Momentum strategy: Skip stocks, go for sectors

A momentum strategy can boost returns without too much risk. Just don't be too greedy.

(Money Magazine)

That's especially true if you are constantly moving in and out of individual securities, which is the classic momentum strategy. Yet a decent body of research suggests that entire asset classes that shine in one year have a better-than-average chance of outperforming in the next.

"Momentum is persistent, pervasive, and well documented in virtually every investment and in every country," says Gregg Fisher, chief investment officer with the asset-management firm Gerstein Fisher.

So how do you take advantage of momentum wisely? As with many things in life, moderation is key.

Lessen the bounce

Sam Stovall, chief equity strategist with S&P Capital IQ, points out that any added gains from buying what's been going up "don't come free." History shows that momentum investors have to assume greater fluctuations in their returns.

Related: Invest in innovation - 5 stock picks

But there's a neat twist to the numbers. Researchers at the asset-management firm Leuthold Group divvied up the investment universe into seven major asset classes: blue-chip U.S. stocks, small-company shares, foreign equities, government bonds, commodities, gold, and real estate investment trusts.

Over the past four decades, a portfolio entirely made up of the prior year's absolute top asset class beat the S&P 500 by more than three percentage points a year, but it was also two-thirds choppier.

A "bridesmaid" portfolio composed of the previous year's second-highest performer, however, was only slightly more volatile than the index, and it returned five percentage points more. (For the record, last year's runner-up asset class was blue-chip U.S. stocks. Small U.S. stocks were the absolute winner.)

Be only a little greedy

Of course, no sane investor would keep such an undiversified portfolio; there are years it would kill you.

Related: Do your retirement dreams match?

In 1997, for instance, you would have lost more than 14% holding a basket of commodities while the S&P 500 returned more than 33%. And turning over sizable chunks of your holdings would indeed cost you in fees and taxes, eating into your gains. So momentum strategies should be applied with a good bit of caution.

Fisher suggests that you think about leaning slightly toward what's hot -- say, by moving up to 10% of your portfolio to a momentum-driven approach -- rather than committing huge chunks of your capital.

"Our view is that investors are well served by tilting toward momentum," Fisher says. "But they're even better served by doing so in the context of a well-diversified portfolio."

First Published: March 5, 2014: 4:32 PM ET

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U.S. seizes $458 million stolen by Nigeria dictator

NEW YORK (CNNMoney)

More than $458 million of assets laundered through the U.S. and placed in accounts located in France and the Bailiwick of Jersey have been frozen, DOJ said Wednesday.

Accounts in the United Kingdom, which are expected to contain an additional $100 million, have also been frozen. The exact amount in the accounts has yet to be determined.

The assets were allegedly taken from the Nigerian government by General Sani Abacha, who served as the country's President from 1993 to 1998, when he died. Abacha and his conspirators allegedly laundered the money by buying American bonds and moving them to accounts overseas through U.S. financial institutions.

Related: Ex-employee says Madoff "told me what to do"

"General Abacha was one of the most notorious kleptocrats in memory, who embezzled billions from the people of Nigeria while millions lived in poverty," said acting Assistant Attorney General Mythili Raman in a release.

The schemes occurred in the 1990s and continued through 2011.

The case was brought under the Justice Department's Kleptocracy Asset Recovery Initiative, a program that began in 2010.

First Published: March 5, 2014: 5:38 PM ET

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You can keep your old health plan till 2016

NEW YORK (CNNMoney)

The change could prevent Americans from receiving a new round of termination letters just before the November midterm elections. The cancellations last fall created a public relations nightmare for Obama officials, leading them in November to allow insurers to extend these plans into 2014.

But the move doesn't automatically mean people can keep their old plans, which typically have lower premiums because they don't provide the comprehensive coverage required by Obamacare. As before, state insurance commissioners have to permit insurers to continue offering these policies and insurers have to opt to do so.

About half of states allowed insurers to offer renewals. Administration officials cited a RAND study that estimated 500,000 kept their pre-Obamacare policies into this year.

These plans, which often carry high deductibles and offer skimpy coverage, were originally supposed to end and be replaced with Obamacare-compliant policies. Obamacare plans set an annual limit on out-of-pocket expenses and cover many more benefits, including drugs and maternity care.

Many states, however, refused to allow the extensions, fearing that it would drive healthier residents away from the Obamacare exchanges. That would increase the risk profile of the exchanges, possibly leading to a hike in premium prices for 2015.

The National Association of Insurance Commissioners said Wednesday it remains concerned that the renewal option could sow confusion and have a negative impact on rates.

"Once again, state insurance commissioners will need to consider carefully how this will impact rates, consumer options, and the overall marketplace," said Adam Hamm, the group's president, in a statement. "Even if the regulator decides to allow the plans to continue without coming into compliance, carriers may still cancel plans, as we saw in several states after the November announcement."

Several major insurers did not immediately return requests for comment. But the industry's trade group issued a statement saying that if more young and healthy people chose not to go into the exchange, it could lead to higher premiums for those in exchange plans.

The policy shift, the latest in a long string of changes and delays in Obamacare's implementation, would allow insurers to offer renewals on policies that begin on or before Oct. 1, 2016. That means some customers can stay on these plans into 2017.

The renewal option also applies to small businesses. The Congressional Budget Office estimated that a total of 1.5 million individuals and small businesses retained their former plans, administration officials said.

Unlike last fall, when the administration move came as a surprise to many, White House officials said they are announcing this change early to allow commissioners, insurers and customers time to make decisions and set rates for 2015. A senior administration official said there would be no more major changes to Obamacare this year, reiterating that open enrollment for 2014 will end March 31.

Also, officials announced that the open enrollment for 2015 coverage would be extended. It will now run from Nov. 15 to Feb. 15.

And the annual limit on out-of-pocket costs for individuals in 2015 will go up to $6,600, from $6,350 this year, and $13,200 for families, from $12,700.

First Published: March 5, 2014: 4:15 PM ET

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Smith & Wesson sales jump 7%; shares surge

Handgun sales increased 30% for Smith & Wesson in the third quarter.

NEW YORK (CNNMoney)

The growth was fueled by an increase in handgun sales, which surged 30% compared to the same quarter last year.

Gun sales surged following a series of shootings, especially in Newtown, Conn., in December 2012, as people feared President Obama would successfully pass restrictive gun legislation.

Related: Italian gunmaker brings factory jobs to U.S.

But Obama failed to get a gun bill through Congress, and FBI data shows that this year's sales have fallen from their peak. The CEO of rival gunmaker Sturm Ruger (RGR) recently warned that sales are coming down to more "realistic" levels in 2014.

Despite the low expectations, Smith & Wesson increased its estimated sales for fiscal year 2014, which ends in April.

In the latest quarter, the company brought in almost $146 million in sales.

Gross profit also surged. The gunmaker earned $58.7 million compared to $49.9 million during the same quarter last year.

Shares of Smith & Wesson (SWHC) rose more than 7% on the news.

First Published: March 4, 2014: 5:32 PM ET

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Moody's downgrades Chicago amid pension crisis

NEW YORK (CNNMoney)

After years of avoiding the issue, the city of Chicago is facing a massive spike in its annual bill for the pensions it promised current and retired workers. Next year, the city's required contribution will more than double to $1.07 billion.

Moody's said the pension crisis threatens "the city's fiscal solvency," without major tax hikes or budget cuts.

Related: Chicago workers to protest as pension crisis brews

Chicago is home to one of the most troubled pension systems in the country. In total, the city's four pension funds -- for firefighters, police officers, and two for other city workers -- face funding holes of nearly $20 billion.

Tuesday's downgrades affect $8.3 billion in city debt, including $7.8 billion in general obligation bonds and $556 million in sales tax bonds. It follows previous downgrades by Moody's and other ratings agencies.

It also comes as the city prepares to issue hundreds of millions in new bonds, according to Moody's.

The latest hit to the city's general obligation and sales tax ratings puts that debt only a few notches away from junk status. Moody's said its outlook remains negative, which means additional downgrades could come.

First Published: March 4, 2014: 7:05 PM ET

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China's reform progress tops congress agenda

China kicks off its annual parliamentary meetings in Beijing Wednesday.

HONG KONG (CNNMoney)

The National People's Congress, often criticized as mere political theater, remains an opportunity for top Communist Party brass to reveal new plans and announce economic targets. This year's meetings are of particular note -- it's the first such gathering that President Xi Jinping and Premier Li Keqiang will preside over, since assuming their top posts a year ago.

Beijing promised a slate of reforms last year at two major political meetings, broadly pledging to clean up corruption, stabilize economic growth, and open up China's financial markets. That was on top of social measures that aimed at clearing heavy pollution and easing family planning policies.

The reform measures are nothing if not ambitious. Capital Economics called one laundry list of proposals "the most impressive statement of reform intentions that we've seen this century." But the big question is whether Beijing will follow through on its promises. Some reform initiatives -- such as reforming state-owned companies, managing local government debt and fiscal reform -- have lacked specifics.

Related story: China's anti-corruption drive eats into growth

Xi's sweeping anti-corruption campaign has placed a number of government officials and company executives under investigation. Officials have been banned from conspicuous spending -- no more extravagant banquets, riding in showy cars and gifting luxury items. Some critics say the crackdown is more about knocking out political opponents, but either way, it's a move that has gathered significant momentum.

China has also begun testing a number of financial reforms in a free-trade zone in Shanghai, including greater foreign investment access and experimentation with market-based interest rates.

Related story: Beijing loses billions as rich skip taxes

More recently, the People's Bank of China has allowed the tightly-pegged yuan to fluctuate a bit more than usual -- a possible sign that Beijing is getting serious about building a more market-driven economy.

Despite these strides, China still faces an uphill battle in implementing some reforms, especially in the face of slowing economic growth. While economists agree China needs to change, gains may not be reflected in the economy for years.

Related story: The economics of China's one-child policy

Looking ahead, there are a number of areas that experts say the government must still address, including tax reform, shadow banking regulation, food safety and shoring up the country's social safety net.

Tackling even just one of those could help alleviate a number of major challenges. Tax reform, for example, "is crucial for addressing local government debt, property bubbles, and financial risk," analysts at Barclays wrote in a recent research note.

First Published: March 4, 2014: 8:32 PM ET

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Heed these market signs

Three key market indicators are flashing caution.

(Money Magazine)

Not that a decline is totally unexpected: Total returns for the Standard & Poor's 500 have tripled in the past five years -- that's a year longer than the average bull run -- and stocks have seemed due for a fall. Indeed, in our annual Investor's Guide, MONEY warned of tough sledding ahead.

Still, bull markets have been known to defy the odds and linger long past their expected expiration date. Even the January indicator has been wrong four times out of 10 when it comes to predicting market drops -- witness this year's market bounce-back in February.

How, then, can you tell whether stocks' earlier setback signals the end of the bull market or is merely a pothole on the road to higher prices? The following indicators have proved to be among the most accurate over time.

Revenues are key

Stock valuations shot up last year in anticipation of a strengthening economy and growing corporate profits. And earnings did improve, rising just shy of 15% in 2013 for S&P 500 companies.

That stellar outcome, however, didn't reflect true strength in the underlying businesses -- revenues last year inched up 2.6%. Instead, earnings per share were partly inflated by cost-cutting initiatives and stock buybacks that reduced the number of shares outstanding, as companies took advantage of Fed-engineered low-rate financing.

Related: Stocks, bonds? In 2014, think cash

For the market to keep advancing, says BMO Private Bank chief investment officer Jack Ablin, profits going forward need to be driven mostly by rising revenues.

Indicator to watch. Track S&P 500 revenues using the price-to-sales ratio (go to multpl.com). At 1.6, the P/S is now 15% above its historical average. Traditionally that's been more likely to signal subpar returns ahead than a market drop: Since 1993, in the three years following a reading of 1.6, stocks have eked out average annual gains of 1%, says Ablin.

When to really worry. A P/S of 2 would be "a huge red flag" says Ablin. When the P/S peaked at 2.3 in early 2000, he notes, stocks lost 44% over the next three years.

See who's at the party

When a bull has nearly run its course, fewer and fewer stocks participate in the rally, and new market highs are powered by a small number of companies. That was another warning in the year leading up to the dotcom bust of 2000: Only about 50 holdings drove the S&P 500's record returns.

Indicator to watch. The advance-decline line tracks the number of stocks rising and falling, moving up when more stocks gain than lose. It typically peaks three to six months before a downturn, says James Stack, president of the InvesTech newsletter. For most of last year advances far outnumbered declines, but lately the reverse has been happening.

When to really worry. Sound the alarm bells if the advance-decline line moves in a different direction from market indexes -- a phenomenon, known as divergence, that has proved even more telling than movements in the AD line alone, says wealth manager Barry Ritholtz.

Related: How to take a stock loss on your taxes

In both 1973 and 1980, for example, the markets saw major divergences before crashes. Ritholtz points out, though, that so far this year the AD line has moved largely in line with the indexes.

Beware of overconfidence

"Be fearful when others are greedy," Warren Buffett has famously said. It's a reference to investors' rotten record of market timing, with many historical examples (1990, 1999, and 2007, just to name three) of them piling into stocks just before a precipitous price drop. That's why analysts often view investor sentiment as a contrary indicator.

Indicator to watch. The American Association of Individual Investors tracks bearishness among its members on a weekly basis (aaii.com/sentimentsurvey). At the end of last year AAII found that only 18.5% of investors were bearish, vs. a long-term average of 30.5%. Typically the market has delivered underwhelming returns the year after such a reading, but not losses.

When to really worry. Six of the nine times since 1987 that bearishness fell below 10.5%, stocks slumped within six months, says AAII's Charles Rotblut, losing 15% over the next year. If that happens, bearishness will no doubt spike, and you can follow the other half of Buffett's advice: "Be greedy when others are fearful."

First Published: March 3, 2014: 4:16 PM ET

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Russian energy should keep flowing

Russia exports huge amounts of oil and natural gas to the West, exports that should still flow regardless of the situation in Ukraine.

NEW YORK (CNNMoney)

Russia's energy exports are huge. The country sends more than 7 million barrels of oil a day to the world markets -- a number roughly equal to what the United States imports. While a disruption of that size may be temporarily covered by production increases from other countries and by tapping reserves, the impact on oil prices would likely be crippling for the global economy.

For the Russians, the trade in oil -- and to a lesser extent natural gas -- earns the country 70% of its $515 billion in annual export revenue and accounts for 52% of the federal budget, according to the U.S. Energy information Administration.

Because of this, it's thought that any sanctions that might be imposed on the country for its adventures in Ukraine would be limited in scope and exclude oil or gas.

"Disruption to energy trade would be in neither side's interest," analysts at Capital Markets wrote in a note Monday. "We suspect that any Western sanctions will only target individuals, and political and cultural links, rather than trade."

As such, the surge in oil prices Monday is being viewed as temporary.

"The pullback will be equally measured, if the fever breaks," Mike Fitzpatrick, editor-in-chief of Kilduff Report's Energy Overview, wrote in a note.

Related: How the markets should read the Ukraine crisis

Natural gas is a slightly different story. Europe currently gets about 25% of its natural gas from Russia. That gas is used to produce electricity, heat homes, and in the making of fertilizer and cement.

Unlike oil, which can be shipped by tanker from other parts of the world in the event of a disruption, natural gas pipelines are fixed. If there's a problem with the supply, it's not easy to cover that with supplies from another region. And the problem in this case is that many of Russia's natural gas pipelines to Europe go though Ukraine, said Jeffrey Mankoff, deputy director of the Russia and Eurasia program at the Center for Strategic and International Studies.

In the past, disputes between Russia and Ukraine over how much the Ukrainians pay for natural gas has resulted in the Russians shutting off those pipelines -- and hence some gas not reaching Europe.

There's a chance that could happen again. On Monday, Russian news agency ITAR-TASS reported that the current discount Ukraine gets on Russian natural gas may be "revised."

Still, analysts don't see trouble anytime soon.

For one, the relatively warm winter in Europe means there's an abundance of natural gas in storage, according to Laurent Ruseckas, senior adviser for Eurasian gas at the consultancy IHS.

And with all the meddling Russia is currently doing in Ukraine, the last thing the country would want is yet another provocation with the Europeans.

"They are trying to reduce the reaction from Europe," said Ruseckas. "Cutting off gas supplies would be counter productive."

Correction: An earlier version of this article incorrectly reported the amount of natural gas Europe gets from Russia.

First Published: March 3, 2014: 3:42 PM ET

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Obama wants better tax deal for working families

President Obama's 2015 budget will tweak some old proposals designed to make life easier for the working poor, to make college and child care more affordable and to make saving for retirement easier.

NEW YORK (CNNMoney)

The White House on Monday chose to preview a few that are designed to help the working poor, to make child care and college more affordable, and to make it easier to save for retirement.

The administration said the cost of the proposals would be paid for by "closing tax loopholes" that "let high-income professionals avoid the income and payroll taxes other workers pay."

Now, for a dose of budget reality: In most years, the House and Senate doesn't adopt much, if anything, from presidential budget proposals. And this time could be even worse in that regard since it's a mid-term election year and no one is expecting much to happen legislatively, least of all tax reform.

Nevertheless, Obama's proposed changes do offer a window into the president's thinking should lawmakers choose to make any tax changes.

Expand tax credit for the childless working poor: Obama will propose expanding the Earned Income Tax Credit for childless workers.

The EITC is an antipoverty program designed to encourage and reward work. But the credit primarily benefits workers who have children and does little to help very low-income childless workers or noncustodial parents. Their maximum credit is worth less than a tenth of what they could get if they had two or three children.

In fact, a childless person making the minimum wage and working full time would earn too much to qualify for the EITC, according to the Center on Budget and Policy Priorities, a left-leaning think tank.

The White House, which didn't offer many details, said the credit would be made available to "younger" workers -- today, childless workers under 25 are not allowed to claim it.

The change would lift about half a million more people above the poverty line, the administration said. In 2012, the EITC was estimated to lift roughly 6.5 million people out of poverty, including 3.3 million children.

Obama's budget will also call for recent expansions of the EITC for workers with children to be made permanent.

Related: Obama drops controversial Social Security proposal

Create Auto IRAs: Not for the first time, Obama will call on Congress to authorize automatic IRAs to make saving for retirement easier for workers without access to a 401(k).

Again, the White House didn't offer details. But generally speaking, an auto IRA is an account that employers would set up for their workers. Employers would not be obligated to make matching contributions, but they would automatically deposit a portion of workers' paychecks into auto IRAs.

Employees could decide how much is deducted from their paychecks and would be able to opt out of the program.

Expand the Child and Dependent Care Tax Credit: The president's budget will propose a "significant" expansion of the child and dependent care tax credit for families with children under 5 years old.

Currently the credit is worth 35% of child care expenses up to $3,000 per child, for a maximum of $6,000 per family.

The White House estimates the expansion would result in an average tax cut of more than $600 for 1.7 million families in 2015.

Make the American Opportunity Tax Credit permanent: A college tuition tax credit worth up to $2,500 a year is set to shrink in a few years unless Congress chooses to extend it.

Obama will propose making the American Opportunity Tax Credit permanent.

Such a move would benefit 11.5 million families and students, the White House estimates.

First Published: March 3, 2014: 8:00 PM ET

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New mutual funds better than older ones?

NEW YORK (CNNMoney)

A study released last month by the National Bureau of Economic Research found that younger mutual funds consistently outperformed their more seasoned counterparts.

Using data from Morningstar and the Center for Research in Security Prices, the authors looked at over 3,000 mutual funds from 1979 to 2011. They realized that funds with an age of three years or less beat out those that have been around for more than ten years by almost 1% per year.

The reason: the mutual fund industry keeps getting more competitive. New entrants have a lot to prove -- and that gives them a big incentive to put up strong returns.

Related: Plan for the critical first decade of retirement

Dr. Lubos Pastor, a business professor at the University of Chicago and one of the study's authors, said that newer mutual funds are often run by recent MBA grads equipped with fresh financial knowledge and a strong grasp of the latest investing technology. But it's a vicious cycle. As the fund gets older, it has to face new competition.

"You just graduated, and you've absorbed the latest academic research to beat the markets," Pastor said. "For a few years, you're riding this wave. But as you keep running your fund, more and more funds keep popping up."

While the study did find that mutual fund managers gain more skills the longer they are on the job, it wasn't enough to stay ahead of the newbies.

The researchers didn't look at the actual ages of mutual fund portfolio managers though. But a 1996 study from the NBER did.

Its results were similar, but for different reasons. The 1996 study found that younger mutual fund managers outperformed their older peers because they embraced a survival-mode mentality.

"If you're young and you didn't cut it, you lost your job," said Dr. Glenn Ellison, an economics professor at MIT and an author of the earlier research. "If you're experienced, the market seems more forgiving."

Related: Good news and bad news about corporate sales

But in a counterintuitive twist, younger managers seemed to invest in less risky stocks than their older peers, Ellison said.

Of course, there are plenty of other things to consider when picking mutual funds, such as strategy, past performance, and fees. But age is hard to ignore.

If the mutual fund industry stopped hiring today, experience would actually be a virtue and lead to better returns, Pastor said.

The study comes at an interesting time for the mutual fund industry. There is an intense debate about the value of actively managed mutual funds versus exchange traded funds -- low-cost bundles of stocks and other assets that often mirror an index.

ETFs have become increasingly popular in the past few years. There have been plenty of stories and headlines about how ETFs are killing the traditional mutual fund. And it makes sense. Why pay a mutual fund manager a big fee to select when you can just buy the SPDR S&P 500 ETF (SPY) -- which was up 30% in 2013 and has gained nearly 170% in the past five years.

Still, some experts say mutual funds aren't dead. Investors just have to choose the right ones.

"The fact that the index beat the average actively managed funds doesn't mean that it beat the good actively managed funds," said Ellison.

First Published: March 2, 2014: 12:38 PM ET

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