First things first: You won't find any stock or ETF recommendations in this column.
There's no shortage of advice on the hot investments for the coming year during the holiday season. But as far as I'm concerned, the best financial moves you can make -- and need to make ASAP -- aren't about the outlook for corporate earnings growth or capitalizing on geopolitical trends.
Far more important is how good a job you're doing at taking the best care possible of yourself and your family.
Here's my checklist of must-do items for 2007:
1. Lose your balance.
In a few weeks, the credit card bills for the holiday season will start rolling in. For many of you, so will remorse.
I've always considered January to be the most dangerous financial month; it's when so many of us set in motion decisions that can either save us or sink us. The most pivotal decision is what to do about those credit card bills: pay them off completely, or just pay the minimum due and start running a month-to-month balance.
This is your big moment to do what's right, not what's easy: Find a way to pay off the bills completely. It sets you up for a much more prosperous 2007 and beyond.
Not only will you avoid the high interest charges, but you'll have made the most valuable of resolutions: Choosing to be powerful over your money, not vice versa. That sense of accomplishment and control will have an incredible effect throughout your personal and financial life.
Wondering where to come up with the money? Well, if the interest rate on your credit card is higher than what you earn on your savings account, I say tap the savings.
2. Make sure you rate high.
Everyone loves to talk about what's going on in the stock market, but I've yet to hear anyone boast about their great bank savings rate. But not paying attention to what you earn on your savings is a costly mistake.
First, do you even have a separate savings account, or do you just let all your cash sit in your checking account? Most checking accounts that bother to pay any interest on your balance offer a lousy rate -- less than 1 percent on average -- or require you to keep too high a balance to qualify for a decent rate.
Meanwhile, there are plenty of savings accounts -- especially at Internet banks such as EmigrantDirect and HSBC -- where you can earn about 5 percent right now. That's too huge a difference to ignore.
3. Win the match game.
About 20 percent of people eligible for a company match on their 401(k) contributions don't invest enough to qualify for the maximum match. That's equal parts misguided and tragic.
No matter what's going on in your financial life, it makes no sense to turn down this great deal from your boss. Make sure you invest enough in your company plan to snag the maximum company match.
Consider this: If you turn your nose up at the opportunity to get an annual match of just $1,000, over the next 10 years you could be throwing away not just $10,000 of retirement money, but more like $100,000 or so.
How's that? Well, if you manage to earn 8 percent on the company match, and after 10 years just let what has built up continue to grow for another 25 years, that's what the value of the company match could grow to. I'm assuming you and your family can't afford to ignore six-figure payouts.
4. Face your mortality.
What's mortality got to do with prosperity? Everything, if you love your family.
I know this isn't exactly a favorite topic of conversation, but if you have any dependents -- be it young children, a spouse, or older parents -- you want to make sure they're provided for even if you die prematurely.
If you're at a stage in your life where you have yet to build up sizable assets, the simple solution is a term life insurance policy. And I mean it when I say it's simple: Term life is easy to purchase and incredibly inexpensive.
A 40-year-old, non-smoking male in good health can buy $1,000,000 of coverage for just $100 a month or so. There are more details in my earlier column "Insurance: What You Need and What You Don't."
5. Stop kidding around.
This one is for the parents of young children. If you want your kids to grow into happy and responsible adults, you need to take the time to teach them about personal finance. Don't assume they'll just learn as they go, or get instruction in school.
I often hear from young adults who feel let down by their parents on this front; the kids end up running up huge credit card debt in college because they had no clue what was going on, or they panic when they learn Mom and Dad have "paid" for everything by going deeper and deeper into debt themselves. These young adults now face the reality of having to support not just themselves, but also their parents.
The single best gift you can give a child is to teach them the incredible value of living within your means. This doesn't have to be a downer, and you're not being mean. You are, in fact, liberating your kids -- they won't grow up to have a screwed-up approach to money that leaves them deep in debt and deeply depressed.
One of the smartest financial moves you can make is to give them a credit card education. If you have a solid FICO credit score -- above 720 or so -- then I recommend adding your teenager to the account as an authorized user. It's their training wheels in the world of finance.
Let them use the card, and involve them in the bill paying; literally have them sit down with you when it's time to send in the payment. Explain the dangers of falling into the minimum payment trap, and the cost of paying high interest on an unpaid balance. They may not thank you in 2007, but in years to come I guarantee they'll thank you for giving them the tools to be financially smart and secure adults.
We've all been waiting on the edge of our collective seat for the first bumptious, exciting and far-reaching strategic move from Alan Mulally, the airplane man who was appointed CEO of Ford (F) amid a business media pant-and-squeal attack.
And the move is?
He created a post. That's right, folks, a post, a product of his sweeping "flatter management" approach. Holy '90s flashback, Batman.
That sound you hear echoing from Michigan to Wall Street is expectations falling with a clank.
Personally, I wouldn't have had time to create a post because I'd have been in some garage in Dearborn, Mich., personally trying to screw together a successful subcompact, but perhaps Alan Mulally is just being prudent. In his first major move, Mulally said that Jon Parker, the head of Ford Asia Pacific and Africa, and Mazda, will report directly to Mulally instead of going a roundabout way.
If this first move was the assertion of the sort of visionary leadership that is going to save the nation's second-largest automaker, then The Business Press Maven wears his sundress with combat boots.
But to put things in larger perspective, maybe when press conference expectations are so out of whack, we can't help ending up like this, all forlorn and in a puddle of tears. At the mention of another wedding-day press conference, let's back up, careful not to run over anyone. Aw, heck, let's just throw the car into reverse and gun it.
When Bill Ford downgraded himself to second fiddle in early September, he appointed a CEO in his stead who might very well have been his last choice, a guy who had spent a career at Boeing (BA) peddling planes, named Alan Mulally.
As I said at the time: I had nothing against Mulally. In fact, the only evidence I have that Mulally has bad judgment was the fact that he took this job. But -- and here's where the business media lapsed as usual -- Ford and Mulally held a press conference.
There's an old trading adage: Sell at the wedding and buy at the wake. Truer words were never spoken. But if you look at the history of the news, nothing seems to get written about more gently than weddings, even though half end in divorce and much of the other half hold a lifetime of recrimination and regret.
The gentle coverage of weddings in newspaper Lifestyle sections carries over to the business pages, where press conferences about mergers, joint agreements or new appointments receive much the same treatment.
The coverage of the Ford-Mulally wedding was light and comedic, like something that could appear in a Lifestyle section, with so much prominent mention made of how Bill Ford was going to key Alan Mulally's Lexus that The Business Press Maven suffered post-traumatic stress disorder. The Maven is flashing back in sweaty anguish to the moment Time Warner's (TWX) Jerry Levin and AOL's Steve Case held their little love-fest of a press conference, and coverage centered upon the ridiculous joke about the fact that Levin took off his tie.
Of course, investors in that one eventually came to want to hang themselves with their own ties. But such is too often the fallout from such mergers.
Can Mulally resuscitate Ford? Can anyone? The Business Press Maven does not think so, but even there I'll reserve judgment. As I said before: Outside of one particular career move, I think well of Mulally.
But at the very least, let's look at the time frame. No matter how excited the coverage of one of these announcements is, effecting any change takes a long, long time -- if it can ever be done. Chasing such positive coverage almost always leads you to moments like this, when you realize, once more, the error of the business media's ways.
While no one is bum-rushing Ford, asking to take it over -- and I don't think anyone ever will -- the market is (outside of Ford) in an "if it moves, merge with it" mode. This brings up an interesting question for the business media: how to cover deal chatter, those unsubstantiated rumors that move stocks. I suggest calling it deal chatter in the headline and stating in the first sentence that the rumors are unsubstantiated. The Business Press Maven calls your rapt attention to an article that ran Thursday afternoon on our own TheStreet.com, which did just that.
That story is about American Express (AXP) rumors that pushed the stock up 3%, but could run their course faster than expectations that Mulally will be an instant fix for Ford. More important than what the article says about American Express is what The Business Press Maven beseeches you to take with you: Read stories on rumored takeovers carefully, making sure you have a sense of whether the talk is just chatter and how substantiated it all is.
It's getting a little crazy out there. And that, my friends, is something I can always substantiate.
NEW YORK (AP) -- Lehman Brothers and Bear Stearns sent a not-so-subtle message to Wall Street on Thursday when announcing 2006 results -- the word "record" appears a combined 37 times in their earnings reports. Surging stock and bond markets, coupled with an unprecedented level of takeover activity, has turned the big investment houses into corporate cash machines. It is also delivering stratospheric bonuses to top employees, with Goldman Sachs Group Inc. doling out a staggering $16 billion this year.
For all of fiscal 2006, Lehman Brothers Holdings Inc. reported record net income of $4 billion, up 23 percent from the previous year. Bear Stearns Cos.'s profit for the year soared 40 percent to $2.1 billion. Goldman Sachs said Tuesday its full-year profit soared 70 percent to $9.4 billion, and Morgan Stanley Inc. is set to deliver strong results when it reports next Tuesday.
For chief financial officers, closing the books on 2006 has been an eye popping experience. They remain enthusiastic about 2007, though don't expect to see a repeat as the economy begins to moderate.
"We look out and believe we're having terrific performance, and you see it building throughout the year all across the board ... you can't help but feel good about where you're going," said Lehman CFO Chris O'Meara. "It's hard to predict where we'll be next year, but I will tell you we have some high quality people, and that sets us up for good things next year."
His counterpart at Bear Stearns, Sam Molinaro, said he could tell this was going to be a bumper year for Wall Street. "All you had to do was look at what's going on in the stock market, and the level of interest in taking companies public and making acquisitions," he said. "You have to say that the outlook for corporate America is strong right now, its in a growth mode and looking to build."
The fourth quarter was emblematic of this.
Bear Stearns reported profit attributable to common shareholders rose 38 percent to $557.6 million, or $4 per share, during the three months ended Nov. 30, while Lehman said profit rose 22 percent to $987 million, or $1.72 per share.
Both easily sailed past Wall Street projections, according to analysts polled by Thomson Financial. However, not by as wide a margin as Goldman's 93 percent jump in quarter profit on Tuesday -- the highest quarterly profit ever recorded for a Wall Street firm.
Both Lehman and Bear Stearns are renowned globally for their strength, and sometimes dependence, on the fixed-income market. The bond market has seen strength this year, as Treasury yields dipped to multiyear lows and companies increasingly raised debt to finance acquisitions.
"The quality of the earnings was quite good with merger and acquisitions being the clear standout in terms of performance upside," said Credit Suisse analyst Susan Roth Katzke "It was another solid quarter with full year profitability above average."
Fixed-income trading revenue for both companies rose 25 percent from the year-ago period, and at a faster pace than seen during the third quarter. Instruments such as derivatives were linked to everything from stocks to weather, or credit-default swaps that let investors hedge against bond defaults.
Investment banking was another area that both investment houses have been trying to expand in the U.S. and internationally. Bear Stearns' investment banking business rose 58 percent to $364 million. Lehman said its investment banking business rose only 5 percent to $585 million, and that fees from advising on corporate deals fell 7.2 percent to $256 million.
Six straight months of gains by the Standard & Poor's 500 index, with the Dow Jones industrial average reaching a new all-time high, was a boon for Wall Street.
Bear Stearns reported that revenue from its institutional equities business rose 7 percent to $397 million, while its money management and wealth management revenue jumped 33 percent to $245 million.
Lehman said revenue from equity sales and trading rose 22 percent to $900 million in the fourth quarter, compared with $2.14 billion in revenue from bond trading. Its money management and wealth management revenue grew 26 percent to a record $640 million.
Both Wall Street firms also outlined their bonus scheme for the period, which was far below the $622,000 per employee being paid out by Goldman Sachs.
Lehman said it would pay its employees an average of $335,441 this year -- paying 25,936 workers a total of $7.7 billion in salary, bonuses and other benefits. At Bear Stearns, staff would receive an average of $321,740 in compensation.
Dow closes at new high; profit outlooks overshadow oil
NEW YORK (MarketWatch) - U.S. stocks closed sharply higher Thursday, with the Dow Jones Industrials Average setting a record close, after positive forecasts from some household names helped investors shrug off an upcoming cut in oil output.
Gains in energy shares lent support, after crude spiked above $62 a barrel as the Organization of Petroleum Exporting Countries confirmed it will cut output by another half a million a barrels a day starting Feb. 1. See full story.
The Dow industrials gained 99.26 points to close at 12,416.76, a new record close after earlier touching an intraday high of 12,427.
"We're rallying across the board," said Art Hogan, market strategist at Jefferies & Co. "There's no real negative except the natural-gas story, and we've got stellar report cards from the brokers this week."
Dow component Honeywell International Inc. rose almost 2% after issuing a positive earnings outlook for this year and next.
However, fellow blue chip United Technologies Corp. capped the Dow's climb, losing 3.4% after making upbeat comments on 2007 but also issuing cautionary statements about the fourth quarter. See full story.
Thursday's rallying trend helped investors overlook an unexpected huge drop in the nation's natural-gas inventories, which sent the price of the commodity soaring.
Also helping sentiment, Citigroup strategist Tobias Levkovich lifted his 2007 targets for the main stock averages -- including a forecast that the Dow will reach 14,000 by the end of next year. See full story.
Against this bullish backdrop, the S&P 500 rose 12.28 points to 1,425.49, after touching a 6-year intraday high. The Nasdaq Composite climbed 21.44 points to 2,453.85.
Broker-dealers were in focus after Bear Stearns reported fourth-quarter net income rose 38% to $562.8 million, or $4 a share, flying past analyst forecasts. See full story. The stock gained 2.6%.
However, Lehman Bros. fell 0.4% after the broker's quarterly results and forecasts came in slightly above expectations. See full story.
Trading volume was 1.567 billion on the New York Stock Exchange and 1.950 billion on the Nasdaq.
Advancing issues topped decliners by about 2 to 1 on the Big Board and by 17 to 12 on the Nasdaq.
Late in the session the New York Federal Reserve said it released its December Empire State manufacturing survey early by mistake. The index had been scheduled to be released Friday at 8:30 a.m. Eastern
The index fell to 23.1 in December from 26.7 in November. The decrease was not as large as expected. Economists were forecasting the index to fall sharply to 18.0. New orders rose to 25.1 in December from 22.4 in November. Shipments were little changed.
The prices paid index fell to its lowest level of the year.
Meanwhile, Thursday's other economic reports reinforced the market's recent shift in expectations from concerns over a hard landing for the U.S. economy to concerns that growth and inflation will keep the Federal Reserve from cutting interest rates as early as hoped.
Import prices rose 0.2% in November, reversing a two-month decline, as prices for natural gas skyrocketed. See full story.
Separately, weekly jobless claims dropped by 20,000, pushing the four-week moving average of new claims down 1,500 to 327,250, according to government data. See full story.
Fresh concerns that the Fed won't ease as early as hoped are pushing up bond yields, while money is pouring out of bonds and into the stock market "because the economy's growing better than we thought," Pado said. Listen to Pado.
He noted that before "funds were positioning themselves for lower rates and a slower economy, so we could see them tweak their positions before yearend."
By sector, semiconductors , oil services and telecommunications were among the main leaders Thursday, while only airlines were on the downside.
Concerns about a slowing economy next year might be yet another reason to squeeze in more gains in December, said Jefferies' Hogan.
"It's going to be tough to repeat this year's market performance next year," he said. "With an economic slowdown on the way, and after 14 consecutive quarters of double-digit earnings growth, it makes you wonder about 2007."
In addition, Hogan said that tax deferring is a major incentive for many money-managers to not rake in profits until Jan. 1: "If you own Google right now, why sell it now when you'd have to pay taxes next April while if you wait until January 1 to sell, there's no taxes until April 2007?"
Other markets
Crude oil gained $1.14 to close at $62.51 a barrel on the New York Mercantile Exchange after OPEC's official announcement that it will cut production. See Futures Movers.
The dollar was continuing its recent recovery, adding 0.5% against the euro and 0.3% against the yen, as the greenback received a fresh boost from the import-prices data. See full story.
Gold dropped as the dollar rose, with the February contract losing $1.50 to close at $630.90 an ounce. See Metals Stocks.
U.S. Treasurys finished modestly lower after the import-prices data. The benchmark 10-year Treasury bond fell 3/32 to 100 7/32, while its yield rose to 4.597%. See full story.
Stock movers
Shares of Dow component Procter & Gamble lost early gains to close down 5 cents at $63.35 after it confirmed second-quarter earnings and sales targets. See full story.
Pier 1 Imports Inc. fell 2.3% after reporting a wider third-quarter loss on a 12% decline in sales. See full story.
A retailing standout was Costco Wholesale Corp. , shares of which rose 1.8% after reporting a first-quarter profit of $236.9 million, or 51 cents a share, up from $215.8 million, or 45 cents, in the year-earlier period. Analysts had been expecting earnings of 50 cents a share. See full story.
Recently weak, shares of Ford Motor Co. ran up 3.4% after Merrill Lynch upgraded the automaker to neutral from sell, saying the automaker's efforts to raise liquidity have been more successful than previously expected. See Ratings Game.
In deal news, Swiss food group Nestle said that it has agreed to acquire the medical nutrition business of Novartis for $2.5 billion. U.S.-listed shares of Novartis rose almost 1%.
NEW YORK (MarketWatch) -- U.S. stocks closed lower Tuesday, after the Federal Reserve noted a "substantial cooling" in the housing market but also kept its emphasis on inflation fighting in the statement accompanying its decision to leave interest rates unchanged.
While some market participants hoped the Fed might open the door for eventual rate cuts next year, policymakers maintained a bias towards more tightening as they still see inflation as a risk. See full story.
"Their view on housing was recognizing something that everybody already knows," said John Norris, chief economist and senior fund manager at Morgan Asset Management.
Meanwhile, "the no change in the second part of the statement on inflation will leave some disappointed," he said.
The Dow Jones Industrial Average ended down 12.90 points at 12,315.58, off an earlier low of 12,252 but also beneath a morning high of 12,333.
The market saw some heavy selling just ahead of the Fed decision and then bounced off its lows after the announcement.
"There were really no surprises," said Stephen Sachs, head of trading at Rydex Investments, explaining the short-lived bounce by the fact that "we had sold off to the degree we had before the announcement."
The Fed altered some of the language in its accompanying statement, "but the themes are the same -- yes, the economy has slowed and housing is a big drag, but inflation while elevated is under control. And the Fed is on hold for the foreseeable future," he said.
Caterpillar Inc. was the biggest drag on the blue-chip average, losing about 1.3%, after competitor agricultural equipment manufacturer AGCO Corp. said it sees sales rising only 3-5% in 2007 and wants to cut the number of dealers that sell its products by 20% over the next two years. AGCO ended down 3.8%.
Among other blue chips, Citigroup Inc. fell 1.2% after the bank named Robert Druskin, now chief executive of Citigroup's investment-banking arm, to be chief operating officer, reporting directly to CEO Charles Prince. The news ended market speculation that the bank would announce an in-depth restructuring.
The S&P 500 index fell 1.48 point to 1,411,56, while the Nasdaq Composite dropped 11.26 points to 2,431.60.
Texas Instruments rose 1.6% after JP Morgan upgraded the stock.
The world's top maker of cell-phone microchips cut its fourth-quarter sales and earnings forecast Monday after the market close. See full story.
Still, J.P. Morgan saw some silver lining in the announcement, upgrading the stock to overweight from neutral, on hopes that the company's gross margins are bottoming out.
Caution had dominated trading ahead of the Fed meeting.
The Fed was widely expected to again leave interest rates unchanged but investors wanted to see whether central bankers would mention any of the weakness seen in recent economic data. See full story.
"Now, the Fed comments mean the market will again have to pay attention to the inflation numbers," such as the November consumer price index, to be released Friday, Norris said.
According to Michael Sheldon, chief market strategist at Spencer Clarke, "while expectations of lower rates next year are probably correct, the timing remains uncertain."
Trading activity will start thinning as U.S. markets head into the holiday season, he said.
Volume was recently 1.525 billion shares on the New York Stock Exchange and 1.972 billion on the Nasdaq. Decliners beat advancers 9 to 7 on the Big Board and 18 to 11 on the Nasdaq.
By sector, airlines , gold and transportation led the downside, while pharmaceuticals and utilities finished higher.
Other markets
The dollar was mixed after the Fed comments and after news that the U.S. trade deficit narrowed sharply in October. The greenback was recently down 0.2% against the euro and up 0.1% against the yen. See full story.
Crude oil fell 20 cents to close at $61.02 a barrel ahead of the Organization of Petroleum Exporting Countries meeting later this week.
Gold fell, with the February contract finishing down $3.10 at $631.70 an ounce. See full story.
Treasurys, meanwhile, ticked higher, bolstered by the Fed statement's reference to a weaker housing market. The benchmark 10-year Treasury bond closed up 8/32 to 101 3/32, while its yield rose to 4.488%. See full story.
Stock movers
Brokers were in the spotlight with Goldman Sachs posting a 93% increase in net income, flying past analysts forecasts. Goldman shares, which had rallied ahead of its earnings, fell 1.2%.
Lehman Brothers and Bear Stearns release their results on Thursday.
Best Buy dropped 4.9%. The No. 1 home-electronics retailer said third-quarter profit rose more than 8% and backed its forecast for the year, but it missed Wall Street expectations and said margins were pinched by a "very competitive climate." See full story.
Alcoa Inc. dropped 1.4%, also weighing on the blue-chip average, after RBC Capital downgraded the stock to underperform from sector perform, citing valuation
SAN FRANCISCO (MarketWatch) -- Money managers who own shares of Apple Computer Inc. -- and the Wall Street analysts who follow the company -- believe firmly that Chief Executive Steve Jobs has more iPod magic up his sleeve. That faith in Jobs as a consumer-product visionary has helped drive Apple's stock price up 76% from its mid-July lows. Its shares closed Friday not far from the all-time high of $93.16 they touched Nov. 27.
Yet even those who are bullish on prospects for the technology giant say Apple's reliance on its handheld music player to power sales and profit growth cannot sustain it forever.
"We believe Apple needs to find new areas of growth," wrote Caris & Co. analyst Shebly Seyrafi in a Thursday note to clients.
Apple's sales for the fiscal year ended in September rose 39% to $19.3 billion, far outpacing the growth of such tech companies as Hewlett-Packard Co., Cisco Systems Inc. and Microsoft Corp. Apple's profit rose 46%.
If Jobs is out of tricks, and Apple's sales start to slow, many of the growth-fund managers who've bought its stock may become sellers.
For investors, who've watched the company's shares nearly triple in the past two years, the question of what will succeed the portable media device as Apple's primary growth driver is a critical one. That's because several factors are working against Apple's ability to maintain the torrid pace of its iPod sales, which rose 29% to $1.56 billion for its fourth quarter.
Perhaps the biggest obstacle, ironically enough, is the sheer scope of the success that Apple has already enjoyed with the iPod. Since it first shipped the product five years ago, Apple has sold 70 million units.
Even accounting for the loyalty of iPod fanatics who upgrade to every new model, the MP3 player market is becoming saturated, analysts say.
A maturing market
Growth in the media-player market will slow to about 10% annually over the next four years, down from current rate of about 50%, according to Prudential Equity Group analyst Jesse Tortora.
Apple is also swimming against the law of large numbers. With the company's revenue reaching nearly $20 billion for the fiscal year ended in September, the company must generate ever-higher sales to maintain a growth rate that satisfies Wall Street.
"The bar is getting set higher and higher," said Robert Bacarella, who owns Apple shares and manages the Monetta Select Technology Fund .
And it's not like Apple will have the media-player market to itself. Its iPod line faces growing competition from smaller rivals like SanDisk Corp.'s Sansa player and, most recently, from the Zune, introduced by Apple's longtime nemesis, Microsoft Corp.
Microsoft plans to spend heavily to market its new player, which it rolled out in November. While the product didn't exactly set the world on fire at the beginning of the key holiday-shopping season -- its sales through Amazon.com lagged well behind those for a half-dozen iPod models and even an iPod adapter -- Microsoft has a history of tenacity and is expected to produce 10 million of the devices next year.
"We think Microsoft will be Apple's most formidable competitor," said Prudential analyst Tortora, who has a neutral rating on Apple shares.
Feeling the heat but getting busy
Even Jobs is apparently feeling the pressure for more product-design magic.
Amid reports of strong iPod holiday sales, and with the annual Macworld conference in San Francisco just a month away, the company took the rare step of showing off one its new products, the iTV, months before it was set to hit the market.
Apple intends to release the device, which can beam digital content from a computer to a television via a wireless link, in the first quarter of next year.
Still, most of the recent buzz surrounding Apple is focused on a product that Jobs, true to form, has yet to confirm even exists: the so-called iPhone.
Apple has filed a patent for a "telecom device," and several industry watchers say checks with Asian contract manufacturers suggest the company is set to unveil its first foray into the market for products that combine the features of a cell phone and an MP3 player.
While Apple partnered with Motorola on the Rokr device more than a year ago, its price and features limited its appeal.
But Jobs is expected to make a big bet on the iPhone -- or whatever Apple calls it -- and is gearing up to produce anywhere between 11 million and 16 million of the devices in 2007.
Seyrafi, the Caris & Co. analyst, has estimated that if the iPhone can capture just 4% of the nearly two-billion-unit cell-phone market in a few years, the new line could make up more than 20% of Apple's annual sales.
Seyrafi started his coverage of Apple on Thursday with an above average rating and a $100-a-share price target, becoming one of at least five analysts to publish a triple-digit price target for Apple shares.
Don't forget the Macintosh
One reason for that level of bullishness is that, even as Apple looks to flashy new products for growth, it's seeing a resurgence of interest one of its earliest, the Macintosh computer.
Sales of the venerable product line rose even faster than that of the iPod during the quarter ended in September, climbing 37% to $2.21 billion. Taken together, Apple's laptops and desktop unit sales are growing more than four times faster than the global PC market as a whole and have Apple closing in on third place in the U.S. PC market.
While iPod sales contribute nearly 40% of Apple's revenue, Mac sales still kick in more than half, which means the product's renewed vigor is goosing Apple's sales and bottom line.
That performance has bolstered some investors' confidence in their Apple stakes, even though Microsoft has set aside $1 billion for coupons designed to convince holiday-season computer buyers to choose machines from Dell and H-P as they await Microsoft's new Vista operating system, which is due in January.
"There is reason to believe in 2007 that Apple can build upon the strength it has seen this year," said Connor Browne, co-manager of the Thornburg Investment Management Value Fund , "and continue to grow at nice rates."
NEW YORK (MarketWatch) -- U.S. stocks closed higher Friday, posting a weekly gain, as investors digested a slightly stronger-than-expected November jobs report, and with investors buying recently battered shares in the technology sector.
The Dow Jones Industrial Average rose 29 points to close at 12,307.
For the week, the blue-chips average rose 113 points, or 1%, marking its first weekly gain in three weeks.
Citigroup Inc. was the biggest gainer among blue chips Friday, advancing 2.3%.
According to Richard Bove, analyst at Punk Ziegel & Co., the stock moved on rumors that the bank will announce the spin-off of large portions of its business next week and that Al de Molina, the departing chief financial officer of Bank of America Corp. , will replace Charles Prince as chief executive of Citigroup.
Bove called both rumors "nutty".
Among other bank issues, Bank of America Corp. dropped 1.6% after a Merrill Lynch analyst said that the bank is "very interested" in acquiring U.K. bank Barclays Plc . See full story.
3M Co. , a Dow component, fell 1.3% after Prudential downgraded the stock to neutral from overweight, citing valuation.
The S&P 500 Index gained more than 2 points to 1,409 points. For the week, the broad average rose 13 points, or 1%, also marking its first weekly gain over the past three weeks.
The Nasdaq Composite Index rose nearly 10 points to 2,437. It finished the week with a gain of 24 points, or 1%.
The market got an early boost after the Labor Department said that the economy added 132,000 jobs in November, while the unemployment rate rose to 4.5% from 4.4%. See full story.
Economists polled by MarketWatch expected the economy to add 112,000. The report soothed investors concerned that the U.S. economy is headed for a "hard landing."
"Overall, the number was positive in that it was stronger than expected, but it was not so positive as to keep the [Federal Reserve] on a tightening course," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank.
The market has found comfort in expectations that the Fed will cut interest rates early next year to try and stave off an economic slowdown.
The November jobs data, meanwhile, somewhat scaled back those expectations.
Federal funds futures indicate the market sees a 36% chance that the Fed will cut rates by March, down from 48% on Thursday. For its part, the central bank is widely expected to keep rates unchanged at 5.25% at its meeting on Tuesday.
Mostly, "we've got the biggest [economic] numbers now behind us," added Fitzpatrick. "That can help push equities a little bit higher as we finish the year."
News that consumer sentiment eroded slightly in December according to researchers at the University of Michigan first damped enthusiasm for stocks early Friday.
"There's still a lot of cash on the sidelines and it keeps filtering into equities either directly or with [mergers & acquisitions]," the Deutsche Bank equity executive said. "Every weekend, we've had positive announcements on the M&A front, so we'll see what this weekend brings."
Trading volume was 1.3 billion shares on the New York Stock Exchange and 1.8 billion on the Nasdaq.
Gaining issues beat decliners fractionally on the Big Board and 15 to 14 on the Nasdaq.
By sector, oil services , broker dealers and networking issues led the gains, while semiconductors and transportation were weak.
On Thursday, stocks closed lower as concerns over possible delays to Apple Computer Inc.'s iPhone offset increased confidence in the labor market after weekly jobless claims.
Other markets
The dollar rallied to one-week highs after Treasury Secretary Henry Paulson reiterated a strong dollar policy while avoiding to pegging a desirable level for the Chinese yuan.
The dollar was last up 0.6% against the euro, and up 0.9% against the yen.
Gold futures fell as the dollar rose. The yellow metal for February delivery finished down $6 at $631 an ounce.
Treasurys extended their losses after the nonfarm payrolls report. The benchmark 10-year Treasury note finished down 19/32 at 100 17/32 in price with a yield of 4.559%.
Crude oil futures closed down 46 cent at $62.03, amid questions over whether the Organization of Petroleum Exporting Countries will implement production cuts.
Stocks in motion
Hewlett-Packard Co. fell 0.6% after agreeing to pay $14.5 million to settle charges related to management's spying on board members, employees and journalists. See full story.
McDonald's Corp. , another Dow component, gained 1% after it said that global November sales at restaurants open at least one year rose 6.2%. See full story.
Oracle Corp gained 1.7% after raising its bid late Thursday for the shares it doesn't already own in India's i-Flex Solutions.
GlaxoSmithKline Plc fell 0.1% after agreeing to buy privately held biopharmaceutical firm Domantis for $454 million cash.
U.S. stocks close higher as data show growth, low inflation
NEW YORK (MarketWatch) -- U.S. stocks closed higher on Tuesday after data showed service-sector growth improving in November, while inflation was weaker than expected in the third quarter, fueling hopes of a soft landing for the U.S. economy.
The Dow Jones Industrial Average gained 47 points to close at 12,331, just off its intraday high of 12,335 and slightly below its all-time closing high of 12,342.
Coca Cola Co. was the biggest gainer among blue chips, rising 2.5% to $48, a 2 1/2-year high, after Merrill Lynch raised its price target on the stock to $51 from $48.
The S&P 500 Index rose 5 points to 1,414, and the Nasdaq Composite Index gained 4 points to 2,452.
After a mixed opening, stocks turned positive after the Institute for Supply Management's survey of the service sector showed better than expected growth. See full story.
Last week, the ISM manufacturing survey showed that the sector had contracted in November, sparking fear of a so-called hard landing for the U.S. economy.
"We are a service-sector economy," said Paul Mendelsohn, chief investment strategist at Windham Financial Services.
"This supports the idea that we can avoid a recession," he said, although "the big number will be the [November] employment report on Friday."
Overall, the strategist believes that the market remains in the middle of a Santa Claus rally, which traditionally takes stocks higher through the end of the year.
Few money managers want to cash in their gains in December, as their clients would then have to pay taxes on them in April of next year. If they wait until Jan. 1, taxes on those gains won't have to be paid until April 2008.
"The market doesn't seem to care, even when we get bad economic data," Mendelsohn added. "I'm blown away by the power of this rally, in spite of the inverted yield curve and the economy deteriorating."
Earlier, the Labor Department said unit labor costs -- a key measure of inflationary pressure -- aren't rising as fast as previously thought.
Mildness in wage inflation, which is closely monitored by the Federal Reserve, should take pressure off the central bank to continue lifting rates. See full story.
Trading volume was 1.54 billion shares on the New York Stock Exchange and 2.05 billion on the Nasdaq.
Advancers beat decliners 20 to 11 on the Big Board and 15 to 14 on the Nasdaq.
By sector, semiconductors , multimedia networking and consumer-related issues were strong, while metal mining and oil-services stocks were weak.
On Monday, stocks shrugged off Pfizer Inc.'s decision to halt development of a once-promising cholesterol drug, as a flurry of merger activity sent major indexes higher.
"I'm participating in this market, but the higher we go the worse the risk/reward ratio," said Mendelsohn. "This is a game of musical chairs. I'm telling clients that while it's good to maximize gains, make sure you have a chair and be ready to take money out quickly if things get a little iffy."
Coincidentally, Tuesday marked the 10-year anniversary of the now famous warning from Federal Reserve Chairman Alan Greenspan that markets, then in the midst of the technology bubble, were displaying "irrational exuberance."
The Dow Industrials dropped 55 points the next day but would then go on rallying for over three years before the tech bubble eventually burst.
In the latest economic expansion, the "bubble" formed in the housing market has begun to let out some air since the summer of 2005 and has only recently begun to impact the broader economy, while stocks have continued to rally.
On Tuesday, luxury home-builder Toll Brothers Inc. rose 3% after issuing a profit warning, while also saying that it sees signs of stabilization in some of its markets.
Other markets
The dollar rose against the euro after the latest data, even if it remained near a fresh four-month low against the yen. The dollar was up 0.1% against the euro and down 0.5% against the yen.
Crude futures ended little changed after a volatile session featuring talk that dollar weakness may force the Organization of Petroleum Exporting Countries to cut production. The January futures contract finished down 1 cent at $62.43 a barrel. See full story.
Gold futures, likewise, dropped. The front-month contract finished down $2.90 at $642.30 an ounce.
Treasurys fell after the latest economic data. The benchmark 10-year Treasury fell 4/32 to 101 15/32, while its yield rose to 4.44%.
Blue chips in motion
Several blue-chips helped power the Dow Industrials on Tuesday.
McDonald's Corp. gained 0.6% to $42.75, after earlier reaching an all-time high of $43.43.
News that New York City passed a ban on artery-clogging trans fats in restaurants helped the stock, as the fast-food chain has said it is working on healthier cooking oil. See full story.
General Motors Corp. turned around to gain 1.1% after news that competitor Ford Motor Co. plans to take on another $3 billion in debt. See full story.
Weighing on the Dow Industrials, American Express Co. dropped 4 cents to $59.85 after A.G. Edwards downgraded the stock to hold from buy, citing valuation concerns.
Microsoft Corp. , another member of the Dow, dropped 0.7%. The company's chief financial officer, Christopher Liddell, said that the company remains on track to achieve revenue growth of 13% to 15% in 2007. Read more.
Shares of Sirius Satellite Radio slumped 7.7% after it said late Monday that retail sales since Thanksgiving were below forecast, prompting the satellite-radio firm to cut its 2006 subscriber forecast. See full story.
Slumping Yahoo Inc. to Undergo Biggest Shake-Up in More Than 5 Years SAN FRANCISCO (AP) -- Yahoo Inc. will undergo its most extensive shake-up in more than five years, hoping to snap out of a malaise that has ravaged its stock and provoked one of its own top executives to bluntly question the Internet powerhouse's direction. Under the overhaul announced late Tuesday, Yahoo vowed to rein in a sometimes-rambling product expansion that has bogged down its earnings growth and threatened its position as the Internet's most popular site as more buzz built up around upstarts like MySpace and YouTube.
The streamlining will bunch Yahoo's disparate operations into three core groups focused on its Web site's audience, advertising network and technology.
As part of the reorganization, Yahoo Chief Financial Officer Susan Decker will assume an even more prominent management role and Dan Rosensweig, the company's chief operating officer, will be shown the door in March when the makeover is expected to be completed.
Farzad Nazem, Yahoo's chief technology officer, will remain in that position.
Sunnyvale-based Yahoo plans to hire a new executive to run the unit focused on satisfying Yahoo's 418 million registered users. Like Decker and Nazem, the new executive will report to Chairman Terry Semel, who will remain chief executive despite recent criticism of his performance.
But Decker's promotion appears to anoint her as the 63-year-old Semel's likely successor. Highly regarded by investors, Decker will remain CFO until a replacement is found.
"We're putting the right people in the right places to execute our focused growth strategy," Semel said in a prepared statement.
Yahoo's restructuring comes just a few weeks after a senior vice president blasted the company for losing its focus in an internal memo leaked to the media.
The memo, written by Brad Garlinghouse, was promptly nicknamed the "peanut butter manifesto" because it likened the company's recent strategy to "spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular."
Garlinghouse envisioned a more radical reorganization that would have laid off 15 percent to 20 percent of Yahoo's roughly 11,000 employees as part of an effort to bring more accountability to the company. The overhaul announced Tuesday didn't mention any planned layoffs.
As it is, the changes mark Yahoo's most extensive housecleaning since co-founders Jerry Yang and David Filo recruited Semel -- a former movie studio executive -- to lift the company out of the dot-com doldrums in May 2001.
Semel melded dozens of Yahoo divisions into more cohesive units and jettisoned hundreds of jobs in a traumatic makeover that eventually paid off when advertisers began to flock back to the Internet in 2003 and 2004.
The turnaround lifted Yahoo's stock from a low of about $4 per share in 2001 to a high of $43.45 late last year -- a run-up that Semel capitalized on by cashing in thousands of stock options to generate a windfall of more than $400 million.
But Yahoo has been struggling most of this year as Internet search leader Google Inc. proved far more proficient at delivering ads that captured the attention of Web surfers. Yahoo says it's in the process of introducing significant improvements to its system that will produce higher advertising commissions next year.
For now, Google's advantage has let it grow earnings much faster than Yahoo, a gap that has been underscored on Wall Street.
While Google's market value has climbed by 17 percent so far this year to $149 billion, Yahoo's has shrunk by 30 percent to $37 billion. Yahoo shares rose 54 cents Tuesday to close at $27.43 on the Nasdaq Stock Market, where Google shares gained $2.15 to finish at $487.
To add to Yahoo's misery, Google recently bought YouTube, the Internet's hottest video site, for $1.76 billion in a deal that many analysts expect to yield even more lucrative advertising opportunities. Meanwhile, Yahoo has been frustrated in its attempts to buy Facebook.com, the second biggest social networking site behind News Corp.'s MySpace.
$16.5 billion deal between custodian firm will create 11th largest financial firm
NEW YORK (MarketWatch) -- Investors cheered Monday's $16.5 billion merger agreement between Bank of New York Co. and Mellon Financial Corp. that ranks as the largest marriage of asset managers and creates the nation's No. 1 custodial bank.
News of the deal, which will also create the 11th largest financial institution in the U.S., was the latest sign of a pickup in industry consolidation and it lifted shares across the banking sector. Custodial banks handle account and transaction paperwork for financial institutions, and also, in a growing business, provide clients with services like securities lending.
The companies said the pact will allow the combined group to invest and expand more rapidly than its competitors, and added they have identified "excellent" cost savings and revenue "synergy" opportunities. "This deal is a winner," said analyst Dick Bove of Punk Ziegel. "It takes two aggressive price competitors and combines them, presumably allowing prices to stabilize in some sectors of their businesses. It allows the companies to reduce operating costs."
Bank of New York shares rose $4.27, or 12%, to close at $39.75, while Mellon shares added $2.73, or 6.8%, to $42.78. The deal brings together two venerable U.S. institutions with a combined history of more than 350 years.
Bank of New York was founded by Alexander Hamilton and financed some of the nation's earliest major development projects. Mellon, based in Pittsburgh, was founded by Thomas Mellon in 1869. Later, the bank was run by Andrew Mellon, who was also a banker for Andrew Carnegie and served as the secretary of the Treasury from 1921 until 1932. Growth
"These companies complement each other very nicely," Gerard Cassidy, the lead banking analyst at RBC Capital Markets. "Greater economies of scale should enable them to be more price-competitive and aggressive in the asset management and asset servicing businesses. We think on a global basis the growth is in the double digits for asset management and servicing." The merged company will be headquartered in New York with an 18-seat board of directors, comprised of 10 members designated by The Bank of New York and eight chosen by Mellon.
Executives said the company would continue to have a strong presence in Pittsburgh, where Mellon is headquartered, and added the city will be home to several business divisions as well as a center for technology and administration. Analysts say Mellon has had some success up-selling the asset-management services through the asset-servicing business. By servicing assets and talking to clients every day, Mellon will now have a good referral source for the asset-management business.
Some analysts said the pairing of Bank of New York with Mellon puts pressure on competitors to consider acquisitions to join forces. "It is quite likely that State Street will consider merging with either Citigroup or J.P. Morgan Chase Northern Trust may think of combining with Bank of America," Bove said. While the deal will result in a 6.5% premium on Bank of New York's stock before the pact was unveiled, executives insist the deal is a merger of equals.
"This is a true merger," Bank of New York Chairman Thomas Renyi said on a conference call. "Therefore, premiums and discounts really aren't the issue." Bank of New York has been shifting its focus to trust banking, and in April sold its retail branches to J.P. Morgan Chase and acquired that bank's corporate-trust business.
The resulting company will be the world's biggest asset custodian and corporate trustee, with $16.6 trillion in assets under custody and $8 billion in assets under trusteeship. It will also be a top 10 global asset manager, holding $1.1 trillion of assets under management.
Renyi, who is also currently chairman, will serve as executive chairman of the combined group for 18 months following the close of the deal, expected early in the third quarter of next year. Mellon CEO Robert Kelly will become chief executive of the new company and will succeed Renyi as chairman of the board. Bank of New York President Gerald Hassell will hold the same position in the new company.
"We view Mellon as a touch more in charge," Prudential's Mike Mayo wrote in a report. "Its CEO will be running the show, which should awaken a Bank of New York that can use a degree of change, and the new headquarters will be in New York, which makes sense for Mellon."
The firms said they expect to reduce total pre-tax costs by around $700 million a year, equivalent to roughly 8.5% of the estimated combined expense base in 2006. Within three years, they also intend to eliminate 3,900 of their combined 40,000 jobs, with restructuring charges of around $1.3 billion.
"Both our companies focus their businesses in highly attractive sectors of the financial services industry," Renyi said. "Together, we will have the scale, the technology, the capital, and the people we need to compete and win in the rapidly expanding global marketplace." Assuming the planned cost savings are achieved, Bank of New York said the deal would reduce operating earnings by roughly 1% in 2007 and boost earnings by 1.4% in 2008.
For Mellon the deal will boost operating earnings by 1% in 2007 and 5.7% in 2008
NEW YORK (MarketWatch) -- U.S. stocks were trading higher on Monday, as positive momentum from a flurry of mergers, including a mega deal in the banking sector, offset bad news for Pfizer Inc.
The Dow Jones Industrial Average was up 69 points at 12,262.
Pfizer fell 11% after news it halted development of a once-promising cholesterol drug.
But the impact on the blue-chip average was offset by a spate of mergers, especially news that Bank of New York Co. agreed to buy Mellon Financial Corp. to create a $43 billion giant ranked as the world's largest custodian of financial assets.
The S&P 500 rose 9 points to 1,406, and the Nasdaq Composite gained 34 points to 2,447.
Financial shares were providing strong support, including for the Dow Industrials, where American Express Co. , Citigroup Inc. and JP Morgan Chase & Co. all advanced.
The technology sector also received a boost from merger news after news that LSI Logic Corp. said it will buy Agere for $4 billion.
"You have a lot of different sectors seeing consolidation, but you also have some negative news from Pfizer," said Art Hogan, chief market strategist at Jefferies & Co.
"On the whole, I would say there is more good news than bad news. As we stare down the week, we may be able to get some up days."
Trading volume was 496 million shares on the New York Stock Exchange and 737 million on the Nasdaq.
Advancers beat decliners 23 to 8 on the Big Board and 20 to 7 on the Nasdaq.
By sector, banks , semiconductors and airlines were strong, while oil , precious metals miners and pharmaceuticals were weak.
On Friday, equities began the final month of the year on a bumpy note.
Stocks fell, but closed off their lows, after the latest monthly manufacturing report from the Institute for Supply Management showed the manufacturing sector contracted in November.
The news fueled fears of a hard landing for the economy.
Chicago Federal Reserve President Michael Moskow, speaking to reporters after a speech early Monday, reiterated his previous view that the economy will slow only moderately.
News that the pending-home-sales index dropped in October had little immediate impact on the stock market.
Meanwhile, Hugh Johnson, chairman of Johnson Illington Advisors, tells MarketWatch that stocks should continue to move even higher in what remains a "liquidity-driven market." Listen to Johnson.
"It's a liquidity-driven market and that's very, very positive and probably implies that stock prices will move even higher," he said, even if he believes the market is about 6% overvalued currently.
Monday's flurry of mergers, Johnson said, is an example of the strength of corporate profits and cashflow, adding that companies have a "strong need to do something with that cash."
Other markets
Treasurys were under pressure in the early going, following heavy overnight sales by Japanese and European accounts. The benchmark 10-year note fell 1/32 to 101-15/32 with a yield of 4.437%.
The dollar showed a minor improvement after falling sharply last week in the wake of the weak manufacturing reports.
The modest gains "appear to be largely a function of a bout of profit-taking," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
"Some short-term players appear to have turned a little cautious" ahead of Thursday's European Central bank meeting and Friday's U.S. employment figures, he said.
The dollar was last up 0.1% against the euro and up 0.2% against the yen.
Gold rose 10 cents to $650.60 an ounce.
Crude oil futures fell $1.07 to $62.36, after the president of the Organization of Petroleum Exporting Countries said that supplies continue to outpace demand, despite recent efforts by the oil cartel to cut production. See full story.
Merger Monday
Poultry producers Pilgrim's Pride Corp , rose 11%, after agreeing to acquire Gold Kist Inc. for about $1.1 billion and $144 million in debt.
Reckson Associates Realty Corp. dropped 5% after receiving a $3.3 billion offer from a group led by investor Carl Icahn.
Station Casinos gained 18% after receiving an acquisition proposal that values its common shares at $82 each from Fertitta Colony Partners LLC, an entity that includes Station's chairman and president.
Marshall & Illsey Corp rose 1% after news it will buy united Heritage Bankshares of Florida Inc. for about $217 million in stock.
Elsewhere, Home Depot Inc. , a Dow component, gained 36 cents to $39.33. It said in a regulatory filing that it has had no discussion about a potential leveraged buyout or recapitalization. See full story.
Bank of America was off 1.7%. Late Friday the bank said that Alvaro de Molina, who rose from the ranks in investment banking to the executive offices, is stepping down as chief financial officer a little more than a year after he took the job. See full story.
Since the 2000 tech crash, large-cap growth stocks have lagged their counterparts by historic proportions. Time to buy.
Big earnings boosts. Big market valuation increases. Big price/earnings multiples. Big futures. That's what large growth stocks are all about. But these issues also are big on volatility. They have this Icarus-like trait of flying high, then plunging. Lately, however, they are showing signs of heading up once again. If so, now is a good time to get back in, while large growth shares are still relatively cheap.
Of the 62 different stock fund categories that Lipper researchers track, large-capitalization growth is ranked sixtieth over the past five years, returning a paltry average annual 2.3%. Compare this with almost any other fund area over the same period--small-cap value (on the other end of the investing spectrum) at 15.3%, midcap value 14%, even small-cap growth 7.7%. More stunning still: Of the 35 different bond classes Lipper has, including munis, large-cap growth has lost out to all of them.
To John Jostrand, manager of William Blair Growth Fund, a smallish ($256 million assets) large-cap growth portfolio, this means the category has never been a better buy. "Everything in the market is cyclical, and big growth stocks again will have their day," says Jostrand, with no small self-interest but a lot of common sense.
He recalls a recent investment conference in Chicago, Illinois at which he was one of three panel speakers. "As a growth guy," he told the audience, "I have not been asked to speak on an investment panel in six years." He got a good laugh.
Jostrand, 52, is a longtime student of the market, and he is quick to give us a history lesson. Over the last 25 years return for large-cap growth funds is a solid annual 11%, within a percentage point or two of the five other broadest-ranging fund categories. So, he reasons, if you believe that returns regress to the mean, large growth must outperform hugely in the future to keep in line with historical averages.
Runs tend to go in five- to seven-year spurts. From 1995 to 2000, during the great tech mania, large growth funds with stocks like Cisco Systems and Dell raced ahead, averaging a 29.5% annual return. The usual pattern is that growth performs the best early in a new market cycle, hence four years into this uptrend it seems that opportunity has passed.
On the other hand, market behavior has been anything but typical over the past ten years. The violent end of the tech boom in 2000 meant that large-growth stocks were so badly mauled that they would take a long time to mend. That's why large-growth believers like Jostrand take heart that such a day may be at hand.
A further boost to large growth now is the waning of people's fears over terrorism. Investors may be living in a fool's paradise, yet as long as the fear level is down, the optimism necessary for large growth has a better chance of taking hold.
Another impediment to a bull run on large growth in the U.S., Jostrand contends, has been legal fear--namely concerning the Sarbanes-Oxley law, passed in the U.S. in 2002, which mandates strict accounting and executive liability for corporate decisions. Result: Many big U.S. companies have become overly cautious. Management has paid less attention to the task of expanding the business.
One indication of that is the huge amounts of cash piled up on balance sheets. Cash as a percentage of the largest 1,500 companies' assets is 9.7%, nearly double that of a decade ago, and stands at a generational high. This has depressed return on equity and comes hand in hand with a low level of new product introductions, the growth engine for big companies. "Cash is a nonearning asset, especially in this low-rate environment," says Jostrand. Cash earns something--maybe 3% aftertax--but that's not what growth investors are paying for.
Meanwhile, what large growth stocks make the most sense? Jostrand prefers companies with above-average ROEs (his portfolio's is 23%, to the S&P's 20%). He also likes to see low debt levels (his fund's long-term debt to capitalization is 27%; the S&P's 48%) and above-average revenue from new products, which indicates a company has been investing its cash in future expansion.
An example is Amgen, the big biotech firm (market cap: $85 billion), a font of new products. It gets 42% of its revenues from products introduced in the last five years. Among the promising ones are Vectibix, the colorectal cancer treatment, and denosumab, for postmenopausal osteoporosis. Further, the company, 29% debt-capitalized, returns 15.4% on equity.
Another company in Jostrand's portfolio is Taiwan Semiconductor, with half of its revenues now coming from new products. The chipmaker, headquartered in Hsinchu, Taiwan, has negligible debt and returns 32.4% on equity. At a recent $1.89, it is 13% off its 52-week high and a strong Jostrand buy.
WASHINGTON (MarketWatch) -- The weakening data could soon force the Federal Reserve to change its tune and acknowledge that an economic slump is as big a risk as a sustained breakout in inflation.
"The mounting evidence that growth has slowed further in the fourth quarter is bolstering the case that the next Fed move will be a rate cut -- perhaps as early as the first quarter," wrote Nigel Gault, chief U.S. economist for Global Insight, in his weekly note to clients.
The data in the coming week could move the Fed closer to shifting its rhetoric, if not its policy. An expected increase in the unemployment rate, and a significant downward revision to labor costs could reduce the Fed's worries that the economy is actually overheating, despite all the signs of cooling.
On Friday, the unemployment rate is expected to tick higher to 4.5% amid another month of sluggish job growth. Meanwhile, a key source of inflationary pressures -- unit labor costs -- could look a lot more favorable after revisions to the quarterly productivity data on Tuesday. See economic Calendar.
"The second straight month of sub-par job gains will be another small step towards Fed easing in 2007," wrote Avery Shenfeld, an economist for CIBC World Markets, in a weekly note to clients.
What the Fed needs
If the Fed is to shift its tone, it'll need more support from the economic data. One of the necessary conditions for a switch to a more neutral policy stance is already in place with the news Friday that the Institute for Supply Management's index fell below 50% in November, signaling no growth in the factory sector.
The Fed, of course, doesn't change course on the basis on one-month decline in one indicator.
"One number does not a trend make, and you always have to be careful about reading too much into one month's number," said Philadelphia Fed President Charles Plosser after the ISM report.
Before cutting rates, economists said, the Fed would also like to see declining core inflation and a rising unemployment rate. There could be news on both in the coming week.
Late Friday Federal Reserve Vice-Chairman Donald Kohn said difficulties in gauging the economy are "especially pronounced" at the present. See related story.
"The key to a change in the Fed's assessment of the balance of risks lies in continued deceleration in core inflation and evidence that the labor market is moderating," said Peter Kretzmer, an economist for Bank of America, in his weekly research note.
By some measures, core inflation has already begun to come down, although the evidence is tentative. The core personal consumption expenditure price index hit 2.5% year-over-year in August and has declined slightly each of the past two months. At 2.4%, it's still uncomfortably higher than the Fed's informal 2% cap.
The unemployment rate sits at a cyclical low of 4.4%, mocking anyone who suggests that the economy is weak. However, the unemployment rate is a lagging indicator, which means it's of no value in telling us where the economy is heading. Just before the 2001 recession, the jobless rate was at near a cyclical low of 3.9% when the Fed made its first emergency 50-basis rate cut.
And in that same episode, the core inflation rate didn't peak until the last month of the recession.
Clearly, the Fed hasn't let either a low unemployment rate or a still-rising core inflation rate deter it from easing policy if it decides it needs to.
Jobs report
Nonfarm payrolls are expected to rise about 110,000 for November after a 92,000 gain in October, according to a survey of economists conducted by MarketWatch.
At the high end are forecasters such as Brian Jones of Citigroup Global Markets, who sees payroll gains of about 140,000 along with an upward revision to October to about 150,000. Jones is counting on hiring in the services and fewer layoffs in construction and manufacturing.
"Labor market conditions remain tight," said Dean Maki, economist for Barclays Capital, in his weekly research note. He does expect the jobless rate to rise to 4.5% from 4.4%, as October's two-tenths drop was "overdone."
"A soft economy, particularly in the key cyclical industries, has to, at some point, start to take its toll on hiring," Shenfeld said. Shenfeld argued that construction layoffs should accelerate as builders complete the homes started during the more optimistic summer months.
Global Insight economist Gault says job growth will be "sluggish," at about 90,000.
Average hourly earnings are expected to rise 0.3%, compared with 0.4% in October, which would push the year-over-year gain to a cyclical high of 4.2%, noted Drew Matus, an economist for Lehman Bros.
Productivity
Productivity and unit labor costs are expected to look much more favorable following last week's revisions to income and gross domestic product.
For the third quarter, productivity growth is expected to be revised to 0.4% from 0% earlier. Unit labor costs - a big concern to inflation hawks at the Fed who fear the tight labor markets will translate into a burst of inflation - should settle down to 3.3% from 3.8%. See full story on the productivity revisions.
The revisions in the second quarter will likely reduce the year-over-year increases in unit labor costs to about 3.6% from 5.3% earlier.
Market volatility to remain amid jobs, manufacturing data
SAN FRANCISCO (MarketWatch) -- U.S. stocks are expected to remain choppy next week as investors look to key employment and manufacturing reports to determine whether the economy is headed for a recession next year.
"Volatility is...going to be one of the hallmarks," of the coming trading sessions, said John Caldwell, investment strategist at McDonald Financial Group.
The market's tone has been set by this week's reports of the first contraction in the manufacturing sector since April 2003.
The Institute for Supply Management's November manufacturing index and the Chicago Purchasing Managers Index took on greater-than-usual importance because they raise concerns about the whether the economy is headed for a so-called hard or soft landing, said Caldwell. See ISM report. See Chicago PMI.
The monthly employment report will be released by the Labor Department on Friday and garner attention. But Steve Goldman, chief market strategist at Weeden & Co., said Tuesday's factory orders number could be a more key driver of stocks.
If manufacturing continues to weaken, "systematically, unemployment could shift with that later on," said Goldman.
Economists are expecting 119,000 jobs to have been created in November, up from 92,000 in October, according to a survey of conducted by MarketWatch. The jobless rate is expected to edge up to 4.5% from 4.4% in October, which was the lowest level since May 2001.
Revisions to third-quarter productivity are due Tuesday from the Labor Department. Caldwell expects to see another period of slow growth and that could heighten the central bank's worries about inflationary pressures.
Federal Reserve Chairman Ben Bernanke said in a speech this week that inflation has been "better behaved of late" and that the economy is on track to expand at a moderate pace over the next year without much of a slowdown.
But more investors are hedging their bets against Bernanke's projection. The odds that the Fed will cut rates early next year jumped after Friday's weak manufacturing report.
The fed funds futures market at the Chicago Board of Trade has now priced in a 28% chance of a rate cut to 5% from 5.25% in January and an 80% chance of a cut in March.
The central bank is expected to leave rates unchanged when it meets on Dec. 12.
Mike Holland, manager of the Holland Balanced Fund, expects stocks to gain ground next week and through the end of the year. He said he's taking his cue from the many large multinational companies that have been describing their business bookings as "robust" through year's end.
Caldwell said the decline in stocks this week could have been much worse considering that oil prices simultaneously surged 7%. See Futures Movers.
However, he's still advising clients to move cautiously.
"We're not adverse to taking money off the table in the near term...and using the market volatility to our advantage."
Stocks down for the week, up for November
Direction in the equity market was erratic this week. Two trading sessions ended lower, one finished flat, and two closed higher, including a rally on Tuesday following the upward revision in gross domestic product for the third quarter.
The major indexes climbed from their lowest levels on Friday, but ended with losses for the day and the week.
On the week, the Dow Jones Industrial Average lost 0.7%; the Nasdaq Composite Index fell 1.9%; and the S&P 500 Index shed 0.3%. Read Friday's Market Snapshot.
However, stocks ended higher in November. The Dow rose 1.2%, the S&P gained 1.6%, and the Nasdaq jumped 2.7%.
Holland said the steep fall in the U.S. dollar against major currencies has spurred a "crisis mentality" in the market. The dollar on Friday fell to multi-month lows against the euro and yen, and to a 14-year low against the British pound.
For the week, the dollar lost 2.4% versus the euro and lost 0.5% against the yen. See Currencies.
The downfall has been so sharp and fast, said Holland, that the greenback's decline may be nearing its bottom, and he, for one, would welcome a leveling off sooner than later.
"I can't believe it's [nearing] $2 for the pound right now," he said as he prepared for a business trip to London.
Gold futures fell $2.30 to $650.60 on ounce on Friday but ended up 2.5% for the week. Read Metals Stocks.
Treasury prices rallied on Friday, leaving the yield on the benchmark 10-year Treasury note at its lowest level since late January. The yield closed at 4.425% from 4.458% on Thursday. See Bond Report.
