Sales of Existing Homes in U.S. Fall to Lowest Since 2012

March 20, 2014, 3:05 am

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Filed under: Mortgages, Real Estate, Housing Market, Home Buying

By Shobhana Chandra

Purchases of previously owned homes in the U.S. declined in February to the lowest level since July 2012, a sign the industry may be slow to recover.

Contract closings on existing properties fell 0.4 percent to a 4.6 million annual rate, matching the median projection in a Bloomberg survey, figures from the National Association of Realtors showed Thursday in Washington. Prices rose 9.1 percent from a year earlier, the group said.

The slowdown in housing since the middle of last year reflects a pickup in borrowing costs, declining affordability, limited job growth and, more recently, bad weather. At the same time, Federal Reserve Chair Janet Yellen said Wednesday that more household formation will allow the real-estate market to strengthen.

"It may take some time to get sales back on track after the weather effect," Tom Simons, an economist at Jefferies in New York, said before the report. "Home sales will keep growing this year though maybe not at the pace we saw last year. Rising mortgage rates are a modest negative for demand."

Estimates in the Bloomberg survey of economists ranged from 4.5 million to 4.76 million. The prior month's pace was unrevised at 4.62 million.

Stocks declined, sending equities to a second day of losses, after Yellen signaled Wednesday that interest rates may rise by the middle of next year. The Standard & Poor's 500 index (^GSPC) dropped 0.1 percent to 1,859.18 at 10:05 a.m. in New York.

Jobless Claims

Another report Thursday showed the number of Americans filing applications for unemployment benefits held last week near the lowest level in almost four months, a sign the labor market continues to strengthen.

Jobless claims increased by 5,000 to 320,000 in the week ended March 15.

The median price of an existing home rose from February 2013, to $189,000, Thursday's report showed. Sales of home priced $250,000 and less declined, while those selling for more increased.

First-time buyers accounted for 28 percent of all purchases in February, up from 26 percent in January that was the lowest in data going back to October 2008.

Compared with a year earlier, purchases decreased 6.9 percent on an unadjusted basis.

The number of previously owned homes on the market rose 6.4 percent to 2 million. At the current sales pace, it would take 5.2 months to sell those houses, the highest since April 2013, compared with 4.9 months at the end of the prior month. Less than a five months' supply is considered a tight market, the Realtors group has said.

One-Family Homes

Sales of existing single-family homes decreased 0.2 percent to an annual rate of 4.04 million. Purchases of multifamily properties -- including condominiums and townhouses -- fell 1.8 percent to a 560,000 pace.

Purchases declined in two of four regions, led by an 11.3 percent drop in the Northeast. Sales rose in the South and West.

Of all purchases, cash transactions accounted for about 35 percent, the report showed.

Distressed sales, comprised of foreclosures and short sales, in which the lender agrees to a transaction for less than the balance of the mortgage, accounted for 16 percent of the total.

"Prices are rising much faster than people's incomes," Lawrence Yun, NAR chief economist, said at a news conference Thursday as the figures were released. "The biggest factor is affordability," which has been reversed. Faster job growth can help ease the sting of higher prices and borrowing costs, he said.

Since 2008

Existing-home sales, tabulated when a purchase contract closes, have recovered from a 13-year low of 4.11 million in 2008, three years after a record 7.08 million houses were sold in 2005. Still, higher prices and borrowing costs have put properties out of reach for some Americans, helping explain a slowdown in sales since July.

Colder weather and snowstorms in parts of the U.S. have made it difficult to gauge the true health of housing and other indicators such as retail sales and manufacturing. February ended with its coldest final week since 2003, according to Berwyn, Pennsylvania-based weather data provider Planalytics Inc. The second week of the month was the snowiest such period since 2007.

Housing Starts

Other data have shown new projects have been slow to get under way because of the bad conditions, also depressing builder sentiment. Housing starts were little changed in February at a 907,000 annualized rate, Commerce Department data showed this week. In November, new construction was running at a 1.1 million pace.

The National Association of Home Builders/Wells Fargo index of builder confidence rose less than forecast in March.

Warmer temperatures may revive construction in coming months, and some companies are more upbeat. Among those is Hovnanian Enterprises (HOV), New Jersey's largest homebuilder.

"We believe this is a temporary pause in the industry's recovery," Chief Executive Officer Ara Hovnanian said in a statement on March 5. "Based on the level of housing starts across the country, we continue to believe the homebuilding industry is still in the early stages of recovery."

KB Home (KBH), a builder primarily focused on first-time buyers, Wednesday reported a fiscal first-quarter profit that beat analyst estimates as revenue and prices soared.

Restrained Affordability

Rising borrowing costs have also restrained affordability. The average 30-year, fixed-rate mortgage rate was 4.37 percent in the week ended March 13, up from 3.63 percent a year earlier, according to Freddie Mac in McLean, Va.

Fed policy makers Wednesday gave themselves room to keep borrowing costs low at least until next year by dropping a linkage between the benchmark interest rate and a specific level of unemployment. The central bank also reduced the monthly pace of bond purchases by $10 billion, to $55 billion.

"Growth in economic activity slowed during the winter months, in part reflecting adverse weather conditions," the Federal Open Market Committee said in a statement after its two-day meeting. Even so, "there is sufficient underlying strength in the broader economy to support ongoing improvement in labor-market conditions."

Policy makers also said that the recovery in housing is still slow. That may give way to a pickup as more people take advantage of historically low borrowing costs.

"There's a lot of demographic potential there for new household formation that would ultimately generate new construction," Yellen said during a news conference after the policy meeting. "And the level of rates I think does matter, and the fact that they're low now is something that should serve as a stimulus to people coming back into the housing market."

 

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Philly Fed Factory Activity Index Jumps in March

March 20, 2014, 3:22 am

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Filed under: Economic Indicators, Federal Reserve, Manufacturing, Investing

By Rodrigo Campos

NEW YORK -- Factory activity in the U.S. Mid-Atlantic region expanded far more than expected in March, a survey showed Thursday.

The Philadelphia Federal Reserve Bank said its business activity index rose to 9 in March from -6.3 in February, topping economist expectations for 3.8, according to a Reuters poll.

Any reading above zero indicates expansion in the region's manufacturing. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware.

The new orders index rose to 5.7 from -5.2. The employment component grew at a slower clip, however, coming in at 1.7, the lowest since June, versus 4.8 last month.

Survey respondents' view on business conditions six months ahead fell to 35.4 from 40.2.

The Philly Fed business index is seen as one of the first monthly indicators of the health of U.S. manufacturing leading up to the national report by the Institute for Supply Management.

 

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Soaring Lime Prices Squeeze Margarita Fans, Mexican Families

March 20, 2014, 3:45 am

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Filed under: Cost of Living, Global Economy, Food & Beverage

By Nacha Cattan

Lime growers in the Mexican state of Michoacan have banded together to set prices of the fruit they sell to packing companies and control supply, spurring inflation that's been above the central bank's target range for the last two months.

Members of the Citrus Growers Association of Apatzingan Valley are limiting supply to guarantee a minimum price for producers, said Leonardo Santibanez, an association member and coordinator of its trade events. The policy emptied Michoacan's main citrus market of limes on March 12 after association members told farmers not to harvest their crop that day as the group pushed for a price minimum of 23 pesos per kilo (80 cents per pound), he said.

The tactic has helped dry up margarita consumption in Mexico City as the fruit had become the biggest contributor to inflation nationwide, accounting for one third of last month's increase in consumer prices. The unexpected increase in lime costs may combine with new taxes on sodas and junk food that took effect Jan. 1 to pressure inflation expectations further above policy makers' target range, according to Nomura Holdings.

"The shock of limes at a time when inflation is already high due to the tax reform is something we need to pay attention to," Benito Berber, a strategist at Nomura, said in an e-mail. Economists expect inflation to end the year at 4.01 percent, above the 4 percent upper limit of Banco de Mexico's target range, according to a March 6 central bank survey.

Poor Quality, Higher Prices -- and Bar Customers Notice

Manuel Ambrosio, a bartender at Bloo Bar in Mexico City, says he is reducing portions in the drinks he serves customers to trim his losses after limes rose. Sales of margaritas -- a popular mixed drink of fresh lime juice, tequila and salt -- have plunged 30 percent as customers complain about the poor quality of the fruit that he uses to reduce costs, he says. "These limes have no juice," the 28-year-old said, squeezing a wedge from a pile on his bar. "This is the worst I've seen prices in four years."

Since December, the price of limes in Mexico City's main wholesale market has tripled to 32 pesos per kilo through mid-March. Limes, squeezed into a variety of Mexican dishes, hold the largest weighting among fruits in Mexico's inflation basket after apples. In February, lime prices nationwide surged 68 percent from the previous month, contributing 0.08 percentage point to Mexico's consumer price index, which rose 0.25 percent, according to the national statistics institute. The cost of the fruit soared 45 percent in January, pushing consumer prices up another 0.04 percentage point.

The Citrus Growers Association of Apatzingan Valley "was formed so that producers can establish the price," Santibanez said in a March 12 interview in the association's offices. "For example, the association says to the distributors, 'we'll put a price of 20 pesos.' They can't go lower than that. The producers will receive 20 pesos at a minimum." Leandro Alcantar, the president of the association, wasn't available for comment.

Association members have been able to push up prices after lime infestations from the state of Colima and atypical rainfall in Michoacan crimped production, making Apatzingan the producer of almost all of the fruit consumed in Mexico this year, according to Santibanez. Mexico is considering increasing lime imports to combat their high price, Economy Minister Ildefonso Guajardo said March 14.

Policy May Be Illegal, Former Antitrust Commission Believes

The policy may be illegal, according to Miguel Flores Bernes, a former antitrust agency commissioner and now a lawyer. "Everything points to an accord among competitors," Flores Bernes said by phone March 13. "If they are competitors, they can't agree on prices, neither a ceiling nor a floor."

Santibanez denied the growers were engaging in illegal activity. He said price setting is only occurring in one step along the supply chain -- the producers' sale of limes to packing companies. The final cost to consumers remains fluid, he said.

An investigation into price-fixing would only happen if a complaint is filed, Alfredo Castillo, who was appointed by President Enrique Pena Nieto to improve security and economic and social development in Michoacan, said in a March 12 interview. The Federal Economic Competition Commission, the nation's antitrust agency, declined comment. Recent violence in the state as armed vigilantes push drug cartels out of the area is also generating price speculation among producers, according to Castillo.

Producers founded the Apatzingan association in 2009 for its 4,500 members in order to stop the practice of packing companies paying below-production costs, Santibanez said. The group's growers cultivate 135,000 across the Tierra Caliente valley and currently pick about 2,000 tons of the fruit per harvest day, which the association's members have limited to three days a week, he said.

Lime prices will start to drop by the end of March as Colima's production increases, Santibanez said. "We'll get to around 12 or 15 pesos per kilo." Last year the government removed duties on lime imports after prices surged 20 percent in April, helping drive inflation to 4.65 percent. In 2012, egg prices jumped 16 percent in early July due to a bird-flu outbreak, pushing inflation up to 4.45 percent.

 

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Mortgage Rates Edge Back Down in Latest Survey

March 20, 2014, 3:53 am

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Filed under: Mortgages, Refinancing, Housing Market, Home Buying, Interest Rates

WASHINGTON -- Average U.S. rates on fixed mortgages declined last week, edging closer to historically low levels.

Mortgage buyer Freddie Mac said Thursday that the average rate for the 30-year loan fell to 4.32 percent from 4.37 percent last week. The average for the 15-year mortgage eased to 3.32 percent from 3.38 percent.

Mortgage rates have risen about a full percentage point since hitting record lows roughly a year ago.

The increase was driven by speculation that the Federal Reserve would reduce its $85 billion-a-month bond purchases, which have helped keep long-term interest rates low.

Deeming the economy to be gaining strength, the Fed announced in December and January -- and again Wednesday -- that it was reducing its monthly bond purchases.

The Fed said after its latest two-day policy meeting that even after it raises short-term interest rates, the job market strengthens and inflation rises, the central bank expects its benchmark short-term rate to stay unusually low.

Fed Chair Janet Yellen stressed that with the job market still weak, the Fed intends to keep short-term rates near zero for a "considerable" time and would raise them only gradually.

Yellen also suggested that the Fed could start raising rates six months after it halts its monthly bond purchases, which most economists expect by year's end. That means short-term rates could rise by mid-2015.

The National Association of Realtors reported Thursday that sales of U.S. existing homes slipped in February, the sixth decline in seven months as severe winter weather, rising prices and a tight supply of homes discouraged buyers.

Still, there were some signs that the market could pick up in the coming months. Sales improved in the South and West, where weather was less of a factor. And more people decided to sell, boosting the supply of available homes.

To calculate average mortgage rates, Freddie Mac surveys lenders across the country Monday through Wednesday each week. The average doesn't include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1 percent of the loan amount.

• The average fee for a 30-year mortgage was unchanged at 0.6 point. The fee for a 15-year loan also held steady at 0.6 point.
• The average rate on a one-year adjustable-rate mortgage edged up to 2.49 percent from 2.48 percent. The average fee remained at 0.4 point.
• The average rate on a five-year adjustable mortgage fell to 3.02 percent from 3.09 percent. The fee was unchanged at 0.4 point.

 

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Soaring Airplane Orders Will Affect Ticket Prices, Report Says

March 20, 2014, 4:31 am

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Filed under: Company News, Aerospace & Defense, Transportation & Logistics, Travel Industry, Airfare

By Justin Bachman

Airline finances have benefited radically in recent years from mergers, global alliances and collective discipline in keeping capacity below demand. But as airlines around the world refresh their fleets with more fuel-efficient jets, the flood of new aircraft could ultimately lower ticket prices, according to a report from KPMG, the global consulting and audit firm.

The new airplanes, sporting carbon fiber composites and cutting-edge engines, offer lower operating costs to their owners. Yet the sheer number of orders on manufacturers' books -- more than 8,700 from full-service and low-cost airlines -- could trim whatever financial benefits airlines reap, said James Stamp, KPMG's global head of aviation. "Airlines have historically been good at chasing cost savings, but they tend to pass those on to their customers, because it is a very competitive marketplace," Stamp explained.

The industry's two largest manufacturers, Boeing (BA) and Airbus, are each sitting on more than eight years of production work. Airbus finished last year with more than 5,500 planes on order, and Boeing's backlog neared 5,100. (U.S. carriers accounted for $98.3 billion of new aircraft and engines on order at the end of 2013, according to Airlines for America, the carriers' trade group. The new airplane totals include cargo, regional and charter airlines, but the KPMG transport study focused on orders by two large segments of the passenger airline industry: low-cost players such as Spirit Airlines (SAVE) and Ryanair Holdings (RYAAY), and the full-service airlines such as Lufthansa and Emirates.

To be sure, not every aircraft in an order book will actually enter service in an airline fleet, and there are likely to be dramatic geographic differences in adding capacity. Carriers across Asia, Africa and India, for example, are positioning for heavy growth from an emerging middle class expected to begin traveling by the millions in the next few decades.

Delta Calls Itself a 'Transportation Company'

In Western Europe and the U.S., meanwhile, mature airlines such as American (AAL), Air France-KLM and Delta Air Lines (DAL) are working to financially reward their shareholders -- not customers -- by boosting profits. Delta, for example, told investors in December that it's working to become a "high-quality industrial transportation company," akin to UPS (UPS) and C.H. Robinson Worldwide (CHRW). That would mean passing input costs to customers, returning steady cash and taming the airline industry's vicious cycles.

"Aircraft orders don't necessarily translate to incremental capacity," says John Heimlich, vice president and chief economist at Airlines for America. "What will matter ultimately is how growth in seats compares to growth in passenger demand."

Stamp predicts that domestic routes in mature markets will continue to see stronger profitability than many long-haul routes where rapidly growing Middle Eastern carriers are expanding their fleets and grabbing market share. "Although we do view the order backlog with a healthy degree of skepticism ... it is clear that more, newer capacity should act to drive down ticket prices," according to Stamp's report for KPMG.

Much of the global fleet growth and refreshment is focused on planes such as Boeing's 787 Dreamliner and 777X for long-haul travel and the 737 MAX, a replacement for its top-selling 737 family for short and medium routes. Southwest (LUV) is scheduled to receive the first 737 MAX in 2017.

At Airbus, meanwhile, long-haul customers are buying its new A350, which is predominantly made of carbon fiber materials. In the single-aisle market, Airbus sells the A320neo as a replacement for its longtime bestseller, the A320 family. The first A320neo is set for delivery in mid-2016. "I'm not suggesting that in the U.S. we're going to see a collapse in prices, or in Europe. Not at all," Stamp said. All the same, he considers the airplane shopping spree "good news for travelers, absolutely."

 

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Chew On This: Gum Loses Its Pop

March 20, 2014, 4:40 am

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Filed under: Company News, Consumer Goods, Shopping Trends

By CANDICE CHOI

NEW YORK -- Gum seems as appealing as that sticky wad on the bottom of a shoe these days.

It's not that Americans still don't ever enjoy a stick of Trident or Orbit, the two most popular brands. They just aren't as crazy about chomping away on the stuff as they once were, with U.S. sales tumbling 11 percent over the past four years.

No one in the industry can pinpoint a single factor that's causing the decline -- the theories include an unwillingness to shell out $2 or more for a pack in the bad economy or that advertising veered too far from underlining gum's cavity-fighting benefits. But the biggest reason may be that people simply have more to chew on.

From designer mints to fruit chews, candy companies have invented plenty of other ways to get a sugar fix or battle bad breath and anxiety. The alternatives don't come with gum's unpleasant characteristics either, like the question of whether to spit out or gulp the remains. They're also less likely to annoy parents, co-workers or romantic interests.

"You talk to someone and they're just chomping on gum," said Matt Smith, a 46-year-old who lives Albany, N.Y. and hates gum so much he refers to it only by its first letter. "If you substitute gum for any other food, like mashed potatoes, would you find that acceptable? It's disgusting."

The gum chewing habit dates as far back as the ancient Greeks but arrived in the U.S. in its modern form in the 1860s, according to Mars, the No. 1 player in the market with its Wrigley unit.

Over the years, gum makers positioned it as a way to "Kiss a Little Longer" in the famous Big Red jingle, quit smoking, curb cravings or just make the chewer happier.

Catchy slogans or characters included the "Doublemint Twins" and Orbit's blonde spokeswoman who ends commercials with "Dirty mouth? Clean it up."

It popped up in pop culture too. In the 1960s, a genre of music aimed at younger audiences came to be known as "Bubblegum." In the 1975 movie "One Flew Over the Cuckoo's Nest," the silent Chief Bromden speaks for the first time saying, "Mmm, Juicy Fruit" after the character played by Jack Nicholson gives him a stick of the gum. And Janet Jackson played a feisty, gum-chewing beautician in the 1993 film "Poetic Justice."

But gum's image as a tasteless habit also stuck, with some high-profile gum chewing only making it worse.

In 2003, Britney Spears gave an interview to CNN where a white piece of gum could be seen floating around her mouth as she fielded questions on a range of topics, including the war in Iraq. Talk show host Wendy Williams has a "gum wall" backstage, where she sticks wads of it before walking out. In one episode, she told Patti LaBelle that she could put her gum on the wall after the singer spit out a wad into her hand.

Such imagery may be why gum is still a no-no in business meetings or first dates, according to Lizzie Post, the great-great granddaughter of etiquette expert Emily Post and co-author of "Emily Post's Etiquette."

"My grandmother used to tell me, 'You look like a cow chewing cud'," she said.

The habit so bothered author Malachy McCourt that the extremely long-shot gubernatorial candidate in 2006 told the New York Times he wanted to triple the tax on gum. The former Green Party nominee explained that he didn't like the mess it created on sidewalks and subways.

"The other aspect of it is that it makes people look so stupid," said McCourt, 82, in a recent interview.

Gum's bad image is one reason that alternatives look more attractive. There's also another perennial complaint: "The flavor runs out too fast," said Ryan Furbush, a 17-year-old from Sayreville, N.J. who has stopped chewing gum in favor of chewy candies and chocolates.

It may be why Mars said its gum declines have been most significant with people who are 25 and younger. In the meantime, Altoids mints, Welch's Fruit Snacks and countless other options have taken up space in the checkout aisles where most gum is purchased.

Since peaking in 2009, U.S. gum sales have fallen 11 percent to $3.71 billion last year, according to market researcher Euromonitor International. That's even as overall candy sales -- including gum, chocolate, mints and licorice -- have climbed 10 percent to $31.53 billion.

Over the next five years, Euromonitor projects gum sales will drop another 4 percent to $3.56 billion.

Hershey (HSY), which makes Reese's, Kit Kat and Almond Joy, is taking data to retailers to illustrate the slowing demand for gum. The idea is to encourage them to devote less of their candy aisles to it, and perhaps make way for more of its own products. Hershey, which also makes Ice Breakers mints and gum, is planning another blow against gum: This fall, it's slated to roll out a version of Ice Breakers that "chews like a gum, but dissolves like a mint."

Steven Schiller, global head of Hershey's non-chocolate candies including mints, said it gives gum chewers an alternative that doesn't require "disposal" at the end.

Gum makers are strategizing too. The maker of Trident, whose total gum sales were down as much as 16 percent in developed markets at one point last year, has an online campaign reminding people to run through the mental checklist before leaving the house: "phone, keys, gum."

"We know when people have gum in their pocket or backpack or desk, they're much more likely to chew it," said Stephanie Wilkes, who heads the North American candy business for Mondelez (MDLZ), the No. 2 player in gum with Trident, Dentyne and Bubbalicious.

Mars, which makes Big Red, Doublemint, Juicy Fruit and Orbit, is testing illuminated racks in candy aisles to make its gum and candy stand out more. The company said the racks have led to a 10 to 30 percent sales increase in tests.

And after years of slowly vanishing from shelves, Bazooka bubble gum last year relaunched its brand with new marketing and packaging. Distribution has since rebounded.

Still, executives are realistic about gum's turnaround prospects.

"We're not expecting any dramatic recovery in the category anytime soon," Mondelez CEO Irene Rosenfeld said during an earnings call last month.

 

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Good News From Homebuilders, But Investors Should Be Cautious

March 20, 2014, 5:52 am

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Filed under: Company News, Earnings, Real Estate, Consumer Goods, Materials & Construction

Lennar (LEN) and KB Home (KBH) are the latest homebuilders to step up with their quarterly results, and the numbers are generally pretty flattering.

KB Home moved higher on Wednesday after posting a larger-than-expected profit. Revenue climbed 11 percent to $450.7 million as strong growth in the Southwest, Central and Southeast regions were more than enough to offset a decline in the West.

The 1,442 homes it delivered during the quarter that ended in February was fewer than the 1,485 properties it handed over a year earlier. The key to the revenue growth is that the average selling price rose 12 percent to $305,200.

It was an even better story for Lennar on Thursday morning. Revenue soared 38 percent to $1.4 billion as a 13 percent increase in home deliveries was boosted by the fact that the average selling price was 18 percent higher than it was a year earlier. Profitability also blew past analyst expectations.

Since prices for new homes are climbing faster than the actual raw materials and building costs, most real estate developers are posting explosive growth on the bottom line. Everything seems to be going right for the homebuilders, but let's approach reports with caution.

Reasons to Worry

Homebuilders have been rallying in recent years. Lennar shares have popped 12-fold since bottoming out at $3.42 a little less than six years ago. KB Home has seen its stock more than triple since hitting rock bottom at $5.02 less than three years ago.

Investors can never forget that these same companies were trading a lot higher than they are right now in 2006 and 2007, just before the real estate market collapsed to trigger the financial crisis that was felt around the world. No one is predicting that we're approaching that kind of asset bubble, but it should be clear that the housing market has been outrunning its fundamentals lately.

Zillow's Home Value Index shows that real estate prices have moved 5.6 percent higher over the past year. The markets that fell the hardest during the crisis -- Las Vegas, Phoenix and Miami -- are all growing a lot faster than the national average. But the growth is starting to slow. It was just a 0.1 percent gain over the past month and a 0.7 percent spurt over the past three months.

A good reason for the price growth deceleration is that it's more expensive to buy a home. Freddie Mac reports that the average interest rate on a 30-year mortgage clocked in at 4.3 percent last month, up sharply from the 3.53 percent average a year earlier. If every mortgaged dollar costs 21.8 percent more in financing than it did a year ago and home prices are also higher, it doesn't take much of a leap of faith to predict that something's got to give.

Open House

Right now, Lennar, KB Home and their peers are doing great. However, things can sour fairly quickly. New Federal Reserve chief Janet Yellen struck a cautious tone in her first comments at the helm on Wednesday afternoon. The Fed was already starting to taper its massive bond-buying stimulus plan that was keeping rates low, and Yellen suggested that the program could end completely later this year. That would be followed by the Fed raising rates by early next year.

KB Home and Lennar shares rallied through her comments, even though it should be clear that housing prices can't keep moving higher the way they have in the past couple of years if mortgage rates become more prohibitive. After all, one of the great things about home prices heading higher is that folks don't cancel their contracts the way they did in 2008 and 2009.

Lennar closed out its latest quarter with a backlog of 5,662 homes to deliver, up 15 percent on a unit basis and an even heartier 33 percent on a dollar value basis. KB Home also has a growing backlog of homes to deliver at higher price points.

The moment that mortgage rates have moved too high will be the moment that home prices stop inching higher. We're starting to see that stabilize in recent months. That's fine, but the moment that home prices begin to retreat will be the time when folks go back to walking away from the open contracts with the homebuilders.

Investors and potential homebuyers that wait until those signs are obvious will probably be too late. It's time for homebuilders to start scaling back and being more conservative. They wouldn't want to repeat their mistakes of the past.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

 

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As Obamacare Deadline Nears, Myths, Misconceptions Confronted

March 20, 2014, 6:30 am

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Filed under: Health Care, Insurance, U.S. Government, Barack Obama, Financial Education

By Karen E. Klein

Recently the inbox for Bloomberg BusinessWeek's Smart Answers column has been filled with questions that show how much confusion remains about the Affordable Care Act among small-business owners. Here are two examples:

• I have five employees and can't afford to buy health insurance for them. Will I have to close my doors under Obamacare?
• I have a small business and could get a subsidy for my insurance under Covered California, but I'm afraid that if I do, I could lose my home. Should I pay the total premium myself so my house won't be at risk?

The answer to both of these is: No. First, Obamacare (as the Affordable Care Act is colloquially known) requires only businesses with 50 or more employees to provide health coverage, so the five-person company owner needn't worry. In any case, that part of the law has been delayed until 2015 for all employers and until 2016 for those with from 50 to 99 employees.

As for the second point, people who take advantage of the law's subsidies aren't at risk of losing their homes. The premium subsidies available for people under certain income levels are structured as advance tax credits. If your income goes up unexpectedly and your subsidy isn't adjusted down, you might owe more than expected at tax time. But your home would not be at risk.

'Lack of Awareness and Confusion'

Since Americans began enrolling in health plans under the Affordable Care Act on state and federal marketplaces last fall, the simmering myths and misconceptions around the law seem to have reached fever pitch.

If questions like these are any indication, confused small-business owners are struggling to get basic information about the law, even with the March 31 deadline to buy coverage for 2014 just days away. It's a pretty safe bet that the bungled healthcare.gov rollout and the torrent of bad press that followed made matters worse.

This means Marcia Davalos has a tough job as Southern California outreach manager for Small Business Majority, a nonprofit advocating for health-care reform, and a certified educator with the state's Covered California exchange. She has been on the road, talking to "tens of thousands" (by her estimate) of small-business owners and self-employed individuals about the Affordable Care Act since June 2013, many in the Latino community because she is fluent in Spanish.

"There's a lack of awareness and confusion about [the ACA] hurting micro-businesses, costing too much, making everyone's insurance rates much more expensive, and making it impossible to find a doctor," she says. "Unfortunately, there's a lot of misinformation out there, and a lot of it is being fueled by the media and it's not getting cleared up."

More than 5 million Americans have signed up for health insurance through marketplaces created by the health-care law, and the country's uninsured rate has dropped to the lowest levels since President Obama took office. But signups have been disappointing among certain groups, particularly where the need for insurance coverage is the greatest, including the Hispanic community. Davalos says outreach and communication aimed at that community "has not been as culturally aware and linguistically appropriate as we wanted it to be."

She uses her father, an immigrant who speaks English but mainly gets his news from Spanish-language media, as a benchmark. "My dad will tell me that Obamacare is bad and everyone's complaining about it. Then he hears about people he knows getting covered by Covered California and there's a big disconnect there," she says.

How Do You Say 'Affordable' in Spanish?

Part of the disconnect stems from a language barrier, according to a study on racial and ethnic differences in insurance literacy by researchers at the Urban Institute. While more than half of white adults reported confidence in understanding key health insurance terms, only 21 percent of Hispanic adults said the same. The gap narrows but persists, even after controlling for such factors as income and education level.

"There is a clear distinction in that Hispanics are less aware of the insurance issue and they're enrolling at lower levels," says Sharon K. Long, one of the study's co-authors. "The ads haven't been targeted in a way that resonates with them, so many people are missing the boat."

A marketing campaign that has used direct translations from English to Spanish is one problem. "It's hard enough to understand health insurance choices written in English for an English-speaking audience. It's much, much harder when the words are translated directly into Spanish," Long says. Davalos agrees, noting that even the word "affordable" -- as in Affordable Care Act -- has no good, one-word direct translation. "The closest thing is asequible, but that's a formal word that's not commonly used," she says. An idiom meaning "within the range of your pocketbook" is a better-understood, though cumbersome substitute that she uses.

The marketing campaign for Covered California has also fallen flat among Latinos for two additional reasons, she says. "Surveys show that messages that Latinos respond to the most involve people's stories. And there's been a real big lack in targeting women," Davalos says. "The people making the decisions in the community about health care and how the household money's being spent are Latinas. If we told mothers how this would impact their kids, they would communicate that message."

 

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Toyota $1.2 Billion Deal OK'd to End Criminal Probe

March 20, 2014, 7:49 am

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Filed under: Company News, Toyota, Automotive Industry, Scandals and Lawsuits, Auto Recalls

By Nate Raymond

NEW YORK -- A U.S. judge signed off on Toyota Motor's (TM) $1.2 billion settlement of criminal charges that it concealed safety problems in its vehicles, an accord that could serve as a model for a similar probe into General Motors (GM).

U.S. District Judge William Pauley approved the Japanese automaker's deferred prosecution agreement at a hearing Thursday in Manhattan.

His approval came one day after the U.S. Department of Justice said it resolved its investigation into problems that caused Toyota vehicles to accelerate suddenly.

Pauley said the case presented a "reprehensible picture of corporate misconduct," and expressed hope that the government would ultimately hold the responsible decisionmakers at Toyota accountable.

"This unfortunately is a case that demonstrates that corporate fraud can kill," he said.

Pauley ruled shortly after Christopher Reynolds, Toyota's North American legal chief, entered a "not guilty" plea on behalf of the automaker to one count of wire fraud.

The $1.2 billion settlement is the largest such penalty ever levied by the United States on an auto company. It resolves issues that have dogged Toyota since at least 2007 and have been linked to at least five deaths. Toyota still faces hundreds of private lawsuits.

The settlement marked a huge victory for safety advocates who fought for years for criminal prosecution of automakers over safety violations.

Toyota agreed to a so-called statement of facts,

in which it admitted to having misled U.S. consumers and a federal regulator about two problems that caused cars to accelerate even if drivers tried to slow them down.

No guilty plea was required, and the government agreed not to prosecute Toyota for wire fraud for three years. The charge will be dismissed in 2017 if Toyota follows the terms of the accord, which include allowing an independent monitor to review its safety practices.

A spokeswoman for Toyota declined to comment, as did a spokeswoman for U.S. Attorney Preet Bharara in Manhattan.

U.S. authorities are investigating GM over its handling of an ignition switch defect linked to 12 deaths, and which resulted in a recall last month of more than 1.6 million vehicles, mostly in the United States.

Attorney General Eric Holder told reporters Wednesday that he hoped the Toyota deal would "serve as a model for how to approach future cases involving similarly situated companies."

The Toyota investigation flowed out of publicity starting in 2009 over unintended acceleration linked to at least five deaths, and which prompted hundreds of lawsuits.

Last year, a federal judge approved a settlement valued at $1.6 billion to resolve claims by Toyota owners that the value of their cars dropped because of the negative publicity.

The case is U.S. v. Toyota Motor Corp., U.S. District Court, Southern District of New York, No. 14-cr-00186.

-Additional reporting by Ben Klayman in Detroit.

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After Market: Stocks Reverse Losses as Investors Rethink Fed Comments

March 20, 2014, 9:40 am

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Filed under: Technology, Market News, Federal Reserve, Banks, Materials & Construction

On second thought, maybe the Fed's comments weren't worth getting all worked up about.

The market reversed Wednesday's decline, indicating that investors may have overreacted to the comments by Federal Reserve Chair Janet Yellen that raised fears of a sooner-than-expected interest rate hike.

In addition, a Philadelphia Federal Reserve report on manufacturing Thursday indicates the pace of economic growth could be picking up.

The Dow Jones industrial average (^DJI) rose 109 points, while the Nasdaq composite (^IXIC) and the Standard & Poor's 500 index (^GPSC) both gained 11 points.

Financial stocks, both big and small, led the way. Bank of America (BAC) -- which sponsors this report -- JPMorgan (JPM), Citigroup (C) and Morgan Stanley (MS) all gained about 3 percent. That's part of the market's rethinking of Wednesday's Fed news. And it wasn't just the money center banks. Zions Bancorp (ZION) and SVB Financial Group (SIVB) both gained more than 3 percent.

In the tech sector, Microsoft (MSFT) gained nearly 3 percent and Intel (INTC) rose 1.5 percent.

These two industry giants have been overlooked a bit, with the focus on the sexier names such as Facebook (FB). But Microsoft is up more than 40 percent over the past year.

A pair of semiconductor equipment-makers rose on a "buy" rating from Nomura Securities. Applied Materials (AMAT) and Lam Research (LRCX) both gained 3.5 percent.

But housing stocks gave back the gains that followed KB Home's (KBH) strong earnings on Wednesday. Lennar (LEN) fell 3 percent despite strong quarterly results. D.R. Horton (DHI) and Hovnanian Enterprises (HOV) also lost nearly 3 percent.

The hot 3-D printing sector had some cold water splashed on it. Exone (XONE) tumbled 10 percent, 3D Systems (DDD) fell nearly 4 and Stratasys (SSYS) lost 2 percent -- after Hewlett-Packard (HPQ) said it plans to enter the 3-D printing business.

Elsewhere, furniture-maker Herman Miller (MLHR) jumped 9 percent after raising its earnings outlook.

Ulta Salon Cosmetics & Fragrance (ULTA) gained another 3 percent following a Goldman Sachs (GS) recommendation. It has soared 16 percent in just five days. But apparel-maker Guess (GES) fell 5 percent after forecasting a loss in the current quarter.

-Produced by Drew Trachtenberg.

What to Watch Friday:

These major companies are scheduled to release quarterly financial statements:

• Darden Restaurants (DRI)
• Tiffany (TIF)

 

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All Big Banks But One Pass Fed's Health Check

March 20, 2014, 9:52 am

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Filed under: Company News, Financial Reform, Federal Reserve, Banks

By Emily Stephenson

WASHINGTON -- U.S. big banks have enough capital buffers to withstand a drastic economic downturn, the Federal Reserve said Thursday, announcing that 29 of 30 major banks met the minimum hurdle in its annual health check.

All of the big banks except for Zions Bancorp (ZION) stayed above the 5 percent requirement for top-tier capital in the latest round of stress tests.

The tests aim to show how banks would weather a financial collapse similar to the 2007-2009 crisis. Banks had to show how they would cope with a halving of the stock market, and the eight largest banks had to weigh the impact of the default of their biggest trading counterparty.

"The annual stress test is one of the Federal Reserve's most important tools to gauge the resiliency of the financial sector and to help ensure that the largest firms have strong capital positions," Fed Governor Daniel Tarullo said in a statement.

Stress tests are closely watched by financial markets as a sign of the industry's health, and also because the Fed can reject banks' plans to return capital to shareholders if they think the banks are not strong enough to carry them out.

European regulators plan to conduct their own stress tests later this year, following a broad review of the asset quality of banks on the continent.

The Fed will announce on March 26 which banks' plans to pay dividends or buy back shares were approved.

For the results announced Thursday, the Fed assumed banks would keep dividends at their current levels and buy back no shares.

Regulators tested three different scenarios, the toughest of which assumes stock prices would be cut in half and home prices would plummet.

Over the nine quarters of the testing period, the Fed said total losses at the 30 banks were projected to be $501 billion, including losses across loan portfolios and from a hypothetical global market shock applied to six of the biggest firms.

The group of 30 banks' aggregate tier 1 common capital ratio, which is composed of shareholder equity and reserves, dipped to 7.6 percent under the toughest stress scenario.

That means banks are stronger than during the financial crisis, when the tier 1 ratio was 5.5 percent at the beginning of 2009, the Fed said. Zions' tier 1 capital ratio fell to 3.5 percent during the most severe stress scenario, below the minimum.

Zions also failed to meet other risk-based capital benchmarks, which take into account the riskiness of assets.

Zions said last month that it expected to resubmit its capital plan due to the sale of some securities that disproportionately contributed to losses under the toughest stress scenario.

The other 29 banks stayed above the minimum levels. All of the banks met a so-called leverage requirement, which doesn't incorporate the riskiness of banks' assets.

This was the first year that Zions and 11 other banks, among which were Comerica (CMA) and Discover Financial Services (DFS), participated in the full stress test regime.

The other 18 banks, among which were JPMorgan Chase (JPM), Citigroup (C) and Morgan Stanley (MS), participated in previous rounds.

 

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Embattled Turkey Prime Minister: 'We Will Wipe Out Twitter'

March 20, 2014, 10:55 pm

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Filed under: Company News, Technology, Internet, Scandals and Lawsuits

By Sarah Frier, Mehul Srivastava and Benjamin Harvey

Twitter (TWTR) access was blocked in Turkey after Prime Minister Recep Tayyip Erdogan said the microblogging service ignored court orders to remove content related to a government corruption scandal.

The San Francisco-based company said users in Turkey should send tweets via text messaging instead. Erdogan vowed Thursday to "dig up Twitter and so on -- all of them -- from the roots" at a party rally in Bursa, Turkey. Last week, Erdogan said the country could also block Facebook (FB) and YouTube, owned by Google (GOOG). The tweets targeted by the premier are from two anonymous users: one going by the name of Haramzadeler, a phrase translated by Turkish media as "Sons of Thieves" though it could also mean "bastard," and another called Bascalan, or "Prime Thief."

The person or persons have been leaking documents and audio files, some described as the results of a 15-month prosecutor-led investigation into corruption in Erdogan's government. The leaks have captured the attention of Turkey's 74 million citizens as the prime minister prepares for local elections on March 30.

The leaks also call into question everything from the financial probity of ministers to their religious piety, and provide evidence of a media browbeaten by the government. That's enlivened the opposition and put Erdogan on the defensive amid public allegations of graft involving the premier's family and businessmen who've profited during his 11 years in power.

'No Choice'

While the authenticity of the recordings or police records leaked online can't be independently verified, Erdogan and his government have addressed the allegations in a lawsuit,

in parliament and on the campaign trail.

Turkey's Information Technology and Telecommunications Board, or BTK, said Twitter had been blocked upon "complaints from our citizens" and "violations of personal rights and privacy," according to a statement on its website Friday.

"The Internet site called Twitter has ignored decisions made by the courts of the Republic of Turkey," the board said in the statement. "Left with no other choice to prevent the incompensable victimization of our citizens, a preventive measure blocking access to Twitter has been imposed in line with court decisions."

Nu Wexler, a spokesman for Twitter, declined to comment.

Criminal Content

On March 7, Turkish President Abdullah Gul had ruled out a complete ban on sites including Facebook and Youtube, while saying that criminal content on the Internet could be blocked. Gul approved a law allowing a government agency to block access to web pages directly, without the need for a court order, last month.

Earlier this week, Erdogan's party prevented the opposition from reading a prosecutor's statement outlining graft allegations about four former ministers in parliament. The ruling party's Nurettin Canikli said there was no need to read them because they'd been leaked and "everyone already has them in their hands."

Turkey's lira has weakened 10 percent since the corruption allegations were made public on Dec. 17 and the stock market has dropped 22 percent in dollar terms, the worst performance worldwide. Turkish two-year bond yields rose 12 basis points to 11.53 percent at 9:30 a.m. in Istanbul on Friday, up from a record low of 4.79 percent on May 17 last year.

'Hollywood Technology'

Local media has reported that the most damaging leaks were yet to come. In a column in Yeni Safak newspaper Thursday, Hayrettin Karaman, a retired professor of Islamic law, pre-emptively denied the validity of a tape he said would be aired, showing him advising Erdogan on whether Islam would permit him to order the killing of politician Muhsin Yazicioglu, who died in a helicopter crash on March 25, 2009.

On Thursday, a prominent Turkish news anchorwoman denied rumors of a sexual affair with the prime minister. The pro-government media had been warning this week that new leaks would use "Hollywood" technology including silicon masks to make actors look like recognizable Turkish personalities.

While the original investigation stalled after prosecutors were removed, laws changed and thousands of police officers transferred, some of the files leaked from "Haramzadeler" have been incorporated into parliamentary record by the opposition.

Foreign Powers

Speaking across Turkey, Erdogan has dismissed one recording as a "montage," described another as "natural" and said the entire investigation is backed by "foreign powers" and spearheaded by followers of a U.S.-based Islamic cleric, Fethullah Gulen. The latter has denied the allegations.

Last month Twitter said the Venezuelan government blocked users' online images, amid protests by opposition groups against record shortages of goods and the world's fastest inflation. China, which maintains a system known as the Great Firewall to limit its citizens' access to the Internet, has banned Twitter and Facebook.

India took steps against some social media channels in an effort to contain ethnic violence in 2012, while stopping short of wholesale shutdowns of the sites.

In a message on Twitter on March 19, "Haramzadeler" promised the leaks would continue until municipal elections and beyond.

"These publications will continue not just until March 30, but until Turkey sees the whole truth," according to the post.

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If You're Hacked, Blame the Government

March 20, 2014, 11:00 pm

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Filed under: Identity Theft, U.S. Government, Security, Internet Fraud, Investing

By Cadie Thompson

The increasing vulnerability of companies to cyberattacks can be largely blamed on sluggish or nonexistent action on part of the U.S. government, say some security pros.

Washington has failed largely by not creating the proper system for sharing critical information, security experts said this week at First Data's Cyber Security Summit in New York.

"I'm monumentally frustrated with our government," said Art Coviello, executive chairman of RSA, the security division of EMC (EMC).

"There absolutely needs to be government leadership to share information timely to take some of the liability concerns and antitrust concerns away from us that would like to share information," Coviello said. "We are not getting leadership from our government."

"My biggest concern when we talk about these kind of problems today and all of the solutions that are already in the works is that I'd hate to see us -- having gone through 9/11-- go through 9/11 again to get this kind of change that we are talking about on the political side," Graham said.

"That sharing was pushed by the political side, and that sharing just isn't pushed right now, so that's the challenge."

The government has also failed to implement cybersecurity requirements for companies that are the backbone of critical infrastructure, Coviello said.

Last month, the Obama administration established a voluntary Cybersecurity Framework for critical infrastructure providers,

which was a step in the right direction, but Congress is still "monumentally inactive," Coviello said.

Example: The Senate's failure to pass the Cyber Intelligence Sharing and Protection Act, which was introduced almost three years ago but has stalled because of privacy concerns.

"I'm all for privacy, but we've got to have some balance here. The administration has to lead and Congress has to act," Coviello said. "And we, all of us, have to push Congress to get these things passed."

But businesses shouldn't hold their breath for the government to do anything anytime soon, said John Watters, chairman and CEO of iSight Partners, a cyberthreat intelligence firm.

"Through a customer lens, [the government is] not going to be leading the charge of the change. It will have to come from the commercial sector at a commercial pace," Watters said.

"Commercial companies are going to have to lead the way."

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More from CNBC

• Dangerous Website Attacks - and How to Avoid Them
• How Cybersecurity Pros Really Feel About Hackers
• Hacking America

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Jobless? Uncle Sam Still Taxes Your Unemployment Benefits

March 20, 2014, 11:00 pm

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Filed under: Taxes, Income Tax, IRS, State Income Tax, Tax Laws

The economic recovery has left millions of Americans behind, struggling to find jobs and leaving millions unemployed for extended periods of time. Yet as April 15 approaches, many unemployed people discover that the Internal Revenue Service wants its share of the meager unemployment benefits that they've received.

How Unemployment Benefits Get Taxed

Most benefits you receive from being out of work are subject to federal income tax as unemployment compensation. The IRS defines unemployment compensation as including money you get either from the federal government or from various state governments under unemployment-insurance laws, which includes the most common forms of unemployment benefits for the vast majority of recipients. In addition to general state and federal unemployment insurance, more specialized benefits like those under railroad unemployment rules also get treated as taxable income.

For the most part, even though benefits are subject to federal income tax, you don't have to pay additional taxes like Social Security or Medicare withholding. But some unemployed people get additional assistance from private funds that their employers contribute to on their behalf. In those cases, not only are the benefits taxable, but you might even have to pay additional withholding taxes and treat them the same way that wages and salaries get handled.

On the other hand, other people have jobs at which they themselves make voluntary contributions to private funds that pay benefits to unemployed workers. If you receive benefits from that type of fund, then you only pay tax on the amount you receive that exceeds what you contributed to that private fund.

Why Does the IRS Tax Unemployment Benefits?

The rationale for including unemployment benefits as taxable income is that they're meant to replace wage income that you'd earn if you actually had a job. As a result, if you're getting unemployment in lieu of working, then the IRS believes it makes sense to treat those benefits the same way it would treat your salary, wages, and tips.

Yet in other areas of the tax laws, the IRS doesn't treat unemployment benefits the same way. For instance, if you want to contribute to a Individual Retirement Account or something similar, you need to have what the IRS calls earned income. Earned income includes wages and salaries, but it explicitly excludes unemployment compensation. Moreover, several states, including California, New Jersey, and Virginia, exempt unemployment benefits from state income tax laws.

Nevertheless, despite some of these inconsistencies, it doesn't change the fact that you need to prepare to give the IRS its share of your unemployment check.

What to Watch For

One thing to check is whether you've had taxes already withheld from your unemployment benefits before you receive them. If you completed a voluntary withholding request on Form W-4V when you signed up for benefits, then the 1099-G tax form that you'll get should have both the total unemployment benefits you received and tax you've paid. Be sure to include that tax in the payments line on your tax return to get proper credit.

On the other hand, many people run don't have enough tax withheld. If that's the case, then you might owe even more to the IRS in interest and penalties. To avoid that problem in future years, many unemployed people must pay quarterly estimated taxes and spread out their tax payments throughout the year.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

 

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When to Consider Making a Roth IRA Conversion

March 20, 2014, 11:00 pm

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Filed under: Retirement, Personal Finance, IRA, Roth IRA, IRS

By Kelly Campbell

For individuals who have large government or military pensions and/or Social Security payments that will place them in high tax brackets, the idea of receiving a portion of your retirement income tax-free is very appealing. For people fortunate enough to be in these situations, a Roth individual retirement account should be at the top of their financial "to-do lists" because the tax savings over a number of years can be significant. If you have not already established a Roth IRA and will have a guaranteed retirement income greater than $50,000 per year, then you want to do a conversion before April 15.

Here's why:

Taxes, taxes, taxes. Unless your retirement income is coming from a Roth IRA or a permanent life insurance policy, you will likely be subject to ordinary income taxes on any distributions from a traditional IRA, 401(k) or pension. Most folks assume that they will be in a lower income tax bracket during their retirement because their expenses will go down once they do not have additional costs associated with their preretirement lifestyle. Unfortunately, this is not always the case, and even when it is, a 15 percent decrease in spending does not always mean that your income drops into a lower tax bracket. Remember, you lose valuable deductions in retirement, such as 401(k) contributions, and many retirees have contributed significant funds to paying down their mortgage, leaving a smaller mortgage interest deduction to be taken. Add up your pensions and Social Security benefits before you go to file your taxes this year. Take these numbers to your CPA for a "projected" tax obligation in retirement with a lower spending figure and fewer deductions. The result may surprise you.

Put your gains to use. The biggest drawback to converting a traditional IRA into a Roth IRA is the tax bill that goes to the Internal Revenue Service for your privilege to do so. Remember, any amount that is converted is essentially additional income that you earned for the year.

Therefore it is subject to ordinary income tax. This can have a significant impact on your tax bill, so you'll want to work closely with your CPA and financial adviser when doing so. However, given that the stock market continues to chug along and raise the value of people's portfolios, this could be a good opportunity to take some of the gains from your winning positions to pay for the cost to convert your funds to a Roth IRA. Have your adviser evaluate which positions have had the biggest increases in the past few years and determine if it's appropriate to sell those shares and funds to get into other opportunities. The money will still be invested for retirement purposes, but rebalancing your portfolio on a regular basis is critical to successful investing. The gains from your winning positions could be reinvested in more lucrative opportunities within a Roth IRA, giving you the benefit of tax-free distributions, potentially from a larger asset base.

Time value of money. By taking money from your portfolio to pay taxes for the conversion, you are going to notice the decrease in the portfolio's value. One way to combat this "loss" in value is to structure your Roth IRA to include positions that have more potential to appreciate in value over a longer time horizon (five years plus). This may include small or mid-cap stocks that have not produced a consistent dividend, but have appreciated in price. It could also include positions in more volatile areas such as technology stocks or commodities. You should withdraw money from your least tax-efficient vehicle first in order to maximize the benefits of tax deferral. Since you will not owe any taxes once funds have been converted to a Roth IRA, these funds should be earmarked for providing income at the tail end of your retirement. Capitalize on this opportunity by including shares in companies or funds that have greater potential to increase in value over the long run.

Transferability. If you are in a position where you may never have to take withdrawals from your Roth IRA, consider the possibility and benefits of it being transferred to your children. This can be a powerful way to leverage the existing rules to transfer funds that will receive tax deferral, and never owe any tax on any gains.

Your child will still be required to take required minimum distributions, based on their age, but there could be significant appreciation in the account before they are required to do so. The "rule of 72," is used to calculate the amount of time before the value of a portfolio doubles by dividing the compound return by 72. If you are starting a Roth IRA at age 65 with just $10,000, receive a 7 percent rate of return annually (net of fees) and your child doesn't receive the funds for 30 years, the money could potentially grow to approximately $80,000 tax-free! You would need $114,000 in a traditional IRA to net the same amount at a 30 percent tax rate.

In short, a Roth IRA has many potential benefits, but most important is the role that taxes will play over years in retirement. When you have the potential of 50 percent or more of your Social Security benefits or 100 percent of your pension income is subject to ordinary income tax, you should consider a Roth IRA. If all distributions for retirement income are going to be taken from traditional IRA or 401(k) accounts, again subject to ordinary income tax, you should consider a Roth IRA. If you've had the benefit of a large percentage of your portfolio riding a stock market that posted a 32 percent increase in 2013, you should consider a Roth IRA.

There are few things that are guaranteed in life, but when the government consistently runs a budget deficit each year, it's hard to see how taxes can stay at historically low levels. Be proactive when you have the choice rather than reactive when the important decisions have already been made. Your retirement longevity and legacy could benefit significantly.

Kelly Campbell, certified financial planner and accredited investment fiduciary, is the founder of Campbell Wealth Management and a registered investment adviser in Alexandria, Va. Campbell is also the author of "Fire Your Broker," a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisers abandoned their responsibilities to help them weather the storm.

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More from U.S. News

• Are You Paying Too Much For Mutual Funds?
• 7 Myths About Dividend-Paying Stocks
• 7 Ways to Take Advantage of Your 401(k)

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Case of Faith, Profit, Obamacare, Contraceptives to Hit High Court

March 20, 2014, 11:00 pm

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Filed under: U.S. Government, Scandals and Lawsuits, Barack Obama, Health Insurance

By Greg Stohr

Hobby Lobby Stores' 600 U.S. craft shops close each Sunday, posting a notice that employees are spending the day with their families and at worship. It's a visible sign that the company is as focused on honoring God as it is on making money.

That dual mission is at the core of an ideological showdown over President Barack Obama's health care law, set for argument before the U.S. Supreme Court on Tuesday. Hobby Lobby, a family-owned business that says it looks to the Bible for guidance, is seeking a religious exemption from the requirement that employers cover birth control as part of worker-insurance plans. Hobby Lobby is asking the court to give for-profit corporations the same religious freedoms as individuals, with potentially sweeping rights to opt out of laws they say are immoral. A victory for the company would also put a dent in a health care law that remains under siege on multiple fronts two years after the Supreme Court upheld its central provisions.

"Why as a family, because we've incorporated, do I have to give up religious freedoms, which are core to what our nation was founded on?" said Steve Green, the president of the Oklahoma City-based company and son of its founder.

The case comes to a court that four years ago expanded corporate speech rights under the First Amendment in the Citizens United campaign-finance case. The Hobby Lobby case focuses on the First Amendment's separate guarantee of "free exercise" of religion, along with a 1993 federal religious-rights law.

Corporations as People

Critics of Hobby Lobby's position say religious rights are personal -- and impossible to square with the nature of corporations. That's especially the case given that corporations are designed to limit the legal liability of their owners, said Caroline Mala Corbin, a professor at the University of Miami School of Law. Corporations "are not sentient, they have no soul, and they certainly do not have a relationship with God," Corbin said.

The justices will hear the Hobby Lobby case alongside a similar dispute involving Conestoga Wood Specialties, a woodworking business owned by a Mennonite family. The companies' lawsuits are among at least 47 filed by for-profit businesses opposed to the contraception requirement, according to the Becket Fund for Religious Liberty, which represents Hobby Lobby.

Next week's argument will take place simultaneously with a lower court's consideration of a case that may pose an even more fundamental challenge to the health law. In that case, being argued at a federal appeals court a half-mile away in Washington, opponents of the law contend that people who buy insurance on federally run exchanges aren't eligible for tax credits to cut their premiums.

Hobby Lobby was founded in 1970 by David Green, the son of a Christian minister. David Green is now one of five co-equal owners of the company, along with his wife, Barbara, and their three children. All five have signed statements declaring their religious faith and committing to run the business accordingly.

Christian Songs to Shop By

The company's religious character can be both subtle and unmistakable. In stores, Christian songs play in instrumental form, recognizable to adherents who know the music though not to other customers, Steve Green says. More visibly, Hobby Lobby buys hundreds of full-page newspaper ads at Christmas and Easter inviting people to "know Jesus as Lord and Savior."

At the same time, Hobby Lobby is a growing business, one with $3.3 billion in sales last year and ambitions to add 70 stores this year. It has at least 15,000 full-time employees. The company has long provided health insurance to those employees. Under its plan, Hobby Lobby covers 16 of the 20 federally approved contraceptives. The ones that aren't are Teva Pharmaceutical Industries' (TEVA) Plan B One-Step, Actavis (ACT) Ella and two types of intrauterine devices.

Steve Green said those four can work as "abortifacients" by preventing a fertilized egg from being implanted in the uterus. That's not a universal view. The manufacturers and the U.S. Food and Drug Administration say Plan B and Ella work primarily by preventing the release of an egg from the ovary. The American Medical Association considers pregnancy to begin when a fertilized egg is implanted in the uterus.

1993 Federal Law, 1990 Supreme Court Decision

The high court case focuses less on the science behind contraception than on the reach of the 1993 Religious Freedom Restoration Act, a law enacted to nullify a 1990 Supreme Court decision that cut back constitutional protections for religious practices. The 1993 measure says that only in rare cases may the government "substantially burden a person's exercise of religion."

The Obama administration says that provision doesn't cover for-profit corporations. The government also contends that the Greens themselves can't claim a violation of their rights because the birth-control requirement doesn't impose any obligations on them as individuals.

Either way, the government says the contraceptive requirement doesn't impinge on religious rights because it is the woman, not the employer, who ultimately decides whether to use contraceptives.
"Those decisions by independent third parties are not attributable to the employer that finances the plan or to the individuals who own the company," U.S. Solicitor General Donald Verrilli argued in court papers.

The company's lawyers say that argument is a backdoor effort to challenge the sincerity of the Greens' beliefs. The Greens "object to being forced to facilitate abortion by providing abortifacients, and that objection does not turn on the independent decisions of their employees," their lead lawyer, S. Kyle Duncan, contended.

'No Employer Mandate'

The birth-control rule is part of a broader Obama administration effort to ensure coverage for preventive care. The rule stems from the health care law's requirement that insurance plans provided by employers meet minimum standards.

Opponents say the administration has undermined its own case by carving out an exemption for churches and separately letting religiously affiliated nonprofit groups avoid paying for birth control directly. "The government consistently has said, 'We don't assert an overriding compelling interest to overcome religious objections,' " said Kevin Baine, a Washington lawyer who filed a brief backing the companies on behalf of the libertarian Cato Institute.

Administration supporters counter that accommodations for churches and religious nonprofits shouldn't force similar allowances for profit-making corporations. Although Hobby Lobby says it could be fined as much as $475 million a year for noncompliance, supporters of the requirement say the law gives employers another choice: not providing health coverage at all.

That would leave employees to buy insurance on the new exchanges set up by the health care law. Employers taking that approach must pay a penalty of as much as $3,000 per employee. "There's no employer mandate," said Walter Dellinger, a Washington lawyer and former solicitor general who filed a brief backing the administration. "It's a myth. You do not have to buy health insurance for your employees."

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Rough Road Ahead for GM as Congress Plots Safety Probe

March 20, 2014, 11:35 pm

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Filed under: Company News, General Motors, U.S. Government, Automotive Industry, Auto Recalls

By Richard Cowan

WASHINGTON -- The U.S. congressional investigation into General Motors (GM) automobile defects will bring aggressive scrutiny to a company with powerful lobbying clout and strong ties on Capitol Hill.

GM's recall of 1.6 million vehicles, due to an ignition-switch problem linked to 12 fatalities, has put the Detroit automaker in Congress' cross hairs, with potentially dramatic hearings kicking off in April.

GM Chief Executive Officer Mary Barra is scheduled to testify on April 1 to a U.S. House of Representatives panel investigating the ignition problem. In what could be a preview of such testimony, Barra declared in a video Monday that "something went wrong with our process" and "terrible things happened."

The handling of the defect by GM, which first noticed it in 2001, and federal regulators is the top priority of the powerful House Energy and Commerce Committee, according to aides.

Congressional investigations into consumer safety issues always have the potential of becoming a public relations nightmare for companies at the center of the probes.

In early 2010, for example, Congress looked into sudden, unintended acceleration problems Toyota owners had been reporting for years, which were linked to five deaths.

"I ... was praying to God to please help me," testified one Toyota owner, who said her Lexus 350 ES had accelerated out-of-control. "I thought it was my time to die."

Before it was all over, Toyota sales fell, its reputation suffered and Congress toughened regulations. Just this week, the company agreed to a record $1.2 billion penalty stemming from a Justice Department criminal investigation that could provide guideposts for the GM probe.

The House Energy and Commerce Committee will have broad powers to investigate the actions of GM and the National Highway Traffic Safety Administration, including the ability to subpoena witnesses and documents. The panel has also invited NHTSA acting Administrator David Friedman to testify at the April 1 hearing.

The session is the first in what will likely be a series of congressional hearings.

GM customers could have dramatic stories to tell, since the ignition issue turned off engines and disabled airbags in cars moving at high speed, resulting in deadly accidents.

One committee aide said nearly a dozen of the panel's investigators were working on finding out why flawed ignitions in older Chevrolet Cobalts,

Saturn Ions and other GM models were allowed to stay in the cars for so long with owners uninformed.

"The broad question the committee wants to answer is, 'Is this a problem that could have been prevented or detected any earlier than it was?'" said one House Energy and Commerce aide.

GM has long had allies in Congress, most notably Michigan Rep. John Dingell, the former committee chair. But the hearings will not be the first time the auto giant has been roughed up by lawmakers.

In 2012, a House of Representatives committee looked into an unrelated safety issue: Car battery fires in GM's new hybrid electric car, the Chevrolet Volt. In 2008, GM, Ford Motor Co and Chrysler executives were taken to task by some members of Congress when they flew corporate jets from Detroit to Washington to testify in favor of a government bailout.

GM's allure may have suffered so much from its subsequent government takeover that only four members of Congress, out of 535, owned the company stock in 2012, according to the Center for Responsive Politics.

Five CEOs ran GM during the period of more than a decade since the ignition problem first appeared.

Some aides also warn that what might appear in hindsight to be inexcusable missteps by GM and federal regulators could have been complex and hard-to-define problems as they were unfolding.

GM and Fred

The House hearings will be run by Michigan Rep. Fred Upton, a Midwesterner with an unassuming demeanor, who sometimes tells reporters, "Just call me Fred."

As chairman, Upton has aggressively challenged President Barack Obama's administration on its Obamacare health plan and guided his committee through a tough investigation of the Solyndra solar-panel company, which filed for bankruptcy in 2011 after receiving $528 million in loans from the federal government.

Upton also played an important role in the 2000 congressional investigation of Ford's SUV rollover problems associated with Firestone-made tires.

After emotional hearings, Congress quickly toughened the industry's recall process.

Teaming up with Upton is the committee's senior Democrat, Rep. Henry Waxman, a dogged legislator who has taken on the U.S. tobacco industry, helped enact Obama's landmark healthcare law and won passage of a sweeping climate change bill in the House in 2009.

Also senior on the Energy and Commerce Committee is the "dean" of the House, Rep. John Dingell of Michigan, who was the panel's top Democrat from 1981 to 2008 and is widely seen as GM's staunchest ally in Congress.

"He was a very, very strong chairman. He protected the prerogatives of Detroit and the automobile industry," said Democratic Rep. Eliot Engel of New York, also a longtime member of the committee.

But Dingell's star power faded after Waxman wrested away the committee chairmanship in 2009. Waxman remained the lead Democrat on the committee after Republicans took control of the House in 2011. The 87-year-old Dingell recently announced his retirement later this year after a record 59 years in office.

Dingell's wife, Debbie, who has deep family ties to GM, intends to run for her husband's congressional seat.

Investigation, Then Legislation?

Joan Claybrook, a former National Highway Traffic Safety Administration head and president emeritus of the watchdog group Public Citizen, said that "from time to time," Congress had proven it can be tough on the U.S. auto industry.

She noted that during the Ford/Firestone investigation, Congress demanded that the companies "submit all sorts of documents they didn't want to submit" and made them public.

Claybrook and fellow consumer advocate Ralph Nader said in separate telephone interviews that the scope and aggressiveness of Congress' investigation of GM would depend in part on sustained public outrage and pressure to act.

"The public is mad as a hornet about this GM coverup," she said.

Nader, who wants GM to set up a victims' compensation fund, said the hearings would help "keep the fire under the seat of the Justice Department" as it pursues a criminal probe.

Republicans, who control the House, won't want to ally with GM on a safety problem that has enraged the public, added Nader, who won fame in the 1960s by taking on GM and championing safety issues in his book "Unsafe at Any Speed".

If House lawmakers or Sen. Claire McCaskill, a Democrat who also plans to hold hearings in April in her Commerce Committee panel, decide legislation is needed, GM's lobbyists are sure to respond.

With 87,000 hourly and salaried workers in 60 plants scattered across the United States, GM and its employees are an important constituency for lawmakers.

GM spent nearly $9 million last year on an army of lobbyists whose job is to promote the company's interests in Congress and throughout the federal government. One registered lobbyist, Emily Porter, is a former adviser to House Speaker John Boehner.

Asked about GM's sway with Congress, veteran Democratic Rep. John Larson of Connecticut told Reuters: "It always makes it problematic for Congress" because so many of the company's jobs are located in lawmakers' home districts.

Still, House Energy and Commerce aides insist GM will get no favorable treatment. "You have one hearing and you see where the evidence takes you" before deciding next steps, said one aide.

-Additional reporting by Thomas Ferraro.

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IRS Watchdog Warns of Massive Tax Scam

March 20, 2014, 11:52 pm

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Filed under: Identity Theft, Taxes, U.S. Government, IRS, Ripoffs & Scams

By Patrick Temple-West

WASHINGTON -- Thousands of Americans nationwide have been targeted since August by a phone scam in which fraudsters claim to be from the U.S. Internal Revenue Service and demand money for unpaid taxes, the IRS' watchdog said Thursday.

The Treasury Inspector General for Tax Administration said it has received more than 20,000 complaints from people, including recent immigrants, about the scam.

Thousands of victims have collectively paid more than $1 million to the scammers, the agency said.

"This is the largest scam of its kind that we have ever seen," said J. Russell George, the head of TIGTA in a statement.

The fraudsters can manipulate victim's phone's caller ID so it displays the number of a local IRS office, TIGTA said.

In some cases, the fraudsters have also told victims parts of their Social Security numbers.

In cases where victims hung up, fraudsters have called back displaying a local police phone number on caller ID, TIGTA said.

Potential victims worried about their immigration status have been threatened with deportation, TIGTA said.

The scam has occurred in almost every state and the fraudsters have followed a uniform script, a senior TIGTA official said on a conference call with reporters.

The technology needed to manipulate caller ID displays is easily available to the public, the official said.

Major phone companies have been warned about the scam, as well as companies that provide voice-over-the-Internet call services, the official said.

Claudia Hill, a licensed tax preparer in Cupertino, Calif., said that in one week last month, four of her clients complained of such scam calls. Before this year, none of her clients had previously mentioned phone scams, said Hill, who said she prepares about 1,000 tax returns a year.

"The IRS is not proactive enough in getting out in front of any of this mess," she said.

 

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Shrimp Costs Land Red Lobster in Hot Water

March 21, 2014, 12:59 am

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Filed under: Company News, Earnings, Food & Beverage, Restaurants

ORLANDO, Fla. -- A spike in shrimp costs is causing yet more trouble for Red Lobster.

The seafood chain's parent company Darden Restaurants (DRI) on Friday reported a lower quarterly profit in line with its previously announced estimates. Sales at its struggling Olive Garden and Red Lobster chains dropped by 5.4 percent and 8.8 percent respectively, as reported on March 3.

The Orlando-based company has been fighting to win back customers at its flagship chains and has said it will spin off or sell Red Lobster to focus its attention on fixing Olive Garden with a revamped menu and marketing. Both chains have been losing customers as more affordable alternatives such as Chipotle have gained in popularity.

But in recent months, another factor weighing on Red Lobster was higher shrimp costs. Executives said that costs in the quarter rose about 30 percent because a "production issues in Asia." They said don't expect relief until the early part of its fiscal 2015 year.

On an annual basis, Chief Financial Officer Brad Richmond said the company is facing a $30 million increase in shrimp costs.

For the quarter ended Feb. 23, Darden posted a profit of $109.7 million, or 82 cents a share, matching its guidance.

That was down almost 23 percent from year-ago earnings of $134.4 million, or $1.02 a share.

Analysts expected earnings of 85 cents a share.

Revenue of $2.23 billion was down 1 percent, below the $2.26 billion analysts expected.

Darden also said it still expects its fiscal 2014 earnings to be down between 15 percent and 20 percent from last year. Revenue at stores open at least a year, a key sales metric, is expected to fall 5.5 percent.

The results come a day after Starboard Value LP, which owns about 5.5 percent of Darden's stock, submitted a filing to the Securities and Exchange Commission seeking to call a special shareholders meeting. Darden has urged its shareholders to reject the proposal.

At issue are Darden's plans for its business. Starboard wants Darden to separate all of its large brands, including Olive Garden and LongHorn Steakhouse, from its smaller, better-performing ones such as Bahama Breeze and The Capital Grille.

Its shares fell $1.30, or 2.6 percent, to $48 in premarket trading about an hour before the market open.

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Money Minute: IRS Warns of Huge Tax Scam; Big Banks Pass Stress Test

March 21, 2014, 1:35 am

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Filed under: Market News, Advertising & Marketing, Banks, IRS, Ripoffs & Scams

The IRS says we need to be on the lookout for one of the largest scams ever against taxpayers.

The IRS is warning that scammers have targeted thousands of Americans, and walked away with more than a million dollars of taxpayer money. Here's how the fraud works: they tell us in a telephone call, often aimed at immigrants, that we owe unpaid taxes. These scammers can even manipulate caller ID displays to make it appear as though the call is coming from the IRS.

Meanwhile, April 15 isn't only the deadline to file your real taxes with IRS, it's also the deadline to claim millions of dollars of unclaimed refunds from 2010. The agency says more than 918,000 people are owed money -- mostly those who failed to file tax returns. By the way, the IRS doesn't impose a penalty on a late tax return, if you're due a refund.

The Federal Reserve gave passing grades to 29 of 30 large banks. The so-called stress test measures whether the banks are strong enough to withstand another economic meltdown.

It shows the financial health of the banking sector has improved dramatically since the financial crisis of 2008. That means the Fed could soon approve applications from a number of these banks to resume paying dividends. The only bank to fail the Fed test was Utah-based Zions Bancorp (ZION).

Here on Wall Street Thursday, the Dow Jones industrial average (^DJI) rose 109 points, while the Nasdaq composite (^IXIC) and the Standard & Poor's 500 index (^GPSC) both gained 11 points. The Dow has experience triple-digit moves in four of the last six sessions -- two of them up, two down.

Finally, Nascar does it. So do European football teams. And now the National Basketball Association could soon wear corporate emblems on their uniforms. According to ESPN, new commissioner Adam Silver said sponsor logos are likely within the next five years. Think of the possibilities: the Chicago "Red Bull" Bulls, or perhaps the Washington "Harry Potter" Wizards.

-Produced by Drew Trachtenberg.

 

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