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It's been a year to forget for investors in Ireland, but from this lowly point, you might make some money as a bull.

Think your fund fees are too high? The Supreme Court has agreed to hear a case that will determine whether investors can blame a fund’s advisors for the overcharges, or if it’s their own fault for paying them.
Last week the court announced it would hear Jones v. Harris Associates, a case that pits three investors in Oakmark mutual funds against Harris, the funds' advisor. The plaintiffs allege Harris was charging retail investors higher costs than others in the funds like pension plans, violating rules set up to combat excessive fees.

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At its heart, the case speaks to the way fees are set across the mutual fund industry, and, depending on the court’s decision, could radically change how much shareholders pay in the future. “Millions of people invest in mutual funds,” said William Birdthistle, a professor of securities law at Illinois Institute of Technology's Chicago-Kent College of Law. “This touches everyone.”
But while the lawsuit is full of details about how much the Oakmark funds charged, and, according to the plaintiffs, why the fees were too high, the Supreme Court is actually concerned with something else altogether — the responsibility of a fund’s advisor, which negotiates the fees with the fund’s board. In 1970, Congress passed a law holding a fund’s advisor to what’s called a fiduciary standard — a higher bar than the every-man-for-himself nature of basic bargaining. And the law gave shareholders the right to sue a fund’s advisors if that standard wasn’t met.
Over time, that fiduciary standard has been interpreted very broadly. In general, courts have judged a fee too high if it is “so disproportionately large that it bears no reasonable relationship to the services tendered.” In other words, all a fund’s advisor has to do is justify his fees. These days that’s not that hard: Shareholders have tried to sue their funds more than three dozen times since the law was passed, and they’ve never won.
In this new case, the plaintiffs lost in a lower court. Frank Easterbrook, the Seventh Circuit Court judge who wrote the opinion, went even further in favoring the defendant with his decision. Easterbrook, who is known as one of the country’s most prominent scholars of law and economics, examined the market for mutual funds. He found that, as long as investors can vote with their dollars, and as long as fund trustees can hire and fire the advisors at will, there’s no need for a higher standard of fiduciary responsibility. “Congress can talk about fiduciary responsibility as much as it wants," said Mercer Bullard, a mutual fund shareholder advocate and securities law professor at University of Mississippi. "But Easterbrook’s decision says that a fee that is set in a competitive marketplace, by definition, can not be excessive.”
That’s a radical new standard, say critics, including Richard Posner, an equally prominent judge who wrote a dissenting opinion. The clash of the two legal titans made waves, and some suspect that’s partly why the Supreme Court decided to hear the case. Arguments won’t begin until the fall; the court won’t issue a decision until next spring. But with millions of shareholders paying what amounts to billions in fees every year, there’s quite a bit at stake, says Bullard: “Federal law provides for a fiduciary responsibility. If the Supreme Court doesn’t uphold that, any effect that’s had to restrain fees will be gone.”

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.

News at a Glance

  • Futures Slip: Stocks look to return some gains.

  • Crude Rises: Oil prices return above $50 a barrel.

  • Piece of the Pie: Oracle declares first dividend.

  • Data Due: Jobless claims, Leading Index due later.

The Lowdown

Mixed earnings and higher energy prices are threatening some of Wednesday's Fed-inspired gains.

Stocks looked to open lower Thursday, as traders grew cautious on the latest corporate results and outlooks and the passing of an old benchmark in oil prices. Sh

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ortly after 7 a.m., Dow, Nasdaq and S&P 500 futures were trading below fair value.

In earnings, Oracle offered its shareholders a dividend for the first time. Separately, FedEx (FDX) plans to release quarterly earnings later today. Earnings reports of national shipping companies are often interpretted as proxies for the state of the economy.

In politics, President Obama said Americans were right to be angry about struggling firms like AIG (AIG) doling out hefty bonuses at the expense of taxpayers and accepted responsibility (but not blame) for the problem. Obama will take his economic initiatives and plans for bonus reform on the road tonight, when he is scheduled to appear on "The Tonight Show" with Jay Leno (musical guest: Garth Brooks).

In Washington, House lawmakers are preparing to vote on a bill that would levy a 90% tax on bonuses paid to employees of firms receiving federal bailout funds whose families make more than $250,000 a year. "We figured that the local and state governments would take care of the other 10 percent," Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, told the Associated Press.

In energy, crude prices advanced before the opening bell. Shortly before 7 a.m., oil traded up $1.87 at $50.01 a barrel.

World markets were mixed. In Asia, Japan's Nikkei slipped 0.3%, while Hong Kong's Hang Seng inched up 0.1%. In the U.K., the FTSE stood up 0.9% in midday trading.

On Wednesday, a broad investment plan by the Federal Reserve intended to lower mortgage rates and rekindle economic growth left the major indexes higher. The Dow ended the day up 91 points at 7487.

Corporate News

  • Oracle (ORCL) declared its first dividend after topping third-quarter Wall Street estimates. The software firm earned $1.33 billion, or 26 cents a share, compared with $1.34 billion, or 26 cents a share, in the year-ago period. Excluding one-time charges, Oracle earned 35 cents a share, beating the Street.

  • Nike (NKE) issued what amounted to a profit warning when the sports footwear and clothing firm said its future orders for spring merchandise fell by 10%. Nike sells its mechandise to retailers in advance, so a decline in such sales can speak more to the company's bottom line in the spring than for the current quarter.

  • Johnson & Johnson (JNJ) is the subject of a health probe by Shanghai's Food and Drug Administration, which is investigating claims that chemicals used in some of the firm's baby products are carcinogenic, The Wall Street Journal reported. Johnson & Johnson has denied the claim, explaining the chemicals in questions are used only in trace amounts considered safe by the U.S. Food and Drug Administration.

The Economy

  • The weekly jobless claims report for last week is scheduled to be released at 8:30 a.m. by the Labor Department. In the prior week, claims came in at 654,000. Economists predict the number people seeking unemployment benefits for the first time will have risen slightly to 655,000.

  • The February reading of the Leading Index is scheduled to be released at 10 a.m. by the Conference Board. In January, the index rose 0.4%. For February, economists expect a 0.6% decline.

  • The March reading of the Philadephia Federal Reserve's diffusion index of current business activity is scheduled to be released at 10 a.m. In February, the index stood at a reading of -41.3. For March, economists predict a reading of -39.0.

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.

The software giant moves higher, but at least one options trader is gambling on a drop.

SIRIUS XM RADIO'S FLIRTATION WITH BANKRUPTCY and Dish Network's shrinking subscriber base are creating static in the satellite-entertainment sector. But the picture is prettier for the nation's largest satellite-TV provider, DirecTV Group. The El Segundo, Calif., company is adding subscribers at a healthy clip and is on track to post solid profit gains this year. And its stock, at 21, could continue to outpace the market over the next 18 months.

DirecTV (DTV) is winning eyeballs during the economic collaps

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e, thanks in part to its NFL Sunday Ticket, which broadcasts out-of-market National Football League games. The close-to-$300-a-season Ticket is must-see programming for consumers such as Heather Polinsky in Alma, Mich., who watches it to track her beloved Pittsburgh Steelers. Declares Polinsky, an assistant professor and audio unit manager at the School of Broadcast & Cinematic Arts: "I won't give it up."

That's music to the ears of DirecTV, which is using its premier sports package and the loyalty of its high-end subscribers to shield it from the worst of the recession. The satellite broadcaster added 301,000 new subs in its fourth quarter, its best showing since 2005, while lowering customer churn to a record-low 1.42%. This year, subs could easily top 18 million, from 17.62 million now, if full-year churn says about flat with 2008's 1.47%.

DirecTV leads the pay-TV industry with more than 130 high-definition channels, and it aims to keep that edge by launching its 12th satellite this year, enhancing its ability to provide high-tech features such as video-on-demand to more than 100 million homes.

The company also replaced rival Dish in a partnership with AT&T ; the two will sell each other's services in bundled packages. This hookup, notes Goldman Sachs, lessens the risk of DirecTV not having a broadband product and increases the chances that it will keep the Ticket after its deal with the NFL ends after the 2010 season.

Overall, solid subscriber growth could drive '09 earnings 7% above 2008's, to $1.6 billion, or $1.63 a share, on revenue of $21 billion. Next year, profits could hit $2 billion, or $2.17 a share, aided by share buybacks. DirecTV made $1.5 billion, or $1.37, on $19.7 billion last year.

After hitting 29 last summer, the company's shares are down 8% this year and sell for 13 times estimated 2009 earnings. The market is valuing each DirecTV subscriber at $1,343, based on estimated enterprise value, about half the figure for cable giant Comcast (CMCSA). Indeed, DirecTV stock was around the same level four years ago when Barron's recommended the stock ("Beam Me Up," April 11, 2005), although the company's market share has risen to 18% from 16% then. As he did four years ago when the shares were at 15, CEO Chase Carey argues that his shares are "woefully undervalued."

Paul Wright, an analyst with Loomis Sayles, owner of more than two million shares, thinks better-than-expected EPS results this year should push DirecTV toward 30 in 12 months. "They are executing tremendously," he says. The same can't be said for rival Dish Network (DISH). At five times earnings estimates, it's cheaper than DirecTV, but its subs tend to be less affluent, and its turnaround is uncertain.

That being said, DirecTV's fourth-quarter results suggest that it, too, faces persistent challenges. The satellite provider pays a lot to capture subscribers -- $724 per individual -- and employs aggressive marketing, such as offering free DVR boxes. Quarterly profit slipped 5% on higher promotional spending, and average monthly revenue per subscriber (ARPU) continued its year-long slide.

While applauding DirecTV for "defying gravity" in the fourth quarter, Goldman Sachs maintained its Neutral rating, fearing growing churn and slower ARPU growth. "The HD content gap has closed," says analyst Ingrid Chung. "Marketing and promotions by competitors have increased." Furthermore, some critics worry that the recession will force even die-hards such as Steelers fan Polinsky to ditch the NFL Ticket.

Carey maintains that DirecTV doesn't depend on the Ticket and suggests he won't overspend for renewal rights. The fewer than two million DirecTV customers who buy the service generate less than $1 billion of annual revenue, estimates Gregory Lundberg of Soleil. DirecTV paid $3.5 billion for the franchise in 2004 and will likely fork over much more to keep exclusive rights. It has the money: The balance sheet is solid, and annual earnings before interest taxes depreciation and amortization (Ebitda) is close to $6 billion.

DirecTV eventually could be acquired by a telco such as AT&T or even Liberty Media (LINTA), which bought a 41% stake from News Corp. (NWS), Barron's parent, early last year and now owns 53.6%. Liberty's John Malone is DirecTV's chairman. Carey, a former News Corp. executive, declines to comment. Either deal might be a sweet endgame for investors. For now, DirecTV's ability to weather the economic storm is burnishing its appeal as one of TV Land's top bets.

The Bottom Line
The company is "defying gravity," as one analyst puts it -- gaining more subscribers and growing earnings. The stock could pop more than 40%, to about $30.

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.

Sun Shares Shine on Takeover Bid

Merger talk was radiant news for investors in beleaguered Sun Microsystems (JAVA), whose shares shot up as much as 70% Wednesday after reports IBM (IBM) was considering a $6.5 billion takeover.

Should the transaction go forward, it would represent a 100% premium to Sun’s Tuesday closing price and it would signal a realignment for Big Blue. In recent years IBM has moved away from hardware to higher margin software and services businesses.

The deal is a shot in the arm

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for the technology sector, which has been hard hit by reduced corporate spending during the economic downturn. Sun reported a loss of $209 million during its last quarter. Shares had been trading near a 52-week low before the deal was announced.

First Global analyst Amitabh Goel earlier this month predicted IBM would make such a move. “Amidst the ongoing downturn,” he said, "IBM is aggressively looking at acquiring smaller companies in order to take advantage of their low valuations.” But, Goel thought any deal would come in the software sector.

Christopher Hickey, an analyst at Atlantic Equities, says cash-rich IBM would have little trouble actually pulling off the merger if it’s approved by antitrust regulators, but added that “it’s probably more tactical than strategic.” He says IBM may be more concerned with denying competitors the benefits of owning Sun than it is in making a major shift back to hardware. “IBM would be able to justify this as a cross-selling acquisition and would want to move Sun’s client base to its own hardware,” he says.

Bottom Line: Hold
The path to a successful takeover has many potential pitfalls.

Investors Dine Out on Darden

Investors scooped up the shares of Darden Restaurants (DRI) Wednesday after the company beat Wall Street estimates during its fiscal third quarter and forecast higher earnings going forward.

The Orlando-based operator of the Olive Garden, Red Lobster and LongHorn Steakhouse chains reported earnings of 78 cents a share, ahead of the Street consensus estimate of 68 cents a share. It also said it expected fiscal 2009 earnings to rise 1% to 4% on revenue growth of 9% to 9.5%. It earned $2.74 a share in fiscal 2008.

Although Darden saw same store sales decline in the last quarter, with a company-wide slide of 3.2%, it held up better than its peers as a result of firm cost controls, MKM Partners analyst Stephen Anderson wrote Wednesday. Olive Garden's same-store sales dropped 1.4%, while Red Lobster had a 4.6% decrease and LongHorn declined 5.4%. Oppenheimer & Co. analyst Matthew DiFrisco said marketing efforts helped Darden stay ahead of other sit-down restaurant groups, which had an average same-store sales decline of 6% in the quarter.

Anderson raised his rating on the stock to Buy from Neutral, writing that “we are becoming more convinced that the company will emerge from the recession stronger than its peers.”

Bottom Line: Hold
This stock’s rebound reflects the company’s ability to navigate stormy conditions, but significant growth probably won’t be served up any time soon.

Cereal Killing

General Mills (GIS) shares fell Wednesday after the food company raised guidance for its fiscal year, but not enough to satisfy Wall Street estimates. It also missed earnings estimates for its fiscal third quarter.

The Minneapolis-based conglomerate reported operating earnings of 85 cents a share, down from $1.27 a share a year ago and short of Street forecasts of 88 cents a share. General Mills now expects to earn between $3.87 and $3.89 a share for fiscal 2009, CEO Ken Powell said on a Wednesday conference call. Street estimates averaged $3.94 a share.

“That represents double-digit EPS growth in a very challenging environment, and we see this as a solid base to build on in fiscal 2010,” Powell said, adding that a calendar quirk will add a week of sales to the fiscal year. “As we look ahead to the fourth quarter, the 53rd week will contribute to our sales and EPS growth.”

Other food names, including Kraft Foods (KFT), have recently endured selloffs, too, as investors looking for routes to a recovery may be shunning the defensive, counter-cyclical aspects of these companies as they seek higher growth names.
“The biggest disappointment here is the sizable miss for Q3,” says Soleil Securities analyst Ed Roesch. “I think expectations were still that the full year would have more upside versus this guidance. It’s a pretty unforgiving market now.”

Bottom Line: Hold
Today’s move is overselling, and this isn’t a company to own for big jumps.

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.

For-profit education has been hot while the economy's been cool. Venture investors and private equity are jumping in.
News at a Glance

  • Expanded Portfolio: Fed boosts balance sheet above $3 trillion.

  • Rate Steady: Fed holds funds rate kept at 0.00% to 0.25%.

  • Major Indexes Surge: Traders cheer Fed actions.

  • Bonus Round: Treasury to force AIG to repay bonuses.

The Lowdown

An expansive investment in the economy by the Federal Reserve intended to shore up the housing market and spur on the recovery triggered a broad rally on Wall Street, lifting the major indexes to substantial gains.

Traders immediately

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cheered the Fed's moves, hoping they would lead to lower mortgage rates and a return to more bullish conditions. After being up triple digits, the Dow Jones Industrial Average gained 90 points at 7486. The Nasdaq picked up 29 at 1491, and the S&P 500 jumped 16 to 794.

In its latest statement on monetary policy, the Fed said it plans to buy up an additional $750 billion in mortgage-backed securities, more than doubling its holdings in that class.

Separately, the Fed promised to purchase up to $300 billion in long-term Treasurys over the next six months.

The Fed also held the federal funds rate at 0.00% to 0.25% -- a move widely expected by traders and economists -- as concern over economic growth remained the group's chief concern.

"Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth," the Fed wrote in its statement.

In other economic news, the inflation picture grew a bit more unsettling last month. The Consumer Price Index rose last month by a hair more than economists had expected. Core prices also offered a small surprise.

In Washington, outrage over executive compensation hit a fever pitch. Lawmakers and other officials moved to punish AIG (AIG) for its decision to hand out $165 million in bonuses to its employees after having received more than $170 billion in bailout funds from the federal government. Treasury Secretary Timothy Geithner said in a letter to Congress that the firm should be forced to return to the Treasury the sum of its bonuses and be penalized the same amount by subtracting $165 million from the firm's next bailout installment ($30 billion). Separately, Sens. Max Baucus (D., Mont.) and Chuck Grassley (R., Iowa) announced plans Tuesday to levy a hefty tax on bonuses given to employees of firms receiving federal bailout money.

AIG Chairman and Chief Executive Edward M. Liddy told Congress legal requirements and the "cold realities of competition" forced his firm's hand in delivering the bonuses to employees, according to his testimony. Liddy spoke before a House Financial Services subcommittee to field questions about compensation and the importance of keeping the firm afloat. He also said he asked the recipients to give back half of the rewards.

World markets were mixed. In Asia, Japan's Nikkei picked up 0.3%, while Hong Kong's Hang Seng rose 1.9%. In Europe, the U.K.'s FTSE dropped 1.4%.

Corporate News

  • IBM (IBM) is in talks to acquire Sun Microsystems (JAVA), The Wall Street Journal reported, citing anonymous sources. A deal would give IBM a larger online presence but could cost the firm upwards of $6.5 billion.

  • The Chinese government rejected a bid by Coca-Cola (KO) to acquire China Huiyuan Juice for $2.4 billion, Reuters reported. Citing a negative effect on competition, China's Ministry of Commerce shot down the deal, which would have been the largest acquisition of a Chinese firm by a foreign company.

  • Adobe Systems (ADBE) met Wall Street estimates for the first quarter and predicted a second quarter in line with analysts' projections, as well. During Q1, Adobe earned $156 million, or 30 cents a share, down from $219 million, or 38 cents a share, in the year-ago period.

The Economy

  • The Consumer Price Index rose 0.4% in February, up from a 0.3% gain in January, the Labor Department said. Economists had expected the CPI to have risen 0.3% last month. Excluding volatile food and energy prices, the core CPI 0.2% last month after a comparable gain in January. Economists had expected the core CPI to have risen 0.1% last month. REPORT

  • Crude inventories rose by 1.9 million barrels last week, leaving them above the upper limit of the average range for this point in the year, the Energy Department said. REPORT

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.

After an explosive week of trading, the best swing trades are those that still give the bear his due.
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