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IRS rulings on medical expense deductions create some oddball results.

For years, the most common tactic for U.S. investors in the bond market was to stick close to home, buying federal, state and corporate bonds. But now some are venturing halfway around the world in the search for higher returns.
The reason: Some nations now have interest rates that are far higher than they are in the U.S. Stable places such as South Korea, along with up-and-coming nations like Brazil, have manageable levels of debt (unlike many U.S. states and companies) but higher interest rates. This gives U.S. investors an incentive to buy their bonds. In Australia the 10-year go
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vernment bond now pays about 5.7 percent, compared with 3.4 percent for a 10-year U.S. Treasury.
In South America, Brazil’s seven-year government bond yields 13 percent in the local currency, the real. This fat yield reflects the volatile nature of the real. “We’re in risk-taking mode,” says Chris Diaz, co-manager of the $247 million ING Global Bond fund, who has invested 13 percent of the fund’s assets in Brazilian debt. Investors can get these bonds individually if they have enough money in their brokerage account, but for most investors, a foreign bond fund might be the best option. Don¹t forget to tell the IRS, too. Investors must report all earnings from foreign investments, whether it comes from bonds or bond funds.
Funds With Foreign Flavor

Pimco Foreign Bond
(PFOAX and PFUAX)One-year return: 19.3 (PFOAX); 31.0% (PFUAX)Expenses: $115 per $10,000(PFOAX); $130 per $10,000 (PFUAX)Comment: Both funds invest in established overseas economies. One hedges against foreign currency fluctuations (PFOAX); the other does not.

Templeton Global Bond
(TPINX)One-year return: 25.0%Expenses: $92 per $10,000Comment: The diverse fund¹s largest holding is in South Korean Treasury bonds. Its currency exposure is nearly evenly split between the U.S. dollar and foreign currencies.
SMARTMONEY ® Layout and look and feel of are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 - 2009 SmartMoney. All Rights Reserved.

RadioShack shares shoot higher after margins improve, but profits fell and sales slipped only slightly. Too late to buy this one.
When selling gets excessive in an issue that's been trending higher, the snapback is usually powerful. Look at financials and biotech.

Unless you’ve been living in a mine, it would have been hard to miss gold’s most recent glittering run. Increasingly, people who would have never considered the stuff as an investment are pondering whether to buy it. But those who haven’t yet figured out if they want to join the gold party might be surprised at the indicator some pros are looking to for the answer: the boring, not very glamorous 10-year Treasury bond.
In theory, the direction of both gold prices and Treasury yields reflects what investors think about inflation and the health of the U.S. economy. B
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ut these days it appears the two are looking at decidedly different facts. While gold prices have soared to around $1,059 per ounce, the yield on the 10-year Treasury is only 3.4 percent, lower than early in the summer and lower than even a year ago. Gold’s steep price indicates that many buyers are sure the U.S. government’s trillion-dollar deficit will lead to rampant inflation and a potential collapse of the U.S. dollar. Since gold holds its worth if the dollar loses value, it has been a haven for fearful investors for decades. But bond investors don’t seem to be sweating at all. If they were really worried about inflation, analysts say, bondholders would demand much higher interest rates on Treasurys. “In one market they’re ignoring inflation’s impact, and in the other they’re banking on it,” says Jeffrey Kleintop, chief market strategist at LPL Financial.
So who’s right? Over the long run, Warren Buffett and others say higher inflation is inevitable unless the government curbs spending (good luck with that). If that’s the case, experts say a little gold, perhaps 5 percent of a portfolio, can provide a good hedge against a decline in the value of the dollar. (Individual investors can get the shiny yellow metal easily enough through an exchange-traded fund such as the SPDR Gold Shares (GLD) or buy gold coins directly from the U.S. Mint.) In the short term, however, the bond guys may be right. The recession has left a lot of idle factories and excess inventory, so even if the economy does come back, ample supplies of numerous goods, such as houses and cars, could keep a lid on inflation. That argument trashes the rationale for the most recent run-up in gold. And based on supply-and-demand alone, gold should be trading between $680 and $880 an ounce, says Jon Nadler, senior analyst with commodities dealer Kitco Metals. Recent history certainly favors the bond guys. In the spring of 2008, many economists and investors were afraid of inflation, and gold prices soared toward $1,000. But inflation remained in check, and gold’s price tumbled more than 30 percent in a matter of months. Bonds? Yields fell dramatically, and investors in Treasurys made a killing.
SMARTMONEY ® Layout and look and feel of are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 - 2009 SmartMoney. All Rights Reserved.

Sometimes it's better not to exercise your options. Here are four reasons why.
A loonie too strong and a dollar too weak cause intelligent men to ponder how a gold standard might promote currency stability.
British Recession Keeps On Going On

GOOD MORNING. Stocks in Asia closed higher today; U.S. futures are pointing to a mixed open.
Europe’s economy had shown some signs of recovery lately, but things may not be going as well across the English channel. The U.K. economy posted a surprise 0.4% contraction in the third quarter, according the Office for National Statistics, extending the contraction to a sixth straight quarter and marking the longest recession since at least 1955.
The contraction was a shocker because economists, virtually across t
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he board, were expecting a gain, averaging 0.2%. Britain’s economy had contracted 0.6% in the second quarter while Germany and France eked out gains, raising hopes that Britain would follow suit. But Britain’s services sector, which account for 76% of the economy, shrank 0.2 percent. And other sectors also fizzled, with industrial production down 0.7% and construction slumping 1.1%. All in all, the GDP report was “very disappointing,” says Vicky Redwood, U.K. economist at Capital Economics in London. British stocks pared some of their gains after the news came out, though the FTSE was still up roughly 1% around midday. The British pound weakened, falling 1.3% to $1.646.
Economists say the figures were surprising because Britain had shown some signs of health. Business and consumer confidence picked up in the quarter, points out Redwood. Equity prices have been rising, and the housing market was starting to bounce back. The British government had taken aggressive steps to boost the economy too, including a $30 billion stimulus package, sales tax cuts and interest rate cuts (bringing rates to record lows around 0.5%). The latest figures, however, suggest the economy could be “very sluggish” for some time, says Redwood, lagging the rest of Europe, though she expects a slight GDP gain in the fourth quarter.


  • Amazon’s (AMZN) quarterly profit blew past Wall Street estimates on Thursday and the company said holiday sales could come in well above expectations. Amazon shares soared 15% in after-hours trading to their highest level in nearly a decade. LINK

  • Whirlpool (WHR) reported a higher-than-expected quarterly profit as cost cuts offset weak sales at the world's biggest appliance maker. Net income fell to $87 million, or $1.15 a share, in the third quarter, from $163 million, or $2.15 a share, a year earlier. Analysts were expecting a profit of 77 cents a share. LINK

  • Schlumberger (SLB), the world’s largest oilfield-services provider, said third-quarter profit fell 48% as a drop in oil prices forced producers to slash spending. The company earned 65 cents a share, down from $1.25 a year earlier, beating estimates of 61 cents a share. LINK

Fingers Crossed for Home Sales

Hopes for a real estate recovery took a hit from Tuesday’s disappointing data on housing starts, but today’s release of existing home sales could provide some encouragement. After four months of gains, existing home sales dipped 2.7% in August to a 5.1 million annual rate. Analysts expect September sales to rise to a 5.35 million annual rate.
Last-minute takers for the first-time homebuyer tax credit should still boost existing home sales for September, however, says Robert Johnson, associate director of economic analysis at Morningstar. “People that have that first time buyer credit money burning a hole in their pocket, they can’t buy a new home” because it wouldn’t be finished in time, Johnson says.
Another good sign for September numbers: Pending home sales. They have been increasing for seven straight months, according to the National Association of Realtors, with a 6.4% gain in August pushing the index to 103.8. That, combined with the dip in completed sales in August, bodes well, says Beth Ann Bovino, a senior economist at Standard & Poor’s. “There could be a pullback later if the first time homebuyers program is not extended,” Bovino says, but “there are some signs of stabilization in the markets.”
Disappointing data on the real estate market has hit the stocks of homebuilders such as Lennar (LEN), Pulte Homes (PHM), or Toll Brothers (TOL). Now, many analysts are waiting for real estate to steady as a key to a broader economic recovery. “I think it’s important that housing stabilize, I think it’s important to people’s confidence, it makes them feel better about their balance sheets,” Johnson says. Over the winter months when the real estate market is typically slow, investors can focus on consumer spending to see if signs of improvement over the summer have indeed made consumers more confident, he says.
SMARTMONEY ® Layout and look and feel of are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 - 2009 SmartMoney. All Rights Reserved.

Optimism indicates things are better than headlines suggest.

Mutual funds don’t lack for reporting requirements. Ask anyone who has struggled to un-wedge a bulky prospectus from his mailbox. An army of math-checkers – fund company compliance officers, independent accountants and government auditors – keep the numbers that fill those reports trustworthy. If a fund you invest in says it made 20% year-to-date, you can believe it.
Don’t be as confident about the long-term returns boasted in advertisements. A new study makes clear how misleading they can be.
Investors have long known about “incubator” f
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unds and how they distort returns through a phenomenon known as survivorship bias. A mutual fund family wishing to launch a new fund may quietly nurture several at a time. The funds that beat market averages are eventually marketed while ones that do poorly get closed. Like dead men, abandoned incubator funds tell no tales.
The result is an upward bias in returns for funds that made it out of incubation, and in average returns for fund families that incubate, as well as for the broad mutual fund universe. Past returns, more than any other factor, attract investor dollars, studied have long shown. And the number of dollars under management decides the profits of mutual fund families.
Government regulators frown on fund incubation but fail to prevent it. In response to a citizen query in 1997, the Securities and Exchange Commission stated that “incubator fund performance should not be included in a mutual fund’s prospectus in the absence of extremely clear disclosure explaining the sponsor’s purpose in establishing the incubator fund.” But it defined incubator funds as ones that aren’t registered with the SEC and that exist for the purpose of generating performance records. Fund families can side-step the definition by registering incubator funds but keeping mum about them--not sending details to Morningstar and other data-reporting companies, and relying on employees for seed money. They can also launch a fund in each of several different asset categories, instead of several funds in the same category, to reduce the appearance of purposely launching more funds than they need.
Richard Evans, a professor at the University of Virginia’s Darden School of Business, studied the effects of incubator funds over the decade ended 2005 and reported his findings in a paper scheduled for publication early next year in the Journal of Finance. He found that 23% of new funds were incubated, and that these outperformed non-incubated funds by an average of 3.5 percentage points a year, adjusted for risk. After the incubator funds were hatched to the public, however, the performance edge disappeared. This finding stands opposed to a longtime claim of the mutual fund industry that it uses the incubation process to identify promising managers and strategies. If they were indeed promising, the handsome returns ought to have continued. Moreover, fund families that incubated turned managers over more frequently that families that didn’t, hardly suggesting that incubating families were cultivating long-term winners.
Three more findings from Evans’s paper: First, fund families understandably prefer to incubate within fund categories where their existing offerings aren’t attracting much new money. Second, as expected, investors chase after the higher returns of incubated funds with their deposits, oblivious to the tendency of the outperformance to fizzle. In other words, the process achieves its apparent aim. Third, incubation is most common among fund families that sell primarily through brokers.
That last finding should cast further doubt on the old broker argument that investors should choose funds based on performance and not sales charges.
SMARTMONEY ® Layout and look and feel of are trademarks of SmartMoney, a joint venture between Dow Jones & Company, Inc. and Hearst SM Partnership. © 1995 - 2009 SmartMoney. All Rights Reserved.

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