Does Risk Tolerance Merely Track the Market?

Do risk tolerance scores plummet to zero, then rise as the market recovers?

This commonly voiced suspicion in financial planning circles does not find support in a comprehensive study of risk tolerance.

But the evidence does show a link between market sentiment and changes in risk tolerance in a way that all but assures investor underperformance.

The new study, in the Journal of Financial Planning, is based on a sample of 341,782 individual risk tolerance scores covering period immediately before, during and after the global financial crisis — from January 2007 to May 2012.

Personal financial planning experts Michael Finke and Michael Guillemette combed through the data provided by risk tolerance questionnaire provider FinaMetrica, and arrived at a subtle distinction.

They found that estimates of client risk tolerance were not biased by current market conditions but observed changes in risk tolerance were broadly influenced by changing market conditions.

These estimates of risk tolerance, i.e. the questionnaires, showed stability. While the S&P 500 fell 51.70% from low to high during the financial crisis, the monthly risk tolerance surveys fell just 7.14%.

Whereas S&P 500 values exhibited a volatile standard deviation of 17.27%, the standard deviation for risk tolerance scores was just 1.86%.

And yet, despite these very different magnitudes between risk tolerance results and S&P 500 results, we find that risk tolerance surveys and the S&P 500 have a quite high correlation (.70) and risk tolerance surveys and are even more highly correlated with the bear market (.90).

With seemingly such close tracking, how are the survey estimates so much more stable than stock market returns?

A revealing table of standard deviation broken out by year provides a clue. As the market recovery took root, and stock values swung less wildly — S&P 500 standard deviation fell from 15.86% in 2008 to 4.48% in 2010 — client risk tolerance standard deviations little changed between those same years (1.60% and 1.55% respectively).

So, as the economic recovery proceeded, scarred investors revised attitudes quite slowly.

“When the stock market is falling, average monthly investor risk tolerance scores are strongly correlated with changes in the S&P 500,” the authors write. “However, when stock prices start to rise, changes in average risk tolerance seem to be largely uncorrelated with the market. 

The implication for financial planners is that investors seem to be willing to take market risk precisely when valuations become less favorable — when price-to-earnings ratios are high and dividend yields low.

The authors suggest this tendency found in risk tolerance questionnaires as a source for the short-term market volatility and long-term mean reversion in stock prices that has been theorized in academic finance studies.

In real-world terms, investors lose 1.56% in average annual returns as a result of this sentiment cycle.

So while market movements “are not likely to bias client risk tolerance scores,” the personal financial planning experts say their appetite for risk will vary through market cycles, influencing them to seek safety after periods of market declines.

The authors’ conclusion:

“Employing a long-run strategy that reduces the temptation to buy high and sell low can be a significant source of value provided by a financial planner.”

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Vitamin Shoppe: It’s Not GNC

Barclays upgraded share s of Vitamin Shoppe (VSI) today, expressing a confidence in management that was, well, heartwarming.

Barclays’ analysts Meredith Adler and Sean Kras call Vitamin Shoppe’s management team “thoughtful, deliberate and disciplined” and praise their ability to diversify the business. As a result, they upgraded Vitamin Shoppe to Overweight from Equal Weight two days after Vitamin Shoppe released its earnings.

But Adler and Kras also spent a good number of words explaining what Vitamin Shoppe isn’t–specifically, it’s not GNC Holdings (GNC):

[Vitamin Shoppe] said it saw no fundamental change in consumer demand, nor did it feel much pressure from the bad media reports about things like multi-vitamins and fish oil, unlike GNC. [Vitamin Shoppe] has a much broader offering than GNC, however, so weakness in any one category rarely has a major impact on [Vitamin Shoppe's] overall sales the way it does at GNC. Conversely, it benefits less when there are few very successful products. For example, diet is a far smaller part of the sales mix at [Vitamin Shoppe] than at GNC. Last year diet had some strong products, but this year there are fewer. GNC's comps were stronger than [Vitamin Shoppe's] last year, but we like the stability of [Vitamin Shoppe's] business, especially in the current environment.

Shares of Vitamin Shoppe have gained 1.8% to $43.42 at 3:24 p.m., while GNC has risen 0.8% to $37.43.

CarMax Falls on Earnings, but Potbelly Looks Tasty

Stocks tumbled today, led by a major sell-off in momentum stocks, an indication that investors may see the market as overvalued. Investors ignored a strong jobs report and, instead, sent the Dow Jones Industrial Average  (DJINDICES: ^DJI  ) down 160 points, or 1%. The S&P 500 dropped 1.3%, and the Nasdaq, as the host of many of the most volatile stocks on the market, plummeted 2.6%. 

The market actually opened the day above water as the Department of Labor reported solid employment numbers in its March employment report. The jobs report tends to move markets, as investors see it as the best indicator of the overall direction of the economy. The agency said that 192,000 nonfarm payroll jobs were added last month, essentially in line with estimates at 195,000. Even better, the total number of jobs added in January and February was revised upwards by a total of  37,000, to 144,000 and 197,000, respectively, indicating that the poor winter weather that business complained about did not affect the economy as much as believed. Also, unemployment held at 6.7%, above expectations of 6.6%. 

Among stocks falling today was CarMax  (NYSE: KMX  ) , finishing down 4.2% after its earnings report came out this morning. The used-car dealer came up short on both top and bottom lines as earnings $0.44 a share, short of estimates at $0.53, and revenue of $3.08 billion missed the consensus at $3.18 billion. As other vehicle sellers have done, CarMax cited poor weather in part for the disappointing results. Despite the poor weather, the car dealer still saw a 12% increase in units sold and a 9% increase in revenue. Separately, the board of directors approved a $1 billion share buyback program, which is equivalent to about 10% of shares outstanding at today's prices. 

Source: Wikimedia Commons

Moving in the opposite direction was Potbelly  (NASDAQ: PBPB  ) , gaining 4.8% on an analyst upgrade. William Blair lifted its rating on the sandwich chain from market perform to outperform as analyst Sharon Zackfia said the company was unlikely to fall further this year after a 30% drop so far in 2014. She also noted a rising percentage of shares sold, creating the potential for a short squeeze, and said the stock is now significantly cheaper than peer Noodles & Company. Like Noodles, Potbelly's high price tag comes from the view that the chain has plenty of room to run with new locations and untapped markets, but sales are only projected to grow 11% this year. Given those modest growth prospects, it seems hard to justify a 2014 P/E of about 50.

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Microsoft Reportedly Considering Ericsson CEO for Top Job

Henrik Montgomery, AFP/Getty ImagesEricsson CEO Hans Vestberg SAN FRANCISCO and STOCKHOLM -- Microsoft is considering Ericsson Chief Executive Officer as a possible successor to outgoing CEO Steve Ballmer, Bloomberg reported, citing sources briefed on the software giant's executive search. The dynamic 48-year-old Swede fits the bill as a media-savvy technology fanatic, but his emergence as a leading candidate for the U.S. company will still come as a surprise to many on Wall Street. Vestberg, a former elite-level handball player, worked his way through the ranks at the world's largest mobile telecom equipment maker, with stints in China, Brazil, Mexico and the United States en route to becoming chief financial officer before taking the top job in 2010. But he has struggled to convince investors that Ericsson can maintain its lead in mobile networks in the face of stiff competition from rivals such as China's Huawei. Since Vestberg took the helm, the company's shares have underperformed the sector. Though the share price has risen 19 percent, in line with Microsoft (MSFT), that compares with a leap of nearly 60 percent for the Stoxx Europe 600 Technology Index over the same period and a 41 percent rise for Sweden's blue-chip index. Both Microsoft and Ericsson declined to comment on Bloomberg's report, though a source close to the U.S. company has said that no CEO appointment is likely until the last week of January at the earliest. Furthermore, Microsoft might prefer a candidate with more experience in consumer products as it tries to take the fight to market leaders Apple (AAPL) and Samsung in handsets and tablets after its purchase of Nokia's mobile phone business. Vestberg was in charge of Ericsson's exit from its handset joint venture with Sony two years ago, ending the company's association with consumer products. "I don't think it's very likely that they will choose Vestberg," said Bengt Nordstrom, head of Swedish telecoms consultancy Northstream. "It's more logical that they will find a U.S. leader, from their network of owners, board members and experienced CEOs with a software, enterprise and media background. There's enough with talent and experience in the U.S. market." Limited Options Since Microsoft's Ballmer announced his retirement plans last August, analysts have discussed potential candidates ranging from company insiders Satya Nadella and Tony Bates to several outsiders. But speculation refocused on internal choices this month after the leading external candidate, Ford Motor (F) CEO Alan Mulally, took himself off the list. Sources familiar with the company have told Reuters that, with Mulally out of the running, the list of candidates able to run a globe-spanning software corporation struggling to expand into the mobile software and devices markets is thin. Analysts say that Microsoft may have to look at "dark horse" candidates, but noted that some widely touted executives in the technology sector, including Pivotal Inc. CEO Paul Maritz, have already declined to take the job.

Dollar extends decline after pending home sales

NEW YORK (MarketWatch) — The dollar extended losses against major rivals on Monday after a report on U.S. home sales.

Pending home sales rose for the first time in six months in November, with a key gauge rising 0.2% to 101.7, according to the National Association of Realtors. A Bloomberg News poll showed expectations for a 1% gain from the previous month, compared to a 0.6% drop in October.

The ICE dollar index (DXY) , which compares the U.S. unit to a basket of six other currencies, dropped to 80.052 from 80.369 late Friday, while the WSJ Dollar Index (XX:BUXX) slipped to 73.71 from 73.94.

AFP/Getty Images Enlarge Image

The dollar on Friday had fallen sharply against the euro, which hit its highest level in more than two years intraday, before rebounding later in the day. No major U.S. data came out Friday, and several currency analysts said the volatile action was exaggerated by thin trading volumes.

The Federal Reserve is set to reduce its monthly asset purchases to $75 billion in January from $85 billion, which represents a step back in its unprecedented monetary stimulus. At the same time, other central banks, including the Bank of Japan, could be gearing up for more stimulus. The dollar has surged 21% against the yen in 2013.

The dollar (USDJPY)  stuck near late Friday's levels, trading at ¥105.09 versus ¥105.15.

The euro (EURUSD)  rose to $1.3802 from late Friday's $1.3742, while the Australian dollar (AUDUSD) gained to 89.01 U.S. cents from 88.70 U.S. cents.

Click to Play Positive global survey bodes well for economy

Data from advanced economies continue to show positive momentum, on balance–as seen in business survey results. All things being equal, that should be positive for markets around the world. Photo: Getty Images.

The British pound (GBPUSD)  rose to $1.6507 from late Friday's $1.6469.

While sterling traded below Friday's intraday high of $1.6578, a 28-month high, ICICI Bank analysts said the currency remained supported by recent economic strength. "Although there were no major data releases last week, the confidence in the U.K.'s economic recovery is boosted by strong revival in the housing market and the falling unemployment rate," they wrote Monday.

"With the improving economy, bets on monetary tightening are increasing, which led to a fall in gilts, as the 10-year yield rose above 3% for the first time since September," they wrote.

More MarketWatch news:

Record run for stocks has investors nervous about 2014

Mile wide, inch deep: Bond-market liquidity dries up

10 things not to buy in 2014

Australia’s Central Bank Must Go It Alone

Australia may be on the other side of the globe, but the US Federal Reserve’s dithering over monetary policy since early May has had an outsize influence on the country’s exchange rate. While US investors enjoyed having their gains in Australian equities enhanced by a relatively strong Australian dollar, now that the resource boom has peaked, it’s imperative that the currency weaken in order to boost the competitiveness of the country’s exports.

The Aussie had been trading above parity with the US dollar for much of 2011 and 2012, and finally fell below this key threshold in early May, as Federal Reserve Chairman Ben Bernanke indicated that the central bank was thinking seriously about how to curtail its extraordinary stimulus, otherwise known as quantitative easing. As the market prepared for a September taper, which, of course, never came to pass, the Aussie fell as low as USD0.89 in late August.

With just a couple press conferences, Bernanke had inadvertently engineered a decline in the Aussie that the Reserve Bank of Australia (RBA) failed to achieve on its own, despite seven rounds of interest rate cuts. The RBA has since cut rates again, in August, bringing its short-term cash rate to 2.5 percent, an all-time low.

Nevertheless, movement in the Aussie as of late continues to be largely correlated with traders’ shifting expectations regarding the Fed’s monetary policy (and to a lesser extent the strength of the Chinese economy). President Barack Obama’s nomination of Janet Yellen to succeed Bernanke as head of the central bank may have even extended the timetable for when the Fed starts to wind down its $85 billion per month bond-purchasing program.

As Bernanke’s key deputy at the Fed, Yellen is known to share his dovish stance toward monetary policy. In appearing before the US Senate’s Banking Committee on Thursday, she said there was no set time for a taper, though it obviously can’t continue indefinitely. She acknowledged that the market’s swift reaction to Bernanke’s comments in the late spring had forced the Fed to defer its taper, but also said the Fed shouldn’t be a prisoner of the market. If confirmed, Yellen can be expected to mirror Bernanke’s approach to policymaking, even if their personal style differs.

That means the Aussie likely has a base of support at current levels, which earlier this month the RBA characterized as “uncomfortably high.” The currency recently traded near USD0.937, down about 11.6 percent from its year-to-date high in January, but up 5.3 percent since August. According to a Bloomberg survey of economists, the Aussie is expected to trade at USD0.89 next year, while bottoming around USD0.87 in 2016-17.

The RBA says there’s a chance the exchange rate could remain near current levels over the next couple years, though a softening resource sector could lead to declining capital inflows, which would help depreciate the currency. But it notes that the currency is largely beholden to the monetary policies of the central banks of the world’s larger economies. That means the RBA will have to continue cutting rates to undermine the currency, since it won’t be getting any outside help from its central bank peers.

Though our gains are no longer being enhanced by the currency effect, a weakening Aussie should help our companies compete in the global markets. And we expect that performance to ultimately flow through to higher share prices for our recommendations, which should more than offset the modest decline in the currency.

The rise and fall of a revolutionary drug

One of the best drug launches in history has become one of the fastest run downs.

Approved in May 2011, Vertex Pharmaceuticals' (VRTX ) hepatitis C drug Incivek hit $457 million in sales in its second full quarter on the market. Many drugs never hit $457 million in annual sales at their peak.

Less than two years later, sales are down to $86 million in the most recent quarter. You can't say I didn't warn you.

Ironically, what made Incivek so popular to begin with is also what caused the crash. Hepatitis C is a slowly developing disease, so there's a limited downside to patients waiting a few years to be treated if the virus isn't doing much damage to the liver yet.

Doctors could see that Incivek and Merck's (MRK ) Victrelis were working well in clinical trials, so they cut back on the prescribing the standard of care at the time -- Roche's Pegasys or Merck's Pegintron with a generic called ribavirin -- because they only cured about half the patients and make many people feel like they have the flu.

Once Incivek was approved, the warehoused patients were prescribed Incivek, which had a little better data than Merck's Vicrelis, and sales skyrocketed.

Rinse and repeat

But then doctors heard about the next generation of drugs and started warehousing again. Doctors are going to prescribe Johnson & Johnson's (JNJ ) simeprevir and Gilead Sciences' (GILD ) sofosbuvir, which both look like they're going to get approved this year after getting unanimous endorsements from their respective advisory committees. The large number of drugs in clinical trials also siphoned off some patients.

Vertex has seen the writing on the walls, so the biotech is cutting 370 positions, about 15% of its workforce, to conserve cash while it ramps up its cystic fibrosis business. Vertex also has a next-generation hepatitis C drug, VX-135, but it'll take a few years to get approved -- if side effects don't kill it first -- so it doesn't make sense to keep the hepatitis C sales force ! on the payroll.

All those workers can find new homes at Johnson & Johnson or Gilead Sciences. At least until doctors start warehousing again.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary. Its content is produced independently of USA TODAY.

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Dow Heads Higher With the Help of Home Depot Stock

Blue-chip stocks are broadly higher today following a better-than-expected earnings report from Home Depot (NYSE: HD  ) and a key Federal Reserve official's comments about a continuation of quantitative easing. With an hour left in the trading session, the Dow Jones Industrial Average (INDEX: ^DJI  ) is up by 76 points, or 0.5%.

Shares of Home Depot are among the Dow's leaders this afternoon, up by 3%. The home improvement retailer reported expectation-stomping first-quarter results today. For the three months ended May 5, the company reported net earnings of $1.2 billion on $19.4 billion in revenue, equating to respective increases of 18% and 7.4% over the same time period of last year.

The impressive performance was the result of two trends. First, the housing market is improving. This is particularly the case as we enter the prime season for home sales. And second, Home Depot continued to benefit from rebuilding in the aftermath of Hurricane Sandy, which ravaged the East Coast in the latter half of last year.

According to the company's chairman and CEO, Frank Blake, "In the first quarter, we saw less favorable weather compared to last year, but we continue to see benefit from a recovering housing market that drove a stronger-than-expected start to the year for our business."

Further fueling the optimism of stocks today were comments by two Federal Reserve officials about their support for continued quantitative easing. James Bullard, president of the Federal Reserve Bank of St. Louis, said that the program has been "effective" and that he supports its continuation. William Dudley, the president of the New York branch, followed this up by intimating that the central bank hasn't set a course on winding down the program.

And in one last piece of news that's spurring shares of the nation's largest bank by assets, the chairman and CEO of JPMorgan Chase (NYSE: JPM  ) won a proxy vote allowing him to continue occupying both positions. Jamie Dimon's dual roles had been challenged after it was reported last year that the bank had suffered a multibillion-dollar trading loss known as the "London Whale" scandal. Shares of JPMorgan are currently up by 1.6%.

Why Lifeway Foods Is Poised to Pull Back

Based on the aggregated intelligence of 180,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, dairy products specialist Lifeway Foods (NASDAQ: LWAY  ) has received a distressing two-star ranking.

With that in mind, let's take a closer look at Lifeway, and see what CAPS investors are saying about the stock right now.

Lifeway facts

Headquarters (founded)	Morton Grove, Ill. (1986)
Market Cap	$285.4 million
Industry	Packaged foods
Trailing-12-Month Revenue	$86.3 million
Management	CEO Julie Smolyansky (since 2002) CFO Edward Smolyansky (since 2004)
Return on Equity (average, past 3 years)	11.5%
Cash/Debt	$5.1 million / $5.4 million
Dividend Yield	0.5%
Competitors	Dean Foods  General Mills

Sources: S&P Capital IQ and Motley Fool CAPS.

On CAPS, 16% of the 61 All-Star members who have rated Lifeway believe the stock will underperform the S&P 500 going forward.

Just yesterday, one of those bears, fellow Fool Rich Smith (TMFDitty), touched on the stock's seemingly unsustainable valuation:

I'll take advantage of an unwarranted price spike to short this one [on Thursday]. LWAY is a great company, but it's just reneged on a commitment to not spend money on expanding capacity, buying a plant to quadruple capacity instead. And [free cash flow] is down in comparison with last year's Q1. Time to exit.

While you can certainly make quick gains in speculative momentum plays, the best investing approach is to choose great companies at good prices and stick with them for the long term. The Motley Fool's free report, "3 Stocks That Will Help You Retire Rich," names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.

Preapproval's the Secret for Not Dinging Your Credit Score

Cassandra Hubbart/AOL The almighty FICO score has a big impact on how we make financial decisions, and for good reason. Not only is the score used in more than 90 percent of all lending decisions, but it also impacts other parts of our life, including how much we pay for auto insurance. Some people like to pretend that FICO does not exist. If you are incredibly wealthy (and have, for example, your own radio show and millions in the bank), than you can safely ignore your FICO. However, if you need to borrow money to buy a home or a car, than having a good FICO is helpful. And, fortunately, it is not hard to do. If you pay on time and don't max out your credit cards, than you will have a good score. Contrary to many rumors, you do not need to carry a balance and pay interest on your debt to have a good credit score. You need to use your credit cards, but you can pay them in full every month. If someone tells you that you need to borrow money to have a good score, they don't understand how the calculations work. How Your FICO Score Is Calculated

US proposes fiscal Ebola relief

A health worker returns to her ambulance outside Freetown in Sierra Leone. NEW YORK (CNNMoney) Ebola-stricken Liberia, Guinea and Sierra Leone might get $100 million in debt relief if the US gets its way.

Treasury Secretary Jack Lew suggested in a statement Tuesday that the International Monetary Fund ought to forgive that much for the three countries, whose economies will likely suffer in the virus's wake.

Google wants to match your Ebola donation

"IMF debt relief will promote economic sustainability in the worst hit countries by freeing up resources for both immediate needs and longer-term recovery efforts," Lew said in a statement. Reuters first reported the proposal Tuesday.

The three countries owe the IMF a collective $336 million. The organization has estimated that Liberia will see its economic growth fall more than 70% this year and Sierra Leone will see its growth fall by 60%. Guinea's growth is expected to increase.

Check out CNN's Ebola facts page for coverage updates

A Treasury spokeswoman said that the IMF could finance such an effort with money from a $268 million-emergency relief fund set up for Haiti after its earthquake. The fund still has $150 million in it, she wrote in an email.

She added that Lew would speak more about the plan at the G-20 Finance Ministers Meeting in Brisbane, Australia next week.

An IMF spokesman said that the organization is preparing a response and declined to comment until then.

EU pledges 1 billion euros to fight Ebola

General Motors Might Miss Its Margin Target…and It Doesn’t Matter

The folks at JPMorgan aren’t sure General Motors can meet its margin targets–they’re just not sure it matters. Analyst Ryan Brinkman and team explain why the “see attractively deep value” in shares of General Motors:

Getty Images

[For General Motors, we] forecast 2016 EPS of $5.20, well above Bloomberg consensus of $4.82, on volume gains across most regions and a focus on structural costs in North America (we expect North America structural cost opportunity to be a focus of the firm's upcoming analyst day October 1). Our forecast presumes a 2016 North America EBIT margin of 8.8%, +40 bps y/y vs. 8.4% in 2015, which is itself -60 bps vs. an ex-safety recall 9.0% in 2014 that benefits from strong product cadence.

Said differently, we are above consensus without giving much credence to GM’s 10% mid-decade North American EBIT margin goal, suggesting potential additional upside to the extent GM can deliver in this area. Our newly established December 2015 price target of $51 compares to our earlier $50 December 2014 price target. We have conservatively lowered our target multiple to 4.0x from 4.5x, to necessitate less multiple expansion (when we moved to 4.5x, GM was trading closer to 4.0x). We recognize that even our lowered target multiple represents substantial improvement vs. the 2.6x at which we estimate GM is currently trading; however, we feel it is conservatively in keeping with the automaker's historical range of EBITDA despite structural improvement in profitability and a substantially healthier balance sheet. In an upside scenario in which GM can accomplish 10% GMNA EBIT margins or can convincingly demonstrate that it is on a path toward such margins, we feel the stock could be re-rated still higher, potentially even beyond 4.5x.

As a result, Brinkman prefers General Motors to Ford Motor (F) and Tesla Motors (TSLA). He explains why:

We prefer General Motors to Ford (and GM and Ford to Tesla), on lower valuation and stronger near-term profit trend: Ford trades toward the high end of its range of historical valuation (although not above it, like suppliers), while GM trades at a discount. And yet we expect GM to experience strong truck-led profits for the next several quarters as Ford does not, given lost production as it transitions to produce a new aluminum version, even in the event of flawless execution.

Shares of General Motors have fallen 1.4% to $33.45 at 3: 48 a.m., while Ford Motor has dropped 1.5% to $16.40 and Tesla Motors has declined 3.3% to $250.67.

 

Friday Links

NEW YORK (CNNMoney) -

A weekly collection of design, data and interactive links. Design/Data viz A Spacecraft for all | Chrome experiment for the ISEE-3 Reboot Project Marka | Beautiful icon transformations X to close | The origins of the use of [x] in UI design Lipsum Pro | Superfast lorem ipsum generator Where people were born | Detailed look at every U.S. state A better queue | Filter and browse Netflix instant movies with Rotten Tomatoes' Tomatometer Photo/video Steampunk gifs | Gifs made from the Smithsonian's steampunk prints Time Collapse | Skateboarding Time Collapse: Shot with the Lumia 930 Ground Floor | Subjective city of a mistaken mind 80sTV | Relive the 80s through this video based time portal First-person hyperlapse videos | New research from Microsoft See last week's links Have a nice weekend! @dubly and @talyellin

U.S. Stocks Turn Red; 21st Century Fox Shares Surge On Upbeat Results

Related BZSUM U.S. Stocks Reverse; Cheetah Mobile Back In Google App Store Rankings Markets Open Higher; Brinker Profit Misses Estimates

Midway through trading Thursday, the Dow traded down 0.32 percent to 16,391.07 while the NASDAQ declined 0.14 percent to 4,348.92. The S&P also fell, dropping 0.35 percent to 1,913.61.

Leading and Lagging Sectors

Utilities shares surged around 0.57 percent in today’s trading. Meanwhile, top gainers in the sector included Empresa Distribuidora y Comercializadora Norte S.A. (NYSE: EDN), up 2.9 percent, and PNM Resources (NYSE: PNM), up 1.7 percent.

In trading on Thursday, healthcare shares were relative laggards, down on the day by about 0.62 percent. Meanwhile, top decliners in the sector included Thoratec (NASDAQ: THOR), down 28.4 percent, and PhotoMedex (NASDAQ: PHMD), off 14.6 percent.

Top Headline

Brinker International (NYSE: EAT) reported a drop in its fourth-quarter profit. However, the company's revenue topped analysts' estimates.

The Dallas, Texas-based company posted a quarterly profit of $28.8 million, or $0.43 per share, versus a year-ago profit of $46.4 million, or $0.64 per share. Excluding items, its earnings climbed 10.4% to $0.85 per share from $0.77 per share.

Its total revenue gained 3.9% to $758.7 million. However, analysts were expecting earnings of $0.86 per share on revenue of $749.7 million.

Equities Trading UP

Lehigh Gas Partners LP (NYSE: LGP) shares shot up 24.13 percent to $32.25 after CST Brands (NYSE: CST) announced its plans to acquire Lehigh Gas GP LLC, the general partner of Lehigh Gas Partners LP. Lehigh Gas Partners also reported its financial results for the second quarter.

Shares of Twenty-First Century Fox (NASDAQ: FOXA) got a boost, shooting up 6.53 percent to $34.44 after the company reported upbeat fourth-quarter results. Cowen & Company upgraded 21st Century Fox from Underperform to Market Perform and raised the price target from $29.00 to $35.00.

Stratasys (NASDAQ: SSYS) shares were also up, gaining 17.72 percent to $116.44 after the company reported better-than-expected quarterly results and lifted its forecast.

Equities Trading DOWN

Shares of Thoratec (NASDAQ: THOR) were down 28.46 percent to $23.30 after the company reported downbeat second-quarter sales and issued a disappointing 2014 earnings outlook.

Atmel (NASDAQ: ATML) shares tumbled 7.50 percent to $7.96 after the company reported in-line Q2 earnings. Bank of America downgraded Atmel from Buy to Neutral.

Melco Crown Entertainment (NASDAQ: MPEL) was down, falling 3.25 percent to $29.04 after the company reported downbeat quarterly results.

Commodities

In commodity news, oil traded down 0.20 percent to $96.73, while gold traded down 0.02 percent to $1,308.00.

Silver traded down 0.39 percent Thursday to $19.95, while copper rose 0.36 percent to $3.18.

Eurozone

European shares were lower today. The eurozone’s STOXX 600 fell 0.71 percent, the Spanish Ibex Index dropped 1.79 percent, while Italy’s FTSE MIB Index tumbled 2.10 percent. Meanwhile, the German DAX fell 0.99 percent and the French CAC 40 declined 1.40 percent while UK shares dipped 0.65 percent.

Economics

US initial jobless claims declined 14,000 to 289,000 in the week ended August 2. However, economists were expecting claims to reach 304,000 in the week.

Natural-gas supplies climbed 82 billion cubic feet in the week ended August 4, the Energy Information Administration reported. However, analysts were estimating a rise of 81 bcf to 85 bcf.

Data on consumer credit for June will be released at 3:00 p.m. ET.

Data on money supply will be released at 4:30 p.m. ET.

Posted-In: Earnings News Guidance Upgrades Eurozone Futures Price Target Commodities

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Can this British designer save Coach?

Coach has hired Stuart Vevers to try to revive a brand that has been around since 1941. NEW YORK (CNNMoney) Stuart Vevers' job qualifies as stressful.

The British designer was hired last year to revive the Coach brand, a comeback that may be even harder to pull off than Martha Stewart's.

Coach (COH) stock is down almost 40% this year. The bad weather that kept many American shoppers out of stores this winter only exacerbated the company's problems. The brand is stale.

Known for its leather handbags, Coach doesn't have a clear identity anymore.

The company, founded in 1941, really hit its stride in the 1990s under the dynamic duo of CEO Lew Frankfort and head designer Reed Krakoff. They popularized the concept of "luxury for the masses."

They found the sweet spot in the retail market where customers wanted a bit of brand cache but at a cost that was a lot less than Prada (PRDSF) and Gucci had to offer.

The company went public in 2000 (as a spin-off of food company Sara Lee no less) and the stock rose steadily for a few years with the introduction of products like the "Hampton bag." Wall Street pushed for growth, and Coach responded by opening a lot of outlet stores, which diluted the luxury brand notion.

It also didn't help that competition increased from Michael Kors (KORS), Kate Spade (KATE)and Tory Burch, among others.

Coach's turnaround plan: Enter Vevers. The company is aiming for the higher-end consumer again now that Vevers is Executive Creative Director.

He has the track record. He was named Accessory Designer of the Year by the British Fashion Council several years ago and has worked at other brands trying to reinvent themselves -- such as Calvin Klein and Mulberry.

Thanks to Vevers, Coach held its first New York Fashion Week show earlier this year, garnering largely positive reviews.

But Wall Street is not convinced that the runway success will lead to higher sales just yet.

"Some of his designs will be in full-price stores in the fall. You're not going to see it in the outlet channel until probably 2015! , which is the majority of sales" says Evan Staples, a senior analyst at Nuveen Asset Management. He argues any turnaround will be a long time coming.

"Only if you're a very risky value investor would you be stepping in here," he says.

It's also not clear if this is even the right direction for Coach.

"Can Stuart Vevers put good product on the floor? I don't know," says Paul Lejuez, who covers retail stocks for Wells Fargo Securities. "The more important question is even if the product looks good, does it matter? Will people buy it?"

Coach is in the process of closing some stores. After the latest round, it will have about 250 full-price stores and 200 outlet stores in North America, Lejuez says. That makes it difficult to re-cast the brand as a more up-scale "luxury-lifestyle" brand when its discount stores are still everywhere.

Buying opportunity? Robert Drbul, an analyst who covers the retail sector for Nomura, is more bullish. He has a "buy" rating on the stock, which currently trades around $34, a big drop from 2012 when it traded around $75. Drbul has a target price of $45.

"The company has a track record of brand re-invention and a strong team," Drbul says. "Coach clearly remains committed to their dividend, so from the investor standpoint, they are paid to wait and hold their shares." Coach's dividend yields nearly 4%.

Drbul also points out that many luxury and pseudo-luxury brands are fighting for traction in Europe and Asia. Bringing on a British designer with many European ties could also give Coach an edge internationally.

But the biggest "buying opportunity" may be for consumers. Many retailers are increasing discounts as they try to clear inventory after a slow winter and spring. Coach is also motivated to make room on its shelves for Vevers' designs.

So even if you aren't interested in the stock, Coach's current predicament is a good chance to pick up a nice handbag or pair of shoes at a cheap price! .

GM was warned by its own lawyers on recall debacle

GM lawyers warned that the automaker risked being hit with severe and costly legal penalties for the way it handled the flawed ignition switch. NEW YORK (CNNMoney) General Motors was warned by its own lawyers at least four times that it risked being hit with severe and costly legal penalties for the way it handled the flawed ignition switch tied to at least 13 deaths, according to a Senate hearing Thursday.

So-called punitive damages are awarded in a lawsuit to compensate plaintiffs beyond their actual losses. Sen. Claire McCaskill, the Missouri Democrat, revealed that these warnings took place between 2010 and early 2013 as she questioned GM general counsel Mike Millikin. She noted that the threat of punitive damages should have been a "blinking red light" for GM (GENERAL MOTORS) officials.

But the warnings apparently never reached top executives at the automaker, including Millikin who testified before the Senate panel along with CEO Mary Barra.

"This is either gross negligence or gross incompetence on the part of a lawyer," said McCaskill. She also said she could not understand why Millikin and other top lawyers at GM had not been fired.

But Barra defended Millikin.

"I have made the promise to fix what happened in the company," she said. "To do that I need the right team. Mike Milikin is a man of tremendously high integrity."

Several lower ranking attorneys were fired after an internal investigation into GM's failure handling the recall.

Millikin testified for the first time Thursday, saying he was deeply sorry for the deaths tied to the recall. He testified he was not aware of the ignition problems at the center of the recall crisis until February 2013, even though the company had settled some lawsuits involving the cars long before then.

Other senators also urged that Millikin be fired as well.

"It's shocking to me you would be general counsel...and you wouldn't have known," Republican Sen. Kelly Ayotte told Millikin.

The senators were also angry that when GM refused to answer questions from regulators years ago it invoked attorney-client privilege several times.

"If GM is really serious about changing its culture and imposing a new era of truth telling, the place to start is your legal department," said Sen. Richard Blumenthal.

The is the fourth time that Barra has testified before congress about the recall crisis, and senators were generally less hostile to the CEO this time around. McCaskill, who has been a fierce critic, praised Barra for the steps she has taken.

Commonwealth Exec Returns After ‘Brief Hiatus’ at LPL Financial

Commonwealth Financial says that an executive who left the independent broker-dealer for rival LPL Financial has returned after only a month.

Paul Mahan is back on the job as vice president of Commonwealth’s Retirement Consulting Services operations. He left in May to join the Retirement Partners unit of LPL Financial (LPLA).

“After his brief hiatus, I am pleased to welcome Paul back to Commonwealth, where he will pick up right where he left off,” said CEO Wayne Bloom, in a press release. “We recognize the significant impact he has made in building one of our industry’s leading retirement-consulting services offerings, and it’s gratifying to see, in turn, the impression the Commonwealth community has made on him.

The members of the Retirement Consulting Services team support advisors who want to build and maintain successful retirement practices, the privately held IBD says, both for individual clients and for workplace retirement-plan benefits programs.

Commonwealth first tapped Mahan as an executive for this work in November 2010. Earlier, he worked for Pioneer Funds (May 2004 to July 2010 and Scudder Investment Services/Scudder Financial Services (September 1992 to June 1999), according to FINRA records.

“I had always been a passionate advocate of the quality of Commonwealth’s infrastructure, the extraordinary program and service offering our team has built, the talent and expertise of our staff, and, not least, the advisors who are the foundation of this very special community,” said Mahan, in a statement.

According to Commonwealth, Mahan has 20 years in the financial services business, including a management role at Pioneer Investments, where he was responsible for the firm’s defined contribution and subadvised business development.  He also worked for Fidelity Investments.

“In my three and a half years with Commonwealth, I had developed incredibly close ties, and I always maintained a great level of pride and excitement in my work — which I value deeply," he said. "I’ve realized the Commonwealth community is where I thrive, and serve, best.”

Commonwealth has close to 1,500 affiliated advisors, who had about $464,000 in yearly fees and commissions, according to the Investment Advisor 2014 Broker-Dealer Reference Guide. In contrast, LPL Financial has some 13,700 reps, and their average production is about $234,000.  

(Earlier this month, LPL said Chief Marketing Officer Joan Khoury planned to leaving the firm; as a result, two executives are stepping into new roles within its Advisor & Institution Solutions Group. These changes come about six weeks after LPL Financial named a new head of its Independent Advisor Services unit, Bill Morrissey; he replaced Derek Bruton, who retired from the independent broker-dealer in early April, after it expressed “concerns over his interactions with other employees.”)

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