MONEY The Economy

The Stock Market Loses a Big Crutch as the Fed Ends ‘Quantitative Easing’

The Fed has concluded its asset-purchasing program thanks to an improving labor market. Here's what QE3 has meant to investors and the economy.

After spending trillions of dollars on bond purchases since the end of the Great Recession — to keep interest rates low to boost spending, lending, and investments — the Federal Reserve ended its stimulus program known as quantitative easing.

The central bank’s decision to stop buying billions of dollars of Treasury and mortgage-related bonds each month comes as the U.S. economy has shown signs of recent improvement.

U.S. gross domestic product grew an impressive 4.6% last quarter. And while growth dropped at the start of this year, thanks to an unusually bad winter, the economy expanded at annual pace of 4.5% and 3.5% in the second half of 2013.

Meanwhile, employers have added an average of 227,000 jobs this year and the unemployment rate rests at a post-recession low of 5.9%. It was at 7.8% in September 2012, when this round of quantitative easing, known as QE3, began.

What this means for interest rates
Even with QE over, the Fed is unlikely to start raising short-term interest rates until next year, at the earliest.

In part due to the strengthening dollar and weakening foreign economies, inflation has failed to pick up despite the Fed’s unprecedented easy monetary policy.

And there remains a decent bit of slack in the labor market. For instance, there are still a large number of Americans who’ve been unemployed for 27 weeks or longer (almost 3 million), and the labor-force participation rate has continued its decade long decline. Even the participation rate of those between 25 to 54 is lower than it was pre-recession.

What this means for investors
For investors, this marks the end of a wild ride that saw equity prices rise, bond yields remain muted, and hand wringing over inflation expectations that never materialized.

S&P 500:
Equities enjoyed an impressive run up after then-Fed Chair Ben Bernanke announced the start of a third round of bond buying in September 2012. Of course the last two times the Fed ended quantitative easing, equities faced sell-offs. From the Wall Street Journal:

The S&P 500 rose 35% during QE1 (Dec. 2008 through March 2010), gained 10% during QE2 (Nov. 2010 through June 2011) and has gained about 30% during QE3 (from Sept. 2012 through this month), according to S&P Dow Jones Indices.

Three months after QE1 ended, the S&P 500 fell 12%. And three months after QE2 concluded, the S&P 500 was down 14%.

 

Stocks

10-year Treasury yields:

As has been the case for much of the post-recession recovery, U.S. borrowing costs have remained low thanks to a lack of strong consumer demand — and the Fed’s bond buying. Many investors paid dearly for betting incorrectly on Treasuries, including the Bill Gross who recently left his perch at Pimco for Janus.

Bonds

10-year breakeven inflation rate:

A sign that inflation failed to take hold despite unconventionally accommodative monetary policy is the so-called 10-year breakeven rate, which measures the difference between the yield on 10-year Treasuries and Treasury Inflation Protected Securities, or TIPS. The higher the gap, the higher the market’s expectation for inflation. As you can see, no such expectation really materialized.

BreakEven

Inflation:

Despite concern that the Fed’s policy would lead to run-away inflation, we remain mired in a low-inflation environment.

fredgraph

Unemployment Rate:

The falling unemployment rate has been a real a bright spot for the economy. If you look at a broader measure of employment, one which takes into account those who’ve just given up looking for a job and part-time workers who want to work full-time, unemployment is elevated, but declining.

unemployment rate

Compared to the economic plight of other developed economies, the U.S. looks to be in reasonable shape. That in part is thanks to bold monetary policy at a time of stagnant growth.

Indeed, many economists now argue that the European Central Bank, faced with an economy that’s teetering on another recession, ought to take a page from the Fed’s playbook and try its own brand of quantitative easing.

MONEY stocks

Why It’s Not Too Late to Buy Apple Stock

Michele Mattana of Sardinia, Italy, poses with an iPhone 6 Plus and an iPhone 6 on the first day of sales at the Fifth Avenue store in Manhattan, New York September 19, 2014.
Adrees Latif—Reuters

Apple could very well have another blowout quarter up its sleeve.

It’s taken 2 years to get back to this point. After peaking in September 2012 at approximately $705 (pre-split), Apple has now climbed all the way back after its prolonged pullback to fresh all-time highs. Shares have now traded over $105, the equivalent of $735 pre-split.

Naturally, with shares back to all-time highs investors are now wondering if it’s too late to get in, or if they can still buy Apple. Let’s take a look.

Word on the Street

For starters, let’s consider the Street’s opinion on Apple. According to Yahoo! Finance, the average price target for Apple is $115, which represents about 10% upside from here. That may not seem like a lot, and it’s also a modest hurdle for the S&P 500 to clear in the next year, which determines if Apple were to outperform or underperform should it hit that average price target.

The high price target is $143. After giving up the Street high target temporarily, Cantor Fitzgerald analyst Brian White is back at the top of the list. White seems to always want to have the Street high price target on Apple, and reclaimed his title from JPM Securities analyst Alex Gauna earlier this month. The low price target is $60, but we’ve already covered how silly that sounds.

For the most part, the Street remains bullish overall, suggesting that it’s not too late to buy.

Apple pays

Re-initiated in 2012 after a 17-year hiatus, Apple’s dividend continues to climb higher as the company remains committed to returning its copious amounts of cash to shareholders. While the majority of Apple’s capital return program is being allocated to share repurchases, its still paying out hefty amounts of cash in the form of dividends.

Apple increased its quarterly payout by 15% in early 2013, following up with an 8% increase earlier this year. The Mac maker usually updates its capital return program in March or April, which is likely when investors will find out more about the next dividend boost.

Importantly, Apple’s dividend is sustainable — its dividend payout ratio has averaged 30% since bringing its dividend back.

Source: SEC filings and author's calculations. Fiscal quarters shown.
Source: SEC filings and author’s calculations. Fiscal quarters shown.

There’s no magic number when it comes to payout ratios, but generally investors prefer a figure in the 30% to 60% range. A payout ratio that’s too low may have investors asking for more, while a ratio that’s too high could potentially suggest that the company is being too generous and a dividend cut could be in the cards.

At current levels, Apple’s dividend represents a 1.8% yield. That’s less than some fellow tech giants like Microsoft and Intel, both of which yield around 2.7% right now, but it’s still a respectable yield nonetheless. There’s something for income investors here too.

Apple buys (itself)

As mentioned, the other aspect of Apple’s capital return is its massive share repurchase authorization, which currently sits at $90 billion. This is where Apple has been focusing most of its capital return efforts, believing shares remain cheap.

It should be telling that Apple just embarked upon its fourth accelerated share repurchase program while shares are at all-time highs. That’s literally Apple telling you that it thinks its shares are cheap at current prices and putting its money where its mouth is — because it’s also repurchasing shares itself. While many companies have rather bad timing with repurchases, it’s hard to argue that Apple is overpaying for itself when it’s trading at just 16 times earnings (a discount to the S&P 500).

Thanks to the resulting earnings accretion, EPS growth has been continuously outpacing net income growth by a healthy margin.

Source: SEC filings. Fiscal quarters shown.

Considering the sheer magnitude of Apple’s repurchase program, it’s also worth noting that share repurchases can drive capital appreciation. As Apple continues to amplify EPS growth through aggressive repurchases, its earnings multiple will contract (all else equal) due to a larger denominator.

If Apple’s earnings multiple contracts, shares look even cheaper, which creates buying interest. If the market is willing to simply maintain Apple’s earnings multiple, then that requires prices to go higher still.

An all-time record quarter is around the corner

Apple’s guidance for the current quarter is mind-boggling. The roughly $14.4 billion that the company expects to make over the holidays is well above what any other company in the S&P 500 is capable of producing, including oil companies. As Apple has just dramatically broadened its addressable market by launching larger iPhones (opening up a whole new world of potential Android switchers), Apple could very well have another blowout quarter up its sleeve. The iPhone and Mac businesses are as strong as ever, and the iPad’s recent woes are possibly temporary hiccups.

When the company releases its fiscal first quarter earnings in January, the figures could potentially be a positive catalyst as the quarter is expected to set new all-time records in both top and bottom lines. Shortly thereafter, Apple Watch will ship, potentially boosting investor confidence (and share prices) further.

Yes, you can still buy Apple.

MONEY stocks

How Arnold Palmer and Yo-Yos Can Help Your Finances

Arnold Palmer, golfer
Meeting your idol on the golf course can end up putting your mind at ease. Jim Young—Reuters

When stocks jump around, ease your worries by distracting yourself and taking the long view.

One of my newer clients, concerned about the latest stock market drop, called me earlier this month. After catching up briefly, she began describing the unsettling nature of the market volatility she was hearing on the news. She was feeling fearful about losing more of her nest egg, since she’s in her mid-60s, has recently retired, and wouldn’t be able to make the money back up by working.

No doubt many other financial advisers have received calls like this in recent weeks.

I responded by validating her thoughts, since our emotions play dirty tricks on us when investing. We all want to sell when fear is strong and buy when things have been hot.

We next spent some time discussing her longer-term financial plan and the idea that when stock prices fall we are then positioned for better future returns going forward.

It was at this point that the conversation went off on a tangent. Earlier this year, while planning for her retirement, we budgeted an annual allotment for golf. My client was planning to join a Thursday morning women’s golfing group and play at different courses around the region.

When I asked her how that was going, she started to gush about the experience she had at the U.S. Open golf tournament over the summer in Pinehurst, N.C. One of her friends had received corporate hospitality tickets, so they were able to access the clubhouse. While having a drink on the patio, she spotted her childhood idol, Arnold Palmer. She immediately walked up to him and asked for a picture, to which he agreed. While chuckling she said, “It took everything I had not to lay one on his cheek during the picture.” She said she hadn’t felt that much like a schoolgirl, since, well, she was a schoolgirl.

By the time she finished, and we had both stopped laughing, she took a breath and said, “Now what were we talking about?”

A saying attributed to Milton Berle is, “Laughter is an instant vacation.” It’s true. Laughter temporarily helps to take the focus off of our fear. But a falling stock market is no laughing matter.

It’s easy to get swept up in the fear that comes from stock market drops, especially after a five-and-a-half year period of gains. In the moment, the fear takes over, making us feel like we should do something to stop our cascading portfolio values.

The key to successfully overcoming this fear is to have expectations aligned before the drop happens. To help our clients truly internalize this concept, we walk through a set of steps to help them digest what a loss may feel like.

  • We begin with a look at the wide range of historical stock return outcomes possible over a one-year period compared to a 10-year period. This helps the client to see the random nature of one-year results and the increasing probability of higher returns for longer-term periods. We often compare it to a person walking up a set of stairs while using a yo-yo. The yo-yo will move up and down with each step but ultimately will make it to the top of the stairs.
  • Reviewing the client’s multi-year plan also calms the urgency to sell when stock prices dip. Because as prices fall, future return assumptions increase. Focusing on hitting income and spending targets, which the client can control, shifts the focus away from the fear. Circling back to important goals or memories the client mentioned when establishing the plan adds perspective and serves as a reminder of why a plan was created in the first place.
  • Running hypothetical examples of a loss in dollars, not percentages, helps to lessen the shock value when it actually becomes reality. Instead, reminding clients (and ourselves) to associate losses with opportunity in the good times makes us better prepared to make stock purchases when prices have fallen. Additionally, reflecting on historical gains that have occurred after certain percentages of losses can build confidence for when things seem extremely bleak.

We all face uncertainty when dealing with decisions surrounding our money. We also all know that stock market drops are inevitable. Removing the element of surprise allows us to be better equipped when the drops come along. Losses will never feel instinctively good, but seeing opportunity instead of being consumed by anxiety will help.

———-

Smith is a certified financial planner, partner, and adviser with Financial Symmetry, a fee-only financial planning and invesment management firm in Raleigh, N.C. He enjoys helping people do more things they enjoy. His biggest priority is that of a husband and a dad to the three lovely ladies in his life. He is an active member of NAPFA, FPA and a proud graduate of North Carolina State University.

MONEY stocks

Should I Be Worried That Stocks Are at Near-Record Highs?

Ritholtz Wealth Management CEO Josh Brown, a.k.a. the Reformed Broker, explains how to look at the market's recent performance.

MONEY tech stocks

Twitter Becomes Latest Victim of October’s Mini Tech Wreck

Twitter logo on iPad
Chris Batson—Alamy

Twitter joins a long list of tech heavyweights including Amazon.com, Google, Netflix, and Yelp that failed to beat Wall Street estimates — and whose stock got clocked.

In case you haven’t noticed, this has been a miserable month for tech — especially for those companies that couldn’t find a way to beat Wall Street’s expectations.

Just ask Twitter. The social media darling did pretty much everything that analysts has asked. The company more than doubled its quarterly revenues, posting sales of $361 million. Twitter turned an actual profit, albeit a mere penny a share. But that was what Wall Street analysts had been expecting.

Meanwhile, the company reported that the number of active users grew 23%; timeline views (Twitter’s equivalent of website page views) increased 80%; and ad revenues from those page views increased 83%. Still, as UBS analyst Eric Sheridan told USA Today, the results lacked “upside surprise.”

The result: Investors pummeled the stock, which lost more than 10% of its value in after-hours trading Monday.

TWTR Price Chart

TWTR Price data by YCharts

Twitter wasn’t the only technology company to be taken out to the woodshed.

Last Thursday, Amazon.com did what it usually does — the e-commerce giant reported robust sales growth, but couldn’t manage to turn a profit amid its massive build out. Investors weren’t in a forgiving mood, shaving more than 8% off the stock’s price:

AMZN Price Chart

AMZN Price data by YCharts

The day before that, Yelp reported decent results, but the review site warned investors that fourth quarter sales would fall short of expectations. The result: Investors erased nearly a fifth of the value of the social media company:

YELP Chart

YELP data by YCharts

The week before that, Google reported strong profits, but said that the amount of money it is making per ad is falling. That was enough to knock the stock down.

GOOGL Chart

GOOGL data by YCharts

And the day before that, Netflix announced it attracted far fewer new U.S. members for its streaming video service than was previously estimated. That was enough to erase more than a fifth of the company’s market value:

NFLX Chart

NFLX data by YCharts

MONEY currencies

Making the Most of a Mighty Dollar

Man flexing arm with $ tattoo on it
Claire Benoist—Prop Styling by Brian Byrne for Set In Ice; Tattoo Design by Andy Perez

The buck is back. Here's how to make the most of a stronger currency—and avoid the costs.

After getting pushed around for much of the 2000s, the once-wimpy buck is fighting back. The dollar has gained nearly 20% over the past 3½ years, compared with an index of global currencies. It’s now at multiyear highs against the euro and yen.

This is good news because it represents a global vote of confidence in our economy. Investors worldwide snap up bucks when they want to buy things denominated in our currency—including U.S. bonds, stocks, and other assets. The dollar’s current rally got going in 2011 and 2012, as the U.S. economy fitfully grew while Europe and Japan slipped into double-dip recessions. That has made America look like a better relative investment, says Brian McMahon, chief investment officer at Thornburg Investment Management.

And as our recovery gains strength, interest rates should nudge higher, making bonds more attractive to yield-seeking overseas investors. So the dollar could keep bulking up from here.

Dollar rallies have historically corresponded to a strong stock market, but “in any shift in a currency, there are going to be winners and losers,” says Liz Ann Sonders, chief investment strategist for Charles Schwab. You probably have some of both in your portfolio. So here’s a rundown of how things are likely to play out, asset by asset:

U.S. STOCKS

Bet on the American consumer … In part, the dollar boom is a reflection of the same trends that are benefiting any stock that’s sensitive to an improving domestic economy. GDP grew at an impressive rate
of 4.6% in the second quarter.

Yet the dollar isn’t just a mirror of U.S. strength. Its rise will also help lift some parts of the -economy. “The big winner is the U.S. consumer,” says Mark Freeman, chief investment officer for Westwood Holdings Group. One reason: A rise in the dollar tends to correspond to a drop in oil and other commodity prices. Since April 2011, the price of a barrel of crude oil has fallen by around 25%. Lower costs for energy leave consumers with more money to spend on other things.

Transportation stocks, including rail, freight, and airlines, benefit both from lower fuel costs and from consumer demand—more buying means more stuff is being shipped. A simple way to get exposure to the biggest names in these groups is through an index fund like iShares Transportation Average ETF.

… But not on U.S manufacturers. You can make room for a transportation-oriented ETF by lightening up on your exposure to U.S.-based multinationals.

For years, when the U.S. economy was sluggish, it made sense to bet on firms, such as Procter & Gamble THE PROCTER & GAMBLE CO. PG 0.1964% , that sell a lot to fast-growing markets abroad.

ROOM TO RUN

But a strong dollar will make it harder for such companies to compete with foreign rivals outside the U.S.  This is why large exporters such as Ford FORD MOTOR CO. F -0.5751% and tobacco giant Philip Morris International PHILIP MORRIS INTERNATIONAL INC. PM 0.3299% have cut expectations for profits this year. Industrial companies were once expected to grow earnings 24% in the third quarter. Now the forecast is 8% growth, according to S&P Capital IQ.

Be careful with dividends. In recent years, with interest rates very low, investors have turned to high-dividend-paying stocks to boost their income. So those stocks have boomed. But the rising dollar is signaling a steady shift to higher rates, says Freeman of Westwood Holdings.

Here’s why: Although U.S. bond yields remain low, they are significantly higher than what investors are now getting in many overseas markets. (Ten-year German bonds pay 0.9%, vs. 2.4% for Treasuries.) And the recent momentum in the dollar suggests traders expect U.S. bond yields to stay attractive—a reasonable bet given that the Federal Reserve is signaling that it will start gradually raising rates in 2015.

Better bond yields will be bad news for some high-income stocks, since many investors will switch from stocks that are attractive mainly because of their dividend checks. Income investors should go beyond just grabbing the highest yields and shift to companies that can also increase their payout steadily.

Susan Kempler, a portfolio manager at TIAA-CREF, points to Apple APPLE INC. AAPL -0.4379% , which yields just 1.8% but sits on more than $160 billion in excess cash. Such companies can be found in T. Rowe Price Dividend Growth Fund, which has beaten nearly 80% of its peers over the past decade.

FOREIGN STOCKS

Don’t give up …International investing tends to grow in popularity when the dollar sinks. That’s because when the buck loses value, Americans can make money on international stocks simply on the currency exchange. When the dollar rises, on the other hand, that’s a drag on returns.

So Americans’ attraction to foreign investing is likely to cool, says Scott Clemons, chief investment strategist at Brown Brothers Harriman. Yet this is precisely why you shouldn’t turn your back on international equities now.

For one thing, valuations abroad, especially for European shares, are low. Doug Ramsey, chief investment officer for the Leuthold Group, notes that U.S. stocks have historically been cheap—as measured by price relative to past earnings—compared with global shares. Recently, though, U.S. stocks have jumped to a 20% premium. On valuations alone, he says, “foreign equities should produce total returns of about two percentage points annualized above the U.S. over a seven-to-10-year horizon.”

You can gain European exposure through a broad-based fund that invests globally (so you’re still diversified) but with big positions in Europe. An example is Oakmark International, which is on our MONEY 50 recommended list of funds. The fund keeps more than 75% of its assets in European equities.

… But tread lightly in the emerging markets. As the dollar strengthens, expect rockiness in emerging markets as global investors reassess their portfolios.

Once rates start to climb in the U.S., says Kate Warne, investment strategist for Edward Jones, investors will shift to a more conservative mode, since they won’t have to take as much risk to earn a return. Many are likely to pull money away from emerging-markets investments. Warne says her company recommends that investors keep only 5% of their total portfolio in emerging-markets equities.

BOOMING BUCK

BONDS

Don’t assume the worst …
One cause of the strong dollar—-expected rising rates—may have bond investors shivering. When rates rise, the value of older bonds in your fixed-income funds will fall, reducing your total return.

But take a breath. A gradual rise wouldn’t be a catastrophe if you hold conservative short- and intermediate-term bond funds. Meanwhile, a strong dollar also brings some good news for fixed-income investors. Inflation, a major enemy to bond investors, is held in check by the rising dollar, thanks to lower commodity prices.

… But hedge your foreign exposure. As with stocks, American investors have used foreign bonds as a way to profit from a weak dollar. Indeed, the currency effect added about two percentage points to foreign bond fund total returns since 1985, according to the Vanguard fund group. But a strengthening dollar going forward would mean the currency trade hurts, not helps.

You can still maintain foreign fixed-income exposure for diversification, but in a way that hedges your bets. A few funds lessen the impact of currency shifts by essentially buying dollars in the open market every time they buy
a foreign bond. One solid option is
Vanguard Total International Bond Index, which charges just 0.23% of assets a year. Sometimes you are better off playing just the investment and not the currency it’s wrapped in.

MONEY risk

The Crucial Investing Advice You Need Right Now

glass of water balanced on see-saw
Martin Barraud—Getty Images

When the stock market is near record highs, it's more important than ever to think about risk.

Don’t let history repeat itself.

You’ve heard that phrase before, likely as a warning to those who might be traveling down the same dangerous path as those before them. But it’s also currently the most important piece of advice I offer to clients.

Recently, I’ve been helping clients rebalance portfolios that have become stock-heavy due to the bull market that’s taken the S&P 500 up 194% since March 2009. With the bull now more than five years long and memories of the financial crisis starting to fade, I’m finding that investors aren’t exactly excited about reducing their stock allocations.

One of my duties as a financial adviser is to encourage my clients to rebalance their portfolios to the levels that we agreed made sense for them given their risk tolerance. In August, however, the S&P 500 topped 2,000 for the first time, giving investors a new boost of confidence.

And although seeing the market at new highs is exciting, let’s not forget that markets can go the other way too. On October 19, 1987, the Dow fell 22.6% in just one day. Applied to current levels, a 22.6% drop would be 3,801 points. During the financial crisis, from October 11, 2007 through March 6, 2009, stocks fell 57%, which would be 9,586 points today. I don’t expect anything that drastic to happen anytime soon, but investors need to remember that bear markets — declines of 20% or more — historically have occurred on average every four-and-a-half to five years.

So even though I’m a big believer in holding stocks for the long run, lately I’ve been making a point to show my clients how portfolios like theirs would’ve performed during previous bear markets, including the crash of 1987 and the financial crisis. I help them understand not just stocks’ growth potential but also the risks associated with achieving that growth.

At times like this I talk about risk for two reasons. First, focusing on risk prevents clients from being caught up in the moment and making choices that they may regret. Second, risk is still very much a reality. Investors are more optimistic these days, but this optimism allows them to be tempted to abandon their rebalancing strategies in order to maintain or increase their exposure to the aggressive side of their portfolios, which reduces the downside protection that rebalancing back to bonds and cash may offer.

No matter how the market performs, I reinforce investment discipline by coaching clients to stick with their investment plans. Past performance is not a guarantee of future returns, but a good way to cut the odds of repeating the history of buying high and later selling low is to rebalance in a disciplined way. For many investors, that could mean reducing stock exposure and adding to bonds — especially at times like this, when our impulse is to do just the opposite.

———-

David A. Schneider, CFP, is the principal of Schneider Wealth Strategies, a financial services firm based in New York City. Schneider has more than 25 years of experience in the wealth management industry and specializes in the planning needs of business owners, professionals, and affluent individuals. He is a registered representative of Cambridge Investment Research and an investment adviser representative of Cambridge Investment Research Advisors. Schneider is also a member of the Financial Planning Association.

Note: The S&P 500 and the Dow are stock market indices containing the stocks of American large-cap corporations. An index can’t be invested into directly. Asset allocation does not guarantee a profit or protection against loss.

MONEY

Schwab’s Pitch to Millennials: Talk to (Robot) Chuck

Charles Schwab Corp. courts young investors with low-cost online financial advice.

Charles Schwab Corp. became an icon of the 1980s and ’90s bull market by helping individual investors make cheap stock trades.

Schwab made a smart bet that people were willing to research and pick stocks without the advice of a broker, if only they were given the technology (first just the telephone, and later online) to do it for themselves. But the new generation of investors is already comfortable with technology—what they’re increasingly wary of is picking stocks.

Enter the so-called “robo-advisers,” investment firms that rely on computer algorithms to help investors pick a slate of mutual or exchange-traded funds, typically for a lower cost than traditional advisers. Companies like Betterment and Wealthfront have gained thousands of clients and millions in start-up money, hoping that they might become, essentially, the Schwab of the millennial generation.

Not surprisingly, the actual Charles Schwab wants a piece of the action too.

On Monday the San Francisco discount brokerage unveiled its plan for a product called “Schwab Intelligent Porfolios,” which will launch in the first quarter of 2015.

Schwab isn’t the only investment incumbent to try to jump on this trend. Vanguard has been running a pilot version of a program that takes a similar approach. Fidelity recently announced a venture with Betterment, one of the new upstart firms.

All the new web-driven advice services take for granted that many investors—already used to banking online, shopping on Amazon and sharing personal details on Facebook—will be willing to interact with a financial adviser only online or over the phone. In some cases, the services do away with the flesh-and-blood advisers altogether. Instead, a computer model creates a portfolio of stock and bond funds after a customers fill out an online questionnaire about their goals and risk tolerance. Just as with books and music, putting money advice online has been pushing costs down. Working with a traditional financial adviser, you might pay 1% or more assets per years in fees. Advisers like Wealthfront and Betterment charge less than 0.5%.

The new services also tend to be available to a wider group on investors, with minimum portfolios of $25,000 or less. Many traditional advisers look won’t work with clients unless they have at least ten times that amount.

How does Schwab’s planned new service compare the upstarts? The details about Intelligent Portfolios are still a bit thin. Schwab describes the service as offering “technology-driven automated portfolios” but also says “live help from investment professionals” is available. Schwab is being aggressive on cost: It will not levy any asset-based fee at all, and will require as little as $5,000 to invest. Schwab says it will make money when Schwab’s own exchange-traded funds are included as investment recommendations, and from portfolios’ cash holdings which will be in Schwab bank products. Without knowing which ETFs Schwab ends up recommending, it’s difficult to get a sense of the total amount investors will pay. (Some Schwab ETFs are very low-cost, however.)

What is clear is that the new services have changed the game, pushing companies to get the sticker price for basic advice down as low as possible. For example, an older Schwab investment program, it’s ETF “managed portfolio,” allows investors to talk to advisers over the phone and in branches. It charges investors up to 0.9% of their assets a year.

MONEY stocks

Why You Shouldn’t Buy Ebola Stocks

This colorized transmission electron micrograph (TEM) revealed some of the ultrastructural morphology displayed by an Ebola virus virion.
Frederick A. Murphy—CDC

Companies working on this rare disease are generating interest. But investors should wait.

The recent outbreak of the deadly Ebola virus in Western Africa is now the worst on record, and public health officials are desperately searching for new ways to combat this serious threat to global health. As a result, developmental-stage biopharmas working on this rare disease, like Inovio Pharmaceuticals INOVIO PHARMACEUTICALS INO 2.3214% , NewLink Genetics Corp. NEWLINK GENETICS NLNK 1.5068% , Tekmira Pharmaceuticals TEKMIRA PHARMACEUTICALS CORPORATION TKMR 1.9561% , and Sarepta Therapeutics SAREPTA THERA INC COM USD0.0001 SRPT 2.0408% , have all generated significant interest among investors lately. That said, I think there are three good reasons to shy away from buying these stocks simply because of their experimental Ebola therapies.

Reason No. 1

Every couple years, we hear about a rare disease that has started to spread and now poses serious health risks to humans all over the globe. Not too long ago it was H1N1, aka “swine flu.” After a few weeks of media attention, however, swine flu promptly disappeared from the media’s lexicon seemingly overnight. And remember Middle East Respiratory Syndrome (MERS)? Same story.

The key question for potential investors is the following: Is Ebola likely to become a global health threat? My frank answer is “no.” First, the Ebola virus is extremely rare, with less than 10,000 confirmed cases in this latest outbreak.

Next, the way in which Ebola is transmitted lends itself well to containment. Specifically, the virus is initially spread from animals to humans, and can only be passed from human to human after a patient begins to show signs of infection. Rigorous monitoring programs should thus be sufficient to contain this disease — just as they have done so in past outbreaks. In fact, a recent article appearing in The New England Journal of Medicine detailed how insufficient control efforts early on have been the main reason this outbreak has dwarfed previous ones.

Reason No. 2

Because better screening procedures should dramatically reduce the scope of the current outbreak soon, we are unlikely to see an experimental vaccine become widely available in time to play much of a role in current control efforts. According to GlaxoSmithKline’s experts on the matter, the earliest any of these developmental vaccines could complete the required clinical testing process is by 2016. While Tekmira’s promising Ebola vaccine is now being manufactured on a limited basis, you should bear in mind that this unapproved product will only be used as a treatment of last resort. In short, we are years away from seeing an Ebola vaccine that would be used as a front-line treatment on a large scale.

Reason No. 3

Perhaps one of biggest reasons to be cautious with this group is that they are all clinical-stage companies with limited resources. Specifically, they tend to have huge cash burns because of their clinical programs and a corresponding lack of revenue generating products. At the end of the day, all of these companies are heavily dependent upon dilutive financing to fund their operations; a practice that dampens shareholder value. So even if one of them ends up, way down the road, successfully leading the charge against Ebola, you will probably never make a bunch of money off of it.

Why biotechs are getting involved in the fight against Ebola

Ebola is undoubtedly a serious disease in need of new treatment options. Because of its rarity, however, the commercial potential hasn’t been high enough to entice many companies to pursue this indication with gusto, at least until now. Sarepta, for example, mothballed the development of its Ebola treatment two years ago, and has only recently shown much interest in this program.

Why are these developmental biotechs racing to cure Ebola now? My take is that the push by NewLink, Inovio, Sarepta, Tekmira, among others, to fast-track their experimental Ebola candidates is linked to the government’s increased willingness to provide funds for this research. Since this outbreak spread to the U.S., the Centers for Disease Control and Prevention, and the Department of Defense, have been pouring money into the search for a vaccine.

In conclusion, I don’t think the huge spikes in share price among companies working on Ebola treatments — like the 24% jump in NewLink shares last week, are justifiable given that Ebola is unlikely to transform any of these companies into a huge winner.

MONEY Tech

Why Amazon Is Not A Monopoly

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Kevork Djansezian—Getty Images

Many of the criticisms directed at Amazon of late are nothing more than hyperbole.

The no-holds-barred fight between Amazon.com AMAZON.COM INC. AMZN 1.3705% and Hachette Book Group over e-book pricing took a turn for the worse recently (for Amazon, that is) after a number of prominent commentators suggested the U.S. Justice Department should sanction the e-commerce giant for alleged violations of antitrust laws.

“The company has achieved a level of dominance that merits the application of a very old label: monopoly,” wrote Franklin Foer of the New Republic earlier this month. And just this past week, Nobel Prize-winning economist Paul Krugman claimed in The New York Times that the online retailer “has too much power, and uses that power in ways that hurt America.”

But to anyone familiar with antitrust legislation — more specifically, federal appeals courts’ interpretation of the Sherman Antitrust Act — it’s clear that claims like these are nothing more than hyperbole. While Amazon is certainly a large and growing online retailer, even a liberal interpretation of its share of the domestic e-commerce market puts the figure at less than 50%, which is well below the 70% threshold courts typically require as proof of monopoly power.

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The gap between hyperbole and reality widens when you consider the e-commerce market’s insignificance in the context of overall retail sales. In 2013, for instance, domestic e-commerce sales added up to $263 billion, which is a fraction of the $4.5 trillion in total retail sales processed in the United States over the same period.

And even if a court found Amazon to possess monopoly power — as one could somewhat realistically claim it does in the e-book market — that’s still only half the battle, as it must also be proved that said power is being exercised to the detriment of consumers. According to the Justice Department’s antitrust guidance, “Prohibiting the mere possession of monopoly power is inconsistent with harnessing the competitive process to achieve economic growth.”

To prove Amazon is illegally exercising this hypothetical power, in turn, one would have to demonstrate that it is raising prices or curtailing supply by, among other measures, keeping competitors out of the market through predatory pricing or other prohibited means. Implicit in this is the assumption that Amazon earns monopoly profits — that is, the economic profits that accompany inflated prices. But as many investors know, Amazon has never reported meaningful earnings. In 2013, it generated a mere $274 million in net income from $74.5 billion in sales. That equates to a profit margin of only 0.37%.

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Its willingness to forgo earnings even led former Slate columnist Matthew Yglesias to characterize Amazon as a “charitable institution being run by elements of the investment community for the benefit of consumers.” Amazon founder and CEO Jeff Bezos took issue with that point by arguing that his company isn’t a charity, but instead a business whose strategy is to make customers as happy as possible. Suffice it to say, among monopolies, that is unbecoming behavior.

As a final point, it’s important to appreciate that Amazon isn’t just a retailer; it’s also a marketplace for third parties to sell their wares and, in many cases, to compete against Amazon itself. A recent survey of companies that sell products online found that 84% of them use Amazon’s platform to do so. While the company doesn’t release figures about the size of this channel, one estimate pegged its total third-party sales last year at $73.5 billion. If accurate, this would mean Amazon facilities more third-party business than it records on its own behalf.

Thus, as a matter of law and common sense, there’s little evidence to back the claim that Amazon has exercised or is exercising monopoly power in a way that, as Krugman and other commentators would lead you to believe, hurts America. Does this mean the online giant won’t ultimately accumulate enough market share to do so? No. But it does mean that we have years, if not decades, before that’s a legitimate concern for the Internet retailer.

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