MONEY stocks

Why Main Street’s Gain Is Wall Street’s Pain

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Trader Joseph Mastrolia works on the floor of the New York Stock Exchange while wearing 2015 novelty glasses on New Year's Eve, the last trading day of the year, in New York December 31, 2014. Carlo Allegri—Reuters via Corbis

Monday's 331-point drop in the Dow shows that the tables have turned on Wall Street.

Up until now, the bull market seemed to defy the everyday experience of many Americans: As Main Street households struggled through a recovery that repeatedly fell short of expectations, investors on Wall Street rejoiced.

That’s because the economy was growing fast enough to justify higher share prices, but not so fast that inflation was viewed as a real threat.

This year, though, the script seems to be flipped.

As Main Street Americans finally begin to see the economy improving, it’s the stock market that’s falling short, as evidenced by Monday’s 331-point drop in the Dow.

Monday’s dive was driven by two major economic trends that on the surface should be a boon for U.S. consumers. First, oil prices continued their sudden and surprising slide, driving prices at the pump down with them.

Brent Crude Oil Spot Price Chart

Brent Crude Oil Spot Price data by YCharts

At the same time, the U.S. dollar is now at a nine-year high against the struggling euro. That bolsters the purchasing power of Americans traveling abroad and U.S. consumers purchasing imported goods.

^DXY Chart

^DXY data by YCharts

Thanks to both trends, auto sales last year reached their highest level since before the global financial crisis.

Yet none of this is moving the dial on stock prices so far in 2015.

Some analysts think this could be a recurring trend throughout this year. “Expect a good year on Main Street but a more challenging environment for Wall Street,” says James Paulsen, chief investment strategist for Wells Capital Management.

Why?

Before, lukewarm news on the economic front bolstered the hope that the Federal Reserve would keep interest rates near zero for the foreseeable future. Now, some investors worry that the forces causing oil prices to fall and the dollar to rise — the weak global economy abroad — may be too much for the Fed to tackle even if rates stay low throughout this year.

Moreover, falling oil prices and the strengthening dollar may be giving the market false hope about low inflation.

“Some have argued that lower oil prices give the Fed more room to maneuver. This is a mistake,” says David Kelley, chief global strategist for J.P. Morgan Funds.

While it is true that lower energy prices are reducing inflation in the near term, “falling oil prices are also a big boost for consumers,” Kelly said. “Even if gasoline prices were gradually to move up to $2.75 a gallon by the end of this year from $2.39 at the end of last year, consumers would spend roughly $90 billion less on gasoline in 2015 than they did in the 12 months ended in June 2014.”

Not only is this a financial boost, “it is also a psychological positive with sharp increases seen in consumer confidence readings in the last few weeks,” Kelly said. “This should power an increase in consumer demand which should, in turn, boost prices in other areas.”

TIME Markets

IPOs Raise $249 Billion in 2014 Amid Funding Frenzy

Dow Rises Over 400 Points Day After Fed Signals No Rise In Interest Rates
A trader works on the floor of the New York Stock Exchange in New York City during the afternoon of Dec. 18, 2014. Andrew Burton—Getty Images

Last year was a busy one for public offerings, even without Alibaba’s record-breaking listing

A company looking to raise money in 2014 didn’t have to look too far. Last year was the busiest for initial public offerings since 2010.

From Alibaba Group’s $25 billion IPO to much-hyped smaller listings, such as GoPro and Ally Financial, companies listing on the stock markets raised $249 billion worldwide, according to data collected by Thompson Reuters. Even without Alibaba’s record-breaking offering, last year was a standout period for IPOs.

IPOs picked up pace from 2013: about 40% more companies listed on public markets in 2014 compared to the year prior. They also raised more money. Leaving out Alibaba’s offering, which many agree is a once-in-a-generation kind of IPO, companies raised almost 36% more money year-over-year, according to the New York Times.

The booming market has led some analysts to speculate that it is inflated past realistic valuations, pumped up by overly optimistic investors. For instance, Lending Club’s December IPO valued the online lender at 35 times estimated revenue for 2017, which would put it on par with tech companies such as Facebook.

The public markets weren’t the only place to raise big bucks. The private market also saw big number sums, including Uber’s $1.8 billion fundraising round that valued it at $40 billion. Chinese smart phone maker Xiaomi and online home rental service Airbnb also raised huge sums that valued the startups at $10 billion or more.

Fundraising in both the public and private markets have been driven by a confluence of factors, including low interest rates that have pushed investors toward higher-growth opportunities and a skyrocketing stock market.

While no mega-IPO like Alibaba is set for the year ahead, there are some big-name companies that are scheduled to go public, including file-sharing startup Box and “fine casual” dining chain Shake Shack.

Other potential IPOs remain the subject of much speculation. Investors are watching startups such as Uber, Pinterest and Fitbit carefully, though none have yet indicated when or if they will list on public markets.

This article originally appeared on Fortune.com

MONEY Economy

Economy Delivers a Last-Minute Gift to Wall Street

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Getty Images/Purestock

The U.S. economy isn't exactly partying like 1999, but it came pretty close in the third quarter, growing faster than it has since 2003.

It’s time to stop describing this economic recovery as being “tepid.”

A new report from the Commerce Department Tuesday morning revealed that the U.S. economy had grown at an annual rate of 5% in the third quarter. Not only does that represents a major jump from earlier estimates of 3.9% growth, it marks the economy’s best performance in 11 years. And it’s the second straight quarter in which U.S. gross domestic product grew at or near the historically high mark of 5%.

Wall Street reacted as you’d expect, pushing the Dow Jones industrial average up another 60 points in early morning trading Tuesday to above the 18,000 mark. In just the past week, the so-called Santa Claus rally has now lifted the benchmark Dow up nearly 1000 points.

Most of that rally, however, centered on the bad news surrounding the global economy, as the slowdown overseas is putting a lid on inflation and allowing the Federal Reserve to keep interest rates near zero for some time.

Today’s bump, though, was all about the surprising health of the U.S. economy in general and American consumers in particular.

Earlier reports showed that consumer spending, which represents more than two thirds of total economic activity in the country, had grown a decent 2.2%. But today’s new report updated that figure to 3.2%. “The boost to personal consumption was much stronger than we had expected,” noted Michael Gapen, chief U.S. economist for Barclays Research.

This would imply that the improved job market and rising net worth due to improvements in the stock and housing markets are finally being felt by American households—just in time for the holidays.

MONEY Federal Reserve

Fed Leaves Rates Unchanged, Signals Cautious Stance

Janet Yellen
Federal Reserve Bank Board Chairman Janet Yellen Chip Somodevilla—Getty Images

The Federal Reserve kept interest rates near zero -- and surprised many by not hinting at higher rates.

The Federal Reserve’s Open Markets Committee left interest rates unchanged Wednesday. But in a minor surprise, the central bank declined the opportunity to drop a widely expected hint that it was inching closer to raising rates.

Many on Wall Street and in the financial media had expected the central bank, which wrapped up a two-day meeting in Washington on Wednesday, to prepare markets for higher rates by changing the language of its closely watched economic statement.

The Fed had previously and repeatedly reassured investors that rates would remain low for “a considerable time.” With the U.S. economy steadily improving, many economists expected the phrase to be dropped. But it reappeared in Wednesday’s release.

The Fed’s language did change ever so slightly. The committee, it said, “judges that it can be patient in beginning to normalize the stance of monetary policy.” But it went on to add that it viewed this new assessment as “consistent” with its previous reassurances that the hike would come after a “considerable time.”

The tweaks to the Federal Reserve’s assessment come at a time when the U.S. economy is finally showing signs of sustained strength, with robust third-quarter GDP growth of 3.9% and a November jobs report that was widely regarded as one of the best in months.

But the Fed may have found reason for caution in the stock market’s recent skittishness. Prompted by plunging oil prices and a brewing crisis in Russia, shares have fallen about 5% since December 5. Investors appeared to react positively to the announcement. The Dow had already rallied about 150 points early Wednesday afternoon as news broke that the U.S. planned to normalize relations with Cuba. Immediately following the Fed’s announcement, the Dow was at 17,340, up about 272 points.

 

 

 

 

TIME Investing

This New App Makes It Way Cheaper to Trade Stocks

Robinhood
Robinhood Robinhood

Robinhood wants to convince Millennials to dip a toe into the stock market

Next up for disruption by the Silicon Valley set: Wall Street.

A new startup is aiming to convince Millennials to dip a toe into the stock market by making it cheaper and easier to buy securities. Robinhood, a new mobile-first brokerage that launched its iOS app today, lets users buy U.S.-listed stocks without paying a commission, a cost that typically runs individual investors $7 to $10 per trade.

The app’s slick interface lets users buy securities, track stock performance and keep tabs on their overall portfolio. Users don’t even have to maintain a minimum account balance, a common requirement of similar stock-swapping services.

“People in our age group were not being exposed to what we consider a pretty useful tool for building your wealth,” says Robinhood co-founder Vlad Tenev. He and co-founder Baiju Bhatt launched Robinhood in beta for a few thousand users earlier this year. Already half a million people have signed up to request the app, indicating a heavy appetite for cheaper trades. These users will begin being on-boarded to the app today, and newcomers can download the app to join the waitlist and view different stocks.

The company, which has netted $16 million in venture funding from backers like Andreessen Horowitz and Google Ventures, plans to make money by letting investors trade on margin (basically issuing loans to let customers buy additional stock).

Whether or not young investors really need a service that lets them buy stocks “as quickly as you can call an Uber,” as Bhatt puts it, is an open question. Most active stock pickers fail to outperform the overall stock market. During the first 9 months of 2014, only 9.3% of actively managed mutual funds outperformed the S&P 500, according to the Wall Street Journal — and those funds are managed by people whose job is to be good at picking stocks.

Tenev argues that stock-picking is a good way for young people to learn about investing. “It makes a lot of sense for a first-time investor who is an early adopter of technology and discovers companies through using their products and services,” he says.

That advice flies in the face of a lot of collective wisdom about investing, including from famed businessman Warren Buffet. But for those that are still confident they can beat the market and would like to attempt it more affordably, Robinhood will also be available on Android and on desktop soon.

TIME Money

Millennials Will Make These 15 Companies Tons of Money

Bags of tortilla chips sit in a row at a Chipotle Mexican Grill Inc. restaurant in Hollywood, California on July 16, 2013.
Bags of tortilla chips sit in a row at a Chipotle Mexican Grill Inc. restaurant in Hollywood, California on July 16, 2013. Patrick T. Fallon—Bloomberg / Getty Images

Where Millennials choose to spend their money could pay off serious dividends

The question on every Wall Street trader’s mind these days: “What do millennials like?”

Or at least it should be, according to a new report released Tuesday by Morgan Stanley’s equity strategy team. The report paints a pretty compelling picture of the millennial generation’s spending power five years out.

First, in terms of sheer size, millennials outnumber baby boomers as the largest demographic group. But more importantly, they are aging into some of the spend-happiest years of their lives. In the average lifecycle of the American shopper, spending tends to spike between the ages of 25 and 39:

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Morgan Stanley Research

 

Where they choose to spend that money could pay serious dividends to a few savvy stock pickers. Which brings us back to the question, “What do millennials like?”

“Fast casual dining, hotels, buying online, gaming (social and online, less so casinos), eating organic and healthy, and working out more,” writes Morgan Stanley’s consumer stock researchers. They winnowed down a shortlist of 15 companies that hit those millennial sweet spots, and presented them as a “millennial basket” for investors’ consideration before the flood:

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Morgan Stanley Research

 

 

 

 

MONEY Markets

Are the Media to Blame for Financial Bubbles?

Ritholtz Wealth Management CEO Josh Brown, a.k.a. the Reformed Broker, explains the relationship between media coverage and financial bubbles.

MONEY

Why Does a Hedge Fund Care About Breadsticks? This Video Explains

An "activist" fund just took over the board of the company that runs Olive Garden and wants to change the menu. Another investor is telling Apple what do with its cash. Who are these guys?

TIME financial regulation

The Real Silver Lining of the Absurd AIG Lawsuit

Former U.S. Federal Reserve Chairman Ben Bernanke.
Former Federal Reserve chair Ben Bernanke. Jonathan Ernst—Reuters

It's ludicrous that shareholders are suing the government over their losses, but at least it's a reminder that Wall Street financiers did take losses.

Have I mentioned how outrageous it is that AIG shareholders are suing the government over the AIG bailout that prevented them from total wipeout? Have I compared them to homeowners suing the fire department for getting their furniture wet while saving their home? Have I mocked the bailout critics who admit this lawsuit is “asinine” and “mostly insane” but still claim it’s performing a public service?

Oh, I have? Just last week?

Well, this week, the critics will get their wish, as the architects of the Wall Street bailouts—Hank Paulson, Tim Geithner and Ben Bernanke—are scheduled to testify in this frivolous lawsuit. So this is a good time to concede there actually is a silver lining to this cloud of absurd litigiousness. But it definitely isn’t what the critics think it is. It’s that the AIG lawsuit, while breaking new ground in chutzpah, might help remind Americans that even though government rescued some Wall Street firms, the financial crisis still cost a lot of Wall Street investors a lot of money. The financial sector emerged way better than it would have without government help, and it’s certainly thriving today, but financiers didn’t all emerge unscathed.

The critics have applauded the lawsuit for a very different reason. They expect this week’s testimony to reveal The Truth about AIG, which will surely involve Geithner and Goldman Sachs conspiring with Colonel Mustard to destroy Main Street while bwahahaha-ing all the way to the bank. In fact, the truth about the AIG bailout is already out there. It was infuriating, because bailouts are always infuriating, but it was necessary and ultimately successful. After insuring toxic mortgage assets for every major global financial institution, AIG was dead in the water in September 2008, and its failure in the wake of the Lehman Brothers collapse could have shredded the global financial system. Not only did the $182 billion AIG bailout save the firm, it saved the system. And U.S. taxpayers eventually recouped their entire investment in AIG, plus a cool $22.7 billion in profit.

The bailout helped AIG shareholders, too. Their equity was worth something instead of nothing. Former AIG chief executive Hank Greenberg, the lead plaintiff in the lawsuit, unloaded $278 million worth of company stock in 2010; it presumably would have been worth nothing if the government had let the firm declare bankruptcy and the global economy implode. Greenberg’s complaint that the government unconstitutionally seized his property—and that AIG was entitled to the same bailout terms as much less troubled banks that posed much less of a threat to global financial stability—should have been laughed out of court.

That said, it’s important to recognize that while AIG’s shareholders didn’t lose everything, they lost an unimaginable amount of money. AIG stock plummeted from a high above $150 a share to less than $5 the day of the bailout. The government then took over 79.9 percent of the company, further diluting the value of each share. And when AIG needed more help, there was even more dilution. In his memoir, Stress Test, Geithner recalls how at a time when the country wanted his head for being too gentle with AIG, Greenberg visited him to complain that the Fed had been overly harsh by taking so much equity in AIG. “I told him we hadn’t done the deal to make money, and we’d be happy to sell him back some of the equity if he’d be willing to take some of the risk,” Geithner recalled. Greenberg wasn’t willing, so taxpayers rather than shareholders enjoyed most of the upside of AIG’s recovery.

I helped Geithner with Stress Test, so I’m biased, but I think Greenberg’s pique is silly; there wouldn’t have been any upside for anyone if the government hadn’t stabilized AIG and the rest of the system. At the same time, I think the terms of the AIG bailout were legitimately tough on investors who made bad bets on a reckless firm. They were certainly tougher than the terms of the broader Wall Street bailout known as TARP—and some bankers complained bitterly about TARP’s terms, which were intended to be (and were) tough enough to encourage banks to pay them back as quickly as possible. All of the bailouts were designed to balance the need to quell the panic in the markets and pave the way for economic recovery with the need to protect taxpayers. They ultimately did both.

The larger point, so often missed in the post-crisis too-big-to-fail debate, is that the lavish Wall Street bailouts did not shield all of Wall Street from pain. Critics of the bailouts often say they sent a message that you could invest in Wall Street behemoths without risk, that government would cover all your losses when markets turned sour. It’s amazing this even needs to be said, six years after a financial shock five times as large as the shock that preceded the Great Depression, but that’s simply wrong. Some of the jerks in suits took baths. Main Street bore the brunt of the pain, and that’s not fair, but there was plenty of pain on Wall Street, too.

Lehman Brothers disappeared; its shareholders were wiped out, and its executives all lost their jobs. Investors in Bear Stearns, Fannie Mae, Freddie Mac, Countrywide, Washington Mutual, Wachovia, Citigroup, Bank of America, GMAC, and other firms that got sucked into the crisis took baths, too. Very few of the big Wall Street CEO’s kept their jobs after the bubble burst, although some were fortunate enough to cash out their stock before the house of cards toppled completely. Some savvy investors have taken advantage of the misfortunes of others; David Tepper, a hedge fund manager, made billions by buying bank stocks after the market hit bottom in March 2009, essentially betting on the success of the government rescue plans. But markets always have winners and losers; the bailouts did help some of the losers limit their losses, but they didn’t change that essential capitalist truth.

The even larger point, which should also be clear but most definitely isn’t, is that the Wall Street bailouts were not designed to enrich Wall Street. They were designed to protect Main Street from a Wall Street cataclysm. The goal was to prevent enough financial failure to stem the panic and lay the groundwork for recovery. The goal was achieved. Main Street was losing 800,000 jobs a month during the panic; now it’s gaining more than 200,000 jobs a month. Yes, Wall Street has enjoyed an even healthier recovery. But punishing Wall Street during the panic would not have made things better for Main Street now; it would have accelerated the panic, which would have been devastating for Main Street.

So we should mock the gall of the litigants who are suing the fire department that saved their homes. Still, we can recognize that some of their furniture got wet.

 

 

 

TIME Economy

We Still Haven’t Dealt With the Financial Crisis

Five Years After Start Of Financial Crisis, Wall Street Continues To Hum
A street sign for Wall Street hangs outside the New York Stock Exchange on September 16, 2013 in New York City. John Moore—Getty Images

It often takes years after a geopolitical or economic crisis to come up with the proper narrative for what happened. So it’s no surprised that six years on from the financial crisis of 2008, you are seeing a spate of new battles over what exactly happened. From the new information about whether the government could have, in fact, saved Lehman Brothers from collapse, to the lawsuit over whether AIG should have to pay hefty fees for its bailout (and whether the government should have penalized a wider range of firms), to the secret Fed tapes that show just how in bed with Wall Street regulators still are (the topic of my column this week), it seems every day brings a debate over what happened in 2008 and whether we’ve fix it.

My answer, of course, is that we haven’t. To hear more on that, check out my debate on the topic with New York Times’ columnist Joe Nocera, on this week’s episode of WNYC’s Money Talking:

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