Tax Inversion Deals: DC Blames Wall Street for Its Mess

Democrats and Republicans alike in Washington are unhappy about the increasing number of so-called tax inversion deals, but instead of blaming Wall Street they need to look at the real cause of the problem - themselves.

A tax inversion deal is a merger between a U.S and a foreign company specifically designed to allow the U.S. company to move its headquarters out of the United States to escape America's high corporate tax rate.

Several recent high-profile tax inversions, such as AbbVie Inc.'s (NYSE: ABBV) merger with Ireland-based Shire Plc. (Nasdaq ADR: SHPG) and Medtronic Inc.'s (NYSE: MDT) deal to buy Ireland-based Covidien Plc. (NYSE: COV), have resulted in much wailing and gnashing of teeth in our nation's capital.

Walgreen Co. (NYSE: WAG) is thought to be considering a deal, while Pfizer Inc.'s (NYSE: PFE) attempt via a deal with Britain's AstraZeneca Plc. (NYSE ADR: AZN) fell apart.

Over the past 10 years about 50 U.S. companies have reincorporated overseas via tax inversion to tax-friendly countries like Ireland, about half of which are in the Standard & Poor's 500, but the practice has accelerated in recent years.

And it's not surprising that the federal government doesn't like it; the Joint Commission on Taxation has said corporate tax inversion could cost the Treasury as much as $20 billion in tax revenue over the next decade.

President Barack Obama has returned to the topic several times over the past week or so, but urged "closing this unpatriotic loophole for good" in his budget proposal earlier this year.

"Even as corporate profits are as high as ever, a small but growing group of big corporations are fleeing the country to get out of paying taxes," President Obama said in his weekly radio address on Saturday. "They're keeping most of their business inside the United States, but they're basically renouncing their citizenship and declaring that they're based somewhere else, just to avoid paying their fair share."

Democratic leaders like Sen. Chuck Schumer, D-N.Y., have gone a step further, calling for legislation that would not only prevent future tax inversions, but include retroactive language to deprive the sought-after tax breaks to any company that executed such a deal after May 8.

That would affect the AbbVie and Medtronic deals, and create uncertainty among other U.S. companies that might be considering a tax inversion themselves.

But for all the political hot air, the law now being discussed in Washington treats the symptom, not the disease. What the politicians seem to forget is that their own failure to reform the corporate tax laws is the root cause of this problem...

Why Tax Inversion Deals Are Washington's Fault

The fact is the U.S. has the highest corporate tax rate in the world - 35%. Worse still, the U.S. taxes all profits a company makes, no matter where they are earned. Other major economies only tax profits earned domestically.

This punitive combination strongly incentivizes the use of loopholes like tax inversion deals.

It's also the reason that so many U.S. multinational corporations refuse to repatriate some $2 trillion worth of profits made overseas.

And companies have gotten very good at using these loopholes to the point that many pay an average of only about 12% of profits in taxes, and some pay zero or near zero. Overall, corporate tax loopholes cost the U.S. about $150 billion annually.

So the rules that were intended to maximize revenue instead have had the opposite effect.

But while this is easy for politicians to spin this as "unpatriotic" corporate behavior, the truth is every company has a fiduciary responsibility to their shareholders to minimize all taxes.

It's a silly accusation, and one that the politicians know is silly.

You see, when they're not insinuating that U.S. corporations are tax cheats, both Democrats and Republicans acknowledge that what's really needed is a major overhaul of the corporate tax code.

Both parties also agree that something needs to be done as soon as possible about the tax inversion loophole to stop the bleeding.

And yet, despite the urgency, it's unlikely Congress will do anything, as partisan bickering over how to fix any part of the problem - tax inversions specifically or the corporate tax code in general - quickly bog down on the details.

That leaves a status quo that's not good for anybody - U.S. companies will continue to be forced to find increasingly creative ways to get relief from a burdensome tax code, while the Treasury watches tax revenue from corporations dry up.

"My concern is that tax reform is moving slowly, inversions are moving rapidly and that is a prescription for chaos," Finance Committee Chairman Ron Wyden, D-Ore., told The Wall Street Journal.

How do you feel about tax inversion deals? Do you blame corporations for trying to minimize their tax burden, or Washington for not reforming the corporate tax code? Let us know on Twitter @moneymorning or Facebook.

UP NEXT: At least the worst thing you can say about Congress and the corporate tax code is that they've failed to fix it. When it comes to their own stock trading habits, however, things get a good bit uglier. After promising to behave as recently as 2012, some members of Congress, well, haven't...

Related Articles:

The Wall Street Journal: Congress Is Split on Taxing of Corporate Inversions The Economist: How to Stop the Inversion Perversion MarketWatch: Slim Chances Seen for Tax 'Inversion' Clampdown, Analysts Say Associated Press: Obama: Offshore 'Tax Inversions' Are Unpatriotic

U.S. Steel, AK Steel Trending Higher Following Earnings Beat

Related X Stocks Lower As Earnings Season Takes Back Seat To Geopolitical Uncertainties Earnings Scheduled For July 29, 2014

U.S. Steel (NYSE: X) is making its biggest one-day move in three years after reporting a massive earnings beat. On top of that, revenue beat Wall Street's expectations for the first time since early 2013.

The stock recently traded at $32.75, up 18.3 percent.

AK Steel (NYSE: AKS) shares are also trading about 3.3 percent higher following its better-than-expected second quarter report.

These reports have put several other steel companies in play.

Steel Dynamics (NASDAQ: STLD) shares are up 0.44 percent Commercial Metals (NYSE: CMC) shares are up 0.34 percent ArcelorMittal (NYSE: MT) shares are up 1.77 percent China Precision Steel (OTC: CPSL) shares were up 2.7 percent

Posted-In: Earnings Commodities Markets Trading Ideas

© 2014 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

  Most Popular Telecom Sector Shoots Higher On Unprecedented Windstream Announcement UPDATE: Amended 13D Filing from JANA on Petsmart Includes Letter to Co. Earnings Scheduled For July 29, 2014 4 Things Every Beginning Trader Should Know Morning Market Losers Earnings Scheduled For July 30, 2014 Related Articles (AKS + CMC) U.S. Steel, AK Steel Trending Higher Following Earnings Beat Earnings Scheduled For July 29, 2014 Benzinga's M&A Chatter for Monday July 21, 2014 Markets Lower As Geopolitical Uncertainty Continues Stocks Hitting 52-Week Highs

5 Stocks With Great Earnings Growth — OME LRCX CODI INOC CNC

Popular Posts: 10 Best “Strong Buy” Stocks — GMK TRGP TPL and moreHottest Healthcare Stocks Now – INO CNC WCG MNKD10 Oil and Gas Stocks to Buy Now Recent Posts: Hottest Financial Stocks Now – GHL WF BOH WRB Hottest Technology Stocks Now – CGNX IDTI MSTR MDSO Hottest Services Stocks Now – FTR CTL DIN LVLT View All Posts 5 Stocks With Great Earnings Growth — OME LRCX CODI INOC CNC

This week, these five stocks have the best ratings in Earnings Growth, one of the eight Fundamental Categories on Portfolio Grader.

Omega Protein Corporation (OME) produces protein-rich fish meal, fish oil, and solubles. OME also gets A’s in Earnings Momentum, Earnings Surprises, Cash Flow and Operating Margin Growth. The stock currently has a trailing PE Ratio of 8.40. For more information, get Portfolio Grader’s complete analysis of OME stock.

Lam Research Corporation (LRCX) manufactures, markets, and services semiconductor processing equipment used in the making of integrated circuits. LRCX gets A’s in Earnings Momentum, Cash Flow, Operating Margin Growth and Sales Growth as well. For more information, get Portfolio Grader’s complete analysis of LRCX stock.

Compass Diversified Holdings (CODI) is a public investment firm specializing in acquiring controlling stakes in small to middle market companies. For more information, get Portfolio Grader’s complete analysis of CODI stock.

Innotrac Corporation (INOC) provides order processing, order fulfillment and call center services to large corporations. INOC also gets A’s in Earnings Momentum, Equity, Cash Flow and Operating Margin Growth. The stock has a trailing PE Ratio of 4.90. For more information, get Portfolio Grader’s complete analysis of INOC stock.

Centene Corporation (CNC) is a multi-line healthcare enterprise engaged in Medicaid managed care and other specialty services. CNC also gets an A in Operating Margin Growth. For more information, get Portfolio Grader’s complete analysis of CNC stock.

Louis Navellier’s proprietary Portfolio Grader stock ranking system assesses roughly 5,000 companies every week based on a number of fundamental and quantitative measures. Stocks are given a letter grade based on their results — with A being “strong buy,” and F being “strong sell.” Explore the tool here.

How Good Are Morningstar’s Fund Picks?

About two-thirds of actively managed funds fail to beat their benchmarks. That's one of the strongest arguments for investing in index funds, which merely seek to match their bogeys. However, I think it is possible to identify funds that will top the market averages, and a good place to start is with Morningstar's top-rated funds.

See Also: The Four Best Stock Funds to Own Now

I'm not talking about Morningstar's famous star ratings, which rank funds from one to five stars on the basis of past risk-adjusted performance. Rather, I'm describing the firm's gold-rated funds, which are the product of the efforts of Morningstar's 100-plus fund analysts.

The numbers show that the analysts are equal to the task. Over the past 10 years through May 30, Morningstar's gold-rated diversified U.S. stock funds (previously called analyst picks) on average returned 8.1% annualized, an average of 0.3 percentage point per year ahead of Standard & Poor's 500-stock index. Over the same stretch, gold-rated diversified developed-market foreign stock funds returned 9.1% annualized, on average, topping the MSCI EAFE index by 2.0 percentage points per year. And Morningstar's gold-rated intermediate-term bond funds returned an annualized 5.6%, on average, beating the Barclay's Aggregate U.S. Bond index by 0.6 percentage point per year.

A few caveats. The margins for U.S. stock funds and bond funds aren't overwhelming. The Morningstar returns for the past three and five years are roughly as strong, relative to the indexes, for gold-rated foreign stock and intermediate-term bond funds. But the average Morningstar pick among U.S. stock funds trailed the S&P 500 over the past three and five years. Russ Kinnel, Morningstar's director of fund research, says that actively managed funds, which typically hold some cash, have had trouble keeping up over the past five years because of the stock market's meteoric and nearly non-stop ascent.

Nor are Morningstar's returns adjusted for risk—something Kinnel says he would like to compute in the future. The Hulbert Financial Digest, which tracks the returns of investment newsletters, shows that Morningstar's picks have delivered market-beating risk-adjusted returns, although Hulbert tracks a somewhat different universe. Since Hulbert began monitoring the Morningstar Fund Investor newsletter on June 30, 2005, through May 30, the newsletter's three model portfolios (consisting mostly of gold-rated funds but including some other actively managed funds and even a few index funds) returned, on average, 7.1% annualized, 0.7 percentage point per year less than the S&P 500. But the Morningstar portfolios currently hold 34% in bond funds, as well as a big chunk in conservative stock funds. Bottom line: The Morningstar portfolios exhibited about one-third less volatility than the S&P index. The portfolios' biggest 12-month loss was 29.4%, compared with a loss of 43.3% for the S&P 500.

How does Morningstar pick standout funds? Good returns are important, of course, particularly risk-adjusted returns. But Morningstar also favors funds with low expense ratios, that are run by managers who invest a healthy chunk of their own money in their funds and that come from firms with a sound corporate culture. Morningstar research has shown that all of these factors are good predictors of future success.

Most Morningstar fund picks won't surprise any Kiplinger readers—or, for that matter, readers of my column. So I asked Kinnel for a short list of slightly lesser-known gold-rated funds. Descriptions of his picks are below.

The managers of Dodge & Cox Income (DODIX) apply the same kind of careful company research to investing in bonds that they do at their firm's better-known stock funds. Most of the fund is invested in investment-grade corporate bonds and government-backed mortgage securities. So it's no surprise that the average credit quality of Income's holdings is relatively high, at single A. But the fund is moderately susceptible to rising interest rates (bond prices and rates generally move in opposite directions). If rates were to rise one percentage point, the fund's price would fall about 4.5%. Expenses are 0.43%. Over the past five years through July 18, the fund returned an annualized 6.4%, compared with 4.8% annualized for Barclay's U.S. Aggregate Bond index (all fund returns are through July 18).

LKCM Equity (LKEQX), based in Fort Worth, has been putting up solid returns since 1995. Lead manager Luther King has been using much the same methods to pick stocks since 1979. But today he has three co-managers and a large analyst team. He and his colleagues focus on large companies, looking for those that have strong cash flow and high returns on equity (a measure of profitability) and that sell at bargain prices. Over the past 10 years, LKCM gained an annualized 9.0%, an average of 0.8 percentage-point per year better than the S&P. Expenses are 0.80% annually.

Primecap Odyssey Stock (POSKX) is the tamest of the three funds run by Primecap Management under the Los Angeles firm's own name. The fund is a near-clone of the storied Vanguard Primecap (VPMCX), which has produced solid returns since its 1984 launch but is closed to new investors. Like the other Primecap funds, Odyssey Stock has more than half of its assets in two sectors: technology and health care. But, unlike its friskier siblings, this fund has almost all of its assets in large, well-established companies. Expenses are 0.63% annually. Returns often diverge sharply from the S&P 500, depending upon the direction of the health and tech sectors. From Odyssey Stock's inception in late 2004, the fund returned an annualized 9.8%—an average of 1.7 percentage points per year more than the S&P.

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

Weitz Investment Management Comments on Berkshire Hathaway

Berkshire Hathaway (BRK.A)(BRK.B) is also an active acquirer, both at the parent company level and through its various subsidiaries. Warren Buffett (Trades, Portfolio) is holding cash reserves of $40-50 billion and has expressed strong interest in making more very large acquisitions. Berkshire recently agreed to swap its long-time holdings of the Washington Post Company (now called Graham Holdings) for a TV station and Berkshire shares held by that company. When completed, this tax-efficient transaction will reduce the number of Berkshire shares outstanding and add another cash generating asset to the fold. Berkshire is constantly growing and evolving as a group of operating businesses but also, in extreme stock market dislocations like 2008, Warren has the courage and capacity to make bold investment moves. Berkshire has been a holding in our stock funds continuously since our firm opened in 1983.

From Wallace Weitz (Trades, Portfolio)'s Q2 Shareholder Letter.

Also check out: Wallace Weitz Undervalued Stocks Wallace Weitz Top Growth Companies Wallace Weitz High Yield stocks, and Stocks that Wallace Weitz keeps buying

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The Momentum Is With American Manufacturing Again

Corbis For the last three years, manufacturing activity has been growing more rapidly than the gross domestic product. This is the first time this has happened in more than 50 years. I believe the factors that have led to this oddity are sustainable and that manufacturing and overall industrial growth will probably continue to outpace overall GDP growth rates in the United States for some time. Many manufacturing costs are becoming more level. Since the 1970s, many foreign countries have been leveraging their low cost-of-labor advantage to gain market share of the global manufacturing pie. It now appears that, in many cases, this cost advantage is becoming less acute. Most manufacturing organizations can break their major cost structures down into the following broad categories: Raw materials, including energy. Cost of capital, including interest. Labor. Transportation. Inventory costs. Research and development. Selling, general and administrative expenses. Taxes and regulations. Positive Long-Term Developments

FBI Sting Busts Group of 5 for Microcap Fraud

The Securities and Exchange Commission, the U.S. Attorney for the District of Massachusetts, and the Federal Bureau of Investigation announced charges against five individuals Friday whose attempt to manipulate shares of Boston-based Amogear Inc. was caught by an FBI undercover operation.

According to the SEC and criminal cases filed in federal court in Boston, the defendants knew that Amogear was a shell company without any real operations, but schemed to boost its price and profit by selling their own shares.

“What the parties didn’t know was that the FBI controlled Amogear and used it to obtain evidence of attempted stock manipulation," the SEC said in a statement. "To protect investors, the SEC suspended trading in Amogear’s securities on Feb. 10, as the attempted stock manipulation was underway.”

According to the SEC, the charges follow a series of cases since December 2011 in which the SEC suspended trading in seven companies and criminal authorities charged 22 individuals with using kickbacks and other schemes to trigger investments in microcap stocks, convicting 18 to date.

Small “microcap” companies often trade for pennies per share, and many do not file financial reports with the SEC. "The fact that investors often cannot find accurate information about microcap companies can make the microcap stock market a fertile ground for fraud and abuse," the SEC said.

“This case is an outstanding example of law enforcement creativity and cooperation trumping microcap fraudsters,” Andrew Ceresney, director of the SEC’s Enforcement Division, said in a statement. “By obtaining control of a shell company, using it to collect evidence of a manipulation scheme, and suspending trading before the scheme succeeded, we have protected investors from harm.”

“These defendants brazenly attempted to manipulate Amogear’s stock,” added Paul Levenson, director of the SEC’s Boston Regional Office, in the statement. “It didn’t occur to them that the FBI and SEC were a step ahead of them.”

Vince Lisi, special agent in charge of the FBI’s Boston Division, added that “fund representatives, CEOs, traders, fund managers, equities analysts, lawyers and publicists should take note that Boston FBI agents purposefully designed multiple undercover operations aimed directly at rooting out market manipulation and insider trading. As the scope and design of our undercover operations become well-known, no one should think that future undercover operations will be the same as prior ones because in this instance the FBI took control of a publicly traded company making it nearly impossible to discover.”

The SEC announced that the following individuals were charged today by the SEC with securities fraud and were recently charged by the U.S. Attorney on the following criminal charges:

The SEC is seeking permanent injunctions against further violations of the securities laws, return of allegedly ill-gotten gains with interest, civil monetary penalties, and to bar the defendants from being involved in penny-stock offerings.

---

Check out SEC Enforcement: Missouri Firm Slapped for Fiduciary Duty Breach on ThinkAdvisor.

A Few Reasons to Invest in This Voice Specialist

Development stocks are always favored by investors. One such stock is Nuance (NUAN), which has been consistently impressive on the stock business. Nuance has performed truly well this year with 15% development in revenue. Yet it may confront weakness because of high official compensation, an aggressive acquisition strategy, and steep obligation. So let us see why investors should purchase Nuance and what works against it from an investment perspective.

Great Growth

Nuance is seeing great times as a result of development in segments such as medicinal services, versatile and consumer, enterprise and imaging, thus recording 26% year-over-year development in bookings in the previous quarter.

Nuance has been impressive in the medicinal services segment with developments in its social insurance solutions such as Dragon Medical 360, Clintegrity 360, Powerscribe 360 and health awareness diagnostics that have prompted popularity from retail as well as wholesale customers. Nuance is making further advances here and expects better revenues later on as a result of the performance of its products such as machine assisted solutions and CLU-based solutions.

With the fast-developing versatile and consumer market, Nuance is seeing extraordinary development opportunities. The organization is expecting positive trends later on with the late dispatch of Nina, which is an astute virtual assistant for its key customers such as Denso, Fiat, Fujitsu, GM, Hitachi, Kapsys, LG, Nokia, Samsung, Volvo and Yangfeng Visteon. Nina is picking up footing in the market, so Nuance is anticipating that it will turn into one of the essential development drivers.

Engineering Improvements

Nuance is also taking a shot at enhancing its voice distinguishment engineering. Under this, the organization has propelled an enhanced version of Dragon Dictate for Mac. This change is drawing in numerous customers around the world. With such new innovations, Nuance is envisioning all the more better performance from its voice distinguishment innovation, pulling in more customers, along these lines seeing an increase in the top line later on.

As the world is moving towards virtualization and digitalization, Nuance is focusing on enhancing its imaging solutions. It is discovering great footing in this segment, giving imaging-based solutions to clients such as ABN AMRO Bank, Canon (CAJ), IKEA, Prince George, Ricoh, Stinson and Tetrapak. With such potential clients and aggressive moves, Nuance is anticipating that this segment will convey positive results in the long run.

Concerns

At the same time Nuance also faces some weakness as a result of Apple, to whom it supplies innovation for Siri. Apple has captivated some of Nuance scientists to create it voice distinguishment. This may prompt weakness for Nuance. In spite of the fact that the organization is seeing development in revenue, its earnings are relied upon to drop this year.

Nuance is making numerous solid moves to keep up profitability. In line with this, the organization is investing a ton in creating new innovation. With such solid moves, Nuance is focused on minimizing the negative effects of Apple.

Conclusion

Despite Nuance's woes, the organization is well in-line with its objectives and has some energizing features in its pipeline which are relied upon to take off later on. At the same time losing on Apple and mismanagement may demonstrate dangerous. Investors should be cautious while investing in Nuance as this is one investment that could go sour.

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Big Money in Plastic

It's summertime, and the living is easy for American Express (NYSE:AXP). AXP's stock is ready to pop, as consumers seem ready to spend some serious money this summer, and they'll be using their credit cards to do so.

Not convinced? Consider these statistics on credit cards and spending habits: According to Dun & Bradstreet, consumers spend 12-18 percent more when using credit cards instead of cash. Additionally, McDonald's reports its average transaction is $7 when people use credit cards, compared to $4.50 with cash.

A  study by the American Psychological Association found that using cash discourages spending, and credit or gift cards encourage it. “The more transparent the payment outflow, the greater the aversion to spending, or higher the pain of paying," the APA reports. Cash is viewed as the most transparent form of payment, especially when compared to credit cards.

And, in good times, Americans use their credit cards to spend more. Check out these stats from the Federal Reserve.

From 2002 to 2012, America's credit card debt balances increased by $76 billion:

Year            Total U.S. Credit Card Spending

2012:               $845.8 billion

2011:               $842.5 billion

2010:               $840 billion

2009                $917 billion

2008                $1.005 trillion

2007                $972 billion

2006                $902 billion

2005                $849 billion

2004                $823 billion

2003                $791 billion

2002                $769 billion

Credit card spending has really taken off in the 2000s, as these earlier figures indicate:

1987                $169 billion

1977       !          $39 billion

1967                $1.4 billion

(Source: Federal Reserve)

The trend toward increased credit card spending, especially in good times, really helps a company like American Express. That's what we are seeing right now, with the U.S. economy and with AXP. “This summer appears to be an inflection point for accelerating consumer spending with opportunities for improving balance growth by the card lenders,” reports Guggenheim, in a new research note out this week. The analyst firm just hiked its outlook on AXP from "neutral" to "buy."

The thinking is that higher credit card debt, whether that's good for consumers or not, is great for credit card companies, which benefit by higher loan growth when credit card usage climbs. Amex, along with Capital One and Discover, are now "finally all on track” to post consistently positive year-over-year loan growth, starting in the second quarter, said Nomura Securities analyst Bill Carcache in a research note. “The willingness of the U.S. consumer to put a little bit more spending on their credit cards is rising,” he says.

Carcache is bullish on AXP, but sees higher growth after spinning off its Global Travel division, even as it keeps a 50 percent stake in the operation. “Ultimately, we expect [American Express'] reinvestment of its joint-venture gain to drive market-share growth,” he says.

Barclays also hiked its call on American Express to $100 (it's currently trading at $93 per share), citing low credit losses, which also translate into higher earnings, from AXP. TheStreet.com is also weighing in on American Express, and bullishly so, with a rosy recommendation from firm analysts this week.

"We rate AXP as a buy," TheStreet reports. "This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate."

"The company’s strengths ca! n be seen! in multiple areas, such as its revenue growth, notable return on equity, impressive record of earnings per share growth, increase in net income and solid stock price performance. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated.”

As TheStreet notes, American Express currently out-produces its industry peers in terms of revenue growth, has hiked its earnings-per-share by 15.7 percent in the last quarter on a year-to-year basis, and has seen earnings grow steadily over the past few years.

All are encouraging signs for a financial services company, but it's double the fun with Amex, given stronger consumer sentiment on the economy, and given the consumer's more aggressive usage of credit cards in that improving economy.

Amex has seen its stock price increase by 25% over the past year, primarily because of improving economic conditions, and sturdier company earnings growth.

I see plenty of room for additional upside, definitely over $100 per share this year, as the Great American Consumer flexed his and her muscles, and reaches deep into the household budget to dust off that credit card, and start spending in ways that benefits Amex, and its fortunate shareholders.

Brian O'Connell is an investment analyst at Investing Daily. He has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets. 

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We continually try to foster interaction with our readers. By promptly responding to your queries, we help make you a better investor—and you help us continually improve the quality of our advisories.

Superior Returns and Advisory Services, ‘for Free’

DFA advisor Eric Nelson says investors can beat the performance of index funds and in so doing get the tremendous value an advisor offers essentially for free.

The Servo Wealth Management principal is wont to sift through data to find how to eke out extra basis points of return.

In a recent post, Nelson follows this familiar format by comparing the performance of three investment approaches over the past 10 years: conventional active management versus index investing versus what he calls “structured investing.”

Looking at seven different asset classes (six stock portfolios and one bond category), Nelson finds that active management performed the worst, trailing the index in five out of seven cases.

But the performance results are actually worse than they appear, he says, because of what is known as “survivorship bias”: As many as 40% of these funds have performed so poorly that even in the space of 10 years they have been shut down, their unflattering data unfactored from the category’s average.

Index funds, by simply mimicking an appropriate benchmark and keeping costs low, beat active funds, but fall short of the performance of “structured funds” in all seven categories — by 1% or more in many instances.

Structured funds, like those offered through Dimensional Fund Advisors, are managed to capture higher risk and higher return characteristics that are found in areas such as small-cap and value investing. Nelson says they are taking index investing to the next level by accenting higher returns and extending the benefit of lower costs by avoiding portfolio turnover.

The difference among these alternatives can be seen especially vividly in the case of U.S. large value stocks, where active funds delivered average returns of 7.1%, index funds 8% and structured funds 9%; in the emerging markets category, the spread was 11.2%, 12.6% and 13.5% for active, index and structured funds respectively.

Discussion board critics have assailed Nelson’s approach, arguing that DFA funds are inaccessible to individual investors without an advisor, whose added fees would erode the funds' purported advantage.

But Nelson turns that argument on its head by arguing that advisory fees are not paid for fund access but rather for essential wealth management services, and that those services are essentially delivered “for free” as a result of structured funds' superior historical performance.

“What I tell prospective clients…is: Hiring me most likely will not cost you anything above the results you'll earn investing on your own,” Nelson tells ThinkAdvisor.

The reason for these “free” advisory services, though, has less to do with investment performance and more to do with the discipline a good advisor can impose on naughty investor behavior.

Nelson asks: “If the average investor is costing themselves 2%+ per year [according to three estimates from the St. Louis Fed, Morningstar and John Bogle that Nelson discusses in his current blog post] due to poor decisions, is paying me 0.5% to 0.75% to avoid those bad decisions a net cost?  Or are you 1.25% to 1.5% per year ahead assuming you are the average investor?”

While expressing confidence that structured funds will maintain their investment advantage into the future, Nelson echoes standard investment industry diction in adding that “it’s certainly not something I can guarantee.”

But sounding like a seasoned financial advisor, he says there is something that is a pretty sure bet:

“If you are an emotional investor, on the other hand, and prone to chase performance and buy high/sell low, we can almost guarantee you'll never change.  A leopard can't change its spots, as they say.”

But apart from the crucial help in maintain investor discipline, Nelson says his wealth management services also include help with minimizing taxes, setting long-range investment and estate plan goals as well as risk management through insurance.

What is ultimately at issue for every advisor is their value proposition.

“If you don't have one or can't articulate it, you're in trouble and will lose clients and prospects to the DIY movement, lower-cost advisors or robos,” the Servo principal warns.

“Mine's pretty simple,” he adds, going through the arithmetic.

“1) Taking someone from active management to indexing equals +1% per year.

“2) Ensuring they stay disciplined and avoid the behavior gap equals +2% per year.

“3) Adopting a long-term, growth-oriented allocation with an emphasis on equities compared to the bond-heavy, short-term volatility focused traditional plans (like "age in bonds") we commonly see equals +1.5% per year.

“4) ‘Taking indexing to the next level’ with an asset class approach and structured, institutional-class mutual funds equals +1% per year.

“5) Continually addressing evolving wealth concerns like taxes, estate, risk (life, health care, etc.) and providing continuity in the event of primary client's death/impairment [is] different for everyone.

“So I say: pay me 0.75% per year, or cost yourself upwards of 5% per year,” he concludes. “Your choice.”

2 Materials Stocks to Buy for Long-Term Growth

Popular Posts: 3 Cheap Retail Stocks to Buy2 Under-the-Radar Energy Stocks to BuyThinking of Buying the Dow? Read This First Recent Posts: 2 Materials Stocks to Buy for Long-Term Growth Earnings Preview – 5 Financials to Watch Thinking of Buying the Dow? Read This First View All Posts 2 Materials Stocks to Buy for Long-Term Growth

We have been seeing some signs of economic growth in the U.S., recently. I am hesitant to declare victory just yet as we have seen plenty of false starts in the past few years. I am also very skeptical about homebuilding being the driver of growth in the near term as the lack of first-time buyers could cause building to slow.

I am far more confident that housing will rebound over the next five years than I am about a robust recovery over the next 12 months. The ISM Manufacturing Index has been above 50 for 13 months in a row, indicating that this segment of the economy is continuing to slowly grind higher. The consensus among the always highly accurate economists is for growth to accelerate in the second half of the year and stay stronger in 2015.

I have no idea what the economy will do for the rest of this year. I’m not so sure that the economists have much of a handle on the question, either. I hope they are right about the near term but confess to being a tad skeptical. Once again, I am far more confident about the long-term recovery prospects of the global economy than I am about the short-term level of global activity.

At some point in the next five years or so, we will get back on a solid growth trajectory and we will see consumption of things like steel, paper and wood products accelerate. That should lift the price of some material stocks to levels several times higher than today depressed pricing.

With that in mind, here are two materials stocks to consider for their long-term potential.

Arcelor Mittal (MT)

Arcelor Mittal (MT) is one of the largest integrated steel companies in the world. It also has mining operations that produce materials like iron ore and coal. It has been reducing capacity and implementing tight cost controls to survive the economic downturn and is positioned to be a solid growth leader when we see stronger economic activity. At the same time, Arcelor has been expanding operations in some key market around the world like Canada, Brazil and the United States.

CEO Lakshmi N. Mittal has expressed confidence that the bottom is in for steel, and the future looks strong for the company he runs. He has a vested interest in being right as he and his family own more than a third of the company. The stock is incredibly cheap, trading at just 55% of book value. This stock traded for more than $80 per share before the recession and a return to just half of that level would be a huge return form the current sub-$15 stock.

Posco (PKX)

Korean steel company Posco (PKX) is also priced at bargain levels. The company has a new CEO who is refocusing the company on higher-margin businesses and divesting things like their energy and trading subsidiaries. The stock trades for about 60% of book value right now, so it’s certainly cheap. You will have some elite company as fellow shareholders as Brandes Investment Partners, Marty Whitman’s Third Avenue Fund and Charlie Munger's Daily Journal (DJCO) are all large shareholders.

Bottom Line

I have no idea when the economy recovers to the point that steel consumption and prices increase rapidly. I don't think anyone really does. But I am pretty sure that it will happen at some point in the next five years or so, and when it does these stocks will sell much higher than the current bargain levels.

As of this writing, Tim Melvin was long MT.

CalAmp Corp. (CAMP) Q1 Earnings Preview: FBR Say To Own Before EPS Announcement

CalAmp Corp. (NASDAQ:CAMP) will release its operating results for its fiscal 2015 first quarter after the market close on Tuesday, July 1, 2014. In addition, the Company will host a conference call at 4:30 p.m. Eastern (1:30 p.m. Pacific) on July 1, 2014 to discuss its financial results.

Wall Street anticipates that the Wireless Technology company will earn $0.18 per share for the quarter, which is $0.02 more than last year's profit of $0.16 per share. iStock expects CAMP to top Wall Street's consensus number, the iEstimate is $0.19.

Sales, like earnings, are expected to edge higher, increasing 7.9% year-over-year (YoY). CalAmp's consensus revenue estimate for Q1 is $57.89 million; more than last year's $53.75 million.

[Related -CalAmp (CAMP) To Supply Mobile Data Network For City Ff Buffalo Emergency Services]

CalAmp develops and markets wireless technology solutions that deliver data, voice and video for critical networked communications and other applications. The Company has two business segments: Wireless DataCom, which serves commercial, industrial and government customers, and Satellite, which focuses on the North American Direct Broadcast Satellite (DBS) market.

iStock is not alone in expecting a bullish surprise. On the eve of earnings, FBR Capital says CalAmp's guidance for Q1 could be conservative. The brokers believe investors should step in front of the announcement and own the stock.

[Related -Nasdaq, AAPL Lag In Mixed Session]

FBR might have a point based on CAMP's recent history of bullish surprises and earnings-driven price sensitivity.

CalAmp bypassed the street's outlook for 10 consecutive quarters, averaging 54% more in profits than forecasted.  The range of positive surprises in the timeframe was 7.69% to 200% above expectations.

The stellar bottom-line results had investors bidding up shares in the days surrounding six of the last 10 quarterly checkups. Let's go with the bad news first. CAMP traded flat once and backpedalled three times, losing -3.6%, -9.30, and -11.70% in the three days before and after the three red EPS announcements.

On to the good stuff… CAMP rocked higher six of the last 10, including three in a row, which includes an out-of-this-world 51.9% rally last quarter. The average gain for the half-dozen buying frenzies averaged 21.47% with a range of 10.7% to the already mention 51.9%.

There is another reason to believe FBR might be right based CAMP's recent annual report. The income statement shows a strong investment in research & development along with selling. Meanwhile, cost of revenue grew at a slower pace than sales i.e. fatter gross profit margins. If the commitment to R&D and sales pays off with reduced costs, it means big profits.

Overall: The iEstimate, FBR's belief and CalAmp Corp.'s (NASDAQ:CAMP) earnings and price performance history suggest CAMP's reward to risk ratio favors owning the wireless company pre-announcement. 

These Signs of Market Trouble Are Looming

"Markets are priced to perfection. 

Signs of late-cycle behavior and thinking are abundant. 

The latest example came from BMO's strategist Brian Belski, who published a report arguing that the bull market in stocks will continue for another ten years with annual gains of 10.5%. 

This is the type of report that appears at market peaks. Despite the fact that it was dressed up in statistics and produced by a respectable brokerage house, this isn't a serious piece of research; it is nonsense and anyone who takes it seriously and invests based on its conclusions deserves the losses that will follow."

The above is excerpted from a recent report I produced for my Credit Strategist readers. I wanted to share with you some of my thinking on rapidly coalescing signs that point to growing cracks in the façade of a healthy market...

Be Wary of "Growth" in These Propped-Up Indices

Too much of today's market forecasting is focused on the wrong data, and even more is just outright bad analysis as we saw above with Mr. Belski's report.

We may not be looking at a nominal-value market bubble, but there are signs valuations are out of touch with realities in the credit markets and relative to our managed interest rate environment. The combination spells losses for investors who don't, or won't, prepare for changes ahead.

Here is why I'm concerned about the "everything is rosy" scenario, and what I want you to do to protect yourself when the music stops.

Still, the epic stock market rally continues to churn. Year to date...the S&P 500 is up over 7% ...the Nasdaq Composite Index is up 6.3% and the small cap Russell 2000 index is ahead, despite some serious noise around the rally:

The situation in Iraq and Syria continues to deteriorate, yet investors remain squarely focused on supportive monetary policies around the world. Investors believe inflation is not going to be a problem even though it already is in the real world outside official government statistics, and that corporate earnings will continue to rise on the back of low borrowing cost, low effective tax rates, weak wage growth and stock buybacks, and other non-organic factors.

Stocks remain, on the face of it, far more attractive than other asset classes such as bonds, but relative value does not equate to absolute value.

How Will Your Investments Respond to "Normalizing" Interest Rates?

The first half of 2014 has seen a historic rally across all asset classes. Six important gauges of world stock, bond, and commodity performance are headed for gains for this period, the first time that has happened since 1993. Through July 8, gold was up 8.8%, the Dow Jones UBS Commodity Index 5.5%, the MSCI World Index of developed world shares 4.8%, and the MSCI Emerging Markets Index just over 3%.

Not every market in the world is up - the Japanese stock market is down a few percent. But for the most part all asset classes have rallied as a result of unprecedented stimulus efforts by global central banks.

The question, of course, is how long those efforts will continue and what happens when they stop. So what's the catalyst for a change?

Recently, Bank of England head Mark Carney signaled that his bank may raise rates sooner than expected in order to stem a sharp rise in British housing prices.

Meanwhile, Chinese authorities have been taking steps to deal with a housing bubble as well.

In contrast, European and Japanese central bankers have been doubling down on efforts to stimulate their economies.

The Big Kahuna, of course, is the U.S. Federal Reserve, which is reaching the end of its tapering of bond purchases and will be out of the market by November. The Fed, however, has made it clear that it will not be raising rates for the foreseeable future although markets reacted badly when St. Louis Fed President James Bullard (a non-voting member of the Federal Reserve's Open Market Committee this year) warned that rates could be raised sooner than expected.

The Fed faces the dilemma that the benchmarks it has set for raising rates - a 6.5% unemployment rate and 2.0% inflation - have either already been breached (unemployment) or are about to be breached (inflation). At the same time, it realizes that heavily indebted private and public sectors would react badly to any normalization of interest rates.

As a result, the Fed is going to face a test of its credibility as it fights to keep interest rates low in the face of evidence that the rationale for doing so is wavering.

Investors should be preparing for the day when rates rise, which could come sooner than expected. Now, not later, is the time to prepare.

Bolster Your Portfolio... with This in Mind

Even if it doesn't come as early as 2015, which is not priced into the market, investors should focus their investments on those that will be able to withstand a gradual rise in rates. This will include value as well as growth stocks, event-driven, floating rate and short duration (rather than traditional and long duration) fixed income investments, and gold.

Trees don't grow to the sky and neither do stocks. At the very least, investors should avail themselves of the low cost of insurance and Money Morning's oft-recommended trailing stops to protect the gains that they have enjoyed during this epic five-year bull market run.

Regeneron Picked a Heck of a Day to Announce Good News

With stocks selling off and biotech giants like Gilead Sciences (GILD) and Biogen Idec (BIIB) falling, Regeneron (REGN) picked a heck of a day to deliver good news.

Special to The Chronicle

The biotech giant and its partner Sanofi (SNY) announced that they would start late-stage trials of its eczema treatment after earlier trials showed that it helped reduce symptoms of the skin condition.

Piper Jaffray’s Edward Tenthoff and team call Regeneron’s dupilumab “a potential blockbuster.” They explain why:

Last year, Regeneron presented positive Phase IIa data of dupilumab in eosinophilic asthma. With the data presented yesterday in atopic dermatitis, it is becoming evident that targeting IL-4/IL-13 could represent a blockbuster approach for treating allergic diseases. We look for additional responder analysis from the Phase II asthma study of dupilumab in the coming months with Phase IIb data potentially this year. The drug is also being investigated in nasal polyposis.

We see several milestones for Regeneron in 2H:14 including resumption of U.S. EYLEA sales growth driven by label expansion along with additional data read-outs from the company’s rich pipeline. We reiterate our Overweight rating and $382 price target.

Shares of Regeneron have dipped 0.1% to $310.64 at 10:05 a.m., besting the the iShares Nasdaq Biotechnology ETF’s (IBB) 1.2% drop to $253.10. Sanofi has fallen 1.3% to $51.57, Gilead Sciences has declined 0.8% to $87.94 and Biogen Idec is off 0.8% at $317.55.

Stocks to Watch: Container Store, Celgene, American Airlines

Among the companies with shares expected to actively trade in Wednesday’s session are the Container Store Group Inc.(TCS), Celgene Corp.(CELG) and American Airlines Group Inc.(AAL)

Container Store lowered its full-year financial projections amid a “retail funk” that has hampered sales growth even as its first-quarter loss narrowed. Shares fell 14% to $23.20 premarket.

Celgene said Wednesday its Phase 3 trial of a drug intended to treat a form of long-term arthritis didn’t meet its primary endpoint after a certain period, although results showed improvement beyond that. Shares fell 2% to $84.00 premarket.

American Airlines said it will book a charge of $330 million in its second quarter tied to the sale of its portfolio of fuel hedging contracts, along with a number of other one-time charges. The company, meanwhile, also reported its passenger traffic rose 1% in June from a year earlier on increased capacity. Shares rose 5.8% to $42.60 premarket.

Silicon Image Inc.(SIMG) cut its revenue outlook for the second quarter amid lower-than-expected shipments to a significant customer and a delay of certain expected royalty revenue. Shares fell 10% to $4.49 in recent premarket trading.

American depositary shares of Portugal Telecom (PT) SGPS SA tumble premarket amid criticism from Brazil’s state development bank BNDES relating to an investment by the telecommunications group in debt issued by Espirito Santo International. Shares fell 6.1% to $2.79 premarket.

MSC Industrial Direct Co.(MSM) said its fiscal third-quarter earnings edged higher will revenue increased following higher demand. Still, shares dropped 5.8% to $87.89.

AeroVironment Inc.(AVAV) swung to a fourth-quarter profit as the drone maker reported a surge in sales and raised its outlook for the year. Shares rose 4.3% to $32.29 premarket.

Alcoa Inc.(AA) swung to second-quarter profit, driven by growth in its engineered products segment and as its primary metals business also returned to the black. Shares rose 2.4% to $15.20 premarket.

Gigamon Inc.(GIMO) lowered its second-quarter revenue guidance as the networking-hardware company said it ran into challenges closing deals in its pipeline in the later end of the period. Shares fell 31% to $12.64 premarket.

Salix Pharmaceuticals Ltd.(SLXP) agreed to combine with an Ireland-based unit of Cosmo Pharmaceuticals SpA(COPN.EB) in an inversion deal that is expected to come with tax benefits. Salix shares slipped 5.3% to $130.00 premarket.

Bob Evans Farms Inc.(BOBE) reported a lower profit for its fiscal fourth quarter and its fourth consecutive decline in quarterly same-store sales, while also cutting its earnings guidance for the new year.

Coty Inc.(COTY) unveiled a new organizational structure built around categories and regions, as the beauty-products maker looks to improve profitability.

Cummins Inc.(CMI) appointed the president of its engines business, Rich Freeland, as its chief operating officer, and the company also unveiled a 25% dividend increase and the buyback of as much as an additional $1 billion of its stock.

Energizer Holdings Inc.(ENR) will close its feminine-care products facility in Montreal by early 2017, consolidating operations in Delaware. The move is part of ongoing restructuring.

International Paper Co.(IP) said Tuesday its board approved an expansion of the company’s existing share-repurchase program by as much as $1.5 billion.

Google buys streaming radio service Songza

Meet the latest company in Google's start-up shopping basket. NEW YORK (CNNMoney) The streaming music business is heating up.

Google (GOOGL, Tech30) announced Tuesday that it's acquiring streaming radio service Songza, which creates free playlists tailored for various activities and times of day. The companies declined to reveal the purchase price.

Songza, launched in 2010, will complement Google Play Music All Access, the subscription streaming service Google unveiled last year. Google said Songza will continue to function independently for the time being while it "explore[s] ways to bring what you love about Songza to Google Play Music."

"We'll also look for opportunities to bring their great work to the music experience on YouTube and other Google products," Google added.

Songza said no immediate changes to its service are planned "other than making it faster, smarter, and even more fun to use."

The news follows Apple's (AAPL, Tech30) $3 billion acquisition in May of Beats Music, which runs a popular streaming service in addition to its headphone business.

Songza, Beats and Google Play Music are in a crowded business, facing competition in streaming from services including Spotify, Pandora (P), Rhapsody, Rdio and Amazon Prime.

TDFs Gobbling New Fund Assets: Morningstar

Nearly a third of net new assets in firms with target-date funds in 2013 came from TDF inflows, according to Morningstar's 2014 target-date series research paper released on Tuesday.

For T. Rowe Price, it’s even more. More than 90% of the firm’s total $8.5 billion in net new mutual fund assets in 2013 were gained from its target-date series’ $8.1 billion in net new assets (excluding money market flows). Roughly half of Fidelity’s new assets came from TDFs.

Even for firms with smaller target-date series, like J.P. Morgan and American Funds, TDFs made up a significant portion of their parent firms’ sources of new assets.

“J.P. Morgan’s $7.4 billion in new target-date assets, for instance, represented more than a third of the firm’s net new assets in 2013," the study said. "American Funds’ $2.3 billion in net new target-date assets helped soften the impact from the firm’s overall $13.0 billion in outflows that year.”

The target-date market overall saw a rise in net flows, with a 10.5% organic growth rate in 2013. The study reported 20 of 36 target-date mutual fund firms with growth rates greater than the overall industry’s. According to the annual study, target-date mutual funds held more than $650 billion in assets as of March 31, thanks to the more than $50 billion in new flows in 2013 and combined with an additional $18 billion in new assets in 2014’s first quarter plus market appreciation.

“Those figures underscore not only how ubiquitous target-date funds have become to individuals saving for retirement, but also their central role to many fund companies' business prospects,” wrote Janet Yang, Morningstar’s target-date series strategist and lead author of the study, in her report summary. “With echo boomers — a group often anecdotally noted for embracing the set-it-and-forget-it nature of target-date funds — beginning to enter their peak earning period, investors and industry watchers should expect those numbers to continue growing in the years to come.”

While the trend of lower fees continues again this year for the fifth year in a row, the award for lowest-cost target-date series in the industry has changed hands. This year Fidelity Freedom Index series was crowned the lowest-cost target date series, unseating Vanguard's Target Retirement series. At the end of 2013, the Vanguard series had an asset-weighted fee of 0.17%, compared with 0.16% for Fidelity Freedom Index.

According to Morningstar’s annual survey, the industry’s average asset-weighted fee has come down, from 1.04% in 2008 to 0.84% at the end of 2013.

“Part of that movement comes from a longer-term trend favoring lower-priced index-based investments within target-date funds,” Yang wrote.

  Other Key Findings:

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