MONEY Ask the Expert

How to Tell if Your Broker Protects You Against Identity Theft

Investing illustration
Robert A. Di Ieso Jr.

Q: Are there any brokerages that protect customers from unauthorized computer access or theft? I was going with Vanguard, but on page 7 of its brokerage account agreement, under liability, the company says in writing that it is not liable. — Patty

A: This is a good reminder of why it’s important to actually read brokerage account agreements, especially in light of the massive security breach at J.P. Morgan Chase.

While the details may differ slightly from one firm to the next – which is why you should always check – the wording in Vanguard’s policy is similar to that of other large brokerages. (We ran your question by Charles Schwab, Fidelity and Vanguard.)

The short answer: If someone gains access to your account through no fault of your own — a security breach, for example — the broker would be liable for your losses. If the theft, however, is a result of your own negligence (more on that in a second) then that’s a different story.

“The brokerage account agreement explains that under certain circumstances, Vanguard will not accept legal liability for certain losses in or related to an account,” notes Vanguard spokesperson David Hoffman, adding that this is consistent with Vanguard’s online fraud policy. “… If the client has taken certain appropriate steps to protect the account, we will reimburse the assets taken from the account in the unauthorized transaction.”

Fidelity and Schwab offer similar responses. Under Fidelity’s customer protection guarantee, the firm will reimburse Fidelity accounts for losses due to unauthorized activity, says Fidelity spokesperson Adam Banker. Likewise, the Schwab security guarantee says the firm will cover 100% of losses in any Schwab accounts due to unauthorized activity.

In case you didn’t pick up on it, that word “unauthorized” is key in determining who’s liable.

That’s all the more reason to be particularly vigilant about protecting your account information. Set up a unique and unpredictable password (mix numbers, characters, lower case and upper case). Change your passwords regularly and don’t reuse passwords from other accounts. Store your password in a safe place — ideally not on your computer, your phone or online — and make sure computer has up-to-date security software. Check your accounts regularly and if you see something suspicious, let the broker know immediately.

Finally, never give your account information to anyone calling or emailing and claiming to be your broker or bank.

If someone calls claiming to be from your broker, or any financial institution for that matter, hang up and call the number listed on your statement or the company’s site. Never log in to your account by clicking on a link in an email.

You should also be careful about sharing your account information with family and friends. If you give someone access to your account, that’s considered authorized use, and, yep, you’re liable.

MONEY

Most Financial Research Is Probably Wrong, Say Financial Researchers

Throwing crumpled paper in wastebasket
Southern Stock—Getty Images

And if that's right, the problem isn't just academic. It means you are probably paying too much for your mutual funds.

In the 1990s, when I first stated writing about investing, the stars of the show on Wall Street were mutual fund managers. Now more investors know fund managers add costs without consistently beating the market. So humans picking stocks by hand are out, and quantitative systems are in.

The hot new mutual funds and exchange-traded funds are scientific—or at least, science-y. Sales materials come with dense footnotes, reference mysterious four- and five-factor models and Greek-letter statistical measures like “beta,” and name-drop professors at Yale, MIT and Chicago. The funds are often built on academic research showing that if you consistently favor a particular kind of stock—say, small companies, or less volatile ones—you can expect better long-run performance.

As I wrote earlier this year, some academic quants even think they’ve found stock-return patterns that can help explain why Warren Buffett has done so spectacularly well.

But there’s also new research that bluntly argues that most such studies are probably wrong. If you invest in anything other than a plain-vanilla index fund, this should rattle you a bit.

Financial economists Campbell Harvey, Yan Liu, and Heqing Zhu, in a working paper posted this week by the National Bureau of Economic Research, count up the economic studies claiming to have discovered a clue that could have helped predict the asset returns. Given how hard it is supposed to be to get an edge on the market, the sheer number is astounding: The economists list over 300 discoveries, over 200 of which came out in the past decade alone. And this is an incomplete list, focused on publications appearing in top journals or written by respected academics. Harvey, Liu, and Zhu weren’t going after a bunch of junk studies.

So how can they say so many of these findings are likely to be false?

To be clear, the paper doesn’t go through 300 articles and find mistakes. Instead, it argues that, statistically speaking, the high number of studies is itself a good reason to be more suspicious of any one them. This is a little mind-bending—more research is good, right?—but it helps to start with a simple fact: There’s always some randomness in the world. Whether you are running a scientific lab study or looking at reams of data about past market returns, some of the correlations and patterns you’ll see are just going to be the result of luck, not a real effect. Here’s a very simple example of a spurious pattern from my Buffett story: You could have beaten the market since 1993 just by buying stocks with tickers beginning with the letters W, A, R, R, E, and N.

Winning with Warren NEW

Researchers try to clean this up by setting a high bar for the statistical significance of their findings. So, for example, they may decide only to accept as true a result that’s so strong there’s only a 5% or smaller chance it could happen randomly.

As Harvey and Liu explain in another paper (and one that’s easier for a layperson to follow), that’s fine if you are just asking one question about one set of data. But if you keep going back again and again with new tests, you increase your chances of turning up a random result. So maybe first you look to see if stocks of a given size outperform, then at stocks with a certain price relative to earnings, or price to asset value, or price compared to the previous month’s price… and so on, and so on. The more you look, the more likely you are to find something, whether or not there’s anything there.

There are huge financial and career incentives to find an edge in the stock market, and cheap computing and bigger databases have made it easy to go hunting, so people are running a lot of tests now. Given that, Harvery, Liu, and Zhu argue we have to set a higher statistical bar to believe that a pattern that pops up in stock returns is evidence of something real. Do that, and the evidence for some popular research-based strategies—including investing in small-cap stocks—doesn’t look as strong anymore. Some others, like one form of value investing, still pass the stricter standard. But the problem is likely worse than it looks. The long list of experiments the economists are looking at here is just what’s seen the light of day. Who knows how many tests were done that didn’t get published, because they didn’t show interesting results?

These “multiple-testing” and “publication-bias” problems aren’t just in finance. They’re worrying people who look at medical research. And those TED-talk-ready psychology studies. And the way government and businesses are trying to harness insights from “Big Data.”

If you’re an investor, the first takeaway is obviously to be more skeptical of fund companies bearing academic studies. But it also bolsters the case against the old-fashioned, non-quant fund managers. Think of each person running a mutual fund as performing a test of one rough hypothesis about how to predict stock returns. Now consider that there are about 10,000 mutual funds. Given those numbers, write Campbell and Liu, “if managers were randomly choosing strategies, you would expect at least 300 of them to have five consecutive years of outperformance.” So even when you see a fund manager with an impressively consistent record, you may be seeing luck, not skill or insight.

And if you buy funds that have already had lucky strategies, you’ll likely find that you got in just in time for luck to run out.

MONEY Markets

The Dow Moved Triple Digits Today. Here’s What You Should Do.

Arrow cut out of piece of paper
Gregor Schuster—Getty Images

Nothing. You should do absolutely nothing. Here's why.

[Update: The DOW went up 216 points on Oct. 23.]

The Dow Jones Industrial Average has long been held up as the stock market index to follow. Now that the Dow Jones is at such a high level, even moves that are small on a percentage basis allow for attention-grabbing headlines like “Dow Jones Today Skyrockets Over 200 points!” or “Dow Jones Plummets 150 points!”

While these headlines lure in readers, they do nothing to make us better investors. Read on to see why the best investors ignore the daily movements of the DJIA.

Dow Jones today

Do you remember when the Dow jumped 220 points after tensions with Ukraine moderated? How about the 200-point drop after Chinese industrial production slowed, or the 180-point jump following the release of minutes from the secret early-March meeting of the Federal Reserve?

I doubt it.

And don’t get me started on early October. The Dow Jones Industrial average dropped 272 points on a Tuesday — its biggest drop of the year to that point. The next day, the Dow jumped 274 points — the Dow’s biggest gain of the year. Then, on Thursday, the Dow fell 334 points.

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The headlines would have you think the world is ending or that you won’t be able to retire because of these market dips. The stock market is one of the few places where, whenever things go on sale, no one wants to buy.

However, these moves only amounted to a 2% drop from the end of the previous week. To put that in an even bigger-picture perspective, the Dow is basically flat year to date.

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What you should do now?

Nothing. You don’t have to do anything. If your investment strategy changes based on one day’s market movements, you’re doing it wrong. Your focus should be to stick to your plan, constantly educate yourself, and invest for the long term. And if you don’t have a clear strategy, this is your wake-up call.

Research has shown that process is one of the biggest determinants of success in the market over the long term. While your process can yield good or bad results in the short term, those with a proven process do better than the average investor over the long term.

For total beginners, I would first suggest learning about how the market works and how you can do at least as well as the market through index investing. I highly recommend The Little Book of Common Sense Investing by John Bogle as a great place to start.

If you understand the basics of the market as well as index investing, check out The Motley Fool’s 13 Steps to Investing Foolishly, which will teach you the process The Motley Fool has used to consistently beat the markets over the long term.

Everyone can learn from this

For every investor, focusing too much on daily market movements is a mistake. Things happen for no discernible reason. Rather than wasting time wondering why the market is up or down by a percent or two, we should focus on business fundamentals and continue to search for quality stocks trading at bargain prices.

We also must keep calm and not make rash decisions based on short-term market moves. Research has shown that it is far better to focus on minimizing mistakes, rather than overreaching for greatness. As economist Eric Falkenstein wrote: “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”

And as Warren Buffett’s longtime business partner Charlie Munger said: “We try to profit more from always remembering the obvious than grasping the esoteric. It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

My Dow Jones Industrial Average prediction for today

The Dow Jones Industrial Average will continue to fluctuate. That’s a given, and we have no control over it. What you can control is your reactions to those fluctuations — and the best reaction is usually no reaction.

Dan Dzombak can be found on Twitter @DanDzombak, on his Facebook page DanDzombak, or on his blog where he writes about investing, happiness, life, and success in life. He has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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MONEY mutual funds

Big Tax Bill Looms for Mutual Fund Investors

Even if you don't sell any mutual fund shares this year, you might owe big taxes on capital gains. Here's why — and here's how you can avoid the problem.

If you are the kind of steadfast investor who buys a mutual fund and holds it forever, prepare to pay for your loyalty next April, when you settle up your 2014 tax bill.

At the end of this year, many mutual funds are expected to distribute sizeable capital gains to shareholders who will have to pay taxes on them.

That is true of stock mutual funds that sold off last week after carrying forward big gains from 2013, and also may be true of the popular Pimco Total Return Fund, which was thrown a curve when star manager Bill Gross left Pacific Investment Management Co. in late September and the Pimco Total Return Fund was forced to sell appreciated bonds to pay off shareholders who left in his wake.

Here is why: Mutual funds must distribute realized gains to their shareholders every calendar year. Managers of both bond and stock funds have seen sizeable gains for several years running, but have not had to sell shares and realize those gains. This year, there have been some big selloffs that may have forced the managers to sell winning securities and realize those gains for tax purposes.

For individual investors, those gains might hurt more than they would have over the last few years, because a lot of investors have been offsetting their taxable gains for years with losses they carried over from the 2008-2009 rout. Now, with most of their losses used up, they will have full exposure to the gains. Long-term gains are typically taxed at 15%; those in the top tax bracket face a capital gains tax rate of 20%.

The Pimco Total Return Fund, for example, saw $48.4 billion in outflows through September, according to data from Morningstar and Pimco, and some analysts believe that could result in unusually high taxable gains.

“If Pimco sold bonds to meet redemptions at a gain, the remaining shareholders could suffer an inordinately large tax consequence,” said Tom Roseen, an analyst with Lipper, a Thomson Reuters company.

Through September, research firm Morningstar was estimating that Pimco Total Return Fund would pay out 2% of its net asset value in taxable gains, a high figure but one not out of the fund’s long-term historical range.

That means a person with $50,000 in that fund would see a $1,000 taxable gain, and — at the most common 15% capital gains tax rate — owe $150 in federal taxes on it.

Last year, the Total Return fund distributed 0.66% net asset value in gains. The year before, it distributed 2.31%, Roseen said.

Stock fund investors could be harder-hit, said Morningstar analyst Russel Kinnel. He estimates that U.S. domestic stock funds might be sitting on gains of around 20% and could end up paying 16% or 17% of their value to shareholders as gains. (When that happens, fund shareholders do not actually cash in the gain; they end up with more shares at lower prices.)

Note that none of this affects investors who hold mutual funds through tax-favored retirement accounts. They do not have to pay annual taxes on fund earnings.

For everyone else, there are very few ways to minimize the impact of those taxable gains. Here are some strategies that might help.

  • If you bought recently, you might consider selling quickly. If you have not seen much of a gain in a fund you bought, or if you have actually sustained a loss, you can sell shares and either use your capital loss to offset other gains, or at least get out before the gain is distributed. That strategy will not work if you have been in the fund long enough to rack up your own gains – then you will just have to pay taxes on them when you sell.
  • Think before you buy. The people who will get hardest-hit by these year-end mutual fund taxes are people who have not owned the funds for long. They buy in just before the distribution, miss out on the actual gains, but get hit with the taxable distribution anyway. Do not buy any funds this year until you have checked with the fund company to find out when it is distributing 2014 gains. If you think it is a fund that is sitting on big gains, wait until that date passes before making your purchase.
  • Take losses. If you own any stocks or funds that have lost money since you have held them, sell and reap the loss. It can offset those fund gains.
  • Relax. At 15% for most people (20% for top tax bracketeers), the capital gains tax is still much lower than regular income taxes. And there are worse things than having to pay taxes because you made money.

 

MONEY Tech

Here’s Why Apple Had Such a Great Quarter

Local resident Andreas Gibson celebrates after being the first to exit the Fifth Avenue store after purchasing an iPhone 6 on the first day of sales in Manhattan, New York September 19, 2014.
Adrees Latif—Reuters

And why you can expect even more good news next quarter.

Summer is usually a slow time for Apple APPLE INC. AAPL 0.372% , much as it is for other consumer-electronics companies. For the iPhone maker specifically, summer is right before its widely publicized iPhone launches, which should intuitively create purchase delays as consumers wait for the latest and greatest. Not this time.

Apple just crushed expectations.

Starting with the headliners

Most of the pertinent metrics tapped new records for the quarter ended in September. Revenue came in at $42.1 billion, which translated into $8.5 billion in net income. That’s $1.42 per diluted share. Gross margin stayed strong at 38%, a modest sequential decline. Apple also declared a $0.47-per-share quarterly dividend.

The Street was modeling for $39.9 billion in revenue, $1.29 in EPS, and a gross margin of 37.9%. Apple’s own guidance topped out at $40 billion and 38% gross margin.

iPhone is officially a $100 billion business

Despite all of the speculation surrounding the iPhone 6, iPhone unit sales came in well above expectations at 39.3 million, a 16% jump from a year ago. Analysts were expecting just 37.5 million units. Average selling prices put up an encouraging $42 jump to $603. That helped trailing-12-month iPhone revenue cross the $100 billion threshold for the first time ever.

Source: SEC filings. Fiscal quarters shown. TTM = trailing 12 months.

Even better yet, Apple normally puts up another ASP increase during the calendar fourth quarter following the launch of new models, so the company could have an ASP tailwind this holiday quarter.

Apple is unsure of when it will reach supply and demand balance, since it currently has a significant backlog of orders. The company is selling every unit it can make, and CEO Tim Cook said supply and demand are currently so far apart that they’re “not even on the same planet.”

iPad is still lagging

Technically speaking, the iPad remains a relative soft spot in Apple’s results, with unit sales falling 13% to 12.3 million. There’s a broader deceleration occurring in the tablet market, and Apple is not immune. Still, Cook continues to consider the current situation little more than a “speed bump” on the long-term road to riches.

He also added some useful context. First, since Apple has been in the tablet business for only four years, it’s difficult to determine what the upgrade cycle will be. Everyone expects it to be longer than smartphone upgrade cycles, but it remains unclear by how much. On top of that, what’s not shown in these high-level figures is which countries Apple is selling in, or the demand characteristics in those countries.

Adoption in developed markets was very quick to take off, and those users are still trying to determine their upgrade cycles. Sales are now shifting to emerging markets, where 50% to 70% of buyers are first-time tablet buyers. That has important long-term implications, since those users are now on the Apple upgrade track.

Cook is less interested in the quarterly trends and remains extremely bullish on the bigger picture.

Macs set a new record

Apple sold 5.5 million Macs during the quarter ended in September, a new record and again outpacing the broader PC market. The back-to-school season was particularly kind to the company, according to Cook.

Management attributed this strength to its laptop lineup, which is even more impressive considering the mid-2014 upgrades were modest, as Apple is still waiting for Intel to ship its Broadwell chips in volume.

Cranking up share repurchases

Last quarter, Apple kind of slowed its rate of share repurchases, which made sense, since shares have recovered and it gets marginally less bang for its repurchase buck. This quarter, Apple cranked up the repurchase again, embarking upon its fourth accelerated share repurchase program, or ASR.

Source: SEC filings. Fiscal quarters shown.

Share repurchases this quarter totaled $17 billion, consisting of a $9 billion ASR program and $8 billion in open market repurchases. Even as Apple shares are now within spitting distance of all-time highs, it clearly still thinks the current valuation is compelling. Cook more or less agrees with Carl Icahn.

Once again, the buybacks helped juice EPS growth. Diluted EPS was up 20%, outpacing the 13% jump in net income. Apple has now repurchased nearly $68 billion to date, leaving over $22 billion of its total $90 billion repurchase authorization. That should hold it over until the next update to its capital return program, which is typically in March or April.

Some reporting changes

Starting in fiscal 2015, which just kicked off, Apple is also making changes to its reporting methods. The last reporting change occurred about two years ago, when the company unbundled accessories and peripherals from their related segments and established the iTunes/Software/Services segment.

Going forward, iTunes/Software is being renamed the Services segment, but this will also include other services such as Apple Pay. Other Products will include the current accessories business, along with the iPod, Apple TV, and forthcoming Apple Watch.

Current segments Future segments
iPhone iPhone
iPad iPad
Mac Mac
iPod Services
iTunes/Software/Services Other products
Accessories

Source: Conference call.

One analyst asked whether grouping Apple Watch into the Other Products segment says anything about Apple’s expectations for its upcoming wearable. Cook responded decisively, “It says nothing about our expectations.” Rather, the decision was based on current revenue bases, and Apple may decide to break out Apple Watch performance at a later time.

More importantly, Apple knows that its smartwatch competitors are watching its every move and are very interested to get figures and data points surrounding this nascent business — figures and data points that Apple doesn’t want to share with its rivals. Not sharing with rivals entails not sharing with public investors.

That may be somewhat frustrating, especially at first, but if Apple Watch becomes material to the business, then Apple will probably begin disclosing pertinent figures. Until then, Apple will probably tout various milestones as it hits them from time to time.

Additionally, Apple’s retail results have long been a distinct segment, which has always made its geographical disclosures incomplete. For instance, all retail stores have been included in this reportable segment, regardless of where they are located. Apple is dissolving the Retail reporting segment and will begin including those results in the stores’ respective geographies. That will make the geographical segments much more relevant and usable (finally), particularly the all-important Greater China segment.

It’s the time of the season

As Apple heads into the holiday season with a fresh product lineup, it’s expecting another all-time record quarter. Revenue is expected in the range of $63.5 billion to $66.5 billion, which represents 13% growth at the midpoint. That would be the highest growth in eight quarters, before even considering the possibility of a blowout.

So much for slow summers — or falls or winters for that matter.

MONEY bonds

Risky Puerto Rico Funds Are Still on UBS’s Menu

UBS
Matthew Lloyd—Bloomberg via Getty Images

Brokers, according to an October memo, can recommend clients buy bond funds at the center of a recent $5.2 million settlement and hundreds of arbitration claims.

UBS is sticking with its recommendations that some clients buy risky Puerto Rico closed-end bond funds, despite hundreds of arbitration claims by investors who blame the securities for huge losses, according to an internal document.

UBS told brokers that they may continue to recommend the funds to clients following a $5.2 million settlement last week with Puerto Rico’s financial institutions regulator about sales practices involving the funds, according to an Oct. 9 internal memo reviewed by Reuters.

However, brokers “should continue to evaluate investment recommendations in a manner consistent with UBS policies and FINRA rules,” the firm said in the four-page memo, written in a question and answer format. FINRA, the Financial Industry Regulatory Authority, is Wall Street’s industry-funded watchdog.

Brokers who have questions about whether a “particular investment recommendation” is suitable should contact their branch manager or the firm’s compliance department, UBS wrote.

It is unclear who wrote the memo, which is unsigned.

A UBS spokeswoman did not say whether the firm planned to give more specific guidance to brokers. She said brokers consider “each client’s entire range of wealth management needs and goals when devising their financial plans.”

She noted that Puerto Rico municipal bonds and closed end funds provided excellent returns for more than a decade, as well as tax benefits.

FINRA requires that investment recommendations be “suitable” for investors, based on factors such as risk tolerance and age.

Lawsuits have been mounting, and there are more than 500 arbitration claims against UBS following a sharp decline in the value of Puerto Rico municipal bonds last year. Investors in closed-end funds with heavy exposure to those bonds suffered deep losses.

Puerto Rico regulators interviewed a sampling of UBS clients while looking into the firm’s bond fund sales practices. Those interviewed were elderly with low net worth and conservative investment goals, according to the settlement with UBS, also on Oct. 9. UBS did not admit to any wrongdoing as part of the deal.

According to the settlement, six UBS brokers in Puerto Rico “may have” directed their clients to improperly borrow money in order to buy the funds. Lawyers handling the arbitration cases said the investors’ losses were magnified because they invested through the illegal loans, sold through UBS Bank USA of Utah.

Even without the added leverage, analysts say funds that invest heavily in Puerto Rico debt still carry significant risk. Ratings agencies have cut Puerto Rico’s debt to junk status because of significant default risks.

Puerto Rico has an onerous debt burden that faces headwinds of a weak economy and significant unfunded pension obligations, said Morningstar analyst Beth Foos. She declined to comment specifically on the UBS funds.

Analysts said investors continue to buy Puerto Rico bonds, drawn to tax advantages and attractive yields as high as 7.75 percent, even though there is a significant risk that the U.S. territory will not be able to repay its bond obligations.

MONEY bonds

Why Does Grandma Still Buy EE Savings Bonds?

granddaughter hugging grandma after graduating from college
Alamy

This popular investment pays much lower interest than people think and probably won't return much in time for college.

Last month I made a presentation to a bunch of high school students on the importance of basic financial planning skills. I had hopes of starting a conversation about saving for large purchases such a college education or a car. But the students were surprisingly interested in learning about EE savings bonds — those gifts that grandparents and other relatives give children to commemorate life events such as a birthday, first communion, or a Bar Mitzvah.

One student said he had savings bonds that were worth over $2,000. On special occasions, he said, his grandparents would give him a $50 EE savings bond. They told him that in eight years it would be worth $100 and then it would continue to double in value every eight years thereafter.

The Truth About Savings Bonds

Savings bonds that double in value every seven or eight years, however, have gone the way of encyclopedia salesmen, eight-track tapes, and rotary telephones. EE bonds sold from May 1, 2014 to October 31, 2014 will earn an interest rate of 0.50%, according to the US Treasury website. It’s not surprising that these interest rates are so low; what is surprising is that people are still buying these securities based on very old information.

You can buy EE savings bonds through banks and other financial institutions, or through the US Treasury’s TreasuryDirect website. The bonds, which are now issued in electronic form, are sold at half the face value; for instance, you pay $50 for a $100 bond. The interest rate at the time of purchase dictates when a bond will reach its face value.

This rate is detemined by discounting it against the 10 year Treasury Note rate, currently about 2.2%.

Years ago, you could calculate when your bond would reach face value by using a simple mathematical formula called the Rule of 72. If you simply divide an interest rate by 72 you can determine the number of years it will take for something to double in value. So, let’s try it. 72 divided by 0.5% = 144 years. Ouch!!

Fortunately, the Treasury has made a promise to double your investment in a EE savings bond in no less than 20 years. Actually it’s a balloon payment. So if you happen to cash out your EE bond in it’s 19th year, 350th day, you’ll only get the interest earned on the initial investment. You need to wait the full 20 years to get the face value. At that point, you’ve effectively gotten an annualized return of 3.5% on your initial investment.

So let’s recap. If Grandma wants to buy a EE savings bond for a grandchild to cash in to cover some college costs, she ought to buy that bond at the same time she’s pressuring her kids to start working on grandchildren. I joke, but, I think it’s very important to recognize the world has changed, and savings bonds don’t deliver the same solutions that many people remember from years past.

But back to the boy who stood up in class to talk about the savings bonds. What about the bonds his grandparents had purchased over the past several decades? Well many of those bonds may in fact be earning interest rates of 5% to 8%. It just depends on when they were purchased. The Treasury has a savings bond wizard that will calculate the value of your old paper bonds. Give it a shot. You may be pleasantly (or unpleasantly) surprised at the value of the bonds you have sitting around.

———-

Marc S. Freedman, CFP, is president and CEO of Freedman Financial in Peabody, Mass. He has been delivering financial planning advice to mass affluent Baby Boomers for more than two decades. He is the author of Retiring for the GENIUS, and he is host of “Dollars & Sense,” a weekly radio show on North Shore 104.9 in Beverly, Mass.

MONEY stocks

3 Things to Know About IBM’s Sinking Stock

141020_INV_IBM
Niall Carson—PA Wire/Press Association Images

IBM's shares plunged 7% Monday after a disappointing earnings report. Can tech's ultimate survivor transform itself one more time?

International Business Machines INTERNATIONAL BUSINESS MACHINES CORP. IBM -0.0617% has long enjoyed a unique status on Wall Street — a tech growth powerhouse that investors also see as a reliable blue chip, with steady profit growth and a hefty dividend. But with the rise of new technologies like cloud computing, Big Blue has struggled to maintain that balancing act.

Now investor confidence has suffered a big blow.

On Monday the company announced the results of a pretty lousy quarter. IBM’s third-quarter operating profit was down by nearly one fifth, and the company failed to generate year-over-year revenue growth for the 10th consecutive quarter.

Big Blue also revealed plans to sell-off its struggling semiconductor business, a move that involves taking $4.7 pre-tax billion charge against IBM’s bottom line. Actually, it is paying another company to take this unit off its hand.

While CEO Virginia Rometty acknowledged she was “disappointed” with IBM’s recent performance, she’s also pledged to turn the company around, led in part by IBM’s own foray into the cloud.

Now, you don’t get to be a 103-year-old tech company without learning to adapt. That’s what IBM famously did in the ’90s, when the computer giant started to shift away from profitable PC hardware in favor of consulting and service contracts for businesses.

But Monday’s dismal earnings show just how hard repeating that trick could turn out to be.

Here’s what else you need to know about the stock:

1) You can’t really call IBM a growth company anymore since its sales aren’t rising.

When it comes to revenues, IBM ranks behind only Apple APPLE INC. AAPL 0.372% and Hewlett-Packard HEWLETT-PACKARD CO. HPQ -0.0286% among U.S. tech companies. On a quarterly basis, though, sales have actually shrunk for 10 periods in a row, including a 4% slide in the third quarter. The big culprit is cloud computing, in which businesses can access computing services remotely via the Internet.

Since the 1990s, IBM’s model has been premised on selling powerful, expensive computers to large businesses, then earning added profits on contracts to help firms run those machines. But the cloud lets companies rent, not buy, this computing power. “You only pay for what you use,” says Janney Montgomery Scott analyst Joseph Foresi. The result: IBM’s hardware revenues sank 15% last quarter.

2) IBM is racing to be a leader in cloud computing, but with mixed results.

The company has identified four alternative areas of growth. One is the cloud, the very technology eating into IBM’s hardware sales. Big Blue has spent more than $7 billion on cloud-related acquisitions. It’s also going after mobile, IT security, and big data, the analysis of information sets that are too large for traditional computers. An example of that is Watson. IBM’s artificial-intelligence project, which won Jeopardy! in 2011, is being marketed to businesses in finance and health care.

These initiatives have promise, but IBM’s size is a curse. For instance, the company’s cloud revenues jumped 69% to $4.4 billion last year, but with nearly $100 billion in overall sales, “it’s hard to move the needle,” says S&P Capital IQ analyst Scott Kessler.

3) The stock is now much cheaper than its tech peers, but it may deserve to be.

Investors willing to wait and see if these moves will transform IBM may take comfort in the fact that the stock looks cheap. What’s more, the shares yield 2.4%, vs. 2% for the broad market. This could make the company look like a good value.

But investors should tread carefully, says Ivan Feinseth, chief investment officer at Tigress Financial Partners. He notes IBM has spent $90 billion on stock buybacks in the past decade, which has kept the P/E low by increasing earnings per share. Yet none of that money was invested for growth, as evidenced by IBM’s sluggish annual growth rate. It is hard to imagine IBM outmuscling Amazon AMAZON.COM INC. AMZN -8.3403% , Cisco CISCO SYSTEMS INC. CSCO 0.9124% , Microsoft MICROSOFT CORP. MSFT 2.4656% , HP HEWLETT-PACKARD CO. HPQ -0.0286% , and Google GOOGLE INC. GOOG -0.7721% in the cloud — and there are better values in tech.

MONEY stocks

Could Another Sell-Off Be Lurking This Week?

Traders work on the floor of the New York Stock Exchange October 15, 2014.
Brendan McDermid—Reuters

Last week's tumultuous week in the stock market sets the stage for yet more nervousness and hand-wringing as a fresh set of earnings and economic data are due to be released.

When Wall Street opens for business on Monday morning, will bad news about the global economy be bad news for stocks?

That was the case for most of last week, when the equity market was hit with a frightening sell-off that reminded investors of the bad old days of the financial crisis.

^INDU Chart

^INDU data by YCharts

Or will bad news turn out to be good news for the market, as was the case on Friday, when the Dow Jones industrial average soared more than 260 points?

^INDU Chart

^INDU data by YCharts

Friday’s dramatic rebound in stock prices reflected two forces that are likely to move the market in the coming days.

Keep an Eye on the Fed

At the end of this month, the Federal Reserve is slated to end its stimulative bond-buying program known as quantitative easing.

Investors are naturally nervous about this development, as quantitive easing, or QE, has been credited for the strength and length of what is now a five-and-a-half-year-old bull market. As many market observers have noted, Wall Street is about to lose a major psychological crutch.

Remember that when the Fed ended its prior two rounds of quantitative easing — in 2010 and 2011 — stocks sold off fairly quickly:

After QE round 1, which ended March 31, 2010:
^SPX Chart

^SPX data by YCharts

After QE round 2, which ended on June 30, 2011:
^SPX Chart

^SPX data by YCharts

But late last week, when the market was in the throes of a selloff, St. Louis Fed president James Bullard said in a Bloomberg TV interview that “we could go on pause on the taper at this juncture and wait until we see how the data shakes out into December.”

In other words, a member of the Federal Open Market Committee that sets the nation’s interest rate policy is openly mulling whether the Fed should postpone ending QE in light of recent market volatility.

Bullard’s remarks on Thursday were enough to give the markets a lift in the last two days of the week. And if there are more signs of a major global economic slowdown, including a possible recession in Europe and Japan, then the Fed may have to think twice about how — and how soon — it ends its stimulus efforts.

This week, investors will want to see if more members of the FOMC sound similar conciliatory notes of extending QE. So far, no one else has. Boston Fed president Eric Rosengren, a major defender of QE, said on Friday that he does not expect the Fed to extend the program at this juncture.

What else should investors look for?

  • Wednesday’s inflation report from the Department of Labor. If the global economic slowdown is starting to impact the U.S., we will start to see it in the form of lower prices for U.S. consumers.
  • Thursday’s report on the index of leading economic indicators from the Conference Board. The LEI is forward-looking barometer of economic trends, so if the global slowdown is likely to affect the U.S. in the coming months, this index should offer clues.

Keep an Eye on Earnings

Last week’s bloody selloff was peppered by major earnings disappointments on Wall Street. For instance, there was Netflix, which reported that subscriber growth wasn’t as strong as expected and saw its stock lose more than a quarter of its value on Wednesday. Google also disappointed Wall Street on earnings and revenue growth, as well as on paid clicks on ad links.

The idea is that if Wall Street is about to lose its QE crutch, it will have to fall back on the fundamentals — so corporate profit reports will have to look good.

On Friday, a slew of companies led by General Electric and Honeywell announced better-than-expected results, which helped drive stocks higher at the end of the week.

Yet the mood on Wall Street regarding earnings is somewhat pessimistic. The strengthening U.S. dollar, brought about by the global economic slowdown, is expected to crimp global profits for U.S. exporters.

This week, several high-profile earnings announcements are due to be released. Here are the major ones to look for:

  • On Monday, Apple is due to report its results after the closing bell. Everything Apple reports is news these days.
  • On Tuesday, Coca-Cola will reports its results before the market opens. No company is as exposed to the global economy as Coke is.
  • On Wednesday, Boeing is set to reveal its earnings before the market opens. The global slowdown is expected to hurt U.S. exporters, and Boeing could be a sign of how bad things have become.
  • On Thursday, Amazon.com will report after the bell. Amazon isn’t just a bellwether of the tech economy, it is now a key gauge of the health of the U.S. consumer.
MONEY Markets

The Word on Wall Street Is It’s Okay to Be Bullish Again

After the market's triple-digit rebound on Friday, the bulls came out in force — on TV and social media. Here's how the talking heads explain the state of the market after one scary week.

After dramatic drops on Monday and Wednesday, the market took a turn for the better at the end of the week.

And the bulls started coming out of the woodwork.

“…the mid-week storm in the market was really a passing sun shower — though we did not know it at the time,” — Jonathan Lewis, chief investment officer, Samson Capital Advisors.

“…we remain steadfast with our multi-year bull-market scenario, as corrections and periods of consolidation are necessary ingredients to any prolonged bull market.” — Brian Belski, chief investment strategist BMO Capital Markets

“Whether the complete correction is over I’m not positive yet, but there looks to be some relative calm. I think the next leg is going to be higher.” – Jim Iuorio of TJM Institutional Services via CNBC

“The time to rebalance [and buy stocks] is when doing so requires courage and when things look ugly. Right now, investors are worried and see things as being ugly.” – David Kotok, chairman of Cumberland Advisors

A common theme from the bulls is that for all the worries about the global recovery, the U.S. economy looks solid:

“Ironically, the pullback in stocks has occurred against a backdrop of a strengthening U.S. economy.” — Gregg Fisher, chief investment officer at Gerstein Fisher

“The question is whether it is actually the beginning of a bear market. I don’t think so because I don’t expect a recession in the U.S. anytime soon.” — Edward Yardeni, president of Yardeni Research

Of course, Yardeni goes on to add that:

“the Eurozone and Japan may be heading in that direction now. So is Brazil. China is slowing significantly.”

Shouldn’t investors be worried, then, that a recession in the European Union could reverberate in the U.S.?

Fear not, the bulls have an answer for that:

“The impact of an E.U. slowdown on U.S. growth would be minimal: U.S. exports to the E.U. are a small proportion of GDP (2.8% in 2013)…” notes UBS economist Maury Harris.

Many point out that economic factors have not really shifted since a month ago, when the stock market seemed just fine.

“You can go deep in the weeds in this if you like, but the fact is that nothing fundamental has changed in recent weeks or months or quarters,” writes Jared Bernstein, a senior fellow at the Center for Budget and Policy Priorities.

In fact, global economic worries, which have led to lower oil prices, may end up being a boon.

Screen Shot 2014-10-20 at 9.38.52 AM

Many experts are saying that this week’s wild market swings are actually just the result of “narrative fallacy,” which leads investors to come up with explanations for market moves where they don’t necessarily exist — in this case placing blame on external forces like Ebola and fears of rising interest rates.

But who’s to say that the bulls aren’t the ones who are now coming with plausible-sounding explanations for why the rally should keep going?

For the record, the bears have more entertaining explanations in their quiver. For instance, there’s the McDonald’s theory. As in, “as the Big Mac goes, so goes the global economy.”

Permabear Marc Faber, who edits the Gloom Doom Boom site, noted the following:

“Now, McDonald’s is a very good indicator of the global economy. If McDonald’s doesn’t increase its sales, it tells you that the monetary policies have largely failed in the sense that prices are going up more than disposable income, and so people have less purchasing power.”

And Mickey D’s sales have been slumping badly lately.

Then there’s the so-called dental indicator.

Bloomberg Businessweek reported a nifty theory that says that the rate at which Americans cancel scheduled follow-up visits offers a good clue about the real state of the consumer — and in turn the financial markets.

“This is a forward indicator signifying lack of consumer confidence.” — Vijay Sikka, president of Sikka Software, as told to Bloomberg Businessweek

And the follow-through rate on follow-up dental visits has sunk to about where it was in 2007, just before the last downturn/bear market.

At this stage, it’s impossible to tell whether this is the start of bear market or a buying opportunity. However, what’s absolutely clear is that big dips are just a normal part of being a stock investor.

Despite anxieties about the Dow’s sudden plunge this week, if you look at historical performance, the index typically turns negative for the year often enough that it’s not a good doomsday indicator, says author and investment adviser Josh Brown.

Screen Shot 2014-10-20 at 9.39.39 AM

And at the end of the day, who’s to say which wacky theories wind up being right or wrong?

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