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NEW YORK (Fortune) — The Federal Reserve has spent the past year cleaning up after a housing bubble it helped create. But along the way it may have pumped up another bubble, this time in stocks. To head off the worst downturn since the Great Depression, the central bank has slashed interest rates while funneling money to banks. The Fed has mostly won praise for its efforts. The pace of job losses has slowed, and there has been a modest recovery in output. At the same time, stocks have bounced back with startling speed. Since global markets hit their bottom in March, the S&P 500 has jumped 51% — even as the outlook for economic recovery remains dim. “This is the most speculative momentum-driven equity market since the early 1930s,” Gluskin Sheff economist David Rosenberg wrote in a note to clients Monday. Of course, stocks have rallied in part because investors perceive the worst-case scenario — a 1930s-style Depression — is off the table. And while the gains have been remarkable, they come after an even bigger decline. The S&P is still down 16% since Lehman Brothers collapsed in September.But while most people take the rise in stocks as a hopeful sign for the economy, some see evidence that the Fed has been financing a speculative mania that could end in another damaging rout. Recent weeks have brought huge rallies in some of the lowest-quality stocks — including firms such as AIG (AIG, Fortune 500), Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) that are being propped up by the government and are unlikely to return to health any time soon.What’s more, this year has brought an 80% surge in emerging market stocks, while the dollar has posted a 10% decline since March. A declining dollar and surging emerging markets were the hallmarks of the credit-fueled bull run earlier this decade.”We have put the band back together on a lot of this,” said Howard Simons, a strategist at Bianco Research in Chicago. “That couldn’t have happened without liquidity.”Though liquidity is admittedly a nebulous concept, there’s no question that central bankers around the globe have poured huge amounts of money into the markets to ease the financial crisis. Given free money, investors’ appetite for risk shoots higher and they gobble up stocks. That’s good, except when the outlook for economic growth doesn’t seem to support the higher stock values. “Many observers are wondering whether the strong stock market rebound since mid-March is already a forerunner of the next recovery or simply driven by a reflux of liquidity into riskier asset markets,” Deutsche Bank Research analyst Sebastian Becker wrote in a report last month. Rosenberg, who notes that consumer credit has dropped an unprecedented five straight months, said it’s far from clear the recession is over. He says the risk of a market relapse later this year is high.Simons said another factor that could work against recovery is that short-term interest rates could soon head higher, judging by action in futures markets. That could raise companies’ borrowing costs at a time when policymakers have committed to holding rates near zero to restore economic growth.0:00
/1:22Greenspan: New rules requiredFed officials have stressed that they will start to unwind their financial support programs at the earliest sign of inflation. Given the cost of cleaning up after the last bubble, Becker writes that “this time, policymakers are unlikely to remain inactive should they suspect the formation of another asset price bubble.” But it’s clear that bankers are loath to pull back on their support for the financial system before it’s clear the economy has staged a stronger recovery. And the Fed has a long and painful history of ignoring asset price inflation. “The central bankers have this textbook belief that the only inflation is the kind that appears in consumer price indexes,” said Simons. “They don’t believe what they’re doing could cause an asset price bubble.” For now, Fed chief Ben Bernanke and other central bankers can console themselves for now with stable consumer price inflation readings in major economies. But comparing the bankers with a driver pulled over for speeding for the umpteenth time, Simons said, “At some point, you have to say maybe your speedometer’s broken.”

Source:CNN

TOKYO (Reuters) — Asian shares tumbled from multi-month peaks on Wednesday, in a sell-off led by the Shanghai market, as investors booked in profits ahead of more company earnings.Japanese shares gained, but stock indexes in Australia and Hong Kong fell after strong run-ups in the past two weeks. The MSCI Asia-Pacific index excluding Japan fell 2.6%, flagging after a climb this week to a 10-month high.0:00
/1:01Japanese electronics sufferIn Europe, stock eased after Chinese stocks fell as investors worried banks there may start to restrict lending, and S&P futures signaled a soft start on Wall Street.Shares in China State Construction Engineering Corp, whose 7.3 billion IPO last week was the world’s largest in a year, jumped 70% at its debut, besting expectations — but also stirring concerns about asset price bubbles.It was the second big listing in Shanghai since China resumed IPOs last month, and followed on the heels of Sichuan Expressway’s runaway success on Monday.”Such strong debuts of new listings will become a great boost for forthcoming IPOs, though worries have also strengthened of overall high valuations of the market,” said Qian Qimin, deputy head of research at Shenyin & Wanguo Securities in Shanghai.BBMG Corp, one of China’s largest building materials manufacturers, also jumped 60% at its debut in Hong Kong..But the Hang Seng index shed 3% after ending at its highest in nearly 11 months on Tuesday, and the Shanghai Composite Index closed down 5%, its biggest daily loss in eight months.In Tokyo, the Nikkei average edged up 0.3% to its highest close in seven weeks, a day after snapping its longest string of consecutive gains since 1988.”It’s natural that the market takes a breather due to investor fatigue after a nine-day winning streak and caution before earnings reports,” said Fumiyuki Nakanishi, manager at SMBC Friend Securities.”But foreign investors appear to have a bullish view on the outlook for the stock markets and that’s providing support to blue-chip stocks and a solid floor for the Nikkei.”Japan’s market was buoyed by high-tech shares such as Tokyo Electron. After the bell Nomura Holdings Inc, its largest brokerage, posted its first profit in six quarters, and Toshiba Corp announced a smaller-than-expected quarterly operating loss thanks to solid chip prices.Australian shares shed 0.6%, with top investment bank Macquarie Group up on relief that its operations were improving. Shares in BHP Billiton (BHP), which agreed with some customers to take a 33% price cut for contracted iron ore shipments, fell 1.5%.The Dow Jones industrial average closed down 0.13% at 9,096.72 on Tuesday. The Standard & Poor’s 500 Index fell 0.26% but the Nasdaq Composite Index rose 0.39%.Weak U.S. consumer confidence in the previous session weighed on Shanghai copper and on oil, which slid below 67 a barrel and extended losses from Tuesday when industry data showed a larger-than-expected rise in crude inventories last week.Gold made little headway after a sharp drop to its lowest in nearly two weeks on Tuesday. Spot gold stood at 935.60 an ounce, up from the low of 933.70 the previous day.In the currency markets, the dollar edged up from this year’s trough against a basket of currencies set on Tuesday, while the euro eased 0.3% to 1.4122, slipping from this week’s eight-week high.The yen edged up, capitalizing on profit-taking in higher yielding currencies, to standing at ¥94.13 per dollar.Shorter-dated U.S. Treasury debt prices firmed after falling on Tuesday following weak results at a record 42 billion sale of two-year notes.The auction cast doubt on investor appetite for U.S. government debt and made the market nervous about big auctions of five-year notes on Wednesday and seven-year notes on Thursday.

Source:CNN

NEW YORK (Reuters) — U.S. Treasurys rose Friday, sending benchmark yields to their lowest in nearly four weeks, as a weak stocks outlook and signs of subdued inflation allowed bonds to bask in the glow of three well-received auctions this week.Bond investors shrugged off data showing a larger than expected jump in personal income in May and focused instead on a tame reading on price pressures in the same report, suggesting the Federal Reserve’s super-easy monetary policy has yet to spur inflation.Bonds were still on a firm footing after this week’s record volume of debt auctions, calming worries over the mounting national debt, and a dip in stock index futures only enhanced the allure of Treasurys.0:00
/2:24Buffett: No recovery, yet”The Treasury market’s gains may be from a feeling of relief that we are not seeing any kind of evidence that the consumer is ready to come back on track yet, with spending in line with consensus, and in the afterglow of this week’s successful auctions,” said Kevin Flanagan, fixed income strategist for global wealth management at Morgan Stanley, in Purchase, New York.Benchmark 10-year Treasury notes traded 9/32 higher in price for a yield of 3.51% versus 3.55% at Thursday’s close. During the early-morning rally, yields fell as far as 3.50%, their lowest since the start of June.Next up for bonds, consumer sentiment data is due at 9:55 a.m.

Source:CNN

NEW YORK: What’s that sound? That rumbling from Wall Street? The broad market has cooled off this month. But some stocks are taking the June swoon in stride, thank you very much.It’s what basketball broadcaster Marv Albert would describe as the crowd taking up the chant of defense. Many utility stocks, due to their relatively steady business of collecting monthly payments and providing investors with fat dividends, are actually up this month. Boring slow-growth telecoms Verizon and Embarq are also up in June. So are stodgy consumer staples firms like J.M. Smucker, General Mills and Clorox. But where oh where are the health care stocks? They’re down along with such losers as banks and tech. The difference is that health care stocks are often viewed as good hiding places in a recession. After all, if you’re concerned about your job security, you might be willing to convince your kid that he doesn’t need a new pair of Nike LeBron VI “kicks” for 140. But if Junior comes down with the sniffles, are you not going to take him to the pediatrician?Yet, the S&P Healthcare Index is flat so far this month, while Big Pharma giant Merck (MRK, Fortune 500), insurer UnitedHealthcare (UNH, Fortune 500) and biotech firm Genzyme (GENZ) are all down nearly 10%Jack Ablin, chief investment strategist with Harris Private Bank in Chicago, summed up the problem in one word: politics.”The sector is like a yo-yo tethered to the conversations in Washington. There is cause for concern because of the potential for upheaval,” he said.President Obama is eager for health care reform. But there is little consensus on how to do it. Will there actually be a public health plan? Will drugmakers, which have already agreed to some price cuts for seniors in Medicare, be forced to go even further? With all those unanswered questions, Ablin said that health care stocks are trapped in a no-win situation. “Health care took a back seat during the rebound, but now it’s role as a typical defensive area in the market has been undermined as well,” Ablin said. “The perception is that it will no longer be business as usual so investors are worried about the impact of reform on profits.”Talkback: What do you think needs to be done to reform the nation’s healthcare industry? Leave your comments at the bottom of this story. Along those lines, Cowen & Co. pharmaceutical analyst Steve Scala did an analysis of how much of a profit hit the big drug companies could take as a result of their agreement to fund half of the cost of brand-name drugs for seniors falling into Medicare’s so-called “doughnut hole” of coverage.Scala wrote in a report Tuesday that filling this hole would be “costly but manageable.” He found that the companies that would likely suffer the largest drop in profits were Eli Lilly and AstraZeneca while Wyeth, GlaxoSmithKline and Pfizer would experience the smallest decline in earnings.0:00
/2:50The great health care debateTed Parrish, co-manager of the Henssler Equity fund, agreed that the possibility of a real change to the way big health care firms do business is more likely now than at any point in the past few decades. For that reason, he said his fund, which usually has had heavy exposure to the health care group, has been trimming its positions in pharmaceutical firms, HMOs and medical device makers. Simply put, even if you believe that the long-term demographic trend favors healthcare — i.e. Baby Boomers aging and needing more medical attention — treating illness may no longer be as profitable. “It’s clear that health care costs have to come under control. We’ve known for years something has to be done and this time it looks like reform is for real,” Parrish said. Still, this doesn’t mean that there are no opportunities in health care. For one, the changing landscape is likely to lead to more consolidation. There already have been two blockbuster mergers announced this year — Pfizer buying Wyeth and Merck’s acquisition of Schering-Plough. More recently, generic drugmakers and biotechs have become the focus of the M&A market, with generic leader Watson Pharmaceuticals (WPI) buying privately held Arrow Group for 1.75 billion and diversified healthcare giant Johnson & Johnson (JNJ, Fortune 500) scooping up cancer treatment specialist Cougar Biotechnology for 1 billion.Parrish said generics firms, which make cheaper versions of drugs that are no longer protected by patents, should continue to do well given the focus on reducing the cost of medication. His fund owns shares of Israeli-based Teva Pharmaceutical Industries (TEVA), the world’s largest generic drug firm. And shares of Teva, Watson and fellow generic maker Mylan (MYL, Fortune 500) are all up year-to-date. As for biotech, Parrish thinks more big firms like Johnson & Johnson, which his fund also owns, will seek to broaden their pipeline with biotech acquisitions. But instead of gambling on the biotech firms themselves, many of which are unproven and unprofitable, he’d rather own solid leaders like J&J that have a history of making smart deals.”It’s difficult to pull the trigger on biotechs because a lot of them are one-trick ponies,” Parrish said.Still, as long as investors remain in the dark about what exactly health care reform is going to look like, much of the sector will probably remain stuck in Wall Street’s sick ward — regardless of whether recovery or recession fears rule the daily headlines.Talkback:What do you think needs to be done to reform the nation’s healthcare industry?
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NEW YORK: Stocks were headed for a higher opening on Tuesday morning as investors reacted to Moody’s saying it will maintain the United States’ credit rating at triple-A. They also awaited the beginning of the two-day meeting of the Federal Reserve.At 5:35 a.m. ET, Dow Jones industrial average, S&P 500 and Nasdaq 100 futures were all positive. Futures measure current index values against perceived future performance and offer an indication of how markets may open when trading begins in New York.Stocks sank Monday, ending at three-week lows, after the World Bank issued a bleak outlook on global growth and a sell off in commodity prices raised doubts about the prospects of an economic recovery. Economy: Existing home sales for May are due out after the start of trade from the Census Bureau. Sales are expected to have risen to a 4.82 million unit annual rate.Tuesday also brings a report on mass layoffs from the Labor Department. Mass layoffs refers to the number of layoff announcements involving at least 50 workers.Meanwhile, investors are gearing up for a key meeting of the Federal Reserve, which begins Wednesday. Companies: Tech bellwether Oracle reports earnings after the close. It’s expected to have earned 44 cents per share after earnings 47 cents a year ago. International: Asian markets closed off almost 3%. European indexes were trading up 1/2% by mid-day GMT. Oil and money: The price of oil fell 44 cents a barrel to 67.06. The dollar fell versus the euro and the yen but rose against the British pound.

Source:CNN

NEW YORK: Congress has finally passed the so-called “cash for clunkers” bill and President Obama is expected to soon sign it into law. So if you have an old gas guzzler you’ve been wanting to trade in, you could wind up getting a voucher for a new car.But even if you already own a fuel-efficient car — or even no vehicle at all — you might be able to benefit. Some analysts think that steel companies and scrap recyclers could get a bump in demand and be worth buying.The cash for clunkers bill could boost new auto sales by between 200,000 and 400,000 vehicles in the second half of the year, according to some estimates. That’s not a huge amount. But any bit could help the depressed steel industry, which counts the auto companies among its biggest customers. U.S. Steel (X, Fortune 500) (“Michael, we’re bigger than U.S. Steel!”), AK Steel Holding (AKS, Fortune 500) and Arcelor Mittal (MT), the Luxembourg-based company that is the world’s largest steel producer, could all see a boost. 0:00
/3:47How can GM prosper?Sales to the transportation industry, including the automotive sector, accounted for 13% of U.S. Steel’s revenue in 2008, according to filings with the Securities and Exchange Commission. And nearly a third of AK Steel’s sales last year came from the auto industry. So it goes without saying that anything that helps to turn around auto sales could be welcome news for steel companies.In fact, Morgan Stanley steel analyst Mark Liinamaa upgraded shares of U.S. Steel and AK Steel earlier this month. In his report, he specifically cited AK Steel as a company that could benefit as the program “could significantly boost auto steel sales.”Talkback: Will cash for clunkers help boost auto sales? Are you interested in participating in the program? Leave your comments at the bottom of this story. There may be other beneficiaries too. Eric Prouty, an analyst with Canaccord Adams, pointed out in a report last week that scrap recycling firms such as Schnitzer Steel Industries (SCHN), SIMS Metal Management (SMS) and Metalico (MEA) (not to be confused with heavy metal legends Metallica) could also see extra sales. “The junking of old cars would help create more scrap for these recyclers to process, while the production of new vehicles would generate manufacturing-related scrap and lead to an increase in overall steel demand,” Prouty wrote. Good news already priced in?Of course, investors shouldn’t expect a tidal wave of business for these companies.”The number of scrapped vehicles is likely to be relatively small compared with the overall volume of scrap material generated in the US each year,” Prouty wrote. “As a result, any impact on scrap prices is likely to be minimal. Still, scrap processors would be happy to get their hands on any additional material,” he said.In addition, the fundamentals for steel companies remain incredibly weak. U.S. Steel and AK Steel are both losing money and are not expected to return to profitability until 2010. But there are some signs of improving demand. U.S. steel industry leader Nucor (NUE, Fortune 500) sparked a rally across the entire sector last week when chairman and CEO Dan DiMicco said in a statement that “order entry has improved in recent weeks.” Nucor, nonetheless predicted a quarterly loss for the second quarter, albeit a narrower loss than it posted in the first quarter.Finally, it’s also worth pointing out that shares of many steel companies have soared since early March as hopes of an economic recovery have taken root and commodity prices have taken off. Shares of U.S. Steel and Schnitzer Steel have more than doubled in the past few months while AK Steel’s stock has tripled. That probably means that a lot of momentum oriented traders have been bidding the stocks higher and that much of the expected increase in demand later this year could already be priced into the stocks. Still, if you are confident that the economic recovery is for real and that cash for clunkers will be a big success for the auto industry, the steel stocks are probably not a bad bet — even after their surge. Just keep in mind that they are going to be extremely volatile. Any hint that the worst may not be over for the auto sector and the broader economy could send these stocks tumbling once again. In fact, that’s exactly what happened Monday in the midst of a broad market sell-off on fears about the health of the global economy. U.S. Steel and Arcelor Mittal each fell 7% while AK Steel plunged 10%. So investors need to be careful or they could wind up exchanging cash for stocks that turn out to be clunkers. Talkback:Will cash for clunkers help boost auto sales? Are you interested in participating in the program?
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NEW YORK: The stock market rally has stalled in June. And that has to make you wonder if this is just a healthy pause after a three-month long surge — or the beginning of another brutal leg down like we had last summer.It hopefully is the former. After all, it does seem as if troubled financials such as AIG (AIG, Fortune 500), Citigroup (C, Fortune 500) and Hartford Financial Services (HIG, Fortune 500) are on more solid footing now than they were in early March.But they’re not exactly healthy yet either. So following a stretch in which the Hartford’s shares tripled and AIG’s and Citigroup’s stocks quadrupled — all from admittedly low bases — it’s not surprising that shares for these three have pulled back this month.”At the March lows, we were on the precipice about to jump off. So it’s a natural reaction to pause, and is not reason for more doom and gloom,” said Richard Hughes, co-president of Portfolio Management Consultants, an investment firm with 7.5 billion in assets under management. Other “hot” stocks of the spring awakening rally have also cooled off so far in June. Several retailers, such as Gap (GPS, Fortune 500) and Abercrombie & Fitch (ANF), are down after enjoying a nice pop from March through May.Simply put, investors might finally be coming to grips with the notion that the economy may take more time to bounce back than originally thought. With the unemployment rate still rising, it’s hard to imagine a quick recovery.That’s not necessarily a bad thing though. If anything, it’s encouraging that investors finally seem to be paying attention to reality.”During the rally, ‘less bad’ news was being interpreted as good. Now, less bad news is being interpreted as still bad,” Hughes said. “That’s healthy. People are not looking at things with rose-colored glasses any more.” Talkback: Is the recent market slump a healthy pullback or signs of more bad economic news to come? Leave your comments at the bottom of this story. That could also mean that some of the recent fears about the Federal Reserve fanning inflation flames by keeping rates artificially low may be premature.”The market was worried that the Fed was not going to take away the punch bowl before the party was over and that ignited inflation concerns,” said Roger Bayston, a portfolio manager in the fixed income group at money manager Franklin Templeton Investments. “But it may be dawning on people that are not enough people at the party yet to drink from the punch bowl.”Along those lines, investors appear to be regaining their appetite for bonds and other less-risky investments in recent days. 0:00
/6:05Risks of a ‘w’-shaped recoveryThe price of the 10-year Treasury note has edged higher, pushing the yield down to about 3.62%. Bond prices and rates move in opposite directions, and the yield on the 10-year flirted with 4% last week.And the utility sector, which lagged while banks, retailers and tech stocks soared, is one of the few sectors that are up so far in June. Utility stocks, in addition to being less cyclical, also tend to pay solid dividends. That makes them, much like bonds, attractive to more conservative investors who seek steady income streams. “Across the board, what you are seeing is a return to investors looking at strategies to lower volatility,” Bayston said. “Over long periods of time, fixed-income investments offer that.” It’s also worth noting that even though this month hasn’t exactly been a slow one for financial news — with the bankruptcy of GM (GMGMQ), oil prices and gas prices rising, and regulatory reform all serving as juicy headlines — June is still usually a bit of a snooze compared to July.Is the economy improving? Earnings will tell the storyNext month, investors will have tons of quarterly corporate results to digest. These reports, most notably the guidance companies provide for the third quarter and remainder of the year, will give investors even more concrete clues about just how quickly the economy is recovering.Are corporations feeling more confident about how they’ll do in the second half of 2009? That’s crucial information even if you are not an active investor. The faster that companies big and small begin to think that their sales and profits are about to turn for the better, the more likely they will be to start producing more goods and hire again. But unfortunately during the rally, investors had been conveniently ignoring the fact that, even if the economy is starting to bottom out, profits are likely to remain weak for sometime. FedEx served as a sobering reminder of that Wednesday morning.FedEx warned that earnings for its fiscal first quarter, which ends in August, will be in a range of 30 cents to 45 cents a share, substantially lower than the 68 cents per share analysts were forecasting. And it’s not just a matter of FedEx (FDX, Fortune 500) missing expectations. The company reported a profit of 1.23 in the same period a year ago.FedEx probably won’t be an anomaly. Hughes said investors should not expect healthy profits from many companies for awhile, given that consumers, faced with a backdrop of rising unemployment and higher gas prices, are still wary. “The cold reality of the economic situation is setting in. Earnings growth is going to be muted for the foreseeable future. Economic headwinds will make the results tepid at best,” he said. “Much of the rally has been momentum driven and we’d like to see the fundamentals catch up.”Ron Sweet, vice president of equity investments with USAA, a money management firm in San Antonio, added that there is only so much more that companies can do with cost-cutting to bolster profit margins. So he’s concerned that the market has rallied too sharply in too short a period of time.”Nobody knows what the new normal for earnings will be. There is still lots of uncertainty,” Sweet said. “There comes a time when earnings have to be driven by top-line growth and people may not be factoring that in just yet. Where are sales going to come from? You are eventually going to need real demand.” Talkback: Is the recent market slump a healthy pullback or signs of more bad economic news to come?
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NEW YORK: Has rally fatigue finally set in on Wall Street? Stocks have been relatively flat following solid gains in March, April and May.All of a sudden, investors are finding things to worry about again. The spike in long-term Treasury yields and oil prices has people concerned that inflation may be around the corner. And if bond rates keep rising, that could jeopardize an economic recovery.But a pause in this rally may not necessarily be a bad thing. In fact, one is long overdue. The surge since the March 9 lows was really just a prolonged sigh of relief. The market wasn’t necessarily charging higher on hopes of a rapid and robust recovery. Instead, stocks were skyrocketing on the notion that not every big bank was going to fail or need to be nationalized. Not every retailer was destined for Chapter 11 bankruptcy or outright liquidation. The unemployment rate wasn’t going to head to Depression-era levels.This is reflected in the types of stocks that have led the market higher. Eight of the ten best performers in the S&P 500 during the past three months are companies whose stock prices are still in the single-digits, according to Thomson Baseline. That list includes struggling retailer Office Depot (ODP, Fortune 500) and that little insurance company owned by you and me called American International Group (AIG, Fortune 500). 0:00
/4:48Searching for quality stocksWhat’s more, nine of the S&P 500’s top twenty stocks since mid-March are expected to lose money in 2009, such as Ford Motor (F, Fortune 500) and beleaguered Ohio-based banks Fifth Third Bancorp (FITB, Fortune 500) and Huntington Bancshares (HBAN). And get this, profits for the 166 stocks in the S&P 500 that are up at least 50% during the past three months are expected to decline, on average, 61% this year. Their long-term debt-to-capital ratio is, on average, 42% compared to the average of 34% for the S&P 500 as a whole.Talkback: Are you investing in or trading stocks? If so, what types of companies are you buying right now? Leave your comments at the bottom of this story. Simply put, the market is rewarding companies with poor fundamentals.”Trash and junk has really rallied hard. When you look at what’s done well, it’s a lot of companies with weak balance sheets while quality has lagged. I definitely would not be wading into junk at these levels,” said Haag Sherman, managing director of Salient Partners, an investment firm based in Houston.Part of what’s going on is just simple, good old-fashioned speculation and day trading. With the economy at least showing some signs of pulling out of what many thought was a death spiral, investors are willing to take on more risk these days.But long-term investors need to avoid the temptation to chase performance at stocks that have had astonishing returns in the past three months since so many of these “winners” remain in financial trouble.Just take a look at General Motors (GMGMQ). The stock has more than doubled in the week since it was delisted from the New York Stock Exchange and moved to the Pink Sheets. But with GM filing for bankruptcy, these shares will eventually be canceled. So they may make a decent short-term trade, but they’re a sucker’s bet for an actual investor. Over time, stocks tend to move up and down based on corporate earnings growth — or lack thereof. At some point, the fact that profits (or losses) aren’t as awful as people expected them to be won’t be enough to justify more gains. Investors will soon need concrete proof that earnings are improving and being driven by actual increases in demand (i.e. improving sales) not cost-cutting (i.e. more layoffs) or accounting gimmicks.Daniel Alpert, managing director with Westwood Capital, an investment bank in New York, thinks that the market will become more discerning next month — once companies start to report second-quarter results and give guidance for the remainder of the year. “July will be crucial. There will be less forgiveness for smaller losses. People will start wondering whether companies are actually going to post profits in the short-term,” Alpert said. Alpert’s particularly concerned about what may happen to bank stocks. He does not think that many troubled banks are out of the woods just yet.”The bank stock rally is based on the triumph of hope over fundamentals,” he said. “Fundamentals are still poor and banks could face steeper losses. Commercial real estate and other loans across the board are continuing to worsen.”Now this doesn’t mean that the market is going to come tumbling back to its March lows. But rather than chase the hot momentum stocks of the moment, investors might be better off looking at solid blue-chips in a wide variety of industries that are profitable, expected to post earnings growth this year and have low debt loads.Companies like insurance broker and soon-to-be Manchester United shirt sponsor Aon (AOC, Fortune 500), biotech Cephalon (CEPH) and discount retailer Family Dollar Stores (FDO, Fortune 500) fit that bill. Those three are stocks that I pointed out in Wednesday’s column as stocks left behind during the rally. And while those three may not have enjoyed the types of eye-popping returns that some of the stress test banks have enjoyed in the past three months, they’re also a lot less likely to disappoint you with massive financial losses.Talkback: What stocks are you investing in right now?
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NEW YORK: Happy three-month birthday, stock market rally! The S&P 500 finished on March 9 at 676.53, its lowest close of the year. (Technically, the market hit its nadir on March 6 when the S&P 500 hit the demonic level of 666.79. But you catch my drift.)It’s hard to believe that only three months ago investors were trying to figure out whether the economy, to paraphrase a frequent Stephen Colbert query to members of Congress, was heading for a Great Depression or the Greatest Depression.Since March 10, it has been all blue skies as far as Wall Street is concerned. The S&P 500 is up more than 30%, and some sectors — most notably banks, retailers and industrials — have really soared on hopes that the worst is over.To commemorate this quarter of a year anniversary, I thought it might be interesting to take a look at the stocks that have been left behind. Talkback: Will bank stocks and retailers continue to rally or are they due to fall? Leave your comments at the bottom of this story. Only nineteen companies in the S&P 500 are in this Land of Misfit Stocks, with six of the laggards residing in the healthcare sector. For example, drug and medical device makers Abbott Laboratories (ABT, Fortune 500) and Baxter International (BAX, Fortune 500) and biotech Cephalon (CEPH) have all fallen more than 5%There are, of course, some individual reasons why these and the other healthcare firms have underperformed. But it makes sense that the sector hasn’t participated in the rally.For one, healthcare stocks held up a lot better when the market was tanking based on the notion that people still get sick in a recession and have to take care of themselves. So healthcare is typically a defensive sector, one to own more of if you think the economy’s reeling, and one of the first to get dumped when investors rush back into more cyclical industries like finance and tech.But the debate in Washington over healthcare reform is adding to some of the uncertainty about the healthcare sector. Healthcare stocks have historically been whipped around anytime there is talk of government-mandated change, and many believe that restructuring is finally in the offing (unlike Hillary Clinton’s failed attempt at universal coverage in 1993-1994).”Regulatory reform is a terrifying unknown threat which limits investors’ enthusiasm for the sector. We saw it with ‘HillaryCare’ and now it looks like the probability of reform is higher,” said Lawrence Creatura, a portfolio manager with Federated Clover Investment Advisors. 0:00
/4:48Searching for quality stocksBut healthcare stocks aren’t the only losers. Interestingly, four S&P 500 companies from the supernova-hot financial sector are down since March.The biggest laggard in the S&P 500 during the past three months is Cleveland-based bank KeyCorp (KEY, Fortune 500). This is a bit curious since Key is one of the banks that was found to need more capital following the government’s stress tests — and the other banks on that list have all surged on hopes that they have finally hit bottom.Another bank that has lost ground is People’s United Financial (PCBT), the opposite of KeyCorp. This regional bank, based in Bridgeport, Conn., is a rare breed in this environment: a healthy bank that isn’t hated by consumers. People’s is one of several regional banks to say no thanks to TARP. And in a recent J.D. Power survey, it was listed as having the highest customer satisfaction rating of all banks in New England. So it could just be that the stock, which didn’t get punished as severely as peers during the financial meltdown, may now be pulling back as investors return to more beaten down “bad” banks. Before the rally began in March, People’s stock was down just 2.4% year-to-date compared to a 60% plunge in the S&P Banking Index.Winners becoming losersIn that respect, People’s does appear to be part of a broader market trend. Stocks that didn’t get crushed earlier this year are the ones pulling back now. Education company Apollo Group (APOL), which surged late last year partly due to expectations that it could do well with unemployment rising as more people would seek to go back to school, is down 6%. Shares of stodgy consumer companies like milk producer Dean Foods (DF, Fortune 500) and bargain retailer Family Dollar Stores (FDO, Fortune 500) are also down. Finally, many utility stocks have also lagged the broader market’s gains, although just one, FirstEnergy, has actually slipped during this rally. Utilities tend to be defensive stocks as well. Earnings usually don’t fall as sharply in economic slowdowns and the companies typically pay sizable dividends.Now that economic recovery hopes are percolating, utilities look less attractive. Plus, long-term bond rate are marching higher, which also may steal some thunder from utilities. The U.S. 10-year note is yielding nearly 4%, up from a low of almost 2% in December.”Bonds are providing competition for your typical income investor looking for yield. There has been a move away from utilities toward Treasurys,” said Paul Nolte, director of investments for Hinsdale Associates, a money-management firm based in Hinsdale, Ill. What’s nextSo with all this in mind, what should investors be doing now? Both Creatura and Nolte think investors shouldn’t completely ignore the recovery signs. Creatura said his firm has been buying more materials and energy companies as a way to capitalize on growth hopes and increased commodity prices. And Nolte said tech stocks may be the best way to play an economic rebound.But neither thinks it would be completely wise to dump all defensive investments and go all-in on a bet that the economy’s going to surge back to life just like the stock market has. Nolte said he’s not willing to gamble that consumers are going to binge on credit and start spending recklessly again. For this reason, he’s favoring healthcare stocks over retailers and banks.”The markets have priced in a fairly robust recovery. But it’s a surprise that the recession is being dismissed so quickly,” Nolte said. “There are still scars in the economy and growth may be crimped because of consumer debt levels.”And Creatura noted that even if the economy does continue to recover, it’s likely to be a bumpy rebound. Plus, many of the stocks that have risen so far so fast in the past three months are no longer bargains. Meanwhile, shares of some of the stocks left behind during the market’s surge are trading at more attractive valuations. “The fasten seat belt sign may be off for the economy but if you’re seated you may still want to keep it buckled and look to some defensive stocks. And by the way they’re relatively less expensive,” Creatura said.Talkback: Will bank stocks and retailers continue to rally or are they due to fall?
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NEW YORK: The recent bank stock rally may have finally run its course.After bottoming out in early March on fears that some of the biggest banks were insolvent, shares across the sector skyrocketed before government regulators finally unveiled the findings of their stress test program for the nation’s largest financial firms in May. Since then, however, investor interest in banks has cooled considerably. Two of the most widely-watched barometers of the sector – the KBW Bank Index and S&P Banking Index – have each fallen more than 10% since the stress test results were announced and remain well below where they were trading back in mid-September before the collapse of Lehman Brothers.Lenders that enjoyed the biggest returns during the months of March, April and early May, such as Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), have taken a hit in recent days. Citigroup fell again Monday, despite a broad market rally, on the news that it was being removed from the Dow Jones industrial average. Ironically, it is being replaced by the Travelers Companies, a leading insurer that once was part of Citigroup.Big banks aren’t the only one suffering from pullbacks. Shares of SunTrust (STI, Fortune 500) and Regions Financial (RF, Fortune 500), two top regional banks based in the Southeast which were also deemed to be in need of additional capital by the government, are both off more than 30% since the results of the stress test were revealed. Massive gyrations in the financial sector are hardly a new phenomenon. For nearly a year now, bank stocks have endured wild swings, falling as much as 25% in a single trading session.Still, those who track the industry tend to agree that investors are now viewing bank stocks differently. Blake Howells, director of research at Portland, Ore.-based Becker Capital Management, which oversees 1.7 billion in assets, said investors are now more focused on whether banks can return to normal, stable earnings growth, rather than fears about nationalization and an institution’s solvency. Some critics insist that the surprisingly strong numbers generated by large lenders in the first quarter were exaggerated as banks tried to pass the government’s stress test. A surge in mortgage refinancing activity did not hurt either, although that is a trend that many analysts see as unsustainable — especially since mortgage rates have been rising in the past few weeks.Banks also remain saddled with loan portfolios that are ripe for further losses, particularly in areas like commercial real estate. The percentage of construction and development loans that were 30 to 89 days past due climbed to 3.56% from 2.92% during the first quarter, according to figures published last week by the Federal Deposit Insurance Corporation. “Credit trends are negative across the board whether you are a community lender, regional or national bank,” said Eric Hovde, chief executive of Hovde Capital Advisors LLC, a money-management firm in Washington that focuses on the financial services sector. Of course, other factors could figure into bank stock performance in the coming quarters, including future actions by the government. Banks with sizable credit card businesses suffered somewhat of a setback last month following the passage of legislation that reined in lenders’ credit card practices.There is also widespread speculation that banking regulators could take a hard line on the industry, demanding that lenders, for example, hold more capital on their books to compensate for future losses. That could crimp profitability.Curves aheadOthers have a less dire view however. Bank stock bulls contend that the worst may be over for many lenders, as some banks have, and will continue to, aggressively reserve for future losses.The increasing number of signals that the nation’s economy may finally have reached a bottom is also encouraging for the industry.Weekly figures on first-time unemployment claims, often viewed as a real-time assessment of labor conditions, have started to slow in recent weeks even as continuing claims remain at historic levels. Activity in the manufacturing sector has also been on the mend in recent months, according to recent readings by the Institute for Supply Management.0:00
/1:56Banks face good, bad and uglyThe emergence of such signals foreshadowed an economic recovery in five of the last recessions dating back to the 1970s, notes Peter Winter, managing director at BMO Capital Markets. Winter upgraded a number of regional banks two weeks ago, including U.S. Bancorp (USB, Fortune 500) and California-based lender EastWest Bancorp (EWBC).Should a similar trend occur this time around, that would certainly bode well for the more than 8,200 lenders that make up the nation’s banking system and the roughly 13.5 trillion in assets they control.But investor confidence in the banking sector, much like the U.S. economy itself, remains shaky at best, setting up what most analysts believe will be another volatile, albeit more modest, period for bank stocks.”Unfortunately the group is going to trade more on economic news than anything else, at least in the near term because the recovery is tentative,” said Winter. Of course, some lenders are widely believed to be better positioned than others to navigate the current environment, including JPMorgan Chase (JPM, Fortune 500) and U.S. Bancorp, two banks that were deemed not to need any additional capital by the government.Their position of strength may translate into stable stock performances rather than outsized returns though. Part of that is due to the fact that healthier banks didn’t fall as sharply as weaker lenders.For that reason, Howells of Becker Capital Management, whose firm owns shares of U.S. Bancorp and JPMorgan Chase, said some of the undercapitalized regional lenders could enjoy the biggest bounces going forward.Some of those bets could misfire, Howells said. But he added that it is not farfetched to think that Fifth Third (FITB, Fortune 500) or KeyCorp (KEY, Fortune 500) — two Ohio-based banks that were also told by the government to raise capital — or Regions Financial could double in price before long.

Source:CNN