Stocks higher on housing but Europe worries linger - Yahoo Finance Stocks higher on housing but Europe worries linger - Yahoo Finance

Sunday, June 3, 2012

Stocks higher on housing but Europe worries linger - Yahoo Finance

Stocks higher on housing but Europe worries linger - Yahoo Finance

NEW YORK (AP) -- Hopes that the U.S. housing market is starting to recover and the economy is on the mend sent stocks higher on Wall Street.

But the gains are being constricted from continuing worries that Greece's political deadlock could fracture the European Union and roil global markets.

The Dow Jones industrial average rose 75 points Wednesday to 12,707. The Standard & Poor's 500 added nine points to 1,340. The Nasdaq composite rose 15 points to 2,908.

Home builder stocks rose after the Commerce Department said builders started work on new homes at an annual pace of 717,000 last month, 2.6 percent more than in March. It was a heartening sign for the beleaguered housing market, which seems to be forming a bottom and starting to recover. Construction rose for both single-family homes and apartments.

Target Corp. rose after a strong earnings report. Target said revenue at stores opened at least a year rose 5.3 percent, the strongest performance in six years for that period. Target's results illustrate that Americans are beginning to spend cautiously as economic uncertainty persists. Though the job market is still shaky, falling gas prices have given shoppers hope.

As signs of a global economic slowdown persist, prices of commodities have come off highs. Oil prices continued their march downwards from $105 in the beginning of the month to $93. Crude oil prices were down $1 on Wednesday. Gold prices fell $18 to $1539, the lowest level since December.

In Europe, a potentially chaotic situation was developing in Greece, where power-sharing talks collapsed Tuesday and new elections were called for next month. There is already concern in other European countries about how a possible Greek exit from the euro would affect the rest of the continent.

On Wednesday, Spain's prime minister warned that the country, which is trembling under a 24.4 percent unemployment rate, could be locked out of international markets due to problems in the EU.

"Right now there is a serious risk that (investors) will not lend us money or they will do so at an astronomical rate," Mariano Rajoy told Spanish lawmakers.

Financial pressures extend well beyond Europe too. The Indian rupee hit a new all-time low against the dollar with investors increasingly seeking a safe place to put their money. The rupee sank to 54.44 against the dollar Wednesday, surpassing the prior low of 54.39 on December 15.

Among other stocks making big moves:

— JC Penney plunged 14 percent, the most in the S&P 500 index, after the retailer reported a bigger-than-expected first-quarter loss. Sales plummeted as shoppers are rejecting their new pricing plan.

— Abercrombie & Fitch fell 11 percent after reporting that its first-quarter net income shrank 88 percent because of higher costs and declining sales in established stores and in Europe.

— General Electric rose 3.6 percent, the most of the 30 stocks in the Dow, after the company said its finance unit will pay a special dividend of $4.5 billion to the parent company this year. It had suspended the payments in 2009 during a freeze in credit markets.

New Rules for Money Transfers, but Few Limits - New York Times

Both resent having to pay Western Union a $10 fee to send money abroad and an additional cut to convert dollars to pesos. But these charges have fueled the company’s record profits and made it a relative outlier in the financial services industry.

As billions of dollars in fee income has evaporated at the nation’s largest banks because of regulations passed in the wake of the financial crisis, the money-transfer industry has escaped the crackdown.

Soon, however, the companies, which are largely regulated by states, will be subject to new federal rules. Starting in February, they will have to disclose more to customers about transfer fees and currency exchange rates. The rules, part of the Dodd-Frank financial regulation law, will also require companies to give customers up to 30 minutes after a transaction to get a full refund.

But consumer advocates are raising alarms that money-transfer companies face fewer restrictions because the rules do not touch the pricing of services.

“You still have a situation where customers are subjected to these predatory products with no cap on fees or exchange rates,” said Oscar Chacon, the executive director of the National Alliance of Latin American and Caribbean Communities in Chicago.

Money-transfer companies say that they offer an invaluable service for customers who might not have access to traditional banks and who would otherwise have no way of transmitting money to their families.

“The money-transfer industry is very competitive, and consumers have a range of choices for sending money,” said Tom Fitzgerald, a Western Union spokesman.

Western Union, which dominates the money-transfer market, notes that it already discloses the amount of money being submitted, the exchange rate and the amount that the recipient will receive. It also tells customers that “in addition to the transfer fee, Western Union also makes money when it changes your dollars into foreign currency.”

MoneyGram, among the largest companies, said, “We believe the new rules essentially standardize across the industry our existing high level of disclosure, which should benefit anyone wishing to send funds.”

Mr. Esparza, who sends money to his children in Mexico City, said that the $10 fee would not be onerous if he were sending a larger amount, but that it seemed exorbitant for $50. “Western Union’s fees are just too high,” he said.

Ms. Gonzalez said that even though $10 might not seem like a lot, “In Mexico, that money goes farther.”

Aside from the transfer fees, Western Union and other similar services profit as they buy batches of currencies at a wholesale rate. The money-transfer companies do not disclose the spreads they benefit from when they set exchange rates.

“It’s a big profit center for these companies, borne on the backs of the people who can least afford it,” said Matthew Piers, a lawyer in Chicago, who successfully brought a lawsuit on behalf of Mexican immigrants against Western Union in 2000 that accused the company of misrepresenting exchange spreads.

Western Union did not admit or deny wrongdoing, but agreed to pay more than $400 million to settle the claims.

Referring to the money it makes off the spread, Western Union said in its 2012 annual filing, “we generate revenues based on the difference between the exchange rate set by us to the customer and the rate at which we or our agents are able to acquire currency.”

Western Union received $1.15 billion in so-called foreign-exchange revenue in 2011, up from $910.3 million in 2009.

For Javaid Tariq, a taxi driver in New York City who sends money monthly to his family in Pakistan, the exchange rate is particularly infuriating because of how much money he loses. When he sent $300 to his family in April, he received 89.2 rupees for every dollar, less than the 91.2 exchange rate that he checks each morning, he said. For his family, that means 599 fewer rupees, or more than a week’s salary in Lahore.

Frustrated, Mr. Tariq said, “They are taking this money from the people who can least afford it.”

Analysts expect the market for money transfers to grow. The value of cross-border transfers is expected to reach $437 billion in 2012, up from $387 billion in 2009, according to the Aite Group, a research and advisory firm. In the United States, this is led partly by a growth in transfers to China and India and an influx of immigrants from western and eastern Africa, said Larry Berlin, an analyst with First Analysis in Chicago.

Western Union and rival companies are poised to profit. Western Union, with the largest share of the market at nearly 18 percent, recorded $4.2 billion in transaction fees last year, up 4 percent from 2010. The fees accounted for more than 75 percent of the company’s total revenue last year. In the first quarter, profits totaled $247.3 million, up 18 percent from the year-ago period, and for all of 2011, net income was $1.16 billion, up 28 percent from the year before.

Western Union and MoneyGram, which has nearly 4 percent of the money-transfer market, according to the Aite Group, are primarily regulated by the states in which they operate. The new rules, however, fall under the oversight of the new federal Consumer Financial Protection Bureau.

In the buildup to the Dodd-Frank rules, Elizabeth Warren, in her former role as a special adviser to President Obama charged with forming the consumer bureau, warned that with money-transfer companies, “you put your money in and take your chances.”

The central idea behind the new regulations was that having more transparency would promote greater competition and allow immigrants to shop for better rates, said Betsy Cavendish, the executive director of Appleseed, a nonprofit organization focused on policy reform that provided public comment during the rule-making process.

In a February speech to the League of United Latin American Citizens, Richard Cordray, the director of the consumer bureau, emphasized that “with our rule, we hope to increase competition.”

But competitors have made little progress in penetrating the money-transfer market largely because Western Union has half a million locations in 200 countries and territories, making it more difficult for others to edge in, industry consultants said. Although there was some hand-wringing in the industry during the rule-making, analysts said that disclosure requirements would not significantly dampen the revenue at Western Union.

“There will be some one-time costs, but not anything significant,” Mr. Berlin said. Western Union, he added, already works to make fees clear to customers.

Already there are signs that competition might be slow to materialize, banking analysts said. They pointed to a growing number of partnerships between Western Union and banks that might have competed for a slice of the business.

Regions Financial, for example, just finished introducing Western Union’s money-transfer services through its 1,800 branches. U.S. Bancorp gives customers access to Western Union services through its online banking site.

Immigrant advocates argue that many people do not have time to shop for better rates.

“These are people working who are often working minimum wage jobs with very little savvy or time about where to price-shop,” said Francis Calpotura, the founder and director of the Transnational Institute for Grassroots Research and Action in Oakland, Calif.

Some immigrants complain that while there might be multiple options to send money from the United States, there are not as many in the countries where their families live.

Mr. Tariq, the taxi driver with family in Lahore, says he must use Western Union to send $300 a month because “they have a monopoly on stores and are in every post office.”

That makes him feel “like a hostage,” he said.

5 Stocks to Buy Before Facebook - Daily Finance

At this point, you've gotten quite an earful about Facebook (NAS: FB) . But whether you're hopping mad or shaking your head at the apparent foolishness, a bull or a bear, a Mark Zuckerberg fanboy or a hater, you have to admit this: For all of its size and influence, as an investment Facebook has some serious fleas.

So if you're reading about Facebook but hoping to invest in something better, here are five companies that excel where Facebook falls short.

1. Facebook has an unproven business model
Because Facebook is online and most of its revenue comes from advertising, it's tempting to think of the business model as very similar to that of Google. However, the search-centric model of Google is different from Facebook's social-networking platform, so it'd be a mistake to automatically assume that Facebook's advertising business will be as successful as Google's. Maybe more worrisome, as technology continues to shift Facebook users to mobile devices, the company will have to grapple with a platform that hasn't been particularly lucrative for it thus far.

On the polar opposite end of the spectrum, Procter & Gamble (NYS: PG) has a very well proven business model -- it develops and sells products and brands that consumers are willing to buy over and over again. Not only is that business model time tested, but so is P&G's incarnation of that business -- the company is 175 years old and owns blockbuster brands such as Gillette, Tide, and Crest.

2. Facebook's stock appears vastly overvalued
On the basis of Facebook's forward earnings -- that is, what Wall Street expects the company to earn over the next year -- the company's price-to-earnings ratio is 52. In simple terms, that means -- growth aside -- that if investors were given every cent of Facebook's profit, it would take 52 years for them to be paid back for their investment. Only after that would they be making a profit.

Just staying within the world of tech, there are plenty of investment options with lower valuations. Google's forward P/E ratio is 13, Apple's (NAS: AAPL) is 11.8, Cisco is at 8.8, and Oracle trades at 10.2 times its expected earnings.

One of my favorites, though, is Intel (NAS: INTC) . Its forward P/E is less than 10, and it's a business that's proved itself very successful over decades of slinging industry-leading chips.

3. Facebook doesn't pay a dividend
A stock doesn't have to pay a dividend to be worth buying, but in recent years many investors have recognized the value that comes from a quarterly cash profit payout. Since Facebook is still in high-growth mode, it's smart for it to hold onto its cash. But that's not the case for many companies -- even in the historically dividend-unfriendly tech sector.

For investors who want a company that pays them back, the mighty Apple is one place they can look. The company had been reluctant to start distributing its massive cash hoard to investors, but it finally cracked earlier this year and announced that it will finally start paying its shareholders. It won't be a huge dividend -- yields from companies the likes of Intel and Microsoft are higher -- but Apple should have a lot of room to grow that payout in the future.

4. Facebook is overhyped
The time to buy a stock is either when everyone is (mistakenly) pessimistic about the company or they're just plain ignoring it. The worst time to buy? When everyone is hyped up about the stock and can't stop talking about it. Even though Facebook's stock has fallen precipitously since the IPO, it still falls in the latter category.

Table Facebook, at least for now, and check out some ignored or beaten-down stocks. One such idea is Advance Auto Parts, the $5 billion auto-parts retailer. The company has a great track record, but the stock got pummeled recently because of a lackluster forecast for this year.

5. Facebook's top brass is questionable
I applaud Zuckerberg -- he's done an outstanding job creating a huge business and making himself insanely wealthy. But do I want to invest in a company run by a 27-year-old who was reluctant to show up for the meetings for the company's IPO? I'm not so sure. Worse, do I want to own a company that thinks it's OK to endow insiders with special voting rights? Umm ...

Ditch Facebook and opt for Berkshire Hathaway (NYS: BRK.B) . Despite being one of the most famous investors on the planet, Warren Buffett has no problem spending a lot of time chatting with his shareholders at the company's annual meeting. And while Berkshire does have a dual-class share structure, neither of the share classes are unavailable to outside investors -- you just need deep pockets to snag those $119,845 "A" shares.

Don't like those? Three more to try on.
Didn't find what you're looking for here? My fellow Fools have three more ideas -- each of which I'd prefer over Facebook. To check out these world-beaters, get your free copy of "3 American Companies Set to Dominate the World."

Well, We've Officially Had A "Correction!" But Stocks Still Aren't Cheap - The Business Insider

Well, stocks are now down more than 10% from their recent peak--an official "correction."

So what does that mean?

Is it a "buying opportunity"? Are stocks cheap?

Not necessarily.

Over the short-term, the market could certainly snap back. And if the carnage keeps up,  Ben Bernanke might announce some huge new quantitative easing program in addition to his zero-percent-interest-rates-forever policy. Or Congress might panic about the elections and suddenly address "Taxmageddon" and the fiscal cliff. Or Europe might suddenly bail out all its banks and kick the can down the road for a while.

And those initiatives might boost stocks.

On the other hand, stocks could now keep dropping until they enter a "bear market" (20% decline), or worse.

On that score, the bigger valuation picture is still not that encouraging, at least for long-term returns. Even after the recent pullback, stocks are still about 20% overvalued when measured on Professor Robert Shiller's "normalized" earnings--earnings adjusted to normalize profit margins. This is is one of the only valuation measures that actually bears some correlation to long-term future returns. (PEs based on a single year of earnings can often be highly misleading).

Specifically, even after the pullback, stocks are still trading at 20X cyclically adjusted earnings. As we can see in the following chart from Professor Shiller, over the past century, stocks have averaged about 16X those earnings. So we're still about 20% above "normal."

Importantly, though, 20X is a lot closer to normal than the ~24X recent peak. Stocks certainly aren't "cheap," but they're also not wildly overvalued anymore.

Wait, what are "normalized" earnings?  Aren't stocks now astoundingly "cheap"?

In recent months, eager to suggest that stocks are cheap, most analysts have talked about the market P/E ratio relative to next year's projected earnings. And relative to those earnings, stocks do seem modestly "cheap" (12X, or something).

Unfortunately, measuring stock values against next year's projected earnings has a couple of flaws. First, no one knows whether those projections will materialize. Second, and more important, those projected earnings assume that today's record-high profit margins (see below) will persist. 

St. Louis Fed

Corporate profit margins have now hit record highs. If they don't regress to the mean, it will be the first time in history that they haven't.

Over history, corporate profit margins have been one of the most reliably "mean-reverting" metrics in the economy. When margins get extended to super-high (today) or super low (2009) levels, they generally revert toward the mean. This radically changes the PE ratio.

Using single-year earnings often provides a very misleading impression of how "cheap" or "expensive" stocks are. When profit margins are abnormally high, as they are now, the PE seems misleadingly low. And when profit margins are abnormally low, as they were in 2009, the PE seems misleadingly high. The "normalized" PE ratio provides a much more meaningful view.

And measured on average profit margins, not today's super-high margins, the stock market is still a bit expensive. (We discuss this in detail here).

Sadly, this doesn't tell you anything about what the market will do next.  As you can see in Professor Shiller's chart, the market has spent decades above and below the average.

What this PE ratio does tell you is that stocks still have lots of room to fall--20%, just to get back to normal, much more than that if they "overshoot."

And it also tells you that long-term returns are still likely to be sub-par. Through history, one of the most reliable predictors of next-10-year returns is the valuation level at the beginning of the period. Today's valuation level is not as high as yesterday's. But it's still higher than average.

But we're getting closer to "fair value."  And that's good news for long-term investors who want a compelling long-term return. And bonds are now so expensive that stocks are highly likely to produce better returns than bonds over the next decade, even if the stock returns are sub-par.

See Also: ALBERT EDWARDS: The Stock Market Will Collapse To New Lows And All Hope Will Be Crushed

No comments: