Investor's Business Daily
Wednesday February 13, 6:09 pm ET
Adelia Cellini Linecker
While many people work to make a living, many more aspire to become wealthy on their own. That leap from wage earner to money accumulator can be daunting.
Catherine McBreen and George Walper, authors of "Get Rich, Stay Rich, Pass It On," researched families that made it and concluded that the move is quite doable.
Here are key steps:
Get out of the rut. Shed all your credit card debt, which is likely carrying a double-digit interest rate.
Then diversify your assets with marketable securities, life insurance and annuities. Resolve other financial loose ends as well, McBreen says. "Keep investing your 401(k) plans and figure out if you have enough saved for your children's college costs," she told IBD.
The one debt that's acceptable is your mortgage, experts say. Indeed, buying a home is helpful in rounding up funds you'll need to buy other real estate. Owning your primary residence lets you build equity that you can use to purchase rental properties, for example.
Keep your day job. Mike Summey, author of "Weekend Millionaire Mindset," says to keep working while accumulating wealth.
If you're into real estate investments, that should be an extra stream of income. "The key is doing it right and not getting in trouble like many people are doing it right now," Summey told IBD. "Start with a single family home, because it's the safest and easiest to finance and the easiest to get out of."
McBreen says finding a rental property is different from hunting for your primary residence. "It's all about the numbers," she said. "You don't have to fall in love with it."
Find communities full of renters, McBreen says. "Look for people who transfer in and out of areas because they work at the companies in the areas, college towns where students rent, and where elderly people have to rent," she said.
Scout opportunities. Keep your ear to the ground for new ideas. McBreen says you can get involved in businesses related to your expertise to minimize risk.
"We know of a doctor who got involved in new equipment for delivering anesthesia," she said. "He understood what he was involved in; he was an expert."
Sometimes new ideas are found in filling a need in which you're not involved, McBreen adds. "Maybe you've noticed your neighborhood could use a dry cleaner, but you don't know the first thing about running one," she said. "But you know the need is there, so you're willing to invest money to get one opened."
Live frugally. Accumulating wealth means you're going to have to avoid spending on things you don't really need. Summey says he's been a saver since his teens.
"I made a habit of not spending everything I made," he said. "Later, I forced myself to live on 80% of my net income. It was doggone tough in the beginning, but I put it aside with the intent to invest. In the beginning, it was nothing more than a savings account."
Experts agree that significant wealth accumulation doesn't happen overnight.
"Most research shows it's a long-term process," McBreen said.
Saturday, February 16, 2008
Friday, February 15, 2008
Stocks Slide on Economic Readings
AP
Friday February 15, 3:32 pm ET
By Tim Paradis, AP Business Writer
Stocks Decline As Lackluster Economic Readings Offer Little to Dislodge Wall Street's Fears
NEW YORK (AP) -- Stocks fell for second day Friday after lackluster economic reports offered investors little incentive to put down big bets ahead of a long weekend.
Concerns about the economy continued to simmer after readings on manufacturing, consumer confidence and import prices rendered fresh images of a struggling economy.
A New York Federal Reserve survey on regional manufacturing indicated that conditions have deteriorated this month, while the preliminary Reuters/University of Michigan survey on consumer sentiment for February showed a marked decline from the prior month. A Labor Department's report found that import prices have jumped amid higher oil prices.
Friday's market declines, while not severe, occurred a day after investors' revealed their skittishness about the economy and sent stocks down more than 1 percent. The pullback, which came after strong gains earlier in the week, followed somewhat downcast remarks about the economy from Federal Reserve Chairman Ben Bernanke.
With stock markets closed Monday for the President's Day holiday and fresh economic concerns, investors appeared uninterested in making any sizable moves.
"The fear factor still sits in the minds of investors," said Bill Schultz, chief investment officer at McQueen, Ball & Associates in Bethlehem, Pa. "We just can't get over that hurdle."
In late afternoon trading, the Dow Jones industrial average fell 59.99, or 0.48 percent, to 12,316.99.
Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 3.71, or 0.28 percent, to 1,345.15, and the Nasdaq composite index fell 18.41, or 0.79 percent, to 2,314.13.
Government bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.77 percent from 3.82 percent late Thursday. The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude oil edged up 4 cents to settle at $95.50 a barrel on the New York Mercantile Exchange.
Not all economic findings that arrived Friday portended further weakness but over all, investors seemed unimpressed. The nation's central bank said that industrial output showed a modest increase last month, as expected, largely because of strength from utilities.
But investors remain worried that consumers who are uneasy will be reluctant to open their wallets -- an alarming prospect as consumer spending accounts for more than two-thirds of economic activity.
Comments from Bernanke on Thursday outlined the concerns. The Fed chief issued a sobering but not entirely unexpected prediction that economic growth in much of 2008 is likely to be "sluggish" before gathering strength later in the year. He told the Senate Banking Committee that further losses were likely at banks from soured mortgages.
Schultz predicts that volatility will remain on Wall Street as investors try to sort through their concerns about the financial sector. The uncertainty lapping at Wall Street is in part due to the opaque nature of subprime mortgage debt. Many of these loans, which are now going bad, were sold off in exotic debt packages whose worth is difficult to determine. The concerns about faltering debt have stoked worries about the solvency of bond insurers and sent some borrowing costs higher, disturbing normally staid parts of the financial sector that help pedal the economy.
In corporate news, Priceline.com Inc. said its fourth-quarter earnings more than doubled amid a 62 percent increase in gross travel bookings. The online travel company jumped $17.44, or 17 percent, to $119.67.
Declining issues outnumbered advancers by 2 to 1 on the New York Stock Exchange, where volume came to 1.13 billion shares.
The Russell 2000 index of smaller companies fell 6.84, or 0.97 percent, to 698.48.
Overseas, Japan's Nikkei stock average finished down 0.03 percent. Britain's FTSE 100 closed down 1.56 percent, Germany's DAX index fell 1.87 percent, and France's CAC-40 fell 1.79 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Friday February 15, 3:32 pm ET
By Tim Paradis, AP Business Writer
Stocks Decline As Lackluster Economic Readings Offer Little to Dislodge Wall Street's Fears
NEW YORK (AP) -- Stocks fell for second day Friday after lackluster economic reports offered investors little incentive to put down big bets ahead of a long weekend.
Concerns about the economy continued to simmer after readings on manufacturing, consumer confidence and import prices rendered fresh images of a struggling economy.
A New York Federal Reserve survey on regional manufacturing indicated that conditions have deteriorated this month, while the preliminary Reuters/University of Michigan survey on consumer sentiment for February showed a marked decline from the prior month. A Labor Department's report found that import prices have jumped amid higher oil prices.
Friday's market declines, while not severe, occurred a day after investors' revealed their skittishness about the economy and sent stocks down more than 1 percent. The pullback, which came after strong gains earlier in the week, followed somewhat downcast remarks about the economy from Federal Reserve Chairman Ben Bernanke.
With stock markets closed Monday for the President's Day holiday and fresh economic concerns, investors appeared uninterested in making any sizable moves.
"The fear factor still sits in the minds of investors," said Bill Schultz, chief investment officer at McQueen, Ball & Associates in Bethlehem, Pa. "We just can't get over that hurdle."
In late afternoon trading, the Dow Jones industrial average fell 59.99, or 0.48 percent, to 12,316.99.
Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 3.71, or 0.28 percent, to 1,345.15, and the Nasdaq composite index fell 18.41, or 0.79 percent, to 2,314.13.
Government bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.77 percent from 3.82 percent late Thursday. The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude oil edged up 4 cents to settle at $95.50 a barrel on the New York Mercantile Exchange.
Not all economic findings that arrived Friday portended further weakness but over all, investors seemed unimpressed. The nation's central bank said that industrial output showed a modest increase last month, as expected, largely because of strength from utilities.
But investors remain worried that consumers who are uneasy will be reluctant to open their wallets -- an alarming prospect as consumer spending accounts for more than two-thirds of economic activity.
Comments from Bernanke on Thursday outlined the concerns. The Fed chief issued a sobering but not entirely unexpected prediction that economic growth in much of 2008 is likely to be "sluggish" before gathering strength later in the year. He told the Senate Banking Committee that further losses were likely at banks from soured mortgages.
Schultz predicts that volatility will remain on Wall Street as investors try to sort through their concerns about the financial sector. The uncertainty lapping at Wall Street is in part due to the opaque nature of subprime mortgage debt. Many of these loans, which are now going bad, were sold off in exotic debt packages whose worth is difficult to determine. The concerns about faltering debt have stoked worries about the solvency of bond insurers and sent some borrowing costs higher, disturbing normally staid parts of the financial sector that help pedal the economy.
In corporate news, Priceline.com Inc. said its fourth-quarter earnings more than doubled amid a 62 percent increase in gross travel bookings. The online travel company jumped $17.44, or 17 percent, to $119.67.
Declining issues outnumbered advancers by 2 to 1 on the New York Stock Exchange, where volume came to 1.13 billion shares.
The Russell 2000 index of smaller companies fell 6.84, or 0.97 percent, to 698.48.
Overseas, Japan's Nikkei stock average finished down 0.03 percent. Britain's FTSE 100 closed down 1.56 percent, Germany's DAX index fell 1.87 percent, and France's CAC-40 fell 1.79 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Corporate News
Citigroup (C: 25.20, -0.54, -2.09%) has blocked investors from withdrawing from one of its more sickly hedge funds in an effort to keep it afloat, The Wall Street Journal reported. CSO Partners, a fund invested heavily in corporate debt, put a lock on its assets after investors tried to pull nearly a third of the fund's $500 million.
Berkshire Hathaway (BRK.A: 142601.00, -389.00, -0.27%), Warren Buffett's investment firm, has acquired more than 132 million shares of Kraft Foods (KFT: 31.27, +1.96, +6.68%), according to a regulatory filing. Shares of Kraft have slipped about 15% since early December.
UBS (UBS: 33.07, -0.87, -2.56%) could be facing as much as $18 billion in additional write-downs this year, according to an analyst's note cited in article by Reuters. UBS has already recorded $18 billion in losses in 2007. The firm is still reeling from bad investments tied to subprime mortgages in the U.S.
Abercrombie & Fitch (ANF: 75.34, -0.70, -0.92%), the clothing retailer known for its risque catalogues, posted a 9% increase in fourth-quarter profits. The firm earned $216.8 million, or $2.40 a share, up from $198.2 million, or $2.14 a share, in the year-ago period. However, Abercrombie fell just shy of analysts' revenue estimates of $1.25 billion.
Berkshire Hathaway (BRK.A: 142601.00, -389.00, -0.27%), Warren Buffett's investment firm, has acquired more than 132 million shares of Kraft Foods (KFT: 31.27, +1.96, +6.68%), according to a regulatory filing. Shares of Kraft have slipped about 15% since early December.
UBS (UBS: 33.07, -0.87, -2.56%) could be facing as much as $18 billion in additional write-downs this year, according to an analyst's note cited in article by Reuters. UBS has already recorded $18 billion in losses in 2007. The firm is still reeling from bad investments tied to subprime mortgages in the U.S.
Abercrombie & Fitch (ANF: 75.34, -0.70, -0.92%), the clothing retailer known for its risque catalogues, posted a 9% increase in fourth-quarter profits. The firm earned $216.8 million, or $2.40 a share, up from $198.2 million, or $2.14 a share, in the year-ago period. However, Abercrombie fell just shy of analysts' revenue estimates of $1.25 billion.
Stocks Crumple on Weak Data; Credit Anxiety Remains in Focus
February 15, 2008 10:41 a.m.
Stocks fell as investors fretted both about industry's ability to profit by making goods and about Wall Street firms' ability to remain solvent after making risky credit investments.
The Dow Jones Industrial Average recently traded down 44.38 points, or 0.4%, at 12332.60. The Standard & Poor's 500 was off 0.4%, or 4.93 points, at 1343.93, led by industrial components, off nearly 1%. The tech-focused Nasdaq Composite Index was off 0.6%, or 12.99 points, at 2319.55.
The selloff is being fueled by a continued trickle of unpleasant corporate news from big financial firms and several pieces of new data about the so-called real economy. Those data have again undermined investors' already scant hopes that the ill effects of Wall Street's soured credit bets might not spill into other parts of the economy.
Major stock indexes are still clinging to modest weekly gains, with the Dow up about 1%. But the buoyant mood from just a few days ago has quickly evaporated, with many investing pros saying the market is still in an overall slump despite brief bursts of buying.
"We still think that this is a bear market," said Barry James, president of James Investment Research in Alpha, Ohio.
In recent weeks, Mr. James has encouraged clients to increase their proportion of stocks in their portfolios by a few percentage points, mostly because major yardsticks like the Dow have posted such poor year-to-date performance that they now look a little cheap. But Mr. James has been careful to warn that he sees only a short-term buying opportunity.
"It's certainly not a time to go hog-wild," he said. "It's just that we've had some areas of the market that have been absolutely crushed, so that always warrants a good, hard look. But eventually we'll have to go back to a more cautious approach."
In economic news, the New York Federal Reserve reported early Friday that its general business conditions index tumbled to -11.72, falling below zero for the first time since May 2005, from a reading of 9.03 in January. The index was well below the median forecast of 6.5 in a Dow Jones Newswires survey.
Import prices jumped 1.7% last month as higher energy, food and commodity prices pushed the annual increase to a record high. Economists had been expecting only a 0.5% rise. Compared to a year ago, prices soared 13.7%, the highest reading since the government began gathering the data in 1982. Export prices also surged last month, by 1.2%.
Investors also digested several unwelcome bits of news about Wall Street firms. People familiar with the situation told The Wall Street Journal that troubled Financial Guaranty Insurance Co., has notified the New York State Insurance Department that it will request to be split into two companies. The news comes a day after New York Gov. Eliot Spitzer and the state's insurance commissioner Eric Dinallo testified to Congress about the problems facing the bond insurers.
UBS dropped almost 3% in early trading after Citigroup analysts speculated the bank might need to write off another 12 billion Swiss francs ($10.9 billion) to 20 billion Swiss francs in 2008. Also, The Wall Street Journal's report that Citigroup has barred investors in one of its hedge funds from withdrawing their money could spook already wary investors.
Warren Buffett's Berkshire Hathaway disclosed Thursday that it amassed an 8.6% stake in Kraft Foods in 2007. Berkshire also revealed that it increased holdings in Wells Fargo, bought a new stake in GlaxoSmithKline and trimmed stakes in Ameriprise Financial and Iron Mountain. Kraft climbed nearly 6% Friday.
Shares of Best Buy slipped 4.3% after the consumer-electronics retailer cut its fiscal 2008 earnings forecast, citing soft domestic customer traffic in January.
Crude oil futures gained 72 cents to $96.18 a barrel.
In major market action:
Stocks were down. On Friday, 825 stocks were up and 2,044 were down at the New York Stock Exchange.
Bonds rose. The two-year note was up 2/32, yielding 1.862%. The 10-year note gained 11/32 to yield 3.780%. The 30-year bond rose 24/32 to yield 4.606%. Yields move inversely to prices.
The dollar weakened. The euro traded at $1.4690, compared with $1.4637 late Thursday in New York, while the dollar traded at 107.62 yen, versus 107.98 yen late Thursday.
Write to the Peter A. McKay at peter.mckay@wsj.com
Stocks fell as investors fretted both about industry's ability to profit by making goods and about Wall Street firms' ability to remain solvent after making risky credit investments.
The Dow Jones Industrial Average recently traded down 44.38 points, or 0.4%, at 12332.60. The Standard & Poor's 500 was off 0.4%, or 4.93 points, at 1343.93, led by industrial components, off nearly 1%. The tech-focused Nasdaq Composite Index was off 0.6%, or 12.99 points, at 2319.55.
The selloff is being fueled by a continued trickle of unpleasant corporate news from big financial firms and several pieces of new data about the so-called real economy. Those data have again undermined investors' already scant hopes that the ill effects of Wall Street's soured credit bets might not spill into other parts of the economy.
Major stock indexes are still clinging to modest weekly gains, with the Dow up about 1%. But the buoyant mood from just a few days ago has quickly evaporated, with many investing pros saying the market is still in an overall slump despite brief bursts of buying.
"We still think that this is a bear market," said Barry James, president of James Investment Research in Alpha, Ohio.
In recent weeks, Mr. James has encouraged clients to increase their proportion of stocks in their portfolios by a few percentage points, mostly because major yardsticks like the Dow have posted such poor year-to-date performance that they now look a little cheap. But Mr. James has been careful to warn that he sees only a short-term buying opportunity.
"It's certainly not a time to go hog-wild," he said. "It's just that we've had some areas of the market that have been absolutely crushed, so that always warrants a good, hard look. But eventually we'll have to go back to a more cautious approach."
In economic news, the New York Federal Reserve reported early Friday that its general business conditions index tumbled to -11.72, falling below zero for the first time since May 2005, from a reading of 9.03 in January. The index was well below the median forecast of 6.5 in a Dow Jones Newswires survey.
Import prices jumped 1.7% last month as higher energy, food and commodity prices pushed the annual increase to a record high. Economists had been expecting only a 0.5% rise. Compared to a year ago, prices soared 13.7%, the highest reading since the government began gathering the data in 1982. Export prices also surged last month, by 1.2%.
Investors also digested several unwelcome bits of news about Wall Street firms. People familiar with the situation told The Wall Street Journal that troubled Financial Guaranty Insurance Co., has notified the New York State Insurance Department that it will request to be split into two companies. The news comes a day after New York Gov. Eliot Spitzer and the state's insurance commissioner Eric Dinallo testified to Congress about the problems facing the bond insurers.
UBS dropped almost 3% in early trading after Citigroup analysts speculated the bank might need to write off another 12 billion Swiss francs ($10.9 billion) to 20 billion Swiss francs in 2008. Also, The Wall Street Journal's report that Citigroup has barred investors in one of its hedge funds from withdrawing their money could spook already wary investors.
Warren Buffett's Berkshire Hathaway disclosed Thursday that it amassed an 8.6% stake in Kraft Foods in 2007. Berkshire also revealed that it increased holdings in Wells Fargo, bought a new stake in GlaxoSmithKline and trimmed stakes in Ameriprise Financial and Iron Mountain. Kraft climbed nearly 6% Friday.
Shares of Best Buy slipped 4.3% after the consumer-electronics retailer cut its fiscal 2008 earnings forecast, citing soft domestic customer traffic in January.
Crude oil futures gained 72 cents to $96.18 a barrel.
In major market action:
Stocks were down. On Friday, 825 stocks were up and 2,044 were down at the New York Stock Exchange.
Bonds rose. The two-year note was up 2/32, yielding 1.862%. The 10-year note gained 11/32 to yield 3.780%. The 30-year bond rose 24/32 to yield 4.606%. Yields move inversely to prices.
The dollar weakened. The euro traded at $1.4690, compared with $1.4637 late Thursday in New York, while the dollar traded at 107.62 yen, versus 107.98 yen late Thursday.
Write to the Peter A. McKay at peter.mckay@wsj.com
Thursday, February 14, 2008
Choosing a Financial Advisor
Many investors feel uncomfortable working with investment professionals. This isn't surprising, given the cloudy haze surrounding much of the financial services industry. For instance, many investment professionals receive commissions from companies for selling those firms' products -- creating an inducement for some financial salespeople to sell products that puts money in their pocket, but may or may not be the best choice for you.
But for many investors -- particularly those who don't have the time or incentive to manage their own financial situations by themselves -- a well-chosen advisor can be an important ally in creating and carrying out a long-term financial plan.
Where to Find a Financial Advisor
Most people find their financial advisors through referrals from friends, coworkers, accountants, or attorneys. Although this is a comfortable method for most people, it has two major pitfalls. First, in today's litigious society, professionals and laymen alike are less willing to refer you to others due to the implied endorsement. This is especially true for accountants and attorneys. They simply don't want to take the risk that you will have a bad experience and hold them at fault. Second, people often make a referral because they like an advisor personally -- not because they are qualified to judge an advisor's skill and knowledge about investing.
Evaluating a Financial Advisor
Referrals are a good place to start, but you've got to do your homework. Ask any potential advisor plenty of questions. Your advisor should be prepared to meet you in an initial interview and explain his or her approach to investing and planning. In particular, make sure of the following points:
* The advisor should be compensated on a fee-only basis rather than by brokerage commissions. Advisors who work on commissions are more likely to recommend frequent transactions in your portfolio. A fee-only advisor has fewer conflicts of interest and is more likely to have your best interests in mind.
* The advisor should focus on risk in selecting your portfolio. Reviewing historical portfolio performance in bad markets is the best way to get a feel for the potential volatility of a particular asset mix. Paying attention to risk will give you the best chance of staying invested throughout your time horizon since your portfolio will be consistent with your risk tolerance.
* The advisor should work with you to set target rates of return -- the returns you will need to achieve your objectives. A fee-only advisor can show you different models and mixes of investments that have the highest probability of achieving your goals.
* The advisor should write an investment policy statement for you. This statement should provide specific instructions covering the following objectives and constraints: target return, risk tolerance, time horizon, anticipated withdrawals or contributions, tax constraints, and regulatory issues, if any.
* The advisor should rebalance your portfolio periodically. If an asset differs significantly from its original target allocation, the advisor should either buy or sell some of the assets until its target percentage is restored.
* Your advisor should provide you with a quarterly assessment of the portfolio�s performance and market values. He or she should determine whether the market value of your portfolio is growing fast enough to achieve your objectives and whether any adjustments need to be made.
Some investors and inexperienced advisors believe that once they build a portfolio, particularly an asset class portfolio, they won�t need to make any changes. If we look back just five years, we see that asset class investing has improved dramatically. Researchers have identified new asset classes leading to the development of many new asset class funds. Value and emerging market funds are two recent introductions, for example.
Over the next five years, it is likely that we will see even greater changes. It would be foolish for any investor not to take advantage of new knowledge and products. Finding an advisor to help you keep informed of new developments will add tremendous value to your portfolio.
But for many investors -- particularly those who don't have the time or incentive to manage their own financial situations by themselves -- a well-chosen advisor can be an important ally in creating and carrying out a long-term financial plan.
Where to Find a Financial Advisor
Most people find their financial advisors through referrals from friends, coworkers, accountants, or attorneys. Although this is a comfortable method for most people, it has two major pitfalls. First, in today's litigious society, professionals and laymen alike are less willing to refer you to others due to the implied endorsement. This is especially true for accountants and attorneys. They simply don't want to take the risk that you will have a bad experience and hold them at fault. Second, people often make a referral because they like an advisor personally -- not because they are qualified to judge an advisor's skill and knowledge about investing.
Evaluating a Financial Advisor
Referrals are a good place to start, but you've got to do your homework. Ask any potential advisor plenty of questions. Your advisor should be prepared to meet you in an initial interview and explain his or her approach to investing and planning. In particular, make sure of the following points:
* The advisor should be compensated on a fee-only basis rather than by brokerage commissions. Advisors who work on commissions are more likely to recommend frequent transactions in your portfolio. A fee-only advisor has fewer conflicts of interest and is more likely to have your best interests in mind.
* The advisor should focus on risk in selecting your portfolio. Reviewing historical portfolio performance in bad markets is the best way to get a feel for the potential volatility of a particular asset mix. Paying attention to risk will give you the best chance of staying invested throughout your time horizon since your portfolio will be consistent with your risk tolerance.
* The advisor should work with you to set target rates of return -- the returns you will need to achieve your objectives. A fee-only advisor can show you different models and mixes of investments that have the highest probability of achieving your goals.
* The advisor should write an investment policy statement for you. This statement should provide specific instructions covering the following objectives and constraints: target return, risk tolerance, time horizon, anticipated withdrawals or contributions, tax constraints, and regulatory issues, if any.
* The advisor should rebalance your portfolio periodically. If an asset differs significantly from its original target allocation, the advisor should either buy or sell some of the assets until its target percentage is restored.
* Your advisor should provide you with a quarterly assessment of the portfolio�s performance and market values. He or she should determine whether the market value of your portfolio is growing fast enough to achieve your objectives and whether any adjustments need to be made.
Some investors and inexperienced advisors believe that once they build a portfolio, particularly an asset class portfolio, they won�t need to make any changes. If we look back just five years, we see that asset class investing has improved dramatically. Researchers have identified new asset classes leading to the development of many new asset class funds. Value and emerging market funds are two recent introductions, for example.
Over the next five years, it is likely that we will see even greater changes. It would be foolish for any investor not to take advantage of new knowledge and products. Finding an advisor to help you keep informed of new developments will add tremendous value to your portfolio.
Basic Options Concepts: How Options Work
Options are the most versatile trading instrument ever invented. Since options cost less than stock, they provide a high leverage approach to trading that can significantly limit the overall risk of a trade or provide additional income. Simply put, op tion buyers have rights and option sellers have obligations. Option buyers have the right, but not the obligation, to buy (call) or sell (put) the underlying stock (or futures contract) at a specified price until the 3rd Friday of their expiration month. There are two kinds of options: calls and puts. Call options give you the right to buy the underlying asset. Put options give you the right to sell the underlying asset. It is essential to become familiar with the inner workings of both. Every strategy you learn from this point on depends on your thorough understanding of these two kinds of options.
There are no margin requirements if you want to purchase an option because your risk is limited to the price of the option. In contrast, option sellers receive a credit in their account for selling an option and get to keep this amount if the option expires worthless. However, option sellers also have an obligation to buy (put) or sell (call) the underlying instrument if their option is exercised by an assigned option holder. Therefore, selling an option requires a healthy margin.
To trade options, you must be acquainted with the select terminology of the option market. The price at which an underlying stock can be purchased or sold if the option is exercised is called the strike price. Options are available in several strike prices above and below the current price of the underlying asset. Stocks priced below $25 per share usually have strike prices at 2 ½ dollar intervals. Stocks priced over $25 usually have strike prices at $5 dollar intervals.
The date the option expires is referred to as the expiration date. A stock option expires by close of business on the 3rd Friday of the expiration month. All listed options have options available for the current month and the next month as well as specific future months. Each stock has a corresponding cycle of months that they offer options in. There are three fixed expiration cycles available. Each cycle has a four-month interval:
A. January, April, July and October
B. February, May, August and November
C. March, June, September and December
The price of an option is called the premium. An option's premium is determined by a number of factors including the current price of the underlying asset, the strike price of the option, the time remaining until expiration, and volatility. An option premium is priced on a per share basis. Each option on a stock corresponds to 100 shares. Therefore, if the premium of an option is priced at 2, the total premium for that option would be $200 (2 x 100 = $200). Buying an option creates a debit in the amount of the premium to the buyer's trading account. Selling an option creates a credit in the amount of the premium to the seller's trading account:
Example: Jane wants to buy a house. After a few weeks of searching, she discovers one she really likes. Unfortunately, she won't have enough money for a substantial down payment for another six months. So, she approaches the owner of the house and negotiates an option to buy the house within 6 months for $100,000. The owner agrees to sell her the option for $2,000.
Scenario 1: During this 6-month period, Jane discovers an oil field underneath the property. The value of the house shoots up to $1,000,000. However, the writer of the option (the owner) is obligated to sell the house to Jane for $100,000. Jan e buys the house for a total cost of $102,000-$100,000 for the house plus the $2,000 premium paid for the option. She promptly turns around and sells it for a million dollars for huge profit of $898,000 and lives happily ever after.
Scenario 2: Jane discovers a toxic waste dump on the property. Now the value of the house drops to zero and she obviously decides not to exercise the option to buy the house. In this case, Jane loses the $2,000 premium paid for the option to the owner of the property.
How Options Work Review
1. Options give you the right to buy or sell an underlying instrument.
2. If you buy an option, you are not obligated to buy or sell the underlying instrument; you simply have the right to.
3. If you sell an option and the option is exercised, you are obligated to deliver the underlying asset (call) or take delivery of the underlying asset (put) at the strike price of the option regardless of the current price of the underlying asset.
4. Options are good for a specified period of time, after which they expire and you lose your right to buy or sell the underlying instrument at the specified price.
5. Options when bought are done so at a debit to the buyer.
6. Options when sold are done so by giving a credit to the seller.
7. Options are available in several strike prices representing the price of the underlying instrument.
8. The cost of an option is referred to as the option premium. The price reflects a variety of factors including the current price of the underlying asset, the strike price of the option, the time remaining until expiration, and volatility.
9. Options are not available on every stock. There are approximately 2,200 stocks with tradable options. Each stock option represents 100 shares of a company's stock.
For more information on learning how to make money with options, go to the Optionetics.com full site! We empower investors through knowledge.
There are no margin requirements if you want to purchase an option because your risk is limited to the price of the option. In contrast, option sellers receive a credit in their account for selling an option and get to keep this amount if the option expires worthless. However, option sellers also have an obligation to buy (put) or sell (call) the underlying instrument if their option is exercised by an assigned option holder. Therefore, selling an option requires a healthy margin.
To trade options, you must be acquainted with the select terminology of the option market. The price at which an underlying stock can be purchased or sold if the option is exercised is called the strike price. Options are available in several strike prices above and below the current price of the underlying asset. Stocks priced below $25 per share usually have strike prices at 2 ½ dollar intervals. Stocks priced over $25 usually have strike prices at $5 dollar intervals.
The date the option expires is referred to as the expiration date. A stock option expires by close of business on the 3rd Friday of the expiration month. All listed options have options available for the current month and the next month as well as specific future months. Each stock has a corresponding cycle of months that they offer options in. There are three fixed expiration cycles available. Each cycle has a four-month interval:
A. January, April, July and October
B. February, May, August and November
C. March, June, September and December
The price of an option is called the premium. An option's premium is determined by a number of factors including the current price of the underlying asset, the strike price of the option, the time remaining until expiration, and volatility. An option premium is priced on a per share basis. Each option on a stock corresponds to 100 shares. Therefore, if the premium of an option is priced at 2, the total premium for that option would be $200 (2 x 100 = $200). Buying an option creates a debit in the amount of the premium to the buyer's trading account. Selling an option creates a credit in the amount of the premium to the seller's trading account:
Example: Jane wants to buy a house. After a few weeks of searching, she discovers one she really likes. Unfortunately, she won't have enough money for a substantial down payment for another six months. So, she approaches the owner of the house and negotiates an option to buy the house within 6 months for $100,000. The owner agrees to sell her the option for $2,000.
Scenario 1: During this 6-month period, Jane discovers an oil field underneath the property. The value of the house shoots up to $1,000,000. However, the writer of the option (the owner) is obligated to sell the house to Jane for $100,000. Jan e buys the house for a total cost of $102,000-$100,000 for the house plus the $2,000 premium paid for the option. She promptly turns around and sells it for a million dollars for huge profit of $898,000 and lives happily ever after.
Scenario 2: Jane discovers a toxic waste dump on the property. Now the value of the house drops to zero and she obviously decides not to exercise the option to buy the house. In this case, Jane loses the $2,000 premium paid for the option to the owner of the property.
How Options Work Review
1. Options give you the right to buy or sell an underlying instrument.
2. If you buy an option, you are not obligated to buy or sell the underlying instrument; you simply have the right to.
3. If you sell an option and the option is exercised, you are obligated to deliver the underlying asset (call) or take delivery of the underlying asset (put) at the strike price of the option regardless of the current price of the underlying asset.
4. Options are good for a specified period of time, after which they expire and you lose your right to buy or sell the underlying instrument at the specified price.
5. Options when bought are done so at a debit to the buyer.
6. Options when sold are done so by giving a credit to the seller.
7. Options are available in several strike prices representing the price of the underlying instrument.
8. The cost of an option is referred to as the option premium. The price reflects a variety of factors including the current price of the underlying asset, the strike price of the option, the time remaining until expiration, and volatility.
9. Options are not available on every stock. There are approximately 2,200 stocks with tradable options. Each stock option represents 100 shares of a company's stock.
For more information on learning how to make money with options, go to the Optionetics.com full site! We empower investors through knowledge.
Bonds
What is a Bond?
TECHNICALLY SPEAKING, a bond is a loan and you are the lender. Who's the borrower? Usually, it's either the U.S. government, a state, a local municipality or a big company like General Motors. All of these entities need money to operate -- to fund the federal deficit, for instance, or to build roads and finance factories -- so they borrow capital from the public by issuing bonds.
Now for a little bond-speak. When a bond is issued, the price you pay is known as its "face value." Once you buy it, the issuer promises to pay you back on a particular day -- the "maturity date" -- at a predetermined rate of interest -- the "coupon." Say, for instance, you buy a bond with a $1,000 face value, a 5% coupon and a 10-year maturity. You would collect interest payments totaling $50 in each of those 10 years. When the decade was up, you'd get back your $1,000 and walk away.
A key difference between stocks and bonds is that stocks make no promises about dividends or returns. General Electric's dividend may be as regular as a heartbeat, but the company is under no obligation to pay it. And while GE stock spends most of its time moving upward, it has been known to spend months -- even years -- going the other way.
When GE issues a bond, however, the company guarantees to pay back your principal (the face value) plus interest. If you buy the bond and hold it to maturity, you know exactly how much you're going to get back (in most cases, anyway. We'll discuss some exceptions later). That's why bonds are also known as "fixed-income" investments -- they assure you a steady payout or yearly income. And although they can carry plenty of risk (we'll discuss why in our How Bonds Behave lecture), this regular income is what makes them inherently less volatile than stocks.
TECHNICALLY SPEAKING, a bond is a loan and you are the lender. Who's the borrower? Usually, it's either the U.S. government, a state, a local municipality or a big company like General Motors. All of these entities need money to operate -- to fund the federal deficit, for instance, or to build roads and finance factories -- so they borrow capital from the public by issuing bonds.
Now for a little bond-speak. When a bond is issued, the price you pay is known as its "face value." Once you buy it, the issuer promises to pay you back on a particular day -- the "maturity date" -- at a predetermined rate of interest -- the "coupon." Say, for instance, you buy a bond with a $1,000 face value, a 5% coupon and a 10-year maturity. You would collect interest payments totaling $50 in each of those 10 years. When the decade was up, you'd get back your $1,000 and walk away.
A key difference between stocks and bonds is that stocks make no promises about dividends or returns. General Electric's dividend may be as regular as a heartbeat, but the company is under no obligation to pay it. And while GE stock spends most of its time moving upward, it has been known to spend months -- even years -- going the other way.
When GE issues a bond, however, the company guarantees to pay back your principal (the face value) plus interest. If you buy the bond and hold it to maturity, you know exactly how much you're going to get back (in most cases, anyway. We'll discuss some exceptions later). That's why bonds are also known as "fixed-income" investments -- they assure you a steady payout or yearly income. And although they can carry plenty of risk (we'll discuss why in our How Bonds Behave lecture), this regular income is what makes them inherently less volatile than stocks.
Stocks End Lower on Bernanke's Comments
AP
Thursday February 14, 4:19 pm ET
By Madlen Read, AP Business Writer
Stocks Fall As Bernanke Predicts 'Sluggish' Economic Growth Before Late-Year Strengthening
NEW YORK (AP) -- Wall Street retreated Thursday after Federal Reserve Chairman Ben Bernanke predicted a "sluggish" economy until later in the year and more mortgage-related losses at banks. The Dow Jones industrial average fell 175 points.
Though the Fed chairman's comments suggested the central bank is still open to further interest rate reductions, the tone was, as expected, somber. Bernanke said the housing and credit crises have weighed on the economy and curbed hiring. If the job market deteriorates, consumer spending, which is crucial for economic growth, will keep dwindling.
The Labor Department said Thursday the number of workers filing unemployment claims fell 9,000 to 348,000 last week. But after the January jobs report that showed the first net jobs loss in more than four years, Wall Street remains worried that businesses are becoming cautious about hiring and that unemployment will compound the debt problems that have been slamming the markets and the greater economy.
After three strong days on Wall Street, investors found scant encouragement in Bernanke's testimony and cashed in their gains.
"He was more bearish on the economy than he was before," said Arthur Hogan, chief market analyst at Jefferies & Co. After this week's better-than-expected report on January retail sales, investors found Bernanke's assessment of the economy particularly disheartening.
"To have the Fed come in and talk about how things could be getting worse, not better, kind of takes the wind out of their sails," Hogan said.
According to preliminary calculations, the Dow Jones industrial average fell 175.26, or 1.40 percent, to 12,376.98.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 18.35, or 1.34 percent, to 1,348.86, and the Nasdaq composite index fell 41.39, or 1.74 percent, to 2,332.54.
Government bond prices dropped, pushing up the yield on the benchmark 10-year Treasury note, which moves opposite its price, to 3.84 from 3.73 percent late Wednesday.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Thursday February 14, 4:19 pm ET
By Madlen Read, AP Business Writer
Stocks Fall As Bernanke Predicts 'Sluggish' Economic Growth Before Late-Year Strengthening
NEW YORK (AP) -- Wall Street retreated Thursday after Federal Reserve Chairman Ben Bernanke predicted a "sluggish" economy until later in the year and more mortgage-related losses at banks. The Dow Jones industrial average fell 175 points.
Though the Fed chairman's comments suggested the central bank is still open to further interest rate reductions, the tone was, as expected, somber. Bernanke said the housing and credit crises have weighed on the economy and curbed hiring. If the job market deteriorates, consumer spending, which is crucial for economic growth, will keep dwindling.
The Labor Department said Thursday the number of workers filing unemployment claims fell 9,000 to 348,000 last week. But after the January jobs report that showed the first net jobs loss in more than four years, Wall Street remains worried that businesses are becoming cautious about hiring and that unemployment will compound the debt problems that have been slamming the markets and the greater economy.
After three strong days on Wall Street, investors found scant encouragement in Bernanke's testimony and cashed in their gains.
"He was more bearish on the economy than he was before," said Arthur Hogan, chief market analyst at Jefferies & Co. After this week's better-than-expected report on January retail sales, investors found Bernanke's assessment of the economy particularly disheartening.
"To have the Fed come in and talk about how things could be getting worse, not better, kind of takes the wind out of their sails," Hogan said.
According to preliminary calculations, the Dow Jones industrial average fell 175.26, or 1.40 percent, to 12,376.98.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 18.35, or 1.34 percent, to 1,348.86, and the Nasdaq composite index fell 41.39, or 1.74 percent, to 2,332.54.
Government bond prices dropped, pushing up the yield on the benchmark 10-year Treasury note, which moves opposite its price, to 3.84 from 3.73 percent late Wednesday.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Wednesday, February 13, 2008
Stocks End Higher on Upbeat Sales Data
AP
Wednesday February 13, 5:41 pm ET
By Joe Bel Bruno, AP Business Writer
Wall Street Extends Advance After Slight Increase in January Retail Sales Figures
NEW YORK (AP) -- Wall Street moved sharply higher Wednesday after the Commerce Department reported an unexpected increase in retail sales last month and eased some concerns about consumers' willingness to spend despite economic uncertainty. The Dow Jones industrials rose nearly 180 points.
The 0.3 percent rise in January retail sales, which followed a drop during December, alleviated some of the market's worries that consumers were retrenching because of rising fuel prices, a faltering real estate sector and a choppy stock market. Analysts had expected a 0.3 percent decline in January sales.
However, another report from the department showed that U.S. business inventories grew a little more than expected in December. The data could be a sign of an involuntary buildup of unsold goods on store shelves amid the economic slowdown.
The inventories report was not enough to offset optimism during the session. Stocks have mostly risen in recent days as investors tried to determine whether Wall Street has reached a bottom after months of declines related to the housing and credit crisis, or whether further sluggishness in the economy will send stocks lower.
"So far this week there has been a positive bias, but I think what you're seeing is people taking a very cautious approach," said Scott Fullman, director of investment strategy at I.A. Englander & Co. "There is no great rush to jump in, and the preservation of capital is more important than growth at this moment."
He also said investors were encouraged by the government's latest plan to help homeowners falling behind on mortgage payments. U.S. Treasury Secretary Henry Paulson said Wednesday he believes the economy will remain on a growth path, and pledged "aggressive action" to help troubled homeowners.
The Dow rose 178.83, or 1.45 percent, to 12,552.24. The blue chip index finished at its highs of the session.
Broader indexes also moved higher. The Standard & Poor's 500 index added 18.35, or 1.36 percent, to 1,367.21, and the Nasdaq composite rose 53.89, or 2.32 percent, to 2,373.93.
Bond prices dipped, with the yield on the benchmark 10-year Treasury note, which moves opposite its price, at 3.73 percent from 3.66 percent on Tuesday.
The dollar was mixed against other major currencies.
Light, sweet crude oil rose 49 cents to settle at $93.27 on the New York Mercantile Exchange. The International Energy Agency cut its oil demand forecasts for this year due to the weakening U.S. economy.
Analysts said the market will likely be choppy as investors react to economic data through the next several weeks. Most important will be any reports that provides clues about the slumping housing market.
Michael Strauss, chief economist at CommonFund, said he'll be listening Thursday to see if Federal Reserve Chairman Ben Bernanke makes any projections about the housing market. Bernanke is scheduled to provide testimony before a Senate committee on banking and housing at 10 a.m. EST.
"I think Bernanke will be grilled more on housing, and one of the things he'll focus on is that the housing sector has had a much bigger impact on the economy than the Fed anticipated it would have," Strauss said. "The question is whether he dangles a carrot, and maybe even praises Congress, about the fiscal stimulus package."
President Bush on Wednesday signed a multibillion-dollar economic rescue package that means $300 to $1,200 rebates for many American households.
In corporate news, Coca-Cola Co. said its fourth-quarter earnings jumped 79 percent amid a 24 percent increase in revenue. The world's biggest beverage producer cited growth in its key soft-drink brands as well as in its water, sports drink and orange juice businesses. But Coke fell 53 cents to $59.39.
Applied Materials, the largest maker of semiconductor equipment, led technology stocks higher after it reported a surge in orders for machines that make flat screens. Shares of the company rose $1.84, or 10.2 percent, to $19.91.
Deere & Co. said fiscal first-quarter profit increased 54 percent as the heavy equipment maker posted strong international sales. However, shares fell 94 cents to $85.54.
Waste Management Inc. rose 91 cents to $34.04 after reporting its fourth-quarter earnings increased 26 percent. The nation's largest garbage hauler got a bounce from tax benefits and the sale of some operations. However, fuel prices ate into profits.
Also, the state oil company of Venezuela said it has halted sales of crude to Exxon Mobil Corp. in response to the U.S. company's drive to use the courts to seize billions of dollars in Venezuelan assets. The oil company rose $1.11 cents to $85.49.
The Russell 2000 index of smaller companies rose 16.45, or 2.33 percent, to 721.93.
Advancing issues led decliners by a 2 to 1 margin on the New York Stock Exchange, where consolidated volume came to 3.64 billion shares, down from 3.92 billion shares on Tuesday.
Overseas, Japan's Nikkei stock average closed up 0.16 percent. Britain's FTSE 100 fell 0.51 percent, Germany's DAX index rose 0.08 percent, and France's CAC-40 rose 0.30 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Wednesday February 13, 5:41 pm ET
By Joe Bel Bruno, AP Business Writer
Wall Street Extends Advance After Slight Increase in January Retail Sales Figures
NEW YORK (AP) -- Wall Street moved sharply higher Wednesday after the Commerce Department reported an unexpected increase in retail sales last month and eased some concerns about consumers' willingness to spend despite economic uncertainty. The Dow Jones industrials rose nearly 180 points.
The 0.3 percent rise in January retail sales, which followed a drop during December, alleviated some of the market's worries that consumers were retrenching because of rising fuel prices, a faltering real estate sector and a choppy stock market. Analysts had expected a 0.3 percent decline in January sales.
However, another report from the department showed that U.S. business inventories grew a little more than expected in December. The data could be a sign of an involuntary buildup of unsold goods on store shelves amid the economic slowdown.
The inventories report was not enough to offset optimism during the session. Stocks have mostly risen in recent days as investors tried to determine whether Wall Street has reached a bottom after months of declines related to the housing and credit crisis, or whether further sluggishness in the economy will send stocks lower.
"So far this week there has been a positive bias, but I think what you're seeing is people taking a very cautious approach," said Scott Fullman, director of investment strategy at I.A. Englander & Co. "There is no great rush to jump in, and the preservation of capital is more important than growth at this moment."
He also said investors were encouraged by the government's latest plan to help homeowners falling behind on mortgage payments. U.S. Treasury Secretary Henry Paulson said Wednesday he believes the economy will remain on a growth path, and pledged "aggressive action" to help troubled homeowners.
The Dow rose 178.83, or 1.45 percent, to 12,552.24. The blue chip index finished at its highs of the session.
Broader indexes also moved higher. The Standard & Poor's 500 index added 18.35, or 1.36 percent, to 1,367.21, and the Nasdaq composite rose 53.89, or 2.32 percent, to 2,373.93.
Bond prices dipped, with the yield on the benchmark 10-year Treasury note, which moves opposite its price, at 3.73 percent from 3.66 percent on Tuesday.
The dollar was mixed against other major currencies.
Light, sweet crude oil rose 49 cents to settle at $93.27 on the New York Mercantile Exchange. The International Energy Agency cut its oil demand forecasts for this year due to the weakening U.S. economy.
Analysts said the market will likely be choppy as investors react to economic data through the next several weeks. Most important will be any reports that provides clues about the slumping housing market.
Michael Strauss, chief economist at CommonFund, said he'll be listening Thursday to see if Federal Reserve Chairman Ben Bernanke makes any projections about the housing market. Bernanke is scheduled to provide testimony before a Senate committee on banking and housing at 10 a.m. EST.
"I think Bernanke will be grilled more on housing, and one of the things he'll focus on is that the housing sector has had a much bigger impact on the economy than the Fed anticipated it would have," Strauss said. "The question is whether he dangles a carrot, and maybe even praises Congress, about the fiscal stimulus package."
President Bush on Wednesday signed a multibillion-dollar economic rescue package that means $300 to $1,200 rebates for many American households.
In corporate news, Coca-Cola Co. said its fourth-quarter earnings jumped 79 percent amid a 24 percent increase in revenue. The world's biggest beverage producer cited growth in its key soft-drink brands as well as in its water, sports drink and orange juice businesses. But Coke fell 53 cents to $59.39.
Applied Materials, the largest maker of semiconductor equipment, led technology stocks higher after it reported a surge in orders for machines that make flat screens. Shares of the company rose $1.84, or 10.2 percent, to $19.91.
Deere & Co. said fiscal first-quarter profit increased 54 percent as the heavy equipment maker posted strong international sales. However, shares fell 94 cents to $85.54.
Waste Management Inc. rose 91 cents to $34.04 after reporting its fourth-quarter earnings increased 26 percent. The nation's largest garbage hauler got a bounce from tax benefits and the sale of some operations. However, fuel prices ate into profits.
Also, the state oil company of Venezuela said it has halted sales of crude to Exxon Mobil Corp. in response to the U.S. company's drive to use the courts to seize billions of dollars in Venezuelan assets. The oil company rose $1.11 cents to $85.49.
The Russell 2000 index of smaller companies rose 16.45, or 2.33 percent, to 721.93.
Advancing issues led decliners by a 2 to 1 margin on the New York Stock Exchange, where consolidated volume came to 3.64 billion shares, down from 3.92 billion shares on Tuesday.
Overseas, Japan's Nikkei stock average closed up 0.16 percent. Britain's FTSE 100 fell 0.51 percent, Germany's DAX index rose 0.08 percent, and France's CAC-40 rose 0.30 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Stocks Higher on Upbeat Retail Sales
AP
Wednesday February 13, 10:24 am ET
By Joe Bel Bruno, AP Business Writer
Wall Street Opens Higher on Slight Increase in January Retail Sales Figures
NEW YORK (AP) -- Wall Street moved higher Wednesday after the Commerce Department reported an unexpected increase in retail sales last month and eased some concerns about consumers' willingness to spend despite economic uncertainty.
The 0.3 percent rise in January retail sales, which followed a drop during December, alleviated some of Wall Street's worries that consumers were retrenching because of rising fuel prices, a faltering real estate sector and a choppy stock market. Analysts had expected a 0.3 percent decline in January sales.
However, another report from the department showed that U.S. business inventories grew a little more than expected in December. The data was a sign of an involuntary buildup of unsold goods on store shelves amid the economic slowdown.
The report was not enough to offset optimism during the session. Stocks have mostly risen in recent sessions as investors tried to determine whether Wall Street has reached a bottom or whether further sluggishness in the economy will send stocks lower.
In midmorning trading, the Dow Jones industrial average rose 82.26, or 0.66 percent, to 12,455.67.
Broader indexes also moved higher. The Standard & Poor's 500 index added 7.39, or 0.55 percent, to 1,356.25; and the Nasdaq composite rose 25.68, or 1.11 percent, 2,345.72.
Bond prices fell following the retail sales report. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.69 percent from 3.67 percent late Tuesday. The dollar was mixed against other major currencies.
Light, sweet crude oil fell 43 cents to $92.35 per barrel on the New York Mercantile Exchange.
In corporate news, Coca-Cola Co. said its fourth-quarter earnings jumped 79 percent amid a 24 percent increase in revenue. The world's biggest beverage producer cited growth in its key soft-drink brands as well as in its water, sports drink and orange juice businesses. Coke fell 66 cents to $59.26.
Deere & Co. said fiscal first-quarter profit increased 54 percent amid strong international sales. However, shares fell $1.11 cents to $85.37.
Waste Management Inc. rose 49 cents to $33.64 after reporting its fourth-quarter earnings increased 26 percent. The nation's largest garbage hauler got a bounce from tax benefits and the sale of some operations. However, fuel prices ate into profits.
Also, the state oil company of Venezuela said it has halted sales of crude to Exxon Mobil Corp. in response to the U.S. company's drive to use the courts to seize billions of dollars in Venezuelan assets. The oil company rose 53 cents to $84.91.
The Russell 200 index of smaller companies rose 8.16, or 1.16 percent, to 713.64.
Advancing issues led decliners by a 2 to 1 margin on the New York Stock Exchange, where volume came to 199.4 million shares.
Overseas, Japan's Nikkei stock average closed up 0.16 percent. In afternoon trading, Britain's FTSE 100 fell 0.15 percent, Germany's DAX index rose 0.40 percent, and France's CAC-40 rose 0.76 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Wednesday February 13, 10:24 am ET
By Joe Bel Bruno, AP Business Writer
Wall Street Opens Higher on Slight Increase in January Retail Sales Figures
NEW YORK (AP) -- Wall Street moved higher Wednesday after the Commerce Department reported an unexpected increase in retail sales last month and eased some concerns about consumers' willingness to spend despite economic uncertainty.
The 0.3 percent rise in January retail sales, which followed a drop during December, alleviated some of Wall Street's worries that consumers were retrenching because of rising fuel prices, a faltering real estate sector and a choppy stock market. Analysts had expected a 0.3 percent decline in January sales.
However, another report from the department showed that U.S. business inventories grew a little more than expected in December. The data was a sign of an involuntary buildup of unsold goods on store shelves amid the economic slowdown.
The report was not enough to offset optimism during the session. Stocks have mostly risen in recent sessions as investors tried to determine whether Wall Street has reached a bottom or whether further sluggishness in the economy will send stocks lower.
In midmorning trading, the Dow Jones industrial average rose 82.26, or 0.66 percent, to 12,455.67.
Broader indexes also moved higher. The Standard & Poor's 500 index added 7.39, or 0.55 percent, to 1,356.25; and the Nasdaq composite rose 25.68, or 1.11 percent, 2,345.72.
Bond prices fell following the retail sales report. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.69 percent from 3.67 percent late Tuesday. The dollar was mixed against other major currencies.
Light, sweet crude oil fell 43 cents to $92.35 per barrel on the New York Mercantile Exchange.
In corporate news, Coca-Cola Co. said its fourth-quarter earnings jumped 79 percent amid a 24 percent increase in revenue. The world's biggest beverage producer cited growth in its key soft-drink brands as well as in its water, sports drink and orange juice businesses. Coke fell 66 cents to $59.26.
Deere & Co. said fiscal first-quarter profit increased 54 percent amid strong international sales. However, shares fell $1.11 cents to $85.37.
Waste Management Inc. rose 49 cents to $33.64 after reporting its fourth-quarter earnings increased 26 percent. The nation's largest garbage hauler got a bounce from tax benefits and the sale of some operations. However, fuel prices ate into profits.
Also, the state oil company of Venezuela said it has halted sales of crude to Exxon Mobil Corp. in response to the U.S. company's drive to use the courts to seize billions of dollars in Venezuelan assets. The oil company rose 53 cents to $84.91.
The Russell 200 index of smaller companies rose 8.16, or 1.16 percent, to 713.64.
Advancing issues led decliners by a 2 to 1 margin on the New York Stock Exchange, where volume came to 199.4 million shares.
Overseas, Japan's Nikkei stock average closed up 0.16 percent. In afternoon trading, Britain's FTSE 100 fell 0.15 percent, Germany's DAX index rose 0.40 percent, and France's CAC-40 rose 0.76 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Tuesday, February 12, 2008
Wall Street Rallies on Buffett News
AP
Tuesday February 12, 5:42 pm ET
By Tim Paradis, AP Business Writer
Stocks Rise After Buffett Offer of Aid to Bond Insurers Eases Some Credit Concerns
NEW YORK (AP) -- Wall Street finished mostly higher Tuesday after billionaire investor Warren Buffett offered to help out troubled bond insurers, easing some of the market's concerns about further deterioration in the credit markets. The Dow Jones industrials rose more than 130 points.
In an interview on CNBC, Buffett said his Berkshire Hathaway Inc. holding company has offered a second level of insurance on up to $800 billion in municipal bonds. The reinsurance offer is for bond insurers Ambac Financial Group Inc., MBIA Inc. and Financial Guaranty Insurance Co., known as FGIC.
Word of the offer gave some investors relief although Buffett said a deal would only back municipal bonds, and not the risky and complicated financial instruments that many see as more likely to have problems. Still, further assurances on the soundness of municipal bonds could help shore up Wall Street's confidence and reinforce the differences in quality among various levels of debt.
Russell Croft, portfolio manager at Croft Leominster Investment Management in Baltimore, said Buffett's move gives the market a bit of needed confidence.
"It's a good thing to see," he said. He also agreed with Buffett's assessment that stocks are mostly fairly valued. "We could definitely test some more lows going forward but there was a pretty good drop-off there again and I think people are trying to take advantage of it to get some quality stocks at cheaper prices."
The Dow rose 133.40, or 1.09 percent, to 12,373.41. The blue chip index was up more than 200 points earlier in the session. The Standard & Poor's 500 index advanced 9.73, or 0.73 percent, to 1,348.86.
However, the Nasdaq composite index edged down 0.02, or less than 0.01 percent, to 2,320.04.
Tech stocks fell in the last hour of trading amid uncertainty about Microsoft Corp.'s bid to acquire Yahoo Inc. -- an overture that could eventually go hostile. In addition, Research In Motion Ltd. fell after its Blackberry e-mail system had an outage.
Bond prices fell Tuesday after Buffett's announcement. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.67 percent from 3.63 percent late Monday.
The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude fell 81 cents to settle at $92.78 a barrel on the New York Mercantile Exchange.
Buffett's overture to the big bond insurers reassured investors. Buffett said one firm rejected his offer and he is still waiting to hear from the other two.
Bond insurers write policies that promise to cover payments to bondholders if the entity that issued the bonds defaults. Reinsurance provides a second level of insurance on those bonds.
But some analysts were cautious.
Investors should be careful not to read too much into the market's advance, said Len Blum, managing director of Westwood Capital. He noted that recent readings on U.S. retail spending show that Americans are hurting financially.
"Stock markets will have good days in bear markets," he said, adding that he believes more problems will be uncovered in the financial sector. "We haven't seen all the losses. Even if you have some investors willing to bottom fish, or very sophisticated investors like Warren Buffet willing to invest at this point, the financial sector is still really sick."
Investors also appeared pleased Tuesday by a government plan called Project Lifeline involving the six largest mortgage lenders to help at-risk borrowers with all types of mortgages retain their homes.
And adding to investors' upbeat mood, Credit Suisse Group sharply reduced its estimate of how much exposure it has to subprime mortgage debt. Switzerland's second largest bank said its debt tied to subprime mortgages, those given to borrowers with poor credit, fell to 1.6 billion francs ($1.45 billion) from 3.9 billion francs at the end of September. Its fourth-quarter net profit fell 72 percent because of write-downs. The company's U.S.-traded shares rose $1.11 to $51.94.
General Motors Corp. fell 52 cents to $26.60 after announcing a fresh round of buyouts to all 74,000 of its U.S. hourly workers represented by the United Auto Workers. The company also reported losses of $38.7 billion in 2007, the largest annual loss for an automotive company.
Yahoo fell 30 cents to $29.57 after the search engine's board rejected Microsoft's $44.6 billion bid. That raised speculation that Microsoft -- whose shares rose 13 cents to $28.34 -- might take its offer directly to shareholders.
Meanwhile, Research In Motion shares fell $2.97, or 3.1 percent, to $91.50 after the company acknowledged that its network service was widely disrupted Monday.
Advancing issues outnumbered decliners by 3 to 2 on the New York Stock Exchange, where consolidated volume came to 3.92 billion shares from 3.51 billion.
The Russell 2000 index of smaller companies rose 5.73, or 0.82 percent, to 705.48.
Overseas, Japan's Nikkei stock average inched up 0.04 percent and Hong Kong's Hang Seng index advanced 1.35 percent. Britain's FTSE 100 rose 3.54 percent and Germany's DAX index rose 3.33 percent. France's CAC-40 closed up 3.37 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Tuesday February 12, 5:42 pm ET
By Tim Paradis, AP Business Writer
Stocks Rise After Buffett Offer of Aid to Bond Insurers Eases Some Credit Concerns
NEW YORK (AP) -- Wall Street finished mostly higher Tuesday after billionaire investor Warren Buffett offered to help out troubled bond insurers, easing some of the market's concerns about further deterioration in the credit markets. The Dow Jones industrials rose more than 130 points.
In an interview on CNBC, Buffett said his Berkshire Hathaway Inc. holding company has offered a second level of insurance on up to $800 billion in municipal bonds. The reinsurance offer is for bond insurers Ambac Financial Group Inc., MBIA Inc. and Financial Guaranty Insurance Co., known as FGIC.
Word of the offer gave some investors relief although Buffett said a deal would only back municipal bonds, and not the risky and complicated financial instruments that many see as more likely to have problems. Still, further assurances on the soundness of municipal bonds could help shore up Wall Street's confidence and reinforce the differences in quality among various levels of debt.
Russell Croft, portfolio manager at Croft Leominster Investment Management in Baltimore, said Buffett's move gives the market a bit of needed confidence.
"It's a good thing to see," he said. He also agreed with Buffett's assessment that stocks are mostly fairly valued. "We could definitely test some more lows going forward but there was a pretty good drop-off there again and I think people are trying to take advantage of it to get some quality stocks at cheaper prices."
The Dow rose 133.40, or 1.09 percent, to 12,373.41. The blue chip index was up more than 200 points earlier in the session. The Standard & Poor's 500 index advanced 9.73, or 0.73 percent, to 1,348.86.
However, the Nasdaq composite index edged down 0.02, or less than 0.01 percent, to 2,320.04.
Tech stocks fell in the last hour of trading amid uncertainty about Microsoft Corp.'s bid to acquire Yahoo Inc. -- an overture that could eventually go hostile. In addition, Research In Motion Ltd. fell after its Blackberry e-mail system had an outage.
Bond prices fell Tuesday after Buffett's announcement. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.67 percent from 3.63 percent late Monday.
The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude fell 81 cents to settle at $92.78 a barrel on the New York Mercantile Exchange.
Buffett's overture to the big bond insurers reassured investors. Buffett said one firm rejected his offer and he is still waiting to hear from the other two.
Bond insurers write policies that promise to cover payments to bondholders if the entity that issued the bonds defaults. Reinsurance provides a second level of insurance on those bonds.
But some analysts were cautious.
Investors should be careful not to read too much into the market's advance, said Len Blum, managing director of Westwood Capital. He noted that recent readings on U.S. retail spending show that Americans are hurting financially.
"Stock markets will have good days in bear markets," he said, adding that he believes more problems will be uncovered in the financial sector. "We haven't seen all the losses. Even if you have some investors willing to bottom fish, or very sophisticated investors like Warren Buffet willing to invest at this point, the financial sector is still really sick."
Investors also appeared pleased Tuesday by a government plan called Project Lifeline involving the six largest mortgage lenders to help at-risk borrowers with all types of mortgages retain their homes.
And adding to investors' upbeat mood, Credit Suisse Group sharply reduced its estimate of how much exposure it has to subprime mortgage debt. Switzerland's second largest bank said its debt tied to subprime mortgages, those given to borrowers with poor credit, fell to 1.6 billion francs ($1.45 billion) from 3.9 billion francs at the end of September. Its fourth-quarter net profit fell 72 percent because of write-downs. The company's U.S.-traded shares rose $1.11 to $51.94.
General Motors Corp. fell 52 cents to $26.60 after announcing a fresh round of buyouts to all 74,000 of its U.S. hourly workers represented by the United Auto Workers. The company also reported losses of $38.7 billion in 2007, the largest annual loss for an automotive company.
Yahoo fell 30 cents to $29.57 after the search engine's board rejected Microsoft's $44.6 billion bid. That raised speculation that Microsoft -- whose shares rose 13 cents to $28.34 -- might take its offer directly to shareholders.
Meanwhile, Research In Motion shares fell $2.97, or 3.1 percent, to $91.50 after the company acknowledged that its network service was widely disrupted Monday.
Advancing issues outnumbered decliners by 3 to 2 on the New York Stock Exchange, where consolidated volume came to 3.92 billion shares from 3.51 billion.
The Russell 2000 index of smaller companies rose 5.73, or 0.82 percent, to 705.48.
Overseas, Japan's Nikkei stock average inched up 0.04 percent and Hong Kong's Hang Seng index advanced 1.35 percent. Britain's FTSE 100 rose 3.54 percent and Germany's DAX index rose 3.33 percent. France's CAC-40 closed up 3.37 percent.
New York Stock Exchange: http://www.nyse.com
Nasdaq Stock Market: http://www.nasdaq.com
Warren Buffet Biography
By Joshua Kennon,
The Story of Berkshire Hathaway's Billionaire Chairman:
Warren Edward Buffett was born on August 30, 1930 to his father Howard, a stockbroker-turned-Congressman. The only boy, he was the second of three children, and displayed an amazing aptitude for both money and business at a very early age. Acquaintances recount his uncanny ability to calculate columns of numbers off the top of his head - a feat Warren still amazes business colleagues with today.
At only six years old, Buffett purchased 6-packs of Coca Cola from his grandfather's grocery store for twenty five cents and resold each of the bottles for a nickel, pocketing a five cent profit. While other children his age were playing hopscotch and jacks, Warren was making money. Five years later, Buffett took his step into the world of high finance.
At eleven years old, he purchased three shares of Cities Service Preferred at $38 per share for both himself and his older sister, Doris. Shortly after buying the stock, it fell to just over $27 per share. A frightened but resilient Warren held his shares until they rebounded to $40. He promptly sold them - a mistake he would soon come to regret. Cities Service shot up to $200. The experience taught him one of the basic lessons of investing: patience is a virtue.
Warren Buffett's Education
In 1947, a seventeen year old Warren Buffett graduated from High School. It was never his intention to go to college; he had already made $5,000 delivering newspapers (this is equal to $42,610.81 in 2000). His father had other plans, and urged his son to attend the Wharton Business School at the University of Pennsylvania. Buffett stayed two years, complaining that he knew more than his professors. When Howard was defeated in the 1948 Congressional race, Warren returned home to Omaha and transferred to the University of Nebraska-Lincoln. Working full-time, he managed to graduate in only three years.
Warren Buffett approached graduate studies with the same resistance he displayed a few years earlier. He was finally persuaded to apply to Harvard Business School, which, in the worst admission decision in history, rejected him as "too young". Slighted, Warren applied to Columbia where famed investors Ben Graham and David Dodd taught - an experience that would forever change his life.
Ben Graham - Buffett's Mentor
Ben Graham had become well known during the 1920's. At a time when the rest of the world was approaching the investment arena as a giant game of roulette, he searched for stocks that were so inexpensive they were almost completely devoid of risk. One of his best known calls was the Northern Pipe Line, an oil transportation company managed by the Rockefellers. The stock was trading at $65 a share, but after studying the balance sheet, Graham realized that the company had bond holdings worth $95 for every share. The value investor tried to convince management to sell the portfolio, but they refused. Shortly thereafter, he waged a proxy war and secured a spot on the Board of Directors. The company sold its bonds and paid a dividend in the amount of $70 per share.
When he was 40 years old, Ben Graham published Security Analysis, one of the greatest works ever penned on the stock market. At the time, it was risky; investing in equities had become a joke (the Dow Jones had fallen from 381.17 to 41.22 over the course of three to four short years following the crash of 1929). It was around this time that Graham came up with the principle of "intrinsic" business value - a measure of a business's true worth that was completely and totally independent of the stock price. Using intrinsic value, investors could decide what a company was worth and make investment decisions accordingly. His subsequent book, The Intelligent Investor, which Warren celebrates as "the greatest book on investing ever written", introduced the world to Mr. Market - the best investment analogy in history.
Through his simple yet profound investment principles, Ben Graham became an idyllic figure to the twenty-one year old Warren Buffett. Reading an old edition of Who's Who, Warren discovered his mentor was the Chairman of a small, unknown insurance company named GEICO. He hopped a train to Washington D.C. one Saturday morning to find the headquarters. When he got there, the doors were locked. Not to be stopped, Buffett relentlessly pounded on the door until a janitor came to open it for him. He asked if there was anyone in the building. As luck (or fate) would have it, there was. It turns out that there was a man still working on the sixth floor. Warren was escorted up to meet him and immediately began asking him questions about the company and its business practices; a conversation that stretched on for four hours. The man was none other than Lorimer Davidson, the Financial Vice President. The experience would be something that stayed with Buffett for the rest of his life. He eventually acquired the entire GEICO company through his corporation, Berkshire Hathaway.
The Story of Berkshire Hathaway's Billionaire Chairman:
Warren Edward Buffett was born on August 30, 1930 to his father Howard, a stockbroker-turned-Congressman. The only boy, he was the second of three children, and displayed an amazing aptitude for both money and business at a very early age. Acquaintances recount his uncanny ability to calculate columns of numbers off the top of his head - a feat Warren still amazes business colleagues with today.
At only six years old, Buffett purchased 6-packs of Coca Cola from his grandfather's grocery store for twenty five cents and resold each of the bottles for a nickel, pocketing a five cent profit. While other children his age were playing hopscotch and jacks, Warren was making money. Five years later, Buffett took his step into the world of high finance.
At eleven years old, he purchased three shares of Cities Service Preferred at $38 per share for both himself and his older sister, Doris. Shortly after buying the stock, it fell to just over $27 per share. A frightened but resilient Warren held his shares until they rebounded to $40. He promptly sold them - a mistake he would soon come to regret. Cities Service shot up to $200. The experience taught him one of the basic lessons of investing: patience is a virtue.
Warren Buffett's Education
In 1947, a seventeen year old Warren Buffett graduated from High School. It was never his intention to go to college; he had already made $5,000 delivering newspapers (this is equal to $42,610.81 in 2000). His father had other plans, and urged his son to attend the Wharton Business School at the University of Pennsylvania. Buffett stayed two years, complaining that he knew more than his professors. When Howard was defeated in the 1948 Congressional race, Warren returned home to Omaha and transferred to the University of Nebraska-Lincoln. Working full-time, he managed to graduate in only three years.
Warren Buffett approached graduate studies with the same resistance he displayed a few years earlier. He was finally persuaded to apply to Harvard Business School, which, in the worst admission decision in history, rejected him as "too young". Slighted, Warren applied to Columbia where famed investors Ben Graham and David Dodd taught - an experience that would forever change his life.
Ben Graham - Buffett's Mentor
Ben Graham had become well known during the 1920's. At a time when the rest of the world was approaching the investment arena as a giant game of roulette, he searched for stocks that were so inexpensive they were almost completely devoid of risk. One of his best known calls was the Northern Pipe Line, an oil transportation company managed by the Rockefellers. The stock was trading at $65 a share, but after studying the balance sheet, Graham realized that the company had bond holdings worth $95 for every share. The value investor tried to convince management to sell the portfolio, but they refused. Shortly thereafter, he waged a proxy war and secured a spot on the Board of Directors. The company sold its bonds and paid a dividend in the amount of $70 per share.
When he was 40 years old, Ben Graham published Security Analysis, one of the greatest works ever penned on the stock market. At the time, it was risky; investing in equities had become a joke (the Dow Jones had fallen from 381.17 to 41.22 over the course of three to four short years following the crash of 1929). It was around this time that Graham came up with the principle of "intrinsic" business value - a measure of a business's true worth that was completely and totally independent of the stock price. Using intrinsic value, investors could decide what a company was worth and make investment decisions accordingly. His subsequent book, The Intelligent Investor, which Warren celebrates as "the greatest book on investing ever written", introduced the world to Mr. Market - the best investment analogy in history.
Through his simple yet profound investment principles, Ben Graham became an idyllic figure to the twenty-one year old Warren Buffett. Reading an old edition of Who's Who, Warren discovered his mentor was the Chairman of a small, unknown insurance company named GEICO. He hopped a train to Washington D.C. one Saturday morning to find the headquarters. When he got there, the doors were locked. Not to be stopped, Buffett relentlessly pounded on the door until a janitor came to open it for him. He asked if there was anyone in the building. As luck (or fate) would have it, there was. It turns out that there was a man still working on the sixth floor. Warren was escorted up to meet him and immediately began asking him questions about the company and its business practices; a conversation that stretched on for four hours. The man was none other than Lorimer Davidson, the Financial Vice President. The experience would be something that stayed with Buffett for the rest of his life. He eventually acquired the entire GEICO company through his corporation, Berkshire Hathaway.
Top 5 ETF Picks for 2008
The top 5 ETF picks to out perform the competition for 2008 are:
1. EWZ: iShares MSCI Brazil Index
2. ILF: iShares S&P Latin America 40 Index
3. PGJ: PowerShares Gldn Dragon Halter USX China
4. FXP: UltraShort FTSE/Xinhua China 25 Proshare
5. EWG: iShares MSCI Germany Index
1. EWZ: iShares MSCI Brazil Index
2. ILF: iShares S&P Latin America 40 Index
3. PGJ: PowerShares Gldn Dragon Halter USX China
4. FXP: UltraShort FTSE/Xinhua China 25 Proshare
5. EWG: iShares MSCI Germany Index
Warren Buffett to the rescue?
The genius investor behind Berkshire Hathaway (BRK.A, news, msgs) told CNBC this morning that his company last week offered to help three troubled bond insurers -- Ambac Financial (ABK, news, msgs), MBIA (MBI, news, msgs) and Financial Guaranty Insurance, which is partly owned by Blackstone Group (BX, news, msgs) -- by reinsuring $800 billion worth of municipal bonds the companies cover in exchange for a payment of 1.5 times the premium they receive.
Stocks rallied by midday, as worries about the credit markets were calmed somewhat by Buffett's offer. At 1 p.m. ET, the Dow Jones Industrial Average was up 193 points, or 1.6%, to 12,433. The Nasdaq Composite Index had added 22 points, or 0.9%, to 2,342, and the Standard & Poor's 500 Index was up 18 points, or 1.3%, at 1,357.
"It's another potential solution to some of the credit problems," Security Global Investors money manager Mark Bronzo said to Bloomberg News. "That's why the markets are responding well."
Buffett said that one company has turned down his offer and that he has not yet heard from the other two.
The offer was only extended to municipal bonds, which are issued by cities, states or other local governments, as well as any governmental agencies.
With the recent turmoil in the mortgage and credit markets, the ratings of many bonds that these companies insure have been downgraded, putting the companies' AAA ratings at risk. And if the companies lose their AAA ratings, there are a number of institutions that will have to sell the bonds, increasing supply and causing a market disruption, Buffett said.
Shares of Ambac added 2 cents to $10.50 this morning; MBIA shares fell 58 cents, or 4.3%, to $13.00.
How ETFs work?
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Money Market Funds: Stash Your Cash
Money market funds are mutual funds. However, they don't invest in stocks -- they invest in U.S. Treasury bills (notes and bonds with less than 13 months until maturity), top-rated commercial paper, bank notes, and other high-quality, short-term debt instruments. (They shouldn't to be confused with money market accounts, or money market deposit accounts, which are FDIC-insured but pay much lower rates on average).
Money market funds attempt to maintain a stable $1.00 per share NAV (net asset value), so their risk exposure is non-existent when compared with stock and bond funds. Money market funds are not insured or guaranteed by the government (or anyone else), but the Securities and Exchange Commission heavily regulates them; they have a number of restrictions on the quality, maturity and diversity of the securities they may invest in.
Though it certainly is a possibility, no retail investor has ever lost money in a money market fund. There has been just one case of a money market fund "breaking-the-buck," or dropping below its $1.00 share price. In 1994 an institutional money fund, Community Bankers U.S. Government Money Market Fund, liquidated at 94 cents a share due to extensive derivatives-related holdings.
While nothing is risk-free, money market funds have had a far better track record than banks in their 25 year history. The savings and loan bailout alone cost taxpayers billions, while the losses from money fund "bailouts" (where the adviser purchased troubled securities in order to prevent a fund from "breaking-the-buck," or deviating from the $1.00 per share NAV) to advisers, not to shareholders, can be counted in the millions. Remember, even with money market funds, return equals risk (a corollary of "there's no free lunch").
Mutual Funds Basics
Once you've decided to invest in the stock market, mutual funds are an easy way to own stocks without worrying about choosing individual stocks. As an added bonus, you can find plenty of information on the Internet to help you learn about, study, select, and purchase them.
But what is a mutual fund? It's not complicated. A dictionary definition of a mutual fund might go something like this: a single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors.
The investment company is responsible for the management of the fund, and it sells shares in the fund to individual investors. When you invest in a mutual fund, you become a part owner of a large investment portfolio, along with all the other shareholders of the fund. When you purchase shares, the fund manager invests your funds, along with the money contributed by the other shareholders.
Every day, the fund manager counts up the value of all the fund's holdings, figures out how many shares have been purchased by shareholders, and then calculates the Net Asset Value (NAV) of the mutual fund, the price of a single share of the fund on that day. If you want to buy shares, you just send the manager your money, and they will issue new shares for you at the most recent price. This routine is repeated every day on a never-ending basis, which is why mutual funds are sometimes known as "open-end funds."
If the fund manager is doing a good job, the NAV of the fund will usually get bigger -- your shares will be worth more.
But exactly how does a mutual fund's NAV increase? There are a couple of ways that a mutual fund can make money in its portfolio. (They're the same ways that your own portfolio of stocks, bonds, and cash can make money).
- A mutual fund can receive dividends from the stocks that it owns. Dividends are shares of corporate profits paid to the stockholders of public companies. The fund might have money in the bank that earns interest, or it might receive interest payments from bonds that it owns. These are all sources of income for the fund. Mutual funds are required to hand out (or "distribute") this income to shareholders. Usually they do this twice a year, in a move that's called an income distribution.
- At the end of the year, a fund makes another kind of distribution, this time from the profits they might make by selling stocks or bonds that have gone up in price. These profits are known as capital gains, and the act of passing them out is called a capital gains distribution.
Everyone hates to have losses, and funds are no different. The good news is that these losses are subtracted from the fund's capital gains before the money is distributed to shareholders. If losses exceed gains, a fund manager can even pile up these losses and use them to offset future gains in the portfolio. That means that the fund won't pass out capital gains to shareholders until the fund had at least earned more in profits than it had lost. (Although you might want to reconsider your decision to remain invested in a fund that's losing money if the rest of the market is growing).
What is a Stock, Anyway?
STOCK IS OWNERSHIP, simple as that.
Buy a share of Microsoft and you acquire a tiny sliver of the software giant, tying your fate to that of Chairman Bill Gates, for better or worse. This is ownership in the most literal sense: You get a piece of every desk, contract and trademark in the place. Better yet, you own a slice of every dollar of profit that comes through the door. The more shares you buy, the bigger your stake becomes.
OK, So How Is a Stock Valued?
The stock market itself is basically a daily referendum on the value of the companies that trade there. All those guys screaming at each other? Their job is to take in the day's news and distill it down to a single question: Will it help the companies I own make money in the future, or will it prevent them from doing so? If Microsoft loses a court battle to the Justice Department, look for its shares to fall. But if strong economic numbers come out promising better PC sales, traders will buy with a vengeance.
Earnings (a.k.a. profits) are the supreme measure of value as far as the market is concerned. Wall Street is obsessed with them. Companies report their profits four times a year and investors pore over these numbers -- expressed as earnings per share -- trying to gauge a company's present health and future potential.
The market rewards both fast earnings growth and stable earnings growth. Stock traders will even pay up for a money-losing company that promises to earn a lot in the future (witness 1998's explosion in Internet stocks). Things the market will not tolerate are declining earnings or unexplained losses. Companies that surprise Wall Street with bad quarterly reports almost always get punished.
What About Risk?
While history shows that stocks will rise given the fullness of time, there are no guarantees -- especially when it comes to individual stocks. Unlike a bond, which promises a payout at the end of a specified period plus interest along the way, the only assured return from a stock is if it appreciates on the open market. (While many companies pay shareholders dividends out of their earnings, they are under no obligation to do so.) The worst-case scenario is that a company goes bankrupt and the value of your investment evaporates altogether. Happily, that's rare. More often, a company will run into short-term problems that depress the price of its stock for what seems an agonizingly long period of time.
For all the risk, however, there are ways to manage your exposure. The best is to diversify by owning a variety of stocks. That way, no single company can harm you. (Check out our Risk vs. Reward section for more on diversification strategies.) It's also important to remember that investors are well compensated for rolling the dice with equities. Historically, the long-term return from stocks is about 11% annually, while bonds -- which are less risky -- return just 5.2%. Over time, that spread can make a huge difference in the earning power of your savings (see The Power of Compounding).
One final note: Along with ownership, a share of stock gives you the right to vote on management issues. Company executives work at the behest of shareholders, who are represented by an elected board of directors. By law, the goal of management is to increase the value of the corporation's equity. To the extent this doesn't happen, shareholders can vote to have management removed.
That's the way it is supposed to work, anyway. As we noted above, one of the grim realities of the stock market is that individual investors rarely amass enough stock to be able to exert any tangible influence over a company -- that's left to big institutional shareholders or groups of company insiders. Consequently, it behooves you to carefully research management's competence before you buy a stock. And the best measure of that may be the company's ability to consistently deliver earnings over time.
CDs: Low Risk, Low Return
THE BASIC PREMISE behind a certificate of deposit is simple enough: You lend a bank your money (as little as $100, but often $1,000 or more) for a specific amount of time (up to five years). In return, you receive a set amount of annual interest on the loan and when the CD contract reaches maturity (when it ends), you get your money back.
How much interest you earn is the key. And that depends on a number of factors -- which bank you use, the prevailing interest rate environment, how much money you invest and how long you lock it up for. Your local bank most certainly sells CDs, but its rates may or may not be competitive.
When buying a CD, there are two terms you need to keep straight: annual percentage yield (APY) and annual percentage rate (APR). The yield is the total amount of interest you will earn in one year. It's expressed as a percentage of what you invest and takes into account the way the bank compounds interest. The rate is simply the interest rate you will earn for that year.
Confused? An example should help. If, say, you earned 1% per month, the APR would simply be 12%. But the APY would be 12.68%. That's because the APY takes into account the compounding effect on the interest you earned earlier in the year.
Pros
For conservative investors, the best thing about CDs is that your money is safe. When you purchase one through a bank, your total assets there are FDIC insured for up to $100,000. (If you're going to invest more than that, you should purchase at least two CDs.) At a brokerage house, a single CD may be insured for up to $500,000 through the Securities Investor Protection Corporation (SIPC), or even more through the broker's private insurance.
The other advantage is that you know what's coming to you. You aren't at the mercy of the market, so you can plan accordingly. And you're still earning a whole lot more than if you let that money rot away in a savings account earning a paltry 2%.
Cons
There are two big problems with CDs: They have tiny returns and they can lock up your money for the long haul. If you buy a five-year CD in 2001, for example, you can't get the money out any earlier than 2006 without paying a steep penalty. Even on a one-year CD, you might be penalized three months worth of interest. That's why a money-market fund is usually a better alternative. The rate may be slightly lower, but you can withdraw your money whenever you see fit.
Granted, a money market fund is not considered as secure as a CD, but the difference is minimal. According to Peter Crane, managing editor of the IBC Money Fund Report, no money-market fund has "broken the buck" (returned less than the original contribution) in the last 15 years.
But even money funds don't get around the paltry returns issue. While you can reasonably expect a 10% annual return from an stock mutual fund, you're going to earn about half that from a typical CD or money-market fund. Consequently, neither investment should be used for anything other than to park money for a short period of time. If, say, your daughter is heading off to college within a year and you want a risk-free way to keep earning interest on the money you've saved, a CD makes sense. But if she's three years old and you're just starting her college fund, then you need to be much more aggressive.
Feds Announce Plan to Delay Foreclosures
AP
Feds Announce Plan to Delay Foreclosures
Tuesday February 12, 12:44 pm ET
Dubbed "Project Lifeline," the new program will be available to people who have taken out all types of mortgages, not just the high-cost subprime loans that have been the focus on previous relief efforts.
These lenders say they will contact homeowners who are 90 or more days overdue on their monthly mortgage payments. They will be given the opportunity to put the foreclosure process on pause for 30 days while the lenders try to work out a way to make the mortgage more affordable to the homeowner.
"Project Lifeline is a valuable response, literally a lifeline, for people on the brink of the final steps in foreclosure," Housing and Urban Development Secretary Alphonso Jackson, said at a joint news conference with Treasury Secretary Henry Paulson.
He said the goal was to provide a temporary pause in the foreclosure process "long enough to find a way out" by allowing homeowners and lenders to negotiate a more affordable mortgage.
Paulson said that the new effort was just one of a number of approaches the administration was pursuing with the mortgage industry to deal with the country's worst housing slump in more than two decades.
In December, President Bush announced a deal brokered with the mortgage industry that will freeze certain subprime loans, those offered to borrowers with weak credit histories, for five years if the borrowers are unable to afford the higher monthly payments as those mortgages reset after being at lower introductory rates.
"As our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures," Paulson said. "However, none of these efforts are a silver bullet that will undo the excesses of the past years, nor are they designed to bail out real estate speculators or those who committed fraud during the mortgage process."
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