarter current account deficit is forecast to hit a record $218 billion.
In the energy markets Monday, April West Texas Intermediate crude oil futures closed up $1.81 at $61.77 a barrel, as geopolitical concerns lingered.
European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 44.9 points, or 0.76%, to 5,952.8. Germany's DAX index added 50.24 points, or 0.87%, to 5,855.16. In Paris, the CAC 40 index climbed 38.2 points, or 0.75%, to 5,107.47.
Asian markets finished higher. Japan's Nikkei 225 index rose 245.88 points, or 1.53%, to 16,361.51. In Hong Kong, the Hang Seng index added 97.02 points, or 0.63%, to 15,542.07. Korea's Kospi index gained 18.21 points, or 1.38%, to 1,338.28.
Treasuries weakened on follow-through selling after the solid February labor data released Friday, says S&P MarketScope. Prices for 10-year Treasury notes closed lower at 97-28/32 with a yield of 4.77%, while 30-year bonds fell to 95-26/32 for a yield of 4.76%, amid speculation of interest-rate hikes globally and mixed remarks from the San Francisco Fed chief.
The Bank of Japan scrapped its easy monetary policy, sending overseas markets higher. GM and Google were also in focus
Stocks finished lower Thursday, giving up early gains as high Treasury yields fueled concern about interest-rate hikes. Trading was cautious ahead of Friday's labor report, though the Bank of Japan's move to end its easy monetary policy allayed some uncertainty, says Standard & Poor's MarketScope.
The Dow Jones industrial average fell 33.46 points, or 0.3%, to 10,972.28. The broader Standard & Poor's 500 index dipped 6.24 points, or 0.49%, to 1,272.23. The tech-heavy Nasdaq composite index declined 17.74 points, or 0.78%, to 2,249.72.
Market players were digesting news from Tokyo on Thursday. The Bank of Japan scrapped its five-year experiment with an ultra-loose quantitative easing policy and returned to a conventional interest-rate regime.
On the domestic front, the trade deficit grew 5.3% to a record $68.5 billion in January, up from a revised $65.1 billion in December. Jobless claims for the week ended Mar. 4 rose 8,000 to 303,000, more than expected.
Investors were awaiting Friday's nonfarm payrolls report, expected to show an increase of 220,000, says Action Economics. Also on the economic calendar Friday, January wholesale sales are seen rising 1.5%.
Stocks and bonds showed little reaction to word that Dubai, under political pressure from Congress, agreed to turn U.S. ports it acquired from British company P&O over to a U.S. entity, says S&P MarketScope.
In corporate news, General Motors (GM) rose in afternoon trading amid conflicting reports on the status of a potential deal with Delphi and the United Auto Workers union.
Internet search giant Google (GOOG) was lower after agreeing to pay as much as $90 million to settle a click-fraud lawsuit. Advertisers claimed they paid for clicks on ads that had no chances of generating sales.
Software behemoth Microsoft (MSFT) dipped slightly as the company unveiled its much-hyped Origami project: a paperback-sized computer running Windows XP with a touchscreen. Also in tech, software maker Intuit (INTU ) was higher after raising guidance on its TurboTax tax-preparation program.
Health-care conglomerate Johnson & Johnson (JNJ ) was lower afer approving a $5 billion stock buyback.
M&A activity continued to percolate. Exxon Mobil (XOM ) slipped after reports the world's largest oil company is considering takeovers. The company's president said on TV that Exxon Mobil is not considering deals.
Electronics retailer Sharper Image (SHRP ) surged 23% in afternoon trading on a report that a group of shareholders seek control of the company.
In broker calls, Deutsche Bank boosted Sirius Satellite Radio (SIRI ) from hold to buy. Lehman Brothers upgraded Sun Microsystems (SUNW ) from underweight to equal weight.
Among other companies in the news, the newly public NYSE Group (NYX) slipped on its second day of trading. The company was formed after the New York Stock Exchange's merged with electronic exchange Archipelago Holdings.
In the energy markets Thursday, April West Texas Intermediate crude oil futures closed up 45 cents at $60.47 a barrel amid geopolitical uncertainty in Nigeria and Iran.
European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rose 43 points, or 0.74%, to 5,855.9. Germany's DAX index climbed 58.86 points, or 1.04%, to 5,732.22. In Paris, the CAC 40 index added 38.33 points, or 0.77%, to 5,007.84.
Asian markets finished mostly higher. Japan's Nikkei 225 index bounced 409.42 points, or 2.63%, to 16,036.91 on the Bank of Japan's decision. In Hong Kong, the Hang Seng index nudged higher by 17.04 points, or 0.11%, to 15,510.13. Korea's Kospi index slipped 2.84 points, or 0.22%, to 1,311.21.
Treasury yields remained elevated Thursday after giving investors fits earlier in the week. The benchmark 10-year Treasury note closed unchanged at 98-07/32 with a yield of 4.73%, coming off a midsession high of 4.75%. The 30-year bond was also flat at 96-18/32 for a yield of 4.72%. The yield curve for two-year and 10-year Treasuries was no longer inverted.
The announcement of a new CEO gave investors a sugar rush, but Daryl Brewster has his work cut out for him to put the dough back in doughnuts
Hot off the conveyor belt at Krispy Kreme Doughnuts (KKD ): a new chief executive. Daryl Brewster, a 23-year veteran of the food business, stepped in Mar. 7 to replace interim CEO Stephen Cooper. But it may take more than a new cook to put the glaze back on the troubled doughnut maker.
True, investors seem to like Brewster's chances. Shares in the Winston-Salem (N.C.) chain surged 20.7% on Tuesday, to $7.71, nearly double their 52-week low of $3.91. "This is a significant step forward for the company," says Morningstar analyst John Owens. But Krispy Kreme, once a high-flying stock that traded as high as $44.54 in 2003 after an impressive public debut in 2000, has been beset by accounting woes and falling sales since May, 2004 (see BW Online, 11/23/05"Krispy Kreme Has That Glazed Look").
THE RIGHT GUY. Brewster's hefty industry resume should suit him well for his new role, most analysts say. Before joining Krispy Kreme, he was president of the $6 billion North American snack and cereal division at Kraft Foods (KFT ). His eight years with Kraft and its affiliate Nabisco gave him experience that should prove especially relevant for the wholesale side of Krispy's operation. Former Pizza Hut executive Jeff Jervik, who joined Krispy Kreme last October as executive vice-president of operations, can probably compensate for the retail experience Brewster lacks, says Morningstar's Owens.
But J.P. Morgan analyst John Ivankoe issued a report Tuesday maintaining an underweight rating for Krispy Kreme. "While a new CEO is a positive for the stock, much uncertainty still remains with regards to the fundamentals of the business and the timing of a turnaround," Ivankoe wrote. Standard & Poor's stopped covering the stock in the wake of earnings restatements announced last year, and Morningstar no longer gives it a rating. No other analysts filed reports today.
Back in May, 2004, Krispy Kreme blamed flagging revenues on the low-carb craze, but the company has more to fear from its pastry-purveying competitors, who avoided Krispy Kreme's fate. Dunkin' Donuts, owned by privately traded Dunkin' Brands, is hungry for expansion. Wendy's International (WEN ) recently announced plans to spin off Tim Hortons, the primarily Canadian coffee-and-doughnut chain.
WAKING UP THE BRAND. Brewster must also return the luster to a tarnished brand, analysts say. Franchisee conflicts have bedeviled the chain's public-relations efforts. Two franchisees filed for bankruptcy in 2005, while three others sued. At least one of the suits has been settled. Delays in filing financial statements and missed loan covenants have also hurt Krispy Kreme's reputation.
The company's expansion into grocery and convenience stores means it can't directly control the quality of its sugary treats. Perhaps even more important, such outlets can't offer what many saw as the Kreme de la Kreme -- fresh, hot, glazed doughnuts. The glowing red light, a signal that fresh doughnuts were for sale, was the basis for a cult phenomenon. After all, who ever had a craving for cold Krispy Kremes?
Krispy Kreme also must catch up with early-morning rivals Dunkin' Donuts and Starbucks (SBUX ) when it comes to caffeine (see BW Online, 7/3/03, "Can Dunkin' KO Krispy?"). In recent years, Krispy Kreme went beyond its starchy staples and started offering specialty coffees, but both the variety and quality aren't as robust as they could be.
The new chief's predecessor, meanwhile, will stay on the payroll. Former CEO Cooper, the Kroll Zolfo Cooper turnaround specialist who took over in January, 2005, following longtime CEO Scott Livengood's ouster, moves into the new position of chief restructuring officer. Steven Panagos, previously president and COO, will become director of restructuring. Cooper must be optimistic about the company's prospects, as his new compensation deal allows his firm to purchase 1.2 million shares of Krispy Kreme common stock at $7.75 a share (see BW Online, 12/5/05, "Krispy Kreme's Problems: Not "Fatal").
OUT OF THE HOLE? In a statement, Brewster expressed confidence profitability will return for the company, which hasn't filed earnings reports since 2004. A company spokesman declined to comment beyond the press release.
It has been reported that Krispy Kreme will look to overseas markets for growth, but a global push might not be the best immediate strategy. The company has more immediate issues, such as continuing to pare back the number of its underperforming stores, analysts say. "I'd be interested in seeing a turnaround of the existing business before taking on any significant expansion," Owens says.
Brewster's hire signals the embattled chain's celebrated conveyor belts are moving in the right direction, but it may be a while before its doughnuts -- and its stock -- are really hot again.