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Why Even Rich People Are Having Trouble Getting a Mortgage

Home prices are rising, but even the well-off are facing obstacles from tight-fisted banks

By: Richard Satran

US News & World Report’s | August 1, 2013


Having trouble getting home financing? You’re not alone. Even wealthy  people are getting rejected under the tough new lending rules adopted  after 2008’s housing market crash.

Moneyed  enclaves are still feeling the impact of tight mortgage money. In the  breezy New Hampshire lakes region where “On Golden Pond” was filmed and  waterfront homes routinely sell in the $5 million to $10 million range,  sales are “brisk” but loan applications are often rejected, says sales  associate Jerry Love of Peabody & Smith Realty in Holderness, N.H.,  on the shore of Squam Lake.

“We don’t see deals  sail through with the automatic approvals that we used to see,” Love  says. “And we are seeing plenty of wealthy people turned down on  million-dollar loans who would easily have qualified a few years back.”

The  rules may get even tougher under proposals now being considered in  Washington designed to cap borrowing as a percentage of income. That  will be especially bad news for first-time homebuyers and people with  moderate incomes who have the hardest time lining up financing. But even  those with millions in assets and high credit scores are being turned  down if their income is low. And in a low-rate environment, their  investment income counts for less than ever on bank loan applications.

“People  with a lot of resources are usually OK getting first mortgages, but  they are finding they can’t refinance or get funding for a second home,”  says Tyler Vernon, a loan specialist for Biltmore Capital Advisors in  Princeton, N.J. “Of course it’s a nice, high-level problem to have. But  it’s a real problem for retirees in places like the Northeast.”

Also,  while increasingly stringent income requirements are posing the most  barriers, stingy assessments are also a frequent problem for costlier  deals, according to real estate agents and lenders. In part, that’s  because “assessors are protecting themselves because banks have been  suing them over mortgage failures that showed inflated values,” Vernon  says. Costly properties can pose difficulties when assessors try to find  comparable sales for estimating what mansions are worth, Love adds.

“Everything  has moved to a much more rigorous underwriting environment, and every  datapoint in every application is verified, checked and documentation is  gone over multiple times,” says Michael Fratantoni, vice president of  single-family research and policy development at the Mortgage Bankers  Association.

People with money are finding ways  to buy properties, but in the first go-around, they are finding  surprises. “The lenders want income statements. They want to check with  employers directly on people’s work record, and they want to see people  who have been in jobs for awhile,” Love says. “That’s not something our  wealthy buyers can always show.”

To be sure,  it’s first-time buyers and people with moderate incomes who are having  the most trouble getting credit, Fratantoni says. But this is a  dramatically different lending environment no matter what income strata  you are in. The MBA’s index on mortgage credit availability has risen  slightly over the past year, but it’s nothing like it was prior to the  crash. The MBA’s credit availability index is just two years old. But it  calculates that home financing would have been eight times as easy in  the years leading up to the housing collapse.

Still,  some lending has thawed a bit. The MBA says there has been some recent  easing up on loan requirements, and wealthier borrowers have benefited  the most: Even borrowers without high incomes are starting to qualify  based on healthy savings and high credit scores alone. “They have a  better chance, but not every lender is willing to do that,” Fratantoni  says. “It might require some shopping around.”

But  even as the housing market improves, loan originations overall are  expected to drop by 10 percent this year versus last, according to the  MBA. Banks remain reluctant to part with their own reserves, even though  they are flush after five years of easy money from the Federal Reserve.  Fratantoni says the change in credit availability reflects the banks’  more prudent lending and the elimination of “no-documention” and  “interest-only” loans that led to many of the foreclosures in the real  estate crash.

Also, bad loans of all shapes and  sizes are still working their way through foreclosures and court  proceedings. Just this week, prosecutors in New Jersey filed charges  against one of television’s “Real Housewives of New Jersey,” Teresa  Giudice, and her husband Giuseppe “Joe” Giudice, who were charged with  falsifying income data on $2 million in home mortgages dating back to  the early 2000s when standards were loose.

Financial  regulators are also pushing for controls to avoid the excesses that led  to the crash. The new Consumer Financial Protection Bureau has been  pushing for a limit on borrowing when a debt-to-income ratio exceeds 43  percent, although Congressional opponents worry it will “reduce access  to credit that qualified borrowers need to buy homes,” according to a  press release issued by members of a House Financial Services  subcommittee.

Lending experts say consumers  need to be well-prepared to deal with the stringent process when they  seek loans. Documentation is important, sometimes in the form of a  letter from an employer. People seeking mortgages should also be  prepared to shop for deals. Different lenders have much different  standards. Down payments are rising for many loans, with 20 percent to  30 percent equity required from private lenders. For those who qualify  for FHA loans, the down payment is 3.5 percent, but requirements for the  federal lending program are stringent. Two years in a job and a credit  score of 620 or better are needed, and costly mortgage insurance adds  more than a percentage point to the lifetime cost of the loan. For  wealthy buyers, FHA loans don’t help much since they are capped at  $625,000.

The high-end lending market is  slowly recovering, though, and private lenders are extending credit for  the well-heeled while avoiding the starter-home set that can borrow  through government programs. “It’s more work but things are getting  done,” says Love, whose clients are mostly those with enough money to  afford a second home. “We are very busy this summer, and we haven’t even  gotten to the peak period [at summer’s end when people often buy  vacation homes.]”

Biltmore’s  Vernon says his firm has been busy getting loans for wealthy clients  who borrow against their investment portfolios. The rate of borrowing in  so-called margin accounts has reached near the all-time highs just  before the 2008 market crash. That strategy is attractive because such  arrangements offer rates as low as 1 percent and sometimes even less,  and they require no additional down payment because the banks hold the  securities that back up the loans. “It’s almost no risk to the banks  because the securities are pledged as collateral,” Vernon says.

The  downside is that if the securities fall in value, the borrower’s assets  can be liquidated. Vernon says he advises caution and recommends such  borrowers keep “back-up emergency funds” like a home equity credit line.  The rates can also increase as overnight bank-lending benchmark rates  rise.

MBA’s Fratantoni worries that a further  increase in interest rates could cause problems for borrowers at all  income levels. “People’s credit has been getting better since the  crisis,” he says. “But any time you see a rapid increase in rates,  anything tied to variable rates has some additional risk.” Bankers and  consumer advocates find themselves in rare agreement on the issue.  Easing loan terms too much could be risky for banks and borrowers.

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Biltmore Capital Advisors’ Tyler Vernon is named a New Jersey Five Star Wealth Manager by New Jersey Monthly Magazine!

Press Release: Biltmore Capital Advisors – Thu, Apr 11, 2013 9:00 AM EDT

PRINCETON, N.J., April 11, 2013 /PRNewswire/ — Biltmore Capital Advisors president and CIO, Tyler Vernon, receives ranking among New Jersey Monthly Magazine’s 2013 Top Wealth Managers.

The list recognizes the efforts and success of financial professionals across the state. The award is presented by New Jersey Monthly Magazine that engaged Five Star Professional, an independent research company, to perform research and rankings of Wealth Managers in New Jersey.

“It is a tremendous honor to be ranked as a Five Star Wealth Manager,” says Vernon. “My team and I strive to consistently deliver outstanding service and investment advice, and this award underscores our ongoing efforts.”

Mr. Vernon is president and Chief Investment Officer at Biltmore Capital Advisors. Mr. Vernon founded the Princeton, NJ-based firm after spending nearly a decade working on Wall Street. Biltmore Capital Advisors specializes in investment planning and management, with a particular focus on alternative investment strategies. Mr. Vernon is often featured by the national media, including on CNBC, Fox Business, Bloomberg, and in the Wall Street Journal.

Vernon was featured in the January 2013 issue of New Jersey Monthly Magazine. Vernon was also recognized on the 2011 list.

About Biltmore Capital Advisors
Biltmore Capital Advisors is a SEC-registered investment advisory firm headquartered in Princeton, NJ. Tyler Vernon is Chief Investment Officer of the firm, which employs “family office” services and fiduciary oversight for high net worth clients, endowments and foundations.

For more information on Biltmore Capital Advisors and its offerings, please visit

CONTACT: Marissa Foy for Biltmore Capital Advisors at 610-228-2104 or

Award candidates were then evaluated against 10 objective eligibility and evaluation criteria associated with wealth managers who provide quality services to their clients such as client retention rates, client assets administered, firm review and a favorable regulatory and complaint history. Five Star Professional finalized the list of Five Star Wealth Managers to be no more than 7% of the wealth managers in the area.
• Wealth managers do not pay a fee to be considered or placed on the final list of Five Star Wealth Managers.
• The Five Star award is not indicative of the wealth manager’s future performance.
• Wealth managers may or may not use discretion in their practice and therefore may not manage their client’s assets.
• The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine.
• Working with a Five Star Wealth Manager or any wealth manager is no guarantee as to future investment success, nor is there any guarantee that the selected wealth managers will be awarded this accomplishment by Five Star Professional in the future.
For more information on the Five Star award and the research/selection methodology, go to www.fivestarprofessional.com

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Brawling Politicians: Bad for Your Portfolio?

By Richard Satran           September 7, 2012

The love fest of the political convention season ended almost as soon as it began, when the first prime-time speaker, House Speaker John Boehner, set a Republican agenda that “starts with throwing out the politician who doesn’t get it, and electing a new president who does.” Since then, the two parties have launched into a brawl in which few rules apply, and flame-throwing and facile lies are standard gear.

The loser could well be you and your stock portfolio over the next two months. Much of the heated rhetoric will consist of Republican claims that President Obama mishandled the economy or Democrats saying how they believe Mitt Romney’s programs would hurt people more.

In that kind of environment, investor confidence, already low, could sink further, say some analysts. Fund company T. Rowe Price said in its recently monthly report, “investors are focused on an apparently never-ending eurozone crisis and the campaign rhetoric emanating from both major political camps in the U.S.”

Good-time elections now history. Historically, election years have been good times for investors. But over the past five elections, the Dow has fallen an average of 3.72 percent, and declined in four out of five September-to-November election day periods.

“The past several presidential elections, and politics in general, just keep getting more nasty,” says Tyler Vernon, chief investment officer and co-founder of Biltmore Capital Advisors in Princeton, N.J. “It’s not the way things were 25 years ago. Over the past few cycles, it has become much more negative. With Democrats and Republicans, the attack ads are questioning leadership more and more. It hurts investor confidence.”

The perception that advertising is growing more negative is borne out by numerous studies. A recent one by the Wesleyan Media Project showed negative ads rising by a staggering amount—accounting for 70 percent of all presidential advertising in the early few months of this year, compared with just 9 percent in the 2008 period (although other factors, including fewer positive ads run by groups supporting Obama in this cycle, caused some of that shift.)

The big difference over the past four years is that so-called Super PACs have been freed from spending limits, or even listing contributors, and the Big Money advertising has been overwhelmingly negative, the Wesleyan study showed.

Politicians have always had a penchant for painting a negative picture of their opponents—some remember President Johnson’s vivid black-and-white television ad showing a girl picking a flower as a nuclear mushroom cloud appeared behind her, a slap against his opponent Barry Goldwater’s strident anti-Communism, or George H.W. Bush’s ads accusing Massachusetts governor Michael Dukakis of furloughing a convicted murderer, Willie Horton, who embarked on a violent crime spree.

Those negative campaigns, though memorable, were not the norm. The LBJ ad was quickly withdrawn. And ads were often about “finding prosperity,” rather than slamming the economy, Vernon says. From 1900 to 1988, the market scored nearly twice as many gains as losses in the September-through-November election span. The Dow gained in 15 of the years and declined in eight. The average September-to-election gain was 1.7 percent, exactly in line with the average gain for all two-month periods since 1900.

Impact of financial crisis. The most recent election losses can be blamed at last partly on the crash of 2008, which was an election year event, although election years of the past also had some ugly Octobers, including the 1932 pre-election period in which stocks plunged 20 percent.

But the rising importance of the economy as an election factor and a surge in negative advertising are also playing a critical role, studies show. It’s not just your imagination; things really have gotten uglier since the days of Ike and Adlai, or even since Bill Clinton and George Bush the First.

The Google Ngram tool, which measures and displays keywords in publications going back to 1800, shows a dramatic “hockey stick” upswing in the term “negative political advertising” after 1988. It also shows the steady rise of the phrase “the economy” in the national dialogue. Social issues and foreign policy have faded, in relative terms.

The issue-oriented negative ads might be even more effective at swaying voters than obvious personal attacks, suggested one study by two Rutgers professors and one from George Washington, “The Effects of Negative Campaigning, A Meta-Analytic Reassessment.” They saw significant potential for the practice to undermine public sentiment.

“When that happens, people spend less, they don’t hire, they don’t buy homes,” says Vernon.

The focus on business issues likely reflects the fact that many of the Super PAC contributors are wealthy and tend to be most interested in issues affecting their financial standing. Supreme Court rulings in 1976 and 2010 affirmed a free-speech right to spend one’s money on political campaigns without limit, freeing wealthy contributors and candidates of key post-Watergate campaign reforms. Many politicians began shunning matching funds to give them more fund-raising freedom.

What investors are doing. “A lot of people are just incredibly confused about the economy, and they are like deer caught in the headlights,” says Vernon. “The campaign promises and attacks are not helping. There is always uncertainty about elections, but it is really magnified this time. The leadership, both Democrat and Republican, acts like they are in kindergarten when it comes to getting things done. They prefer to do things that are right for the party, not for the country,” citing the near shut-down of the federal government over the disagreement on extending the debt ceiling.

Still, the market responds to influences well beyond the scope of any election, and there’s no doubt it’s been surprisingly strong in the August through early September period with the S&P returning to prerecession highs. But economic indicators, like the latest ugly jobs report, are still weak. “It’s hard to get really excited about the market when all that really gets it going is the chance for easier Fed policy,” says Vernon.

He is advising his own clients “to stay long, but stay hedged.” He advises a balanced portfolio and a long-term view. Studies in the past have shown that the market does worst during the first two years of a presidential term, and tends to do better the second two years.

While stocks have performed poorly in recent pre-November periods, bonds have been generally stronger, gaining in price and offering steady yield.

“From now to the election, bonds will be a fairly good place to be,” Vernon says. “People do not want to invest in riskier things when there is a high level of uncertainty. And there is a lot of that out there now.”


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Stocks End Mixed; Fed Urges Action on Housing

By Kaitlyn Kiernan 01/04/12 – 04:20 PM EST

NEW YORK (TheStreet) — The Dow Jones Industrial Average shot into positive territory Wednesday as commentary from the Federal Reserve on plans to shore up the U.S. housing market overshadowed European debt crisis concerns.

The Dow rose 21 points, or 0.2%, to close at 12,418, after falling 0.5% earlier in the day. The S&P 500 climbed less than a point to 1,277, while the Nasdaq slid less than a point to 2,648.

The turn higher came after the central bank sent a white paper to Congress calling for the federal government to take more action to stabilize the still-floundering U.S. housing market. The paper suggests “redeploying foreclosed homes as rental properties” as a possibility for combating an expected flood of foreclosures hitting the market and prompting another pricing swoon.

“Continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery,” the paper said. In a letter to lawmakers on the Senate Banking and House Financial Services committees, Fed chairman Ben Bernanke wrote, “Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery.”

Concerns about Europe’s sovereign debt crisis resurfaced Wednesday with early declines underlined by fresh worries that the situation in Spain is worsening. The Iberian country is considering applying for loans from the eurozone bailout fund and the International Monetary Fund to help the restructuring of its banking industry, the Spanish newspaper Expansion reported, citing anonymous sources.

Also, overnight deposits of commercial lenders hit a record high at the European Central Bank, suggesting that Europe’s banks remain incredibly cautious about lending to each other. Shares of UniCredit, Italy’s largest bank, sank 14.5% after the lender said it will sell $9.8 billion worth of new shares to boost capital.

Investors are also sensitive to rising borrowing costs in the eurozone with a France holding a bond auction on Thursday, and Italy and Spain about to sell debt next week.

Germany’s DAX lost 0.89% while London’s FTSE was down 0.55%. Overnight, Japan’s Nikkei Average settled 1.24% higher, and Hong Kong’s Hang Seng was down 0.8%.

“We are holding very neutral until we get some better volume trading and a better sense of what investors are going to do,” said David Ader, rates strategist at CRT Capital Group. “On the surface we have mixed to bearish technicals, better data and some degree of calm in Europe.”

The U.S., however, received another piece of positive economic data. The Commerce Department reported that U.S. factory orders rose 1.8% in November after a 0.4% fall in October, slightly beating the 1.7% forecast of economists polled by Thomson Reuters. Meanwhile, General Motors(GM_), Ford Motor(F_) and Chrysler Group beat analysts’ estimates for December car sales, with sales getting a boost from increasing consumer confidence and ads around the holiday season.

GM said that its December sales rose 5%, led by a 9% gain at Chevrolet. For the full year, GM sales rose 14%, to more than 2.5 million vehicles, and GM gained market share. Ford said that its car sales rose 10% last month and 11% for the year. Meanwhile, Chrysler’s sales jumped 37% in December. GM traded 0.5% higher while shares of Ford rose 1.5% on Wednesday.

In other corporate news, Yahoo!(YHOO_) tapped PayPal President Scott Thompson, who runs eBay’s (EBAY_) online payments unit. Yahoo! had been without a permanent CEO since firing Carol Bartz in September. Shares fell 3.1% to $15.78.

A big mover in afternoon trades was Eastman Kodak(EK_) following a report that the 132-year old company is preparing to file for bankruptcy in the “coming weeks if it fails to sell its patents. The report from The Wall Street Journal, which cited anonymous sources, comes after months of speculation that the company was preparing to take this step. Kodak shares tumbled 28% to 47 cents.

Jefferies Group’s(JEF_) executives and other employees at the company’s prime-brokerage unit threatened to leave the firm in a dispute over issues including a recent restructuring and year-end compensation, The Wall Street Journal reported, citing people familiar with the matter.

Jefferies executives and its global head of prime brokerage, Glen Dailey, reportedly held meetings Tuesday to discuss the issues but Dailey said that no one was leaving, adding that the “family affairs are now in order.” Jefferies in recent weeks has seen its stock under attack over its European exposure. Shares slipped 2.6% to $13.64.

Acme Packet(APKT_), a networking-equipment maker, lowered its outlook for the fourth quarter. The company, whose products include both hardware and software, now sees non-GAAP earnings of 26 cents to 28 cents a share for the three months ended Dec. 31 on revenue ranging from $84 million to $86 million. The current average estimate of analysts polled by Thomson Reuters is for a profit of 37 cents a share in the quarter on revenue of $93.4 million. Shares plunged 19% to $25.70.

With most of the day’s trading in negative territory stocks barely hung on to Tuesday’s strong New Year’s rally, which saw the S&P 500 index finish at its highest level since late October. The Dow, up 1.5%, closed at its highest since July 2011.

Analysts think that the S&P 500 will gain 6.6% by the year’s end, compared with a flat finish for 2011, according to polls by Reuters. Investors are now looking carefully at how stocks perform the first days into the new year, as track records show that positive momentum in January often translates into a bullish year overall.

“Transports and technology stocks could help the market in the beginning of the year,” noted Tim Ralph, portfolio manager at Biltmore Capital Advisors. Both sectors benefited from online shopping in the holiday, explained Ralph. “We could see strength here later this month and in early February.”

February oil futures settled up 26 cents to $103.25 a barrel, while February gold futures gained $12.20 at $1611.90.

The dollar index was up 0.5%. The benchmark 10-year Treasury was down 12/32, pushing the yield to 1.991%.

– Written by Kaitlyn Kiernan in New York.

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Stocks: A ‘schizophrenic’ day

By Hibah Yousuf August 1, 2011: 4:27 PM ETNEW YORK (CNNMoney)

Stocks took a wild ride Monday. The day started with an early rally fueled by hopes of a debt deal, but a weak manufacturing report quickly deflated that optimism — leaving stocks little changed as investors await a House vote.

The Dow Jones industrial average (INDU) ended down just 11 points, or 0.1%, after tumbling more than 1% earlier in the session. That decline followed a jump of 139 points, or 1.1%, at the start of trading.

Home Depot (HD, Fortune 500) and Merck (MRK, Fortune 500) were the biggest laggards on the blue chip index, with shares falling more than 2%.

The S&P 500 (SPX) slid 5 points, or 0.4%; and the Nasdaq composite (COMP) lost 12 points, or 0.4%.

While investors showed early enthusiasm for the debt ceiling deal, which still needs Congressional approval, the fragile U.S. economy quickly took center stage.

“The market is schizophrenic the way investors are getting overly panicked and overly excited,” said Tyler Vernon, CIO of Biltmore Capital.

Deal or no deal. Economy still stinks.
Last Friday’s second-quarter GDP report in particular served as a stark reminder that the economy is growing at a sluggish 1.3% pace.

The gloom continued into Monday, with a report that showed that the manufacturing sector nearly stood still in July. The Institute for Supply Management’s manufacturing index slid to 50.9 in July — much worse than the level of 54 that economists were expecting, and down from 55.3 in June.

“We keep seeing data that shows the economy is getting worse,” said Kim Caughey Forrest, senior equity analyst at Fort Pitt Capital Group. “Earlier this year, we thought the economy would improve — albeit gradually. But all the negative surprises are concerning investors.”

Stocks posted their worst weekly performance in more than a year last week, losing $700 billion in market capitalization.

America’s debt crisis: Obama announced late Sunday that lawmakers reached a deal to raise the debt ceiling and dramatically curb federal spending — and to avoid a costly default in the end.

But the president cautioned that lawmakers’ work was not done, with the deal expected to go up for a vote Monday.

Even if the deal passes, which many investors are expecting at this point, Vernon said he doesn’t think it will do much for markets. While there may be a short relief rally, the market is still facing serious longer-term headwinds.

“If I look out 18 months from now, I’m having a hard time seeing anything good for the economy — no matter what deal is made,” said Vernon, adding that investors are still concerned about high unemployment and the eurozone debt crisis.

Debt ceiling: What they’ll be voting on
“We’re going to see some high volatility and more of a trading up, trading down environment until these clouds clear,” he said.

Plus, a downgrade of the United States’ credit rating still isn’t out of the question — even if the debt ceiling is raised.

“Eventually there’s a downgrade coming, it depends on Moody’s, S&P and Fitch and they’re very slow-moving,” PIMCO founder and managing director Bill Gross told CNN Sunday. “This country has $10 to 12 trillion worth of outstanding debt. In addition, however, we’ve got about $60 trillion worth of liabilities. I call this Debt Man Walking.”

PIMCO’s Gross: U.S. is ‘debt man walking’
Economy: The job market remains one of the roughest spots in the economic recovery, and investors will be bracing for the all-important July jobs report due Friday.

The U.S. economy is expected to have created 78,000 jobs last month, according to a consensus of analysts polled by Briefing.com. In June, the economy added a paltry 18,000 jobs.

“We’re 25 months into the recovery, and the job market is moving in the right direction but it’s still abysmal,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. “If the figures on Friday come below estimates, that will only compound economic concerns and lift the probability of the economy falling back into a recession.”

Companies: Shares of HSBC Holdings PLC (HBC) rose 1.6%, after the London-based bank announced it will eliminate 25,000 jobs by 2013. The bank has already trimmed 5,000 jobs. The job cuts are seen as a positive, since they will help the bank reduce costs. HSBC also posted a solid profit.

Defense contractors under debt deal cloud
Shares of defense firms slipped, since the debt deal includes about $2.4 trillion in spending cuts that would hurt major government contractors.

Shares of Northrop Grumman (NOC, Fortune 500) and Lockheed Martin (LMT, Fortune 500) sank more than 1%, while Raytheon (RTN, Fortune 500) and General Dynamics (GD, Fortune 500) also declined.

Currencies and commodities: The dollar rose against the euro, British pound and Japanese yen.

Oil for September delivery fell 81 cents to settle at $94.89 a barrel.

Gold futures for December slipped $9.50 to $1,621.70 an ounce.

Bonds: The price on the benchmark 10-year U.S. Treasury edged higher, pushing the yield down to 2.74% from 2.80% late Friday.

World markets: European stocks also drifted into the red in afternoon trading and ended lower. Britain’s FTSE 100 fell 0.7%, the DAX in Germany dropped 2.8% and France’s CAC 40 sank 1.9%.

Asian markets ended the session with gains, with Tokyo’s Nikkei leading the rally, after Obama announced the debt deal. The Shanghai Composite edged higher 0.1%, the Hang Seng in Hong Kong rose 1% and Japan’s Nikkei climbed 1.3%.

First Published: August 1, 2011: 9:38 AM ET

Link: http://money.cnn.com/2011/08/01/markets/markets_newyork/

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Bankrate.com: What to do about foreign currency exposure

By Dan Weil

The dollar has taken a wild roller coaster ride over the past three years, wreaking havoc on a portion of many investors’ portfolios. If you’re wondering what to do about that, you aren’t alone.

“Everyone is talking about this. Clients are getting concerned,” says Tyler Vernon, chief investment officer of Biltmore Capital Advisors in Princeton, N.J.

Strategies to deal with the dollar’s fluctuation range from avoiding any foreign currency exposure to eagerly seeking it. Such exposure can help diversify your portfolio and enable you to benefit from a weaker dollar.

You can even speculate on the direction of currencies using exchange-traded funds, or ETFs, options or futures. But many financial advisers recommend against such activity, because the risks of speculation can be high.

Not for novices

“Most people don’t have the ability to analyze or anticipate these kinds of currency moves,” says Charles Lieberman, chief investment officer at Advisors Capital Management in Hasbrouck Heights, N.J. “That’s really a professional’s market, and professionals often get it wrong. It’s not something most individuals should be doing.”

He says you may want to avoid straying from the dollar at all. “We earn our compensation in dollars and spend our income in dollars. When you go into other currencies, it entails complications and costs that are significant.”

If you desire to tap into economic growth overseas, you can simply invest in blue-chip U.S. companies that generate a lot of their revenue there, Lieberman says.

Others are more adamant about the need for currency diversification. “If you’re a dollar-based investor, it’s worthwhile to have exposure outside of the dollar,” says Kevin McDevitt, a mutual fund analyst for Morningstar research firm in Chicago.

Given the dollar’s weakness in recent years and the strong possibility that the Federal Reserve will maintain an accommodative monetary policy, “it’s a good idea to look for ways to diversify out of the dollar,” he says.

To hedge or not to hedge?

The main currency question for most individual investors is whether to buy international stock and bond funds that hedge their foreign currency exposure. The managers of these funds often purchase their foreign stocks and bonds with the issuers’ home currencies.

But your fund shares are priced in dollars and any dividends and interest income are paid to you in dollars, of course. So the fund must translate its holdings from their native currencies into dollars. When foreign currencies rise and the dollar falls, that will boost the dollar value of fund shares and dividends or interest payments.

Conversely, when foreign currencies fall and the dollar rises, that will depress the value of fund shares and dividends or interest payments.

Hedging strategies, generally involving futures and options, allow fund managers to avoid any impact from currency fluctuation. Therefore, share and dividend-interest payment values won’t be affected whether the dollar goes up or down.

If you want to take currencies out of the equation, you’ll want to purchase funds that hedge, though you probably will have to endure higher fees to pay for the hedging strategy.

But if you want exposure to foreign currencies, which will help you when the dollar falls and hurt you when it rises, then you’ll want an unhedged fund.

‘Waste of money’

David Cowles, director of investments for Mosaic Financial Partners in San Francisco, recommends against hedging. “We like a diversified portfolio to hold U.S. and foreign assets,” he says. “But in the long run, we think currency movements are a wash. It does reduce volatility, but there is a cost. We think it’s a waste of money.”

If you have a strong view on the dollar or another currency’s direction, there are several ways to put your money behind your view. Perhaps the easiest and safest are currency ETFs. Conventional wisdom has it that emerging market currencies will gain against the dollar in coming years, says Michael Sheldon, chief market strategist at RDM Financial Group in Westport, Conn.

If you want to speculate on that view, you can invest in a Chinese yuan, Indian rupee or Brazilian real ETF, for example. The fund’s value will rise if the currency does, and you will receive income based on the country’s money market rates. But beware: Conventional wisdom can often be wrong.

More sophisticated hedging can involve futures, options, managed futures funds and structured products. But most of these strategies are complicated and can incur substantial costs.

“For the average investor, getting involved in currency markets is probably way too complicated and not worth the hassle,” Sheldon says.

Link: http://www.bankrate.com/finance/investing/what-to-do-about-foreign-currency-exposure.aspx

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CNN Money: Earnings: The market’s bright spot

By Hibah Yousuf July 3, 2011: 7:26 AM ET

NEW YORK (CNNMoney) — Hooray for earnings! The economy may be slowing, but don’t expect too much of a hiccup in the upcoming earnings season.

Experts are optimistic that Corporate America’s balance sheets will continue to improve, and say earnings for S&P 500 companies are on track to rise 13% this year, according to an exclusive CNNMoney survey.

Of course that’s nowhere near the 47% earnings growth companies booked in 2010, but that’s to be expected since earnings were lapping the recession-dark quarters of 2009 last year.

Plus, when it comes to earnings and their impact on a company’s stock, it’s all about how they fare against the market’s expectations. So while year-over-year growth may slow, profits are expected to largely be in-line with or ahead of forecasts.

“We continue to look for earnings and revenues to exceed expectations,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research. “Will they slow some the second half of the year? Maybe. But it is all about expectations, and we think analysts are still too bleak as to how strong earnings will come in.”

A stormy year for stocks

Though the majority of companies don’t begin reporting results until the second week of July, a handful of firms that operate on a slightly adjusted calendar have already offered up a glimpse into what may come.

Last week, FedEx (FDX, Fortune 500) delivered earnings and sales that topped analysts’ estimates for its fiscal quarter ended in May, and issued a healthy outlook for the next quarter and full year.

“So far, so good,” said Donald Selkin, chief market strategist at National Securities. “There’s somewhat of a disconnect between the economy and Corporate America. Companies aren’t hiring, and there’s still not much pressure to do so. Savings from that have helped profit margins.”

Results from used car dealership CarMax (KMX, Fortune 500), supermarket chain Kroger (KR, Fortune 500), homebuilder Lennar (LEN) and retailer Bed Bath & Beyond (BBBY, Fortune 500) also beat expectations.

While Oracle’s (ORCL, Fortune 500) earnings and sales figures also exceeded forecasts, investors were disappointed by the software giant’s hardware sales.

CNNMoney survey: Where the markets are headed

At nearly 9%, profit margins are the fattest since 2007, according to Standard and Poor’s data.

Those will inevitably begin to contract, said Tyler Vernon, chief investment officer at Biltmore Capital, but revenues will strengthen so margins will ultimately remain at a healthy level.

But it’s not all sunshine and roses. There will be some weak spots.

In particular, companies that rely on commodities will be under pressure since prices for oil, metals, and agricultural products remain strong.

“Food-based companies and apparel retailers have been commenting that the high price of commodities are cutting into margins, and we’ll probably hear more comments along those lines in the second quarter reports,” said Peter Tuz, president at Chase Investment Counsel.

But even so, investors will likely look at those soaring commodity prices and subsequent economic weakness as short-term strains, and be willing to overlook the shortfalls, said Marc Pado, chief investment strategist at Cantor Fitzgerald.

Except for energy companies. With oil prices above $100 a barrel for the bulk of the quarter, companies like Exxon Mobil (XOM, Fortune 500) and Chevron (CVX, Fortune 500) will likely enjoy a nice boost to their bottom lines.

Link: http://money.cnn.com/2011/06/27/markets/earnings_markets_in_depth/

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CNN Money: Stocks: Worst day of the year for Dow, S&P 500

By Hibah Yousuf June 1, 2011: 4:34 PM ET

NEW YORK�(CNNMoney) — A triple dose of bad news sent stocks sharply lower Wednesday afternoon, with the Dow and S&P 500 posting their steepest losses in nearly a year.

The Dow Jones industrial average (INDU) fell 280 points, or 2.2%, with all of the blue chip index’s 30 components in the red. Caterpillar (CAT, Fortune 500), Alcoa (AA, Fortune 500) and Bank of America (BAC, Fortune 500) were the worst performing stocks on the blue-chip index, falling more than 4%.

The S&P 500 (SPX) lost 31 points, or 2.3%, and the Nasdaq Composite (COMP) slid 66 points, or 2.3%.

The declines were the worst since last August for the Dow and S&P, while the Nasdaq’s performance was the worst in nearly four months.

Stocks were under pressure right at the open following a dismal report on private sector employment, and the selling gained momentum after the U.S. manufacturing report was released.

The Institute for Supply Management’s manufacturing index for May fell to 53.5, falling short of economists forecast for a 57 reading.

“Weak economic data has started to snowball,” said Michael Sheldon, chief market strategist at RDM Financial. “Initially, we just had bad news from the weekly jobless claims data, but now we’re starting to see a broad-based economic slump.”

Late in the trading session, the slide in stocks got steeper as concerns about Europe’s debt problems resurfaced. Moody’s cut Greece’s bond rating by three notches to Caa1, which put the debt-ridden country’s debt even further in junk territory.

Markets’ mixed signals – StockTwits

Commodities followed stocks’ lead to trade lower. Oil prices slumped 2.4% to $100.29 a barrel, while copper slid 1.7% to $4.11 a pound.

Shares of Freeport McMoRan (FCX, Fortune 500), the world’s largest copper producer, tumbled 4%.

The daily gyrations stem from underlying worries about where the economy is headed.

Wall Street’s most widely cited measure of volatility and fear, the VIX (VIX), surged more than 18% Wednesday to 18.31. But it’s still far below 30 — the level that’s thought to indicate investor fear.

The signs of a stalling recovery have been building during the last several weeks, prompting stocks to deliver their worst monthly performance in May since August 2010.

But while it’s been a rough several weeks, stocks are still up about 5% for the year.

Home prices: ‘Double-dip’ confirmed

Market experts say stocks will likely struggle through June, as investors prepare for the end of the Federal Reserve’s $600 billion bond buying program, commonly known as QE2.

Economy: The first of this week’s jobs-related economic reports showed that the pace of planned job cuts edged higher in May, according to a report from outplacement consulting firm Challenger, Gray & Christmas.

A separate report by ADP showed private-sector payrolls added only 38,000 jobs in May. The number fell well below the 170,000 private sector jobs economists were expecting, according to an estimate from Briefing.com.

Both sets of data are typically used to forecast the government’s closely watched monthly jobs data due Friday.

A CNNMoney survey of 26 economists expect the government’s jobs report to show a total gain of 170,000 jobs, and a private sector gain of 190,000, with the unemployment rate edging down to 8.9%.

The Commerce Department said construction spending rose 0.4% in April, following a 0.1% rise the previous month. Economists were expecting spending to drop 1%.

5 stocks for cloud computing

Companies: Shares of Marathon Oil (MRO, Fortune 500) slipped 2.8% after the Houston-based company said it is buying oil and natural gas fields within the state’s Eagle Ford shale formation for $3.5 billion.

Telvent (TLVT)’s stock jumped more than 15% following news that the energy software company will be acquired by Schneider Electric for $1.4 billion.

Shares of JoS A. Bank Clothiers (JOSB) tumbled 13% after the men’s clothing retailer’s first-quarter profit failed to meet Wall Street’s expectations.

World markets: European stocks fell Wednesday. Britain’s FTSE 100, France’s CAC 40 and the DAX in Germany shaved more than 1%.

The United Kingdom’s manufacturing sector also signaled weakness. While the sector did continue to expand, it grew at the slowest rate since September of 2009.

And while China’s manufacturing sector continued to expand, the most recent data showed that it expanded at the slowest rate in 10-months.

Asian markets ended mixed. The Shanghai Composite finished the session flat, while the Hang Seng in Hong Kong lost 0.2% and Japan’s Nikkei ticked up 0.3%.

How a Greek farce could delight the dollar

Currencies and commodities: The dollar rose against the euro and the the British pound but slipped versus the Japanese yen.

Gold futures for August delivery rose $6.40 to settle at $1,543.20 an ounce.

Bonds: The price on the benchmark 10-year U.S. Treasury rose, with the yield dipping below 3% for the first time since December.

Link: http://money.cnn.com/2011/06/01/markets/markets_newyork/?section=money_latest

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Market Watch: Funds Use Options to Enhance Income

By Reshma Kapadia

At a time when investors are caught between meager interest rates on savings accounts and worries about whether the recent stock-market run-up can continue, funds using options to generate extra income or cushion against losses, or both, are gaining attention.

One of the most popular approaches involves “covered calls,” a strategy in which an investor—in this case a fund—generates extra income by selling to another investor the right to buy some of its stock holdings at a set price, if the shares rise above that price by a set date. In essence, the fund is getting more dollars today in exchange for giving up potential gains down the road. Other options may be used simultaneously to limit downside risk.

“We think the [stock] market has experienced most of the gain for the year already and is probably going to see more volatility, so this strategy makes a lot more sense at this point” than in some other environments, says Tyler Vernon , chief investment officer of Biltmore Capital Advisors, Princeton, N.J., which has $600 million under management.

The Chicago Board Options Exchange’s CBOE S&P 500 BuyWrite index, which tracks covered calls, outperformed the Standard & Poor’s 500-stock index over the decade through March, with annualized returns of 3.5% versus 3.4%. And the S&P 500 had 30% more volatility than the CBOE index.

“Covered-call writing is always less risky than outright stock ownership,” says Dick Cancelmo , manager of Bridgeway Managed Volatility /quotes/zigman/291455 BRBPX -0.26% , a fund that uses options. “How much less depends on how aggressive or conservative is the strategy.”

Possible Outcomes

A covered-call strategy typically works best when the market is rising gradually or relatively flat, so the income collected from the option sale exceeds any potential gains that may be forfeited.

If the stock against which a call is written doesn’t rise above the strike price by the agreed-upon date, the fund pockets the extra income from the option sale and gets to hang on to the shares, too. If the stock rises above the price within the agreed-upon time, the fund hands over the stock to the option buyer, forfeiting any future gains, but gets to keep the income from the option sale. Of course, if the stock plummets, the fund is left holding the stock—and the loss—although it is reduced somewhat by the income generated from the option sale.

The highest premiums from selling covered calls typically come from owning the most volatile stocks. “Because you have full exposure to the downside and are capping the upside, you have to be careful to buy high-quality businesses,” says Zeke Ashton , who manages Tilson Dividend /quotes/zigman/378692 TILDX -0.07% .

Options come with their share of risk, so analysts urge investors to stick with fund managers who have a good track record using them and caution against being wooed by high yields without digging deeper.

Not every fund manager uses the same options strategy. Some sell covered calls on a broad index, while others write them on individual stocks, which can be riskier. Others buy put options, or the right to sell, in conjunction with the covered calls to reduce the risk from a market decline.

Here is a look at some funds using covered calls:

Cautious Approach

Gateway /quotes/zigman/227304 GATEX -0.30% , which owns a basket of stocks that resembles the S&P 500, is one of the longest-running funds using covered calls to generate income and put options to cushion the downside. Gateway sticks with index calls and puts, rather than selling and buying options on individual stocks. At any given time, the managers may not be completely hedged on the downside if the puts, which essentially act as insurance, are too expensive. The fund has beaten the S&P 500 over the past decade, with less volatility. But Nadia Papagiannis , alternatives analyst at Morningstar Inc., says Gateway in the past year “has not shone as bright as in the past,” in part because it hasn’t excelled at capturing the market’s recent upside. Over the last three years, it has returned an average of 0.53% annually, putting it in the top half of its long-short category.

Bridgeway Managed Volatility uses its quantitative models to create a basket of stocks designed to mimic the S&P 500. Mr. Cancelmo, who has worked with options since the 1980s, uses them in this fund primarily to reduce risk. He sells covered calls or secured puts, another strategy to achieve the same goal, against the index-like portion of the fund. The fund holds at least a quarter of its assets in high-quality bonds, helping minimize volatility further. While Morningstar says Bridgeway’s quantitative models have been bumpy lately, Mr. Cancelmo says the fund has beaten the S&P 500 since its inception in 2001 with 55% less risk. Over the past three years, it averaged a 1.7% return annually, beating 70% of the long-short funds with which Morningstar groups it.

Seeking More Juice

Neiman Large Cap Value /quotes/zigman/346789 NEIMX -0.40% owns mostly dividend-paying stocks. It sells covered calls on the individual stocks, handing over the rights to the stock typically after the company pays at least one quarterly dividend. “On average, we are collecting about 2% annualized from the dividend and then we feel we can often double that rate of return with the option,” says fund manager Harvey Neiman . While Mr. Neiman sells covered calls on all of the fund’s stocks, he doesn’t necessarily sell the right to the full amount of any one holding. “If we get a raging bull market, you want some of the upside,” he says. The fund returned an average of 1.41% a year over the last three years, putting it in the top half of large-cap value funds.

Aston/M.D. Sass Enhanced Equity /quotes/zigman/496328 AMBEX -0.11% holds just 35 to 40 large-cap value companies and sells covered calls against every holding—often with expiration dates that are six months out, which is longer than the average one to two months. The fund’s manager, Ron Altman , says that typically enables him to pocket a larger share of the stock’s potential upside and help meet the fund’s objective of generating cash flow from the calls plus dividends of 10% or more a year. Mr. Altman says he will occasionally buy puts as “catastrophe insurance,” but only when they are cheap. Over the past three years, the fund has averaged a 2.84% return annually, putting it in the top quarter of long-short funds.

Tactical Strategies

Some funds take their cues from the market and don’t always opt for the insurance of put options.

Schooner Fund /quotes/zigman/523065 SCNAX -0.31% buys large-cap stocks and often sells covered calls against them. It also occasionally uses put options against an index like the S&P 500, but only when protection is cheap, which usually means buying puts when the market is flat or climbing. As much as half of the fund’s assets can be invested in fixed income. “Some funds may be bad at doing it tactically, but Schooner has done well so far,” Ms. Papagiannis says.

Tilson Dividend also takes a more tactical approach. The fund tries to combine decently paying dividend stocks with covered calls to generate income. Mr. Ashton, the fund manager, says he doesn’t sell covered calls on every stock in the portfolio and occasionally owns non-dividend-paying stocks for their upside potential.

In general, he says the covered-call strategy allows him to stick with strong high-quality companies to generate the income investors expect, rather than seek out higher-yielding firms with weaker balance sheets. Over the past three years, the fund has averaged a 13.74% return, putting it in the top 1% of the midcap blend category, according to Morningstar.

Link: http://www.marketwatch.com/story/funds-use-options-to-enhance-income-2011-04-03?pagenumber=2

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Market Watch: US Stocks Edge Higher On Strong Factory Data

By Brendan Conway

NEW YORK (MarketWatch) — U.S. stocks inched into positive territory, as a white-hot reading from mid-Atlantic manufacturers outweighed higher-than-expected jobless claims and a rise in U.S. consumer prices.

A day after investors pushed the Standard & Poor’s 500-stock index to twice its financial-crisis low, the Dow Jones Industrial Average rose 13 points, or 0.1%, to 12301 in afternoon trade, while the Standard & Poor’s 500-stock index rose 3 points, or 0.2%, to 1339 and the Nasdaq Composite gained 6 points to 2832. Energy and materials stocks led the S&P 500, while Coca-Cola and Intel led the Dow’s gainers.

Investors were keeping a close eye on tensions in Libya, Bahrain and fears of a standoff between Iran and Israel over the Suez Canal. But so far, those haven’t dominated the day’s trading.

“I don’t see long term these geopolitical issues affecting the corporate earnings story here in the U.S. market, so I’d be using it as a buying opportunity,” Tyler Vernon, chief investment officer of Princeton, N.J.-based Biltmore Capital Advisors said.

The Federal Reserve Bank of Philadelphia’s index of general business activity hit its highest level since January 2004, handily outstripping expectations as it jumped to 35.9 from 19.3 the month before. Even though factories represent a relatively small amount of total U.S. economic performance, they tend to serve as a leading indicator, and the strong reading was seen as a positive signal of the economy’s momentum.

Even so, the U.S. labor market remained sluggish, keeping the optimism in check. Initial jobless claims increased by 25,000 to 410,000 in the week ended Feb. 12, the Labor Department said in its weekly report. Economists surveyed by Dow Jones Newswires had expected claims would rise last week by 17,000 to 400,000. The previous week’s total was revised to 385,000 from 383,000.

Separately, the seasonally adjusted consumer price index last month increased by 0.4% from December, and underlying inflation, which excludes volatile energy and food prices, rose by 0.2%.

Neither the worse-than-expected reading on jobs nor the somewhat higher inflation figures were likely to change investors’ overall positive outlook, said Timothy Harder, chief investment officer at Peak Capital Investment Services. “They both signal that the economy is getting healthier in the bigger picture.”

The euro rose to $1.3593 from $1.3570 late Wednesday. Crude-oil prices neared $86 a barrel, and gold also rose.

Strategists warned that sentiment on simmering Middle East and North African tensions could change quickly.

“If it was just Iran sending ships, that’s one thing, but you’ve also got Libya and Bahrain in the news, plus Egypt,” Jay Suskind, senior vice president at Duncan Williams, said. “I do still think the average investor is more focused on the domestic economy. A geopolitical storm could have investors saying, “‘Let’s take some profits,'” he added.

Among stocks in focus, NetApp weighed on the technology sector, skidding 6.5% after a disappointing earnings report.

Chip maker Nvidia rose 6.8% after the company posted a 31% increase in fourth-quarter earnings and better-than-expected first-quarter guidance late Wednesday.

Skechers USA’s stock rose 1.9% after the shoe company’s fourth-quarter earnings showed better-than-expected top-line growth.

Natural-gas group Williams Cos.’ stock jumped 7.7% after the group’s board approved a plan to spin off its exploration and production business.

Cliffs Natural rose 6.8% after the coal and iron-ore producer reported fourth-quarter profit that more than tripled, with higher sales volume and prices.

Weight Watchers surged 42% and hit an all-time high as the company’s fourth-quarter profit more than doubled. While the activity took most investors in the stock market by surprise, analysts in the options market were abuzz over big, remarkably well-timed trades earlier in the week that set up some investors for huge profits.

“They made a ton of money on these, in a matter of days,” Interactive Brokers equity options analyst Caitlin Duffy said. Big trades Monday in Weight Watchers’ normally thinly traded February $45 call options jumped in price from about 85 cents Monday to near $19 Thursday, a huge windfall for any trader who held the option.

Link: http://www.marketwatch.com/story/us-stocks-edge-higher-on-strong-factory-data-2011-02-17

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