Market Spread

House OKs Stimulus Without Any Votes From Republicans

noreply@blogger.com (Garret Higgins) — Thu, 29 Jan 2009 06:45:00 +0000

BY DAVID HOGBERG

Posted 1/28/2009

President Obama's first big initiative, the $819 billion stimulus package, passed the House with little difficulty by 244-188.

But no GOP lawmakers voted for it, despite Obama's efforts to create a bipartisan atmosphere. Also, more economists are arguing that the measure would be ineffective.

Even some Democrats expressed doubts.

"I am going to support the package. There's a lot of good in it for future economic growth," said Rep. Dan Boren, D-Okla. "But it's not the bill I would have written. I would've spent far more money on infrastructure and shovel-ready projects, not funding for the National Endowment for the Arts and other extraneous parts. I also don't think we should be giving tax cuts to people who don't pay taxes."

Rep. Jeff Fortenberry, R-Neb., voted no. "I fear in the name of stimulus we are on an unsustainable path of spending that will be very difficult to reverse in the future."

Nevertheless, he too had some mixed feelings. "The alternative energy plan, health information technology, and modernizing the electric grid are bold, new ideas and standing alone, I probably would have voted for them."

Too Much, Too Late?

House Republicans balked at the stimulus package as they regain their small-government voice.

"Instead of injecting new life into the economy, we're seeing a massive expansion of government," Rep. Darrel Issa, R-Calif., wrote in an op-ed.

Calling the bill "perfectly awful," Rep. John Campbell, R-Calif., said the "stimulus package is nothing more than a political grab bag of spending."

But Small Business Committee Chairwoman Nydia Velazquez, D-Calif., said the bill would "drive growth within the small business community . . . $30 billion in targeted tax measures will allow struggling startups to stay afloat."

Republicans say spending delays would limit the near-term impact.

A Congressional Budget Office report says just $93 billion in new outlays would occur in the rest of fiscal 2009, which ends in Sept. 30. Another $225 billion would be spent in 2010. All told, that's about half of the bill's eventual spending.

The Senate's stimulus bill is expected to include more tax cuts to Republicans' liking. That could win over more GOP support there.

No Bipartisan Spirit Here

One GOP aide cited partisanship as a reason for low House Republican support: "For all the president's calls to find an 'American' solution, Speaker Pelosi refused to allow any Republican input."

House Majority Leader Steny Hoyer blamed Republicans. He cited Democrat cooperation with President Bush last year on economic plans and past GOP opposition to Clinton economic plans.

Fortenberry, while noting that the GOP was largely shut out by House Democrats, held out hope for long-term cooperation with Obama.

"President Obama came to see us Tuesday," he said. "It was a very cordial, gracious meeting in which there was honest and fair dialogue about areas of common ground regarding concern for the economy."

Common ground may be harder to find as more prominent economists oppose the stimulus package.

The libertarian Cato Institute on Tuesday ran a full-page ad in prominent papers, including the New York Times. Signed by 200 economists, including Nobel laureates Vernon Smith, James Buchanan and Edward Prescott, it stated that they "do not believe that more government spending is a way to improve economic performance."

"The package will simply put future generations of Americans $800 billion further in debt," said Chris Edwards, director of tax policy studies at Cato. "We already have a deficit at a historic high and we cannot afford spending more."

But the bill has plenty of backers.

"We have to worry about budget deficits, but not anytime soon," said Dean Baker, co-director of the liberal Center for Economic and Policy Research. "The economy is in free fall. Spending money and running a large deficit will both get the economy on track and improve efficiency."

BofA Bailout Fails To Stanch Bleeding In Financial Stocks

noreply@blogger.com (Garret Higgins) — Mon, 19 Jan 2009 00:35:00 +0000

BY SCOTT STODDARD

INVESTOR'S BUSINESS DAILY

Posted 1/16/2009

The government threw a lifeline to ailing Bank of America (BAC) on Friday, but shares of the financial giant and many peers continued to sink.

The Treasury said it would inject $20 billion of new capital into BofA after the top U.S. bank said it lost $1.79 billion in the fourth quarter, its first loss in 17 years. That excludes $15.3 billion in red ink at Merrill Lynch, which it bought Jan. 1.

Washington also agreed to put up $118 billion in guarantees to help BofA absorb Merrill.

The plan follows the model used to aid Citigroup (C) last November.

Meanwhile, Citi lost $8.3 billion, bringing losses over the past five quarters to more than $28 billion.

Citi will split into one unit focused on its healthy commercial and retail banking operations and another dealing with riskier assets.

Financials Still Slide

Stocks seesawed Friday before finishing in the black. The Dow and S&P 500 rose 0.8% and the Nasdaq 1.2% despite ongoing concerns about the banking sector.

But the SPDR Financial ETF fell for a third straight day, sinking 3%.

BofA plunged 14%, Citi dived 9%, Wells Fargo (WFC) sank 7%. JPMorgan (JPM), which fell 6% Thursday despite reporting an unexpected profit, sank 6% on Friday.

Barclays (BCS) tumbled as much as 32%, paring those losses to 14% after the U.K. banking giant said it expected to top quarterly views.

Bad debts will keep mounting despite herculean government efforts to flood the financial system with cash to help banks rebuild their capital cushions, analysts said.

"I don't think the worst is behind us," said Michael Carlson, a partner in the finance and restructuring group of law firm Faegre & Benson. "The so-called toxic assets that financial institutions have are still kind of a black hole — nobody knows really how to value them, and until there is some method of removing those from the balance sheets of banks I think we're going to continue to see more rough times for banks."

Support For 'Toxic' Bank

FDIC Chairman Sheila Bair told CNBC on Friday that setting up a government-backed bank to remove bad debt from lenders' books might have "some merit."

Treasury Secretary Henry Paulson, who leaves office Wednesday, also signaled support for the idea.

Federal Reserve Chairman Ben Bernanke had previously cited a toxic assets bank as an option.

President-elect Obama's team is also reportedly mulling such sweeping rescue plans.

Bank of America agreed to stricter limits on executive compensation as part of its deal. It will also slash its quarterly dividend to a penny a share from 32 cents.

The government will receive preferred shares for its $20 billion investment in BofA. Along with prior injections of $25 billion into that bank and Merrill, the Treasury will become BofA's top shareholder with about a 6% stake.

"The banks of today are effectively nationalized by the U.S. government, whether we want to admit it or not," said Doug Roberts, chief investment strategist for ChannelCapitalResearch.com.

The Senate voted Thursday to release the second half of the $700 billion in TARP funds set aside to stabilize the financial industry.

Citi said Friday that it plans to sell its CitiFinancial consumer lending business and its Primerica Financial life insurance unit as it dismantles a decade-long strategy of acquisitions to provide a wide range of financial services to firms and consumers.

Earlier in the week, Citi announced plans to sell control of its Smith Barney brokerage to Morgan Stanley (MS) to raise badly needed capital.

"My No. 1 priority is to return this company back to profitability," Citi CEO Vikram Pandit said Friday.

Meanwhile, the government's $118 billion backstop for BofA is meant primarily to help it absorb Merrill.

BofA threatened last month to abandon the Merrill deal, CEO Kenneth Lewis said. But the government, fearing systemic collapse, promised assistance, he said.

The aid deal calls on BofA to absorb the first $10 billion in losses. But the government will cover 90% of up to $108 billion in further losses.

Yet Moody's and Fitch cut BofA's debt ratings on concerns that Merrill's losses would continue to grow.

Tax Rates Differ For ETF Asset Classes

noreply@blogger.com (Garret Higgins) — Sun, 21 Dec 2008 23:16:00 +0000

BY TRANG HO

INVESTOR'S BUSINESS DAILY

Posted 12/15/2008

Depending on whether they hold stocks, metals and futures, as with inverse and leveraged ETFs, ETF asset classes are taxed differently.

Some are taxed as ordinary income, some as capital gains and some as collectibles, with tax rates ranging from 15% to 35%.

So it behooves tax-sensitive investors to be aware of how gains in various asset classes are treated by the tax man.

Robert Green, CEO of GreenTraderTax.com and author of "The Tax Guide for Traders" and the forthcoming "Green's 2009 Trader Tax Guide," says investors can apply the rules to their advantage.

IBD: How are different asset classes among ETFs taxed?

Green: ETFs based on securities are taxed like securities. Short-term capital gains are taxed up to the ordinary income tax rate, which rises to the highest level of 35%. And long-term capital gains are taxed up to 15%. So if you hold an ETF security for over 12 months, you'll get the lower 15% rate. If you sell it before 12 months, it's short term, and you pay up to the highest rate of 35%.

ETFs based on precious metals like gold or silver, such as SPDR Gold Trust (GLD), are subject to the collectibles tax rate, which is currently as high as 28% on a long-term capital gain and 35% on a short-term capital gain.

If you trade an ETF based on a future other than precious metals, you will get 60-40. And 60-40 means whether you hold it for a day or over a year, you pay a blended rate for short-term and long-term capital gains: 60% is long-term, taxed up to 15%; 40% is short-term, taxed up to 35%.

Due to the math, the highest blended rate is 23%, which is 12% less than the short-term rate on securities of 35%.

What about options on ETFs? The IRS has not issued tax guidance for that, so it's not clear. An industry practice is to treat options on ETFs as futures for the more beneficial, lower 60-40 tax rate. Usually you don't hold an option for over a year, so you're not looking for the long-term rate.

IBD: Some ETFs hold stocks overseas. Does that subject you to the tax structure of the host country?

Green: No. Generally, when you buy and sell securities, financial instruments, it's not considered income in the country in which you're trading.

So if nonresident aliens open a brokerage account and trade U.S. stocks, they're not taxed on capital gains as a nonresident alien, unless they're here for more than 183 days.

When an American trades in a foreign country or with a foreign broker or buys foreign instruments from a U.S. broker, there is no foreign tax.

If your foreign account has more than $10,000, you need to file a TDF 90-22.1, a foreign bank account reporting form. The Treasury is really busting taxpayers big time with severe penalties if they don't file those forms.

IBD: What can investors do at year-end to control tax consequences?

Green: There's a lot of specialized tax planning. Those who trade as a business have special challenges for year-end planning. They may want to have wash sales (sales that lock in losses, followed by buys within one month to regain exposure; typically not allowed by the IRS for tax purposes) if they've already exceeded the capital-loss limitation, and they may also want to have unrealized losses rather than realize them. Why? Because the unrealized losses and the wash losses can be turned into ordinary business losses in the following year.

If you're not a business trader this year, but you're going to be a business trader next year, you may want to save some of your year-end purchases of equipment (for) next year or startup expenses. If you are a business trader this year, then you want to load up on them because you just get more business deductions.

For example, if a trader does not rise to the level of trader tax status or didn't use Section 475 in '08, they're stuck with capital-loss treatment and they may have a capital loss which is well beyond the $3,000 capital-loss limitation.

It would be a mistake for them to generate more capital losses with tax-loss selling because they couldn't get the benefit; they're already into the capital-loss carryover situation.

And wash sales, which are generally considered bad by the mainstream financial media, can actually be helpful to the business trader because they can reduce capital-loss carryovers and instead get wash-sale-loss carryover. And the wash-sale-loss carryover can be turned into an ordinary loss in the subsequent year with a Section 475 mark-to-market accounting election. So the trader does the reverse of what they generally hear.

GM, Chrysler To Get $17.4 Bil In Loans To Sputter Into '09

noreply@blogger.com (Garret Higgins) — Sun, 21 Dec 2008 00:48:00 +0000

BY SEAN HIGGINS

INVESTOR'S BUSINESS DAILY

Posted 12/19/2008

The White House prevented the auto industry from going on cinder blocks and perhaps being sold for parts Friday by announcing a package of $17.4 billion in loans to sustain it through early next year.

The loans would go to General Motors (GM) and Chrysler, which have both said they face bankruptcy in weeks without assistance.

Ford (F), the other member of Detroit's Big Three, is not as cash-strapped as the other two and has opted not to take these loans.

GM shares rose 23% on the announcement. Ford climbed 4%. Stocks overall were mixed.

The funds will come from the Troubled Assets Relief Program, a move the White House had previously resisted until Dec. 12.

President Bush said his preference would have been to allow the automakers to go into bankruptcy "but these are not ordinary circumstances."

"There is too great a risk that bankruptcy now would lead to a disorderly liquidation of American auto companies," Bush said. "My economic advisors believe that such a collapse would deal an unacceptably painful blow to hardworking Americans far beyond the auto industry."

The Bush administration attached a number of conditions to the aid, but doesn't require truly fundamental reforms in terms of labor costs or debt restructuring that could make GM and Chrysler more viable.

The announcement effectively punts any long-term decisions about how the federal government should be involved in efforts to revitalize the domestic car industry to the incoming Obama administration.

"They just made sure that nothing happens before Bush leaves office," said Daniel Clifton, Washington policy analyst for Strategas Research Partners. "The last thing George Bush wants is the bankruptcy of GM around the holidays as the last major event of his presidency."

Obama called Bush's loan plan "a necessary step" to save the industry. An Obama official told Reuters the president-elect was informed of the Bush administration's deliberations on the loan package but did not take part.

The Big Three cheered the plan.

"We again thank the administration for this important support of our industry at this challenging time, and we look forward to proving what American ingenuity will achieve," GM said in an official statement.

Business lobbies like the Chamber of Commerce and the National Association of Manufacturers offered similar praise.

United Auto Workers President Ron Gettelfinger applauded it but signaled he would fight any effort to get the union to renegotiate its contracts with the automakers.

Democrats offered tepid applause. Senate Majority Leader Harry Reid, D-Nev., said he was "pleased" that the administration's plan included most of a Democratic-backed bill.

Republicans and conservatives lamented that the deal didn't do more to force the Big Three to restructure.

"The best solution would have been definite terms, within a finite time period, committed to law, that protected taxpayers," said Sen. Bob Corker, R-Tenn.

Corker led GOP efforts to cut a deal in the Senate, which broke down after the UAW rejected a 2009 date for reworking pay and benefits.

It'll Get Better, Right?

Dave Cole, chairman of the Ann Arbor-based Center for Automotive Research, says that despite the loans, the domestic industry's survival is dependent on whether credit markets and car sales improve.

The loan deal "is a bridge until we get a little stability in the economy," Cole said.

Shikha Dalmia, senior analyst for the free-market Reason Foundation, said that's a problem. There's little evidence that auto sales will revive any time soon.

"I think this is tantamount to throwing good money after bad," Dalmia said. "The auto market right now is so frozen that these companies don't have a prayer of coming back even if they get their cost structures and labor costs in line."

Bush's plan is closely modeled after the proposal that passed the House earlier this month. It would require Chrysler and GM to become financially viable by March 31, or face having the loans revoked. Financial viability is defined in this case as having a "positive net present value."

But if GM and Chrysler aren't viable next spring, they likely wouldn't be able to repay the loan without a forced liquidation, which would be economically devastating and politically unthinkable.

The automakers would have to agree to caps on executive compensation, sell off corporate jets and halt paying dividends.

It would also let the federal government audit them and give it veto power over company transactions of more than $100 million.

The administration's plan proposes but doesn't require automakers to cut their debts by two-thirds via a debt-for-equity swap.

'Unfair' Labor Demands

It also suggests the companies eliminate a jobs bank that pays employees even after they are laid off and make wages and work rules competitive with foreign manufacturers operating in the U.S.

UAW's Gettelfinger bristled at even suggesting this. "(W)e are disappointed that (Bush) has added unfair conditions singling out workers," he said in a statement.

That shouldn't worry Gettelfinger. Reason's Dalmia said another problem with the loan package is that it is "too easily undone" and the Bush administration has only a month left. Barack Obama is not bound by any of the terms so he can simply rewrite them as he sees fit.

"Chances are these companies are going to come back in March and ask for more money. With a Democratic Congress and a sympathetic president, I think they'll get it," Dalmia said.

The once-dominant U.S. auto industry has suffered for decades from loss of market share and high labor costs. The automakers were paying about $70 an hour to cover salaries and benefits, including legacy costs, when the financial crisis hit this fall — making credit harder to obtain and hurting sales.

The Big Three chief executive officers and UAW came to Washington in November to request loans but faced a skeptical, bailout-weary Congress. It didn't help that the CEOs initially flew in on corporate jets to plead poverty and then upped their aid request from $25 billion to $34 billion in a week. Talks stretched into December but no deal was reached, making Bush the Big Three's last hope.

Using TARP to aid automakers will essentially drain the first half of the $700 billion fund. That prompted Treasury Secretary Henry Paulson on Friday to ask Congress to release the other $350 billion.

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noreply@blogger.com (Garret Higgins) — Sat, 20 Dec 2008 04:38:00 +0000

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Indexes Surrender 50-Day, But Most Higher For The Week

noreply@blogger.com (Garret Higgins) — Fri, 19 Dec 2008 23:50:00 +0000

Originally Published: Investor's Business Daily

BY ALAN R. ELLIOTT

Posted 12/19/2008

The week wound down to an unremarkable finish, with indexes giving up early gains to end mixed in heavy options-expiration trading.

The Nasdaq ended 0.8% higher and the S&P 500 edged up 0.3%. The NYSE composite was a fraction into the red. The Dow, slipping 0.3% on a quadruple-witching boost from options expirations, logged its third distribution day since the Dec. 2 follow-through.

Still, three of the four major indexes gained ground for the week. The NYSE composite added 1.3% and the Nasdaq 1.5%. The S&P 500 edged 0.9% higher, while the Dow slipped 0.6%.

For the NYSE, Nasdaq and S&P 500 it was the first two-week advance since September. The Dow hasn't managed a two-week gain since May.

In addition, all the major indexes eased in late trading, losing the week's battle to hold above their 50-day moving averages.

No significant economic news is scheduled for release Monday. But Tuesday's releases will include new and existing home sales, GDP data and the University of Michigan's revised Consumer Sentiment index numbers for December.

Drugstore chain Walgreen (WAG) and software maker Red Hat (RHT) are scheduled to report earnings Monday.

4:15 p.m. Update: Indexes Close Mixed After Volatile Session

BY JUAN CARLOS ARANCIBIA

A volatile session ended with mixed results Friday.

The Dow fell 0.4%, weighed down mostly by oil components Exxon Mobil (XOM) and Chevron (CVX), as crude continued sliding.

The NYSE composite edged down a fraction, while the S&P 500 rose 0.2% and the Nasdaq 0.8%, according to early figures.

Volume rose amid options expiration-related trading. The market heads into one of its quietest weeks, shortened by the Christmas holiday.

Automakers and auto-supplier stocks rose after the White House agreed to provide emergency loans to the Big Three.

3:15 p.m. Update: Indexes Hold Gains, But Settle To Lower End of Ranges

BY ALAN R. ELLIOTT

A back-and-forth session held to positive territory, as decliners led advancing issues by healthy margins. But the day's heavy-volume trading bypassed most leading stocks.

The Nasdaq composite held top honors, up 1.3%. The S&P 500 kept 0.9% in the black, while the Dow and NYSE composite clung to 0.4% gains.

Research in Motion (RIMM) and Oracle (ORCL) continued to be heavy upside players on the Nasdaq. Energy and international plays lagged on the NYSE. Small caps continued riding ahead of the mainstream, driving the S&P 600 up better than 2%.

Volume continued to settle toward more normal ranges, but remained 78% higher on the NYSE and up 23% on the Nasdaq.

Oil prices split in late trading. The expiring January contract shed $2.35 to settle at $33.87. The February contract climbed rose 69 cents to $42.36, leaving the front month contract down 8% for the week.

Aaron Rents (RNT) climbed 5%, breaking above a 26.68 buy point on a 13-week, cup-with-handle base. The rent-to-own chain announced Tuesday it would acquire Missouri-based Rosey Rentals, a franchisee operating 35 Aaron's stores in six states in the Southeast with annual revenue of about $45 million.

Quality Systems (QSII) cut losses for a 4% run, but volume was just a shade above average. The maker of health care practice and records management software has jumped 16% so far this week as it works to build the right side of a base.

On the downside, Italian oil & gas heavyweight Eni Spa (E) slipped 7% as oil prices sculpted out multiyear lows. Eni has been in a general uptrend since early October and is holding its own above support at its 10-week moving average.

2:15 p.m. Update: Stocks Rebound In Afternoon Trade

BY VINCENT MAO

The major stock indexes bounced back in afternoon trading Friday but remained off session highs.

The Nasdaq climbed 1.5%, the S&P 500 1.1%, while the Dow and NYSE composite rose 0.6% each.

Volume continued to track sharply higher, but the pace had slowed.

PetMed Express (PETS) rallied 6% and regained its 50-day moving average. The pet pharmacy operator may be forming a base.

Research In Motion (RIMM) rallied 9% in heavy trading. Despite hovering near two-year lows, the stock's Accumulation/Distribution Rating has improved to B from a worst-possible E in October.

On the downside, AeroVironment (AVAV) extended losses to 10% and is off more than 8% from its buy point. The unmanned aircraft systems maker cleared a 36.32 buy point from a base-on-base pattern Thursday.

Tractor Supply (TSCO) dropped 4% and sliced is 10-week and 40-week moving averages. The stock also triggered the 8% sell rule. It passed a 42.85 buy point from a double-bottom base Wednesday. William Blair & Co. warned that deflation may hurt the farming equipment retailer.

Crude oil dropped $1.90 to $34.32 a barrel. Energy stocks were mixed.

1:15 p.m. Update: Indexes Tinker With Mixed Territory; Small Caps Outperform

BY ALAN R. ELLIOTT

Indexes threw in the towel after an early surge spurred by news of a federal bailout for U.S. automakers.

The NYSE composite slipped briefly into the red, then managed a fractional gain. The Dow flattened. The S&P 500 held a 0.5% advance and the Nasdaq composite showed a 0.9% rise.

Financial issues dragged on the Nasdaq, with the exchange's financial index down 1.3%. Computer, telecom and insurance sectors still held better-than-1% gains. On the NYSE, the International 100 index lagged with a 1% decline, and technology stocks tracked close behind. Small caps ran well ahead of the curve, with the S&P 600 up 2%.

Volume eased from its early highs, but remained at extraordinary levels — particularly on the NYSE — because of options expiration trading.

Crude oil prices ground lower, down more than $1 after dipping to midsession lows below $34 a barrel. Gold held the bulk of its early losses, remaining down more than $22 to below $838 an ounce.

Flowers Foods (FLO) cooked up a 4% gain as it tried to notch its first weekly gain in December. Shares are still well below their 50- and 200-day moving averages in a consolidation begun in August.

Onyx Pharmaceuticals (ONXX) swung 5% higher in above-average volume. The biotech drug maker is in its fourth straight week of gains, has topped resistance at its 10-week line and appears ready to take a run at the 40-week level.

On the downside, advanced ceramic components maker Ceradyne (CRDN) gapped down and surrendered 20% after a downgrade from buy to hold from Stanford Research. The big-volume tumble punched the stock back below support at its 50-day line. It has been trying to build a floor to a consolidation begun in August.

12:15 p.m. Update: Indexes Retreat Near Session's Halftime

BY VINCENT MAO

Stocks pulled back sharply near the halftime of Friday's session. Most major indexes slipped back under their respective 50-day moving averages after regaining them earlier.

The Nasdaq climbed 1.4%, down from an intraday high of 2.6%. The S&P 500 rose 1%, Dow 0.6% and NYSE composite 0.4%.

Volume was again tracking vastly higher across the board due to quadruple expiration and the quarterly rebalancing of S&P indexes.

Tower Group (TWGP) tacked on 9% in heavy trading, its fourth straight advance. The insurance firm is nearing a potential 27.63 buy point from a cup base.

Gentiva Health Services (GTIV) gapped up and gained 3% in brisk trade. After a failed breakout earlier this month, the home health care firm is forming a new handle with a buy point at 28.36.

On the downside, Supertex (SUPX) gapped down and dropped 7% after cutting its sales outlook. The chipmaker now expects revenue in the range of $17 million to $18 million, down from a prior forecast of $21.3 million to $22.3 million. Advanced Micro Devices (AMD), Atmel (ATML), Atheros Communications (ATHR), MEMC Electronic Materials (WFR), Monolithic Power Systems (MPWR) and Xilinx (XLNX) have all slashed their earnings and/or sales guidances.

AeroVironment (AVAV) lost 4% in active trading, slipping below a 36.32 buy point cleared Thursday.

11:15 a.m. Update: Indexes Drive To Solid Gains With Options Expiration Support

BY ALAN R. ELLIOTT

Indexes swept higher in broad-based gains, with advancing issues leading by better than 4-to-1 on the NYSE and by a 3-to-1 margin on the Nasdaq.

The Nasdaq composite scored a 2.5% rise, with Oracle (ORCL), Research In Motion (RIMM) and Comcast (CMCSA) driving the Nasdaq 100.

The S&P 500 flashed a 2% advance, the Dow climbed 1.8% and the NYSE composite rode 1.5% higher.

On the NYSE, energy, financials and health care pulled ahead of other sectors.

NYSE volume erupted in quadruple witching action, up nearly 250%. Nasdaq volume soared 67% above Thursday's below-average volume.

Commodities traded generally mixed as crude futures hovered, holding near a 4-1/2 year low just below $36 a barrel. The dollar strengthened vs. the euro. Gold slumped more than $25 to below $836 an ounce.

S&P 400 component Highwood Properties (HIW) phoned in an 8% jump on more than double its average trading volume. The Southeast/Midwest commercial property REIT sports a best possible 99 EPS Rating from IBD. It appears set to end its second week above its 10-week moving average as it climbs up from a three-month consolidation.

California Water Services (CWT) launched into a 4% gain in heavy trade. The move began what would be a fourth straight day of gains for the multistate public and commercial water utility. Shares are up 14% so far this week, clearing new highs for the first time since 2006 and 8% above a 42.60 buy point on a rebound from the stock's 10-week moving average.

On the downside, heavy construction firm Fluor (FLR) slipped 7% in busy trading. The company, which has strong ties to refining and energy industry construction, has suffered from the fall in oil prices. Shares are down 6% so far for the week, hurting the stock's effort to build a right side to a six-month consolidation.

10:15 a.m. Update: Stocks Pare Gains After Higher Open

BY VINCENT MAO

Stocks charged out of the gate Friday after automakers received their long-awaited bailout, but the major indexes have already shaved a chunk of gains.

The Nasdaq climbed 1.3%, thanks to gains in a number of high-profile tech issues and chip stocks. The Dow rose 0.6% and the S&P 500 0.5%. The NYSE composite was mostly unchanged.

Volume was tracking vastly higher due to quadruple expiration of stock options, stock index options, stock index futures and single stock futures.

Provident Bankshares (PBKS) gapped up and skyrocketed 58% on news that it will be acquired by M & T Bank for $401 million in stock.

Research In Motion (RIMM) rose 5% in fast trade following a round of mixed analysts' actions. Cowen & Co. cut the BlackBerry maker to underperform from neutral, while Raymond James and UBS both cut the stock's price target. TD Bank Financial raised shares to Action List Buy from Buy.

On the downside, AECOM Technology (ACM) fell 3% as it slipped for a second session. That left the government contractor 5% past a 27.30 buy point from a cup-with-handle pattern.

January crude pared losses, but was still down 53 cents to $35.69 a barrel.

9:15 a.m. Update: Stocks Poised For Higher Start As Automakers Get Bailed Out

BY VINCENT MAO

Stock futures signaled a higher open Friday after the While House announced help for U.S. automakers.

Nasdaq futures rose 12 points vs. fair value, S&P 500 futures rallied 9 points and Dow futures gained 112 points.

General Motors (GM) and Chrysler will split $13.4 billion in loans to help them stave off bankruptcy. They'll split another $4 billion in February and must show "financial viability" by March.

GM shares rose 7% in the pre-market. Ford (F), which has said it doesn't need bailout money, rose 5%.

Standard & Poor's Ratings Services cut ratings on a slew of major U.S. and European banks, citing rising risks amid the worsening recession. The list of downgraded firms includes Bank of America (BAC), Barclays (BCS), Citigroup (C), Credit Suisse Group (CS), Deutsche Bank (DB), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), Royal Bank of Scotland Group (RBS), UBS (UBS) and Wells Fargo (WFC).

S&P also lowered HSBC's (HBC) outlook to negative. The U.K. bank fell 3% in the pre-market.

On the upside, Oracle (ORCL) gained nearly 4% in the pre-open on its bright fiscal Q3 outlook. Amid a weak tech spending environment, the database software maker sees current quarter sales growing 8% to 11% vs. views of 8%. Earnings are pegged at 34 cents to 36 cents a share vs. views of 34 cents.

Intrepid Potash (IPI) cut its Q4 sales outlook, while fellow fertilizer maker Potash Corp. Of Saskatchewan (POT) cut its full-year profit guidance. Intrepid fell 14% in the pre-market, while Potash Corp. shed 3%.

Elsewhere, Panasonic offered to buy rival Sanyo for $9 billion.

Crude oil rebounded slightly after touching its lowest level in nearly five years. The expiring January contract fell $1.42 to $34.08 a barrel. Earlier, it hit $33.44, the lowest since February 2004.

Hedge Fund's Capital Needs Could Derail CSX

noreply@blogger.com (Garret Higgins) — Fri, 19 Dec 2008 06:17:00 +0000

Originally Published: WWW.TheStreet.com

By Robert Holmes

An activist hedge fund that's been waging war against the board of CSX(CSX Quote - Cramer on CSX - Stock Picks) may be forced into retreat by the demands of its own investors.

After acquiring enough CSX shares to earn voting rights in a proxy dispute last year, The Children's Investment Fund Management, or TCI, could find itself in the awkward position of having to dump the railroad company's stock because of its own need for capital.

The result could be a blow to CSX's market value that is driven by insider shareholders rather than the company's fundamental performance -- exactly the opposite of what TCI set out to do.

London-based TCI partnered in 2007 with New York's 3G Capital Partners to wage war on CSX, arguing that the Jacksonville, Fla., railroad operator's board was too entrenched and had not served shareholders well. Between the two, TCI and 3G Capital have amassed more than 35 million shares of CSX, nearly 9% of the outstanding shares -- enough to secure four of the company's 12 board seats.

Now massive hedge fund redemptions and selling may derail TCI's plans. As pressure to maintain adequate capital grows, the fund could be forced to pare or abandon its position in CSX.

CSX is TCI's third-largest equity position and one of the best performers in its portfolio, making the stock a good candidate for liquidation if the fund needs to raise capital.

TCI purchased its entire stake in CSX -- nearly 18 million CSX shares worth about $558 million -- in the first quarter of 2007, according to regulatory filings. In the worst case scenario, TCI is down somewhere near 10% on its investment, though depending on the exact date it bought shares, the investment could be up slightly. The fund did not report its exact purchase date.

Some of TCI's other big equity positions have performed worse. The fund's biggest investment is in Union Pacific (UNP Quote - Cramer on UNP - Stock Picks), with a total of 24 million shares for a value of $1 billion. TCI first bought Union Pacific stock in the first quarter of 2007 and has added to its stake nearly every quarter since. According to regulatory filings from the second quarter, TCI doubled its position in the railroad company at a time when shares traded above $60. Shares have fallen 23% since that time to roughly $48 a share.

TCI's second-largest holding is 6 million shares of MasterCard (MA Quote - Cramer on MA - Stock Picks), which carries an equity value of $828 million. TCI initially invested in MasterCard in the first quarter of this year and has added to its position in the second and third quarters. That stock is down 31% so far this year and nearly 50% over the last six months.

From a fundamental point of view, CSX looks solid. The company exceeded third-quarter estimates in October; BB&T Capital Markets analyst John Barnes said his "bullish thesis remains very much intact"; and Deutsche Bank analyst Marcelo Choi noted that "rails have proven in the past that they can generate firm pricing despite soft volume."

Nonetheless, other hedge funds have begun dumping entire stakes in the company.

More than 18 funds sold their entire positions in CSX some time in the third quarter, including Seneca Capital Advisors, Matrix Capital Management, JGD Management and TPG-Axon Capital, according to regulatory filings. And while Deutsche Bank (DB Quote - Cramer on DB - Stock Picks) is the fifth-largest holder of CSX shares, it halved its stake in the previous quarter, selling more than 15.6 million shares. Taconic Capital Advisors, which held positions in both CSX and Union Pacific, has since sold off both completely.

Could these other hedge funds, smelling blood in the water, be exiting their positions in CSX and Union Pacific, exacerbating TCI's troubles?

"Hedge funds are very opportunistic," said Joel Schwab, managing director at HedgeFund.net. "There is a wide swath of hedge funds looking for any signs of weakness with public equities. The fact that one hedge fund is involved would really mean nothing to them about putting on a long or a short position to the other fund's detriment."

Schwab says that a wide group of hedge funds generally play follow the leader. Because many are experiencing redemptions right now, it may be forcing them to liquidate positions, he says.

"TCI is a very prominent fund, so it's possible that some hedge funds may have followed them into CSX," said Schwab. "But with the wave of hedge fund redemptions, it would certainly be within the way hedge funds operate for them to move on, regardless of TCI's interest. They'll look down their portfolio and they'll determine what's the best investment to jettison."

Even CSX's CEO Michael Ward sold nearly his entire holding in early November, at roughly $46 a share. In the regulatory filing for the transaction, Ward cited his wife as the reason for the sale, presumably due to a divorce settlement. Since that time, the stock has fallen 25% to its lowest level in two years. CSX did not return a request for comment.

So far, there are no regulatory filings showing any sales of CSX stock by TCI or 3G Capital. Should that change, it will have to be reported right away because of disclosure rules for the fund's representatives on the CSX board. That's little consolation, though, for those shareholders who have seen shares fall from their 52-week high of $70.70 in May to $35.74.

Neither TCI nor 3G Capital were available for comment.

Of course, not every fund is selling. In the third quarter, Citigroup(C Quote - Cramer on C - Stock Picks), Barclays Global, Tiger Global Management and Janus Capital Management(JNS Quote - Cramer on JNS - Stock Picks) were among those that increased their stake in CSX. Citigroup is currently the largest holder of CSX shares with a total of 21.1 million, Barclays ranks second with 18.6 million shares, and both Tiger Global and Janus are in the top 15 holders by amount held.

But if hedge funds are indeed trying to break TCI, they picked an easy mark. TCI was launched in January 2004 by Christopher Hohn, who donates a significant portion of all fees earned to a charitable trust and is known to have an activist bent. For example, TCI amassed a large share of German stock exchange Deutsche Boerse and forced the resignation of its CEO after he refused to abandon his plan to takeover the London Stock Exchange.

One criticism of the fund is that it is particularly vulnerable to market declines because Hohn focuses on very concentrated bets in a handful of companies, abandoning the traditional hedging technique. Those bets certainly paid off in the past, with TCI returning 42% on an annualized basis from its launch in 2004 through last year.

However, the implosion of other hedge funds is spreading fear, likely affecting TCI and its own returns. The fund faced a significant setback after it sold its entire stake in the Japanese company Electric Power Development, known as J-Power, after the Japanese government intervened, citing national security. TCI had been attempting since 2005 to force the company to increase its dividend before selling its 9.9% stake back to the company at a loss of $130 million.

The public battle with CSX has only made matters worse for Hohn, who is reported to be publicity-shy and prefers to maintain a low profile. In May, TCI's founder was grilled in a New York court regarding his fund's investment in CSX. In September, after seeing four of his five picks finally seated on CSX's board, Hohn told Alpha Magazine that he was rethinking his aggressive activist strategy.

"It has been very profitable for us, but it is unpredictable and expensive," Hohn said in the interview. "Just look at CSX. We've already spent over a year trying to effect change and paid out more than $10 million in legal fees on the proxy fight."

As part of the discovery process related to the court case, emails between Hohn and TCI co-founder Patrick Degorce showed that Hohn was contemplating the need for more capital, but ultimately decided that the move "may damage [TCI's] long-term franchise."

The CSX saga became more expensive for TCI on Wednesday, after CSX announced that it joined a settlement with all parties to a civil action brought by Deborah Donoghue, a shareholder of CSX. Donoghue had sought to recover so-called "short-swing" profits alleged to have been realized by TCI and 3G Capital in connection with their alleged purchases and sales of CSX securities. The settlement, subject to approval by the court, will cost TCI another $10 million.

Oracle Meets Views As Sales Fall Short, But Q3 Looks Solid

noreply@blogger.com (Garret Higgins) — Fri, 19 Dec 2008 03:09:00 +0000

BY J. BONASIA

INVESTOR'S BUSINESS DAILY

Posted 12/18/2008

Business software giant Oracle (ORCL) met analysts' second-quarter earnings estimates Thursday even as sales fell short amid weak spending, compounded by a strong dollar that hurt overseas results.

But Oracle's better-than-expected third-quarter outlook cheered investors, sending shares up nearly 3% in late trading.

Oracle President Safra Catz says the company feels "extremely good" about its recent results in light of the weakening economy.

"The product and competitive positioning of the company is strong," Catz said.

For the quarter that ended Nov. 30, the leader in database software earned 34 cents per share, 10% over the year before. Sales grew 6% to $5.6 billion, 4% below the average estimate of analysts polled by Thomson Reuters.

Outlook Good Enough

For the current quarter, the Redwood City, Calif., company sees sales growing 8% to 11%, excluding currency effects; analysts had forecast an 8% jump.

Oracle expects earnings of 34 cents to 36 cents, adjusting for currency and excluding special charges; analysts had forecast 34 cents.

With currency effects not taken into account, the company sees sales growth of 1% to 4% and earnings of 31 cents to 33 cents.

But new software sales — a harbinger of future growth — may fall as much as 10%. Even excluding currency effects, Oracle doesn't expect sales to grow more than 11%, well below its historical growth rates.

That deceleration worries many technology investors, says Richard Williams of Cross Research.

New database and middleware license revenue grew just 4% in the second quarter from the year before, well below the double-digit gains it usually posts.

The trend is less dramatic when accounting for currency fluctuations, but at 12% the adjusted growth rate is still the lowest in at least six quarters.

"Bottom line, Oracle is hurting just like everybody else," Williams said. He has a hold rating on the stock.

In September, Oracle expected sales of new software licenses to grow 2% to 12% in the quarter. Instead, they fell 3% to $1.63 billion.

Oracle's large base of recurring revenue, about 50% of total sales, should help the company weather the rough economy, says Brent Williams of Benchmark Co.

Others are less sanguine.

"Oracle does not appear to be immune to uncertainty surrounding (technology) buying," Wachovia analyst Philip Rueppel wrote when he cut his forecast for Oracle's fiscal 2009 revenue and earnings earlier this month. "As a result, we are forecasting a longer and deeper decline in new software license growth."

He still rates the stock as outperform or buy.

Oracle might be gearing up for "significant across-the-board" layoffs, according to Patrick Walravens of JMP Securities.

Oracle has spent some $35 billion on acquisitions in the past five years to build its portfolio of business applications.

The recession should let Oracle make less costly buys, says Avi Cohen of Avian Securities.

Oracle also should gain from the weak economy because customers will be wary of buying from smaller rivals.

"Organizations will have a lower propensity to spend with companies that may be forced to significantly cut back R&D or go bankrupt," Cohen wrote in a research note on Thursday. He rates Oracle stock as positive.

Madoff bad omen for fund of hedge funds industry

noreply@blogger.com (Garret Higgins) — Wed, 17 Dec 2008 21:57:00 +0000

Originally Published: www.reuters.com

By Martin de Sa'Pinto and James Molony

ZURICH/LONDON (Reuters) - Bernard Madoff's alleged $50 billion fraud is another nail in the coffin of funds of hedge funds already struggling to convince investors they should stomach double fees.

The failure of several funds to act on red flags in Madoff's New-York based operations have raised concerns over their abilities to select the best hedge funds for clients, which is the core of their product offering.

"Frankly anybody who was invested in Madoff really has got trouble proving credibility as a house that's able to perform appropriate due diligence," said John Godden, chief executive officer at hedge fund consultancy IGS Group.

Madoff was arrested last week, charged with running a Ponzi scheme using funds from new investors to pay out existing investors -- many of whom were funds of funds -- rather than actually making investment returns.

The scandal comes as the funds of hedge funds model is already being widely questioned, with the diversification across strategies largely failing to protect investor assets.

In 2008 through November, the Credit Suisse/Tremont All Hedge index, a good indicator of funds of hedge funds performance, returned a negative 26 percent.

It did outperform the S&P 500's minus 38 percent, but that was a far cry from the absolute returns that most fund of hedge funds investors were promised.

The poor performance will be magnified by the failure of Madoff's fund, a sizeable component of the All Hedge index, and which Credit Suisse/Tremont marked down to zero as of end-Nov and may well trigger calls for more regulation.

RED FLAGS

Several funds said they had not invested in Madoff because of concerns over its operational procedures, such as the use of accountants and brokers very closely aligned with the fund and returns that were too good to be true.

"There are a lot of boxes that you would need ticked in a due diligence process that just could never be ticked by Madoff," said IGS's Godden.

Another red flag was the fact that Madoff did not charge fees, but relied on revenues from his proprietary brokerage business instead, others said.

Yet the fact that Madoff's brokerage fell under the gaze of the SEC may have reassured many, and the presence of so many fellow reputable funds was a likely further comfort.

"If everyone believes they are piggybacking off the due diligence of others, the risk is that no one does it," said Paolo Cristofolini, a former hedge fund manager.

And many fund of funds would have been aware that if they couldn't provide access to Madoff -- known as one of the best risk-adjusted performers in the business -- they could end up losing clients to rivals.

The U.S. hedge fund industry could see redemptions accelerate in the wake of Madoff, industry participants said, while others predicted a surge in regulation.

"There will be pressure and preference from the UK and European investor and advisors for these funds to be structured in more regulated environments with a greater regulatory oversight," said Tushar Patel, managing director of London-based fund of hedge funds firm HFIM.

(Additional reporting by Jane Baird; Editing by Richard Hubbard)

3 Bubbles That Will Shape 2009

noreply@blogger.com (Garret Higgins) — Wed, 17 Dec 2008 21:53:00 +0000

Originally Published: www.MotleyFool.com

By Morgan Housel

It’s as reliable as the sun rising in the east: Financial bubbles burst. All of them do. Always. Usually in grand fashion. Over the years, there have been dozens and dozens of them, and every single one has ended badly. Shall we reminisce? Here are a few big ones:

Tulip mania
The South Sea bubble
The railroad bubble
The Roaring '20s
The 1980s buyout bubble
The dot-com bubble
The housing bubble
The American Idol bubble (Fun fact: More people vote for American Idol than typically vote for the winning President)

There are probably more, but you get the idea: As long as there has been an economy, there have been bubbles.

So what bubbles might underline 2009? Here are three distinct ones I can think of.

Bubble No. 1: Treasuries
As I write this, a three-month Treasury bill yields 0.005%, a 10-year note will fetch you 2.5%, and a 30-year bond will score you a spectacular 3.007%. For comparison's sake, inflation has averaged 3.42% since 1913.

If the expectation is that every other asset class will be eroded by deflation, skimpy returns on government bonds might not be a bad idea. I bet most investors would have loved to achieve "only" a 0.005% return over the past year, compared to the destruction of nearly every other asset class.

Still, the stampede into Treasuries will eventually burst. It has to. One of two factors practically guarantees this:

Things will get better; investors will regain an appetite for risk, and move away from Treasuries.
Things will get worse, prompting more bailouts and more stimulus packages, eroding faith in the dollar.

Either way, the Treasury bubble won't be fun when it bursts. Having sent the government's borrowing costs higher, Uncle Sam might have a tough time funding its trillion-dollar endeavors, and this could leave companies like Citigroup (NYSE: C), General Motors(NYSE: GM) and Ford (NYSE: F) up in the air should they come back, hats in hand, asking for more ... which, come to think of it, probably isn't a bad thing.

Bubble No. 2: Fear
Have a look at these fear indicators:

In January of 2007, the spread between corporate junk bonds and U.S. Treasuries was just 2.65%. Yesterday, it was more than 20%.
Annaly Capital (NYSE: NLY) -- which invests solely in Fannie Mae and Freddie Mac securities -- saw the spread on its investments surge from 0.67% to more than 2% over the past year, even though those investments technically became less risky after the government nationalized and guaranteed Fred and Fan.
Credit default swaps on Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) surged to 440 basis points last month (higher than Citigroup's at the time), meaning some assumed a Berkshire bankruptcy was a very real possibility within the next five years.

What started years ago as a bubble of optimism has morphed into a bubble of fear today. Sure, reckless speculation needs to be purged out of the system, but an economy that's unwilling to take any risk is just as bad as one that's oblivious to it.

One worry is that even financially healthy consumers will become gripped by fear, slamming their wallets shut and exacerbating an already beleaguered economy. Another is that investors' hesitation to take any risk could stifle the venture capital investments that produce the Googles (Nasdaq: GOOG) of the world, hurting our chances of staying globally competitive when we need it the most.

Let's not forget that when Franklin D. Roosevelt warned, "The only thing we have to fear is fear itself," it was in the context of factors he thought could prolong the Great Depression. And he was right.

Bubble No. 3: Distrust
In just the past week, we've been blindsided by two (really, three) big stories that could lead to a bubble of distrust:

Illinois Governor Rod "do I hear $500,000" Blagojevich undermining the credibility of politicians.
Money manager Bernard Madoff, whose self-described Ponzi scheme may have blown through $50 billion.
The Securities and Exchange Commission being asleep at the wheel while Madoff committed perhaps the largest financial fraud in history.

All three are pretty appalling. What's scary is that the few bad apples who make all the headlines ruin it for the honest politicians (I'm sure they exist) and credible money managers that are vital to the economy. The old saying that "capitalism is based on trust" is getting tested, and that's a scary, scary proposition. If these shady headlines keep up at this pace, one fear is that we could become a culture that dismisses even sound financial advice and refuses to accept almost everything politicians do, which certainly isn't a recipe for anything economically healthy.

This could just be a partial list, of course. Any other potential bubbles you can think of? Feel free to share your thoughts in the comment section below.

Madoff Madness

noreply@blogger.com (Garret Higgins) — Wed, 17 Dec 2008 08:51:00 +0000

Even investors who think they're safe are wrong.

By Mark Gimein Posted Tuesday, December 16, 2008 - 6:52pm

Originally Published: www.TheBigMoney.com

Let's say, just for the sake of argument, that you invested your life savings in a fund run by a Wall Street legend named Mr. Made Up. For 15 years, your investment in the Made Up Fund has risen a nice 10 percent a year, and now the $1 million you put in is worth about $4 million. Then you get a tip from a friend out on the golf course that the Made Up Fund is ... well, just what its name suggests.

Do you:
a) Take your money out the next morning, then go to the police.

b) Take your money out the next morning, and say nothing.

c) Do nothing with your money and go to the cops the next morning.

d) Do nothing, say nothing, and hope that no one else notices.

The ordinary human impulse on finding out that you've given your money to someone who's unlikely to return it is to ask for it back immediately. The ordinary moral impulse is to let other people know. And the one choice that you'd think any reasonable person would avoid is (d). That seems completely obvious, right?

Unless, that is, you have any familiarity with the terrifying labyrinth of the law on investment frauds. Once you do, you'll see why even the investors who got suspicious of what Bernard Madoff was up to might have been very, very wary of going public—and why the Madoff implosion will probably lead to an even longer, uglier unraveling than the sheer numbers suggest.

A hedge-fund manager friend called last night to talk about Madoff. He wanted to talk about just how ugly the unraveling of the Madoff saga was likely to get. And if the first name on his lips was (obviously) Madoff, the second was Bayou. Bayou was a fund that blew up and was revealed in 2005 to be a fraud with some $450 million in investor losses. Bayou is memorable for two reasons. One is founder Samuel Israel III's staged suicide. (He eventually rose from the dead and turned himself in after prosecutors went after the girlfriend who helped him disappear.) The other is a legal precedent set in the Bayou case that should scare the heck out of anyone who once invested with Madoff but who managed to get out safely in the last few years: Any investors who managed to take out profits from a fund like Bayou before the fraud was revealed had to give the money back.

On the face of it, the Bayou ruling (which stories in the Wall Street Journal and Forbes have, to their credit, noted) seems reasonable: If some early investors made outsized gains, doesn't it make sense for them to pay back the money to those who lost everything? But, as this fund-manager friend pointed out, it has some pretty extreme implications.

At this point, the complexity of the situation should be clear. But maybe not the whole potential for absurdity. Imagine that Rich Folks Capital Management—RFCM—placed its money with Madoff 10 years ago and then decided, five years ago, that something didn't feel right and pulled it out. Well, now RFCM is on the hook for any of its gains from the time before the fraud was discovered. But what happens if the people who'd invested with RFCM 10 years ago aren't the same as the people who invest with it now? Tough noogies. RFCM's current investors are probably responsible for paying back gains in the RFCM fund that they never even saw. Or, possibly, RFCM needs to go after its own former investors. No one's really sure.

The technical Wall Street term for this is a nightmare. The Bayou precedent means that the discovery of a huge fraud leads to a whole chain of liabilities that stretches back for years and may hit investors who hadn't dealt with Madoff in a decade. A few folks who think that they've lost everything may, at the end of the process, get back some portion of their money. But many others who thought they'd escaped, or didn't even know they had any link to Madoff, will turn out to have huge losses.

All of which finally brings us back to the multiple-choice question we got started with. What would you do if you found you'd been taken in by a scheme like the one that Madoff seems to have organized? The fallout from the Madoff fraud for fund managers like Tremont and Fairfield already reaches into the billions of dollars. But that's not the end of the line. Even if the funds lose all the money that they had invested with Madoff when the fraud is revealed, they could still be on the hook for any money they'd taken out in earlier years. The managers—and the parent companies, such as Oppenheimer Funds, which owns Tremont—are likely to be asked to give back any money they thought they earned for their “success” in earlier years. Meanwhile, any funds that did manage to pull their money quietly out of Bernard Madoff's safe before the scam blew up could see their current and even future investors facing demands to give it back.

Your head just spins, doesn't it?

The bottom line is that the perfectly reasonable precedent set by Bayou—that investors who got out early shouldn't see profits from a Ponzi scheme—leads to a virtually infinite entanglement of give-backs and unravelings. The losses in a scheme like Madoff's do not simply stay where they seemed to lie at the end of the game: They have to be traced back through years of investments and redemptions.

The consequence of this is that any longtime Madoff investors who'd gotten suspicious could very well have seen that publicizing their suspicions and outing Madoff's scam would not have saved their money, but actually exposed them to greater losses. As the law stands, post-Bayou, a major fund company that finds itself entangled in a scam like Madoff's has every incentive not to out the fraud but, rather, to keep its fingers crossed and maybe hope that the whole thing can be written off as just another multibillion-dollar stock market blowup. Now that the scam's been revealed, for Madoff, it's the end. But for the grand saga of litigation that will pit Madoff's hapless investors against each other and probably make Charles Dickens' “Jarndyce vs. Jarndyce” look like days in small-claims court, this is just the beginning.

IRS Eases Up on Homeowners

noreply@blogger.com (Garret Higgins) — Wed, 17 Dec 2008 08:39:00 +0000

Originally Published: Wall Street Journal

IRS officials say they are speeding up efforts to provide relief for homeowners in financial distress.

The Internal Revenue Service has developed an "expedited process" to make it easier for homeowners to refinance their mortgages or sell their homes without having a federal tax lien delay or even block the process, officials said Tuesday.

IRS Commissioner Doug Shulman said he isn't in a position to predict how many families will benefit. He did say there are more than one million federal tax liens outstanding tied to real estate and personal property. The IRS issues more than 600,000 federal tax lien notices a year.

When the IRS files a lien on someone's property, it's in effect making a formal claim to that property as security or payment for a tax debt. The lien also tells other creditors that the government has a claim on the property.

"These are difficult times for the U.S. economy," said Mr. Shulman. "Many homeowners are at risk of losing their homes. Many are hoping to refinance at lower rates, and in some cases, homeowners are forced to sell their homes and get the best deal they can in the current marketplace."

As a result, he says, IRS officials will respond more quickly to taxpayer requests to clear away liens and allow homeowners to proceed with refinancings or home sales. In the past, the process usually has taken about 30 days after a completed application is filed, a spokesman said. Officials didn't say how much more quickly they will respond, but they did say they are increasing staffing, as necessary, to speed up the processing time and the decision-making process.

"We don't want the IRS to be a barrier to people saving or selling their homes," Mr. Shulman said. "We want to raise awareness of these lien options and to speed our decision-making process so people can refinance their mortgages or sell their homes."

Linda Goold, tax counsel for the National Association of Realtors, calls the IRS move "very helpful." She says "anything that clears any impediment to a transaction is a boon. We view that as a great positive." The national median existing-home price for all types of housing fell to $183,300 in October, according to the Realtors group. That was down about 11% from a year earlier, when the median price was $206,700.

If you're trying to refinance or sell a home with a lien attached to it, you have several options. You or a representative, such as a lender, can ask the IRS to make its lien secondary to the claim of the lender that's refinancing or restructuring the loan, the IRS said. Another option: If you're selling your home for less than the amount of the mortgage lien on that home, you can ask the IRS to "discharge" its claim on it. That doesn't erase your tax debt. It just clears that home from the lien so that the home can be sold, or the debt refinanced.

Very few people seem to be aware that these options exist. IRS officials say they get relatively few requests each year to discharge liens or to make them secondary to another lien, such as a lending institution's, in a process known as "subordination."

* * *

More states are offering tax amnesties or similar programs.

In a typical amnesty, the state agrees not to prosecute or impose penalties on those who step forward voluntarily, before officials knock on their door, and pay what they owe or make arrangements to pay. Many states go even further by offering reduced interest charges, or no interest at all.

Connecticut hopes to raise about $40 million through an amnesty from May 1 through June 25, 2009, says Sarah Kaufman, a spokeswoman for the Department of Revenue Services in Hartford. The state won't impose penalties and is offering a reduced interest rate. "You're going to see more deals like this in the coming year as legislative sessions open in 2009" and lawmakers look for ways to raise cash quickly, says Verenda Smith of the Federation of Tax Administrators in Washington.

In New York, the state tax department launched a new "voluntary disclosure" plan last summer that officials say already has been highly successful. It offers protection from criminal and civil penalties to all eligible taxpayers who voluntarily disclose and "correct" their "delinquent tax liabilities," and who agree to obey the law in the future. To participate, you have to come in voluntarily before the department finds you. Unlike traditional amnesties, New York's offer doesn't have an end date.

So far, New York's tax department has received nearly 1,000 applicants, says William Comiskey, deputy commissioner for tax enforcement. Of those, about 45% reported owing a total of more than $12 million. "The other 55% will tell us what they owe when they sign their agreements and send their returns," he says. Mr. Comiskey estimates that those 1,000 applicants will be reporting "somewhere around $25 million when all the numbers are in," and calls the results "pretty spectacular."

"Securing voluntary compliance is our primary enforcement objective," Mr. Comiskey says. The program is "the honey intended to entice taxpayers to self-correct past delinquencies and become compliant in the future."

Write to Tom Herman at tom.herman@wsj.com

Fed Slashes Rates To Near 0%, Makes Historic Policy Shift

noreply@blogger.com (Garret Higgins) — Wed, 17 Dec 2008 05:14:00 +0000

Originally Published: Investor's Business Daily

BY SCOTT STODDARD

INVESTOR'S BUSINESS DAILY

Posted 12/16/2008

The Federal Reserve cut interest rates to as low as 0% on Tuesday and signaled it will use asset purchases as its primary tool to ease the credit crunch and jolt the economy out of recession.

Stocks, up modestly before the announcement, surged after the rate cut and historic policy shift. The Dow jumped 4.2%, the S&P 500 5.1% and the Nasdaq 5.4%.

Policymakers voted 10-0 to cut the fed funds target rate for overnight bank loans — from 1% to a record-low range of 0% to 0.25%. Analysts expected a half-point cut.

The Fed said in its post-meeting statement that the economy has deteriorated across the board, justifying "exceptionally low" rates for "some time."

With rates essentially at zero, the Fed will "employ all available tools" to jump-start the economy and restore normal credit. It specifically cited the use of its balance sheet, which has swelled above $2 trillion.

The central bank said it will buy "large quantities" of debt issued by government-backed mortgage lenders Fannie Mae (FNM) and Freddie Mac (FRE) over the next few quarters and buy mortgage-backed securities to bolster the housing market. Last month the Fed announced a $600 billion plan. It now says it's ready to expand those purchases if needed.

It will also consider buying "longer-term" Treasuries and take further steps to make credit more available to households and small businesses.

The 10-year Treasury yield dived, falling 25 basis points to a record-low 2.26%. That's expected to push mortgage rates down further, spurring home sales and helping troubled homeowners refinance into more affordable loans.

But November housing starts plunged 18.9% to an annual pace of 625,000 units, the lowest since records began in 1959, the Commerce Department said. It was the worst monthly drop in 24 years.

Permits fell 15.6% to 616,000, the lowest on record, a bad sign for future building activity.

"This is mind-bogglingly awful," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said in a note.

On the upside, fast-falling home construction will eventually reduce the glut of unsold homes.

November consumer prices dived 1.7%, the most since records began in 1947, as energy prices cooled 17%, the Labor Department said. Compared to a year ago, prices were up 1.1% vs. 5.6% in July.

Core prices, which exclude food and energy, were unchanged vs. October.

"Not only is growth collapsing but so is inflation," said Dana Johnson, chief economist at Comerica Bank.

But aggressive Fed action and a likely 2009 government stimulus package as high as $700 billion will eventually pull the economy out of its tailspin, Johnson predicted.

"There is so much stimulus being applied that when the economy does turn around, it's going to do so fairly impressively," he said.

Gross domestic product shrank at a 0.5% annual rate in the third quarter and economists predict a much bigger contraction in the fourth quarter. The National Bureau of Economic Research recently said the U.S. fell into recession in December 2007.

Mortgage Loan Modification How To's - Mortgage Loss Mitigation Made Simple

noreply@blogger.com (Garret Higgins) — Wed, 17 Dec 2008 01:24:00 +0000

Originally Published: ezinearticles.com
By Ron Stephens

These are incredibly challenging times for American homeowners. More people than ever before are considering mortgage loan modification as an alternative to the possibility of losing their homes. The need for banks to consider loan modifications for homeowners has come about because of various reasons:

Adjustable rate mortgages that have adjusted up and increased monthly mortgage payments beyond their ability to pay.
Some homeowners took out adjustable rate mortgages, expecting to refinance at a better rate later, only to find their home's diminished value won't support a sufficient loan amount to qualify for refinance, and therefore they can not take advantage of new lower rates.
Many have lost their jobs, some having worked for the same company for many years, and now can't afford their payment.
Retirement income that would have helped pay off the mortgage, lost in the stock market crash.

If any of these situations describe you, there is hope. Because of the tremendous number of people facing foreclosure, banks are more willing than ever to work with homeowners in several ways. They know that the epidemic proportions of distressed homeowners, has created a bigger challenge than foreclosing the loans of so many people who are in default, can overcome. Here are some possibilities for you if you need answers:

Short refinance: Your lender may be willing to lower the balance on your home mortgage, create a new loan at the lowered amount, and thus give you a lower payment.
Short Sale: If you just need to get out of your house, your lender may be willing to let you sell the home to another party, for an amount that is less than what you owe, and forgive you of the difference.
Loan Modification: Your lender may restructure your loan, add any late payments to the balance, create a new loan amount with new parameters.

Whichever one of these options that your bank may be willing to consider, depends on your personal standing with them, and your financial situation. Here are some things that you must do if you want your bank to consider a mortgage loan modification on your behalf:

Communicate with them early on...DO NOT avoid talking to them about your hardship.
Keep a proper perspective...They are not the enemy. You owe them the money, having borrowed it with the promise to pay it back. Don't get angry with them for your difficulty. Respect them, and you have a better chance of them working with you.
Ask them for help. If the person you talk to is not willing to help you, keep calling and asking for a supervisor until you get someone who will listen and try to help.
Consider enlisting the help of a professional "loan mitigation service". You may have to pay a small fee, but these people are very good at what they do. They have the know how and the resources, and the credibility that will get your bank's attention and cause them to be more willing to work with you.

The bottom line is: banks are more willing than ever to enter into mortgage loss mitigation with their customers. And if you do enough research, and you are patient and stick to the process of filling out many forms and making many phone calls, and being put on hold for long periods of time, you may be able to get a mortgage loan modification, and save your home and your credit.

If the thought of doing all of that causes you to break out in a cold sweat, and feel like giving up before you even start, than you should consider a loan mitigation specialist. They are available online, in the yellow pages, or you may be able to get a good one referred to you by a realtor or mortgage broker.

SIGNS OF REVIVAL

noreply@blogger.com (Garret Higgins) — Tue, 16 Dec 2008 07:53:00 +0000

Originally Published: www.vectorvest.com

by Dr. Bart DiLiddo Friday, 12/12/2008

At 26 weeks, the current downturn, which was signaled by a C/Dn on June 11, 2008, is the longest we have recorded in the VectorVest U.S. database, which goes back to June 1995. In fact, it's the longest downturn we have encountered since going into business in January 1988. When is it likely to end?

Well, I really can't answer that question, but I'll know it when I see it. I'll know it because our Market Timing System will give a Confirmed Up, C/Up, signal at that time. In order to get the C/Up signal, the Price of the VectorVest Composite must go up, week-over-week, on any given day for two consecutive weeks and the Buy/Sell Ratio, BSR, must go from below 1.00 to above 1.00. The beauty here is that we can see this signal develop as it happens.

The first step in this process is that the Price of the V V C must go up week-over-week for a single week. This event is noted in our Daily Color Guard Report by saying that the Primary Wave is Up, and the Up signal is then logged into the Trend column of the Color Guard Report. If we access the Timing section of last night's Views, we can see that the Primary Wave was Up on November 26th and 28th, and it has been Up for the last four days. As I write this essay, the Primary Wave is Up by a scant 10 cents per share. Nevertheless, five consecutive up days is very encouraging. Moreover, we could also see a couple of Green lights in the Price column.

The next significant step is to see the Price of the V V C go up week-over-week on any given day for two consecutive weeks. When this happens, we say that "The Price of the V V C has given a preliminary signal of a sustainable uptrend." If you look at our Market Timing Graph in the Weekly Mode, you'll see that a string of five consecutive Up weeks started on July 18, 2008. So I checked the Strategy section of the July 25, 2008 Views to see if we had properly documented the two week signal. Sure enough, these very words were there for all of the world to see.

Things appeared to be going pretty well with the incipient rally and our Market Timing Indicator, MTI, was even bold enough to close above 1.00 on August 11, 2008. But all was not well. The BSR was at a lowly level of 0.58 and it needed to go above 1.00 to confirm the rally. Moreover, the traditionally tough months of September and October were looming ahead. So what's all this got to do with what's happening now?

Right now I'm seeing shades of 1990. You may recall that the market peaked in July 1990 and the economy was in the tank due to rising interest rates. In addition to that, the banking industry was losing tons of money on foreign loans and the U.S. government was spending $200 billion trying to recover from the S&L Crisis. Finally, Saddam Hussein invaded Kuwait on August 2nd, threatening our oil supplies and caused stock prices to plunge. The BSR crashed to the lowest level, 0.04, I had ever seen in the short history of VectorVest.

Around the end of October an amazing thing happened: The BSR started to go up. It seemed crazy. With all the problems facing investors, why would stock prices be going up? We could ask the same question today. Whether we know the answer or not, the BSR has begun to rise again. It closed at a 48-day high of 0.10 on Wednesday, December 10th. Now that's not very high, but it is a good sign.

Other good signs are that the Price of the V V C closed above its 40-Day Moving Average on Wednesday, December 10th, and the MTI also closed above 1.00. Altogether, I'd say we're seeing Signs of a Revival.

10 Nominees for International-Stock Manager of the Year

noreply@blogger.com (Garret Higgins) — Tue, 16 Dec 2008 07:50:00 +0000

Originally Published: www.morningstar.com

This year's nominees for Morningstar's International-Stock Manager of the Year have all performed abysmally of late. They have losses with a capital L. The best of the bunch has dropped nearly 30% so far in 2008 and more than half are down more than 40%. Sure, they've all held up much better than the benchmark MSCI EAFE Index and the vast majority of international funds, but that isn't saying much and will be cold comfort to shareholders curled up in the fetal position watching a big chunk of their nest egg vaporize.

To their credit, none of our nominees is even remotely happy with their near-term performance. No one is ordering "We lost less than EAFE in 2008" T-shirts. They all know you can't eat relative returns and that losing less than your rivals is a Pyrrhic victory: Another year like this and these funds would practically be goners.

Fortunately, we don't expect that. The nominee's funds have been caught in a vicious global downturn that has hit all markets. No one has been safe as liquidity has evaporated, and forced selling by hedge funds and other levered vehicles has exacerbated the plunge in share prices. Loads of cheap stocks have gotten even cheaper. They may fall further yet.

But things always look darkest before the dawn. All our nominees have stellar long-term records, and, most importantly, the processes and teams that built these enviable results remain largely intact. They've seen plenty of downturns over the years and lived to tell about it. And remember, the next couple of years will likely look much different than the past two. Veterans like our nominees know that sticking with a proven process matters most when things are bleakest. It lays the groundwork for future gains. As John Templeton noted, you make most of your money in bear markets, you just don't know it at the time.

The managers below continue to do what has brought them success over the long haul, and we are highly confident in them. Markets will rebound. Maybe not tomorrow, next month, or even next year. But they'll come back. They always have. When things are once again looking up, we expect our nominees' funds to remain among the cream of the crop. The difference is that we plan to be lauding them for making more than their peers, rather than losing less. We can't wait.

The Nominees
Christopher Browne, William Browne, John Spears, Tom Shrager, and Bob Wyckoff at Tweedy Browne Global Value (TBGVX

Sponsored by:

TBGVX)
It's a bit of redemption for this fund. Despite posting strong absolute returns from 2003 to 2007, this prudent fund badly lagged more-aggressive peers. Some questioned whether its cautious style was obsolete. But, more than a year into a global downturn, the fund's measured tack has been validated--again. It has lost a ton so far in 2008 but is holding up better than most. And the implosion of a bunch of highfliers has raised the fund's three- and five-year rankings toward the top of its category. This fund has 10% of its assets in U.S. stocks, which has given it a small leg up on most of the other nominees this year.

Jeffrey Coons, Michael Magiera, Marc Tommasi, Christian Andreach, Jeffrey Donlon, Brian Gambill, and Jeffrey Herrmann at Manning & Napier World Opportunities (EXWAX

Sponsored by:

EXWAX)
Manning & Napier is not the most widely known shop. But it's a winner. All its funds use an all-cap, analyst-driven approach that incorporates growth, value, and cyclical plays. The shop is risk-averse, and its funds have done comparatively well in down markets. This one lost much less than the benchmark and its typical rival in the last bear market from 2000 through 2002. Although it's down more than 40% so far in 2008, it's besting its bogy and nearly all of its category peers. This fund's long-term record remains stellar, and we think highly of Manning & Napier's commitment to shareholders.

Hassan Elmasry, Paras Dodhia, Jayson Vowles, and Michael Alison at Van Kampen Global Franchise (VGFAX

Sponsored by:

VGFAX)
This world-stock fund keeps about 80% of its assets in consumer-related stocks, which has given it an edge this year. Morningstar's consumer-services and consumer-goods sectors have held up much better than most in 2008. In a market crisis investors have flocked to the stable, dominant consumer plays that this fund holds, such as Procter & Gamble (PG

Sponsored by:

PG). But this team knows how to picks stocks. The fund's 10-year returns are superb, despite the fact that its sector bias has worked against it at times over a full market cycle.

Jean-Marie Eveillard, Abhay Deshpande, and Matthew McClennan First Eagle Overseas (SGOVX

Sponsored by:

SGOVX)
Investing legend Jean-Marie Eveillard is back after a brief retirement, this fund has lost less than any of the nominees so far in 2008, and its 10-year return is the best among our nominees--by far. So why haven't we already etched Eveillard's name on another award--he won in 2001--and moved on? Mainly, we have some concerns about the revolving door on the manager's office here the past year or so. Eveillard retired a few years back, turning the reins over to his protege, but came back after he bolted. Matthew McLennan was just named to the team alongside longtime analyst Abhay Deshpande. And Eveillard is retiring--again--in March 2009. The constant has been the rigorous application of Eveillard's Ben Graham-inspired strategy. Eveillard has trained his teams well, and the fund remains a winner.

William Fries, Wendy Trevisani, and Lei Wang Thornburg International Value (TGVAX

Sponsored by:

TGVAX)
This pure stock-picker's vehicle is a proven entity. Veteran Bill Fries and his team have used a go-anywhere approach to generate one of the best long-term risk/reward profiles in the foreign large-blend category. Fries ignores the benchmark and simply buys where he finds the best bargains. He's been right much more often than not over time. The fund has taken some hits in a brutal market and is deep in the red so far in 2008. Still, that loss is less than nearly all its rivals' and the MSCI EAFE's Index. All the right pieces remain in place here.

George Evans at Oppenheimer International Growth (OIGAX

Sponsored by:

OIGAX)
George Evans is a bit of an anomaly among our nominees. He's a growth investor favoring a thematic approach, while most of the other nominees are value-leaning investors who use pure bottom-up approaches. Both strategies can work. This fund has been hit a bit harder than many nominees so far in 2008, but it's still beating the benchmark and most international funds. Its long-term record remains strong as well.

Anne Gudefin, Mandana Hormozi, and Charles Lahr Mutual Discovery (TEDIX

Sponsored by:

TEDIX)
This fine fund would seem to be a shoo-in for this year's award. It has lost less than the other nominees in 2008 and has a great long-term record. But manager Anne Gudefin has been here for about three and a half years and the rest of her team joined her in early 2007. So, the fund's topnotch long-term results aren't fully attributable to them. And this is a world-stock fund that keeps about half its assets in the United States. Foreign markets have fallen even further than domestic stocks this year, giving this fund an edge over the other nominees. Still, Gudefin has made hay while in charge. The fund's three-year return is near the very top of its category, and Mutual's process and support structure are great.

James Moffett and Gary Anderson UMB Scout International (UMBWX

Sponsored by:

UMBWX)
This fine fund is down but far from out. Like all international funds, this one has been hit hard by the global downturn that has crushed stocks in all markets. It's been hit hard in 2008 but looks strong compared with its typical rival. Long-term holders are still in great shape here, and new prospects will be well positioned if they buy in. Moffett has long had success using a combination of macroeconomic forecasting and pure bottom-up stock-picking. He looks for countries and sectors with the strongest economic trends and then buys financially sound firms with stable businesses within those areas. He has executed this process with aplomb over time, and we expect the same going forward.

David Samra and Daniel O'Keefe Artisan International Value ARTKX
One of the younger nominees, this fund has been a winner since its 2002 inception. David Samra and Daniel O'Keefe had past stints working on Oakmark's international offerings with David Herro, our 2006 International-Fund Manager of the Year. They've learned their lessons well. Like Herro, Samra and O'Keefe are contrarians who buy firms trading at big discounts to their estimates of intrinsic value. They willingly pile into battered and emerging markets and pay no heed to the benchmark's weightings. So far, they haven't missed a step. The fund is down less than nearly all other nominees in 2008, but it lacks the truly long-term record that some of the others have.

Amit Wadhwaney Third Avenue International Value (TAVIX

Sponsored by:

TAVIX)
As we've noted before, this fund gets so far off the beaten path that it doesn't even know there is a beaten path. Amit Wadhwaney takes Third Avenue's safe-and-cheap approach on the road with this fund. Unlike many managers who've recently found balance-sheet religion in a global downturn, Wadhwaney has always focused on assets and liabilities--or the lack thereof. He has a talent for unraveling complex entities to find hidden and undervalued assets. No market or firm is too obscure, and the fund often owns names that few others in Morningstar's database hold. The fund is deep in the red so far in 2008 but has lost much less than the benchmark and nearly all of its peers. Its record since inception is stellar.

The 2008 Fund Manager of the Year winners will be announced on Morningstar and CNBC on Tuesday morning, Jan. 6, 2009. In the meantime, stay tuned to Morningstar.com for our Fixed-Income nominees and read about Morningstar's Domestic-Stock candidates.

Home Buyers Turn to USDA for Mortgages

noreply@blogger.com (Garret Higgins) — Tue, 16 Dec 2008 07:46:00 +0000

Originally Published: Wall Street Journal

Home Buyers Turn to USDA for Mortgages

Agency Program Backs Loans to Aid Rural Development; No Money Down -- Even Now

By NICK TIMIRAOS

Tightened lending standards are leaving builders and real-estate agents scrambling for new ways to move cash-strapped buyers into homes. One increasingly popular option: an obscure home-loan program offered by the U.S. Department of Agriculture.

View Full Image

Coke Whitworth/Aurora Select for The Wall Street Journal

Erick Moore used a no-money-down USDA-backed loan to buy this four-bedroom house outside Raleigh, N.C.

Created in 1991 as a way to boost homeownership in rural areas, the program is being tapped by home buyers in overbuilt exurbs who are attracted to the no-money-down terms.

When Erick Moore first read about the USDA's Rural Development Guaranteed Loan program, he says he imagined it would be "restricted to some little farmhouse." Instead, the 33-year-old computer programmer moved last month into a four-bedroom, three-bath home in Fuquay-Varina, N.C., 17 miles outside Raleigh. The house sits on nearly one acre and features a brick facade, 10-foot ceilings and hardwood floors.

"I couldn't believe it until we closed," says Mr. Moore, who paid only $1,200 out of pocket to move into the $228,000 home. The seller contributed $5,000 in closing costs, and Mr. Moore rolled the 2% fee charged by the USDA into the loan. Mr. Moore, who owned a home in St. Louis before he relocated to the Raleigh area last year, says a 60% drop in his stock portfolio made it difficult to come up with a down payment. He directed his Realtor to show him only homes that were eligible for the USDA program.

Fueled by buyers like Mr. Moore, volume has nearly doubled for these USDA-backed loans. The department insured $7 billion in loans during the 2008 fiscal year, which ended Sept. 30, up from $3.6 billion the previous year. In October and November, the agency has already insured some $1.7 billion in loans.

That's relatively small when compared with the volume of business handled by the Federal Housing Administration -- which guaranteed $102 billion in new loans during fiscal 2008. But interest in the USDA's development lending program is growing rapidly in response to the nation's credit crunch and as most private lenders have stopped offering loans with no money down.

To be eligible for a USDA-backed loan, a borrower can't have income that exceeds 115% of the median county income, and the loans are restricted to areas with lower population density -- generally towns of no more than 25,000 residents. So while home buyers in big cities aren't eligible for the loans, residents of many of America's fastest-growing towns and exurbs do qualify. The loans that come through the program are made by private lenders, then insured by the government and sold to Ginnie Mae, a federal agency that sells mortgages to investors.

Home builders, many of which have overbuilt properties in these areas, are eagerly promoting the program to sell excess inventory. The USDA program accounted for 40%-50% of sales in October and November for Scottsdale, Ariz.-based home builder Meritage Homes, says John Bargnesi, vice president for sales. "It's one of our main tools right now."

Builders Promote Program

Meritage is advertising a "$500 move in" program to clear inventory in new exurban developments, including the Buckeye and Queen Creek subdivisions outside Phoenix that have been hard hit by foreclosures and falling prices. "If a builder is in one of these geographical areas, they certainly are using it," says Mr. Bargnesi. "We're all in tune with it now."

D.R. Horton Inc., the nation's largest home builder by number of houses built, is promoting the program in sales pitches for a number of new developments outside Austin, Texas. One is named Parkside Condos, a development of 144 new two- and three-bedroom condos priced at $130,000 in Pflugerville. Kastera Homes LLC, a home builder based in Boise, Idaho, is offering to pay closing costs for buyers who use a USDA loan. D.R. Horton and Kastera didn't return calls seeking comment.

The success of the USDA program comes at a time when easy home financing is getting much harder to find. Private lenders have stopped offering loans that require no money down, amid worries that borrowers without equity are more likely to let their homes fall into foreclosure. In October, Congress terminated a popular program that allowed sellers to fund down-payment "gifts" for new home loans backed by the FHA. Next year, the FHA will require a minimum 3.5% down payment on all new loans, up from 3%, and private lenders often require a minimum 5% down payment.

Such restrictions do not apply to loans backed by the USDA, which is best known as the guardian of the nation's food supply. In fact, some buyers can finance 102% of the home price, factoring in a 2% USDA insurance fee meant to cover loan losses. The loans also don't require borrowers to pay for monthly mortgage insurance. That means that USDA loans typically carry lower monthly payments than FHA loans, even in cases when the size of the loan is larger.

Sue Botelho of Northstar Mortgage Group in Destin, Fla., is promoting the USDA loans as part of a "move in with a penny down" program. "The down-payment assistance has gone away. Subprime has gone away," she says. "So now mortgage lenders are pretty aggressive in terms of making people aware of this USDA program."

One of Ms. Botelho's clients, 46-year-old insurance adjustor Alan Sammons, paid nothing to move into a new $270,000 home in the Florida Panhandle in June. He had spent more than a year trying to find a reasonable loan before beginning construction on a custom four-bedroom, 3½-bathroom home in his Crestview, Fla., subdivision, which includes a community swimming pool and lighted tennis courts.

"They're still building homes in here," Mr. Sammons says.

Julie Chapman, a Brunswick, Ga., real-estate agent, says she is listing more properties eligible for the USDA loans -- including homes in the Plantation at Golden Isles, a new subdivision adjacent to a golf course. Many of the properties are selling preconstruction. "That's something you don't see anymore in this market," she says.

New housing developments built on open land that were among the first to experience the downturn could now benefit from the USDA program. "They're showing some signs of recovering," says Michael Orr, a housing analyst based in Mesa, Ariz.

Some question the USDA's practice of allowing no-money-down purchases. "If you have to get a 102% loan, you probably shouldn't be buying a house," says U.S. Sen. Christopher Bond (R., Mo.), who adds that he supports the intent of the programs because it has traditionally been "very difficult" for rural borrowers to buy homes.

USDA officials, for their part, say that concerns about the program's 100% financing aren't warranted because the department has a strong track record and because rural areas are less prone to big increases in home prices. "We guarantee in a very controlled environment," says Philip Stetson, a USDA administrator for the lending program. Because its average loan amount is just $120,000, he says that the program is less susceptible to large-scale losses.

Income Verification

USDA- and FHA-backed loans aren't prone to some of the risks that faced subprime loans because the government-insurance programs offer only fixed loans and require income verification. "We have not seen any direct evidence at this point that 100% financing is leading to greater losses," Mr. Stetson says.

The default rate on USDA loans is slightly better than the rate for FHA-backed loans. Some 11.35% of USDA loans were delinquent in 2008, while 1.4% went into foreclosure, according to the department's statistics. Meanwhile, FHA loans had a 13.6% delinquency rate, while 2.3% went into foreclosure. That compares to a 4.3% delinquency rate and 1.6% foreclosure rate on prime loans, and a 20.0% delinquency rate and 12.9% foreclosure rate on subprime loans, according to the Mortgage Bankers Association.

Unlike the FHA, the USDA programs rely on a fixed appropriation from Congress, which totaled $4.1 billion in the 2008 fiscal year, and new loans can't be made once that allocation is exhausted. The program was able to make nearly $7 billion in loans this year because it received additional funding from other department sources.

But heavy demand for the loans has administrators asking for more money. Officials say that the program will run out of money next month, even though it has been funded through March. "Up until only two years ago, we weren't even using the full amount," says Mr. Stetson. "It has been rather incredible at how it has taken off."

When to Buy: Selecting the Right Stocks at the Right Time

noreply@blogger.com (Garret Higgins) — Tue, 16 Dec 2008 07:38:00 +0000

Key Fundamentals: Sales, Margins, Return On Equity

Sales growth, profit margins and return on equity are vitally important in evaluating a company's health. This lesson explains the significance of these financial gauges and how to identify the companies with best numbers.

It All Starts With Sales

Sales figures are a key measure of a company's strength -- or lack of it. Perhaps no other piece of financial information reflects growth better than sales: the money that comes into a company from products sold or services rendered. If a company is run efficiently, sales growth essentially drives earnings growth. Companies basically have two ways to increase earnings. They either increase sales, reduce expenses or ideally do both. Although a well-managed company controls expenses, healthy sales are the main engine for growth.

When you search for the best stocks, you want a company to have strong sales growth to support its earnings growth. Think of sales growth as the foundation under your house: if it is loose, it's not as stable as one with all the structural elements in place. When you see a company increasing its sales, it's telling you its business is drawing larger demand and is structurally sound and prepared to expand and generate the earnings capable of boosting its stock price.

Demand is driven by a number of factors, including larger numbers of customers, customers increasing their purchase volume, introduction of new products, expansion into new markets and the improvement of existing products.

The top-performing companies show consistent double- or triple-digit sales growth. It's even better when the percentage growth rate increases quarter after quarter. Such acceleration is the hallmark of quality growth companies. They reflect a well-managed organization. Take a look at some companies that have done just that:

Nokia

Nokia began a 630% jump from March 1998 through December 1999 and continued rising into 2000 after the wireless-phone maker reported sales gains of 9%, 12% and 19% in the three quarters leading up to the big move. Earnings were rising sharply during this period, too.

Home Depot

Home Depot made a 698% move from June 1982 to June 1983. Its sales grew 104%, 158%, 191% and 220% respectively over the four quarters leading up to this major stock-price jump.

EMC Corp

EMC, the maker of memory chips, rose 512% from September 1992 to October 1993 as sales in the four quarters before this huge move rose 30%, 46%, 54% and a hefty 267%.

How high should sales growth be? The three most recent quarters should each have strong sales growth of at least 25% compared to their year earlier quarters. Otherwise, sales growth should be accelerating in the last three consecutive quarters.

Investor's Business Daily's earnings reports include the sales figures for every company releasing its quarterly results. Up and down arrows show if sales are higher or lower than the previous quarter.

Dollar's Tumble Gives Gold A Boost

noreply@blogger.com (Garret Higgins) — Tue, 16 Dec 2008 07:27:00 +0000

Originally published: Investor's Business Daily

BY TRANG HO

INVESTOR'S BUSINESS DAILY

Posted 12/11/2008

A sharp drop in the dollar Thursday sent foreign currencies and commodities higher. The U.S. dollar index, which tracks the buck against six major currencies, fell as much as 1.8% to a six-week low of 83.60, as of Thursday evening.

PowerShares DB U.S. Dollar Index Bullish, (UUP) which tracks the greenback against the basket of currencies, gapped down 4% at the open but retraced half of its losses. It ended down 2.22% at 25.52. The ETF dropped below its 10-week moving average for the first time since late September.

Its opposite, PowerShares DB U.S. Dollar Bearish (UDN) leapt 1.6% to 25.81 in three times average volume, clearing its 10-week moving average.

CurrencyShares Canadian Dollar (FXC) and Euro Trust (FXE) both shot up 2.3%. CurrencyShares tracking the British pound, (FXB) Australian dollar, (FXA) Japanese yen, (FXY) Mexican peso, (FXM) Swedish krona (FXS) and Swiss franc (FXF) all fell 1% to 2%.

"The move today in addition to the move in the bond market indicates investors are getting more risk averse going into the end of the year," said Kathy Lien, director of currency research at GFT Forex. "The market is pricing in a deeper recession."

An expected rate cut at the upcoming FOMC meeting Dec. 15-16 could cause further depreciation in the greenback. Some economists say the Fed should cut interest rates less than the expected half point.

But Lien believes U.S trade, producer prices and retail sales numbers due out Friday will raise concerns that the U.S. recession is worse than what most believe and call for more aggressive Fed measures.

"The market is already pricing in a 75-basis point rate cut Tuesday, and the jobless numbers confirmed that the Fed will have to cut by no less than that," said Lien.

A rate cut to 0.25% would make the U.S. dollar the lowest-yielding currency in the developed market.

The Treasury market is already pricing in the possibility of deflation and depression with yields in zero- to-negative territory for the first time since the Great Depression, according to Lien.

Commodity Bull To Resume?

Commodities shot up across the board on safe-haven buying. And a weaker dollar makes products traded in the currency more expensive.

SPDR Gold Shares (GLD) rose 1% to 80.65, following a 4.5% jump Wednesday. The ETF rose above its 10-week moving average but is still below the 40-week line, which may be an area of resistance.

IShares Silver Trust (SLV) ticked up 0.79% to 10.20, spending a second day above its 10-week average. It has been trading in a sideways range between 8.45 and 10.67 the past two months. It could be forming a bottom after falling 50% from its high.

Lien projects gold will reach $850 an ounce, up 6%, by Tuesday and oil to spike to $55 a barrel, up 28%, within the month on further devaluation of the dollar.

Crude oil for January delivery jumped $4.46 to $47.98 Thursday. United States Oil (USO) leapt 7.74% to 38.58 on nearly 2 1/2 times usual trade. It trades deep below its 10-week and 40-week averages and has dropped 67% from its July high.

United States Gasoline, (UGA) which holds gasoline futures, soared 8.82% to 21.22 in four times average volume. Its chart looks similar to USO.

PowerShares DB Commodity, (DBC) which combines futures of crude oil, heating oil, gold, aluminum, corn and wheat, gained 3.03% to 21.40 in more than double usual trade. It's tumbled 54% from its July peak.

PowerShares DB Agriculture, (DBA) which holds futures contracts for corn, wheat, soybeans and sugar, edged up 0.38% to 23.58. It has fallen 45% from its 52-week high of 43.50. But it's closer to approaching its 10-week average than the other commodity ETFs.

"If the U.S. dollar (index) falls below 80 or returns to the 72 level, it will provide an excellent opportunity to buy a bull market in commodities at a discount," said Paul Kavanaugh, senior trader at PFGBEST.com.

Welcome

noreply@blogger.com (Garret Higgins) — Tue, 16 Dec 2008 07:02:00 +0000

Hello fellow investor,

Welcome to the Market Spread.

I, not unlike yourselves, have sustained massive losses in the recent economic death/doom crash (that's really just a formal euphemism for saying "I got screwed").

Everything happens for reason though.

The lesson I learned: Always be educated. Ignorance is doom. Bliss? No. My 401K disagrees.

So in the coming future, Market Spread will serve as an article base/knowledge hub. You will be able to find anything/everything regarding investments/ economy/ stock market.

So sit back, grab a beer, and get to learning.

See you soon...
Rusty