Thursday, 30 April 2009

Recognizing Value Situations - Growth at a Reasonable Price (GARP)

Recognizing Value Situations - Growth at a Reasonable Price (GARP)

GARP is the mainstream scenario of reasonable market valuation - or undervaluation - of growth potential. Solid and improving fundamentals and supporting intangibles are key. As part of the assessment the value investor must ask how realistic are the growth projections, particularly over time, and whether the company takes a balanced approach to the business and fundamentals. In short, is the business a good business, capable of sustained growth, and selling at a reasonable price? Key words not to lose sight of are good, sustained, and reasonable.

Or is the business a bet on an extreme but temporary success in short-term margins, market share, revenue, or profit? The G in GARP must be sustainable, not based on a short-term blip, fad, acquisition, or worse, a wild hope. The business model and its perception in the marketplace must be solid and on the rise.

Stocks with a PEG ratio of 2 or less with other solid fudamentals are good candidates, but "GARP" is not a matter of ratios alone.

Select companies with solid fundamentals and strong growth prospects based on various factors to analyse, but beware the growth maybe far from a sure thing.

Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors

Recognizing Value Situations

Recognizing Value Situations

Value comes wrapped in many different packages. The common is the growth case through normal business results, where solid and improving business fundamentals and intangibles point to solid business growh down the road, and where the market has undervalued that growth. That's arguably the most clear-cut, least risky, and easiest-to-understand scenario.

But other situations do present themselves, and although they may take weeks of professional-level analysis to fully grasp, they can be quite interesting. And in a few cases, they may be as easily justified by your own observations, common sense, and gut feeling as by the numbers.

In general, you're encouraged to be a do-it-yourselfer. But in many of the special situations, do-it-yourself may not be practical. Some of these value drivers can be well hidden and subjective - like a company's breakup value. They often turn into value not through normal business results but by being unlocked through acquisitions and restructurings. For these situations it makes sense to rely a bit more on industry professionals and analysts, who have access to key, paid-for data and a lot of historical precident. They can also pick up the phone and call the company itself or others who may have interest in the assets.

Smart value investors know when to - and when not to- rely on the work of others.

Also read:
Recognizing Value Situations
Recognizing Value Situations - Growth at a Reasonable Price
Recognizing Value Situations - The Fire Sale
Recognizing Value Situations - The Asset Play
Recognizing Value Situations - Growth Kickers
Recognizing Value Situations - Turning the Ship Around
Recognizing Value Situations - Cyclical Plays
Recognizing Value Situations - Smoke and Mirrors

The Thought Process Is What Counts

The Thought Process Is What Counts

In value investing, it really is the thought that counts. The thought process is important. This is how you think about your investments and investment decisions. Analysis doesn't decide for you; it only serves to support the thinking behind the choices you make.

There are many analytical blocks and approaches to appraising company value and many ways to decide whether the price paid for that value is right. These are evident in the postings in this blog. However, it is repeatedly obvious that no single method works all the time, and if one did, everyone would make the same findings and buy the same companies and values would no longer be values. Every article, every book, every value investor has a unique application of the vlaue investing thought process.

The thought process is the intellectual process - the philosophy - that the value investor internalizes. The tools are there to help, and different tools will help more at different times. If you strive to understand the business value underlying the price before you buy, investing history will be on your side. As you get good at understanding value and price, your investment decisions and performance will only improve.

In the real, practical world of value investing, value comes in many forms. There is so much detail on any given company (much of which you can't know) that it often isn't realistic to become a walking encyclopedia on a company or its fundamentals. And formulas and ratios, although they work and can help, hardly can deliver absolute answers. Usually, taking a few shortcuts makes sense, reserving the deepest analysis to the most critical, difficult and largest investing decisions.

As a practical matter, the so-called Pareto principle, also called the 80-20 rule, applies to investing as it does in much of business: 80 percent of the picture comes from 20 percent of the questions you may ask or facts you may collect about a business. If you focus on most critical aspects of a given business, you'll get most of the picture, without digging up 100 percent of everything about it. If this weren't the case, you'd spend six months analyzing each investment.

You can't spend days on each company and you can't analyze all companies in the investing universe. A simplified, practical approach will help the new value investor get started, and will also help experienced value investors improve their game. You'll undoubtedly find yourself adding plays to your value investing playbook as you gain experience. And you'll also get better at finding that 20 percent that's really important.

Famed fund manager Peter Lynch, in his famous book, One Up on Wall Street, shared this wisdom: "Once you're able to tell the story of a stock to your family, your friends or the dog, and so that even a child could understand it, then you have a proper grasp of the situation."

Shopping for Value: A Practical Approach

Shopping for Value: A Practical Approach

"Value investing boils down to finding a good business, analyzing it to find the simple truths about it, and deciding whether the truths are on track and the price is right."

The thought process is what counts.

1. Recognizing value situations:

  • Growth at a reasonable price (GARP)
  • The fire sale
  • The asset play
  • Growth kickers
  • Turning the ship around
  • Cyclical plays

2. Making a value judgement in practice

3. It ain't over until it's over

  • Keeping track
  • Making the "sell decision"

8 Questions That Define Your Investing Style

8 Questions That Define Your Investing Style
By Dayana Yochim April 29, 2009 Comments (3)

We're celebrating Financial Literacy Month in numeric style. Follow our crash course on maximizing your portfolio and finances with The 10 Essential Money Lessons.

The path to financial literacy follows a logical sequence from start to success. So far in this series you've:

  1. put your financial house in order,
  2. set aside the cash that you need for the near term,
  3. brushed up on some classic investing tomes,
  4. learned some key investing metrics,
  5. and kicked the tires on a couple of investment ideas.

Ready to invest? Set! And ... wait!

One more thing -- well, eight more things, actually.

Your moment of investing Zen
How well do you know yourself? Do you know your tolerance for risk and loss? Have you pinpointed your investing time horizon? To what degree are you interested in digging into stock research? In other words, what color is your investing parachute?

As Warren Buffett says, "Success in investing doesn't correlate with I.Q. ... what you need is the temperament to control the urges that get other people into trouble in investing." You've gotten this far, so it would be a shame to get sidetracked by emotional triggers that lead to bad investment decisions.

How are you wired?
Before you deploy your money in the market, take this quiz to identify your natural inclinations (both good and bad) so you can find the methods, philosophies, and strategies that best match the way your brain is wired.

1. You're at the store and on the shelf is an array of options for the product you need. Which are you most likely to toss into your shopping cart?

A. The brand you've purchased in the past, even though it lacks the bells and whistles of some of the others.
B. A pricier brand you've always wanted to try because it's on sale for 20% off today.
C. A brand-new product that promises revolutionary results.
D. A reasonably priced version that has not been FDA approved, but has gotten favorable reviews from its customers.

2. You log onto your brokerage account. Which scenario are you happiest to see?

A. The market's up a whopping 10%, but your stock gained just 1% during the run-up.
B. One of the companies you own missed hitting its earnings target and is down 30% as a result, giving you the opportunity to buy more shares at fire-sale prices.
C. Over the past six months a stock in your portfolio has traded anywhere from $10 to $80. It's at the low end of that range right now, but you think it has the potential to double or even quadruple over time.
D. One of your stocks is up 15%, but there's no obvious reason why, so you'll have to do more research to find out.

3. Which activity are you most likely to choose at the theme park?

A. A spin on the merry-go-round with your kids.
B. The newly revamped 3-D laser Zombie show.
C. The Nitro at Six Flags.
D. Forget the rides and head to the "Tastes of the World" food court.

4. How much information do you need to comfortably make buy, sell, or hold decisions?

A. You like to get regular company updates that are widely followed and analyzed by Wall Street, the media, and individual investors.
B. You prefer to check in on the business -- or its customers -- firsthand either in person or via online forums.
C. You regularly consult SEC filings, trade journals, and industry forums and do all your own analysis.
D. You're content with fairly regular coverage of the sector in which the company operates, even if news about your particular company can be spotty.

5. One of your companies is in the headlines today. Which event would not cause you to lose sleep tonight?

A. The company says it may have to temporarily suspend paying its dividend.
B. The launch of the company's next product has been delayed for at least several months.
C. The Board of Directors is making noises about ousting the CEO in order to install an industry veteran.
D. The currency of the country in which your company operates has taken a haircut.

6. If this were an "I'm a Mac/I'm a PC" ad, which company would you be?

A. Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B)
B. Buffalo Wild Wings (Nasdaq: BWLD)
C. Google (Nasdaq: GOOG)
D. America Movil (NYSE: AMX)

7. The business trajectory that most excites you is ...

A. A stable, mature company with some room to grow via cost-cutting efforts, strategic acquisitions, and/or partnerships.
B. A newcomer that has not yet made a name for itself (and may not for many years) and has no heady expectations priced into the stock.
C. An innovative -- and often volatile -- company that challenges the status quo and has the potential to dominate (or create) a business niche.
D. A company that is ideally positioned to capitalize on fast-growing economies overseas.

8. What kind of volatility are you willing to endure on the road to wealth?

A. I'm not looking for massive growth -- I'm willing to settle for a couple of years of so-so returns just so I don't lose a lot of money.
B. I'm willing to endure a few white-knuckle periods until my investment hits the bull's-eye.
C. I'll hold on for dear life -- even while everyone else is bailing -- if I truly believe that the long-term payoff will be big.
D. I can stomach volatility that is beyond the company management's control (e.g. currency fluctuations, political messes) if it means being in the right place at the right time.

The Key: What's your investing temperament?

Let's see how you're wired.

Mostly As: You've worked hard for your money and even if it means passing up headier potential returns, you're most comfortable limiting your exposure to risk. Patience is your investing virtue. Like the great Warren Buffett, you have the temperament to wait for a quality company to go on sale.

Your stocks probably won't wow anyone at a cocktail party -- after all, big-name, been-around-forever companies don't typically make for riveting chitchat. But when the confetti settles, it's your time to shine. If your portfolio were a party guest, it'd be the designated driver: sober but reliable. It gets you where you need to go with no hairpin turns or squealing wheels.

Look for quality companies that have seen their share prices temporarily discounted. You'd also do well to seek steady growth with investments that literally pay investors back -- dividend stocks. (These are the investing strategies we practice in our Inside Value and Income Investor services.)

Mostly Bs: Sound business practices (e.g., strong balance sheets, good management) are as important to you as any investor. But you're willing to look for these things where few others dare to tread -- in small-cap territory.

While the rest of the world is fixating on the name-brand players, you're prowling for their smaller, nimbler, lesser-known competition. At The Motley Fool, we call such companies Hidden Gems.

Because of their size, these companies fly well under Wall Street's radar. The flip side is, of course, that they can often wildly fluctuate in a single trading day. But if "Bs" dominated your quiz results, then you have the stomach to tolerate the volatility, particularly in the pursuit of bigger returns.

You could build a market-beating portfolio solely comprised of Hidden Gems (or any other type of investment, in fact). But it's probably more reasonable to devote just a portion of your investible assets to the best-of-small breed of stocks -- anywhere from 10% to 40% of a portfolio depending on your comfort level.

Mostly Cs: Innovation gets your heart racing. When high-def, Bluetooth-enabled, surround-sound rocket boots hit stores, you'll probably be the first person on your block to own a pair.
In investment terms, you seek companies that challenge the status quo -- those that take on an established business, reinvent it, and eventually usurp the original. Even better are those that create an entirely new market for something everyone didn't even realize we couldn't live without.

At the Fool we call these companies Rule Breakers (apt, eh?). And in every way, these businesses defy the rules. Traditional valuation metrics like P/E ratios and discounted cash-flow calculations don't fly in the land of Rule Breakers. The numbers often look wacky because the Street simply doesn't have the tools to accurately assess these companies' merits, so as a shareholder you need to stay alert and be psychologically nimble enough to reevaluate your investment thesis. Flexibility is a must.

Also be aware of the rule of Daedalus: You can't keep flying higher and higher without eventually getting burned. This may be the most exciting kind of investing there is. But you must recognize the big-risk/big-reward connection. Your mistakes will cost you. But it's a lot less painful if you spread the risk around with other asset classes.

Mostly Ds: You are a worldly Fool. In the pursuit of investment opportunities, you're not afraid to tread into foreign territory -- literally. You recognize that the rate of growth of our economy versus others has changed. The U.S. will still grow, but there are countries where the growth opportunities are astronomical.

"International" is not an investing strategy per se. In our Global Gains newsletter service we seek investment opportunities overseas no matter what label they carry -- small cap, value, Rule Breaker, etc.

If you pine for foreign flavor in your portfolio get comfy with a little less clarity from the companies in this universe. Your comfort level with different accounting methods, shareholder laws, currency risks, and even "political risk" will determine how much of your portfolio to devote to international fare.

A combination of As, Bs, Cs, and Ds: No, you're not fickle. You simply seek a variety of opportunities to make your money grow. In your heart you know that investing in the stock market is the one true way to build inflation-beating wealth over the long term. But sometimes your doubts overcome your determination to stay the course. You can be gun-shy, perhaps because of a few investing missteps in the past (burned by a hot tip, perhaps?). Or maybe the stock market's recent contortions have left you questioning how much risk you really can stomach.

Your answers reveal a temperament that recognizes the true price of opportunity (taking on some amount of risk) and the real cost of waiting out the storm (missing the market's brief yet inevitable uptick). You've got a mind-set that's well-suited to allocating portions of your portfolio to the best investments from a variety of stock-picking approaches.

Establishing clear parameters -- an asset allocation model -- is the way to go. As to how much to put into which pot, the correct answer is the one that best lets you sleep at night and stick it out through thick and thin. Don't fight your natural tendencies ... instead play to your strengths and seek investments that sit well with you.

Finally, consider that the stock market's recent gyrations may be influencing your answers. That's understandable; even the best investors have been rattled, and may even be questioning their own core strategies. However, in volatility, there is opportunity. Not just in finding bargain stocks, but in taking the pulse of your own investing temperament in a real-world/real-money scenario.

Now that you've gotten a handle on your finances and have tuned into your inner investor, you're ready for our bonus tip. Tomorrow, we're going to give you the rundown about Foolishly investing in the stock market. Check back then!

In the mood for more financial know-how? Check out the rest of our 10 Essential Money Lessons.

Before joining The Motley Fool, Dayana Yochim's investing temperament could be confused for that of an 87-year-old widow. Today she is a mix of As, Bs, Cs, and Ds -- a true investing moderate. The Fool's disclosure policy is steady as she goes. Berkshire Hathaway is a Stock Advisor and Inside Value recommendation. Google is a Rule Breakers selection and America Movil is a Global Gains pick. Buffalo Wild Wings is a Motley Fool Hidden Gems recommendation. The Fool owns shares of Berkshire Hathaway and Buffalo Wild Wings.

Markets face 20pc fall if swine flu spreads

Markets face 20pc fall if swine flu spreads

World stock markets could fall by 15pc-20pc if the World Health Organisation (WHO) upgrades the swine flu outbreak to a "phase 5" crisis, a leading fund manager has warned.

By Alistair Osborne
Last Updated: 9:14PM BST 29 Apr 2009

Mark Bon, at Canada Life, based his calculation on the market reaction in Asia to 2003's SARS outbreak, which killed 813 people.

The WHO yesterday said it was "moving closer" to raising its six-level pandemic alert to "phase 5", which is characterised by human-to-human spread of the virus into at least two countries in one WHO region.

Mr Bon said that, as the crisis moves closer to a pandemic, "it alters the economic environment and people behave differently. They stop shopping in crowded areas and they travel less."

So far the markets have shrugged off the swine flu threat, with the FTSE-100 last night closing up 93.19, or 2.27pc, at 4189.59. However, Mr Bon said: "If the market is wrong-footed, the reaction could be quite severe."

Narim Behravesh, chief economist at IHS Global Insight, warned that a pandemic could cut GDP in developed economies by 2pc-3pc, exacerbating the world downturn. "For poorer countries, the impact would be devastating," he said.

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Europe's age crisis begins to bite

Europe's age crisis begins to bite

The EU's working age population will peak next year before tipping into decline for half a century

By Ambrose Evans-Pritchard
Last Updated: 9:25PM BST 29 Apr 2009

This will cause a relentless rise in pension and health costs that risk asphyxiating the region's economy.

A new report by the European Commission said this financial crisis could turn into a "permanent shock to growth" from which Europe never fully recovers unless it moves fast to bring its public debts under control.

The main danger is a "Lost Decade" akin to Japan's deflation slump, with economies contracting by 0.9pc into the middle of the next decade, but there is also a risk of a deeper downward spiral.

Every country in the EU has a fertility rate below 2.1 births per woman, the minimum to keep the population stable. The average is 1.51, chiefly caused by women waiting late into their 20s or 30s before having children. This stretches out the generations.

While the fertility rate is expected to rise over time, demographic shifts tend to be glacial. An ageing crunch is already baked into the pie, hitting hardest from 2015 to 2035.

Britain fares relatively well, helped by immigrants and – some say – by its unwed teenage mothers, who lift the fertility rate at 1.8. The British working age cohort will be the biggest of any EU country by mid-century at 45m, followed closely by France.

If demographics is destiny, Britain and France may reclaim their mid-19th century status as the two dominant powers of Europe, but by then the Old World will be a much reduced force.

Germany's working population will shrink by 29pc to just 39m. Poland, Bulgaria, Romania and the Baltic states will all see drops of over 40pc.

No country will be spared the vaulting costs of ageing, an extra tax of 5pc on GDP, leaving aside the less visible tax on cultural dynamism that comes with lost youth.

The EU "dependency ratio" will soar: there will be two workers to support each person over 65, compared to four today. It will be worse if Europe fails to attract enough immigrants, all too likely given the catch-up under way in the developing world.

Faced with this future, Britain and Europe need to slash debt and salt away investment wealth in the rising East. Instead, public debt is exploding. Brussels has laid it bare: we will need hair-shirt discipline once we emerge from this recession. It may be our last chance.

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Swine flu deflation

Swine flu deflation
Posted By: Ambrose Evans-Pritchard at Apr 28, 2009 at 19:20:44 [General]

The markets have been remarkably relaxed about the rise in the World health Organization pandemic alert Phase 4 (sustained human to human transmission) - and tonight perhaps to Phase 5.

They seem not to care that confirmed cases of H1N1 avian-swine flu have spread to Israel, Spain, France, New Zealand, and Korea.

This surprises me. The WHO alert is the best objective indicator we have of rising risk, and the potential implications of Phase 4 or Phase 5 are .. well .. awful.

We can all argue about the likely damage from a "severe pandemic" along the lines of 1918 'Spanish Flu' or the Neapolitan pandemic of 1775.

The World Bank has floated a figure of $3 trillion, or 4.8pc of global GDP. The US Congressional Budget Office has come up with something similar. These are arbitrary telephone book numbers.

But even if losses are less, we are still talking about a further deflationary shock to a world economy already tipping into debt deflation (though it might not be a uniform deflation, if shortages push up local food and fuel prices). It would certainly finish off half the global banking system.

It is too frightful to think about. That perhaps is why investors are doing exactly that: refusing to think about.

Over the last couple of days I have been deluged by notes from City analysts and economists suggesting that H1N1 avian-swine flu poses no great threat to the global economy because the authorities showed during the 2003 SARS epidemic in Asia that outbreaks can be contained.

This is a misreading of the threat we face.

SARS is a coronavirus. It is extremely hard to catch. Just 8,000 people were infected worldwide during the entire epidemic (10pc died).

Today's H1N1 outbreak is an influenza virus, which is far more contagious.

Dr. Keiji Fukuda, the WHO's assistant director-general, said it is already too late to stop the spread of the disease. “At this time, containment is not a feasible option.

It is entirely possible that we may see a very mild pandemic. I think we have to be mindful and respectful of the fact that influenza moves in ways we cannot predict.

The worst pandemic of the 20th century occurred in 1918, and it also started out as a relatively mild pandemic that wasn’t very much noticed in most places. Then in time it became a very severe pandemic, one of the most severe infectious disease episodes ever recorded.

Perhaps because so few market players studied science, or have a current link to science, they seem not to realize that the world’s virologists and flu experts are in a state of nail-biting, ashen-faced, fear.

Rob Carnell, chief economist at ING, is one of the exceptions. “We believe fear of infection will lead to drastically altered behaviour. It may be that swine flu does not tip the human fear scale sufficiently, but if it did, with the economy already in tatters, the results could be catastrophic,” he said in a note today.

We may be lucky. The virus may indeed prove mild - like the Hong Kong flu in 1968 - or burn out altogether as it mutates.

The early cases in the US and Canada give hope. So does the apparent fall-off in the fatality rates in Mexico.

But as Dr Fukuda said, nobody can pre-judge the virulence of this pandemic. Least of all the markets.

Full coverage of the swine flu virus.

Investors can learn a psychological lesson or two from swine flu

Investors can learn a psychological lesson or two from swine flu

We're all experts in epidemiology now and it is, therefore, with some trepidation that I add to the canon of knowledge on this subject.

By Tom Stevenson
Last Updated: 9:02PM BST 29 Apr 2009

Comments 0 Comment on this article

Like most people, I know nothing worth listening to about viruses or pandemics but the medicine is only half the story. Just as interesting, especially to investors, are the lessons swine flu can offer about human behaviour and psychology. Here are six:

1. What's in a name? A rose may smell as sweet by any other name but the tag we hang on an illness can have real economic significance. The World Health Organisation plumped for swine flu because the virus involved is more porcine than avian or human. Sorry pigs. And sorry the pig-breeding and rearing industry. A number of countries have already slapped a ban on Mexican pork exports, despite the fact that the flu cannot be passed on through meat. Previous flu pandemics have adopted the name of their country of origin but here too mistakes are made – the Spanish flu of 1918-1919 apparently started in Scotland. Fortunately memories are short and, even if this outbreak comes to be known as Mexican flu, the tourists will be back soon enough.

2. Heads you win, tails I lose. Which is worse, do you think, a high mortality rate or a high infection rate? As an individual, I'd prefer it if there were a good chance I caught the flu but a slim chance it would kill me. My employer might be less relaxed about high numbers of its staff staying in bed for a week. More broadly, business would suffer if a highly infectious strain kept people at home (and out of the shops) for fear of getting sick. But fear could be an even greater factor if, as in Hong Kong six years ago, it was relatively hard to get infected but relatively easy to die if you did.

3. History is bunk. Having already mentioned Spanish flu and SARS, I am hardly one to say that historical comparisons are of limited use. We can't resist them, though. Smack bang in the worst economic slump since the Great Depression, we're now facing the worst pandemic since the Great War. But the world was rather different in 1918 as millions of troops criss-crossed the globe on their way home from the front line. The Spanish flu may have killed more people than the First World War but that doesn't necessarily tell us much about today's circumstances. SARS, too, was apparently a completely different type of virus and it was restricted to Hong Kong, quite different from the rapid spread of today's outbreak.

4. The appliance of science. Investment banks have always picked up their fair share of physics PhD graduates – who do you think dreamt up all those complex derivatives? – but otherwise the City and science tend to keep their distance. Because investors do not understand science well, they either over-react to it or are complacent about it. If investors and regulators had had a better understanding of the way in which complex systems work in the real world (hurricanes, pandemics) they might have been less relaxed about the impact that a modest shock such as a decline in US house prices could have on the global economy.

5. Black swans and sick pigs. While we were all watching the oil price or the cost of chartering a freight ship, the end to the seven-week share price rally flew in unnoticed from a country few were keeping an eye on. Like the Australian black swan that ended the idea that all swans are white, the poorly Mexican porker was the "unknown unknown" that, perhaps temporarily, slammed the brakes on the nascent equity bull market. And, who knows, there may be worse to come. When HSBC announced in 2007 that it had problems at its Household subsidiary in the US, few imagined what it would lead to.

6. The final lesson from the last week is that markets react to unfolding events both very quickly and far too slowly. The usual suspects took an immediate pounding when the news broke – airlines, travel companies, hotels, retailers – so it is tempting to think that, having missed the first knee-jerk response, it is too late to react to a market-moving story. But selling banks was the right thing to do for months after it was apparent that they were in trouble. The reason markets sometimes move slowly is that they don't benefit from hindsight. If a pandemic occurs, with a further reduction in GDP hitting severely weakened economies, the market's apparent complacency today will seem odd. If the outbreak peters out, it will look like investors were right to ignore the media storm. Sadly, we won't know until it's too late.

US in worst recession for 50 years

US in worst recession for 50 years

The US economy slowed by an annualised rate of 6.1pc in the first quarter, confirming the current downturn is the worst American recession in 50 years.

By James Quinn Wall Street Correspondent
Last Updated: 10:12PM BST 29 Apr 2009

Poor, tired, huddled masses: not since the presidency of Dwight D Eisenhower 50 years ago has America experienced such an economic downturn However, the GDP figures from the US Commerce Department gave hope that America is seeing "green shoots" emerge, thanks to a return in consumer spending in some parts of the economy.

The data came ahead of yesterday's meeting of the Federal Reserve's Open Markets Committee (FOMC) which was expected to maintain its base interest rate at a range of 0pc-0.25pc.

The world's largest economy has now shrunk by 3.3pc since its peak last year, making this the worst recession since the 1957-58 slump, when GDP fell by 3.8pc. In addition, it is the first time since the 1974-75 downturn that America has recorded third consecutive quarters of negative growth.

The headline figure of a 6.1pc slump, on top of a 6.3pc contraction in the fourth quarter of 2008, was worse than the 4.6pc slide for the three months to March economists had expected.

But, in spite of better-than-expected consumer spending, businesses drastically cut spending and inventories, and the government sector, which has been propping up the US economy in recent months, also spent less than forecast.

The GDP figures are seen as possibly the most important read on the state of any country's economy, and are an indicator to production across the economy.

Consumer spending makes up approximately 70pc of US GDP, and the fact that it rose by 2.2pc in the first quarter – after dropping 4.3pc in the fourth quarter – is a positive sign amongst the gloom.

But increased consumption could not mask falls in other parts of the economy, such as a 34pc annualised slide in equipment and software, or a 38pc slide in residential investment.

Exports collapsed by 30pc, the biggest fall since 1969, while investment by business fell a record 37.9pc.

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The bear case for gold

A Goldilocks economy, like Goldilocks' porridge, is neither too hot nor too cold

Goldilocks and the bear case for gold

The primary risk to the gold price is a return of the "Goldilocks" economy, according to analysts at a firm of asset managers.

By Richard Evans

Last Updated: 5:02PM BST 28 Apr 2009

A Goldilocks economy – one that is neither too hot nor too cold, sustaining moderate economic growth, low inflation and low interest rates – would "completely remove the safe-haven investment case for gold as a form of insurance against inflation or as an alternative currency", said the commodities and resources team at Investec Asset Management.

"Under the Goldilocks scenario the US Federal Reserve's balance sheet will quickly adapt once economic activity begins to improve as the Fed reduces the money supply dramatically and curbs any major inflationary cycle," Investec said.

"Furthermore, under this scenario all other central banks will do the same. Inflation would be averted, and economic growth could continue."

The bank said the current high price of gold was driven by demand from investors putting their money into the classic safe-haven asset. But it added: "Should investment flows into gold cease or turn negative, we believe that this drying up of investor demand will have repercussions for the gold price.

"A return of risk appetite or improvements in other asset classes could result in an unwinding of investment buying and put considerable downward pressure on the gold price, particularly if global economic and financial conditions begin to show meaningful signs of improvement."

Although Investec has identified factors that could push the gold price down, the bank's overall stance on the precious metal remains bullish. It said: "We continue to believe that gold can perform well in either an inflationary or deflationary environment.

"This supports our positive outlook for the commodity and for gold equities. Quantitative easing programmes are also supportive for gold."

The London afternoon gold fix was $891.00 an ounce.

Wednesday, 29 April 2009

Behaviour and projections

Behaviour and projections
Published: 2009/04/29

This article intends to explore the behavioural side of those who make stock market projections

THE economic tsunami that has hit the world since late-2007 has left many wondering where it is heading, what to expect, etc. Experts as well as laymen make projections, mostly trying to predict when the stock market will hit bottom. Unfortunately, no one can really provide a definite answer. Setting aside the technical details of the various projections that have been and are being made as we speak, this piece intends to explore the behavioural side of those who make these projections.

Gambler Fallacy

According to Hersh Shefrin, in his book titled "Beyond Greed and Fear", research has shown that strategists and analysts are often caught in a behavioural phenomenon called "gambler fallacy"- the misconception that the law of averages can be applied to even a small sample size.

This is illustrated by a simple coin-tossing game. If five consecutive tosses of a coin come up heads, most people tend to think that the sixth toss should be tails, even though the probability of getting either heads or tails is 50/50. Going by this, some predictions tend to project inappropriate trend reversal as evident by a study done by De Bondt in 1991. Based on published predictions by Wall Street analysts, the study shows that the analysts are overly pessimistic after three-year bull markets and overly optimistic after three-year bear markets.

What does this behaviour mean to you?

It is especially important if you use the projections to make investment decisions. When dealing with a bear market that has yet to touch the bottom, using an overly optimistic projection would lead to the wrong decision. You stand to lose by buying certain stocks believing that their prices are low enough and the downtrend is going to reverse anytime soon, only to find that the prices continue to drop. By the time the market actually hits bottom, you may have already used up your resources.

Naive Extrapolation

Studies have shown that individual investors have the behaviour that is quite the opposite of what has been described above. The retailers in the market, for instance, have the tendency of doing simple extrapolation - projecting the future based on the recent past. As a result, they are overly optimistic during bull markets and overly pessimistic during bear markets.

Seasoned investors would always tell you to prepare to leave the market when you hear that people around you (especially those who've hardly ever talked about investing) start to be active in the stock market. This may indicate that the bull run is about to end. Unfortunately, new and inexperienced investors would naively think that the bull run would continue.

The time to look around hard is when no one is talking about buying stocks. Your golden opportunity in getting good stocks at a bargain surfaces when others steer clear of buying them. As Warren Buffett said, "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well".


Both the analysts and individual investors have something in common. They are overconfident when it comes to predicting the future. So, they often end up getting surprises. Interestingly, it has also been found that experience plays an important part here. Those who are inexperienced turn out to be the ones that have greater confidence in their predictions and therefore higher expectations in stock market returns. Seasoned investors and analysts, on the other hand, tread with more caution and are more conservative in their investment approach.

Less Predicting, More Reading!

The combined effect of the behavioural phenomena from the investors drives market sentiment. As an intelligent investor, learn to separate yourself from the herd effect and try not to fall into the biased behaviour described above. You need to be aware of the market direction, but don't waste too much time predicting when the market will bottom out. Instead, spend your valuable time reading more and doing your research on the companies of your interest. Understand the fundamentals well and learn from errors that others have made in the market.

Securities Industry Development Corporation, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission Malaysia. It was es tablished in 1994 and incorporated in 2007.

Ten Habits of Highly Successful Value Investors

Ten Habits of Highly Successful Value Investors

Warren Buffett once said, "All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."

Keeping this in mind, here are ten things to remember as you evolve your value investing style.

  1. Do the due diligence
  2. Think independently and trust yourself
  3. Ignore the market
  4. Always think long term
  5. Remember that your're buying a business
  6. Always buy "on sale"
  7. Keep emotion out of it
  8. Invest to meet goals, not to earn bragging rights
  9. Swing only at good pitches
  10. Keep your antennae up

Ten Signs of Value

Ten Signs of Value

Looking at five tangible signs of value

Steady or increasing return on equity (ROE)
Strong and growing profitability
Improving productivity
Producer, not consumer, of capital
The right valuation ratios

Understanding five intangible signs of value

A franchise
Price control
Market leadership
Candid management
Customer care

Ten Signs of Unvalue

Ten Signs of Unvalue

Looking at five tangible signs of unvalue

Deteriorating margins
Receivables or inventory growth outpacing sales
Poor earnings quality
Inconsistent results
Good business, but stocks is too expensive

Considering five intangible signs of unvalue

Acquisition addiction
On the discount rack
Losing market share
Can't control cost structure
Management in hiding

Take charge and evolve your own investing style

Like most investors, Buffett evolved his investing style, trying different things along the way.

1. Often, Buffett would simply buy shares, hold them, and wait for growth prospects to materialize.

2. Sometimes, his objective was a little more short term in nature, buying to capture arbitrage - small differences between price and value that often emerge in merger, acquisition and liquidation situations. (Capturing arbitrage is value investing, too; it's very shrot term in nature and one had better be good. One is going against other professionals who have access to a lot of information and are betting for something different to happen.)

3. Sometimes Buffett would buy a large stake in an undervalued company, large enough to be noticed and reported to the SEC, usually 5 percent or more. He then would get himself installed on the company's board of direcctors. Many of these companies were having financial problems or problems translating company value into shareholder value. Many welcomed his presence. Buffett would help right these problems and, if necessary, assist in selling or finding a merger partner for the company.

Of course, most ordinary investors can't do this, but the thought process is important.

Tuesday, 28 April 2009

How I Lost $100,000 (Without Even Trying!)

How I Lost $100,000 (Without Even Trying!)
By Rich Smith April 25, 2009 Comments (4)

Once upon a time, I bought a house.

At the time, I thought I had overpaid ... but "the time" was 2001 -- much nearer the start of the housing boom (that's recently turned bust) than its end. Fast forward a few years, and I sat down to my trusty computer, pulled up for a "Zestimate," and was informed that my little brick box was worth more than $500,000. Amazing news? Sure. Gratifying? You bet. Zillow was telling me that my house had more than doubled in value in just five short years.
Sadly, Zillow was on crack.

Welcome to the other side of the looking glass

About a year after receiving the good news from Zillow, I sold the house for far less than the site had told me it was worth. A 25% drop -- $100,000 -- from the top, in fact. Or, if you're a glass-half-full kind of a Fool, a 60% profit beyond what I paid for it.

The real truth, though, is that the house was worth neither what I paid for it, nor what I could have sold it for in 2006 -- nor even what I ultimately pocketed from the whole transaction. The real worth of the house was something unknowable, something that could only be guessed at: its intrinsic value.

"Price is what you pay. Value is what you get."

Leave it to Warren Buffett to sum up the dilemma in a single pithy dichotomy. The world's greatest investor reminds us that the value of an asset -- whether a car, a house, or a stock -- does not necessarily have any relation to the price we pay to own it. Far be it from me to criticize the Oracle's wisdom, but Buffett's observation still leaves us with one crucial question: How exactly do we know the value of the asset?

Benjamin Graham's classic non-answer stated that an asset is worth at least its book value, so you're safe if you pay less than that. There's also a logically impeccable but not very helpful adage that "an asset is worth whatever someone will pay for it." And Professor Aswath Damodaran offers this math-intensive solution: "The value of equity is obtained by discounting expected [residual] cash flows."

A more honest answer, though, is that we simply never know how much anything is worth. Not exactly, at least.

Hunting stocks with an axe

Yet in real life, we don't allow the lack of an exact answer to stop us from buying. Humans need shelter, so we buy a house when the price seems fair. We need cars, so we work from sticker prices and the Kelly Blue Book to pick an acceptable price for those, too.

The same goes for stocks. We shouldn't "measure with a micrometer, mark it off with chalk, then cut it with an axe." We make our best guess at a fair price. We try to buy for significantly less than our estimation. If we guess right more often than wrong, we make money. But where do we start?

Start with common sense

Look in places where you're more likely than not to find bargains:

Low prices: Stocks hitting the new 52-week-lows list may be "down for a reason." Still, a stock selling cheaper today than it's sold any time for the past year is more likely a good bargain than a stock selling for more than it's ever fetched before. Last month, I noted five stocks that had fallen to their 52-week lows. While the S&P trades 12% higher today, all five of those stocks have risen anywhere from 22% (Marvel Entertainment (NYSE: MVL)) to 184% (Republic Airways).

Read the paper: Newspaper headlines offer another superb place to seek bargains. Remember how oil was selling for $150 a barrel last July? Remember how a few months later, it sold for less than $40? How much do you want to bet that the intrinsic values of oil majors such as ExxonMobil (NYSE: XOM) or Chevron (NYSE: CVX) tracked those movements exactly? (Hint: They didn't.) Somewhere between $40 and $150, there was value to be had in the oil majors.

Cheap valuations: Another great way to scan for bargains is to run a stock screener every once in a while. I like to look for stocks that trade for low price-to-free cash flow multiples, exhibit strong growth, and have low debt. In recent weeks, this method has yielded me such unexpected bargains as (Nasdaq: NTES), (Nasdaq: PCLN), and eBay (Nasdaq: EBAY).

Foolish takeaway

The key point I want you to take away from all this is simple: Trust your instincts.

When Zillow tells you your house has doubled in value, treat that "Zestimate" with some skepticism. When Suntech Power (NYSE: STP) doubles in price on announcements of industry subsidies from China, be wary. On the other hand, when stocks that have little to do with the financial crisis drop 50% in the space of a year, when stock prices don't match the news they're supposed to reflect, or when you stumble across a stock with a price that looks cheap, you might just have found a bargain.

Fool contributor Rich Smith owns shares of Marvel Entertainment and eBay, Marvel, and are Stock Advisor recommendations. eBay is also an Inside Value pick. and Suntech Power are Rule Breakers selections. The Motley Fool has a disclosure policy.

What the Swine Flu Panic Means for Your Portfolio

What the Swine Flu Panic Means for Your Portfolio
By Seth Jayson
April 27, 2009 Comments (6)

It's a delicate subject, and people's lives are at risk, so I'll state right here, up top, that I do not intend to make light of this public health concern. I share the sympathies that we all have for individuals afflicted by the swine flu. (I've experienced a delirium-packed, 10-day version of the usual seasonal flu, and I wouldn't wish this illness on my worst enemy.)

That said, the reactions of the investing community already look ridiculous: "Markets Down on Swine Flu" read the headlines. Other writers will try to convince you to pile into vaccine names like GlaxoSmithKline (NYSE: GSK), or companies like Netflix (Nasdaq: NFLX), for which a simplistic, "stay-at-home" argument can be made. This is simply rank trend speculation in reverse.

How to really profit

If you really want to find opportunities relating to the swine flu story, I suggest you do the opposite of what most people are advocating. For instance, consider inverting one particularly brazen and short-sighted call that was reported by Bloomberg this morning: UBS downgrades Mexican stocks from "top pick" to "underweight" because of the swine flu.

Really? An entire country's strongest businesses will be permanently impaired because of this health crisis? Would you write off entire segments of the U.S. economy if the illness got worse here? Would you sell Procter & Gamble (NYSE: PG)? Ditch Home Depot (NYSE: HD)?

Sure, the Mexican economy is generally more fragile than ours, but most of the big-name firms trading on our exchanges are anything but weak. Beverage and minimart king FEMSA will likely sell fewer soft drinks and beers over the coming weeks. Will Gruma sell fewer tortillas, Industrias Bachoco fewer chicken chunks? Probably.

Will this matter for the long term?

Very unlikely

If you are investing in strong names for the long term -- and that's how you should be investing -- these are the times when you should be more interested in buying stocks, not less. Flu epidemics are terrible, but they're also normal. So are economic cycles and (in Mexico) the occasional currency panic.

Buying good companies when the headline news is bad is the hardest thing to do (psychologically), but it's the simplest way to buy low. And buying low makes it a lot easier to sell high.

That's the takeaway from the two wealthiest investors in the world -- Warren Buffett and Carlos Slim, who made their fortunes buying companies with competitive advantages on the cheap, often during times of uncertainty. Despite recessions, oil shocks, currency convulsions, SARS, and bird flu, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), Telmex, and America Movil (NYSE: AMX) have made them very wealthy.

We've recently revamped Motley Fool Hidden Gems, putting real money into small-cap stocks, to enable us to take advantage of exactly this kind of short-term market craziness. At times like this, we're more interested in our favorite Mexican stocks: Grupo Aeroportuario del Sur and Grupo Aeroportuario del Pacifico. As monopoly airport operators with high fixed costs, both would see turbulence due to a temporary dip in air travel (one they're already getting thanks to the economy).

But in the long term, monopolies like these thrive and enrich shareholders. Ditto the major players I mentioned further up. So unless you think Mexico is forever on the wane, it's time to look at buying these stocks, not selling them.

Seth Jayson is co-advisor at Motley Fool Hidden Gems. He owns shares of Grupo Aeroportuario del Sur, FEMSA, and Berkshire Hathaway. Grupo Aeroportuario del Pacifico and Grupo Aeroportuario del Sur are Hidden Gems recommendations. Berkshire Hathaway and Netflix are Motley Fool Stock Advisor selections. Berkshire Hathaway and The Home Depot are Motley Fool Inside Value selections. Procter & Gamble is a Motley Fool Income Investor recommendation. America Movil and FEMSA are Global Gains picks. The Fool owns shares of Procter & Gamble and Berkshire Hathaway. The Fool has a disclosure policy.

Stress Test Preview - JPMorgan vs Citigroup

Friday, 24 Apr 2009
David Faber: Stress Test Preview - JPMorgan vs Citigroup

Topics:Nasdaq NYSE Stock Market Stock Options Stock Picks

The banking industry will learn preliminary results of the so-called stress tests today (Friday) — but CNBC's David Faber reports that plenty of questions will remain. (UPDATED: See below.)

"The banks are going to march down there [the NY Fed], and each CFO will be told, 'you've got an A, a B or a C.' But then the next stage, the real questions have to start to be answered," Faber said.

"For instance, how much capital will need to be raised?" Analyst speculation ranges "as high as 7 percent, as low as 3 percent."

Which Banks Are on The Stress Test List?
Faber Report: Regional Banks' Danger Now

And of course, the speculation differs from company to company:

"If you're JPMorgan, you may not need to raise any capital. If you're Goldman Sachs, you may not need to. But if you're Citi, it may be a different story."

And once the numbers are derived, Faber said, "the big question remains: How are you going to do it?"

The stress test methodology will be revealed at approximately 2pm ET.

UPDATE: The Federal Reserve said "most banks" are currently well capitalized but need to hold a "substantial" amount above regulatory requirements in case the recession worsens. “Most banks currently have capital levels well in excess of the amounts needed to be well capitalized," the Fed said in its eagerly awaited report.

See Full CNBC Report

Top TARP Recipients:

JPMorgan Chase
[JPM 32.78 -0.60 (-1.8%) ]

Morgan Stanley
[MS 21.26 -0.70 (-3.19%) ]

[C 3.07 -0.12 (-3.76%) ]

Wells Fargo
[WFC 20.299 -1.101 (-5.14%) ]

Bank of America
[BAC 8.92 -0.18 (-1.98%) ]

© 2009

Swine flu is a non-recurring event

Move Over Swine, The Bulls & Bears Are Back
Posted By:Bob Pisani

Topics:Swine Flu Wall Street Investment Strategy Stock Market

Companies:General Motors Corp

Stocks show only modest weakness, despite concerns over swine flu. Airlines, hotels, cruise ships and some food processors are down, but the overall market is only fractionally to the downside.

Why? Because after an initial panic Sunday traders have concluded that swine flu is a non-recurring event, which is unlikely to have a long-term impact on the economy.

This view, however, could change if the situation deterioriates dramatically.

Meanwhile, we are closing out the month in a few days, and stocks are up for the second month in a row:

S&P 500: up 7.9 percent
NASDAQ: up 10.3 percent

While most of the gains for the month came in the first half, both the S&P and the NASDAQ are on the verge of breaking out to multi-month highs.

This wasn't in the bears playbook; we were supposed to sell off in the middle of earnings season.

Remember this simple mantra: after the gains since the bottom on March 9th, sideways or up is a victory for the bulls.

Here's who would own what of GM's common shares under the latest GM proposal:

Government 50 percent
Unions 39 percent
Bondholders 10 percent
Current shareholders 1 percent

Two issues are on everyone's mind:

1) Will the bondholders accept an all-equity bond exchange?

The unions are on board, but 90 percent of the bondholders have to approve the deal by the May 26th deadline.

Many traders think it would be better to hold out for bankruptcy.

Why? Because bondholders feel they are getting the short end of the stick. Bondholders are being asked to exchange $27 billion in debt for 10 percent of the company; the unions are getting $10 billion in cash (half of the $20 billion they are owed) AND a 39 percent stake in the company.

Most analysts feel the same way. Brian Johnson at Barclays said "the offer is unlikely to be accepted by bondholders, who are in effect being asked to sacrifice most of their claims in order to help GM satisfy commitments to the UAW."

John Murphy at Bank of America/Merrill Lynch, who said back in November that bankruptcy was the most likely outcome for GM, repeated that assertion this morning.

2) Is the latest GM restructuring more realistic than the prior plans?

On the surface, it certainly appears to be: the last plan in February assumed they would be breakeven at 15 million in seasonally adjusted annual car sales; this one assumes 10 million would be breakeven.

Hardly discussed is whether the new core strategy of concentrating on Chevy, Cadillac, Buick and GMC will work; most analysts believe they should concentrate on at most 3 brands.

Prophetic words that predicted the greatest financial collapse

House of Cards - Origins of the Financial Crisis ''Then and Now''

"Let's hope we are all wealthy and retired by the time this house of cards falters."--Internal email, Wall Street, 12/15/06

Prophetic words that predicted the greatest financial collapse since the Great Depression. The current global economic collapse has its roots in the sub-prime mortgage crisis.

"House of Cards" Show Times

US National Debt

US National Debt
$11,046,247,657,049.48 (According to US Treasury Direct, 3/26/09)

The mounting US National debt, growing by billions every day, has recently topped the $11 trillion mark. If denominated in $1 bills, the cash would stack as high as the tallest building in the world, the 2683.7 foot Burj Dubai skyscraper… 1,474,918 times. At this height, it would create a block of bills with a base approximately twice the size of the Empire State Building's, which is just under the size of three American football fields.

If consolidated into a single stack of $1 bills, it would measure about 749,666 miles, which is enough to reach from the earth to the moon twice (at perigee), with a few billion dollars left to spare. If the amount was laid out, the area of the $1 bills would cover the state of Rhode Island three times over, and in $100 bills the amount would carpet about 3/4 the area of Washington DC.

It is also interesting to note that this number is approximately 13 times the amount of US currency in circulation, according to the Treasury bulletin, which lists the amount at $853.6 billion as of December 31, 2008.

Monday, 27 April 2009

Swine flu outbreak

April 27, 2009
Swine flu outbreak

The swine flu outbreak is more worrying than bird flu because it is spread much more readily between humans.

SYDNEY - THE swine flu outbreak is more worrying than bird flu because it is spread much more readily between humans, an Australian infectious diseases expert said on Monday.
Australian National University epidemiology specialist professor Paul Kelly said swine flu had a lower mortality rate than bird flu but warned this was a mixed blessing because it would help the virus spread more quickly.

Pandemic fears grow(2:02)

He said bird flu had remained relatively contained because human-to-human transmission was difficult, while swine flu was highly infectious.

'(Bird flu) has been limited - to a limited extent that has happened in Indonesia and other places, but it's never been on the sort of scale as this,' Ms Kelly told ABC radio. 'This is actually really more worrying.'

He said swine flu appeared to be a form of the virus that epidemiologists had feared for years - a combination of strains from various animals that was easily transmitted between humans.
'In terms of an epidemic, for the virus to be able to spread it's actually better for the virus for humans to remain alive because that can spread it more quickly and to a greater extent geographically,' he said.

Professor John Mackenzie, a biosecurity expert from Perth's Curtin University, said the latest flu threat appeared to be a combination of at least two types of swine virus and an avian virus gene.

He said the next few days would be crucial in determining whether the world was facing a pandemic.

'I guess we're at that 'grey' stage where we don't know if it is going to be a pandemic strain or not,' he said.

'We're certainly concerned but at the same time Australia is in a better position than most other countries to be able to withstand or cope with a pandemic.' -- AFP

Read also:
Global alarm as flu spreads
Asia acts against flu threat
EU calls urgent flu meeting

World Markets Struck by Swine Flu Fears

World Markets Struck by Swine Flu Fears

Published: April 27, 2009
Filed at 5:49 a.m. ET

LONDON (AP) -- World stock markets fell Monday as investors worried that a possible deadly outbreak of swine flu, which has already killed more than 100 people in Mexico alone, could go global and derail any global economic recovery.

Airlines took the brunt of the selling amid concerns passengers could hold back from flying for fear of catching the virus, which has already reportedly spread as far as New Zealand.

''News over the weekend of a deadly flu outbreak is rocking financial markets,'' said Matt Buckland, a dealer at CMC Markets.

By mid-morning London time, the FTSE 100 index of leading British shares was down 48.53 points, or 1.2 percent, at 4,107.46, while Germany's DAX fell 81.11 points, or 1.7 percent, to 4,593.21. The CAC-40 in France was 44.15 points, or 1.4 percent, lower at 3,058.70.

Earlier, most of Asia's markets were hit by the pandemic fears, with Hong Kong -- one of the main focal points of the SARS virus concerns just six years ago -- closing down 418.43 points, or 2.7 percent, to 14,840.42. Japan's Nikkei 225 stock average managed a gain of 18.35, or 0.2 percent, to close at 8,726.34 in back-and-forth trade.

In Europe, Deutsche Lufthansa AG fell 10 percent, while British Airways PLC was down more than 7 percent. Earlier, Australia's Qantas Airways fell 4 percent while Hong Kong-based Cathay Pacific Airways slid 8 percent.

Travel and hotel companies were also heavily sold off, with British cruise line firm Carnival PLC down more than 7 percent and French hotel group Accor SA down more than 6 percent.

While airlines tanked, pharmaceutical companies enjoyed a modest rally in falling markets amid expectations that demand for anti-viral drugs would rise. Swiss drugmaker Roche Holding AG -- the maker of Tamiflu -- was up 4 percent, while GlaxoSmithkline PLC, which manufactures the Relenza drug, rose 3 percent.

Worries about the epidemic's spread will likely remain at the forefront of investors' mind over the coming days and overshadowed any hopes generated over the weekend by the announcement from the Group of Seven finance ministers that the worst of the world recession may be over and that recovery may emerge by the end of the year.

''It's really going to be a case of watching how this Mexican flu issue develops before deciding if these already bruised markets have another big fall coming up,'' said CMC's Buckland.

Hopes that a recovery of sorts is on its way has helped world stock markets rally off multiyear lows in early March. Despite some range trading over the last couple of weeks, stocks began to rally strongly again at the end of last week, with the Dow Jones industrial average, for example, advancing 1.5 percent to 8,076.29 on Friday.

Selling is expected to be the name of the game when Wall Street opens, with Dow futures down 124 points, or 1.5 percent, at 7,932 and the broader Standard & Poor's 500 futures 15 points, or 1.7 percent, lower at 851.50.

''At the moment we are expecting the Dow to open down around 90 points lower from Friday's close -- again on swine flu concerns,'' said David Jones, chief market strategist at IG Index.

Elsewhere in Asia, Australia's stock measure gained 0.5 percent while Shanghai's fell 1.8 percent. Markets in Singapore, Taiwan and India retreated.

Oil prices dropped sharply as investors mulled comments from OPEC suggesting the price was too low for companies to justify new investments in crude production. Benchmark crude for June delivery fell $2.78 to $48.77. The contract jumped $1.93 to settle at $51.55 last week.

In currencies, the dollar weakened to 96.55 yen from 97.17 yen. The euro traded lower at $1.3141 from $1.3161.


AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.

Swine flu: the UK shares affected

Swine flu: the UK shares affected

The outbreak of swine flu, which has killed more than 100 people in Mexico and spread to the US, Canada and New Zealand, has hit UK shares linked to travel and agriculture, and give a boost to pharmaceuticals companies. Some of the biggest companies affected are listed below.

By Amy Wilson
Last Updated: 10:26AM BST 27 Apr 2009
British Airways
Thomas Cook Group
TUI Travel
InterContinental Hotels Group


GlaxoSmithKline: its shares rose as much as 44p, or 4.4pc to 1,050p. Glaxo makes a flu drug called Relenza, which could be bought up by governments seeking to treat and halt the spread of swine flu. Relenza has been shown to work against viral samples of the disease.

Roche: The shares rose in Swiss trading. Roche's Tamiflu drug can reduce the symptoms of swine flu and said it has an ample supply of the drug as the outbreak spread outside Mexico.

Shire: the drugs company’s shares rose in sympathy with Glaxo's.


British Airways: The airline has been hit along with others in the sector, on fear the swine flu outbreak will reduce demand for travel.

easyJet: The low-cost airline fell.

Ryanair: the Irish budget airline was also under pressure.

Travel companies:

Thomas Cook: The holiday company fell on concern the spread of swine fever will curb foreign travel. Mexico has been a popular destination for holidaymakers trying to avoid countries using the euro while it remains so strong against the pound.

TUI Travel: The Thomson holiday group also declined.

Carnival: the cruise operator, whose Caribben cruises take in Mexico, dropped.

Intercontinental: Shares in the hotel operator also fell.


Cranswick: The food firm, which has just bought a Norfolk-based supplier of pork for Tesco and a number of other major retailers, fell on concern shoppers will avoid pork products as a result of swine flu.

Genus: The pig breeding specialist declined.

Gold hits four-week high as swine flu fears grow and China builds reserves

Gold hits four-week high as swine flu fears grow and China builds reserves
Gold has climbed to its highest in almost a month as fears of a global flu pandemic prompted investors to seek safer assets, according to a report from Reuters.

Last Updated: 10:44AM BST 27 Apr 2009

Gold, which has registered four straight sessions of gains, has risen by 5pc over the past week
Fears of a global swine flu pandemic grew with new infections in the US and Canada on Sunday, while millions of Mexicans have stayed indoors to avoid a virus that has killed more than 100 people.

Gold hit an "intra-day" high (in other words, not a closing price) of $918.25 an ounce, its highest since April 2. The price had been boosted on Friday by the revelation that China had secretly raised its gold reserves by 75pc since 2003, confirming years of speculation that it had been buying.

Gold, which has registered four straight sessions of gains, has risen by 5pc over the past week and is just 8pc below an 11-month high above $1,000 hit in February.

Darren Heathcote of Investec Australia said: "I am not too sure how the swine flu will play out. The problem is the potential for this to explode to pandemic proportions, leaving a lot of people very wary. It may well benefit gold, as gold would be seen as a safe haven.”

Dealers expected gold to face resistance around $932 – an intra-day high seen in early April. "Ultimately, we could well be targeting that mid $960s again, which is that peak in the middle of March," added Heathcote.