Recently, the Federal Reserve left interest rates unchanged. Following the announcement, Fed Chairman Ben Bernanke held the first ever Fed press conference in which he laid out the Fed’s view of the U.S. economy. He suggested that the economic recovery is slowing. He didn’t use the word fragile, but plenty of people heard it anyway. He also suggested that inflation was tame and that any uptick was dwarfed by the greater potential for a slowdown in growth.

Jobs Key to Economic Recovery

Business spending has been measured, despite a tiny boom going on in Silicon Valley. Consumer spending has been whacked by not only by widespread job losses, but also by the housing market crash and subsequent collapse of the mortgage industry.

Many homeowners have no equity left in their homes. Those that do are finding that terms for second mortgages are no better than the difficulties faced by many in getting first mortgages. Refinancers aren’t doing any better regardless of credit score and loan payment history.

In other words, the only source of new money for this economy is new jobs. Without them, the recovery is doomed. With them, what is now a fragile economic recovery could slowly bloom into a full-fledged recovery.

The April jobs report is expected to come in with around 200,000 new private sector jobs. If the actual jobs number is close, expect the usual temporary effect from the jobs report, up if better than 200K or lower if less, either way, faded into market memory by the middle of next week.

If, on the other hand, the jobs number comes in substantially lower, expect some serious fallout. Unless analysts choose to write off April as an anomaly, low job creation suggests the economy may not be recovering, slowly or otherwise. That suggestion could trigger the slow unwinding of the current bets on Wall Street that better numbers and better growth is on the way for stocks and earnings. Without that optimism, nothing is holding this market up.

Low job growth, plus Washington budget cutting that slashes jobs at the Federal Government could be the death blow for an economic recovery that has been slow and unsteady thus far.

If investors start worrying too much about that possible future, the market is due for another downturn that could wipe out all the gains for this year and may even start wiping out last year’s stock market rise.

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April Jobs Report Could Have Big Impact On Stocks originally published at Finance Gourmet

Banks and financial institutions that have repaid their government bailout TARP funds and passed the stress test have been given the go-ahead by the Federal Reserve to make new capital-based decisions such as increasing their dividend payouts or doing share buybacks.

Shortly after the Fed’s announcement, the financial sector came alive with press releases about how the banking stocks would take advantage of the new allowances.

J.P. Morgan announced both a higher dividend and a share buyback, for example.

Banks Raising Dividends After Drastic Cuts

During the height of the banking crisis, most banks and financial stocks were forced to cut their dividends to minimal levels, or even to zero. Eliminating their dividends took away one of the major reasons to invest in financial stocks, which historically have provided solid dividend income to investors. Even the the financial sector’s best preferred stocks were forced to slash their dividends.

The quick moves by the big banks and Wall Street firms to reverse their dividend cuts offer a glimpse at how the banks themselves feel about their current position in the capital markets.

It is not surprising that the same banks who did not have enough capital to weather the banking crisis now believe that they have enough capital to weather whatever comes next. The interesting part will be how banks choose to implement their newfound regulatory freedom.

Check out Citibank rewards Premier Card review.

Banks announcing big share buybacks are focusing their efforts on raising their stock prices. Buying back shares reduces the number of outstanding shares and theoretically, causes stock prices to rise by lowering the available supply of bank stock shares.

Banks announcing higher dividends are focusing on returning to their position as high dividend-paying stocks. This action suggests that the company is comfortable in their long-term revenue and balance sheet position. Unlike a share buyback, which is only a one-time authorization to repurchase shares, not a commitment, an increased dividend is an on-going capital commitment.

Cutting a dividend requires a high-profile announcement and is generally regarded as both bad news and a sign of bad management. As such, companies are very careful to only raise dividends when they are confident that they will be able to continue paying them.

Banks Good Investment With Higher Dividends?

Are banks stocks a good investment now that they will be paying higher dividends and repurchasing shares?

For financial stocks that lean more heavily to share buybacks, the message is mixed. A share buyback demonstrates that management is focused on the stock price, which can be a good thing. However, short-sighted focus on stock price in order to maker sure it rises so that executives can cash out stock options and bonuses can be a very bad thing.

If, on the other hand, management genuinely believes its stock price is undervalued, then a stock buyback signals a good time to invest.

In other words, investors must carefully analyze both the quality of management and an assessment of their motivation to make a good investment decision. Only experienced investors willing to do in-depth research are going to benefit from this kind of investment analysis.

Higher dividends are a better way to judge how legitimate a banking stock move should be read. As investors have learned (and re-learned) time and time again, real cash payouts in the form of dividends are harder to fake with accounting tricks and bogus bookkeeping.

Investors looking to get back into the financial sector would do well to consider higher dividend payouts a better signal than big share buyback plan announcements. J.P. Morgan’s increasing its regular dividend by 20 cents and approving a large stock repurchase is better news than Wells Fargo’s announcement of a one time special dividend coupled with a large share buy back, for example.

Are you more inclined to buy bank stocks that are raising their dividends?

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Banks to Buy Back Shares, Raise Dividends After Passing Fed’s "Stress Test" originally published at Finance Gourmet

A recovery without new jobs isn’t worth the paper it’s statistics are printed on. Ongoing economic recovery requires that not just the people who are currently employed go back to spending and non-fear based economic decisions, but also that more people join their ranks. Unfortunately, that can’t happen if people are not returning to being employed.

Smart money decisions will swing from taking advantage of low prices and low interest rates to saving cash. While increasing savings is good on a personal level, it isn’t necessarily good for the economy overall.

The possibility that jobless benefits will begin to run out for millions of Americans only adds an additional weight to the overall economy. Put it together with States losing billions of dollars worth of Federal money from economic stimulus programs ending in 2011, and you have a lot of negatives pulling on the first quarter of 2011.

The Federal Reserve’s recent announcement to continue providing monetary stimulus is no doubt tied to the expanding scope of economic concerns. Whether the Fed can keep the economy from falling backwards is unknown, but it can blunt the effects of all the negatives lining up against a strong economic recovery next year.

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Unemployment Report Bad News for 2011 Economy Recovery originally published at Finance Gourmet

Whenever the political theories involved, as a more practical matter, there were some very real concerns about how and when the government might be able to undo some of the things they had done. One example was the government’s bailout of Citigroup. The Treasury provided $25 billion to the banking giant. In exchange, it got an enormous amount of preferred stock. At the peak, the U.S. Treasury owned approximately 27 percent of Citigroup stock.

This unprecedented arrangement left some very difficult questions up in the air to be determined later, not the least of which is how does someone — the U.S. Government included — get out of a 27 percent position in a major financial institution without causing more problems?

Thankfully, recovering markets and an improving situation at Citigroup have made it unnecessary to answer such questions under difficult scenarios. Rather, the Treasury has been selling off the shares of Citigroup stock it owns over an extended period of time. The shares have been mopped up by the market. While all of those shares do have an effect on the stock and the markets, it hasn’t been something that sticks out, and so things have gone on as normally as possible.

An interesting milestone is approaching for the TARP program regarding the Citigroup bailout.

In addition to the $25 billion cash the government traded for preferred stock, the Treasury paid $3.25 per share to convert the preferred stock into regular common stock. In total, the Feds are into Citigroup for about $45 billion.

So far, sales of Citigroup stock have generated $41.6 billion. That means that the government need only earn approximately $3.4 billion on the remaining shares it owns in order to “break-even”. Any amount above and beyond that actually ends up generating a profit for the government on its investment in Citigroup. That shouldn’t be too hard considering it was just announced that during the 4th quarter, they have authorized up to 1.5 billion shares to be sold.

With Citigroup stock trading for north of $4 per share, this quarter’s sales could cross the mark and turn the Citigroup bailout into a profitable investment for the government.

Say what you want about the politics and theory of the matter, when was the last time you heard of the United States Government actually turning a profit on something it did “for the good of the country?”

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Government Making Profit From Bank Bailout? originally published at Finance Gourmet

The catch is, there is no Facebook. Not a Facebook company you can invest in at least. Should savvy investors be looking to buy Facebook stock when they can?

Investing In Facebook

Let’s start with the basics.

When most people think of stock, they think of the stocks that trade on the major stock exchanges like the New York Stock Exchange. The companies that trade their stocks here are called publicly-traded companies, because shares of their stock are bought and sold on public exchanged like the NYSE, AMEX, and NASDAQ. There are also many companies, both big and small, that do not have stock shares that trade on the public markets. These companies are often referred to as privately-held companies, although that is not always a technically accurate decision.

Facebook is NOT a publicly traded company. There are no Facebook shares of stock to buy on the NASDAQ or any other public stock exchange. That means that there is no way to use your brokerage account to buy stock in Facebook.

Technically, if you wanted to — and a lot of people do — you CAN buy shares of Facebook on certain boutique exchanges that allow people who own shares of the privately held Facebook to sell them to other people.

There are some very important things to understand before running off and trying to find one of these Facebook stock markets.

First, as a private company Facebook has no obligation to release ANY financial information of any kind. Everyone knows that Wall Street likes companies to massage their books a little bit to make things look good, but Facebook doesn’t even have to share THAT kind of data. Anything you have heard about the company is either, rumor, second-hand, or at the very least, unaudited and unverified.

How Is Facebook Valued At Billions of Dollars?

It won’t take you long to find a news story or blog post or financial analyst staying that Facebook is “worth” billions of dollars, or that the valuation of Facebook is billions of dollars. However, that number is in large part, a guess.

Typically, a company’s valuation is the current price per share of its stock times the number of share of stock outstanding. In other words, the number of shares times the price per share.

Since Facebook does not have a publicly traded stock, this number can’t really be used. But, remember those private exchanges where Facebook shares can be sold by Facebook insiders? There is a price per share when company stock is sold on those exchanges, and one could, multiply that number times the number of shares of Facebook there are to get a market valuation.

Is that a real value?

In a word, no.

Consider that these markets are highly illiquid. There simply are not that many shares offered at any one time, and there are not that many buyers at any one time. That means that the prices set on these exchanges are the price of a limited commodity with a limited pool of buyers. This is NOT the same thing as the public markets.

What is Facebook really worth?

Until the company goes public with a Facebook IPO, nobody really knows. Even then, the publicity and popularity of the company coupled with the number of people who think that the company is a good investment, no matter what any numbers say, all but ensures that the company will start with a bang. A high per-share IPO with a fast price increase in the opening days is all but assured. After that…

There is one thing that people should start thinking about when they are racing to attach these huge numbers to Facebook’s value. The company has not gone public yet.

Despite huge demand for the shares, and investors lining up to snatch-up pre-IPO shares, the company has not even made the most basic steps toward going public. The optimist would say that the company is waiting for the right time. A more realistic look might wonder if the company CAN go public without losing the mystique that makes it valuable.

Consider that many Facebook investors, including venture capitalists and early-stage angel investors, both of whom like to cash out as soon as possible, have been invested in Facebook for a very long time. Consider also that numerous large investments have been made over the last few years, often in exchange for big ownership stakes or very preferential treatment. Consider that Facebook just passed 500 million users and that many in the tech industry are wondering if Facebook is set to be a Google killer.

You have to wonder, what else could the company need?

The answer may very well be MONEY. Until recently, Facebook wasn’t focused on revenue, and often said so. Now, the company sells advertising and has released its Facebook Credits system to generate revenue from the Facebook website. As a private company, nobody knows how big those revenues are, or where they come from. The answer might not be a good one.

It seems that Facebook going public is inevitable in the near future, but for now, there are no moves in that direction. Perhaps the company simply needs longer to pretty up its balance sheet, or it just needs more time to grow its revenues.

Whatever it is, one thing is clear. If Facebook’s investors thought they could be getting $300 per share right now for their investments in an IPO, there would be a lot more rumblings about going public.

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Facebook Valuation Estimates Billions Wrong? originally published at Finance Gourmet

That is the question a lot of people are asking today as newspapers, news websites, and television news shows lead with a headline that seems to declare that the economy is back to normal. Of course, this is not at all what is going on. This presents another opportunity to take a quick look at how financial facts and financial reporting are not always in sync.

First, the actual event that occurred is that the National Bureau of Economic Research, or NBER, released a statement saying that “a trough in business activity occurred in the U.S. economy in June 2009.” Obviously, this does NOT mean the economy is back to normal, a fact that the NBER statement goes out of its way to highlight.

In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.

Why is every news outlet in America proclaiming that the recession is over then?

Technically, the recession is over, but that doesn’t necessarily mean what people think it means. Assuming the picture below depicts a hypothetical economic cycle of growth, or expansion, followed by decline, or contraction, the “end” of the first recession occurs at the lowest point of decline, as indicated by the red arrow.

Notice how this in no way implies that the economy has returned to normal. For one thing, there is no such thing as a “normal” economy. Technically, the economy is always growing, contracting, or flat. In other words, the economy is always moving. People like to think that a growing economy is “normal” but there is nothing more normal about growth than there is about a shrinking economy.

Looking at the picture above, no one would dispute that the red arrow points at the time when the economy stopped shrinking and started growing again. This is what it means when the recession is over. However, this DOES NOT mean that the economy has gotten back to where it was. In fact, in the graphic above, the economy goes through two more recessions before growing back to the highest point of expansion from the first economic cycle.

Declaring Recession Over

It is also important to realize that NBER is not a forecasting group. In other words, NBER does not make predictions about whether or not the economy has hit bottom. Instead, NBER looks at historic data and then determines where the bottom of economic contraction occurred. NBER is essentially looking at a graph like this, and pointing out where the lowest point of the trough occurred.

This also does not in any way state that the economy cannot go down from here. Economic expansions can be very short-lived. When a recession ends and a new one begins shortly thereafter, is often referred to a double-dip recession. That may still happen to the U.S. economy, or it may not. Either way, all that anyone is saying today is that there was some upward trend in the economy that started in June 2009. How much or how long that upward movement lasts, is still to be determined.

Finally, remember that this has NOTHING to do with the stock market, the real estate market, or any other financial markets. Economic data is tied to how much stuff the country is making, how much money the country is spending, and how many people are working. It is not about how well the stock market is doing or if stocks are going to make money again.

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Is The Recession Really Over – Recession Ended in June 2009 News Reports Say originally published at Finance Gourmet

Amazon Makes Online Shopping OK

Not long ago, online shopping was the exclusive providence of very specific people, typically techies, and ultra-bargain shoppers who linked together in electronic discount finding groups reminiscent of the old coupon clubs. A few appearances on Oprah by folks like "Coupon Mom" helped drive online shopping and deal finding to the forefront of the American consciousness. But, what finally pushed online shopping over the edge from the wary, angst filled, activity it used to be to a common shopping method used by teenagers, little old ladies, and the technological inept alike was the legitimizing factor of Amazon.com.

When Amazon burst onto the scene a decade ago, it was a revolutionary idea. Selling books online meant that not only could Amazon offer deep discounts on books, but it could also stock many more titles than local booksellers could on their shelves. Even the big national chains like Barnes & Noble and Borders couldn’t compete with how many books Amazon sold. The offer to order a book for you began to pale by comparison. Instead of waiting for the bookstore’s regular shipment of books to include the book title you were looking for, you could order the same book from Amazon and have it delivered directly to your house right away.

For a while, books, were one of the things that was OK to purchase online. There were many things that made them safe. First, any book Amazon.com sells is exactly the same as the books on the shelves at Barnes and Noble. In other words, there is no concern about quality or some sort of bait and switch scam. Secondly, shipping costs were relatively low. The savings offered on the price of the book was larger than the cost of sending it in the mail, which meant a good deal, was still a good deal even with shipping. This was no small factor as online pet supply websites found out when it turned out no one was interested in buy 50 lb. bags of dog food online due to the ridiculous shipping costs. Finally, Amazon had good customer service. Products could be returned, and exchanged, and over time, the company became a household name, erasing the fear of giving out your credit card number online.

Once Amazon started selling products beyond books, the barriers were officially broken, and online shopping was a common thing among all groups of people.

Not All Shopping Websites Are Like Amazon

Unfortunately, this familiarization with online shopping via a retailer like Amazon has made many Americans let their guard down when it comes to buying online. It is important to remember that not all merchants are Amazon.com. In fact, precious few are. That means that you need to find out all the facts about who you are buying from FIRST before placing an order, no matter how great of deal it is.

Top Things To Know About Online Shopping Websites

1. Return Policy – Not just that they accept returns, but the details as well. Who pays for shipping? How long is the return period? If it is also a brick and mortar store, can you return items to the store? Is there a restocking fee? Most importantly, under what conditions can something be returned? Many sites allow returns, but only for defective items. That means if you don’t like it, or it isn’t what you thought it would be, then that is just too bad.
2. Shipping and Handling Charges – Even on Amazon.com you have to be careful of this one. Amazon lets anyone sell on their website. Unfortunately, it sorts prices based on the cost without shipping. That means that the vendor who sells for $9.99 plus $8.95 shipping is listed as cheaper than the vendor who sells for $12.99 plus $2.99 shipping.
3. Is It Really Amazon – Speaking of Amazon. The website doesn’t always make it easy to tell if you are buying a product from Amazon, or from some third-party using Amazon as a store front. It matters because they have very different return policies and shipping time frames.
4. Who Is It?  – Amazon isn’t the only website that makes it harder to see who you are actually doing business with. Don’t check out the main website to see if they are legitimate, check out the actual seller. There is a big difference between how legitimate eBay.com is and how legitimate one of its storefront sellers is.
5. Privacy Policy – Will your name and address be sold on lists as a sucker who buys stuff online from unknown websites? You can never know for sure, but make sure you check the privacy policy to ensure that the vendor at least cares enough about their customers to make it look like they care.

Lastly, never forget that identity theft and credit card numbers are tasty targets for scammers. Protect them as much as you can by not signing up or registering for websites with your real name and address until you are actually ready to make a purchase. Whenever possible, use a temporary credit card number for all online transactions to avoid nasty surprises later.

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Online Bargains Aren't Always Great Deals Check The Details First originally published at Finance Gourmet

In light of the recent banking crisis and consumer fears, the FDIC insured banks up to $250,000 per account. The move was aimed at increasing American confidence in the banking system. It appears to have worked. However, the higher FDIC coverage limits were temporary.

FDIC Insured Banks $250,000 Coverage Limits Extended

When first implemented, the increased insurance limits on FDIC savings accounts and other FDIC insured accounts at most banks, was set to expire at the end of 2009. However, to avoid a rush of customers restructuring (withdrawing) money from various FDIC insured banks, in order to get back under the $100,000 limit, President Obama signed a law passed by Congress that extends the higher FDIC coverage until December 31, 2013.

However, the law does NOT include most retirement accounts including IRAs. So, those IRA CDs, or IRA Certificates of Deposit are NOT insured to $250,000 like your regular bank savings accounts or checking accounts.

To get higher government insurance amounts on retirement accounts, move them to an investment account, or brokerage account. Even a discount online brokerage account is good.

While investment accounts with brokers are not FDIC insured, they are insured by a similar quasi-governmental entity called SPIC. (What is SPIC? – SPIC Defined) Unlike the FDIC, the SPIC already insured the amount of cash in an SPIC insured brokerage account up to $500,000 per customer. However, there is a catch. Cash, and cash equivalent, claims are limited to $100,000. So, to take advantage of the higher limits, you’ll need to have your IRA invested in something other than money market funds and CDs.

If you are worried about the safety of your IRA principal, but still want the higher SPIC insurance ceiling, look for low-risk investments to use in your brokerage account.

But, before you run out and make any changes, make sure that you understand FDIC Insurance Limit Coverage first.

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FDIC Insurance Limit Increase Extended originally published at Finance Gourmet

The first bad conclusion is that now is the time to pull money out of the market.  While this market has fallen long and fallen fast, it is almost always the case that when the average person looks to get out of their investments, they have already fallen significantly which means that getting out now just means locking in losses, especially because precious few of them have any idea about when or how they will get back in.

The second miscalculation that continuously happens to virtually everyone who is not a seasoned investor is the mistaken notion that the stock market is moving and pricing based on now, as in today.  It isn’t.

The stock market is now, and has always been, priced based on the future.  Investors buy stock not because the stock will be higher today, but because it will be higher in the future (day-traders excluded.)  Thus, when a professional investor looks at GE or IBM in today’s market they aren’t interested in today, they are interested in next quarter, next year, next five years, or whatever.

This all adds up to the stock market being what is known as a leading indicator.

Leading Indicator

A tool or system whose value indicates the direction of movement, usually in regards to the overall economy, prior to the actual change occurring.

The catch to this, of course, is that no one knows precisely how far out the market is leading, nor how far forward the masses who buy and sell stocks each day are looking.  So whether today’s drop in the stock market signifies predicts a drop next quarter or next year is difficult to ascertain.  The best one can hope for is to see clues or signs that things might be changing soon.

One such sign may have popped up today.

Merck announced today that it was offering to rival drug titan Schering-Plough in a $41 billion deal. 

While it is possible that this is an anomaly and that it means nothing, it may also mean that some of the big money out there is starting to think that prices are at the levels where buying makes sense.  A $41 billion deal isn’t the kind of thing you throw together because you are bored on a Sunday afternoon.  Merck must see some value at that price in Shering-Plough.

Obviously, a single data point is meaningless in predicting anything, much less the stock market, especially coming on the heals of the yet un-accepted Roche offer for Genetech. It is possible that this is nothing more than biotech consolidation, which is good for the long term, but hardly bullish.

However, if this marks the beginning of a series of mergers and acquisitions, it will be time to start looking at where you want to put your investment dollars for the beginning of the next bull market.

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2009 Stock Market Recovery Starts Now? originally published at Finance Gourmet

Note that we are talking about BONDS here, NOT Notes, which are a whole different deal.  Unless you are an expert or near-expert bond trader, you should stay away from any and all notes of any kind except those from the US Treasury.

But, that can’t be the end of it.  After all, there are some examples of muni bonds going sour, most notably Orange County’s default on some of its muni bond debt. 

And, of course, various municipal bonds which were pegged to specific projects or revenue streams have gone belly up.  Of course, it is pretty easy to spot which ones have that kind of risk.  Bonds fully backed by the state, county, or city are generally as safe as you can get without investing in a US Treasury.  Also pretty safe are bonds back by utilities (water and sewer especially) since people have to pay for those one way or another. 

The ones you have to watch out for are the ones that are for building a specific project and then funded with the revenues from that project.  Common examples are things like an aquarium, stadium, road, business park, mall, and so on. Those can and do default pretty regularly, so you’ll really want to make sure you know all about the project and all about municipal bonds before you dip a toe in there.

When it comes to regular municipal bonds though, they tend to be as safe as anything can be without being backed by a federal agency like the FDIC or NCUA.

Here is an example.  Today’s CNNMoney site (among others) reports that California is delaying $3.5 billion in payments.  The list includes taxpayer refunds, contractors, counties that get money from the state, and even social service agencies.  Do you notice what is missing from that list? 

Nowhere in any news story in any paper or on any website do you see even a hint that California is considering for one second not making timely interest payments on California Muni Bonds.  In fact, while Fitch was downgrading California Revenue Anticipation Notes, or RANs, (what did I tell you in the second sentence?) it made no moves to lower its A+ rating (with negative watch, from before this news) for California municipal bonds.  That is a pretty good example of how safe most municipal bonds are.

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How Safe Are Municipal Bonds originally published at Finance Gourmet