1 Big Retailer Stumbles, Falls Behind

This morning's earnings release from Target (NYSE: TGT  ) contained a few surprises -- and not the good kind. The retailer failed to hit the bar analysts had set up, and the stock had fallen 3.5% by midday. The biggest issue for Target is the slowdown in foot traffic. The resulting shortfall forced the company to drop its overall earnings forecast for the full year. In short, things are not looking great over at Target, and it might be time for investors to bow out.

Target misses the boat
The retailer cited softness in its apparel sales, a problem that has plagued apparel retailers all year. The long winter meant that customers were less likely to start buying spring clothes early in the year. That reluctance meant that the total number of transactions suffered, accounting for a 1.9% drop in comparable sales for Target. The company was able to regain a bit of ground, though, due to an increase in average transaction size. The combination of the two left Target with a 0.6% decline in comparable store sales.

Trickle that down to earnings per share, and the company was staring down a 5% drop, from $1.11 per share in 2012 to $1.05 this year. The fall meant that management had no choice but to drop its yearly earnings-per-share expectations, down from $4.85-$5.05 to $4.70-$4.90.

What should Target investors do?
Compared to others in the sector, Target is middle-of-the-pack. The leader is clearly Costco (NASDAQ: COST  ) , which has managed to pull in more customers through its bulk discounting. While the company has not reported its current quarter earnings yet -- the report comes out at the end of the month -- monthly comparable sales have been rising.

Costco has managed to buck the issues that seem to have hampered Target. Last quarter, Costco recorded more transactions, with larger average transactions, both of which resulted in a 5% favorable comparable-sales increase for the quarter.

If Costco is the front-runner of the business, Wal-Mart (NYSE: WMT  ) looks increasingly like it's bringing up the rear. The company blamed inflation, weather, income tax returns, and health care tax in its recent poor showing. Comparable sales fell 1.5% last quarter, and Wal-Mart management was quick to point the finger outside of the company. Even with those issues,it managed to increase earnings per share.

The problem for Target investors is that the cost of moving to a better-performing business may not make sense. Although Target has failed to keep up with returns for the S&P 500 over the last 12 months, it's still up 22%. That's roughly in line with Wal-Mart's return, but well short of the 37% that Costco has gained.

That success comes at a cost, though. While Wal-Mart and Target both trade at P/Es below 16, Costco is trading at 26. If I were invested in Target, I'd seriously consider a switch of allegiance. Target seems to be stumbling -- by no means failing, just stumbling -- while Costco is soaring.

Before you sell or buy any of these retailers, make sure to check out our detailed report on Costco, containing in-depth analysis on the company and one year of free updates on important company news. Simply click here now to gain instant access to this valuable investor's resource.

Intel Earnings: A Crowd-Pleasing Meet

When Intel (NASDAQ: INTC  ) reported earnings, the company announced that it had successfully met the reduced expectations of analysts. After the collective yawn was complete, investors looked toward the fact that the company did not alter guidance for the rest of the year, but did revise its projections of spending for capex. Against the backdrop of falling PC sales and struggling customers -- including Dell (NASDAQ: DELL  ) and Hewlett-Packard (NYSE: HPQ  )  -- any positive news for the chip maker has the potential to have far-reaching consequences.

In this video, Fool.com contributor Doug Ehrman discusses Intel's results and what they mean for the next few quarters.

When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, our analyst runs through all of the key topics investors should understand about the chip giant. Click here now to learn more.

2 Stocks to Watch Right Now

The following video is from Friday's Investor Beat, in which host Chris Hill, and analysts Ron Gross and Charly Travers dissect the hardest-hitting investing stories of the day.

In this installment of Investor Beat, our analysts explain why they're watching Google (NASDAQ: GOOG  ) and Western Union (NYSE: WU  ) .

As one of the most dominant Internet companies ever, Google has made a habit of driving strong returns for its shareholders. However, like many other web companies, it's also struggling to adapt to an increasingly mobile world. Despite gaining an enviable lead with its Android operating system, the market isn't sold. That's why it's more important than ever to understand each piece of Google's sprawling empire. In The Motley Fool's new premium research report on Google, we break down the risks and potential rewards for Google investors. Simply click here now to unlock your copy of this invaluable resource.

The relevant video segment can be found between 3:33 and 5:35

Which Automaker's Sales Surged 20% in December -- and Which Stalled?

If we think back to early 2014, there was skepticism around the automotive industry and whether or not sales would recover from a slow start during severe winter weather. Also in early 2014, analysts and journalists across the industry wondered how much longer the U.S. could sustain an overall accelerated pace of new car sales as the industry inched toward prerecession levels. 

Well, if there was any doubt left, December certainly shut the door on doubters, at least for now.

How it wrapped up
Consumers were more confident in the economy as the books closed on 2014. This, combined with lower fuel prices and holiday deals, led to a strong December in the automotive industry. New car sales topped 1.5 million in the U.S. during December, which was an 11% increase over December 2013. Here's a breakdown of the five largest automakers in the U.S., and how their sales gains stacked up:

Table by author. Data source: Automotive News.

Starting from the top
Fiat Chrysler Automobiles' (NYSE: FCAU  ) sales in December reached 193,261, which was an industry-leading 20% improvement over last year's December. FCA's sales for the full year topped 2 million units to record the automaker's best full-year sales performance since 2006. Looking at a wider picture, it was its 57th consecutive month of year-over-year sales gains and its fifth consecutive year of annual sales growth -- not too shabby. 

FCA's industry-leading month, at least in terms of gains compared to last year, was clearly led by two brands: Jeep and Ram.

Jeep had 80% of its vehicles post December sales gains, compared to last year's December, of 16% or higher. Furthermore, three Jeep models posted their best December sales performance ever, which led to the Jeep brand posting its best December as well. Not to be outdone, FCA's very important full-size Ram truck posted sales gains of 32% last month, capping off a very solid 2014 as the truck gained market share on its two major competitors, the F-Series and Silverado.

Sales of the 2015 Colorado will be worth watching, one way or another. Image source: General Motors.

Photo finish
Nipping at the heels of FCA's 20% sales gain over last December was General Motors (NYSE: GM  ) with its also-impressive 19% gain. In fact, GM's Chevrolet, GMC, and Buick brands each increased last month, compared to last year, by 21%, 23%, and 32%, respectively -- it was only Cadillac that failed to post a sales increase, down 11% in December.

Five GM vehicles posted their highest December sales ever, and seven vehicles recorded their best full-year sales in 2014. Despite not posting their best December sales, the two most important points of vehicle sales data came from GM's full-size trucks. The Silverado and Sierra haul a huge amount of profits for the automaker, and both posted respective December sales gains of 36% and 31% compared to last year.

Looking beyond the numbers revealed an interesting statistic for General Motors and its investors. GM has posted 27 consecutive months of year-over-year average transaction prices, or ATPs. Part of this could be because more consumers are taking longer loan term agreements, which pushes up the overall price. However, part of the increase in GM's ATPs is its fresher lineup, which is certainly a positive.

Falling behind?
Ford Motor Company (NYSE: F  ) certainly lagged behind the two industry leaders in terms of sales gains, as it barely managed to register a 1% gain in December compared to the prior year. Ford's sales actually declined for the full year, narrowly missing a total of 2.5 million units. However, Ford's slowing sales story goes beyond the numbers, as most investors know. It's been repeated ad nauseum that 2014 is a building year as Ford cranked out new vehicles, and a fresher lineup will sell better in 2015 and beyond. With that said, there were certainly some highlights in Ford's sales data.

Consider that Ford's Escape and Fusion sold very well all year long. In fact, those two models did something only Ford's F-Series has done since 2004, which was break the 300,000 annual sales mark. Furthermore, during the conference call it was noted that nearly a third of Escape sales were of its premium titanium trim, which drives ATPs and margins higher.

That's primarily because of the SUV downsizing trend. According to Ford, as consumers continue to downsize into a small to midsize SUV, they have refused to give up the options and amenities found in larger vehicles -- boosting the titanium trim sales.

Speaking of higher transaction prices, and fatter margins, Ford's struggling Lincoln luxury brand posted a December sales increase of 21% -- mainly due to the all-new MKC, which wasn't selling last December. Still, for the full year, Lincoln's sales were up 16% to 94,474 units, which was the brand's best year since 2008.

Last, but certainly not least, is Ford's all-important F-Series. Ford's most important product once again led the U.S. in sales and remains the best-selling overall vehicle and full-size truck for the 33rd and 38th consecutive year, respectively. Despite sales remaining essentially flat year over year, sales of the F-Series topped 74,000 units last month -- an extremely strong month.

Graph by author. Data source: Ford Motor Company.

Looking ahead, many analysts continue to wonder aloud how long new car sales can remain at this level. At least one person believes strong sales are here to stay, for now. "The industry finished last year on a high note thanks to a strong economic tailwind," said Bill Fay, general manager of the Toyota division, according to Automotive News. "That momentum should continue in 2015 and combined with continued strong replacement demand, boost sales further." 

Warren Buffett's worst auto-nightmare (Hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to ride this megatrend. Click here to access our exclusive report on this stock.

Amazon's Same-Day Grocery Delivery Makes Its East Coast Debut

amazon.com East Coast hipsters can rejoice. They can finally order groceries from Amazon.com (AMZN) and have them delivered on the same day, the company has announced. There's just one catch: You have to live in the Park Slope neighborhood of Brooklyn to be eligible. People who live in that area and have paid Amazon Prime memberships have their choice of more than 500,000 items delivered the same day. That includes "fresh groceries and products from local specialty shops to toys, electronics, and household goods." Place an order by 10 a.m. and you receive the goods by the end of the day. Or, place the order by 10 p.m. and they arrive in an early morning shipment. Consumers will also be able to purchase prepared meals or items that can be prepared in 15 minutes or less. They include lobster, charcuterie, salads and bread. Free, for Now The service is free through the end of the year to Amazon Prime members. Expect that to change next year. In San Francisco, for example, Amazon Fresh costs $299 a year, according to GeekWire, including an Amazon Prime membership. Orders under $35 have an additional delivery charge. In Seattle, however, the structure has been different. Anyone could order from Amazon Fresh, with delivery charges running $8 to $10 per order. Amazon Fresh was first piloted in Washington State in 2007, as the Seattle P-I reported at the time. It was the extension of Amazon's gourmet food business that opened in 2003. According to Fast Company, Amazon Fresh is a Trojan horse because it's not really about groceries. Instead, the company's purpose is to develop a door-to-door same-day delivery infrastructure, which could let it offer something that retail chains and local stores would find difficult to match: Total convenience. Many Choices for Consumers There is competition, as Re/Code reported. Fresh Direct is an existing online grocer and there are startups like Instacart, which is working with Whole Foods. Google (GOOG) also has a same-day delivery service, although it doesn't handle perishable foods. Amazon's secret weapon might be the U.S. Postal Service. The retailer already ships a reported 35 percent of its order through the Post Office, and it is testing using the USPS as part of its Amazon Fresh delivery strategy in San Francisco, according to the Verge. More from Erik Sherman
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Why pSivida (PSDV) Stock Is Soaring in After-Hours Trading Today

NEW YORK (TheStreet) -- Shares of pSivida  (PSDV)  soared 10.26% to $4.73 in after-hours trading Friday after the FDA approved the company's eye implant Iluvien.

The FDA approved Iluvien to treat diabetic macular edema (DME), a swelling on the back of the retina that can cause blindness should the condition become severe enough. Iluvien is an injectable implant, and its use involves placing a small cylindrical tube filled with a drug on the back of the eye where DME usually forms.

pSivida announced the FDA approval entitles it to receive a milestone payment of $25 million from Alimera Sciences (ALIM) , to which pSivida licensed Iluvien in February 2005. pSivida is also entitled to 20% of net profits from U.S. sales of Iluvien, which the company said should debut in early 2015.

Must Read: Warren Buffett's 25 Favorite Stocks

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more. Iluvien is already approved in 10 European countries, including the U.K., France and Germany. Alimera also surged 18.78% to $5.85 in after-hours trading. PSDV data by YCharts
STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

Can’t Afford Beef? Buy a TV!

We’ve often written about how the government's favored method of measuring inflation, the Consumer Price Index (CPI), is deliberately skewed to keep the official measure of inflation low. By underweighting components such as food and housing or using the substitution method – swapping out higher priced items for lower priced ones on the assumption that consumers will switch themselves – bureaucrats can say, with a straight face, "what inflation?"

Interestingly though, if you dig into the components of the CPI you'll likely be left wondering what most of the components actually have to do with daily life. Even if you're in perfect health, it is likely that you'll go to a doctor, dentist or ophthalmologist in almost any given month. And if you're like the average American, you probably have at least one prescription filled. For most of the men out there, at least if you're as vain as I am, you probably also get at least one haircut a month. Given the average frequency of consumption, including those services in the CPI makes perfect sense.

But how often do you purchase a new car? In 1995 the average age of cars and trucks in America was 8.4 years but, as of last year, the average age had risen to 11.4 years. American's clearly aren't buying new vehicles as often as they once did if for no other reason than the lingering effects of the recession. Over that same period, the average hourly worker's wage rose by more than 75 percent while the average cost of a new car rose by just 4.4 percent. Despite the fact that most of us aren't buying new cars every year, much less every month, the average cost of a new car continues to influence the government's reading on inflation.

Some other interesting items that you'll find in the government's basket of goods and services includes televisions, major appliances such as clothes dryers and refrigerators, video rentals (who still! does that?), photographic equipment and living room furniture. While it is true that most of us purchase those types of items at some point in our lives, they hardly impact our day-to-day cost of living. At the same time, the average cost of most of those goods has been steadily falling thanks to increasingly automated manufacturing processes, improving technology and the influence of cheaper imported products.

While the price of any one of those items has any significant impact on the overall inflation measure, in all, about half of the 175 items included in the government's basket are things which you most likely rarely actually buy. I'm not saying that the prices of those things aren't important in determining the level of inflation in the economy, but how is the cost of typewriter repair in any way relevant to how much cash I have in my wallet to spend?

The very composition of the CPI is why the government can tell us that there's really no such thing as inflation today, with it running at just 2.2 percent. And they can say it is just 2.2 percent despite the fact that their own data shows that the average cost of a gallon of gasoline is up by more than 5 percent compared to last year, the price of eggs is up by more than 7 percent, beef prices are up by nearly 10 percent and pork is up by almost 13 percent.

Can't afford that porterhouse steak? Go buy yourself a dining room table, the average price is down by nearly 14 percent over the past three years. Yet another reason why the CPI is a poor representation of real inflation.

 

We Can Invest in Uber Before Its IPO

Too many people view taxi service as nothing more than a pedestrian, everyday type of business.

Those people would be very wrong.

It's actually a complicated, multi-billion dollar sector that right now is going through perhaps the most profound changes of any business model in the United States.

Indeed, this revolution is moving the industry from its original days of horse-drawn carriages to the age of global positioning systems (GPS) in automobiles.

The biggest name in the revolution is, of course, Uber, whose mobile cab service app is turning the taxi-for-hire model on its head, all while waiting for a much anticipated IPO.

But right now there's another way to play on Uber's success and future, with a well-known company that's going to surprise you....

Uber Has Disrupted the Industry Model Forever

If ever there was an industry ripe for high-tech disruption it would have to be taxicabs.

Here's the thing: The first known use of taxis for hire involved horse-drawn carriages in England more than 400 years ago.

Today, many taxis use autos equipped with GPS and other high-tech gadgets, a quantum leap from its humble beginnings. And yet, despite all these taxicab advances, many critics argue that when it comes to providing fast service, not much has changed in the past 400 years.

But that all got turned 180 degrees when Uber was founded in 2009, and its mobile app was launched in 2010 in San Francisco.

Think of Uber as a digital chauffeur service. Users simply tap on the Uber app and find drivers in the area who are willing to drive them to their destinations for a small fee.

Ironically, Uber has made headlines lately not because of its innovation, but because of what many investors believe is the startup's sky-high valuation.

After recently receiving $1.2 billion in additional venture funding, Uber is now worth some $18.2 billion.

But let's not get bogged down in debating just how much Uber will eventually be worth if it does in fact have a successful IPO.

Fact is, Uber represents the disruption of a centuries-old global industry, and the result of its technology is a staggering revenue growth model that merits a closer look.

Uber Is on Track for $1 Billion in Revenue

Uber is a company with a very simple concept but with huge financial opportunities.

See, the company uses data mapping software to create what amounts to an electronic exchange that links potential passengers with drivers who are willing to give rides for a fee.

The robust technology is a vast improvement over what any one cab company could hope to emulate.

Hence the company's slogan: Everyone's private driver.

This app's power derives from the fact that it can identify as many as a dozen drivers a short distance from the person who needs a ride.

People who use this service rave about it to anyone who will listen. On Apple's App Store, Uber earns a five-star rating with headlines like "Best car service in the world!!!"

Make no mistake, the company faces a bright future. The New York Times estimates that if the company could grab half of the taxi market share in the United States, it will generate more than $1 billion in yearly sales.

And that figure doesn't include the 36 other countries the firm currently serves. Nor does it include the potential for selling other services later.

What's more, Uber's leaders say the firm's sales, which TechCrunch recently pegged at $213 million for fiscal 2013, have been doubling every six months - a compound annual growth rate of nearly 145%!

But Uber offers an even more intriguing long-term play: a direct tie to an even newer technology - robotic chauffeurs - being developed at the same time at another high-tech company.

So while all the fuss today is focused directly on Uber's valuation and IPO dates, we've found a unique back-door way to play this robot-centric technology with a familiar name that shares some critical ties to Uber...

Google's Links to Uber Run Deep... and They're Getting Deeper

Investors targeting Uber's "killer app" would do well to look at Google Inc. (Nasdaq: GOOG, GOOGL) as a great backend play. The two companies are linked by money and technology.

First, the money...

Last year, Google's venture-capital unit invested roughly $258 million in Uber. At the time, it was the largest investment Google Ventures had ever made.

Second, the two companies have a natural high-tech affinity. That's because beyond its leadership in online search and mobile phones, Google is way ahead of the curve on robotic cars.

Consider that Google plans to test 100 self-driving prototype cars this summer in California. Just weeks ago, Uber announced that it hopes to tap driverless cars in the very near future.

Talk about synergy!

Uber Chief Executive Officer Travis Kalanick insists that passengers could end up paying less by summoning a driverless vehicle.

"When there's no other dude in the car," Kalanick explains, "the cost of taking an Uber anywhere becomes cheaper than owning a vehicle."

And in car-challenged New York City, Uber has quietly introduced a messenger service integrated into its own app. Kalanick has even touted the benefits of developing Uber into a platform for shipping and logistics.

That type of tech could dovetail nicely with Google Shopping Express, the tech giant's shipping service.

Meantime, Google recently integrated Uber into the search firm's highly popular Maps application. Users can link to Uber rides under the app's options for travel directions.

Now then, I downloaded the app and put it through its paces.

I can honestly understand why people love it so much. I tested the technology by sending a black SUV to pick up my daughter, 15, from a friend's house.

A screen popped up with a map showing where the car was located. At the bottom was a small picture of the car's front end and a box with the driver's name and Uber rating. It also had his license plate number.

Not only that, but the closer he got to picking up my daughter, the larger the map became. This was incredibly cool - I followed the icon of his car as it drove up to the front of the house.

I had pushed a button on the app that allowed me to share the driver's route and had texted that to my daughter's iPhone. Then I tracked her as he climbed 1.6 miles to the top of the Oakland Hills for the drop off.

Bear in mind, this all occurred phone-to-phone, seamlessly. Since I had an account, the service just billed me digitally, including a 20% tip.

All in all, an outstanding service!

Uber Is Another Piece in Google's ETF-Like Portfolio

Just because Uber is not yet publicly traded, that doesn't mean we can't invest in its future.

In fact, its relationship with cutting-edge companies like Uber is one of the reasons why I say tech investors should continue to take a good look at Google.

From online search to mobile phones to robotic cars and smart home devices, Google is becoming as much a high-tech ETF as it is an individual stock.

Trading at $582 a share, Google has a nearly $400 billion market cap. It has operating margins of 23%, a 15% return on equity, and $50 billion in net cash on hand.

Thus, Google offers investors high profit margins, the chance for appreciation, and access to disruptive tech firms like Uber.

There's no reason for investors looking to profit from Uber's bright future to wait for an IPO that will likely shut out retail investors.

Head for Google instead.

The Google play here is only the latest "backdoor" IPO investment Michael's looking at. His Strategic Tech Investment readers are making money on some of the biggest tech IPOs ever. To start getting Strategic Tech Investor, along with Michael's Secret Way to Profit from the Biggest Tech IPOs report, simply click here. It's free, and you'll get two updates per week.

3 ETFs Paying 14% That Are Safe…For Now

Popular Posts: The 4 Most Important Income ETFs to Own3 Short Sells with Huge Profit PotentialAMC Stock: You Won’t Find a Safer Dividend Recent Posts: 3 ETFs Paying 14% That Are Safe…For Now 3 Covered Calls to Cash In on Internet Stocks The Student Loan Bubble: How We Got Here and How to Profit View All Posts 3 ETFs Paying 14% That Are Safe…For Now

High-yield ETFs that have mega-high yields are very tempting. Anything offering a dividend yield above 10% always gives me pause, because there's got to be a reason that the payout is so high. In cases like BDCs or mREITs, it's because they are leveraging really low interest rates to lend out or sell securities at higher yields. In other cases, the stocks have been beaten down to the point that the yield has risen to a level that may be unsustainable.

I decided to go on a hunt for the highest high-yield ETFs I could find, because ETFs would offer some safety in their inherent diversification. If a few stocks in the ETF imploded, the entire ETF may not go down with them.

 

I found three ETFs that offer diversification but also carry their own risks. After careful evaluation, I feel these dividend yields are safe for the foreseeable future. Any danger of implosion is likely to be telegraphed.

 

UBS E-TRACS 2x Wells Fargo Business Development Company ETN (BDCL) is a play on the Business Development Company concept just referenced.   BDCs are entities that raise equity through the public markets via IPO, or borrow money at attractive rates, and then turn around and invest their capital into what are known as "middle market companies". These are companies with a modest track record of producing reliable cash flow, that are already carrying a lot of debt and need to raise a lot more capital to finance their rapid growth. Banks usually won't lend to them due to new restrictions on lending to businesses already in debt, so BDCs step in and offer financing in the 11% – 15% range and even take a small equity position.   They must pay 90% of their income as a dividend.

 

This ETN uses a 2x leverage feature, so it exactly tracks twice the value of its underlying assets, as represented by the Wells Fargo Business Development Company Index, consisting of over two dozen BDCs. You are well insulated against disaster here, barring a major economic meltdown that torpedoes many of the companies the BDCs themselves invest in. It yields 16.32%.

 

iShares Mortgage Real Estate Capped ETF (REM) is a basket of mortgage REITs. These are companies that generally pull down cheap debt to purchase baskets of mortgages that pay higher yields. 90% of these mortgages are federally insured, while the other 10% consists of commercial mortgage financing, industrial and office REITs.

 

REM offers a high dividend yield because it holds two high-yield mREITs as major components of its basket of securities – Annaly Capital Management (NLY) and American Capital Agency Corp. (AGNC). Yet it is well-diversified with 36 holdings. The 15 % yield feels relatively safe because of something called "arbitrage". Shares can be redeemed or created in 50,000 share lots. If the price drops, more shares can be purchased to be redeemed if NAV is significantly above market price.

 

iShares MSCI Colombia Capped ETF (ICOL) is a bit of an odd bird. It invests in a basket of Colombian equities   Colombia is shaping up to be one of the big growth stories of the next decade. With the cartels now gone, and the government pushing to make it more attractive for tourists, and overall economic improvement, it's a good place to be for international equity exposure.

 

The ETF holds only ten stocks, representing the largest energy, financial, materials, utility and consumer staples companies in the country. It's not as diversified as I'd like, but time will likely result in more companies being added.

 

The ETF makes irregular monthly distributions, and at present, the distribution yield is 14.92%. The big risk here is political instability, but with Democratic elections being held, this seems unlikely.

 

Lawrence Meyers does not own shares in any security mentioned.

 

Wasatch International Growth Fund Q1 2014 Commentary - The Universe of High Quality Japanese Small Companies Has Increased

Investing in small or micro cap funds will be more volatile and loss of principal could be greater than investing in large cap or more diversified funds.Investing in foreign securities, especially in frontier and emerging markets, entails special risks, such as currency fluctuations and political uncertainties, which are described in more detail in the prospectus.For the period ended March 31, 2014, the average annual total returns of the Wasatch International Growth (Trades, Portfolio) Fund for the one-, five- and ten-year periods were 12.71%, 28.72%, and 10.73%, and the returns for the MSCI AC World Ex-U.S.A. Small Cap Index were 16.28%, 21.18%, and 9.31%. Expense ratio: Gross 1.57% / Net 1.57%.Recent stock market performance has caused atypical short-term returns for some asset classes,which may not continue in the future. Fund performance may be subject to substantial short-term changes due to market volatility.Data shows past performance, which is not indicative of future performance. Current performance may be lower or higher than the data quoted. To obtain the most recent month-end performance data available, please click on the "Performance" tab of the individual fund under the "Our Funds" section. The Advisor may absorb certain Fund expenses, without which total return would have been lower. Investment returns and principal value will fluctuate and shares, when redeemed, may be worth more or less than their original cost.Wasatch Funds will deduct a 2.00% redemption proceeds fee on Fund shares held 60 days or less. Performance data does not reflect the deduction of fees, including sales charges, or the taxes you would pay on fund distributions or the redemption of fund shares. Fees and taxes, if reflected, would reduce the performance quoted. Wasatch does not charge any sales fees. For more complete information including charges, risks and expenses, read the prospectus carefully.Wasatch Funds are subject to risks, including loss of principal.OverviewDuring the quarter ended March 31, ! 2014, we saw European stocks do well driven by better sentiment toward Europe, the recovery of peripheral countries like Spain, and property markets like the one in the United Kingdom (U.K.) coming back, following a similar recovery to that of the U.S. The Japanese market had a very strong year in 2013 and we are not surprised there was a bit of a pull back at this point. Emerging markets have had a very rough period contending with just about every type of crisis, the main market anxiety being concern over China's decelerating growth and deleveraging. The news and sentiment on emerging markets has clearly been poor across the board with issues ranging from slowing growth in Brazil to geopolitical turmoil in Ukraine. The Wasatch International Growth (Trades, Portfolio) Fund returned -1.72% in the first quarter of 2014, while the MSCI All Country (AC) World Ex-U.S.A. Small Cap Index returned 3.47%.Details of the QuarterWhile the Japanese market cooled off following strong performance in 2013, the Japanese companies held in the Fund outperformed those in the Index and made a positive contribution to performance. We would like to discuss Japan in more detail. Some members of the international team were in Japan visiting a list of current holdings and prospective investments—in all we met with some 30 companies over a two-week period. What has become clearer to us as growth investors is how our views of Japan have changed, that we think the opportunity set has increased enough to have a weight in Japan that is closer to the Index weight. This has not been driven by our views on Abenomics†† or political changes, but has more to do with our belief that there are emerging growth companies in Japan that are world class, companies that are comparable to the best companies we see in Asia or Europe. Although Japan is rightly seen as a cheap market (based on price-to-book††† and price-to-earnings‡), our names tend to be more expensive than average but with significantly higher returns on capital‡�! �� and st! rong cash generation.It is interesting that a number of what we consider to be our best companies in Japan are Internet-related or are operating internationally—it is in these areas that we are seeing the Japanese "next generation" management teams in action. These are companies with strong accumulated know-how and technology, managed generally by founders or the second generation of a family. These managers look outside Japan to learn best practices and they are well aware of the leading companies in their fields—whether Japanese or not. For example, Sawai Pharmaceutical Co. Ltd. (TSE:4555) is led by the son of the founder. Sawai is the leading Japanese generic drug company. We believe it is well-positioned, as the government is keen to control drug costs. Internet-focused firms Start Today Co. Ltd. and Kakaku.com, Inc. are both founder-led companies. In talking to the CEO of Sugi Holdings Co. Ltd. (TSE:7649), which operates drug stores in Japan, we learned that he knows well the history of Walgreens‡‡‡ in the U.S. He believes that Sugi, like Walgreens, will be a consolidator in the market, fueling long-term growth. The common thread across most of our Japanese names is management ownership and the global outlook of the companies—and not because they compete globally, as many do not. The best Japanese baseball players no doubt watch the best players in the U.S., and not because they have to pitch or bat against them.Just as the quality of small companies has improved in emerging markets over the last 15 years, to us it really feels anecdotally that the overall standard of Japanese small companies has improved, and that is significant for us as quality growth investors. The universe of high quality companies has increased in size. Fifteen years ago, it was hard to find Japanese small companies with returns on equity§ greater than 15%. Why should there be more high quality small companies in Japan when the country does not have a high growth economy and in fact has suffered from long-ter! m deflati! on? In addition, Japan still seems culturally isolated from the rest of the world in many ways. We think the following factors may help explain the increase we are seeing in high quality Japanese small companies:Japan has less of a large company culture today—working for a large Japanese company is not the be all and end all it used to be. There is a more youthful technology culture.Downsizing: In the U.S. in the 1980s large companies downsized massively (like GE, IBM, for example). Downsizing by large companies did two things—made experienced managers more available to smaller companies and made small companies more respectable (it was OK to be an entrepreneur).Globalization of best practices through competition, consulting, and the Internet. For example, when we asked Start Today's managers about companies they admired, they named Internet retailers Yoox S.p.A. (MIL:YOOX) and ASOS plc (LSE:ASC), two companies held in the Fund that they have studied. Start Today doesn't have a good comparable inside Japan.The next generation of managers—of Start Today or United Arrows Ltd., for example—is evident from the clothing styles. The Internet is having significant cultural effects on how Japanese employees dress and see themselves. Internet companies are like technology companies in general, outward looking and not tied to legacy practices.What has been the biggest change-making company in Japan in the last 20 years? Probably SoftBank‡‡‡ Corp.—its roots are in the Internet and it has been the classic outsider company with an outsider founder (Masayoshi Son is of Korean ethnicity). Our guess is that this has had a huge cultural effect on how new companies see themselves, and as part of the universal technology culture.What we find striking about the companies the Fund holds is how close they are to our quality ideal (in returns, disclosure, technology platforms, etc.). We think this has come about through technology and the Internet and for others (like Pigeon Corp. and Calbee, Inc.) through! their in! ternational exposure and mindset. For example, the CEO of Calbee came from Johnson & Johnson.‡‡‡ Overall, these companies seem less a product of a closed cultural and economic system.The U.K. and Russia were the biggest detractors from the Fund's performance in the quarter. The Fund's holdings in the U.K. underperformed those in the Index. While several of our U.K. holdings performed well, including Fusionex International plc, an enterprise software solutions provider, others like Oxford Instruments plc (LSE:OXIG) and Abcam plc detracted from performance. Oxford Instruments is the leader in tools and technologies that facilitate nanotechnology scientific research. The long-term potential for nanotechnology is significant given finite available global resources and the need to do more with less. The industry is still in the early phases where most of the research is done at universities and research facilities that rely on public funding. While Oxford Instruments has been increasing its exposure to commercial end markets, research still drives over 40% of the company's revenues. As a result, Oxford Instrument's stock has had less visibility, and more volatility due to recent public funding cuts. As the market leader in the space, we believe Oxford Instruments will be a primary beneficiary of the long-term trend toward nanotechnology. Abcam is a web-based retailer of research antibodies. Like Oxford Instruments, a large portion of Abcam's revenues depends on public funding for research. While public research funding trends seem to have stabilized, Abcam will be investing heavily to increase its portfolio of products and expand geographically. This will result in lower growth rates than the company has achieved historically. Given the recent sell-off in Abcam's stock, its leading market position, and strong business model, we believe the market is presenting us with a buying opportunity.Eurasia Drilling Co. Ltd. (LSE:EDCL), a provider of drilling services to the oil and gas industry,i! s the Fun! d's only Russia-related holding and was the largest detractor from performance for the quarter. Through our bottom-up due diligence process, we often find attractive companies like Eurasia Drilling that are generating excellent returns on capital through innovative approaches to their markets, paying generous dividends and looking confidently into the future. These are the kinds of companies we have a history of investing in. However, at some point even the best companies can become difficult investments when they must contend with a consistently depreciating currency on the back of a slowing macroeconomic environment. When the Russian economy slowed to near-zero growth in 2013, we began to see diminishing pricing power as the company struggled to offset cost inflation—a typical sign of an economy beginning to face challenges. Eurasia Drilling also lost its second largest customer, but management was able to redeploy all of those assets with minimal impact to earnings. We have adjusted our position accordingly, reducing our weight as we see an increasingly difficult road ahead for even world-class companies in such a challenging macro environment. We are still optimistic about the company's long-term prospects and continue to hold the stock. Supporting our confidence is the company's decision to buy back up to $200 million of stock.OutlookOur outlook remains constructive for the year given signs of bottoming in emerging markets and the ongoing recovery evident in Europe. We are excited about the long-term future of the diverse set of what we consider to be quality companies that we own in the Fund.We thank shareholders for their support as always.Sincerely,Roger Edgley and Linda Lasater**The MSCI AC World Ex-U.S.A. Small Cap Index is an unmanaged index and includes reinvestment of all dividends of issuers located in countries throughout the world representing developed and emerging markets, excluding securities of U.S. issuers. This index is a free float-adjusted market capitalization index desi! gned to m! easure the performance of small capitalization securities.†The MSCI World Ex-U.S.A. Small Cap Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed markets, excluding the United States.You cannot invest in these or any indices.Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the "MSCI Parties") expressly disclaims all warranties (including, without limitation, any warranties or originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)CFA® is a trademark owned by CFA Institute.The Wasatch International Growth (Trades, Portfolio) Fund's investment objective is long-term growth of capital.††Abenomics refers to the economic policies advocated by Japanese prime minister Shinzo Abe after his December 2012 re-election to the post he last held in 2007. His aim was to revive the sluggish economy! with "! three arrows"—a massive fiscal stimulus, more aggressive monetary easing from the Bank of Japan, and structural reforms to boost Japan's competitiveness.†††The price-to-book ratio is used to compare a company's book value to its current market price.‡The price-to-earnings or P/E ratio is the price of a stock divided by its earnings per share.‡‡Return on capital is a measure of how effectively a company uses the money, owned or borrowed, that has been invested in its operations.‡‡‡As of March 31, 2014, the Wasatch International Growth (Trades, Portfolio) Fund was not invested in Walgreen's Co., SoftBank Corp. or Johnson & Johnson.§Return on equity (ROE) measures a company's efficiency at generating profits from shareholders' equity.The MSCI World Ex U.S.A. Small Cap Index is an unmanaged index that measures the performance of stocks with market capitalizations between U.S. $200 million and $1.5 billion across 22 developed markets, excluding the United States. The MSCI AC World Ex U.S.A. Small Cap Index is an unmanaged index and includes reinvestment of all dividends of issuers located in countries throughout the world representing developed and emerging markets, excluding securities of U.S. issuers. This index is a free float-adjusted market capitalization index designed to measure the performance of small capitalization securities. You cannot invest directly in indexes.View the International Growth Fund's most current Top 10 HoldingsPortfolio holdings are subject to change at any time. References to specific securities should not be construed as recommendations by the Funds or their Advisor.Read our Holdings Release Policy and why we have one.CFA® is a trademark owned by CFA Institute.Also check out: Wasatch International Growth Undervalued Stocks Wasatch International Growth Top Growth Companies Wasatch International Growth High Yield stocks, and Stocks that Wasatch International Growth keeps buying

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Subprime mortgages making a comeback

  First-time homebuyers squeezed NEW YORK (CNNMoney) Borrowers with bad credit were shut out of the mortgage market after the housing bubble burst, but now a handful of small lenders are starting to offer subprime loans again.

Once synonymous with toxic, adjustable-rate mortgages -- like the "exploding ARMs" that led many homeowners to lose their homes to foreclosure during the housing bust -- subprime mortgages are once again being offered to borrowers who pose a higher credit risk, typically those with credit scores that fall below 640.

But this time around, the loans are much more costly. During the housing bubble, lenders were handing out subprime loans with cheap teaser rates and little or no down payments. Now, lenders are charging interest rates of as high as 8% to 10% and requiring borrowers to make down payments of as much as 25%-35%.

The premium price is worth it for some borrowers who are trying to build or repair their credit, according to Bill Dallas from Skyline Financial, of Calabasas, Calif. Skyline started offering subprime loans a few months ago under its NewLeaf Lending division.

Among his firm's subprime mortgage customers: young, first-time homebuyers and former homeowners whose credit was ruined in the housing bust.

"They're just Americans who want to buy homes but can't," said Dallas, who used to run First Franklin, a subprime lender that went bust in the mortgage meltdown.

Most of these borrowers have nowhere else to turn. Fannie Mae and Freddie Mac, which back 80% of all U.S. home loans, won't back loans issued to subprime borrowers.

Only the Federal Housing Administration cont! inues to support low-credit score borrowers in the wake of the housing bust. But it has hiked fees and premiums.

To help protect borrowers, the Consumer Financial Protection Bureau requires strong consumer protections. The loans cannot carry interest rates that increase after default, or prepayment penalties, for example. And lenders must provide these borrowers with homeownership counseling from a representative approved by the U.S. Department of Housing and Urban Development.

In addition to the small lenders who are issuing subprime loans, Wells Fargo recently lowered the minimum credit score it requires of borrowers to get FHA loans.

Wells Fargo is now approving applicants who have scores of between 600 and 640 for FHA loans, which remains well within FHA's guidelines, according to spokesman Tom Goyda.

"It will open up access to credit for many lower income families, including first-time homebuyers," said Goyda.

And Dallas points out that these borrowers don't necessarily have to pay those high interest rates for the life of the loan. Once they demonstrate they can repay their loans regularly, their credit scores should improve and they should be able to refinance into a lower-rate loan.

Your Investment Watch List for 2014

It's been a great year for the U.S. stock market. The Standard & Poor's 500 Index is up about 25%, and the Dow Jones Industrial Average has climbed 23%.

And Money Morning's gurus have done even better than that for their subscribers this year...

Chief Investment Strategist Keith Fitz-Gerald decoded an 80% gain for readers of his Money Map Report with an insurance company that pays out a super dividend.

Our Defense and Technology Specialist Michael A. Robinson, delivered a 100% gain with a politics-proof defense contractor.

Now it's time to pick the next big winners for 2014. Some of our experts share what they're watching, looking for, or forward to, next time around.

The Good

Here's who's going to have a great 2014:

Two of our favorite tech stocks, Apple Inc. (Nasdaq: AAPL) and Microsoft Corp. (Nasdaq: MSFT), bear close watching next year, according to Money Morning's Capital Wave Strategist Shah Gilani.

"Apple is headed back to $700," he said, on the basis of "new products and business lines that will shock the world." AAPL is trading at $560 per share now.

Meanwhile, Gilani says Microsoft will mount its own challenge to Apple and Google - and emerge from the fight "bigger, stronger, and more growth-oriented."

2013 was a rough year for the equity markets in the emerging economies of Asia and Latin America. Although gross domestic product (GDP) growth was 4.5% in those markets, share price indexes for Asia were only up 1.7%, and down 8.7% for Latin America, according to research firm Yardeni.

Next year, things will start to look up, at least for one of the big emerging economies.

"2014 is going to be all about Brazil: economically, politically, athletically," said Gilani. "If Brazil can rise to the many challenges it faces, its stock market will soar."

Brazil will host the 2014 FIFA World Cup and the 2016 Olympics in Rio da Janeiro, both events that will tax the country's infrastructure.

And speaking of soaring, this famed investor is poised to have a massively profitable 2014...

"Billionaire private equity investor Stephen Schwartzman will make still more billions as his fund Blackstone IPOs more of its portfolio companies." Blackstone took Hilton Hotels public in 2013, and it has plenty more companies in its portfolio. The Fed(s)

In the U.S., 2013 market activity seems to have revolved around one question: What's the Fed going to do?

The Open Market Committee answered that question - taper starts in January - but that doesn't mean the Fed has become irrelevant.

Far from it. The Federal Reserve and the federal government - "the Feds" plural - will only increase in importance.

One thing our experts absolutely agree is a must-watch for next year is the Federal Reserve Bank and its incoming Chairman, Janet Yellen.

"There is no stock, no investment, no person more important to watch than Janet Yellen and the rest of the central bankers," said Money Morning's Chief Investment Strategist Keith Fitz-Gerald. "The central bankers will take their cue from Yellen, which will set the tone for every asset class in the world."

And speaking of politics and money, our Global Investing & Income Strategist Robert Hsu predicts we'll "See a lot more class warfare in the United States next year, thanks to the Congressional mid-term elections in November."

But there is more to money and banking than is dreamt of by Treasury secretaries and central bankers. And that's why Money Morning's Global Income Specialist Robert Hsu is watching China's shadow banking system.

"There's probably going to be at least one default in China's underground credit system," he warned.

And The Tech-y

This year was great for technology, with the tech-heavy NASDAQ Composite Index up 33% - higher than the Standard & Poor's 500's 25%.

And 2014 will be no different.

"Americans love technology and the country is continuing to embrace new developments, products and innovations," said Money Morning's Defense & Technology specialist Michael Robinson. "The big money makers are going to be in cloud computing and biotechnology."

3D printing really got noticed in 2013, Robinson said, which means that the industry will only increase its momentum in the New Year. "We're talking about an industry with a compound growth rate of 25% per year. 3D printing is going to be everywhere."

But it's not all business...

Here at Money Morning we love keeping you abreast of the news you can profit from. And we have a good time doing it. (Besides, sometimes a good time is also a good investment.)

But even we like to kick back with a great TV series or movie, and 2014 is looking to be a bang-up year for entertainment.

The year 2013 brought the untimely end of beloved chemistry teacher-turned-drug kingpin Walter White. People distraught over the end of AMC's hit series Breaking Bad will rejoice, says Robert Hsu, as the spin-off and prequel Better Call Saul becomes the most anticipated TV show in years.

Perhaps most importantly, the long wait for the second Avengers installment comes out next year, too. Robert tells us that the new movie's villain, Thanos, "will move out of comic book obscurity and into the mainstream."

Now get started on making 2014 your most profitable year ever: This New Year's Eve, "Ring the Register" for Profits

Boeing Union Rejects Offer, Company Looks Elsewhere to Build 777X

After three days of talks between Boeing Co. (NYSE: BA) and the International Association of Machinists & Aerospace Workers (IAM) local union ended Thursday night, the union's leadership rejected what Boeing called its “best and final” contract extension offer. As part of its offer to the union, Boeing would have committed to doing final assembly of the new 777X aircraft and the assembly of the plane’s composite wing at a plant in Washington and would have committed to doing final assembly work on the 737 MAX through 2024.

Just a month ago, the IAM membership rejected a Boeing contract extension that called for cuts in wage increases for union members, reduced health care benefits and lower company contributions to its defined benefit retirement plan. Some 67% of IAM members voted to reject that deal.

Boeing tried to sweeten yesterday’s offer to the union, adding $5,000 to its previous offer of a $10,000 signing bonus and improving dental benefits. The company made no change its previous pension offer, which would have allowed union members to keep what they have accrued to date under the defined benefit plan, but base future benefits on a defined contribution plan. The pension benefit issue was the primary reason Boeing’s November offer was rejected.

Boeing said it has received offers to build a new plant for assembling the 777X from 22 states, many of which have submitted multiple sites. A total of 54 sites are being evaluated for a new plant location.

After the IAM rejected Boeing’s offer in November, we suggested that the negotiations were not really over between the two sides. Building a new plant in Washington and taking advantage of the available talent pool in the state is still the company’s best option for assembling its new planes. The union could win its struggle with Boeing over the long-term pension benefits issue because the company’s current management eventually will figure out that it will not be around when the bill comes due and paying the benefits will be somebody else’s problem.