KLSE 1 Year Chart
http://finance.yahoo.com/echarts?s=%5EKLSE#chart1:symbol=^klse;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Important lessons learned from the last 2 years.
1. Always buy good quality stocks.
2. Do not over-diversify.
3. Monitor the business.
4. Do not be influenced by the market price.
5. Do not follow or be influenced by the crowd. The crowd is often wrong.
6. Volatility in the market is a friend, take advantage of it.
7. Always buy at bargain price. Always buy with a margin of safety, at a discount to the fundamental intrinsic value.
8. Do not lose your capital. Even in March 2009, the portfolio still showed a gain.
9. Develop a good investing philosophy and strategy. Stick to them.
10. Invest for the long term.
11. Understand your emotions to greed and fear. Challenge them before reacting. Are these rational or appropriate given the facts?
12. It is often alright to do nothing.
Happy New Year to all.
Thursday, 31 December 2009
Wednesday, 30 December 2009
Stock markets flirt with full bubble territory
Stock markets flirt with full bubble territory
With the FTSE 100 back at levels last seen before the collapse of Lehman Brothers, Martin Hutchinson asks whether there is a bubble brewing in asset prices.
Published: 11:36AM GMT 29 Dec 2009
Rapid increases in the prices of financial assets can be a healthy sign. Markets are doing their job when prices jump because of sudden economic strength or a disruption of supply. But when the causes are more monetary than real, a market bubble is forming. Are markets healthy or unhealthy now?
Observers from the Bank of International Settlements to the Hong Kong central bank are asking the question. And quite right, too. The MSCI World stock price index is up 70pc since March and many commodity prices are rocketing. The Reuters-CRB Metals Index is up 74pc over the past year.
Some portion of those increases is probably healthy. Prices were lowest when the financial and economic worlds were undergoing a near-death experience. Banking systems and the economy are not exactly up and running, but the trends are more positive.
Still, some markets seem to have moved past recovery into excess. The jump in commodities, probably the most "financialised" markets in the world, comes despite ample current inventories and limited recovery in demand.
Global stock markets are in danger of hitting full bubble territory. Analysts expect global market earnings to increase by 30pc in 2010, and investors are already paying a fairly generous 14 times those expected earnings, according to Societe Generale calculations.
The case for a bubble is supported by day-to-day market behaviour -- prices often fall on good economic news. Investors seem to care less about the prospect of stronger demand than about the possibility that the authorities will tighten up financial conditions.
If past practice is any guide, the tightening will be slow in coming. Central bankers have not yet fully cast off their long-established belief that asset prices aren't relevant to their task of keeping inflation at bay, while governments find it hard to abandon the many pleasures of deficit spending.
Recent experience should teach another lesson. Financial excess leads to destabilising market crashes. More distant history suggests that monetary excess frequently leads to retail price inflation. Tighter money might make the recovery less robust over the next year or two, but would make the world safer for the next decade.
http://www.telegraph.co.uk/finance/markets/6905092/Stock-markets-flirt-with-full-bubble-territory.html
With the FTSE 100 back at levels last seen before the collapse of Lehman Brothers, Martin Hutchinson asks whether there is a bubble brewing in asset prices.
Published: 11:36AM GMT 29 Dec 2009
Rapid increases in the prices of financial assets can be a healthy sign. Markets are doing their job when prices jump because of sudden economic strength or a disruption of supply. But when the causes are more monetary than real, a market bubble is forming. Are markets healthy or unhealthy now?
Observers from the Bank of International Settlements to the Hong Kong central bank are asking the question. And quite right, too. The MSCI World stock price index is up 70pc since March and many commodity prices are rocketing. The Reuters-CRB Metals Index is up 74pc over the past year.
Some portion of those increases is probably healthy. Prices were lowest when the financial and economic worlds were undergoing a near-death experience. Banking systems and the economy are not exactly up and running, but the trends are more positive.
Still, some markets seem to have moved past recovery into excess. The jump in commodities, probably the most "financialised" markets in the world, comes despite ample current inventories and limited recovery in demand.
Global stock markets are in danger of hitting full bubble territory. Analysts expect global market earnings to increase by 30pc in 2010, and investors are already paying a fairly generous 14 times those expected earnings, according to Societe Generale calculations.
The case for a bubble is supported by day-to-day market behaviour -- prices often fall on good economic news. Investors seem to care less about the prospect of stronger demand than about the possibility that the authorities will tighten up financial conditions.
If past practice is any guide, the tightening will be slow in coming. Central bankers have not yet fully cast off their long-established belief that asset prices aren't relevant to their task of keeping inflation at bay, while governments find it hard to abandon the many pleasures of deficit spending.
Recent experience should teach another lesson. Financial excess leads to destabilising market crashes. More distant history suggests that monetary excess frequently leads to retail price inflation. Tighter money might make the recovery less robust over the next year or two, but would make the world safer for the next decade.
http://www.telegraph.co.uk/finance/markets/6905092/Stock-markets-flirt-with-full-bubble-territory.html
Why shares beat property
Why shares beat property
How many realise that shares remain ahead of property over the past quarter century?
By Ian Cowie
Published: 7:42AM GMT 18 Dec 2009
Short of a miraculous surge in the stock market, the end of this month will mark the close of a dismal decade for shares.
Most investors know that the FTSE 100 has never revisited the peak of 6,930 it briefly hit on December 30 1999. But how many realise that shares remain ahead of property over the past quarter century?
Yes, you may very well stretch your eyes. I did, too, when Andrew Bell, head of research at Rensburg Sheppards Investment Managers, first told me.
I was almost as surprised when his graceful consultant, Jain Castiau, talked me into taking a dawn dip with her in the near-freezing waters of the Serpentine this week. At least it wasn't snowing at the time but, hey, that's another story.
Back to the statistics. The comparison, as you can see from the graph on this page, is based on the Halifax house price index and the FTSE 100 total returns index; both being the best-known benchmarks for their respective assets.
Or nearly. Because, as sharp-eyed readers will already have noticed, this version of the Footsie is the "total returns" version. In other words, it includes dividend income.
That is an important difference from the most widely quoted form of the Footsie which, for the purposes of simplicity, only measures changes in capital value or share prices, excluding dividends.
That goes a long way toward explaining why so many people underestimate the value of shares and share-based funds as a means of storing wealth.
Dividends are an important part of the total returns from most shares, but they are completely excluded from the simple snapshots of changes in capital values that form the basis of most television and tabloid stock market analysis.
No wonder the figures look so bad because they are so wrong.
Even after this year's splendid stock market rally, the Footsie is still yielding a shade under 3.4pc. That is, dividends expressed as a percentage of share prices averaged across the 100 stocks in this benchmark index.
So, for example, even if share prices remained frozen for 20 years, you would double your money in less than that time simply by reinvesting dividend income.
Bear in mind that income paid by equities is quoted net of basic rate tax – so most investors would need gross returns of 4.25pc and high earners would need 5.6pc to match the yield on the Footsie.
Few bank or building society deposits pay that much income – although, unlike shares, they do provide a capital guarantee. Bonds and bond funds often pay more – although, unlike shares, fixed interest securities are very vulnerable to inflation.
All things considered, it is daft to ignore dividend income when measuring returns from shares. For starters, the full picture demolishes the cliche of a ''lost decade for shareholders''.
What's that I hear you say? When comparing housing and shares it would be totally unfair to include income from one asset, but not the other. Too true. Mr Bell was scrupulously fair and has factored into his calculation a 5pc rental yield on property, less 1pc maintenance costs.
That's even fairer to bricks and mortar than it sounds because the Investment Property Databank UK Residential Index is currently yielding only 3.2pc gross and, of course, it is much easier to reinvest relatively small sums of income in shares than it is to buy tiny bits of houses.
Needless to say, the total returns from any asset would be much lower if you failed to promptly reinvest income because the compounding effect, so marked over long periods of time, would be absent.
Against all that, it just doesn't feel right to say shares have proved a better bet than bricks and mortar over the past quarter century.
Most shareholders are also homeowners and, while equities have delivered higher returns than most media coverage would suggest, I would hazard the guess that bricks and mortar have contributed more to the total wealth of the majority of homeowners than equities did.
The explanation is gearing. Until recently, almost anyone could fill in a few forms and borrow 100pc of their investment in housing. Such easy credit has never been available for shares.
And, of course, stock-market profits are generally subject to capital gains tax – unless you obtain them via an individual savings account or pension – whereas gains on your home are always CGT-free.
Even so, Mr Bell's comparison remains surprising and encouraging at a time when so much analysis of the stock market is merely depressing.
And it is always true – as I recalled while splashing through the gelid lake in Hyde Park this week – that the more you look, the more you see.
http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/6836526/Why-shares-beat-property.html
How many realise that shares remain ahead of property over the past quarter century?
By Ian Cowie
Published: 7:42AM GMT 18 Dec 2009
Short of a miraculous surge in the stock market, the end of this month will mark the close of a dismal decade for shares.
Most investors know that the FTSE 100 has never revisited the peak of 6,930 it briefly hit on December 30 1999. But how many realise that shares remain ahead of property over the past quarter century?
Yes, you may very well stretch your eyes. I did, too, when Andrew Bell, head of research at Rensburg Sheppards Investment Managers, first told me.
I was almost as surprised when his graceful consultant, Jain Castiau, talked me into taking a dawn dip with her in the near-freezing waters of the Serpentine this week. At least it wasn't snowing at the time but, hey, that's another story.
Back to the statistics. The comparison, as you can see from the graph on this page, is based on the Halifax house price index and the FTSE 100 total returns index; both being the best-known benchmarks for their respective assets.
Or nearly. Because, as sharp-eyed readers will already have noticed, this version of the Footsie is the "total returns" version. In other words, it includes dividend income.
That is an important difference from the most widely quoted form of the Footsie which, for the purposes of simplicity, only measures changes in capital value or share prices, excluding dividends.
That goes a long way toward explaining why so many people underestimate the value of shares and share-based funds as a means of storing wealth.
Dividends are an important part of the total returns from most shares, but they are completely excluded from the simple snapshots of changes in capital values that form the basis of most television and tabloid stock market analysis.
No wonder the figures look so bad because they are so wrong.
Even after this year's splendid stock market rally, the Footsie is still yielding a shade under 3.4pc. That is, dividends expressed as a percentage of share prices averaged across the 100 stocks in this benchmark index.
So, for example, even if share prices remained frozen for 20 years, you would double your money in less than that time simply by reinvesting dividend income.
Bear in mind that income paid by equities is quoted net of basic rate tax – so most investors would need gross returns of 4.25pc and high earners would need 5.6pc to match the yield on the Footsie.
Few bank or building society deposits pay that much income – although, unlike shares, they do provide a capital guarantee. Bonds and bond funds often pay more – although, unlike shares, fixed interest securities are very vulnerable to inflation.
All things considered, it is daft to ignore dividend income when measuring returns from shares. For starters, the full picture demolishes the cliche of a ''lost decade for shareholders''.
What's that I hear you say? When comparing housing and shares it would be totally unfair to include income from one asset, but not the other. Too true. Mr Bell was scrupulously fair and has factored into his calculation a 5pc rental yield on property, less 1pc maintenance costs.
That's even fairer to bricks and mortar than it sounds because the Investment Property Databank UK Residential Index is currently yielding only 3.2pc gross and, of course, it is much easier to reinvest relatively small sums of income in shares than it is to buy tiny bits of houses.
Needless to say, the total returns from any asset would be much lower if you failed to promptly reinvest income because the compounding effect, so marked over long periods of time, would be absent.
Against all that, it just doesn't feel right to say shares have proved a better bet than bricks and mortar over the past quarter century.
Most shareholders are also homeowners and, while equities have delivered higher returns than most media coverage would suggest, I would hazard the guess that bricks and mortar have contributed more to the total wealth of the majority of homeowners than equities did.
The explanation is gearing. Until recently, almost anyone could fill in a few forms and borrow 100pc of their investment in housing. Such easy credit has never been available for shares.
And, of course, stock-market profits are generally subject to capital gains tax – unless you obtain them via an individual savings account or pension – whereas gains on your home are always CGT-free.
Even so, Mr Bell's comparison remains surprising and encouraging at a time when so much analysis of the stock market is merely depressing.
And it is always true – as I recalled while splashing through the gelid lake in Hyde Park this week – that the more you look, the more you see.
http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/6836526/Why-shares-beat-property.html
Lessons to be learned from the decade that shocked the stock market
Lessons to be learned from the decade that shocked the stock market
It has been a decade that many investors would rather forget.
On December 31, 1999 the FTSE100 closed at 6,930 and 10 years on it still has some distance to go before it regains this peak, sitting at around just 5,300 last week.
By Emma Simon
Published: 7:00AM GMT 28 Dec 2009
1. A guarantee is only as good as the guarantor
Structured products may have been guaranteed by Wall Street investment banks. But once Lehman's went bust, people realised that many of their guaranteed investments weren't as guaranteed as they thought.
2. Don't buy something you don't understand
Financial advisers often point out that many people drive a car without fully understanding how the internal combustion engines works. But those who got lost money in split-capital trusts and precipice bonds will no doubt now think twice before being reassured by such twaddle. If a car breaks down there is always the AA; there isn't any equivalent rescue service when it's your life savings.
3. Higher returns come with higher risks
If you want to better returns than a building society account you need to take more risk with your money. This almost always means you could lose capital.
4. Don't pay more than you have to
The advent of the internet and price comparison sites mean people can now shop around for financial deals and compare prices and products more effectively.
5. Long-term investments don't always mean long-term gains
Just because an investment should be held for a minimum if five years, doesn't mean you will get a positive return at the end of this period, as the "lost decade" for equities demonstrates.
6. Ask how your adviser earns his money
Commission skews judgements; it pays to inquire why comparable products aren't being recommended.
7. Read the small print
What will you be charged if you exceed your overdraft limit? What penalties will be applied if you cash the investment in early? When can the insurer turn down your claim? Such vital information is almost always in the small print.
8. Don't rely on easy credit
Many assumed cheap loans, remortgages and interest-free credit cards would bail them out of any financial difficulty. But these credit lines disappear when times get tough.
9. Don't rely on others to provide a pension
If you want a decent retirement, start saving. Employers have watered down pension schemes while the value of the state pension has declined. Even generous public sector pension look under threat.
10. What goes up also comes down
Shares prices can plummet, house price can fall, and interest rates can tumble – as well as rise sharply too. It's best to plan for such eventualities. They almost always happen.
http://www.telegraph.co.uk/finance/personalfinance/investing/6867372/Lessons-to-be-learned-from-the-decade-that-shocked-the-stock-market.html
It has been a decade that many investors would rather forget.
On December 31, 1999 the FTSE100 closed at 6,930 and 10 years on it still has some distance to go before it regains this peak, sitting at around just 5,300 last week.
By Emma Simon
Published: 7:00AM GMT 28 Dec 2009
1. A guarantee is only as good as the guarantor
Structured products may have been guaranteed by Wall Street investment banks. But once Lehman's went bust, people realised that many of their guaranteed investments weren't as guaranteed as they thought.
2. Don't buy something you don't understand
Financial advisers often point out that many people drive a car without fully understanding how the internal combustion engines works. But those who got lost money in split-capital trusts and precipice bonds will no doubt now think twice before being reassured by such twaddle. If a car breaks down there is always the AA; there isn't any equivalent rescue service when it's your life savings.
3. Higher returns come with higher risks
If you want to better returns than a building society account you need to take more risk with your money. This almost always means you could lose capital.
4. Don't pay more than you have to
The advent of the internet and price comparison sites mean people can now shop around for financial deals and compare prices and products more effectively.
5. Long-term investments don't always mean long-term gains
Just because an investment should be held for a minimum if five years, doesn't mean you will get a positive return at the end of this period, as the "lost decade" for equities demonstrates.
6. Ask how your adviser earns his money
Commission skews judgements; it pays to inquire why comparable products aren't being recommended.
7. Read the small print
What will you be charged if you exceed your overdraft limit? What penalties will be applied if you cash the investment in early? When can the insurer turn down your claim? Such vital information is almost always in the small print.
8. Don't rely on easy credit
Many assumed cheap loans, remortgages and interest-free credit cards would bail them out of any financial difficulty. But these credit lines disappear when times get tough.
9. Don't rely on others to provide a pension
If you want a decent retirement, start saving. Employers have watered down pension schemes while the value of the state pension has declined. Even generous public sector pension look under threat.
10. What goes up also comes down
Shares prices can plummet, house price can fall, and interest rates can tumble – as well as rise sharply too. It's best to plan for such eventualities. They almost always happen.
http://www.telegraph.co.uk/finance/personalfinance/investing/6867372/Lessons-to-be-learned-from-the-decade-that-shocked-the-stock-market.html
Window dressing aka dressing up a portfolio
Definition
The deceptive practice of some mutual funds, in which recently weak stocks are sold and recently strong stocks are bought just before the fund's holdings are made public, in order to give the appearance that they've been holding good stocks all along. also called window-dressing.
The deceptive practice of some mutual funds, in which recently weak stocks are sold and recently strong stocks are bought just before the fund's holdings are made public, in order to give the appearance that they've been holding good stocks all along. also called window-dressing.
Stock market crash is triggered by drastic change in sentiment of market players
A stock market boom can be described as a bubble if there is high probability of a large scale fall in share prices.
Stock market crash is not triggered
Instead, it happens because of
This is why the necessary and sufficient conditions for the bursting of a given asset price bubble, applicable in practice, cannot be provided with the tools of mathematical economics.
A market crash will ensue with a high likelihood if noise trading becomes dominant, the signals of which are to be found in the following stochastic factors:
• Increasing effect of leverage.
• Increasing activity on part of the economic policy.
• Increasing number of corporate scandals, fraud and corruption.
• Fundamentally unjustifiable co-movement of share prices.
http://myinvestingnotes.blogspot.com/2009/11/how-to-distinguish-stock-market-bubbles.html
- by fundamental news or
- by a certain level of share overvaluation.
Instead, it happens because of
- a drastic change in the behavior of market players.
A Decade of Bubbles 2000-2009
"S&P 500 has fallen 23% from 1469.25 in 2000 to its current 1,126.20"
Published: Wednesday December 30, 2009 MYT 10:46:00 AM
String of investment bubbles marked 2000-09
NEW YORK (AP): A string of exploding investment bubbles that started with the dot-coms and ended with mortgages and oil dominated the years from 2000 to 2009. And it looks like the next decade will be no different.
It doesn't seem to matter to many hedge fund traders and other professional investors that the Standard & Poor's 500 index has turned in its first losing performance over the course of a decade, having fallen 23 percent from 1,469.25 at the start of 2000 to its current 1,126.20.
Or that they or other investors helped create and then destroy the bubbles that left stocks worth $2.5 trillion less today than when the decade began - and that's before adding in the effects of inflation.
A mix of investor hubris, ignorance and piles of easy money created the bubbles.
New ideas about where to invest seemed foolproof and greed crowded out doubts.
Many investors looking for the best returns failed to see the potential problems with an Internet business that had no sales plan, or that thousands of expensive homes bought with no down payment might end up in foreclosure.
Now, these investors who fled the last blowups risk running smack into others. The Federal Reserve is keeping borrowing costs low to help revive the economy, and that means there's still plenty of easy money around, helping traders to inflate the price of everything from stocks to commodities such as gold.
"They've put out the biggest punch bowl in U.S. history and people are guzzling from it," said Haag Sherman, chief investment officer at Salient Partners in Houston. It begs several questions: What will be the next bubble? Or is it already here? And, how do individual investors protect their savings?
Some analysts have already been asking if the stock market formed a bubble with its huge rebound this year. The S&P 500 is up 68.9 percent from the 12-year trading low of 666.79, its best performance since the 1930s.
Gold is also suspect. It's above $1,098 an ounce and up 24 percent in 2009. Other possible sources of bubbles include stocks in emerging markets such as China, where the Shanghai index is up 76.4 percent this year.
Analysts say it's in the DNA of markets to let ambition cloud good judgment and that even when investors learn or relearn a lesson about excess, many still forget it.
Moreover, investors still have $3.2 trillion in money market mutual funds that's waiting to be invested, according to iMoneyNet Inc. With so much cash available and investors hankering after big returns, analysts warn that bubbles may be inevitable.
The signs of effervescence can be hard to spot.
"Pets.com was going to have a market cap larger than Exxon Mobil," said David Darst, chief investment strategist for Morgan Stanley Smith Barney in New York, referring to the Web site that collapsed in November 2000, nine months after raising $82.5 million from investors.
He says investors will keep getting tripped up as they find new ways to invest. "Human nature doesn't change," Darst said. "Market mechanisms change but human fear, human greed will be like this decades and centuries hence."
The numbers from this decade tell a stunning story:
>The Nasdaq composite index, powered by the dot-com buying that began in the late 1990s, went all the way up to 5,048.62 in March 2000, then crashed down to 1,114.11 at the depths of the 2002 bear market. It rose as high as 2,859.12 in October 2007, but no one expects it to return to its loftiest levels.
And the indexes don't reflect inflation, taxes and fees, which take the value of an investment down further. Thornburg Investment Management, which analyzed the value of investments beyond the decade, said $100 invested in 1978 would have been worth only $376 thirty years later after accounting for inflation, expenses and taxes.
>Crude oil, sparked by a weaker dollar and worries that oil producers would soon be unable to meet global demand, rose 71 percent in just six months to a high of $147.27 in July 2008. Prices then crashed down to $33.87 in just five months. The plunge was so precipitous that it destroyed several hedge funds that had bet oil would just keep soaring.
>Low borrowing rates and insatiable demand for mortgage debt by investors made it easy to get loans. That helped prop up housing prices and fuel speculation on securities based on those risky mortgages. The peak came in April 2006; after that, home prices fell 31.9 percent to a low in May 2009, according to the S&P/Case-Shiller 20-city index. Along the way, two investment banks that bought mortgage-backed securities collapsed and the government spent hundreds of billions of dollars to prop up many commercial banks.
>Prices for soybeans and corn hit record levels in the summer of 2008 as floods swept the Midwest and damaged key growing regions. In the first six months of the year, corn shot up more than 60 percent and soybeans rose more than 30 percent. The jump in prices was a boon to many traders, but led to food riots in Africa, Asia and the West Indies. By December of last year, both grains had lost half their value.
Analysts say the best way to avoid being caught by other bubbles is to remain vigilant about diversifying, the practice of investing in a variety of assets. It could also mean shedding some of the stronger performers to avoid some of the risks that the winners will falter.
"When something grows too big in the portfolio you have to force yourself to scale it back a little bit," Darst said. "There's no substitute for doing your homework, there's no substitute for asking questions."
By spreading their holdings around and saving more, investors can buffer against what many analysts worry will be the fallout from the low interest rates and easy money that are being used to help revive the economy.
Policymakers also have concerns. Fed Chairman Ben Bernanke said last month a policy favoring cheap borrowing risked setting more traps for investors. He said he didn't see any signs that a bubble is emerging but also acknowledged that it is "extraordinarily difficult" to detect one forming.
Some analysts see bubbles right now. Quincy Krosby, market strategist for Prudential Financial is skeptical of gold's recent surge.
It's easy to see why gold could be in a bubble. Many investors who have bought gold are speculating that inflation will start rising because of all of the money coursing through the financial system. One of gold's greatest appeals is as a hedge against inflation.
"It will move up, but the music always stops," Krosby said of gold.
Simon Laing, a director at Newton Investment Management Ltd. in London, notes that investors are using money borrowed at low rates in the U.S. and Europe to buy stocks in other markets - raising the prospect of new bubbles.
This comes as causes of past bubbles still present obstacles.
"I don't think we've taken the medicine yet," he said. "We've had a decade of bubbles and I still think we're in the same scenario."
Krosby said individuals shouldn't be fooled into thinking that regulators have been able to curtail risk-taking in the past two years since the collapse of the market for securities based on iffy mortgages.
"They're playing in a world where professional traders dominate even though we think we've gone through this tremendous regulatory revolution," she said.
http://biz.thestar.com.my/news/story.asp?file=/2009/12/30/business/20091230104944&sec=business
Published: Wednesday December 30, 2009 MYT 10:46:00 AM
String of investment bubbles marked 2000-09
NEW YORK (AP): A string of exploding investment bubbles that started with the dot-coms and ended with mortgages and oil dominated the years from 2000 to 2009. And it looks like the next decade will be no different.
It doesn't seem to matter to many hedge fund traders and other professional investors that the Standard & Poor's 500 index has turned in its first losing performance over the course of a decade, having fallen 23 percent from 1,469.25 at the start of 2000 to its current 1,126.20.
Or that they or other investors helped create and then destroy the bubbles that left stocks worth $2.5 trillion less today than when the decade began - and that's before adding in the effects of inflation.
A mix of investor hubris, ignorance and piles of easy money created the bubbles.
New ideas about where to invest seemed foolproof and greed crowded out doubts.
Many investors looking for the best returns failed to see the potential problems with an Internet business that had no sales plan, or that thousands of expensive homes bought with no down payment might end up in foreclosure.
Now, these investors who fled the last blowups risk running smack into others. The Federal Reserve is keeping borrowing costs low to help revive the economy, and that means there's still plenty of easy money around, helping traders to inflate the price of everything from stocks to commodities such as gold.
"They've put out the biggest punch bowl in U.S. history and people are guzzling from it," said Haag Sherman, chief investment officer at Salient Partners in Houston. It begs several questions: What will be the next bubble? Or is it already here? And, how do individual investors protect their savings?
Some analysts have already been asking if the stock market formed a bubble with its huge rebound this year. The S&P 500 is up 68.9 percent from the 12-year trading low of 666.79, its best performance since the 1930s.
Gold is also suspect. It's above $1,098 an ounce and up 24 percent in 2009. Other possible sources of bubbles include stocks in emerging markets such as China, where the Shanghai index is up 76.4 percent this year.
Analysts say it's in the DNA of markets to let ambition cloud good judgment and that even when investors learn or relearn a lesson about excess, many still forget it.
Moreover, investors still have $3.2 trillion in money market mutual funds that's waiting to be invested, according to iMoneyNet Inc. With so much cash available and investors hankering after big returns, analysts warn that bubbles may be inevitable.
The signs of effervescence can be hard to spot.
"Pets.com was going to have a market cap larger than Exxon Mobil," said David Darst, chief investment strategist for Morgan Stanley Smith Barney in New York, referring to the Web site that collapsed in November 2000, nine months after raising $82.5 million from investors.
He says investors will keep getting tripped up as they find new ways to invest. "Human nature doesn't change," Darst said. "Market mechanisms change but human fear, human greed will be like this decades and centuries hence."
The numbers from this decade tell a stunning story:
>The Nasdaq composite index, powered by the dot-com buying that began in the late 1990s, went all the way up to 5,048.62 in March 2000, then crashed down to 1,114.11 at the depths of the 2002 bear market. It rose as high as 2,859.12 in October 2007, but no one expects it to return to its loftiest levels.
And the indexes don't reflect inflation, taxes and fees, which take the value of an investment down further. Thornburg Investment Management, which analyzed the value of investments beyond the decade, said $100 invested in 1978 would have been worth only $376 thirty years later after accounting for inflation, expenses and taxes.
>Crude oil, sparked by a weaker dollar and worries that oil producers would soon be unable to meet global demand, rose 71 percent in just six months to a high of $147.27 in July 2008. Prices then crashed down to $33.87 in just five months. The plunge was so precipitous that it destroyed several hedge funds that had bet oil would just keep soaring.
>Low borrowing rates and insatiable demand for mortgage debt by investors made it easy to get loans. That helped prop up housing prices and fuel speculation on securities based on those risky mortgages. The peak came in April 2006; after that, home prices fell 31.9 percent to a low in May 2009, according to the S&P/Case-Shiller 20-city index. Along the way, two investment banks that bought mortgage-backed securities collapsed and the government spent hundreds of billions of dollars to prop up many commercial banks.
>Prices for soybeans and corn hit record levels in the summer of 2008 as floods swept the Midwest and damaged key growing regions. In the first six months of the year, corn shot up more than 60 percent and soybeans rose more than 30 percent. The jump in prices was a boon to many traders, but led to food riots in Africa, Asia and the West Indies. By December of last year, both grains had lost half their value.
Analysts say the best way to avoid being caught by other bubbles is to remain vigilant about diversifying, the practice of investing in a variety of assets. It could also mean shedding some of the stronger performers to avoid some of the risks that the winners will falter.
"When something grows too big in the portfolio you have to force yourself to scale it back a little bit," Darst said. "There's no substitute for doing your homework, there's no substitute for asking questions."
By spreading their holdings around and saving more, investors can buffer against what many analysts worry will be the fallout from the low interest rates and easy money that are being used to help revive the economy.
Policymakers also have concerns. Fed Chairman Ben Bernanke said last month a policy favoring cheap borrowing risked setting more traps for investors. He said he didn't see any signs that a bubble is emerging but also acknowledged that it is "extraordinarily difficult" to detect one forming.
Some analysts see bubbles right now. Quincy Krosby, market strategist for Prudential Financial is skeptical of gold's recent surge.
It's easy to see why gold could be in a bubble. Many investors who have bought gold are speculating that inflation will start rising because of all of the money coursing through the financial system. One of gold's greatest appeals is as a hedge against inflation.
"It will move up, but the music always stops," Krosby said of gold.
Simon Laing, a director at Newton Investment Management Ltd. in London, notes that investors are using money borrowed at low rates in the U.S. and Europe to buy stocks in other markets - raising the prospect of new bubbles.
This comes as causes of past bubbles still present obstacles.
"I don't think we've taken the medicine yet," he said. "We've had a decade of bubbles and I still think we're in the same scenario."
Krosby said individuals shouldn't be fooled into thinking that regulators have been able to curtail risk-taking in the past two years since the collapse of the market for securities based on iffy mortgages.
"They're playing in a world where professional traders dominate even though we think we've gone through this tremendous regulatory revolution," she said.
http://biz.thestar.com.my/news/story.asp?file=/2009/12/30/business/20091230104944&sec=business
Favor modest valuations and big, safe dividends.
The recent rally has favored economically sensitive companies—ones whose profits rise quickly as the economy grows. Investors who expect the rally to fizzle ought to swap these for shares of companies whose products sell steadily no matter what. Favor modest valuations and big, safe dividends. Both are still abundant, fortunately. Also, keep ready a generous stash of cash.
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.smartmoney.com%2Finvesting%2Fstocks%2Fare-we-headed-for-a-third-bubble%2F%3Fcid%3D1122
http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.smartmoney.com%2Finvesting%2Fstocks%2Fare-we-headed-for-a-third-bubble%2F%3Fcid%3D1122
BELIEVING A BULL MARKET
We are in the midst of a bull market. The market fell off the cliff in 2008. Its nadir was in March 2009. Many stocks were trading below their intrinsic value: intrinsic P/E and intrinsic P/B were much higher than the market P/E and market P/B then.
When market confidence and sentiment turned, the investors rushed in and picked up huge bargains. Many stocks were trading at huge discounts to their intrinsic values. The initial price rise from March to June 2009 was particularly fast and steep. Those who stayed invested throughout the deep recession and/or invested in the early phase of the steep rise are sitting on big gains. Since June/July 2009, many stocks are trading at fair values. Accordingly, these stocks are trading at higher prices within a narrow range.
Still many "glamour" stocks' prices continue the climb. These are the "growth" stocks. At a certain price, these stocks are fairly valued. As the prices climb, beware that the market price may be expensive compared to their fundamentally derived intrinsic values. Momentum trading and various market strategies used by 'investors' in the market tend to create bubbles. Valuation is a skill and is also subjective. Those without this skill (and this would be the majority) may not be anchored on the intrinsic value of the stock as their guide.
The present bull market is about 9 months old. Driven the poor yield from fixed income investments (FDs), the liquidity due to the low interest rates and the low market prices in March 2009, the index has risen fast. The KLSE has risen from the low of around 800 to the present of 1250. Those who rode the rise would have in general obtained an average of 40% to 50% gain since March 2009. During the last bull run in 2007, the KLSE peaked around 1350. From 1250 to 1350, this 100 point rise will translate to a gain of about 8%. It is unlikely for the market to go down to the low of March 2009. However, there hasn't been any significant correction in the present bull run. Some investors would welcome a significant correction to to consolidate the market for the next phase. A correction of 10% to 20% maybe welcomed by various players in the market.
Though the market has risen, particularly the index-linked stocks, opportunities exist for the value stock pickers still. The year is ending on a good note, it is also a good time to rebalance one's portfolio.
----
http://myinvestingnotes.blogspot.com/2009/01/believing-bull-market.html
BELIEVING A BULL MARKET
When markets are rapidly rising, value investing invariably falls out of favor with the investing public. In an upward racing market, value stocks appear dull and stodgy as the more speculative issues rush toward new market highs. But come the correction, it all looks different. Stable value stocks seem like trusted friends.
Most bull markets have well-defined characteristics. These include:
Though the market has risen, particularly the index-linked stocks, opportunities exist for the value stock pickers still. The year is ending on a good note, it is also a good time to rebalance one's portfolio.
BELIEVING A BULL MARKET
- Price levels are historically high.
- Price to earnings ratios are high.
- Dividend yields are low compared with bond yields (or compared with a stock’s particular dividend yield pattern).
- Margin buying becomes excessive as investors are driven to borrow to buy more of the high-priced stocks that look attractive to them.
- There is a swarm of new stock offerings, especially initial public offerings (IPOs) of questionable quality. This bull market is what investment bankers and stock promoters call the “window of opportunity.” Because IPOs so often occur when Wall Street is primed to pay top dollar, seasoned investors joke that IPO stands for “it’s probably overpriced.”
Be patient: Wait for opportunities during correction or panic during a bull market
Great Opportunities to buy companies with durable competitive advantage
a) Correction or panic during a bull market:
Any company with a durable competitive advantage will eventually recover after a market correction or panic during a bull market.
b) Bubble-bursting situation:
But beware. In a bubble-bursting situation,during which stock prices trade in excess of 40 times earnings and then fall to single-digit PEs, it may take years for them to fully recover.
After the crash of 1997, it took until 2007 to match the 1990s bull market highs. There are still companies trading today at below their last decade high price. On the other hand, if you bought during the crash, as Warren Buffett often did, it didn't take you long to make a fortune.
http://myinvestingnotes.blogspot.com/2009/10/opportunities-to-buy-companies-with.html
a) Correction or panic during a bull market:
Any company with a durable competitive advantage will eventually recover after a market correction or panic during a bull market.
b) Bubble-bursting situation:
But beware. In a bubble-bursting situation,during which stock prices trade in excess of 40 times earnings and then fall to single-digit PEs, it may take years for them to fully recover.
After the crash of 1997, it took until 2007 to match the 1990s bull market highs. There are still companies trading today at below their last decade high price. On the other hand, if you bought during the crash, as Warren Buffett often did, it didn't take you long to make a fortune.
http://myinvestingnotes.blogspot.com/2009/10/opportunities-to-buy-companies-with.html
In the aftermath of the bursting of the bubble
The Aftermath
In the aftermath of the bursting of the bubble, you initially find investors in complete denial. In fact, one of the amazing features of post-bubble markets is the difficulty of finding investors who lost money in the bubble. Investors either claim that they were one of the prudent ones who never invested in the bubble in the first place or that they were one of the smart ones who saw the correction coming and got out in time.
As time passes and the investment losses from the bursting of the bubble become too large to ignore, the search for scapegoats begins. Investors point fingers at brokers, investment banks and the intellectuals who nurtured the bubble, arguing that they were mislead.
Finally, investors draw lessons that they swear they will adhere to from this point on. �I will never invest in a tulip bulb again� or �I will never invest in a dot.com company again� becomes the refrain you hear. Given these resolutions, you may wonder why price bubbles show up over and over. The reason is simple. No two bubbles look alike. Thus, investors, wary about repeating past mistakes, make new ones, which in turn create new bubbles in new asset classes.
http://myinvestingnotes.blogspot.com/search/label/phases%20of%20bubble
In the aftermath of the bursting of the bubble, you initially find investors in complete denial. In fact, one of the amazing features of post-bubble markets is the difficulty of finding investors who lost money in the bubble. Investors either claim that they were one of the prudent ones who never invested in the bubble in the first place or that they were one of the smart ones who saw the correction coming and got out in time.
As time passes and the investment losses from the bursting of the bubble become too large to ignore, the search for scapegoats begins. Investors point fingers at brokers, investment banks and the intellectuals who nurtured the bubble, arguing that they were mislead.
Finally, investors draw lessons that they swear they will adhere to from this point on. �I will never invest in a tulip bulb again� or �I will never invest in a dot.com company again� becomes the refrain you hear. Given these resolutions, you may wonder why price bubbles show up over and over. The reason is simple. No two bubbles look alike. Thus, investors, wary about repeating past mistakes, make new ones, which in turn create new bubbles in new asset classes.
http://myinvestingnotes.blogspot.com/search/label/phases%20of%20bubble
Can investors take advantage of bubbles to make money?
Whether investors can take advantage of bubbles to make money seems to be a more difficult question to answer. Part of the reason for the failure to exploit bubbles seems to stem from greed �even investors who believe that assets are over priced want to make money of the bubble � and part of the reason is the difficulty of determining when a bubble will burst.
Over valued assets may get even more over valued and these overvaluations can stretch over years, thus imperiling the financial well being of any investor who has bet against the bubble.
There is also an institutional interest on the part of investment banks, the media and portfolio managers, all of whom feed of the bubble, to perpetuate the bubble.
Over valued assets may get even more over valued and these overvaluations can stretch over years, thus imperiling the financial well being of any investor who has bet against the bubble.
There is also an institutional interest on the part of investment banks, the media and portfolio managers, all of whom feed of the bubble, to perpetuate the bubble.
THE PAUSE AT THE TOP OF THE ROLLER COASTER
There is only one strategy that works for value investors when the market is high – patience. The investor can do one of two things, both of which require steady nerves.
· Sell all stocks in a portfolio, take profits, and wait for the market to decline. At that time, many good values will present themselves. This may sound easy, but it pains many investors to sell a stock when its price is still rising.
· Stick with those stocks in a portfolio that have long-term potential. Sell only those that are clearly overvalued, and once more wait for the market to decline. At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.
But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.
-----
http://myinvestingnotes.blogspot.com/2009/01/pause-at-top-of-roller-coaster.html
The portfolio of one value investor shows what can happen when markets stumble off a cliff. In early September 1987, Walter Schloss’s portfolio was up 53%. The market as a whole had risen 42%, after a DJIA peak of 2722.42. Then in October the market fell off the mountain and the Dow lost 504 points in a single day. The market struggled back and Schloss finished 1987 with a 26% gain while the overall market made only a 5% advance. Schloss followed one of the first rules of investing – don’t lose money. Making up for lost ground puts an investor at a serious disadvantage when calculating long-term average returns.
Schloss is an experienced investor, and not all value investors will do as well in a rising market. It takes patience, “At a guess I’d say that (the value investor) should do a good 20% better than the market over a long period – although not during the most dynamic period of a bull market – if he is rigorous about applying the method,” says author John Train.
As for the hot stocks, when they take a hard hit the investor is cornered. If the stock is sold, the loss becomes permanent. The lost money cannot grow. If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall return.
· Sell all stocks in a portfolio, take profits, and wait for the market to decline. At that time, many good values will present themselves. This may sound easy, but it pains many investors to sell a stock when its price is still rising.
· Stick with those stocks in a portfolio that have long-term potential. Sell only those that are clearly overvalued, and once more wait for the market to decline. At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.
But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.
-----
http://myinvestingnotes.blogspot.com/2009/01/pause-at-top-of-roller-coaster.html
The portfolio of one value investor shows what can happen when markets stumble off a cliff. In early September 1987, Walter Schloss’s portfolio was up 53%. The market as a whole had risen 42%, after a DJIA peak of 2722.42. Then in October the market fell off the mountain and the Dow lost 504 points in a single day. The market struggled back and Schloss finished 1987 with a 26% gain while the overall market made only a 5% advance. Schloss followed one of the first rules of investing – don’t lose money. Making up for lost ground puts an investor at a serious disadvantage when calculating long-term average returns.
Schloss is an experienced investor, and not all value investors will do as well in a rising market. It takes patience, “At a guess I’d say that (the value investor) should do a good 20% better than the market over a long period – although not during the most dynamic period of a bull market – if he is rigorous about applying the method,” says author John Train.
As for the hot stocks, when they take a hard hit the investor is cornered. If the stock is sold, the loss becomes permanent. The lost money cannot grow. If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall return.
Tuesday, 29 December 2009
The Process of Fundamental Analysis
http://spreadsheets.google.com/pub?key=thrIJu34ZkHzDDZwDLtNIHw&output=html
The figure outlines the 5-Step process of fundamental analysis that produces an estimate of the value.
In the last step in the diagram, Step 5, this value is compared with the price of investing. This step is the investment decision.
The figure outlines the 5-Step process of fundamental analysis that produces an estimate of the value.
In the last step in the diagram, Step 5, this value is compared with the price of investing. This step is the investment decision.
The man in charge of US$1tril assets warns about stocks
Updated: Monday December 28, 2009 MYT 1:20:42 PM
The man in charge of US$1tril assets warns about stocks
NEW YORK: Homes are selling at their fastest clip in nearly three years, the unemployment rate is falling and stocks are up 66 percent since their March lows - the best performance since the 1930s. What's not to like?
Plenty, according to Mohamed El-Erian, chief executive of giant bond manager Pimco.
The investor says the recovery may be gaining steam but is no different than a kid who eats too much candy at one of the birthday parties his 6-year-old daughter attends.
FILE PIX - In this Feb. 12, 2008 file photo, Mohamed El-Erian, Co-Chief Executive Officer and Co-Chief Investment Officer of PIMCO, talks about sovereign wealth funds in New York. - AP
"We're on a sugar high," El-Erian says.
"It feels good for a while but is unsustainable."
His point: This burst of economic activity fed by government spending and near-zero interest rates will soon peter out.
As CEO at Newport Beach, Calif.-based Pimco, El-Erian, 51, oversees nearly $1 trillion in assets, more than the gross domestic product of most countries.
So when he talks, people listen.
What he's saying now:
-Stocks will drop 10 percent in the space of three or four weeks, bringing the Standard & Poor's 500 index below 1,000 - though he's not predicting when.
-The unemployment rate will be hovering above 8 percent a year from now.
-U.S. gross domestic product will grow at an average 2 percent or so for years to come - a third slower than we're used to.
El-Erian and his famous partner, Pimco founder Bill Gross, are watched closely because they've made investors a lot of money over the years.
The Pimco Total Return Fund, which at $203 billion is the world's largest mutual fund, has returned an average 7.6 percent annually over 10 years, after fees, versus 6.3 percent for Barclays Capital U.S. Aggregate fixed income index fund.
The hotshots at Pimco have made money by anticipating big moves in the economy and interest rates way before other investors.
In the depths of the financial crisis last year, for instance, Pimco sold some of its Treasury bonds to panicked investors looking for a safe haven and put the proceeds into government-backed mortgages and bank debt - in time to catch the big upswing in prices of those and other riskier securities this year.
Now Pimco is once again changing tack. El-Erian says people are fooling themselves if they think all the bullish data of late means a strong recovery is in the offing.
So he's buying Treasurys and selling riskier stuff.
His bet: Investors will get scared again and want U.S.-guaranteed debt so they know they'll get repaid.
At Total Return, government-related securities, including Treasurys and corporate debt backed by Washington, comprised 48 percent of the fund's holdings in September.
That was up from 9 percent at the beginning of the year.
One of Pimco's newest funds, the Global Multi-Asset Fund, a hybrid stock-bond offering, is 35 percent in equities now, down from 60 percent earlier this year.
Investors betting on stocks or high-yield bonds are likely to be disappointed, El-Erian says.
Markets for those securities are rallying not because people like them but because they hate the puny yields of safer investments like money markets and feel they have no choice but to buy, he says.
He quips that that makes the bull market as likely to last as a forced marriage.
The danger: If stock and junk bond prices start falling, lots of investors are likely to bail, feeding the drop.
Of course, there are plenty of true believers in the bull who are not buying the El-Erian line.
James Paulsen, chief strategist at Wells Capital Management in Minneapolis, with $355 billion under management, has been pounding the table for months to buy stocks.
Just like in the early 1980s, the recovery will take the form of a "V," he says. The reason: Companies have cut inventories and payrolls to the bone, so just a little revenue growth could translate into a bumper crop of profits.
El-Erian says many of the bulls don't appreciate just how much the government props still under the economy are masking its weakness.
Instead of focusing on the fundamentals today, he says, they're looking to the past, expecting a quick economic rebound because that's what's happened before.
We're trained to think the "farther you fall, the higher you'll bounce back," El-Erian says. "We're hostage to the V."
El-Erian says he learned to be open to many different views on the world (and markets) from his father, an Egyptian diplomat who insisted on reading several newspapers everyday, both on the right and the left.
El-Erian had hoped to become a college professor.
But when his father died, he took a job at the International Monetary Fund to support the family.
He rose through the ranks, eventually becoming deputy director.
In 1999 he joined Pimco, where he quickly made a name for himself with some prescient bets on emerging markets.
One of his biggest wins: selling Argentine bonds in 2000 while they were still popular with investors.
When the country defaulted the next year, the emerging markets fund that El-Erian managed returned 28 percent versus negative 1 percent for the Emerging Market Bond Index.
He eventually left to head the group that manages Harvard University's massive endowment, returning to Pimco in January 2008 in time catch the depths of the financial crisis.
El-Erian says we've probably seen the worst of the crisis but consumers, and not just Washington, need to start spending again for the recovery to really take hold.
He doesn't expect that to happen soon. Like in the Great Depression, Americans are saving more and borrowing less - a shift in attitudes toward family finances that Pimco thinks will last a generation.
That, plus the impact of more regulation and higher taxes, El-Erian says, will crimp growth for years to come.
Whatever the merits of that view, Pimco is not exactly knocking the lights out right now. So far this year, the Total Return Fund has returned 14 percent, impressive in normal times but no better than average for similar funds during the rally, according to Morningstar.
The 19.1 percent return for Global Multi-Asset, which El-Erian co-manages, lags two-thirds of its peers.
El-Erian says he sold equities "too early" but is convinced his view on the market will prove correct - even if it strikes many as a tad too pessimistic.
"I'm calling it as I see it," he says. "I'm not optimistic or pessimistic - I'm realistic." - AP
http://biz.thestar.com.my/news/story.asp?file=/2009/12/28/business/20091228081257&sec=business
The man in charge of US$1tril assets warns about stocks
NEW YORK: Homes are selling at their fastest clip in nearly three years, the unemployment rate is falling and stocks are up 66 percent since their March lows - the best performance since the 1930s. What's not to like?
Plenty, according to Mohamed El-Erian, chief executive of giant bond manager Pimco.
The investor says the recovery may be gaining steam but is no different than a kid who eats too much candy at one of the birthday parties his 6-year-old daughter attends.
FILE PIX - In this Feb. 12, 2008 file photo, Mohamed El-Erian, Co-Chief Executive Officer and Co-Chief Investment Officer of PIMCO, talks about sovereign wealth funds in New York. - AP
"We're on a sugar high," El-Erian says.
"It feels good for a while but is unsustainable."
His point: This burst of economic activity fed by government spending and near-zero interest rates will soon peter out.
As CEO at Newport Beach, Calif.-based Pimco, El-Erian, 51, oversees nearly $1 trillion in assets, more than the gross domestic product of most countries.
So when he talks, people listen.
What he's saying now:
-Stocks will drop 10 percent in the space of three or four weeks, bringing the Standard & Poor's 500 index below 1,000 - though he's not predicting when.
-The unemployment rate will be hovering above 8 percent a year from now.
-U.S. gross domestic product will grow at an average 2 percent or so for years to come - a third slower than we're used to.
El-Erian and his famous partner, Pimco founder Bill Gross, are watched closely because they've made investors a lot of money over the years.
The Pimco Total Return Fund, which at $203 billion is the world's largest mutual fund, has returned an average 7.6 percent annually over 10 years, after fees, versus 6.3 percent for Barclays Capital U.S. Aggregate fixed income index fund.
The hotshots at Pimco have made money by anticipating big moves in the economy and interest rates way before other investors.
In the depths of the financial crisis last year, for instance, Pimco sold some of its Treasury bonds to panicked investors looking for a safe haven and put the proceeds into government-backed mortgages and bank debt - in time to catch the big upswing in prices of those and other riskier securities this year.
Now Pimco is once again changing tack. El-Erian says people are fooling themselves if they think all the bullish data of late means a strong recovery is in the offing.
So he's buying Treasurys and selling riskier stuff.
His bet: Investors will get scared again and want U.S.-guaranteed debt so they know they'll get repaid.
At Total Return, government-related securities, including Treasurys and corporate debt backed by Washington, comprised 48 percent of the fund's holdings in September.
That was up from 9 percent at the beginning of the year.
One of Pimco's newest funds, the Global Multi-Asset Fund, a hybrid stock-bond offering, is 35 percent in equities now, down from 60 percent earlier this year.
Investors betting on stocks or high-yield bonds are likely to be disappointed, El-Erian says.
Markets for those securities are rallying not because people like them but because they hate the puny yields of safer investments like money markets and feel they have no choice but to buy, he says.
He quips that that makes the bull market as likely to last as a forced marriage.
The danger: If stock and junk bond prices start falling, lots of investors are likely to bail, feeding the drop.
Of course, there are plenty of true believers in the bull who are not buying the El-Erian line.
James Paulsen, chief strategist at Wells Capital Management in Minneapolis, with $355 billion under management, has been pounding the table for months to buy stocks.
Just like in the early 1980s, the recovery will take the form of a "V," he says. The reason: Companies have cut inventories and payrolls to the bone, so just a little revenue growth could translate into a bumper crop of profits.
El-Erian says many of the bulls don't appreciate just how much the government props still under the economy are masking its weakness.
Instead of focusing on the fundamentals today, he says, they're looking to the past, expecting a quick economic rebound because that's what's happened before.
We're trained to think the "farther you fall, the higher you'll bounce back," El-Erian says. "We're hostage to the V."
El-Erian says he learned to be open to many different views on the world (and markets) from his father, an Egyptian diplomat who insisted on reading several newspapers everyday, both on the right and the left.
El-Erian had hoped to become a college professor.
But when his father died, he took a job at the International Monetary Fund to support the family.
He rose through the ranks, eventually becoming deputy director.
In 1999 he joined Pimco, where he quickly made a name for himself with some prescient bets on emerging markets.
One of his biggest wins: selling Argentine bonds in 2000 while they were still popular with investors.
When the country defaulted the next year, the emerging markets fund that El-Erian managed returned 28 percent versus negative 1 percent for the Emerging Market Bond Index.
He eventually left to head the group that manages Harvard University's massive endowment, returning to Pimco in January 2008 in time catch the depths of the financial crisis.
El-Erian says we've probably seen the worst of the crisis but consumers, and not just Washington, need to start spending again for the recovery to really take hold.
He doesn't expect that to happen soon. Like in the Great Depression, Americans are saving more and borrowing less - a shift in attitudes toward family finances that Pimco thinks will last a generation.
That, plus the impact of more regulation and higher taxes, El-Erian says, will crimp growth for years to come.
Whatever the merits of that view, Pimco is not exactly knocking the lights out right now. So far this year, the Total Return Fund has returned 14 percent, impressive in normal times but no better than average for similar funds during the rally, according to Morningstar.
The 19.1 percent return for Global Multi-Asset, which El-Erian co-manages, lags two-thirds of its peers.
El-Erian says he sold equities "too early" but is convinced his view on the market will prove correct - even if it strikes many as a tad too pessimistic.
"I'm calling it as I see it," he says. "I'm not optimistic or pessimistic - I'm realistic." - AP
http://biz.thestar.com.my/news/story.asp?file=/2009/12/28/business/20091228081257&sec=business
Monday, 28 December 2009
Chart wise: These stocks continue to climb
Will these stocks continue to climb further uncorrected?
Adventa, Petdag, PBB, LPI, Latexx, GAB, HaiO, HLBank, QL, KPJ, JobSt, KLK, IOICorp, Sime
Adventa, Petdag, PBB, LPI, Latexx, GAB, HaiO, HLBank, QL, KPJ, JobSt, KLK, IOICorp, Sime
Chart wise: These stocks settled lower than their recent peaks
The prices of these stocks rose from March 09 and peaked in June 09. The prices subsequently settled below their peaks.
BStead, LionDiv, KNM, PohKong, POS
BStead, LionDiv, KNM, PohKong, POS
Chart wise: These stocks rose and plateau at their peaks
The prices of these stocks started the climb in March over variable periods and all subsequently flatten out at higher prices.
iCap, Coastal, DLady, GenM, Genting, Integra, Maybank, Nestle, Parkson, Tenaga, UMW, Maybulk, UtdPlt, UMCCA, SOP, KMLoong
Chart wise: This stock is back to its March 09 lows.
Interestingly, the price of this stock is back to its March 09 low.
Sunday, 27 December 2009
Dividends are the key to a sensible investment strategy
Dividends are the key to a sensible investment strategy
As we entered 2009, no one would have predicted the strong rally in the FTSE 100, which is now up 22pc as we approach the end of the year.
By Garry White
Published: 7:32PM GMT 26 Dec 2009
In fact, sentiment was so grim that the FTSE 100 fell by almost a quarter over the first three months of 2009.
Questor has therefore been particularly defensive over the last year and focused on yield plays, recovery shares and defensives. This strategy has proved sound, with some real successes, although there have been one or two less than perfect calls along the way.
A dividend strategy should be the cornerstone of any sensible investor's portfolio. Various studies have suggested that more than 70pc of the long-term return in a portfolio is generated by reinvested dividend payments. In the UK we have some of the highest-yielding shares in the world – and UK investors should continue to exploit this.
Yield plays over the last 12 months include National Grid, Northern Foods, Imperial Tobacco and Primary Health Properties. All of these shares remain buys as we enter 2010.
The mining sector has proved lucrative as commodity prices jumped after being oversold last year. The falling dollar has boosted the price of basic materials significantly, as a falling dollar makes them attractive to investors in currencies other than the dollar. Vedanta (up 368pc), Centamin Egypt (up 191pc), Petropavlovsk (up 67pc) and Randgold Resources (up 38pc) have been notable success. A buy stance remains on Russian gold miner Petropavlovsk and Egyptian gold miner Centamin. However, Questor did tip South African ferrochrome producer International Ferro Metals at the wrong time and the shares have plunged by more than 50pc.
Investments in the oil sector have also proved good investments, including Tullow Oil, Afren, BP and Dana Petroleum. The oil services sector has proved even more lucrative, with shares in Petrofac up 116pc and Cape shares up 226pc. The stance on Petrofac shares is hold and Cape shares remain a buy.
It was not all a success, however. A bet on the direction of the oil price using an exchange-traded fund in the earlier part of 2009 proved disastrous – and led to a 30pc loss. All these shares except for Tullow remain a buy.
Next year prospects look brighter than they did 12 months ago, but there is still scope for substantial upset. Dubai World's bond default is a recent example of the potholes that could be faced by investors next year – and the chances of a double-dip recession are very real. Questor has said on a number of occasions that he would not start to become more positive on the outlook until global unemployment started to fall. There has been scant evidence of this so far.
One thing investors should bear in mind next year is that the FTSE 100 is not a reflection of the UK economy – and that's why it should do quite well. About 30pc of the index's weighing is comprised of commodity-related plays such as mining and oil and gas groups. These shares will be influenced by changes in global GDP and prospects for the dollar. The FTSE 250 is by far a clearer reflection of what is going on in UK industry. If the UK economy starts to get back onto its feet, it should be positive for this index.
One sector that should continue to perform is the outsourcing sector – no matter which party wins the election in the first half of the year. In his pre-Budget report, Alistair Darling said: "We will sell those assets that can be managed better by the private sector." As governments all over the world strain to cut debt, this trend will be global and will be around for many years to come.
Over the past year Questor has recommended a number of outsourcing groups and still has buy ratings on Serco, Capita and VT Group.
Questor will reveal his tips for 2010 in The Daily Telegraph on Monday, January 4.
http://www.telegraph.co.uk/finance/markets/questor/6890986/Dividends-are-the-key-to-a-sensible-investment-strategy.html
As we entered 2009, no one would have predicted the strong rally in the FTSE 100, which is now up 22pc as we approach the end of the year.
By Garry White
Published: 7:32PM GMT 26 Dec 2009
In fact, sentiment was so grim that the FTSE 100 fell by almost a quarter over the first three months of 2009.
Questor has therefore been particularly defensive over the last year and focused on yield plays, recovery shares and defensives. This strategy has proved sound, with some real successes, although there have been one or two less than perfect calls along the way.
A dividend strategy should be the cornerstone of any sensible investor's portfolio. Various studies have suggested that more than 70pc of the long-term return in a portfolio is generated by reinvested dividend payments. In the UK we have some of the highest-yielding shares in the world – and UK investors should continue to exploit this.
Yield plays over the last 12 months include National Grid, Northern Foods, Imperial Tobacco and Primary Health Properties. All of these shares remain buys as we enter 2010.
The mining sector has proved lucrative as commodity prices jumped after being oversold last year. The falling dollar has boosted the price of basic materials significantly, as a falling dollar makes them attractive to investors in currencies other than the dollar. Vedanta (up 368pc), Centamin Egypt (up 191pc), Petropavlovsk (up 67pc) and Randgold Resources (up 38pc) have been notable success. A buy stance remains on Russian gold miner Petropavlovsk and Egyptian gold miner Centamin. However, Questor did tip South African ferrochrome producer International Ferro Metals at the wrong time and the shares have plunged by more than 50pc.
Investments in the oil sector have also proved good investments, including Tullow Oil, Afren, BP and Dana Petroleum. The oil services sector has proved even more lucrative, with shares in Petrofac up 116pc and Cape shares up 226pc. The stance on Petrofac shares is hold and Cape shares remain a buy.
It was not all a success, however. A bet on the direction of the oil price using an exchange-traded fund in the earlier part of 2009 proved disastrous – and led to a 30pc loss. All these shares except for Tullow remain a buy.
Next year prospects look brighter than they did 12 months ago, but there is still scope for substantial upset. Dubai World's bond default is a recent example of the potholes that could be faced by investors next year – and the chances of a double-dip recession are very real. Questor has said on a number of occasions that he would not start to become more positive on the outlook until global unemployment started to fall. There has been scant evidence of this so far.
One thing investors should bear in mind next year is that the FTSE 100 is not a reflection of the UK economy – and that's why it should do quite well. About 30pc of the index's weighing is comprised of commodity-related plays such as mining and oil and gas groups. These shares will be influenced by changes in global GDP and prospects for the dollar. The FTSE 250 is by far a clearer reflection of what is going on in UK industry. If the UK economy starts to get back onto its feet, it should be positive for this index.
One sector that should continue to perform is the outsourcing sector – no matter which party wins the election in the first half of the year. In his pre-Budget report, Alistair Darling said: "We will sell those assets that can be managed better by the private sector." As governments all over the world strain to cut debt, this trend will be global and will be around for many years to come.
Over the past year Questor has recommended a number of outsourcing groups and still has buy ratings on Serco, Capita and VT Group.
Questor will reveal his tips for 2010 in The Daily Telegraph on Monday, January 4.
http://www.telegraph.co.uk/finance/markets/questor/6890986/Dividends-are-the-key-to-a-sensible-investment-strategy.html
Coastal Contracts year-to-date has topped RM148 million
Coastal to sell vessels for RM49.2m
Tags: Bursa Malaysia | Coastal Contracts Bhd | deck barge | Ng Chin Heng | offshore support vessel(OSV) | tugboat
Written by The Edge Financial Daily
Thursday, 24 December 2009 11:45
KUALA LUMPUR: Coastal Contracts Bhd have secured contracts for the sale of an offshore support vessel (OSV), a tugboat and a deck barge for RM49.2 million, the company announced yesterday.
Including the new contracts, the value of vessel orders clinched by Coastal Contracts year-to-date has topped RM148 million, it told Bursa Malaysia.
Coastal Contracts currently has about RM1.4 billion worth of vessel sales orders awaiting delivery to customers up to 2011.
The group said revenue stream from these three vessels was expected to contribute positively to its bottomline performance for the financial year ending Dec 31, 2010.
In a statement, its executive chairman Ng Chin Heng said: “Despite the challenging market conditions since the latter part of last year, we have been steadily replenishing our vessel sales order book, the ‘building blocks’ that will buoy the group’s future revenue and earnings clarity.”
http://www.theedgemalaysia.com/in-the-financial-daily/156290-coastal-to-sell-vessels-for-rm492m.html
Tags: Bursa Malaysia | Coastal Contracts Bhd | deck barge | Ng Chin Heng | offshore support vessel(OSV) | tugboat
Written by The Edge Financial Daily
Thursday, 24 December 2009 11:45
KUALA LUMPUR: Coastal Contracts Bhd have secured contracts for the sale of an offshore support vessel (OSV), a tugboat and a deck barge for RM49.2 million, the company announced yesterday.
Including the new contracts, the value of vessel orders clinched by Coastal Contracts year-to-date has topped RM148 million, it told Bursa Malaysia.
Coastal Contracts currently has about RM1.4 billion worth of vessel sales orders awaiting delivery to customers up to 2011.
The group said revenue stream from these three vessels was expected to contribute positively to its bottomline performance for the financial year ending Dec 31, 2010.
In a statement, its executive chairman Ng Chin Heng said: “Despite the challenging market conditions since the latter part of last year, we have been steadily replenishing our vessel sales order book, the ‘building blocks’ that will buoy the group’s future revenue and earnings clarity.”
http://www.theedgemalaysia.com/in-the-financial-daily/156290-coastal-to-sell-vessels-for-rm492m.html
Measurement in the Balance Sheet
Book values measurement determines the price-to-book ratio. To evaluate the price-to-book ratio, we must understand how book values are measured.
The values of some assets and liabilities are easy to measure, and the accountant does so. He applies mark-to-market accounting, thus recording these items on the balance sheets at fair value (in accounting terms). These items do not contribute to the premium over book value.
But for many items, the accountant does not, or cannot, mark to market. He applies historical cost accounting. U.S. GAAP gives measurement rules for items commonly found on balance sheets, with those carried at fair value and historical cost indicated. International accounting standards broadly follow similar rules.
-----
Example:
Company A Balance Sheet
Cash and cash equivalent $7.764 million
Short term investments $208 million
Long term investments (mainly interest bearing debt securities) $1,560 million.
Comment: A market value is usually available for these securities, so they can be marked to market.
Accounts payable $11,492 million
Long term debt $362 million
Comment: The accounts payable is close to market value and, while the long-term debt is not marked to market, its book value approximates market value unless interest rates change significantly.
So all these items above do not contribute to price premium over book value.
Net accounts receivable $5,961 million
Financing receivables $1,732 million
Accrued expenses $4,323 million
Other "liabilities" $2,070 million
Comment: All the above 4 items involve estimates, but if these are made in an unbiased way, these items, too, are at fair value.
Company A
2,060 outstanding shares
Market Price $20 per share.
Market value of these shares: $41,200 million.
Book value $3,735 million
Therefore the market premium was $37,465 million.
Comments:
The market saw $37,465 million of shareholder value that was not on the balance sheet.
And it saw $37,465 million of net assets that were not on the balance sheet.
With 2060 million shares outstanding,
How does one account for Company A's large market premium of $37,465 million over the book value of its equity?
The large market premium of $37,465 million over the book value of its equity arises largely from
-----
Short term investments $208 million
Long term investments (mainly interest bearing debt securities) $1,560 million.
Long term debt $362 million
So all these items above do not contribute to price premium over book value.
Financing receivables $1,732 million
Accrued expenses $4,323 million
Other "liabilities" $2,070 million
2,060 outstanding shares
Market Price $20 per share.
Market value of these shares: $41,200 million.
Book value $3,735 million
Therefore the market premium was $37,465 million.
The market saw $37,465 million of shareholder value that was not on the balance sheet.
And it saw $37,465 million of net assets that were not on the balance sheet.
With 2060 million shares outstanding,
- the book value per share (BPS) was $1.81 and
- the market premium was $18.19 per share.
- tangible assets, recorded at (depreciated) historical cost, and
- unrecorded assets.
- its innovative "direct-to-customer" process,
- its supply chain, and
- its brand name.
- Nor might we want them to be.
- Identifying them and measuring their value is a very difficult task, and we would probably end up with very doubtful, speculative numbers.
The Market Price-to-Book and Intrinsic Price-to-Book Ratio
The balance sheet equation corresponds to the value equation.
The value equation can be written as:
Value of the firm = Value of equity + Value of debt
or
Value of equity = Value of firm - Value of debt
The value equation and the balance sheet equation are of the same form but differ in how the assets, liabilities, and equity are measured.
The measure of stockholders' equity on the balance sheet,l the book value of equity, typically does not give the intrinsic value of what the equity is worth.
Intrinsic premium = Intrinsic value of equity - Book value of equity
The difference between the market price of equity and its book value is called the market premium:
Market premium = Market price of equity - Book value of equity
If these premiums are negative, they are called discounts (from book value). Premiums sometimes are referred to as unrecorded goodwill because someone purchasing the firm at a price greater than book value could record the premium paid as an asset, purchased goodwill, on the balance sheet; without a purchase of the firm, the premium is unrecorded.
Premiums can be calculated for the total equity or on a per-share basis.
-----
Example:
Company A
2,060 outstanding shares
Market Price $20 per share.
Market value of these shares: $41,200 million.
Book value $3,735 million
Therefore the market premium was $37,465 million.
Comments:
The market saw $37,465 million of shareholder value that was not on the balance sheet.
And it saw $37,465 million of net assets that were not on the balance sheet.
With 2060 million shares outstanding,
The ratio of market price to book value is the price-to-book ratio or the market-to-book ratio.
The ratio of intrinsic value to book value is the intrinsic price-to-book ratio.
In asking such questions, it is important to have a sense of history so that any calculation can be judged against what was normal in the past. The history provides a benchmark for our analysis.
What causes the variation in ratios?
The low P/B ratios in the 1970s certainly preceded a long bull market.
Company A's P/B of 11.0 in 2008 looks high relative to historical averages.
The fundamental investor sees himself as providing answers to these questions. He estimates the intrinsic value of equity that is not recorded on the balance sheet.
You can screen for firms with particular levels of P/B ratios using stock screener from links on the Web.
or
Value of equity = Value of firm - Value of debt
- The value of the firm is the value of the firm's assets and its investments.
- The value of the debt is the value of the liability claims.
- Correspondingly, the net assets are not measured at their values.
- If they were, there would be no analysis to do! It is because the accountant does not, or cannot, calculate the intrinsic value that fundamental analysis is required.
Company A
2,060 outstanding shares
Market Price $20 per share.
Market value of these shares: $41,200 million.
Book value $3,735 million
Therefore the market premium was $37,465 million.
The market saw $37,465 million of shareholder value that was not on the balance sheet.
And it saw $37,465 million of net assets that were not on the balance sheet.
With 2060 million shares outstanding,
- the book value per share (BPS) was $1.81 and
- the market premium was $18.19 per share.
- Investors talk of buying a firm for a number of times book value, referring to the P/B ratio.
- The market P/B ratio is the multiple of book value at the current market price.
- The intrinsic P/B ratio is the multiple of book value that the equation is worth.
- An investor will spend considerable time estimating intrinsic price-to-book ratios and asking if those intrinsic ratios indicate the the market P/B is mispriced.
- P/B ratios in the 1990s were high relative to historical averages, indicating that the stock market was overvalued.
- The medican P/B ratios (the 50th percentile) for the U.S. listed firms were indeed high in the 1990s - over 2.0 - relative to the 1970s.
- But they were around 2.0 in the 1960s.
- The 1970s experienced exceptionally low P/B ratios, with medians below 1.0 in some years.
- Is it due to mispricing in the stock market?
- Is it due to the way accountants calculate book values?
- Could this bull market have been forecast in 1974 by an analysis of intrinsic P/B ratios?
- Were market P/B ratios in 1974 too low?
- Would an analysis of intrinsic P/B ratios in the 1990s find that they were too high?
- Was it too high?
Measurement in the Financial Statements
Balance sheet reprots the stock of shareholder value in the firm.
Income statement reports the flow, or change, in shareholder value over a period.
In valuation terms:
Value and value added have to be measured, and measurement in the balance sheet and income statement is less than perfect.
Income statement reports the flow, or change, in shareholder value over a period.
In valuation terms:
- The balance sheet gives the shareholders' net worth.
- The income statement gives the value added to their net worth from running the business.
Value and value added have to be measured, and measurement in the balance sheet and income statement is less than perfect.
Saturday, 26 December 2009
The Articulation of the Financial Statements (Graphic)
How the Statements Tell a Story
http://spreadsheets.google.com/pub?key=tFepEVcjqq1iGBfbXis2cUA&output=html
The stock of cash in the balance sheet increases from cash flows that are detailed in the cash flow statement.
The stock of equity value in the balance sheet increases from net income that is detailed in the income statement and from other comprehensive income and from net investments by owners that are detailed in the statement of shareholders' equity.
http://spreadsheets.google.com/pub?key=tFepEVcjqq1iGBfbXis2cUA&output=html
The stock of cash in the balance sheet increases from cash flows that are detailed in the cash flow statement.
The stock of equity value in the balance sheet increases from net income that is detailed in the income statement and from other comprehensive income and from net investments by owners that are detailed in the statement of shareholders' equity.
How the Financial Statements Tell a Story: Stocks and Flows
Articulation is the way in which the statements fit together, their relationship to each other.
The articulation of the income statement and balance sheet is through the statement of shareholders' equity and is described by the stocks and flows relation.
Beginning equity
+ Comprehensive income
- Net payout to shareholders
= Ending equity
Balance sheets give the stock of owners' equity at a point in time. The statement of shareholders' equity explains the changes in owners' equity (the flows) between two balance sheet dates, and the income statement, corrected for other comprehensive income in the equity statement, explains the change in owners' equity that comes from adding value in operations.
By recognising the articulation of the financial statements, the reader of the statements understands the overall story that they tell. That story is in terms of stocks and flows. (Stocks here refere to stocks of value at a point in time). The statements track changes in stocks of cash and owners' equity (net assets).
----
Consolidated Balance Sheet of Company A (in millions)
February 1, 2008
Cash and cash equivalent 7764
Total shareholders' equity 3735
February 2, 2008
Cash and cash equivalent 9546
Total shareholders' equity 4328
Consolidated Statement of Income (in millions)
Net Revenue 61133
Total Operating expenses 8231
Operating income 3440
Investment and other income, net 387
Income tax provision 880
Net income 2947
Consolidated Statement of Cash Flows (in millions)
Cash flows from operating activities 3949
Cash flows from investing activities (1763)
Cash flows from investing activities (4120)
Effects of exchange changes on cash and cash equivalents 152
Net (decrease) increase in cash and cash equivalents: (1782)
Cash and cash equivalents at beginning of year 9546
Cash and cash equivalents at end of year 7764
Consolidated Statements of Shareholders' Equity (in millions)
Balances at (February 2, 2007) 4328
Net income 2947
Impact of adoption of SFAS 155 6
Cahnge in net unrealised gain on investments, net of taxes 56
Foreign currency translation adjustments 17
Change in net unrealised loss on derivative instruments, net of taxes (38)
________________________________________________
Total comprehensive income 2988 (Total of all the above)
Impact of adoption of FIN 48 (62)
Stock issuances under employee plans 153
Repurchases (4004)
Stock-based compensation expense under SFAS 123(R) 329
Tax benefit from employee stock plans 3
Balance at (February 1, 2008) 3735
----
A Summary of Accounting Relations
The Balance Sheet (in millions)
Assets
- Liabilities
=Shareholders' equity
Beginning of 2008 fiscal year:
9546 in cash
4328 in equity
Ending of 2008 fiscal year:
7764 in cash
3735 in equity
Cash decreased by 1782
Equity decreased by 593
The Income Statement (in millions)
Net revenue 61133
- Cost of goods sold
= Gross margin
- Operating expenses 57693
= Operating income before interest and taxes (ebit)
- Interest expense & other incomes 387
= Income before taxes
- Income taxes 880
= Income after tax and before ordinary items
+ Extraordinary items
= Net income 2947
- Preferred dividends
= Net income available to common 2947
or
Net revenue 61133
Operating expenses 57693
Other Income & Expenses 387
Pretax Income
Taxes 880
Net Income 2947
Cash Flow Statement (and the Articulation of the Balance Sheet and Cash Flow Statement) (in millions)
Cash flow from operations 3949
+ Cash flow from investing -1763
+ Cash flow from financing -4120
+ Effect of exchange rate 152
= Change in cash 1782
Statement of Shareholders' Equity (and the Articulation of the Balance Sheet and Income Statement) (in millions)
Beginning equity 4328
+ Comprehensive income 2988
- Net payout 3581
= Ending equity 3735
Net Income 2947
+ Other comprehensive income 41
= Comprehensive income 2988
Dividend
+ Share repurchases 4004
= Total payout
- Share issues 153
- Others 270
= Net payout 3581
----
The cash flow statement reveals that the $1782 million decrease came from a cash inflow of $3949 million in operations, less cash spent in investing of $1763 million, net cash paid out to claimants of $4120 million, and an increase in the US dollar equivalent of cash held abroad of $152 million.
But the main focus of the financial statements is on the change in the owners' equity during the year.
The Company A owners' equity decreased from $4328 million to $3735 million over the year by earning $2988 million in its business actiivities and paying out a net $3851 million ($4004 million - $153 million) to its owners (plus those other items in the equity statement $270 million).
The income statement indicates that the net income portion of the increase in equity from business actiivities ($2947 miillion) came from revenue from selling products and financing revenue of $61133 million, less expenses incurred in generating the revenue of $57693 million, plus investment and other income of $387 million, less taxes of $880 million.
So Company A began its fiscal 2009 year with the stocks in place in the 2008 balance sheet to accumulate more cash and wealth for shareholders. Fundamental analysis involves forecasting that accumulation.
For analysis of the fundamentals, the ability to see how the accounting relations is important in developing forecasting tools.
+ Comprehensive income
- Net payout to shareholders
= Ending equity
Cash and cash equivalent 7764
Total shareholders' equity 3735
Cash and cash equivalent 9546
Total shareholders' equity 4328
Total Operating expenses 8231
Operating income 3440
Investment and other income, net 387
Income tax provision 880
Net income 2947
Cash flows from investing activities (1763)
Cash flows from investing activities (4120)
Effects of exchange changes on cash and cash equivalents 152
Net (decrease) increase in cash and cash equivalents: (1782)
Cash and cash equivalents at beginning of year 9546
Cash and cash equivalents at end of year 7764
Net income 2947
Impact of adoption of SFAS 155 6
Cahnge in net unrealised gain on investments, net of taxes 56
Foreign currency translation adjustments 17
Change in net unrealised loss on derivative instruments, net of taxes (38)
________________________________________________
Total comprehensive income 2988 (Total of all the above)
Impact of adoption of FIN 48 (62)
Stock issuances under employee plans 153
Repurchases (4004)
Stock-based compensation expense under SFAS 123(R) 329
Tax benefit from employee stock plans 3
Balance at (February 1, 2008) 3735
A Summary of Accounting Relations
The Balance Sheet (in millions)
- Liabilities
=Shareholders' equity
9546 in cash
4328 in equity
7764 in cash
3735 in equity
Equity decreased by 593
- Cost of goods sold
= Gross margin
- Operating expenses 57693
= Operating income before interest and taxes (ebit)
- Interest expense & other incomes 387
= Income before taxes
- Income taxes 880
= Income after tax and before ordinary items
+ Extraordinary items
= Net income 2947
- Preferred dividends
= Net income available to common 2947
Operating expenses 57693
Other Income & Expenses 387
Pretax Income
Taxes 880
Net Income 2947
+ Cash flow from investing -1763
+ Cash flow from financing -4120
+ Effect of exchange rate 152
= Change in cash 1782
+ Comprehensive income 2988
- Net payout 3581
= Ending equity 3735
+ Other comprehensive income 41
= Comprehensive income 2988
+ Share repurchases 4004
= Total payout
- Share issues 153
- Others 270
= Net payout 3581
Comments:
- Understand how the statements fit together.
- Understand how financial reporting tracks the evolution of shareholders' equity, updating stocks of equity value in the balance sheet with value added in earnings from business activities.
- And understand the accounting equations that govern each statement.
The Footnotes
The Footnotes and Supplementary Information to Financial Statements
The notes are an integral part of the financial statements, and the statements can be interpreted only with a thorough reading of the notes. A lot of information on the financial statements are embellished in the footnotes.
You will see that the footnotes are supplemented with a background discussion of the firm - its strategy, area of operations, product portfolio, product development, marketing, manufacturing, and order backlog. There may be a discussion of regulations applying to the firm and a reveiw of factors affecting the company's business and its prospects. Details of executive compensation also are given. This material, along with the more detailed formal annual report, is an aid to knowing the business but is by no means complete. The industry analyst should know considerably more about the industry before attempting to research a company.
The notes are an integral part of the financial statements, and the statements can be interpreted only with a thorough reading of the notes. A lot of information on the financial statements are embellished in the footnotes.
You will see that the footnotes are supplemented with a background discussion of the firm - its strategy, area of operations, product portfolio, product development, marketing, manufacturing, and order backlog. There may be a discussion of regulations applying to the firm and a reveiw of factors affecting the company's business and its prospects. Details of executive compensation also are given. This material, along with the more detailed formal annual report, is an aid to knowing the business but is by no means complete. The industry analyst should know considerably more about the industry before attempting to research a company.
How Parts of the Financial Statements Fit Together
A Summary of Accounting Relations
The Balance Sheet
Assets
- Liabilities
=Shareholders' equity
The Income Statement
Net revenue
- Cost of goods sold
= Gross margin
- Operating expenses
= Operating income before interest and taxes (ebit)
- Interest expense
= Income before taxes
- Income taxes
= Income after tax and before ordinary items
+ Extraordinary items
= Net income
- Preferred dividends
= Net income available to common
Cash Flow Statement (and the Articulation of the Balance Sheet and Cash Flow Statement)
Cash flow from operations
+ Cash flow from investing
+ Cash flow from financing
= Change in cash
Statement of Shareholders' Equity (and the Articulation of the Balance Sheet and Income Statement)
Beginning equity
+ Comprehensive income
- Net payout
= Ending equity
Net Income
+ Other comprehensive income
= Comprehensive income
Dividend
+ Share repurchases
= Total payout
- Share issues
= Net payout
The Balance Sheet
Assets
- Liabilities
=Shareholders' equity
The Income Statement
Net revenue
- Cost of goods sold
= Gross margin
- Operating expenses
= Operating income before interest and taxes (ebit)
- Interest expense
= Income before taxes
- Income taxes
= Income after tax and before ordinary items
+ Extraordinary items
= Net income
- Preferred dividends
= Net income available to common
Cash Flow Statement (and the Articulation of the Balance Sheet and Cash Flow Statement)
Cash flow from operations
+ Cash flow from investing
+ Cash flow from financing
= Change in cash
Statement of Shareholders' Equity (and the Articulation of the Balance Sheet and Income Statement)
Beginning equity
+ Comprehensive income
- Net payout
= Ending equity
Net Income
+ Other comprehensive income
= Comprehensive income
Dividend
+ Share repurchases
= Total payout
- Share issues
= Net payout
The Statement of Shareholders' Equity
The statement of shareholders' equity starts with beginning-of-the period equity and ends with end-of-the period equity, thus explaining how the equity changed over the period.
For purposes of analysis, the change in equity is best explained as follows:
Ending equity = Beginning equity + Comprehensive income - Net payout to shareholders
----
Beginning equity
+Comprehensive income
- Net payout
___________________
=Ending equity
___________________
This is referred to as the STOCKS AND FLOWS EQUATION for equity because it explains how stocks of equity (at the beginning and end of the period) changed with flows of equity during the period.
Owners' equity increases from value added in business activities (comprehensive income) and decreases if there is a net payout to owners.
Net payout is amounts paid to shareholders less amounts received from share issues. As cash can be paid out in dividends or share repurchases, net payout is stock repurchases plus dividends minus proceeds from share issues.
----
Dividends
+ Share repurchases
_______________
= Total Payout
-Share issues
_______________
= Net Payout
_______________
Comprehensive income includes net income reported in the income statement pl,us some additional income reported in the equity statement. The practice of reporting income in the equity statement is known as DIRTY SURPLUS ACCOUNTING, for it does not give a clean income number in the income statement. The total of dirty surplus income items is called OTHER COMPREHENSIVE INCOME and the total of net income (in the income statement) and other comprehensive income (in the equity statement) is COMPREHENSIVE INCOME:
Comprehensive income = Net Income + Other comprehensive income
----
Net Income
+ Other comprehensive income
________________________
Comprehensive income
________________________
A few firms report other comnprehensive income below net income in the income statement and some report it in a separate "Other Comprehensive Income Statement."
For purposes of analysis, the change in equity is best explained as follows:
Ending equity = Beginning equity + Comprehensive income - Net payout to shareholders
----
Beginning equity
+Comprehensive income
- Net payout
___________________
=Ending equity
___________________
This is referred to as the STOCKS AND FLOWS EQUATION for equity because it explains how stocks of equity (at the beginning and end of the period) changed with flows of equity during the period.
Owners' equity increases from value added in business activities (comprehensive income) and decreases if there is a net payout to owners.
Net payout is amounts paid to shareholders less amounts received from share issues. As cash can be paid out in dividends or share repurchases, net payout is stock repurchases plus dividends minus proceeds from share issues.
----
Dividends
+ Share repurchases
_______________
= Total Payout
-Share issues
_______________
= Net Payout
_______________
Comprehensive income includes net income reported in the income statement pl,us some additional income reported in the equity statement. The practice of reporting income in the equity statement is known as DIRTY SURPLUS ACCOUNTING, for it does not give a clean income number in the income statement. The total of dirty surplus income items is called OTHER COMPREHENSIVE INCOME and the total of net income (in the income statement) and other comprehensive income (in the equity statement) is COMPREHENSIVE INCOME:
Comprehensive income = Net Income + Other comprehensive income
----
Net Income
+ Other comprehensive income
________________________
Comprehensive income
________________________
A few firms report other comnprehensive income below net income in the income statement and some report it in a separate "Other Comprehensive Income Statement."
Shareholders' equity: the retained earnings portion is often the largest component.
Shareholders' Equity
What Does Shareholders' Equity Mean?
A firm's total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity represents the amount by which a company is financed through common and preferred shares.
Also known as "share capital", "net worth" or "stockholders' equity".
Shareholders' equity comes from two main sources.
Shareholders' equity comes from two main sources.
- The first and original source is the money that was originally invested in the company, along with any additional investments made thereafter.
- The second comes from retained earnings which the company is able to accumulate over time through its operations. In most cases, the retained earnings portion is the largest component.
Friday, 25 December 2009
If you fall into a million dollars, you probably aren't set for life
$1 Million: Does It Still Mean You're Rich?
Posted: December 22, 2009 9:32AM
by Douglas Rice
Becoming a millionaire used to mean you were on top of the world. Nowadays, it means you are climbing up the ladder. While a million dollars is completely out of reach for many people, it's just a step along the way for many others. Why? Because it doesn't go as far as it used to.
The term millionaire has been synonymous with being rich ever since we became a country. The person most often credited to be the first American millionaire, Elias Hasket Derby, made his fortune as a privateer during the American revolution. Back then a millionaire did really mean rich.
Also, we all love round numbers. We love to see 1999 become 2000, and our odometer roll over to 100,000 miles. So it's only natural we would fixate on $1,000,000. It's a milestone with a lot of zeros. It's even got an additional comma. Now that's rich – having two commas in your net worth! But what does that get you? Not as much as you would think. (Learn more in Retiring: Is $1 Million Enough?)
Housing
Housing is where most people hold their largest chunk of wealth and with real estate falling considerably in many areas, some might think that the lifestyle a million dollars would provide would be luxurious. But that depends on where you live.
There are plenty of nice places to live that don't cost very much, but according to the California Association of Realtors, the median house price in Palo Alto, Los Altos, Manhattan Beach and Cupertino is over $1 million. The median price for the entire San Francisco Bay Area tops $500,000 and Orange County is right behind at just under that. And those are just averages, not even something special. While other areas of the country aren't nearly this expensive, being a millionaire in some areas just means you paid off the mortgage.
Retirement
Another aspect of becoming a millionaire is not working. If you had a $1 million right now, could you retire and would your money last? This is a simple calculation. If you want to try to live off the interest and you invest the money in tax exempt municipal bonds that pay 4%, then you would have $40,000 a year to live on. (Learn more in What's The Minimum I Need To Retire?)
But that doesn't account for inflation going forward. If $1 million today doesn't feel like much, imagine what it will feel like in 30 years. At 3% inflation compounding for the next 30 years, $1 million dollars will have the purchasing power of $412,000 today and your $40,000 income will feel like $16,500. So retiring when you have $1 million may sound nice, but it's likely that it won't be what many people have in mind when they think of retiring a millionaire.
Instead of living on the interest, you could tap into the principal as well. Those are slightly more difficult calculations. For example, if you were 50 years old right now and wanted to plan for your money to last until you were 95, then you need money for 45 years in retirement. If you stick with the 4% return, then you could withdraw about $48,000 a year. Again this doesn't account for inflation going forward. Each year if prices rise, your standard of living would fall. In this example, you have 45 years of prices going up at 3%. So that last year will feel like $12,600 does today.
Combining Retirement and Real Estate
If we factor in a house, this gets even worse. If we take the price for a house out of the $1 million, even in a reasonable area and not San Francisco, it's going to be a big piece of your net worth and cut into your funds for retirement. For example, if you bought a nice $250,000 home, you would only have $750,000 left to live on. At 4% that would be $30,000 a year or $2,500 a month. That's before inflation takes a bit every year.
These retirement calculations show that even if your house is paid off, that living off a million dollars isn't what it's cracked up to be. And if your house isn't paid off, it's probably not even close to what you want to do.
Bottom Line
So the bad news is that even if you fall into a million dollars, you probably aren't set for life, especially if you are young. But the good news is, you'll still be a millionaire, and that's better than the alternative. (Learn how to make it happen, read 10 Steps To Retire A Millionaire.)
http://financialedge.investopedia.com/financial-edge/1209/1-Million-Does-It-Still-Mean-Youre-Rich.aspx
Posted: December 22, 2009 9:32AM
by Douglas Rice
Becoming a millionaire used to mean you were on top of the world. Nowadays, it means you are climbing up the ladder. While a million dollars is completely out of reach for many people, it's just a step along the way for many others. Why? Because it doesn't go as far as it used to.
The term millionaire has been synonymous with being rich ever since we became a country. The person most often credited to be the first American millionaire, Elias Hasket Derby, made his fortune as a privateer during the American revolution. Back then a millionaire did really mean rich.
Also, we all love round numbers. We love to see 1999 become 2000, and our odometer roll over to 100,000 miles. So it's only natural we would fixate on $1,000,000. It's a milestone with a lot of zeros. It's even got an additional comma. Now that's rich – having two commas in your net worth! But what does that get you? Not as much as you would think. (Learn more in Retiring: Is $1 Million Enough?)
Housing
Housing is where most people hold their largest chunk of wealth and with real estate falling considerably in many areas, some might think that the lifestyle a million dollars would provide would be luxurious. But that depends on where you live.
There are plenty of nice places to live that don't cost very much, but according to the California Association of Realtors, the median house price in Palo Alto, Los Altos, Manhattan Beach and Cupertino is over $1 million. The median price for the entire San Francisco Bay Area tops $500,000 and Orange County is right behind at just under that. And those are just averages, not even something special. While other areas of the country aren't nearly this expensive, being a millionaire in some areas just means you paid off the mortgage.
Retirement
Another aspect of becoming a millionaire is not working. If you had a $1 million right now, could you retire and would your money last? This is a simple calculation. If you want to try to live off the interest and you invest the money in tax exempt municipal bonds that pay 4%, then you would have $40,000 a year to live on. (Learn more in What's The Minimum I Need To Retire?)
But that doesn't account for inflation going forward. If $1 million today doesn't feel like much, imagine what it will feel like in 30 years. At 3% inflation compounding for the next 30 years, $1 million dollars will have the purchasing power of $412,000 today and your $40,000 income will feel like $16,500. So retiring when you have $1 million may sound nice, but it's likely that it won't be what many people have in mind when they think of retiring a millionaire.
Instead of living on the interest, you could tap into the principal as well. Those are slightly more difficult calculations. For example, if you were 50 years old right now and wanted to plan for your money to last until you were 95, then you need money for 45 years in retirement. If you stick with the 4% return, then you could withdraw about $48,000 a year. Again this doesn't account for inflation going forward. Each year if prices rise, your standard of living would fall. In this example, you have 45 years of prices going up at 3%. So that last year will feel like $12,600 does today.
Combining Retirement and Real Estate
If we factor in a house, this gets even worse. If we take the price for a house out of the $1 million, even in a reasonable area and not San Francisco, it's going to be a big piece of your net worth and cut into your funds for retirement. For example, if you bought a nice $250,000 home, you would only have $750,000 left to live on. At 4% that would be $30,000 a year or $2,500 a month. That's before inflation takes a bit every year.
These retirement calculations show that even if your house is paid off, that living off a million dollars isn't what it's cracked up to be. And if your house isn't paid off, it's probably not even close to what you want to do.
Bottom Line
So the bad news is that even if you fall into a million dollars, you probably aren't set for life, especially if you are young. But the good news is, you'll still be a millionaire, and that's better than the alternative. (Learn how to make it happen, read 10 Steps To Retire A Millionaire.)
http://financialedge.investopedia.com/financial-edge/1209/1-Million-Does-It-Still-Mean-Youre-Rich.aspx
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