Money And Change

Wells Fargo Is Your Last Warning: Check Your 401(k)
The bank’s scandal is a useful, and urgent, reminder: Don’t sink your retirement money into your company’s stock.

Suzanne Woolley WealthWatch     Bloomberg.com
October 13, 2016 — 3:08 PM EDT

Consumers have lodged countless complaints about how Wells Fargo & Co. employees opened sham accounts in their name. Recently, a Wells Fargo & Co. employee pointed her finger at the company for a different kind of financial pain—the hit to her 401(k) retirement savings account, due to a 12 percent drop in the company's stock in the wake of the cross-selling scandal. 

The proposed class-action lawsuit alleges that Wells Fargo "intentionally withheld material non-public information from Plan Participants invested in Wells Fargo stock and the public at large about a criminal epidemic at Wells Fargo associated with a critical component of Wells Fargo's business model and key driver of its stock price—i.e. cross-selling."

It states that the company knew its stock was "artificially inflated" but allowed employees in the $35 billion plan to keep investing in it through both the employee-stock ownership plan (pdf) and a non-ESOP fund. The matching contributions made to Wells Fargo employee accounts are automatically made in the form of company stock, according to the complaint.
Wells Fargo didn't immediately respond to a call seeking comment on the lawsuit.
Recently, similar proposed class actions, by employees of Whole Foods Corp., BP PLC, and RadioShack Corp., were rejected by the courts, which found that the employees hadn't met the Supreme Court's threshold for suits over stock losses. And just this month the plaintiff in a suit against Sanofi-Aventis U.S. LLC was found to lack standing.

So let us repeat: Don't sink a big slug of your retirement money into your company's stock, unless there's a compelling reason to do so.

Even if your company is squeaky clean (as far as you know), you're exposed to its fortunes and its industry's ups and downs just by virtue of working there, especially if you get compensation in the form of stock options. Why double or triple down on the risk? Especially if you work in financial services (see Scandal, Libor; Manipulation, Forex Market; etc. etc.).

If you're still not convinced, consider this scary thought, from financial adviser William Bernstein, author of The Investor's Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between.

One bit of traditional advice about managing your "human capital"—your earning potential—is to ask: Am I a stock or a bond? If you're in an industry such as financial services that's more cyclical or volatile, like a stock, you want a greater emphasis on bond-like investments to balance out your portfolio risk. If you're a tenured professor, on the other hand, you're more like a bond and so should invest more heavily in equities.

Today we're all arguably more stock-like, with such trends as tenure coming under attack, traditional pension plans increasingly rare, cuts to public pension fund benefits once thought sacrosanct, and social safety nets under ever greater financial stress. At the same time, it's hard to eke a decent return from bonds these days, and that has more advisers urging investors to beef up the stock portion of their portfolio and hold that stock longer than they may have in the past. It all adds another layer of risk to our financial lives.

Bernstein says hang on. It's worse than that. Instead of asking, are we a stock or a bond, we should be asking are we a lottery ticket or a bond.
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"For the most part, although our human capital has gotten riskier, the average return on it hasn't moved higher, at least not in developed nations," Bernstein said in an e-mail. What's new now, he said, "is that there's a much bigger positive skew: A very few people at the top do spectacularly well and make millions and retire, if they want, at age 33. That didn't exist 6o years ago. But on average, and certainly at the median, the return on human capital hasn't increased. Hence, lottery versus bond."

Maybe you feel investing in your company is "safer," since you're familiar with the business. But history shows that a company's vulnerability can be far from apparent, even to insiders.
And the trend is against you. A little more than 30 percent of plans now limit how much can be invested in company stock, according to data from the Plan Sponsor Council of America. Ten years ago, 17 percent of plans had more than 50 percent of total plan assets in company stock, compared with 6.6 percent of plans today.

Yet the percentage of companies offering employer stock as an investment option in a 401(k), while down, is still significant. For all companies, public and private, it was 34 percent last year, down from 39 percent in 2013, according to Aon Hewitt. Among companies with publicly traded stock, it's shockingly high, at 63 percent.

Whether your career is best represented as a stock, a bond, or a lottery ticket, the best strategy for the long run is to keep the bulk of your retirement money in diversified, low-cost index funds or in a low-cost, target-date fund.

We're glad you believe in your company. But you wouldn't believe what could happen to its stock.

Bank of America has a recession warning that's downright 'scary'
   http://finance.yahoo.com

October 9, 2016

There's a chilling trend in the market, and it could wreak havoc on your portfolio, a top market watcher said.

"We are seven years into a full-fledged, all out, central bankers doing everything they can to stimulate demand," Bank of America-Merrill Lynch's head of U.S. equity and quantitative strategy Savita Subramanian recently warned on CNBC's " Fast Money ."

"We looked at all of these indicators that have been pretty good at forecasting recessions and we extrapolated that if they follow the current trends they're on, we're going to hit a recession sometime in the second half of next year." The most unsettling thing is that this recession risk isn't discounted into the market at these levels, according to Subramanian.

The S&P is 1.8-percent away from its intraday all-time high of 2,193.81, hit on August 15. Subramanian's year-end 2016 S&P 500 (INDEX: .SPX) price target is 2000, about seven percent lower than where it's trading today. And, if she's right, it's about to get a lot worse next year.
"What scares me is the market been so fragile. So, remember what happened in January? We got a whiff of bad news and all of the sudden the market is at 1800," she said—a move that augured poorly for the near-term.

"I think that speaks to the reaction function of the market. There are a lot of itchy trigger fingers. There's lot of violent trades that can really roil a fairly complacent environment."
Even though Subramanian acknowledged there's a lot more risk than reward at this point, she says the health care and technology sectors look the best right now.
"They are both pretty cheap on a relative basis," she said.

Restaurant Industry, Leading Indicator of US Economy Sours, Bankruptcies Pile up 
by Wolf Richter •  Wolfstreet.com
October 2, 2016  “Very challenging” sales trends.[Update] On October 3, Garden Fresh Restaurant Corp., which owns Souplantation and Sweet Tomatoes, filed for bankruptcy. The company, owned by private-equity firm Sun Capital Partners, said it will close 20 to 30 of its 124 locations and put itself up for sale.

On September 30, Restaurants Acquisitions, the operator of Black-eyed Pea and Dixie House restaurant chains, converted its Chapter 11 filing to Chapter 7 liquidation. The bankruptcy court order noted the company had shuttered its restaurants and management had resigned.
On September 29, Cosi Inc., a fast-casual chain with 1,100 employees filed for bankruptcy. It closed 29 of its 74 company-owned restaurants and laid off 450 people. The 31 independently owned franchise operations continue operating.

Also last week, Logan’s Roadhouse, a casual steakhouse with over 200 locations, closed more than 10 restaurants, on top of the locations it had already closed in August when it filed for Chapter 11 bankruptcy. Nine restaurant companies representing 14 chains have filed for bankruptcy since December: Garden Fresh Restaurant, Restaurants Acquisitions, Cosi, Logan’s Roadhouse, Fox & Hound, Champps, Bailey’s, Old Country Buffet, HomeTown Buffet, Ryan’s, Johnny Carino’s, Quaker Steak & Lube, and Zio’s Italian Kitchen.

Restaurants are precarious creatures. They lease costly space and have to invest in equipment and furnishings. It’s a competitive environment, with high expenses and little pricing power. To expand, they load up on debts. Some, like Cosi, always lose money. Customers are finicky and fickle. When new competitors come along, or when the economy tightens, customers thin out and creditors begin to fret and turn off the money spigot.
 
Some of that is normal. New restaurants come along, and old ones die.
“But the current wave of bankruptcies is definitely unusual, and rivals the chain bankruptcy wave of 2009 and 2010, when several chains filed for debt protection after sales fell,” writes Jonathan Maze at Nation’s Restaurant News, adding: In this case, the wave of bankruptcies is largely due to a decline in sales at restaurant chains that is particularly harmful to companies that are already walking a balance-sheet tightrope. The companies that filed for bankruptcy recently were already weak.

Some are repeat offenders, including Buffets LLC (Old Country Buffet, HomeTown Buffet, and Ryan’s) which is now mired in its third bankruptcy. Many of them, battered by declining sales and rising expenses, have been losing money for a long time. But now things are coming to a head.
Restaurant bonds moved into fourth place early this year in Standard & Poor’s Distress Ratio, behind brick-and-mortar retailers and the doom-and-gloom categories of “Energy” and “Metals, Mining, and Steel.”

Other restaurants are trying to hang on by cutting costs and shrinking their footprint, which entails more sales declines, and thus continues the downward spiral.
In August, casual-dining operator Ruby Tuesday announced that – after “a rigorous unit-level analysis of sales, cash flows, and other key performance metrics, as well as site location, market positioning and lease status” – it would sell its headquarters and close 15% of its 624 or so company-owned restaurants by September.

Clinton Coleman, interim CEO of Rave Restaurant Group, which operates Pie Five Pizza Co. and the Pizza Inn buffet brand, put it this way on September 23, after reporting that same-store sales had tumbled in Q4 and that losses had ballooned: “Sales trends in the fourth quarter were very challenging for the Pie Five system, as was the case in much of the fast-casual segment.”
 
The restaurant industry is not a sideshow. About 14 million people work in it, according to the National Restaurant Association. With $710 billion in annual sales, it’s an important part of consumer spending and accounts for about 4% of GDP. If the industry is having problems, it’s a red flag for the overall economy.

Its difficulties are not limited to just a few beat-up restaurant chains. The National Restaurant Association reported on Friday that its Restaurant Performance Index (RPI) for August fell 1% to 99.6 and is now in contraction mode (below 100 = contraction). It was the worst reading since February 2013.

The RPI’s post-Financial Crisis peak was in the spring and summer 2015, when it dabbled with 103. Its all-time peak, going back to its inception in 2003, was 103.4 in 2004. Its all-time low of 96.5 occurred during the depth of the Financial Crisis.

The index consists of two components:

• The Current Situation Index, which tracks restaurant operators’ reports on same-store sales, customer traffic, hiring, and capital expenditures
• And the Expectations Index which tracks restaurant operators’ six-month outlook, including on the overall economy – more on that in a moment.

The Current Situation Index fell 1.9% in August to 98.6, the lowest since February 2013. Three of its four indicators declined: same-store sales, customer traffic, and labor. Only 30% of the restaurant operators reported a year-over-year increase in same-store sales. That’s down from 71% in February.

But 53% reported a year-over-year decline in same-store sales. This metric has been deteriorating for months. In February, March, and April, between 19% and 38% of the operators had reported lower same-store sales. Then it ticked up: 42% in May, 43% in June, 45% in July, then jumping to 53% in August.

Operators also reported a net decline in customer traffic: while 21% reported a year-over-year increase, 59% reported a year-over-year decline. August was the fourth months in a row of year-over-year net declines in customer traffic.

And optimism is beginning to wane. The Expectation Index edged down to 100.6: “While the Expectations component of the index remains in expansion territory, it too has trended downward in the past several months.” And operators are turning gloomy about the overall economy: only 17% expect the economy to improve over the next six months, but 29% expect conditions to worsen:
This represented the 10th consecutive month in which restaurant operators had a net negative outlook for the economy.

Restaurant operators as a group are an optimistic bunch – they have to be, or else they wouldn’t do it. But they also have daily intense contacts with consumers and are thus a leading indicator of the consumer-based economy.

In the beaten-up brick-and-mortar end of the retail industry, the meme has been that Millennials aren’t buying enough goods but like spending money on “experiences” – such as eating out. If that’s true, and not just an excuse by faltering retailers, it appears Millennials are not doing enough of that either anymore. Either way, the restaurant industry has been giving off increasingly loud warning signs about the overall economy, and the state of the consumer.