MONEY stocks

What the Financial Press Isn’t Telling Us About Google and Other Tech Companies

Google on iPhone 5
Iain Masterton—Alamy

The search engine's ongoing struggles in mobile highlight problems cropping up throughout the tech sector — yet you wouldn't know it by the reactions of investors and the media.

This was an awful week for tech, as many of the sector’s biggest names announced disappointing results that point to slowing growth and troubled strategies.

Yet you wouldn’t know it by how the markets — or the media — reacted this week.

Late Thursday, the search engine giant Google reported the amount of money that advertisers are willing to pay whenever someone clicks on an online ad continues to fall. So-called “average costs per click” for Google fell 6% in the quarter, compared with the same period a year earlier. This continues a trend that’s been going on for some time. In the first quarter, for example, costs per click sank 9%.

There are two explanations for why this is happening and neither is good news for Google. One is that online sites are increasingly being viewed through mobile devices such as smart phones and tablets, and mobile ad platforms are not paying the premium that traditional web ads have. The other reason is that Google is no longer the only game in town when it comes to online advertising, and Facebook’s recent efforts to boost its mobile presence are clearly succeeding.

Yet instead, most news accounts focused on the rosier parts of Google’s quarterly results, such as the fact that overall revenues grew 22%.

The same thing happened all week throughout the sector:

* eBay

On Wednesday, the online auction site reported sales that fell short of the Street’s expectations. In fact, on a quarterly basis, revenues have been flat for several quarters. Instead, headlines focused on profits meeting consensus forecasts.

* Yahoo

The portal, which is making a huge push to try to be a big player in online advertising, reported on Tuesday that display ad revenues declined. Yet instead, many publications focused on how Yahoo’s mobile efforts were improving or that the company was going to sell a smaller-than-expected stake in Alibaba, the giant Chinese online retailer and auction site that is expected to go public later this summer.

* Intel

Intel shares hit a decade-high after releasing earnings results on Tuesday that showed better-than-expected PC sales expectations and overall revenue growth. As Reuters reported, chief financial officer Stacy Smith said “PC sales had stabilized, easing fears about the four-year decline in computer sales as consumers turn increasingly to tablets and smartphones.”

Great. That means the dying part of the industry is dying a little less rapidly than was previously thought. Meanwhile, investors glossed over the fact that revenues for the mobile and communications chip group sales were down 67% compared with the prior quarter and off 83% versus last year.

* Microsoft

The company announced the biggest layoffs in its history on Thursday, cutting its workforce by 18,000 — many of those coming from its recently acquired Nokia division. As MONEY’s Ian Salisbury reported, the historic cuts show how far this once-dominant tech company has fallen as it struggles to find its place in the sector. Yet many sites looked at the situation as glass-half-full, noting how the stock was rising on news that Microsoft was retrenching.

Of course, that’s what happens when investors fall in love with a particular group of stocks that have collectively posted a better-than-expected run. They start viewing those shares through rose-colored glasses.

MONEY Markets

Markets React to Malaysian Jet Crash and Gaza Invasion

A part of the wreckage of a Malaysia Airlines Boeing 777 plane
A part of the wreckage of a Malaysia Airlines Boeing 777 plane is seen after it crashed near the settlement of Grabovo in the Donetsk region, July 17, 2014. Maxim Zmeyev—Reuters

Investors sold off stocks in response to news that a Malaysian Airlines jet had crashed in eastern Ukraine today, reportedly killing 295 people. Ukrainian government officials said the plane may have been shot down; pro-Russian separatist fighters in the region denied responsibility. Then late in the trading day came reports that Israeli forces had begun a ground invasion of Gaza.

The S&P 500 index of large cap stocks fell more than 1% for the day. The Dow Jones Insutrial Average also declined, closing at 16,977, back below the 17,000 milestone it first crossed earlier this month.

ycharts_chart(2)

Investors in general moved away from risky to safer assets. The 10-year Treasury bond yield fell below 2.5%, down from 2.55% yesterday. A fall in bond yields means a rise in price, and reflects investors being willing to accept a low return in exchange for the safety of U.S. government-backed securities.

MONEY stocks

Stock-Pickers Can’t Keep Up With the Aging Bull Market

Running of the bulls
Simon Greenwood—Getty Images/Lonely Planet Image

The big companies favored by mutual fund managers have substantially underperformed the S&P 500 index this year.

Even fund managers’ best ideas are not working out this year.

In one sign of the poor performance of stock picking by fund managers as the U.S. stock market continues to rally, the largest overweight positions by large-cap fund managers substantially underperformed the broad Standard & Poor’s index over the first half of the year, according to a Goldman Sachs research report.

Those stocks which were the most shunned, meanwhile, posted above-average returns.

Visa, the most overweight position among the 485 large-cap funds included in the Goldman Sachs study, is down 0.4% for the year, while Exxon Mobil, the most underweight, is up 1.1% over the same period.

Overall, well-loved stocks gained 6% on average for the year through June, while the S&P 500 gained 8% over the same time. The most underweight stocks, by comparison, rallied by an average of 10 percent, according to the report.

The underperformance of active fund managers comes at a time when stock pickers were expected to prosper. The aging bull market, which began in 2009, and falling stock market correlations after last year’s big rally were supposed to make 2014 a time when fund managers would be rewarded for picking companies based on their fundamentals.

Yet poor stock selection is one reason why just one in five actively managed large-cap stock funds are beating the S&P 500 for the year so far. Typically, about 40% of managers best the S&P 500 over the same period, said Todd Rosenbluth, director of fund research at S&P CapitalIQ.

“What funds need to do to outperform is find unloved stocks and get in front of it. If they hold the same stocks that other managers are overweighting, then it’s more likely that they are just going to tread water,” Rosenbluth said.

Underweight stocks’ performance this year seems to bear that out. Shares of Goodyear Tire & Rubber, the company with the largest underweighting among consumer discretionary stocks, is up nearly 16% for the year to date, while shares of Essex Property Trust, the most underweight financial company, have rallied 32%.

Other companies with significant underweighting include Apple, PepsiCo, and Ventas, according to the Goldman report.

The lack of a significant market pullback could be another reason for the underperformance, Rosenbluth added. The S&P 500 has not had a pullback of 10%, known as a correction, in three years. That has made it hard for managers who sold during last year’s 30% rally in the S&P 500 to find places to invest their cash, he said.

“Some managers were prudent and sold during the rally, and now they are left wondering what to do,” he said.

MONEY The Economy

A Key Fed Official Says the Job Market is Just Fine. But is He Right?

Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas
Richard Fisher, president of the Federal Reserve Bank of Dallas. Jose Luis Magana—Reuters/Corbis

With a little help from Jonathan Swift, Shakespeare, and World War II, Dallas Fed President Richard Fisher makes the case for why interest rates need to rise soon.

In between references to Shakespeare, beer goggles and Wild Turkey, Dallas Federal Reserve Bank President Richard Fisher— a member of the Federal Open Market Committee that sets the nation’s interest-rate policy— expressed concern Wednesday about the risks caused by the Fed’s ongoing stimulative policies.

Thanks to a dramatically improving jobs picture, according to Fisher, the Fed should not only cut off its bond-purchasing program (known as “QE3″) by October, but the central bank should also shrink its portfolio of assets and begin raising interest rates early next year or sooner.

Whether or not the economy can withstand monetary tightening — fewer jobs means fewer people able to buy stuff — is open for debate. The real question, though, is if the jobs picture is really that strong?

First some context.

In his colorful speech, Fisher, one of the Fed’s leading “inflation hawks,” reiterated his belief that the Fed’s rapidly escalating balance sheet (now at approximately $4.4 trillion) in combination with a near-zero federal funds rate has led to investors having “beer goggles.” (As Fisher explains it, “this phenomenon occurs when alcohol renders alluring what might otherwise appear less clever or attractive.”) This is what he says is happening with stocks and bonds, which are both relatively expensive.

To make his point Fischer quoted Shakespeare’s Portia in Merchant of Venice: “O love be moderate, allay thy ecstasy. In measure rain thy joy. Scant this excess. I feel too much thy blessing. Make it less. For fear I surfeit.”

Portia’s adjectives (joy, ecstasy and excess) describe “the current status of the credit, equity and other trading markets that have felt the blessing of near-zero cost of funds and the abundant rain of money made possible by the Fed and other central banks that have followed in our footsteps,” Fisher said.

Of course, the Federal Reserve hasn’t bought trillions of dollars of debt, and cut the main interest rate to nothing, for no reason. There was something called, you know, the Great Recession — the once-in-a-lifetime cataclysmic economic event from which the country is still recovering.

But, said Fisher, things are improving, especially in the labor market. Not only did businesses add almost 300,000 employees last month, but there are more job openings, workers are quitting more often and wages are rising. Is he right?

Let’s check out some graphs:

Job openings:

ycharts_chart-1

Fisher is right that job openings “are trending sharply higher.” This time last year, there were a little less than 3.9 million job openings. Right now there are more than 4.6 million – an 18% increase.

“Quits”:

quits

The healthier an economy, the higher the number of employees who quit their job to either find another or start a new business. Therefore a higher so-called quits rate, means a healthier labor market.

Like job openings, the number of quits has been rising since bottoming out during the recession. The major difference though is that the number of job openings has almost reached pre-recession levels, while quits has not.

Wages:

wage growth
BLS

Fisher admits that wages aren’t growing “dramatically.” Nevertheless, he cites the Current Population Survey and the most recent National Federation of Independent Business survey to show that wages are on the rise.

However, wage data from the Bureau of Labor Statistics shows that Americans in the private sector are earning $24.45 an hour, only up 1.9% from last year.

But these three metrics aren’t the only metrics to gauge the health of the labor market.

Long-Term Unemployed:

l-t unemployment
BLS

Before the recession, about 1.3 million workers were without a job for longer than 27 weeks. Today, that number is slightly more than 3 million. While that’s significantly better than the post-recession high of 6.8 million in August 2010, there are still a lot of workers who’ve been without a job for a long time.

“Long-term unemployment is still a significant source of slack in the economy and is accounting for a historically large share of the total unemployment rate,” says Wells Fargo Securities economist Sarah House.

Broader unemployment:

l-t2
BLS

And while the unemployment rate may signify the economy is moving closer to full employment, the picture is less sanguine if you look at a broader unemployment rate that takes into account the underemployed (part-time workers who want to work full-time) and discouraged workers. Before the recession that number hovered a little over 8%. It’s now 12.1%. And while it’s trending down, it’s not coming down fast enough. At least according to recent testimony by Federal Reserve Chair Janet Yellen.

Conventional wisdom says inflation will come when wages really start to rise. Some, like Fisher, think we’re getting really close to that point. But if you take into account wage data from the BLS and look at the millions of Americans who aren’t working to their full capacity, it’s not hard to see how tightening monetary policy might make life harder on lots of workers.

MONEY stocks

WATCH: What’s the Point of Investing?

In this installment of Tips from the Pros, financial advisers explain why you need to invest at all.

MONEY stocks

WATCH: The Problem With Investing in Penny Stocks Like CYNK

MONEY's Pat Regnier explains what's behind the phenomenon of the stock that rose 25,000% in days, and why you should beware.

+ READ ARTICLE
TIME stocks

Why a Portuguese Bank’s Problem Is Costing You Money

Explaining the Banco Espirito Santo SA problem

You don’t have money deposited at Banco Espirito Santo SA. You probably don’t own its bonds, or its stock. Or stock in Espírito Santo Financial Group SA, which apparently controls the bank or in Espirito Santo International SA, the Luxembourg holding company that issued the now-faltering commercial paper that is at the center of all this. You probably have never even heard of Banco Espirito Santo, which has been described as one of Portugal’s leading financial institutions, which would be significant if Portugal’s economy was significant. But that nation’s GDP of $220 billion makes it bit player in the European zone. Even Greece is bigger.

Still, troubles at Banco Espirito Santo have spread to other segments of the European banking system and then reverberated across the pond to Wall Street, sending the Dow down 180 points in Thursday morning trading. So even if you owned the bluest of blue chip stock with no exposure to European banking, you still lost money.

How does that work? It’s just another reminder that everything financial in the world is connected in one way or the other. So a seemingly containable problem in a Portuguese bank can quickly find a way into your pocketbook. “The event has hit European financials like a torpedo and has revived investors’ darkest nightmares about Europe,” the Financial Times quoted one equity strategist as saying.

The issue for investors is to decide whether this is a one-off problem or a hint of bigger troubles in Europe, whose economic recovery has lagged that of the U.S. While some are looking for other evidence, others aren’t waiting to find out. They headed for the exits, pushing gold higher and the yield on ultra-secure German bonds lower. Portugal’s stock market took a hit as Banco Espirito Santo’s shares tumbled 17%. Shares of Spanish and Italian banks fell sharply, too. Spain and Italy are bigger economies than Portugal but they’ve had similar problems. So bond yields on Italian and Spanish debt rose and Greece, not surprisingly, finds the market for its own bonds shrinking.

And if a trader for an institution held a long position on Spanish and Italian debt, say, he might forced to sell some other assets to cover that position. Those other assets might be U.S. stocks.

It’s a Portuguese problem, but it’s now your loss too.

MONEY Portfolios

For $50 You Can Push For More Female CEOs — But Is It a Good Investment?

Indra Nooyi, chairman and chief executive officer of PepsiCo.
Indra Nooyi, chairman and chief executive officer of PepsiCo. Bloomberg—Bloomberg via Getty Images

Two new products let you invest in companies led by female executives. Whether this is a good idea depends on what you hope to achieve.

On Thursday, Barclays is launching a new index and exchange-traded note (WIL) that lets retail investors buy shares — at $50 a pop — of a basket of large U.S. companies led by women, including PepsiCo, IBM, and Xerox. This should be exciting news for anyone disappointed by the lack of women in top corporate roles.

After all, female CEOs still make up less than 5% of Fortune 500 chiefs and less than 17% of board members — despite earning 44% of master’s degrees in business and management.

The new ETN is not the only tool of its kind: This past June, former Bank of America executive Sallie Krawcheck opened an index fund tracking global companies with female leadership — and online brokerage Motif Investing currently offers a custom portfolio of shares in women-led companies.

The big question is whether this type of socially-conscious investing is valuable — either to investors or to the goal of increasing female corporate leadership. Is it wise to let your conscience dictate how you manage your savings? And assuming you care about gender representation in the corporate world, is there any evidence that these investments will actually lead to more diversity?

Here’s what experts and research suggest:

Getting better-than-average returns shouldn’t be your motivation. Beyond the promise of effecting social change, the Barclays and Pax indexes are marketed with the suggestion that woman-led companies tend to do better than peers. It’s true that some evidence shows businesses can benefit from female leadership, with correlations between more women in top positions and higher returns on equity, lower volatility, and market-beating returns.

But correlation isn’t causation, and other research suggests that when businesses appoint female leadership, it may be a sign that crisis is brewing — the so-called “glass cliff.” Yet another study finds that limiting your investments to socially-responsible companies comes with costs.

Taken together, the pros and cons of conscience-based investing seem generally to cancel each other out. “Our research shows socially responsible investments do no better or worse than the broader stock market,” says Morningstar fund analyst Robert Goldsborough. “Over time the ups and downs tend to even out.”

As always, fees should be a consideration. Even if the underlying companies in a fund are good investments, high fees can eat away at your returns. Krawcheck’s Pax Ellevate Global Women’s fund charges 0.99% — far more than the 0.30% fee for the Vanguard Total World Stock Index (VTWSX). Investing only in U.S. companies, the new Barclays ETN is cheaper, with 0.45% in expenses, though the comparable Vanguard S&P 500 ETF (VOO) charges only 0.05% — a difference that can add up over time:

image-29
Note: Projections based on current expenses and a $10,000 investment.

If supporting women is very important to you, you might consider investing in a broad, cheap index and using the money you saved on fees to invest directly in the best female-led companies — or you could simply donate to a non-profit supporting women’s causes.

If you still love this idea, that’s okay — just limit your exposure. There is an argument that supporting female leadership through investments could be more powerful than making a donation to a non-profit. The hope is that if enough investor cash flows to businesses led by women, “companies will take notice” and make more efforts to advance women in top positions, says Sue Meirs, Barclays COO for Equity and Funds Structured Markets Sales in the Americas. If investing in one of these indexes feels like the best way to support top-down gender diversity — and worth the cost — you could do worse than these industry-diversified offerings. “Investing as a social statement can be a fine thing,” says financial planner Sheryl Garrett, “though you don’t want to put all of your money toward a token investment.” Garrett suggests limiting your exposure to 10% of your overall portfolio.

TIME Economy

Stocks Fall for a Second Day; Nasdaq Slumps

(NEW YORK) — U.S. stocks declined in afternoon trading Tuesday as investors waited for corporate earnings reports due out this week. Technology and small companies fell sharply. The Dow Jones industrial average dropped below 17,000 from the open after crossing that threshold last week on news that employers have been hiring more.

KEEPING SCORE: The Dow fell 88 points, or 0.5 percent, to 16,935 as of 2:21 p.m. Eastern time. The Standard & Poor’s 500 fell 10 points, or 0.5 percent, to 1,967.

The tech-heavy Nasdaq composite fell 50 points to 4,401, a loss of 1.1 percent. It hasn’t fallen that much in two months. Pandora Media, a music streaming service, fell 6 percent. Two other tech stars, Facebook and Netflix, fell more than 3 percent each.

BUY SAFETY, SELL RISK: Utilities rose 0.7 percent, the only sector of the 10 in the S&P 500 that rose. Telecommunications stocks fell the most, 1.3 percent. The Russell 2000, which tracks small-company stocks, fell 12 points, or 1 percent, to 1,174.

WATCH THOSE EARNINGS: With major stock indexes near record highs, investors will be scrutinizing second-quarter earnings reports for evidence the run-ups have been justified.

Financial analysts expect earnings per share for the S&P 500 rose 6.6 percent from a year earlier, according to S&P Capital IQ, a research firm. That is about double the increase in the first quarter. They expect earnings growth to accelerate for the rest of the year, topping 11 percent in the fourth quarter.

The earnings reporting season unofficially kicks off after the close of U.S. stock markets Tuesday when aluminum producer Alcoa reports its results. Wells Fargo, the No. 1 home mortgage lender in the U.S., reports Friday.

BULL MARKET PETERING OUT? Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research, doesn’t think so. But he’s not surprised investors are jittery and selling a bit. He notes that the S&P 500 has risen for 1,940 days since its 2009 low, the fourth longest bull market since World War II.

“The longer it gets out of line with historical patterns,” he says, “the closer we get to fizzling out.”

DEAL SWEETENER: Drugmaker AbbVie fell $1.60, or 2.8 percent, to $55.80 after news that it raised its offer to buy another drug company, Shire. The target, known for its rare-disease drugs, has rejected three AbbVie offers.

EUROPE: France’s CAC-40 fell 1.4 percent and Germany’s DAX fell 1.3 percent. Britain’s FTSE 100 dropped 1.2 percent.

BONDS AND OIL: U.S. government bond prices rose. The yield on the 10-year Treasury note fell to 2.57 percent from 2.61 percent late Monday. In energy markets, U.S. crude for August delivery fell 45 cents to $103.09.

MONEY stocks

7 Marijuana Stocks for a Buzzworthy (But Risky) Pot-folio

Agricultural Facility Recent Planting, Medical Marijuana Inc.

With marijuana legalization riding high, investors are looking for ways to play the trend. So far, though, even the biggest companies in this green rush have yet to turn a profit.

Earlier today, pot went on sale legally in Washington state for the first time ever, following in the footsteps of Colorado. A day earlier, New York became the 23rd state to permit the use of medical marijuana.

Throughout the country, marijuana legalization is going ganja-buster — leading many to wonder how they can profit from this trend.

Several private equity funds recently launched to invest in marijuana-related companies and startups, including one led by none other than the bobo bible, High Times magazine.

But what about retail investors? You’d think that the mutual fund and exchange-traded fund industries would have jumped on this green rush already. After all, there are specialty ETFs that let investors bet on such niche trends as fertilizer, fishing, and even water. But so far such an investment vehicle remains a pipe dream.

In the absence of a simple, off-the-shelf fund, investors can turn to individual equities. But be careful: Many stocks that are trying to ride the Pineapple Express are tiny micro-cap companies or penny stocks that are quite volatile and risky. Moreover, regulators have begun warning investors to watch out for pot-related “pump-and-dump” schemes, in which speculators talk up a stock and then sell before their inflated projections lose air.

In the Ganja universe, here are some of the biggest companies, based on market value, with their strategies and risks highlighted. Keep in mind that all of these “big” marijuana stocks are actually shares of tiny, still-profit-less companies.

GW Pharmaceuticals (Ticker: GWPH; share price: $92.60; market value: $1.4 billion)
Strategy: Cannabis-based pharmaceuticals. The company’s Sativex is already being used in several countries to treat spasticity related to multiple sclerosis. GW is also working on a treatment for severe childhood epilepsy based on cannabis extract.
YTD Performance: +132.3%
2013 Performance: N/A
2012 Performance: N/A
Profitable: No
Valuation: Price/sales ratio: 29.0 (S&P 500’s P/S ratio: 1.8)

Medbox (MDBX; $17.75; $537 million)
Strategy: Dispensary services. The company manufacturers self-service kiosks that dispense
medicines including marijuana.
YTD Performance: —0.3%
2013 Performance: —70.1%
2012 Performance: +4,819.4%
Profitable: No
Valuation: Price/sales ratio: 77.5

Cannavest (CANV; $11.37 $381 million)
Strategy: Makes and markets cannabis related products, including hemp oil.
YTD Performance: —60.0%
2013 Performance: +470.0%
2012 Performance: +150.0%
Profitable: No
Valuation: Price/sales ratio: 44.8

Advanced Cannabis Solutions (CANN; $7.50; $101 million)
Strategy: Leases growing space and related facilities to licensed marijuana business operators.
YTD Performance: +138.5%
2013 Performance: +221.8%
2012 Performance: —99.0%
Profitable: No
Valuation: Price/sales ratio: N/A

Medical Marijuana (MJNA; $0.20; $105 million)
Strategy: A holding company with diversified businesses ranging from consumer products to services, including security and surveillance for cannabis-related businesses.
YTD Performance: +27.1%
2013 Performance: +53.5%
2012 Performance: +512.1%
Profitable: No
Valuation: Price/sales ratio: N/A

GrowLife (PHOT; $0.10; $81 million)
Strategy: A marijuana equipment maker that sells hydroponic gardening gear.
YTD Performance: —27.8%
2013 Performance: +308.1%
2012 Performance: —75.3%
Profitable: No
Valuation: Price/sales ratio: 11.4

Cannabis Sativa (CBDS; $6.40; $75 million)
Strategy: The former sun-tanning company is pushing into the marijuana industry, producing cannabis-based oils and edibles. Its new CEO is Gary Johnson, the former Libertarian Party presidential candidate and a two-term governor of New Mexico.
YTD Performance: +990.0%
2013 Performance: —11.0%
2012 Performance: +12.4%
Profitable: No
Valuation: Price/sales ratio: 1000.0

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