Ray Dalio - Radical Truths of the Financial Universe

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You've spoken about individuals who shape the world we live in and the particular qualities they share. What is the process these people, "the shapers," go through that perhaps the rest of us do not?

Ray Dalio: I think for everybody, in order to be successful, there are five steps that you go through essentially. But everybody has their goals. What is their goal and passion? So you have goals. And then what happens is you're going after your goals and you encounter your problems. So encountering problems, and then the big difference between people is how they approach those problems. People who get bummed out by the problems don't learn from it. Who learns from them? So those who recognized the problems are excited that they get into those problems or mistakes. Mistakes are learning experiences. The pain that comes for that mistake, every time you have pain it's an indication that something is at odds. So the people who have the pain are the people then who will go into that and realize that if they solve that pain, solve that problem, understand what that is representative of -- not just the one problem -- but that problem is a certain type of problem that will happen over and over and over again in your life, and if you can solve, "How do I deal with that kind of problem?" The third thing that everybody needs to do is, if they have problems on the way to their goals, that they diagnose those problems and they get to the root cause -- the real root cause. The real root is often -- is typically -- what people are like. Can you go to what you're like? Can you go to your mistakes? Can you go to your weaknesses? Right. Can you go to other people's mistakes and weakness? Some people, because of ego barrier, can't do that, so if they don't recognize their own mistakes, their own weaknesses, or other's mistakes and weaknesses -- what the root ca! use may be and what they're like because of ego barriers -- if they can't go there, they're going to repeat those mistakes. They're going to have them over and over again. So it's the process essentially of saying, at that stage, "What am I like?" Everybody has strengths and everybody has weaknesses. The weaknesses are the other side of the strengths. So let's say if you're a right brain/creative person, you may not be reliable. Because just the way you think necessitates you to think a certain way, that means you can't think in another way. That means you're going to keep bumping into that thing that's standing in your way. But unless you can embrace, "I'm not reliable," right, and deal with it, you won't get around it. It's still going to continue to be a barrier. Right. So the diagnosis to the root cause is important. So then if you diagnose, then you have to design what you are going to do about it that works. So let's say you are very creative but not reliable. Okay, you have to find the means of first of all embracing that, and then saying, "If I'm not reliable, what do I? Do I work with a reliable person? Do I learn reliability? Do I have some compensating mechanism?" Because I can't let that lack of reliability stand in the way of my goal. As long as I keep doing that I'm going to keep running into problems.

So you have to design what you do about the problems. And then when you're designing what to do about the problems, you have to follow it through. You have to follow through, or do the thing you design. Doing the thing you design requires self-discipline and so on. People have to do those things in order to be successful. Right. They have to know what their goals are. They have to diagnose their problems down to the root cause, the real root cause. They have to design ways to get around them, and then they have to have the self-discipline to follow that. It's a continuous iterative process. So that's what we keep doing. I would say that all of the shapers are doing that. So they don't ! mind the ! problems. That's their adventure. A wonderful book is Einstein's Mistakes. You hear his struggles. He wouldn't have been cutting-edge, he wouldn't have been inventive if he didn't go through that. So when you're looking at the personality characteristics, the personality characteristics lend themselves to doing that five-step process well.

In his book The Outliers, Malcolm Gladwell says it takes something like 10,000 hours of working at something to become remarkable, to become extraordinary. I think you're also describing a person who is very driven, who has great tenacity and doesn't let things get in the way of the goal.

Ray Dalio: Yes, of course. It's an element, but... It's the mixture of the elements that matter. You could have a tremendous tenacity, but you're studying, you're learning, you're trying to memorize and remember everything that you're being taught and you're really trying hard. You could have great tenacity. You need the making sense of something, you need to embrace reality. You need these other dimensions. Right. So I think the things that we started to talk about just before, the things that these people have a need for is: First, they need to -- most fundamentally - make sense of things, which is a very different kind of learning process. It's a very internalized learning process. It's not a memory-based process. So none of these people -- unlike the population as a whole -- none of these people have a desire to follow instructions.

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Bernanke Signals Flexibility on Tapering

Federal Reserve Board Chairman Ben Bernanke told lawmakers Wednesday that if the economy fails to satisfy the Fed’s expectations, its plans to taper bond buying could change and the Fed could even “potentially increase purchases for a time.”

The economy continues to recover at a “moderate pace,” with housing having contributed “significantly” to recent gains, but the unemployment rate is only seeing “moderate” improvement — standing at 7.6% in June, Bernanke said in the Fed's semiannual monetary report to members of the House Financial Services Committee.

Bernanke signaled to the committee that the Fed would adjust its bond-buying program — better known as quantitative easing — depending on how the economy performs. “Our intention is to keep monetary policy accommodative,” he said.

“We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low — our second tool — to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels,” Bernanke told lawmakers.

After Bernanke delivered his report, 10-year Treasury yields fell to 2.49% from 2.63%. The Dow Jones industrial average rose 0.1% in afternoon trading, while the Standard & Poor's 500 index and Nasdaq rose 0.3% and 0.2% respectively.

In late June, Bernanke said that the Fed would likely curtail its stimulus bond buying later this year, which sent the markets into a tailspin and spooked investors.

As Bernanke stated in his prepared testimony, “if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly.” However, “on the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2%, or if financial conditions — which have tightened recently — were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer.”

Jim O’Sullivan, chief U.S. economist at High Frequency Economics, noted in reaction to Bernanke’s testimony, that in starting to scale down the purchasing program, “the data will matter,” as Bernanke said the Fed is not “on a preset course.” O’Sullivan said that Bernanke was “emphasizing the no-imminent-tightening point a bit more” than he has before.

The lengthy hearing covered many issues, including worries about the recent spike in mortgage interest rates. “Mortgage rates are a bit higher and we have to monitor that,” Bernanke said. “We’ll see how housing and house prices go from here.”

In his testimony, Bernanke said that housing has “contributed significantly to recent gains in economic activity.” Home sales, house prices, and residential construction, he said, “have moved up over the past year, supported by low mortgage rates and improved confidence in both the housing market and the economy.” He went on to note that “rising housing construction and home sales are adding to job growth, and substantial increases in home prices are bolstering household finances and consumer spending while reducing the number of homeowners with underwater mortgages.” Housing activity and prices, he said, “seem likely to continue to recover, notwithstanding the recent increases in mortgage rates,” noting the importance of monitoring developments in this sector carefully.

Some lawmakers noted that both the House and Senate are currently considering legislation to reform the government-sponsored enterprises — Fannie Mae and Freddie Mac. Bernanke said that the Fed “agrees” that some type of reform needs to take place, as the Fed “for many years warned about [GSEs’] lack of capital.”

The key question, Bernanke said, is “What role should the government play?” The private sector should play a bigger role in housing finance going forward, one reason being so there’s “more product innovation,” he said.

As to unemployment, Bernanke said while the 7.6% rate in June is a half percentage point lower than in the months before the Federal Open Market Committee (FOMC) initiated its current asset purchase program in September, the “jobs situation is far from satisfactory.”

Despite the fact that nonfarm payroll employment has increased by an average of about 200,000 jobs per month so far this year, “the unemployment rate remains well above its longer-run normal level, and rates of underemployment and long-term unemployment are still much too high,” Bernanke said.

As to inflation, Bernanke said that consumer price inflation “has been running below” the FOMC’s “longer-run objective of 2%.” With “measures of longer-term inflation expectations hav[ing] generally remained stable,” this “should help move inflation back up toward 2%,” he said. “However, the committee is certainly aware that very low inflation poses risks to economic performance — for example, by raising the real cost of capital investment — and increases the risk of outright deflation. Consequently, we will monitor this situation closely as well, and we will act as needed to ensure that inflation moves back toward our 2% objective over time.”

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Check out Upbeat Jobs Report Signals Quicker QE Tapering on ThinkAdvisor.

Is Taper No Longer an Issue for Stocks? - Ahead of Wall ...

Wednesday, July 10, 2013

Stocks are within striking distance of reclaiming the all-time high reached less than two months back, with the pullback resulting concerns that the Fed was getting ready to pare back its QE program. We will get more clarity on the Fed question this afternoon with the release of the minutes of the Fed's June meeting. Also at play in today's session are renewed concerns about China's growth outlook after another weak economic reading – this time about that country's exports.

The stock market's ability to claw back its losses over the last few weeks despite the persistent rise in benchmark treasury yields, is very impressive. My sense is that these gains will prove sustainable only if they reflect investors' collective judgment that an improved economic outlook trumps less Fed QE and somewhat higher interest rates. But if the market's gains reflect the hope that 'Tapering' was not imminent, then we may be at risk of giving all of these back in the coming days.

I continue to believe that U.S. economic outlook was stable enough to allow the Fed to start pulling back from its QE program later this year. A number of Fed officials went out of their way to dial back Bernanke's fairly explicit pronouncements on the 'Taper' question. But the bond market got it right from the get go, pushing 10-year treasury yields by almost 100 basis points since early May. This afternoon's minutes of the June FOMC meeting will likely confirm that Bernanke's comments were more in-line with the emerging majority on the committee.

With respect to China's growth outlook, Alcoa (AA) appeared to be reassuringly explicit in its earnings release on Monday, belying concerns raised by a host of weak economic readings in recent days. But today's official export numbers run counter to Alcoa's claims and raise further doubts about that country's picture. The decline in Chinese exports in June, the first in a non-holiday month since late 2009, is likel! y not a one-off event and likely reflective of some loss of competitiveness for China's export sector. Competitiveness has suffered to some extent relative to lower wage regional countries like Vietnam as a result of rising wages and unfavorable exchange rate movements. The continued economic problems in Europe also remain a headwind, as the more than 8% drop in exports to Europe reconfirm.

The China growth question magnifies similar concerns about the rest of the emerging world as the recent growth downgrade by the IMF shows. The China issue will figure prominently in the Yum Brand's (YUM) earnings release later today as well, though YUM is dealing with a number of company-specific issues that are not directly tied to China's growth outlook.

But the fact remains that a big part of the expected earnings growth in the second half of the 2013 and full year 2014 for the S&P 500 as a whole is contingent on improved economic growth beyond the U.S. borders. For context, keep in mind that consensus earnings expectations are looking for earnings growth to accelerate from the first-half 2013's less than +3% pace to more than +9% rate in the second half and accelerate even further to more than +11% in 2014. With more than 40% of S&P 500 earnings coming from international markets, those growth expectations will likely need to be scaled back.

Sheraz Mian
Director of Research

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3-Year Review: Best & Worst ETFs In Each Sector

In the last few years, investors have slowly found their way back to equity markets as more lucrative opportunities continue to present themselves. And with more and more investors adopting higher risk tolerances, bullish momentum has undoubtedly become a dominant force on Wall Street, pushing equity markets into uncharted territory. And though across the board, most corners of the equity market have flourished in recent years, there have been certain sectors that have continuously outperformed while others have missed the mark .

Below, we highlight a handful of ETFs across each sector that have performed well over the past three years, as well as those that have struggled to keep up with the equity market's quick pace (note that inverse and leveraged ETFs are excluded from this list – data as of 7/29/13):

Consumer Discretionary: Retail, Leisure & Entertainment Soar; International Funds StruggleIn the consumer discretionary space, two retail ETFs (XRT and PMR) and a leisure and entertainment fund came out on top, posting returns above 100% over the trailing three-year period. International consumer discretionary ETFs, however, posted lower returns, while the China Consumer ETF slipped nearly 16%.

Consumer Staples: Small Caps & Alternative Weighting Methodologies Deliver; Foreign Exposure Ekes Out Small GainsAlternative weighting methodologies have proved their worth in the consumer staples sector, with the AlphaDEX , SmallCap , and equal weight  funds delivering returns of over 70%. The Brazil and international-targeted ETFs (IPS and AXSL), however, posted significantly lower returns.

Energy: Alternative Weighting Wins Again; Solar and Coal StruggleAs with the consumer staples sector, energy ETFs that utilized alternative weighting methodologies also came out on top. PXE, PSCE, and PXI all posted returns around 80%. The two solar funds (KWT and TAN) as well as the coal ETF have struggled over the trailing three-year period, posting double-digit losses .
Financials: Small Cap, AlphaDex, and Regional Banks Come Out on Top; Emerging Market Funds SlumpAnother small cap, , and the AlphaDEX fund delivered stellar returns in the financials sector, while a regional banking ETF also performed well. Investors who parked their assets in financial equities from emerging markets, however, suffered losses over the past three years.

Healthcare: Biotechs and Pharma Skyrocket, Medical Devices and International Options Fall BehindIn the healthcare space, biotechnology-targeted funds have delivered stellar returns over the trailing three-year period; Van Eck's Market Vectors Biotech ETF has gained an incredible 161%. The medical devices and international healthcare ETFs, however, have struggled to gain traction.

Industrials: Dynamic, Small Cap, and Aerospace Soar; Shipping and Chinese Funds StruggleBesides the small cap and alternative weighting methodologies (which have proven to be great picks over the years), aerospace and defense equities have also posted compelling returns. The shipping  and China-focused ETFs, however, were the worst performers in the industrials sector.

Materials: Homebuilders and Construction Funds Catch Fire; Metal Miners Miss The MarkWith housing data showing significant uptrends in recent years, it perhaps is not surprising to see homebuilders and construction ETFs post stellar returns. Metal miners, however, have taken significant hits over the trailing three-year period .

Real Estate: Retail And Residential Funds Soar; Mortgage and Global Options Post Modest GainsEvery real estate fund delivered strong returns over the last three years, as the housing market continues to show encouraging signs. Coming out on top were the Retail , REIT and Residential  funds. Chinese and global real estate, however, did not post as lucrative returns as their domestic counterparts

Technology: Internet Funds Come Out on Top; Nanotech SlipsIn the tech space, two internet funds (PNQI and FDN) as well as a smal! l cap ETF! were the top performers, logging in double digit returns. The nanotechnology-focused fund , however, lost over 17% over the last three years.

Telecom: Domestic Picks Post Stellar ReturnsAcross the board, telecom ETFs have delivered strong gains over the last three years, with Vanguard's Telecom ETF rising more than 60%.

Utilities: Small Cap and Equal Weight Deliver; Emerging Market Funds Slip Into Negative TerritoryOnce again, small cap and equal-weight ETFs came out on top in the utilities sector, while funds with exposure to emerging market economies suffered losses.

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Disclosure: No positions at time of writing.

DSW to Kick Stock with 2-for-1 Split

Management at footwear retailer DSW (NYSE: DSW  ) raised guidance 5.5% for the full year to $3.60 to $3.80 per share, and said it would split its Class A stock 2-for-1.

If approved by shareholders, DSW will issue one share of Class A stock for each Class A or Class B share outstanding. The split is expected to create a total of approximately 90.2 million shares, comprised of approximately 81.6 million Class A shares, which will continue to hold one vote per share, and 8.6 million Class B shares, which will hold eight votes per share, with the voting control of the Class B shareholders reduced from 65% to approximately 46% post-split.

The split was brought about as a result of second-quarter revenues jumping 9% from the year-ago period to $558 million as same-store sales rose 4.3% year over year with the anticipation they would continue to grow in the low-single-digit range.

In conjunction with the stock split, the board will also seek an amendment to allow DSW to increase the number of authorized Class A shares from 170 million to 250 million.

Headquartered inColumbus, Ohio, DSW operates 377 Designer Shoe Warehouse stores in 42 states, the District of Columbia, and Puerto Rico while also supplying footwear to 351 leased affiliated business group locations. The stock rose less than 1% today, closing at $77.56 per share.

Marvel Is Never Getting Spider-Man Back -- Here's Why

How crazy are fans for comic-book movies? Hours after activist investor Daniel Loeb released a letter arguing that Sony (NYSE: SNE  ) should make better use of its entertainment assets, the Internet was ablaze with rumors that the company might sell the rights to make Spider-Man movies back to Marvel and parent Walt Disney (NYSE: DIS  ) . Sony has since said it plans to consider Loeb's proposal yet makes no mention of disposing any of its assets.

It's hard to blame fans for getting the story wrong. Spidey is Marvel's most visible character, and Loeb is Sony's largest shareholder through his fund, Third Point LLC. He wants the company raising capital for bolstering Sony's important-but-beleaguered electronics division. An asset sale would be a natural option, says Tim Beyers of Motley Fool Rule Breakers and Motley Fool Supernova in the following video.

Unfortunately, Loeb's idea is more complicated. He wants to take 15% to 20% of Sony Entertainment public and make the resulting stock available primarily to management as a carrot to boost performance of movie assets such as The Amazing Spider-Man 2, which is filming now.

Surprised? Don't be. Last year, Disney agreed to forfeit Marvel's claim to Spider-Man film rights in exchange for 100% of the merchandising haul. Disney might gain some influence were it to buy into a Sony Entertainment IPO, but that's presuming Sony executives take Loeb's proposal serious enough to go through with an offering. And that's anything but a guarantee, Tim says.

Do you agree? Please watch to get Tim's full take, and then leave a comment to let us know how you would unlock Spidey's big-screen value.

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Best Buy: It's Getting Better, But for How Long?

On Tuesday, Best Buy (NYSE: BBY  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

Best Buy has struggled for years under the weight of competitive pressures from online retailers, as the electronics retailer has been one of the primary victims of the showrooming trend whereby shoppers go to a store to see items that they then buy elsewhere online for less. Yet more recently, the company has shown signs of turning its fortunes around. Let's take an early look at what's been happening with Best Buy over the past quarter and what we're likely to see in its quarterly report.

Stats on Best Buy

Analyst EPS Estimate	$0.25
Change From Year-Ago EPS	(65%)
Revenue Estimate	$10.64 billion
Change From Year-Ago Revenue	(8.3%)
Earnings Beats in Past 4 Quarters	2

Source: Yahoo! Finance.

Will Best Buy keep moving forward this quarter?
Analysts have had mixed views on Best Buy's earnings prospects recently, as they've cut their estimates for the just-ended quarter by $0.20 per share but modestly raised their full-year fiscal 2014 and 2015 estimates. The stock has squarely focused on long-term potential for the company, as shares have soared 80% since mid-February.

Best Buy's actions over the past quarter have contributed toward CEO Hubert Joly's "Renew Blue" turnaround strategy, under which the company is looking to improve its customer service, boost its presence in e-commerce, and cut its overhead. For instance, Best Buy's decision to match prices of Amazon.com (NASDAQ: AMZN  ) and other online retailers as well as retail-store competitors is geared not only toward getting people to buy more in-store purchases but also at driving customers toward seeing Best Buy's website as a low-price alternative.

One big initiative announced in early April involves smartphone giant Samsung using the store-within-store format at 1,400 Best Buy locations. For Samsung, the move is clearly an attempt to put together some form of competition against Apple (NASDAQ: AAPL  ) and its huge retail presence through its highly successful Apple Stores, yet without the massive capital expenditure that would be necessary to establish its own independent store network. For Best Buy, though, the potential could be much higher, as it could bring in more traffic not just for smartphone purchases but for its other merchandise.

Best Buy has also made some strategic moves during the quarter to refocus on its core business. Less than a month ago, it sold its 50% stake in the Best Buy Europe joint venture to partner Carphone Warehouse, raising about $775 million in cash and eliminating the distraction of having to deal with the chain in a tough economic environment in Europe right now.

Another long-awaited boost could come if the proposed federal Internet sales-tax bill becomes law. Amazon, eBay (NASDAQ: EBAY  ) , and other online retailers without physical presences in many states have had a big advantage over Best Buy, and given the high-ticket items that Best Buy sells, closing the sales-tax gap will make the substantial savings from showrooming disappear if the measure passes.

In Best Buy's report, watch for comments from management on how its recent initiatives are bearing fruit with real financial improvements. As good as the plan's proposals sound, it's important for the company to point to tangible results to prove that Best Buy is actually moving in the right direction.

The battle between bricks-and-mortar stores and e-commerce battle will rage on for a while, and to get more information about the unanswered questions about Best Buy's future, turn to the Fool's premium research report on the stock. Inside, you'll get in-depth analysis of how new leadership will perform, whether a smaller store format work out for the company, and much more. Simply click here now to claim your comprehensive report today.

Click here to add Best Buy to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Few Steps Remain in American Airlines, US Airways Merger

Matt Rourke/AP DALLAS -- US Airways began studying a potential merger with American Airlines several months before American filed for bankruptcy protection in late 2011, according to papers filed Monday by the two companies. The documents give a blow-by-blow account of how the merger was negotiated, including the thorny issues of how to share ownership of the merged company and who would run it. The companies also revived a proposed $20 million severance deal for Tom Horton, the CEO of American parent AMR Corp. A federal judge had declined to approve the payout, finding that it violated a 2005 bankruptcy law, but he had left open the possibility that a payment could be reconsidered later. US Airways Group Inc. (LCC), whose CEO, Doug Parker, will run the combined company, played up the importance of Monday's filings with the bankruptcy court in New York and the U.S. Securities and Exchange Commission. "With these materials filed, we are one step closer to completing the merger, which we expect to occur in the third quarter of this year," US Airways officials said a memo to employees. The bankruptcy court has already signaled approval for the merger, which would create the world's largest airline. The deal faces only a few more hurdles, including approval from the U.S. Justice Department and US Airways shareholders. AMR will have 60 days to win support among creditors for its reorganization plan. Major creditors were closely involved in negotiations leading to the merger announcement in February, so it seems unlikely that they would derail the plan that will be considered by U.S. Bankruptcy Judge Sean Lane. It's less clear whether antitrust regulators in the Justice Department will impose major conditions on the deal. Regulators approved other big airline mergers -- Delta and Northwest, United and Continental, Southwest (LUV) and AirTran -- so industry analysts expect them to let this deal pass. The Justice Department, however, could require the American-US Airways combination to give up takeoff and landing slots at Washington's busy Reagan National Airport, where it would be the dominant carrier, and possibly slots in New York, too. The company will be called American Airlines Group Inc. It is expected to operate more than 6,700 flights a day to 336 destinations in 56 countries and have about 100,000 employees. Based on current figures, American will emerge slightly bigger than United Airlines (UAL) and Delta Air Lines (DAL) in the number of miles flown by passengers, the usual standard for ranking carriers. Parker will be chairman and CEO after Horton steps down as chairman in 2014. Parker would get $19.5 million if he is terminated by the new company for a reason other than misconduct, according to a separate filing Monday. The merger is a coup for Parker, who just a decade ago was running a much smaller carrier called America West Airlines. He merged that airline with US Airways, and then relentlessly pursued a deal with AMR. According to Monday's filings, US Airways executives briefed their board about a potential merger in April 2011 -- seven months before American and AMR filed for bankruptcy protection. As has been previously reported, Parker and Horton even spoke about a deal during an industry event that year, but Horton initially dismissed the idea, saying American preferred to focus first on fixing its own business. Parker persuaded American's unions and many AMR creditors that a merger would fare better than an independent American, however, and forced AMR into negotiations. Leaders of the two companies then haggled over ownership split and management titles. AMR creditors and unions will own 72 percent of the new company, and US Airways shareholders will get the other 28 percent. ---

10. Microsoft Income tax expense: $4.57 billion Earnings before taxes: $20.03 billion Revenue: $72.93 billion 1-yr. share price change: -12.04%

ACADIA Pharmaceuticals Skyrockets on Accelerated NDA Filing

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of ACADIA Pharmaceuticals (NASDAQ: ACAD  ) , a clinical-stage biopharmaceutical company, skyrocketed as much as 54% after it announced that it was filing an accelerated new drug application for Pimavanserin after discussions with the Food and Drug Administration.

So what: Pimavanserin, an experimental anti-psychosis drug for people with Parkinson's disease, breezed through its late-stage clinical trial, meeting the primary endpoint of "highly significant antipsychotic activity," and also meeting the secondary endpoint of improved motoric tolerability. ACADIA had been planning to run a confirmatory phase 3 trial, which it planned to begin enrolling patients in this quarter. However, the data thus far, and the discussion between the FDA and ACADIA, warranted an early drug submission.

Now what: I'd say this is definitely a step in the right direction toward getting Pimavanserin approved. But, let's also keep in mind that what the FDA does initially and what its panel or final ruling may indicate can occasionally be two different things. Another factor to consider is that most Wall Street peak sales estimates for Pimavanserin are around $300 million within the U.S. Acadia's valuation is pushing $950 million following today's pop, meaning it's valued at more than three times peak sales. To me, that seems a bit lofty for its first potential FDA-approved drug.

Craving more input? Start by adding ACADIA Pharmaceuticals to your free and personalized watchlist so you can keep up on the latest news with the company.

While you can certainly make huge gains in biotechs like ACADIA, the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Valuing Stocks Using a Snapshot Multiple Requires Earnings Predictability

In How to Value a Stock Using the Income Statement, I discussed the conflict between (1) the theoretically-pure way to measure the value of a business as an ongoing concern – i.e., discounting the company's annual free cash flows in perpetuity at an interest rate that accounts for business risk – and (2) the practical difficulties of accurately estimating either future business risk or the company's annual cash flows over the next 10 years let alone in perpetuity.

Given the practical difficulties of accurately estimating a multitude of future data points, a short-cut method that many smart investors use to value a stock is to limit the estimation process to a single number — a snapshot multiple of a company's current earnings (or EBITDA or free cash flow or book value).

On the surface, estimating a single number is easier than estimating multiple numbers, but the reality is that this distinction is somewhat illusory because several data "inputs" must be estimated in order to generate the single "output" multiple. Most important inputs are future earnings growth and cost of capital (i.e., business risk). Earnings growth may reasonably be estimated from past experience if the company's business is stable, but business risk is a slippery measure that can easily be overshot or undershot.

Only Use P/E Ratios to Value Companies with "Predictable" Earnings

Because of the inherent uncertainties in estimation, I previously wrote that:

I would only consider using a P/E ratio on stable stocks with a prolonged operating history and a modicum of earnings-growth reliability.

Earnings predictability simply means that a company's earnings have historically grown in a consistently stable pattern that is likely to continue in the future.  In contrast, a 2008 study found that corporate earnings that are very volatile over the past five years – jumping up and down haphazardly f! rom one quarter to the next – typically signal uncertainty and unpredictable earnings for five years into the future:

Earnings volatility captures the effects of real and unavoidable economic volatility. Intuitively, firms operating in environments subject to large economic shocks are likely to have both more volatile earnings and less predictable earnings.

The volatility of reported earnings also reflects important aspects of the accounting determination of income. One such aspect is the quality of matching of expenses to revenues. Poor matching acts as noise in the economic relation between revenues and expenses, and thus the volatility of reported earnings increases in poor matching. Poor matching is also associated with poor earnings predictability because the matching noise in reported earnings obscures the underlying economic relation that governs the evolution of earnings over successive periods.

Earnings volatility not only reduces earnings predictability, but it also signals a company without a competitive advantage that has no control over pricing or a loyal customer base, but is vulnerable to the whims of a commoditized marketplace. A 2011 study found that the stocks of companies with high earnings uncertainty significantly underperform the stocks of companies with predictable earnings and that high earnings volatility "strongly predicts lower future earnings." This helps explain "the greatest anomaly in finance", where stocks with low betas (a measure of price volatility relative to a benchmark index) have historically outperformed high-beta stocks. Roadrunner's six-point safety-rating system awards a safety point to low-beta stocks because of this outperformance potential.

A 10-year study by Gurufocus.com similarly found that companies with predictable earnings outperformed. In fact, based on their five-point rating system of predictability, relative outperformance increased in perfect lockstep with increases in predictability:

Companies with Predictab! le Earnin! gs Outperform the Market

Predictability Rank	5-Star	4.5-Star	4 -Star	3.5-Star	3 -Star	2.5-Star	2 -Star	1-Star (non-predictable)	Average among all
Average Annualized Gain (Jan. 1998- Aug. 2008)	12.1%	10.6%	9.8%	9.3%	8.2%	7.3%	6.0%	1.1%	3.1%
% that are in loss with 10-year holding period	3%	10%	8%	9%	11%	18%	16%	45%	37%

Source: gurufocus.com

Below is a list of ten small-cap stocks that currently enjoy the maximum five-star rating for earnings predictability:

Ten Very Predictable Small Caps

Company	10-Year Annualized EBITDA Growth Rate	Market Capitalization	Industry
Medifast (NYSE: MED)	29.2%	$411 million	Weight Loss Products
World Acceptance (Nasdaq: WRLD)	20.1%	$761 million	Small-loan Consumer Finance
Neogen (Nasdaq: NEOG)	19.6%	$1.4 billion	Food Safety and Veterinary Products
NIC (Nasdaq: EGOV)	19.4%	$1.0 billion	Government Application Software
Thoratec (Nasdaq: THOR)	18.8%	$1.9 billion	Heart Medical Devices
Exponent (Nasdaq: EXPO)	16.0%	$958 million	Engineering and Scientific Consulting
The Andersons (Nasdaq: ANDE)	11.9%	$1.5 billion	Farm Products
Munro Muffler Brake (Nasdaq: MNRO)	11.6%	$1.7 billion	Auto Parts
General Communication (Nasdaq: GNCMA)	11.0%	$470 million	Alaska Telecommunications
Papa John's International (Nasdaq: PZZA)	10.8%	$1.8 billion	Pizza

Source: Gurufocus.com

Value Line Investment Survey also ranks stocks by earnings predictability. There must be something to this!

Warren Buffett Likes Stocks with Bond-Like Cash-Flows

Warren Buffett, one of the greatest investors of all time, doesn't like to gamble with his money and only invests in companies with predictable earnings. In the book entitled The Warren Buffett Way, Buffett was quoted telling some business school students in 1994 that:

I put a heavy weight on certainty. If you do that, the whole idea of a risk factor doesn't make any sense to me. Ri! sk comes ! from not knowing what you're doing.

In fact, Buffett is so certain about the future earnings of companies he invests in that when he estimates the stock's intrinsic value, he discounts projected cash flows at the same interest rate as risk-free long-term government bonds – no equity risk premium:

Buffett is firm on one point: He looks for companies whose future earnings are as predictable, as certain, as the earnings of bonds. A company's future cash flow should take on a "coupon-like" certainty. If the company has operated with consistent earnings power and if the business is simple and understandable, Buffett believes he can determine its future earnings with a high degree of certainty. If he is unable to project with confidence what the future cash flows of a business will be, he will not attempt to value the company. He'll simply pass.

To be clear, unlike some other prominent value investors, Buffett allegedly does attempt to value stocks via a discounted cash flow analysis, and is quoted as saying that short-hand valuations methods based on a snapshot multiple of earnings or book value "fall short." Nevertheless, his focus on earnings predictability underscores the importance of limiting valuations based on a snapshot multiple to only a select group of companies with persistent earnings that are growing at a stable rate.

"Normal" Earnings Must Be Isolated to Value a Stock

Okay, now that you have narrowed down the list of companies that are suitable for a valuation based on a snapshot multiple based on their predictable earnings, the next step is to isolate a company's "core" earnings – the "normal" earnings that are recurring and based on the company's business operations – not financial tomfoolery or one-time events. Even if you calculate the proper earnings multiple to use (i.e., the proper P/E ratio), that multiple will not be useful if applied to a bogus "E" number. 

In other words: Both the "P/E" multiplier and the "! E" base! number must be accurate for the stock valuation to make sense.

Standard & Poor's has developed a measurement of "core" earnings (Page 70) that:

focuses on a company's after-tax earnings generated from its principal businesses. Included are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities.

Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance settlements.

That definition has a lot of accounting jargon that can confuse rather than clarify. BusinessWeek explains the concept more simply:

Core earnings represent the difference between the revenue of a company’s principal, or core, business and the costs and expenses associated with deriving that revenue.

A simple example would be a chain of retail stores. The core business is running stores. Look at the revenues and the expenses from those stores, and you can find core earnings. While many retail chains may buy and sell real estate, that isn’t their main business. Neither is running a pension fund or many other things that such a company may do.

S&P believes that for an equity investor to make an investment decision based upon a company’s reasonable earnings expectation, it’s necessary to understand how that organization’s core business will perform in the future.

When analyzing a company's income statement and balance sheets, one must extract the abnormal from the normal and isolate the core earnings.

Real-Life Example: Analyze the Financial Statements

Consider the financial statements below:

Note: Year ‘T’ corresponds to the most recent annual statement. ‘T-1′ and ‘T-2&! #8242; ar! e the previous two annual statements.

Income Statement	T	T-1	T-2
Net Sales	$107,714	$107,257	$112,883
Gross Profit	$49,915	$47,671	$46,319
Operating Income	$18,745	$17,373	$15,974
Non-operating Income	$1,740	$3,514	$2,925
Interest Expense	$1,388	$2,068	$1,533
One-time Write-down	$4,989	$0	$2,750
Taxes	$6,400	$6,778	$5,998
Net Income	$7,709	$12,041	$8,617
Shares Outstanding	6,995	6,995	7,922
Earnings per Share	$1.10	$1.72	$1.09

 

 

Balance Sheet	T	T-1	T-2
Cash and e! quivalent! s	$8,819	$7,969	$4,094
Accounts Receivable	$13,317	$13,253	$12,412
Inventory	$24,168	$20,405	$19,900
Other Current Assets	$2,631	$1,492	$1,568
Total Current Assets	$48,935	$43,119	$37,974
Plants Property & Equipment (PPE)	$28,357	$25,233	$23,125
Accumulated Depreciation	$13,404	$11,810	$10,814
Net PPE	$14,952	$13,423	$12,311
Other Non-current Assets	$21,195	$27,064	$27,405
Total Assets	$85,082	$83,606	$77,690
Accounts Payable	$12,324	$11,549	$11,077
Current portion of LT Debt	$69	$2,153	$66
Other Current Liabilities	$4,193	$3,322	$2,883
Total Current Liabilit! ies	$16,585	$17,023	$14,026
Long-term Debt	$9,540	$9,607	$15,914
Other Non-current Liabilities	$9,348	$10,670	$9,885
Total Liabilities	$35,474	$37,299	$39,825
Total Equity	$49,608	$46,307	$37,865
Preferred	$982	$982	$982
Common Equity	$48,627	$45,325	$36,883
Book Equity Per Share	$6.95	$6.48	$4.66

The most recent annual earnings are $1.10 per share. A novice investor may simply decide to use this $1.10 figure as the base for calculating the stock's value based on a snapshot earnings multiple. But that would be a mistake because the income statement includes extraordinary items.

Convert Reported Earnings to Core Earnings

Specifically, two line items entitled "one-time write-down" and "non-operating income" must be accounted for to ascertain normal earnings. Adding back the write-down and deducting the non-operating income yields a core earnings number of 10,958:

Reported net income ($7,709)

–        Non-operating income ($1,740)

+ One-time write-down ($4,989)

= $10,958

Divide $10,958 by the 6,995 shares outstanding yields core earnings per share of $1.57, which is 43 percent higher t! han the r! eported number of $1.10!

If you perform the same "core" earnings adjustments to the two previous years of financial statements, the earnings per share numbers in T-1 and T-2 become $1.22 and $1.07, respectively. So, what initially looks like a company with volatile earnings and flat growth over the past two years ($1.10 in T vs. $1.09 in T-2), actually is a company growing "core" earnings steadily at a compounded annual rate of 20% ($1.57 in T vs. $1.09 in T-2).

"Margin of Safety" May Require that Growth Rate be Discounted Before Using as P/E Ratio

According to Peter Lynch, the P/E ratio should equal the earnings growth rate and stocks growing earnings between 20-25 percent annually are his favorite (not too slow and not too fast), so arguably one could multiply $1.57 by 20 and get a stock valuation of $31.40. But our calculated growth rate is based on only two years of changes, which is too short – Lynch describes the proper earnings growth rate as "long term" or "in recent years." Under neither of these characterizations would two years of earnings growth seem to suffice.

Furthermore, the three years of financial data in our example appear to be tumultuous ones for the company, with substantial "one-time" write-downs occurring in two of the three years. One needs to question whether write-downs truly are "one-time" in nature if they occur in a majority of the years being studied! There is also some funky recapitalization going on in year T-1 with long-term debt decreasing dramatically by 40 percent, shareholder equity increasing by 23 percent, cash balances increasing by 95 percent, and shares outstanding decreasing by 12 percent. This unusual financing activity is an additional reason to discount the company's growth rate in my valuation.

Because of the limited financial data and numerous write-downs, the valuation principles of conservatism and "margin of safety" require that the company's annual earnings growth rate of 20 percent be disco! unted by ! at least 20 percent, which brings the earnings growth down to a more believable 16 percent. If you use 16 as the P/E multiple for the company's current core earnings per share of $1.57, the stock's valuation is $25.12 – 20 percent lower than the original estimate of $31.40.

As it turns out, the three years of financial statements used in this example are from the real-life 1988-1990 financial statements of spirits manufacturer Brown-Forman (NYSE: BF-B). The actual stock price at the time the 1990 financial statements were released in August of that year was $23.25, which is 7.4 percent below my fair-value estimate of $25.12. But, based on a 12 percent discount rate and the stock's actual dividend-adjusted stock performance over the 20 years from 1990 to 2010, the stock's present value in August 1990 was worth $26.11, 3.9 percent higher than my $25.12 estimate, so my valuation estimate is narrowly situated in between the stock's actual market price (+7.4 percent) and the stock's actual intrinsic value (-3.9 percent). Not bad.

Anchoring Bias is the Enemy of Accurate Stock Valuation

To be fair, I calculated the stock valuation after already knowing what Brown-Forman's stock price was in August 1990, so my calculation is tainted by "anchoring bias." Would I have decided to discount the company's 20-percent earnings growth rate by 20 percent if I hadn't known that a 20 P/E would overvalue the company? I like to think so, but we'll never know.

A financial blogger conducted an experiment using the Brown-Forman financial statements above, whereby he provided the same financial data to two groups of stock analysts, except that he provided one group of analysts with no information about the stock's current market price while providing the other group with false information that the stock was currently trading at $87.12.  The analyst group provided with the false market-price information estimated the stock's value (on average) at $34, significantly higher (68%) than! the aver! age value estimate of $20.21 in the other group.

Conclusion: anchoring bias is real and explains why so many retail investors are willing to buy overvalued stocks – their valuation of a stock is tainted by its current market price. The Internet bubble of 1999-2000 proved that the stock market is not efficiently priced and market prices cannot be relied upon to reflect true value. Remember the wise saying of value investor Benjamin Graham:  "Price is what you pay, value is what you get."

Intrinsic value and market price often diverge and the way to make money is to buy stocks that have a market price below intrinsic value and sell stocks that have a market price above intrinsic value. Using market prices to determine intrinsic value defeats the entire purpose of value investing.

A 14% Return in Less than a Month

When one values a stock correctly and waits for an opportunity to buy the stock at a substantial discount to its intrinsic value, it can be a beautiful thing. Last month, an independent energy driller recommended in my Roadrunner Stocks small-cap investment service rose more than 14% on news that eight corporate insiders had bought thousands of shares worth of the stock. Given that the company’s revolutionary “Generation 6″ frac design is head-over-heels superior to the frac design of any of its driller competitors in the Eagle Ford Shale and Permian Basin, the stock’s outperformance came as no surprise to me or my Roadrunner subscribers.

My stock-valuation methodology is based on a little-known and proprietary system, similar to the one that made Warren Buffett, Peter Lynch and others rich. It's taken me 20 years to perfect and the system is complicated, but the results are crystal clear. You can get all of my latest research by clicking here.

Yahoo! Inc. Winks as It Buys Blink App

Yahoo! Inc. (YHOO) has made the first big move in recent years: It has bought out Blink app, for an undisclosed amount.

What's Blink?

Blink is one of the many, all new and exciting messaging apps (which differs from trendsetters like WhatsApp and similar messaging apps) following the SnapChat philosophy: It self-destructs within a user-controlled timespan!

SnapChat has been a newsmaker in recent months, not as much for its hit "disappearing snaps"-based feature, as for the unsuccessful acquisition bid by social media giant Facebook Inc. (FB) for a whopping $3 billion. Where Snapchat allows users to upload photos or snaps which disappear to self-destruct within a few seconds after they viewed/displayed, Blink works on much the same principle for messages, images, videos and more!

Yahoo Inc.'s First Big Acquisition Post-Alibaba IPO Announcement

Much of Yahoo Inc.'s fortunes in the past few quarters are being driven not by internal growth factors but by much of the external "performers" in which it holds critical stake. Alibaba, the Chinese ecommerce giant which is privately held by founders such as Jack Ma and executives along with SoftBank, is the star of Yahoo Inc.'s growth, in which it currently holds a 22.6% stake.

But Stake in Alibaba Is 22.6%, Not 24%

Incidentally, industry analysts had assumed Yahoo Inc.'s stake in Alibaba was much higher at 24% but as per filings before the U.S. Securities and Exchange Commission as part of its Initial Public Offering, Alibaba revealed the actual stake held by the once popular search engine giant!

Ever since Alibaba's IPO offer has surfaced, analysts have been researching and crunching numbers to note the gains which Yahoo Inc. will hope to see, ever since the downward trend beginning 2006.

Troubled in mid-2006

Yahoo! Inc. (YHOO) despite being the trend setter and technology services innovator for the Internet at the turn of the millennium, ran into troubled financial waters as the company's founding members lost their way in taking it forward, unlike competitor and open source platform giant Google Inc (GOOGL). As Google soon diminished Yahoo's relevance as it unleashed services which Yahoo could not match, it was further sidelined as Microsoft Corporation (MSFT)'s Bing made inroads into Yahoo's traditional U.S. business community user base along with Yelp Inc. (YELP).

By 2006, Yahoo had well hit the worst phase, eventually making changes at the top-most level to bring in dramatic change. As Marissa Mayer, with dog-years of experience driving Google's Search Engine products, moved to take over as Yahoo's chief executive officer, there has been a focused strategy towards making Yahoo the service for the mobile platform!

There have been revenue-sharing forays with Bing and Yelp, but Alibaba continues to be the highest revenue garnerer currently.

And Alibaba's IPO offer will bring in more funds.

Past the IPO, Yahoo will have to sell nearly 40% of the stake it owns, which is expected to bring in substantial funds which will drive growth by way of acquisitions.

The first big move to acquire the Blink App is therefore understandable.

"First with the big deal" says Robert Cox during discussions with Ed Lazear and Hoover for the Reuters program Breaking views, is the "likely motivation behind Yahoo's acquisition of mobile messaging app "Blink". The reason you pay up for these things is because they have a user base."

Increase in number of users and higher engagement is what Yahoo currently desires and Blink could well be the "wink" which will accelerate Yahoo back into the echelons of technology profit making companies with higher user engagement, advertising revenues and substantial quality improvement in the content it provides as it now cuts deals with Spotify to Clear Channel and CNBC.

About the author:Pushpa NareshI have done my MBA (Finance) and an avid market tracker.

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IPO market is casualty of stock market pullback

Weibo, better known as China's answer to Twitter, was the big winner among five initial public offerings that made their debuts Thursday. Yet, it wasn't exactly a high-flying performance to make investors chirp.

The IPO market, which is coming off its best year since 2000, is showing unmistakable signs of returning to earth — the latest casualty of last week's stock market plunge, which prompted investors to dial back risk-taking.

That slowdown may take some of the excitement out of the coming IPO for Chinese e-commerce giant Alibaba, which could submit its official filing to U.S. regulators as early as next week. . It's being widely touted as the biggest IPO since Facebook raised more than $16 billion in May 2012.

The five IPOs that started trading Thursday posted an average return of just 8.7%, below the average 17% first-day pop so far this year and for 2013, according to IPO investment advisory firm Renaissance Capital.

Chinese microblogging site Weibo jumped 19.1%. Three of the deals were priced below their projected range, while two priced at the low end of the range. Chinese real estate site Leju rallied 18.6%, but travel industry player Sabre, sporting goods retail chain Sportsman's Warehouse and drugmaker Vital Therapies all finished flat or with low single-digit percentage gains.

The fact that Weibo had to price its IPO at $17, which was the bottom end of the $17 to $19 range, and slash the number of shares it was offering by more than 3 million, signals that the IPO market is coming back to earth, says Kathleen Smith, a principal at Renaissance Capital. She called it a "necessary correction."

The days of eye-opening day one pops, such as the 206.7% gain that Dicerna Pharmaceuticals posted on Jan. 30, and Castlight Health's 148.8% jump on March 14, seem to be fading.

The IPO market has lost some of its luster since a major correction in high-price biotech and Internet stocks last week. As the stock market goes, so goes the IPO market, says John Fi! tzgibbon, founder of IPOScoop.com. Last week, the Nasdaq suffered its worst weekly swoon in nearly two years and was down 9% from its recent high before rebounding.

"You need a healthy stock market to have a good IPO market," says Fitzgibbon. "The market (turbulence) is what put this (IPO rally) to bed this week. Without the wind at your sails, you can't go anywhere."

The more bearish tone is best illustrated by the recent performance of the Renaissance IPO Exchange Traded Fund. At its 2014 high on March 5, it was up 8.4% for the year. But it has since given up all

In the past week, the IPO market has gone from a seller's market favoring the bankers to a buyer's market that favors individual investors, says Josef Schuster, founder of IPOX Schuster.

The IPO window, he adds, hasn't closed completely, but if bankers want to get deals done, they'll have to price the shares more conservatively going forward. Alibaba's IPO might not be as gargantuan as many analysts believe due to the recent market jitters, he adds.

"It is definitely going to hurt Alibaba on its initial valuation," said Schuster.

Kellogg's To Trace Its Palm Oil Suppliers, While General Mills Looks Internationally For More Opportunities

Related GIS Market Wrap For February 18: Dow Finishes Lower, Nasdaq Still Hot Radio Shack vs. General Mills: Which Would You Rather - Super Bowl Edition Related K Morgan Stanley Remains Positive on Kellogg Company Despite Disappointing Guidance UPDATE: JP Morgan Upgrades Kellogg, But Lowers PT Following Recent Earnings Report

Some recent dispatches from the breakfast cereal front.

The Battle Creek, Michigan-based Kellogg Company (NYSE: K) says it is working to ensure the palm oil used in its products is responsibly produced, and doesn't come from plantations that harm local environments. According to The Associated Press, the cultivation of palm oil has destroyed tens of thousands of acres of vulnerable rainforest in countries like Indonesia and Malaysia.

"As a socially responsible company, traceable, transparent sourcing of palm oil is important to us," Diane Holdorf, Kellogg Company Chief Sustainability Officer, said in a press statement, "and we are collaborating with our suppliers to make sure the palm oil we use is not associated with deforestation, climate change or the violation of human rights."

Palm oil production is a multi-billion-dollar business globally, and AP says it is also minor ingredient in some Kellogg products, such as toaster pastries, waffles and cookies.

Related: Disney's Hong Kong Resort Stays In The Black

Reuters, meanwhile, reports General Mills (NYSE: GIS) – suffering from weak sales at home – is again turning its eye overseas to some rapidly-expanding, emerging markets.

In 2012, the company purchased Brazilian food maker Yoki Alimentos for $1 billion.

And now, Reuters says General Mills is "actively investigating" opportunities to expand in India and Indonesia, as well as across North Africa and the Middle East.

The Minneapolis Star Tribune says General Mills is also looking to branch out further into the yogurt business.

Several years ago, the company bought a 51-percent interest in France's Yoplait for more than $1 billion. And COO Christopher O'Leary, according to the newspaper, announced company plans to open a yogurt production plant in China.

General Mills CEO Ken Powell, speaking at a business conference in Florida on Tuesday, acknowledged "it's been a tough winter for U.S. consumers and for U.S. food industry sales," but said he remains optimistic about his company's long-term growth.

"There's plenty of growth to be had," he added, "and it's our job to get it."

Posted-In: brazil breakfast cereal cereals China Christoper O'Leary Diane Holdorf food and beverage India Indonesia Ken Powelll Malaysia Middle East North Africa Yoki AlimentosNews Emerging Markets Eurozone Retail Sales M&A Economics Markets Media Best of Benzinga

(c) 2014 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

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Icahn Eyes eBay

One of our favorite stocks has caught the attention of activist investor Carl Icahn, explains Geoffrey Seiler, editor of BullMarket.com.

eBay (EBAY) disclosed that Carl Icahn had accumulated a 0.82% stake in eBay and proposed a non-binding shareholder proposal to split-off PayPal as a separate unit.

The board rejected the split-off proposal, saying it has examined that idea in detail in the past, and believes keeping PayPal together with eBay's Marketplace unit is in the best interests of shareholders.

It believes PayPal is better able to leverage the company's technology capabilities, commerce platforms, and relationships with retailers, brands, and large merchants worldwide, as part of eBay.

As to its results, the company earned $850 million, or 65 cents per share, up 13% from $751 million, or 57 cents per share, a year earlier. Adjusted earnings rose 15% to $1.07 billion, or 81 cents a share.

The result was in line with the analyst consensus. Revenue jumped 13% to $4.53 billion, just below the $4.54 billion consensus.

eBay generated $1.43 billion in free cash flow during the quarter. It ended the quarter with cash, equivalents, and investments of $12.8 billion, and $4.12 billion in debt. Net cash was approximately $6.62 per share. During the quarter, the company repurchased $254 million of its stock. The company's board also authorized another $5 billion for share repurchases.

Looking first at the operating results, eBay delivered an OK quarter, given challenges, such as the shortened holiday season for the Marketplace unit. PayPal once again delivered solid growth.

In both cases, we think the growth in active users, up 14% year over year at Marketplace and 16% for PayPal, points to continued momentum for the businesses.

Icahn is not the first investor to suggest PayPal should be spun-off. One of the arguments is that PayPal would likely command a higher multiple on its own; it would also open PayPal up to be a takeover target.

Our view of Icahn's investment is that it is, mostly, a positive for shareholders, but a distraction for management. Icahn doesn't always get everything he wants, but he's been pretty successful at bidding up the price of companies he has a stake in.

His investment in eBay, at the least, should help raise the floor price a bit and it certainly will lead to a vigorous debate over the merit of his proposal. Meanwhile, eBay remains one of our favorite stocks for the long-term and we continue to rate it a Buy. Our target is $64.

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Terminal Tuesday – 2013 Comes to an End

Will it be a happy new year?

Hard to imagine it being happier for the markets than 2013, with the indexes closing at record highs and investor optimism nearing 80% bullish – as good as it's been since October of 1929 – just day's before the crash.  Earnings were also looking great in 1929 and the gap between the top 1% and the bottom 99% had never been greater – until now.

That's another record we've shattered in this trickle-less rally, wealth disparity is at an all-time high.  The top 10% are partying like it's 1999, and why shouldn't they?  The top 10% control 83% of the country's financial wealth, 50% more than they did in 1929 and the next 10% have 12%, leaving 5% for the bottom 80% to share.  

There's no use complaining about it, these are the conditions we're living in (well, that's what we like to say to the bottom 80% – to keep them from revolting!).  If the prevailing social condition is slavery and the average white plantation owner has 200 slaves, then we should buy stock in the plantations, right?  

That's what we do when we play the markets, there was a brief fad of "social-conscience investment funds" but, of course, they underperformed and no one wanted them and they died a quick death.  There are, in fact, just 29M people in the World who have more than $1M and only another 344M people who have more than $100,000 in assets.  Between them, these 373M people, just 5% of the World's population, control 82.4% of the World's assets.  

That's US and, believe me, you do NOT want to be one of THEM.  You may think you can live fighting with the bottom 90% for your share of the remaining 17.6% but, essentially, it's like permanently moving to Survivor Island – and you've seen that experience break down even the strongest of people.  Even the poorest Americans are typically in the top half of the global wealth dung-heap and the poorest Europeans as well – the rest of the world suffers beneath us all.  

Ken Langone is one…

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The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Futures Pre-Market Outlook Markets

Originally posted here...

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Chestnuts make roaring comeback

Chestnuts still roast on open fires, but some farmers are now using the traditional holiday favorite in many other ways — making treats like hummus, soup and gluten-free beer.

With a combination of nature, entrepreneurial farming and some help from Michigan State University, Michigan has become a national leader in growing chestnuts and is harvesting more than 100,000 pounds a year.

It's a comeback of sorts for the nuts after the trees that grow them were nearly wiped out by a fungus that destroyed billions of chestnut trees across the country by the 1950s.

"If I had a million pounds of chestnuts, I could sell them tomorrow," said Roger Blackwell, president of the Chestnut Growers Inc., a cooperative of 29 growers across the state.

Roasting the nuts at Christmastime still is popular, Blackwell said, but additional uses have fueled the industry's growth. Unlike other nuts, chestnuts are full of water — rather than oil — which means they can be dried out and ground up like grain to make flour. Their natural sweetness makes them ideal for pastries.

Researchers say the American Chestnut tree was once king of the forest in the eastern U.S., producing a decay-resistant hardwood perfect for building things like railroad ties, barns and other structures left out in the elements. In the 1940s, Mel Torme and Bob Wells lionized chestnuts in "The Christmas Song," later made famous by Nat King Cole.

But a fungus, first noticed in the early 1900s, took out billions of the trees. By the 1950s, it was rare to see a mature tree that hadn't been destroyed. Most chestnuts sold in stores were imported from Italy and China.

By the 1990s, Michigan farmers sensed a potential cash crop if the nuts could be grown successfully. Dennis Fulbright — a professor of plants, soils and microbial sciences at MSU — was researching chestnut trees and isolated a natural advantage that Michigan could exploit.

The fungus that kills the trees was itself susceptible to a virus tha! t occurs naturally in Michigan.

"We don't know where the virus came from," Fulbright said. "But it slows down the fungus considerably to the point where the trees' resistance can work."

Scientists helped by finding a hybrid tree that combines European and Japanese varieties. They produce larger nuts and a larger crop.

Fulbright said that eventually farmers hope to grow about 3,000 pounds of nuts per acre. The nuts sell for about $2 per pound wholesale and can fetch three times that much when sold retail, said Joyce Ivory of the Chestnut Growers.

The Henry Ford buys Michigan-grown chestnuts, and roasts and sells them during its Holiday Nights in Greenfield Village.

Jesse Eisenhuth, director of Food Services for the Henry Ford, said it's important to musuem to buy local.

"Chestnuts are a type of food most people equate with the holidays," Eisenhuth said. "Few people, however, have actually tasted them. We see a lot of people at our Holiday Nights program in Greenfield Village, eating chestnuts for the first time."

Fulbright said chestnuts give growers a diversity of products to offer; that helps when something goes wrong with their other crops.

"It's an alternative crop," Fulbright said. "We didn't freeze out the year of the big freeze in Michigan. If your apples or cherries are damaged, you still have your chestnuts."

Fulbright said Michigan's fruit belt on the west side of the state, where apples and cherry thrive, is perfect for chestnuts. But he sees other areas that can grow them, too.

Ivory and her husband, Peter, grow chestnuts on their property in Lapeer County in the Thumb. Fulbright said he initially doubted they could do well there, but: "They've proven me wrong, and I like to be proven wrong."

Fulbright said soil conditions and other factors in metro Detroit could make chestnut-growing possible here, too.

"This a great agricultural story," Fulbright said. "There are not too many start-ups in agriculture in our lifetime."

With K-Cup patent expired, others try to cash in

BURLINGTON, Vt.— Green Mountain Coffee Roasters in Waterbury, Vt., built a huge business on the strength of its patented K-Cup single-serve portion pack for Keurig single-cup coffee makers.

When the patent expired in September 2012, some analysts foretold doom.

That has not been the case. Rival companies have captured just about 8% of the single-serve market, and through the third quarter of this year, $2.4 billion of Green Mountain's $3.3 billion in revenue has come from selling the ubiquitous portion packs.

Green Mountain struck deals to make K-Cup packs for some of the biggest names in the business, including Starbucks and Dunkin' Donuts, and has kept that business after the patent expiration.

"The patent expired 13 months ago," said Bill Chappell, an analyst with SunTrust Robinson Humphrey in Atlanta. "We've had more than ample time to see what kind of impact it would have, and it really hasn't had that much."

That doesn't mean there aren't determined challengers out there, perhaps none more feisty than Rogers Family Co. in Lincoln, Calif.

Founder Jon Rogers remembers his first mug of K-Cup coffee, some 20 years ago at a car wash. He didn't like it and decided the single-cup craze would be a flash in the pan.

"I didn't think it had legs," he said. "Obviously time proved me wrong."

Rogers didn't wait for Green Mountain Coffee's patent to expire to launch his own single-serving portion pack, which led to his company being sued in November 2011. Green Mountain Coffee lost that lawsuit in May and appealed to the federal circuit, where the appeal is ongoing.

Rogers said he felt it was important to fight the much-larger Green Mountain Coffee because Rogers' One Cup portion pack is so different from the K-Cup pack. Rogers Family Co. has about $200 million in annual sales.

"Look at ours, and look at theirs," Rogers said. "They don't have a leg to stand on."

The One Cup uses a ring made from plant-based materials and an inner bag made from wo! od pulp, together with a mesh filter made from food-grade polyester. It is 97% biodegradable, says Rogers, who invested $10 million in machines to make the pods. Only the mesh filter is not biodegradable. Rogers is looking for an alternative that will make One Cup 100% biodegradable.

"It's done very well," Rogers says of One Cup. "It's pretty much nationwide, sold in selected Costcos. We manufacture (the) private label for Safeway."

One of the enduring criticisms of the K-Cup pack has been that it ends up in landfills — a problem that Green Mountain Coffee is still trying to solve.

Whole Foods Market, which launched a pod under its private 365 Everyday Value brand in July, did not even consider Green Mountain Coffee as a supplier, said Mark Dickerson, a buyer for the grocery chain.

Dickerson declined to say who makes Whole Foods' pods but did say the famously green company had to grapple with the fact that its consumers "tend to not like additional packaging."

As much as Whole Foods might chafe at the single-serve pod — which is difficult to recycle because of its small size and the combination of plastic and aluminum used in its packaging — the company decided it couldn't ignore the numbers.

"The sales trend really, really made it compelling to explore the opportunity," Dickerson said. "In doing so we wanted to stay true to our mission and core values and do it in a Fair Trade organic format to differentiate ourselves."

While the inroads that unlicensed portion packs have made so far are modest, Green Mountain Coffee's plans to introduce a brewer in 2014 that can reject unlicensed pods has some analysts wondering just how worried the company is.

CEO Brian Kelley explains that Keurig 2.0, as the new brewer is known, utilizes interactive technology to distinguish licensed from unlicensed pods.

"We will brew perfectly every licensed pod," Kelley said. "We're in the process of offering unlicensed pods the opportunity to come into the system so the! y, too, c! an be perfectly brewed."

Kelley declined to say what the fate of unlicensed pods will be in the new system, but it could range from not brewing them at all to brewing them a few times before they no longer work.

"It's fair to say we're still deciding on exactly how we will handle the unlicensed pod," Kelley said.

Dan D'Ambrosio also reports for the Burlington (Vt.) Free Press

Advanced Micro Devices, Inc (AMD): When Warm Just Isn't Hot Enough

Last Thursday after the market closed, Advanced Micro Devices, Inc (NYSE: AMD) reported earnings and now the stock is off by almost 22% over the last four trading days with most of the fall coming when the market opened on Friday after earnings were reported. Part of the problem for the company was bad timing as there were a whole bunch of earnings reports that came out last Thursday and Friday plus major tech names like Microsoft Corporation (NASDAQ: MSFT) and Google (NASDAQ: GOOG) missed Wall Street expectations. Nevertheless, our SmallCap Network Elite Opportunity (SCN EO) portfolio position in Advanced Micro Devices went from a handsome profit to being down about 6%, but we aren't going to worry too much for the following reasons:

The Earnings Report Beat Expectations. Advanced Micro Devices did largely beat Wall Street expectations when it reported earnings. Revenues fell 18% to $1.16 billion while Wall Street had expected $1.1 billion; plus the company reported a net loss of $74 million verses net income of $37 million for the same period last year, while Wall Street was expecting a loss of around $102.9 million. CEO Rory Read also said that Advanced Micro Devices is on track to report net income in the third quarter, something that hasn't happened since mid-2012, with most of an expected 22% sequential improvement in revenue expected to come from console chip sales. Finally, Gross margin will drop to about 36% this quarter from 40%. Stock Downgrades. Some Wall Street analysts decided to downgrade Advanced Micro Devices after the earnings report with John Pitzer of Credit Suisse cutting his rating from "Neutral" to "Underperform." Pitzer noted that while the results and guidance were ahead of Wall Street's estimates, he cautioned that estimates for the company's profits from videogame consoles appear too high He added: "Its unclear to what extent new gaming platforms are incremental relative to AMD's current royalty position." Joseph Moore of Morgan Stanley also called the earnings report "a good quarter," but then he cited margins from game consoles that will be lower than expected when he downgraded the stock to an "Underweight" rating. Neutral Analyst Opinions. Not everyone was downgrading Advanced Micro Devices as Citi analyst Glen Yeung reiterated his "Neutral" rating plus he increased his price target by $2 to $5. Yeung added that while the video game player business will boost sales, its products have very small margins which will limit its effect on the company's bottom line. Meanwhile, Susquehanna Financial Group's Chris Caso also backed his "Neutral" rating and raised his price target by $1.50 to $4. However, Caso did caution that the company's cash balance and debt obligations leave it little flexibility plus he added there is no guarantee that the new video game consoles its chips supply will be successful. Finally, Wedbush Securities' Betsy Van Hees has kept her "Hold" rating and noted: "It was a great report but a lot of the good news is already priced in." Cramer Still Likes the Stock. For what his oppinion may be worth, Jim Cramer, the host of CNBC's Mad Money, recently said: "I'm a buyer as a bullish bet on new gaming consoles." Share Performance. Advanced Micro Devices fell 0.82% to $3.63 in heavy trading yesterday, but the stock is rising in premarket trading plus its still up 59.2% since the start of the year, down 14% over the past year and down 21.9% over the past five years:

For technicians, here is the latest technical chart for AMD:

Again, Advanced Micro Devices put in a pretty good earnings report – meaning the selloff after or perhaps the run up ahead of earnings was a bit overblown.

SmallCap Network Elite Opportunity (SCN EO) has an open position in AMD. To find out what other open positions SCN EO currently has, and to learn why so many traders and investors are relying on this premium subscription service, click here to find out more.

The Retirement Time Bomb No One’s Talking About ... Yet

The problem of insufficient retirement savings is an oft-highlighted problem, but the safety of Americans’ meager retirement assets gets far less attention.

So says Ron Surz (left), pension consultant and gadfly on target-date and hedge fund issues who has written numerous technical articles on portfolio management.

In an interview with ThinkAdvisor, Surz warns that masses of retirement portfolios are due to blow up, just like they did in 2008, because of the inappropriate risk levels of target-date funds, which today claim a far higher proportion of retirement assets than they did back then.

“It’s not a matter of if — it’s a matter of when, says Surz of San Clemente, Calif.-based Target-Date Solutions. "We will have another market correction and those folks at or near retirement will be toast,”

While both diversification and fund costs have improved somewhat since the 2008 financial crisis, the key factor that is unchanged since that time is the riskiness of these funds.

“The equity allocation is exactly what it was in 2008,” Surz says, noting that target-date assets have skyrocketed since that time.

The fund category, which combines stocks and bonds but which reallocates in order to become more conservative as the investor approaches retirement, has surged in growth since the Pension Protection Act (PPA) of 2006 made TDFs (the most popular) one of three default investments.

From zero assets prior to the PPA, target-date funds today amount to more than $1 trillion, or about one fourth of all 401(k) assets, and are on track to reach $4 trillion, or half of all 401(k) assets, by 2020.

And yet, as the financial media mark the fifth anniversary of the Lehman Brothers bankruptcy, which sent the stock market into a tailspin, Surz wants Americans to recollect that target-date funds, despite their image as safe investments, performed abysmally at that time.

Investors — some already retired and others close to retirement — in 2010 target-date funds (i.e., funds invested for investors targeting that year as their retirement date), lost 25% of their funds’ value on average in 2008.

The Securities and Exchange Commission and Department of Labor held hearings at which fund company executives assured officials that all was well.

“As soon as they made back 25%, the fund companies were saying no harm no foul. This will never happen again. It’s a pretty naïve view,” Surz says.

That is because fund company incentives are not aligned with retirees’ goals, which is to not risk losing their retirement wealth when they need it.

“The fund companies get paid whether performance is good or bad, and they get paid more for running higher risk products. They get paid for more for running a stock portfolio than a bond portfolio,” Surz says.

And indeed, Surz points out that the three fund companies that collectively manage 85% of target-date fund assets — T. Rowe Price, Vanguard and Fidelity — have average equity allocations of 60%, 55% and 55% respectively, a level of risk Surz says is inappropriate.

(While unchanged on average since 2008, he notes that 2010 funds specifically averaged equity allocations of 45% when they lost 25% in 2008.)

Beyond these averages, Surz finds it curious that some companies have widely different allocations that seem to reflect corporate objectives more than investor objectives.

For example, PIMCO, a bond shop, has just a 20% average equity allocation at the target date, whereas AllianceBernstein, an equity shop, has a 70% equity allocation.

“In their presentations, they’ll tell you that PIMCO’s demographic is people who have saved enough and don’t need to take risk and AllianceBernstein’s is people who haven’t saved enough and need to take more medicine [i.e., equities],” Surz says.

“But look at their prospectuses: You will not see these objectives; they’re just an excuse to package product any way they want to.”

He adds that each has its Ph.D. presenters who will “prove to you that 70% of the target-date portfolio should be in equities [for AllianceBernstein while] Pimco will prove to you that 80% should be in bonds.”

The reality, he says, is they allocate their funds the way they do for two reasons: “They want to get paid most they can and they want to win the horse race” — meaning they understand that equities usually outperform, so (PIMCO notwithstanding) they’re going to load up on stocks so they have good performance numbers most of the time.

Surz, who has developed his own Smart Funds available to RIAs through Hand Benefit & Trust of Houston, says advisors must play the key fiduciary role.

The plan sponsors who are obligated as fiduciaries for workers “are just plain lazy,” Surz remarks. “These guys are running companies, not pension funds.”

Five-year losses for his Smart Funds were just 10% in the five most brutal months of 2008, compared with 37% for T. Rowe Price, 30% for Vanguard and 35% for Fidelity.

Surz has spoken to ERISA attorneys who are already planning class-action lawsuits against mutual funds (rather than shallower-pocketed plan sponsors) when the next crisis hits.

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Check out Beware of Target-Date Funds by Ron DeLegge on ThinkAdvisor.