Top Portfolio Products: Fidelity Launches Short-Duration Bond Funds

New products and changes introduced over the last week include three short-duration bond funds from Fidelity and a new global industrials fund and an online retirement center from T. Rowe Price.

In addition, Mariner Wealth announced the launch of its trust company, and Nasdaq OMX launched 14 new indexes.

Here are the latest developments of interest to advisors:

1) Fidelity Adds 3 New Bond Funds

Fidelity Investments announced Tuesday the launch of three new short-duration bond funds: Fidelity Limited Term Bond Fund (FJRLX), Fidelity Conservative Income Municipal Bond Fund (retail class, FCRDX; advisor class, FMNDX) and Fidelity Short Duration High Income Fund (FSAHX).

FJRLX is lead managed by Robert Galusza and co-managed by David Prothro. It seeks to provide a high rate of income and is credit-oriented, investing in sectors such as corporates, commercial mortgage-backed securities, asset backed securities and Government agency mortgages, which typically offer higher yields than Treasuries and Government securities. The fund normally maintains a dollar-weighted average maturity between two and five years.

FCRDX/FMNDX is managed by Doug McGinley. It invests in money-market securities and high-quality investment-grade municipal debt securities with a short duration. The fund normally maintains a dollar-weighted average maturity of one year or less.

FSAHX is managed by Matt Conti and co-managed by Michael Plage. It normally invests in higher-quality below-investment-grade bonds rated BB or B. It also intends to invest in floating-rate loans and investment-grade corporate bonds. The fund normally maintains a dollar-weighted average maturity of three years or less.

2) T. Rowe Price Adds Global Industrials Fund, Online Retirement Center

T. Rowe Price announced Tuesday the launch of its Global Industrials Fund (RPGIX), which seeks long-term capital growth by investing in foreign and U.S. companies within the industrials sector. It will be managed by Peter Bates, and its net expense ratio is estimated to be 1.05%.

RPGIX will normally invest at least 80% of its net assets in securities issued by companies in the industrials sector, at least 40% of its assets in companies outside the U.S. across a minimum of five different countries and in companies of any market capitalization, depending on where the portfolio manager sees the best opportunities. It will invest among the following industries within the sector: aerospace and defense; building products and equipment; automobiles; machinery; construction and engineering; electrical components and equipment; industrial technology; transportation; and manufacturing and industrial conglomerates.

T. Rowe Price Retirement Services also announced the launch of its Online Learning Center for participants in the employer-sponsored retirement plans for which it is recordkeeper. Currently the center offers a series of four educational videos designed to better equip retirement participants with the knowledge they need to plan for the future. Additional videos, including ones focused on financial planning tips for women and the basics of money management, are under development.

Plan sponsors can provide their participants with a link to the center on their benefits websites, or work with the firm to create a targeted campaign to promote the new resource within their organizations. In addition, the center is available on demand and gives participants the ability to learn at their own pace. Its content is optimized for smart devices and tablets, and accessible without having to log in to an account. 3) Mariner Wealth Launches Trust Company

Mariner Wealth Advisors announced Wednesday that it has launched Mariner Trust Co., created as a solution for clients who have requested a higher level of support to solve multigenerational wealth planning challenges.

Robert Swift heads the firm’s trust capabilities as senior vice president of Mariner Trust Co.

NASDAQ OMX Launches 14 New Indexes

The NASDAQ OMX Group, Inc. announced Wednesday that it has added 14 new indexes in the NASDAQ Newfound Index family, which features rules-based, quantitatively enabled investment strategies created by Newfound Research LLC and tracks specific investment strategies through the use of ETFs. The indexes are designed to utilize ETFs to allow for specific outcomes to be achieved as an overlay on a broad market experience.

These initial indexes represent an investment strategy that includes defensive equities, target yields, risk-managed income, and a dynamic market neutral strategy. NASDAQ OMX and Newfound expect the new indexes will be available for licensing and implementation through separately managed accounts and, in some cases, ETFs.

The 14 indexes are: NASDAQ Newfound Global Defensive Equity (NQNFGEQ); NASDAQ Newfound Global Defensive Equity Total Return (NQNFGEQT); NASDAQ Newfound 1% Target Excess Yield (NQNF1YL); NASDAQ Newfound 1% Target Excess Yield Total Return (NQNF1YLT); NASDAQ Newfound 2% Target Excess Yield (NQNF2YL); NASDAQ Newfound 2% Target Excess Yield Total Return (NQNF2YLT); NASDAQ Newfound 3% Target Excess Yield (NQNF3YL); NASDAQ Newfound 3% Target Excess Yield Total Return (NQNF3YLT); NASDAQ Newfound 4% Target Excess Yield (NQNF4YL); NASDAQ Newfound 4% Target Excess Yield Total Return (NQNF4YLT); NASDAQ Newfound Risk Managed Income (NQNFINC); NASDAQ Newfound Risk Managed Income Total Return (NQNFINCT); NASDAQ Newfound US Dynamic Long/Short (NQNFLS); and NASDAQ Newfound US Dynamic Long/Short Total Return (NQNFLST).

Read the Nov. 8 Portfolio Products Roundup at ThinkAdvisor.

5 Internet and Web Service Stocks to Sell Now

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This week, the ratings of five internet and web service stocks on Portfolio Grader are down. Each of these rates a “D” (“sell”) or “F” overall (“strong sell”).

Youku Tudou, Inc. Sponsored ADR Class A’s () rating falls to a D (“sell”) this week, down from C (“hold”) the week prior. Youku.com operates as an Internet television company in the People's Republic of China. In Portfolio Grader’s specific subcategories of Earnings Revisions and Equity, YOKU also gets F’s. .

Slipping from a C to a D rating, 21Vianet Group, Inc. Sponsored ADR Class A () takes a hit this week. 21Vianet Group provides carrier-neutral Internet data center services in the People's Republic of China. The stock gets F’s in Earnings Growth and Earnings Momentum. .

iPass () is having a tough week. The company’s rating falls from a C to a D. iPass offers enterprise mobility services on a global basis by providing services that simply, smartly and openly facilitate network access from mobile devices while providing the enterprise with visibility and control over their mobile ecosystem. The stock gets F’s in Earnings Revisions, Equity, and Sales Growth. .

The rating of Liquidity Services, Inc. () declines this week from a C to a D. Liquidity Services provides full service solutions to market and sell surplus assets and wholesale goods. The stock also gets an F in Earnings Momentum. The stock price has fallen 16% over the past month, worse than the 1.3% decrease the Nasdaq has seen over the same period of time. As of Nov. 29, 2013, 29.4% of outstanding Liquidity Services, Inc. shares were held short. .

Velti () earns an F (“strong sell”) this week, moving down from last week’s grade of D (“sell”). Velti is a global provider of mobile marketing and advertising solutions. The stock gets F’s in Earnings Growth and Earnings Momentum. .

Louis Navellier’s proprietary Portfolio Grader stock ranking system assesses roughly 5,000 companies every week based on a number of fundamental and quantitative measures. Stocks are given a letter grade based on their results — with A being “strong buy,” and F being “strong sell.” Explore the tool here.

Layne Christensen: Water Works

We believe that water-related issues will continue to grow in importance around the globe, and we think this bodes well for our latest turnaround candidate, forecasts George Putnam, editor of The Turnaround Letter.

Over its 130-year history Layne Christensen (LAYN) has evolved from a domestic water company into a global provider of services to the water infrastructure, mining, and oil and gas industries; its clients include both governmental and private entities.

The company has encountered a variety of headwinds. Its Heavy Civil division bid too aggressively on several large projects a couple of years ago, and the company has been losing money on those projects ever since.

In addition, its Mining division has suffered from the global slowdown in the mining sector, as commodity prices have fallen. As a result, the company has reported sizable losses for two years.

While the red ink may continue to flow for a few more quarters, Layne has a number of the features that we like to see in a turnaround: a strong market position, a new CEO, a catalyst for change, a decent balance sheet, and exposure to a growing market.

With its long history, Layne is a major player in most of its lines of business. For example, in the water sector in the US, it is the largest driller of wells, number two in trenchless pipeline rehabilitation, and one of the top five in sewer repair and construction. In the mining sector, it is the third largest provider of drilling services.

In 2011, the company brought in a new CEO, Rene Robichaud, who has a strong resume as a turnaround leader. In a previous post, he turned around a maker of tubular steel products, eventually selling the company for about ten times its market value, from when he took over six years earlier.

At Layne, Robichaud has taken a number of steps, including realigning business units to make executives more accountable, divesting non-core assets, and creating a culture of more disciplined budgeting.

The most immediate catalyst for improved results is the completion of most of the poorly bid, unprofitable projects. In the latest quarter, the Heavy Civil division reported "essentially break-even results," after several periods of large losses, and it is expected to be profitable later in the fiscal year.

The balance sheet is decent, with a manageable debt load of about $100 million. Cash flow is improving, with many of the recent losses coming from non-cash write-downs.

In addition to improved prospects in its traditional business lines, Layne has strong growth potential in the newer parts of the oil and gas services sector. Layne's water management expertise is likely to be in high-demand in the fast-growing and water-intensive hydraulic fracturing (or "fracking") area.

Subscribe to The Turnaround Letter here…

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Tesla’s Big Battery Order: How Many Cars is That?

Tesla (TSLA) needs batteries like a character in a Lou Reed song needs a fix–and Panasonic is willing to be The Man.

Agence France-Presse/Getty Images

The Associated Press has the details on Tesla’s order.

Under the pact announced early Wednesday, Panasonic will supply nearly 2 billion cells over the next four years. The automotive grade lithium-ion battery cells will power the Model S sedan as well as the Model X SUV, which is scheduled to go into production by the end of 2014, Tesla said.

The agreement amends a 2011 contract between Panasonic and Tesla that promised enough cells for 80,000 vehicles — or approximately 560,000 cells — through 2015.

Deutsche Bank’s Dan Galves does the math:

We estimate that these vehicles use an average of 6,000 cells per vehicle (i.e. 7k for the 85kwh and 5k for 60kwh). So this implies that Tesla sees the potential for production of roughly 330k vehicles over that 4-year period. (Hat Tip: Street Insider.)

Tesla expects 21,000 of its Model S to hit dealerships this year, the AP says.

Shares of Tesla have dropped 2.3% to $160.73 today at 11:47 a.m.

Top Insider Trades: AGYS, ANAC, P, GMZ

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By Jonathan Moreland, founder of Insider Insights and author of Profit From Legal Insider Trading.

NEW YORK (TheStreet) -- It is a victory for common sense. Tracking the trading behavior of company executives, directors and large shareholders in the stocks of firms they're registered in as "insiders" has proven to be profitable, according to both academic studies and (more importantly) the experience of professional investors.

Below are lists of the top 10 mainly open-market insider purchases and sales filed at the Securities and Exchange Commission Wednesday, Nov. 27, 2013 as ranked by dollar value. Please note, however, that these are only factual lists, not buy and sell recommendations. Dollar value is only one metric to assess the importance of an insider transaction, and, frankly, often not even the most important metric that determines if an insider transaction is significant. At InsiderInsights.com, we find new investment ideas just about every day using these and more intricate insider screens to determine where we should focus our subsequent fundamental and technical analysis. And while stocks don't (or shouldn't) move up or down based on insider activity alone, insiders tend to be good indicators of when real stock-moving events like earnings surprises, corporate actions, and new products may be in the offing. So use these regular Top Insider Trades columns as the initial research tools they are meant to be, and click the links in the tables to analyze a company's or insider's full insider history. Also feel free

Tech Trifecta: Amazon, Microsoft, Zynga Surge After Quarterly Results

Tech stocks are in vogue on Friday.

Shares of three high-profile tech companies — Amazon.com Inc.(AMZN), Microsoft Corp.(MSFT) and Zynga Inc.(ZNGA) — are surging on the heels of their respective quarterly results.

They’re also giving a boost to the Nasdaq Composite, which is up 0.3% at 3941. The tech-heavy index is up 30% this year and is outpacing both the Dow Jones Industrial Average and the S&P 500.

Here’s a breakdown of what’s driving the results and stock performance for Amazon, Microsoft and Zynga.

AMAZON

The online retailer once again continued its logic-defying run in the stock market by reporting another quarterly loss — its third this year — that was largely overlooked by Wall Street. Instead, investors fixated on Amazon’s 24% increase in revenue, which exceeded analysts’ expectations and bodes well for the company heading into the holiday season, the most important quarter of the year.

Analysts pointed to Amazon’s strong sales growth and the fact that Amazon touted it added “millions” of new paying Prime members over the past 90 days. Such a trend is “a positive indicator of long-term purchase volumes, as AMZN said its Prime customers have very strong retention and do more cross-shopping,” says Brian Nowak, an analyst at Susquehanna. “In effect, Amazon is adding more higher lifetime value customers…which will lead to larger market share and earnings power.”

Share surged 10% to $365.30. The stock is up 46% this year.

MICROSOFT

Amid an environment of struggling enterprise sales, Microsoft bucked the trend. The software giant notched a double-digit percentage jump in both revenue and profit, driven by robust sales to businesses.

“Upside to results was in contrast to Street apprehensions for a possible miss and a more likely guide lower,” says Rick Sherlund, an analyst at Nomura Securities. “While still not a great quarter, it was a surprise to the Street and any upside is good news when the set-up is so cautious.”

Shares jumped 6.5% to $35.91. The stock is up 34% year-to-date and is hovering near its highest level of the year.

ZYNGA

The social-game maker’s third-quarter loss narrowed from a year earlier as expenses dropped significantly. Shares jumped as the results beat expectations.

But the underlying problems plaguing Zynga still remain. The company’s daily active users dropped to 30 million in the third quarter, down from 39 million a quarter earlier and 60 million a year ago. Bookings, or the actual value of virtual goods Zynga sells in games, tumbled 40% to $152.1 million.

Zynga has taken steps to address these issues. Earlier this year the company announced it would cut 18% of its staff and close some offices to help reduce expenses.

“Incrementally positive monetization trends emerged in Q3, including healthy advertising [average revenue per user] growth, but we prefer to take a wait-and-see approach as the company positions for a potential 2014 recovery,” says Michael Olson, an analyst at PiperJaffray.

Shares rose 13% and jumped above $4 for the first time this year. The stock still remains well below its $10 IPO price in December 2011.

U.S. Stock Futures Little Changed as HP Advances on Sales

U.S. stock-index futures were little changed, with equities heading for a third straight monthly gain, as investors awaited data to gauge the strength of consumer confidence in the world's largest economy.

Hewlett-Packard Co. gained 7.1 percent in early U.S. trading after the maker of personal computers posted revenue and profit that topped analysts' estimates. Analog Devices Inc. (ADI) slipped 3.4 percent late in New York yesterday after predicting first-quarter profit that missed analysts' projections.

Futures on the S&P 500 expiring next month rose 0.1 percent to 1,804 at 7:10 a.m. in New York. Dow Jones Industrial Average contracts added 20 points today, or 0.1 percent, to 16,080.

"We've seen multiple expansion because of continued support from monetary policy and this is still the main driver of the market," Ivo Weinoehrl, a fund manager at Deutsche Asset & Wealth Management, said by phone from Frankfurt. "The market is fundamentally fully valued. The expectation is for growth to pick up in the U.S. next year, but if companies aren't willing to increase investment and begin hiring, then I wonder who will flip the first coin to drive the economy."

The S&P 500 has rallied 26 percent this year, heading for the biggest annual gain since 1998, as the Federal Reserve continued the pace of monetary stimulus. The index is up 2.6 percent this month, with valuations near their highest level since the end of 2009. The gauge trades for about 16.3 times its companies' projected earnings, according to data compiled by Bloomberg. U.S. equity markets will be closed tomorrow for the Thanksgiving holiday.

Consumer Confidence

U.S. data today at 9:55 a.m. New York time will probably show that the final reading of the Thomson Reuters/University of Michigan November consumer sentiment index rose to 73.1 from a preliminary reading of 72, economists predicted. Figures yesterday showed the Conference Board's index of American consumer sentiment fell to a seven-month low this month.

"We need to see job growth," said Weinoehrl, who helps oversee about about $1.29 trillion. "The consumer is not in a good shape, and mass retailers have been quite disappointing going into this holiday season."

Employment data may show applications for jobless benefits increased to 330,000 in the week through to Nov. 23, economists predicted, after dropping to the lowest level since September in the previous week.

Durable Goods

A separate report may show that orders for durable goods dropped in October for the first time since July. Orders fell 2 percent after gaining a revised 3.8 percent in the prior month, according to the median economist estimate before the release at 8:30 a.m. in Washington.

Hewlett-Packard increased 7.1 percent to $26.86 in early New York trading. Sales (HPQ) for the three months ended Oct. 31 were $29.1 billion, the Palo Alto, California-based company said yesterday. That exceeded the $27.8 billion average analyst estimate compiled by Bloomberg. Profit excluding some items was $1.01 a share, compared with the $1 average estimate.

Analog Devices slipped 3.4 percent to $48.20 in extended trading in New York yesterday. Adjusted earnings will be between 44 cents and 52 cents a share in the first quarter, the company said in a statement. That compares with the average analyst projection of 56 cents.

Jeffrey Saut of Raymond James: Stock market trend remains up

Jeffrey D. Saut

“The Boys Are Back in Town”

Guess who just got back today?

Them wild-eyed boys that had been away

Haven't changed, haven't much to say

But man, I still think them cats are crazy

They were asking if you were around

How you was, where you could be found

Told them you were living downtown

Driving all the old men crazy

The boys are back in town

The boys are back in town

... Thin Lizzy (1976)

The boys are indeed back in town as Washington D.C. opened its doors for business as usual last week following a contentious debt ceiling debate and a 16-day shutdown of the government. This outcome had been anticipated in these letters for often-stated reasons, and just like when the ”fiscal cliff” was averted, I now expect the media to turn its focus to the next Armageddon. While the self-inflicted crisis took the amateurish rollout of Obamacare out of the headlines, it will likely have a de minimis effect on the economy (maybe shave 0.03 – 0.04% off of the official GDP figures). The good news is that except for this week's delayed September employment report, I doubt investors will pay much attention to any of the other economic reports between now and Christmas due to the recent Beltway consternations and their expectation about the potential impact on the economy.

As for the impact on the stock market, it was profound with the S&P 500 (SPX/1744.50), the mid-cap S&P 400, and the small-cap Russell 2000 trading to new all-time highs. While there were some upside non-confirmations (most notably the D-J Industrial Average), the majority of indications confirmed the move higher. For example, the Advance/Decline Line climbed to a new bull market high, the Selling Pressure Index fell to a new reaction low, the short-term “buy signal” I spoke of on October 15th remains in force (when the 14-day Stochastic crossed above its moving average), the Short-Term Trading Index confirms that “buy signal,” the number of new highs on the NYSE expanded, and the list goes on. Such metrics caused the “godfather of technical analysis,” namely Ralph Acampora, t! o abandon his bearish “call” of last summer. Recall that like me, Ralph was looking for a short/intermediate-term stock market peak in the mid-July through mid-August timeframe. At the time I was expecting a decline of roughly 10%. And, we were about halfway into that 10% pullback when Vladimir Putin pulled our President out of a tight spot with Putin's Syrian solution. At that point I mainly gave up on my downside “call” and recommended recommitting 15% of the cash that was raised in June. Since then, while the equity markets have been choppy, they have refused to surrender much ground. As stated in last Thursday's Morning Tack, “With the debt ceiling debates behind us, the markets can focus on earnings, economics, and the Federal Reserve.” To that trifecta, the story is pretty good.

On the earnings front, the bottom up operating earnings estimate for the SPX is currently $107.58, leaving the SPX's P/E ratio at almost 16x. Next year's estimate is $121.66. If the SPX continues to trade at that P/E multiple it renders a price target of 1946. Moreover, so far of the 190 companies that have reported earnings, 60.5% of those companies have beaten estimates and 50.9% have beaten revenue estimates. As far as economics, as stated the numbers are probably going to be ignored for a few months because of the shutdown. However, I believe GDP growth will accelerate to 3% in 2014 driven by a capital expenditure cycle because companies like GM are running their plants flat out 24/7 and the equipment is wearing out. Finally, with Janet Yellen at the helm of the Fed it should be steady as you go. That implies no tapering and plenty of liquidity. And, a number of other things are going right in this country.

While the politicians do not want to broadcast it, the latest monthly CBO report shows tax revenues up 13% year/year and individual income tax payments up an amazing 15.8%. Further, payroll taxes are better by 11.6%, all of which have cut the CBO's 2013 estimate of the deficit! to $642 ! billion. Part of the reason for that deficit reduction is because median family annual incomes have stabilized for the first time since the recession to an inflation-adjusted $51,017. Another reason is that the U.S. is on track to overtake Russia as the world's largest producer of oil and natural gas. Of course the reason for that energy leap is the technologies of fracking and horizontal drilling. Interestingly, the research firm IHS Global Insights notes fracking has added the equivalent of $1,200 to real household disposable income on average in 2012 and estimates that figure will grow to $3,500 by 2025. Further, fracking added $283 billion to economic growth last year and is expected to add $533 billion in 2025 with an attendant federal/state tax payment of $138 billion. The relative resulting “cheap” energy estimates are causing foreign companies to invest, or are planning to invest, billions of dollars in plants that would churn out chemicals, fertilizers, plastics, metals, etc. Obviously, the American Industrial Renaissance (AIR) is happening. A few of the ways to participate in this renaissance is through Rich Bernstein and either of the mutual funds he manages for Eaton Vance, Richard Bernstein Equity Strategy Fund (ERBAX/$13.62) and the Richard Bernstein All Asset Strategy Fund (EARAX/$12.24). As for a pure play (100%) on AIR, there is First Trust's Richard Bernstein TS American Industrial Renaissance ETF (FWRVLX/$10.17).

Another theme we have embraced for the past two years has been the recovery in housing. Recently many investors have cooled on this theme due to the rise in mortgage rates. However, mortgage rates have declined over the past few weeks. A second derivative way to get at the burgeoning housing theme is via Strong Buy-rated Weyerhaeuser (WY/$30.11). As our fundamental analyst writes in the commentary for our Analysts' Current Favorites product, released earlier today:

We believe: 1) the embedded value of Weyerhaeuser's homebuilding platform is underappreciate! d relativ! e to other public builder valuations (most notably, the 17,700 lots it controls in California); 2) the recent underperformance of WY shares has created a buying opportunity; and 3) in the context of our REIT coverage, there are relatively few opportunities to find similar long-term earnings/cash flow growth stories. In our view, Weyerhaeuser's homebuilding platform (one of the 20 largest in the country), significant wood products business, and immense timberland portfolio position it as a compelling alternative to pure-play homebuilders in this housing recovery. Weyerhaeuser is targeting a payout of 75% of FAD over the cycle and is well positioned to raise its dividend as the housing recovery gains momentum. The company has already boosted its dividend by 33% since October (WY shares currently yield ~3%).

The call for this week: According to the weight of the evidence, the primary stock market trend remains “up!” Indeed, last Thursday's gain, while not a 90% Upside Day, was indeed an 80% Upside Day as the market breadth, and total points gained, were decidedly positive. Manifestly, since 1940 there have only been 45 other days when 80% of issues and volume were positive and the SPX closed at a new 52-week high (like happened last week). Of those, only seven occurred two days in a row. According to the must have SentimenTrader folks, “To get more precedents, let's look for any time that both the percentage of up issues and volume were both above 75%, with the last one occurring on a day the S&P closed at a new high. In 73 years, there have been 17 precedents. A week later, there were only three negative returns, and two of those were less than -0.5%. Three months later, there was essentially only one negative return, as was the case six months later was well. Average returns were about double what a random return was during the study period.” Verily, the only current negatives are the short-term overbought condition and the upside non-confirmations.

Jeffrey D. Saut is managing! director! at Raymond James & Associates. This commentary originally appeared on the firm's website. Like what yo

Apple Inc. Looks to Roll Out Black Friday Deals (AAPL)

Consumer favorite Apple (AAPL) is largely expected to roll out lucrative Black Friday deals on 11/29 for its customers.

Past deals have included up to $100 off of laptops as well as other discounts on iPads and iPods. The sales will be especially crucial after Apple’s most recent quarterly sales of certain devices were not up to snuff for many on The Street. A nice boost in sales buoyed by discounts could help ensure that the firm hits its sales and revenue estimates for its next report.

Thus far, the event has only been posted to the company’s Australia and New Zealand websites, but with those two nations roughly one day ahead of the U.S., many are expecting a similar announcement for domestic markets to come sometime within the next day.

Apple shares were up $4.13, or 0.8%, at Monday’s close. The stock is down just over 1.5% on the year.

Variable annuity sellers clamp down on payments to existing contracts

Two of the largest variable annuity sellers sharply pulled back on additional premiums into existing contracts during a busy third quarter for the sellers.

This summer, MetLife Inc. and Prudential Financial Inc. both tightened the reins on investors' ability to add more money to their existing variable annuities, according to Morningstar Inc.'s roundup of quarterly variable annuity filings with the Securities and Exchange Commission.

MetLife Inc. on July 15 filed with the SEC to limit additional payments into variable annuities with its Guaranteed Minimum Income Benefit Max rider and its Enhanced Death Benefit Max rider, which are known as the GMIB Max I and EDB Max I.

The filing blocked additional payments into the contract starting Aug. 9 unless the contract's account value was below a minimum value or if the rider charge was greater than the value of the account.

Followers of the VA industry will recall the GMIB Max — originally released in May 2011 — spurred massive flows into MetLife, as the product offered 6% compounded growth and 6% withdrawals per year based on the benefit base. Similar benefits for new products have become scarce in the industry, so it only makes sense that advisers add to existing contracts.

Prudential, meanwhile, filed June 28 with the SEC to curb additions to contracts with the Highest Daily Lifetime Income rider, the Spousal Highest Daily Lifetime Income rider or the Highest Daily Lifetime Income rider with Lifetime Income Accelerator feature. As of July 29, those affected clients will be subject to a $50,000 annual limit on additional payments in any benefit year.

Prudential spokeswoman Lisa Bennett noted that the change did not affect annuity contracts with Highest Daily Lifetime Income 2.0 or 2.1. “The $50,000 annual cap allows many investors to make contributions to SEP IRAs and other retirement plans originally set up to accommodate annual contributions,” she said. “We consider this change to be a prudent risk management measure in keeping up with our overall goal of balancing the needs of our clients while protecting the guarantees and assets they entrust to us.”

Nationwide Life and Annuity Insurance Co. also filed limits with the SEC that would allow it to curb additional payments into its lifetime withdrawal benefits, which are 5%, 7% and 10% lifetime income options, according to Morningstar.

“Unlike moves to limit additional contributions by some competitors, these clients will still be able to contribute up to $50,000 a year – up to $1 million in total premium – which is enough to accommodate the annual savings needs of many investors,” said Nationwide! spokesman Dace de la Foret.

These days, advisers are annoyed about funding limits, which have become commonplace as insurers seek to limit their exposure to longstanding liabilities tied to living benefits. But they are moving on to other insurers and other contracts that are open to additions.

“The brokers were shoveling a lot of money into the older products for better benefits for the clients,” said Kraig Lange, first vice president and manager of the insurance department at Stifel Nicolaus & Co. Inc. These recent limits on subsequent premium payments “weren't well received, but we all got over it,” he added. Advisers at Stifel are selling policies from Jackson National Life Insurance Co., Lincoln Financial Corp. and Pacific Life Insurance Co., and they continue to recommend Nationwide and Prudential, Mr. Lange said.

Not all insurers are looking to take their foot off the gas on variable annuity sales. Some have filed for product enhancements that up the ante on withdrawal percentages. Such is the case with Securian Financial Group, which added new income benefits in October — a suite of living benefits called MyPath.

Dan Kruse, second vice president and individual annuity actuary at Securian, noted that staying in the annuity game is a balancing act in terms of product development, moderating volume and keeping a close eye on the relationships the insurer has with its distributors.

“We aren't going to write business we don't want to write, but with a smaller number of distribution partners, I can keep market share in play: How much risk are you willing to take on before you undermine your distribution?” Mr. Kruse said. “Are we turning back relationships? No. But are we focused on which ones we want to go deepest on? Yes.”

Fiserv Brings Model Portfolio Data to Unified Wealth Platform

Fiserv announced earlier this month the launch of Model Management: Reporting, a module that provides investment managers with model portfolio data within the company’s Unified Wealth Platform.

The new module from Fiserv (FISV), a financial services technology solutions company based in Brookfield, Wis., provides investment managers data about the use of their models-only portfolios by participating broker-dealer sponsor firms.

Reported data as provided by the sponsor firms includes assets under management, weekly and monthly asset flows and information about the financial advisors using the models. In addition, an optimized login process provides single sign-on access to the middle-office component of the Fiserv platform.

“This technology gives investment manager clients access to key metrics about the use, penetration and movement of their portfolios,” said Cheryl Nash, Fiserv’s president of Investment Services, in a statement. “With the largest lineup of models-only sponsors in the industry, this data enables managers to measure their models’ penetration in a particular region or financial advisor, allowing them to measure their performance relative to competitors.”

Managers like the module’s timeliness, transparency and year’s worth of rolling data, while sponsors like the efficiency of the application since they don’t have to provide data and maintain email lists of their managers anymore, according to Michael Snizek, product manager of Investment Services.

“Once additional sponsors begin to use this component of Model Management from Fiserv, managers will be able to retrieve timely, accurate data that provides powerful insight into the use of their funds,” Snizek said in a statement. “With more than 60 managers already using the technology, we’ll be able to readily add additional managers, making Model Management: Reporting a very robust source for models-only manager data.”

Read Fiserv Launches Online Retirement Illustrator Tool at ThinkAdvisor.

Chill, Dude (Part II): Debt Default Drama Queens

When I took my first finance class, I was taught that the government bond rate in the currency in question is the risk free rate. Implicit in that teaching was the assumption, misplaced even then, that governments do not default on their local currency borrowings, since they control the printing presses. When confronted with evidence of government defaults in the local currency in prior decades, the defense offered was that these defaults occurred in tumultuous emerging markets but would never happen in developed markets. I took that teaching to heart and for almost three decades used the US Treasury bond unquestioningly as the risk free rate in US dollars. With the government default looming tomorrow, you would think that this would be a moment of reckoning for me, but my faith in governments being default free was lost a while back, in September 2008. For those who do remember that crisis (and it is amazing how quickly we forget), there were two events that month that changed my perceptions of government default. The first occurred on September 17, 2008, where money market funds (supposedly the last haven for truly risk averse investors) broke the buck, essentially reporting that they had lost principal even though they had invested in supposedly risk free, liquid securities. The second happened a week later, when the nominal interest rate on a US treasury bill dropped below zero, an almost unexplainable phenomenon, if you believe that the US government has no default risk. After all, why would investors pay more than a thousand dollars today for a T.Bill for the right to receive a thousand dollars in the future, unless they perceive a chance that they will not be paid?

That last question is the key to understanding default risk. It is not a zero-one proposition, where it shows up only after you have defaulted. If an entity is truly default free, the question of whether there is default risk will never come up, and if it does come up, that entity is not default free. Put in specific terms, I believe that markets have perceived and built in some default risk in the US Treasury since 2008, though it is perhaps small enough to ignore. The issue was crystallized two summers ago, when S&P announced its ratings downgrade for the US, to screams of protest from politicians in DC. At the time, I posted my reaction to the downgrade and advised investors to take it down a notch and that while the downgrade was definitely not good news for any one, it was not the end of the world that it was made out to be.    Market Assessments of US default risk To back up my point about how default risk is not a zero one proposition to markets and investors, I will start with a graph of credit default swap spreads for the US on a monthly basis from January 2008 through today. While I have posted about the limitations of the CDS market, it provides a barometer of market views on sovereign default risk that are much more timely than sovereign ratings.   Looking at the chart, it is clear that the crisis is 2008 changed market perceptions of default risk in the United States. The US CDS spread increased from 0.105% in January 2008 to 0.73% in January 2009. While that number dropped back for a while, it started climbing again in late 2010 and the S&P downgrade in August 2011 had little impact on the spread, suggesting that as always, ratings agencies follow markets, rather than lead them. Updating the numbers through this year, the US CDS spread has dropped over the course of the year and the debt default drama has had little impact on that number, suggesting again that while the recent events in Washington may have increased investor concern about default risk, the effect is not as large or as dramatic as it has been made out to be.   If you are concerned that the month to month graph might not be indicating day to day volatility in the market, this graph should set that fear to rest:   Some analysts have pointed at the increase in the T.Bill rate as evidence of market concern about default and there is some basis for that.   The one-month T. Bill rate has climbed from zero in mid-September to 0.35% yesterday. However, note that the US T.Bond rate actually declined over the same period, again indicative that if there is a heightened sense of worry about default with the US Treasury, it is accompanied by a sense that the default will not last for long and will affect short term obligations by more.   Valuation Implications What are the implications of heightened default risk in government bonds for risky assets? In the immediate aftermath of the 2008 crisis, I worked on a series of what I call my "nightmare" papers, where I took fundamental assumptions we make about markets and examined how corporate finance and valuation practice would have to change, if those assumptions were not true. The very first of those articles was titled, "Into the Abyss: What if nothing is risk free?" and it looked at the feedback effects of  government default into valuation inputs. You can download the paper by clicking here, but I can summarize the effects on equity value into key macro inputs that affect the value of every company:   1. Risk free rate: How will a default or a heightened expectation of default by the US government affect the risk free rate in US dollars? It is tough to tell, but my guess is that the risk free rate in US dollars will decline. That may surprise you, but that may be because you are still equating the US treasury bond rate with the risk free rate in US dollars. Once government default become a clear and present danger, that equivalence no longer holds and the risk free rate in US dollars will have to be computed by subtracting out the default spread for the US from the US treasury bond rate. Thus, just as a what if, assume that there is default and the US T.Bond rate jumps from 2.60% today to 2.75% tomorrow and that your assessment of the default spread for the US (either from a newly assigned lower sovereign rating or the CDS market tomorrow) is 0.25%. Risk free rate in US dollars = 2.75% - 0.25% = 2.50%

Why do I expect the risk free rate in US dollars to drop? A pure risk free rate is a composite of expected inflation and expected real interest rate, and as I have argued before, reflects expectations of nominal growth in the economy. A default by the US treasury will affect both numbers negatively, since it may tip the economy back into a recession and bring lower inflation with it. In fact, looking back at the daily T.Bond rates and CDS rates over the last month, I tried to break down the T.Bond rate each day into a risk free US $ rate and an estimated default spread. To estimate the latter, I compared the CDS spread each day to the CDS spread of 0.20% on August 31, 2008.

If you go along with my estimates, the US $ risk free rate has dropped from 2.67% to 2.42% over the last 30 days, while the default spread has widened from 0.19% to 0.28%.   2. Equity Risk Premiums and Corporate Default Spreads: Lest you start celebrating the lower risk free rate as good for value, let me bring the other piece of the required return into play. If the default risk in the US is reevaluated upwards, it is also very likely that investors will start demanding higher risk premiums for investing in risky assets (stocks, corporate bonds, real estate). In fact, I think that the absence of a truly risk free alternative makes all risky investments even riskier to investors and that will show up as higher equity risk premiums. The same argument can be applied to the corporate bond market, where default spreads will increase for corporate bonds in every ratings class, as sovereign default risk climbs. To get a measure of how equity risk premiums have behaved over the last month, I can provide my daily estimates of the implied ERP from September 16 to October 16 for the S&P 500.   Note that I have computed the implied ERP over my estimated US$ risk free rate (and not over the US T. Bond rate). You can download the spreadsheet and make the estimates yourself. The net effect on equity will therefore depend upon whether equity risk premiums (ERP will increase by more or less than the risk free rate decreases. If default occurs, the ERP will increase by more than the risk free rate drops, which will have a negative effect on the value of equity. However, that effect will not be uniform, with the negative impact being greater for riskier companies than for safer ones.   The End Game By the time you read this post, I would not be surprised if Congress has stitched together a last minute compromise to postpone technical default to another day. In a sense, though, it is too late to put the genie back in the bottle and while it is easy to blame political dysfunction for this debt default drama, I think that it is reflective of a much larger macro economic shift. With globalization of both companies and markets, even the largest economies are no longer insulated from big crises and in conjunction with the loss of trust in institutions (governments, central banks) over the last few years, I think we have to face up to the reality that nothing is truly risk free any more. That is the bad news. The good news is that the mechanism for incorporating that shift into valuation and corporate finance exists, is already in use in many emerging market currencies and just has to be extended to developed markets.

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

Posted-In: Markets

Originally posted here...

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Will Recent Deal Discussions Boost Netflix?

With shares of Netflix (NASDAQ:NFLX) trading around $324, is NFLX an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Netflix is an Internet subscription service that streams television shows and movies. The company's subscribers can watch unlimited television shows and movies streamed over the Internet to their televisions, computers, and mobile devices. In the United States, subscribers can also receive DVDs delivered to their homes. Netflix has revolutionized the television and movie industry with its services.

Netflix is reportedly in negotiations with pay-TV providers Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC), among others, to provide its service as a part of pay-TV packages and allow pay-TV providers to include Netflix as an app on their set-top boxes. According to people familiar with the matter who spoke to the Wall Street Journal, talks are in early stages and could still break down. Netflix cut a similar deal with the U.K.'s Virgin Media recently, but pay-TV and Netflix are still enemies in many ways, although they are apparently willing to explore partnerships.

T = Technicals on the Stock Chart Are Strong

Netflix stock has been exploding higher over the last several years. The stock is currently trading slightly below all-time high prices and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Netflix is trading above its rising key averages, which signal neutral to bullish price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Netflix options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Netflix Options	70.48%	90%	88%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
October Options	Flat	Average
November Options	Flat	Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Netflix’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Netflix look like and more importantly, how did the markets like these numbers?

	2013 Q2	2013 Q1	2012 Q4	2012 Q3
Earnings Growth (Y-O-Y)	345.45%	162.50%	-78.96%	-88.79%
Revenue Growth (Y-O-Y)	20.23%	17.72%	7.96%	10.13%
Earnings Reaction	-4.46%	24.28%	42.22%	-11.87%

Netflix has seen improving earnings and rising revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Netflix’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Netflix stock done relative to its peers, Amazon (NASDAQ:AMZN), Comcast (NASDAQ:CMCSA), Outerwall (NASDAQ:OUTR), and sector?

	Netflix	Amazon	Comcast	Outerwall	Sector
Year-to-Date Return	244.30%	23.85%	24.09%	23.26%	38.57%

Netflix has been a relative performance leader, year-to-date.

Conclusion

Netflix is a streaming services that provides video entertainment to consumers in the United States. The company is reportedly in talks with top pay-TV providers in order to bring its product to the pay-TV networks. The stock has been exploding higher and is now trading slightly below all time high prices. Over the last four quarters, earnings have been improving while revenues have been rising which has produced mixed feelings among investors about recent earnings announcements. Relative to its peers and sector, Netflix has been a year-to-date performance leader. Look for Netflix to continue OUTPERFORM.

Shiller vs. Fama: Which Nobel Winner Comes Out on Top?

Eugene Fama and Robert Shiller (along with Lars Peter Hanson) received the Nobel Prize in Economics last month for their contributions to understanding asset prices.

But as was frequently noted at the time, Fama and Shiller have very different views on the nature of markets.

Fama, famously, is associated with efficient market hypothesis (EMH) and sees markets as rational, whereas Shiller is noted for his acceptance of a market riddled with behavioral biases.

While both economists are identified with portfolio approaches linked to value investing, Research Afffiliates' head of equity research, Dr. Vitali Kalesnik, teases out the differences between these approaches — and weighs in on the side of Shiller.

Indeed, in the Southern California-based firm’s November “Fundamentals” newsletter, Kalesnik’s research contribution compares two model value portfolios — helpfully labeled the Eugene Portfolio and the Robert Portfolio — that deliver returns that are miles apart.

Here’s where it is helpful to understand that not everything that is called value is the same. While value investors share a lot in common — both look for stocks with low price-to-fundamentals stock ratios and both agree that value stocks “co-move” with one another.

That said, Fama and Shiller differ in their interpretations of the pricing mechanism, and Kalesnik attempts to show that the implications are profound.

Both would agree that that buying low and selling high is a rewarding strategy. But to Fama, the basis for value’s superiority is risk. Investors are simply being rewarded for assuming more risk.

To Shiller, value investors are being compensated for cleverly exploiting an irrational market’s mispricing of securities.

The Kalesnik paper wonkishly detours to note that empirical studies have disproven various explanations for the source of value stocks’ risk. Neither default risk nor illiquidity explain the performance of value stocks, so it remains an open question what makes this group of stocks more risky, according to the Fama model; current explanations center on hard-to-model systemic or catastrophic risk.

In any event, assuming these two value approaches imply very different portfolios, the Research Affiliates paper tests a Eugene Portfolio that is long risky stocks and short safe stocks, but which is indifferent to book-to-market ratios.

The Robert Portfolio is long cheap stocks (those having high book-to-market ratios) and short expensive stocks (with low B/M ratios), but is indifferent to risk.

Kalesnik and fellow researchers, in a separate study he cites, simulated these two strategies in 23 developed countries spanning many decades and found the Eugene Portfolio generated annualized average performance of 0.79%, which actually implies a negative alpha of -1.74%.

In contrast, the Robert Portfolio yielded an average annual return of 7.61% with a positive alpha of 3.01%. What’s more, Robert’s strategy worked in 100% of the countries under study.

The implication is that it is mispricing (rather than some poorly understood systemic risk) that drives value’s premium returns, and it is specifically book-to-market characteristics that are useful in predicting returns.

Value investors should therefore be much more interested in a tech stock with high fundamentals-to-price ratios, even though it tends to co-move with its fellow “growth” stocks, than a classic “value” stock that co-moves with its ilk but which is priced as an expensive company.

Think an out-of-favor Dell over a much beloved Berkshire Hathaway.

As Kalesnik puts it, “if (as is the case) mispricing and not risk is responsible for value returns, then we can construct more efficient and powerful strategies to extract the value premium”—through cheap stocks that swim with the growth family.

---

Check out Gundlach on Shiller CAPE Fund: ‘A Better Mousetrap’ on ThinkAdvisor.

Is Spotify REALLY Worth $4B Against Pandora and Sirius?

The world around venture capital sometimes creates some very interesting reading when you look at private company valuations versus public company valuations. In this case, it is in the online streaming music service of Spotify. It is hard to know what the valuation should be without having access to the books, but a $4 billion valuation should catch the eyes of Pandora Media Inc. (NYSE: P) and also of Sirius XM Satellite Holdings Inc. (NASDAQ: SIRI).

Reuters, the Wall Street Journal, and others have thrown some figures out showing that a $250 million capital raise gave Spotify a value of more than $4 billion. When currencies are translated, we have seen that Spotify generated revenue of close to $570 million in 2012 with what may be a loss of about $77 million. Spotify is also shown to have 24 million active users and 6 million who pay for a premium service. So how does this add in a relative value basis?

Pandora Media Inc. (NYSE: P) recently released its earnings and disclosed that it had 70.9 million active users and it said it is on track to generate roughly $660 million in revenue this year after having generated $427 million in 2012. Pandora just became profitable on normalized operations this year. Its market cap is $5.1 billion, but keep in mind that shares have tripled off their lows this year.

Sirius XM Holdings Inc. (NASDAQ: SIRI) is in a different class because it is almost all subscriber-generated. It is the big kahuna with a market cap of over $22 billion and its latest press release showed has that it has 25.6 million subscribers. Sirius is also profitable, and sales were $3.4 billion in 2012 and expected to be almost $3.8 billion in 2013.

Again, a problem in analyzing the current value is not knowing the current financial expectations of Spotify. That being said, Spotify is valued at close to $166 per active user versus close to $72 per active user of Pandora. We do not truly want to do the direct comparison for Sirius XM due to its subscriber only model, but that would be worth about $882 per subscriber in case you really had to know.

On Pandora, we would also point out that in the first nine months of 2013, some $85.2 million of the revenue came from subscribers versus its $463 million in total revenue. We do not have any comparable breakdowns for Spotify.

Here is where the rub comes in on valuing a company like Spotify at $4 billion. We cannot use a Sirius XM comparison as of now, but Pandora’s $5.1 billion is after its shares tripled this year. We will have to wait to see final sales and income numbers before making any final verdict here. Just keep in mind that for a venture-backer to pay a $4 billion valuation today it means they expect the value to be $5 billion, $6 billion, or far more when it comes time to sell or go public tomorrow.

Is There A Light At The End Of The Tunnel For J.C. Penney?

Is the worst over for J.C. Penney (NYSE:JCP)? Some investors seem to think so.

Shares of the Plano, Texas-based company surged Wednesday after the 110-year-old retailer reported quarterly results that were not as awful as Wall Street had feared. The company had a net loss of $489 million, or $1.94 per share, wider than the $123 million, or 56 cents, it lost a year earlier. Revenue fell 5.1% to $2.78 billion, an improvement from a year earlier when sales plunged 27%. What caught the eye of investors, however, was the optimistic tone CEO Mike Ullman had regarding the all-important fourth quarter.

Revenue at existing stores, a key retail metric, will rise in the fourth quarter, on both a year-over-year and quarter-to-quarter basis, according to Ullman. Same-store sales rose in October for the first time in more than two years. During the holiday quarter a year ago, comparable sales fell 31.7 percent. Gross margins also are improving. The company's profits were hurt in the past quarter because it had to mark down slow-selling merchandise that former CEO Ron Johnson brought in during his disastrous 17-month tenure. J.C. Penney was able to quell concerns about its liquidity by noting that it had $1.71 billion in cash and cash equivalents including the funds available from its credit facility.

Wall Street, which has pushed J.C. Penney's shares up more than 30% over the past month, was heartened by the news. J.C. Penney surged nearly 7% to $9.31. One investor that isn't benefiting from the run-up is billionaire Bill Ackman. The head of the Third Point hedge fund unloaded his stake in the retailer, which he had held for several years, in August at a loss of about $470 million.

Speaking to analysts on the earnings conference call, Ullman, who was pushed out in favor of Johnson prior to his recent return, didn't appear to be resting on his laurels.

"The work we've been doing over the last seven months to stabilize the business financially and operationally required fun! damental changes in many aspects of our business, " he said. "It's hard work with no quick fixes, but our teams are rising to the challenge and our customers tell us they love the progress we're making."

If investors are game enough to buy J.C. Penney shares, the time to do it is now. Wall Street is starting to take a shine to the stock and shares of the retailer may surge higher as more investors start to believe that Ullman's turnaround is sustainable. Just look at what happed to Best Buy.

Last year, many on Wall Street had given up on Best Buy (NYSE:BBY). The consumer electronics giant made headlines for all the wrong reasons including having to fire its CEO Brian Dunn for having an affair with a female subordinate. Founder Richard Schulze stepped down as board chairman because he didn't notify other members about Dunn's relationship. Schulze briefly considered buying the company, whose financial performance had been dismal, but abandoned the idea. Schulze rejoined the company this year as chairman emeritus Under the leadership of current CEO Hubert Joly, shares of Best Buy have skyrocketed more than 200%. However, Best Buy stumbled in the most recent quarter, posting disappointing earnings. This underscores the notion that corporate turnarounds take time and often don't go smoothly.

Many challenges lie ahead for J.C. Penney. As Bloomberg noted, the company's gross margin of 29.5% lags rivals such as Macy's (NYSE:M) (39.2%) and Kohl's (NYSE:KSS) (32.5%). For the company to remain competitive, that's got to change. Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are also competing for the same shopper and will be ferocious competitors with J.C. Penney when it comes to price.

Unfortunately, the macroeconomic environment isn't great for J.C. Penney as consumers, especially those with lower incomes, take a cautious approach to the holidays. Stable gas prices, which are closely correlated with consumer confidence, are preventing merry holidays from turning miserable but they certainly won't be jolly for some retailers. The National Retail Federation is expecting holiday sales to rise 3.9% to $602.1 billion, a projection that many economists think is optimistic.

The Bottom Line

Ullman deserves credit for making progress in undoing the damage done by his predecessor. Ironically, Ullman was shoved aside as CEO to make way for Johnson, whose claim to fame was establishing Apple's (Nasdaq:AAPL) retail stores.

Investors with a high tolerance for risk and an ! iron stomach should buy J.C. Penney's shares today. There's a chance that the stock could follow Best Buy and "pop" over the next few months. Equally, the retailer could stumble again.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

DLTR – Snatch Up Discounted Dollar Tree Stock Today

Shares of Dollar Tree (DLTR) were substantially lower this morning after the company reported third-quarter earnings. Dollar Tree earnings tallied 59 cents per diluted share of DLTR stock, which missed analyst estimates by two pennies.

The results also compared poorly to earnings of 68 cents per share of DLTR stock in the third quarter of 2012.  However, that quarter also included a one-time gain of 17 cents per diluted share due to the company's sale of Ollie's Holdings.

Plus, the Dollar Tree earnings report showed that consolidated net sales for DLTR increased by nearly 10% to $1.88 billion. While that was an improvement, the revenue figures also missed DLTR stock analysts’ expectations.

Following the earnings announcement, DLTR Chief Executive Officer Bob Sasser said, “I am pleased with our performance in the third quarter.” He also cited fast growth in higher-margin variety categories as a contributing factor for the improved sales numbers.

However, Dollar Tree stock investors were not so pleased. DLTR stock opened significantly lower this morning at $55.55, down around 6% from yesterday's close of $58.92.

What’s Next for DLTR Stock

DLTR stock has ranged from a low of $37.47 to a high of $60.19 over the past 52 weeks. Although Dollar Tree stock has traded sideways recently, as the accompanying chart shows, share of DLTR have been on a blistering pace, up some 57% year-to-date before this morning's gap lower.

The other dollar store stocks were also seen somewhat lower after the news. Dollar General (DG) opened down 1.9 % while Family Dollar Outlet (FDO) was lower by 1.4%.

This is not the first time that Wall Street has crushed Dollar Tree stock and other discount retailer stocks. One year ago, DLTR stock fell from $49 to $37 after disappointing the Street, while fellow discounters FDO stock and DG stock were also trounced at various times during 2012 following disappointing earnings reports.

However, all three of these stocks subsequently bounced back, rising to new 52-week highs. It seems like the Street continually overreacts to what are essentially terrific business models whenever the earnings fail to match the lofty expectations of the analysts. Investors who have picked up shares of DLTR stock or DG stock at far lower levels within three to four weeks after the earnings reports have been rewarded handily for their faith.

Plus, the Dollar Tree earnings report wasn’t all bad news. Year-to-date earnings per diluted share of DLTR stock tallied $1.73 vs. earnings per diluted share of $1.69 through three quarters last year. And excluding the gain from the sale of Ollie's Holdings, earnings per share of DLTR stock through three quarters last year came to just $1.53.

Plus, Dollar Tree has recently entered into a $1 billion accelerated share repurchase program, which is expected to be completed by June of 2014. The company received 15 million shares of DLTR stock during the third quarter.

Therefore, the negative earnings report coupled with the repurchase program provides long-term investors with an opportunity to pick up shares of DLTR stock well-below its late October high of $60.19.

However, having now fallen through the 50-day moving average, Dollar Tree stock is likely to head towards its recent support area just below $53. Should that fail to hold, the next stop for DLTR stock would be the 200-day moving average, currently at $51.45.

If you can pick up shares at or near that level, DLTR stock will be a screaming buy.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities,

From Doom to Boom (and Back): Grantham Sees Stocks Soaring up to 30%, for Now

Breaking news: Stock market scold Jeremy Grantham expects the U.S. stock market to soar another 20% to 30% in the next year or “more likely” two — before the next mega-crash, at least.

The famed Grantham, Mayo, Van Otterloo & Co. hedge fund manager, who foresaw the credit crisis, is known for his relentlessly Malthusian forecasts about freaky weather, a shortage of food and excess of people, and a secular move away from economic growth.

While the GMO manager retains his pessimism about economic growth—he notes that Japan virtually alone among major economies bested the IMF’s growth forecast for 2013 by a tiny 0.7%, while most economies fell short of their modest projections — he credits monetary distortion with boosting stock markets.

Still, in his new quarterly letter to shareholders, Grantham sees the soaring stock market and underlying economy as out of whack:

“There have been few such occasions when such broad disappointment with economic growth still allowed the U.S. and most other major economies to make material upward moves in their stock markets. It is yet another testimonial to the global reach of the Fed’s stimulus of equities,” Grantham writes.

But that stimulus, of which he has been harshly critical, is succeeding at boosting stocks and has a way yet to go before the ultimate crash he foresees, since he finds the telltale signs of a traditional bubble largely absent.

Those signs would include ordinary investors pouring into mutual funds, which he says they are not yet doing consistently; CNBC talking heads making recommendations along the lines of Pumatech in 1999; and “wonderful and influential theories as to why the P/E structure should be much higher today as there were in 1989 or in the U.S. in 2000.”

Only an uptick in the IPO market suggests to Grantham that “we are probably in the slow build-up to something interesting…a badly overpriced market and bubble conditions.”

So Grantham’s “personal guess” is a further 20% to 30% stock market gain in the coming year or two before “we will have the third in the series of serious market busts since 1999,” a wreckage he describes as “the next utterly unnecessary financial and asset class failure.”

The hedge fund manager pins his “positive” forecast on deregulation as well as Fed stimulus, and makes clear that the run-up he anticipates in stocks is not based on valuation criteria.

“Investors should be aware that the U.S. market is already badly overpriced — indeed, we believe it is priced to deliver negative real returns over seven years,” he writes, adding that foreign markets are also overpriced, but less so.

Grantham therefore suggests that prudent investors will have to endure the pain of foregoing all the “fun at the top end of markets,” arguing that risk takers will “probably make some more money, but you may be bushwhacked and, if you are, your excuses will look thin.”

Grantham’s current forecast is very much in line with veteran bear John Hussman of the Hussman Funds, who one week ago cited a mathematical model suggesting a nearly vertical bull run before a coming crash that he considers unavoidable.

Most of Grantham’s lengthy letter has little to do with current market conditions but is rather a discourse, even diatribe, against efficient markets theory and criticism of the Nobel Committee’s award of its prestigious economics prize to Eugene Fama (though Grantham approves of co-recipient Robert Shiller).

The hedge fund manager also turns his withering attention on the once, current and future Federal Reserve chairmen, Alan Greenspan, Ben Bernanke and Janet Yellen.

Regretting that Larry Summers or others were not nominated, Grantham says monetary policy will be “same ole, same ole” under Yellen, whom he criticizes as someone “who has happily gone along with the failed Fed policy of hoping madly for a different outcome despite repeating exactly the same thing.”

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Check out Hussman Sees ‘Textbook Pre-Crash Bubble’ on ThinkAdvisor.

On Fannie, Freddie Reform, Wall Street Is Left of Maxine Waters

NEW YORK (TheStreet) -- It is a strange world when the call to keep bailed-out mortgage finance giants Fannie Mae  (FNMA) and Freddie Mac  (FMCC) alive and preserve the government's legacy contribution to American homeownership comes not from Washington liberals but from Wall Street.

Practically every reform proposal being considered in Congress supports the winding down of the government-sponsored entities or GSEs, ending the implicit government subsidy that fueled an unsustainable growth in homeownership in the run up to the bubble.

Yet, big institutional investors are arguing that the companies, which are now making record profits and will have paid out dividends almost equal to the $188 billion in bailout money by December, should be rehabilitated and privatized.

"In this country we fix valuable businesses by restructuring; we do not simply throw them away," Fairholme Fund's Bruce Berkowitz said last week. The billionaire investor is proposing that the mortgage insurance businesses of the agencies be recapitalized and spun off into two private, state-regulated insurance companies. The new companies would be capitalized with $34.6 billion from the conversion of the GSE's junior preferred stock to common shares. At least another $17 billion of new capital would be raised from the junior preferred stockholders in a rights offering. The proposal was touted as an answer to the broad bipartisan call for more private capital in the private sector, but the likelihood of it being accepted appears slim. "An offer of this nature would not be in the public interest," Senator Bob Corker (R.,Tenn) told Bloomberg in an email. "Without meaningful legislative reform we would still have dominant entities owned by the private sector but operating with an implied government guarantee, leaving taxpayers at great risk." Berkowitz is one of a small group of professional investors who, in recent years, have scooped up Fannie Mae and Freddie Mac common and preferred shares for pennies on the dollar. Early investors bet that the companies would return to profitability and repay the government, a la AIG (AIG), but their hopes were quashed when the Treasury amended the bailout agreement in 2012. Under the revised terms of the agreement,the companies had to sweep almost all of their profits to the Treasury as dividends. This effectively prevented them from building capital that would allow them to repay the government.

Berkowitz and other investors including hedge fund Perry Capital have filed lawsuits against the Treasury, arguing that it violated shareholder property rights when it amended the agreement. The Treasury says it has acted appropriately. Despite the likelihood of a long-drawn legal battle with the government, the investor interest in GSE shares has only grown. On Friday, activist investor Bill Ackman's Pershing Square Capital Management disclosed that it had a roughly 10% stake in Fannie and Freddie common shares. The fund said in a filing that it would be in discussions with the management and the government about the restructuring of the companies. The Fannie/Freddie trade may have attracted major league investors but political analysts believe the bets could backfire as there is no appetite in Washington to a) return the agencies to their former avatars as publicly- traded companies with a federal charter and b) allow Wall Street firms to profit off their restructuring.

Both the Corker-Warner bill, the bipartisan reform effort put forward by the Senate Banking Committee and the PATH bill, advanced by House Financial Services Committee Chairman Jeb Hensarling, call for a new mortgage finance system to replace the GSEs.

What's surprising is that these proposals to kill Fannie and Freddie, two agencies that helped subsidize homeownership for decades, have elicited little protest from the far left.

Even Congresswoman Maxine Waters (D.,Calif.), the House Financial Services Committee's top ranking Democrat, who was once an avid supporter of Fannie Mae and Freddie Mac, appears to have accepted a future without the agencies and is proposing an alternative model.

"Both sides of the aisle absolutely believe that we have got to do reform because of what happened with the subprime meltdown that we experienced in this country," she said at a recent housing policy forum organized by the Bipartisan Policy Center. "But I have to tell you, even if I wanted to say 'look how well Fannie and Freddie are doing, let's just leave them alone and let them keep going,' we are past that point now. We can't do that. Despite the fact that they are doing well, everyone remembers what happened. They remember the debt, they remember the meltdown, they remember the foreclosure and the fact that Fannie and Freddie undermined their own [underwriting] criteria when they were challenged." Waters is expected to introduce a proposal that calls for a cooperative-owned securities issuer that would address the "perverse incentives created by Fannie Mae and Freddie Mac's ownership structure of private shareholders." So what makes these big investors think the government will change its mind, given that even the most liberal policymakers are against the status quo? Perhaps they believe that it is only a matter of time before policymakers are swayed by populist sentiment. Winding down and replacing the GSEs with a brand new, untested housing finance model could be hugely disruptive to the mortgage market and could destabilize housing, they argue. Does the government really want to risk rocking the housing market, which has just begun to recover? Even if the government was to continue offering a limited guarantee, analysts say the cost of mortgage credit may rise as much as 100 basis points as private capital would demand a higher return for their risk than the GSEs.

Policymakers who promise reform have the tough job of explaining to their constituents that their mortgage rates are going to go up.

Sure, that may be the price taxpayers have to pay for a safer housing market. But political observers also know how difficult it is to roll back subsidies.

Consider the recent efforts to raise flood insurance premiums to repair the finances of the National Flood Insurance Program. The Briggert-Waters Flood Insurance Reform Act of 2012 was a bipartisan plan that instructed the Federal Emergency Management Agency or FEMA to phase out subsidies so that premiums more accurately reflect risk.

About 20% of policyholders are likely to see their premiums increase annually, though only a fraction of them will see really steep hikes. But there is a big push to delay the implementation of the rules from none other than Maxine Waters, who co-authored the reform bill. "I am outraged by the increased costs of flood insurance premiums that have resulted from the Biggert-Waters Act," she said in a statement. "I certainly did not intend for these types of outrageous premiums to occur for any homeowner. When I agreed to coauthor this legislation, our goal was to create a bipartisan solution to repair our National Flood Insurance Program. Neither Democrats nor Republicans envisioned it would reap the kind of harm and heartache that may result from this law going into effect." It is not hard to see this kind of pushback happening in the debate over housing finance reform.

Investors are betting that as the cost of mortgage reform sinks in, there will be a shift in thinking in Washington. Housing reform measures would likely be diluted and an increasing number of politicians might favor just "rebranding" Fannie and Freddie. That sounds plausible, especially if it happens to be an election year. But in trying to advance a populist agenda in Washington, Wall Street seems to have underestimated their own unpopularity. "We believe the prospects for significant recoveries on the GSE junior preferreds is inversely proportional to the amount of lobbying and public pressure fund managers exert. No matter the type of fund -- hedge, mutual, or private equity -- the bulk of lawmakers will publicly distance themselves from any proposal which could be framed as "enriching" money managers no matter its merits," Isaac Boltansky, an analyst with Compass Point said in a note last week. "Simply put: Wall Street is not viewed as a sympathetic constituency in D.C. and that fact will not change as the 2014 midterm election comes into focus."

Right now in D.C. it  apparently pays to be anti-Wall Street even more than it does to be pro-homeownership.

-- Written by Shanthi Bharatwaj in New York.
Follow @Shavenk

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

American Funds Throws Gauntlet to Passive Investors

Watch out, Vanguard. Capital Group wants the active investing crowd to up its game.

The group, which has about $1.2 trillion of investor and institutional assets under management (or roughly half of Vanguard’s global AUM) in its American Funds and other products, released a study on Monday highlighting how often its funds have beaten the S&P 500. It’s also beefing up its sales force in the hopes of stemming recent outflows and finding more ways to work with financial advisors.

According to Capital Group, the American Funds general sales force, which works with all types of financial advisors, will be expanded to 145 from 115 over the next six to eight months. The organization also has a separate group of institutional wholesalers, 10 of whom focus on the RIA channel.

“Recently, conversations about investing have become too narrowly focused,” said James F. Rothenberg, chairman of Capital Group, in a press release. “It has become apparent that there is only one voice out there, a voice contending that passive investing is more attractive. We need to challenge that assumption.”

 

Numbers in Focus

Overall, actively managed funds outpaced the S&P 500 47% of the time from 1993 to 2012. But, Capital Group believes, investors have a lot to gain by focusing on active managers that “add value” and beat the benchmark.

“Most of both the academic work and the cited references about passive investing use comparisons that are extraordinarily broad,” Rothenberg said. “They take the whole mutual fund business and say that, on average, active managers do not outperform. However, we believe that if you look beneath all the data and ask the question not as, ‘Do money managers underperform?’ but turn it around the other way and ask, ‘Are there certain managers who show a sustainable ability to outperform?’ the answer is ‘yes.’”

Capital Group's research looked at the results of 17 equity funds, excluding those in the moderate and world-allocation categories. Looking at one-year average performance, it found its funds topped the S&P 500 57% of the time between 1934 and 2012. That figure rose to 67% for a five-year average and 98% for a 30-year average.

Since 2003, the average one-year performance of equity-focused American Funds outpaced that of the S&5 500 58% of the time. The three-year results topped the index 77% of the time.

”The choices investors and their advisors make concerning the investment managers they hire can have important long-term consequences,” Rothenburg said.

Comparing retirement portfolios with $500-a-month contributions over the past 30 years, an investor in American Funds (after deducting fees and expenses) would have had nearly $1.1 million versus about $805,000 for the index-dominated portfolio — a difference of about 35%.

“There can be an active advantage, and we think Capital can provide that,” Rothenburg said.

“We think there may be some potential long-run hidden costs to investors who simply buy index funds for their equity allocations, and we’d like to see investors be in a position to evaluate their choices with the benefit of more information,” he said. “For example, in the work we do in our funds, if we think the market is a little rich, we can change the mix of what we own, we can go to cash, we can do a variety of things to try to protect the shareholder’s exposure. Index funds cannot.”

In the Capital Group white paper, the asset manager notes the views of Morningstar global research chief Don Philips, who said, “The active-versus-passive debate has been grossly overplayed to the detriment of many fine, actively managed fund shops and to intelligent investment discourse.”

Pushing for a Turnaround

Still, American Funds will most likely need to embrace a range of strategies to convince advisors and investors of the merits of its products.

While the Growth Fund of America (AGTHX) is outpacing the S&P 500 over the past 12 months, with returns of 24%, the American Mutual Fund (AMRMX) is underperforming the index with returns of about 17% versus 17.5% for the S&P, according to data from Yahoo Finance on Monday.

In its analysis of August fund flows, Morningstar found that American Funds lost $1.9 billion, bringing total 2013 outflows to $11.6 billion. In the same month, Vanguard attracted $552 million in flows and has seen $50.8 billion of inflows this year.

As of Aug. 30, Vanguard has about 17.5% of the fund market (excluding funds of funds and money-market funds), while Fidelty has 10.5%, American Funds 10% and PIMCO 5.4%, the research groups says.

In early summer, Los Angeles-based Capital Group began sharing more information with advisors about attribution analysis and other portfolio information, while soliciting more insights from advisors about their portfilio-building techniques. The first phase of this transparency-boosting initiative is under way, the company says, and it includes passing along reports and data to reps via e-mail communication and other methods.

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Check outthese related stories on ThinkAdvisor:

Hedge Funds: You Name It, They Trade It

Note from Knight Kiplinger: Hedge funds are coming under fire, with recent articles in The Washington Post and BloombergBusinessweek. In this column written six years ago, when hedge funds were flying high, I laid out what I didn't like about them on principle: their lack of transparency, liquidity and government regulation, plus their high management fees. I still feel the same.

You should give your money only to investment managers who can clearly explain their investment strategy, who will give you back your money whenever you need it, who are subject to regulatory oversight, and who charge reasonable fees. And never put all your money in a single investment fund, even a mutual fund from a respected fund family. The bottom line: Know what you're investing in, spread your money over several asset classes (stocks, bonds, real estate, etc.), and use numerous money managers and index funds.

Read our Fund Watch column: Are Hedge Funds Right for You?

The other day I spoke with a money manager who wanted me to invest with his firm. I had a lot of questions.

What do you invest in? I asked.

"Anything that we think is poised for a gain at any particular moment," he replied.

Such as?

"U.S. and foreign stocks and bonds, currencies, petroleum and metals futures, office buildings, start-up ventures, private companies, mortgages, shares of companies about to go public. You name it, we trade it."

How will I know which kinds of assets my money is in at any given moment?

"You won't. Our clients trust us to move their money in and out of all kinds of assets rapidly, and there isn't time to tell you in advance."

What trading techniques do you use?

"Any and all that we deem suitable to the circumstances: buying on margin, short selling, derivatives -- whatever."

Can I withdraw my investment on short notice?

"Actually, no. It would hamper our performance to offer instant liquidity to our investors. But after we've had your money for one year, you can usually withdraw it once a quarter or so, depending on market conditions."

What's the minimum investment for opening an account?

"We originally required at least $1 million, but we're pleased to announce a new program for the smaller investor, with an opening minimum of just $100,000."

What's the annual cost of your services?

"We charge you 2% of your account value each year, and we keep 20% of your investment gains."

Isn't that a little steep? After all, hot-shot mutual fund managers like Bill Miller at Legg Mason and Ken Heebner at CGM charge just 2% or less each year and there's no "incentive fee," so I keep almost 100% of my gains.

"Sure, they've done a great job of beating the big indexes year after year, but our firm is doing far better for our clients, even after we take our 20% off the top."

Can you send me some audited performance data going back, say, five years?

"Well, we started our company two years ago, and performance varies a bit from account to account. But our managers have great records from their previous jobs."

Is your fund registered with, or regulated by, any government agency or industry watchdog?

"Not at present, but I hear there's some talk about future oversight by the Securities and Exchange Commission."

Hedgehogs

If you haven't guessed by now, this pitch was from a hedge fund -- and I took a pass. The answers to my questions revealed what I don't like about their style of investing.

To summarize: Hedge funds are unregulated pools of capital that may trade in any asset class, with any methods they wish and without telling clients in advance how they plan to invest the money. They charge high fees and offer limited liquidity.

The pioneers of hedge funds included quite a few brilliant investors, and their returns were often eye-popping, as they darted in and out of undervalued assets all over the globe. But just as adding teams to Major League Baseball dilutes the average quality of pitchers, the proliferation of hedge funds has strained the supply of investment talent.

Not-so-spectacular

With hedge-fund managers often overpaying for the same foreign stocks, private-equity deals and initial public offerings, it's not surprising that average hedge-fund returns are coming down to earth -- and will likely flatten further.

But as competition for capital intensifies, so will the pressure to produce dazzling returns. Chasing big rewards always requires taking big risks -- with the potential for big losses. So when it comes to hedge funds, I'll just say no.