MONEY The Economy

If You’re Looking for Work, the Outlook is Brightening

open plan office
Mark Bowden—iStock

While the number of Americans in the labor pool is still at worrisome lows, the outlook for those who are employed or are still looking is improving

While there’s great debate about why so many Americans have dropped out of the workforce, there is new hope for those who have stuck it out in the labor pool.

The government reported on Thursday that the number of workers filing first-time claims for unemployment benefits dropped to 298,000 in the week ended Aug. 23, another sign that the job market is stabilizing.

This marked the second straight week of declines in initial claims. More importantly, the four-week average claims figure itself is now just below the 300,000 mark — at 299,750 — putting the job market back where it was before the global financial crisis began in 2007.

US Initial Claims for Unemployment Insurance Chart

US Initial Claims for Unemployment Insurance data by YCharts

To be sure, pessimists (and market bears) will point out that the overall unemployment rate, which stands at 6.2%, still has a ways to go before improving to pre-crisis levels:

US Unemployment Rate Chart

US Unemployment Rate data by YCharts

And as economist Ed Yardeni, head of Yardeni Research, points out, Federal Reserve chair Janet Yellen and other policy makers don’t look at just this one measure of the job market. In fact, she looks at 19.

“Among her favorite labor market indicators is wage inflation,” he said, “which remains too low, in her opinion.” Money‘s Pat Regnier has more about that here.

US Real Average Hourly Earnings Chart

US Real Average Hourly Earnings data by YCharts

But Yardeni points out that wages and salaries on a per-payroll employee basis — in other words, measuring folks who have a job —are nonetheless up 8% over the past 10 years.

So it just goes to reinforce the divide: If you’re employed or in the work force, things are probably looking up. If you’ve dropped out, on the other hand, the picture may not be so bright.

MONEY wall street

Burger King Wants to Cut its Exposure to Hamburgers, Not Just Taxes

While all the focus is on the tax savings Burger King could enjoy through a Canadian inversion, the real benefit of buying Tim Hortons is boosting breakfast and coffee sales.

The initial media reaction is that Burger King is turning its back on America by reportedly seeking to buy the Canadian coffee-and-doughnut chain Tim Hortons. After all, it can move its headquarters to Ontario to pay less in taxes.

In reality, Burger King BURGER KING WORLDWIDE INC BKW 1.8205% may be more interested in turning its back on the hamburger.

The $11 billion burger chain is in talks to buy Tim Hortons TIM HORTONS INC THI 0.0622% , Canada’s biggest fast-food chain with a market value of around $10 billion. The deal would reportedly involve a so-called inversion, where Florida-based Burger King would for tax purposes be headquartered in Canada, where the top corporate tax rate is 15%, versus 35% in the U.S.

But as The New York Times pointed out, Burger King’s tax rate is actually closer to 27%, and this inversion really wouldn’t cut its taxes that much because the majority of its revenues are generated in the U.S. Even if it moved to Canada, BK would still be on the hook for U.S. taxes on sales made on American soil.

No, there’s something else driving this deal, and it could be that Burger King wants to abdicate its rule over burgers and switch kingdoms.

As Americans’ tastes have changed, burger sales, which have long dominated the fast-food landscape, have started to stall. Last year, for instance, revenues at Burger King restaurants in the U.S. that have been open for at least a year fell 0.9%, while U.S. same-store sales at McDonald’s slumped 0.2%. By comparison, Starbucks STARBUCKS CORP. SBUX -0.1285% reported an 8% rise in comparable store sales in fiscal 2013 while Dunkin’ Brands DUNKIN BRANDS GROUP DNKN 0.0574% , the parent company of Dunkin’ Donuts, enjoyed a 3.4% rise in revenues.

This isn’t just a short-term problem. Analysts at Janney Montgomery Scott recently noted that while three of the five biggest fast-food chains in the U.S. are still hamburger joints (McDonald’s, Wendy’s, and Burger King), by 2020 that number should drop to just one: McDonald’s.

Meanwhile, coffee chains Starbucks and Dunkin’ Donuts are expected to move up the ranks. And McDonald’s is itself doubling down on coffee, pushing more java not just in its restaurants but also on supermarket shelves.

Noticing a common theme here?

In the fast food realm, there are three buzzy trends right now. There’s the rise of the higher-end “fast-casual” restaurants such as Chipotle Mexican GrillCHIPOTLE MEXICAN GRILL INC. CMG -0.0251% . There’s the explosion of cafe coffee shops, which according to the consulting firm Technomic was the fastest-growing part of the fast-food industry last year, with growth of 9%.

Darren Tristano, executive vice president at Technomic, recently noted that “the segment continues to be the high-growth industry leader with Dunkin’ Donuts and Tim Hortons rapidly expanding.”

He added:

[The] coffee-café segment competition will heat up, and new national chain, regional chain and independent units will increase major market penetration. Smaller rural and suburban markets will be getting more attention. Fast-casual brands in the bakery-café segment like Panera Bread, Einstein Bros. Bagels and Corner Bakery will also create new options for consumers as more locations open. Quick-service brands like McDonald’s will provide lower-priced, drive-thru convenience that provide value-seekers with a strong level of quality that is also affordable.

And the third area of growth in fast food is breakfast. According to The NPD Group, while total “quick serve” restaurant traffic fell by 1% at lunch and dinner time in 2013, business at breakfast time rose 3%.

“Breakfast continues to be a bright spot for the restaurant industry as evidenced by the number of chains expanding their breakfast offerings and times,” says Bonnie Riggs, NPD’s restaurant industry analyst.

Now, while Burger King isn’t really positioned to go after the Chipotles of the world, the acquisition of Tim Hortons could quickly make it a bigger player in the coffee and breakfast markets, where it has languished far behind McDonald’s and Dunkin’ Donuts.

Tim Horton’s already controls 75% of the Canadian market for caffeinated beverages sold at fast-food restaurants, according to Morningstar, and more than half the foot traffic at the key morning rush hour.

Morningstar analyst R.J. Hottovy noted recently that same-store sales throughout the chain are expected to rise 3-4% over the next decade, which would be a marked improvement over the same-store declines that Burger King has been witnessing lately.

Even though Burger King is a bigger company by market capitalization, it generates less than half the $3 billion in annual revenues that Tim Hortons does. This means that by buying the Canadian chain, Burger King will be able to buy the type of same-store growth that it could not muster with hamburgers and fries.

So the next time you go to Burger King, don’t be surprised if they ask you “would like some coffee to go with that?”

SLIDESHOW: Burger King’s Worldwide Journey To Canada

 

 

MONEY Google

The 8 Worst Predictions About Google

Magic 8-ball with Google logo
Flickr

In the 10 years since Google became a public company, there have been a lot of predictions made about the search engine giant. And it turns out, a lot have been wrong.

”I wouldn’t be buying Google stock, and I don’t know anyone who would.”
— Jerry Kaplan, futurist, in the New York Times, Aug. 6, 2004

The problem with making any public pronouncement about Google GOOGLE INC. GOOGL 0.0276% is that if you end up being embarrassingly wrong, someone can just Google that prediction to remind you how off the mark you were.

So that’s what we did.

With Tuesday being the 10th anniversary of the tech giant’s historic IPO, MONEY Googled the sweeping predictions that were made about the company and the stock leading up to and after the company’s public offering on Aug. 19, 2004, when Google shares began trading at an opening price of $85 a share.

To be fair, no one could have really predicted the stock would soar more than 1,000%—10 times greater than the S&P 500 index—in its first decade as a publicly traded company. You have to remember that in 2004, the Internet bubble was still a recent memory and Google’s offering was seen as the first significant tech IPO in the aftermath of the 2000-2002 tech wreck.

Still, it’s hard not to wince at some of the things said about what is now the third most-valuable company, with a market cap of nearly $400 billion.

1) Google won’t last.

What are the odds that it is the leading search engine in five years, much less 20? 50/50 at best, I suspect… — Whitney Tilson, The Motley Fool, July 30, 2004

In a memorable 2004 column, value investor Whitney Tilson argued that there was a significantly better chance that Dell would still be a leading computer company in the year 2024 than Google would be a leading search engine in 2009.

Obviously, he was wrong as Google still controls nearly 70% of all search and more than 90% of the growing mobile search market. (Meanwhile, Dell’s PC market share has shrunk considerably and desktop computers aren’t even a growth area anymore).

His argument may have made sense at the time. “Just as Google came out of nowhere to unseat Yahoo! as the leading search engine, so might another company do this to Google,” he wrote, adding that “I am quite certain that there is only a fairly shallow, narrow moat around its business.”

Yet Tilson made the mistake of underestimating the actual search technology. In the early 2000s, Google’s algorithms could search billions of pages at a time when rival search engines were able to get to just tens of millions. That lead in search capability gave Google enough time to leverage that technology into a dominant position in online advertising. Today, Google controls about a third of all global digital ad dollars.

2) Google’s founders won’t last.

These Google guys, they want to be billionaires and rock stars and go to conferences and all that. Let us see if they still want to run the business in two to three years. — Bill Gates at Davos, in 2003.

Microsoft co-founder Bill Gates was, of course, referring to Google co-founders Sergey Brin and Larry Page. Not only did the Google guys not go away, eight years later Page took over as CEO, and under his tenure the company became the dominant player in the smartphone market; made inroads into social media and e-commerce; and began dabbling in more futuristic technologies such as driver-less cars that are likely to boost interest in the stock going forward.

3) Google is a one-trick pony.

I mean, come on. They have one product. It’s been the same for five years — and they have Gmail now, but they have one product that makes all their money, and it hasn’t changed in five years. — Steve Ballmer, former CEO of Microsoft, in the Financial Times, June 20, 2008.

The bombastic Ballmer, who also predicted that the iPhone would go nowhere, wasn’t the first to call Google a one-trick pony. Yet Ballmer was flat out wrong. Today, Google has several tricks up its sleeve. The company still dominates search, but it is also a major player in mobile search, mobile operating systems, online advertising, e-commerce, social media, cloud computing and even robotics.

4) And who cares about search anyway?

Search engines? Aren’t they all dead? — James Altucher, venture capitalist (sometime in 2000)

You have to give Altucher credit for fessing up to what he admits may have been “the worst venture capital decision in history.” Three years ago, the trader/investor blogged about how his firm, 212 Ventures, had an opportunity in 2000 or 2001 to be part owner of the company that would later become an integral part of Google for a mere $1 million.

As he told the story, one of the associates of his firm had approached him with an opportunity in 2000. “A friend of mine is VP of Biz Dev at this search engine company,” the associate told him. “We can probably get 20% of the company for $1 million. He sounds desperate.”

To which Altucher replied: “Search engines? Aren’t they all dead? What’s the stock price on Excite these days? You know what it is? Zero!”

“No thanks,” Altucher said. That company was Oingo, which changed its name to Applied Semantics, which in 2003 was purchased by Google and re-branded AdSense. As Altucher points out, “Google needed the Oingo software in order to generate 99% of its revenues at IPO time. Google used 1% of the company’s stock to purchase Oingo, which meant that Altucher’s potential $1 million bet would have been worth around $300 million in 2011.

Oh well.

5) Microsoft will chase Google down.

Word has it that Microsoft will feature an immensely powerful search engine in the next generation of Windows, due out by 2006… As a result, Google stands a good chance of becoming not the next Microsoft, but the next Netscape. — The New Republic, May 24, 2004.

Alas, Microsoft’s Bing search engine didn’t come out until three years after the article said it would. And it wasn’t until last year when Microsoft truly embedded Bing into Internet Explorer on Windows 8.1.

Even if Bing gains traction on desktops — where it still only has about a 19% market share — search is transitioning to mobile. And there, Google utterly dominates and will probably stay in control because its Android operating system powers around 85% of the world’s mobile devices, versus Windows’ mere 3% market share.

6) Google isn’t a good long-term investment.

Don’t buy Google at its initial public offering. — Columnist Allan Sloan, Washington Post, Aug. 3, 2004.

I’m back from the beach and it’s clear that my advice turned out to be wrong…But now that the price is above the original minimum price range, I’m not in doubt. So I’ll repeat what I said three weeks ago. This price is insane. And anyone buying Google as a long-term investment at $109.40 will lose money. — Allan Sloan, Washington Post, Aug. 24, 2004.

Well, investors didn’t lose their shirts. A $10,000 investment in Google back then would have turned into more than $110,000 over the past decade. By comparison, that same $10,000 invested in the S&P 500 would have grown to less than $22,000. Howard Silverblatt, a senior index analyst for S&P ran some numbers and discovered that only 12 stocks currently in the S&P 500 wound up outpacing Google during this stretch.

To his credit, Sloan, now a columnist at Fortune, later admitted that “I was wrong, early and often, on Google’s stock price when it first went public, for which I ultimately apologized.”

7) Google isn’t a good value.

If you have any doubts at all about Google’s sustainability — you may, for example, recall that Netscape browsers used to be just as ubiquitous as Google home pages — you shouldn’t touch the stock unless its market capitalization is well under $15 billion. — MONEY Magazine, July 2004.

Okay, so we’re not infallible either. If you had followed MONEY’s line of thinking, you never would have purchased this stock because at the opening price of $85, the company was already valued at $23 billion. And it never dipped below that level on its way to a near $400 billion market capitalization today.

MONEY based its analysis on numbers crunched by New York University finance professor Aswath Damodaran, an expert on valuing companies.

Damodaran came to the $15 billion assessment after figuring that Google would generate a total of nearly $48 billion in cash over its lifetime. That turned out to be a bit off, as Google has generated that amount of free cash flow in just the past five years.

Again, this was an example of how difficult it is to estimate the future value of a corporation based on what the company is up to at the moment.

8) Google will avoid being evil.

Don’t be evil. We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo some short term gains. This is an important aspect of our culture and is broadly shared within the company. — Google’s 2004 Founders’ IPO Letter.

Now, evil is in the eye of the beholder. Some privacy buffs think Google long crossed the line when it began tracking user behavior across all of its services including search, Gmail, You Tube, etc.

Progressives, meanwhile, point to Google’s lobbying efforts as a sign the company is behaving like any other corporation. The company has reportedly contributed to conservative causes such as Grover Norquist’s Americans For Taxpayer Reform, which seems to belie the company’s left-leaning Silicon Valley culture.

Then there’s the fact that Google’s chairman Eric Schmidt has stated that he is proud of how the company has managed to avoid billions in taxes by holding company profits in Bermuda, where there is no corporate tax.

Whether you think this qualifies as evil or not, it highlights what folly it was to try to ban evil.

As Schmidt stated in an interview with NPR:

“Well, it was invented by Larry and Sergey. And the idea was that we don’t quite know what evil is, but if we have a rule that says don’t be evil, then employees can say, I think that’s evil,” he said. “Now, when I showed up, I thought this was the stupidest rule ever, because there’s no book about evil except maybe, you know, the Bible or something.

Related:
4 Crazy Google Ambitions
10 Ways Google Has Changed the World

MONEY tech stocks

Which 80-Year-Old Billionaire Would You Trust With Your Tech Portfolio?

Diptych of Warren Buffett and George Soros
Mark Peterson/Redux (Buffett)—Luke MacGregor/Reuters (Soros)

Billionaire hedge fund manager George Soros and billionaire investor Warren Buffett are both buying tech stocks—but decidedly different kinds. So who would you bet your portfolio on?

Both billionaire investor Warren Buffett and billionaire hedge fund manager George Soros have had somewhat troubled relationships with tech stocks over the years.

Buffett famously punted on tech throughout the 1990s, declaring that “we have no insights into which participants in the tech field possess a truly durable competitive advantage.” So his investment company Berkshire Hathaway severely lagged the S&P 500 in the late 1990s — but at least it missed the tech wreck in the early 2000s. For Soros, the opposite was the case: His fund stayed at the Internet party too long in 2000.

Recently, though, both octogenarians have been dabbling in this sector — but in decidedly different ways.

SEC filings released on Thursday indicate that while Buffett is looking to the past for time-tested but overlooked plays on this sector, Soros seems only to be interested in future trends.

Buffett and ‘Old Tech’

Buffett is taking the old school approach. Quite literally. His tech sector holdings — indeed, his entire portfolio — looks as if it was straight out of the early or mid 1990s.

For instance, one of his biggest tech holdings, which recent SEC filings indicate he’s been adding to, is the century-old IBM INTERNATIONAL BUSINESS MACHINES CORP. IBM 0.1061% .

This technology service provider — which has run into difficulties in the crowded cloud computing space lately — has seen its revenue growth decline for several quarters while its stock has been under fire.

IBM Chart

IBM data by YCharts

No doubt, Buffett clearly sees IBM as a value, as the stock trades at a price/earnings ratio of around 9, which is about half what the broad market currently trades at. In his most recent letter to Berkshire shareholders, Buffett described IBM as one of his “Big Four” holdings, along with American Express, Coca-Cola, and Wells Fargo.

Beyond IBM, Buffett prefers lower-priced but slower growing internet backbone companies to fast-growing but pricey content providers. This is part of a tech investing trend that MONEY contributing writer Carla Fried recently addressed.

Other stocks he recently purchased or positions that he has been adding to include the Internet infrastructure company Verisign VERISIGN INC. VRSN 1.0271% and internet service providers Verizon VERIZON COMMUNICATIONS INC. VZ 0.6375% and Charter Communications CHARTER COMMUNICATIONS INC. CHTR 0.4295% .

Soros’ ‘New Tech” Bets

By contrast, Soros seems to be trying to ride current and future trends — albeit with highly profitable names.

In the second quarter, Soros added to his stake in the social media giant Facebook FACEBOOK INC. FB 1.1712% . Last month, Facebook shares hit a record high after the company reported robust profits. Plus, Facebook has proven to Wall Street that it can conquer the mobile advertising market, as nearly two-thirds of its revenues now come from mobile ads.

Facebook isn’t the only mobile bet Soros is making. He has also been recently adding to his stake in Apple APPLE INC. AAPL 0.1741% , which along with Google dominates the mobile computing space. New data from IDC showed that Apple’s iOS operating system held about a 12% market share among phones shipped in the second quarter — even though demand for iPhones has fallen as consumers await the arrival of the new iPhone 6, which will be introduced in September.

For the moment, Soros’ bets on these new tech names seem to be in the lead.

AAPL Chart

AAPL data by YCharts

But over the long-term, would you bet on Team Soros or Team Buffett?

MONEY stocks

Has the Bull Market Come to an End?

140806_INV_endofbull_1
Getty Images

As the economy keeps growing, the market will sour on the sunny, putting a damper on stocks.

A version of this article ran in the August 2014 issue of MONEY magazine.

The Dow Jones Industrial Average lost another 140 points on Tuesday, wiping out Monday’s modest bounce-back from what had been the worst weekly decline in over six months. All told, the index has fallen 4.1% since it hit a record high on July 16.

This happened despite some pretty good (though not really good) economic data, like last week’s Labor Department report that the economy added 209,000 new jobs in July.

So what’s going on? In short, I suspect the bull market has entered its next—and perhaps final—phase.

Why a change of heart is due. While equities should reflect the health of the economy, there comes a time in every business cycle in which earnings growth—the real driver of stock prices—peaks. S&P 500 profit margins are already at all-time highs. A better job market shows the economy is improving now, but it also hints that wages could rise down the road, weighing on future profits.

At the same time, better-than-expected news may lead the Federal Reserve to stop trying to stimulate economic activity. And that’s a big concern in the final throes of a bull when investors are trying to ride that last bit of tailwind provided by cheap credit.

What works during the bull’s final stage. As risk taking and speculation fall out of favor, shares of big, dominant companies tend to grow in popularity. Today, these big blue chips have another advantage: They’re cheap relative to smaller-company stocks, says Jack Ablin, chief investment officer for BMO Private Bank.

Indeed, the price/earnings ratio for stocks in the Vanguard Mega Cap ETF (MGC), which owns only the biggest blue chips in the U.S., is 16.8. By comparison, stocks in the Vanguard Small-Cap ETF sport an average P/E more than 15% higher.

Where to seek shelter. The natural inclination at this stage is to hide in stable but slow-growing sectors like utilities, since these stocks pay dividends and are likely to fall less in a market downturn.

However, economically sensitive sectors such as energy and tech perform surprisingly well in the last 12 months of a bull, according to Ned Davis Research. So take refuge in a fund like Fidelity Large Cap Stock (FLCSX), which has big stakes in both sectors and has beaten at least 90% of its peers over the past three, five, and 10 years.

Related:
Goldilocks Jobs Report Calms Down Wall Street’s Bears—for Now
Don’tBe Fooled by the Everything is Awesome Market

MONEY stocks

Goldilocks Jobs Report Calms Down Wall Street’s Bears—For Now

The three bears discover goldilocks asleep in their bed they are not amused...
Chronicle—Alamy

While job growth was tepid in July, this was exactly what the markets needed to reverse Thursday's 317-point decline, as pressure on the Federal Reserve to raise rates subsides.

At first blush, today’s jobs report sure felt underwhelming. The Labor Department said that the economy created 209,000 new jobs in July, not the 233,000 that were expected.

Yet what seemed like disappointing results turned out to be exactly what Wall Street needed.

On the one hand, the economy still managed to produce more than 200,000 jobs in July, which marked the sixth consecutive month in which job creation topped that level. That hasn’t been seen since the late 1990s. “July’s payrolls report helps to confirm the sustainability of the strongest labor market expansion since 1997,” said Guy LeBas, chief fixed income strategist for Janney Montgomery Scott.

On the other hand, the labor market was just tepid enough to cool at least some of the hot debate about how the Federal Reserve needs to stop coddling an economy that’s starting to sizzle and hike rates soon.

Immediately after the jobs report was released Friday morning, investors took a deep breath and calmed down following Thursday’s 317-point drop in the Dow Jones Industrial Average.

Though it seemed as if the markets were headed for another triple-digit down day based on sentiment before the opening bell, the Dow and S&P 500 were relatively flat in early morning trading. By around 11:30 am, the Dow had fallen by around 50 points, but that was pretty much all the bulls could hope for:

^DJI Chart

^DJI data by YCharts

The real question is how long will the bears be kept at bay? A week from now, the government is set to release another batch of data detailing worker productivity and labor costs. And if there’s any whiff of inflation in those figures, the bears are likely to awake once more.

MONEY The Economy

For the Fed, There’s Only One Excuse Left to Keep Rates Low

Aerial view of housing development
David Zimmerman—Getty Images

The economy and inflation have now risen to levels where the Fed has to start thinking about raising rates. The only excuse left: the weaker-than-expected housing market.

The pressure is mounting on the Federal Reserve to start raising interest rates — and Fed chair Janet Yellen is running out of excuses.

On Wednesday, the Fed announced that it would keep short-term interest rates near zero and would continue to gradually taper its stimulative bond-buying program as the economy improves. No surprise there.

But the chatter for the Fed to stop coddling the economy really heated up Wednesday morning.

That was when a new government report showed that, after hitting a speed bump in the snowy first quarter, the economy really sped up between April and June. Gross domestic product grew at an annual rate of 4.0% in the second quarter.

What’s more, the government went back and revised some of its estimates for prior quarters. Uncle Sam now believes the economy grew well above the normal 3% rate in three out of the past four quarters.

“With this morning’s GDP release,” says James Paulsen, chief investment strategist and economist at Wells Capital Management, the “is-the-Fed-behind-the-curve fears among investors are increasingly evident.”

The GDP report included preliminary measures of inflation that might not sit well with Wall Street’s inflation hawks.

In the second quarter, the so-called personal consumption expenditure index, which is the Fed’s preferred measure of inflation, grew 2.3%. If you strip out volatile food and energy costs, core PCE still rose 2%. UBS economist Maury Harris notes that this represents a big jump from the 1.2% pace of core inflation in the first quarter. Plus, 2% is the target that the Fed has openly set for inflation.

While the actual level of inflation today may not be so worrisome, the ability to fight inflation after the fact is, says Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott. “The challenge with inflation is that there’s a very long lag between policy and price pressures, so a Fed concerned with inflation 12 to 24 months down the road needs to start acting now to protect against the prospect.”

Three years ago, the Fed drew another line in the sand. The Fed back then said that it would not think about raising rates until the national unemployment rate fell to 6.5%. Back then, policy makers thought that this would not transpire until around 2015. However, the unemployment rate fell below this level in April and is threatening to fall below 6%.

US Unemployment Rate Chart

US Unemployment Rate data by YCharts

In recent months, as the Fed has tried to explain why it won’t hike rates soon despite rising inflation and falling unemployment, Yellen introduced a new reason altogether: housing.

In mid July, in a monetary policy report delivered to Congress, Yellen said:

The housing sector has shown little recent progress. While it has recovered notably from its earlier trough, activity in the sector leveled off in the wake of last year’s increase in mortgage rates, and readings this year have, overall, continued to be disappointing.

Later on in the report, Yellen noted that the lack of traction in the housing sector is probably preventing the labor market from reaching its full potential:

Even after rising noticeably in 2012 and the first half of 2013, real residential investment remains 45 percent below its pre-recession peak. The lack of a rapid housing recovery has also affected the labor market: Employment in the construction sector is still more than 1.6 million lower than the average level in 2006.

In announcing its rate decision on Wednesday, the Fed’s Federal Open Market Committee reiterated that while economic growth in general appears to be returning, “the recovery in the housing sector remains slow.”

The irony is that the two things that are likely to get the housing market on track are low mortgage rates and an improving job market.

To achieve the latter, the Fed is keeping rates low. Yet to achieve the former, the Fed needs to show the bond market that it is serious about combatting inflation. And the worst way to do that is keep rates low.

There, in a nutshell, is Janet Yellen’s conundrum.

MONEY tech stocks

Twitter Jumps on Strong Earnings. Trouble Is, It’s Still Not Profitable.

Person using Twitter on iPhone
James Davies—Alamy

The social media company blew past expectations—using an unofficial measure of profits. Based on generally accepted accounting principles, Twitter is still in the red.

When you get used to receiving complicated messages in a short amount of space — in, say, 140 characters — you grow accustomed to overlooking key details.

That was evident late Tuesday, when investors reacted to Twitter’s earnings announcement by sending shares of the social media company soaring more than 30% in after-hours trading.

TWTR Price Chart

TWTR Price data by YCharts

Investors pounced on some better-than-expected results found high up in Twitter’s earnings release. This included the fact that revenues in the second quarter jumped 124% to $312 million, and that the company earned $0.02 a share, slightly stronger than what analysts had been expecting.

Nevermind that those profits were based on an adjusted, alternative method of measuring earnings that critics have come to criticize. Using generally accepted accounting principles (GAAP), Twitter TWITTER INC. TWTR 0.3035% actually lost $145 million in the quarter, or $0.24 a share.

What’s more, Wall Street analysts tallied by Zacks.com still expect Twitter — based on GAAP standards — to lose $0.98 a share in 2014 and another $0.87 a share in 2015. So it’s probably premature to regard the second-quarter results as a breakthrough for the profitless company.

User Growth Rebounds

To be fair, there were promising developments in the second quarter. Twitter reported that so-called timeline views, which are the company’s equivalent of page views, hit a record 173 billion in the quarter.

This was an important point, as timeline views in the prior quarter fell short of the company’s peak performance in 2013, despite the fact that there are more Twitter users than ever.

In the second quarter, the Twitter’s so-called average monthly active users (MAUs) rose an impressive 24%. Active users who use mobile surged even more, by 29% in the past year to 211 million.

By comparison, timeline views grew a relatively modest 15%, which means the company still needs to work on converting Twitter account holders into truly active users.

This morning, three research firms changed their rating on Twitter stock in the wake of the company’s earnings results. Bank of America upgraded its recommendation on the stock to a “buy”. UBS upgraded its rating to a “neutral”. And Pivotal Research downgraded the shares to a “sell” as Thursday evening’s surge pushed the stock above analysts’ target price.

That pretty much sums up the still-cloudy picture at Twitter.

MONEY stocks

The Market’s New Message: Show Me the Money Now!

Investors lost patience last week, punishing companies like Amazon that aren't generating profits while rewarding those such as Facebook that are delivering on their promise.

The stock market has a reputation for looking ahead.

That’s why equity prices tend to predict shifts in the economy six to nine months before they happen. It’s also why investors recently punished shares of the credit card giant Visa VISA INC. V -1.0857% after the company posted solid earnings but hinted that revenues later in the year would fall short of expectations.

Still, there are times when Wall Street adjusts its perspective and focuses on the here and now. And Friday was one of those occasions.

In what turned out to be a rather brutal end of the week, investors gave companies—including some of the market’s darlings of the past few years—an extremely short leash. Those that lived up to their promise came out relatively unscathed, but those that fell short got hammered.

Just ask Jeff Bezos and Mark Zuckerberg.

For years, Bezos’ Amazon.com AMAZON.COM INC. AMZN -0.4441% soared as it posted robust sales growth while promising strong earnings were just around the corner. The e-commerce giant delivered the exact same message (and results) when it announced its quarterly earnings last week. This time, though, investors responded by erasing $16 billion of market value from the company in half the time it takes the company to deliver packages to its Prime membership customers.

Other examples of companies that couldn’t deliver on growth and earnings now were the streaming music service Pandora Media PANDORA MEDIA INC. P 0.6747% and Dunkin’ Brands DUNKIN BRANDS GROUP DNKN 0.0574% , the parent company of the Dunkin’ Donuts chain, which is struggling to fight off Starbucks and McDonald’s in the coffee wars.

DNKN Price Chart

DNKN Price data by YCharts

On the flip side, Zuckerberg’s Facebook FACEBOOK INC. FB 1.1712% not only blew past Wall Street’s revenue and earnings expectations in the recent quarter, it proved that it was making big strides in mobile advertising, the area the social network giant’s investors were most worried about in recent years.

Not surprisingly, shares of Facebook—and other companies firing on all cylinders, such as Starbucks STARBUCKS CORP. SBUX -0.1285% —defied the market’s end-of-the-week sell-off and are at or near their all-time record highs.

Here’s a closer look at the week’s winners and losers:

Amazon and Pandora Slammed by Wall Street for Weak Earnings

Dunkin, Mickey D’s, or Starbucks? The Surprising Winner of the Coffee War

Facebook’s Next Battle is Wrestling Your Credit Card Number from Amazon

MONEY tech stocks

Amazon and Pandora Shares Tumble After Reporting More Losses

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Luke Baldacchino—Flickr

Amazon.com and Pandora Media learn the hard way that potential profits just won't cut it anymore in this market. Take note, Twitter.

Updated 7/25/14 4:15 pm

Investors sent a loud message to e-commerce and social and streaming media companies on Friday: profit-less potential just won’t cut it anymore.

Nowhere was this clearer than at Amazon.com, which seems to be able to deliver everything these days — tablets, streaming video, even food — with the exception of earnings.

After the company announced a wider-than-expected loss Thursday, the stock fell nearly 10% Friday, helping push the entire market lower at the end of the week.

AMZN Price Chart

AMZN Price data by YCharts

In what sounds like a broken record, the e-commerce giant reported another robust quarter of sales — up an impressive 23% versus the same period a year ago — yet still can’t seem to turn a profit.

As costs rose in the recently ended quarter — as the company invested in new areas such as its recently announced Fire smartphone and a new unlimited e-book rental service — Amazon AMAZON.COM INC. AMZN -0.4441% reported a net loss of 27 cents per share. That was nearly twice the loss that Wall Street analysts had been bracing for.

Even worse, the e-tailer warned investors that the third quarter won’t be much better. Amazon officials forecast that net sales would likely grow between 15% and 26% in the current quarter but that the company would probably suffer an operating loss of between $410 million and $810 million.

For more than a decade, Amazon shares trounced the broad market, as company leaders managed to convince investors not to focus on short-term losses, but rather the long-term potential for this company to dominate retail and consumer electronics.

They tried to do the same on Thursday, pointing to the company’s entry into the smartphone market. “Customers all over the U.S. will begin receiving their new Fire phones — including Firefly, Dynamic Perspective, and one full year of Prime,” said CEO Jeff Bezos, in announcing his company’s results. “We can’t wait to get them in customers’ hands.”

Investors shot back: “We can’t wait until we start seeing some profits in shareholders’ hands.” By Friday afternoon, it was clear that investors have had it with Amazon’s just-you-wait attitude with earnings.

For the year, Amazon shares have lost nearly a fifth of their value.

AMZN Chart

AMZN data by YCharts

Amazon wasn’t the only tech stock that got hit on Friday. Shares of Pandora Media PANDORA MEDIA INC. P 0.6747% fell more than 10% on Friday on news of another profitless quarter.

The streaming music company reported a loss of 6 cents, which was worse than the 4-cent a share loss that investors were expecting.

The company tried to spin the news in a positive light by stressing its relative success in mobile advertising, a hot topic in tech these days.

“Our better-than-expected second-quarter results demonstrate success and continued business acceleration as a result of our investments in mobile and local advertising,” Pandora’s chairman and CEO Brian McAndrews noted in the company’s press release. “Mobile advertising reached a record 76% of total ad revenue and local grew at 144% year-over-year.”

Wall Street would have none of it.

P Price Chart

P Price data by YCharts

As second-quarter earnings season gets underway, the market’s stance should worry other profit-less tech companies that are set to report their results next week.

On deck for Tuesday is Twitter TWITTER INC. TWTR 0.3035% . The social media company, whose shares have already fallen 39% this year, is expected to report a loss of 29 cents a share when it announces its results next week.

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