Research in Motion: The End is Near

Research in Motion (NASDAQ:RIMM) has too much to prove to the Street and the consensus is for the pain to continue for shareholders.



(theStockMasters.com | Frank Lara) We knew Research in Motion (NASDAQ:RIMM) had one last run left, that run has occurred and now its time to never look back. Think back to the Blackberry Ban when every other country was threatening to put an end to RIM in 2010. We told our readers to buy at that 52-week low. RIM shares then went on a tear and almost bucked above $70 in Feburary. Friday Research in Motion shares closed within 7.5% of its 12 month low.

Could the same game plan be executed once again? Will Research in Motion shares rise from the ashes and prove the Street wrong? Can lightning strike twice for investors?

The Masters aren't willing to go to bat for RIM this time, that ship has sailed.

Last time RIM hit a 52-week low we screamed "Buy". The company at that time had 41 million subscribers all over the planet, the blackberry bans were all hype, and the Street refused to buy the company's impressive guidance.

rimmHowever we knew a year ago that RIM was eventually going to lose the battle to Google's (GOOG) Andriod system, Apple's (AAPL) incredible iPhone, and even Microsoft's Windows Mobile 7 (MSFT). This time the comeback story is much more difficult to believe and the cold reality is starting to sink in.

Last Thursday, IDC reported a significant shift in smartphone sales for Q1 2011. The key takeway from the stats: Apple (AAPL) and Google (GOOG) continue to own RIMM and Nokia (NOK) when it comes to smartphones. The rankings show Q4 2010 to Q1 2011 increases/decreases in global market share (SeekingAlpha.com | Rocco Pendola).

The numbers were the following:
Nokia: 28% to 24.3%
Apple: 16.1% to 18.7%
RIMM: 14.5% to 14%
Samsung (SSNLF.PK): 9.6% to 10.8%
HTC: 8.5% to 8.9%

Worse yet RIM's average selling price for its BlackBerry devices keeps falling. Too bad the company's stock price can't stop falling.

Research in Motion will continue to rake in revenue, but not at the margins that will enable its share price to become a growth stock. RIM will be lucky to ever hit $70 a share again. It could be possible on a long enough time frame or with a reverse stock merger. Then again, maybe RIM will just fade into the sunset or finally get bought out by Microsoft (MSFT). Regardless of the outcome, RIM as a profitable company is questionable at best.

Bottom line: RIM shareholders are in for a tough ride. The Masters are betting on a new 52-week low before RIM shares make any spark of a comeback.

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What Attracted Berkshire to Lubrizol

Lubrizol's niche market, the critical function of its products, and focus on service lead to better pricing power and stickiness, says Sanibel Captiva Trust's Pat Dorsey.

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Google's Spendthrift Ways Spook Investors

Google (GOOG, $530.70, -47.81) announced its Q1 results last night. The company grew its top line by 27% year over year, topping expectations, but a 54% increase in spending and a clear signal from co-founder and new CEO Larry Page that the expenses would keep, sent investors running for the exits.

Page made a brief appearance on the earnings call last night, expressing optimism about the company's future and saying that management changes Google announced earlier in the year were "all working very well, exactly as planned." Page, who has a reputation for being media averse, exited and left CFO Patrick Pichette and other executives to answer analyst queries.

The costs increases stemmed from the company's announcement at the end of last year that it would increase salaries across the board by 10% and ramp up hiring. It added about 1,900 new employees during the quarter. Google's management argues that is battling other Silicon Valley tech firms for talent and the increased salary scales and aggressive hiring practices are necessary for it to remain a leader in the online industry. Google had over 26,000 employees at quarter end.

"Look, we’re nothing but very, very excited about our reporting 27% year-over-year revenue growth in Q1. This 27% proves really the logic behind our strategy, not only to invest heavily in our core search business and ads, but also in our new emerging businesses like display, like mobile, like enterprise," Pichette told analysts.

"From an investment perspective, our Q1 results don’t only show our continued commitment to invest in hiring, in marketing, and in the other areas; but they also, as you can see through our expenses, they reflect for the first time the full impact of the compensation changes we announced in Q4, the 10% salary increase," he added. "Google is clearly benefiting from and is also fueling the unrelenting pace of the digital economy that’s around us. And it’s growth we believe will benefit both Google, but in fact, the entire ecosystem for a long time to come."

The company reported an adjusted profit of $8.08 per share, which fell short of $8.10 that analysts were projecting as a result of margin pressure from its increased spending.

As reported according to GAAP, Google's profit was $2.3 billion, or $7.04 per share, compared with $1.96 billion, or $6.06 per share, in Q1 2010.

Google's gross revenue grew by 27% year over year to $8.58 billion; revenue excluding traffic acquisition costs (TAC) of $2.04 billion equaled $6.54 billion and easily topped the $6.31 billion Street estimate. Gross revenue grew by 2% from a strong Q4 2010; adjusted for FX and its hedging activities, it was up 1.2%.

The company's adjusted EBITDA equaled $3.63 billion, but the EBITDA margin was cut by -350 basis points sequentially to 55.5% from 59.0% in Q4.

Breaking down the results, revenue from Google's owned and operated (O&O) sites grew 33% year over to $5.88 billion, equal to 69% of total revenue and up 32% from a year ago.

Google’s partner sites generated $2.43 billion in revenues through its AdSense programs, which was 28% of total revenues. It represented a 19% increase year over year.

Other revenue was down -10% year over year to $269 million. Google booked revenue from its Nexus One mobile phone in the year-ago quarter but it has since been discontinued.

On a geographic basis, revenue from outside of the U.S. totaled $4.57 billion, or 53% of total revenues, up from 52% in Q4 and equal to the year-earlier percentage. On a currency neutral basis, the results would have been reduced by -$23 million, the company said. Revenues from the United Kingdom grew by 15% to $969 million, or 11% of the total, down from 13% of the total last year. The disaster in Japan "somewhat negatively" impacted the international results, Pichette said.

Global aggregate paid clicks grew by 18% year over year and 4% sequentially, which Pichette said reflected the accelerated shift of offline advertising to online. Aggregate cost per click (CPC) growth was up 8% year over year and down -1% sequentially. FX had little impact on CPC growth, Pichette added.

TAC expense was 25% of total advertising revenue; other cost of revenue equaled $897 million, including stock-based compensation of $49 million.

Operating expenses totaled $2.8 billion, including approximately $383 million in stock-based compensation. The increase year over year in OpEx was primarily due to payroll, increased advertising, and promotional spend, and some other professional services.

Operating cash flow equaled $3.2 billion. Google spent $890 million in CapEx in Q1. The majority of CapEx was related to facilities expenses and data center operations. Google bought two buildings in Q1, one in Dublin and one in Paris.

Analysts were mixed in their reaction to the company's results. Citigroup cut its rating on Google to a "hold" from a "buy," calling the stock a "show me story."

Colin Gillis of BGC Partners called the stock "dead money until summer," and criticized Page's brief remarks on the call.

"Our opinion was the 370-word introduction that was delivered by the CEO that did not include any comments on how he wanted to shape the company was lackluster," Gillis wrote. He also rates the stock a "hold."

Other more bullish analysts -- the overwhelming majority of the 41 analysts who follow the company rate the stock a "buy" or "strong buy" -- were more willing to wait and see, though several adjusted their targets and/or EPS estimates. The following comment from Benchmark Capital was typical of the bulls' camp:

"Google managed costs well through the recession but began to ramp expenses earlier than most. This proved successful as 2010 top-line growth accelerated to 26% from 10% in 2009. Based on this track record, we give Google the benefit of the doubt that investments will pay off and scale over time. Google’s primary areas of investment offer rewarding profit margins," the firm wrote.

BMR Take: Leaving aside the debate over whether Google is spending wisely or recklessly for one moment, its core business actually performed very well. The fact that revenue from its O&O sites is growing faster than network revenue is a good trend for Google as will drive down TAC expense as a percentage of revenue. The top-line growth was clearly excellent; Google shows no sign of losing appreciable search market share.

Google investors clearly aren't pleased with the company's increased spending, but the company's management is equally unapologetic about it. Several speakers talked about the array of new products Google has launched over the last 18 months, pointing to the success of Android in particular and noting that YouTube has become a solid platform for advertisers.

The fear is that Page will let spending get out of control; we agree that his first appearance as a CEO on a conference call was hardly inspiring. Many people are media shy, but hopefully he'll get some coaching because a CEO that can't articulate a clear strategy is not going to inspire investor confidence even if he is a tech genius and a co-founder of the company.

Trading at about 11x the slightly revised 2012 EPS consensus of $39.66, minus its approximately $97 per share in net cash and investments, we think the stock looks undervalued, but agree that the shares are likely to be range bound until investors get a better handle on its long-term expenses and margins. We would put a target of around $735 on the stock, which is a 16x multiple of 2012 EPS excluding its net cash. We note as well that Google's stock has tended to trade lower in the summer when traffic declines and then picks up steam in the second half of the year. As such we think interested investors will be able to ease into the name over the next couple of months.

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Dollar mixed after brief rally

NEW YORK -The dollar is retreating again after a brief rally following news of the death of al-Qaida leader Osama bin Laden.

The dollar has fallen against a group of six major currencies for the past eight trading days. Investors expect that the Federal Reserve will keep interest rates super low and continue other stimulus efforts, while central banks overseas are raising interest rates. Higher rates tend to make currencies more attractive to investors seeking higher yields.

In morning trading Monday in New York, the euro is up to $1.4845 from $1.4839 late Friday. The dollar is giving back some of its overnight gains against the British pound and Japanese yen, but is higher against the two currencies than it was on Friday.

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Spring Sellers Try House Swap Instead

Wendy Bauwens is no stranger to swapping. As a horse trainer, she has traded a harness for a new website and a riding lesson for a haircut. Today, however, she's lining up her biggest swap yet: her horse farm, Sunnyside Farms (pictured at left), located near Bozeman, Mont., for something closer to the ocean. A new place to call home in Hawaii or California are at the top of her list.

As spring selling season gets under way, some homeowners are opting for an unconventional route: house swapping. Even as the housing market defrosts this spring, sellers are on the lookout for creative ways to minimize their costs. Swapping offers several bottom-line benefits: there are few to no agents' fees, sellers can minimize their tax burden, and it's a way to leverage property that may be otherwise difficult to sell. On the downside, swappers face fewer choices and have to be prepared to finance the difference in property value if necessary.

Over the last few years, a handful of websites have sprung up to support swappers, including GoSwap.org, OnlineHouseTrading.com and DomuSwap.com. Craigslist operates a whole category for home trades. The small boom in swap and barter sites took hold at the height of the financial crisis two years ago and shows no sign of waning.


Swapping the Ocean for the Desert

Sergei Naumov, founder of GoSwap, says there are more than 30,000 listings on his website, most of which are concentrated in the southeastern states. Founded in 2006, the site started picking up steam in 2008 and traffic has yet to fall. He estimates the number of successful swaps to be in the thousands.

One of those success stories is Pam Farley, 58, who used GoSwap to trade her three-bedroom home in Osprey, Fla., for an adobe house near Santa Fe., NM. In late 2008, she and her husband were empty nesters, ready to move from their Florida home after 12 happy years. Their timing couldn't have been worse. The housing crisis was rippling across the state and qualified buyers were scarce. After sitting on their for-sale-by-owner listing for more than year, Farley decided to investigate a permanent house trade.





"I listed on several swap sites, and every day I had someone emailing me," she says. "We made adventures out of visiting the potential houses. We went to New England, Idaho, and Oregon. It was cool because we got to see interesting parts of country."

Farley, a painter, knew she wanted to move to the southwest to work on her craft and kept returning to a listing in New Mexico. Willingness try a new location is common among swappers, says Naumov. "A lot of the swappers tend to be older. They are not as bound by where they are, and their criteria is very open," he says. "Many people will consider a swap in any state."

Controlling the Process

Bauwens, who has a degree in marine biology, is also open to what the swap universe might send her way. Part of her desire to move away from her Montana farm, where she has lived for 10 years, is to pursue better job opportunities in marine science. Her other motivation is simply to change the scenery.

"I turned 40 last summer and I am in the mindset that life is too short to not be where you want to be," she says. "I am excited to move and wipe the slate clean."

With bartering as a way of life among horse trainers, Bauwens views her swap as a natural step. By advertising her farm as a swap on Craigslist rather than listing it as for sale, she avoids paying a 6-8% broker's commission and gets to keep the details of the transaction to herself.

"When you list on the MLS, people expect you to lower the prices," she says about her farm, which was appraised for around $350,000 several years ago. "Being in a small town, once it's listed, people start talking."

Making the Deal

After mutual visits to New Mexico and Florida, Farley and her home swapper quickly agreed on a deal. The next step, drawing up the offer-to-purchase contracts, was at the heart of the swap.

Even as the word "swap" conjures the days of yore, the deal is in fact two simultaneous sales. Ideally, both transactions close on the same day to prevent one owner from holding two mortgages or properties. For primary residences of equal value that are swapped, there is no taxable gain. If there is a difference in price, sellers can exclude capital gains up to $250,000 for a single taxpayer and $500,000 for married couples. Swappers of investment properties or businesses may defer taxes through section 1031 of the IRS code.

Farley's deal took several weeks and many drafts of the contracts faxed back and forth. After a wrinkle in securing financing, she was able to get a loan with a local bank in New Mexico and close on the swap in 30 days. "When we were done, it was fair and good," she says. "We protected each other."

As Bauwens sorts through the first trade offers that she has received for her farm, she feels a swap will help ensure the farm goes to another owner who will enjoy it as she has. She renovated the farm house a few years ago, complete with stained-glass windows and old barn wood, and acknowledges that it will be hard to move. "I feel strongly that if you put effort out there, something will happen," she says. "You have to create the good karma and the right thing will come along."

Farley's experience underscores the human connection to home buying and selling that swapping provides.

"Trading puts the power back in the people's hands," she says. "It makes it a real partnership between people possible. They are not stuck in their homes and they can move forward with their lives."

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Checking Accounts Often Costly, Contain Hidden Risks, Study Finds

A new study reveals your checking account could be costing you a lot more than you think.

The study, from the Pew Health Group, called Hidden Risks: The Case for Safe and Transparent Checking Accounts, found that the average checking account in the U.S. has:

an $8.95 monthly fee,
an overdraft penalty fee of $35,
an overdraft transfer fee of $10,
and an extended overdraft penalty fee of $25 every seventh day the account is overdrawn.


According to estimates from Moebs Services, Americans will spend a record $38 billion in overdraft fees in 2011. "If overdraft were treated like a short-term loan with a repayment period of seven days, then the annual percentage rate, or APR, on the typical overdraft would be over 5,000 percent," the Pew study noted.

Pew based its overall findings on an analysis of 250 types of checking accounts offered by the country's top 10 banks.

In addition to its startling conclusions about high fees, Pew researchers also concluded that most checking accounts lack transparency and are overly complicated. For instance, the study found that the average checking account has 111 pages of disclosures for consumers to read through and interpret.

"Congress acted nearly two years ago and passed the Credit CARD Act of 2009, which protected credit card holders from practices deemed 'unfair' or 'deceptive'," Eleni Constantine, director of the Financial Security Portfolio at the Pew Health Group, said in a statement. "Now is the time for policy makers to further protect American families by ensuring that our checking accounts are safer, easier to use and more transparent."

Pew is the latest organization to decry the lack of transparency in checking accounts. Recently, the consumer advocacy group U.S. PIRG also highlighted major problems with disclosure in the banking industry. After a six-month study of the practices at 392 banks and credit unions, as well as 12 online banks, PIRG concluded that fewer than 40% of those institutions comply with the federal Truth in Savings Act, which requires financial entities to provide prompt disclosure of bank fees and rates.

To combat the problems it cites in the banking industry, Pew's Hidden Risks report offered five recommendations, including:

Requiring banks to provide information about checking account terms, conditions and fees in a concise, easy-to-read format, similar to the Schumer Box used for credit cards;
Directing depository institutions to provide accountholders with clear, comprehensive pricing information for all available overdraft options;
Requiring that overdraft penalty fees be reasonable and proportional to the bank's costs in providing the overdraft loan;
Making depository institutions post deposits and withdrawals in a fully disclosed, objective and neutral manner; and
Urging the Consumer Financial Protection Bureau to examine the prevalence of binding arbitration clauses, fee shifting provisions and "loss, costs and expenses" clauses in checking accounts, and assess whether such provisions prevent consumers from obtaining relief.

Whether policymakers act on these recommendations remains to be seen. In the meantime, your best protection as a consumer is to devote some serious time to reading and fully understanding the terms and conditions of your checking accounts.

If you encounter fees, charges or terms you don't like, it's worth trying to negotiate with your bank to reduce or eliminate those fees or terms. If the bank won't budge and you feel unfairly treated, you can always exercise your right to take your business elsewhere.

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Buffett's Berkshire Hathaway Sees Profit Tank 58%

Berkshire Hathaway's first-quarter profits fell 58 percent because of an estimated $1.7 billion in pretax insurance losses from major disasters in Japan, Australia and the U.S.

CEO Warren Buffett estimates that Berkshire will report $1.5 billion in net income, down from $3.6 billion the year before. He did not offer earnings per share figures.

Buffett offered a, earnings preview at Saturday's annual shareholders meeting. Berkshire's full earnings report is scheduled to be released Friday.

Buffett said the biggest factor in the earnings drop was losses related to the damage from the Japanese earthquake and tsunami, Australian floods and the New Zealand earthquake.

"We had probably the second-worst quarter for the insurance industry in terms of disasters around the globe," Buffett said.

Reinsurance companies, like Berkshire's General Re and National Indemnity, sell backup insurance to primary insurers so the industry can cover big losses.

Berkshire expects to record an $821 million underwriting loss in its insurance businesses during the quarter because of the catastrophes. That compares with a $226 million underwriting gain in last year's first quarter.

Berkshire's insurance businesses will still contribute $131 million to net income for the first quarter, because of investment gains. That's considerably less than a year ago when Berkshire's insurance businesses, which include auto and home insurer Geico, added $1.2 billion to net income.

Buffett said most of Berkshire's companies continue to improve gradually along with the overall economy - except for those tied to residential construction. Berkshire subsidiaries that are particularly sensitive to the housing market, such as Acme Brick, Shaw Carpet, and Johns Manville haven't improved significantly since the recession slammed the home-building industry.

Berkshire's railroad and utility division, which includes Burlington Northern Santa Fe railroad and MidAmerican Energy, posted a big jump in profits. That unit will add $908 million to Berkshire's net income in the quarter, up from $505 million last year.

Berkshire recorded an $82 million loss on investments and derivatives in the first quarter. In 2010, Berkshire posted a $1.4 billion gain.

The true value of the derivatives won't be clear for at least several years, because they don't mature until at least a decade from now on average. But Berkshire is required to estimate their value every time the company reports earnings. Buffett has told investors he believes the contracts will ultimately be profitable because the premiums are being invested.

Berkshire's operating earnings were $1.59 billion in the first quarter, down 28 percent from a year ago. Buffett has said Berkshire's operating earnings are a better measure of how the company is performing in any given period, because those figures exclude the value of derivatives and investment gains or losses.

Berkshire owns roughly 80 subsidiaries, including clothing, furniture and jewelry firms. Its insurance and utility businesses typically account for more than half of the company's net income. It also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.

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BofA to spin off $5 billion private equity unit

(Reuters) - Bank of America Corp (BAC.N) plans to spin off its last large private equity fund, with more than $5 billion in assets, and has no plans to make new private equity investments, a company spokesman said on Tuesday.

Bank of America, the largest U.S. bank by assets, will spin off BAML Capital Partners into its own unnamed firm.

The firm would then manage the bank's private equity assets for a fee -- winding those positions down over time -- and could begin accepting outside investors.

The assets will remain on BofA's balance sheet until they are wound down.

Company spokesman Jerry Dubrowski said BofA determined the business was "not strategically critical to customers and our clients" and the decision was made to spin off the unit.

Dubrowski said the head of the new firm had not yet been announced, and it was not immediately clear the number of employees that would move to the new firm.

The spin-off is the latest in a series of moves by the bank to comply with the Volcker Rule, a part of the financial regulatory overhaul law passed in 2010 that limits proprietary trading, or investments by banks using their own capital. It also fits with Chief Executive Brian Moynihan's efforts to sell off extraneous business units.

In 2010, the bank spun off Banc of America Capital Investors, a $1.4 billion private equity group to form Ridgemont Equity Partners, under a similar structure.

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Japan eyes sales tax rise to pay for post-quake rebuild

(Reuters) - Japanese consumers may have to help foot the reconstruction bill after last month's earthquake and tsunami caused $300 billion of damage, further burdening the hugely indebted economy, a newspaper said on Tuesday.

It would be the first increase since 1997, though a sales tax hike had been the subject of fierce political debate before the earthquake struck as one way for Japan to dig itself out of its massive debt.

The government is considering raising the tax by 3 percentage points to 8 percent when the new fiscal year starts next April, the Yomiuri newspaper reported.

"It was clear even before this disaster and the need to secure funds for reconstruction that to ensure a sustainable fiscal situation, some sort of reform of spending and revenues was necessary," said Internal Affairs Minister Yoshiro Katayama.

"The debate over the fiscal situation is not something that began with this disaster," he told reporters.

The government hopes to avoid issuing new bonds to fund an initial emergency budget, expected to be worth about 4 trillion yen ($48 billion), due to be compiled this month.

But bond issuance is likely for subsequent extra budgets which will only make it harder for Japan to rein in its debt, already running at twice the size of the $5 trillion economy.

The mood among consumers about the prospects for jobs and incomes darkened in March after the quake, a Cabinet Office survey showed.

Though the triple disasters of quake, tsunami and nuclear crisis are bad news for the Japanese economy, the damage is not expected to spill over across the region.

The Asian Development Bank's chief economist said he saw little sign of a serious negative impact on other Asian economies.

The government says it has not yet decided how to fund the rebuilding cost but the Yomiuri said it had ruled out raising income and corporate taxes.

"I am aware that the Democratic Party is considering various methods, including this (tax rise). But the government is not considering any specific funding methods at this stage," top government spokesman Yukio Edano told a news conference.

Katsuya Okada, secretary-general of the ruling Democratic Party (DPJ), said on Sunday taxes had to rise to repay new government bonds that will be needed to pay for reconstruction.

A poll by the Nikkei business daily showed about 70 percent of Japanese voters would support a tax hike, but want unpopular Prime Minister Naoto Kan to be replaced.

IMPACT OF NUCLEAR CRISIS

As well as trying to deal with the consequences of quake and tsunami which killed at least 13,000 and left tens of thousands homeless, Japan is struggling to control the Fukushima Daiichi nuclear power plant that began leaking radiation when it was nearly destroyed by the natural disasters.

NHK state television said police statistics from hard-hit Iwate Prefecture found drowning caused 92 percent of the deaths and that more than two-thirds of victims were over 60 years old.

Plant operator Tokyo Electric Power (TEPCO) said it had started removing highly contaminated water from one of the reactors, a key step to repair the cooling system that regulates the temperature of radioactive fuel rods.

It wants a "cold shutdown" of the plant in six to nine months, setting a timeframe for bringing the world's worst nuclear crisis in 25 years under control.

French nuclear plant maker Areva said it had agreed with TEPCO to provide a water treatment plant that uses a process called "co-precipitation" -- which isolates and removes radioactive elements from water -- to speed up decontamination of the Fukushima site.

"We have much experience of decontamination . we are ready to put it at the disposal of the Japanese government," Areva Chief Executive Anne Lauvergeon told reporters in Tokyo.

She said TEPCO is hoping to begin the water treatment before the end of May, but she did not know when was feasible. Areva would "try to do this as soon as possible," Lauvergeon added.

The damage to Fukushima Daiichi, and the shutdown of other nuclear power plants, has caused power outages that exacerbate the disruption to manufacturing supply chains and overall economic activity.

Toshiba has cut its 2010/11 operating profit estimate, blaming the disaster. Earnings at cellphone venture Sony Ericsson, due later, were expected to shed light on the size of the earthquake's impact on the cellphone industry.

Chip maker Texas Instruments warned of slower-than-usual quarterly sales growth as it scrambles to restart production after the quake, and said it was unclear when the supply of the silicon and wafers it needs will return to normal.

Japanese corporate confidence plunged by a record amount in April and is seen worsening further, a Reuters poll showed last week.

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Yahoo earnings beat estimates, sales fall

SAN FRANCISCO (MarketWatch) — Yahoo Inc. on Tuesday reported a smaller-than-forecast decline in quarterly profit, as the Internet search and advertising company presses ahead with an ongoing turnaround effort.

Yahoo’s earnings for the first quarter beat Wall Street estimates, and its shares of rose more than 2% in after-hours trading, following the report.
Sprint looks to share network

Sprint Nextel is in advanced talks to rent space on its wireless network to start-ups LightSquared and Clearwire, a move driven by consolidation and cost-cutting. Spencer Ante reports.

Yahoo YHOO +3.47% said net income fell to $223 million, or 17 cents a share, compared to $310.2 million, or 22 cents a share, in the same quarter last year. The Sunnyvale, Calif., firm said net revenue for the period ended March 31 fell 6% to $1.06 billion.

Yahoo’s first-quarter earnings included an impairment charge of 2 cents a share related to Yahoo Japan, the company said.

The results also compare to a year-earlier period when Yahoo’s earnings were boosted by its sale of the Zimbra email service, and its search partnership with Microsoft Corp.

Analysts polled by FactSet Research had expected Yahoo to report first-quarter earnings of 16 cents a share and $1.05 billion in net revenue.

For the second quarter, the company said it expects revenue excluding traffic acquisition costs to come in the range of $1.08 billion to $1.13 billion. Analysts had been expecting $1.1 billion for the period.

“Our turnaround is proceeding on schedule, and we are very confident that Yahoo is headed in the right direction,” Chief Executive Carol Bartz said during a conference call with analysts.

Bartz pointed to various “proof points,” including the increase that Yahoo saw in online display advertising revenue during the quarter.

Yahoo hired Bartz in 2009 to reboot the embattled company. The CEO has sought to streamline operations and has set a target of reaching a 24% operating margin by 2013. Yahoo said Tuesday that its operating margin excluding the cost of acquiring traffic stands at 18%.

Bartz has also sealed a partnership with Microsoft MSFT +1.19% that has Microsoft powering Yahoo’s search results in a revenue-sharing arrangement.

But in January, Yahoo cautioned that it likely won’t see a significant benefit from the Microsoft partnership in terms of revenue-per-search until the second half of this year, due to “bumps in the road” encountered as the companies align their operations.

Bartz said Tuesday that problems encountered in combining with Microsoft’s search-advertising technology have continued. As a result, Bartz said Yahoo would hold off on moving more of its geographical markets outside the U.S. over to Microsoft’s search advertising technology this year, until the companies “get this thing back to where it needs to be” in terms of revenue growth.

In particular, Bartz said that “as it turns out,” Microsoft’s technology does a poor job of predicting performance for some search advertisers that don’t have a history on their system. Therefore, “many of the new advertisers can’t even get their campaigns in,” she said.

Yahoo said that its gross search advertising revenue fell to $455.1 million in the first quarter, from $841.2 million in the same quarter last year.

Analysts had been anticipating a significant decline in Yahoo’s search advertising revenue.

Yahoo said that gross revenue from online display advertising, a market in which it has long enjoyed a more solid footing, rose to $522.6 million, from $491 million — a 6% increase.

Analysts had been expecting display-advertising revenue growth in the quarter of slightly less than 10%.

Bartz said that Yahoo enjoyed particularly strong interest in its news blogs, and original Web video content. The CEO said that Yahoo’s video advertising still makes up a relatively small part of its total revenue, though it’s “the fastest growing part.”

Yahoo said Tuesday that its total cash, equivalents and marketable securities on hand as of March 31 fell by $101 million compared to Dec. 31, to $3.5 billion.

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Gold Tops $1,500 on Outlook for Escalating U.S. Debt, Dollar

Gold futures rose to a record $1,500.50 an ounce as U.S. debt concerns weighed on the dollar, boosting demand for the precious metal as an alternative investment. Silver surged to a 1980 high.

The greenback dropped against the euro on speculation that the European Central Bank will continue to raise borrowing costs as some nations struggle to contain sovereign debt. Standard & Poor’s yesterday revised its long-term outlook on U.S. debt to negative from stable. Gold has climbed 32 percent in the past year, and silver prices have more than doubled.

“The U.S. credit rating will undoubtedly be lowered in the next few years,” said Michael Pento, a senior economist at Euro Pacific Capital in New York. “This will mean much higher borrowing costs and a much lower currency. International investors have been using gold and silver as an alternative currency and an alternative to the dollar, and this will only exacerbate and accelerate that process.”

Gold futures for June delivery rose $2.20, or 0.1 percent, to settle at $1,495.10 at 1:38 p.m. on the Comex in New York. Earlier, the price climbed as much as 0.5 percent to the record.

Gold for immediately delivery rose $1.97 to $1,497.27 at 3:49 p.m. New York time. Earlier, the price gained as much as 0.3 percent to an all-time high of $1,499.32.
Silver Climbs

Silver climbed as much as 2.8 percent to $44.175 in after- hours trading. The most-active contract settled up 95.7 cents, or 2.2 percent, to close at $43.913 an ounce.

“Silver is like gold on steroids,” said Jon Nadler, an analyst at Kitco Inc. in Montreal.

Euro Pacific’s Pento, who correctly predicted gold’s rally in the past three years, said the metal will reach $1,600 in 2011. The commodity has gained every year since 2001 on increased investment demand for raw materials.

“The bullish trend becomes pronounced as more and more people get out of the dollar to buy hard assets,” said Lim Chae Myung, a Seoul-based trader with Hyundai Futures Co.

The Treasury Department projected that the government may reach the $14.3 trillion debt-ceiling limit as soon as mid-May and run out of options for avoiding default by early July.

The Federal Reserve has kept its benchmark interest rate at zero percent to 0.25 percent since December 2008 and has pledged to buy $600 billion in Treasuries through June to stimulate growth.

The ECB this month raised its main rate to 1.25 percent from a record 1 percent to stem inflation.

The Fed probably won’t risk damping economic growth by raising borrowing costs rapidly, Pento said.

S&P changed its long-term rating, citing “material risk” that policy makers won’t reach an accord on “medium- and long- term budgetary challenges.”

“There certainly has always been that lingering concern over U.S. debt and the S&P people are finally identifying the threat,” said Stephen Platt, an analyst at Archer Financial in Chicago. “The world is awash in liquidity. Gold’s slow, grinding action upward shows the deterioration in the dollar, excess liquidity and deficit problems are still in force.”

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Dow falls 118 as oil slides, Japan worries rise

Energy stocks stumble as crude oil falls below $107. Drivers are cutting back, a new report shows. Japan raises the severity rating on its nuclear problem. Gold pulls back, but airlines jump. Wal-Mart and Procter & Gamble boost the Dow; Alcoa lags.

A series of inconvenient truths dawned on Wall Street today: The economy may not be as strong as thought; high gas prices are already causing people to change their driving habits; and the Japanese nuclear crisis is worse than thought.

The result was a sell-off in crude oil, gold and a broad array of commodities -- and a steep decline in stocks. In the afternoon, bargain hunters emerged, and the market modestly trimmed its losses.

The Dow Jones industrials ($INDU) were down 118 points, or 1%, to 12,264. The blue chips had been down as many as 148 points. The Standard & Poor's 500 Index ($INX) dropped 10 points, or 0.8%, to 1,314, and the Nasdaq Composite index ($COMPX) was off 27 points, or 1%, to 2,745.

Crude oil settled down $3.67 to $106.25 a barrel in New York. Brent crude was down $3.34, or 2.7%, to $120.64 a barrel in London.

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Washington shutdown fears sink U.S. dollar

SAN FRANCISCO (MarketWatch) — The euro climbed Friday to its highest level versus the U.S. dollar since January 2010 as traders dumped the greenback due to fears of a potential U.S. government shutdown.

The dollar index (DXY 74.95, -0.12, -0.16%) , a measure of the U.S. unit against a basket of six major rivals, slid to 74.892 from 75.553 late Thursday. It is the first time the index fell below 75 since December 2009.

The greenback “continues to weaken as further negative sentiment from the impending U.S. government shutdown also manifests itself as weakness against commodity prices with U.S. crude above $110, and silver hitting the $40 mark for the first time in over 30 years,” Michael Hewson, market analyst at CMC Markets, said in a note to clients.

The euro (EURUSD 1.4465, +0.0010, +0.0692%) changed hands at $1.4476, up from $1.4311 in late North American trading Thursday, and posting a weekly gain of 1.7% against the greenback. The 17-nation shared currency traded as high as $1.4444, according to FactSet Research data, its highest level since January 2010.

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“The U.S. dollar is likely to continue as the most unloved currency as the market’s focus shifts from the [European Central Bank] to the increasingly likelihood of a U.S. government shutdown,” said Michael Sneyd, currency strategist at Societe Generale.

House and Senate leaders said late Thursday that they had moved closer to a U.S. budget deal but had not yet reached agreement after again meeting with President Barack Obama. Government operations, funded through Friday at midnight, would partially shut down Saturday morning without a spending deal. Read Market Pulse on budget talks.

The euro continued its march higher as European finance ministers met in Hungary, where they are discussing a Portuguese bailout plan. Read "Portugal bailout price: More pain"

The euro saw only temporary pressure late Thursday after the European Central Bank delivered a long-awaited rate hike. The currency slipped after central bank chief Jean-Claude Trichet offered little indication that it would deliver further interest-rate increases at a more aggressive pace than already anticipated by market participants.

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“The ECB did not provide any additional positive signals for the euro,” wrote strategists at Commerzbank in Frankfurt. “That is not necessary for additional upwards moves in euro/U.S. dollar, though, the general dollar weakness is quite sufficient for that.”
Broad weakness

With the greenback in broad retreat, the Australian dollar (AUDUSD 1.0567, +0.0012, +0.1137%) continued to press into record territory, trading at $1.0569 in recent action, up roughly 1% from Thursday.

The U.S. unit also remained under pressure versus its Canadian counterpart (USDCAD 0.9558, +0.0006, +0.0628%) , going for 95.56 Canadian cents, down 0.4% from Thursday.

Statistics Canada on Friday reported a 1,500 net drop in jobs during March, while the unemployment rate declined to 7.7% from 7.8%. Read Friday’s story on Canada.

The British pound (GBPUSD 1.6377, +0.0001, +0.0061%) traded at $1.6386, up from $1.6325. Sterling had topped the $1.64 level after data showed producer prices rose at a faster-than-expected 0.9% rate in March, driving the annual rate of producer inflation to 5.4%.

Economists had expected increases of 0.7% on the month and 5.3% on a year-on-year basis.

The data suggested increased pressure on the Bank of England to boost interest rates, boosting the pound.
SEC eyes new stock rules

Federal securities regulators are moving toward easing decades-old constraints on share issues by private companies in a sweeping review that could remake the way start-ups raise capital.

Blerina Uruci, economist at Barclays Capital, said the central bank’s Monetary Policy Committee would have had a preview of the data when they decided Thursday to leave interest rates on hold.

“The apparent pickup in pipeline inflation pressures is likely to have been a source of discomfort at the meeting, but the MPC might have taken some solace in the fact that the increase was mainly in imported goods prices, supporting their argument that inflationary pressures at the moment are transitory and consumer price inflation is expected to fall sharply next year,” Uruci said.

In metals trading, gold futures (GCM11 1,476, +2.30, +0.16%) continued to climb, hitting a new record high above $1,470 an ounce. Read more about gold’s fresh record as silver tops the $40 mark.

The U.S. dollar was mostly flat against the Japanese yen (USDYEN 84.9800, +0.1200, +0.1414%) at ¥84.82 versus ¥84.89 late Thursday but it still posted a weekly loss of 0.9%.

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Chinese Purchases Of U.S. Real Estate Poised To Rise

Growth in the number of well-off mainland Chinese, an increase in overseas study by their children, and a drop in U.S. property prices are leading to more purchases of U.S. real estate by buyers from China. Where are they buying and why? How can U.S. developers and other sellers connect with Chinese buyers?

To find out more, I talked to Steven Lawson, CEO of the Windham Realty Group of Michigan. He opened the company’s China headquarters in Shanghai in 2008 and has lived in the city since 2007. Excerpts follow.

Q. From a Chinese point of view, why is it a good time to buy U.S. property?

A. The U.S. represents a good value for what we consider to be a rapidly globalizing Chinese investor. Permanent private ownership and the market adjustment in the last five years represent a good time for people who are well funded with cash to take advantage of market conditions.

Q. What do you mean by good value? The market is still coming down on the whole, according to some news reports.

A. The U.S. on the whole does have some softness. In particular, Las Vegas, Detroit are Atlanta are really dragging down the market. But when you look at the two cities that our clients are most interested in – New York, particularly Manhattan, and the L.A. area, they are not behaving in the same way as the U.S. market. In L.A, properties are still in many cases 20% below their 2007 peak, and there is some room for capital appreciation.

Importantly, a lot of our clients have some level of self- use intention, whether it’s a business connection, a children’s education connection, or an immigration intention connection. In terms of the clients who’ve transacted, I think we would say 60% + have an education connection. Education is a huge driver. So Boston is a rather natural market for us to kind of dig into. It’s only more recently that we’re seeing more purely investment-driven clients.

Q. How long have you been doing business with Chinese customers, and how are you approaching this new business?

A. We probably started thinking about China and investigating China a little later that we should have. It was in 2006. We started making trips to China in about 2006-2007. Now we have set up our infrastructure in China — an investment consulting business. In the U.S., we have a brokerage company. We’re able to work with our clients here (in China), and give them information. Then, we’re able to refer them to our U.S. company. It functions legally. In the U.S., we have two types of clients – self-use clients and about 20 developers spread out between New York, California, Florida and Michigan. Relative to our total business, China is still not proportionally big, but we anticipate that it’s still going to grow bigger and bigger.

Q. You mentioned that there is growing interest in investment in U.S. commercial properties among Chinese. How will that play out in the next few years?

A. I think it’s going to grow substantially, because the U.S. commercial market has some stress and difficulties, and it’s going to create opportunities. We are getting more inquiries from people who are interested in purchasing commercial property, primarily hotels, shopping centers and office buildings. One of the things we have done is to open a New York office. So we see a trend of emergence (of demand) on the commercial side.

Q. Who is a typical buyer?

A. We had a group in town this week, three to four people represented some typical Chinese diversified companies. They’re in the education field, they’re in the travel field and they’ve made other overseas investments but they’ve been more in Singapore and the UK. Now, they’re interested in acquiring U.S. property. I think the trend is moving in that direction.

Q. What’s a typical trip to the U.S. like when you have a group that is going over?

A. We arrive in New York, we show New York and New Jersey, and we go down to Florida. We show Miami and say, “Here’s a place where there isn’t a tremendous Chinese population but that we think one day there will be. Then we go to Vegas. That’s usually just to play, and then we do L.A. and San Francisco. This spring we’re going to alter that: we’re going to have Boston, too, because there’s just so much interest in education.

This year, we’re going to try to do a golf-related tour. We find a lot of clients have a lot of enthusiasm for golf, so we’ll (visit) some great golf courses and then enjoy looking at some golf real estate. You have to show some hospitality. You have to show you care before people develop some trust in you. We try to make it fun. We try to make it light. We have had transactions that have occurred as a result of a tour, but much more often it comes six months or a year later.

Q. How do you identify customers in China?

A. We have a website, and our web traffic is reasonably substantial. Of course we utilize search engine optimization and search engine positioning. The other thing we’ve done is to set up what we refer to as channel partners. They tend to be in the areas of immigration consulting, education consulting, financial consulting and real estate. These channel partners in essence send us clients, and we try to be reciprocal. We have clients looking for their services. We try to be reciprocal. It’s a big part of where we find clients to work with. Of course, there are exhibitions, such as the Money Show and also real estate exhibitions. We are working in Beijing with a pretty good media partner in the Beijing Media Group. We funded a small joint venture company with them for the northern China market, kind of mirroring what we’re trying to do in the southern and central areas.

Q. What are some of the best real estate “buys” in the U.S. today?

A. You can’t beat Manhattan overall, when you look at rental yields and when you look at how it’s been really restrained market over the last 10 years from a capital appreciation point of view despite everything that’s happened. Manhattan condominiums, for example, appreciated 60% between 2001 to 2010. We think that there’s still a lot of value there and a lot of stability there. If one of our clients says, “I want prime, I want stable, and I want safe,” we feel that Manhattan is very well aligned.

Some of our clients have more of a “want to see more rapid appreciation,” and we think that Miami, as long as you buy right, is well positioned from a 3-5 year viewpoint. The market saw some really substantial devaluation in properties, in some cases 50%+. Some very good developers (have) had some very prime properties that are selling for below construction cost.

Q. Would you say that for commercial property, too?

A. It’s primarily residential is what we’re advising people about now. We think that there are some very good oceanfront condominiums in good buildings where the building itself is not in any financial danger and is 50-60% sold. We think there’s a good opportunity for Chinese buyers who want to buy those now and do a 3-5 year flip.

Q. What about other markets?

A. The suburban parts of L.A. still offer some very good value — places like Arcadia, Pasadena, Orange County, and Newport Beach. These areas are still 20% – and in some cases a little better than 20% — below their 2007 peaks. The market took a pretty substantial hit in 2007, but it rebounded quite quickly. Again, these are places that are well aligned with different clients we work with.

Q. Jim Rogers said in an interview with Forbes recently that the agricultural sector holds a lot of promise for investors. Do you see much Chinese interest in U.S. agricultural land?

A. We do have two or three dairy farms in California that are on our website that are actively for sale, and we did bring a client to one. We have a client coming next month that has a fairly substantial dairy farming operation in China, not far from Wuxi, and it wouldn’t shock me if this group chose to transact on this dairy farm. The price of milk has gone way up proportionally to what this dairy farm is on the market for.


Q. Historically speaking, there isn’t a lot of connection between Florida and China. You’re working with developers there. Could you say more about how you pitch Florida’s potential to a Chinese investor?

A. The good part about Florida is that Chinese have heard of Disney and Orlando, but it’s amazing how little they’ve actually heard about Miami. And they don’t know how substantial it is. The state of Florida has engaged a PR firm in China to promote tourism and promote Florida as a destination, but it’s early. Could a university in a second-tier city in Florida attract Chinese students? I think the answer is yes, if they can integrate it with something. A partnership with a university in China would be a way that one could see flow thorough. Actually, in my home state of Michigan, is of course economically lagging in all kinds of ways. Three or four different universities have done an excellent job of attracting a really substantial number of Chinese students. That’s because they’ve made the effort and have done exceedingly well with it.

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Why Lady Gaga Will Earn $100 Million in 2011

Whether it’s showing up to an awards ceremony clad entirely in raw meat or nearly suffering a deep-vein thrombosis while wearing a dress made of caution tape on an airplane, Lady Gaga has a knack for making headlines.

She also has a talent for moneymaking. Gaga raked in $62 million last year by our estimate, making her the seventh highest-paid musician in the world, just $1 million behind sixth-ranked Jay-Z. Only U2 ($130 million) and AC/DC ($114 million) crested the $100 million earnings mark.

It’s quite likely that the financially shrewd Gaga will join the elite group by topping $100 million in 2011 — here’s why.

First of all, there’s touring, which should provide the largest chunk of Gaga’s earnings this year. In 2010, her 138-show Monster’s Ball tour grossed $133 million, second to only Bon Jovi on the list of year’s most lucrative tours. Gaga already commands a higher average ticket price ($102) than her New Jersey counterpart ($92), but she’s been playing to crowds of 14,000 on average (compared to Bon Jovi’s 33,000).

Over the next six months, Gaga is scheduled to play 41 shows at 20,000-seat venues like Madison Square Garden in New York and the Staples Center in Los Angeles. If she maintains her average ticket price, that works out to $2 million gross per show, of which she’d likely keep about $800,000 a night after concert promoter fees, security, and other costs. Multiply that by 41 and you get roughly $33 million.

The second half of the year could prove to be even more remunerative as Gaga’s new album, Born This Way, hits stores in June. If sales approach those of her debut The Fame, which moved 12 million copies worldwide, Gaga could easily see $10-$15 million from the album alone. Because she’s both an artist and a songwriter, she’ll also stands to receive an extra-large chunk of money from radio play– a fat publishing check in the U.S. as well as songwriting and performance royalties for spins abroad could add up to another $10-$15 million.

An ultra-successful album would have an even more profound financial impact beyond simple record sales and radio play. ”If the album is a success, she’ll be beyond an arena act by the end of the year,” says entertainment attorney Bernie Resnick, who represents Gaga’s manager, Troy Carter. “She could be a stadium act.”

That means if she goes on the road for the last six months of the year, she could be filling 30,000- and 35,000-seat venues. Perhaps average ticket prices would dip down to a Bon Jovi-esque $90 with more seats available, but even so, that’s means a stratospheric nightly gross in the $3,000,000 range and take-home pay of somewhere around $1,000,000 a day. That’s $45 million for a half-year of touring, bringing the full-year total to nearly $80 million, not counting merchandise, which could easily add another $6-$10 million in profits for an 80-date tour.

Gaga also shills a range of products: video sunglasses for Polaroid, headphones for Beats by Dre, phones for VirginMobile, and a host of items and services via product placement in her videos (a Russian billionaire reportedly paid $1 million to place himself in one of her videos). All these commercial ventures should add at least another $5-$10 million to her coffers.

To be sure, these projections are on the rosy side, as they assume her new album will be a smash success and global macroeconomic conditions will be strong enough that people will continue to dish out $90-$100 a pop for concert tickets. But add it all up: $80-$90 million for touring and merchandise, $20-$30 million for album and radio play, and $5-$10 million for endorsements, meaning Gaga could cross the $100 million threshold with relative ease — and earn as much as $130 million in an absolute best-case scenario. That’s before taxes, management fees, attorney costs, etc, but likely enough to make her the top-earning musician in the coming year.

“She’s just hitting her stride artistically and commercially now,” says Resnick. “We’re only seeing the beginning.”

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Don't Give Up on Small Stocks

These days, it seems that nearly everyone is recommending large- company stocks. The big boys, according to many analysts, have attractive valuations, and the recovering economy should improve their prospects. But some pros are loath to dump the group of smaller stocks that have trounced the broader market for years.


Indeed, while the Standard & Poor's 500 index was up 13 percent in 2010, small and midsize stocks gained nearly twice that. Over the past two decades, small- and midcap stocks have produced an average annual return of 14 percent, while the S&P 500 has returned an average of 11 percent annually, according to FactSet Research Systems. And some portfolio managers say there's still plenty of opportunity in the small and midsize outfits. Smaller stocks tend to outperform their bigger cousins at the beginning of periods of economic expansion. It's easier for niche companies to do well right now, experts say, because they're not as dependent on the overall economy to grow, just small segments of it. "We're still in the early stages of the economic rebound," says Craig Hodges, portfolio manager of the $64 million Hodges Small Cap fund. Plus, some smaller companies remain attractive takeover targets for big firms with lots of cash but few growth prospects.

Of course, there's more risk with small and midsize firms. Their stock values tend to move considerably faster—both on the way up and the way down—than large firms. Most don't have as much cash as big firms, so a downturn could hurt them harder and more quickly, analysts say. The small stocks aren't cheap, either. Thanks to their big rally, they trade at an 11 percent premium compared with large firms. Historically, they trade at an average 2 percent discount, according to market research from The Leuthold Group. The stellar performance of small-caps and midcaps for so long has led many strategists to wonder if their heyday is over; Goldman Sachs, for one, sees the S&P 500 gaining 23 percent this year. "Large-caps are the most attractive cap sector right now," says Will Muggia, portfolio manager of the $840 million Touchstone Mid Cap Growth fund.

But Hodges says smaller companies that are well managed and are increasing earnings at a faster clip than sales remain attractive. Men's retailer Jos. A. Bank ( JOSB: 46.11, -1.18, -2.49% ) , for example, has been able to open stores and unveil new clothing lines even as others have cut back. Analysts also like Luby's ( LUB: 5.35, -0.05, -0.92% ) , a cafeteria chain that bought a larger restaurant outfit, Fuddruckers, out of bankruptcy. The business isn't growing much, but Hodges says Luby's management has a track record of turning businesses around. In the financial sector, credit card company Discover Financial Services ( DFS: 21.75, -0.07, -0.32% ) intrigues some pros. The firm, considerably smaller than its rivals, recently bought The Student Loan Corp. and could become an acquisition target for a large bank, says Don Wordell, manager of the $1.6 billion RidgeWorth Mid-Cap Value Equity fund.

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A Portfolio to Keep Income Flowing

While pension funds are increasingly seen as relics from a bygone age, they can still teach investors a thing or two about managing money during retirement.


Pension funds and retirees have similar goals. A retiree is trying to maintain a certain standard of living, including the basics of having enough money to pay the bills for the rest of his or her life.

A pension fund, meanwhile, has to ensure it can make the payouts it owes to participants for the rest of their lives.

In both cases, the primary goal isn't to make as much money as possible or "beat the market." Instead, it's to create a portfolio of investments that will allow you to meet specific obligations -- no matter what happens in the markets.

This may seem like a distinction without a difference. But it requires a fundamentally different mindset and approach than investing to maximize returns.

It even has a name: liability-driven investing.

"You're not investing to maximize returns...you're maximizing the chance of being able to meet future income needs," says Christopher Jones, chief investment officer at Financial Engines, which provides asset-allocation services to 401(k) plans.

Compared with a growth-focused investment strategy, a liability-driven portfolio is more likely to have a heavier weighting toward safe bond investments that provide a predictable level of income and much less in stocks. And it's one where despite the high level of bond holdings, rising interest rates can actually be good news -- even though that hurts the day-to-day value of your bond portfolio.

The most straightforward form of liability-driven investing is a "bond ladder," a portfolio of U.S. Treasury bonds, which mature gradually over time and provide a guaranteed source of future cash.

Unfortunately, most individual investors don't have account balances big enough to make a bond ladder work. But it's possible to approximate the strategy with mutual funds, although it requires a more hands-on approach and discipline.

The challenge with mutual funds is that, unlike owning individual bonds, most funds don't mature and return a predictable amount of money at a specific date in the future. To approximate this key part of a bond ladder, an investor can buy a series of short, intermediate and long-term bond funds. However, it requires being diligent about gradually rolling the money down the maturity spectrum to shorter-term bond funds over the years.

Financial Engines, for example, will create an income-generating portfolio for a 65-year-old that is 80% bond funds and 20% stock funds. This is a much lower stock allocation than many target-date mutual funds, which put more than half of investors' money into stocks at that age.

"You could do a fund that is 60% stocks and 40% bonds and simply consume 4% or 5% of what there is in the portfolio every year," says Mr. Jones. "If the market does well, your income goes up. But if the market goes down, your income goes down."

He adds that "when you're in retirement, you want to minimize the chances that your income is going to go down. You want to use bonds to structure the income floor you can count on."

Bonds, of course, do have their risks, such as the possibility that an issuer will default on its payments.

In addition, bonds will lose value when interest rates rise. For someone holding individual bonds, this isn't an issue because that won't have an impact on the amount of income the bonds pay out.

In fact, this is one area that requires a different mindset: Higher rates can be a positive.

"If interest rates go up, the amount of money you need to meet your liabilities goes down," says Aaron Meder, head of U.S. pension solutions at Legal & General ( LGEN.LN ) Investment Management America, which specializes in liability-driven investing.

Here's why: If you need your portfolio to pay out $10,000 a year, at 4% interest rates you need $250,000 in bonds. But with 6% rates, you need much less, only $180,000 in bonds.

Also, the stock portfolio is there to help offset any losses that have to be taken in a bond-fund portfolio. The stock holdings, which hopefully grow in value over time, should be slowly shifted into bonds and potentially reinvested at higher yields.

"A situation where rates go up might be a great time to move money from a growth portfolio to [bonds] to lock in a reduction in retirement income-funding needs," says Mr. Meder.

This highlights a key point. "The thing that's different is you're no longer focused on the value of your portfolio, but what is the ability of those assets to meet your future liability," says Financial Engines' Mr. Jones.

One final piece of the puzzle: Investors still need to hedge against outliving their money. This is where an annuity, which guarantees income for life but locks up your money, can come in.

Financial Engines recommends taking about 15% of the portfolio and buying an annuity. But the firm suggests waiting until you're in your early to mid-70s to do so.

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Why Stocks Are Tanking (It's Not Just Libya)

IT'S NOT JUST ABOUT Libya. There's another reason the stock market just took a hit. Everyone had become way too bullish and way too complacent.


Pride, as they say, goeth before a fall. When everyone's bullish, who is left to come in?

We're slap-bang in the middle of another mania.

How crazy have people become? Last week a portfolio manager I know told me about a conversation he'd just had with one of his clients. This manager runs a conservative practice. His clients are solid, sensible types—some old money, and some new money that thinks a bit like old money. One of his clients, a partner in a small private firm, had called him up and said, casually, that he and his partners were discussing this year's bonus pool. "We're thinking about putting it all in Apple ( AAPL: 353.13*, +4.97, +1.42% ) stock for the year. What do you think?" he asked.

The portfolio manager thought the guy was kidding. "No, we're serious," the client replied.

Huh?

"Why not?" he went on. "I mean, it's not like Apple's going to go down. It's a sure thing."

Yikes. You see this type of stuff when animal spirits are soaring.

No wonder IPOs are back on the menu. The time to take your company public is when the investors are rushing around with their checkbooks open.

A few days ago, while everyone was watching events unfold across the Arab world, an intriguing document came across my desk. It was the monthly Bank of America/Merrill Lynch survey of the world's top investment managers.

Bank of America ( BAC: 14.23*, +0.03, +0.21% ) spoke to 270 institutional investment managers—with a thumping $773 billion in assets—around the world and asked them for their views on the markets.

In a nutshell? They were about as euphoric as they have been since the late 1990s. "Institutions have record equity and commodity overweights, very low cash levels and the strongest risk appetite since Jan '06," reports Bank of America. Cash had fallen to 3.5% of assets—a dangerously low level. BofA research says that in the past, when it has fallen that low a stock market "correction" has usually followed in a matter of weeks.

Our old friends the hedge funds are back to where they were before the crash. According to the BofA report, hedge funds are betting as heavily on booming share prices as they were in July 2007, and the last time they were playing with this much borrowed money was in March 2008. Ah, the happy memories ...


There are no certainties in the markets, but the Bank of America/Merrill Lynch survey is among the better indicators. On the occasions when it has shown sentiment at extreme levels, it has often proven an excellent "magnetic south," pointing you in exactly the wrong direction. If you had sold when everyone was crazy bullish, and bought when everyone was crazy bearish, you would not have done badly over the years. After all, the big institutions are the ones that bet the big money. If they are already loaded up to the gunwales with equities, who's going to be the next buyer?

It isn't just the institutions, either. The individual American investor, who has been selling stocks for most of the past couple of years, has suddenly turned tail and started buying again. Portfolio managers will tell you their clients have been back on the phone since the start of the year, eager to get in on the action. The Investment Company Institute, a trade organization for mutual funds, reports big inflows of new money into stock-market funds since early January. Indeed, inflows into U.S. stock funds have been running at levels not seen—but for a single brief spike in 2009—since well before the crash.

Sentiment is one thing. Valuation is another. And Wall Street is frankly expensive by most measures. The dividend yield on the overall market, according to FactSet, is a measly 1.5%. The last time it was this low for any length of time was during the great bubble years of 1997 to 2001. According to data tracked by Yale University economics professor Robert Shiller, the market overall is priced at about 24 times cyclically-adjusted corporate earnings. That is very high; the average is about 16. Last week I screened the stock market for good dividend stocks: blue-chip companies whose shares are selling cheaply and which offer decent yields. The ranks are pretty thin these days. Everything has boomed.

White-shoe fund company GMO has just published its latest investment forecasts. From today's levels, it says, investors are looking at pretty slim long-term pickings. Indeed, it thinks typical investors in U.S. equities will be lucky to make money, after inflation, over the next seven or so years.

None of these indicators are dispositive. Nothing in the investment world is ever more than about 80% certain. Last week I spoke to a brilliant hedge-fund manager I know, and he was a raging bull. But then he's trading on short-term moves, and he's been buying things like distressed European financial stocks, where the bold (or foolish) may yet find bargains. It's a dangerous game.

For anyone looking to make long-term investments, the situation right now offers plenty of grounds for caution. And it's not just because of Libya.

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Bucking a Trend: Why the Dollar Could Rally in 2011

Despite a likely third straight year of $1 trillion U.S. budget deficits, and the U.S. Federal Reserve's controversial quantitative easing program, the U.S. dollar has basically remained flat against the world's other major currencies. Compared to the British pound, it has barely budged over the past year, going from $1.6153 to $1.6093. At the same time, it fell a relatively small 4% against the Canadian dollar and went up 5% against the euro.

Admittedly, the dollar lost a substantial 10% of its value against Japan's yen, but unless you're willing to "park" your money in Japan's famously low-interest banks for almost no return, the yen is not a worthwhile option. By extension, that same drive for yield/return will probably discourage many institutional investors from trading in their dollars for yen.

If the dollar's resiliency in 2010 didn't surprise you enough, try this on for size: There's a decent chance the dollar may rally in 2011, rising in value against other major currencies. Here's why:

U.S. budget deficit reduction progress. First, it seems likely that there will be progress in reducing the budget deficit in 2011. That may be hard to believe, given that the Democrats and Republicans in the past week courageously said "you go first" regarding entitlement reform, but the important point is that the structure of the debate has changed. The debate is no longer focused on spending increases; instead, it's looking at how much will be cut and where the slashing will occur.
Analysis: Dollar bullish.

Euro-zone debt concerns. The European Union has made strides addressing its sovereign debt woes; for example, it's poised to increase the size of its bailout fund. Still, at least two large-debt nations, Spain and Portugal, remain under "24-hour observation." While the pair will probably will avoid a bailout, the chance that they might need one -- and the negative impact that such a bailout would have on the euro -- is likely to keep investors nervous about the euro for the next year.
Analysis: Slightly dollar bullish.

Dollar as global reserve currency. Eventually, globalization may lead to the adoption of several reserve currencies. In fact, the euro, yen, British pound and Swiss franc already play supporting roles. For the time being, however, institutional investors are not yet ready to abandon the dollar-dominated reserve currency system -- a status that continues to boosts the dollar's value.
Analysis: Dollar bullish.

U.S. economic expansion. Finally, there's the U.S. economy. After the longest and most painful recession since the Great Depression, the world's largest economy appears to be headed for a better-than-adequate performance in 2011. U.S.-based companies, including many multinationals, are lean, cash-flush (they've amassed about $2 trillion in cash), and are well-positioned to take advantage of the global growth cycle. That bodes well for earnings growth. And because these are largely dollar-denominated investments, it will increase demand for dollars.
Analysis: Dollar bullish.

So whether you're talking about the deficit reduction, Europe's debt woes, currency reserves or the multinational-led U.S. economic recovery, the stars appear to be lining up for a decent year for the dollar. Of course, the outbreak of another war involving the U.S., an unforeseen natural or man-made calamity (such as terrorism) or a major and sustained disruption in the flow of imported oil could all result in a bad year for the buck. But minus those, look for the dollar to hold its own in 2011.

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Silver Near a 31-Year High

Back in the late 1970s, the Hunt brothers from Texas tried to corner the silver market. That drove prices to $48 an ounce. Now, 31 years later, silver is shooting higher again. The March silver futures contract closed at $32.296 per ounce, up 72 cents.

Since gold is expensive, investors are turning to silver to hedge against inflation. Many fear that the Federal Reserve will not be able to control the spike in commodity prices. The Fed is buying $600 billion of treasuries and keeping interest rates near zero.

Silver is an industrial metal as well as a precious metal. With industrial production picking up, silver is more in demand. It is used in a host of products, mainly in electronics.

Some miners are hedging their silver production. They are selling forward contracts against their estimated production. The Commodity Futures Commission keeps a record of these commercial transactions. For the week ending February 15, commercial short positions totaled 50,796 lots, up from 44,340 at the start of the month.

For example, Boliden, a silver miner, has hedged 2.23 million ounces of it total 6.78 million ounces through 2013. In other words, they sold futures contracts against their physical silver. Hedging becomes a bit tricky in these fast moving markets. Barrick Gold (ABX) got caught when gold started moving sharply higher and had to unwind its hedges in 2009 and 2010.

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