Stock Investing Vs Real Estate Investing Profits

BofA's Asset Sales Sink Profits

January 19, 2012, 7:25 AM EST By Hugh Son

(Updates shares in the seventh paragraph.)

Jan. 18 (Bloomberg) -- Bank of America Corp.’s $33 billion of asset sales last year, designed to help meet international capital standards, may slice at least $2.8 billion from 2012 profit that the firm also needs to reach its target.

That’s probably more than the bank earned before taxes in all of 2011, a year marred by the worst quarterly loss for the Charlotte, North Carolina-based company. The amount, based on estimates compiled by Bloomberg, reflects the loss of income from divestments including a stake in a Chinese lender, a Canadian credit-card unit and an insurer of foreclosed homes.

“There are consequences to downsizing the balance sheet, and that’s lower interest income,” David Trone, an analyst at JMP Securities LLC, said in an interview. “Management gets into situations where they have to make uneconomic decisions. It reflects how intense the pressure is for them.”

Chief Executive Officer Brian T. Moynihan boosted asset sales at the second-biggest U.S. bank from $20 billion in 2010 to avoid issuing stock that would dilute current shareholders. He may end up doing that anyway: With fewer unwanted assets left to sell, Moynihan is now more reliant on earnings to generate capital. Selling shares or even crucial businesses can’t be ruled out if new mortgage losses wipe out profit.

“The risk of having to initiate core asset sales or a partial breakup of the company is rising with the persistent pressure on core earnings,” said Todd Hagerman, an analyst at Sterne Agee Group Inc. in New York, in a Dec. 21 note.

Selling Pieces

Moynihan, 52, started selling pieces of the bank as costs from shoddy loans inherited in the 2008 acquisition of Countrywide Financial Corp. soared to $40 billion. He faces another $12 billion to $32 billion in such expenses, according to a Jan. 5 note by Keith Horowitz, an analyst at Citigroup Inc. in New York, who rates the lender a “buy.” Trone, with a “market perform” rating, sees as much as $40 billion more.

While the lender probably can manage these charges over time, regulators could force Bank of America to raise capital, said a person with knowledge of the firm’s planning. The bank is more likely to choose a stock sale than sell a core business, particularly if shares rise above $10, said the person, who declined to be identified because the process is private. The stock rose 2.3 percent to $6.63 at 10:09 a.m. in New York.

Quarterly Results

Bank of America reports fourth-quarter results tomorrow. The firm may post pretax profit of $3.68 billion, according to the average of estimates by 13 analysts surveyed by Bloomberg. Full-year totals are likely to be much less because losses in the first nine months were $2.66 billion.

According to analysts’ estimates, Bank of America forfeited $1.5 billion a year in pretax earnings when it sold its non-U.S. credit-card unit. Also gone is the bank’s stake of about 10 percent in China Construction Bank Corp., that nation’s second- largest lender, which paid a $774 million annual dividend; the Balboa insurance unit, which contributed $410 million, and $75 million earned from shares in asset manager BlackRock Inc.

Jerry Dubrowski, a Bank of America spokesman, confirmed Bloomberg’s estimate of the income drop. He declined to say whether the bank would sell core assets or offer new shares to investors if pushed by regulators to raise more capital.

More earnings may have been sacrificed with the sale of private-equity stakes in NPC International Inc., the biggest U.S. Pizza Hut franchisee, and hospital operator HCA Holdings Inc. The company didn’t provide estimates on how much profit those holdings contributed.

‘Growth Company’

Moynihan told investors in March that the bank had returned to being a “growth company” and could earn $35 billion to $40 billion in pretax profit when businesses recover.

Showing how far Bank of America is from full recovery, the company probably made just $2.6 billion in pretax income for 2011, according to Bloomberg estimates, after a record second- quarter loss stemming from mortgage settlements. Analysts expect pretax profit of $16.2 billion in 2012 and $22.6 billion in 2013, about half of Moynihan’s target.

Bank of America needs the money to help reach higher levels of capital demanded by regulators as a cushion against losses from future financial crises. Under new and more stringent rules approved by the Basel Committee on Banking Supervision, the firm may have to retain more than $40 billion in earnings by 2019. The figure could drop if the bank sells more of its riskiest assets, which would cut the need for capital, Dubrowski said.

‘Earnings Power’

“It’s an important question for investors -- what’s their earnings power?” said Jefferson Harralson, an Atlanta-based analyst at KBW Inc. with a “market perform” rating on the lender. “What kinds of returns can shareholders expect?”

Bank of America, which held the title of biggest U.S. bank by assets until last year, is shrinking faster than rivals. It pared assets by $45 billion, to $2.2 trillion, in the first nine months of 2011. Citigroup contracted by $22 billion, to $1.9 trillion, over the same period, selling holdings including student loans.

Moynihan is seeking to make Bank of America a leaner, more focused company amid stagnant revenue and sluggish U.S. economic growth. In the process, he’s dismantling some of the more than $130 billion in acquisitions made by his predecessor, Kenneth D. Lewis, who was criticized by investors for overpaying when he bought Countrywide and Merrill Lynch & Co. as those firms were reeling toward collapse.

‘Hot Coals’

The divestments pushed the bank’s Tier 1 capital above 9 percent by the fourth quarter, more than double the level during the 2008 financial crisis. Tier 1 capital, which includes common stock, reserves and retained earnings, is a measure of a bank’s financial strength and ability to absorb unexpected losses. The lender used proceeds to trim debt, which reduces interest costs, Dubrowski said. Long-term debt declined by $50 billion to $399 billion as of Sept. 30, the bank said in November.

“What Moynihan has been doing must be as fun as walking on hot coals, but he keeps walking,” said Greg Donaldson, chairman of Evansville, Indiana-based Donaldson Capital Management LLC, which has $500 million in assets including Bank of America shares. “There’s a grudging, arm’s-length respect for him continuing to fight.”

Moynihan told employees at a town-hall meeting in October that he had largely completed his plan to spin off name-brand holdings. The company will now focus on cutting so-called risk- weighted assets, including mortgage-servicing contracts and credit-card loans, he said.

“We’re getting to the point where the franchise we have is in the condition we want it in,” Moynihan said at the time. “There are still non-core assets we’re getting rid of, but it’s loan portfolios, things of less note, and that will take place through the next 12 to 18 months.”

Reducing Branches

Bank of America could break up a segment of its retail- banking business if regulators required a capital raise, said Thomas Brown, CEO of New York-based Second Curve Capital LLC, in a Dec. 9 Bloomberg Television interview. In June, the bank told the Federal Reserve it could reduce branches to bolster finances in an emergency, said a person briefed on the discussions.

“There’s no question that Bank of America is worth a lot more broken up than it is today,” said Brown, a former Wall Street banking analyst and now a Bloomberg contributing editor.

Meanwhile, JPMorgan Chase & Co. CEO Jamie Dimon, 55, has said his firm, now the biggest U.S. bank by assets, would expand beyond its 5,508 locations to capture more deposits. Bank of America had 5,715 retail centers as of Sept. 30.

Merrill Lynch

Bank of America could also find a buyer for its wealth- management unit, whose 16,722 financial advisers each produce about $890,000 in annual revenue, Mike Mayo, a New York-based analyst at CLSA Ltd., said last week in an interview. Moynihan has said he won’t undo any part of the Merrill Lynch takeover, which gave the firm the opportunity to sell bank products to brokerage clients.

The CEO made other decisions last year that boosted capital while potentially shrinking profit for stockholders.

In August, Moynihan agreed to pay $300 million a year to Warren Buffett’s Berkshire Hathaway Inc. in exchange for a $5 billion investment. That deal includes the option for Berkshire to buy 700 million shares in the lender at $7.14, which could make him the biggest shareholder and dilute other investors.

The bank issued 400 million shares to investors in private exchanges for preferred securities in November and December. While the moves are dilutive, they lower interest payments, which benefits investors, the bank has said. The company has more than 10 billion shares outstanding.

New Shares

The lender may issue another $15 billion in stock this year to meet capital requirements, Matthew O’Connor, an analyst at Deutsche Bank AG in New York, said in a Jan. 4 note. Further share exchanges may happen in amounts “not expected to be material,” Bank of America said last month in a filing.

Moynihan risks further eroding his standing among investors if he issues more stock, after saying in August that the bank won’t “continue on a course of diluting our shareholders” as it had done after government bailouts in 2009.

Concern that Bank of America will issue new shares has plagued the stock, which sank 58 percent last year, the worst performance in the Dow Jones Industrial Average. This month, Bank of America has surged 17 percent, the most of the 30 companies in the Dow index, as investors bet that an improving U.S. economy will buoy earnings.

“All they have to do this year to have the stock rise significantly,” said KBW’s Harralson, “is show that the current share count is close to the eventual one.”

--With assistance from Donal Griffin in New York. Editors: Rick Green, Robert Friedman

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Rick Green at rgreen18@bloomberg.net

View the original article here

Catastrophes Slash U.S. Insurers’ Profits

December 28, 2011, 12:03 AM EST By Noah Buhayar

Dec. 27 (Bloomberg) -- U.S. property and casualty insurers’ profitability fell to the lowest level since 2008 as losses from natural disasters exceeded gains in sales and investment income.

Insurers posted a 1.9 percent annualized rate of return on policyholders’ surplus, or cushion against unexpected claims, in the nine months through Sept. 30, according to a statement today from the Property Casualty Insurers Association of America. That’s the lowest since the 1.2 percent return in 2008, when the industry faced losses from Hurricane Ike and on investments.

Travelers Cos. and Allstate Corp. are among insurers raising prices for coverage to boost shareholder returns after claims from storms and low interest rates pressured results. Policy sales rose to $115.7 billion in the third quarter from $111.1 billion a year earlier, according to PCI.

The increase in sales “was blunted somewhat by deteriorating underwriting results,” Robert Gordon, PCI’s senior vice president for policy development and research, said in the statement. “Current low interest rates and the Federal Reserve’s pledge to keep interest rates low for some time to come continue to put pressure on insurers’ investment income.”

Catastrophes, including Hurricane Irene, which made landfall in North Carolina in August then lashed the U.S. East Coast with rain and winds, cost the industry $9.5 billion in the third quarter. That compares with $2.9 billion a year earlier.

Net investment income rose 1.4 percent industrywide to $11.7 billion in the third quarter, according to the statement, which was jointly produced with ISO, a unit of Verisk Analytics Inc., and the Insurance Information Institute, a trade group.

Travelers, Allstate

Travelers Chief Executive Officer Jay Fishman said at an investor conference this month that his company is driving “for improved rate and terms” across its business. Tornadoes in April and May wiped out the New York-based insurer’s second- quarter profit. Irene contributed to a drop in net income in the third quarter.

Allstate, the largest publicly traded U.S. home insurer, said in October it received approval from regulators to boost rates for its main line of homeowners’ coverage in 15 states in the third quarter. The premium increases averaged about 14 percent, the Northbrook, Illinois-based insurer said.

Insurers’ net income plunged in the period 69 percent from a year earlier to $3.2 billion, according to the statement.

--Editors: Dan Reichl, William Ahearn

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

View the original article here

Mini-Size Treat Trend Pads Profits

May 20, 2011, 9:05 AM EDT By Leslie Patton

May 20 (Bloomberg) -- Mini-size me. American restaurants infamous for dishing out a day’s worth of calories in a single meal are selling cheaper, trimmed-down portions to snag calorie- conscious customers.

“The small is always just a little bit too much,” said Jill Glascott, 40, polishing off a Snickers candy-bar mini Blizzard at a Dairy Queen in Chicago last week with her two children. With the 7-ounce mini, “you don’t feel as guilty,” she said.

Berkshire Hathaway Inc.’s Dairy Queen promoted the baby Blizzards last month, giving diners about half the calories of the small 12-ounce size. In March, Starbucks Corp. unveiled the “petite” line of mini cupcakes, whoopie pies and lemon squares for $1.50 each; the junior lemon square has 120 calories, compared with 490 for Starbucks’s lemon pound cake.

Downsized desserts make diners feel better about tacking a treat onto a full meal, and restaurants can make more money off them by charging higher prices, said Michael Keller, chief brand officer at Minneapolis-based Dairy Queen.

“Consumers are willing to pay a little bit of a premium for the mini Blizzard,” Keller said. “That has helped our operators protect their margins.”

Surging ingredient costs are putting restaurant margins under increasing pressure. World food prices rose to almost a record in April as grain costs advanced, leading to price hikes for basics like eggs, meat and sugar. Dairy Queen, which also debuted a smaller milkshake this month, expects its ice cream costs to jump more than 10 percent this year.

Shrinking the snacks lets restaurateurs sell for less without sacrificing profitability, said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago.

Pass It On?

“At the end of the day, they’re unable to pass on the increases to consumers as higher prices, so they’re downsizing meals,” she said.

Restaurants are following the lead of foodmakers, who debuted the concept about seven years ago at supermarkets, selling 100-calorie snack packs of Oreos and Chips Ahoy cookies, says Todd Hooper, a restaurant strategist at Kurt Salmon in New York. A few years later, PepsiCo Inc. copied with 100-calorie Cheetos and Doritos.

Snacks of that size may help put fat-wary customers at ease as they scan menus for an afternoon bite, especially now that more chains are revealing calorie counts on display cases in an effort to be more transparent. Many restaurants serve entrees that clock in at 2,000 calories -- or about an entire day’s recommended intake -- so mini-foods can help balance out the bill of fare, said Dennis Lombardi, executive vice president at restaurant consultant WD Partners in Dublin, Ohio.

McDonald’s Plans

McDonald’s Corp., which hawks several 700-calorie burgers, is also experimenting with how to scale back. The world’s biggest restaurant chain is testing $1.99 chicken bites at some sites in Detroit and has promoted Angus snack wraps, about half the size of the deluxe burger of the same name, to lure diners during mid-afternoon downtimes.

Serving less-hearty helpings may turn off customers who still want big meals. More than 70 million Americans weigh in as obese, according to data from the Centers for Disease Control and Prevention.

“Especially in the U.S., unlike other countries, consumers have gotten used to super-size me,” Mesirow’s Swonk says. There’s also the risk snack-sated diners will spend less as they trade down to cheaper mini-sizes.

Still, some restaurants may sell it as a chance to sample new menu items, says strategist Hooper, which may generate sales gains and repeat visits.

“If you can get a mini, it’s not just the financial risk is down, but the risk of the meal being dissatisfied is reduced,” he said. “It allows you to get out of your rut.”

--Editors: Julie Alnwick, Robin Ajello

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

View the original article here

The Little Book of Bulletproof Investing: Do's and Don'ts to Protect Your Financial Life (Little Books. Big Profits)

Investing do's and don'ts from some of the most recognizable voices in personal finance

It's been a tough year for investors. Many have seen their retirement accounts dwindle dramatically and are looking for a safe way to protect what they have and make back some of what they've lost. That's why the bestselling author team of Ben Stein and Phil DeMuth have created The Little Book of Investing Do's and Don'ts.

When you invest, there are essential things you should do and many things you shouldn't. The Little Book of Investing Do's and Don'ts addresses this issue and shows you how to utilize the fundamentals of finance to achieve success in today's market. This practical guide contains proven advice on navigating today's treacherous financial landscape and will put you in a better position to make more informed investment decisions.

• Includes street-smart advice for the individual investor uncertain about their investment and retirement portfolios
• Written by a experienced team of bestselling authors whose investment advice is accessible to everyone
• Outlines the steps you must take to protect yourself from the financial calamities of modern life

The Little Book of Investing Do's and Don'ts offers quick, easy-to-follow, and entertaining advice for anyone looking to get back on the right investment track.

Price: $19.95

Click here to buy from Amazon

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)

Investing is all about common sense. Owning a diversified portfolio of stocks and holding it for the long term is a winner’s game. Trying to beat the stock market is theoretically a zero-sum game (for every winner, there must be a loser), but after the substantial costs of investing are deducted, it becomes a loser’s game. Common sense tells us—and history confirms—that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost. The classic index fund that owns this market portfolio is the only investment that guarantees you with your fair share of stock market returns.

To learn how to make index investing work for you, there’s no better mentor than legendary mutual fund industry veteran John C. Bogle. Over the course of his long career, Bogle—founder of the Vanguard Group and creator of the world’s first index mutual fund—has relied primarily on index investing to help Vanguard’s clients build substantial wealth. Now, with The Little Book of Common Sense Investing, he wants to help you do the same.

Filled with in-depth insights and practical advice, The Little Book of Common Sense Investing will show you how to incorporate this proven investment strategy into your portfolio. It will also change the very way you think about investing. Successful investing is not easy. (It requires discipline and patience.) But it is simple. For it’s all about common sense.

With The Little Book of Common Sense Investing as your guide, you’ll discover how to make investing a winner’s game:

• Why business reality—dividend yields and earnings growth—is more important than market expectations
• How to overcome the powerful impact of investment costs, taxes, and inflation
• How the magic of compounding returns is overwhelmed by the tyranny of compounding costs
• What expert investors and brilliant academics—from Warren Buffett and Benjamin Graham to Paul Samuelson and Burton Malkiel—have to say about index investing
• And much more

You’ll also find warnings about investment fads and fashions, including the recent stampede into exchange traded funds and the rise of indexing gimmickry. The real formula for investment success is to own the entire market, while significantly minimizing the costs of financial intermediation. That’s what index investing is all about. And that’s what this book is all about.

JOHN C. BOGLE is founder of the Vanguard Group, Inc., and President of its Bogle Financial Markets Research Center. He created Vanguard in 1974 and served as chairman and chief executive officer until 1996 and senior chairman until 2000. In 1999, Fortune magazine named Mr. Bogle as one of the four "Investment Giants" of the twentieth century; in 2004, Time named him one of the world’s 100 most powerful and influential people, and Institutional Investor presented him with its Lifetime Achievement Award.

Price: $19.95

Click here to buy from Amazon