Shares Rally to Give Indexes Their Best Day of the Year

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Best Buy Shares Tumble on Weak Holiday Sales

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High Losses for Penney, but Shares Jump Higher

Shares in the company jumped 8.4 percent after it reported quarterly results that included a slowdown in sales declines and the prospect of rising profit margins during the all-important holiday season.

The spate of promising news suggests that Penney has bought itself some breathing room as it takes on its third self-help campaign in two years. Though the retailer’s executives acknowledged that much work lay ahead, they said repeatedly that the next few months would reflect even more progress.

“We’re making significant strides toward restoring J. C. Penney to its rightful place in retail,” Myron E. Ullman III, the company’s chief executive, said in a conference call with analysts. “It’s hard work, with no quick fixes, but our teams are rising to the challenge and our customers tell us they love the progress we’re making.”

Yet Penney’s revival remains far from certain, with the retailer’s stock still 70 percent lower than it was at the same time two years ago. Its room for error remains small, especially compared with better-performing rivals like Macy’s and Kohl’s.

The company reported an adjusted net loss of $457 million for the three months that ended Nov. 2. That amounted to a loss of $1.81 a share after excluding certain one-time charges and gains. Analysts on average had expected the company to lose $1.77 a share, according to estimates compiled by Standard & Poor’s Capital IQ.

Using generally accepted accounting principles, the retailer lost $489 million, or $1.94 a share. Additionally, total sales fell 5 percent, to $2.8 billion.

But investors and analysts appeared more focused on the future. Sales at stores open at least one year rose just under 1 percent last month, for the first time in nearly two years, a trend that management said it expected to continue through next quarter.

While gross margins fell to 29.5 percent for the quarter from 32.5 percent a year ago, in large part because of steep discounts, executives argued that Penney needed to take the hit to clear out merchandise associated with a previous failed strategy. Those items should be gone by the first quarter of 2014.

Online sales rose 24.5 percent, to $266 million.

Mr. Ullman, who returned to the job of chief executive earlier this year, has been working to undo one of the most prominent failures in recent corporate turnaround history. During the 17-month tenure of Ron Johnson, whom the company ousted this spring, the retailer’s stock plummeted more than 50 percent.

Mr. Johnson’s ambitious plans to eliminate discount sales drove away customers, prompting him to issue an apology in February after Penney reported a $552 million quarterly loss.

Penney became further embroiled in controversy in the summer after Mr. Johnson’s former backer, the hedge fund manager William A. Ackman, publicly feuded with his fellow board members, going as far as to publicly leak confidential director deliberations. Mr. Ackman resigned in mid-August and, two weeks later, sold his 18 percent stake in the company.

Last month, Penney agreed to abandon efforts to sell a broad range of home products designed by Martha Stewart, surrendering in a long-running branding war with Macy’s. The move, which also involved returning 11 million shares in Martha Stewart Living Omnimedia, was another unwinding of Mr. Johnson’s legacy.

Even Penney’s efforts to shore up its future, like the sale of 84 million new shares in late September to help finance the turnaround, prompted a plunge in the stock price. The company wagered that the move was worth the hit, since it now expects to have more than $2 billion in cash and available credit lines by the end of its fiscal year.

Off the Charts: Five Years After Chaos, Shares of Many Big Banks Are Still Struggling

Two weeks later, Lehman Brothers failed and a panic began. The crisis demonstrated how interconnected the world financial system had become and how vulnerable even apparently healthy banks were when their competitors began to crumble. In the weeks that followed, most large banks around the world had to be bailed out. Their share prices plummeted.

Since then, however, some big banks have performed much better than others — a difference based to a significant extent on just how well, or badly, each bank had been run in the months and years leading up to the crisis.

The accompanying charts show the performance of 25 large banks around the world. As the crisis began, each of them ranked in the top 20 in the world in at least one of three measurements — market capitalization, book value or total assets.

In the weeks and months that followed, all but one of them lost at least half of their market value, as measured in the local currency of the bank’s primary market. The exception was a Chinese bank, the Industrial and Commercial Bank of China, whose shares lost less than a third of their value.

The charts also show the performance of the Bloomberg World Bank Index, which comprises more than 140 banks and has done better than most of the large bank stocks. This was a crisis where bigger was not necessarily better, and where some of the largest banks proved to be far from adequately capitalized, notwithstanding what their books had indicated before Lehman collapsed.

This spring, the world bank index got back to within 3 percent of its level at the end of August 2008, although it has since slipped back and is now 11 percent lower. Few of the large banks shown have done as well.

But a handful of banks turned out to be profitable long-term investments that August. Shares of both JPMorgan Chase and Wells Fargo in the United States are now more than 40 percent higher than they were. Shares of two of the three Chinese banks shown — Bank of China and China Construction Bank — are higher now than they were five years ago, while the third is approximately unchanged. In Britain, HSBC is up about 13 percent, a much better performance than was shown by other large European banks. It did not hurt that HSBC had a significant presence in many developing countries, most of which rode out the recession reasonably well even though some have stumbled this year.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

DealBook: J.C. Penney Shares Jump on Report of Push for Permanent Chief

Facebook Shares Touch a Symbolic Threshold

On Wednesday morning, the company’s stock crossed an important psychological barrier, trading above $38 a share, the price at which Facebook, the world’s leading social network, first sold shares to the public in May 2012.

The catalyst for the rise was the company’s surprisingly strong second-quarter earnings report last Wednesday, which quelled many investors’ doubts about Facebook’s ability to make money from its legions of mobile users and suggested that the company’s profit stream would continue growing.

Since last week’s report, shares have risen about 34 percent. Early Wednesday, they briefly touched $38.31 a share, although they pulled back to end at $36.80 a share at the time the market closed.

The company’s shares hit a low of $17.55 last fall. Since then, investors have warmed to the company as its management demonstrated that it can increase profits and not just users.

“There was a perception that they hadn’t monetized the users they have,” said Aaron Kessler, an analyst at the Raymond James brokerage firm, referring to last summer, when the Facebook’s stock was trading at half the current level.

These days, Wall Street sees revenue potential everywhere — from soon-to-come video ads in the Facebook news feed to the expansion of high-dollar ads targeted to specific swaths of Facebook users.

“Facebook was caught flat-footed by the shift to mobile,” said Mark S. Mahaney, an analyst with RBC Capital Markets. Now, he said, “they appear to be set up as a sustainable, high-growth business.”

Still, there are reasons to be concerned. Mobile messaging platforms like Snapchat and WhatsApp are grabbing the attention of many of Facebook’s younger users. Twitter is mounting a major effort to go after marketers, especially brands that typically advertise on television, as it prepares for its own likely public offering.

And Facebook risks turning off users with too many ads. About 1 in 20 items in the news feed, the main flow of items that a Facebook user sees, is an ad. During the company’s quarterly conference call with analysts, Facebook’s co-founder and chief executive, Mark Zuckerberg, said that users were beginning to notice the number of ads, suggesting that the company could not greatly increase their frequency without losing some users.

Nate Elliott, a principal analyst with Forrester Research, said Facebook users who visit the site on a computer’s browser still see too many cheap, poorly targeted ads on the right side of the page. “They’ve got to get much better at targeting,” he said.

Despite these worries, investors’ views of the company’s prospects have clearly changed.

Mr. Mahaney, whose firm has a $40 price target on the Facebook stock, said that analysts across Wall Street had increased their projections of the company’s financial performance. Analysts now expect Facebook to increase its profits 30 to 35 percent a year through 2015.

Because stocks tend to trade as a multiple of a company’s future profits, those upgrades last week sent Facebook’s stock soaring.

Facebook officials declined to comment on the stock rise on Wednesday. But for the company’s executives, who had urged investors to be patient as their strategy played out, the surge surely offers some vindication.

The company raised $16 billion from the initial public offering on May 18, 2012, vaulting it into the big leagues of American stocks, but problems struck immediately. The Nasdaq stock exchange botched the handling of buy and sell orders on the first day of trading — so badly, in fact, that regulators eventually fined Nasdaq $10 million for the fiasco.

In ensuing weeks, Facebook shares continued to fall. Instead of pouring into the stock, as they did a decade earlier with Google, many investors questioned whether Facebook’s stock was overpriced at $38 a share.

Particularly worrisome was Facebook’s seemingly nonexistent mobile strategy just as Internet users were abandoning PCs for their smartphones. The company’s smartphone and iPad applications were clunky, and it was generating no revenue from mobile ads.

Facebook’s management, including Mr. Zuckerberg, recognized the problem and began a crash course to revamp the company’s approach to mobile and better position the company for fast-growing emerging markets.

The company overhauled its apps, introduced ads into its users’ news feeds, and created a new category of revenue called app-install ads. With the app-install ads, a game maker, for example, can promote its new game in Facebook’s mobile software and give users an easy way to install the app with just a couple of clicks.

Facebook also introduced new advertising products meant to give marketers more ways to target specific groups of customers, which allowed the service to charge higher advertising rates.

While mobile advertising continues to grow, and was about 41 percent of Facebook’s ad revenue in the second quarter, investors are also looking to new areas of potential profit growth. Those include video advertising in the news feed, which is expected to begin later this year, and the possible sale of ads in Instagram, the fast-growing photo and video-sharing app that Facebook bought in 2012.

“All of those seem like relatively large low-hanging fruit, and they are starting to go after them,” Mr. Mahaney said.

July Rally Seems to Wane as Shares Slip, Pending Major Economic Reports

The July rally in the stock market appears to be fading.

Stocks edged lower on Monday as investors awaited major economic news this week. Several big-name mergers were not enough to push the main market indexes higher.

The government will report its first estimate of economic growth for the second quarter on Wednesday, and it will release its employment report for July on Friday.

The Federal Reserve may give some indication about the future of its economic stimulus program on Wednesday after the central bank’s two-day policy meeting. The Fed’s stimulus has been a major factor supporting a four-year rally in stocks.

The Standard & Poor’s 500-stock index dropped 6.32 points, or 0.4 percent, to close at 1,685.33.

Seven of the 10 sectors in the S.& P. 500 fell. The declines were led by energy companies and banks.

The S.& P. 500 is still up 4.9 percent in July, and it appears to be on track to have its best month since January. The index reached a nominal closing high on July 22, after Ben S. Bernanke, the Fed chairman, assured investors that the central bank would not cut its stimulus before the economy was ready. The Fed is buying $85 billion a month in Treasury and mortgage-backed securities to help keep interest rates low and encourage borrowing and hiring.

The Dow Jones industrial average fell 36.86 points, or 0.2 percent, to 15,521.97. The Nasdaq composite index dropped 14.02 points, or 0.4 percent, to 3,599.14.

Stocks may struggle to add to their gains, given that expectations for the economy remain modest, said Scott Wren, a senior equity strategist at Wells Fargo Advisors.

Economists estimate that the economy grew at an annual rate of just less than 1 percent in the second quarter. That would be about half the 1.8 percent annual growth rate in the first quarter.

“I don’t think you’re going to see the market sustain much higher levels than this,” Mr. Wren said. “All this data is going to show that we are slowly improving, but it’s a slow process and there’s not much to get excited about.”

Three corporate deals did not excite the broader stock market.

The luxury retailer Saks rose 64 cents, or 4.2 percent, to $15.95 after the Canadian retailer Hudson’s Bay, the parent company of Lord & Taylor, agreed to buy it for $2.4 billion, or $16 a share.

The Interpublic Group, a big advertising company, jumped 74 cents, or 4.7 percent, to $16.61 after the Omnicom Group agreed to combine with Publicis Groupe of France to create the world’s largest advertising company. Interpublic’s stock gained even after the company’s chief executive, Michael Roth, said that he saw no need for a major merger to keep the company moving forward.

Omnicom shares climbed as high as $70.50 in early trading, but ended the day down 36 cents, or 0.6 percent, at $64.75.

Perrigo stock fell $9.06, or 6.75 percent, to $125.17 after the drug maker agreed to buy the Irish biotechnology company Elan in a deal valued at $8.6 billion.

The deals should encourage more merger activity, said Dan Veru, chief investment officer at Palisade Capital Management. “Companies are struggling to grow organically,” he said. “So, how do they grow? They grow by buying other businesses.”

In government bond trading, the price of the 10-year Treasury note fell 9/32, to 92 23/32, while its yield rose to 2.60 percent, from 2.56 percent late Friday. The 10-year note’s yield is up nearly 1 percentage point since the start of May, when it hit 1.62 percent, its low point of the year.

Yahoo to Buy Back Shares From Third Point

Three Yahoo board directors appointed by Third Point, including Daniel Loeb, the hedge fund's chief, will resign from Yahoo's board. Third Point will still own about 20 million shares, less than 2 percent of the Internet media company's common stock.

Third Point's decision to sell shares of Yahoo comes as the struggling Internet's company's stock has surged more than 80 percent during the past 12 months, due largely to aggressive share buybacks and the value of Yahoo's Asian assets.

It was not immediately clear why Third Point was selling its shares now. Third Point declined to comment, but Loeb expressed his confidence in Yahoo's prospects in a statement on Monday.

Given the gains in Yahoo's shares, Third Point may have decided it was prudent to sell some of its holdings, said JMP Securities analyst Ronald Josey.

But Loeb's move may be prompting other shareholders to similarly re-evaluate their investment, he said.

"Probably a lot of investors are saying 'We had a pretty good run here, it makes sense to take some off the table,'" Josey said, adding, "Much like a lot of investors followed Third Point in, a lot will follow Third Point out."

Yahoo, which plans to fund the Third Point transaction primarily with cash, said it would increase earnings per share.

After the deal, about $700 million will remain under a $5 billion overall buyback authorization that Yahoo announced last year.

Third Point settled a bitter proxy battle with Yahoo last year after months of criticising the company. Loeb was instrumental in selecting former Google Inc executive Marissa Mayer to join Yahoo as CEO.

The resignations of directors Loeb, Harry J. Wilson, and Michael J. Wolf were part of Yahoo's settlement with Third Point in May 2012, Yahoo said.

Yahoo shares fell 4.3 percent, or $1.25, to $27.86 on Nasdaq in midday trading.

(This story adds "per share" to first paragraph)

(Additional reporting by Sinead Carew; Editing by Jeffrey Benkoe and Leslie Gevirtz)

Microsoft Profit Misses as Surface Tablets Languish; Shares Drop

The stock fell 5 percent after hours from 5-year highs.

The massive charge underlines the struggles of the world's largest software company, which last week announced a deep reorganization to transform itself into a "devices and services" leader, but is struggling to make mobile computing as attractive as Apple Inc or Google Inc.

"That's the biggest miss we've ever seen from Microsoft, the biggest that I could remember," said Brendan Barnicle, an analyst at Pacific Crest Securities. "It looks like everything was weak."

Before the sell-off late Thursday, Microsoft shares had risen 32 percent this year, beating a 19 percent rise in the Standard & Poor's 500 index.

Microsoft said the $900 million charge was related to its Surface RT tablet, the version of its tablet running on ARM Holdings-designed chips. The Surface was meant to challenge Apple's iPad when it was launched alongside Windows 8 in October, but has not sold well.

Earlier this week, Microsoft said it was drastically cutting prices and expanding distribution of the model to entice buyers, reducing the value of Surface devices in its inventory.

"We do know we have to do better, particular in mobile devices," Amy Hood, Microsoft's new chief financial officer, said in a telephone interview. "That's a big reason we made the strategic organizational changes last week."

Microsoft's biggest shake-up in five years, unveiled by Chief Executive Steve Ballmer last week, creates a single devices unit for the first time at the company, suggesting that it will double down on its so-far unsuccessful move into hardware.

Redmond, Washington-based Microsoft reported fiscal fourth-quarter profit of 59 cents per share, compared with a 6 cents per share loss in the year-ago quarter when it wrote off the cost of a failed acquisition.

Wall Street had estimated earnings of 75 cents per share, on average, according to Thomson Reuters I/B/E/S. Excluding the Surface charge, Microsoft reported 66 cents per share profit, a less drastic miss.

Revenue rose 10 percent to $19.9 billion, helped by sales of Microsoft's Office suite of applications, but fell short of analysts' average estimate of $20.7 billion.

Sales of Windows rose slightly, but only because of the inclusion of some deferred revenue, weighed down by an estimated 11 percent dip in PC sales in the quarter.

Microsoft's Windows 8 has sold more than 100 million licenses since launching in October, but is struggling to win over many consumers confused by the new design which is more suited to tablets than traditional PCs. Acknowledging this, Microsoft is releasing a revamped version of the system called Windows 8.1 later this year, which brings back the iconic 'start' button.

(Additional reporting by Liana Baker in New York; Editing by Richard Chang)

DealBook: Morgan Stanley Announces a Buyback, and Its Shares Rise

Mark Lennihan/Associated PressMorgan Stanley’s headquarters in New York. The firm posted a 42 percent rise in profit and said it would buy back part of its stock.

Morgan Stanley shares rose more than 4 percent on Thursday after the firm announced it planned to buy back a chunk of its own stock.

News that the firm had received approval from the Federal Reserve to repurchase $500 million worth of its stock was good for shareholders, whose stake in the company has been diluted in recent years as the firm issued millions of shares to pay employees. This dilution has weighed on the stock, and it was trading in the teens earlier this year.

The stock rose about 4.4 percent, or $1.16, to close at $27.70, a level it has not hit since 2011. It is the first buyback Morgan Stanley has undertaken since the financial crisis and comes after the firm’s decision to buy the remaining stake of its wealth management business, a move James P. Gorman, the firm’s chairman and chief executive, has heralded as “transformational.”

Morgan Stanley received approval from regulators in June to buy the rest of its wealth management division, a joint venture it formed with Citigroup during the crisis. Since then, the firm has been working to diversify its earnings, moving away from riskier businesses like trading and into wealth management, which offers steady, albeit lower returns. Its ability to purchase all of that division gave it full control of the operation and the full share of the profits.

Mr. Gorman told analysts that the firm was careful to have the wealth management purchase in order — and paid for — before it started spending money on stock buybacks.

The other good news for shareholders was the firm’s second-quarter earnings, which came in slightly ahead of analysts’ expectations.

The firm reported that second-quarter profit applicable to Morgan Stanley’s common shareholders rose 42 percent, to $802 million, or 41 cents a share, compared with $564 million, or 29 cents a share, in the period a year earlier. Overall net income was $980 million, compared with $591 million in the period a year earlier.

The results, however, were affected by two big charges, one related to Morgan Stanley’s credit spreads and the other to its recent purchase of the remaining stake of the wealth management business. Stripping out those charges, the firm had a profit of $872 million, or 45 cents a share. That beat the estimates of analysts polled by Thomson Reuters, which had projected a profit of 43 cents a share.

Morgan Stanley’s revenue, excluding those charges, rose to $8.3 billion in the second quarter from $6.6 billion in the period a year earlier.

The results were driven by decent performances in most of its business units, notably wealth management and equity and debt trading. Morgan Stanley is coming off what was a weak second quarter of 2012 and is also enjoying what seems to be a better operating environment for all banks.

Morgan Stanley is the last big financial institution to report second-quarter earnings, and results have been generally strong as lenders seem to be benefiting from a pickup in the American economy. Goldman Sachs, for instance, reported that its net income doubled, beating analysts’ expectations handily.

At Morgan Stanley, wealth management, which is led by Gregory J. Fleming, was a big focus for analysts on the quarterly conference call.

That unit, with 16,321 financial advisers, posted net revenue of $3.5 billion, up more than 10 percent. Its pretax profit margin, a widely watched figure on Wall Street, came in at 18.5 percent. That margin, which previously had been around 17 percent, was higher than the firm’s expectations.

Institutional securities, which houses Morgan Stanley’s banking and trading operations, posted net revenue, excluding the debt charge, of about $4.2 billion, up about 40 percent from a year earlier.

The firm experienced a solid increase in revenue from various segments in this department, including debt and equity underwriting, investment banking, and currency and commodities trading.

The fixed-income sales and trading unit reported that adjusted revenue rose to $1.2 billion from $771 million in the period a year earlier. This year’s performance was slightly below what analysts were hoping for.

In the second quarter, there was a sudden and sharp rise in interest rates after the Federal Reserve indicated it might wind down its bond purchase program, which has helped the economy recover from the financial crisis.

Ruth Porat, the bank’s chief financial officer, told analysts that the firm reduced the risk it was taking trading interest rate products.

While the bank’s second-quarter results were a marked improvement over those in the period a year earlier, the firm is still producing a return on equity, excluding the two charges, of just 5.6 percent. This is up from 2.1 percent in the period a year earlier but still well below what it costs the bank to simply cover its debt expenses and other capital costs. To do that, it needs to achieve a return on equity, an important measure of profitability, of closer to 10 percent.

Shares End the Week Down After 2 Dissatisfying Reports

Disappointing reports about the economy helped push the stock market lower on Friday.

Concern that the Federal Reserve could announce plans to cut back its stimulus program next week also weighed on the mood of investors.

Americans’ confidence in the economy weakened in June and was lower than economists had estimated, according to the Thomson Reuters/University of Michigan survey released on Friday. Another report said factories were not as busy as expected.

The International Monetary Fund, a global lender, offered no help. The I.M.F. said Friday in its annual report on the American economy that spending cuts by the United States government that kicked in March 1 were “ill designed” and slowed the economy. Though in a statment, the fund’s managing director, Christine Lagarde, said, “There are signs that the U.S. recovery is gaining ground and becoming more durable.”

The Standard & Poor’s 500-stock index sank 9.63 points, or 0.59 percent, to 1,626.73. The Dow Jones industrial average dropped 105.90 points, or 0.7 percent, to 15,070.18. The Nasdaq composite index lost 21.81 points, or 0.63 percent, to 3,423.56.

American Express led the Dow lower, losing $2.24, or 3 percent, to $72.97. The media company Gannett fell the most, dropping 6 percent, or $1.61, to $24.99.

“There was just no good news today,” said Cam Albright, a director at Wilmington Trust Investment Advisors in Wilmington, Del. Add the handful of economic reports out Friday to the anxiety over the Fed’s stimulus program, “and you have the recipe for a soft market to finish the week,” he said.

Market indexes flitted from slight gains to losses in morning trading, a contrast to the sudden lurches in previous days. All three major indexes lost 1 percent or more this week.

Trading has been volatile since late May as investors try to figure out when the Fed will dial back its aggressive support for the economy. The Fed buys $85 billion in bonds every month as part of a campaign to keep interest rates extremely low. The aim is to encourage borrowing, spending and investing. Some investors worry that long-term interest rates could spike when the Fed pulls back, raising borrowing costs and threatening the economic recovery. Higher yields for government bonds have already started pushing mortgage rates up.

Policy makers at the Fed will start a two-day meeting on Tuesday to discuss the central bank’s next steps. Afterward, the bank will release its policy statement and the Fed chairman, Ben S. Bernanke, will hold a news conference.

Banks led nine of the 10 industry groups in the S.& P. 500 lower. Utilities made slight gains. Investors tend to favor these safety plays when they want stable companies that pay steady dividends.

The S.& P. 500 hit a record of 1,669 on May 21. The next day, Fed officials said they would consider pulling back on its stimulus program once the economy looked healthy. The index has lost 2 percent since.

The price of oil rose $1.15, to $98.07 a barrel, near its highest level of the year, as traders reacted to news that the United States would provide weapons to rebel forces in Syria.

Gold rose $9.70, to $1,387.30 an ounce.

In the market for government bonds, the benchmark 10-year Treasury note rose 5/32 to 96 20/32, sending the yield down to 2.13 percent from 2.15 percent late Thursday. The yield reached a 14-month high of 2.29 percent on Tuesday.

Expectations that the Fed would pare its bond buying have helped drive the yield up from 1.63 percent on May 3, when it was at its lowest level this year.

DealBook: Private Equity Capitalizes on Chinese Firms’ Depressed Shares

HONG KONG – If you can’t buy them, bankrupt them.

Three months ago, Ambow Education Holding, a troubled operator of tutoring centers in China that was listed on the New York Stock Exchange, was the target of a $108 million privatization bid by Baring Private Equity Asia.

On Monday, Baring emerged as one of several big shareholders that had succeeded in pushing Ambow into provisional liquidation by a court in the Cayman Islands, where the company is registered, after a dispute with management over an investigation into possible financial misconduct.

Rapid downfalls have not been uncommon among Chinese companies listed in the United States in recent years, after a wave of accounting scandals led to a broad sell-off of such stocks. At the same time, a growing number of private equity firms have sought to capitalize on depressed share prices of Chinese companies by making buyout offers.

But Ambow’s situation stands out.

“Perhaps no company ever transited as quickly from a private equity firm’s sought-after takeover target to being liquidated,” said Peter Fuhrman, chairman of China First Capital, an investment bank and advisory firm based in Shenzhen, China.

Ambow was taken public in 2010 in a $107 million deal led by JPMorgan Chase and Goldman Sachs. Its market value rose to more than $1 billion that year but came under pressure throughout 2011, along with many other Chinese stocks.

Then in July 2102, Ambow disclosed in stock exchange filings that a former employee had come forward claiming “financial impropriety and wrongful conduct” related to the company’s purchase of a training school in China in 2008.

Ambow said it had hired outside lawyers to help its audit committee carry out an internal investigation of the matter and that it would not comment further. Its shares promptly dropped by half, from more than $4 apiece to just over $2, then continued to slide until early this year.

Baring, a firm based in Hong Kong that used to be part of the Dutch financial services company ING, began its privatization bid for Ambow on March 15 at $1.46 per American depositary share. It was a 45 percent premium to the share price at the time.

Then things got messy. On March 18, three of Ambow’s four independent directors resigned. On March 22, the law firm Fenwick & West resigned after nine months of leading the investigation into possible financial misconduct. That same day, the Chinese affiliate of PricewaterhouseCoopers, also known as PwC, resigned as Ambow’s auditor.

“In its letter, PwC stated it was resigning as a result of its concerns that the investigation may not be given the necessary resources and time, and the presence of existing management may make conducting an investigation of the scope that PwC believes is warranted unlikely,” Ambow said in a filing. The New York Stock Exchange suspended trading in the shares.

Baring withdrew its privatization bid on March 25, 10 days after it was made, citing the resignations and the trading suspension. It said in a letter that “as a result of these unexpected events, we have concluded that it is not possible for us to proceed.”

The petition to the Cayman court to liquidate Ambow was filed in April by a fund run by the Asian unit of the Avenue Capital Group, a New York investor in distressed stocks and bonds that owns 21.6 percent of Ambow’s shares.

According to filings on Monday to the United States Securities and Exchange Commission announcing the success of the petition, the move was supported by Baring, which has a 10 percent stake in Ambow, and an investment unit of the Australian bank Macquarie, which holds an 11.6 percent stake.

The petition accused Ambow’s chief executive, Jin Huang, of abusing her power in relation to the investigation into possible financial misconduct and of “obstructionist tactics designed to entrench her control of Ambow.”

In a statement last month, Ambow firmly rejected the accusations, saying there was “no basis” for any of the claims and that “the filing of the petition and the relief it seeks are wholly inappropriate.”

In its ruling on Friday, the Cayman court appointed the auditing firm KPMG as provisional liquidator for Ambow. KPMG will also take control of the investigation into possible financial misconduct.

The situation is complicated because Ambow’s operating business — like many Chinese companies listed in the United States — is based in China but controlled by the offshore-registered listed company through a series of complex holding structures called variable interest entities, or V.I.E.’s.

One such foreign control structure was recently ruled invalid by China’s highest court.

“Right now our control over the operating assets in China has been quite limited,” Tiffany Wong, a partner at KPMG China and herself one of the court-appointed liquidators, said on Tuesday. “We haven’t got access to the books and records of company at the moment.”

Monday, Tuesday and Wednesday are public holidays in mainland China, and Ms. Wong plans to meet with Ambow management in Beijing later this week. “We will be seeking to stabilize the company,” she said.

European and Japanese Central Banks Pledge Support, Boosting Shares and the Dollar

ECB Executive Board member Joerg Asmussen said on Monday the policy would stay as long as necessary. On Tuesday, BOJ board member Ryuzo Miyao said it was vital to keep long- and short-term interest rates stable.

Yields on U.S. Treasuries surged to their highest levels in over a year as prices skidded. A strong consumer confidence report underscored the notion that the Federal Reserve could soon trim its bond-buying program.

"The vicious selling once again materialized after the much-stronger-than-expected consumer confidence report," said Cantor, Fitzgerald Treasury strategist Justin Lederer.

Yields have jumped since Fed Chairman Ben Bernanke said on Wednesday that the U.S. central bank may decide to decrease its bond purchases gradually in the next few policy meetings if data shows the economy is gaining steam.

"The path of least resistance is higher yields," said Sean Simko, portfolio manager at SEI Investments.

Benchmark 10-year notes fell more than a point to 96-7/32 while their yields, which move inversely to price, soared to 2.17 percent from 2.01 percent on Friday. Ten-year yields have surged from 1.61 percent at the beginning of May as optimism about the economy has grown.

Thirty-year bonds fell more than two points in price while their yields rose to 3.33 percent, the highest level since March, and up from 3.18 percent on Friday.

Both the 10-year notes and 30-year bonds are on track for their worst monthly loss since December 2009.

U.S. STOCKS, DOLLAR RECOVER

U.S. stocks recovered from recent weakness, propelling the Dow to finish at yet another record closing high.

The Dow Jones industrial average gained 106.29 points, or 0.69 percent, to end at a record 15,409.39. The Standard & Poor's 500 Index rose 10.46 points, or 0.63 percent, to 1,660.06. The Nasdaq Composite Index climbed 29.74 points, or 0.86 percent, to close at 3,488.89.

The dollar rebounded against the euro and yen after data on U.S. consumer confidence and home prices suggested the world's largest economy was on a steady road to recovery.

The Fed's stimulus program is viewed as negative for the greenback because it floods the market with dollars.

A measure of U.S. consumer confidence rose in May to its highest level in more than five years. That private-sector report followed data showing single-family home prices rose in March, with their best annual gain in nearly seven years.

Higher Treasury yields have also boosted the appeal of dollar-denominated investments.

DOLLAR RISES AGAINST YEN AND EURO

The U.S. dollar rallied against the euro and yen as the stronger-than-expected U.S. economic data underscored views the Fed could reduce its bond purchases in coming months.

Against the yen, which tumbled broadly, the dollar rose 1.2 percent to 102.09 yen, rebounding from a two-week low of 100.68 set on Friday. The dollar rose to a 4-1/2-year high of 103.73 yen last week.

The euro rose 0.6 percent to 131.24 yen, pulling away from Thursday's trough of 129.94 yen.

The safe-haven Swiss franc fell, down 1.1 percent against the dollar at 0.9740 franc and down 0.6 percent against the euro at 1.2533 francs.

Currencies such as the yen and the Swiss franc, which rose sharply last week after a recent sell-off in stock markets, typically gain in times of financial uncertainty.

The dollar index, which measures the greenback versus a basket of currencies, rose 0.6 percent to 84.172.

Gold fell 1 percent as the stock market rally diminished bullion's safe-haven appeal. Strong buying of physical bullion, however, briefly reversed gold's fall.

Spot gold was down 1 percent to $1,380.81 an ounce by 3:25 p.m. EDT (8:25 p.m. British time), after trading as low as $1,373.14.

U.S. Comex gold futures for June delivery settled down $7.70 at $1,378.90 an ounce.

Among other precious metals, silver was down 1.7 percent to $22.25 an ounce. Platinum rose 0.6 percent to $1,455.74 an ounce, while palladium gained 2.1 percent to $751.22 an ounce.

Brent crude oil rose on increased Middle East risk and as stocks rallied. Brent crude oil for July rose $1.61 to $104.23 per barrel while U.S. crude rose $0.95 to $95.10 per barrel.

The promise of monetary support from the European and Japanese central banks was reinforced as French, German and Italian governments urged action to tackle youth unemployment. [ID:nL5N0E911M] Youth unemployment in countries like Greece and Spain has risen to 60 percent. [ID:nL3N0DY1IW]

In Europe, the broad FTSE Eurofirst 300 index closed up 1.3 percent at 1,246.44, while MSCI's world equity index rose 0.5 percent, reversing four days of losses.

Japan's Nikkei stock index, which last week reached a 5-1/2-year high before dropping 7.3 percent on Thursday, steadied on Tuesday, ending 1.2 percent higher.

(Additional reporting by Karen Brettell, Gertrude Chavez-Dreyfuss, Ryan Vlastelica and Frank Tang; Editing by Nick Zieminski and Dan Grebler)

Groupon’s Quarterly Revenue Tops Estimates, and Shares Jump

Shares in the company, one of the most feted Internet market debutantes of 2011 before daily deals mania cooled, climbed almost 10 percent in after-hours trade. They have gained about 40 percent since the February ouster of co-founder and former CEO Andrew Mason, who was criticized for lacking the experience to run an increasingly global, public company.

Wall Street was cautious ahead of Groupon's results, so the company's "solid" performance triggered a particularly big gain in Groupon shares on Wednesday, analysts say.

"Margins came in better and they are re-affirming their full-year income guidance. It could have been worse," said Ken Sena, an analyst at Evercore Partners.

Groupon has been trying to revive a sluggish European business, while juggling the fast-rising cost of ensnaring new customers, and merchants to partner on Internet coupons for everything from spa treatments to fine dining.

The Chicago-based company finally fired Mason in February after a string of disappointing results wiped out three-quarters of its market value since its 2011 IPO.

On Wednesday, it reported first-quarter revenue rose to $601.4 million from $559.3 million a year earlier, surpassing the $590 million analysts had expected, according to Thomson Reuters I/B/E/S.

Consolidated segment operating income, or CSOI, a closely watched measure of Groupon's profitability, came in at $51.2 million in the latest period. Mark Mahaney, an analyst at RBC Capital Markets, was expecting CSOI of $26 million.

Its North American revenue rose 42 percent, while international revenue fell 18 percent.

Groupon, which has lost several other key executives, is on the lookout for a new permanent chief executive. Interim co-CEOs Eric Lefkofsky and Ted Leonsis continue to grapple with its struggling European business, while expanding in the United States.

Lefkofsky, who co-founded Groupon with Mason and is chairman, led the earnings conference call with analysts for the first time, acknowledging missteps and announcing a "new chapter" focused on the company's local commerce roots.

Analysts expect a slimmed-down company under new leadership.

"At times as an organization we spread ourselves too thin and fail to focus on the things that will have the greatest impact," Lefkofsky said.

LOCAL MARKETPLACE FOCUS

Groupon has been building an online deal marketplace called Pull that lets people search for and buy deals in their area. This is a big change from Groupon's original business, which sent a daily email to subscribers offering one or two deals.

Emails accounted for less than 45 percent of North American transactions in the first quarter, suggesting the Pull marketplace is gaining momentum. A Groupon spokesman declined to say how many transactions came from online searches.

Lefkofsky said the marketplace approach has potential because more people are carrying smartphones and can search for what they want to do and buy locally as they move around.

About 45 percent of North American transactions came from mobile devices in March, up from about 20 percent two years ago, Lefkofsky noted.

That Pull marketplace however needs a lot of merchants to offer deals for longer periods, something Lefkofsky said the company was making progress on.

At the end of March, Groupon was offering almost 40,000 active deals from merchants in North America, up from about 1,000 when the company went public in late 2011.

Lefkofsky said that over half of Groupon's local transactions in North America came from this "deal bank" of longer-term merchant offers. In March more than 60 percent of the contracts Groupon signed with merchants were for longer-term deals, he said.

For now, Groupon's board of directors has formed a special committee that has begun a search for a new chief executive for the company, interim co-CEO Ted Leonsis said on Wednesday.

RBC's Mahaney said Lefkofsky did a "nice job" on the conference call and asked if he was interested in the full-time CEO role. The co-founder did not respond, asking Ted Leonsis, Groupon's other interim CEO, to chime in.

The current leadership team is "gelling very very nicely," giving the search committee more time to find "the ideal long-term CEO," Leonsis added.

Groupon spokesman Paul Taaffe said Lefkofsky has not put himself forward as a candidate and is not being considered by the committee for the role.

Leonsis is leading the search committee, which Lefkofsky will not be on. Groupon's Taaffe declined to say who else is part of the group.

(Editing by Carol Bishopric, Matthew Lewis and Eric Walsh)

DealBook: Glencore Shares Rise on Investor Optimism of Cost Savings

XstrataA thermal coal operation in Australia run by Xstrata.

4:34 p.m. | Updated
LONDON – Shares in Glencore Xstrata rose on their first day of trading on Friday, as investors banked on potential dividends and future cost savings from one of the largest deals in recent years.

After more than a year in the making, the commodities trader Glencore International has finally completed its $30 billion all-share takeover of the mining giant Xstrata.

On its first day of trading on Friday, the newly combined company’s stock price rose more than 4 percent. The firm’s shares will start trading in Hong Kong on Monday. The company has a market valuation of almost $70 billion.

In a presentation to investors, Glencore Xstrata’s new chief executive, Ivan Glasenberg, promised that the merger would result in cost savings. Mr. Glasenberg, the former head of Glencore, outmuscled his counterpart at Xstrata, Mick Davis, for the top job at the newly merged company following a shareholder revolt over the initial takeover bid.

After Qatar Holding, which owns a 12 percent stake in Xstrata, balked at Glencore’s original 2.8-share proposal, the commodities trader raised its offer to 3.05 of its own shares for each Xstrata share.

In response, Glencore also demanded that Mr. Glasenberg become chief executive earlier than had previously been envisioned.

Attention will now shift to how the combined company will streamline its operations and pare back on new investment because of falls in the global commodity markets.

Some analysts also have speculated the Glencore Xstrata may pursue further acquisitions to take advantage of depressed valuations of rivals.

Deutsche Bank, Goldman Sachs, JPMorgan Chase and Nomura Bank advised Xstrata on the deal, while Citigroup and Morgan Stanley advised Glencore. Lazard advised Qatar Holding.

DealBook: Deutsche Bank’s Shares Rise as Its Leaders Look Past Financial Crisis

Boris Roessler/DPA, via Agence France-Presse — Getty ImagesJürgen Fitschen, left, and Anshu Jain, co-chiefs of Deutsche Bank of Germany.

4:58 p.m. | Updated FRANKFURT — Shares in Deutsche Bank rose for a second day after the bank sold 2.96 billion euros ($3.87 billion) in new stock on Tuesday to help it bolster the size of its capital reserves.

Deutsche Bank has long faced criticism that its capital buffers, the money that banks set aside to absorb losses in a crisis, were inadequate and that it carried too much risk from derivatives and other volatile investment banking products.

But since taking over last year, Anshu Jain and Jürgen Fitschen, the bank’s co-chief executives, have been hoarding profit and selling assets to raise the proportion of capital to money at risk. Bank officials insisted that the share sale was not done in response to pressure from regulators in Europe or the United States.

“It was our decision,” Mr. Jain said on Tuesday during a conference call with analysts. “There was no gun to the head.”

Still, the move will go a long way toward ending the bank’s reputation as one of Europe’s riskiest and least-capitalized lenders. The new capital will allow it to rank near the top among large European banks in the size of its reserves, rather than near the bottom, and to comfortably meet new regulatory requirements.

The bank also raised more than it aimed for when it first announced the share sale on Monday. Institutional investors paid 32.90 euros a share for the new equity, Deutsche Bank said, a discount to the market price in Frankfurt on Tuesday of 35.03 euros.

Shares of Deutsche Bank, the largest German lender, rose 5 percent in New York trading on Tuesday on expectations that the share sale will clear the way for higher dividend payments, even though an increase in the number of shares lowers each shareholder’s cut of profits.

Mr. Jain and Stefan Krause, the bank’s chief financial officer, portrayed the share issue as a turning point that would set the stage for the bank to focus less on its baggage from the financial crisis and more on growth and profit.

“We could see where a capital raise would bring us to the point where the capital issue was off the table,” Mr. Jain said.

European banks have as a rule taken longer to put the financial crisis behind them than American banks. The European lenders have had to deal with the burden of euro zone debt, but they also faced less pressure from regulators to confront their problems. Lately, though, there have been signs that some of the bigger banks are returning to health.

Investors had other good news to cheer from the bank this week. On Monday, the bank reported that net profit in the first quarter rose nearly 18 percent, to 1.66 billion euros, from 1.41 billion euros in the period a year earlier.

Though revenue rose a modest 2 percent, to 9.4 billion euros, the bank was able to cut costs. Mr. Krause said on the conference call that the bank expected to save about a billion euros over the full year.

Some analysts were still cautious about the bank’s long-term prospects. The bank faces uncertainty over the European economy, which is stuck in recession. It also continues to address an array of legal proceedings that could be costly to resolve.

“Whilst we still see risks from litigation, regulation and the macro environment, the strengthened capital position should put the group in a better position to deal with these challenges going forward,” analysts at Credit Suisse wrote in a note to clients. Credit Suisse upgraded Deutsche Bank shares to neutral, from underperform.

Deutsche Bank also said it would raise an additional 2 billion euros later in the year in the form of so-called hybrid equity, a form of debt that converts to shares in time of crisis and can thus be counted toward capital. The bank is waiting for German regulators to clarify rules for such instruments before it issues them.

Zynga Reports Fewer Players of Its Online Games and Shares Drop

Shares fell 10 percent to $2.99 in extended trading.

The San Francisco-based publisher behind games like "FarmVille" and "Words With Friends" said its number of monthly players continued its decline to 253 million, the lowest figure since the number peaked at 331 million at the end of the third quarter of 2012.

On an adjusted basis, Zynga reported earnings of 1 cent per share, beating analyst expectations of a loss of 4 cents per share. But the company also projected that its second-quarter loss would be between 3 to 5 cents per share, exceeding the 1 cent per share loss analysts had expected.

"The second quarter guidance is light," said Sterne Agee analyst Arvind Bhatia. "We continue to think that any hope for real growth for this nebulous company really depends on what it can do in real-money gaming."

Zynga has struggled to keep users, who once flocked to its games on Facebook Inc's website. In recent months, Zynga and Facebook have revised their business partnership, as Zynga has sought to establish itself as a more independent gaming network at the risk of receiving less visitor traffic from Facebook.

Zynga has promised investors that it could tap into a potentially lucrative new revenue stream by launching real-money casino games around the world.

The company reported revenues of $263.6 million, down 18 percent from the year-ago quarter but above Wall Street's depressed expectations as the online game maker wrung more sales than expected out of its shrinking user base.

Zynga's quarterly bookings of $229.8 million also topped estimates but represented a 30 percent decline from a year ago.

(Reporting By Gerry Shih; Editing by Leslie Adler and David Gregorio)

P&G Shares Fall After Forecast Misses Expectations

The news spooked investors who do not want to wait until 2014 for better sales increases. Shares of the world's largest household products maker fell as much as 6 percent after closing at an all-time high of $82.54 on Tuesday.

"There's a lot of frustration that they've been talking about a lot of actions they've been taking but we haven't really seen an acceleration in the sales growth," said David Blount, co-portfolio manager of the Growth & Income Fund at Eagle Asset Management, which includes P&G shares.

The company, maker of Pampers diapers, Gillette razors and many other products, has been under greater scrutiny to improve after cutting profit expectations in the past and learning that activist investor Bill Ackman invested in the stock.

Cincinnati-based P&G also posted a fiscal third-quarter profit on Wednesday that topped estimates despite sales that were weaker than both the company and analysts had anticipated.

Chief Executive Bob McDonald was roasted by analysts on a conference call a year ago when P&G gave a profit warning. While Wednesday's call was not as tense, analysts wanted to know why the company has not yet posted better sales growth more than a year into its turnaround.

P&G, which announced a $10 billion restructuring in February 2012, said that its push for more innovation means that several products such as new Iams pet foods and Olay skin creams will soon hit stores. After cutting billions of dollars in costs, along with eliminating hundreds of more jobs than anticipated, it will now spend more to promote those new goods and even to build the plants to produce them around the world.

FOURTH-QUARTER FORECAST

For the current fourth quarter ending in June, P&G said profit should fall to 69 cents to 77 cents per share, while analysts expected it to earn 81 cents per share, according to Thomson Reuters I/B/E/S. P&G earned 82 cents per share in the fourth quarter of fiscal 2012.

The company cited factors including weak market growth, higher marketing and other costs and volatility in Venezuela, Argentina, Egypt, Syria and South Korea.

Wednesday's fiscal third-quarter results were a sharp departure from the fiscal second quarter, when P&G raised its annual profit forecast and its shares jumped. On Wednesday, on the heels of the better-than-expected third quarter profit, it raised only the bottom end of its annual forecast range by 2 cents per share.

"They're still making progress, they're still on the right track, it is just going to be a little more slowly than what people expected," said Edward Jones analyst Jack Russo.

P&G insists that its forecast is "realistic, not conservative," especially given the headwinds it faces such as volatility in Venezuela and elsewhere, Chief Financial Officer Jon Moeller told analysts.

Along with spending on marketing to promote its new products, P&G is dealing with what it calls a "choppy" economic recovery, and sees a 1 to 2 percent impact on its sales this year from foreign exchange rates.

Its shares slid as low as $77.48 on Wednesday and were last trading down 4.7 percent at $78.05, wiping out nearly all of this month's gains. Shares of rivals such as Colgate-Palmolive Co and Kimberly-Clark Corp were down less than 2 percent.

JOB CUTS EXCEED GOAL

While products such as single-dose Tide Pods laundry detergent have boosted U.S. sales, P&G said it still needs to figure out the formula for getting products such as Pantene shampoo and Olay skin creams to stand out among competitors. Net sales decreased in the hair care and skin care business in the latest quarter.

P&G is taking the right steps by cutting costs, bringing out new products and growing in developing markets, but it is important for it to show progress in the beauty unit in the next quarter or two, said Russo.

P&G said it earned 99 cents per share on a core basis in the quarter ended in March, topping analysts' target of 96 cents. Core earnings exclude items such as restructuring charges.

Overall sales rose 2 percent to $20.598 billion while analysts were looking for sales of $20.73 billion. The company had forecast 3 to 4 percent in sales growth.

P&G's organic sales, which strip out the impact of divestitures and foreign exchange changes, grew 3 percent - at the low end of its forecast of 3 to 4 percent.

On a net basis, the company earned $2.57 billion, or 88 cents per share, in the fiscal third quarter. That was up from $2.41 billion, or 82 cents per share, a year earlier.

McDonald declined to comment on any discussions he may have been having with Ackman, who is known to push for change at companies in which he invests. Ackman's Pershing Square had a 1.02 percent stake in P&G, or 27.95 million shares, as of December, making it P&G's eighth-largest shareholder, according to Thomson Reuters data.

P&G said it now plans to repurchase $6 billion of its stock this year, at the high end of its prior forecast for $5 billion to $6 billion in buybacks. Last June, P&G decided to hold off on buybacks, but in August quickly reverted back to its usual plan.

P&G also said it had cut 6,250 jobs as of March 31, ahead of its goal to cut 5,700 jobs by the end of June.

(Reporting by Jessica Wohl; in Chicago; editing by Jeffrey Benkoe and Matthew Lewis)

Zynga Reports Fewer Players of Its Online Games and Shares Drop

Shares fell 10 percent to $2.99 in extended trading.

The San Francisco-based publisher behind games like "FarmVille" and "Words With Friends" said its number of monthly players continued its decline to 253 million, the lowest figure since the number peaked at 331 million at the end of the third quarter of 2012.

On an adjusted basis, Zynga reported earnings of 1 cent per share, beating analyst expectations of a loss of 4 cents per share. But the company also projected that its second-quarter loss would be between 3 to 5 cents per share, exceeding the 1 cent per share loss analysts had expected.

"The second quarter guidance is light," said Sterne Agee analyst Arvind Bhatia. "We continue to think that any hope for real growth for this nebulous company really depends on what it can do in real-money gaming."

Zynga has struggled to keep users, who once flocked to its games on Facebook Inc's website. In recent months, Zynga and Facebook have revised their business partnership, as Zynga has sought to establish itself as a more independent gaming network at the risk of receiving less visitor traffic from Facebook.

Zynga has promised investors that it could tap into a potentially lucrative new revenue stream by launching real-money casino games around the world.

The company reported revenues of $263.6 million, down 18 percent from the year-ago quarter but above Wall Street's depressed expectations as the online game maker wrung more sales than expected out of its shrinking user base.

Zynga's quarterly bookings of $229.8 million also topped estimates but represented a 30 percent decline from a year ago.

(Reporting By Gerry Shih; Editing by Leslie Adler and David Gregorio)

DealBook: Comparing the Valuations Behind Amazon and Apple Shares

And people wonder why it’s hard to understand the stock market.

Take a consumer sitting at home buying stuff on Amazon.com with his iPhone. To him, Apple’s product is a clear leader in the market, while Amazon is the retailer he uses most. Amazon’s shares are up nearly 40 percent over the last 12 months, while Apple’s are down nearly 30 percent over the same period. So why have their stock prices diverged so much when both companies appear to be at the top of their game?

Growth is the most common answer you’ll hear. When a company convinces investors that its earnings can keep going up, an enthusiasm grows around the shares, and they tend to perform well. Wall Street analysts expect Amazon’s earnings next year to be 66 percent higher than the forecast for 2013. They project a 10 percent uptick for Apple.

But there’s another conversation you need to have.

It revolves around whether the market has already factored the hoped-for growth into the stock price. It is possible to pay too much for excellence.

There are all sorts of ways to gauge how much credibility investors ascribe to a company’s “growth story.” One is to look at what investors are paying now for a company’s free cash flows, or the hard dollars it takes in from profits (minus the spending it does on plant and equipment). The results are stark. Apple’s stock market value is nine times last year’s free cash flows. On this metric, Amazon is at over 300 times. Sane investors would never touch a stock with such a dear valuation unless they felt cash flows were going to soar in the future.

And this brings us to the part of investing that usually separates winners from losers: guessing whether companies will actually do what we expect them to.

Amazon’s believers don’t mind that it’s spending such huge amounts on setting up new operations for its retail and data businesses. At some point, hopefully in the not too distant future, that spending will fall as the expansion reaches its limits. In that case, Amazon will be churning out much bigger cash flows as it enjoys near unassailable dominance.

Sure, but how wondrous will those cash flows be? Amazon’s operations produced $4.2 billion of cash flows last year. Let’s generously assume 10 percent annual growth for them, which would take them to $5.1 billion by the end of 2014.

Let’s be kind again and assume that capital expenditures fall a lot, to, say, $1 billion a year, from last year’s $3.8 billion. Free cash flows in 2014 would therefore total $4.1 billion.

Now, remember, at this future point, Amazon’s growth in free cash flow will have slowed a lot. Investors will probably decide to attach a lower valuation to the company. Being generous, let’s assume they value those hypothetical 2014 free cash flows at 21 times, Google’s multiple today. That would give Amazon a market worth of about $86 billion. That’s 30 percent lower than today.

Of course, the stock market believes what it wants to believe. It may well decide to remain starry-eyed about Amazon and give it a much higher valuation for years to come. But Apple’s recent drubbing suggests even the strongest runs can end nastily.