Rising food and paper costs may have you paying more for your Big Mac. / Image: pointnshoot/Flickr/CC BY

McDonald’s is the world’s leader in the fast food market, garnering about 19 percent of that niche. However, faced with the rising costs of food and paper, the company has announced that it plans to implement more small price increases throughout the year in order to offset this trend somewhat.

Earlier estimates proved inadequate

McDonald’s estimates that food costs will rise between 4 percent and 4.5 percent in the U.S. and Europe this year. This is an increase from earlier estimates, which projected only 2 to 2.5 percent increases in the U.S. and 3.5 to 4.5 in Europe. Paper costs were also cited in the projected price hikes. McDonald’s claims that food and paper costs ate up 33.6 percent of the company’s sales in the first quarter of 2011. Those costs were up from 32.9 percent in the same quarter a year ago.

A bad time to raise prices

Consumers who struggle daily with the rising costs for housing, fuel and the other staples, may just stay home to eat if prices increase too significantly.  Steve West, an analyst for securities-related financial services company Stifel Nicolaus, said, “It’s very hard to pass through price increase[s] right now.”

Stock prices fall

After the company announced that it planned to raise prices, shares fell 1.5 percent in midday trading on the New York Stock Exchange.

The company’s CFO Pete Bensen says the company intends to sacrifice some short term profits in favor of long term growth.

Prices up by 1 percent

In March, McDonald’s implemented a 1 percent menu price increase in the U.S. and Europe. Other increases are planned throughout the year. Price increases are also planned for its stores in China.

McDonald’s continues to lead competition

McDonald’s continues to outperform its competition. Peter Jankovskis, an officer at Oakbrook Investments, claims, “The bottom line is they’re still doing a great job of growing revenue.”  The total first-quarter revenue for the corporation rose 9 percent, to $6.1 billion.  Sales in the European stores were especially significant.

Sources

Reuters

MSNBC

Daily Finance

Shareholders aren't pleased about the pay raises of some CEOs. (Photo Credit: CC BY-ND/Mike Blake/My Unbalanced Opinions)

Hiring was up in April, but so were unemployment numbers. However, one thing that hasn’t changed is the stagnant salary level of average U.S. workers. According to the Associated Press, however, CEO salaries in 2010 were at the highest level since 2007.

Recession Never-Never Land

The year 2007 was marked by economic boom, record high stock prices and an unemployment rate half of what it is now. Three years later, after a recession as the U.S. continued to struggle to pull itself out of the doldrums, CEO pay climbed in 2010 to an average of $9 million at Standard & Poor’s 500 companies. That’s a 24 percent increase over the average CEO salary from 2009, according to an AP study. It was also the first time in three years that CEO pay increased, and it increased across all pay categories, from salary to bonus, stock, options and more. Higher cash bonuses were common; two-thirds of executives were rewarded more than three times the amount they’d received in 2009.

Corporate profits were the justification

As corporate profits climbed at a rapid pace last year – 41 percent, reports the AP – and companies continued to cut costs from the lower end of the pay scale, CEO raises were justified by corporate boards. The stock market nearly doubled over 2010 from where it had been in March 2009, thanks to a bull market that produced significant gains in both stock and options.

How CEO pay was calculated

The AP study looked at executive salary, bonuses, perks, interest on deferred pay above market rates and the value of corporate stock and options awarded during the year. Executive data was provided by research company Equilar for 334 of the companies in the S&P 500. The AP’s analysis is considered to be the most comprehensive study of 2010 CEO compensation available.

Six of the 10 highest-paid CEOs came from media and entertainment companies, including the highest-paid CEO of 2010, Philippe Dauman of Viacom, who was paid $84.5 million. Leslie Moonves of CBS ($56.9 million); David Zaslav of Discovery Communications ($42.6 million); Brian Roberts of Comcast ($31.1 million); Robert Iger of Walt Disney ($28 million); and Jeff Bewkes of Time Warner ($26.1 million) rounded out the list of media barons.

According to AFL-CIO analysis of CEO pay data, the average CEO pay at S&P companies in 2010 broke down this way:

Salary: $1.1 million

Bonus: $251,413

Stock awards: $3.8 million

Option awards: $2.4 million

Non-equity incentive plan: $2.4 million

Pension and deferred compensation: $1.2 million

Other compensation: $215,911

Total: $11.36 million

Criticism of CEO raises

CEO pay expert Jesse Brill of CompensationStandards.com told AP that corporate boards need to consider how much wealth CEOs have already accumulated before approving record raises.

“Boards need to recognize that many CEOs already have enough in terms of motivation and lifetime wealth,” he said. “It is very frustrating to see boards keep giving them more.”

Shareholders will still have a say in such boardroom decisions, though they are typically only able to vote once every three years on what CEOs and executives are paid. Even then, such votes are not binding. They simply generate bad PR.

Sources

AFL-CIO

Associated Press

CompensationStandards.com

Equilar

CEO salaries are rising fast

Canadian treasury bonds and exchange-traded funds can be a good investment. Ask your broker. (Photo Credit: CC BY/scazon/Fotopedia)

Some investors look to Canada, the United States’ neighbor to the north, for their treasury bonds. Unlike the U.S. system, where which treasury bonds can be purchased through companies like TreasuryDirect, the Canadian process is slightly different. Individual bonds can be purchased from three different categories: Government of Canada marketable bonds, Government of Canada real return bonds and Government of Canada treasury bills (T-bills). An experienced broker can steer you in the right direction, or even clue you in to exchange-traded funds (ETFs), writes Bankrate.

Investing in Canadian bonds: What you should know

Whether you’re investing in financial products from Canada or any other country than your own, you need to know more than simply how to invest your money. It is very important to remain abreast of currency exchange rates and practices by country, as well as how earnings on such investments are taxed. If brokerage houses have had success securing the prevailing foreign exchange rate, they’ll expend more energy directing their clientele in toward bond transactions. In they haven’t, the investor will be largely on their own.

Get excited about ETFs, maybe mutual funds

Exchange-traded funds are a viable option to discuss with your broker. Bankrate suggests perusing one or two sources for the research you’ll need to make an informed decision: the iShares DEX All Government Bond Index Fund and the Bank of Montreal’s Mid Federal Bond Index. While taking a swim in the pool of invested money in Canadian mutual funds may sound lucrative, there are three big things to consider:

1. Many Canadian banks won’t open an account for a foreign national. You could change your citizenship and get a Canadian postal address if you’re serious about this, but understand that that would be an enormous undertaking.
2. If you do manage to invest in a Canadian mutual fund as a non-resident, a flat 10 to 25 percent tax will apply to any income distributions.
3. Expect to encounter heavy reporting and taxation requirements on the U.S. side, as well.

If you simply want to trade currency, Canadian mutual funds may not be the best idea. Consult with your broker, as the credit quality, safety or yield may or may not be enough to make it worth your while.

Canadian T-bills: Your best bet

For most people, Government of Canada Treasury Bills offer the best rates for a fully guaranteed federal product. Available in terms from one month to a year, there’s little or no risk if the T-bill is held to maturity. They are also highly liquid, in that they can be sold at any time, with penalty. Minimum investment is $5,000 for three months to a year, or $25,000 for one or two months.

Sources

Bank of Canada: Interest rates

Bankrate

HSBC Canada

TD Canada Trust

Don’t blame Canada. Join Canada!

The U.S. Dollar Index is approaching its all-time low, but a number of factors may signal a rebound for the greenback. Image: Flickr/iChaz CC-BY-SA

Continuing a prolonged slide, the U.S. dollar fell in value to nearly its lowest level since August 2008 Tuesday against the currencies of major U.S. trading partners. Analysts say that Federal Reserve policies of low interest rates and billions in bond purchases, plus international worries about the U.S. debt situation are keeping the dollar down. Analysts also say that much like interest rates, what goes down must eventually come up and the U.S. dollar could be a profitable long-term investment.

Inside the U.S. Dollar Index

The U.S. Dollar Index (USDX) has fallen 2.7 percent in April and 6.6 percent so far in 2011. The USDX is a measure of the value of the U.S. dollar weighted against a basket of foreign currencies that includes the euro, pound sterling, Canadian dollar, Swedish krona, Swiss franc and Japanese yen. Upon its inception in 1973, the USDX was 100.000. In February 1985 it peaked at 148.1244. On March 16, 2008, the USDX hit an all-time low of 70.698. On Monday, the USDX fell as low as 73.744. Other currencies have been rising at the dollar’s expense. The euro has gained more than 9 percent this year and hit $1.4639 Monday. Despite the earthquake, tsunami and nuclear disaster in Japan, the yen has gained about 2 percent on the dollar in April. The pound sterling has gained 5.4 percent on the dollar in 2011.

Greenback destined to get weaker

The dollar could get even weaker in the next few months. Analysts expect that the Fed, which convened the Federal Open Market Committee Monday for a closely watched 2-day rate-setting meeting, will maintain a loose monetary policy consisting of interest rates near-zero and quantitative easing, the controversial bond buying program. There is also growing concern in the rest of the world that partisan bickering will preclude the U.S. government from adequately addressing the huge federal budget deficit. Those concerns were made tangible a week ago when the Standard & Poor’s rating agency lowered it’s outlook for U.S. debt. A weak dollar has been padding the profits of U.S. multinationals such as IBM, Coca-Cola and Procter & Gamble, but the spending power of U.S. consumers is being eroded. In a response to a question about how the Fed has hastened the dollar’s decline, Treasury Secretary Timothy F. Geithner told the Council on Foreign Relations in New York the U.S. is committed to a strong dollar and the U.S. won’t weaken its currency to gain an advantage over its trading partners.

The case for a strong dollar

The U.S. Dollar Index is currently only 5 percent higher than its all-time low from March 2008. But also like 2008, oil and gas prices could soon peak because those higher prices are destroying demand, especially in developing markets. If that happens, the dollar could rally as commodity prices fall. Plus, any hint the Fed will raise rates will boost the dollar. Some analysts believe the Fed will start raising interest rates slowly later this year. Today, many currency fund managers are actively shorting the dollar. But if the dollar starts to recover, those funds short the dollar may be forced to cover their positions and the greenback could rally once again.

Sources

MarketWatch

CNNMoney.com

Bloomberg

Wikipedia

AIG's aim to securitize bets on death has been criticized by the life insurance industry as a potential avenue for fraud and abuse. Image: Flickr/markhillary CC-BY-SA

American International Group went belly-up in 2008 because of over-leveraged exposure to credit default swaps written against sub-prime mortgages. Now AIG, which was rescued with a $182 billion taxpayer bailout, wants to do the same thing with securities backed by life insurance settlements, otherwise known as “death bonds.” After securitizing the death bonds, AIG’s death bond scheme hit a major roadblock when Standard & Poor’s refused to rate the securities for investors.

AIG’s death bond business

A life settlement is the purchase of an older person’s life insurance policy for cash. The investor bets that death benefits will exceed the amount they paid for the policy and the premiums they pay while they wait for the insured party to die. Death bonds, also referred to as “collateralized death obligations” and “death pools,” became popular during the financial bubble. Wall Street banks that bundled sub-prime mortgages to sell as securities started doing the same thing with life settlements. Much like sub-prime mortgage securities, most collateralized death obligations became losing bets when credit dried up and people who sold their insurance policies lived longer than the investors had hoped. AIG’s death pool portfolio includes 4,000 life settlements totaling $2.58 billion in potential death benefits.

Why S&P declined to rate AIG death pool

Earlier this year AIG bundled more than $2 billion of its life settlement portfolio into death bonds, but so far no investors are biting. A Standard & Poor’s rating is a key requirement for selling securities. Citing the unique risks of death bonds, which include the difficulty of correctly estimating the life expectancies of the insured individuals, S&P declined to publish a rating for AIG’s death bonds. Insurers also look upon death bonds with distaste, saying that the mass-marketing of betting on death is bad for the industry’s reputation. The American Council of Life Insurers has said that the need to fill a Wall Street pipeline with death bonds would result in the same type of fraud by commission-paid mortgage brokers that triggered the housing crisis and financial meltdown.

The greedy prey on the needy

As many cash-strapped elderly people struggle to find ways to survive, brokers have found a growing market for investors who want to gain a financial interest in their deaths. Competition among life settlement brokers for individuals expected to live from two to 10 more years who would consider selling their life insurance policies is becoming intense. Many life settlement operations target seniors in poor health with aggressive sales tactics. Many insurers have taken life settlement brokers to court, claiming they were misled by brokers who said the policies were for estate planning purposes when they planned on flipping them to investors all along.

Sources

Wall Street Journal

Bloomberg Businessweek

FINRA

Goldman Sachs cashed in on crude oil, warning that high prices are creating demand destruction that will end the rally. Image: Moon Stars and Paper CC-BY-SA

Commodity prices, which have been rising since December, fell sharply Tuesday. Inflation is beginning to curb demand and slow economic growth. A note from Goldman Sachs that it was time to cash in on crude oil, copper, cotton and platinum triggered a sell-off that signaled a possible end to a historic commodities rally. The commodities rout was led by oil as high gas prices are beginning to force Americans to cut back on driving.

Goldman warns of demand destruction

After rising 25 percent since December and setting fresh peaks Monday, April 11, commodity prices halted their advance by the end of the day. A broad-based commodity rout began in earnest after Goldman Sachs warned that commodity prices would fall and Japan’s economic minister warned that damage from the March 11 earthquake and tsunami would be worse that originally expected for the world’s third largest economy. Oil fell more than 7 percent and copper ended Tuesday with its largest one-day loss since February. According to Goldman, although oil and gas prices are approaching levels seen in Spring 2008, high prices are resulting in “demand destruction” that has increased the risk of being long on oil. Plus, relatively peaceful elections in Nigeria and a potential cease-fire in Libya, two major oil producing countries, have dampened the enthusiasm of speculators whose bets on fear and risk have been driving up commodity prices.

Bringing commodity prices back down to earth

Some analysts think Goldman triggered the commodities rout in order to cash in and position itself for a more profitable entry point into a longer term upward trend. However, in addition to the oracle of Goldman, many recent headlines have pressured commodity prices. A report released Tuesday by the International Energy Agency suggested high oil prices threatened global economic growth. On Monday the International Monetary Fund projected that inflation borne by high commodity prices would slow global economic growth from 5 percent in 2010 to 4.5 percent in 2011 and 2012. In his daily remarks to subscribers Tuesday, Richard Russell, publisher of the Dow Theory Letters, said that the markets could be preparing for the end of the Federal Reserves quantitative easing program. The Feds purchase of $600 billion in Treasury securities has flooded the markets with cheap cash used by speculators to drive up commodity prices.

Will U.S. consumers triumph over speculators?

Besides Goldman Sachs, perhaps the most influential driver of a commodities rout led by oil is the U.S. consumer. A Mastercard report released Monday showed that gasoline sales declined for the fifth consecutive week. Before the decline, demand increased for two months and analysts expected the trend to continue as the economic recovery gathered steam. But the average gas price in the U.S. is already 41 cents higher than the same period in 2008, when the average gas price peaked at $4.11 in July. MasterCard reported sales of 2.7 billion gallons of gas last week, down 3.6 percent from the same period in 2010, when it the price was 80 cents lower. A March survey by the Oil Price Information Service showed that sales had fallen at 70 percent of U.S. gas station chains. More than 50 percent reported a decline of 3 percent or more.

Sources

Barrons

Reuters

The Street

Delcotimes.com

The world's biggest bond trader has gone short on U.S. Treasuries and warns investors not to trust Congress to solve the debt problem. Image: Flickr/Phil Roeder CC-BY-SA

As the federal deficit grows, the world’s largest bond trader is betting politicians will fail to prevent a U.S. debt crisis. The Pimco Total Return Fund has taken a short position on U.S. government debt in the form of Treasury bonds. Analysts are saying that Pimco has gotten out of bonds because the company expects that few investors will want Treasuries when the Fed quits buying bonds as quantitative easing ends in June.

Pimco ups the ante on U.S. Treasuries

By taking short positions on U.S. government debt, Pimco is betting that deficit financing will drive interest rates higher and endanger the nation’s triple-A bond rating. To get to a short position on Treasury bonds, Pimco sold borrowed securities on a bet it can buy them back later at a lower price. Pimco head Bill Gross has been warning investors about the risks of U.S. government debt. In February Gross caused a stir by selling all of Pimco’s Treasury holdings. In March he took it further and went net short on Treasury funds, making a $7 billion bet against the securities.
The portion of Pimco’s $236 billion Total Return Fund held in U.S. Treasuries and other long-term government debt dropped from zero in February to negative 3 percent in March. The fund’s cash equivalents rose to 31 percent of the fund’s assets, a $73 billion bet that the good times are about to end in the markets.

Behind Pimco’s short position

Gross has no faith that Congress will be able to solve the deficit problem. In an April Pimco newsletter, he said the U.S. government was “out-Greeking the Greeks.” Greece’s massive government debt forced its leaders to ask for a bailout from the European Union to prevent a global chain reaction of financial failure. In fact, current unfunded government spending on entitlements adds up to five times U.S. GDP, a debt burden much heavier than what sent Greece into crisis. The current budget battle in Congress that targets discretionary spending without addressing politically radioactive entitlements such as Medicare, Medicaid and Social Security has done nothing to bolster Gross’s confidence. “We are smelling $1 trillion deficits as far as the nose can sniff,” he said.

Will market play into Pimco’s hands?

By assuming a short position on U.S. Treasuries, Gross may be using his fund’s ability to move the market to ensure that the bet pays off. Investors have been following Pimco’s lead. As of April 5, speculators went net short on Treasuries for the first time in six weeks, according to the Commodity Futures Trading Commission. John Carney at CNBC warns investors to regard Gross’s machinations with caution. A move that is universally viewed as the right one by Wall Street often turns out to be “dangerously wrong.” If Treasuries sell off in the near future and Treasury prices fall, expect Gross to bring Pimco back into the bond market — that’s what he’s betting on.

Sources

Associated Press

Fortune

Christian Science Monitor

Reuters

Find a good financial planner to help you generate investing ideas. (Photo Credit: CC BY-ND/Brook Rushing/Creative Loafing)

People invest because they want to create wealth. Day traders may savor the adrenaline rush, but profit is the purpose. In order to invest effectively, however, it pays to know some basics. It also pays to know how not to invest.

Invest in a 401(k)

Experts advise getting started with a 401(k) plan from your place of employment, preferably with matching funds from the company. The money deposited is not taxable as long as it remains in the account, earning dividends, interest and capital gains. Let it sit for a while and gain interest for your retirement.

About.com reminds investors that a 401(k) is not an investment per se but an account that holds investments in stocks, bonds, mutual funds and more, depending upon your 401(k) variant.

Save for a rainy day

In addition to a retirement account, it is essential to establish savings. Online resources like Motley Fool or any worthwhile financial adviser can help you decide how much you should realistically be saving.

Max out your Roth or Traditional IRA

A Roth IRA retirement account gives you the flexibility to make contributions after taxes, so taxes are paid only upon withdrawal. Maxing out your contribution limits will enable you to build a fine nest egg. Even if you don’t qualify for a Roth, a Traditional IRA still grants you sizable tax benefits.

Expanding beyond the retirement account

Producing additional wealth can mean opening a brokerage account and buying stocks. Before investing, however, you should have a clear vision of your goal. Know what you want and how long it will take you to get there based upon the amount of the investment and rate of return.

Pay off your credit cards first

The interest rate on credit cards make them the worst debt consumers can hold. Take care of all credit card debt before beginning to invest in stocks.

How NOT to invest: Don’t sit on your hands

Motley Fool points out that stock market is unpredictable, but t if you venture nothing, you will gain nothing. The miracle of compound interest smiles upon those who buy in. If you invest in stocks and stop paying attention, you’re asking the market to swallow your cash. Follow your stocks and move on if and when the time is right. Remember your financial goals and don’t go too far outside your comfort zone unless you’re prepared for possible loss.

In and out is expensive

If you’re investing through a brokerage firm, frequent trading in and out of the market will produce major fees. Day traders make up for this in volume, but for the basic investor, long-term investments (ideally five years or longer) are the safer course. If short-term investment is necessary, consider money market funds or CDs, advises Motley Fool.

Sources

About.com

Motley Fool

From socks to stocks

Despite rampant speculation, oil and gas prices are expected to stabilize when consumers reach their breaking point. Image: CC Walter Baxter/Geograph

Oil prices are soaring, and gas prices are approaching levels not seen since the summer of 2008. The U.S. has huge oil and gasoline stockpiles, but speculators betting on risk and fear have pushed oil prices up 21 percent in 2011. Some analysts think the oil rally is about to end, however, as rising oil and gas prices reduce consumer demand.

Oil rally continues, for now

In early trading Friday light, sweet crude for May delivery rose to $111.90 a barrel on the New York Mercantile Exchange, the highest level since September 2008. U.S. gas prices reached an average of $3.70 this week, their highest level since the summer of 2008 as well. Analysts credited a number of factors to the oil price surge. A looming government shutdown is weakening the dollar, which makes dollar-based commodities such as crude oil more affordable for traders betting with other currencies. The markets are also betting that the conflict in Libya won’t end in the near future; Libya has reduced its oil production of 1.3 million barrels a day to a trickle. But as U.S. consumers pay a little more every day at the pump, the U.S. is awash in oil. According to the U.S. Energy Information Administration, U.S. oil inventories rose by 2 million barrels in the week ending April 1. Crude refinery input rose to more than 14 million barrels per day.

Speculators suspend law of supply and demand

The U.S. used to blame OPEC for its oil shocks, but OPEC’s role in higher oil prices has been diminished. At an oil conference in Paris, the oil minister of the United Arab Emirates said that there is little OPEC can do to control prices. Mohammed bin Dhaen al-Hamli said that OPEC is providing the market with the oil it needs. Oil prices are rising, he said, because traders are ignoring market fundamentals and betting on worst case scenarios. Oil speculators are being aided and abetted by the Federal Reserve, which has been giving hedge funds and pension funds money at zero percent interest so they can bet on rising commodity prices. Analysts estimate that because of speculators, oil futures are $15 to $20 higher than they should be. The next betting frenzy could be triggered by elections this weekend in Nigeria, where output of 2.2 million barrels a day could be disrupted by violence.

Is the oil tipping point on the horizon?

There are signs that oil and gas prices have risen to a level that U.S. consumers can no longer afford. Gasoline demand has fallen 3.7 percent over the past four weeks. Some analysts are saying that oil prices will reach a tipping point soon, unless another crisis in the Middle East or a Nigerian meltdown play into the hands of oil speculators. Before the Fed’s second quantitative easing plan (QE2) began last fall, oil was at about $90 a barrel. As rising prices continue to constrain consumer demand, when quantitative easing ends in June and the free money spigot is turned off, oil and gas speculators could reduce their position by as much as a third, stabilizing crude oil prices at between $85-$95 a barrel.

Sources

Wall Street Journal

New York Times

Industrial Fuels and Power

Fortune

Billions are pouring into the hedge fund industry, but most firms have yet to reach high water mark and performance numbers may be skewed. Image: CC Jim Champion/Geograph

Based on the billions that poured in last month, the hedge fund industry appears to have its swagger back. Investors are lining up to put their trust in mysterious firms notorious for market manipulation that give Wall Street a bad name. But the industry’s resurgence from the financial crisis has just a few big winners and analysts expect a hedge fund shakeout in 2011.

Hedge funds treading water

The hedge fund industry attracted $22 billion from investors in March, the highest rate in over a year, according to Hedgefund.net. Overall, the hedge fund industry is managing $2.5 trillion, 83 percent of the all time highs registered in 2008. But aside from a few superstars, hundreds of hedge funds are scrambling to reach their historic peaks, the point at which they can resume collecting profits. In fact, Hedgefund.net reports that about 35 percent of 2,500 funds that voluntarily report performance have yet to return to their high water marks. While investors are seeing returns, the hedge funds themselves can’t charge performance fees until the assets they manage return to their pre-financial crisis peak. For example, a hedge fund managing $100 million that lost 25 percent during the meltdown must generate returns of up to 35 percent on the remaining $75 million to hit the high water mark. It could take years before the fund resumes collecting 20 percent on investment returns.

Hedge fund market manipulation

Established hedge funds with billions in assets struggling to reach their high water marks keep the lights on with management fees–about 2 percent of those assets, and charge clients for expenses. Others who lost most of their client’s money simply shut down, reopen under a different name, entice new investors and start collecting performance fees. Then its business as usual, which includes classic forms of hedge fund market manipulation. For hedge funds that have returned to performance fee territory, most of them inflate reported returns by buying up their own holdings the last few seconds before a quarter ends. After their fabricated results are recorded, they dump the stock. A study conducted by analysts from Ohio State, Swiss Finance Institute, Toulouse School of Economics and Wharton confirms this practice. The research found evidence that shows stocks with a high percentage of hedge fund ownership benefit from startling last-second rallies more often than would be considered normal. After the manipulation, stocks with high hedge fund ownership also trended toward lower returns on the first day of the month.

The hedge fund mystique

With so many hedge funds struggling to make a comeback, industry experts predict a hedge fund shake-out in 2011 as underperforming funds lose top traders to rivals and disappear from the landscape. Statistics show this is already happening all the time. According to Hedgefund.net, the median return of 1,400 hedge funds tracked over the past five years is 41 percent. But during that time, 3,000 hedge funds fell by the wayside. According to Brett Arends at MarketWatch, the great numbers reported by the hedge fund industry only include a few of the survivors. He conducted his own 10-year comparison with a “vanilla portfolio” and 2,229 hedge funds that started in 2001. The vanilla portfolio gained 94 percent. The hedge funds that failed (75 percent) would have had to gain 60 percent for the industry as a whole to match the vanilla portfolio. One fifth of the 535 survivors didn’t come close.

Sources

MarketWatch

New York Times

AllAboutAlpha.com

Reducing Apple's weight on the Nasdaq-100 makes Apple shares less vulnerable to rumors spread by hedge funds to manipulate the entire index. Image: CC chrisscott/Flickr

The Nasdaq stock exchange announced Tuesday that it is rebalancing its Nasdaq-100 index next month to correct the outsized influence of Apple, Inc. The Nasdaq rebalancing reduces the weight of Apple stock on the total value of the Nasdaq index by half. Nasdaq’s move will reduce the manipulation of Apple stock by hedge funds and give long-term investors a rare chance to buy Apple stock at a discount.

Nasdaq rebalancing reduces weight of Apple on index

For the past few years, as Apple stock goes, so does the Nasdaq-100. Since the market bottomed out in 2009, the Mac, iPhone and iPad have driven Apple shares skyward more than 250 percent. Since then, Apple’s stock has risen about another 150 percent to represent more than 20 percent of the total value of the Nasdaq-100 index. According to Nasdaq officials, Apple stock has ballooned to more than twice the weight it should have on the index. After Nasdaq rebalancing on May 2, Apple shares will account for a little more than 12 percent of the Nasdaq-100. The adjustment to correct for Apple realigns the ratio for the company’s stock and outstanding shares with the way the Nasdaq-100 is calculated. The change also reduces weighting for 81 other companies. Some Apple rivals will gain. Microsoft will rise from 3.4 percent up to 8.3 percent. Oracle will rise to 6.7 percent, Google will rise to 5.8 percent, and Intel will climb to 4.2 percent.

How hedge funds manipulate the market with Apple rumors

A lower ratio for Apple shares on the Nasdaq-100 should shield the stock from future manipulation by hedge fund traders suspected of shorting Apple and spreading rumors that send the entire Nasdaq-100 down. Jason Schwartz at Seeking Alpha describes a recent instance in which unconfirmed conjecture about Apple based on vague sources subjected Apple stock to irrational price swings. In February, when Apple was trading at $360, hedge fund Yuanta Securities floated a rumor based on “supply chain contacts” that the iPad 2 would be delayed until June. Bloggers spread the rumor, and Yuanta Securities used it to aggressively short Apple shares. In two trading days Apple stock dropped $20. Shortly afterward, Steve Jobs, who was given six weeks to live by bloggers, announced that the iPad would go on sale March 10. Investors who should have known better felt duped, and Yuanta padded its returns. But the chicanery affected the value of the entire Nasdaq-100.

Impact of Apple rumors already diminished

The Nasdaq rebalancing doesn’t take effect until next month, but money managers are already rebalancing their holdings. In pre-market trading Tuesday, Apple stock was down $4.19 to $337 from $341.19 at Monday’s closing. The ability of hedge funds to manipulate the market using Apple already has been diminished. Analysts don’t expect the latest iPhone delay rumors (which would freeze the iPhone market and hurt Apple if they were true) to work because Apple stock remains about $15 below its high and is trending upward again. A window has been opened for average investors and traders to get into Apple shares and the company is expected to exceed expectations again when it reports first quarter earnings this month.

Sources

Fortune

The Mac Observer

MSN Money

Seeking Alpha

Because investors equate lower payrolls with higher profits, the stock market historically performs better with higher unemployment. Image: CC Davic C. Foster/Flickr

Stocks rose on the jobs report released by the Labor Department Friday. Job creation in the last two months is the strongest it has been since before the recession. But the market’s current response to a positive jobs report is unusual, and stocks could fall again if the labor market continues to improve.

First quarter gain for stocks and jobs

The U.S. unemployment rate dropped from 8.9 percent in February to 8.8 percent in March, the lowest rate in two years, according to the Labor Department. In response, stocks rose across the market. The Dow Jones Industrial Average rose 87 points to 12,406, a 0.7 percent gain and a new high for 2011. The Standard & Poor’s 500 rose 10 points to 1,335, a 0.8 percent gain. The Nasdaq composite rose 15 points to 2,796, a 0.6 percent gain. Payrolls at U.S. companies increased by 216,000 workers in March after a 194,000 gain the month before. The unemployment rate has been dropping since it was 9.8 percent November, the biggest four-month decrease since 1983. U.S. stocks surged 5.4 percent in the three months ending with March for the biggest first-quarter gain since 1998.

The counterintuitive relationship between markets and labor

Normally companies announcing layoffs benefit on Wall Street because investors believe smaller payrolls equal higher profits. When the labor market was hemorrhaging jobs in January 2009, the stock market gained. In fact, in the past 60 years the stock market has performed better on average when the U.S. unemployment rate was higher rather than lower. According to Ned Davis Research, the S&P 500 mustered an average annualized gain of 13.5 percent when the unemployment rate was above 6 percent. When unemployment dipped to 4.3 percent or below, the S&P 500 managed just a 2.1 percent gain on average. In January 2009 Ed Clissold of Ned Davis Research told MarketWatch that in addition to lower costs and higher profits, traders salivate at high unemployment because it means they will benefit from economic stimulus provided by the federal government. Traders may also believe that by the time unemployment news hits the streets, stock prices have already been affected by job cuts and shares can be flipped for profit if they rise.

Traders hope job news doesn’t get too good

Stocks may have surged on Friday’s good labor market news not because unemployment has dropped but because it hasn’t dropped too much. Traders myopically chase short term gains and don’t consider long-term strategies. In the current environment, many of these traders believe the stock market has been propped up by the Federal Reserve bond buying program known as QE2. Some of them, especially those in the fixed-income market, worry that if the labor market gets too strong, the Fed will quit buying bonds after QE2 is slated to end in June, and the gravy train will stop. As the return of record profits and bonuses on Wall Street while average Americans have struggled has shown, what’s good for stocks isn’t necessarily good for the country. If more Americans keep finding work, the markets could change their tune.

Sources

Associated Press

MarketWatch

CNNMoney.com

Earn good interest on your money with a money market account. (Photo Credit: CC BY-ND/Catherine Hoyle/Wrights Business Research)

If the rate of return on a small savings account were a particle in the natural world, you’d need an electron microscope to see it. For a better rate of return, consider a money market account. While not as liquid as a savings account – you can’t cash it out as quickly – a money market account is a safe investment that you can easily sign up for online.

Money market accounts and money market funds

There are two basic variations when it comes to a money market: the money market account (aka the money market savings account) and the money market fund (aka the money market mutual fund). Money market accounts are products of a bank, and hence such an investment carries the benefit of being FDIC insured. “High-yield savings,” “Internet savings” and “electronic savings” are all terms various banks will use to refer to such accounts. And like a savings account, a money market savings account provides liquidity, although with some limitations not present in a regular savings account.

Money market mutual funds are quality, short-term investments with some liquidity and interest rates that fluctuate daily. While investors have historically had great success with money market funds in terms of safety, there is no FDIC insurance that guarantees investors will get their money back if the issuing bank becomes insolvent.

Research the best money market account or fund for you

Decide what features work best for your financial situation and shop around. Yields will vary greatly from one financial institution to the next. Check Bankrate.com to compare rates. It is important that consumers pay attention to bait-and-switch-style situations in which a bank advertises a high opening rate, only to drop it down later.

Some banks give customers free checks and access to electronic funds transfer (EFT) between a money market fund and checking account. However, the number of monthly transfers allowed will likely be limited.

If you sign up for a money market account through a brokerage, unlimited check writing, an attached debit card and EFT transfers are common features. Any cash surplus between trades and investments performed within a broker money market account are “swept” into a separate money market account that is used to pay for future trades.

Go to your chosen institution’s website

Once you’re on the website for the financial institution of your choice, the procedure to open an account will be spelled out in detail. Print, sign and mail in the required account agreement, as well as the signature card if the option for checks is available. If you have questions, a toll-free number is made available by most issuing banks. Keep in mind that if signing up for a money market account is difficult with a particular bank, it is likely that future transactions involving the account will also be more trouble than they’re worth.

Don’t forget the EFT

If you want the flexibility to be able to instantly transfer money from your money market account or money market mutual fund into your checking account – and the option is available at your bank of choice – make sure to set up the EFT link at sign-up.

Sources

eHow Money

Investopedia

Cathy Pareto, MBA, CFP, on the benefits of money market accounts

Hydroponic supply companies are considering initial public offerings. Image: Flickr / jpck / CC-BY

In 30 percent of the United States, medical marijuana is legal, to varying degrees. The industry surrounding medical marijuana can be a very profitable one. Now, two major marijuana industry companies have announced plans for initial public stock offerings.

Marijuana related industries

There are a variety of industries that have developed around medical marijuana. Businesses provide grow lights, humidifiers, fertilizers, processing equipment, packaging equipment, etc. Estimates say the marijuana industry could be worth $60 billion or more within 10 years. The technology sector of the industry is also continuing to grow. There are now “grow trailers” that can be controlled by smart phone apps, and hydroponic technology is improving every year. Many medical dispensaries and growth operations fund their expansion with short term loans in hopes of making big profits — and most do. Average markup for grow stores ranges between 70 and 120 percent of wholesale cost.

Initial public offerings planned

Companies that directly deal in marijuana exist in a difficult legal gray area. All marijuana is illegal on the federal level. On the state level, all recreational use of marijuana is illegal. Marijuana for medical use is legal in some states, but federal officials have raided state-compliant businesses in many states. Two companies — GrowOp Technology Ltd. and General Cannabis Inc. — both avoid this legal gray area by selling the technology and equipment, but not the actual substance. Both companies have indicated that by the end of 2011 they wish to be traded on public stock exchanges. These initial public offerings would raise more than $10 million for these businesses and allow individual investors to get in on a “growth” industry.

The problem with marijuana finances

The growth of medical marijuana has many investors hoping to get in on the action. This growth, however, could be creating another financial bubble. Since medical use was made legal in California in 1992, the price of finished product has dropped from $3,000 or more per pound to $1,800 per pound. Competition is fierce; warehouse-style operations such as WeGrow are franchising across many cities. Marijuana industry business owners are assuming that more states will continue allowing medical marijuana.

Source

24/7 Wall St

The price of dairy products have skyrocketed as oil prices have made production more expensive. (Photo Credit: CC BY-SA/James Rintamaki/Flickr)

As a result of the crisis in Libya, the already high food prices worldwide will likely be pushed even higher, reports CNN Money. A report by the United Nations Food and Agriculture Organization indicates that the food price index, which measures the price of a basket of food commodities, was up 2.2 percent in February. Currently, the index is at its highest point since it was created in 1990.

Prices up for most food commodities

While sugar prices were slightly lower in February, prices for cereal, dairy products, meat and nearly every other food commodity rose significantly. According to the U.N. Food and Agriculture Organization, U.S. consumers should expect the price of cereal to remain high throughout 2011, as inventories of wheat and coarse grains are low, and demand has remained high. Compared with February 2010, the cost of exporting grains was up 70 percent this February.

Oil prices pushed up by unrest in Libya

The price of a barrel of oil has exceeded $100 for the first time since fall 2008 – a by-product of violence in Libya that shut down oil production. As a result, U.S. drivers have paid 25 cents more per gallon of gasoline on average over the past 10 days, indicates the U.S. Energy Information Administration. This does not bode well for global food prices, said FAO director David Hallam in a statement.

“Unexpected oil price spikes could further exacerbate an already precarious situation in food markets,” writes Hallam. “This adds even more uncertainty concerning the price outlook, just as plantings for crops in some of the major growing regions are about to start.”

Jeet Dutta, an economist at Moody’s Analytics, sees no uncertainty when it comes to the link between high oil prices and high food prices. The costs of food production and transportation cannot be discounted.

“Energy is a big part of the cost bucket in food production,” Dutta told CNN. “Retail prices lag behind commodities, so consumers haven’t felt the full extent of recent increases.”

Food exporters rebuild stockpiles, tighten supply

Even as global harvests expand, exporters are tightening the reins on such commodity supplies as corn, wheat and soybeans. This chokes global supply, which in turn raises prices. Global financial services company UBS AG projects that corn will reach $8.30 per bushel, a 15 percent jump over Wednesday’s closing price, while wheat will rise to $10 per bushel (a 23 percent increase) and soybeans to $15 per bushel (7.6 percent higher).

High food commodities have pushed 44 million people into poverty since June 2010, said World Bank President Robert Zoellick. According to World Bank data, those 44 million join the more than 900 million people globally who go hungry on a daily basis.

Sources

Bloomberg

CNN Money

U.S. Energy Information Administration

Strife in Libya and the impact on fuel prices

AIG recently raised more than $6 billion to pay back the U.S. Treasury. Photo Credit: David Shankbone/Wikimedia Commons/CC-BY

AIG and General Motors have been making great progress in paying the United States Treasury back for the bailout loans both companies received. AIG and GM were both maligned for the huge amount of money the firms received from the government, but they are returning to solvency. AIG was the single largest bailout performed under the program.

MetLife stock sold to pay back loans from Treasury

Insurance giant AIG sold a portion of its shares in the MetLife insurance company and turned over the proceeds to the United States Treasury, according to USA Today. AIG gave up 146.8 million shares of MetLife stock, from which the company raised $6.3 billion to make payments to the United States Treasury. AIG is using the funds in the effort to repurchase the $18.2 billion the Treasury holds in preferred equity shares of AIG. The government also holds 92 percent of AIG’s common stock, which was a condition of the bailout package the insurance giant received from the Troubled Asset Relief Program, or TARP. AIG was the single largest bailout, receiving more than $182 billion in total. The bailout included the Treasury and the Federal Reserve purchasing toxic asset from the company and $68 billion in loans.

General Motors on the road to health

General Motors, another notorious bailout recipient, borrowed $49 billion from the government to stay afloat, and the company has been making huge strides toward paying it back. General Motors recently announced in an earnings report that the company had made a profit every quarter of 2010, according to Reuters. This marks the first time since 2004 that the automaker has been profitable for an entire year, and it made the largest profit since 1999. GM posted a profit of $4.7 billion for 2010, though the stock price for the company has barely moved since the initial public offering in November. The Treasury still holds 33 percent of GM stock, which is a significant reduction since November 2010, when the Treasury held 61 percent. It is projected that the GM share price will have to rise to $53 per share for the government to break even.

End result of TARP

David Miller, the chief investment officer for the Troubled Asset Relief Program, said that the cost of corporate bailouts is not likely to be more than the money allocated for the housing crisis, according to Reuters. Miller said the Congressional Budget Office estimates that TARP will cost a total of $25 billion, and the Obama administration estimates slightly more than $28 billion. Treasury Secretary Timothy Geithner has said the estimate of $25 billion may be high. Various companies still owe the government $135 billion for TARP loans.

Sources

USA Today

Reuters on General Motors

Reuters on TARP estimates

Costco stores are adjusting their offerings while stock prices are falling, but income is ticking up. Image: Geograph.org.uk

Among publicly owned retail stores, Costco is in a unique place. The store makes much of its income from membership fees. Though stock prices are dropping, quarterly sales results are strong — and Costco is making some adjustments to its offerings.

Costco’s quarterly results

Costco, publicly traded on Wall Street, recently released its quarterly results. The membership club reported an 11 percent increase in sales for the final quarter of 2010, resulting in sales of $20.9 billion. Membership fees accounted for another $426 million in income. Despite these profitable quarterly results, shares in Costco fell by about 3 percent. Traders cited decreased profitability from gasoline sales and a decrease in sales thanks to bad weather.

Taking overfishing off the menu

In addition to strong quarterly results, Costco has announced a few changes to its in-store offerings. Costco has indicated it will discontinue sales of any fish defined as “at risk” by the Marine Stewardship Council. Atlantic Cod, Atlantic Halibut, Chilean Sea Bass, Greenland Halibut, Grouper, Monkfish, Orange Roughy, Redfish, Shark, Skates, Rays, Swordfish and Bluefin Tuna are all on the list of wild fish that will no longer be offered. Farmed seafood will still be available at Costco stores.

Here comes the bride

In addition to taking over-fished seafood off the shelves at Costco, one other big change will be made in some stores. Pop-up bridal boutiques will be tested in a few Costco stores in California. These boutiques will be temporary, enclosed spaces in the Costco stores, offering wedding dresses in a cost range similar to David’s Bridal, $400 to $1200 per dress. These pop-up bridal boutiques, if they do well in California, will likely be expanded to all Costco stores within a few months. The bridal gowns will not be a permanent fixture, however. The boutiques will likely only be open during peak wedding shopping season, February through May.

Sources

Dallas News
WalletPop
Seattle Times

Former Goldman board member Rajat Gupta faces insider trading charges for profiting from confidential information during the financial crisis. Image: CC World Economic Forum/Flickr

The level of notoriety that Goldman Sachs either enjoys or endures increased Tuesday. The Securities and Exchange Commission filed insider trading charges against Rajat K. Gupta, one of its former board members. Goldman Sachs was also forced to admit that it could lose billions from lawsuits by investors who were bilked by the bank during the financial crisis.

Gupta busted for Buffett tip

The SEC  is suing former Goldman Sachs board member Rajat K. Gupta for insider trading on suspicions that he passed confidential information to Raj Rajaratnam of the Galleon Group, a financier scheduled to go on trial for securities fraud and conspiracy charges. The SEC said that while Gupta served on Goldman Sachs and Procter & Gamble boards, he tipped off Rajaratnam that Warren Buffett was going to invest $5 billion in Goldman Sachs. Buffett bet on Goldman in September, 2008, during the worst of the financial crisis, a move that helped prevent the bank from collapsing and provided assurance to the markets that all was not lost. Rajaratnam allegedly used the insider trading information from Gupta to generate “illicit profits and loss avoidance of more than $17 million,” according to the SEC.

Why was Gupta lining Galleon’s pockets?

The SEC also charged Gupta for passing Rajaratnam information about Goldman Sachs financials for the second and fourth quarters of 2008 before the reports were made public. Additional insider trading charges against Gupta include giving Rajaratnam information about Procter & Gamble’s 2008 fourth-quarter financials the day before they were released. Rajaratnam allegedly used the Procter & Gamble data to generate $570,000 in ill-gotten gains for his Galleon Group. While a board member at Goldman Sachs and Procter & Gamble, Gupta directed investing for several Galleon hedge funds that the SEC has tied to the insider trading scheme. Gupta also had numerous other business deals brewing with Rajaratnam, who is scheduled to go on trial in federal district court in Manhattan on March 8.

Goldman overwhelms penalties with profits

After the SEC insider trading charges against Gupta made the news, Goldman Sachs shares dropped 1.2 percent. Goldman also reported that it could stand to lose $3.4 billion in damages over lawsuits involving mortgage backed securities it sold that became worthless during the financial crisis. Goldman released the information to comply with new SEC transparency rules regarding financial liabilities. In 2010 Goldman paid a $550 million SEC fine, the largest ever assessed to a Wall Street bank, for deceiving investors with collateral debt obligations. Yet 2010 was the fourth best year for profits in Goldman’s history. The firm’s trading revenue dropped 33 percent from the previous year in 2010, but revenue from investing and lending more than doubled.

Sources

New York Times

Forbes

Wall Street Journal

Business Week

Wall Street bonuses declined on average in 2010, but overall executive compensation rose with higher base salaries. Image: CC pingnews.com/Flickr

Wall Street bonuses for 2010 fell 8 percent on average from the previous year. Wall Street bonuses fell despite the fact that 2010 was the second-highest year ever for Wall Street profits. Overall compensation for Wall Street workers actually grew in 2010, with a greater percentage paid in base salaries rather than bonuses.

Wall Street bonus statistics

Wall Street bonuses in the financial services industry averaged $128,530 in 2010, according to New York State Comptroller Thomas DiNapoli. That figure represents an 8 percent drop from the $140,730 average for Wall Street bonuses the year before. Total Wall Street bonuses in 2010 were $20.8 billion, a 33 percent drop from 2006 before the financial crisis, when bonuses reached a record $34.3 billion. Despite the financial crisis, Wall Street profits added up to $27.6 billion in 2010, second only to 2009, when government bailouts and record low interest rates drove up profits to a record high $55 billion.

Wall Street bonus deception

The decline in Wall Street bonuses for 2010 is not a signal of executive compensation in decline.  The smaller bonuses are a response by the financial services industry to public backlash that arose about executive compensation during the financial crisis. DiNapoli reported that compensation for the financial services industry on Wall Street grew 6 percent in 2010. Financial reform regulation, along with the controversial nature of obscene bonuses, has motivated big banks to change the way they pay employees. Now, more money is funneled to them through base salaries rather than bonuses.

A new tax avoidance tactic

Wall Street firms are also deferring compensation to give financial regulators the impression they are encouraging long-term profitability instead of short term gain. By doling out smaller bonuses, Wall Street firms have also discovered a new and effective tax avoidance tactic. According to DiNapoli, tax revenue from the financial sector made up about 20 percent of New York state tax revenues before the financial crisis. That number has fallen to 13 percent. New York City’s tax revenue from Wall Street declined from 13 percent before the crisis to 7 percent in 2010.

Sources

CNNMoney.com

Wall Street Journal

NPR

Unrest in Libya has caused oil prices to spike, negatively affecting stock markets as Moammar Gadhafi pledges retaliation against protesters. Image from Wikimedia Commons.

Political turmoil in Libya has led to an increase in worldwide oil prices. Libya is a major exporter of oil, and unrest in that nation could lead to a drop in the output of oil. Despite a growing number of people calling for him to leave, Libyan ruler Moammar Gadhafi refuses to abdicate his office.

Major oil producer Libya paralyzed by protests

The worsening turmoil in North African nation Libya has reverberated throughout the financial world as instability in a major oil producing nation led to a slide in stock markets, according to the Los Angeles Times. Prices of crude oil rose, which caused the Dow Jones Industrial average to slide more than 178 points downward during trading on Tuesday, Feb. 22. Crude oil futures rose from $91.42 per barrel on Monday to $94.49 on Tuesday. However, oil prices slid to $93.57 per barrel of crude oil after the oil minister of Saudi Arabia, Ali Ibrahim Naimi, announced that the Organization of Petroleum Exporting Countries would make up any shortfalls due to unrest in Libya.

Gadhafi refuses to leave

Moammar Gadhafi (also Gaddafi or al-Gaddafi), ruler of Libya, has refused to leave his post, according to The Telegraph. Unlike other rulers in nearby countries who managed a modicum of empathy for those harmed during protests, Gadhafi spoke on Libyan state television, promising further bloodshed should the Libyan protests continue. Gadhafi said he would use the death penalty on protesters and said he is completely justified in the use of force against dissidents who are calling for an end to his four decades at the helm of Libya. He also pledged that he wouldn’t leave and would “die a martyr.”

Libyan officials leave posts in protest

In an expression of solidarity with the protesters, several key Libyan officials and diplomats have left their posts and in some cases defected, according to the Christian Science Monitor. Ambassadors and other Libyan diplomatic staff at the United Nations and in India, Australia, the United States and elsewhere have called for an end to the bloodshed. Loyalists and security forces have shot protesters, and reports are emerging that African mercenaries have been called in by Gadhafi to shoot at crowds. Members of the Libyan military still loyal to Gadhafi have used jets and helicopters to fire on protesters.

Sources

Los Angeles Times

The Telegraph

Christian Science Monitor