European Stocks Drop for Third Day as ThyssenKrupp Falls

European stocks dropped for a third day as investors weighed valuations before U.S. jobs data this week that may help gauge the timing of a reduction in Federal Reserve stimulus. U.S. index futures and Asian shares outside Japan retreated.

ThyssenKrupp AG slid to a 10-week low after raising 882.3 million euros ($1.2 billion) through a share sale. Antofagasta Plc led a measure of mining companies to a seven-week low. Sonova Holding AG (SOON) declined 1.5 percent as Morgan Stanley cut its rating on the Swiss hearing-aid maker. Orange SA slipped 3.4 percent amid concern a price war in the French mobile market will extend to fourth-generation data services.

The Stoxx Europe 600 Index fell 0.9 percent to 321.15 at 11:30 a.m. in London, for its longest losing streak since Oct. 9. The benchmark slid 0.3 percent yesterday, following a three-month rally, as Spanish manufacturing unexpectedly contracted in November. Standard & Poor's 500 Index futures dropped 0.3 percent. The MSCI Asia Pacific Excluding Japan Index slid 0.5 percent, while the Nikkei 225 Stock Average rose 0.6 percent.

"There's been a frenzy for European equities in the last three months and we're now waiting for a short-term consolidation," said Francois Savary, who oversees about $9.4 billion as chief investment officer at Reyl & Cie. in Geneva. "A lot still depends on a few uncertainties in the U.S., such as fiscal and monetary policy, that have the potential to disappoint investors. Market psychology has been too optimistic for Europe and expectations for 2014 growth may be too high."

Earnings Multiple

The Stoxx 600 has rallied 15 percent this year, even as analysts have cut their earnings estimate for its constituents to 21.37 euros per share from 24.13 euros at the beginning of 2013. That has pushed its valuation to 15 times projected earnings, below the 15.72 mark reached in October 2009, which was its highest level since at least March 2005, data compiled by Bloomberg showed.

On Friday, investors will get the latest reading on U.S. non-farm payrolls for November, and data may show the unemployment rate fell to 7.2 percent, matching the lowest level in five years. A jobs report tomorrow may show U.S. companies added the most workers since June. The Fed has said it will monitor labor-market gains before deciding when to pare its $85 billion of monthly bond purchases.

Policy Meetings

The central bank will release its Beige Book on economic conditions tomorrow. The Federal Open Market Committee meets on Dec. 17-18. Policy makers will probably wait until their March 18-19 meeting to pare stimulus, when they will reduce monthly bond purchases to $70 billion, according to the median estimate in Bloomberg's survey on Nov. 8.

The European Central Bank and the Bank of England will both announce policy decisions on Thursday.

In Portugal, the government raised 578 million euros by selling a 70 percent stake in its postal service, CTT-Correios de Portugal SA. It sold the shares at 5.52 euros apiece, the top of the price range it indicated. This was the first initial public offering in the euro area's third-most indebted country since June 2008.

ThyssenKrupp fell 2.8 percent to 17.14 euros. The German steelmaker sold 51.4 million new shares at 17.15 euros apiece. The stock yesterday plunged the most since August 2011 after the company said it would increase its capital by 10 percent of its market value.

Commodity Producers

Antofagasta tumbled 5.3 percent to 739.5 pence. Polymetal International Plc dropped 4.7 percent to 486 pence, its lowest price since July 10. BHP Billiton Ltd., the world's largest mining company, slid 2.1 percent to 1,783 pence. Rio Tinto Group, the second biggest, retreated 1.5 percent to 3,181.5 pence. A gauge of commodity producers posted the biggest retreat among the 19 industry groups on the Stoxx 600.

Sonova lost 1.5 percent to 123.40 Swiss francs. Morgan Stanley downgraded the stock to equal weight, similar to a neutral recommendation, from overweight. New product releases from competitors such as GN Store Nord A/S and William Demant Holding A/S may hurt revenue growth, Morgan Stanley said.

Orange declined 3.4 percent to 9.20 euros. Iliad SA's Free Mobile subsidiary said it will offer customers 4G Internet as part of its monthly plans at no extra cost, according to a statement. Bouygues SA retreated 2.2 percent to 27.12 euros.

What Does Warren Buffett’s Purchase Say About Phillips 66?

Shares of Phillips 66 (PSX) have jumped today after it sold one of its units to Warren Buffett’s Berkshire Hathaway (BRK.B). Are investors reaching the wrong conclusion?

Bloomberg

Here’s what happened: Phillips 66 said that it had sold its specialty products unit to Berkshire Hathaway for $1.4 billion. Berkshire, however, chose not to pay for the division with cash, which would have been easy considering its cash hoard, but in shares of Phillips 66–19 million shares that Berkshire already owns. Could that be sign that Buffett thinks shares of Phillip 66, which have gained 45% this year, have run too far?

Now Berkshire has done a lot of portfolio management in the energy sector this year. For instance,  it bought oodles of Exxon Mobil (XOM) in November, while offloading some 20 million shares of ConocoPhillips (COP)–and it takes smarter folks than me to explain why.

Still, it’s something to think about heading into the New Year.

Shares of Phillips 66 have gained 3% to $76.94 today at 11:41 a.m., while Exxon Mobil has advanced 0.6% to $100.92, ConocoPhillips has risen 1% to $70.58 and Berkshire Hathaway is up 0.4% to $118.52.

Impact of Share Repurchases

A share repurchase or buyback simply refers to a publicly traded company buying back its own shares from the marketplace. Along with dividends, share repurchases are an avenue for a company to return cash to its shareholders. Many of the best companies strive to reward their shareholders through consistent dividend increases and regular share buybacks. A share repurchase is also known as "float shrink" since it contracts a company's freely trading shares or share float.

Repurchase Impact on EPS

Since a share repurchase reduces a company's outstanding shares, its biggest impact is evident in per-share measures of profitability and cash flow such as earnings per share (EPS) and cash flow per share (CFPS). Assuming that the price/earnings (P/E) multiple at which the stock trades is unchanged, this should eventually result in a higher share price.

As an example, consider the case of a hypothetical company – call it Birdbaths & Beyond (BB) – which had 100 million shares outstanding at the beginning of a given year. The stock was trading at $10, giving BB a market capitalization of $1 billion. BB had net income of $50 million or EPS of 50 cents ($50 million/100 million shares outstanding) in the preceding 12 months, which means that the stock was trading at a P/E of 20 (i.e. $10/50 cents). Assume BB also had excess cash of $100 million at the start of the year, which it deployed in a share repurchase program over the next 12 months. So at the end of the year, BB would have 90 million shares outstanding. For the sake of simplicity, we have assumed here that all the shares were repurchased at an average cost of $10 each, which means that a total of 10 million shares were repurchased and canceled by the company.

Suppose BB earned $50 million in this year as well; its EPS would now be about 56 cents ($50 million/90 million shares). If the stock continues to trade at a P/E multiple of 20, the share price would now be $11.20. The 12% stock appreciation has been entirely d! riven by the EPS increase thanks to the reduction in BB's outstanding shares.

Driving Shareholder Value

A couple of simplifications have been used here. First, EPS calculations use a weighted average of the shares outstanding over a period of time, rather than just the number of shares outstanding at a particular point. Second, the average price at which the shares are repurchased may vary significantly from the shares' actual market price. In the example above, buying back 10% of BB's outstanding shares would quite possibly have driven up its stock price, which means that the company would end up buying back less than the 10 million shares we have assumed for its $100 million outlay.

These simplifications understate the magnified effect that consistent repurchases have on shareholder value. Companies that consistently buy back their shares can grow EPS at a substantially faster rate than would be possible through operational improvements alone. This rapid EPS growth is often recognized by investors, who may be willing to pay a premium for such stocks, resulting in their P/E multiple expanding over time. In addition, companies that generate the free cash flow required to steadily buy back their shares often have the dominant market presence and pricing power required to boost the bottom line as well.

Going back to the BB example, assume the company's P/E multiple rose to 21 (from 20), while net income grew to $53 million (from $50 million). After the buyback, BB's stock would be trading at about $12.40 (i.e. 21 x EPS of 59 cents, based on 90 million shares outstanding) at year-end, an increase of 24% from its price at the beginning of the year.

Impact on Financial Statements

A share repurchase has an obvious effect on a company's income statement, since it reduces its outstanding shares. But it also impacts other financial statements.

On the balance sheet, a share repurchase will reduce the company's cash holdings, and consequently its total as! sets base! , by the amount of the cash expended in the buyback. The buyback will simultaneously also shrink shareholders' equity on the liabilities side by the same amount. As a result, performance metrics such as return on assets (ROA) and return on equity (ROE) typically improve subsequent to a share buyback.

Companies generally specify the amount spent on share repurchases in their quarterly earnings reports. The amount spent on share buybacks can also be obtained from the Statement of Cash Flows in the "Financing Activities" section, as well as from the Statement of Changes in Equity or Statement of Retained Earnings.

Impact on Portfolios

Share repurchases can have a significant positive impact on an investor's portfolio. For proof, one only has to look at the S&P 500 Buyback Index, which measures performance of the 100 companies in the index with the highest buyback ratio (calculated as the amount spent on buybacks in the past 12 months as a percentage of the company's market capitalization). In the 10 years ending Nov. 8, 2013, the S&P Buyback Index had surged 158.2%, compared with a gain of 68.1% for the S&P 500, outperforming it by 90 percentage points.

What accounts for this degree of outperformance? Like a dividend increase, a share repurchase indicates a company's confidence in its future prospects. Unlike a dividend hike, a buyback signals that the company believes its stock is undervalued and represents the best use of its cash at that time. In most cases, the company's optimism about its future pays off handsomely over time.

Share Repurchases vs. Dividends

While dividend payments and share repurchases are both ways for a company to return cash to its shareholders, one notable difference is that dividends represent current payoff to an investor, while share buybacks represent a future payoff. This is one reason why investor reaction to a stock that has announced a dividend increase will generally be more positive than to one announcing an increase in its buyback program.

Another difference has to do with taxation, especially in jurisdictions where dividends are taxed less favorably than long-term capital gains. Assume you acquired 100,000 shares of BB – the company mentioned in the example earlier – at $10 each, and you live in a jurisdiction where dividends are taxed at 20% and capital gains are taxed at 15%. Suppose BB was debating between using its $100 million in excess cash for buying back its shares from you, its only shareholder, or paying it out to you as a special dividend of $1 per share. While the buyback would have no immediate tax impac! t on you, if your BB shares were held in a taxable account, your tax bill in the event of a special dividend payout would be quite hefty at $20,000. If the company proceeded with the buyback and you subsequently sold the shares at year-end at $11.20, the tax payable on your capital gains would still be lower at $18,000 (15% x 100,000 shares x $1.20). Note that $1.20 represents your capital gain of $11.20 minus $10 at year-end.

Overall, while share repurchases may be better for building one's net worth over time, they do carry more uncertainty than dividend payments, since the buybacks' value depends on the stock's future price. If a company's float has contracted by 20% over time but the stock subsequently plummets 50%, an investor would in retrospect prefer to have received that 20% in the form of actual dividend payments.

Capitalizing on Share Repurchases

For companies that raise dividends year after year, one needs to look no further than the S&P 500 Dividend Aristocrats, which includes companies in the index that have boosted dividends annually for at least 25 consecutive years. For share repurchases, the S&P 500 Buyback Index referred to earlier is a good starting point to identify companies that have been aggressively buying back their shares.

While most blue chips buy back shares on a regular basis – usually to offset dilution caused by the exercise of employee stock options – investors should watch for companies that announce special or expanded buybacks. For example, in October 2013, IBM (NYSE:IBM) announced a $15 billion addition to its repurchase plan; with sales declining for six successive quarters, the buyback was expected to enable IBM to reach its adjusted EPS target of $20 by 2015.

"Float shrink" ETFs have also attracted a great deal of attention after a sizzling performance in 2013. The PowerShares Buyback Achievers Portfolio (NYSE:PKW) is the biggest ETF in this category. The ETF invests in U.S. companies that have repurchased at ! least 5% ! of their outstanding shares over the previous 12 months, and as of Nov. 5, 2013, it was up 38.4% for the year. Another popular but much smaller ETF is the TrimTabs Float Shrink ETF (NYSE:TTFS), which was up 34.9% as of the same date.

Conclusion

Share repurchases are a great way to build investor wealth over time, although they have a higher degree of uncertainty than dividends.

Get The Most Out Of Employee Stock Options

An employee stock option plan can be a lucrative investment instrument if properly managed. For this reason, these plans have long served as a successful tool to attract top executives, and in recent years become a popular means to lure non-executive employees. Unfortunately, some still fail to take full advantage of the money generated by their employee stock. Understanding the nature of stock options, taxation and the impact on personal income is key to maximizing such a potentially lucrative perk.

What's an Employee Stock Option?
An employee stock option is a contract issued by an employer to an employee to purchase a set amount of shares of company stock at a fixed price for a limited period of time. There are two broad classifications of stock options issued: non-qualified stock options (NSO) and incentive stock options (ISO).

Non-qualified stock options differ from incentive stock options in two ways. First, NSOs are offered to non-executive employees and outside directors or consultants. By contrast, ISOs are strictly reserved for employees (more specifically, executives) of the company. Secondly, nonqualified options do not receive special federal tax treatment, while incentive stock options are given favorable tax treatment because they meet specific statutory rules described by the Internal Revenue Code (more on this favorable tax treatment is provided below).

NSO and ISO plans share a common trait: they can feel complex! Transactions within these plans must follow specific terms set forth by the employer agreement and the Internal Revenue Code.

Grant Date, Expiration, Vesting and Exercise
To begin, employees are typically not granted full ownership of the options on the initiation date of the contract (also know as the grant date). They must comply with a specific schedule known as the vesting schedule when exercising their options. The vesting schedule begins on the day the options are granted and lists the dates that an employee is able to exercise a spec! ific number of shares. For example, an employer may grant 1,000 shares on the grant date, but a year from that date, 200 shares will vest (the employee is given the right to exercise 200 of the 1,000 shares initially granted). The year after, another 200 shares are vested, and so on. The vesting schedule is followed by an expiration date. On this date, the employer no longer reserves the right for its employee to purchase company stock under the terms of the agreement.

An employee stock option is granted at a specific price, known as the exercise price. It is the price per share that an employee must pay to exercise his or her options. The exercise price is important because it is used to determine the gain (called the bargain element) and the tax payable on the contract. The bargain element is calculated by subtracting the exercise price from the market price of the company stock on the date the option is exercised.

Taxing Employee Stock Options
The Internal Revenue Code also has a set of rules that an owner must obey to avoid paying hefty taxes on his or her contracts. The taxation of stock option contracts depends on the type of option owned.

For non-qualified stock options (NSO):

The grant is not a taxable event.
Taxation begins at the time of exercise. The bargain element of a non-qualified stock option is considered "compensation" and is taxed at ordinary income tax rates. For example, if an employee is granted 100 shares of Stock A at an exercise price of $25, the market value of the stock at the time of exercise is $50. The bargain element on the contract is ($50 - $25) x 100=$2,500. Note that we are assuming that these shares are 100% vested.
The sale of the security triggers another taxable event: If the employee decides to sell the shares immediately (or less than a year from exercise), the transaction will be reported as a short-term capital gain (or loss) and will be subject to tax at ordinary income tax rates. If the employee decides to sell the shares a year after the exercise, the sale will be reported as a long-term capital gain (or loss) and the tax will be reduced. Incentive stock options (ISO) receive special tax treatment:

The grant is not a taxable transaction.
No taxable events are reported at exercise; however, the bargain element of an incentive stock option may trigger alternative minimum tax (AMT).
The first taxable event occurs at the sale. If the shares are sold immediately after they are exercised, the bargain element is treated as ordinary income.
The gain on the contract will be treated as a long-term capital gain if the following rule is honored: the stocks have to be held for 12 months after exercise and should not be sold until two years after the grant date. For example, suppose that Stock A is granted on January 1, 2007 (100% vested). The executive exercises the options on June 1, 2008. Should he or she wish to report the gain on the contract as a long-term capital gain, the stock cannot be sold before June 1, 2009. Other Considerations
Although the timing of a stock option strategy is important, there are other considerations to be made. Another key aspect of stock option planning is the effect that these instruments will have on overall asset allocation. For any investment plan to be successful, the assets have to be properly diversified. An employee should be wary of concentrated positions on any company's stock. Most financial advisors suggest that company stock should represent 20% (at most) of the overall investment plan. While you may feel comfortable investing a larger percentage of your portfolio in your own company, it's simply safer to diversify. Consult a financial and/or tax specialist to determine the best execution plan for your portfolio.

Bottom Line
Conceptually, options are an attractive payment method. What better way to encourage employees to participate in the growth of a company than by offering them a piece of the pie? In practice, however, redemption and taxation of these instruments can be quite complicated. Most employees do not understand the tax effects of owning and exercising their options. As a result, they can be heavily penalized by Uncle Sam and often miss out on some of the money generated by these contracts. Remember that selling your employee stock immediately after exercise will induce the higher short-term capital gains tax. Waiting until the sale qualifies for the lesser long-term capital gains tax can save you hundreds, or even thousands.

Sebelius questioned about Obamacare site security

NEW YORK (CNNMoney) At a House hearing on Wednesday, U.S. Secretary of Health Kathleen Sebelius acknowledged security concerns facing Healthcare.gov but said the site had not been hacked.

Until last week, anyone could easily reset Obamacare applicants' passwords and potentially hijack their accounts. The glitch was discovered last week by a software tester in Arizona, and CNNMoney reported the security vulnerability on Tuesday. Health spokeswoman Joanne Peters told CNNMoney that the Department of Health made key changes this week, eliminating the "theoretical vulnerability."

Sebelius rebutted incorrect assertions by Republican Congressmen that the website had been hacked.

"There was not a breach," Sebelius said. "It was a theoretical problem that was immediately fixed."

Related story: Security hole found on Obamacare website

Though the security hole was never exploited, the problem was quite real -- at least until last week. Anyone who could guess an existing user name and had a basic understanding of how to read a website's code could potentially access someone's account.

Congressman Mike Rogers, R-Mich., also asked Sebelius about the security implications of putting in so many patches and fixes. He said that adding in new computer code exposes the entire system to new risks. He also accused health officials and their many contractors of not performing a system-wide security test, a tech industry standard.

"You did not have the most basic end-to-end test on security in the system" Rogers said. "Amazon (AMZN, Fortune 500) would never do this."

When Rogers asked if the federal government would be willing to shut down the Obamacare website until such a test is done, Sebelius said no.

Related story: Obamacare site has another outage

During the hearing, Sebelius spoke at length about the website's many issues, apologized for its shortcomings and promised they would all be resolved by the end of November -- even while most of the site remained down Wednesday morning.

"Hold me accountable for the debacle. I'm responsible," she said.

Do you need a career coach?

When management consultant Cheryl Wallace, 49, returned to the workforce after years of unsuccessfully trying to conceive, she had to rebuild from the ground up. "It took me two years to learn how to tell my story without crying," recalls Wallace, a New Yorker.

Her turning point came when a career coach told Wallace, in a no-nonsense way, that she was sharing too much of her personal struggles while networking and job hunting. Wallace and her coach came up with language that would explain the long gap on her résumé while keeping it professional—and tear-free.

"That one coaching relationship gave me the most important tool: how to tell that story," Wallace says. "I was making the transition from the open wound to having to have a game face."

Whether you are returning to the workforce, need a different job or want to explore a change, a career coach could help you chart your course. But before you invest precious time and resources, make sure you select a reputable coach who can tailor advice and support to meet your needs.

"As the coaching industry has exploded, there hasn't been a specific way to evaluate the coaching models and the courses," says Peggy Klaus, a consultant and author of The Hard Truth About Soft Skills: Workplace Lessons Smart People Wish They'd Learned Sooner. "A lot of these coaching programs are so quick and thin. People just put out their shingles."

Klaus once saw a new client who had been told by another coach not to stand out from the job applicant pool. The client was advised to dress in a shapeless, gray, pin-striped suit with an oxford shirt. "She looked so drab and so awful," Klaus says. "There can be a lot of bad advice, maybe well-intended, that will really derail you in your efforts."

To find a coach who fits your needs, ask family, friends and colleagues for references, and review training, experience, certifications and professional affiliations. For help finding a coach, check with the International Coach Federation (coachfederation! .org), a professional association that certifies coaches.

Know What You Want

Having some sense of your goals will drive the coach selection process. "If you're trying to figure out what feeds your soul, you need a career coach," says Lora B. Poepping, a job-search coach based in Seattle. "If you already know what you want to do but you need some assistance navigating the challenging process, find a job-search coach."

Working with Poepping, Hilary Meyerson, 42, of Seattle, mapped out a strategy to return to full-time work after being home with her children, now 11 and 13, since 2002. "When I was just going back to the workforce, I was so overwhelmed. I didn't know where to start," Meyerson says. "After every session she gave me homework, really clear, crisp things I needed to send her before our next session. It refined my messaging."

First, Meyerson took an unpaid internship for four months to add recent experience to her résumé. Then, she leveraged her occasional freelance writing into a position as a magazine editor, negotiating the additional title of social media strategist with her end goal in mind. After a couple of years, she joined an Internet startup as a marketing communications manager and social media strategist—achieving her ultimate goal.

Janice Smith, Ernst & Young's Americas coaching leader, enlisted a coach herself when moving into her current role. "My goal was to find my leadership voice, my leadership style," says Smith, 47, who is based in Denver. "It's hard work. Any good coaching relationship comes with a big dose of self-awareness."

Prepare to Work Hard

In fact, one of the most important things to understand about career coaching is the amount of effort and personal growth involved.

"Sometimes people will come and think there's no work on their part, that somehow I'm the job fairy or the promotion fairy, and I can give them five easy steps to this goal," says Linda Mercurio, a professional coach based in the Washington, D.C.! , metro a! rea. "This is a messier process."

Because coaching requires tough personal work, it's important to feel a connection with your coach. Find one with the right chemistry—he or she will push you to understand your weaknesses, so you need to develop trust.

Nancy O'Brien, 55, engaged a coach when she was thinking of leaving her "big job" as a director of commercialization to start a tasting room and retail store for olive oil and vinegar in Bar Harbor, Maine. She and her coach clarified the reasons she wanted to become an entrepreneur, and her coach helped her keep perspective in the throes of the transition.

"The process of a life change should never be blindly taken," O'Brien says. "To have the ear, the shoulder and the expertise of a coach to steer and direct is immeasurable."

Choosing a coach

Any coaching engagement should have a clear beginning, middle and end—typically three to six months. Questions to ask a prospective coach include:

Tell me about your background in coaching, your experience, certifications and professional affiliations.What type of clients do you work with in terms of industry, age and gender?What is your coaching process or system?How will we measure improvement?How long do you expect the engagement to last?What am I not asking you that would be good for me to know?

This article is excerpted from USA TODAY Best Years magazine, featuring lifestyle stories for women 50 and older. Find it on magazine newsstands or at bestyears.usatoday.com.

Advance Auto Parts Goes Big, Real Big, Shares Surge 16%

Investors really like Advance Auto Parts (AAP) deal to buy a chain of repair shops–so much so that a stock that finished yesterday in the low 80s is now trading in the mid-90s.

Agence France-Presse/Getty Images

Reuters has the details on the deal:

Advance Auto Parts Inc will buy 1,418 outlets of the Carquest chain to boost its auto repair operations to complement its car parts business, sending its shares up as much as 20 percent to a record high.

Advance Auto, which sells products such as batteries, air fresheners and engine parts, said it would buy General Parts International Inc for just over $2 billion, creating the largest North American retailer of auto parts.

General Parts is the biggest operator of the Carquest chain, which runs auto repair shops and car parts stores. General Parts also owns Worldpac, the No.1 supplier of replacement parts for imported car and truck brands.

Reuters notes that the finished product will be the largest supplier of auto parts by sales, just beating out Autozone (AZN).

Credit Suisse analyst Simeon Gutman and team call the deal a “smart strategic acquisition.” They write:

The acquisition would solve two important issues for AAP. First, it has struggled in the DIFM segment, primarily due to a weaker and less accessible distribution network. General Parts has one of the most established distribution networks in the country (~40 DCs vs. AAP’s 10) and long standing relationships with mechanics nationwide. More importantly, WORLDPAC (estimated $1 billion in sales) is the leader in foreign parts with AAP owning the number three player and we see synergies from AI flooding into WORLDPAC.

A meaningfully positive aspect of the transaction is targeted annual cost savings of roughly $160 million within three years (~6.1% of acquired sales). This seems relatively consistent with previous DIY Auto deals. The deal is expected to be 20%+ accretive to FY 14 cash EPS. Though there are always risks in realizing synergies, the high overlap between these businesses makes these estimates seem reasonable.

Even Standard & Poor’s has blessed the acquisition:

We are affirming all ratings on the company, including the ‘BBB-’ corporate credit rating.

The outlook is stable and incorporates our expectation that the company will use the vast majority of its excess cash flow in the two years subsequent of the acquisition to reduce debt. We also expect moderate profit growth at Advance’s legacy business, no material integration risk associated with the acquisition (given the similar businesses), and cost synergies that lead to material profit growth beginning in the near term.

Advance Auto Parts has gained 16% to $95.61, while Autozone has risen 0.8% to $423.49, O’Reilly Automotive (ORLY) has advanced 2% to $131.64 and Pep Boys (PBY) is up 1% at $12.50.

Zalicus Gives us Another Trade-Worthy Reversal (ZLCS)

The hot and cold cycle for Zalicus Inc. (NASDAQ:ZLCS) continues to repeat itself. The fourth such turn of that wheel looks like it's getting ready to begin, and if this is one anything like the last three, ZLCS is due for a rally of anywhere between 25% to 50%. Traders who hop on that wave shouldn't tarry, however, because if the budding rally is anything like the last three, it's still only going to lead to a pullback about half the size of the gain. Still, a sizeable double-digit gain isn't bad for a few days' worth of work.

If the name or ticker rings a bell, it might be because yours truly has been following all the twists and turns of the ZLCS saga since August 30th. That's the day it was deemed a buy, though that call was reversed - and rightfully so - on September 4th, after a 31% runup but before an 11% dip. As was also noted on the 4th of September, however, Zalicus Inc. would be a buy again once a pullback was and key support lines were proven to be floors again. That happened all throughout September, and sure enough, shares were catapulted from $4.58 on the 26th to a high of $8.28 on October 2nd. Though the warning from October 1st may have been a day early, it wasn't an ill-advised recommendation. ZLCS only traded briefly higher that next day, and began the 28% pullback that looked inevitable (to me) the day before.

I don't reprise the ongoing saga of Zalicus to pat myself on the back, however. Believe me, every time I bring it up and have to post something bearish or pessimistic on the stock, I catch an inordinate amount of flack for doing so ... even if the call is just a short-term one. I'm reprising the story now just to say, the pullback I was worried about back on the 1st has run its course, and ZLCS looks like a buy again.

The chart tells the story. Friday's dip was something of a blowout - a mini capitulation characterized by high volume and a big move lower. That in itself implies something of a flushoout of all the weak owners and would-be profit takers. More encouraging was how even before Friday's session was over, Zalicus Inc. started to recover, closing around the middle of that day's trading range.

The clincher came today, however, with the simple fact that ZLCS followed through on Friday's upside move. Things started weakly, but the bulls quickly dug back in again to hammer out a gain. Though volume is light so far, the reversal and follow-through speaks volumes.

Assuming this turnaround is like the last few, Zalicus could make its way all the way to just under $9.00 before hitting a headwind. And yes, I'll be suggesting selling it again there. Nothing personal - just (trading) business. Just keep in mind the last three calls I made were all on target.

If you'd like to get more trading ideas and insights like this one, sign up for the free SmallCap Network daily e-newsletter. It's full of stock picks, market calls, and more.

Stock Futures Point Lower Amid Budget Jitters

NEW YORK (TheStreet) -- U.S. stock futures were edging lower Friday as investors awaited a consumer sentiment report and remained jittery about the ongoing budget negotiations in Washington.

Lawmakers must agree to an emergency budget deal by Monday in order to allow key federal government services to continue running through Dec. 15 from the start of the new fiscal year on Oct. It's estimated that a U.S. government shutdown could reduce economic growth in the fourth quarter by up to 1.4 percentage points.

Futures for the S&P 500 were falling 6.5 points, or 5.62 points below fair value, to 1,686. Futures for the Dow Jones Industrial Average were down 45 points, or 32.30 points below fair value, to 15,216. Futures for the Nasdaq were dipping 10.75 points, or 10.14 points below fair value, to 3,215.25.

BlackBerry (BBRY) shares were declining 4.15% to $7.62 in premarket trading. The company said last week it would report a loss of nearly $1 billion when it releases fiscal second-quarter earnings on Friday. The loss includes more than $900 million in charges to write down the value of its unsold smartphones. BlackBerry canceled Friday's conference call with analysts to discuss earnings in light of Fairfax's letter of intent that "contemplates" buying BlackBerry for $9 a share, or $4.7 billion. Fairfax is BlackBerry's largest shareholder. J.C. Penney (JCP) shares were plunging 8.35% to $9.55. The company said it plans to sell 84 million common shares. Penney said proceeds from the offering would be used for general corporate purposes. It also granted Goldman Sachs, the underwriter, a 30-day option to purchase up to 12.6 million more shares. Separately, J.C. Penney disclosed in a regulatory filing that its controller, Mark Sweeney, left the company last week. Ford (F) CEO Alan Mulally is one of the leading candidates to become the new CEO of Microsoft (MSFT), AllThingsD reported, citing sources close to the situation. Mullally denied earlier this month he was leaving the automaker. People with knowledge of the situation told AllThingsD that while the 68-year-old Mulally wasn't seeking the job at first, he has become more amenable to the idea in recent weeks. Microsoft shares were rising 0.5% to $32.93 in premarket trading. Nike (NKE) was surging 5.91% to $74.50. The athletic shoes and apparel maker, said fiscal first-quarter net income rose 38% from a year earlier and per-share profit of 86 cents a share topped Wall Street expectations. Nike said revenue in the quarter rose 8% to $6.97 billion. Nike, dealing with a growth slowdown in China, said it expects China revenue to grow in the second quarter and be roughly flat for the year as it works to turnaround results. The Bureau of Economic Analysis is expected at 8:30 a.m. EDT on Friday to report that personal income rose 0.4% in August after gaining 0.1% in July. Meanwhile personal spending is predicted to have edged up 0.3% after a 0.1% rise. At 9:55 a.m., the final September estimate on University of Michigan Consumer Sentiment Index is expected to come in at 78 versus 76.8 in the preliminary reading. The data will be interspersed with appearances from Federal Reserve officials. Boston Fed President Eric Rosengren is scheduled to make opening remarks to a New York Fed payments conference in New York at 8:30 am. And at 2 p.m., New York Fed President William Dudley is expected to give a speech on the economy in Syracuse, N.Y. Major U.S. stock markets rebounded Thursday after a five-day losing streak for the S&P 500, its longest losing streak since December, as the latest jobless claims numbers provided a constructive read on the labor market ahead of next week's widely watched monthly government jobs report. There was also hope that Washington's fiscal drama will come to a halt even if it means an 11th-hour budget deal. The DAX in Germany was slipping 0.44% while the FTSE 100 was falling 0.71%. The Hong Kong Hang Seng closed up 0.35% while the Nikkei 225 fell 0.26%. The benchmark 10-year Treasury was rising 4/32, lowering the yield to 2.637%. December gold futures were slipping $3 to $1,333.20 an ounce while November crude oil futures were up 10 cents to $102.76 a barrel. Follow @atwtse -- Written by Andrea Tse in New York >To contact the writer of this article, click here: Andrea Tse.>

The Media Is Lying to You About Apple

NEW YORK (TheStreet) -- If you take a step back and consider what has happened in tech over the last several weeks, it's difficult to deny that there's a hate campaign, even if exists in some collective subconscious, against Apple (AAPL).

I'll spare you too many links and YouTube videos; if you follow this stuff, you've seen or heard about everything I will mention. And, if not, trust me because I'm beholden to nobody or nothing . . . not overnight ratings, page views or a big or boutique Wall Street firm.

It's simply an exercise in funny to skim the outskirts of your memory and summarize the lunacy we ultimately dismiss in favor of the noise we can't ignore.

You have Microsoft (MSFT) CEO Steve Ballmer falling into a glass table, bloodying himself, during Nokia (NOK) buyout discussions. The guy tripped and fell or whatever. We all do it from time to time. I'm glad he's okay. So it's not the specifics of the incident that make it worth mentioning; it's just a fitting metaphor for the complete and total ineptitude that has marked his watch over Microsoft's still-pending demise.

Here's a guy who writes down nearly a billion dollars' worth of Surface tablets after touting how well things were going. Where's the SEC when you need them? We'll skip the in-between and just get to his most recent botched experiment in competition -- that Apple-mocking spoof that was so bad Microsoft had to pull it.

But wait, there's more!

On Tuesday, Microsoft pulls a fresh buyback and increased dividend from its tired bag of tricks to pump its stock.

Now, to be fair and provide proper context, I must note that this is an annual occurrence for Microsoft, particularly the dividend hike. Lots of companies who pay dividends regularly raise them on schedule. In fact, the last time Microsoft didn't up the dividend was between FY 2009 and FY 2010. And the timing of this one isn't even suspect; it follows a predictable chronological pattern.

But, again, I -- and others -- chided Apple -- and rightfully so -- for resorting to a dividend and buyback. That plan has hardly worked. All it does is allow guys like David Einhorn to report a better-looking profit/loss column. We should chide Microsoft here for not doing the opposite. If it really wants to get real with investors, it could say, we're suspending these payments because, unlike Apple, we're focused on putting all of our resources toward not ending up like BlackBerry (BBRY).

But, whatever, Ballmer's family jewels appear to have left him at the same pace as his hair.

Then there's the Microsoft/Nokia response to the Apple iPhone 5S/5C event.

It's akin to the Toronto Maple Leafs taking out a full-page ad in the Boston Globe ahead of their next game against the Bruins boasting something like You want some more?

If Microsoft and Nokia want to blow their cash on promoted Tweets, they ought to do a search for "iOS 7" on Twitter and promote one of the many that goes like this:

Ready for iOs 7 tomorrow

� Young Hippie (@LeonFlyOrDie) September 17, 2013

Do you see anything anywhere near the level of excitement that surrounds an Apple software (or hardware) release for an Android update? It's not even close. And you're lying to yourself and the rest of us if you think otherwise. Cutesy Kit Kat statues notwithstanding.

Along similar lines, Samsung introduced a smartwatch last week (or was it the week before) and read me: Nobody cares!

I could go on and on. We could put together a killer comedy routine comprised of the antics and non-events from Apple's competition.

Then there's the media. They're willing to let all of the above and more exit the news flow in less than 24 hours in favor of the, at worst, lie and, at best, context-less puddle of drivel that Apple is losing market share.

In Harshest Critics Don't Understand Apple, I expose the bold-faced fib. iOS is the only smartphone operating system that gained market share in the most recent reporting period. In terms of hardware market share, Apple, without a new phone in approximately a year, still gained ground. Samsung grew just 0.9% points faster than Apple with myriad devices aimed at low-hanging fruit.

I'm as concerned about Apple's long-term future as much as the next guy. I don't have confidence that Tim Cook can doing anything that even resembles a repeat of Steve Jobs' magic. But I don't let this interfere with my ability to interpret and honestly report present reality.

There's no producer of technology who creates more of a buzz, captures more mindshare and, most importantly, generates massive margins and profit on a it will stand the test of time ecosystem than Apple. Not one.

This media hysteria we're seeing results from laziness, unoriginality, group psychology, jealously, a toxic Wall Street environment that few are willing to challenge and spoiled brat syndrome. Apple spoiled us. We assign ourselves Steve Jobs-level genius and then hammer Apple for not showing it to us at every turn.

Follow @rocco_thestreet

--Written by Rocco Pendola in Santa Monica, Calif.

KeyBanc Upgrades The Wendy’s Co. to “Hold” (WEN)

KeyBanc analysts upgraded fast food restaurant operator The Wendy’s Co (WEN) on Friday, noting that the company has a number of positive developments that could provide a floor for the stock.

The analysts upgraded WEN from “Underweight” to “Hold.”

KeyBanc analyst Christopher O’Cull said, “We are raising our rating for The Wendy’s Company to HOLD as we believe: 1) Wendy’s SRS performance will diverge from the industry for the foreseeable future as new products are supported by more effective use of marketing dollars; 2) better menu and promotional management will lead to improved franchisee profitability (a focus of the new CFO Todd Penegor); and 3) the opportunity to extend the re-franchising program will provide a floor on the stock.”

Wendy’s shares were up 7 cents, or 0.81%, during pre-market trading on Friday. The stock is up 57.01% year-to-date.

The Worst Month for Stocks is Not October

Thanks to two major crashes, October usually is pegged as the worst month for stocks - but that's not the case.

It's actually the current month that has delivered the worst performance, leading to the question: Why do stocks fall in September?

Going back to 1929, the S&P 500 averages a 1.1% decline in September. It's the only month to drop more than 50% of the time, according to Standard & Poor's research. All other months have positive returns 60% of the time.

September performance for the Dow Jones Industrial Average is also dismal.

The Dow has lost an average 1.09% in September since the index started in 1896. That compares to the 0.75% gain in all other months.

So what is behind September's bad showing for the stock market?

Why September Is Bad for Stocks

Here are five reasons why stocks tend to fall in September:

In September, moods change as people again focus on portfolios instead of vacations. Investors are more inclined than in the previous summer months to take action and dump losers. "Psychologically, when the leaves turn in the fall, vacations end and the days are getting shorter, there is this kind of negative vibe out there that tends to accentuate any negative events," Dan Seiver, a finance professor at San Diego University, explained to the Associated Press. Tax refunds and bonuses are received in the first few months and often go into IRA accounts or toward maxing 401(k) contributions, so less capital flows into investments in the second half of the year. Mutual funds frequently do some "window dressing." Scores of funds end their fiscal year in September, and they sell their losers and buy the best-performing stocks ahead of presenting their year-end portfolios and fund performances to shareholders. Investors often do a reality check in September. Record stock market rallies have pushed the Dow up some 14.55%, the S&P 500 up 16.64%, and the Nasdaq up 23.74% year to date. Investors want to take a piece of the robust gains before volatility hits. September has seen the highest number of banking crisis events. According to an International Monetary Fund (IMF) working paper, 24 of the 147 global banking calamities since 1970 have occurred in September. Will This September Be Bad for Stocks?

Even without the historical trend, there are factors pointing to increased volatility this month, like these four developments:

Geopolitical risks in Syria and Egypt remain a threat. That means the following: crude oil prices are expected to move sharply higher (higher oil prices leave consumers with less disposable income), and money is shifting from equities into safe-haven assets like gold and silver. The Bank of Japan releases its interest rate decision on Sept. 5. Its benchmark interest rate was last recorded at 0%. The zero interest rate policy is part of a controversial move from Japan's government aimed at expanding the Asian nation's economy and end nearly two decades of deflation. From 1972 until 2013, the rate average was 3.22%. Any rate change from the world's third-largest economy could rattle global markets. The Federal Open Market Committee (FOMC) meets Sept. 17-18, and the big question on everyone's minds is will the central bank taper or not taper its $85 billion monthly bond-buying program. Minutes from the U.S. Federal Reserve's July meeting showed broad support for a scaling back, but a spate of weak economic data may give the Fed reason to pause. Ever since the first mention of a taper, stocks have sold off. Even if the Fed keeps the same course for now, fear of a QE taper could slam stocks before the meeting. We find out who will become Germany's next chancellor on Sept. 18. Analysts expect a victory for Angela Merkel and her ruling collation in September general elections. But there are some who would like to see more active engagement from the country and for the leading Eurozone nation to take on more global responsibility, which Chancellor Merkel has steered clear of. The latest polls have Merkel ahead by 41%. In order to garner the majority of votes, Merkel may have to take a tougher line on banks, push up spending, and raise taxes on high earners - moves that could rattle markets.

As investors, you should be prepared for a busy month. But no matter what happens to stocks, we have you covered with the info you need now.

Here are a couple of stories (in case you missed them the first time) that will prepare you for what's ahead:

As Money Morning Chief Investment Strategist Keith Fitz-Gerald has explained, this is the most unloved bull market in history - and it has gone on for 11 months longer than the average bull market run since 1953. That means you should know how to prepare for a correction; here are some options. With all the "crash talk" floating around markets, there's really only one indicator you should take seriously. Fitz-Gerald spells it out for investors - with four things to do now - in this analysis, "The Only "Crash Talk" Worth Trading." If we do have a volatile September, it will bring about great buying opportunities. Go here to learn from Fitz-Gerald what you should be shopping for: "How To Invest In Today's Volatile Market."

Related Articles:

Associated Press:
September Is Actually Worst Month for Stocks International Business Times:
Why September Is the Worst Month of the Year: Stocks Tank; Banks Fail U.S. News & World Report:
For the Market's Cruel September, a Surprise Ending?

Impact of Currency Pressures

The potential cutback in Fed bond buying has caused major pressure on emerging market currencies and MoneyShow's Jim Jubak explains the implications for investors.

As crises go, the Bernanke Bubble/emerging markets meltdown doesn't come close to layman or anything like that, but it is a major vent for the markets and it's still developing, so for the week ahead I'm going to try to tell you what to watch.

Okay, here's what's going on. When the fed and other central banks did their big quantitative easing programs, they produced a lot of money by buying treasuries and other bonds to put that into the market. Not all that stayed in the United States. In fact, a lot of it didn't because people were looking for higher rates, so in 2012, about 1,200,000,000,000 of that, in fact, went into emerging markets. Now the fed has said they're going to taper off this program. No one knows exactly when. Money is coming back to the United States and leaving the emerging markets. So far in 2013 we've had about, just using ETFs, electronically traded funds, as an example, we've had about 95,000,000,000 float into US stock ETFs and about 8,400,000,000 flow out of emerging markets, so that gives a sense that the cash flow has reversed. This is a problem because it also means that you've got money coming out of countries with big current account deficits. They need the inflow of foreign capital to balance it. Turkey needs about $5,000,000,000 a month, not getting it right now. That puts the pressure on currencies such as the Turkish lira, the Indian rupee, and the Indonesian rupiah. All these currencies are under pressure. They're sinking like a stone. Some of them are back to where they were in 2009. Some of them are back even further. As those currencies fall, it means that you've got a possibility of inflation in those countries because imported goods are more expensive.

One of the things, you've got a lot of companies that loaded up on US dollar denominated debt during the Bernanke Bubble because dollar denominated debt was cheaper. Now they're going to have to pay that debt back in more expensive dollars, so you've got central banks in India, Turkey, and Indonesia intervening and trying to keep their currency from sinking too far. On the other hand, if you're a net current account country running a deficit you don't have a whole lot of foreign exchange. You can't do it forever, so you're watching these central banks decide that they're going to raise interest rates as a way to prop up their currency, which, of course, then has the problem that probably slowed rates, they're going to slow growth, growth is already slowing, so you can see where this is all going. You can see that you've got currencies under attack, which means that stocks are going down; bonds are going down in price in these countries, which of course makes the currencies under attack more, the possibility of slower growth rate, which again makes the currencies less valuable. It makes the financial markets less, assets, drives down those prices. All this is sort of unwinding. It's a question of how far it goes since no one knows exactly when the fed is going to start to taper. It's very hard to pick a bottom, but you've seen tremendous swings. The Indian rupee has been 40 to a dollar. It's now up near 65, so all this is still unwinding. You're still seeing a lot of people just sort of just catching up to it and going oh okay now I'm going to start pulling my money out. We haven't yet seen the final capitulation in a lot of these markets. I think that's still to come.

Basically, right now when most people are at the beach in August, most people in the United States go to the beach in August, you've got this huge international crisis going on. Not a lot of people are focused on it. You need to take a look at your portfolio. It's always better in one of these crises to sell early rather than late. I think you're sort of middle of the crisis, so it's worth selling some stuff now if you think you've got stuff that's really, really exposed and I look at countries with big current account deficits for places to sell. South Africa, Brazil, Indonesia, India, and Turkey would be the five markets I think that are most exposed and the ones to watch in the week ahead.

This is Jim Jubak for the Moneyshow.com Video Network.

SEC’s White Pushing to Finish Fiduciary Proposal ‘Quickly’

Securities and Exchange Commission Chairwoman Mary Jo White told lawmakers Tuesday that the agency was “focused” on completing a fiduciary duty rule proposal and that “it’s important for me to get to wherever we are going on that [rulemaking] as quickly as we can.”

Since the July 5 close of the comment period on the costs and benefits of a fiduciary rulemaking, White (left) told members of the Senate Banking Committee that she has met with senior officials at the Department of Labor regarding collaboration on both agencies’ fiduciary rules and has directed staff “to engage more” with DOL “to make sure they understand [the SEC’s] perspective” on its fiduciary rulemaking, particularly the impact of the DOL’s fiduciary rule proposal on broker-dealers.

However, White stressed at the hearing, titled, “Mitigating Systemic Risk in Financial Markets through Wall Street Reforms,” that while the agencies are collaborating, they will proceed independently.

The DOL’s Employee Benefits Security Administration’s Semiannual Regulatory Agenda, released July 3, states that a reproposal to amend the definition of fiduciary under the Employee Retirement Income Security Act will come in October.

While White said that the SEC is focused on the fiduciary rulemaking--which is not a mandatory rulemaking under Dodd-Frank--she noted the “full plate” of Dodd-Frank and the JOBS Act mandated rules that the agency must wade through and act on.

To ensure completion of both Dodd-Frank and JOBS Act rulemakings, White said that she has created “parallel" teams at the agency to focus on rulemakings under each law. White said that the sheer volume of Dodd-Frank rulemakings as well as the fact that some are more complex than others and need to be worked on jointly with other agencies has delayed action on some. However, she said the agency “is making progress” on various "front burner" issues like derivatives, the Volcker rule, crowdfunding and money market funds.

Action on fiduciary rulemaking, however, could be stymied by the arrival of the two new SEC Commissioners–Kara Stein and Michael Piwowar–who were confirmed by the Senate Banking Committee on July 18. Industry officials say full Senate confirmation of Stein and Piwowar could come this week, before Congress breaks for its August recess.

White noted that the two new SEC Commissioners could hinder completion of the agency’s rules on money market funds, which she said could likely be released in a “month or two.”

The SEC on June 5 proposed two alternative reforms to money-market funds. First, to require that all institutional prime money-market funds operate with a floating net asset value (NAV). Second, to employ a “fees-and-gates” approach in which a nongovernment money fund imposes a 2% liquidity fee if the fund’s weekly liquid assets fall below 15% of its total assets.

White said at the time that the two reforms could be adopted separately or combined into a single reform package. “The two alternative approaches in today’s proposal target the common goal of reducing the incentive to redeem in times of stress, albeit in different ways,” she said.

As to the SEC's equity crowdfunding rules, White said that the agency is working to ensure that the Financial Industry Regulatory Authority's rules governing crowdfunding portals are released simultaneously with the SEC's equity crowdfunding rules.

Santarus Continues to Soar - Analyst Blog

Riding on a strong growth momentum ahead of its second-quarter earnings release, the shares of Santarus, Inc. (SNTS) closed at $25.57 on Jul 12, 2013. Just last week, Santarus had hit a 52-week high of $24.07 and it touched $25.71 on Friday's trading session, representing an upside of 6.8%.

The Zacks Rank #2 (Buy) specialty biopharmaceutical company has consistently delivered positive earnings surprises for the last three quarters. In the first quarter of 2013, the company posted a surprise of 108.33%.

Santarus reported revenues of almost $80 million in the first quarter of 2013. Going forward, performance should be driven by Uceris (mild-to-moderate ulcerative colitis), Zegerid (heartburn and other symptoms of gastroesophageal reflux disease) and Glumetza (type II diabetes).

Uceris, which generated sales of $6.6 million in first quarter of 2013, should continue growing on a sequential basis over the rest of 2013. The Zegerid re-launch should aid revenues as well. Glumetza, targeting the lucrative diabetes market, is expected to witness sales growth from the second quarter of 2013.

Santarus also possesses a strong pipeline consisting of interesting candidates like Ruconest for hereditary angioedema (HAE). The US Food and Drug Administration (FDA) is reviewing the marketing application of Ruconest for the acute treatment of HAE and will render a decision by Apr 2014. Santarus also plans to develop the candidate for the prophylaxis treatment of HAE and acute pancreatitis.

On a price-to-sales basis, Santarus is trading at 7.7x, reflecting a huge premium of 133.3% compared with the peer group average of 3.3x. On a price-to-book basis, the stock is also trading at a premium to the peer group average. However, given the company's strong fundamentals, the premium valuation is justified.

At present, companies like Jazz Pharmaceuticals (JAZZ), Cadence Pharmaceuticals Inc. (CADX) and NPS Pharmaceuticals, Inc. (NPSP) look more attractive with a Zacks Rank #1 (Stro! ng Buy).

Can Dish Network Continue This Bullish Run?

With shares of Dish Network (NASDAQ:DISH) trading around $39, is DISH an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Dish Network is a pay-television provider that offers a range of local and national programming, featuring more national and local high definition channels than most pay-TV providers. A rising number of consumers are opting for satellite services due to the reduced costs and increased coverage offered. Dish Network is poised to capitalize on this rise in consumer interest as entertainment takes the center stage for consumers in the United States. As a television giant, look for Dish Network to provide the services that consumers and companies love.

T = Technicals on the Stock Chart are Strong

Dish Network stock has shot higher over the last several years and is now trading at prices not seen since the early-to-mid 2000s. The stock looks ready to continue higher but it may need some time to digest current prices. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Dish Network is trading near its rising key averages, which signal neutral to bullish price action in the near-term.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Dish Network options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Dish Network Options	42.89%	86%	84%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
July Options	Steep	Average
August Options	Steep	Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Dish Network’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Dish Network look like and more importantly, how did the markets like these numbers?

	2013 Q1	2012 Q4	2012 Q3	2012 Q2
Earnings Growth (Y-O-Y)	-41.25%	-34.09%	-149.30%	-33.33%
Revenue Growth (Y-O-Y)	-0.74%	-1.15%	-2.20%	-0.51%
Earnings Reaction	-2.04%	-0.16%	3.35%	-0.22%

Dish Network has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets have not been too excited about Dish Network’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Dish Network stock done relative to its peers, Directv (NYSE:DTV), Comcast (NASDAQ:CMCSA), Time Warner Cable (NYSE:TWC), and sector?

	Dish Network	Directv	Comcast	Time Warner Cable	Sector
Year-to-Date Return	7.66%	26.83%	8.73%	6.62%	8.15%

Dish Network has been an average performer, year-to-date, with greater or relatively equal return in comparison to its competitors.

NEW! Discover a new stock idea each week for less than the cost of 1 trade. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Conclusion

Dish Network is a provider of local and national television programming offering more channel options than many other providers. The stock is on a bullish run and is trading at prices not seen since the mid-2000s. Over the last four quarters, investors have not been to excited with the company as earnings and revenue figures have been decreasing. Relative to its peers and sector, Dish Network has been an average performer, year-to-date. WAIT AND SEE what Dish Network does in coming quarters.

5 Uptrending, 5 Downtrending Stocks

Corey Rosenbloom of AfraidToTrade.com shares the results of his scans, which identified candidates for trading pro-trend retracement entries, aggressive reversal, or as fade candidates for counter-trend trades.

Let’s update our ongoing stock scan of the uptrending stocks most overextended and downtrending stocks most under-extended stocks from their 200-day simple moving average.

This scan provides candidates to trade pro-trend retracement entries or alternatively, aggressive reversal or ‘fade’ candidates for those inclined to trade counter-trend movement.

We’ll start with the most over-extended stocks above their rising 200-day SMA:

All five top SP500 over-extended stocks are clustered roughly 50% above their rising 200-day simple moving average so there isn’t much difference in the list this month.

GameStop (GME) and Netflix (NFLX) have experienced stellar uptrends as shown in the quick charts below:

Netflix (NFLX):

Generally, a trader would prefer to enter a stock that is rising in a persistent uptrend through a pullback or retracement, similar to a “bull flag” pattern.

While GameStop (GME) just completed a ‘flag’ retracement to the rising 20-day EMA (trade entry signal), it remains in breakout bullish mode without a clear entry signal.

Netflix (NFLX), however, is in the midst of a retracement to the rising 20- and 50-day EMAs, which marks a pivot or decision-point (inflection point) for the stock.

Another current top stock, Best Buy (BBY), has shown a persistent uptrend as well but the retracements have not been as clear (the trend has been more of a ‘creeping’ mode):

As we often discuss in these stock-scan update posts, aggressive traders can look to short-sell overextended movements away from the rising 20- or 50-day EMA to play for a ’scalp’ or retracement back to rising moving averages.

It’s often better, or at least lower-risk with higher reward potential, to join uptrending stocks as opposed to fighting them by adding shares on pullbacks to rising moving averages.

The same can be said about downtrending stocks extended down from their falling 200-day SMA:

We’ll skip News Corp. (NWSA) and focus on the other names for candidates.

Specifically, Newmont Mining (NEM) has formed an interesting retracement to compress again between the 20- and 50-day EMAs:

I highlighted each of the prior four instances during the persistent downtrend where shares have retraced into the “grey area” between the falling 20- and 50-day EMAs.

These always form decision-points where aggressive traders can play for a bullish breakout and reversal on a clean break ABOVE the 50 EMA, or else pro-trend retracement-style traders can enter the ongoing downtrend on retracements to the falling 50-day EMA or else a breakdown under the 20 EMA.

Watch the divergences—they tend to argue for a reversal play but price has to prove it is capable of reversing, else the next swing will be a simple pro-trend movement back to the $27.00 per share low.

Similarly, Cliffs Natural Resources (CLF) is threatening a bullish reversal:

I highlighted the prior “trap” on the May 2013 breakthrough above the 50 EMA, which is similar to the current breakout above $18.00 per share.

Breakouts generate excitement yet buyers/bulls must sustain the breakout and enthusiasm, lest the persistent downtrend resume with a ‘failure outcome’ and bearish trigger under $18.00 per share.

You’ll likely find familiar names like Netflix (NFLX) and Best Buy (BBY) on the upside along with Cliffs Natural (CLF) and Newmont Mining (NEM) on the downside, which simply reminds us of the power of persistent trends in motion.

By Corey Rosenbloom, CMT, Trader and Blogger, AfraidToTrade.com

How to Make Money in Smart Grid Stocks

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some smart grid stocks to your portfolio, but don't have the time or expertise to hand-pick a few, the First Trust NASDAQ Clean Edge Smart Grid Infrastructure ETF (NASDAQ: GRID  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of smart grid stocks simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The First Trust ETF's expense ratio -- its annual fee -- is 0.70%, which is a bit more than many ETFs, but still considerably lower than a typical stock mutual fund. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is too young to have a sufficient track record to assess, but it has underperformed the world market over the past three years. It's the future that counts most, though, and, as with most investments, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why smart grid stocks?
Building a smart grid involves the process of modernizing, digitizing, and making more efficient our electricity industry's infrastructure. Many expect big things from it, with Cisco Systems CEO John Chambers suggesting, back in 2009, that it will be a bigger business than the Internet. Some smart grid stocks are pure plays, while others are bigger companies engaged in lots of other operations, too.

More than a handful of smart-grid-related companies had strong performances over the past year. Solar energy inverter maker Power-One (NASDAQ: PWER.DL  ) , and utility contractor Pike Electric (NYSE: PIKE  ) , both surged 44%. Power-One's gain is in large part due to its being acquired, at a premium, by Switzerland-based power and automation technology giant ABB. Some have worried about inverters becoming commoditized, but others have admired Power-One's profitability and solid balance sheet.

Expectations for Pike Electric have been so high that the stock slumped in May on news that its third-quarter revenue and EPS grew only by 23% and 33%, respectively. Management blamed the weather for some slowdown in construction. Analysts at Stifel downgraded the stock in March, but then upgraded it back to a buy rating in May.

General Electric (NYSE: GE  ) jumped 24%, and recently yielded 3.2%. The company makes hardware and software for the smart grid, such as its smart meters. It's pretty far away from being a pure play among smart grid stocks, though, as its portfolio includes everything from light bulbs to refrigerators, to aircraft engines, to mammography systems, to mining equipment, and much more. Its latest earnings report is coming up later this week, and in its last quarter, it posted operating earnings up 15%, and equipment orders up 10%. One factor holding the company back has been weakness in Europe. GE has been boosting its involvement in renewable energy in recent years.

Canada's largest energy company, Suncor Energy (NYSE: SU  ) gained 10%, and yields about 2.5%. The company has expertise in deep oil sands, which are not known for cleanliness, but it's also investing more heavily in renewable energies. In recent news, pipeline shutdowns due to flooding put a crimp in production. Suncor is vulnerable to possible tightened regulations on pipelines, and its diversification beyond North America.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in, and profiting from it, that much easier. It you're interested in smart grid stocks, give this ETF a closer look. Or just examine the smart grid stocks within it.

This ETF focused on smart grid stocks isn't the only one to consider. I invite you to check out our special free report, "3 ETFs Set to Soar," which will introduce you to a few ETFs that have great promise for delivering profits to shareholders. Just click here to access it now -- for free.

Why Ford Is Beating General Motors

Ford Headquarters. Photo Credit: Ford Motor Company.

Ford (NYSE: F  ) and its crosstown rival General Motors (NYSE: GM  ) have been battling for a century to be the best-selling domestic automaker. It's hard to believe after so much time that the automakers are still really neck and neck here in the U.S. market. With the first half of the year in the record books, GM sold 1,420,346 units in the U.S. compared to Ford's 1,289,736. Ford is narrowing the gap and has increased its market share more than any other automaker from the same time period last year. Ford's 13.1% increase over last year's sales was also the second best of all automakers – only because Subaru had such a smaller unit of base sales to increase from. While Ford continues to narrow the sales gap there's more to the story here – Ford is killing GM on the bottom line. 

Top line vs. bottom line
In many ways Ford and rival GM represent a yin-yang relationship, where one's strength represents its rival's weakness. GM still ranks atop the U.S. in sales, and competes with Toyota globally for the sales lead creating its strength in top-line revenues. On the other side, Ford has its strength in consolidating platforms and streamlining production to create strong margins and profits – strengthening its bottom-line profits. That's where I believe Ford has won the game thus far, and should continue to do so.

In 2006, when Alan Mulally was introduced as CEO, the launch of his "One Ford" plan emphasized a few key strategies right off the bat. One of those strategies was streamlining global platforms. No longer would Ford have different platforms for similar vehicles in various markets around the world – a huge operating cost.

To explain a little better, consider that Ford's "C" platform produces two very different vehicles that can be produced with many of the same basic parts on the same assembly line. Two of the vehicles on the "C" platform are the Focus compact and the Escape SUV. Creating both of those different vehicles using some of the same essential parts creates economies of scale and increases profitability per vehicle.

Taking a step back and looking at the big picture, consider that Ford had 27 platforms in 2007, but by next year that number will be reduced to 14. Ultimately it will be down to as few as nine core platforms, giving Ford a unique ability to create many different vehicles and focus on improving the quality of the parts used.

GM, who is years behind in consolidating its platforms, had 30 platforms in 2010 and plans to narrow that to 17 by 2018. This is definitely part of the reason that Ford's operating margins in North America were 11% in the first quarter, whereas GM only managed 6.2%. It's also part of the reason GM's net income in North America last quarter was $1.18 billion, trailing Ford's $1.6 billion.

Bottom line
Ford is years ahead in streamlining operations and consolidating global platforms. GM is taking notes and will fix its weakness, but I believe that by the time GM does so, Ford will have increased its sales and market share through its new and popular vehicles, and could leap over GM for the best-selling automaker in the U.S.

Only time will tell which automaker brings the greatest returns for investors, but one thing is for sure: Both are correcting mistakes and weaknesses that have lingered for the last decade. I think both are great investments with their respective company improvements, and the momentum in the automotive industry looks to remain strong in the years ahead.

Ford is beating GM on the bottom line, but another factor may decide which automaker is the best investment. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market", names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free – just click here for instant access.

Apple Scores in the Education Market

Little by little, the Apple (NASDAQ: AAPL  ) iPad continues to make headway in the education market. Last week, the company announced that it will supply the Los Angeles Unified School District with $30 million worth of iPads. Starting this fall, the country's second-largest school district will begin to outfit each student with their very own iPad, which it expects will be completed in 2014. Upon completion, the LA School District will become the largest school district in the nation to give all of its students the iPad.

Add this to the tally!
According to Philip Schiller, Apple's senior vice president of worldwide marketing, nearly 10 million iPads are already in the education system. Based on the iPad's average selling price of $449 during its fiscal second quarter, Apple has cumulatively raked in nearly $4.5 billion from education alone.

According to IDC, annual tablet shipments to the education sector grew by 103% in 2012. As a result, the share of tablets in the education client device market grew from 19.4% in 2011 to 35.4% in 2012. Going forward, IDC expects this is just the beginning of a trend where tablets make up a greater share of education client devices. A key growth driver will be government mandates to digitize education coupled with the relatively low cost of tablets.

The mother of all opportunities
Back in February, it was widely reported that Apple was in the running for a massive contract with the Turkish government to supply up to 15 million students with iPads. Just a few weeks ago, the Turkish Prime Minister was seen visiting Apple's headquarters to hear the company's final pitch. If a deal is reached, it's expected to bring in about $3 billion to $4 billion in revenue over the next four years, which initially will translate to 10.6 million tablets. However, investors shouldn't bank on this being a done deal, because Google and Microsoft are also reported to be in the running.

If Apple does land the deal, it reinforces that its streamlined user experience is unmatched, making it a perfect fit for the education market. Given the deal's size, it could also be the catalyst that gets Apple investors excited again about the company's growth prospects.

Apple has a history of cranking out revolutionary products... and then creatively destroying them with something better. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.

Boeing's Cheap Play Could Cost It $700 Million

The KC-46 tanker that Boeing (NYSE: BA  ) is building for the United States Air Force is on track for a major design review in July. Considering that Boeing is looking at absorbing an estimated $700 million in cost overruns thanks to the fixed-price nature of the contract, the fact that the project is on schedule is a welcome sign. Here's what you need to know. 

KC-767Aeronautica Militare refueling B-52H. Source: Wikimedia Commons. 

When aggressive bidding bites back
Bidding for the U.S. Air Force tanker contract was fierce, to say the least, and defense heavyweights such as Northrop Grumman (NYSE: NOC  ) , and European Aeronautical Defense and Space (NASDAQOTH: EADSY  ) , submitted bids. In fact, when Boeing's initial win was rescinded because of shenanigans -- people even went to jail -- a bid from Northrop/EADS won the second go-around. However, Boeing wasn't willing to give up that easily and lobbied to have the award overturned. It worked, and Boeing won the third and final round. 

The reason Boeing's bid beat out EADS in the final round was that it came in 1% below EADS. Boeing admitted that its bid was "aggressive." More pointedly, in 2011, James Bell, who was then Boeing's chief financial officer, said, "We have always bid this contract thinking this, on the development phase, would be a very low profitability or breakeven." 

Well, breakeven didn't happen, and now Boeing is on the hook for anything over the agreed-upon development-stage price of $4.9 billion. And while Boeing estimates that cost to be around $5.2 billion, the Air Force estimated it to be closer to $5.6 billion.  

High-flying profits in the future?
Even though Boeing is looking at a pretty expensive cost overrun right now, potential future profits will more than offset the cost. The initial KC-46 tanker contract win was worth $35 billion for the purchase of 179 tankers. That worth has since climbed to an estimated $52 billion, and some analysts estimate that with future parts and maintenance, it could climb to $100 billion. 

In any event, the crash of the U.S. Air Force KC-135 tanker in early May highlights the need for updated tankers, as the current fleet is more than 50 years old.  

What to look out for
The new tankers aren't scheduled to come online until 2028, and there's a lot that could go wrong between now and then. The good news is that the tanker is based on Boeing's commercial 767, and not the troubled 787 Dreamliner, so perhaps it won't face too many issues going forward. More importantly, if Boeing keeps the tanker on track, this is definitely something that could prove positive for Boeing's stock. But right now, that's still a big "if," and investors would do well to continue closely monitoring Boeing's progress.

With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery" outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

Why UniPixel Shares Popped Temporarily

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of UniPixel (NASDAQ: UNXL  ) popped temporarily today, up by as much as 11% after the company received a milestone payment for its UniBoss license.

So what: The company received a $5 million payment from its recently announced capacity license with Eastman Kodak, which was inked to facilitate the development, introduction, and production of products using its UniBoss sensor film. The amount will be recorded as deferred revenue in the second quarter and UniPixel will use the funds to build out additional production capacity.

Now what: CEO Reed Killion said the payment marked a major milestone on the company's path toward a worldwide commercial rollout, and that the ramp-up schedule is on track. The news follows a 26% plunge on Friday after a handful of negative rumors, including one that suggested that Apple could become a direct competitor after the Mac maker filed a patent application. Analysts discredit this notion, saying that Apple's patent does not threaten UniPixel. The milestone payment may have sparked a rebound rally, but shares have since given up all gains and then some.

Interested in more info on UniPixel? Add it to your watchlist by clicking here.

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Why the Street Should Love Grupo Aeroportuario del Sureste's Earnings

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on Grupo Aeroportuario del Sureste (NYSE: ASR  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, Grupo Aeroportuario del Sureste generated $157.8 million cash while it booked net income of $164.4 million. That means it turned 37.3% of its revenue into FCF. That sounds pretty impressive. However, FCF is less than net income. Ideally, we'd like to see the opposite.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at Grupo Aeroportuario del Sureste look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

With 23.8% of operating cash flow coming from questionable sources, Grupo Aeroportuario del Sureste investors should take a closer look at the underlying numbers. Within the questionable cash flow figure plotted in the TTM period above, other operating activities (which can include deferred income taxes, pension charges, and other one-off items) provided the biggest boost, at 18.9% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures, which consumed 22.7% of cash from operations. Grupo Aeroportuario del Sureste investors may also want to keep an eye on accounts receivable, because the TTM change is 3.0 times greater than the average swing over the past 5 fiscal years.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

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We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

Add Grupo Aeroportuario del Sureste to My Watchlist.

Updating the Bypass Trust

Is the bypass trust dead? Many people believed when the lifetime estate tax exemption rose to $5 million per person (indexed for inflation), the role of bypass trusts in most estates ended. Far from it. Under the current tax law the bypass trust can be turned from a powerful estate tax saver into a tool for optimizing income tax planning and meeting nontax goals.

Let’s first review how the bypass trust traditionally was used in estate plans and still can be used when the estate is valuable enough to be taxable.

The bypass trust (also called a credit shelter trust or A/B trust) was essential for married couples when the estate tax exemption was lower and most estates were at risk of incurring taxes. The will would direct to the bypass trust an amount of wealth equal to the estate tax exemption, and in the standard will the rest of the estate was given directly to the surviving spouse. The bypass trust stated that the surviving spouse would receive all the income from the trust each year and also could receive any principal necessary to maintain his or her standard of living. After the surviving spouse passed away, the children of the couple became beneficiaries of the trust.

The effect of this strategy was to avoid taxes on an amount of the estate of the first spouse to pass away equal to the estate tax exemption, so it passed to the children without being reduced by any estate taxes. Yet, the surviving spouse was provided for with the assets in the trust, though the value of the trust wasn’t included in the surviving spouse’s estate. The surviving spouse also could pass on an equal amount estate tax free using his or her own lifetime exemption.

With the exemption at $5.25 million per person for 2013 and $5,340,000 for 2014, only a few families need a bypass trust to help shield their estates from taxes. Families with estates below the exempt amount still should consider using a bypass trust to meet other non-estate tax goals and adapt the trust terms for today’s circumstances.

The primary goal of a bypass trust now probably should be to minimize the family’s income tax burden over the years. Start by giving the trustee more discretion regarding distributions from the trust and by naming the spouse and children and perhaps grandchildren as current beneficiaries instead of only the spouse.

Also, give the trustee more discretion regarding the investment strategy. Typical trust terms these days require the trustee to use modern portfolio theory or some similar form of diversification. The problem with this language is that under today’s tax code the location of assets matters considerably. It can mean the difference between paying ordinary income tax rates, long-term capital gains rates, or no tax.

Trusts reach the highest tax bracket and have surtaxes, such as the 3.8% net investment income tax, imposed at very low income levels. In addition, when assets are put in a trust they retain the tax basis the original owner had, and when distributed from the trust retain the tax basis the trust had. But assets held by the surviving spouse have their bases increased to current market value when they are bequeathed to the next owners, such as the children.

The trustee can take advantage of current income tax planning strategies and minimize income taxes on the family when given broader discretion regarding investments and distributions than is traditionally allowed.

The trustee can be allowed to consider family-wide asset allocation instead of only the trust’s investment portfolio when making investment and distribution decisions. The trustee also can be empowered to consider family-wide and long-term tax considerations as well.

For example, instead of distributing primarily investment income to the surviving spouse, the trust can distribute assets that have appreciated significantly. Removing them from the trust makes it possible for the surviving spouse to hold them for life and allow the heirs to increase the tax basis to their fair market value at the surviving spouse’s death. The heirs then can sell them and pay no capital gains taxes on all the appreciation.

You might want to put limits on this discretion, because when assets leave the trust there is the potential that they won’t find their way to the children. They might be redirected to charity or the family of a subsequent marriage. So, the trust agreement might give the trustee discretion to distribute to the surviving spouse only assets that have appreciated by, say, 20% or more or put a dollar limit on such distributions.

When the trustee has discretion to take income taxes into account in both portfolio decisions and distributions, he or she might be able to increase family after-tax wealth and income by avoiding the top tax bracket and the 3.8% investment income tax on trust income.  

You also should reconsider the powers of appointment clause of the trust. This clause allows a person, usually the surviving spouse, to decide who among the other named beneficiaries, usually the children and perhaps the grandchildren, will benefit from the remaining trust assets. The clause also might allow the spouse to decide if assets should be distributed outright to beneficiaries or retained in the trust for a period of time.

In the past, there was a bias to using a limited power of appointment. That kept trust assets from being included in the estate of the surviving spouse. But, because of the step-up in basis allowed beneficiaries who inherit and the high estate tax exemption, it might be beneficial to give the surviving spouse a general power of appointment over assets that have appreciated significantly. That puts the assets in the surviving spouse’s estate. That, in turn, allows the heirs to increase their basis in the inherited assets to current fair market value and avoid capital gains taxes when they sell the assets.

A final consideration is state taxes. These are a greater component of the overall tax bill than in the past, and in many states are likely to rise further. You might want to give the trustee or some other person the power to relocate the trust’s state of residence, particularly if the surviving spouse moves to a low income tax state but the trust was set up in a higher income tax state. A move would save money and be convenient.

A bypass trust also will continue to provide its traditional benefits. The surviving spouse has support and the remaining assets eventually go to your intended final beneficiaries. It also can provide professional management, creditor protection, and family-wide financial planning. With the recommended modifications, the bypass trust also helps reduce income taxes.

Bypass trusts should remain key elements of many estate plans. Their estate tax reduction benefits are necessary for fewer people, but they provide other valuable benefits when adapted for current law.