2014 Top Stocks Market, Best Stocks Investment In 2014, Top Stocks For 2014: 2015

Giachetti to Junxure Users: Show, Donâ€™t Tell, SEC Examiners Youâ€™re Compliant

Speaking at the debut Junxure Advisor Conference on Monday, noted securities attorney (and Investment Advisor columnist) Tom Giachetti warned the 180 attendees that since Bernie Madoff and the Dodd-Frank Act, “the SEC has gotten better on asking smart questions” in its exams of RIAs.

The questions asked of advisors and the areas of concern to the examiners is “much different than in 2008, 2009, even 2011,” he said, suggesting that RIA firms that have not updated their internal recordkeeping and documents could be in for a very nasty surprise when the examiners come to call.

Tom Giachetti The attendees at the first Junxure users conference included RIAs, dually registered advisors and independent broker-dealer reps, and they crowded into the main auditorium at the Hilton Anatole in Dallas to be alternately lectured and cajoled by Giachetti (right). Junxure co-founder and CEO Greg Friedman introduced Giachetti by saying that while he has been traveling with Giachetti on a multi-city compliance roadshow this year, and that he is Friedman’s own securities attorney at his Private Ocean wealth management firm, Friedman always learns something new when Giachetti speaks, even if what he hears can be scary.

There have been three main areas of concern for the SEC post-Madoff and DFA, Giachetti reported: custody, due diligence, and privacy/confidentiality. However, the SEC now has added a fourth area: business continuity plans (BCPs) and disaster recovery (it’s not just the Feds who are worried about BCP, as Giachetti wrote in his August column for Investment Advisor, the states are concerned as well.)

Giachetti doesn’t suffer fools gladly, especially those in the compliance consulting business: “some are good, some are terrible,” he said. Beyond whether he thinks his firm, Stark & Stark, is the ne plus ultra of compliance (which he does), Giachetti’s main point was that advisors’ documents not only be up-to-date, but that they match their actual practice.

For example, Giachetti said that your firm’s business continuity plan “can’t be dated four or five years ago; old ones won’t cut it anymore.” With BCPs as well as your policies and procedures manual, you have to “show the government you look at your documents every year.”

The biggest problem with “canned” compliance packages is not only that they may not reflect current regulatory concerns, he said, but that they don’t match either what an advisory firm is required to do, or what the firm actually does. One other thing on compliance consultants: if they hand you a policies and procedures manual in PDF format, “fire them,” because to take control of your practice’s compliance, you must have the ability to edit and customize the manual to match your firm’s specific activities.

Here’s one example of where canned documents are “terrible.” As he does during all his speeches (at least those that this writer has attended over the years), Giachetti first asked the Junxure audience how many were RIAs. He then asked those attendees how many had a money laundering policy. When several hands stayed up, he delivered his customary zinger: “You don’t need a money laundering policy! Get rid of it.”

On the question of due diligence, Giachetti said “you can’t count on your custodian’s own due diligence” to satisfy examiners; “if you hire your own managers, you have to have written” proof that you conducted due diligence on those managers. For larger firms with multiple offices, Giachetti said the SEC has adopted the “FINRA model on branches.” Too many advisors are also running afoul of the SEC by failing to file Form 13F, the quarterly report of equity holdings by RIAs who have discretionary authority over $100 million or more of exchange-listed equity securities (Giachetti goes into more detail on who should file 13F in his September column.)

He warned that in the current atmosphere, SEC examiners are “looking to set examples for the advisor community, so make sure your policies jibe with your ADV and your disclosure statements; take control of your documents.” Further, if you have a “two-, three- or four- year-old policies and procedures manual,” you won’t be able to demonstrate to the examiners that “you have a ‘culture of compliance.’”

Giachetti warned against inflating your assets under management, which some RIA firms do in order to be SEC-regulated rather than by the states (which he said is not always a desirable goal to begin with). “If you say you have a bazillion dollars under advisement, you’ll get an enforcement action,” he predicted, since “there is no such thing as ‘assets under advisement’ for the SEC, only ‘assets under management.’”

Admitting that he’s not exactly an early adopter of technology, nevertheless Giachetti said that when it comes to compliance for advisors, “social media scares me to hell,” in large measure because “you’re creating a track record for yourself.” Ever thinking of possible litigation and what can be brought up in discovery, the attorney said that “clients keep that stuff; it can pop up when you get sued.”

His other recommendations on social media: Don’t communicate with clients using Facebook or LinkedIn, “no LinkedIn endorsements — goose egg!” and that if you must have a Facebook page, don’t put on that page anything more “than you have on your web site.”

As for email, he suggested that advisors “use it as a tool for you,” i.e., for the advisor’s convenience, not for your clients. “Sometimes your clients will be trying to trap you in an email,” he warned, and said that when a client raises a complex or potentially troublesome issue in an email, respond instead by saying "I’ll give you a call." /* .premium-promo { border: 1px solid #ddd; padding: 10px; margin: 0 10px 10px 0; width: 200px; float: left; } .premium-promo li, .premium-promo ul { list-style-type: none; margin: 0; padding: 0; } .premium-promo li { margin: 0 0 10px; padding: 0 0 10px; border-bottom: 1px dotted #ddd; } .premium-promo h3 { text-transform: uppercase; font-size: 11px; } .premium-promo h4 { font-size: 16px; } .premium-promo a { text-decoration: none !important; } .premium-promo .btn { background: #0069a1; border-radius: 4px; display: inline-block; padding: 5px 10px; clear: both; color: #fff; font-weight: bold; } .premium-promo .btn:hover { background: #034c92; } */ Among the new questions on the SEC exam, he reported, is one relating to whether the advisor pays a referral fee to a third party. “If you do pay a fee, the SEC and state rules are about the same. In most states, solicitors have to be registered.” Since “the states are bankrupt,” this is one area where they believe they can raise some money, since the states “need the fines.”

In addition, “you need a whistleblower statement,” in your policies and procedures manual, saying “there are two questions on the exam about whistleblowers.” There are also two questions on the exam relating to outside business activities.

Finally, he warned the attendees about saying, or writing on any client documents, that the firm “provides comprehensive financial planning,” since that is such a murky term. “Marketing people are scary,” Giachetti said, “they use adjectives.”

His final warning: “if you say something you can’t prove” when it comes to the services you offer clients, “don’t say it.” No fan of investment policy statements or risk assessment questionnaires, Giachetti did say that “the most important information you should get from a client” when it comes to your investing is “Are there any restrictions?”

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Check out Making Sense of Form 13F by Tom Giachetti on ThinkAdvisor.

Senators Take â€˜Blank Slateâ€™ Approach to Tax Reform

After working on bipartisan tax reform for the past three years, the Senate Finance Committee's leaders have said they want to start with a blank slate.

Chairman Max Baucus and the committee’s ranking member, Sen. Orrin Hatch, sent a letter to their fellow lawmakers Thursday asking for their input by July 26 on how to reform the tax code, as they’re “now entering the home stretch.”

Baucus, D-Mont., and Hatch, R-Utah, told their colleagues “now it is your turn” to give your ideas and “partnership to get tax reform over the finish line.” Both said they want to complete reforming the tax code in this Congress.

To ensure “that we end up with a simpler, more efficient and fairer tax code, we believe it is important to start with a ‘blank slate’—that is, a tax code without all of the special provisions in the form of exclusions, deductions and credits and other preferences that some refer to as ‘tax expenditures,’” the two write. “This blank slate is not, of course, the end product, nor the end of the discussion.”

The senators went on to say that “some of the special provisions serve important objectives.” Indeed, they said, “some existing tax expenditures should be preserved in some form. But the tax code is also littered with preferences for special interests.”

To clear out all the unproductive provisions and simplify in tax reform, Baucus and Hatch said they “plan to operate from an assumption that all special provisions are out unless there is clear evidence that they: help grow the economy, make the tax code fairer, or effectively promote other important policy objectives.”

Hatch and Baucus asked that lawmakers submit legislative language or detailed proposals for what tax expenditures meet the above mentioned tests and should be included in a reformed tax code, “as well as other provisions that should be added, repealed or reformed as part of tax reform” by July 26. “We will give special attention to proposals that are bipartisan,” they said.

The two senators explained in their letter that the "blank slate approach would allow significant deficit reduction or rate reduction, while maintaining the current level of progressivity." The amount of rate reduction “would of course depend on how much revenue was reserved for deficit reduction, if any, and from which income groups,” they said.

The specter of a tax code stripped of "special provisions" is stoking worries in much of the financial sector. Cities and other localities have been nervous for some time about the effects of a possible end to the muni bond tax exemption.

Brian Graff, CEO of the American Society of Pension Professionals and Actuaries, says the senators’ blank-slate approach means that to begin the tax reform process, “the tax deferral incentive for retirement savings is to be thrown out along with every other tax incentive in the Internal Revenue Code that represents permanent lost revenue.”

But Graff said that while ASPPA “appreciates the senators’ acknowledgement that some tax incentives should be preserved — and we believe the incentive for retirement savings is clearly one of them … we are disappointed that there is no recognition that the tax incentive for retirement savings is a deferral, not a true ‘tax expenditure,’” he said in a statement.

Tens of millions of workers, Graff continued, “count on their employer-based retirement plans, and it is the tax incentive that powers these programs. In fact, the primary factor in determining whether or not a worker is saving for retirement is whether or not they have a retirement plan at work.”

The benefits of this deferral incentive “are very real,” Graff said, “and the revenue that would be gained by eliminating it is not. Every dollar of retirement savings excluded from income today will be included as income when it is paid out in retirement. Treating the retirement savings income deferral like a permanent exclusion is terribly misleading, and could lead to bad policy decisions.”

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Check out Repeal of Muni Tax-Exempt Status Would Devastate Counties: Report on AdvisorOne.

SanDisk: Likely to Beat Earnings Est. - Analyst Blog

We expect memory chip maker SanDisk Corp. (SNDK) to beat expectations when it reports second quarter 2013 results on Jul 17.

Why a Likely Positive Surprise?

Our proven model shows that SanDisk is likely to beat earnings because it has the right combination of two key ingredients.

Positive Zacks ESP: Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method), which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is at +4.55%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.

Zacks Rank #1 (Strong Buy): Note that stocks with Zacks Ranks of #1, #2 and #3 have a significantly higher chance of beating earnings. The sell rated stocks (#4 and #5) should never be considered going into an earnings announcement.

The combination of SanDisk's Zacks Rank # 1 (Strong Buy) and +4.55% ESP makes us very confident in looking for a positive earnings beat on Jul 17.

What is Driving the Better Than Expected Earnings?

Improved supply/demand metrics for NAND and solid state drive (SSD), strength across OEM (original equipment manufacturer) and Retail channels and tailwinds from weak yen are expected to lead to a positive earnings surprise in the upcoming quarter.

The positive trend is evident from the trailing four-quarter average surprise of 22.9%. This was possible mainly due to solid recovery in the mobile embedded and retail businesses, strength across geographies and favorable supply/demand metrics.

Other Stocks to Consider

Apart from SanDisk, we also expect earnings beat from the following stocks.

Earthlink Inc. (ELNK), Earnings ESP of +33.33% and Zacks Rank #1 (Strong Buy).

Rambus Inc. (RMBS), Earnings ESP of +9.09% and Zacks Rank #1 (Strong Buy).

Spreadtrum Communications Inc. (SPRD), Earnings ESP of +9.68% and Zacks Rank #1 (Strong Buy).

This Company is Really Cooking

There is a company that takes a unique approach to its business plan, and even though it might miss estimates when it announces earnings tomorrow, remains a company for you to have faith in, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

Take it from someone who has been in and out of Middleby (MIDD) shares over the last decade: the big problem can be finding a way to get back after you've sold because the stock has hit what looks like a peak. (I added Middleby to my Jubak Picks 50 portfolio on May 3 when the shares traded at $144.78. To see the write-up on my annual changes to this portfolio click on this post.)

But there is a chance that we'll get a slight dip this week after the company announces earnings on August 7. Analysts project that earnings per share will grow by just 6.6% year over year. That could qualify as a disappointment after the 15.8% year over year growth reported last quarter. The company might even miss, although Middleby has beaten estimates for the last five quarters in a row.

Why do you want to own Middleby? Here's what the company does in the fragmented industry for cooking equipment for restaurants and food processors. It acquires a smaller specialized maker of kitchen equipment for the food industry, such as 2012 acquisition Nieco, a maker of automated broiler equipment, or Stewart Systems, a maker of bakery equipment. Then, using its size and management skills, it finds ways to cut costs in those acquisitions, while also increasing sales from those acquired businesses by leveraging its existing customer base. And quite a customer base it is too: Middleby has the Number One market share in equipment for pizza chains, Number One in convenience stores, Number One in fast casual, Number One in chicken outlets—you get the idea. In fact, the only mass-market restaurant segment that I could find where Middleby wasn't Number One was a Number Two position in the quick service (fast food) segment.

Middleby's future growth will come from continued penetration and consolidation in the still fragmented US market for restaurant equipment, plus a move into international markets. There, Middleby's history of working with restaurant customers to understand what equipment will work for them is important. Middleby isn't going to attempt to jam US style equipment down the throats of non-US restaurants, but instead will use its investment in R&D to come up with products suited to individual international markets. For India and China, for example, Middleby has rolled out tandoor ovens, samosa fryers, and rice steamers. (International markets now account for 31% of sales.) The other source of growth for Middleby is in the industrial food processing and baking segment, now 30% of sales. The selling proposition in all these markets is simple: Middleby cranks out a steady stream of innovative products that lower costs to restaurants and food processors—by cutting the time from order to food delivery, (what's know as ticket time, for example)—while also providing measurable improvements in customer satisfaction.

Wall Street projects earnings growth of 16.3% for 2013 and 17.7% for 2014. The shares currently trade at 27.8 times trailing 12-month earnings per share and 24.4 times projected 2013 earnings.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Middleby as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.

The Fresh Market: Great Business, Premium Price

Similar to its larger, more well-known peer, The Fresh Market (NASDAQ: TFM ) has traded at lofty valuations, riding the wave of the organic-food boom of the past several years in the United States. Though it's a well-run company with attractive growth prospects, the grocer suffers from market hysteria. This became more apparent over the last 12 months as slowed growth frightened investors paying nearly 30 times earnings. Now, it looks as if all is forgotten as the company posted an impressive earnings release. How does the company's valuation measure up today? Let's take a closer look at earnings to find some clues.

Earnings recap
For the first quarter of 2013, The Fresh Market brought in top-line revenue of $366.6 million -- a near 13% increase from the prior year's quarter, yet short of analyst estimates (approximately $373 million). The reason for the big gain was maybe the best reason for a grocery store: big comparable-sales growth. Moving down the income statement, gross profit improved a staggering 14.8% to $129.3 million, driven (again) by same-store sales growth.

On the bottom line, the company beat the Street by bringing in $0.46 per share -- a 14.6% gain over the prior year and $0.02 higher than consensus estimates. Margins improved slightly across the board, based on favorable accounting measures and merchandise margins.

Same-store sales grew by 3%, coming off the back of a 1.9% gain in the prior-year's quarter.

All in all, it was a strong quarter, and if you step into a Fresh Market, you can tell these guys have a great formula. It's homier than Whole Foods (NASDAQ: WFM ) , with a slightly lower price point on some items. Unfortunately, though, a great company is not always a great stock. Is The Fresh Market still too hot to touch?

Looking down the road
Encouragingly, The Fresh Market 's management bumped guidance to reflect traffic increases at the stores. Same-store sales growth is now projected at 2.5% to 4.5%. Investors can expect earnings to grow more substantially in the back half of the year, yet EPS guidance remains unchanged (and represents about 19% growth over the prior year). The company plans to open up to 22 new stores throughout the year, and with a long growth runway ahead, as well.

Again, there is no doubt this is an A-plus operation, but what are we paying for it?

The stock currently trades at 26 times forward one-year earnings. In the mind of Peter Lynch, that means (assuming no more growth thereafter -- obviously not the case) your investment will take 26 years to pay back. Now, of course The Fresh Market will keep growing, but this should give investors some context. There are, without doubt, investments with stronger economics than this one, when using the Lynch P/E.

The Fresh Market isn't alone in its premium pricing. Whole Foods trades at 30 times forward earnings, and arguably doesn't have as large a growth platform (by store count) as The Fresh Market. It is, though, the gorilla in the space.

For some grocery store industry context, Safeway (NYSE: SWY ) trades at under 10 times earnings and is in a mature, slow-moving state. The company is in the midst of renovating stores in hopes of finding some growth. While not nearly as sexy an investment (and riddled with debt), Safeway is priced to move off the shelves.

This author tends to be a broken record when talking about hot stocks, but I feel The Fresh Market is simply too expensive to own, even after its several month sell-off. That said, if this business ever goes on sale, I am backing up the truck.

It's hard to believe that a grocery store could book investors more than 30 times their initial investment, but that's just what Whole Foods has done for those who saw the organic trend coming some 20 years ago. However, it may not be too late to participate in the long-term growth of this organic foods powerhouse. In this premium report on the company, we walk through the key must-know items for every Whole Foods investor, including the main opportunities and threats facing the company. So make sure to claim your copy today by clicking here.

5 Reasons Not to Worry This Week

It's not a perfect world out there for investors, but things may be starting to get better.

The market's coming off another week of hearty gains, and falling commodity prices may help keep inflation in check in the near term.

I recently went over some of the companies that are expected to post lower quarterly profits when they report this week. Thankfully, they're the exceptions and not the rule.

Let's go over some publicly traded companies that are expected to stand tall this week by posting year-over-year improvement on the bottom line.

Company

Latest Quarter EPS (estimated)

Year-Ago Quarter EPS

NetApp (NASDAQ: NTAP )	$0.68	$0.66
8x8 (NASDAQ: EGHT )	$0.06	$0.03
Foot Locker (NYSE: FL )	$0.89	$0.83
Ross Stores (NASDAQ: ROST )	$1.07	$0.93
salesforce.com (NYSE: CRM )	$0.10	$0.09

Source: Thomson Reuters.

Clearing the table
Let's start at the top with NetApp. The data storage and data management solutions specialist continues to take steps in the right direction. Sure, these are baby steps that we're talking about here. Analysts see revenue and earnings merely inching higher at a 3% pace when it reports tomorrow. However, NetApp has managed to beat Wall Street's profit targets in each of its four previous quarterly outings. In other words, it won't be much of a surprise if Netapp earns more than $0.68 a share.

8x8 is a fast-growing provider of PBX telephony, video conferencing, and other Web-based communication services. I singled out 8x8 in my monthly "5 Stocks Under $10" column, impressed by its margin expansion and healthy double-digit revenue growth.

It's probably going to happen again. Wall Street sees earnings doubling on a 17% increase in revenue.

Foot Locker reports on Friday. The athletic footwear retailer is expected to post marginal improvement on both ends of the income statement. Consumers are apparently not flinching at the high prices of branded athletic footwear these days.

Foot Locker merely met expectations in its most recent quarter, but it beat Wall Street's projections by double-digit percentage margins in each of the three periods before that.

Ross Stores steps up in a week that will be loaded with earnings reports out of leading discount retailers. The "dress for less" apparel retailer will join the parent companies of Kmart, T.J. Maxx, Target, and Marshalls in reporting, giving investors a great snapshot of the state of value-minded retail.

Estimates have been creeping higher for Ross Stores. Analysts were banking on a profit of $1.04 a share two months ago, $1.05 a share last month, and $1.06 a share a week ago. Now the pros are perched at $1.07 a share, well ahead of the $0.93 a share it earned last year.

Finally, we have Salesforce. The poster child of cloud computing has been able to grow at a healthy clip over the years by offering companies cost-effective and scalable cloud-based enterprise software solutions. True to its CRM ticker symbol, customer relationship management applications are its strength.

Margins have historically fluctuated at Salesforce, blurring the heady growth. We're seeing that again this time around, as Wall Street's targeting profitability to inch marginally higher on a 28% top-line pop.

Cross those fingers, but know the fundamentals
Investors in these five stocks have a right to be excited. They are all improving their financial situations. They are worthy of the gains that the market rally has bestowed upon them over the past year.

I wouldn't be uncomfortable owning any of these companies. They're doing the right thing, regardless of Mr. Market's mood swings.

The expectations may be high, but these five stocks wouldn't have it any other way.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

5 Leading Companies in Employee Relations

Like most investors, you probably aim for the best possible return when picking potential investments. But as consumers increasingly clamor for companies to embrace social responsibility, good corporate citizenship is becoming a vital part of many companies' success. And it can boost the performance of our portfolios, too.

CR magazine recently released its "100 Best Corporate Citizens" list for 2013, in which it rated members of the Russell 1000 large-cap index on 325 different elements related to responsible behavior. In the coming weeks, I'll delve into each of the seven categories that contribute to a company's overall score.Today, we'll look at the employee relations category, which gets a hefty 19.5% weighting. Here are some of the top-rated companies:

Intel (NASDAQ: INTC )

Gap (NYSE: GPS )

Hewlett-Packard (NYSE: HPQ )

Merck (NYSE: MRK )

Cisco Systems (NASDAQ: CSCO )

To earn their high scores, the companies above engaged in a variety of good practices, including offering their employees benefits such as onsite recreation facilities, vision insurance, and adoption assistance, and disclosing the percentage of employees and managers who are women or members of a minority group.

Digging deeper
So what, exactly, are these companies doing right? Here are a few examples of their employee-related practices:

Intel offers a wide variety of generous benefits, and at Glassdoor.com, 83% of employees chiming in would recommend their employer to a friend. One interesting twist at Intel is that workers are routinely rotated into new positions every 18 to 24 months, to keep them learning new things. Its flexible work options include telecommuting, compressed workweeks, flextime, and more.

At Gap, employees typically receive 20 to 35 days of paid time off, whether for illness, vacation, or personal time. Other benefits include discounts on company merchandise and on other items, too, such as computers, gym memberships, or flowers. There's also paternity pay and child care support. About 67% of workers would recommend their employer to a friend.

Hewlett-Packard has been struggling in recent years, making generous benefits all the more important, in order to attract and retain workers. (It's not always enough, as attested by only 41% of employees recommending the company to friends, per Glassdoor.com.) Along with the usual suspects (401(k) matching up to 4%, dental and vision insurance, adoption assistance, and more), it offers discounts on a wide variety of expenses, such as hotels, insurance, and company products.

Merck offers some workers a benefit that's hard to find these days -- a traditional pension. It has also boosted the percentage of women in executive roles from 25% to 35% between 2009 and 2011, and per its own "Culture Survey," 49% of its workers are "engaged" or "fully engaged." About 64% of its employees would recommend it to a friend, per Glassdoor.com.

Cisco's benefits have led to its being included in Fortune's list of "Best Companies to Work For" for the past 16 years in a row. Its percentage of female workers is 22%, down a little over the past few years, and 82% of workers express satisfaction with their workplace. About 76% of workers would recommend their employer to a friend, per Glassdoor.com.

Earning well while doing good
Companies doing good, such as treating their employees well, can boost your portfolio's performance. And various other studies have suggested that socially responsible investments are at least competitive with the overall market, if not outperforming it on occasion. That's a solid motivation for even the most coolly rational investors to take social responsibility to heart.

If you're in the market for solid socially responsible candidates for your portfolio, check out the real-money portfolio run by my colleague Alyce Lomax. Out of all the Fool portfolios in the group, hers was recently in first place.

Learn more about Cisco
Once a high-flying tech darling, Cisco is now on the radar of value-oriented dividend lovers. Get the low down on the routing juggernaut in The Motley Fool's premium report. Click here now to get started.

Why Fortinet Shares Got Walloped

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 computer-network security specialist Fortinet (NASDAQ: FTNT ) plummeted 18% today after its preliminary quarterly results disappointed Wall Street.

So what: One slow quarter isn't a huge deal, of course, but Fortinet's 35-plus P/E forces analysts to come down extra-hard on the stock. In fact, management blamed the warning on waning U.S. service provider demand, EMEA/Latin America weakness, and inventory shortages, giving investors plenty of concerns over slowing growth going forward.

Now what: Management now expects first-quarter EPS of $0.10 on revenue of $134 million-$136 million, clearly below the consensus of $0.12 and $140.4 million, respectively. "We remain optimistic about Fortinet's long-term opportunities as our products and innovation are strong and security demand drivers remain high," CEO Ken Xie reassured investors. Given the stock's still-lofty forward P/E of 25, however, I'd wait for even more of a pullback before buying into that bullishness.

Interested in more info Fortinet? Add it to your watchlist.

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

Deutsche Upgrades Bank of America, Large Banks

Bank of America shares are positioned to move higher on a pickup in capital markets revenue, higher interest rates and an improiving U.S. economy.

So said Deutsche Bank in upgrading Bank of America (BAC) shares to Buy from Hold on Wednesday with an $18 price target. Shares are up 2% today to

Deutsche also upgraded market-sensitive banks with Goldman Sachs (GS) and JPMorgan Chase (JPM) as top picks. Deutsche analysts think fixed-income, commodity and currency (FICC) trading revenue looks to have hit bottom in May, with upside from here. They write:

“We sense some pick up within FICC in June given strong credit issuance, tighter spreads and a pickup in broker dealer inventory levels. From here, the second half of 2014 year-over-year comparisons are easier for FICC. M&A activity should also pick up materially based on what's been announced this quarter and M&A tends to lead to ancillary business, often boosting revenues by 2-4 times advisory fees. Separately, while legal/regulatory risks remain high, the group has absorbed a lot of bad news and it's possible November elections could prove to be a positive catalyst for banks.”

Specific to Bank of America: Deutsche thinks BofA will see a pickup in capital market revenue, and will benefit from higher interest rates. Big negatives are reflected in the stock, at 1.1 times tangible book value and 10 times 2015 earnings estimate, Deutsche writes.

Dutsche is sour on Wells Fargo (WFC) however. Its shares have ralled about 16% so far this year on solid results and an investor shift away from market sensitive banks with weak trading revenue and legal overhangs. The 17-point outperformance relative to Bank of America and JPMorgan is “a bit much,” Deutsche analysts write.

Shares of Goldman are flat, but JPMorgan stock is down 1% this afternoon following news that CEO Jamie Dimon was diagnosed with curable throat cancer.

Nadex Binary Options Are Probably Taxed As Swap Contracts With Ordinary Gain Or Loss Treatment

By Robert A. Green, CPA, with help from our tax attorney Mark Feldman, and Darren Neuschwander, CPA

Traders are increasingly getting involved with Nadex and other “binary options” and they've been asking us how they are taxed. Are they taxed like securities (capital gains), futures (60/40 capital gains) or swap contracts (ordinary)?

Binary options are “bets” on the direction of an underlying financial instrument or the outcome of a financial event during a time frame chosen in the bet, which could be an hour or several months or more. Picture playing roulette with the spinning wheel and the ball landing on red (you win!) or black (you lose). It's an all or nothing bet based on how much you put down.

While binary options certainly have elements of gambling, we don't think the IRS can apply gambling-loss-limitation tax treatment. Gaming commissions regulate gambling on games of chance, whereas the SEC and CFTC regulate financial exchanges, including Nadex. We consider binary options on regulated exchanges like Nadex to be another faction of the ever-expanding trading marketplace. Clearly there are risks, especially when you fray from registered brokers and regulated exchanges.

Public companies and hedge funds often use swap contracts by making bets or swap payment agreements to manage risk. What's the difference? Most “derivatives” are privately negotiated agreements, often handled by investment bankers (yet Dodd-Frank now wants them to be cleared on futures exchanges). Nadex binary options originate on the exchange with price discovered and regulated clearing. For “risk on and risk off” trades, a manager can protect his portfolio without rushing to sell underlying securities, options or futures positions, which could cause a further drop in price. Binary options have a seat at the table.

Tax treatment is unclear
Unfortunately, the IRS has not issued specific guidance on tax treatment of binary options. Nadex does not provide tax information. Nadex says the CFTC designates its binary options as “swap contracts.” While a regulator's statements are informative, they are not dispositive for tax treatment.

Regulators weigh in
Read “SEC warns investors about binary options." It includes a good explanation of how binary options work. According to the article, “Binary options are securities in the form of options contracts whose payout depends on whether the underlying asset — for instance a company's stock — increases or decreases in value. In such an all-or nothing payout structure, investors betting on a stock price increase face two possible outcomes when the contract expires: They either receive a pre-determined amount of money if the value of the asset increased over the fixed period, or no money at all if it decreased.”

The SEC called binary options “securities” and “option contracts.” It's also possible they call swaps securities, too. The CFTC regulates Nadex and swaps and the CFTC labels Nadex binary options swap contracts.

Probable tax answer
We think the probable answer is binary options should be treated like swap transactions with ordinary gain or loss treatment.

Binary options resemble swap contracts; they don't involve ownership or trading of securities, futures, equity options or other types of “capital assets.” Each party makes a bet on a future development or event, with one party agreeing to make one or more fixed payments to the other party if the future event transpires. They are different from capital assets, where one party sells a capital asset with the other party investing in it. The investor owns an asset, which he can sell at any time for a capital gain or loss. The asset's price fluctuates based on market movements. Once a binary option contract is executed, the trigger for which party wins or loses is determined and the payment and “expiry” expiration date is fixed.

While many swaps contracts generally require multiple payments, binary options may only have one swap payment and that difference is not a material factor to us.

“If it were a swap payment, then it would seem to me that it should be treated the way a periodic or non-periodic swap payment is treated (ordinary income) rather than the way a termination payment is treated (capital gains under Section 1234A),” our tax attorney Mark Feldman says. “A termination payment (for all parties to a notional principal contract) is defined as ‘a payment made or received to extinguish or assign all or a proportionate part of the remaining rights and obligations of any party under a notional principal contract' and includes a payment made between the original parties to the contract (an extinguishment), a payment made between one party to the contract and a third party (an assignment), and any gain or loss realized on the exchange of one notional principal contract for another. This is not a payment to close out a position. Rather, the deal all along involved just one payment.”

A better label would be “binary swaps”
The Internal Revenue Code refers to “options” in many contexts. We believe the term “option” should have the same meaning throughout the Internal Revenue Code. Section 1234(a) refers to “an option to buy or sell property.” Binary options and swaps do not involve an option to buy or sell property.

Labeling the product “binary options” misleads users and confuses the tax treatment issue. Binary options are very different from equity options (securities) and non-equity options (Section 1256 contracts), which are both capital assets.

When you buy an equity option, you own the right — deemed a capital asset — to purchase a stock at a set price on a set date in the future. You can either sell that option before its expiration for a capital gain or loss or hold through expiration, either letting the option contract expire worthless or exercising your right to buy the stock. There is ownership of an asset, transferability, fluctuation in price and optionality.

Optionality means “The value of additional optional investment opportunities available only after having made an initial investment. The short-term payoff for this is modest, but the optionality value is enormous.” We don't think binary options have optionality per this definition; there is no further investment opportunity from the fixed payments conditional on future events or developments. There are no further strings or investments attached.

Here's another example of confusing labels: “Single-stock futures” are taxed as securities, not futures.

Can you use Section 1256 treatment?
If you have significant income from binary option transactions, you may seek to use Section 1256 to reduce your tax rate up to 12% using the lower 60/40 capital gains tax rates.

The general approach to getting into Section 1256 is to first look on the list of what's included: regulated futures contracts, broad-based indexes and options on those indexes, options on futures, certain foreign currency contracts and non-equity options. The ticket to entry to Section 1256 is often non-equity options. If an option is not an equity option, then perhaps it's a non-equity option. If we believed a binary option were a true option, we might be tempted into this line of reasoning. But we feel binary options aren't options.

The Dodd Frank tax reform law from 2010 called for swap contracts negotiated privately to be cleared on a qualified board of exchange. The Dodd Frank law clearly states that swap contracts may not use Section 1256 tax treatment. (Read our September 2012 blog “Tax Treatment for Swaps.”)

“The Nadex binary options are a challenge to tax advisors because they have certain characteristics of Section 1256 contracts (such as being listed on a qualified board or exchange) but the primary regulator, the CFTC, treats the contracts as swaps and not options and that is a very substantial hurdle to overcome for Section 1256 contract,” NYC tax attorney Roger D. Lorence says.

Tax compliance for binary options
The good news is taxpayers may deduct ordinary losses from gross income with exemption from capital loss limitations and wash sale loss deferral rules. It's generally a big tax benefit to deduct your losses when incurred.

It's like the default tax treatment for forex contracts in Section 988, which also have ordinary gain or loss treatment directly from gross income. As we point out in our extensive forex tax content, if a trader lacks trader tax status, he may wind up with some wasted losses if he has negative taxable income. In that case, he wouldn't have a business NOL or a capital loss carryover. Short-term capital gains are taxed like ordinary income.

There's more good news on accounting and reporting: Summary reporting is allowed. There's no need for line-by-line reporting as is required for securities transactions reported on Form 8949.

U.S. brokers probably won't include binary options on Form 1099-Bs since they are not “covered securities” or Section 1256 contracts — securities are reported on one 1099B and Section 1256 contracts are reported on a different 1099. Equity options are supposed to be covered securities starting with 2014 under the cost-basis-reporting transition rules, although it's more likely to be extended to 2015. Foreign brokers don't issue 1099s.

Swaps require mark-to-market tax treatment.

Trader tax status issues
Can trader tax status (business expense treatment) be used for expenses related to a high volume and frequency of binary options transactions, perhaps done on an intra-day basis? Probably. The expiry date could be in one hour and Nadex allows traders to enter and exit existing contracts. Regular trader tax status rules should apply.

Bottom line
The conservative approach is to treat binary options as swap contracts with ordinary gain or loss treatment. There's no capital asset involved, so why attempt to use capital gain or loss treatment? The IRS guards against people using Section 1256 when they should not as those tax breaks are highly coveted. So unless the IRS provides clear guidance allowing Section 1256 on binary options, why take that undue risk for back taxes, interest and penalties?

SanDisk, Weibo gains pace tech stocks

SAN FRANCISCO (MarketWatch) — Tech stocks ended up putting in a broadly upbeat market performance Thursday, as notable gains from SanDisk Corp, Netflix Inc. and newly public Chinese Internet company Weibo Corp. paced the sector's advance and help withstand losses from bellwethers such as IBM Corp. and Google Inc.

SanDisk (SNDK) shares climbed more than 9% to close at $82.99 a day after the memory and storage-chipmaker reported upbeat quarterly sales and earnings.

Weibo (WB) shares rose 19% to end the day at $20.24. The company that is considered the Twitter of China went public Thursday when it sold 16.8 million U.S.-listed shares at $17 each, which was at the low end of an expected range of $17 to $19 a share.

Twitter (TWTR) shares rose 1.3% to close at $45.01 as the company said it would allow advertisers to offer application-install ads on mobile devices .

Gains also came from Netflix (NFLX) , up 4.3% to close at $345.74; Groupon Inc. (GRPN) , which rose 4.4% to end the day at $7.41 a share, as well as Amazon.com Inc. (AMZN) and Apple Inc. (AAPL) .

IBM Corp. stood out among decliners as investors turned against Big Blue following a disappointing quarterly earnings report.

IBM (IBM) fell by $6.39 a share, or more than 3%, to close at $190.01 after the company said late Wednesday that it earned $2.38 billion, or $2.29 a share, for its first quarter ended in March. During the same period a year ago, IBM earned $3.03 billion, or $2.70 a share. Revenue declined by 4% to $22.5 billion.

Excluding one-time items, IBM would have earned $2.54 a share, which was in line with estimates of analysts surveyed by Thomson Reuters, who had also forecast IBM to report $22.91 billion in revenue.

The results showed IBM's lowest quarterly revenue since it reported $21.71 billion in the first quarter of 2009. The main source of IBM's sales drop was the company's hardware sales, which declined 23% from a year ago to $2.4 billion. The company has been moving more into software and cloud-based services and is in the middle of selling its low-end server business to Lenovo Group.

Still, such moves have yet to spur meaningful sales or earnings improvements at IBM. Analyst Brian Marshall, of ISI Group, said the company "has a long history of proactively discarding unattractive businesses" such as hard-disk drives, printers and PCs, but that Chief Executive Virginia Rometty and Chief Financial Officer Martin Schroeter need to take more dramatic action in order to transform the company.

"Unfortunately, the pace of change in tech has only accelerated and we believe the focus now needs to turn to building attractive new multi-billion dollar business lines rather than shedding old ones," Marshall said.

The Nasdaq Composite Index (COMP) reversed course from its early losses and rose 9 points to close at 4,095. The Philadelphia Semiconductor Index (SOX) ended the day with a gain of almost 2%.

More must-read tech news from MarketWatch:

5 surefire ways to get taken by ID thieves

Intel pushes into mobile, but finds no profits

Twitter steps further into mobile-app ads

Is Pandora Media Worth Investing In?

Pandora Media (P)'s results for the quarter ending in December were quite impressive, with both profits and revenue increasing. But the forecast for earnings per share for this year lies between $0.13 and $0.17, which is below analysts' expectations of $0.19 per share. The main reason behind this weak forecast for earnings is the aggressive investments that Pandora is making to keep up growth in users and to boost advertisement sales in the face of tough competition from Apple (AAPL) and Google (GOOG).

CEO Brian McAndrews said, "Our bias will continue to be toward revenue growth and capturing additional market share." So Pandora could see some weak earnings figures since it is eyeing a greater share of the market. But is it a good buy at its 52-week high if we look at the various troubles that it is facing.

Increase in Royalties Will Burden Pandora Even More

Pandora pays record companies and publishers in lieu of the songs it plays. Last year, it paid 49% of its revenue to record companies, while 4% of its revenue went to publishers. Due to this large disparity in payments, publishers are struggling to earn money from digital music. Because of the royalty payments, Pandora has to pay for each song it plays, so it is unprofitable as of now. But for every song that Pandora plays, it gets money from ads.

Licensing organization ASCAP is likely to increase the current rate of royalties, according to Business Insider. It is mainly on account of publishers that ASCAP is increasing this rate because, as mentioned already, the publishers are getting less pay as compared to singers and record companies. But this increase will put extra burden on Pandora's balance sheet to the extent that it can lead them to bankruptcy since the company had just $344 million in cash at the end of the last quarter, while it paid $339 million to publishers and record companies in 2013. An increase in royalties can further increase the payout to other parties and handicap Pandora.

Cut-Throat Competition

Also, despite being one of the world's largest online music service companies, having 76 million active users, Pandora faces tough competition from Apple's new iTunes radio service and Google's music subscription service.

When compared to Google and Apple, Pandora lags in technology. Both Google and Apple have their own mobile hardware that enables them to incorporate their service directly into the mobile operating system. Also, if people turn to YouTube, Google has the advantage because of the wealth of data it has on its users.

Google is also pushing its All Access music service to next-generation devices such as the Google Glass. Recently, Google sent VIP invitations to subscribers of its music service to join the Glass Explorer program. Hence, if Google's Glass clicks in the future and becomes a hit with customers, then it might be difficult for Pandora to penetrate this market as well.

Apple is also pushing forth its iTunes radio service in an aggressive manner. It recently launched the service in Australia, making it the first non-U.S. country to get the platform. In the future, Apple aims to launch iTunes Radio in various markets such as the UK, Canada and New Zealand in early 2014. In the long run, Apple is aiming to take the service to more than 100 countries ultimately.

An Overcrowded Industry

To combat these rivals, Pandora is coming up with its own strategies. It is aiming to increase the value of its advertisements by increasing its ad load. In this regard, Pandora is introducing advertising for its in car service this year, and hopes to expand the market for this new service.

However, Google and Apple also have plans to enter this service. With mobile and in-car service already taken into consideration, not much space is left for Pandora's expansion. It will have to venture into new areas like on-demand streaming, which is currently dominated by YouTube. This will increase its advertising avenues without need of increasing the user base. Pandora will have to work hard to know the listening habits of its target audience.

There are other potent competitors as well in the form of Spotify, Rdio, Beats Music and YouTube. This overcrowding of the music industry has caused Pandora to spend heavily on advertising and promotion to attract new customers, and this will ultimately hurt earnings.

The company is increasing its sales force to sell more slots to its advertisers to direct some ad budget to Pandora. Because of this extra selling and marketing costs, margin growth has been offset to some extent.

What Should Investors Do?

Every investor wants to know whether the company could be profitable or not. And Pandora seems to have answered that question with the company expecting to show a profit for the full fiscal year in 2014, even though it had a weak start with losses in the first quarter. Yet, Pandora has to work more to impress investors. The company has covered a lot of ground in the U.S. but it might lose in the wake of competition from Google and Apple. The probable increase in royalties could be another headache, and could even drain its cash reserves and lead to bankruptcy.

So investors should sell Pandora since it is already trading at its 52-week high, and stay away from it till the time the company's strategies start giving results.

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Regeneron Pharmaceuticals: Follow the Bouncing Eylea

Investors are eying big gains in Regeneron Pharmaceuticals (REGN) following its earnings release today, which featured good news on the biotech company’s blockbuster-to-be, Eylea.

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Reuters has the details on Regeneron’s results:

Regeneron Pharmaceuticals Inc forecast U.S. sales of eye drug Eylea to reach $1.7-$1.8 billion in 2014 as it expects the drug to win approval for newer uses, sending its shares up 3 percent before the opening bell.

Regeneron, whose stock has been propelled by the success of Eylea, said U.S. sales of the sight-saving drug rose 46 percent to $402 million in the fourth quarter. The drug’s international sales touched $184 million in the quarter…

The company’s net income fell to $97 million, or 86 cents per share, in the quarter ended December 31, from $470 million, or $4.08 per share, a year earlier. The year-ago quarter included a non-cash tax benefit of $336 million.

Analysts had expected a profit of 98 cents per share, according to Thomson Reuters I/B/E/S.

RBC Capital Market’s Adnan Butt and team note that Eylea sales could be better than management forecasts:

The trend shows growth over 4Q run-rate and is deemed a positive as management is typically viewed as conservative when it comes to guidance. Questions on the call will focus on what is included, i.e., whether it includes DME or not which is not yet approved. We like [Regeneron] for the blockbuster potential of Eylea and the deep pipeline and are buyers, especially on any pullbacks. It is one of our top ideas for 2014.

Brean Capital’s Jonathan Aschoff and Yi Cheng raise their target price on Regeneron to $380 from $367. They explain why:

4Q13, U.S. Eylea sales were hurt by the holiday season but helped by an increase in inventory held by distributors to over two weeks, which should negatively affect sequential Eylea sales in 1Q14. In 4Q13, Eylea had 50% of the U.S. branded [anti-vascular endothelial growth factor, or VEGF] wet [age-related macular degeneration] market and Eylea had 40% of the U.S. branded anti-VEGF [central retinal vein occlusion, or CRVO] market…We look forward to the many Phase 3 alirocumab trials reading out around mid-2014, and view the drug to be the next major value driver. Given our adjusted Eylea projection, we have raised our target price to $380 from $367.

Shares of Regeneron have risen 6.1% to $322.94 at 3:27 p.m., while Amgen (AMGN) has risen 1.1% to $120.96, Biogen Idec (BIIB) has advance 0.3% to $319.02 and Gilead, (GILD) is up 1% to $81.74. The SPDR S&P Biotech ETF (XBI) has gained 1.3% to $155.89.

AbbVie Inc (ABBV): What To Watch In Q4 Results?

AbbVie Inc (NYSE: ABBV) will announce its fourth-quarter and full-year 2013 financial results on Jan. 31, 2014. AbbVie will host a live webcast of the earnings conference call at 8 a.m. Central time (9 a.m. Eastern).

Wall Street expects Abbvie to report earnings of 82 cents a share, according to analysts polled by Thomson Reuters. Abbvie's earnings have topped Street view in all of the past three quarters, with upside surprises ranging between 1.5 percent and 5.1 percent. Two analysts have raised their profit view in the past month.

Quarterly revenue is estimated to fall 2 percent to $5.10 billion from $5.21 billion. Abbvie sees fourth-quarter sales of about $5 billion.

[Related -Can Abbvie Inc (NYSE:ABBV) Trump Gilead Sciences, Inc.'S (NASDAQ:GILD) HCV Lead?]

AbbVie, which was spun off from Abbott Labs (NYSE:ABT) in January 2013, gets more than half of its revenues from Humira, a mega-blockbuster drug with sales of $9.3 billion in 2012 and on track to peak at $13 billion in 2017.

Humira is indicated for a broad range of autoimmune diseases such as rheumatoid arthritis and psoriasis, which collectively make up one of the world's largest biopharma markets worth $30 billion. The consensus view calls for Humira to generate sales of $3.06 billion for the fourth quarter.

For the full year, the Street expects Abbvie to earn $3.14 a share on revenue of $18.75 billion. In 2012, the company earned $3.35 a share on revenue of $18.38 billion. The company expects earnings of $3.11 to $3.13 a share and sees revenue "somewhere above" $18.5 billion.

[Related -Abbvie Inc (NYSE:ABBV): Ready To Shift Gears In 2014?]

Humira's growth should continue as biologics gain deeper penetration in autoimmune markets driven by more aggressive treatment strategies.

Other key products that attract investor attention includes Androgel, Kaletra, Lupron and Synthroid. If the company manages to achieve revenue increases in these products, it bodes well for valuation. On the other hand, the Street could focus on the pipeline and new indications of Humira.

Investors focus will be on 2014 guidance and pipeline updates, particularly for the HCV franchise. AbbVie's HCV regimen includes the next-generation program that could be ribavirin free, once daily and pan-genotypic. BMO Capital Markets analyst Alex Arfae estimates the HCV regimen could reach peak sales of $2.8 billion with only 10-13 percent market share

Moreover, due to the strong launch of Gilead Science's (GILD) Sovaldi, the market is heavily discounting the potential for AbbVie's HCV regimen, which is expected to launch in early 2015.

The HCV market is expected to be sustainable for at least 7-10 years as treatment is rationed for more advanced patients. There are roughly 300,000-350,000 HCV patients are estimated to be on treatment in major markets by 2014-2015.

In December, Abbvie demonstrated that 96 percent sustained virologic response in its late stage study of treatment-experienced patients with genotype 1 Hepatitis C at 12 weeks with three direct-acting-antiviral (3D) regimen plus ribavirin.

Investors should be looking for additional updates on ABT-199, a promising drug for chronic lymphocytic leukemia (CLL) that potently achieves antitumor activity while sparing platelets; but need to manage tumor lysis syndrome. ABT-199 is being developed in collaboration with Roche.

In addition, it started the second Phase 3 pivotal trial to evaluate elagolix for the treatment of endometriosis. Based on the strong phase-2 data, analysts cautiously expect approval and launch in 2016, and forecasted sales of $500 million by 2020.

The market would look for updates on studies evaluating daclizumab in patients with relapsing/remitting multiple sclerosis (MS). Daclizumab High-Yield Process (DAC HYP) is believed to target the activated immune cells that can play a key role in MS without causing general immune cell depletion. A second registrational study, the DECIDE trial, is expected to complete in mid-2014, supporting a potential regulatory submission by year-end 2014.

For the third quarter, AbbVie's net earnings fell to $964 million from $1.59 billion in the previous year. Earnings per share dropped to 60 cents from $1.01 last year. Adjusted earnings per share came in at 82 cents. Net sales increased 3.3 percent to $4.66 billion, with Humira sales rising 19.1 percent to $2.77 billion.

AbbVie shares, which trade 15.1 times its forward earnings, have dropped 3 percent since its last quarterly report. During the past 52-weeks, they traded between $35.01 and $54.78 and gained 29 percent in the past year.

Google, car makers bring Android to dashboards

Google has kicked off press day here at CES 2014 in Las Vegas by announcing that Audi, GM, Honda, Hyundai, and chip manufacturer Nvidia are creating a partnership aimed at bringing Android to your car.

Called the Open Automotive Alliance (OAA), it promises that automotive infotainment systems may run on the open-source operating system as soon as 2014.

The idea of Audi bringing Android to the automotive scene was long-rumored ahead of CES. While it was expected that Audi and Google would pair up to bring Android into the car, the inclusion of other partners is something that hadn't hit the rumor mill until today.

The alliance uses a platform that's already familiar to drivers and developers alike, giving automakers access to an open ecosystem and allowing programmers to easily create new apps specifically tailored to in-car use.

When Nvidia revealed its latest chip last night, the Tegra K1, it specifically teased the possibility of cars that could employ Android computing not just for infotainment, but for a host of demanding functions such as driverless travel.

Patrick Brady, Android's director of engineering, wrote in a blog post that OAA would create a "driving-optimized experience," customizing Android to make driving "safer, easier and more enjoyable for everyone."

We already saw an Android-powered infotainment system in the 2014 Kia Soul at last year's New York Auto Show, and came away impressed with its speed and customizability. We're hoping to see similar results from the automakers in the Alliance.

Brady said the announcement of OAA was "just the beginning," as other companies are welcome to join. With Apple's promise of iOS in the Car, competition for dashboard real estate may be heating up.

Get more coverage of the 2014 Consumer Electronics Show from Reviewed.com and follow @ReviewedDotCom on Twitter.

Nike Disappoints, Buy Foot Locker Instead?

Nike (NKE) ran past earnings forecasts, but that wasn’t enough for fickle investors, who have sold down the sportswear stocks shares today.

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Shares of Nike have dropped 1.2% to $77.33 today at 3:19 p.m., even as Under Armour (UA) has risen 1.3% to $87.16 and Skechers U.S.A. (SKX) has gained 1.9% to $33.06. Even Lululemon Athletica (LULU), which has dropped 16% in December, has ticked up today–it’s gained 0.1% to $58.83.

Marketwatch has the details on Nike’s earnings:

Nike's fiscal second-quarter profit rose to $537 million, or 59 cents a share, from $384 million, or 42 cents, a year earlier, when discontinued operations hurt results by 15 cents a share. Sales in the quarter ended Nov. 30 rose to $6.43 billion from $5.96 billion.

Analysts, on average, were looking for profit of 58 cents a share on sales of $6.44 billion, according to FactSet…

Nike's North American sales rose 9%, missing estimates of analysts many of whom were expecting a gain of at least 10%. Western Europe sales rose 15% while China turned positive with a gain of 5% excluding currency translations.

Canaccord Genuity’s Camilo Lyon and Patrick O’Brien fear the worst is ahead:

In our opinion, this was a fine quarter with no surprises; however, as we expected expenses are accelerating resulting in guidance that implies a meaningful reduction to Q3 and Q4 estimates. Also, gross margin headwinds are mounting as the favorability from raw materials has turned and supply chain disruptions in Mexico will persist for two Q's. Given NKE's premium 25x multiple, we prefer to play its strength through its retail partners ([Foot Locker (FL) and Finish Line (FINL)]).

Susquehanna Financial Group’s Christopher Svezia also recommends investors buy Foot Locker instead of Nike. He writes:

Nike shares trade at 14.8x FY15 EV/EBITDA (SIG), a +46% premium to its five-year average. As expected, current expectations are leaving little room for error. That said, we believe Nike’s momentum bodes well for FL. Nike represents ~65% of FL's sales and is weighted by basketball. In addition, futures strength in North America and Western Europe (Germany, in particular), point to continued momentum in these regions. Recall that Germany represents FL's largest country since the RSG acquisition. At 5.8x NFY EV/ EBITDA, FL shares continue to look relatively attractive complemented by a +2% dividend yield and ~$4.40 a share in net cash.

Shares of Foot Locker have gained 3.2% to $40.95 today, while the Finish Line, which beat earnings estimates today, has risen 7% to $27.97.

Analysis: Stop freaking out over $13B JPMorgan …

The size of the reported $13 billion settlement between the Justice Department and JPMorgan Chase commands awe and attention. It's also garnering a lot of criticism.

The New York Post portrays it as a kind of bank robbery. The Wall Street Journal describes it as the government "confiscating" half of JPMorgan's annual earnings to "appease . . . left-wing populist allies" of the Obama administration.

We still do not know all the details of the tentative settlement or the evidence the government has against the bank. But the initial outburst of horror at the $13 billion figure is very likely unwarranted and appears to be based on a fundamental misunderstanding of how damages should be assessed in cases of financial wrongdoing.

In the first place, any view about the unprecedented size of the fines needs to be balanced by the unprecedented size of JPMorgan.

The bank now has $2.4 trillion in assets. This means there are more opportunities for legal liabilities to arise and a need for larger fines to punish wrong-doing. A fine of a few million dollars — even several hundred million dollars — barely merits a footnote in a JPMorgan earnings report.

REALTY CHECK: How JPMorgan deal could curtail credit

VIDEO: Breaking down JPMorgan's settlement

CARNEY AND COX: NetNet's news roundup

In thinking about the size of the potential JPMorgan settlement, it's helpful to begin with the very basics.

Fines levied by the government should aim to deter undesirable behavior without over-deterring beneficial behavior. We want to avoid outright fraud and negligence without making it impossible for banks to offer mortgage securities to investors.

Many people worry that very large settlements could permanently disrupt the mortgage market.

Extreme fines could make playing the role of issuer just too risky for banks. Or, alternatively, the cost of investigating mortgage quality and compliance with representations and warranties required by investors (and, after th! e fact, by regulators) may simply be more than the market can bear.

But this is only one side of equation.

On the other side, there are the potential investors who need to know that banks are properly incentivized to live up to the promises they make when issuing mortgage-backed securities. That there is no room for "efficient fraud" or "efficient negligence" whereby the bank makes more by fraudulent or negligent issuance than loses through fines years later.

Large fines should convince investors that the market in mortgage-backed securities is safe enough to re-enter.

In other words, if we focus on the demand side, strict enforcement of promised credit standards in mortgage-backed securities could lead to looser credit and more mortgage finance availability. Investors will know that the system can be trusted.

Ideally, the fines for the negligence claims would be high enough to incentivize future issuers to properly investigate the underlying mortgages but not so high as to make issuance prohibitive because of possible legal liabilities. Which is to say, we'd want the fines to exceed to cost of undertaking an investigation into the loans multiplied by the odds of getting away with not investigating—and we'd want that number not to be so high that they make issuance completely uneconomical.

We do not, however, live in the ideal world. In the real world, there may be no actual middle ground on which regulators, investors and issuers can meet.

Fines large enough to convince investors that issuers will be well-behaved may be too large for issuers to bear. There may not be a market for the securitization of any but the safest mortgages.

That would mean that we either have to accept that the market for riskier-mortgages will be tighter for the foreseeable future or allow for continued subsidization of this market through government guarantees.

Instead, however, everyone seems to want to pretend that we live in the ideal world where mortgages are safe, ch! eap and r! eadily available so long as everyone follows the rules.

But assuming that the admittedly shocking size of the JPMorgan settlement is a sign that regulators are over-reaching is a mistake. In a world of multi-trillion dollar banks taking in scores of billions in revenue, effective deterrence comes with a high price tag.

Follow Carner on Twitter: @Carney

The Latest Perspectives on Photo Collecting

With the arrival of phone cameras and social media sites, it seems everyone is a photographer nowadays. Investors who enjoy photography and want to add a new hard asset to their portfolios, however, might want to consider purchasing historic, collectible photos or contemporary photos taken with stand-alone cameras.

Like other fine art markets, it’s misleading to speak of a single photography market, because there are multiple sub-markets.

Denise Bethel, head of the photographs department at Sotheby’s in New York, notes that classic photos—the equivalents of blue-chip stocks—are a major category. Several of these photos, often dating from the early 20thCentury, each have sold for over $1 million at auction.

There’s also a thriving market in contemporary photography, says Bethel, and the top photos in that category can command seven figures.

The variety of categories gives collectors considerable range of choice.

“We do have collectors who collect across the board,” says Bethel. “So, for instance, collectors who start with Daguerreotypes and go all the way to contemporary photography.

“And, we also have collectors who specialize so there are collectors who only collect, let’s say, American modernist photography from the first half of the 20thCentury or European 19th-Century photography or contemporary photography,” she explains. “So, we’ve got people who collect every decade of photography and then we have people who are more specialized.”

In addition to numerous periods and types, photo prices cover the spectrum. Consider Sotheby’s early October auction in New York. Sales totaled over $5 million, but a large number of the lots sold for less than $10,000.

Apart from the auction houses, online galleries such as PurePhoto.com also offer collectible photos at a wide range of prices.

Careful Consideration

There’s a standard piece of advice given to collectors of fine paintings and other expensive collectibles: Unless they have very deep pockets, they can either buy art that they love and not worry about building a collection or they can focus on building a collection that will have more appeal to potential buyers.

Photo collectors can accomplish both goals, says Bethel. “You can certainly craft a very good collection by buying what you like,” she says. “You can do both simultaneously. I don’t think you have to do one or the other. I’d recommend that you do both simultaneously.”

As with any collectible, buyers need to know their market or be able to hire experts with that knowledge. Fortunately, there are ample educational resources available, including websites, books, auction catalogs, and museum and gallery displays, for example.

Bethel advises prospective collectors to spend at least a year looking before purchasing anything. The learning process can include going to museum exhibitions, photography galleries and fine art galleries that sell photography and previewing multiple auctions.

There’s also a vast wealth of photography books available today, she says. “I know that when I started back in 1980, you could buy the essential photography books you needed by buying 10 or 20 books,” she says. “Now, walk into any bookstore and the photography section is huge.”

The expert also suggests that potential buyer get on the mailing lists for catalogues put out by the different auction houses.

“Look and learn before making that first purchase. And, then, once you do start to purchase things, I recommend keeping up, keeping up with the auction market, keeping up with what’s going on in museums, keeping up with the gallery scene,” Bethel explains. “And, of course, there’s always the option of hiring an art advisor who knows the territory to help you.”

Now the Venaxis Spring is De-Coiling, & That's Good News (APPY)

To tell the truth, I'm not the least bit surprised that I'm chiming in on Venaxis Inc. (NASDAQ:APPY) today. It was a stock I dissected just two days ago (on Tuesday - here's that chat), pointing out how all the telltale signs of bullishness were brewing. Sure enough, APPY popped on Wednesday, and as a result has gone from a mere potential big mover to an actual mover.

Just to get everyone up to speed, APPY had been getting squeezed into a narrower and narrower trading range. In fact, that range had been whittled down to a mere ten cents, which just isn't enough room for a $1.40 stock like Venaxis Inc. to comfortably move around in. Something had to give soon, and given that the market had been squeezing in on shares for a little over a month, there's was a lot of pent-up energy to unleash.

Well, as of yesterday, Venaxis has broken out of that narrowing range - bullishly - and at the same time has broken above the 100-day moving average line (gray), which had been a nagging resistance area since late July.

That 'unleashing' action alone was enough for me to go ahead and fall in love with APPY, but today's action seals the deal. Today, shares are following through, up five cents (+3.0%) so far, telling us yesterday's surge wasn't just a little volatility. Take a look.

Bolstering the bullish argument is the fact that volume poured into Venaxis Inc. shares on Wednesday. The 1.8 million shares that traded hands - most of it buying volume - yesterday was the most interest we'd seen in the stock in weeks, and in light of the multi-week buildup we've seen [APPY has been moving higher for months, in fits and starts] since June, it's the culmination of a lot of bullish undertows that have been working hard to finally converge at this point. Now that they're all converged, Venaxis is ready to go from good to great.

As for a target, well, this isn't necessarily a long-term call on APPY. Though we should get some good traction now that the taut slingshot has been released, the rally's apt to slow down, if not stop, around $2.25. That was a turbulent area earlier in the year. The $3.00 mark was a firm ceiling in the last half of last year if shares do manage to break past $2.25. Still, that's a pretty good move, and worth a shot.

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Jim Cramer's Top Stock Picks: FRT ETFC LNC GNW AIZ SCHW AAPL

Search Jim Cramer's "Mad Money" trading recommendations using our exclusive "Mad Money" Stock Screener.

NEW YORK (TheStreet) -- Here are some of the hot stocks Jim Cramer talked about on Wednesday's "Mad Money" on CNBC:

FRT Chart FRT data by YCharts

Federal Realty Trust (FRT): Investors looking to add a REIT to their portfolios should consider Federal Realty, said Cramer. It's been a solid performer since the lows of 2008.

ETFC Chart ETFC data by YCharts

E*Trade Financial (ETFC), Lincoln National (LNC), Genworth Financial (GNW), Assurant (AIZ) and Charles Schwab (SCHW): Cramer said these top-five, best-performing financials will continue to rally into the end of the year.

AAPL Chart AAPL data by YCharts

Apple (AAPL): Can new iPhones move the needle in the right direction for Apple? Cramer said he thinks they can, at last.

To read a full recap of "Mad Money" on CNBC, click here.

To sign up for Jim Cramer's free Booyah! newsletter with all of his latest articles and videos please click here. To watch replays of Cramer's video segments, visit the Mad Money page on CNBC. -- Written by Scott Rutt in Washington, D.C. To email Scott about this article, click here: Scott Rutt Follow Scott on Twitter @ScottRutt or get updates on Facebook, ScottRuttDC

At the time of publication, Cramer's Action Alerts PLUS had no position in stocks mentioned. Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for TheStreet.com, Inc., and CNBC, and a director and co-founder of TheStreet.com. All opinions expressed by Mr. Cramer on "Mad Money" are his own and do not reflect the opinions of TheStreet.com or its affiliates, or CNBC, NBC Universal or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither TheStreet.com, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or TheStreet.com is related to the specific opinions expressed by him on "Mad Money." None of the information contained in "Mad Money" constitutes a recommendation by Mr. Cramer, TheStreet.com or CNBC that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You must make your own independent decisions regarding any security, portfolio of securities, transaction, or investment strategy mentioned on the program. Mr. Cramer's past results are not necessarily indicative of future performance. Neither Mr. Cramer, nor TheStreet.com, nor CNBC guarantees any specific outcome or profit, and you should be aware of the real risk of loss in following any strategy or investments discussed on the program. The strategy or investments discussed may fluctuate in price or value and you may get back less than you invested. Before acting on any information contained in the program, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser. Some of the stocks mentioned by Mr. Cramer on "Mad Money" are held in Mr. Cramer's Action Alerts PLUS Portfolio. When that is the case, appropriate disclosure is made on the program and in the "Mad Money" recap available on TheStreet.com. The Action Alerts PLUS Portfolio contains all of Mr. Cramer's personal investments in publicly-traded equity securities only, and does not include any mutual fund holdings or other institutionally managed assets, private equity investments, or his holdings in TheStreet.com, Inc. Since March 2005, the Action Alerts PLUS Portfolio has been held by a Trust, the realized profits from which have been pledged to charity. Mr. Cramer retains full investment discretion with respect to all securities contained in the Trust. Mr. Cramer is subject to certain trading restrictions, and must hold all securities in the Action Alerts PLUS Portfolio for at least one month, and is not permitted to buy or sell any security he has spoken about on television or on his radio program for five days following the broadcast.

'Despicable': Soros, Schultz Weigh In on J.C. Penney CEO Fight

Getty ImagesStarbucks Chairman Howard Schultz (left) and William "Bill" Ackman, founder and chief executive officer of Pershing Square Capital Management. Oh, you thought everything would get back to normal at J.C. Penney (JCP) once Ron Johnson was gone? Just four months after Johnson was ousted as CEO, the struggling retailer once again finds itself embroiled in a leadership controversy. Activist investor Bill Ackman, who was responsible for bringing on Johnson in the first place, is now making noise about replacing current CEO Myron Ullman. Ullman had preceded Johnson as CEO, and was brought back by the board in April to stabilize things after Johnson's disastrous reign. Ackman's Pershing Square Capital Management represents one of the company's biggest investors, and despite the failure of his last hand-picked chief executive, Ackman hasn't hesitated to throw his weight around. Last week, he sent a letter to the board urging it to speed up it search for a new CEO; the board fired back, calling his efforts "disruptive and counterproductive" and calling Ullman "the right person to rebuild J.C. Penney." Ackman is also pushing for Allen Questrom, another former CEO, to replace Tom Engibous as chairman of the board. Ackman's efforts to undermine the current leadership have drawn sharp rebukes from outside the company. Most notably, Starbucks (SBUX) CEO Howard Schultz jumped into the fray late last week, blasting Ackman for trying to oust Ullman. "It is despicable of Ackman to leak a letter asking for [Ullman's] removal," he told the Wall Street Journal. "The irony is that Ackman himself has every step of the way severely damaged this company." Schultz also told CNBC that he thought the board should move to remove Ackman. Schultz isn't the only one weighing in on the controversy. Bloomberg reports that George Soros -- who owns a sizable stake in the company -- likewise told J.C. Penney that he supports Ullman and Engibous. But Ackman isn't without allies: Richard Perry's hedge fund, Perry Capital, another big shareholder, said that it agrees with Ackman that Ullman and Engibous need to go. The week of infighting has had the stock on a roller coaster ride for the last week. Indeed, it's rare to see such an ugly boardroom fight play out in the public eye. If and when it comes time to replace Myron Ullman as CEO, we have to imagine the board will have a hard time convincing a talented CEO to join this circus.