Walmart fourth quarter earnings show challenges

This winter's wrath put a chill on Walmart's sales in the fourth quarter, leading to profit of $4.4 billion, a 21% drop, the company said Thursday.

Walmart's earnings per share were $1.34, down from $1.67 in the same quarter last year. For fiscal 2014, the company reported EPS of $4.85, a 2.0% increase over fiscal 2013's EPS of $5.01.

That missed Wall Street estimates for annual earnings per share of $5.11 and its quarterly estimate of EPS of $1.59.

The numbers were in line with estimates, however, when adjusted for one-time items, "so Q4 was fine," said Brian Yarbrough, a consumer research analyst at Edward Jones.

Walmart shares were down 48 cents, or 0.64%, to about $74.85 in pre-market trading.

Walmart CEO Doug McMillion emphasized that the company's global online sales, including acquisitions, topped $10 billion, a 30% increase over last year.

"We will continue to grow our global business by focusing on customers and serving them how they want to be served," said McMillion.

Improving store sales figures will be a priority, McMillion said, "and we'll focus on being even stronger item and category merchants, delivering value and improving our service levels. We'll remain focused on our expense structure, and innovate to improve productivity and aid our ability to deliver everyday low prices."

Walmart warned in late January that its fourth quarter would be hit hard by weather woes and reductions in food stamp benefits.

Walmart is losing market share to dollar stores and grocer Kroger, which tries to compete with Walmart on price, something not all chains have attempted, Yarbrough says. And these stores have other benefits, too, he says.

"Something tells me people are more into convenience right now," says Yarbrough. "You can get in and out of a dollar store in two to three minutes, about the time it takes to walk from your car into a Walmart."

Stick With Used Dealers When Shopping for Car Stocks

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Think hard about this: What was the most obvious element of Super Bowl Sunday's TV ads? No, it wasn't the peanut M&M. No, it wasn't the crazy amount of money spent on some really poor spots. It was the fact that one industry dominated the ad buys.

Cars.

Every other commercial was a car commercial. I turned to my friend, Mike, who was watching the game with me. He sells advertising time for a big network and anticipated my question. "I filled my sales quota for the entire quarter in mid-January,” he said, “and 80% of the ad time was for cars".

The economy may still stink, but car stocks have had a resurgence since the financial crisis waned. Investors have their choice between new car stocks or used car stocks. I love the used car space, because its margins are much higher.

The overall numbers for the used car industry have been very strong, as folks who need a new car but can't afford one pick a used car instead. But which of the used car stocks is best? Let’s take a look.

CarMax (KMX)

CarMax (KMX) is first up on our car stocks shopping trip. The company had a terrible commercial on Sunday, but CarMax has an interesting superstore model, with 123 such stores in 61 markets.

What I like about CarMax is that it doesn't merely sell used cars. It also sells used cars that don't meet their internal standards to other used car dealers via online auctions, so KMX can still make money if a client offers a garbage trade-in. It also sells high-margin products like extended warranties, repairs, and accessories.

Most of all, I love that KMX also offers financing, because many used car buyers tend to have lousy credit, which means CarMax can hit them for high-interest loans.

Something’s wrong here, however. The company is generating negative operating cash flow, and even more negative FCF. Stop the car. I'm out.

AutoNation (AN)

AutoNation (AN) is a hybrid, offering both used and new cars, along with all those high-margin products. But how does it compare to other car stocks?

I love that AN has a lucrative collision business, as well — if you’ve ever needed repairs after a wreck, you know how expensive fixing collision damage is. AN also has financing and insurance products. I also like that AutoNation deals in premium luxury new vehicles, which are also high margin.

However, the company just reported that retail sales were flat with last year. AN stock is sitting in a better position than KMX, with 18.65% long term growth. On FY14 EPS of $3.38, it suggests fair value is upwards of $60, and currently trades at $49. The company isn’t heavily leveraged, and it has positive FCF. So far, AN stock is looking like the best buy among these used car stocks.

Penske Automotive Group (PAG)

Penske Automotive Group (PAG) could almost be an identical twin to AutoNation as far as what it provides, outside of the luxury market.

PAG is more spread out geographically, with 344 franchises, about half of which are in the U.K. That compares to AutoNation's 263 franchises in 15 US states. There's strong growth here, too.

However, that growth is 20% in FY13, 15% in FY14 and 9% in the long term. PAG stock trades at $41, or about 13x FY14 estimates. It has the least leverage of all, at about $1 billion, and while it has positive FCF, that figure is weaker than our other options. PAG isn’t the worst of the car stocks, but AN stock is in better condition. I'll pass on PAG.

America's Car-Mart (CRMT)

America's Car-Mart (CRMT) is the last of our used car stocks.

Looking at its financials, I'm actually going to dismiss it out of hand. CRMT has negative FCF, and has barely ever broken into positive free cash flow. Its forward price-to-earnings ratio looks attractive, but it’s just not worth the risk of that awful cash flow right now.

If things improve, it might be worth looking at because it's the smallest of the group, which means it may have the most room to grow.

So after shopping around, AutoNation is the hands-down winner for used car stocks. I'm looking to buy in the next 72 hours.

Lawrence Meyers does not own any security mentioned, but intends to purchase AN in the next 72 hours.

The Five New Challenges of Diversification

Every year investment advisors, analysts and money managers review client portfolios to decide whether to change asset allocations to better reflect risk tolerances and objectives, always with an eye toward improving risk diversification.

But with the market’s expectation of the Federal Reserve tapering its stimulus in the coming months, many of the  relationships among stocks, bonds, commodities and even international markets are already beginning to change.

As 2014 gets underway, we recommend that you maintain a diversified portfolio hedged for inflation and deflation, until the new year’s nascent trends come into better focus. Indeed, diversification is your key weapon against the twin beasts of inflation and deflation.

That’s why a white hot spotlight should be put on the correlation between markets or asset classes this year, because this is one of the essential building blocks to building a diversified portfolio.

Below we highlight how times of market stress can alter a diversified portfolio and make it riskier if nothing is done, and then overview how correlations are changing in five different markets and what investors should do to offset the changes.

A Portfolio Building Block

Correlation is a measure of the tendency of the returns of one asset to move in tandem with those of another asset. In other words, two assets that are “uncorrelated” could be expected to show no systematic, linear relationship between their returns over time. By combining uncorrelated assets, the movements of one asset can be expected to at least partially mitigate the movements of the second asset, reducing the average volatility of a portfolio.

Chart A: Monthly Correlations Between Select Market Segments (1988-2011)


Source: Vanguard

Many assets are imperfectly c! orrelated over time, because the long-run historical correlations may not hold during short-term periods of acute market stress. This dynamic could possibly emerge this year, if the Fed withdraws stimulus too quickly and the private sector is either too slow or not ready to supplant the government’s support.

According to a 2013 paper by Vanguard, “This is because during a flight to quality, increased systematic risk tends to swamp asset-specific risk, and risky assets have a tendency to suddenly become more positively correlated, often in contrast with how they perform during ‘normal’ times.”

This occurred during the global equity bear market (2007-2009), whereas correlations during this period to both U.S. stocks and U.S. bonds increased significantly—virtually across the board. As a result, the long-term diversifying properties at least temporarily largely disappeared, Vanguard found.

This result has prompted some to proclaim the “death of diversification,” though the benefits of diversification, low correlation and sensible portfolio construction tend to bear out over longer periods (3, 5 and 10 years), according to Vanguard’s exhaustive analysis (see Chart A). This is small comfort, though, to investors over the short-term.

Below we take you through five potential changing market correlation trends:

1. International Markets are Becoming More Correlated to U.S. Markets.

Whether its inflation, deflation or stagflation, investors have long counted on international markets to diversify their portfolio away from periods of market stress in the United States to preserve wealth. But a 2008 economics study by Georgetown University business Professor Dennis P. Quinn and his colleagues found that over the last century, capital account liberalizations have been accompanied by higher correlations of national stock markets with those abroad. Also, open countries have maintained higher correlation levels than closed on! es (see C! hart B).

“Rather, as more and more countries open up to outside capital, the benefits from diversification are likely to decline. The ‘home bias puzzle’ will be commensurately smaller. It is still possible that investors who are among the first to put their money into newly open markets can benefit from uncorrelated returns for a while. Further, high returns appear to follow liberalizations. Yet over the long run, diversification benefits may be small, provided a significant number of investors chase them,” the Georgetown University professor concluded.

As such, we recommend investors take an active inventory of existing international portfolio allocations to review their correlations to the home market and readjust accordingly to preserve the diversification benefits of this asset class.

Chart B: A Century of Global Equity Market Correlations

 
Source: Georgetown University

2. Breakdown in Correlation Between Stocks and Bonds

Bonds have long been expensive, according to BlackRock’s 2014 Investment Outlook, and the problem for stocks: the numerator of the P/E ratio (price) is driving returns, not the denominator (earnings). “Investors have jumped on the momentum train—effectively betting yesterday’s strategy will win again tomorrow,” BlackRock  argues. This situation, the asset manager has observed, means rising correlations between bonds and stocks have made well-diversified, “safe” portfolios riskier than they appear.

But investment bank Société Générale predicts the demise of the relationship that has been observed last year under federal stimulus, where changes in bond yields have been associated with larger changes in equity prices than previous stimulus programs. In other words, when yields rise again (induced by a tapering of QE or the Fed’s stimulus program) as! they did! earlier this summer, the SocGen fixed income strategists believe the relationship will break down as higher yields fail to boost equity prices.

“We have currently reached a new peak in equities, and the ‘beta’ — that is, the strength of the relationship for equity prices to rise as bond yields rise (the coefficient on ‘x’ in the regression equation) — is probably unsustainably high as the Fed tapers asset purchases over the next six months,” the SocGen strategists wrote, in a note to clients.

Based on their analysis, the projected level of the Dow for a 10-year Treasury yield at 3.00 percent is 15,916; for 3.25 percent it’s 16,338; and for a 10-year Treasury yield at 3.50 percent, the Dow would be at 16,760.

According to SocGen, equity prices won’t collapse this year as the Fed tapers asset purchases, but the level of bond yields will rise and equity prices will be volatile, “moving roughly sideways for a time while both markets re-adjust.”

As noted above, investors are advised to have a diversified portfolio hedged for inflation and deflation until the market’s overall direction becomes clear.

Chart C: Correlation of US Equities and Treasuries (1988-2013)



Source: BlackRock

3. Breakdown in Inverse Correlation Between Equities Versus Commodities

The year 2014 will mark a third year in a row in which commodities have underperformed U.S. equities. Including 2013, the Dow-Jones UBS Commodity Index has fallen for each of the last three years, as the S&P 500 Index scored significant gains over the past two (see Chart D).

Analysts believe that either commodities are too low or equities are too high. If there’s a correction in equities markets, post Fed tapering, many believe commodities markets could come roaring back. This may be investors’ last opportunity to be invest! ed in com! modities as a hedge against future inflation at historically low levels.

Chart D: The S&P 500 Has Outpaced Commodities Over the Last Three Years



 
Created with Y Charts

4.  End of Risk-On, Risk-Off Market

Shares are moving less in tandem with the overall market than at any time since the financial crisis, which means investors are focusing on quality names rather than making wide bets on stocks as a whole. For the last few years, the stock and bond markets have been very sensitive to news from the Federal Reserve as well as global financial news. Investors bought almost any stock and bond on good news and sold on bad, a phenomenon known as the “risk on, risk off” market.

As of the end of July 2013, stocks in the Russell 1000 index of large-capitalization stocks had a weighted average correlation of 0.30 to the index itself, the lowest since 2007 and down from 0.57 a year earlier, according to Deutsche Bank data. A reading of 0 indicates stocks are moving with no relationship, while 1 means gains or losses in perfect unison.

These numbers suggest that investors may recognize some stock names are overvalued and are seeking earnings and balance sheet strength. Nonetheless, pricing power should be a key focus for those looking for equity names that can preserve value during inflationary periods.

5.  Dollar, Gold and Oil Relationship to Reverse

Even as we have seen a period of strengthening in the greenback and weakening in gold and oil prices, many analysts believe this relationship will reverse in 2014 (see Chart E).

Analysts at Wells Capital Management expect the dollar to weaken as the global economic recovery takes hold.
“U.S. real GDP growth will likely rise above 3 percent this year and in isolation this would strengthen the U.S. dollar,” Jim Paulsen, chief investment strategist and economist, wrote in a note! .

! “However, most other economies are also experiencing acceleration in their recoveries. And, in most cases, improvements in foreign growth rates are more dramatic and by comparison to the U.S., should lead to a weaker dollar.”

Paulsen argues that the Fed’s quantitative easing program has not bloated the U.S. money supply and therefore there is no reason to believe that tapering will slow the money supply. “And, if the relative growth of the U.S. money supply does not change much vis-à-vis its trading partners, why should ending QE have much impact on exchange rates?,” he wrote.

Chart E: Dollar, Gold and Oil Trends During the Last 10 Years



Source: Federal Reserve

Why Icahn-Backed Transocean Is Still Attractive for Long-Term Investors

By Sarfaraz A. Khan and Gohar Yousuf

The world's largest offshore drilling contractor and one of the leading drilling management services providers Transocean (RIG) has joined the coveted S&P-500 Index on Monday. The company has replaced the struggling PC manufacturer Dell. This comes just a few days after Transocean announced a five-year contract with Chevron (CVX) to construct a new state-of-the art ultra-deepwater drillship. The delivery of the vessel is expected in the second quarter of 2016. The vessel will require investment of $725 million and will bring $1.1 billion as revenues. The construction of the drillship is expected to begin in fourth quarter of 2014 in Okpo, South Korea, where the company has a long history of operations. It has developed five enterprise-class drill ships at that facility and it currently has six other ultra-deepwater rigs under construction.

Going Towards Efficiency

In its previous fleet status report for the month of October, Transocean revealed that since Sept. 18, it has acquired new contracts worth $2.0 billion, which includes the new Chevron contract mentioned above. Back in 2012, Transocean reported a massive backlog of $27 billion, the biggest in the industry. This has significantly improved the company's visibility. This year, it has focused more on improving the profitability of its backlog.

Last year, Transocean started its initiative for improving its organizational efficiency by cutting costs and focusing on higher margin operations. The business has been selling non-core assets as it consolidates its operations. Last year, Transocean sold 38 older rigs for $1.05 billion as it shifted its concentration towards ultra-deepwater and high-specification rigs. The benefits from these measures will start to flow from 2014 and will translate into savings of around $300 million.

Industry's Outlook

The demand for deep! water oil exploration and production has been increasing due to the two main factors. First, the onshore resources have been extensively used for decades and there simply isn't a lot left to explore, particularly in the developed world.

Second, most of the unexplored and lucrative areas lie in the Middle East and Africa, a region which is known for its unstable business environment. For instance, Mozambique is home to enormous gas reserves and has been going on a path to prosperity over the last eight years, which is evident in its 7% GDP growth rates. Leading oil companies, such as Eni SpA (E) and Anadarko Petroleum (APC) have billions at stake in the country. However, the sudden termination of a peace deal by a rebel group recently has raised question marks over the country's ability to attract investment.

Meanwhile, the global oil demand will continue to increase and is expected to touch 96.7 million barrels a day by 2018. Due to these factors, oil companies have been shifting their focus towards offshore, particularly deepwater reserves.

Transocean is in a good position to capitalize on the trend of growing demand of deepwater drilling. The business gets almost 68% of its revenues from deepwater and ultra-deepwater assets. Transocean boasts of a fleet of 29 ultra-deepwater rigs which represent more than one-fifth of the industry's total global fleet. The company has a total backlog of nearly $30 billion, including $2 billion from new contracts mentioned earlier. Its ultra-deepwater rigs make up around 70% of its total backlog. These ultra-deepwater rigs look more promising than other deepwater rigs as they have higher revenue efficiency and utilization rates. Transocean's nearest competitor and the world's second largest ultra-deepwater operator, Seadrill (SDRL), has around 15 ultra-deepwater rigs.

The Carl Icahn Factor

Transocean is also backed by Carl Icahn of Icahn Capital Management. Icahn has been pushing for a higher dividend payout. The famed activi! st invest! or has increased its stake in Transocean by 1.3 million shares from the end of last quarter to 21.5 million shares, or 6% of the company. Moreover, the company's board also includes Icahn's backed members.

Conclusion

Therefore, due to the increasing demand of ultra-deepwater drilling, which is Transocean's core area of operation, and the company's focus on efficiency and margin enhancement, Transocean looks poised for long-term growth. The fact that Carl Icahn yields considerable influence in the company's board should give confidence to potential investors as the business will likely reward shareholders with dividends and buybacks. However, readers should note that Goldman Sachs has recently downgraded Transocean from Neutral to Sell with a $50 price target. This follows just a few days after Argus also downgraded Transocean from Buy to Hold.

In the last six months, Transocean's shares have dropped by 6%, as opposed to S&P 500 ETF (SPY) and Seadrill that have risen by 11% and 23%, respectively. Due to the recent downgrades, its shares will likely remain under pressure in the short term. However, a further decline could create a buying opportunity. Its shares are certainly not expensive at the moment as they are trading 10.5 times their trailing earnings, as opposed to the industry's average of 14 times. Moreover, at these price levels, Transocean gives an attractive yield of 4.65%, considerably above the industry's average of 2.5%.

Notes:

Transocean Fleet Status Report October 2013 (Pdf File)

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

How to always choose the best investments for yourself

"I am always at a loss while planning my finances. With so many options and choices available, everything looks green in one second and completely in red the next second. I get confused a lot on choosing the best investment option for me, what can I do about it?" Not only the beginners but also the experts get such thoughts many times.

What is known as the best investment option?

To be frank with you there is no "best investment option". There is only the right investment option. The right investment option is the one that helps you meet your financial goals. Are there any criteria available to buy the right investment products? Of course yes. Read on to get clarification on all your doubts.

Understand what you need

At times, I have seen people who are not clear about what they need. When i ask them 'what kind of investment you are looking for?' the typical answer i get is 'low risk with quick and high return'.

Detail what you are looking from an investment:

• What for you are investing? ( financial goals)

• How long you will stay invested?

• What kind of risk you are willing to take?

• How much you are planning to invest?

• How are you going to invest? Lumpsum or periodical...?

This gives you clarity about what you want. This clarity helps you avoid 50 percent of your confusion and makes your short listing process easier.

Understand the product before investing:

Understanding the different investment vehicles will help you avoid the balance 50 percent confusion gives you more clarity.

• What are all the charges involved in this investment?

• What are all the different types of risks involved in this investment?

• Is there any lock-in period?

• How long i need to stay invested to get an optimum return?

• How much return i can expect from this investment?

• What is the tax liability for the returns from this investment?

Understanding is the one simple thing that can make or break your relationship with your investment as well as your spouse. Take time to understand what you need and in which you are planning to invest.

Warren Buffet quotes "Don't invest in something you don't understand"

Let me give you 3 examples, about how investors invest without understanding and how to correct them.

People trade in shares and derivatives without understanding the risk:

Trading in derivatives is a zero-sum game. Money is not getting generated in trading. Money is getting rotated from one pocket to another pocket. Whatever the gain you make out of trading is somebody else is loss. Whatever loss you make is someone else's  gain.

In investing, both the parties, buyer and seller can make money. In trading any one of the parties can make money.

Also for trading in shares or derivatives, you need not pay the full value. By paying just 15 percent to 20 percent of your trading position,  you are allowed to trade. So you end up taking more risk then you are afford to take risk. If the trade makes you loss, the loss can be more that what you have paid. So you may need to pay more from your pocket to cover your loss.

Understand how the guarantee works in your investments:

People invest in insurance products like the highest NAV guaranteed ULIPs thinking that they have invested in risk free instruments.  It is extremely essential to know how guarantee works here.

ULIPs begin with the highest exposure to equity funds, then slowly move to debt funds. Upon maturity, they increase the fraction to debt funds. NAV is maintained within the pre-set level as the equity profits are transferred safely.

Ok, NAV is maintained as guaranteed, what is there to worry about? Is this what you think? Please understand that the high NAV is not the same as high market value. Also, keep in mind that the investments involving equities do not guarantee assured returns.

Understand the interest rate risks associated with your investments:

Most of the times, you invest in income funds and gilt (g-sec) funds without understanding the interest risk in it. Gilt funds are mutual funds connected with government sector securities. The income funds are the mutual funds invested in government, municipal, corporate debt funds and dividend paying instruments.

You must understand the difference between credit risk and interest risk here. As gilt funds are supported by government, you almost have nil credit risk. But, the interest rate and bond prices in gilt or government security funds and income funds are inversely related. When the interest rates go high, the government security gilt funds and income funds value drops down. So you may incur losses in gilt funds and income funds.

The most important steps you must take while choosing the investment option:

1. Do not recklessly follow what the agent or the relationship manager talks about the products.

2. There is no guarantee or risk-free plan come along with equity investments. When you hear about 'guarantee' connected to any product, understand it well how it works in the market.

3. Ask questions about the interest risks, credit risks and other threats associated with the products.

4. Learn well about the key fundamentals used in calculating the stock value.

5. Educate yourself about various products like equity, debt and other investment options.

6. Always read the instructions in the brochures and get all your queries clarified before investing.

Be very careful and do not hesitate to ask questions to the agents talking to you about various products. Do not blindly sign the application form because of laziness or falling victim to marketing pressures.
Always remember that no supernatural number will give you an idea whether to sell or buy your stocks. Educate yourself very well before taking decisions!

Education brings awareness. Awareness brings understanding. Understanding brings clarity. Clarity removes confusion and brings confidence. By understanding your requirement and the investment product you will transform from a confused investor to a confident investor.

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company.

Finra backs incentive comp disclosure rule

Chief executive Richard Ketchum says Finra is committed to transparency. Bloomberg News

The board of the Financial Industry Regulatory Authority Inc. has approved a proposal that would require brokers to disclose the amount of incentive pay they received to switch firms.

Recruiting compensation of $100,000 or more — including signing, upfront or back-end bonuses, loans, accelerated payouts and transition assistance — would have to be disclosed to any customer who followed a broker to a new firm within one year of his or her transition. The broker also would have to disclose future compensation based on performance.

The reporting threshold was increased from the $50,000 level in the original Finra proposal released this year.

Firms would have to disclose to customers compensation paid to new recruits in the ranges of $100,000 to $500,000, $500,000 to $1 million and higher. They also would have to report to Finra any significant increases in a new hire's compensation over his or her first year if it amounted to 25% or $100,000, whichever were higher. Finra intends to use the information to target examinations of sales abuses.

In addition, firms would have to tell customers following a broker whether they will incur costs for moving their assets and whether some of them can't be transferred.

The rule now goes to the Securities and Exchange Commission for review and approval. The agency may make revisions and put the proposal out for comment.

Finra officials say the rule is designed to highlight potential conflicts of interest for hotshot brokers who move from firm to firm.

“This proposal is about making sure the customer can make a fully informed decision to follow a broker to a new firm and understand the cost associated with transferring his or her account,” Finra chief executive Rick Ketchum said in a statement. “This proposal reflects our commitment to transparency and investor protection.”

The original proposal generated about 65 comment letters and a steady stream of criticism from independent-broker dealers and financial advisers. Wirehouse firms generally support the rule while critics said the rule should have included retention bonuses. The proposal does not address that issue.

The Financial Services Institute Inc., which represents independent broker-dealers and financial advisers, said it is pleased that the reporting threshold was raised to $100,000 from $50,000 but it is waiting for more details before deciding whether to support the rule.

“We look forward to closely examining Finra's proposal to see if it achieves the goal of providing investors with meaningful disclosure of material conflicts of interest without unnecessarily compromising financial advisers' priv! acy,” said David Bellaire, FSI executive vice president and general counsel.

The higher limit for reporting gives the independent sector a break.

“Most of the transition packages in the independent channel fall under the $100,000 benchmark,” said Jon Henschen, president of Henschen & Associates LLC, a broker recruiting firm. “They won't have any disclosure requirements.”

While the SEC mulls over the rule, its advance may spur some brokers to make career decisions.

“In the short-term, it may accelerate the moves of advisers who are on the fence,” said Mindy Diamond, president of Diamond Consultants LLC, a search and consulting firm.

Advisers with high-net-worth clients aren't too concerned about the rule, according to Ms. Diamond, who said smaller advisers who generate about $1 million in revenue annually and whose clients have about $500,000 in assets might be put off by the new disclosures.

“It's tough to tell those clients you're being paid $3 million to switch firms,” Ms. Diamond said.

Wirehouses are backing the rule because they're getting tired of paying huge recruiting incentives and are looking to Finra for help, Mr. Henschen asserted.

“They're the obvious motivators in pushing this through,” Mr. Henschen said. “Crony capitalism lives.”

The regulator weighed input from the comment letters and proposed a rule that achieves “a great balance,” John “Jack” Brennan, the Finra board's lead governor and chairman emeritus of the Vanguard Group Inc., said in a video on Finra's website.

“In many ways, it's the best of the Finra rulemaking process,” Mr. Brennan said.

Global Macro: A Correction Looms in Europe

NEW YORK (TheStreet) -- European financial markets have outperformed most of their counterparts for the past month. As global asset markets look ripe for a correction, however, watch for Europe to lead the way down.

The two most pressing events out of Europe for the week were the release of industrial production data and European Central Bank President Mario Draghi's speech on Thursday.

Industrial production underperformed expectations, which is disheartening considering Chinese production was so strong. The lack of continuity calls into question global demand, which is bearish for an already overbought financial market.

In his speech, Draghi cautioned against giving too much weight to survey data versus actual hard data released by European government agencies. His modest tone was slightly bearish for European assets. [Read: Wall Street Doesn't Have Dell to Kick Around Anymore] In order to put this into perspective. let's look at a chart of iShares S&P Europe 350 Index (IEV) below. European equities have been a global market leader for much of the year, racing to record highs in September. The issue is not with the strength of the European economy, but with the technical nature of an overbought market. As investors await the Federal Reserve's monetary policy decision next week, the uncertainty is sure to lead to a broad selloff for global equities. Look for next week to be a mostly negative week for this exchange-traded fund. [Read: Will Twitter Sell Its Soul Like Facebook Did?] The next chart is of CurrencyShares Euro Trust Price (FXE). The euro has been weighed down by the same factors that have weighed on equities, and the strength of the U.S. dollar poses an additional risk to the currency. Weak data stopped a strong euro uptrend this week, as did falling Treasuries.. Treasuries were bid higher during the Syrian conflict, acting as a safe-haven buy. As the fear subsided over the possibility of a Western intervention and investors focused more on U.S. monetary policy, the fall magnified. Rising U.S. interest rates mean a stronger U.S. currency. The euro has failed to make new highs and looks to be rolling over at the 1.31 level. That leaves the euro with weak support on both technical and fundamental levels. [Read: Expiring Tax Benefits] Next week could be the catalyst for a euro selloff toward its yearly lows if Fed officials introduce tighter-than-expected monetary policy. At the time of publication the author had no position in any of the stocks mentioned. Follow @AndrewSachais This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Time Warner Gains-But CBS Gains More-as Deal to Restore Programming Reached

In the Door’s song “the End,” Jim Morrison sang about wanting to kill his father. After today’s deal between CBS (CBS) and Time Warner (TWX) that restore CBS programs to subscribers, T.V. viewers might no longer want to kill their cable provider.

Getty Images

The Wall Street Journal explains what happened:

Time Warner Cable and CBS Corp. announced a new accord on the fees that the cable operator will pay to carry CBS programming, ending the blackout at 6 p.m. Eastern time. Terms of the agreement weren’t disclosed.

“We are receiving fair compensation for CBS content,” CBS Chief Executive Les Moonves said in a note to employees.

Time Warner Cable Chief Executive Glenn Britt said that “while we certainly didn’t get everything we wanted, ultimately we ended up in a much better place than when we started.”

The fact that terms weren’t disclosed hasn’t stopped analysts from speculating about what it might look like. B. Riley & Co.’s analysts offer their view:

While economics were not disclosed, we believe CBS did bend slightly on its demands for $2/sub/month, (which would have been a 300% hike in fees), and agree to between $1.50 – $1.75/sub, depending on the DMA. In turn, we believe TWC agreed to give up any streaming economics which currently CBS currently books on library product from its various deals with OTT providers, (examples – Cheers, Everybody Loves Raymond, Hawaii 5-0, Twin Peaks, CSI Miami, etc.).

Wunderlich’s Matthew Harrigan offers his thoughts:

CBS likely secured a monthly fee not quite immediately in line with its $2 monthly target, but likely to eclipse that threshold near the end of the five- to six-year deal term. The CBS network was back on 6pm Monday, in time for Gino Smith’s likely debut as starting quarterback for the New York Jets. CBS CEO Les Moonves did suggest to staffers that CBS now has latitude to secure domestic subscription VOD deals for CBS and Showtime, including Showtime Anywhere, significant positives for monetizing digital platform carriage. TWC CEO Glenn Britt is suggesting that the MSO was successful in somewhat moderating CBS’s more extreme demands.

The analysts sound as if they believe CBS got the better of the deal-and the market appears to agree. Shares of CBS have gained 3.7% to $53.00, while Time Warner has gained 1.1% to $61.19. Shares of Disney (DIS) are little changed at $60.81, while shares of Cablevision Systems (CVC) have dropped 0.3% to $17.69.

New Website Lists Consumer Reviews of Financial Advisors

A new online service touts itself as a social network for financially minded individuals. WalletHub, an offshoot of CardHub, which is an online store for credit and gift cards, launched the new service on Monday.

The site was in beta testing for a little over a year before its launch, founder Odysseas Papadimitriou told ThinkAdvisor on Tuesday.

“We identified a big vacuum in the market where there are no reviews for financial advisors online,” he said. “You can find a million reviews for the latest iPhone, but for the person who handles your retirement, you cannot find a single review.”

The site lists about a quarter of a million financial advisors and firms, according to Papadimitriou. The list is compiled through publicly available information.

Users can also compare rates on financial products like credit cards or loans, and can rate financial institutions. However, consumers can also rate and review individual advisors -- even though the advisors themselves can't participate on WalletHub.

“Unfortunately, the SEC has, according to some legal experts, overreached when it comes to how they have interpreted that law so they consider reviews testimonials as well,” Papadimitriou said. “That’s a problem in terms of advisors not being able to actively participate on the site, at least the ones that are regulated by the SEC. We are aware of this issue; however, we feel that it’s a higher priority to bring transparency to this market.”

Papadimitriou recommended that advisors featured on WalletHub who are concerned about running afoul of the SEC’s rules on using testimonials “consult with their compliance department to figure out whether they can play an active role or not. There are some that have taken the viewpoint that they can as long as there are no reviews, and if reviews do show up then maybe they will stop participating. Unfortunately, it would impact our credibility if we started removing reviews that consumers have written.”

He added, “We make an analogy that we are the Yelp of personal finance. We have all banks, all insurance companies, a quarter of a million of financial advisors and their firms and adding more as we speak. The vetting process will happen from the marketplace.”

He compared clients of a newly licensed advisor to diners at a new restaurant. “When a restaurant first opens, some brave consumers need to go and give it a try. Similarly, when a new financial advisor gets licensed, they will be on WalletHub, but we hope that when they start getting clients those clients will start sharing their experiences and educate fellow consumers.”

Nancy Lininger, founder of The Consortium, a compliance consulting firm, said she's heard concerns about Yelp before. "I have had advisors ask about Yelp recommendations in regards to the testimonials prohibition," she told ThinkAdvisor by email on Thursday. "My response is that you (the advisor) control Facebook, LinkedIn and similar social media sites. When in your control, you must do what you can to disable recommendation or like features, or to take recommendations down if posted."

Unfortunately, with third-party sites, it's out of advisors' hands. Lininger said, "Yelp, or newer similar services, are not under the advisor’s control. There is no way to stop unsolicited postings to those sites. The only thing you can do is not to encourage clients or others to post to these third-party sites."

Similar to the way Twitter users can “follow” people and companies, WalletHub users can follow various news outlets to customize the news that appears on a dedicated page in their profile. Initially, news is automated through the outlets’ RSS feeds, but those who want to take over their profile can do so by submitting a business listing, which will then be confirmed by the WalletHub team as a legitimate source. Papadimitriou said currently a “handful” of blogs and news outlets have taken control of their listing.

“This is a great way to attract readers that are focused on financial-related news,” he said. “We are trying to attract a community of people who want to talk about saving money, about making smarter financial decisions, not about what they had for breakfast.”

In addition to the Yelp-like review element of WalletHub and the Twitter-like element of the news page, Papadimitriou said, “The third element is companies will essentially be able to take over their profile, professionals can list their qualifications and services they offer, and that resembles LinkedIn. If you will, WalletHub you can think of as a child of LinkedIn, Yelp and Twitter: a ‘Frankenstein’ child but with a focus on personal finance.”

He concluded, “When we go to a restaurant or visit a hotel, we take for granted that we can go to TripAdvisor for thousands of reviews. When it comes to much bigger money issues we, for whatever reason, as you mentioned some of it has to do with regulatory factors, have been completely isolated from transparency.”

Q2 Earnings: 3 Answers From Lumber Liquidators

For those of you who thought Lumber Liquidators (NYSE: LL  ) would finally pull back with the company's earnings announcement this week, think again.

Bullish investors reigned supreme once again as shares of the hardwood flooring specialist closed up nearly 7% Wednesday after the company crushed analysts' expectations with its second-quarter report.

So why is everybody so excited today?

Luckily, I posed three questions for Lumber Liquidators last week going into the announcement to help us sort out the results, so let's see what the retailer had to say:

On growing into its valuation
First, I noted last Friday that the stock was trading at 44 times last year's earnings and 72 times free cash flow, so I was worried the company might not be able to grow into its valuation even if its results were solid.

Even so, I also remembered that doubting the company's incredible growth potential has proven a dangerous game over the past year, and this quarter proved no different.

More specifically, net sales increased an impressive 22.2% from the year-ago period to $257.1 million (compared with analysts' expectations of $243.3 million), helped by strong comparable-store net sales growth of 14.9%.

Better yet, net income increased a whopping 67.7% over the same period to $20.4 million, or $0.73 per diluted share, versus estimates that called for earnings of $0.60 per share.

Even better yet, Lumber Liquidators once again raised guidance for both its full-year revenue and earnings per share, telling investors they should now expect to see sales in the range of $940 million to $963 million, and EPS between $2.45 and $2.60. For those of you keeping track, that's a 2% to 3% boost over its previous revenue range, and 10% to 16% higher than the company's earlier earnings forecast.

On sustainable long-term margin expansion
While it was a safe bet that most investors expected sales to continue increasing,Lumber Liquidators also told us last quarter it was in the middle of a multiyear operating margin expansion, which helps more of every revenue dollar translate to the company's bottom line.

Sure enough, Lumber Liquidators' gross margin increased to 41.3% in the second quarter of 2013, reflecting a combination of lower product costs, increases in the average retail price per unit sold, and streamlined efficiency across the business as a whole. As a result, operating margin rose 350 basis points from the second quarter of last year to 12.9%, helping drive that impressive aforementioned net income growth.

In short, Lumber Liquidators seems to be firing on all cylinders, and old efficiency woes seem to be firmly in the past.

On questionable product safety
Finally, I was hoping Lumber Liquidators might give us some color on recent allegations regarding product safety violations in some of the company's most popular offerings. 

While its press release didn't specifically address these concerns, CEO Robert Lynch did take a few minutes near the end of the company's subsequent earnings conference call to circumvent the issue and discuss what goes into determining the quality of its products.

First, Lynch noted, Lumber Liquidators not only sources products directly from the mills which make them -- a key competitive advantage in its business, allowing it to offer lower prices versus the distributor models adopted by larger competitors like Home Depot and Lowe's -- but it also often purchases the majority of the mill partners' capacity due to the scale of its operations. As a result, this affords Lumber Liquidators unparalleled "insight and visibility throughout the sourcing process."

In addition to "well-designed product specifications," then, Lynch also reiterated that Lumber Liquidators follows a "strict adherence to a set of internal standards set well above regulatory requirements," and that "because of these standards the products we sell nationally exceed the most stringent requirements of any state."

Lynch went on to elaborate on his company's other quality assurance efforts, including "more than 60 professionals around the world ... who perform and monitor those processes that we believe are most effectively executed on the ground at the mill," as well as additional testing in Lumber Liquidators' labs and in independent certified facilities.

Of course, this doesn't mean Lumber Liquidators is completely off the hook yet, but shareholders should rest well knowing their company recognizes that the perceived quality of its products is integral to the success of the business.

Foolish takeaway
All in all, Mr. Market is right to be pleased with another solid quarter from Lumber Liquidators. With all things considered, then, and barring any significant issues with regard to the product safety issues above, I see no reason Lumber Liquidators stock won't continue to outperform the broader indexes for now.

Then again, you should also remember Lumber Liquidators is just one of many great growth stocks our market has to offer.

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The S&P 500's 5 Most Loved Stocks

Investors certainly have every reason to sing "Let the Good Times Roll" out in the streets this year, as the broad-based S&P 500 (SNPINDEX: ^GSPC  ) has risen by 14% year to date.

If it could go right, it has for the U.S. stocks this year with the housing market continuing to stabilize, the unemployment rate remaining steady or ticking modestly lower, and a majority of companies topping Wall Street's earnings estimates. Combined, these factors helped push the S&P 500 to an all-time record closing high of 1,669 in May.

But as we witnessed yesterday, skepticism in a few companies within the S&P 500 is growing -- and with good reason. However, for the majority of S&P components short-sellers have learned to keep a safe distance and not stand in front of the runaway train. Just as we've done in prior months, I propose we again look at the five most loved (i.e., least short-sold) S&P 500 components, examine why investors seem to love these companies, and decipher whether or not shareholders have anything to be concerned about.

Company

Short Interest As a % of Shares Outstanding

Berkshire Hathaway (NYSE: BRK-B  )	0.00%
News Corp.	0.00%
Nike (NYSE: NKE  )	0.54%
Loews (NYSE: L  )	0.58%
Marsh & McLennan (NYSE: MMC  )	0.60%

Source: S&P Capital IQ.

Source: Fortune Live Media, Flickr.

Berkshire Hathaway
Why are short-sellers avoiding Berkshire Hathaway?

If diversity is the key to surviving economic downturns, then consider Warren Buffett's Berkshire Hathaway the king of all conglomerates. The past couple of deals for Berkshire really demonstrate its growing diversity and strength. It purchased railroad company BNSF to get a stranglehold on consumer-goods and petroleum shipments, gobbled up Heinz to rake in its steady condiments cash flow, and recently announced the acquisition of NV Energy to tap into Nevada's growing energy demand and NVE's alternative energy potential. Even if one area of the economy is doing poorly, the chances are good that another segment of Berkshire Hathaway's portfolio is doing well.

Do investors have a reason to worry?

Nothing short of a deep global recession or depression is going to stop the economic engine known as Berkshire Hathaway. Buffett has purposely filled Berkshire's portfolio with companies that deliver brand-name products that express inelastic price and demand histories during economic downturns. The end result is consistent cash flow and market-topping results nearly every year. As long as Buffett is at the helm of Berkshire Hathaway, shareholders have little to fear.

News Corp.
Why are short-sellers avoiding News Corp.?

It's not exactly that short-sellers have avoided publishing company News Corp. so much as the rules and regulations that govern what stocks may be shorted have made it impossible to short News Corp. -- until now. News Corp. recently split its entertainment business from its publishing business (the class A non-voting shares you see here), and until July 1 there had been a short-sale trading restriction in place. With that restriction lifted, you're likely to see this short interest rise dramatically when we get the short interest figures for July. 

Do investors have a reason to worry?

There's both a good side and a bad side to this split. In the plus column, business spinoffs make it easier for shareholders to understand how a company makes money. Better transparency can go a long way to pushing a stocks' share price higher. Conversely, publishing companies that aren't pushing into new mediums of content distribution are getting crushed. News Corp. still has a lot to prove to investors with regard to its future growth prospects, which could give short-sellers plenty of room to push its share price lower in the interim.

Source: Dieselboii, Flickr.

Nike
Why are short-sellers avoiding Nike?

Short-sellers have kept their distance from footwear giant Nike because the company simply keeps stepping over Wall Street's estimates. Just over a week ago it reported better-than-expected fourth-quarter results, which included a 7% increase in operating revenue and a 27% bump in profits. Furthermore, Nike's gross margin expanded 110 basis points over the previous year, as it was able to pass along higher prices to consumers while also benefiting from lower input costs.

Do investors have a reason to worry?

If there was any reason for concern, it'd be the ongoing struggles that Nike is experiencing in China. For such a rapidly growing market, Nike is having a hard time getting its inventory under control, to the point that it cautioned shareholders that first-quarter results might be challenging. Over the long run, Nike has proved that its designs know how to reach a broad audience, and its advertising and ambassadors often hit the mark. I wouldn't read too much into any near-term weakness, but I wouldn't be shocked if Nike backed off its highs, either.

Loews
Why are short-sellers avoiding Loews?

The primary reason Loews makes a poor short-selling opportunity has to do with the fact that property and casualty insurance companies are money-making machines. When catastrophes do strike, it gives these companies ample reason to raise premiums to a level that will keep them profitable. This means any short-term weakness in Loews will usually be met with a rebound a few quarters down the road.

Do investors have a reason to worry?

Actually, Loews shareholders have a lot of reason to be excited that the Federal Reserve is thinking about paring back its monthly bond purchases known as QE3. This monetary easing has been responsible for artificially keeping lending rates low and has constrained the investment income of banks and insurance companies like Loews, which invest quite a chunk of their portfolio in U.S. bonds. As Treasury yields rise, Loews stands ready to see a significant uptick in investment income. Short-sellers could be playing with fire by being short shares of Loews here.

Marsh & McLennan
Why are short-sellers avoiding Marsh & McLennan?

The primary impetus that has kept short-sellers away from Marsh & McLennan, a company that provides strategic advice to businesses and the government, has been its role in getting insurers ready to deal with the implementation of the Patient Protection and Affordable Care Act, known also as Obamacare. The state health exchanges are by far the most complicated aspect of implementing Obamacare, so with plenty of contract dollars being thrown around, short-sellers aren't keen on standing in front of this bus.

Do investors have a reason to worry?

Aside from the PPACA, a lot of Marsh & McLennan's business is dependent on the overall health of the U.S. economy. If you think the U.S. economy is headed for choppy waters, then Marsh & McLennan could run into some temporary troubles. Then again, its advisory services can be useful in both expanding and recessionary environments, making it a company that short-sellers tend to avoid.

Which most-loved S&P 500 company do you think has the greatest risk of heading lower? Share your thoughts in the comments section below.

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Lululemon: Here's What We Know

Friday capped a difficult week for stocks with another losing day, as the S&P 500 (SNPINDEX: ^GSPC  ) , and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) , lost 0.6% and 0.7%, respectively.

Lululemon laughs it off
The announcement on Monday that Lululemon Athletica's (NASDAQ: LULU  ) CEO Christine Day would be stepping down took the market by surprise -- and not the good kind, as the stock shed nearly a fifth of its value the next day. The stock has yet to recover, and the company is trying to lighten the mood with a facetious CEO job ad/ application on its website (reminiscent of Ben & Jerry's "Yo! I'm Your CEO" essay contest that ran in 1994-1995 simultaneously with their search for a new CEO).

The reasons for Day's departure remain a mystery, but it's unlikely that she was forced out by her board. This looks like a case in which the "personal reasons" that outgoing CEOs mechanically cite in the press release is actually accurate.

The following graph shows the performance of Lululemon's stock (blue line) on a total-return basis, starting on Jul. 1, 2008, the date on which Christine Day assumed the role of CEO. The graph also includes three benchmarks: the S&P 500, the Russell 2000 Growth Index (which tracks small-capitalization growth stocks) and Under Armour, the athletic apparel maker that is arguably Lululemon's closest peer.

LULU Total Return Price data by YCharts

The graph makes it plain that, over this nearly five-year period, Lululemon has absolutely smashed the broad market and small-cap growth stocks, while matching Under Armour's fantastic returns.

Now, Foolish investors know that a five-year period is a significant chunk of time, particularly in a market in which many investors' time horizon does not extend beyond the next couple of quarters. As such, that performance is unlikely to be the product of anything other than outstanding business fundamentals. On that note, it's worth recapping a few of the company's achievements under Day's tenure:

During the five-year period ending on Feb. 3, 2013, average annual return on equity was 34.5%. Better yet, this was achieved without any recourse to leverage -- Lululemon doesn't have a dollar of financial debt on its balance sheet. Over the five-year period ended May 5, 2013, revenues grew at an annualized rate of 36.5%. That's a fantastic number in any environment, but Lululemon did this in a very tough economic climate for retail.

Does this week's share price slump present an opportunity for investors? At nearly 31 times the next 12 months' earnings-per-share estimate, Lululemon's stock remains pricey by conventional standards, and it may be dead money as Wall Street takes a "wait-and-see" approach to the leadership issue. However, Lululemon appears to have carved out a solid franchise in a very competitive area; for investors with a higher-than-average risk tolerance and a multi-year time frame, the current price could ultimately prove to be an attractive entry point.

Lululemon has the potential to grow its sales by 10 times if it can penetrate its other markets like it has in Canada, but the competitive landscape is starting to increase. Can Lululemon fight off larger retailers, and ultimately deliver huge profits for savvy investors? The Motley Fool answers these questions and more in its most in-depth Lululemon research available. Thousands have already claimed their own premium ticker coverage; gain instant access to your own by clicking here now.

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How British American Tobacco Measures Up as a GARP Investment

LONDON -- A popular way to dig out reasonably priced stocks with robust growth potential is through the "Growth at a Reasonable Price," or GARP, strategy. This theory uses the price-to-earnings to growth (PEG) ratio to show how a share's price weighs up in relation to its near-term growth prospects -- a reading below 1 is generally considered decent value for money.

Today, I am looking at British American Tobacco  (LSE: BATS  ) (NYSEMKT: BTI  ) to see how it measures up.

What are British American Tobacco's earnings expected to do?

Metric 

2013

2014

EPS Growth	10%	9%
P/E Ratio	16	14.6
PEG Ratio	1.6	1.6

Source: Digital Look.

British American Tobacco has posted strong double-digit growth in four of the past five years, with last year's 6% expansion proving the exception, and the firm is expected to keep earnings rolling higher over the medium term.

At current prices, the firm's PEG reading registers above the benchmark representing good value, however. And the tobacco specialist's price-to-earnings (P/E) ratio is also running above the value benchmark of 10 for this period.

Does British American Tobacco provide decent value against its rivals?

Metric 

FTSE 100

Tobacco

Prospective P/E Ratio	17.1	14
Prospective PEG Ratio	4.8	2.2

Source: Digital Look.

British American Tobacco surpasses the FTSE 100 average in terms of both PEG and P/E ratings, and although it lags the broader tobacco sector when considering the latter reading, a superior PEG ratio illustrates the company's better growth potential.

At first glance, British American Tobacco would not appear to be a traditional GARP investment owing to a PEG reading above 1, even though the reading is not excessively high. Still, for those looking for reliable earnings growth over a long time horizon, I believe the firm is worthy of strong consideration.

Developing markets ready to drive earnings
British American Tobacco advised in last month's interims that revenues nudged 5% higher during the first quarter, although news of a 3.7% slip in cigarette volumes, to 160 billion sticks, concerned investors that demand may be waning for its products.

Even as enduring financial woes in Europe continues to hamper performance, I believe that the firm's revenues should continue to grow as off-take from emerging regions heads skywards. Demand from Asia-Pacific rose 6.7% on an annual basis to 48 billion sticks, the firm noted, and it is hiking its activities in these regions to cash in on these lucrative markets.

And helping to mitigate fears over reduced groupwide volumes last quarter, British American Tobacco advised that "the pricing environment remains strong," and the company is able to use its catalogue of marquee Global Brands -- namely Lucky Strike, Dunhill, Kent, and Pall Mall -- to maintain its pricing power and keep margins steady.

The firm is also tipped to launch its Vype e-cigarette technology in Europe in the next few months, according to recent reports from Sky News, giving it a strong foothold in another rapidly growing market.

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3 Things Investors Should Watch in 2015

While 2014 had been at times rocky for the stock market, investors look set to come out on top again. On the last day of 2014, the S&P 500 was up 12.7%, having recovered from a slow start to the year and two major sell-offs on plunging oil prices in the fall. Looking ahead to 2015, there is at least one good reason to expect the market to outperform.

The economy is finally hitting its stride. The unemployment rate has fallen to 5.8%, below the Federal Reserve's target of 6%, and the economy is on track to add 2.9 million jobs for the year, its best mark since the late 1990s. November's job growth of 321,000 was the best monthly clip in three years, and third-quarter GDP was revised up to 5%, the fastest growth in 11 years.

While the number of long-term unemployed Americans and those working part-time jobs but looking for full-time work is still higher than normal, the economy is rapidly headed toward full health, which should help boost corporate profits next year.

In that context, let's look at three developments that will likely have an outsize effect on the stock market in 2015.

1. Oil prices 
The price for a barrel of West Texas Intermediate crude fell to $53 on the last day of 2014, down from around $105 in the summer. Prices started falling in the second half of the year due to increasing supply from North American shale producers and a slowdown in China's economic growth, and then tumbled when OPEC said it would maintain production levels in order to keep prices low and pressure American producers.

No one knows for sure where oil prices are headed, and an unforeseen event such as a military conflict could always force a spike, but most predictions call for crude prices to remain low throughout 2015. The U.S. Energy Information Administration now predicts an average West Texas Intermediate price of just $63 per barrel for the year, down from $94 in 2014. Meanwhile, the International Energy Agency recently lowered its demand forecast for 2015, noting that lower prices would not spur a sufficient recovery in demand and could cause turmoil in countries dependent on exporting oil, such as Venezuela and Russia. 

The effect of the low price of oil will continue to be widespread. Not only should it ensure a high level volatility in the market, but it will also pressure energy stocks and lift sectors such as airlines and transportation, which will save a bundle on lower fuel prices. Lower gasoline prices will benefit the middle and working-class consumers, and therefore provide a shot in the arm for retailers, particularly those such as Wal-Mart that cater to lower- and middle-income consumers. Despite the growth in U.S. energy production, the economy is still primarily based on consumer spending, and so lower oil prices are a net positive for the country. The Wall Street Journal estimates that GDP would expand by $90 billion if oil prices fell to $71 for 2015, and consumers are likely to save close to $100 billion. 

2. Fed interest rates
Do you remember all the panic surrounding the Federal Reserve's taper of its former $85 billion bond-buying program? Get ready for another round of worry.

In the months leading up to the taper, speculation engulfed the market, leading to large swings on days the Fed Open Market Committee met, and even after the taper began many worried it would sink economic growth. That didn't happen.

Now the market is worried the Fed could spoil the party by raising its benchmark interest rate, and stock prices have shifted as traders bet on when the inevitable decision to raise interest rates comes. The Fed had kept its interest rate near zero since the recession in order to encourage borrowing, and that benefited the stock market by keeping bond yields low. Therefore, higher rates could cause some money to move out of equities.

That might be justification for concern, but history shows rising interest rates have hardly any dampening effect on the stock market. A study by portfolio manager Ben Carlson found that since 1957, stocks have increased in periods of rising interest rates nine out of 11 times, and that the average annual return during the periods combined was 9.6%, just shy of 10.1% average annual return from the S&P 500 since 1958. Other studies have shown that the market tends to fall in the week after a Fed rate hike but then rise over the next one to three months.

So expect plenty of chatter about the Fed's rate hike, which is expected sometime in the middle of the year, but it shouldn't affect your long-term investing decisions.

3. Cybersecurity
With every passing year, it seems security hacks have become more prevalent. A security breach of data and credit card information from more than 100 million customers late last year cost Target $148 million, according to its own estimates, and damaged the company's reputation and customer relationships.

A few months ago, Home Depot reported a similar attack, saying that 56 million credit cards might have been compromised over the span of five-month malware attack on its terminals. More recently, Sony was victimized by North Korean-sponsored hackers in response to its planned release of the movie The Interview, a breach that not only revealed sensitive personal information of Sony employees including high-profile actors, but also proprietary content such as movies. On Christmas, Sony got another dose when a hacking group called the Lizard Squad attacked the company's PlayStation systems and Microsoft Xboxes.

After such high-profile attacks, cybersecurity should be near the top of every CEO's agenda in 2015, especially those in retail and other consumer-facing businesses. In some ways, this presents an opportunity for companies such as Apple, whose Apple Pay system adds another level of security to credit card transactions.

Unfortunately, security attacks are unlikely to ebb anytime soon as viruses and other tactics become more complex, but increased awareness by consumers and companies can help reduce the threat. For businesses, though, cybersecurity might represent another unwanted expense to the bottom line, but the cost of an attack is still much higher than cost of preventing one.

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MSFT Stock Would Move if Windows 10 Includes This One Change

Whatever the validity of Microsoft's grandiose claims for the next version of Windows, one major feature could have big implications for MSFT stock.

Microsoft unveiled Windows 10 on Tuesday at a special event in San Francisco.

"Windows 10 represents the first step in a whole new generation of Windows," gushed Terry Myerson, executive vice president of Microsoft's operating systems group. The new version will be such a massive leap over the current Windows 8, he explained, that Microsoft felt compelled to skip past Windows 9.

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Customers ultimately will decide whether Windows 10 is a flop like Windows 8 and Vista or an enduring success like Windows XP and Windows 7; the new version goes on sale sometime next year.

To be sure, consumer reaction will affect the sales of Windows 10, which will have a direct impact on Microsoft stock.

But many suspect that a possible change to the way the software is sold - something Microsoft declined to discuss on Tuesday - could have a much more lasting impact on MSFT stock...

MSFT's Windows 10 Catch

Microsoft is very likely to introduce a subscription pricing model when it officially launches Windows 10, fundamentally changing how customers purchase its flagship product.

Most people buy a copy Windows indirectly when they buy a new PC. The software is pre-installed, with the PC manufacturer having already paid the licensing fee to Microsoft. It's what's called a "perpetual license" - good for the life of the PC.

The only time such a customer would pay for Windows is if he bought a new version of Windows as an upgrade.

Under a subscription model, a copy of Windows would still be pre-installed on a new PC, but the customer would have to pay Microsoft a monthly or annual fee to keep it active.

The fee would be modest, with the possibility that certain advanced features would cost a little more.

That might sound like a rip-off at first, but it can benefit the customer as well as Microsoft...

How a Subscription Can Be Good for MSFT Stock - And You

The benefits to Microsoft are fairly obvious.

Switching Windows 10 customers to a subscription model provides the company with a steady, dependable revenue stream and erases the uncertainty that would surround a major version release in the past.

Vista and Windows 8 taught Microsoft the harsh lesson that customers will avoid a Windows upgrade that gets a bad reputation. That not only costs the company sales but adds to compatibility headaches as users cling to outdated versions.

Such behavior forces Microsoft to support aging Windows versions for years, which diverts software engineers away from new products and innovations. And once Microsoft stops supporting a version - which means no more regular security patches - customers still using it become vulnerable to malware.

That's what happened with Windows XP. Even today, 13 years and three major versions of Windows after its release - and five months after Microsoft ended support for it - Windows XP is running on more than one in four of the world's PCs.

With a subscription model, that doesn't happen. Customers, be they enterprise customers or individuals, get all product upgrades automatically as long as they remain current with their account.

That's good for Microsoft, of course, but benefits customers by providing a stream of new features, bug fixes, and improvements as well as ensuring they don't get left behind on an unsupported version.

Enterprise customers also get the benefit of being able to spread out the cost of the upgrades over time rather than having to come up with one large sum of money for each major upgrade.

That leaves us with the "Why now?" question.

MSFT Finally Stops Fighting Change

Under former CEO Steve Ballmer, Microsoft often appeared on the defensive, particularly with regard to its two cash cows, Windows and Office.

But since taking over in February, new CEO Satya Nadella has shown that he wants to embrace, rather than fight, the changes to how consumers buy and use technology.

That has meant doing things like making Office available for the iPad. And it has meant a willingness to experiment with how the company sells its products.

"In a world of ubiquitous computing we want Windows to be ubiquitous," Nadella said at the April earning conference call. "And that doesn't mean one price and one business model on all that."

Microsoft has already implemented a subscription pricing model for other products, chiefly Office 360 and other cloud-based offerings. Extending the subscription model to Windows would be the logical next step, particularly given the success it has had with Office 360.

In the past two quarters, Microsoft has reported dramatic increases in its Office 360 subscriber base - more than 1 million in the June quarter alone - which brought the total to 5.6 million users.

More impressive is that Office 360 subscriptions helped drive a 147% increase in commercial cloud revenue in the company's fiscal fourth quarter, to a $4.4 billion annual run rate.

Expect Microsoft to offer several pricing tiers for both consumers and business customers, similar to how it sells Windows now, but as subscriptions. The company may continue to offer a "permanent license" version as well, but incentives and pricing will be geared to push customers toward subscriptions.

That's what Microsoft has been doing with Office, and the strategy has succeeded even beyond the company's expectations.

The arrival of Windows 10 is the perfect opportunity for Microsoft to launch a subscription pricing model for Windows. If Nadella manages it properly, this move can generate the core of a subscriber base that will drive revenue - and MSFT stock - for years to come.

Follow me on Twitter @DavidGZeiler.

UP NEXT: As much as a subscription model would help Microsoft stock, the company has been creating a much broader foundation for success. Here's why the MSFT comeback has only just begun...

Related Articles:

PCWorld: Microsoft CEO Nadella to Wall Street: 'We want Windows to be ubiquitous'

Top GM execs paid $1 million in last year of bailout

The U.S. Treasury let GM execs get salaries that were too big, according to a watchdog report. NEW YORK (CNNMoney) Top executives at GM and Ally Financial enjoyed big pay days while their bankrupt companies struggled to repay the government in full for the bailout, a watchdog report said Wednesday.

The report blamed the Treasury Department for loosening the limits on executive pay that came as conditions to the bailout.

President Obama asked in 2009 that cash salaries be capped at $500,000, but the Treasury Department approved salaries that topped that amount for 16 employees at GM and its former financing arm, Ally, in 2013. In fact, the top 25 employees each received total compensation, including salary and stock, of at least $1 million that year, according to the report.

Treasury was too concerned with keeping companies competitive, disregarding the fact that the reason to keep them competitive was so that they could repay taxpayers in full, the report said.

In a response, Treasury's Acting Special Master Patricia Geoghegan said the report contains many inaccuracies and omissions. She points out that Congress never established a cap on compensation. Instead the Treasury is supposed to determine that pay packages are "not inconsistent" with the public interest.

At the time, GM (GM) and Ally were the only companies left (out of seven) in the government's Troubled Asset Relief Program. The government sold its final stake of GM in December of 2013, but taxpayers came up about $10 billion short on the bailout.

In total, taxpayers invested $352 billion in the seven companies and recouped all of that, plus an additional $25.6 billion.

Goldman Sachs Says Buy Protection on These Stocks…Now

The folks at Goldman Sachs are warning that October usually brings higher market volatility–and recommend investors buy “long volatility positions” in companies where event risk has not been priced into the options market, including Bristol-Myers Squibb (BMY), JC Penney (JCP), Ford Motor (F) and Intel (INTC).

Bloomberg News

Goldman Sachs’ John Marshall and Katherine Fogertey explain:

We expect a seasonal pickup in implied and realized volatility as we approach year-end…On average since 1928, October realized volatility has been 19 vs 15 for all other months. In recent years, October volatility has been even higher and even more of a standout driven by volatility spikes in 1997, 2002, and 2008. High year-end volatility is visible in each major index and sector over the past 30 years…

We expect a seasonal pickup in implied and realized volatility as we approach year-end. We surveyed analysts across the department to identify the top events in each sector through year-end. We recommend long volatility positions in sectors and companies where the options market appears to be missing key events this fall including Bristol-Myers Squibb, Dish Network (DISH), Intel, Ford Motor, JC Penney, and Pioneer Natural Resources (PXD). We continue to see strong economics keeping volatility below average; however, we believe it is likely for realized volatility to rise from the extremely low levels observed this summer.

What are those catalysts? For JC Penney it’s an Oct. 8 analyst meeting, where the company will probably discuss how back-to-school season is going and it’s plans for Christmas. For Bristol-Myers Squibb it’s a number of conferences, as well as trial data for Opdivo. Intel has earnings on Oct. 14, as well as an analyst meeting on Nov. 20 to contend with. Ford has an update for its new F-Series truck on Sept. 29.

Shares of JC Penney have gained 0.4% to $10.94 at 1:26 p.m. today, while Ford Motor has risen 0.5% to $16.61, Bristol-Myers Squibb has dropped 0.7% to $50.81 and Intel is off 0.5% to $34.75.

Newmont Mining: With Overhang Removed, Will Shares Head Higher?

Yesterday, Newmont Mining (NEM) withdrew its arbitration claim against Indonesia. Sterne Agee’s Michael Dudas and Satyadeep Jain are encouraged by the news:

Bloomberg News

Newmont has withdrawn international arbitration filing following encouraging developments and discussions with the Government of Indonesia. Signing of the agreement should pave the way for ramp-up of copper concentrate production and exports from Batu Hijau. This encouraging news helps to remove an overhang for the shares…

Newmont’s shares underestimate where gold prices may trade, in our view. As longer-term plans emerge supportive to margins and returns, we believe Newmont’s valuation should regain support based on its assets, commitment to cash flow, and margin and balance sheet strength.

Dudas and Jain call Buy-rated Newmont their “favorite large-cap North American gold equity,” topping the likes of Hold-rated Barrick Gold (ABX) and Buy-rated Agnico-Eagle Mines (AEM).

Shares of Newmont Mining have dipped 0.1% to $26.48 at 10:32 a.m., while Barrick Gold has fallen 0.3% to $18.14 and Agnico-Eagle Mines has fallen 0.2% to $37.27.

Julian Robertson Likes Uber, Google, Gilead, Stan Druckenmiller

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Tesla Motors: FTC Says States Shouldn’t Ban Direct Sales

Remember when New Jersey and Misouri were banning the direct sales of Tesla Motors’ (TSLA) Model S to consumers? Well, the Federal Trade Commision has weighed in, and it’s recommending that Missouri and New Jersey “repeal their prohibitions.” From the FTC’s press release:

Associated Press

Federal Trade Commission staff submitted written comments to Missouri State Representative Michael J. Colona and New Jersey State Assemblyman Paul D. Moriarty in response to requests for comment on legislative proposals that would alter the ability of automobile manufacturers to sell their cars directly to consumers. The proposed Missouri bill would expand current prohibitions of such sales by franchisors to also include sales by any manufacturer, regardless of whether they use independent dealers. In New Jersey, several bills would create limited exceptions to state law that, as currently interpreted, requires motor vehicles to be sold only through independent auto dealers.

According to the comments by staff from the FTC's Office of Policy Planning, Bureau of Competition, and Bureau of Economics, current laws in both jurisdictions "operate as a special protection for [independent motor vehicle dealers] – a protection that is likely harming both competition and consumers." The comments note the staff's strong opposition to state laws that mandate a single method of distributing automobiles to consumers.

Shares of Tesla Motors have gained 1.3% to $191.10 at 2:47 p.m.

Fund Investors Reveal Their Lousy Timing

Buy high, sell low. That's what the typical fund investor did over the past ten years.

How can I be certain of the accuracy of my sweeping claim? I have data to back it up. Morningstar calculated fund investor returns over the ten year period that ended December 31. The figures show that, on average, investor dollars returned an average of 2.5 percentage points per year less than the average mutual fund. The average open-end fund (excluding money-market funds) returned an annualized 7.3% over the period, while the average investor netted just 4.8% annualized

See Also: When to Sell a Mutual Fund

Investors actually do a pretty good job of identifying good, low-cost mutual funds. But they undo all that hard work with downright awful market timing.

Over that ten-year period, investors' market-timing moves were worse than usual because the markets were unusually volatile. Investors badly misjudged both the onset of the 2007-09 bear market and the start of the subsequent bull market on March 9, 2009.

Making matters much worse, investors got 2013 totally wrong. At the start of the year, they yanked money out of U.S. stock funds and poured it into bond funds and emerging-markets stock funds. U.S. stocks, of course, had a fabulous year, with Standard & Poor's 500-stock index soaring 32.4%. Meanwhile, the MSCI Emerging Markets index fell 2.3%, and the Barclays U.S. Aggregate Bond index slipped 2.0%

Morningstar figures that for the ten years from 2003 through 2012, the average investor trailed the average fund by an average of 0.95 percentage point per year. That's lousy, though not as bad as 2013, which was a banner year for bad timing.

But let's back up a bit. How can Morningstar tell how the average investor did? The investment-research firm first measures the flows into and out of each fund on a monthly basis. Each dollar invested in a fund during a month gets credit for the monthly return of that fund. Add up all the numbers and you get a good estimate of how the average investor dollar, and hence the average investor, did.

Investors, not surprisingly, tend to do the worst with funds that are the most volatile. Sector funds are Exhibit A. For the ten-year period from 2004 through 2013, the average sector fund returned an annualized 9.5%. But the average investor in sector funds earned only 6.3% annualized--a gap of 3.2 percentage points per year, on average.

People did almost as poorly with foreign and global stock funds. These funds averaged an annualized 8.8%, compared with 5.8% for the average investor—a gap of 3.0 percentage points per year, on average.

Investors did best, thankfully, in U.S. stock funds; that's where many investors have the lion's share of their money. Over the past ten years, U.S. stock funds returned an annualized 8.2%, compared with 6.5% for the average investor—a shortfall of only 1.7 percentage points per year.

Surprisingly, investors also couldn't keep up with bond funds, which tend to be much less volatile than stock funds. The average taxable bond fund returned an annualized 5.4% over the past ten years, but the average investor netted just 3.2%--a gap of 2.2 percentage points per year, on average.

What can an investor do to avoid undermining his or her performance? As with so many things in investing, the solution is simple in theory but not easy to put into effect. All you need to do is pick an allocation to stocks, bonds and cash—and stick with it.

In my view, the worst mistake investors make is to change course based on the news. You hear that the Russians have invaded Crimea and you think it's time to cut back on Russian stocks, at the least, and perhaps on all European stocks, maybe even all stocks. You read that the U.S. economy may finally be picking up steam, and you decide to increase your allocation to stock funds. The urge to take action is nearly irresistible.

What people tend to forget is that when some geopolitical event occurs or when an important economic figure is released, it's almost immediately reflected in share prices. The market isn't perfectly efficient, but it's pretty efficient at reflecting new developments—almost instantaneously. So unless you know something the market doesn't, and investors almost never do, you're better off sticking with your current allocations. Or as one of my favorite sayings has it: "Don't just do something, stand there."

Steve Goldberg is an investment adviser in the Washington, D.C., area.