SEC Ripped Over Analyses of Rules by Mercatus Study

“Significant weaknesses” existed in the Securities and Exchange Commission’s economic analysis of several rules it made prior to the SEC’s 2012 updated guidance on ways the agency could beef up its analysis, a working paper released Monday by the Mercatus Center at George Mason University has found.  

Using the Mercatus Regulatory Report Card methodology, senior research fellows Hester Peirce and Jerry Ellig found that “the quality and use of regulatory analysis at the SEC prior to 2012 was significantly inferior to the quality and use of regulatory analysis by executive branch agencies.”

In their working paper, “SEC Regulatory Analysis: A Long Way to Go and a Short Time to Get There,” Peirce and Ellig cite recent requests by Congress that the SEC conduct a more robust economic analysis when it determines whether new rules are in the public interest, as well as federal appeals courts recently vacating several SEC rules due to “inadequate” economic analysis.

The SEC published staff economic analysis guidance in March 2012 similar to the requirements for impact analyses that executive branch agencies are expected to conduct when making major rules.

SEC economists and the agency’s general counsel jointly issued the 2012 economic analysis guidance after the agency “kept losing in court because of its poor economic analysis,” Peirce told ThinkAdvisor in an email.

“The SEC’s decision to publish new economic analysis guidance was a necessary and appropriate response to the significant flaws” that existed in rulemaking prior to 2012, Ellig and Peirce say.

Peirce and Ellig used the Mercatus Scorecard — a standardized scoring system for executive agency rulemaking that measures openness, analysis and use of economic analysis — to analyze seven rules issued from each SEC division. They intended “to ensure that we captured a broad view of rulemaking issues within the SEC’s regulatory jurisdiction” and to offer “a useful cross section of significant SEC rulemaking.”

The rules the senior Mercatus fellows assessed included the creation of the SEC’s Office of the Whistleblower, the requirement that private fund advisors file form PF with the agency, the switching of advisors under Dodd-Frank from federal to state registration, and the net worth standard for accredited investors.

Peirce and Ellig concluded that the SEC’s rulemakings “read more like justifications of the final rule than careful analyses of the underlying problems and the various ways that those problems could be addressed.”

The analyses failed, they said, “beyond sporadic references, to take advantage of the academic literature that would help them analyze the rulemaking. The analyses often deferred to the statute rather than asking fundamental questions about the need for it and what its objectives would be. In designing many of these rules, the SEC did not appear to have a clear picture of what it was trying to achieve.”

The pre-2012 SEC analyses also “often ignored important alternatives that should be obvious to an expert agency,” as well as “significant costs and asserted significant benefits without providing evidence that the regulation was likely to achieve them,” the paper states.

However, both senior fellows express optimism that the SEC’s economic analysis “will improve” as the agency’s “retooled regulatory analysis takes hold and the SEC applies it more.”

Because the SEC has only promulgated “a handful of major rules” with the full benefit of the 2012 guidance, Peirce and Ellig write, “It is too early to conclude whether the analysis has improved.” /* .premium-promo { border: 1px solid #ddd; padding: 10px; margin: 0 10px 10px 0; width: 200px; float: left; } .premium-promo li, .premium-promo ul { list-style-type: none; margin: 0; padding: 0; } .premium-promo li { margin: 0 0 10px; padding: 0 0 10px; border-bottom: 1px dotted #ddd; } .premium-promo h3 { text-transform: uppercase; font-size: 11px; } .premium-promo h4 { font-size: 16px; } .premium-promo a { text-decoration: none !important; } .premium-promo .btn { background: #0069a1; border-radius: 4px; display: inline-block; padding: 5px 10px; clear: both; color: #fff; font-weight: bold; } .premium-promo .btn:hover { background: #034c92; } */ Indeed, SEC Commissioner Daniel Gallagher said recently that the economic analysis the SEC is currently performing on its potential rule to put brokers under a fiduciary mandate will “help the agency to determine whether we need” to move forward.

Peirce and Ellig conclude that while a “more comprehensive economic analysis may be more costly to the agency in the short run,…in the long run [it] may significantly increase the benefits or reduce the costs of the regulations adopted.”

The role of economic analysis in SEC rulemaking could also "reveal best practices from which other agencies could learn or highlight significant pitfalls they should avoid in economic analysis of their own rules," the two senior fellows say. What's more, the SEC’s "interpretation of its statutory rulemaking obligations can provide insights for Congress as it considers various regulatory reform bills designed to foster the use of economic analysis in agency decision making."

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Check out these related stories on ThinkAdvisor:

Apple Starts to Ramp Up

It seems that Apple (NASDAQ: AAPL  ) investors were right to disregard reports last week that primary assembler Foxconn saw a troubling 19% drop in sales, presumably related to "weak demand" for the iPhone.

Both The Wall Street Journal and Bloomberg are reporting today that Foxconn has resumed hiring in its factories as it starts to ramp up iPhone production. The contract manufacturer had instituted a hiring freeze in February, which bears jumped all over. Initially, the freeze was similarly pegged to "weakening demand," but it could actually be considered evidence of improvements in Apple's labor supply chain that were causing workers to stick around longer.

Regardless, the freeze has been ended and Foxconn has put its "Help Wanted" sign back up. The reports specifically note that the hiring is in response to "Apple's request to boost capacity." Foxconn has added roughly 10,000 workers at its facility in Zhengzhou, which only produces iPhones according to Apple's supplier list.

A Foxconn spokesman merely told the WSJ that the move was to meet seasonal demand from clients, but an anonymous source confirmed to the publication that Foxconn is preparing to enter mass production of the next iPhone.

The what is mostly a known quantity at this point. Investors are expecting an iPhone 5S with a similar design, probably with an integrated fingerprint sensor leveraging last year's acquisition of AuthenTec. Affordable iPhones are also probably on the way, to target emerging and unsubsidized markets such as India, among others. The polycarbonate casing that Apple's expected to use may come in numerous colors.

The when is much less certain. KGI Securities analyst Ming-Chi Kuo, who boasts an impressively accurate track record with iRumors, believes that Apple's been running into some manufacturing challenges with both iPhones. The fingerprint sensor seems to be a technical challenge, and the ultrathin plastic casing is reportedly seeing low production yields. Kuo believes these issues may cause the iPhone launch to be later than what investors are expecting.

Still, the hiring reports may signal that Apple's ramping up iPhone production, since it often takes the company months to build up sufficient inventory for its simultaneous global rollouts. With two important flagship Androids launching this month, let's hope that's sooner rather than later.

There's no doubt that Apple is at the center of technology's largest revolution ever and that longtime shareholders have been handsomely rewarded, with more than 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

CarMax Beats on Revenue, Matches Expectations on EPS

CarMax (NYSE: KMX  ) reported earnings on April 10. Here are the numbers you need to know.

The 10-second takeaway
For the quarter ended Feb. 28 (Q4), CarMax beat expectations on revenues and met expectations on earnings per share.

Compared to the prior-year quarter, revenue grew. GAAP earnings per share grew.

Gross margins shrank, operating margins shrank, net margins were steady.

Revenue details
CarMax reported revenue of $2.83 billion. The 12 analysts polled by S&P Capital IQ predicted a top line of $2.73 billion on the same basis. GAAP reported sales were 14% higher than the prior-year quarter's $2.54 billion.

Source: S&P Capital IQ. Quarterly periods. Dollar amounts in millions. Non-GAAP figures may vary to maintain comparability with estimates.

EPS details
EPS came in at $0.46. The 15 earnings estimates compiled by S&P Capital IQ averaged $0.46 per share. GAAP EPS of $0.46 for Q4 were 15% higher than the prior-year quarter's $0.40 per share.

Source: S&P Capital IQ. Quarterly periods. Non-GAAP figures may vary to maintain comparability with estimates.

Margin details
For the quarter, gross margin was 15.3%, 60 basis points worse than the prior-year quarter. Operating margin was 6.2%, 90 basis points worse than the prior-year quarter. Net margin was 3.7%, much about the same as the prior-year quarter. (Margins calculated in GAAP terms.)

Looking ahead
Next quarter's average estimate for revenue is $3.11 billion. On the bottom line, the average EPS estimate is $0.57.

Next year's average estimate for revenue is $12.16 billion. The average EPS estimate is $2.09.

Investor sentiment

Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on CarMax is outperform, with an average price target of $40.00.

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Add CarMax to My Watchlist.

Gurus Dig This Stock

Staying on top of the crest of an industry is no easy task. It requires at least a highly qualified human resource team to discover growth opportunities ahead of the competition. Of course that additional political connections to enter those troubled geographies is as handy as a great load of industry nerds. Halliburton (HAL) seems to have both. The company has gone a long way since successfully tapping the first unconventional well using hydraulic fracturing 65 years ago. Today, fracking is a standard practice in the industry, but the firm has not stopped introducing new products and expanded across the globe. During the first quarter of 2014 alone, Halliburton has expanded its line of drilling optimization tools, introduced a new fracture diagnostic tool, a wireless controlled well testing solution and a line of fully integrated, custom-engineered service solutions. Is this why George Soros (Trades, Portfolio) continues to increase his holding in the company?

Market Trends and New Partnerships

Some news outlets have been the echo of Halliburton's decision to close its liberal facilities. The news remarked the fact that employees would be transferred to another location, but disappointment lingered as reminiscence of fracking golden years linger. "Halliburton is closing the facility as a result of changing business needs from its customers," according to Halliburton Senior Manager – PR & Community Initiatives Emily Mir. And that is the plain truth: The oil and gas industry is going through changes in North America with most companies beginning to focus on offshore drilling.

The offshore trend is so strong that it has the potential to revive companies believed to be permanently out of business, like Transocean (RIG) after the Deepwater Horizon incident. Hence, moving jobs from Liberal, Kansas, to Pampas, Texas, is coherent with current trends in North America as onshore reserves begin to dry. On the other hand, many offshore reserves remain untapped or undiscovered.

Halliburton has additionally looked for long growth opportunities abroad. For instance, the company opened its new Unconventional and Reservoir Productivity Technology Center at King Fahd University of Petroleum and Minerals, located in Dhahran Techno-Valley. Also, the firm announced the signing of a partnership agreement with Gubkin Russian State University of Oil and Gas for the development of unconventional resources in Russia, including the Bazhenov shale.

Prospects for an Industry Leader

Market positioning for Halliburton strength is evidenced by the fact that is a top three players in each of the product and service categories offered, and is present in all major hydrocarbon-producing regions of the world. Additionally, the firm enjoys very strong relationships with both private and state representatives. And prospects continue to improve as activities are driven away from onshore North American operations while no fleet unit is underutilized.

With respect to offshore activities, Halliburton's revenue in the segment is growing 25% faster than the industry average. However, management expects that leverage will decline as competition tightens. This issue is already being addressed by the firm through international opportunities. More specifically, new shale discoveries in Latin America are expected to help the company maintain an edge over the competition.

Additional trends that will keep Halliburton on top are a leading position in the North American oilfield services market, and market penetration in deepwater and underserved international regions. A third leg for the company's future profits aims at tripling mature field services revenue to $9 billion by 2016. And the key for all this to work is the dominant position developed in pressure pumping.

Currently trading at 24.9 times its trailing earnings, Halliburton's stock carries a 7% premium to the industry average. With stable net income through the last three years and increasing revenues amid legal battling and settlements, the company is in a great standing. So great that stock's face value has recovered from the blow suffered in 2011, a trend that gurus anticipated. That is why many bought the stock throughout 2013: Because it was a cheap entry price. Today, prospect investors are obligated to pay current prices or wait for another hard-to-come-by entry point.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:Vanina EgeaA fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website

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Government Properties Income Trust Dividend Safety Analysis

Government Properties Income Trust (GOV) is a real estate investment trust which owns properties primarily leased to the government. GOV owns 68 properties, 49 of which are leased to the U.S. government, 16 to state governments and one to the United Nations.

There are a number of benefits of being a landlord to Uncle Sam. The U.S. government is the nation's largest renter, it will likely never bounce a rent check, and it tends to lease for the long-term. Even though GOV enjoys such a reliable and sound renter of its properties the stock still yields nearly 7%.

Using our REIT dividend safety analysis, lets see how safe that juicy dividend really is.

Note: AFFO calculation was based off of 2013 funds from operations (FFO) minus recurring capital expenditures

For 2013 GOV had an adjusted funds from operations (AFFO) dividend payout ratio above 100%. This means that the funds from operations minus recurring capital expenditures was not enough to cover the total dividends paid during 2013. Going forward GOV will need to reduce its capex costs or increase its FFO in order to bring the AFFO payout ratio to a safer level. The high payout ratio is likely why management has kept the quarterly dividend payment at 43 cents for the past six quarters. If there is a dividend raise announced in the near future it will likely be just 1 cent based on the current AFFO payout ratio.

GOV has achieved a strong occupancy rate and has increased that rate versus 2012. The company also did well to manage through the recent government spending cuts. Those investors willing to take on a little more risk in order to cash in on a high yield may wish to look further into GOV, but those looking for a safer pick may want to wait until the AFFO payout ratio comes down to a more comfortable level.

Disclaimer: The 4% Portfolio Retirement Service has made no recommendations on GOV.

About the author:4PercentThe 4% Portfolio is designed to provide a smarter way for retirees to follow the 4% rule without having to sell a portion of their stock portfolio each year. Our portfolio is based around financially sound corporations spread across multiple industries who reward investors through regular dividend payments. When invested evenly among the stocks in our Portfolio, an investor will yield at least 4% in dividend income each year.

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The Big Move From U.S. Geothermal Has Left the Tank Empty.... For Now (HTM)

By most accounts, it's an all-American dream come true. U.S. Geothermal Inc. (NYSEMKT:HTM), working hard - for years - to make something out of nothing can finally see the light at the end of the tunnel. HTM has swung to a profit, and is strong enough now that it's probably going to remain in the black in perpetuity. Shareholders who got into U.S. Geothermal anytime during or after 2012 have finally been handsomely rewarded, with most of that reward materializing in just the past three weeks. Regardless of when an investor got into a position in HTM though, there's just one thing left to do at this point.... get out. Lock in your gain and walk away, at least for a little while.

Say what? Why let go of one of the market's hottest stocks when things have never been better? Because, between the chart and the news and the euphoria surrounding the whole shebang, there's just something a little suspicious about HTM at these levels, and a significant pullback may be nigh.

First and foremost, there's a valuation problem. As it stands right now, U.S. Geothermal Inc. is a $96 million company that did $27.4 million worth of revenue last year. Granted, that's far better than 2012's top line of $9.8 million, and besides, you own a stock for where it's going rather than where it's been. While that's completely true, where HTM is going in 2014 should be revenue of only about $29 million. That translates into a price/sales ratio of 3.3 versus the market norm of about 2.4.

The valuation conundrum is even more alarming when you're talking about profits. While U.S. Geothermal has fought its way into the black, 2014's projected net income for this year is only $5.5 million at the high end. That translates into a best-case scenario forward-looking P/E of 17.4, which is palatable, though not exactly cheap. And remember, that's the high-end estimate. The low-end is a projected profit of $2.5 million, which translates into a forward-looking P/E of 38.4 for HTM.

This is likely the point where fans and supporters of the company will counter with the notion that one can't value a budding growth story the way more established and older companies are valued. This reporter couldn't agree more.  Indeed, this reporter thinks U.S. Geothermal Inc. is one of the most compelling stories out there for 2014 and 2015. Thing is, this reporter has also seen hundreds of stocks get well ahead of themselves relative to earnings, and though in the long run corporate results and the stock's price find an equitable equilibrium, in the short run, investors tend to not want to wait it out. Instead, traders realize it could be a couple of years before the stock's current price can be justified, and decide not to wait it out, dumping their shares looking for the next big hit. HTM isn't immune to that hot/cold pattern rooted in the fact that the market is amazingly fickle.

That being said, the chart is already in the midst of the process of hitting a top and pivoting lower.

The first clue to that end is today's volume. Although the volume so far isn't anything remarkable (we saw greater volume on the 13th and 24th), we're also only about an hour into today's session as of the time of this writing, and we're already to the halfway point of the volume we saw those two days. So, barring the market closing early, we WILL see a volume spike today, which tend to materialize at pivot points. They're the proverbial last hurrah for rallies and pullbacks, suggesting the last of any would-be buyers are rushing in. Past this point, there aren't apt to be any buyers left... only sellers.  The fact that HTM opened near its high today and has spent the better part of the session so far selling off - and is currently right at its low for the day - further suggests that the crowd has become one of profit-takers rather than buyers. Once that ball gets rolling, it's tough to stop.

The other clue that says we're headed for a deeper pullback from U.S. Geothermal is a little more blatant - it's overbought, and the market doesn't let things stay overbought very long.

Don't misunderstand. U.S. Geothermal Inc. is a great company, and HTM will rebound from whatever setback it suffers over the course of the next few days. There's no need for current shareholders to suffer as well, however. Anybody who locks in their gain today can still buy it back later, at what should be a considerably better price.

For more trading ideas and insights like these, be sure to sign up for the free SmallCap Network newsletter. You'll get stock picks, market calls, and more, every day. Here's what you've missed recently.

Jurors in Madoff Aides' Trial Say Decision Was Easy

Andrew Burton/Getty ImagesAnnette Bongiorno, Bernie Madoff's former secretary, leaves federal court Monday after being found guilty of charges of aiding, assisting and profiting from Madoff's Ponzi scheme. NEW YORK -- When it came down to it, the evidence was simply too overwhelming. That was what several jurors said Monday after they convicted five former Bernard Madoff associates of helping to conceal his multibillion-dollar Ponzi scheme. The verdict -- guilty on all counts -- came after just 20 hours of deliberations, which paled in comparison to the trial's extraordinary length. At more than five months, it was one of the longest white-collar criminal trials in the history of the federal court in Manhattan. But the jurors, interviewed after the verdict, said there was never really any doubt in their minds about the outcome. "It was the overall picture," said Sheila Amato, an art teacher from Rockland County, a suburb of New York City. "The facts speak for themselves." The five employees -- back-office director Daniel Bonventre, portfolio managers Annette Bongiorno and Joann Crupi and computer programmers Jerome O'Hara and George Perez -- claimed they believed Madoff's business was legitimate and were fooled into becoming unknowing accomplices. Starting in October, the jurors heard approximately 40 witnesses testify and saw thousands of documents admitted into evidence, creating a trial transcript that reached 12,000 pages. The closing arguments stretched nearly 25 hours over two weeks. In all, the jurors had to determine a verdict for 59 individual charges, with Bonventre alone facing 20 different counts of securities fraud, conspiracy, bank fraud, filing false tax returns, and falsifying records. Craig Parise, a fifth-grade teacher from Westchester County, another New York suburb, said the fact that the fraud persisted for so long made it hard to believe that the defendants, some of whom worked at the firm for decades, were completely unaware. "It would be different if it was a four-month Ponzi scheme," he said. "When it was 40 years, it's very hard to overlook that." Defense lawyers tried to undermine the government's star witness, Madoff's top deputy, Frank DiPascali, by painting him as a career con man with a talent for deception that rivaled only that of Madoff himself. But the jurors said they found his testimony credible and compelling. "It was pretty captivating," Amato said of DiPascali's testimony. "It wasn't scripted." That stood in contrast to the testimony from Bongiorno and Bonventre, who both made the unusual decision to take the stand in their own defense. The jurors emphatically rejected their claims that they had no idea what was going on. "I don't think it helped their case," Parise said. "It was slightly insulting. I think there was a lot of coaching going on." Another juror, Nancy Goldberg, an instructional assistant for at-risk students from Westchester, said the defense lawyers had done as well as they could without much ammunition. "They didn't have much to work with," she said. The trial's length forced some attrition in the jury box, with two jurors and two alternates excused because of illness or travel plans. After one juror was forced to leave in the middle of deliberations, the judge decided to move forward with only 11 members, a rare but not unheard of occurrence. Gloria Wynn, a church pastor from the Bronx, expressed relief that the grueling case had ended. "It was a long trial, and I'm glad it is over," she said. Goldberg, Amato and Parise, who all work in education, became close friends, commuting together on the train. Some of the jurors passed the time during lunch breaks by watching "The Chew," a cooking-themed talk show on ABC, in a jury lounge inside the courthouse. All the jurors exchanged phone numbers and email addresses, Parise said, and Goldberg suggested a reunion on Oct. 2.

New Biotech Breakthrough: Buy Intermune Stock

Popular Posts: 3 Game-Changing Tech Stocks to Put On Your Radar ScreenCandy Crush is Fun, But KING Investors Should Play ElsewhereNew Biotech Breakthrough: Buy Intermune Stock Recent Posts: New Biotech Breakthrough: Buy Intermune Stock Candy Crush is Fun, But KING Investors Should Play Elsewhere 3 Game-Changing Tech Stocks to Put On Your Radar Screen View All Posts

The market continues to face resistance, due in part to the lingering unease in Ukraine and the possible delay or interruption of energy supplies in the region, and the disappointing economic data out of China. Those are tough overhangs to battle, and resulting profit-taking has sent stocks lower. We talked about the latest geopolitical issues and our exposure to them in last week’s update.

If you missed it, I encourage you to read it here.

Volatility continues to be the name of the game going forward, but I believe I’m positioned to weather the market storms. In fact, I have a new biotech name for today that has held its own despite the downward movement and looks able to maintain that momentum. Let’s take a look at it now.

InterMune (ITMN) has surged more than 100% so far in what can charitably be called a lackluster 2014 for the rest of the market. Almost all of that run up has occurred in the last month, when the stock vaulted onto investors’ radar screens with clinical trial news that put its drug on the path to approval. I don’t blame you if you’re scratching your head, wondering why I’m recommending ITMN now.

Let me explain.

I fully believe that this is just the beginning for InterMune and expect the momentum to stay strong. The stock has plenty of room left to run, thanks to a raft of good news as a tailwind and more expected to come. There is a lot to like about this high-flying and innovative biotech, and I want us to jump on this uptrend for the potential growth ahead.

InterMune is a $2.9 billion market cap company focused on developing drugs for pulmonology and orphan-status fibrotic diseases. Much like former GameChanger winner Intercept Pharmaceuticals (ICPT), ITMN develops drugs to treat a rare disease, which means that it targets a small domestic or global population.

InterMune’s lone drug, pirfenidone (also known as Esbriet), treats patients with idiopathic pulmonary fibrosis (IPF), which is an irreversible and fatal scarring of the lungs. There is no known cause of the disease, which afflicts around 70,000 (by InterMune’s estimates) to 200,000 Americans (according to the Pulmonary Fibrosis Association) annually and leads to death within two to five years after diagnosis.  As of yet, there is no cure. But InterMune’s drug does help slow the inevitable decline of a patient’s lung function.

Esbriet has been on the market in Europe, Canada and Japan for the past few years. It is not currently sold in the United States, but that looks more likely to change.

The drug was initially up for approval in 2010, but was denied by the Food and Drug Administration (FDA) based in part on two studies that showed conflicting effectiveness results. But late last month, the game changed. Data from a new trial showed a number of positive results that could set the stage for U.S. approval, and also further inroads abroad, which in turn bodes well for InterMune’s sales moving forward.

The study, which involved more than 550 patients in the United States and eight other nations, measured lung function and put Esbriet up against a placebo. According to the Phase III study, 22.7% of patients who took the drug saw no decline in lung function – significantly better than the 9.7% of the patients who got a placebo.  Furthermore, 16.5% of patients who got the drug had a decline of 10% or more in lung function or died. That compares favorably with the 32% via placebo that showed similar declines or fatalities.

When the news hit the Street on February 25, ITMN more than doubled to the $30 range on excitement that the drug appeared on track for U.S. approval. Investors were also cheered by the fact that InterMune’s announcement of the positive data came a bit earlier than many had expected, as management had said they would be releasing the Phase III results during the second quarter of 2014.

Profit-taking has pulled the shares from a high of $38.73 back down to the current $31 per share range, which is giving us an attractive entry point ahead of market expansion or even a possible takeout that could see the stock soar 45% (or possibly more in the event of a buyout) over the next 12 months.

Because there are no other drugs or therapies approved for IPF, InterMune has a virtually clear runway for treating the condition. Adoption has been quick in the markets currently served, and the company has steadily grown sales from $5 million in 2011, to $26 million in 2012 to $70 million in 2013.

That top line is expected to grow to $137 million in 2014, and perhaps as much as $316 million in 2015. While that would represent a heady jump from previous estimates of about $225 million in annual sales, it’s fair to say that not all sell-side analysts have fully updated their models to reflect the eventual growth here and abroad, since U.S. approval has not yet happened.

Plus, final details from Phase III data will likely be submitted at an industry conference in May and then resubmitted to the FDA later in the year. As a result, those backend 2014 and 2015 revenue estimates could be revised significantly upward. (Boehringer Ingelheim will also present its own clinical data at the May conference for a competing potential IPF drug, but some analysts note that their drug is less positive than what has been seen with InterMune.)

Although management has not publicly stated what the price tag for Esbriet will be domestically, some analysts have speculated that ITMN will be able to charge more than it has abroad, where patients spend about $30,000 annually, and could perhaps charge as much as double that price or higher thanks to the strong data and relatively early launch. With as much as $200 million in sales from Europe and the U.S. in 2015, total revenues could top $400 million.

For now, valuation must be dependent on sales metrics, as InterMune, like many of its early-stage drug development peers, spends a lot of money to generate sales and new drugs. For the current year, management guided for $320-$345 million in operating expenses, a large chunk of which will be devoted to research and selling-related activities.

This means that InterMune will continue to generate net losses this year and next. Hardly resting on its current IPF laurels, InterMune may also be looking to expand into another orphan lung disease related to sclerosis. With about $190 million in cash on the balance sheet, alongside a relatively strong 6x quick ratio, InterMune should be able to weather any development costs quite well.   Also, the company just said after the close that it would offer 7.5 million shares to help raise more cash for marketing and commercialization efforts. Shares pulled back in after hour trading, reflecting dilution on the order of about 8% for existing holders, but that gives us an even more attractive entry point.

As I mentioned, the stock has also been named as a potential takeout target. In the past few years, biotech deals have been done in a range of 7x sales to as much as 15x sales. If ITMN is indeed acquired, perhaps by a rival looking to “bolt on” IPF treatments to its existing portfolio, that type of multiple is not farfetched for a company that has been growing its top line by several hundred percentage points.

Taking the midpoint of that range, 11x 2015 sales, and the stock could be worth $49 in a year, for a 45% upside from current prices.

Please be aware that I am giving the stock an Aggressive risk rating, as clinical data can make or break a biotech, and the company has a critical May up ahead. But with solid data already behind it, I like the stock’s potential to continue climbing.

Where Has All the Silver Gone?

Investing legend Mark Skousen wonders why he hasn't seen any of those silver dollar coins around, and encourages their reintroduction back into circulation.

TERRY:  I'm Terry Savage from moneyshow.com talking with the always fascinating Mark Skousen, who just handed me this.  What is this?  It's a silver dollar, but not one of the old-fashioned kind.  It doesn't feel too heavy.  Mark, what is this? 

MARK:  That's actually a 1-ounce American Eagle silver dollar.  It's legal tender, and 40 million of those were minted last year, and I ask you:  Where are they?  This is the first time you've seen one of these, right? 

TERRY:  Yeah, absolutely. 

MARK:  Yet this is a legal tender coin, and since 1986, when Ronald Reagan signed a bill called the Gold and Silver Act, creating the American Eagle 1-ounce gold coins… 

TERRY:  Those I've seen. 

MARK:  …and 1-ounce silver coins, and 40 million of these beautiful coins that have Lady Liberty on them, the rising sun—Ben Franklin's favorite symbol of America, In God We Trust, the eagle.  It's got everything in there. 

TERRY:  These must be coll—they're an ounce of silver, correct? 

MARK:  That's correct. 

TERRY:  It's alloyed.  It must be. 

MARK:  It'll cost you $25 to buy one of these. 

TERRY:  Exactly.  Based on the price of one ounce of silver. 

MARK:  Right. 

TERRY:  Nobody's going to give this as a tip to the doorman who brings the car around. 

MARK:  Au contraire.  I encourage people in my newsletter all the time to use them as gifts, anniversaries… 

TERRY:  Oh, right.  But not as a dollar. 

MARK:  …when you graduate.  These are wonderful coins that people should hold on as good luck pieces. 

TERRY:  Yes, exactly.  You're just not, in other words, going to buy a dollar's worth of goods with this because it's worth… 

MARK:  No.  No. 

TERRY:  …whatever the price of silver. 

MARK:  That's the problem.  Because of Gresham's law…    

TERRY:  But where are they, Mark? 

MARK:   …we spend the one-dollar, the one-dollar bill… 

TERRY:  The paper, yep. 

MARK:  …and we keep—we put the silver dollar in our pocket… 

TERRY:  Of course. 

MARK:  …or in our safety deposit box, but I am encouraging people to circulate them.  We need to remember these are what coins used to be like.  The silver dollars that used to go in the slot machines in Las Vegas, and we used to all have in our pockets beautiful coins.  Now we have these tinty (SP?) little quarters that nobody wants to carry. 

TERRY:  Yeah, but the point is, if I'm buying a Coke in a vending machine, I'd never put a silver dollar in there. 

MARK:  No, no.  But here's another thing:  These are superior inflation hedges now… 

TERRY:  Okay. 

MARK:  …because this was equal to $1 in 1960 and now in real terms is worth three or four times that, so that's pretty impressive. 

TERRY:  Okay, so where do you—by the way, do you buy these through the U.S. Mint or any coin dealer? 

MARK:  Any coin dealer, right.  You can't buy directly from the U.S. Mint at this time. 

TERRY:  Okay.  There's probably a slight premium to the price of silver. 

MARK:  Yes, there is because silver's at 20, and these are selling for $23 or $24 each. 

TERRY:  So, both the collectability of them and the very fact that it's nice to hold real silver… 

MARK:  It's beautiful. 

TERRY:  …and the fact that silver prices may go up.  Before we leave you:  Gold—ahh!  It's been a terrible bear market for the last year, but it's been a great bull market for a long time.  What do you think? 

MARK:  Well, we gave a sell signal in November of 2011.  That was a really good lucky call because gold has basically drifted downward ever since.  I have not given a buy signal for gold, but I do recommend people accumulate them and squirrel them away and that sort of thing because it is real money.  Who knows what the government's—they're going to inflate more.  Yellen is very much in favor of inflation and waiting for the unemployment rate to drop.  It's unlikely with our generous welfare system and raising the minimum wage is going to put a lot of teenagers out of work.  I'm quite assured that inflation is going to be the number one problem we're going to be facing… 

TERRY:  Down the road. 

MARK:  Yeah. 

TERRY:  At these levels, silver around $20 and gold somewhat over $1200; you're a buyer of coins. 

MARK:  I am, of the coins, but not in my regular IRA portfolio.  I'm not owning any gold or silver at the present time, or even the mining shares, because they're showing weakness as well… 

TERRY:  Oh, more weakness. 

MARK:  …but that could change at any time, so I will be alert to any increase in mining shares. 

TERRY:  Mark, thank you very much.  You can find out more at markskousen.com.  I'm Terry Savage from moneyshow.com

How to Value a Stock Using the Income Statement

Valuing a stock — and buying below the estimated value — is the key to successful investing.  In How to Read a Corporate Balance Sheet, I discussed how shareholder’s equity (i.e., book value) on the balance sheet can be used as rock-bottom liquidation value for a company. Deep value investors like Benjamin Graham liked to buy stocks below book value, but such opportunities are extremely rare these days except in the high-risk areas  of deeply-troubled, illiquid U.S. microcap stocks and Chinese stocks with questionable accounting. 

Ben Graham (Balance Sheet) vs. Philip Fisher (Income Statement)

In his early days, Warren Buffett followed the “cigar butt” deep-value quantitative approach of his Columbia Business School professor and mentor Graham, but Buffett’s investment approach began to evolve closer to growth with the 1958 publication of Philip Fisher’s book Common Stocks and Uncommon Profits. Unlike stodgy Graham who was born in the “old world” of London, England and worked most of his adult life in New York City, Fisher was a free-wheeling Californian from San Francisco who took an adventurous and optimistic view of stock investing, not focused on current assets but future growth.

Unless a company plans to liquidate, which is rare, measuring a stock’s value based on book value is arguably irrelevant. A company that plans on continuing in business as a going concern will never sell its productive assets, so the proper way to value a company is on its current cash-generating ability and potential to grow that ability in the future. Although the future is unknowable, Fisher analyzed qualitative “scuttlebutt” (e.g., management expertise and integrity, along with the company’s competitive position) to make educated guesses. Consequently, whereas Graham focused on the “here and now” balance sheet, Fisher focused on the &! #8220;forward-looking” income statement, which measured changes and trends in the balance sheet.

Buffett is from Nebraska — the middle of the country — so he was used to looking both ways and was perfectly willing to mold his investment philosophy from the best of both the east (Graham) and west (Fisher) coasts. It didn’t hurt that Buffett’s business partner since 1978 — Charlie Munger — has lived in California for most of his life (born in Omaha just like Buffett, however) and was a Fisher devotee.  For many years, Buffett characterized his investment style as “85% Graham and 15% Fisher,” but recently he has stated that Graham’s approach doesn’t work with the huge investment size required to move the performance needle in Berkshire Hathaway’s $105 billion stock portfolio:

It has less and less application as you get  into bigger and bigger companies with larger sums of money. Moving much more towards Fisher now and less Ben Graham because we are working with larger sums. With smaller sums, we would be looking at better margins/cheaper stocks.

One could argue that Buffett’s investment style is now 85% Fisher and 15% Graham! Adding a qualitative component requires good judgment and is more difficult to do well than Graham’s numbers-based approach, but the rewards are much higher because few investors get the qualitative part right, which leads to market inefficiencies that can be exploited by smart people like Buffett.

Discounted Cash Flow is Theoretically Ideal, But Offers False Certainty

So, in honor of Philip Fisher and growth investing, let’s take a look at the income statement as a source of stock valuation for companies that are ongoing concerns and have no plans to liquidate. In theory, the best way to value a stock is to estimate all of its future free cash flows on an annual basis and discount  them at an appropriate annual interest rate to reach a net present value. Most DCF model! s calcula! te free cash flows for the next 10 years (based on a constant or slowly-declining growth rate) and then add a large terminal value based on a multiple of the 10th-year free cash flow to simulate in one final number the net present value of all future cash flows in perpetuity from year 11 to infinity. However, as I wrote in Value Investing and Value Traps: Separating Winners from Losers:

Performing a full-fledged discounted cash flow (DCF) analysis is not only time consuming, but requires an endless number of input assumptions that are likely to turn out to be wrong.Many legendary value investors feel the same way about DCF. For example, Jean-Marie Eveillard said in a 2008 interview:

We never use discounted cash flows. Buffett does not consider discounted cash flow either, because the way things work, after 10 years you have a residual value which is often about half the net present value. So not only do you pretend to know what is going to happen over the next 10 years but even beyond. So we never do discounted cash flow, which I think is garbage. It's as bad as the efficient market hypothesis.

Similarly, David Winters said in 2007:
I think of DCF as garbage-in, garbage-out. Conceptually it's right, but the ability of anybody to make accurate estimates is low. Somebody showed me a DCF model last week and I looked at it and I was pretty skeptical. They had a terminal growth rate of 2%, and I asked, "What happens if it becomes 5%?" The value went up by 100%.Valuation Requires Humility and a Margin of Safety

Not only is future cash-flow growth uncertain, but so is the appropriate interest rate used to discount that future growth. In his classic investment book Margin of Safety, value investor Seth Klarman argued that calculating a  stock’s value requires “predicting the future, yet the future is not reliably predictable.” Consequently, one should be humble and conservative in one’s predictions and then discount those predictions by a substantial margin of ! safety in! case the prediction is overly optimistic.

How large a margin of safety depends on the stock; for small-cap stocks with a limited financial history, a 30-40% discount makes sense whereas a discount of only 15-20% would be reasonable for a large-cap blue-chip stock with decades of financials. Considering the macro-economic backdrop is also important, especially today when interest rates are near record lows and corporate profit margins are near record highs. Stock valuations get crushed when interest rates rise and/or earnings fall. If your financial adviser claims that he doesn’t need a margin of safety, he is engaging in counterproductive “future babble” and I suggest that you find another adviser! As financial blogger Barry Ritholtz recently wrote:

Investing is about making probabilistic decisions with limited information about an unknowable future. The variables are well known, as are the possible outcomes. Anyone who claims to know the future, who says they can tell you what the economy will do, what earnings will be and, therefore, where the stock market is going is lying to you. Understanding the variables and valuation should help you make better investing decisions.

P/E Multiples are Simpler and Commonly Used for Stock Valuation

A much-simpler valuation method than DCF is to skip over the estimate of 10 years of free cash flows and just use a multiple of today’s free cash flow (or earnings or book value) to calculate a stock’s value. In essence, a multiple-based valuation just calculates a terminal value from the get-go, where one takes a “snapshot” value from the current year’s income statement and assigns a multiple to it to get the stock price.

For example, if a company’s earnings per share are $1.00 and the multiple of earnings you choose is 10, then the stock value would be $10 ($10 * $1.00). This begs the question how you determine what the proper multiple should  be. One possibility is to look to the past for gu! idance ab! out the future. One could look at the average multiple of earnings the company or the industry has sold for in the past, but a company’s future could look very different from its past and a particular company’s business prospects could be very different from the industry average. 

Another possibility is to use the multiplier formula for the terminal value in a DCF analysis:  1/(cost of equity capital – growth rate). But, again, borrowing from a DCF analysis requires us to estimate cost of capital and a terminal growth rate, which is guesswork. Still, at least the formula illustrates the two factors that go into choosing an earnings multiple. Cost of equity is the rate of return demanded by investors to compensate them for business risk. The average cost of equity is around 10% (page 3) and the average long-term annual growth rate in earnings per share is around 3.8%. 

It makes sense that the higher the cost of generating equity returns, the lower the value of that equity (i.e., lower P/E ratio), and the higher the rate at which equity can grow earnings, the higher the P/E ratio. So, if you subtract average EPS growth of 3.8% from the average 10% cost of equity, the result is 6.2% and the reciprocal (1/0.62) is 16, which just so happens to be the long-term average P/E ratio of the stock market.

Reasonable P/E Multiple Depends on Both Growth Rate and Business Risk

Average figures don’t tell you much about the P/E ratios of individual stocks, and calculating the cost of equity of individual industries and stocks can be a pain, so legendary fund manager Peter Lynch offered up a shortcut in his book One Up on Wall Street:

The P/E ratio of any company that’s fairly priced will equal its growth rate.

That’s simple! In essence, Lynch is arguing that a P/E ratio-to-growth (PEG) ratio of 1.0 is the correct definition of a stock’s intrinsic value. So, if a company is projected to grow its earnings at 40% annually, its P/E ratio should be 4! 0, wherea! s if its earnings are projected to growth only 10%, its P/E ratio should be 10. This suggests that if a stock is trading at a P/E ratio below its growth rate the stock is an undervalued buy and if it is trading at a P/E ratio above its growth rate it is a sell. Keep in mind that the inverse of the P/E ratio is the earnings yield, which is a measure of investment return. A stock with a P/E ratio of 12 means that the company generates $1.00 of earnings per $12 of stock value, or a snapshot rate of return on investment of 8.33% (1/12). Similarly, a stock with a P/E ratio of 20 means that the company generates $1.00 of earnings per $20 of stock value, or a snapshot rate of return on investment of 5.00% (1/20).  An investor in the higher-PE stock is willing to accept a 3.33% (8.33-5.00) lower initial rate of return because over time the 8% (20-12) higher annual growth rate will enable him to catch up in total return and even surpass the total return of the investor in the lower-PE stock (assuming the higher growth actually occurs, which is one of the risks).

In any event, no matter how high a company’s current earnings growth rate, it’s unwise to pay a stock price equal to a P/E ratio of more than 40. Wharton finance professor Jeremy Siegel studied the stock performance of the "Nifty Fifty" large-cap growth stocks from the market peak in 1972 until 1998, and concluded that on average a P/E of 40 times was around the highest justifiable price to pay for a good growth stock. A few growth stocks like Coca-Cola and Merck were worth paying a P/E ratio of more than 70, but that is very rare in hindsight and impossible to predict ex-ante (i.e., before the fact). Over the 27-year period of Siegel’s study, Coke and Merck generated annualized total returns of around 16% and grew earnings each year by only 13.5% and 15.1%, respectively, both of which are much-lower numbers than the 70-plus P/E ratios that Siegel says were “warranted” in 1972.

These P/E ratio and earnings! -growth f! igures do not indicate long-term PEG ratios of 4-plus (70/16) that conflict with Lynch’s recommended 1.0 PEG ratio. First, Lynch measured the PEG ratio (both P/E ratio and earnings growth rate) as a snapshot at the time of purchase in 1972 and it’s inconsistent to measure the P/E ratio only at the start but measure earnings growth as a long-term average over a 27-year period. The snapshot earnings growth rates of Coke and Merck were probably much higher than 13.5% and 15.1% back in 1972 when Siegel’s study began, so their snapshot PEG ratios in 1972 could have been closer t0 1.0. The snapshot 1.0 PEG criterion assumes that both earnings growth and the P/E ratio will decline over time, so that a 1.0 PEG ratio in later years will based on a much-lower P/E ratio than what existed at the start. Second, Coke and Merck turned out to be super growth stocks that could sustain high earnings growth for a much longer period of time than the vast majority of stocks, so they proved the exception to the general rule of high earnings growth being unsustainable. No basic valuation model should be expected to accurately value freakish outliers.

Using a P/E Ratio for Stock Valuation Only Works for Companies with Reliable Earnings

In reality, Lynch’s valuation method is too simplistic because it assumes all companies with equal growth rates have equal business risk and that is not the case. One company currently growing earnings at 30% may face a high likelihood of an earnings deceleration in the near future,whereas another company growing at 30% may easily be able to maintain a high growth rate for the foreseeable future. Both companies would be valued the same even though one company’s earnings growth was much more sustainable and that wouldn’t make sense.

Such is the flaw of using a snapshot multiple.

So, I would only consider using a P/E ratio on stable stocks with a prolonged operating history and a modicum of earnings-growth reliability. For value investor Joel ! Greenblat! t, reliable earnings are critical to his stock-valuation methodology:

I care very much about long term earnings power, not necessarily so much about the volatility of that earnings power but about my certainty of "normal" earnings power over time. My goal is to buy a company at a low multiple to normal earnings power several years out and that the company earns good returns on capital at that level of normal earnings. I usually just look at a simple multiple to normalized earnings. If I can buy something at a very low multiple and I have confidence in the earnings stream, I don't have to calculate a DCF to know whether I want to buy it.

“Normal” Earnings Per Share

Now that we’ve established some guidelines for the proper P/E multiple to assign to a company’s “normal” earnings per share, the next issue to be addressed is how to read an income statement to determine what “normal” earnings per share for a company actually are. Often, the earnings per share reported by a company are not normal and must be adjusted before a P/E ratio is applied and a stock value determined.  Stay tuned for Part 2 of How to Value a Stock Using the Income Statement, coming in a few weeks.

A 22% return in one week

When one values a stock correctly and waits for an opportunity to buy the stock at a substantial discount to its intrinsic value, it can be a beautiful thing. Last week, a specialty chemical company recommended in my Roadrunner Stocks small-cap investment service rose 22% on “better-than-expected” earnings. That is, “better than expected” by the analysts on Wall Street! It came as no surprise to me or my Roadrunner subscribers.

My stock-valuation methodology is based on a little-known and proprietary system, similar to the one that made Warren Buffett, Peter Lynch and others rich. It’s taken me 20 years to perfect and the system is complicated, but the results are crystal clear. You can get all of my latest research by clicking here.

Time to Dust Off Universal Display (OLED)

Have you ever noticed how small cap stocks rarely seem to dole out the huge gains investors - and the media - can't shut up about, then once that buzz dies down, the stocks nobody cares about anymore end up going hog-wild when nobody's looking? Yeah, well, you can add Universal Display Corporation (NASDAQ:OLED) to that list of stocks the market mis-times.

OLED was all the rage back in 2011 when the company was a $2.5 billion outfit that struggled to generate $61 million in revenue, and barely turned a profit that year. Yet, shares rallied a stunning 400% leading up to the early-2011 peak price of $63.58, as the market was sure Universal Display Corporation was poised to make a small fortune. Big mistake. Since then, OLED shares were more than cut in half as the company failed to meet ridiculously high expectations. Even at its current price of $34.50, the stock's still only worth 54% of its former highest value. Translation: The thrill is gone. Faith is lost. The party's over. Insert any other "thing's will never be the same again" cliche you want to here - the point is, traders think Universal Display blew its one and only chance to hand out big rewards. Thing is, it didn't. Slowly and quietly, while few have noticed, this stock has dropped hints that it's about to finally reward patient shareholders.

Just a little background... Universal Display Corporation makes materials and technologies used in flat panel screens. Its claim to fame is that its technology works on flexible devices, and can bend, twist, and flex without breaking. The display, made by organic matter, produces a higher-quality image than most - and the most common - LCD screens. Though it's not the only revenue-bearing technology OLED has, it's the highest-profile technology that Universal Display offers, and has been underscored by the fact that the Apple iWatch has a design patent on a wrap-around wristphone, while LG and Samsung have both announced an impending flexible smartphone screen. [LG is a competitor of OLED, while Samsung is a partner of Universal Display Corporation's.]

That's not the interesting part of the story here, however. It's the catalytic part, but not the interesting part.

The interesting, and bullish, part of this story is how as of August of last year OLED shares have pushed past the falling resistance line that's been in place since 2011. Better still, that uptrend materialized thanks to some help from a rising support line that's been in place since June of last year. In the meantime we've made higher highs, and it even looks like the 200-day moving average line (green) is providing support for the new rally.

The clincher is the fact that Universal Display shares have a ton of room to use before bumping into its new, rising resistance line.

With all of that being said, it's worth adding that Universal Display Corporation doesn't have to be a merely technical trade - the fundamentals are pointed in the right direction too. The pros expect the company to earn $1.07 per share of OLED in 2014, marking the fourth straight year of profits, and the fifth straight year of improved earnings. It's not a value idea by any means, with a trailing P/E of 49 and a forward-looking P/E of 31.7. But, with earnings expected to grow 53% this year and at a 55% clip next year, the frothy valuations seem quite normal.

For more trading ideas and insights like these, be sure to sign up for the free SmallCap Network newsletter. You'll get stock picks, market calls, and more, every day. Here's what you've missed recently.

6 Picks in Seasonally Strong Sectors

Just as different markets have differing seasonalities, so do various sectors, and it helps to keep these seasonal tendencies in mind so you can establish positions in stocks that are about to enter their period of strength, says MoneyShow's Tom Aspray.

It has already been a much different stock market in 2014 than it was in 2013. The Spyder Trust (SPY) moved sideways until the latter part of January before dropping almost 6% in just 11 days. The rally from those lows has pushed the SPY almost 8% higher as the market waits for the latest FOMC announcement. The new high in the NYSE A/D line on Tuesday is a bullish sign for the market.

These wide swings are what I was expecting this year as it is more like the price action of 2012. The correlation between individual stocks and the S&P is also mush different this year as it has dropped sharply. Until the latter part of last summer, most stocks moved with the market pushing the correlation close to 1.0. In early January, the 65-day average had dropped to 0.52, well below the three-year average.

This is a plus for stock pickers and it is equally important that you look for stocks in the best sectors. There are three sectors that I like, which are typically strong seasonally until late April and May. In this week's trading lesson, I would like to take a seasonal and technical look at these sectors and review six specific recommendations. (Editor's Note: many were tweeted before the opening on March 19, 2014).

The January correction hit the Select Sector SPDR Consumer Discretionary (XLY) hard as it dropped from a high of $66.85 to a low of $61.03. The rebound has been equally sharp as XLY recently made a new high of $67.85. The seasonal analysis shows that XLY forms a major bottom on or around October 11 (line 1) and then rallies up through January 10.

The next seasonal low typically comes in late February as XLY then rallies sharply until the end of April, line 2. Last year, XLY had a six-week correction from the spring high to the June low and then continued to move higher and higher into the end of the year.

This seasonal tendency is one of many that are included in John Person's latest book Mastering the Stock Market. John suggested I look at the department stores, which have a strong seasonal trend into the end of April. He also mentioned that the last quarter of employment data reflected an uptick in female employment that could add support to retail stocks that focus on women's apparel.

The chart of the department store group typically bottoms on October 25 and then tops on April 25. Given the fact that the weather has prohibited many from shopping, I would not be surprised to see them stay strong until early summer. I am looking for similar demand to hit all of the retail space in the next few months.

NEXT PAGE: Picks in Retail

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Green Bonds Now Out for Auto Industry Financing

Citigroup Inc. (NYSE: C) and Toyota Motors Corp. (NYSE: TM) are said to be making history with the first “green bond” of asset-backed securities in the auto industry. Green bonds are securities or contracts where the proceeds are applied exclusively toward projects and activities that promote climate or other environmental sustainability initiatives. Citigroup and 12 other banks introduced new Green Bond Principles earlier in 2014.

Citigroup’s announcement shows that it has now successfully closed Toyota Financial Services’ (TFS) first ever asset-backed green bond issuance — for a sum of $1.75 billion. The deal was also said to be upsized from a prior $1.25 billion benchmark, due to strong investor demand.

This may not be stock-moving news for Citigroup or Toyota, but this could mark the start of a new trend. As newcomers like Tesla Motors Inc. (NASDAQ: TSLA) begin to take increasingly more share from the likes of Ford Motor Co. (NYSE: F) and General Motors Co. (NYSE: GM), you could start to see more green asset-backed securities issued by the auto finance industry.

Toyota said that it plans to use the net proceeds to acquire retail installment sale contracts and lease contracts to finance new Toyota and Lexus gas-electric hybrid or alternative fuel powertrain vehicles. Citigroup has pioneered green bonds as a new asset class in the asset-backed securities market. The process is said to promote the development of the green bond market and help investors evaluate the environmental impact of bonds.

Again, this will not be immediate market-moving news for the auto companies, nor for the banks that promote the offerings. That being said, this should allow more companies to get better financing mechanisms in place for getting their hybrid, electric and alternative energy cars out to the masses.

Borrowers paying mortgages over credit cards again

In September, borrowers started making their mortgage payments a priority again.

NEW YORK (CNNMoney) As the housing market and hiring continue to recover, consumers are making their mortgage payments a priority again.

A growing number of borrowers are paying off their home loans before their credit card debts, reversing a trend first seen in September 2008, according to a TransUnion study that examined the delinquency rates of borrowers with mortgages, auto loans and credit card debt.

The delinquency rate for mortgages fell to 1.71% in December, down from 3.32% in September 2008. Meanwhile, the rate of credit card delinquencies was 1.83% in December, down from 3.29% in 2008.

After the housing bubble burst, many borrowers owed more on their homes than they were worth and stopped making mortgage payments a priority.

"As unemployment rose and home prices cratered, many borrowers chose to value their credit card relationships above their mortgages," said Ezra Becker, vice president of research and consulting for TransUnion. "When people lose jobs they need credit cards as a source of liquidity."

  3 reasons to ignore the bad housing news

Yet, last September the delinquency rates began to shift to pre-recession norms: Mortgage delinquencies fell to 1.79%, while credit card delinquencies came in at 1.86%, TransUnion found.

One debt borrowers continue to prioritize over everything else is auto loans, mainly because they rely on their cars to get to work.

In December, the delinquency rate on auto loans was 0.87%, compared with 1.65% in September 2008.

The economic recovery, has eased loan payment problems of all kinds. Unemployment, at a February rate of 6.7%, is more than three percentage points lower than it was in September 2009 when mortgage delinquencies reached a peak of 4.92%, according to TransUnion's data.

Stocks Hitting 52-Week Lows

Related FSYS Earnings Scheduled For March 14, 2014 Fuel Systems Offers Bi-Fuel CNG Fuel System for Chevrolet Cruze Sedan Related CCCL Morning Market Losers Earnings Scheduled For May 14, 2013

Fuel Systems Solutions (NASDAQ: FSYS) shares reached a new 52-week low of $10.735 after the company reported downbeat Q4 results.

China Ceramics Co (NASDAQ: CCCL) shares fell 2.40% to touch a new 52-week low of $1.63. China Ceramics shares have dropped 35.27% over the past 52 weeks, while the S&P 500 index has gained 19.70% in the same period.

Boardwalk Pipeline Partners LP (NYSE: BWP) shares fell 1.10% to touch a new 52-week low of $12.11. Boardwalk Pipeline Partners will be removed from the Alerian Energy Infrastructure Index following the close of business on March 21.

Ply Gem Holdings (NYSE: PGEM) shares reached a new 52-week low of $11.48 after the company reported wider-than-expected Q4 loss and issued a weak Q1 revenue forecast.

Posted-In: 52-Week LowsNews Movers & Shakers Intraday Update Markets

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

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Madoff jury's questions spark legal sparring

NEW YORK — Jury deliberations in the trial of five former Bernard Madoff employees ended for the week with prosecutors and defense lawyers sparring over the answer to jurors' questions about the structure of the Ponzi scheme architect's firm.

Before leaving Manhattan federal court Friday, the panel wrote a note asking U.S. District Court Judge Laura Taylor Swain whether three charges in the 31-count criminal indictment referred only to Madoff's phony investment advisory division while three others related solely to his legitimate broker-dealer business.

Evidence during the trial showed that the divisions were intertwined, with Madoff siphoning money from unsuspecting investment clients to prop up his financially struggling broker-dealer wing.

Four of the ex-employees charged in the conspiracy worked chiefly or exclusively in the investment advisory division. The fifth worked largely on the broker-dealer side, though he also had some duties in the other business arm.

All are accused of knowingly participating in and profiting from the decades-long scam that stole an estimated $20 billion from thousands of average investors, celebrities, charities, financial funds and others.

Prosecutors wrote a proposed five-paragraph jury response that Assistant U.S. Attorney Randall Jackson said was drawn largely verbatim from legal instructions Swain gave the jury before deliberations began on Monday.

Defense lawyers, however, recommended that the judge tell the jurors that guidance on their questions could be found in written copies of her legal instructions — which were given to jurors at the start of the verdict phase.

Swain told both sides to put any additional legal arguments on the issue in writing, with final submissions due by noon Sunday.

The debate capped a week in which deliberations stalled for three days due to one juror's illness. The decision-making phase resumed Friday after defense lawyers and prosecutors agreed to proceed with 11 jurors, one short of! the usual number. Taylor Swain approved the agreement.

The five-month trial is one of the longest white-collar crime cases in Manhattan federal court history. It's also the first Madoff-related criminal proceeding to be weighed by a jury. The disgraced financier pleaded guilty after the scam collapsed in December 2008. He's now serving a 150-year prison term.

The former co-workers face decades behind bars if they're convicted on conspiracy, securities fraud, tax evasion and other charges.

They include Daniel Bonventre, Madoff's former operations manager; Annette Bongiorno, who oversaw accounts of her boss' biggest investment clients; JoAnn Crupi, who had day-to-day responsibility for the investment division bank account; and former Madoff computer programmers Jerome O'Hara and George Perez.

Jobless claims rise slightly

WASHINGTON (AP) — The number of people seeking U.S. unemployment benefits rose 5,000 last week to a seasonally adjusted 320,000, which is close to pre-recession levels and suggests a stable job market.

The four-week average of applications, a less volatile figure, fell 3,500 to 327,000, the lowest since late November, the Labor Department said Thursday.

Applications are a rough proxy for layoffs. Their current pace suggests that companies are confident enough about economic growth to keep their staff levels.

About 3.35 million people received unemployment benefits as of March 1, the latest figures available. That's about 101,000 fewer than the previous week.

Jobless claims at their current levels are historically consistent with monthly job growth or roughly 200,000, said Joshua Shapiro, chief U.S. economist at MFR.

Hiring accelerated in February after two months of meager jobs gains. Cold winter weather in January and December limited consumer spending, home buying, and, consequently, economic growth. Employers added 175,000 jobs last month, up from 129,000 in January and close to the monthly average of the past two years, the Labor Department reported recently.

The unemployment rate rose to 6.7%. But the tenth of a percentage point increase happened, in part, for a positive reason: more people began looking for work and entered the job market. Employers didn't immediately hire most of them, causing the unemployment rate to increase. But the fact that they started job hunting suggests they were optimistic about their prospects.

Employers advertised more jobs in January, a separate government report said earlier this week, suggesting that hiring will likely remain steady in the coming months.

The weather did force about 6 million people with full-time jobs to work part-time in February. Many of their paychecks will shrink, likely weighing on spending.

That has contributed to economists forecasting that economic growth will be at an annual rate of 2%! or less in the first three months of this year, down from 2.4% in the final three months of last year. But as the weather improves, most analysts expect growth to rebound to an annual rate near 3%.

Toyota to pay $1.2B to settle criminal probe

The Justice Department announced Wednesday that Toyota will pay $1.2 billion to settle a criminal probe of its handling of the reports of unintended acceleration in its vehicles and subsequent recalls beginning in 2009.

The settlement -- the largest criminal penalty imposed on a car company in U. S. history -- was announced by the Justice Department and Toyota this morning.

"Today we can say for certain that Toyota intentionally concealed information and misled the public about the safety issues behind these recalls," Attorney General Eric Holder said in announcing the settlement.

"Put simply, Toyota's conduct was shameful," he said.

The investigation was spearheaded by the U.S. Attorney's office and FBI in New York.

CRIMINAL PROBE: Key documents released in Toyota settlement

FIRST TAKE: Toyota's quagmire comes to an end as GM's just gets started

Christopher Reynolds, chief legal officer, Toyota Motor North America, said in a statement this morning: "Entering this agreement, while difficult, is a major step toward putting this unfortunate chapter behind us. We remain extremely grateful to our customers who have continued to stand by Toyota.."

The settlement calls for the government to ultimately dismiss its case in exchange for Toyota's payment and continued cooperation. The deal also calls for an independent monitor how Toyota handles safety communications, its internal handling of accident reports and its processes preparing and communicating technical bulletins.

Toyota says it will record $1.2 billion in after-tax charges against earnings in the fiscal year ending March 31.

Some independent safety watchdogs sounded impressed.

The "settlement with Toyota is a game changer," says Clarence Ditlow of the Center for Auto Safety. "Until today, auto makers faced insignificant fines and no criminal penalties under the Vehicle Safety Act."

He points out, too, that if Toyota doesn't follow through, executives will face the threat of prison! .

The federal criminal probe was independent of lawsuits and federal safety regulator and congressional probes of the Toyota sudden acceleration recalls and looked strictly at whether Toyota provided false or incomplete statements to the National Highway Traffic Safety Administration. It also looked at how it handled complaints.

Toyota has already paid at least $1.6 billion to car owners for lawsuits in the cases and paid federal fines of $16.375 million in 2010 and a $17.35 million fine in 2012 for delays in safety defect reporting to NHTSA.

"While the (criminal probe) price tag represents a costly resolution, Toyota can put this issue behind it to fully focus on current and future challenges in a highly competitive market," says Karl Brauer, senior analyst for Kelley Blue Book, in a statement.

The cases involve instances in which Toyota accelerated when the drivers did not intend it, in essence, becoming runaway cars. After an off-duty California Highway Patrol officer and three passengers in a Lexus ES were killed near San Diego in 2009, other reports surfaced.

Toyota blamed floor mats that can jam under the gas pedal and potentially sticky accelerator mechanisms in several models and did multiple recalls covering both problems.

Safety experts also alleged that there were problems with the vehicles' engine electronics. But an extensive investigation by federal safety regulators found no evidence that that the electronics were at fault for unintended acceleration.

Still, some are unsatisfied.

"The coverup is still there on the electronics issue," says Sean Kane, an auto safety expert for Safety Research and Strategies. "This (government penalty) sends an important message, but it's a mixed message."

On one hand, he says, automakers are being told they need to be more diligent on safety issues and reporting them or face severe fines. On the other, government investigators never pushed engineering analyses hard enough to find the root cause of the s! udden acc! eleration cases.

Reynolds said in his statement, however, that Toyota has retooled in the wake of the recalls. "We have made fundamental changes across our global operations to become a more responsive company – listening better to our customers' needs and proactively taking action to serve them."