News Analysis
BusinessWeek.com
February 8, 2007
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The Weird World of ETFs

The proliferation of exchange-traded funds has led to the creation of increasingly specialized products. Here are some of the most exotic

by Marc Hogan

 

Exchange-traded fund launches are quickly becoming as routine as the launches at Cape Canaveral. Fund companies rolled out 155 new ETFs in 2006, according to Boston consultancy Financial Research Corp. As new products hit the market, the nature of the products is changing (see BusinessWeek.com, 5/5/06, "ETFs: Sliced, Diced, and Razor-Thin"). Best known as cheap, tax-efficient portfolio diversifiers, ETFs now provide exposure to even the narrowest—and sometimes most outlandish—investment niches.

Just last week, 22 new ProShares ETFs from Bethesda (Md.)-based ProFunds Group started trading on the American Stock Exchange. Boston's State Street Global Advisors (STT) unveiled its new SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII). Meanwhile, New York upstart XShares (formerly Ferghana-Wellspring) announced a deal with the Chicago Climate Exchange to build ETFs based on carbon emissions credits.

Investors shouldn't assume something is a smart investment simply because it's an ETF. "The package does not make the product," says Philip Edwards, managing director of Standard & Poor's Investor Services (MHP). "Don't invest in anything you don't understand."

ETFs may be carving the market into thinner and thinner slices, but a well-diversified portfolio remains as important as ever for investing success (see BusinessWeek.com, 6/22/06, "Spread Your Bets in ETFs"). This Five for the Money looks at five of ETF providers' most unusual offerings.

1. PowerShares Lux Nanotech Portfolio (PXN)

Fast-growing Wheaton (Ill.)-based PowerShares has contributed its share of today's vast pool of niche-oriented ETFs. Since being acquired by Amvescap (AVZ) early last year, the company has nearly doubled its ETF lineup, from 36 to about 70. Many of those funds, such as PowerShares Lux Nanotech Portfolio, focus on such narrow slivers of the market that they could be unduly risky for most investors.

Some nanotechnology stocks could certainly thrive in the future, but for most of us the potential volatility may not be worth it. "Focusing on these industries in one fund is a rather perilous course," says Morningstar (MORN) ETF analyst Dan Culloton. "They're going to be very volatile, because not all of these firms are going to survive."

Culloton says industries like nanotech can be so narrow that ETFs tracking them must buy some unlikely stocks to fill out their portfolios. For example, PowerShares Lux Nanotech's holdings include such household names as Toyota Motor (TM), IBM (IBM), Hewlett-Packard (HPQ), Intel (INTC), 3M (MMM), and General Electric (GE). Such blue-chips could decrease the ETF's aforementioned volatility, but they mean investors aren't exactly getting a pure nanotech play.

PowerShares Lux Nanotech Portfolio logged a total market return of –6.3% for the year ended Feb. 6, trailing the Standard & Poor's 500-stock index by 22.95 percentage points. The ETF carries an expense ratio 0.73%. Investors should remember that buying or selling ETF shares also incurs brokerage commissions.

2. HealthShares Enabling Technologies ETF (HHV)

Speaking of ETFs for tiny subsectors: XShares' HealthShares ETFs each target a specific segment of the health-care, life-science, and biotech industries. Launched in late January, the five HealthShares offerings so far include the likes of HealthShares CardioDevices ETF (HHE), HealthShares Diagnostistics ETF (HHD), and HealthShares Emerging Cancer ETF (HHJ). HealthShares Enabling Technologies ETF tracks companies involved in technologies "that enable and support the discovery, clinical development, and manufacturing activities of pharmaceutical and biotechnology companies," according to the prospectus. Top holdings include Sangamo Biosciences (SGMO) and Illumina (ILMN).

The same caveats about potential volatility apply to these narrowly focused ETFs. Furthermore, the stocks such funds invest in might not even be the ones that ultimately profit from new technologies, Morningstar's Culloton notes. In The Future for Investors, Wharton professor Jeremy Siegel writes that companies that benefit from technological advances usually tend to be big, boring ones, not necessarily those laying the wires and expanding the networks. "That's an important thing for investors to remember," Culloton says.

Net annual operating expenses for each HealthShares ETF are capped at 0.95%, not including brokerage commissions. XShares has also filed with the Securities & Exchange Commission to launch a series of ETFs dubbed StateShares, which would home in on geographic subsectors. The funds would track S&P indexes for California, Ohio, Missouri, North Carolina, and 18 other states.

3. Claymore MACROshares Oil Down Tradable Shares (DCR)

While the share price of an ETF changes constantly, its net asset value (NAV) is set only once a day. Because the two don't always match, an investor could buy an ETF at a premium to the NAV and sell at a discount, substantially lowering returns.

Claymore MACROshares Oil Down Tradable Shares has only traded near its NAV 11% of the time, according to Amex.com. Almost 60% of the time, the product has traded at more than a 2.5% discount to its NAV. Technically a trust, not a fund, this exchange-traded security tries to make money from the downward movements of crude futures.

S&P's Edwards has concerns about the product's low trading volume, too. "If an investor wanted to get out, they would need to offer a large discount to attract a buyer," says S&P's Edwards. He advises ETF investors against investing "in anything thinly traded."

Claymore MACROshares Oil Down Tradable Shares has posted year-to-date total market returns of 2.95%, beating the S&P 500 by 0.53 percentage points. The exchange-traded security has come under criticism for its expenses of 1.6%.

4. Internet HOLDRS (HHH)

Not all exotic ETF offerings are thinly traded. In fact, some aren't even new. Merrill Lynch (MER) introduced its first HOLDRS exchange-traded security baskets in 1998, and the HOLDRS' are often among the top-volume traders on the Amex.

Though generally lumped in with ETFs, the various HOLDRS are technically trusts, so they can't rebalance—or even add new stocks. As a result, the HOLDRS' holdings and performance may diverge markedly from those of traditional indexes tracking the same sector. Ron DeLegge, publisher of ETFGuide.com, observes, "Who in their right mind would want to own an investment product that's not rebalanced or not updated to properly reflect the sector it's supposed to be representing?"

The Internet HOLDRS comprises just 11 stocks, including Yahoo! (YHOO) and eBay (EBAY) but not Internet heavyweights like Google (GOOG), which came out after the HOLDRS debut. By contrast, the First Trust Dow Jones Internet Index Fund (FDN) ETF holds 40 stocks.

Investors may not be quibbling with Internet HOLDRS' performance, however. It has posted total annualized market returns of 14.42% over the past five years, beating the S&P 500 by 5.4%. On a one-year basis, though, Internet HOLDRS trails that benchmark by 23.18 percentage points.

5. iShares MSCI Belgium Index (EWK)

While Kazakhstan does not yet have its own country-specific ETF—sorry, Borat—many other countries, large and small, do. The iShares MSCI Belgium Index is one of the most unusual of them. That's no knock on Belgium, however. Not only are iShares MSCI Belgium Index shareholders investing in only a slim segment of the world market, but the fund's top five holdings make up 60% of the portfolio, creating even more potential volatility.

Still, the iShares MSCI Belgium Index can boast close to blockbuster-caliber performance. The ETF has posted total five-year annualized market returns of 23.91%, besting the MSCI EAFE index by 6.42 percentage points. It has an expense ratio of 0.54%.

This fund may be out of the ordinary, but there are still practical uses for exotic ETFs, says Tom Lydon, president of financial advisory firm Global Trends. "Individual investors and advisers are utilizing ETFs more for specific asset allocation and identifying changing trends in the marketplace," Lydon says. "The only concern is when individual investors get too enthusiastic about a sector or global region after the lion's share of its upside performance is behind."


Either way, investors should make sure they know what they're getting into if they're considering new and unusual ETFs.

News Article
BusinessWeek.com
February 7, 2007
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Stocks Edge Up amid Solid Data, Oil Drop

Fourth-quarter U.S. productivity jumped, while labor costs slowed. Crude futures slid below $58 after failing for a third straight day to top $60

by Marc Hogan

 

Stocks finished modestly higher in a choppy session Wednesday, as upbeat earnings news boosted tech names and investors weighed a solid report on U.S. productivity. Falling oil prices and a corresponding retreat in energy shares helped pull the Dow back down after crossing 12,700 for the first time ever.

On Wednesday, the Dow Jones industrial average edged up 0.56 points, or less than 0.01%, to 12,666.87, after bobbing above its all-time closing high of 12,673.68, set Feb. 1. The broader Standard & Poor's 500 index rose 2.02 points, or 0.14%, to 1,450.02. The tech-heavy Nasdaq composite climbed 19.01 points, or 0.77%, to 2,490.5.

NYSE breadth was positive, with 19 issues advancing for every 13 declining. Nasdaq breadth was 19-12 positive.

The recent sideways market could be good for stocks, some analysts say. "The market at present appears to have little impetus to either the upside or downside," says Richard Dickson, senior market strategist at Lowry's Reports. "On a longer term basis, this should be a positive for the market, as the ability to correct an overbought condition by trading sideways or though a shallow correction is considered to be a sign of strength."

In economic news, U.S. nonfarm productivity climbed 3% in the fourth quarter, following a modest 0.1% decline in the third quarter. Unit labor costs moderated to a 1.7% pace, from an upwardly revised 3.2% in the third quarter. "This is great news for the Fed," says Action Economics.

Meanwhile, Philadelphia Federal Reserve President Charles Plosser said the central bank may need to take further actions to reduce inflation. He also said the housing market may be stabilizing.

Treasury Secretary Henry Paulson told the House Budget Committee he supports a tougher regulator for mortgage companies Fannie Mae (FNM) and Freddie Mac (FRE).

Thursday's economic docket brings data on wholesale trade, consumer credit, and weekly jobless claims.

Oil prices dropped, weighing on corresponding shares. In the energy markets, March West Texas Intermediate crude oil futures fell $1.17 to $57.71 a barrel, giving up early gains despite a weekly inventory report revealing an unexpected decline in crude supplies. Crude futures failed for a third straight day to crack the $60 barrier.

Among Wednesday's stocks in the news, Cisco (CSCO) was higher after the networking equipment maker reported higher fourth-quarter earnings and forecast sales that would exceed analysts' estimates.

News Corp. (NWS) was higher after the media conglomerate logged a decline in earnings for its fiscal second quarter, but still topped Wall Street expectations.

Cigna (CI) was higher after the health insurer posted an 11% rise in fourth-quarter profit.

DirecTV (DTV) was higher after the satellite TV provider said its fourth-quarter earnings more than doubled.

Oil and natural gas producer Devon Energy (DVN) was lower after the company said fourth-quarter net income fell 40%.

Companies set to report earnings later Wednesday include Disney (DIS). The company was expected to report earnings of 39 cents per share on $9.5 billion in revenue, up from 35 cents per share on $8.9 billion a year earlier, says Reuters Estimates.

Among companies due to announce quarterly results Thursday are PepsiCo (PEP) and Qwest (Q).

Elsewhere, Nike (NKE) was higher after executives said they will add 100 new company stores in an effort to reach $23 billion in sales by 2011.

Equity Office Properties (EOP) was lower after Vornado Realty Trust said it was withdrawing its $23.2 billion buyout bid for the real estate company. Equity Office shareholders approved a $23 billion buyout offer from Blackstone Group.

In analyst calls, Tyco (TYC) was lower after Deutsche Bank lowered its recommendation on the company from buy to hold following Tuesday's disappointing earnings news.

European markets finished higher. The FTSE-100 index in London rose 23.2 points, or 0.37%, to 6,369.5. Germany's DAX index added 39.86 points, or 0.58%, to 6,915.56. In Paris, the CAC 40 index was up 26.22 points, or 0.46%, to 5,703.

Asian markets ended mixed. In Japan, the Nikkei 225 index lost 114.54 points, or 0.66%, to 17,292.32. In Hong Kong, the Hang Seng index gained 24.49 points, or 0.12%, to 20,679.69. Korea's Kospi index slipped 2.29 points, or 0.16%, to 1,426.29.

Treasury Market
 
Treasury yields dipped as strong demand for the Treasury Department's 10-year note auction countered the strong fourth-quarter productivity report. The 10-year note rose modestly in price to 99-02/32 for a yield of 4.74%, while the 30-year bond advanced to 94-17/32 for a yield of 4.85%.

News Analysis
BusinessWeek.com
February 5, 2007
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Health-Care Stocks: Advantage Medicare?

Growth in private, government-sponsored health plans could be a boon for some players in the managed-care industry

by Marc Hogan

 

On Feb. 5, Humana (HUM) is slated to report fourth-quarter results. Analysts expect the health insurer to post earnings of 88 cents per share on $5.7 billion in revenue, up from 46 cents a share on $3.7 billion a year earlier, according to Reuters Estimates. The Louisville (Ky.) company will also likely be one of several outfits in the managed-care sector benefiting from recent growth in private Medicare plans.

Medicare beneficiaries have been able to receive their benefits through private plans since President Clinton signed the Balanced Budget Act of 1997. In 2003, Congress passed the Medicare Prescription Drug, Improvement & Modernization Act, which overhauled the rules for these programs and gave them the name Medicare Advantage (see BusinessWeek, 10/25/06, "Medicare's Big Experiment"). Now some analysts see signs Medicare Advantage programs could be a boon for investors seeking growth in the health-care market.

Rising Enrollment

More and more seniors are signing up for Medicare Advantage, recent reports indicate. As of the latest data, 19% of eligible Americans are enrolled in a private Medicare plan from Humana, UnitedHealth (UNH), or another provider, according to Citigroup (C). That's an increase from 11% in mid-2004. Citigroup projects 25% of seniors will have signed up for Medicare Advantage by the end of 2009.
Private Medicare plans offer opportunities for expansion in an industry where growth typically comes from market share gains, rather than new customers, analysts say. "Enormous growth prospects remain," says Citigroup analyst Charles Boorady in a Feb. 1 report.

He adds that the program's potential success may pressure other insurers like Aetna (AET) and Cigna (CI) to step up their efforts to grab a piece of the Medicare market. (Citigroup has investment banking relationships with Aetna, Cigna, Coventry, Humana, and UnitedHealth.)

Recent data could brighten the outlook for Humana when the U.S. Centers for Medicare & Medicaid Services (CMS) reports results this week. CMS issued figures on Jan. 31 indicating a hefty increase in Medicare Advantage enrollment. "We suspect that Humana may see earnings upside between a nickel and a dime during 2007 as a result of this increase in participation," says Prudential (PRU) analyst David Shove in a Jan. 31 report.

Smaller Players Also Benefit

The news for Humana improved a day later, when CMS clarified that the bulk of Medicare Advantage gains came in more comprehensive plans that include a prescription drug component. "The clarification from CMS should bode well for Humana's [Medicare Advantage] enrollment outlook," says Goldman Sachs (GS) analyst Matthew Borsch in a Feb. 1 report. (Goldman has an investment banking relationship with Humana.)

Big players like Humana and UnitedHealth aren't the only ones that might benefit from projected growth in private Medicare programs. Medicare Advantage makes up a more sizable portion of business for smaller players like Coventry Health Care (CVH) or WellCare Health Plans (WCG), so the impact on the those companies' bottom lines could be particularly notable.

Standard & Poor's equity analyst Phillip Seligman has a strong buy recommendation on Coventry, noting the Bethesda (Md.) company's emphasis on cost control (see BusinessWeek.com, 12/4/06, "Coventry Health Care: Managing Very Well"). Seligman looks for revenues to increase to roughly $8.4 billion in 2007, from an expected $7.8 billion in 2006, helped by 5% to 10% higher Medicare Advantage enrollment.

Seligman has a hold recommendation on WellCare, but he projects even more dramatic private Medicare gains. He sees premium revenues rising about 33%, to $4.8 billion in 2007, after an estimated 97% surge to $3.7 billion in 2006. An expected 30% jump in Medicare Advantage enrollment could be a key driver of this revenue growth, Seligman says in a recent research report.

Dems May Change the Rx

Meanwhile, the latest data from CMS also include modestly encouraging signs for some drugstore chains. CVS (CVS) and Longs Drug Store (LDG) realized the highest organic percentage growth in prescription-drug plan enrollment among the top 15 plans, according to Bear Stearns (BSC). "While we believe profitability of the plans will be lower in 2006 than 2007 due to more competitive pricing, the enrollment gains represent a modest positive to partially offset," says Bear Stearns analyst Robert Summers in a Feb. 1 report.

To be sure, the long-term viability of Medicare Advantage business depends on the political environment. Leading up to last November's elections, some analysts expected the Democrats to push Medicare changes that might hamper stocks in the managed-care sector (see BusinessWeek.com, 9/21/06, "A Game Plan for D.C. Gridlock"). "The government hasn't historically been a good long-term partner to managed-care companies," Morningstar (MORN) analyst Brandon Troegle notes in a Jan. 29 report.

In the meantime, though, Medicare Advantage plans might be the right prescription for growth.

News Article
BusinessWeek.com
February 2, 2007
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Stocks End Mixed After Tepid Jobs Data

January payrolls rose less than expected, from upwardly revised December and November numbers. Also in focus: Chevron, Amazon earnings

by Marc Hogan

 

Stocks finished mixed Friday, as the Dow slipped following a second straight all-time closing high. Investors were digesting somewhat conflicting economic reports, another batch of earnings news, and rising oil prices.

On Friday, the Dow Jones industrial average fell 20.19 points, or 0.16%, to 12,653.49, below Thursday's closing record. The broader Standard & Poor's 500 index rose 2.45 points, or 0.17%, to 1,448.39. The tech-heavy Nasdaq composite added 7.5 points, or 0.3%, to 2,475.88.

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

In economic news Friday, U.S. nonfarm payrolls rose 111,000 in January, softer than expected, from an upwardly revised 206,000 in December. The unemployment rate rose to 4.6% from 4.5%. Big upward revisions for December and November make the modest January increase look stronger, says Action Economics.

The jobs report shouldn't shift the outlook for the economy or interest rates, some analysts say. "It confirms right now that the Fed's been doing a good job balancing the risks of growth and inflation," says Andy Richman, fixed income strategist for SunTrust's Personal Asset Management group. "I don't think this changes anything the Fed would say or do. They're going to wait and see."

U.S. consumer sentiment eased to 96.9, below expectations, for the final January reading of the University of Michigan's index, following a big jump to 98.0 for the preliminary print. That's still up from December's 91.7 reading.

In addition, U.S. factory orders rose 2.4% in December, following an upwardly revised 1.2% increase in November.

Looking ahead, Monday's economic docket holds the release of the Institute for Supply Management's non-manufacturing "business activity" index. The index is seen slipping to 55.5 from December's revised level of 56.7, says Action Economics.

Among Friday's stocks in the news, Chevron (CVX) was modestly lower after the oil giant reported a 9% drop in earnings for the fourth quarter, still enough for a third consecutive year of record earnings.
Amazon (AMZN) was lower after the Internet retailer said profit margins fell as the company lowered shipping fees and cut prices to sell more digital cameras and Mattel's (MAT) Barbie dolls.

Shares of Electronic Arts (ERTS) gained as the video game publisher beat Wall Street targets despite a posting a 38% decline for its fiscal third quarter.

Companies set to announce quarterly results next week include Cisco (CSCO), Disney (DIS), Pepsi (PEP), and Qwest (Q).

Outside of earnings, Gap (GPS) named Banana Republic executive Marka Hansen to replace Cynthia Harriss as head of its Gap North America operations.

In the energy markets, March West Texas Intermediate crude oil futures rose $1.72 to $59.02 a barrel amid forecasts for persistent colder weather in the Northeast and a potential worker strike in Nigeria.
European markets finished higher. The FTSE-100 index in London rose 28.7 points, or 0.46%, to 6,310.9. Germany's DAX index added 34.48 points, or 0.5%, to 6,885.76. In Paris, the CAC 40 index was up 15.05 points, or 0.27%, to 5,677.3.

Asian markets ended higher. In Japan, the Nikkei 225 index gained 27.61 points, or 0.16%, to 17,547.11. In Hong Kong, the Hang Seng index advanced 133.52 points, or 0.65%, to 20,563.68. Korea's Kospi index rallied 30.24 points, or 2.19%, to 1,413.14.

Treasury Market
 
Treasury yields drifted modestly lower, but recovered from early lows, following the smaller-than-expected increase in January payrolls, dip in consumer sentiment, and gain in factory orders. The 10-year note edged up in price to 98-14/32 for a yield of 4.83%, while the 30-year bond nudged higher to 93-14/32 for a yield of 4.93%. "Payrolls Friday was a relatively muted affair," says Action Economics.

News Analysis
BusinessWeek.com
February 1, 2007
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Will Profits Snap Their Hot Streak?

S&P 500 companies have posted 18 consecutive quarters of double-digit earnings growth. But the string might end this quarter, some analysts say

by Marc Hogan

 

Corporate profits are coming off a tremendous run. Since 2002, the Standard & Poor's 500-stock index has chalked up 18 consecutive quarters of double-digit earnings growth (see BusinessWeek.com, 10/23/06, "So Far, So Good for Earnings"). With companies so far reporting a lackluster fourth quarter, the current earnings period could spell an end to profits' impressive streak.

If December-quarter earnings season ended today, the double-digit tear would already be over. As of Jan. 31, with 57% of results in, S&P 500 companies have posted slightly lower-than-expected earnings growth of 8.1%, according to S&P. "There would need to be several major surprises to put it over 10%," says Howard Silverblatt, S&P's senior index analyst.

Meanwhile, stocks have nudged higher amid lower profit forecasts and economic data suggesting the Federal Reserve won't change interest rates any time soon. Since Alcoa (AA) unofficially kicked off earnings season after the Jan. 9 closing bell, the Dow Jones industrial average has risen 1.7%, to post a new all-time closing high of 12,621.69 on Jan. 31. Over the same time, the S&P 500 has added 1.9%, to 1,438.24, while the tech-heavy Nasdaq composite is up 0.8%, to 2,463.93.

"Very Ho-Hum"

Wall Street still awaits earnings reports from bellwethers such as Exxon Mobil (XOM), Wal-Mart (WMT), and Cisco (CSCO). Some market pros worry that a number of companies have issued weaker forecasts for the quarter and year ahead. Whether the S&P 500 snaps its streak this earnings season or in a later quarter, profit growth is widely projected to fall from its recent heights in 2007.

Companies are also losing their edge when it comes to expectations. While fourth-quarter earnings are positive, with 63.5% of the S&P 500 beating analyst estimates so far, that percentage is below historical levels, according to Silverblatt. Prominent downside surprises have included Advanced Micro Devices (AMD) and Alcatel-Lucent (ALU).

"I would characterize this earnings season as very ho-hum," says Ashwani Kaul, chief market strategist at Reuters Estimates. "Right now, I think it's 50-50 whether we will hit double digits for the quarter."

Strength in Finance

The streak could hinge on the energy sector, Kaul says. ExxonMobil announces quarterly results Feb. 1, with rival Chevron (CVX) issuing its earnings report the next day. The sector's earnings growth has slowed from record highs amid lower oil prices, but energy shares are still on track to account for 13.2% of the S&P 500's earnings, despite representing just 9.6% of the index's market value, according to S&P.

One source of strength has been the financial sector (see BusinessWeek.com, 1/22/07, "2007's Top Picks: Financial Services"). The mergers-and-acquisitions boom has boosted brokerages and banks such as Goldman Sachs (GS) and Merrill Lynch (MER) despite an inverted yield curve—the condition when short-term rates are higher than long-term rates that's thought by some observers to prefigure recession. Asset managers such as Franklin Resources (BEN) have benefited from inflows (see BusinessWeek.com, 1/31/07, "Asset Management: Not Tapped Out Yet").


The financial sector's share of S&P 500 earnings is 26.7%, the highest of any sector, notes Ed Yardeni, chief investment strategist at Oak Associates. Financial issues account for 22.2% of the index's market capitalization. "While investors have been getting whiplashed in energy, financials have been steady winners," Yardeni said in a Jan. 31 note to clients. "Financials have always sold at a discount to the market because they've tended to blow up every four years or so. They aren't blowing up anymore," he added.

Tech Warnings

Technology, however, has been more of a mixed bag (see BusinessWeek.com, 1/16/07, "Tech Earnings: The Highs and the Lows"). About 72% of the S&P 500's information-technology companies have beaten analyst estimates, according to S&P. Among them is Wall Street darling Apple (AAPL), along with IBM (IBM), Intel (INTC), Microsoft (MSFT), Google (GOOG), Sun Microsystems (SUNW), and Yahoo! (YHOO). AMD, SanDisk (SNDK), and others have disappointed the Street.

However, tech companies and others have been issuing weaker outlooks for 2007, which could signal trouble ahead. The proportion of companies guiding higher has fallen to 7%, below recent levels, while the proportion of those guiding lower has climbed to 10% after trending downward in previous quarters, according to Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics.

"There's not a lot of bad news in the earnings reports," Ritholtz says. "The only thing we've seen that's just a little disappointing has been that the guidance is weaker than you would've hoped for."

Some market pros expect slimmer profit increases this year to weigh on the stock market. Joe Battipaglia, chief investment officer at Ryan Beck, predicts full-year earnings growth of 8%, which he says could lead to a market correction of 5% to 10%. "The profit picture is more muted than it had been," Battipaglia explains. "The market will have to adjust to that, which means it probably won't have the same get-up-and-go that it had last year in the second half."

Looking Ahead

However, others say fears of earnings slowdowns causing a pullback may be overdone, noting that moderating growth in corporate profits has been widely anticipated. "We would take advantage of current earnings misperceptions and buy into the integrated energy and chip stocks, which have been weak of late, while maintaining some caution still on the banks and materials names," wrote Tobias Levkovich, chief U.S. equity strategist at Citigroup (C), in a Jan. 26 report.

Of course, the current earnings season is a long way from over, and some big upside surprises may yet put profit growth back on the double-digit track. Either way, investors will soon consider the fourth quarter ancient history—and turn their attention to the quarters to come.

Dow Climbs to Another New Record

News Article
BusinessWeek.com
February 1, 2007
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Dow Climbs to Another New Record

Wall Street extended Wednesday's Fed-inspired rally, as consumer spending rose and Exxon Mobil posted record profits

by Marc Hogan

Stocks finished higher Thursday, and the Dow hit a second straight all-time closing high, as mostly solid economic and earnings news helped counter disappointment over Google's (GOOG) quarterly results. The market also likely benefited from carry-over buying after Wednesday's rally, says Standard & Poor's Equity Research.

On Thursday, the Dow Jones industrial average rose 51.99 points, or 0.41%, to 12,673.68, above the previous closing record set Wednesday. The broader Standard & Poor's 500 index added 7.7 points, or 0.54%, to 1,445.94. The tech-heavy Nasdaq composite was up 4.45 points, or 0.18%, to 2,468.38.
NYSE breadth was decidedly positive, with 25 issues advancing for every 9 declining. Nasdaq breadth was 20-11 positive.

The upbeat Federal Reserve statement Wednesday cheered investors' spirits, but earnings trends and technical indicators continue to indicate possible trouble for the S&P 500 and Nasdaq, some analysts say. "Yesterday's Fed news certainly got everyone in a buying mood, but when you look at the fundamentals of what's been going on in the market, I'm kind of disappointed in the rally that we've had," says Chris Johnson, CEO and chief investment strategist of Johnson Research Group. "I don't think we're out of the woods yet."

In economic news Thursday, U.S. personal income rose 0.5% and spending added 0.7% in December, after an unrevised 0.3% income gain and 0.5% spending rise in November. The core PCE deflator, a key inflation gauge, rose 0.1%, from a flat reading in November.

"These numbers are somewhat anticlimactic after yesterday's quarterly data, but are also more of the same Goldilocks scenario, with solid economic growth and tame inflation," says Action Economics.

Looking ahead, a report on January nonfarm payrolls highlights the docket Friday. Investors will also be assessing data on factory orders and consumer sentiment.

In other economic releases Thursday, the Institute for Supply Management's index of manufacturing activity fell to 49.3 in January, much weaker than expected, from 51.4 in December.

The National Assn. of Realtors' pending home sales index climbed 4.9% to 112.4 in December, above expectations.

U.S. jobless claims fell 20,000 to 307,000 in the week ended Jan. 27, after jumping to an upwardly revised 327,000 the previous week.

Among stocks in the news, Dell (DELL) was lower after the computer maker said founder Michael Dell was replacing Kevin Rollins as chief executive officer.

On the earnings front, Internet search company Google was lower despite topping analyst estimates with fourth-quarter earnings of $1.03 billion.

Exxon Mobil (XOM) was higher after the oil giant reported a 4% decline in fourth-quarter net income amid a record $39.5 billion annual profit. Rival Chevron (CVX) was slated to post earnings Friday.

Starbucks (SBUX) was down after the coffee seller posted an 18% jump in profit for its fiscal first quarter.

Corn-processor Archer Daniels Midland (ADM) was sharply higher on a 20% gain in earnings for its fiscal second quarter.

On the downside, shares of Comcast (CMCSA) dipped as the cable operator's fourth-quarter profit fell short of analyst estimates.

Boston Scientific (BSX) was lower after the medical device maker said its fourth-quarter earnings fell 17%.

Companies set to announce quarterly results later Thursday include Amazon (AMZN) and Electronic Arts (ERTS).

Elsewhere Thursday, automakers were reporting January unit vehicle sales. General Motors (GM) logged a much weaker than expected 17% decline from a year earlier, while Ford's (F) 20% drop in sales was line with expectations. DaimlerChrysler (DCX) posted a 3% gain from a year earlier, stronger than expected.

In addition, Toyota (TM) narrowly missed expectations with a 10% year-over-year sales increase. Honda (HMC) posted a stronger-than-forecast 2% uptick. Overall January auto sales are pegged at 16.5 million, says Action Economics.

In M&A news, insurer Marsh McLennan (MMC) said it was selling Putnam Investments to Great-West Lifeco for $3.9 billion in cash.

Bank of America (BAC) CEO Kenneth Lewis said it's unlikely the banking giant will pursue an acquisition of a smaller rival in 2007, scuttling rumors the company was in buyout talks with Countrywide Financial (CFC).

In the energy markets, March West Texas Intermediate crude oil futures fell 84 cents to $57.30 a barrel in a see-saw session following Wednesday's surge.

European markets finished higher. The FTSE-100 index in London rose 79.1 points, or 1.28%, to 6,282.2. Germany's DAX index added 62.17 points, or 0.92%, to 6,851.28. In Paris, the CAC 40 index was up 53.94 points, or 0.96%, to 5,662.25.

Asian markets ended higher. In Japan, the Nikkei 225 index gained 136.08 points, or 0.78%, to 17,519.5. In Hong Kong, the Hang Seng index climbed 323.74 points, or 1.61%, to 20,430.16. Korea's Kospi index advanced 22.67 points, or 1.67%, to 1,382.9.

Treasury Market
 
Treasury yields ticked higher as the jump in pending home sales offset the mild PCE increase, soft ISM reading, and sharp drop in jobless claims. The 10-year note fell in price to 98-12/32 for a yield of 4.83%, while the 30-year bond dropped to 93-13/32 for a yield of 4.93%.

News Analysis
BusinessWeek.com
January 29, 2007
Link

An Automatic Boost for Your Nest Egg

More and more retirement plans have been adding automated features. Now big providers are launching new ways to boost savings by default

by Marc Hogan

The next revolution in retirement savings may be taking place without your even knowing about it. With the "automatic" features increasingly cropping up in workplace retirement plans, the point is that you don't have to.

Over the past few years, employers have turned to new 401(k) programs that aim to make smart savings habits the default option. More recently, retirement plan vendors have started introducing what could be a new generation of automatic savings options.

So-called "autopilot" 401(k)s make certain decisions for employees by default. For a while now, some employers have embraced automatic enrollment, which means they sign new employees up for the company retirement plans unless the worker opts out (see BusinessWeek.com, 4/25/05, "A Nest Egg That's a No-Brainer"). In 2005, 16.9% of companies sponsoring 401(k) plans offered automatic enrollment, including 34.3% of companies with more than 5,000 employees, according to a survey by the Profit Sharing/401(k) Council of America.

Other hands-free features, like automatic contribution increases and even automatic investing, have also arrived in the 401(k) market (see BusinessWeek.com, 10/8/04, "Putting Your 401(k) on Autopilot"). Such programs are based on behavioral research showing that workers typically take the path of least resistance when it comes to retirement—even when it's against their best interest.

"Auto-Everything" Plans

Now, a new set of automatic functions could be making its way into your company's retirement plan. T. Rowe Price (TROW) recently introduced a feature, dubbed "auto-boost," that would raise all employees' contribution rates up to the maximum employer match. Meanwhile, Fidelity is exploring a feature that would go even further, lifting contribution rates for employees age 50 and older to the Internal Revenue Service limit for "catch-up" contributions.

These new features are the latest phase of a trend toward giving 401(k)s some of the "do-it-for-me" advantages of pension plans. "It's auto-everything at this point," explains Ron Bush, managing principal of West Hartford (Conn.) research and consulting firm Retirement Resources. "Now we're talking about getting people to the point where they're contributing at least up to the company match, and hopefully beyond."

A catalyst behind the most recent changes is the Pension Protection Act, passed by Congress in 2006 (see BusinessWeek.com, 8/18/06, "Deciphering the New Retirement Law"). The law made automatic enrollment and automatic contribution increases more attractive for employers. It also made the higher 401(k) and IRA contribution maximums passed in 2001 permanent.

Full Company Match, Pronto

"Congress explicitly placed a priority on helping employers use the path of least resistance to get more workers to participate in 401(k)-type retirement plans, where one is offered," says Jodi DiCenzo, founder of Evanston (Ill.)-based Behavioral Research Associates, in a Jan. 16 report for the nonpartisan Employee Benefit Research Institute.

T. Rowe Price's new auto-boost option puts a more dramatic spin on existing automatic features. The program, due to go fully live at the end of the first quarter, allows employers to bump up their workers' contribution rates so they qualify for the full company matching contribution, says Rachel Weker, vice-president for product development at T. Rowe. Workers receive information about the change beforehand and may opt out.

Automatic contribution increases have been available for some time from Fidelity, T. Rowe, Principal (PFG), Vanguard, and other 401(k) providers. T. Rowe's new feature differs by boosting participants' contribution rates to the company match in one fell swoop, rather than raising them gradually over time.

Catch-Up Made Simple

"Automatic enrollment was getting people in at the minimum, and in a lot of cases that wasn't enough to maximize employees getting their company match," Weker says. "We think auto-boost is going to get people to where they should more likely be."

Fidelity's new 401(k) feature stems directly from a provision that was made permanent in last year's legislation. Under IRS rules, workers may contribute up to $15,500 to a 401(k) in 2007. Workers 50 and older are also entitled to make catch-up contributions of up to $5,000. However, this favorable treatment of catch-up contributions was previously set to expire in 2010. The Pension Protection Act changed that.

In light of the new law, Fidelity is testing a feature that lets employers automatically increase older workers' contribution rates until they reach the maximum catch-up amount. "This is an evolution of the auto increase program, to make sure all participants are taking full advantage of this new savings feature that became permanent as a result of the PPA," says James Cornell, senior vice-president for employer marketing at Fidelity.

Win-Win for Providers and Employees

The new feature could have widespread implications. As of 2005 more than 90% of qualified retirement plans administered by Fidelity offered the catch-up provision, according to the firm. However, just 9.8% of employees eligible to make catch-up contributions were doing so.

Automatic contribution increases could be a smart way to improve workers' chances of saving enough for retirement, financial advisers say. "I am strongly in favor of automatic everything when it comes to financial planning and investment management for employees in the workplace," says John Vyge, senior financial planner at Dulles (Va.)-based Hillebrand Financial Planning. "Otherwise people don't or won't do it, usually due to either procrastination or lack of knowledge."

Of course, higher contribution rates also benefit companies like Fidelity and T. Rowe, which charge fees based on assets. Still, retirement plan automation may be an instance where business interests and the public interest converge, industry experts say. "It's not altruistic, but in the end it's absolutely the right thing to do," says Fred Barstein, president and CEO of Greenacres (Fla.) marketing research company 401kExchange.

Autopilot 401(k)s may lack sex appeal, but their rise might increase the odds of a secure retirement for people who lack the time or inclination to become expert investors. If your retirement can't be guaranteed, at least it could be automatic.

News Article
BusinessWeek.com
January 29, 2007
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Stocks End Mixed Ahead of Fed Meeting

Merrill Lynch and Citigroup each announced $1 billion-plus deals, while Intel buoyed the Dow and Nasdaq. Investors awaited Wednesday's Fed statement

by Marc Hogan

 

Major stock indexes finished narrowly mixed Monday, as investors sifted through M&A news and earnings reports ahead of this week's Federal Reserve policy meeting. With central bankers expected to keep interest rates unchanged, traders want to see what the Fed's statement will say about future policy, particularly amid speculation of possible rate hikes, says Standard & Poor's Equity Research.

On Monday, the Dow Jones industrial average nudged higher 3.76 points, or 0.03%, to 12,490.78. The broader Standard & Poor's 500 index slipped 1.56 points, or 0.11%, to 1,420.62. The tech-heavy Nasdaq composite rose 5.6 points, or 0.23%, to 2,441.09.

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

The Fed could point to recent stronger economic data in its Wednesday policy statement, some economists say. "It is possible the Fed will acknowledge the improved outlook for growth by removing the wording that 'economic growth has slowed' and simply stating that 'although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters,'" says John Ryding, chief U.S. economist at Bear Stearns, in a note to clients.

Intel (INTC) and IBM (IBM) helped lift the Dow on Monday. Both stocks were higher after the companies each separately announced a transistor breakthrough that could lead to smaller, more energy-efficient chips.

Deal activity was also in focus. Merrill Lynch (MER) agreed to buy First Republic Bank (FRC) for $1.8 billion in cash and stock.

Citigroup (C) said it will buy British insurer Prudential's Egg Banking for $1.13 billion in cash.

US Airways (LCC) reportedly may raise its hostile takeover bid for Delta Airlines (DALRQ.PK) by $1 billion.

Meanwhile, drugmakers Bristol-Myers Squibb (BMY) and Sanofi-Aventis (SNY) were reportedly nearing a friendly merger deal.

Canada-based paper and forest products company Abitibi-Consolidated (ABY) and U.S. peer Bowater (BOW) agreed to merge in an all-stock deal.

Biosolid recycling services provider Synagro Technologies (SYGR) said it will be acquired by the Carlyle Group in a deal valued at $772 million, including debt assumption, or $5.76 per share in cash.
Norton security software maker Symantec (SYMC) agreed to acquire software maker Altiris (ATRS) for $830 million in cash, or about $33 per share.

In earnings news, Verizon (VZ) was modestly higher after the telecommunications company reported a drop in fourth-quarter profits but topped analyst estimates.

Tyson Foods (TSN) was higher as the meat producer posted a 46% increase in fiscal first-quarter earnings.

Toymaker Mattel (MAT) edged up on stronger-than-expected fourth-quarter results, helped by improved margins and better sales of its Barbie and Fisher-Price products.

Copper producer Phelps Dodge (PD) was lower despite a sharp gain in fourth-quarter earnings.
A 75% jump in fourth-quarter net income, in line with expectations, wasn't enough to keep shares of drugmaker Schering-Plough (SGP) from falling.

Looking ahead, companies set to announce quarterly results Tuesday include 3M (MMM), Pepsi Bottling Group (PBG), Procter & Gamble (PG), and Wyeth (WYE).

On the analyst front, Kroger (KR) was higher after Bank of America upgraded the supermarket operator from sell to buy, citing less impact than expected from Wal-Mart (WMT).

In economic news, the U.S. calendar was light Monday. The Fed opens its policy meeting Tuesday and is slated to release its policy statement Wednesday.

Also on Tuesday's docket, the release of January consumer confidence is seen rising to 110.0 from December's unexpectedly strong 109.0, says Action Economics.

In the energy markets Monday, March West Texas Intermediate crude oil futures fell $1.41 to $54.01 a barrel amid speculation of ample supplies and a report Saudi Arabia may intend to keep prices around $50 a barrel.

European markets finished higher. The FTSE-100 index in London rose 11.9 points, or 0.19%, to 6,239.9. Germany's DAX index added 35.67 points, or 0.53%, to 6,726.01. In Paris, the CAC 40 index was up 37.4 points, or 0.67%, to 5,619.7.

Asian markets ended mixed. In Japan, the Nikkei 225 index gained 48.53 points, or 0.28%, to 17,470.46. In Hong Kong, the Hang Seng index lost 44.45 points, or 0.22%, to 20,236.68. Korea's Kospi index shed 8.23 points, or 0.6%, to 1,363.1.

Treasury Market
 
Treasury yields drifted higher amid speculation the Fed's policy statement Wednesday will be more hawkish. The 10-year note fell in price to 97-30/32 for a yield of 4.89%, while the 30-year bond dropped to 92-17/32 for a yield of 4.99%.

News Article
BusinessWeek.com
January 26, 2007
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Stocks End Mixed as Investors Weigh Data

New home sales and durable goods orders rose in December, beating expectations. Microsoft and Caterpillar issued upbeat 2007 earnings guidance

by Marc Hogan

 

Stocks finished mixed Friday, helped by late short-covering, as investors digested a pair of solid economic reports and another batch of earnings releases. Recent stronger-than-expected economic data fanned fears the Federal Reserve won't cut rates anytime soon, and may even have to hike, says Standard & Poor's Equity Research.

On Friday, the Dow Jones industrial average slipped 15.54 points, or 0.12%, to 12,487.02. The broader Standard & Poor's 500 index shed 1.71 points, or 0.12%, to 1,420.55. The tech-heavy Nasdaq composite edged up 1.25 points, or 0.05%, to 2,435.49.

NYSE breadth was positive, with 19 issues advancing for every 14 declining. Nasdaq breadth was 18-12 positive.

In economic news Friday, U.S. new home sales climbed 4.8% to a 1.120 million rate in December, from an upwardly revised November rate of 1.069 million. The report was much stronger than expected, says Action Economics.

U.S. durable goods orders rose 3.1% in December, stronger than expected, after an upwardly revised 2.2% increase in November.

Next week's calendar holds the Fed's policy meeting, with an announcement due Wednesday. Central bankers are expected to keep interest rates unchanged, but sentiment is growing that the Fed will raise its federal funds rate target sometime in the coming months, says S&P.

Other economic releases due next week include data on January employment, fouth-quarter economic growth, and December consumer spending.

Among stocks in the news, Microsoft (MSFT) was higher as the software giant raised its 2007 profit forecast and reported fiscal second-quarter earnings that topped analyst estimates.

Fellow Dow component Caterpillar (CAT) was higher on a strong 2007 profit outlook and a 4% rise in fourth-quarter earnings.

Semiconductor stocks helped support the Nasdaq. Shares of MEMC Electronic Materials (WFR) hit a 52-week high after the silicon wafer maker said its fourth-quarter earnings more than doubled on 39% higher sales.

On the downside, Amgen (AMGN) was lower after the biotech company reported fourth-quarter earnings that missed analyst estimates.

Shares of Honeywell (HON) slipped after the high-tech manufacturer logged a 14% rise in quarterly earnings but issued a 2007 forecast that suggested full-year profits could miss analyst expectations.

Halliburton (HAL) was lower after the oil industry services provider posted a 40% drop in fourth-quarter profit.

General Motors (GM) was lower after the automaker postponed reporting its 2006 financial results, citing accounting errors.

Next week brings another torrent of earnings reports. Companies set to announce quarterly results include 3M (MMM), Merck (MRK), Exxon Mobil (XOM), and Chevron (CVX).

In analyst calls, Citigroup cut its recommendation on Cisco (CSCO) from buy to hold, but shares of the networking equipment maker gained. Citigroup also upgraded Juniper Networks (JNPR) from hold to buy, and shares of the company rose.

Elsewhere, KB Homes (KBH) was lower after the homebuilder said the SEC has begun a formal investigation into its stock-options practices.

In the energy markets, March West Texas Intermediate crude oil futures rose $1.19 to $55.42 a barrel amid cold weather forecasts.

European markets finished lower. The FTSE-100 index in London fell 41.3 points, or 0.66%, to 6,228. Germany's DAX index dropped 29.24 points, or 0.44%, to 6,690.34. In Paris, the CAC 40 index was down 26.9 points, or 0.48%, to 5,582.3.

Asian markets ended lower. In Japan, the Nikkei 225 index lost 36.37 points, or 0.21%, to 17,421.93. In Hong Kong, the Hang Seng index slid 388.7 points, or 1.88%, to 20,281.13. Korea's Kospi index shed 11.03 points, or 0.8%, to 1,371.33.

Treasury Market
 
Treasury yields ticked higher after the strong durables and housing reports added to other data this week pointing to unexpectedly strong economic growth. The 10-year note was little changed at 98-01/32 for a yield of 4.88%, while the 30-year bond fell to 92-22/32 for a yield of 4.98%.

News Analysis
BusinessWeek.com
January 25, 2007
Link

Smart Tax Strategies for Younger Workers

Still new to the ways of the IRS? Here are a few smart tips to help you get through tax day as painlessly as possible

by Marc Hogan

 

Taxes are a headache by almost anyone's estimation. Despite occasional talk about simplifying the code, Americans' yearly encounter with the Internal Revenue Service probably won't get less complicated any time soon. For example, President Bush included a proposal in his State of the Union address Jan. 23 that would change the tax treatment of health-insurance benefits (see BusinessWeek.com, 1/24/07, "Salesman in Chief").

Heady stuff when you're setting up your own financial house. Every year, a new batch of young workers dives into this tangled maze of credits and deductions without the benefit of experience. According to IRS demographic data, nearly a quarter of all individual income tax returns processed in 2004 were filed by taxpayers under 30. Many members of this age group face their own unique tax situations, whether it's not having a mortgage to pay or not receiving benefits at work (see BusinessWeek.com, 2/16/06, "Life Without a 401(k)").

Unfortunately, even the enthusiasm of youth probably won't keep taxes from being a chore. To make that job easier, this week's Five for the Money shares five basic tax tips for young professionals still getting the hang of dealing with the taxman.

1. Get It Together.
 
First, make sure your financial house is in order. The longer it takes you to gather up your various tax-related documents, the more it will cost to prepare your return, whether in time or money. "There's one major rule when preparing to file your taxes," explains John Deyeso, principal of New York financial planning firm Financial Filosophy. "Be organized and detailed."

What papers do taxpayers need? The list starts with the W-2 or 1099 form from your employer, or at a minimum your individual pay stubs. Homeowners will require 1098 forms from their mortgage lenders. Also locate any mutual fund 1099 forms or bank-dividend statements. Student-loan payments and receipts for continuing education, charitable donations, or moving expenses may come in handy as well (more on those later).

2. Decide Your Plan of Action.
 
Novice taxpayers face the question of whether they should do their taxes themselves or seek professional help. Even some financial pros say many young professionals should start out doing their taxes themselves using popular tax software like Intuit's (INTU) TurboTax or H&R Block's (HRB) TaxCut. "There's no better education than seeing where the numbers end up on the return," says Sammy Grant, president of SG Financial Advisors in Sandy Springs, Ga. "It's fine to hire a professional one day, but I recommend trying it on your own first."

On the other hand, professional tax advisers can help young workers get their tax lives on the right track at an early age, other experts say. "Correctly addressing tax implications early in one's career can also help establish habits that reinforce a savings ethic over a working lifetime for retirement needs," says Barbara Steinmetz, founder of Steinmetz Financial Planning in Burlingame, Calif.

Taxpayers who settle on a plan early will likely find themselves in better shape on Apr. 16, this year's tax deadline in most states. "Don't wait until the last moment," says Donald Duncan, principal of D3 Financial Counselors, based in Downers Grove, Ill. Duncan likes TurboTax, but young workers should ultimately pick whichever option makes the most sense for their particular circumstances.


3. Jump-Start Your Golden Years.
 
Now that it's 2007, there's little that taxpayers old or young can do to ease their tax bite for the previous year. However, contributions to an IRA can help trim your tax bill right up until tax day. The IRA contribution limit this year is $4,000 (see BusinessWeek.com, 1/11/07, "Retirement Savings: Five Tips to Catch Up").

Young workers can deduct these contributions from their taxes if they have annual income below $50,000, or if they don't receive a retirement plan at work. It may seem early to start saving for retirement, but IRA contributions can both trim your tax bill today and put you on a path for a better tomorrow. "I always recommend that you contribute the most you can afford, up to the maximum," says Susan Serota, chair of the American Bar Assn.'s tax section.

Regular contributions to a 401(k) or other workplace retirement plan throughout the year can also help shelter your earnings from the tax collector. In 2007, workers under 50 may contribute up to $15,500 to their 401(k). (Employees 50 years and older are allowed extra "catch-up" contributions of up to $5,000.)

4. Take Some Credits.

Young people who don't have a mortgage probably won't be able to itemize their tax deductions, financial planners advise. Still, that doesn't mean well-prepared taxpayers can't find ways to shield a little more money from the tax man.

For starters, those student-loan bills might finally pay off. Taxpayers with student loans may deduct up to $2,500 in interest related to a student loan, depending on their annual income. Your lender should send a form 1098-E statement listing the amount of interest paid.

Going back to school can help you save, too. Taxpayers enrolled in graduate school may qualify for the Lifetime Learning tax credit, again depending on income. The credit applies to tuition and related costs, but not books or room and board, and is worth 20% of up to $10,000 in college expenses.

Don't forget to claim your one-time telephone excise tax refund. The IRS expects more than 160 million taxpayers to request this payment, which aims to refund long-distance phone taxes collected under a recently scrapped, century-old law. For the 2006 tax year, taxpayers can either take a standard refund between $30 and $60 (depending on other deductions) or dig up their old phone bills and use the exact amount instead.

Young people who do itemize their deductions could possibly enjoy some additional tax benefits. Moving expenses, home-office expenses, non-reimbursed business travel expenses, and some other costs may be eligible for deductions. A tax adviser or some good tax software should be able to help you figure out whether you qualify.

5. Don't Get Excited About a Big Refund.
 
Nobody likes to end up owing money on their taxes. Still, young workers shouldn't let the lure of a fat check from the IRS sway them from a savvy, sensible tax strategy. "The best situation is when you get no refund, because otherwise you're giving the government an interest-free loan," says Chad Smith, a 28-year-old financial planner with Raleigh (N.C.)-based Financial Symmetry.

Be aware of the amount you're withholding from your paychecks. If you end up getting a big loan this year, adjust your W-4 form with your employer with an eye to coming out even next year. Workers who are self-employed or who don't get taxes withheld from their paychecks should make estimated tax payments each quarter—or else face a penalty at the end of the year.

When it comes to paying Uncle Sam, some of the best advice crosses the generational divide: Be prepared, contribute to a retirement savings plan, and try to make the right payments throughout the year. It won't make paying taxes any more fun, but it could improve your financial health. And it could give you some welcome peace of mind when April 16 rolls around.

News Article
BusinessWeek.com
January 23, 2007
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Stocks Gain amid Earnings, Rising Oil

Crude futures rebounded above $55, while Texas Instruments, Johnson & Johnson and others reported fourth-quarter results

by Marc Hogan

 

Stocks finished higher Tuesday, but below their best levels of the session, as rising oil prices lifted the energy sector. Investors were digesting downbeat guidance from the tech sector and a mixed batch of earnings reports. Some traders were positioning themselves ahead of tonight's State of the Union address, says Standard & Poor's Equity Research.

On Tuesday, the Dow Jones industrial average rose 56.64 points, or 0.45%, to 12,533.8. The broader Standard & Poor's 500 index added 5.04 points, or 0.35%, to 1,427.99. The tech-heavy Nasdaq composite edged up 0.34 points, or 0.01%, to 2,431.41.

NYSE breadth was decidedly positive, with 22 issues advancing for every 11 issues declining. Nasdaq breadth was 18-12 positive.

Coming off some lackluster news last week, corporate earnings could remain a source of worry for the market, some analysts say. "High investor expectations should continue to pressure stocks as we work our way through earnings season," says Chris Johnson, CEO and chief investment strategist of Johnson Research Group.

Morgan Stanley moved from overweight to neutral on stocks. "We are changing our asset allocation by selling equities and raising cash, which becomes the largest overweight in our asset allocation," says Henry McVey, chief U.S. investment strategist at Morgan.

The energy sector was leading the market higher Tuesday amid a rebound in oil prices. In the energy markets, March West Texas Intermediate crude oil futures climbed $2.48 to $55.04 a barrel ahead of Wednesday's weekly inventory report, expected to show a decline in supplies.

Among stocks in the news, Alcatel-Lucent (ALU) was sharply lower after the telecommunications company warned that full-year 2006 revenue would come in at levels similar to 2005's results.

On the upside in tech, Texas Instruments (TXN) was higher after the chipmaker reported fourth-quarter earnings that topped analyst expectations. Also, Merrill Lynch upgraded shares of the company from neutral to buy.

In other earnings news, Johnson & Johnson (JNJ) was lower after the consumer-products maker posted a 3.5% uptick in fourth-quarter profit, missing analyst estimates.

Fellow Dow component DuPont (DD) was lower despite announcing sharply higher fourth-quarter profits.

Also among the blue-chips, United Technologies (UTX) said its fourth-quarter earnings jumped 38%. Shares rose following the news.

Meanwhile, D.R. Horton (DHI) was higher after the homebuilder said first-quarter earnings skidded 64%. Separately, Goldman Sachs raised its recommendation on U.S. homebuilders from sell to neutral.
Bank of America (BAC) was lower after the financial company posted a 47% increase in fourth-quarter net income.

Xerox (XRX) was lower after the copier and printer maker logged a 24% drop in fourth-quarter profit.
Gap (GPS) was lower after the retailer announced the departure of CEO Paul Pressler following a weak holiday shopping season.

After the closing bell, Yahoo! (YHOO) was expected to announce earnings of 13 cents per share on $1.2 billion in revenue, according to Reuters Estimates. Advanced Micro Devices (AMD) was seen reporting earnings of 8 cents per share on $1.7 billion in revenue.

Companies due to post quarterly results Wednesday include McDonald's (MCD). The fast-food chain operator is expected to post earnings of 61 cents per share on nearly $5.7 billion in revenue, according to Reuters Estimates.

Outside of earnings news, American Airlines parent AMR (AMR) was sharply lower after the company said it plans to sell 13 million new shares of common stock.

Apple (AAPL) was lower amid reports CEO Steve Jobs was questioned by government investigators as part of a probe into backdated stock options grants at the company.

On the economic docket Tuesday, U.S. leading indicators rose 0.3% in December, in line with expectations, after an unrevised 0.1% increase in November, for a fourth straight monthly increase.

Bush was set to give his State of the Union address at 10 p.m. Eastern. "We expect him to focus on three key issues-- Iraq, energy and climate change, and health care-- as well as a few secondary ones," Goldman Sachs economists Alec Phillips and Chuck Berwick say in a note to clients. About 30 million Americans could face tax hikes as a result of Bush's expected proposal to make health insurance premiums taxable income, according to S&P.

Wednesday's economic calendar is relatively quiet, highlighted by weekly Mortgage Bankers Assn. data on mortgage applications.

European markets finished mixed Tuesday. The FTSE-100 index in London rose 9.2 points, or 0.15%, to 6,227.6. Germany's DAX index fell 8.38 points, or 0.13%, to 6,678.93. In Paris, the CAC 40 index was down 4.71 points, or 0.08%, to 5,575.07.

Asian markets ended slightly lower. In Japan, the Nikkei 225 index slipped 15.61 points, or 0.09%, to 17,408.57. In Hong Kong, the Hang Seng index edged down 2.52 points, or 0.01%, to 20,769.7. Korea's Kospi index inched lower 0.32 points, or 0.02%, to 1,363.09.

Treasury Market
 
Treasury yields ticked higher following the rise in December leading indicators. The 10-year note fell in price to 98-19/32 for a yield of 4.8%, while the 30-year bond dropped to 93-26/32 for a yield of 4.9%.

News Analysis
BusinessWeek.com
January 22, 2007
Link

2007's Top Picks: Financial Services

Top Wall Street pros offer their thoughts and predictions on companies in the financial-services industry

by Marc Hogan

 

Neither an inverted yield curve, rising interest rates, nor a weakening U.S. dollar could keep financial services stocks from solid gains in 2006. The industry also weathered security concerns and outsourcing talk, and still share prices emerged undaunted (see BusinessWeek.com, 12/19/06, "Financial Services '06: Dash of the Unusual"). In fact, the financial services sector rose 15.8% last year, according to Standard & Poor's (MHP), compared with a 13.6% advance for the broader S&P 500 index.

There's no guarantee the good times will continue, however. Slowing economic growth, the yield curve's ongoing inversion, and deteriorating credit quality could put a damper on earnings growth in 2007, some analysts say. In 2006, S&P estimates the financial sector logged a 16.6% uptick in earnings, while the S&P 500 posted an average 14.6% increase. This year, however, S&P expects the sector's profit growth to slow to 6.4%, vs. 9.9% for the broader benchmark.

Greener Pastures

Despite this gloomier backdrop, Wall Street's soothsayers still see pockets of green in the money business. From banks to brokerages and beyond, BusinessWeek.com asked top analysts for their picks in the financial sector as the year gets underway.

Deal activity could be a boon for one regional bank, according to David George, a senior analyst at A.G. Edwards (AGE). Bank of New York (BK) should get a boost from the recent swap of its retail banking unit with JPMorgan Chase (JPM) and its pending $16.5 billion merger with Mellon Financial (MEL). "The combined company has a platform capable of generating double-digit growth for the next three to five years," George says. The banks expect to cut pre-tax costs by roughly $700 million annually as a result of the deal (see BusinessWeek.com, 12/4/06, "The Man Behind the Mellon Merger").

In the traditional banking sector, George also likes Wells Fargo (WFC) and U.S. Bancorp (USB). He expects 10% earnings growth from these companies in 2007, about twice the anticipated rate for their peers. Wells Fargo should continue to generate strong profits despite a challenging macro-environment, George says. He adds that a high percentage of revenue from fees out of nonbank businesses such as payment services, payment processing, and corporate trusts will likely insulate U.S. Bancorp's earnings from the inverted yield curve. (A.G. Edwards has had business relationships with Bank of New York, Wells Fargo, and U.S. Bancorp.)

UBS analyst Matt O'Connor's top pick among large-cap banks, Wachovia (WB), might be another stock poised to gain after recent M&A action. The company's $25.5 billion purchase of Golden West Financial may have sparked some concerns on Wall Street about the mortgage lender's earnings prospects in a slowing housing market, but overall results should come in line with expectations, O'Connor says. "Combine that with an attractive valuation and what I would view as an attractive franchise," he says, citing the company's southeastern U.S. geographic base and diverse business mix. "I think it could be a very good place to make some money."

Meanwhile, SunTrust Banks (STI) might be a smart play for two different reasons. On one hand, a new cost-savings plan could help the company get expenses under control, paving the way for above-average earnings growth against the industry, O'Connor says. If costs don't come down, he sees an increasing probability that the company will be sold, likely at a premium.

In a somewhat contrarian call, O'Connor expects improved earnings growth from BB&T (BBT). The analyst says the bank is just beginning to see the benefits of its investment in organic growth—such as opening new branches and hiring sales staff— and may enjoy improved operating leverage going forward. The company has also made changes to its balance sheet that could improve its position for a prolonged flat yield curve, he says. (UBS has had business relationships with Wachovia, SunTrust Banks, and BB&T.)

Elsewhere, Bank of America (BAC) analyst Michael Hecht favors Lazard (LAZ). Hecht says the boutique advisory group, his top small- and mid-cap pick in the sector, stands to gain from booming M&A activity and a growing asset-management practice. The company's valuation of 16 times its estimated 2007 earnings is also cheap compared with its peers, he writes in a recent research report. (Bank of America beneficially owns at least 1% of securities of Lazard and has received investment banking fees from the company.)

Within large-cap stocks, discount stockbroker Charles Schwab (SCHW) may be a bargain. Hecht says the stock looks undervalued based on the 23% compound annual growth rate he projects for earnings over the next five years. Ongoing cost discipline and decreased reliance on transaction-based revenue could also bode well for Schwab, Hecht notes in the report. (Bank of America makes a market in the securities of Schwab and has received investment banking fees from the company.)

Schwab is a favorite of Citigroup (C) analyst Prashant Bhatia as well. "We continue to see significant upside for [Schwab]," Bhatia writes in a recent research report, citing faster organic growth and per-share earnings increases of 20% or more over the next two to three years. "In our view, the marketplace continues to underappreciate the long-term earnings power and the growth prospects of the Schwab franchise."

In life insurance, Citigroup analysts' top picks are Aon (AOC) and Lincoln National (LNC). Aon may be positioned to grow revenues, margins, and earnings at the same time, analyst Keith Walsh notes in the Citigroup report. As for Lincoln, fellow Citigroup analyst Colin Devine says the Street has yet to fully recognize the stock's attractive valuation and above-average dividend yield. (Citigroup makes a market in the securities of Schwab, Aon, and Lincoln National, and had business relationships with the companies.)

As the financial sector faces a tougher environment, analysts believe a few well-positioned financial companies could still be poised for growth in 2007.