Shares in Malaysia Airlines fell as much as 20% Monday after one of its flights disappeared over the Gulf of Thailand over the weekend, and is feared to have crashed in waters off Vietnam.
The missing jet has yet to be found–and the cause of its disappearance yet to be determined–but analysts said they expect the incident to cloud the flagship carrier’s prospects. On Monday, rescuers were searching for clues after spotting suspected fragments of the plane on Sunday night.
“I’m expecting it to affect consumer sentiment,” said Daniel Wong, an analyst at Hong Leong Investment Bank, who cut his price target by 30% to MYR 0.20 (6 U.S. cents) in the wake of the incident. “People will get very wary of Malaysia Airline’s branding and will likely go for other airlines.”
That will likely force the airline to offer cheaper tickets or other promotions for the next year, until the incident fades from memory, he added.
Shares were down 10% at MYR 0.23 in mid-morning trading after the initial sell-off, with 10 out of 12 analysts holding “sell” ratings and the remainder with “hold” ratings.
Safety concerns among the public would only add to recent troubles for the government-owned carrier, whose formal name is Malaysian Airline System Bhd. It reported full-year losses during each of the past three years, and prior to Monday’s dive had already seen its share price fall by around a quarter during the past 12 months. It has struggled to add capacity and boost revenue as it competed against low-cost rivals such as Air Asia.
“The main problem for Malaysia Airlines is their legacy cost structure,” said Sharifah Farah, an analyst at Affin Investment Bank, citing long-term contracts and union difficulties which have weighed on profits for years, enabling low-cost carriers to swipe market share. “These problems are not new.”
At the same time, Malaysia Airlines struggles to cut costs because its government ownership creates political resistance any time the carrier seeks to lay off staff, Mr. Wong said. “Capacity has increased at a drastic level across the industry,” Mr Wong added.
One problem the carrier does not share with its rivals is the cost of maintaining older aircraft. “For the last couple of years they’ve been phasing out some of their older fleet,” Ms. Farah said.
The missing Boeing 777-200 had been in service since May 2002. “An 11-year-old aircraft is considered relatively new,” she said, noting that an average lifespan is 25 years.
Ms. Farah rates the stock a “sell” with a price target of MYR 0.19.
Market Snap: At the New York close on Friday, for the week: S&P 500 up 1% at 1878.04. DJIA up 0.8% at 16452.72. Nasdaq Comp up 0.7% at 4336.22. Treasury yields up; 10-year at 2.790%. Nymex crude oil down 0.01% at $102.58. Gold up 1.3% at $1,338.10/ounce.
How We Got Here: The U.S. economy might be still struggling to get through the brutal winter, but the snow isn’t doing anything to tamp down the stock market. U.S. stocks had another good week, sending the S&P 500 to another fresh high, and pulling the Dow within 0.8% of its record high (16575.66 on Dec. 31). All this comes amid the bull market’s fifth anniversary (March 9) to boot.
Traders got a happy surprise Friday morning when the monthly U.S. jobs report came in a bit hot, showing 175,000 jobs created in February. That’s the best number in three months, and most figured it would’ve been even higher if not for – yes, you guessed it – the snow.
But the markets were mainly flat on Friday as traders tried to suss out the report’s import. “There was nothing in today’s jobs data that would suggest any changes to the Fed’s taper timeline,” wrote Kristina Hooper, U.S. investment strategist at Allianz Global Investors. “However, there were enough flaws in the report to suggest the economy still needs monetary-policy support. Expect continued accommodation from the Fed. Think looser for longer.”
Coming Up: Across Asia, the major story is the fate of Malaysia Airlines flight MH370, which left from Kuala Lumpur on Saturday en route to Beijing and disappeared over the South China Sea. Slowly, and painfully, searchers are finding what appears to be wreckage of the flight, but solving the mystery over why it went missing is still far off. There didn’t seem to be any problems with the jet or crew prior to takeoff, leading some to surmise that terrorism was involved.What You Missed Overnight
Stolen Passports on Flight Raise Security Concerns The use of stolen passports by two passengers on a Malaysian airliner that went missing raised concerns over possible weaknesses in immigration and aviation security.
Missing Malaysia Flight Fuels Debate Over Live Black Boxes Regardless of what caused a Malaysia Airlines jet to disappear from the sky over the weekend, air-safety experts predict it will reignite debate over new technology designed to provide immediate clues for investigators in the event of a crash.
RBC Ruling Strikes a Blow to Deal-Making Bank A Delaware judge on Friday found RBC Capital Market’s hunger for financing fees colored its advice, a decision that could affect the M&A business across Wall Street.
Asia Demand for Milk Shakes Up Market Asia’s growing thirst for milk is spilling over into the U.S. market, pushing up prices for consumers and pressuring profits for some food makers.From The Wall Street Journal Asia
Vietnam Searchers Report Spotting Plane Debris A search-and-rescue plane spotted suspected fragments of a missing Malaysian airliner in the first potential breakthrough in the investigation of what happened to the flight after it disappeared early Saturday morning.
Relatives of Passengers Overwhelmed With Grief in Beijing Grief overcame family members of passengers on Malaysia Airlines flight MH370 as they waited in a Beijing hotel Sunday for any word on the fate of the missing flight.
China Bond Default May Not Be Last The failure by a distressed Chinese solar-equipment maker to make a bond-interest payment on Friday signals Beijing’s willingness, however tentative, to let some weak companies fall—a move that analysts and investors said could inject some discipline into a swelling debt market long viewed as implicitly supported by the government.
Afghan Vice President Dies One of Afghanistan’s most influential power brokers, First Vice President Mohammed Qasim Fahim, died Sunday, altering the country’s political landscape ahead of presidential elections next month.From MoneyBeat
Happy Anniversary, Bull Market With the bull market turning five years old on Sunday, there’s a lot to celebrate.
Five Bears Who Turned Bullish The bull market in stocks over the past five years has won over plenty of skeptics, including five of the biggest doubters.
What Traders Said at the Bottom The beginning of March 2009 was a nightmare for investors. Markets kept going down, down, down, reaching their lowest levels in more than a decade. Major American companies were trading as if they were penny stocks. No one seemed sure it was ever going to stop.
In a rare example of a Chinese company turning hostile with a takeover attempt, Shandong-based Landbridge Group Co. pitched a 159.8 million Australian dollars (US$144.6 million) offer for Westside Corp. direct to the energy producer’s shareholders.
Closely held Landbridge has offered 36 Australian cents per Westside share, a 38% premium to their closing price Friday of 26 cents, according to a statement from Landbridge posted on the Australian Securities Exchange.
Shandong-based Landbridge, which owns a port in China along with refinery and real-estate assets, said it approached Westside with an offer last month, but the Australian company rejected its request to scrutinize its books.
The offer provides certainty for Westside shareholders concerned the company may struggle to fund gas field developments, Landbridge Chairman Ye Cheng said in the statement.
Westside owns coal seam gas fields in Queensland state, where three large export projects being built by rivals are due to become operational over the next two years. Analysts fear some of the projects may face a shortage of gas from the Bowen Basin coalfields, forcing them to source supplies for other producers in the area. Westside’s assets are in areas typically considered to have lower quality resources than so-called “sweet spots” in the nearby Surat Basin.
In May last year, Westside said PetroChina Co. had withdrawn a A$185.1 million bid because “the general situation in Australia has changed so much”. No further explanation was given for the decision, which came as all three export projects experienced cost blowouts due to a high Australian dollar, technical difficulties and labor shortages.
PetroChina also owns coal seam gas assets in the Bowen Basin through a joint venture with Royal Dutch Shell PLC. The venture hasn’t decided whether to build its own export project.
The bull market in stocks over the past five years has won over plenty of skeptics.
In March 2009 the gloom-and-doom crowd was out in full force. Stocks were in free-fall, bearish sentiment was at record highs and the notion of even calling the bottom was one that few market participants dared to make.
Much has changed during the past five years.
Many of the bears have retreated into hibernation since March 9, 2009 as the Dow Jones Industrial Average rallied 151%, which ranks it fifth in gains among the 32 bull markets since 1990. One by one, these skeptics have shifted their stance on stocks; some threw in the towel on their bearish prognostications, others slowly turned more optimistic.
Here’s a look at five one-time market bears who have since reversed their gloomy views, and what they’re saying now.Nouriel Roubini
Nicknamed Dr. Doom for accurately forecasting the 2008 crisis, NYU economist and professor Nouriel Roubini started turning more optimistic in February 2012. On the state of the stock rally, Roubini’s firm said: “We’re a believer; we’re celebrating. We think the rally has legs.”
The caveat is on that same day, Mr. Roubini responded on Twitter to calls questioning his new found bullishness: “Indeed in H2 2012 the rally will fizzle.” Still, the notion that Mr. Roubini wasn’t as gloomy as he had previously been marked a turning point for one the market’s well-known bears.
Now: Dr. Doom is no longer Dr. Doom. In fact he’s been trying to abolish the nickname, saying he’d prefer to be called “Dr. Realist.” In an article earlier this month for Project Syndicate, Mr. Roubini outlined the silver linings in the turmoil impacting many of the emerging-market economies. And for months he has been optimistic about the global economy and U.S. stocks.David Rosenberg
In the clique of market bears, few had been as reliably and depressingly dour as David Rosenberg. Mr. Rosenberg had been a market Cassandra for years: He was bearish before the financial crisis of 2008 and remained bearish well afterward. So it caused a mini-sensation within financial circles in June 2012 when Mr. Rosenberg—the former economist at Merrill Lynch & Co. who’s now at Canadian money-management firm Gluskin Sheff—wrote a morning commentary titled “Parting of the Clouds?”
While he claimed he wasn’t defecting from the dark side, he also maintained that he was more optimistic at that point than he had been in more than a decade. “I’m so excited I just can’t hide it,” Mr. Rosenberg wrote. “But for now, I’m keeping the powder dry.” In mid-2012, he upgraded his outlook for the U.S. economy and urged investors to buy more stocks and dump Treasury bonds, citing an improving labor market, among other things.
Now: Mr. Rosenberg acknowledged late last year that even though stocks were looking frothy, they also weren’t poised to peak. “One of the problems for the bears is that everyone seems to acknowledge that we are due for a correction,” he said. “But it may well be this near-universal perception of a correction means that we may not see one.”
And Mr. Rosenberg, who previously worried about deflation as a major concern for the U.S. economy, has changed his tune on that as well. He sees inflation making a return this year. “This deflation, disinflation, benign inflation story which seems to be everybody’s mindset is really yesterday’s story,” Mr. Rosenberg told Businessweek last month. The Federal Reserve “is carrying out the mother of all reflationary policies. My bet is that eventually the Fed will get what it wants, and then some.”Adam Parker
Morgan Stanley’s Adam Parker, previously one of Wall Street’s more notable bears, joined the ranks of bullish stock-market strategists in March 2013 with a call that the rally in U.S. stocks had plenty of room to run. That call marked the first time he called for stocks to move higher in any year in his tenure as Morgan Stanley's strategist dating back to 2010.
“Given our economics team’s view of improving U.S. growth and ample liquidity still being provided by the Fed, it is hard to see what causes a major market correction,” Mr. Parker wrote in a note to clients one year ago.
Now: Mr. Parker’s optimism has increased so much to the point where late last year he channeled his inner Bob Marley, saying he wasn’t worried about a thing. He forecasts the S&P 500 will hit 2014 in 2014, a call that transitioned him from being Wall Street’s biggest bear to its biggest bull.
“The only thing people are worried about is that no one is worried about anything,” Mr. Parker wrote in his 2014 outlook. “That isn’t a real worry.” At some point the market will suffer a correction, but the factors that could trigger such a move aren’t problematic, he says. “In order to time the impossible, the inflect, we remain focused on what could cause fear about a materially lower earnings trajectory, or even what could introduce volatility into the earnings estimates,” he says. “The answer is — not much right now.”Meredith Whitney
Ms. Whitney had been known for her bearish views on the market, and in particular bank stocks. But when asked whether she would buy stocks at a time when the Dow Jones Industrial was first hitting new highs a year ago, she said “without a doubt.”
“I have not been this constructive, this bullish on the U.S., on equities in my career,” Ms. Whitney said in an interview on CNBC.
Now: In October 2013, Ms. Whitney, one of Wall Street’s best-known and most controversial research analysts, closed her firm’s research business, following the departure of numerous clients and employees. WSJ reported Ms. Whitney planned to start a hedge fund.Richard Russell
Richard Russell, a newsletter writer who has been penning the “Dow Theory Letters” since 1958, advised his clients in March 2013 to buy stocks, an about face for someone who had been pretty bearish for much of the rally.More In Crisis Plus 5
“Yes, I know that this market is uncorrected during its long rise from the 2009 low, and I know that there are risks in buying an uncorrected advance that is becoming uncomfortably long in the tooth, but my suggestion is that my subscribers should take a chance (after all, Columbus took a chance),” Russell wrote.
“By taking a position in the market, you’ll be casting yourself on the side of the optimists, and you’ll also be casting your vote on the side of Ben Bernanke and the Feds,” Mr. Russell said. “Besides, it’s fun to be able, for once, to place yourself on the cheerleaders’ side of the U.S. markets, and it makes sense to be on the side of America’s Federal Reserve.”
Now: Mr. Russell, 89, has since reverted back to his gloomy ways. “”In the big picture, I continue to believe that we’re in a world depression,” Mr. Russell warned his 12,000 subscribers earlier this year. “I think we’re at the inflection point where the primary bear trend is overcoming the frantic action of the Fed.”
To be sure, not all bears have turned cheerleaders. In fact, one gloomy prognosticator remains steadfast in his bearish ways.
Portfolio manager John Hussman isn’t ready to emerge from hibernation, but his bearish stance have cost his investors dearly.
Hussman Strategic Growth, launched in 2000, has shed an average 1.3% a year over the 10 years through February, while the S&P 500 gained an average of 7.2% a year, according to Morningstar. The average long-short equity fund rose 5.6%. The fund’s assets have shrunk to $1.3 billion from a peak of $6.7 billion in September 2010.
The fund remains fully hedged. “I don’t think people appreciate how eager I would be to lift our hedges if the evidence supported it,” Mr. Hussman told WSJ earlier this month.
The beginning of March 2009 was a nightmare for investors. Markets kept going down, down, down, reaching their lowest levels in more than a decade. Major American companies were trading as if they were penny stocks. No one seemed sure it was ever going to stop.
“I don’t know if I’ve ever heard as many people being negative on the market as what’s happening right now,” said William Lefkowitz, chief derivatives strategist at vFinance Investments, at the time.
But then, in a four-day span, stocks went up 10%. It was just the start of a 151% gain for the Dow Jones Industrial Average over the next five years.
At the time, no one was sure whether it was the start of something great…or just a brief respite from the months of declines. Here’s a day-by-day account of what people were saying as markets reached their nadir and started their long climb up:
Monday, March 2: Five trading days before the market bottom.
The Dow fell 299.64 points, or 4.2%, to 6763.29. It was the Dow’s lowest close since April 25, 1997, and the first close below 7000 since May 1, 1997.
Manufacturing data indicated that a freeze in industrial activity continued into February, while continued government intervention in American International Group Inc. “raised fears of an incremental nationalization of the U.S. financial sector,” the Journal wrote.
“We’re in a bottoming process and it’s going to take a while,” said Anthony Conroy, head equity trader at BNY ConvergEx. ”Two things need to happen for the market to bottom: financials need to be healthy and the housing market needs to stabilize.”
Tuesday, March 3: Four trading days before the market bottom.
The Dow fell 37.27 points, or 0.6%, to 6726.02, its fifth consecutive decline and its eleventh drop in 13 sessions. The S&P500 fell 4.49 points, or 0.6%, to 696.33. It was the first time the S&P closed below 700 since 1996.
President Barack Obama said he was “absolutely confident” in his plans to revive the economy and restore stability to the financial system. Federal Reserve Chairman Ben Bernanke backed the White House’s efforts, saying aggressive action was needed to avoid an economic calamity even as it added trillions of dollars in new government debt.
The Journal wrote that February auto sales from Ford Motor Co. and General Motors, alongside “grim signals” from a manufacturing report and pending-home-sales data, showed “the economic paralysis that set in when Lehman Brothers failed in September lingers despite more than a trillion dollars committed by the U.S. government to save banks and stimulate the economy.”
JPMorgan Chase & Co. strategist Thomas Lee reversed his tentative “buy” call on the S&P 500 from a week earlier, telling clients he saw the stock index trading sideways until it reached a final low in the second half of 2009.
“There is no doubt that equities are severely oversold, but the more glaring question is, where is the next catalyst?,” he wrote.
“Given the magnitude of this crisis we may have to eventually see very cheap levels before we bottom,” Deutsche Bank analysts said in a research note. The market’s precipitous decline to levels considered “cheap” is “not a reason to suggest an imminent sustainable bounce.”
Wednesday, March 4: Three trading days before the market bottom.
Stocks snapped their five-day losing skid as traders clung to news of a new stimulus package in China and sent shares of industrial and commodities stocks higher. The Dow rose 149.82 points, or 2.2%, to 6875.84. The S&P climbed 16.53, or 2.4%, to 712.86. Caterpillar and Alcoa each rose 13%.
Analyst Steve Condon, of the portfolio-management firm Truepoint Capital in Cincinnati, said he’d been trying to convince jittery clients not to unload their stock holdings.
“At these valuations, you have to be a buyer if you’re investing for a long-term frame,” said Mr. Condon. “At the very least, if we can’t get people to add to their positions, we try to avoid liquidating.”
Don Bright of Bright Trading in Chicago told the Journal he was hopeful that financial markets had returned to normal for the moment, arguing that the latest round of gains could mark the start of a longer rally–lasting perhaps through the summer. Still, he stopped short of declaring an end to the overall bear market.
“Let’s just say the bear is asleep for now,” said Don Bright.
Thursday, March 5: Two trading days before the market bottom.
The declines resumed in earnest, with banks and life insurers taking the hardest hit. The Dow fell 281.40 points, or 4.1%, to 6594.44. The S&P shed 30.32, or 4.25%, to 682.55. That was 56% below the S&P’s bull-market peak in October 2007.
Traders were petrified of owning stocks overnight, said Joseph Saluzzi, co-founder of Themis Trading.
“Nobody wants to get in the way as the freight train comes down the embankment,” he said.
Dow Jones Newswires wrote: “Nothing seems to stop a contagion of confidence crises from spreading from one part of the financial sector to the next.”
“It’s just a never ending spiral,” said Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund.
Friday, March 6: One trading day before the market bottom.
The Dow rose 32.5 points, or 0.49%, to 6626.94. But it was off 6.2% on the week, marking the fourth straight weekly decline and the 15th drop in the last 18 weeks. The S&P rose 0.83, or 0.1%, to 683.38, after dipping as low as 666.79 during the session.
Few people believed the day’s gains were anything to crow about.
The Journal summed it up this way: “Hopes that the bad news is priced in have dwindled as bad turns to worse in the economy and in the banking sector. Burned by so many recoveries gone awry, traders and retail investors have become gun shy, and rallies are fleeting affairs.”
Frank Beck, chief investment officer at Capital Financial Group in Austin, Texas sounded ready to pack it in: “Really, how much demand is there for stocks? You can look at all the great fundamentals in the world, but if there’s not a demand for the stock, it really doesn’t matter.”
Traders said apathy had replaced fear on the market. “Some days, the volume of selling is not intense, but you don’t see the buyers coming in,” said Quincy Krosby, chief investment strategist at Hartford Financial.
Monday, March 9: The bottom.
On the very morning of the day that the market would finally reach its nadir, the Journal asked “Just how low can stocks go?” In an article called “Dow 5000? There’s a Case for That,” we said that reduced earnings estimates and fading hopes for a quick economic fix meant “the once-inconceivable notion of returning to Dow 5000 or S&P 500 at 500 looks a little less far-fetched.”
The Dow fell 79.89 points, or 1.2%, to 6547.05, its lowest close since April 14, 1997. The S&P fell 6.85 points, or 1%, to 676.53, its lowest close since Sept. 12, 1996. The Nasdaq fell 25.21 points, or 2%, to 1268.64.
Warren Buffett went on CNBC and said that the economy had “fallen off a cliff.” The World Bank forecast that the global economy was likely to shrink for the first time since World War II.
In a separate piece, the Journal wrote that “markets seem unable to shake the perception that the global economy is rapidly deteriorating.”
“I don’t know if I’ve ever heard as many people being negative on the market as what’s happening right now,” said William Lefkowitz, chief derivatives strategist at vFinance Investments.
“We have a bad combination of lousy technical performance with lousy fundamentals, which is not a recipe for any strong sustained movement upward,” said Craig Peckham, a strategist with Jefferies.
“There’s a good chance the market could keep going lower,” says Bill Strazzullo, chief market strategist at Bell Curve Trading.
“Some people may say that is the bottom, but I think there is another leg to go on this,” Mr. Strazzullo said. “That last leg will probably be the general public throwing in the towel.”
But a few people were ready to call the decline overdone.
“Analysts are just slashing numbers and people are trying to extrapolate that earnings plunge into Dante’s Inferno,” Citigroup’s chief U.S. equity strategist, Tobias Levkovich, said in the “Dow 5000?” article. The piece said Mr. Levkovich was keeping a year-end target of 1,000 on the S&P. It would end the year at 1,115.10.
Tuesday, March 10: One day after the market bottom.
Comeback! The Dow closed up 379.44 points, or 5.8%, at 6926.49, marking its biggest percentage gain since Nov. 21 and closing at its highest level since Feb. 27.
Citigroup Inc. surged 40 cents, or 38%, to $1.45, though it was still down 98% from the same time a year earlier. Bank of America Corp. surged 28%. JPMorgan rose 23%.
“This kind of broad-based move is encouraging, but the question becomes, will it be sustained? At this point, it certainly feels that way,” said Gordon Charlop, managing director at Rosenblatt Securities.
“Should we see higher prices over the next week or so, the more important question will be whether we are dealing with anything more than an oversold bounce,” said Prieur du Plessis, executive chairman of Plexus Asset Management in Durbanville, South Africa.
March 11: Two days after the market bottom
U.S. stocks eked out their first back-to-back gains since early February. At the close, the Dow was up 3.91, or 0.1%, to 6930.40. The S&P gained 1.76, or 0.2%, to 721.36.
Freddie Mac, still suffering from the lax mortgage-lending practices of the housing boom, reported a loss of $23.9 billion for the fourth quarter and said it would need a $30.8 billion injection of capital from the U.S. Treasury.
The Journal wrote that investors remained concerned about the fate of banks laden with toxic assets on their balance sheets.
“So far, we’ve [mostly] seen the degradation of asset values in housing and derivatives of housing, but you still have corporate credits deteriorating, commercial-mortgage credits are still deteriorating,” said Daniel Alpert, a founder of boutique investment bank Westwood Capital.
Prophetically, a Dow Jones Newswires article said Wall Street “may be getting its appetite for risk back, as evidenced by…the resurfacing of bullish factoids. An email pinged around trading desks claiming Tuesday’s close on the S&P 500 at 719.6 was the first time in 27 years the index had closed at a new low one day, then rallied enough the next to wipe out the previous five-session deficit. Naturally, [the email said] ‘the 1982 instance marked the end of that bear market.’”
Thursday, March 12: Three days after the market bottom
The Dow jumped 239.66 points, or 3.5%, to 7170.06, marking its first three-day streak of gains since January. The index was up 9.5% over the three sessions.
Market watchers embraced the gains but remain cautious about whether it was sustainable. After all, there was still deep uncertainty about the economy and the state of credit markets.
“In the short term, it is encouraging, but we’ve seen this before,” said Ryan Detrick, technical analyst at Schaeffer’s Investment Research. “We are still so oversold, we are due for something like this.”
Meanwhile, Bernie Madoff pleaded guilty to defrauding investors in a massive ponzi scheme.
Friday, March 13: Four days after the market bottom.
The Dow gained 53.92 points, or 0.8%, to 7223.98 for the day and ending the week up 9%. The weekly gain snapped a four-week losing spell and marked just the fourth weekly gain since the end of October 2008. The S&P 500 climbed 5.81 points, or 0.8%, to 756.55.
“This was an encouraging week, but it’s still too early to tell,” said Michael Cuggino, president of the Permanent Portfolio Family of Funds, based in San Francisco.
“At this point, we’ll take a good week anytime, any way we can get it,” said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati.
Traders clung to assurances from banks that their underlying businesses were profitable in the first months of the year, and liked what they saw in a report on retail sales for February. Both gave the market a “little assurance that, yes, there is a real economy out there and it has a chance of doing better,” said Todd Clark, director of trading at Nollenberger Capital Partners.
In an article recently posted to SSRN I addressed certain issues faced by the SEC in the ongoing Title III rulemaking process under the JOBS Act of 2012, enacted into law by Congress in April 2012. The SEC issued proposed rules to implement Title III in October 23, 2013, and has yet to issue final rules.
Title III of the JOBS Act created an exemption from registration for the offer and sale of so-called "crowdfunded" securities under the Securities Act of 1933, allowing the offer and sale of securities to an unlimited number of unaccredited investors without registration with the SEC, on an Internet-based platform, through intermediaries (portals) which are either registered broker-dealers or SEC licensed "funding portals." Title III also provided for a number of built-in investor protections, including limitations on the amount invested, a limitation on the amount an issuer may raise in a 12 month period ($1 million), detailed financial and non-financial disclosure in connection with the offering, and ongoing annual issuer disclosure. Congress left much of the details of Title III in the hands of the SEC, to be fleshed out in the rulemaking process.
A shareholder lawsuit over the buyout of an ambulance operator has put two banks on the defensive, for different reasons and with very different outcomes.
RBC Capital Markets LLC was found liable on Friday for its role in advising on the 2011 leveraged buyout of Rural/Metro Corp., an Arizona-based ambulance operator.
The judge’s ruling, following a four-day trial last summer, found RBC’s desire to get fees on both sides of the deal–as an adviser to the company and a potential lender to its private-equity buyer–wasn’t amply disclosed to Rural/Metro and was a conflict that colored the bank’s advice and caused Rural/Metro’s board to accept an unfairly low $17.25-a-share bid from Warburg Pincus LLC.
The plaintiffs are seeking up to $172 million in damages from the bank, part of Royal Bank of Canada. In a statement on Saturday, the bank said: “We have reviewed the opinion and are considering our options. This process is not yet over so we cannot comment further.”
Lawyers for Rural/Metro’s shareholders also had alleged Moelis & Co., a second adviser to the company, lowered its valuation to make Warburg’s offer appear fair. Moelis’s early valuation showed Rural/Metro was likely worth at least $18.53 a share and possibly as much as $23.42 a share, according to court filings. That range was later lowered after accounting for certain Rural/Metro tax assets, according to court filings.
A big difference between the two banks in the suit was RBC’s desire to finance Warburg’s bid. Unlike RBC, Moelis didn’t seek to play a financing role, as the bank isn’t a lender.
Moelis settled the case last year before trial, agreeing to pay $5 million without admitting wrongdoing.
A spokeswoman for the bank said on Saturday: “This decision [Friday] relates to conduct specific to RBC and is not related to Moelis’ role in this transaction, which was proper and appropriate.”
The court’s Mr. Laster said in Friday’s decision that Moelis made “debatable changes” to its valuation that “had the effect of … making the merger price look more attractive.” But because Moelis settled before trial, he said, his decision “does not delve into the minutiae of Moelis‘s work, and it does not make any findings as to why Moelis made the changes.”
Mr. Laster, writing generally without pointing to a particular bank, said potential conflicts may lurk even among advisers that don’t provide financing. When a bank is providing a fairness opinion for a longtime client, he said, “it may be influenced to find a transaction fair to avoid irritating management and other corporate actors who stand to benefit from the transaction, as this will ensure future lucrative business.”
EU proposal for a regulation on structural measures improving the resilience of EU credit institutions
1. On 29 January 2014 the European Commission published a proposal for a regulation of the European Parliament and of the Council “on structural measures improving the resilience of EU credit institutions”. This proposed legislation is the EU’s equivalent of Volcker and Vickers. It was initiated by the Liikanen report published on 2 October 2012 but the legislative proposal departs in a number of ways from the report’s conclusions. There are two significant departures: the legislative proposal contains a Volcker-style prohibition, which also departs from the individual EU Member States’ approach, and, although the proposal contains provisions which mirror the Vickers "ring-fencing" approach they are not, in direct contradiction to Liikanen’s recommendation, mandatory.
Professional portfolio management has long cost too much. If a new company has its way, it could be free.
This past week, WiseBanyan, an online-only investment adviser, publicly launched a service that builds and manages diversified portfolios of exchange-traded funds for nothing. There is no minimum account size; nor is there any fee to sign up, to buy the funds or to hold them (other than the underlying expenses of the funds, averaging less than 0.14% annually).
“We’re attempting to replicate what good financial advisers do for large clients in an automated, low-fee fashion for small clients,” says co-founder Herbert Moore, a former institutional trader who has run an affiliated advisory firm since 2009. It’s much too early to say whether WiseBanyan will succeed; so far, it has signed up hundreds of clients, says Mr. Moore. The company ultimately hopes to make money by charging fees for additional services.
But the new venture poses a fundamental question to every investor: If money can be managed this cheaply, am I getting my money’s worth from my financial adviser?
Brokers and financial advisers generally ask investors a few questions about their age, income, assets, goals and attitudes toward risk. Then the advisers create an “asset allocation,” or mix of stocks, bonds, cash and other investments. Finally, they recommend specific holdings—typically mutual funds or ETFs—to achieve that allocation.
That will cost you, on average, about 1% of your assets every year, even though the process is often highly mechanical and a computer can do it for nothing, as WiseBanyan shows with its “algorithmic” method of determining which portfolios to recommend.
Oddly, many “financial advisers” barely give advice at all. Scott Smith, a director at Cerulli Associates, a research firm based in Boston, estimates that 9% of roughly 300,000 financial advisers in the U.S. do nothing but manage portfolios; only about 26% provide comprehensive advice on financial planning.
Many of these advisers are itching to beat the market by picking individual securities or by “tactically” whizzing in and out of stocks. A few might succeed, but most don’t; overall, that hyperactivity lowers clients’ returns instead of raising them. So you pay a lot but often get only a little.
Meanwhile, the enormously valuable counsel that a good financial adviser can provide—how to manage the complexities of tax, estate and retirement planning, for example—usually comes at no additional cost.
“It’s absurd,” says James Miller of Woodward Financial Advisors, a firm in Chapel Hill, N.C. “Why should clients’ fees be based solely on the size of their investment portfolio when what they really want is financial-planning advice?”
Mr. Miller’s firm instead charges a flat minimum fee of $7,500 a year, regardless of portfolio size, that includes portfolio management and all financial-planning services.
“I can’t count how many phone calls, direct messages and blog comments I’ve been getting from younger advisers who say, ‘I don’t think our fee model makes any sense for our clients,’ ” says James Osborne of Bason Asset Management in Lakewood, Colo., another firm that assesses a flat annual fee regardless of account size. Bason charges a maximum of $4,500 a year. Bason’s and Woodward’s fees amount to a reasonable 0.45% to 0.75% on a $1 million portfolio—but are prohibitive for clients with smaller balances. Such annual retainers or hourly fees make up only about 3% of all advisers’ compensation, estimates Cerulli’s Mr. Smith.
So it’s no wonder that online-only investment management is booming, albeit off a small base.
Wealthfront, based in Palo Alto, Calif., has expanded from $100 million in assets in early 2013 to more than $730 million as of this past week, says Chief Executive Adam Nash. Betterment, a firm based in New York, has nearly $500 million in assets and expects to surpass $1 billion by year-end, says Chief Executive Jon Stein.
Wealthfront charges a flat 0.25% fee on accounts over $10,000 and nothing for smaller accounts; Betterment charges as little as 0.15%. Both companies build portfolios of ETFs, automatically adjusting them to maintain the desired exposure to assets and to minimize taxes, at no extra charge.
“This generation [of younger investors] has crossed an important threshold,” says Mr. Nash. “They’re ready to trust software with their money.”
Mr. Stein says financial-advisory firms are negotiating with Betterment to take over their clients’ portfolio management so the firms can instead devote their time to financial planning.
“Investment management can be more expertly done by an algorithm than by a human adviser,” says Mr. Stein. “But for many aspects of financial planning, it’s better to have a human.”
And that points toward the ultimate question: Is your adviser charging you a fair price and providing the services you want?
If you look in the “fees and compensation” section of your adviser’s Form ADV, a disclosure document mandated by the Securities and Exchange Commission, you might well find that the fixed fee you have been paying all these years is negotiable.
If it is, negotiate. If it isn’t, think hard about whether what your adviser is giving you is advice or just portfolio management that you could get cheaper from a machine.
Whenever a leveraged buyout is announced these days, one of the first questions many deal watchers ask is: will the financing of the takeover run afoul of a new set of federal guidelines aimed at curtailing risky lending.
Cerberus Capital Management LP’s proposed $9.4 billion acquisition of supermarket operator Safeway Inc., announced yesterday, seems like it will comply–barely.
The Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corporation last year told banks that they should limit deal-related loans to six times a company’s cash flow, or earnings before interest, tax, depreciation and amortization. (As the Wall Street Journal chronicled in a front-page story in January, the rules are causing banks to sit out some lucrative deal-financing opportunities .)
Cerberus plans to borrow about $7.6 billion to help pay for the deal. The banks arranging the financing are Citigroup Inc., Credit Suisse Group AG and Bank of America Corp. Together with existing Safeway borrowings that will remain outstanding, the company will have total debt of about $9 billion after the buyout, according to Moody’s Investors Service. The ratings service estimates that Safeway will have annual Ebitda of about $1.55 billion then, meaning the grocer will have a leverage ratio of 5.8 times.
Other reasons the deal is unlikely to be a violation of the leveraged-lending guidance include the significant cash flow Safeway boasts as a grocery store operator and its substantial inventory, which could be sold to pay down debt.
But all that didn’t stop Moody’s from putting Safeway’s credit rating on review for a possible downgrade to so-called junk status from investment grade, citing a “high probability that the proposed transaction will result in significantly higher financial leverage.” Standard & Poor’s, meanwhile, said its Safeway rating could be lowered to junk if the transaction is completed. That would make Safeway the third North American company to lose its investment-grade status – becoming a so-called fallen angel — in 2014. U.S. midstream energy company ONEOK Inc. and the Government Development Bank for Puerto Rico are the other two, according to S&P.
With the bull market turning five years old on Sunday, there’s a lot to celebrate.
More than $3 trillion in stimulus from the Federal Reserve, a slowly improving economy and record corporate profits have been the major underpinnings of the stock-market rally that has pushed the major indexes to record-breaking levels.
The question now is how much stamina does the bull market have left at current levels.
As investors, analysts and strategists ponder that question, here’s a guide to everything you need to know about the market’s rally over the past five years, beginning with a chart comparing previous bull runs.
Here’s a breakdown of the rally, by the numbers.
151.3%: The Dow Jones Industrial Average’s gains over the past five years, one of only six bull markets in history that have lasted this long.
47%: Exxon Mobil Corp.'s rally through the past five years, the worst-performing blue chip among components that spent all five years in the Dow.
177.6%: The S&P 500′s gain over the past five years.
50: The number of record highs for the broad S&P 500 over the past 12 months, including Friday’s record-setting close of 1878.04.
15.4: The S&P 500′s forward price-to-earnings ratio, up from 10.3 at the bear-market bottom, according to FactSet.
324.4%: The S&P 500 consumer discretionary sector’s rally, the top performer among the index’s 10 large-cap sectors. Financials is second best, up 259%, and industrials is third, up 242%.
68%: The rally for the S&P”s telecommunications sector, the worst performing large-cap sector.
241.8%: The technology-heavy Nasdaq Composite’s rally since the March 2009 bottom.
538.2%: Apple Inc.'s rally over the past five years.
250.6%: The gains for the Russell 2000 index of small-capitalization stocks off the bear-market low.
30.5%: The level of bearish sentiment — or expectations that stock prices will fall over the next six months, according to the weekly survey conducted by the American Association of Individual Investors released Thursday. By comparison bearish sentiment reached a record level of 70.3% in March 2009.
6.7%: The current unemployment rate, as per Friday’s jobs report. By comparison, the unemployment rate was 8.7% in March 2009.
The Newsweek article purporting to shed light on the identity of bitcoin’s creator has stirred a compelling debate: What does the bitcoin community stand to gain, if anything, should the anonymous creator step forward?
The probable inventor behind bitcoin was identified by Newsweek as Dorian Prentice Satoshi Nakamoto. But the Associated Press reported that in a two-hour interview, Mr. Nakomoto denied he had anything to do with the currency. Newsweek said it “stands strongly” behind its bitcoin piece.
So, what’s next?
In this week’s edition of MoneyBeat Week, our Friday podcast, the crew analyzed the real-world circus that has surrounded the virtual currency over the past 48 hours and what it means for bitcoin’s future.
Some bitcoin followers say identifying the creator could add legitimacy to the cryptocurrency, which has suffered from several reputational blows in recent weeks. Others, however, say that the creator’s identity should remain a secret, as it underscores the anonymity surrounding the bitcoin community.
“When you talk about trust, it’s hard to put your trust in a machine or a system,” MoneyBeat blogger Paul Vigna said on the podcast. “It’s much easier to put your trust in a person.”
Grab a set of headphones, take a listen to MoneyBeat Week and let us know if you agree or disagree in the comment section below.