When Stock Prices Drop, Where's the Money?

When Stock Prices Drop, Where's the Money?

by Investopedia Staff
Monday, March 16, 2009

Have you ever wondered what happened to your socks when you put them into the dryer and then never saw them again? It's an unexplained mystery that may never have an answer. Many people feel the same way when they suddenly find that their brokerage account balance has taken a nosedive. So, where did that money go? Fortunately, money that is gained or lost on a stock doesn't just disappear. Read to find out what happens to it and what causes it.

Disappearing Money

Before we get to how money disappears, it is important to understand that regardless of whether the market is in bull (appreciating) or bear (depreciating) mode, supply and demand drive the price of stocks, and fluctuations in stock prices determine whether you make money or lose it.

So, if you purchase a stock for $10 and then sell it for only $5, you will (obviously) lose $5. It may feel like that money must go to someone else, but that isn't exactly true. It doesn't go to the person who buys the stock from you. The company that issued the stock doesn't get it either. The brokerage is also left empty-handed, as you only paid it to make the transaction on your behalf. So the question remains: where did the money go?

Implicit and Explicit Value

The most straightforward answer to this question is that it actually disappeared into thin air, along with the decrease in demand for the stock, or, more specifically, the decrease in investors' favorable perception of it.

But this capacity of money to dissolve into the unknown demonstrates the complex and somewhat contradictory nature of money. Yes, money is a teaser - at once intangible, flirting with our dreams and fantasies, and concrete, the thing with which we obtain our daily bread. More precisely, this duplicity of money represents the two parts that make up a stock's market value: the implicit and explicit value.

On the one hand, money can be created or dissolved with the change in a stock's implicit value, which is determined by the personal perceptions and research of investors and analysts. For example, a pharmaceutical company with the rights to the patent for the cure for cancer may have a much higher implicit value than that of a corner store.

Depending on investors' perceptions and expectations for the stock, implicit value is based on revenues and earnings forecasts. If the implicit value undergoes a change - which, really, is generated by abstract things like faith and emotion - the stock price follows. A decrease in implicit value, for instance, leaves the owners of the stock with a loss because their asset is now worth less than its original price. Again, no one else necessarily received the money; it has been lost to investors' perceptions.

Now that we've covered the somewhat "unreal" characteristic of money, we cannot ignore how money also represents explicit value, which is the concrete worth of a company. Referred to as the accounting value (or sometimes book value), the explicit value is calculated by adding up all assets and subtracting liabilities. So, this represents the amount of money that would be left over if a company were to sell all of its assets at fair market value and then pay off all of liabilities.

But you see, without explicit value, implicit value would not exist: investors' interpretation of how well a company will make use of its explicit value is the force behind implicit value.

Disappearing Trick Revealed

For instance, in February 2009, Cisco Systems Inc. had 5.81 billion shares outstanding, which means that if the value of the shares dropped by $1, it would be the equivalent to losing more than $5.81 billion in (implicit) value. Because CSCO has many billions of dollars in concrete assets, we know that the change occurs not in explicit value, so the idea of money disappearing into thin air ironically becomes much more tangible. In essence, what's happening is that investors, analysts and market professionals are declaring that their projections for the company have narrowed. Investors are therefore not willing to pay as much for the stock as they were before.

So, faith and expectations can translate into cold hard cash, but only because of something very real: the capacity of a company to create something, whether it is a product people can use or a service people need. The better a company is at creating something, the higher the company's earnings will be and the more faith investors will have in the company.

In a bull market, there is an overall positive perception of the market's ability to keep producing and creating. Because this perception would not exist were it not for some evidence that something is being or will be created, everyone in a bull market can be making money. Of course, the exact opposite can happen in a bear market.

To sum it all up, you can think of the stock market as a huge vehicle for wealth creation and destruction.

Disappearing Socks

No one really knows why socks go into the dryer and never come out, but next time you're wondering where that stock price came from or went to, at least you can chalk it up to market perception.

http://finance.yahoo.com/focus-retirement/article/106739/When-Stock-Prices-Drop-Where

Related:

Focus on Lifelong Investing

The FBM KLCI has risen more than 20% since the beginning of the year.

Year-to-date, several Asian markets including Indonesia and the Philippines have broken passed their record levels while the FBM KLCI has risen more than 20% since the beginning of the year.

http://biz.thestar.com.my/news/story.asp?file=/2010/11/10/business/7395324&sec=business

It's Time to Take Some Profits

GETTING GOING
OCTOBER 17, 2010

By DAVE KANSAS

The stock market has had a heady few weeks. The Dow Jones Industrial Average has mustered above 11000 for the first time since April -- and it has managed to stay there through the early part of the third-quarter earnings season.

Sean Kelly

But the swift rise of the market -- the Dow is up about 10% from its Aug. 31 close -- comes against a backdrop of somewhat unsettling news. The jobless rate remains stuck just below 10% with little respite in sight. The housing market is still very weak, and is enduring further shocks as lenders' foreclosure problems keep getting worse. The political situation seems a bit chaotic. And the global recovery is uneven enough that the Federal Reserve is thinking of yet more extraordinary measures to get things rolling.

Even with those headwinds, the mood among stock investors as we near the end of October is surprisingly upbeat. Third-quarter earnings are coming in better than expected and optimism about the Fed's latest extraordinary plan -- quantitative easing part two, or QE2 -- is rampant in the stock market. We entered the dreaded September-October period in fear; we are leaving it with bliss breaking out.

Such sudden shifts in sentiment, especially with uncertainty on the rise, makes me a little queasy. Given the widespread gains, it might make sense to examine your portfolio now with an eye toward rebalancing, rather than wait for the end of the year. In so doing, you may want to pare back some of the bigger winners and salt away the gains for the coming year.

Here's where things get interesting. The big winners this year have come from several corners, and not just in the stock market. In the U.S., small-cap stocks have outperformed bigger stocks, with various small-cap indexes up 10% to 14% year-to-date. Outside the U.S., emerging markets, especially in Asia, have recorded robust gains. In other words, riskier stock investments seem to have done better than the safer, blue-chip shares.

Away from stocks, other assets also have had decent years. The Barclays Capital U.S. Government Bond index is up 9.4% year-to-date. The Barclays Capital U.S. Aggregate Bond Index is up 8.6% this year. Gold is up about 30%; oil has gained 10%; and food commodities have done well. The Dow Jones-UBS Commodity Index is at a 52-week high. The dollar had a great start to the year, but it has retreated and is down sharply against the yen and up a smidge against the euro.

The one asset class that hasn't done very well this year is cash. Interest rates for cash deposits are extremely low, reflecting the Fed's policy of record-low short-term interest rates. So, in the spirit of rebalancing, where we take from winners and add to the laggards, any portfolio trimming should get parked in cash. It feels terrible to park money in cash at these rates, but there's always something comforting about capital preservation.

In analyzing which winners to winnow, bonds have had a strong run for several years. Some believe that the bond market could be facing bubble-like trouble. Earlier this month, Mexico sold a 100-year bond with a yield of 6%, a highly unusual move that fed talk of a bubble. And corporations have gotten rock-bottom yields, too, with International Business Machines recently selling three-year bonds with a yield of 1%. All of these unusually low yields in the bond market have amplified the bubble chatter. If you've got an outsized bond position, trimming some winnings before year-end makes sense.

In the stock market, blue-chip stocks have underperformed. High-dividend-paying blue chips have grown in popularity recently, but these stocks have still trailed riskier sectors such as small caps, real-estate, transportation and Internet shares. Winnings here should be trimmed probably in the small-cap and real-estate areas first, with an eye toward maintaining (or even adding to) blue-chip positions.

Commodities, which should be less than 10% of your total portfolio, have had yet another good year. I've written critically about gold from $1,000 an ounce to $1,300 an ounce. Nothing like being wrong. Despite the gains, it's hard to see gold going lower when the euro, dollar and yen all want to be weaker.

If commodities have risen above 10% of your total portfolio, you should consider reducing the biggest gainers, which probably would include gold. But given the strong year for stocks and bonds, your commodity position may not require any slimming.

The main reason to rebalance is to keep your overall long-term strategy in place. Usually this means something simple, such as selling highflying bonds and adding to underperforming stocks. But so far this year, a lot of asset classes have done well, making the rebalancing exercise somewhat thornier.

But we live in somewhat thornier times. The Fed is preparing for QE2, which means it will essentially print more money, and central bankers are talking about a desire for more inflation. These are two things that would've been very difficult to imagine just three or four years ago. And they also are a bit contradictory.

Given the still extraordinary nature of our times, banking some winners might make the holiday season that much more enjoyable.

http://online.wsj.com/article/SB10001424052702304898004575556753777592096.html

Related:

The Anxiety of Selling

Taking Profit and Reducing Serious Loss

It's Time to Take Some Profits

When Buying a Stock, Plan Your Goodbye

Don't sell just because the price has gone down

Tips for investors in current market conditions

27 Sep, 2010, 10.29AM IST,
Shubha Ganesh,ET Bureau

Tips for investors in current market conditions

The stock touched the magical figures of 6,000 on the Nifty and 20,000 on the last week. The mood this time around was one of caution with individual busy reducing their stock portfolios. The euphoria was missing due to the fear that the markets will come crashing down again.


The last time they were at 20,000 - sometime in December 2007 - individual investors we desperate to get in. Mutual funds were drawing net positive inflows of around Rs 3,000-5,000 crores from individual investors. Today, at 20,000, there are net outflows everyday and the domestic financial institutions have net sell figures of Rs 3,000-5,000 crores on the negative side, indicating heavy withdrawals.


Upward trajectory to continue


However, such caution and skepticism are healthy signs in a bull market. The Sensex is valued at just 19 times the estimated earnings, compared with a high of about 24 times when the measure reached its record in January 2008. Even though the valuations are not cheap they are not too stretched either. This has led to a reduction in margin of safety while purchasing for investments.


In this bull run, sectors such as banking, FMCG and auto that have led this market to 20,000 are trading at all-time highs. These sectors form a very significant part of the index basket and as long as they continue to perform there is very little threat of a very sharp decline in the stock markets.


New normal


According to analysts, liquidity flows to India will continues as a part of 'new normal'. In the new normal, a sharply-polarised world with deflation or near deflation in the western world and a strong growth, albeit inflationary, in emerging markets exists, they say, where it becomes necessary to invest in the emerging markets to hedge against deflation.


This is also called deflation trade. There is some consensus among market participants that a fundamental rebalancing of the global economy is taking place from developed to emerging markets. With the US Fed acknowledging the slowing of growth in the US, deflation hedging could become more prevalent. The second round of quantitative easing could also increase the liquidity surge to India.


Fundamental analysis works

One important takeaway from this year's market is that it has rewarded handsomely all companies that have performed well and has duly punished those that have slacked in earnings growth and performance. The market has rewarded good performance, and more importantly, those who have respected their equity. Never have markets been so focused on performance metrics and paid such a good price for performance. It was a dream year for analysts and stock-pickers to demonstrate their alphagenerating capabilities.


Investment strategy


Investors of today have to handle their stock investments with two home truths. One that liquidity is here to stay. When liquidity becomes a factor in investment decisions it implies that high quality companies' stocks may not be available cheap anymore.

http://economictimes.indiatimes.com/features/financial-times/Tips-for-investors-in-current-market-conditions/articleshow/6626083.cms

Bull Market: Go by fundamentals, invest with caution

26 Sep, 2010, 05.31AM IST,
Kavita Sriram,ET Bureau

Bull Market: Go by fundamentals, invest with caution

A bull run may be good news for investors. However, must exert extreme caution when attempting to churn out profits from these markets.

Factors that led to bull run

The shot past the 20,000 level for the first time since mid-January 2008. Both NSE and BSE regained highs after a gap of almost 32 months. Investor enthusiasm in oil and gas, capital goods and banking sector stocks led the ascent to glory.

The fast-expanding economy on track after stimulus packages built up the momentum. Most important of all was the sustained foreign institutional investor (FII) interest in the markets that gave the Sensex the final impetus. Inflow of foreign capital and strong economic growth forecasts are credited for the optimism in the markets.

Perils of

Anticipation of a large correction could create panic among investors who could resort to booking profits. This situation is more likely when the index rise has been rapid and unexpected. If the bull run is largely owing to foreign capital, the market's direction can be highly unpredictable. This is because foreign investor sentiments are impacted with global developments and trends.

So, a recession or political development elsewhere across the globe can lead to FII selling here. Some analysts could declare a bull run as sustainable and advise investors to enter the markets. There may be many who would advice caution citing a likely correction. These mixed signals could confuse an investor who would watch the bull phase pass, simply waiting by the sidelines.

Golden rules for investing in bull markets

Here are a few pointers for investors in a bull run:

Go by fundamentals

Identifying a possible bull run well ahead and entering at this early stage will give ample opportunity to book profits. However, pick up stocks that have strong fundamentals that wouldn't let you down in volatile times.

Stay within risk appetite

Invest according to your risk appetite. Small-cap stocks have tremendous growth potential. But they carry a high element of risk. On the contrary, largecap stocks are less risky with only little headroom to climb higher.

Balance portfolio

Ensure your overall portfolio is well-diversified and strike a balance between your debt and equity investments. Do not borrow to invest in the markets. Do not divert funds from your savings kitty to the equity market. Do not be deceived by a bubble that has artificially pushed the markets up. Investing systematically with a long-term perspective in mind is the best market strategy.

Stick to goals

Deter from buying or selling high volumes. Do not invest heavily in heated stocks when the index is at a peak. Avoid chasing the crowd. Stick to your investment goals. Some investors who make money in bull markets become over-confident and start taking greater risks. Rely more on market and company research rather than solely on instincts. Do not get carried away by rumours, peer activities and forecasts. Not many can actually chase market indices. 

http://economictimes.indiatimes.com/features/financial-times/Bull-Market-Go-by-fundamentals-invest-with-caution/articleshow/6626132.cms

Investment Experience and Stock Market History Are Important

Ben Graham's 57 years on Wall Street were most instructive, and he expressed his appreciation to them when he alluded to his "old ally, experience". 

To an important extent, you learn to invest by investing. Too often we have to make the same mistake as others before the lesson is instructive. All of us, it seems, must learn through the school of hard knocks. We would do better to learn from the likes of Ben Graham. 

Graham was a careful student of stock market history, and he placed great emphasis on it. He thought that "No statement is more true and better applicable to Wall Street than the famous warning of Santayana : `Those who do not remember the past are condemned to repeat it.'" Graham could ridicule investors grasp of stock market history, referring to their "proverbial short memories". 

It was Graham's knowledge of the long sweep of stock market history that prompted his view that ". . . the investor may as well resign himself. . .to the probability . . . that most of his holdings will advance, say, 50% or more from their low point and decline the equivalent one-third or more from their high point at various periods in the next 5 years." Historical insight is critical to successful investing. It is only through knowledge of the past that we can tell anything about the future.

Dow Theory - Market Phases

Dow Theory - Market Phases

Primary movements have three phases. Look out for these general conditions in the market:

Bull Markets

Bull markets commence with reviving confidence as business conditions improve.
Prices rise as the market responds to improved earnings
Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.

Bear Markets

Bear markets start with abandonment of the hopes and expectations that sustained inflated prices.
Prices decline in response to disappointing earnings.
Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value.

Dividend Yield

Dow believed that stocks yielding below 3.5 percent were over-priced "except there be some special reason." Richard Russell analyzed the dividend yield on the Dow from 1929 to 1959 and found that the market tended to reverse when yields had fallen to between 3 and 4 percent.

Since the 1960s the dividend yield on the Dow and S&P 500 has declined to around 2 percent. We should be careful not to leap to the conclusion that the market is way over-valued. Examine the S&P 500 chart below and you will observe that the Dividend Payout Ratio declined over the same period, from 60 to 30 percent.



Companies are retaining a higher percentage of earnings, preferring to return capital to stockholders by way of share buy-backs rather than by way of dividends. This favors investors who prefer the enhanced earnings growth offered by share buy-backs, without the tax implications associated with dividends.

We should therefore switch our focus to earnings yield, rather than dividend yield, in order to avoid any distortion. An earnings yield of below 5.0 percent would offer a similar over-bought signal to a dividend yield of less than 3.5 percent (0.035/0.7=0.05). This translates to a price-earnings (PE) ratio above 20. I use a PE ratio above 20 to signal that a bull market is entering stage 3.

Perfect Your Market Timing
Learn how to manage your market risk.

Volume Confirmation

Increased volume on declines and dull activity on rallies provide additional evidence of an overbought market. Conversely, lack of activity on declines and increased volume during rallies indicate an oversold market. See Volume Patterns for further detail.

http://www.incrediblecharts.com/technical/dow_theory_market_phases.php

Bull Market

Typically a bull market will accelerate at the beginning and end of the cycle

Bull Market Gains (1940 - Current)

The bull market that began on March 9, 2009 has gotten off to the strongest start of any bull market in U.S. stocks since 1940.

http://seekingalpha.com/article/160154-strong-start-for-bull-market-but-investors-are-nervously-eyeing-the-exits

Interactions between Fundamental value, Market Sentiment, Business Cycle and Market Price

Why stay invested during market declines

Click here for an enlarged version

Stay Invested
For long-term investors, staying invested makes more sense than moving in and out of the market at the first sign of bad news.

Over the past 60 years, bull markets have lasted longer (42 months on average) than bear markets (14 months on average) and have more than made up for the periodic market declines.
Bull markets have begun during economic recessions and expansions and at all level of rates.  And while it is impossible to predict when a bull market will begin, it is possible to miss one by waiting on the sidelines.

Federal fund rates
The interest rate at which private banks lend money for overnight loans.  The Fed generally raises the target federal funds rate to slow economic growth and lowers the rate to facilitate growth.

The Bull Run may continue for quite some time but has become more vulnerable to a correction.

Time and time again, some investors have been forced to sell on the cheap when they read reports that there would be tightening in lending, plans to withdraw stimulus measures as well as valuations being overstretched.

Time and time again, some of them sell during a correction only to be caught flat-footed when a rebound occurs almost immediately.  For example, they bought into a stock at $1, rode the bull market to $1.20 and sold at $1.10 when there was a correction.  The share price immediately shot up to $1.15 before they even knew what happened and missed the next wave to $1.30.  While some of them would have given up on this stock, there are others who jump back in at $1.30 only to sell it at $1.20 during the next correction.

They are scared, so they sell.  This is human nature and there is nothing we can do about it unless we can stand firm and not sell if we are able to identify that we are in the midst of a Bull Run, so selling out for a small profit is never an option.

Yes, the Bull Run is still very much alive but has stalled after a spectacular rally from March.

Much of the easy money has been made and the investors are now treading in treacherous territory where the chances of a correction are high, especially when most people are sure that growth in 2010 will be sluggish.

Even US Federal Reserve Chairman Ben Bernanke has admitted that 2010 will not be a wonderful year.  This has made investors sit up and rethink their strategy with some choosing to take profit or continue staying on the sideline until the clouds clear.

With several uncertainties still looming, it is no wonder that investors refuse to chase the rally preferring to sell every time the rally reaches a fresh recent high.  However, they have to remember that they are still in a Bull Run that may continue for quite some time but has become more vulnerable to a correction - in particular a correction that has to be as deep as 10% - when economic fundamentals in the first quarter of 2010 cannot support the rally.

Share Investment
Issue 372
14/12/09 - 27/12/09
www.sharesinv.com

Read:

BELIEVING A BULL MARKET

and also:

THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):

1. THRIVING IN EVERY MARKET
2. MR. MARKET
3. SUITABLE SECURITIES AT SUITABLE PRICES
4. PAYING RESPECT TO THE MARKET
5. TIMING VERSUS PRICING
6. BELIEVING A BULL MARKET
7. THE PAUSE AT THE TOP OF THE ROLLER COASTER
8. MAKING FRIENDS WITH A BEAR
9. BARGAINS AT THE BOTTOM
10. SIGNS AT THE BOTTOM
11. BUYING TIME
12. IF YOU ABSOLUTELY MUST PLAY THE HORSES

The Bulls and the Bears

In a normal day of trading, many stocks will go up in price, while otheres will go down.

But occasionally, there's a stampede when the prices of thousands of stocks are running in the same direction, like bulls at Pamplona.  If the stampede is uphill, we call it a "bull market."

When the bulls are having their run, sometimes 9 out of 10 stocks are hitting new highs every week.  People are rushing around buying as many shares as they can afford.  They talk to their brokers more often than they talk to their best friends.  Nobody wants to miss out on the good thing.

As long as the good thing lasts, millions of shareholders go to bed happy, and wake up happy.  They sing in the shower, whistle while they work, help old ladies across the street, and count their blessings every night as they put themselves to sleep reviewing the gains in their portfolios.

But a bull market doesn't last forever.  Sooner or later, the stampede will turn downhill.  Stock prices will drop, with 9 out of 10 stocks hitting new lows every week. People who were anxious to buy on the way up will become more anxious to sell on the way down, on the theory that any stock sold today will fetch a better price than it would fetch tomorrow.

How much longer will the rally last? All good things have to come to an end.

How much longer will the rally last?
At the end of each month, BBC World News business presenter Jamie Robertson takes a look at the world's major stock markets. This month he considers what will happen when the global rally comes to a halt.


--------------------------------------------------------------------------------



The price of copper has almost doubled in the past year
A world where everything is going up in price and inflation is close to zero should be a happy and contented place.

It is not quite turning out that way.

Investors cannot put the idea out of their minds that all good things have to come to an end.

It is just no one yet can figure out how - or how messy an end it is going to be.

Huge gains

First, the good news.

Had you invested in a spread of Dow stocks a year ago you would have seen a 24% gain - despite the virtual wipe-out in the spring. The Nasdaq has seen a 51% gain, the FTSE 29%.

Bonds, treasuries as well as corporate bonds, have all shown healthy returns - even though they traditionally head in the opposite direction to stocks, benefiting from low growth scenarios. Copper is up almost 100%.

Early this year, metals prices started to lose touch with fundamentals

Andrew Cole, analyst
It seems everything investors have touched has turned to gold - which, I might add, is up over 70% on the year.

And that's without even mentioning some of the super-performers: the miners Fresnillo and Kazakhmys have risen - wait for it - 597% and 516% respectively.

Now these numbers have a somewhat narrow relevance in that November last year marked the low point for many commodity stocks, while the bulk of the global markets hit bottom in March.

Nevertheless, the point is we are riding a bull market goaded on by an indiscriminate, possibly blind and certainly irrational exuberance.

Commodity boom

The exuberance comes from cheap money.

As long as the liquidity remains the market will not fail, but we all know that at some point monetary policy will start to tighten and the stimulus packages will run out.

Then as fundamentals start to come back into play, which of the markets will turn out to have been an illusion?

The date of this turn-around seems to be around the middle to end of next year.

A number of economists are pointing to June or July for a raising of interest rates in the euro-zone, while the US is likely to wait until the end of the year.

However, markets are very good at pre-empting these things and they may well stumble several months before the actual moves are made.

Commodity prices are particularly sensitive to the Chinese economy that really lifted them out of their trough at the end of 2008, and the weakness of the dollar.

Investors moved money into commodities as a hedge against the dollar and a bet on recovery aided, if not led by China. But, again, it is the weight of money that has caused the rises.

So it is no accident that mining companies dominate the list of best performers on the FTSE 100 over the last year.

'Very shaky'

But Andrew Cole, metals analyst at Metal Bulletin, said: "Early this year, metals prices started to lose touch with fundamentals, which are still pretty poor.

"Outside of China, demand has still not picked up. There is a lot of risk and demand is very shaky. And there is no sign that stockpiles are coming down either.


Those who invested a year ago have had a good run

"But the truth is that investors are looking for places to put cash, and metals still look like a good bet," he added.

The trigger point for a commodity sell-off could be a strengthening of the dollar (or a corresponding weakening of the euro), especially if it happens in conjunction with a slowing of the Chinese stimulus package and a tightening of monetary policy, all of which are possible at varying points over the next 12 months.

The bond market is perhaps the most curious bull market of all, since it seems to be built on such a colossal supply of debt.

While the Dubai crisis rocked the sovereign debt markets - there was no real fear of a sovereign default as Dubai World is a state-owned company, not the state itself.

The real worries are closer to home in Greece, Ireland and Hungary.

UK concerns

Deutsche Bank believes Greece's public debt-to-GDP ratio could soon reach 135%. Meanwhile in the UK if the government doesn't get to grips with its debt in the next 12 months, the bull market in treasuries there may also come to an abrupt halt.

But, and here's the twist, if it does get to grips with it, such self-discipline could mean curtains for the equity bull market.

Howard Wheeldon, senior Strategist at BGC Partners, believes the US has a diverse and dynamic enough economy to continue its recovery.

But he paints a gloomy picture for the UK: "What will happen then to equities when they start slashing jobs in the public sector, when they start putting up taxes, ending the subsidies to things like car buying, and start doing all the things they have to do to bring the debt under control?

"Many of the equities in the UK have a cushion in that they have a great deal of exposure to the international economy, but the effect on the UK economy of all that austerity is going to be profound."

http://news.bbc.co.uk/2/hi/business/8393574.stm

This bull market is not over. The bargain phase is over.

Anthony Bolton: this bull market is not over
Financials such as banks, property and insurance remain Bolton's top picks.

By Reuters staff
Published: 10:05AM BST 21 Oct 2009


Anthony Bolton: the bull market is not over Fidelity's Anthony Bolton said global stocks were still in a bull market and it was not too late to invest now, with technology and consumer sectors expected to lead the next phase of the bull run.

Bolton, whose contrarian bets made him a top UK fund manager for over two decades, told a news conference on Wednesday that growth stocks would be in the limelight, while commodities and industrial companies were running out of steam after their rally.

"The bargain phase is over. But despite the fact the market is well off lows, we expect the bull market to go on. It's a multiyear bull market," Bolton said in Seoul on a trip to mentor young Fidelity portfolio managers in Asia. Bolton is president for investments at Fidelity International, an affiliate of Boston-based Fidelity Investments, the world's biggest mutual fund firm.

He said the first phase of the bull market was ending this year or by the first quarter of next year, but long-term valuations were still attractive.

Bolton, who does not give much weight to economic forecasts for making stock market assessments, views the global economy as being in a recovery phase and unlikely to fall into a recession, although the pace of the recovery would lose steam next year.

Financials such as banks, property and insurance remain his top picks, based on their pre-provisioning valuations, but regulation would be a key risk to the sector.

"I still think it is right to own financials ... I generally found after financial crisis that you can own financials [for] two to three years," Bolton said, citing "six banking crises" he has seen in his investment career.

The London-based executive said inflation would not be a threat to stocks in the next couple of years because of low growth in Western markets, and the current environment of low economic growth and low interest rates was positive for stock markets.


http://www.telegraph.co.uk/finance/personalfinance/investing/6395393/Anthony-Bolton-this-bull-market-is-not-over.html

Bull market

Share prices are consistently rising. Think “bull in a china shop” – excited, but potentially dangerous

BELIEVING A BULL MARKET

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:

• 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.”
  

Just a reminder not to be too carried away by the rising market.

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.

A nice quotation: We believe in taking advantage of temporary market downturns to position our portfolios for the long term.

Everyone is a hero in a bull market

Psychologists have identified that it is human nature to attribute our wins to our skill and our losses to our bad luck. Don't fall for this trap.

With trading and investment, luck often parades as skill, especially when a market is doing well. During a bullish run in the stock market you will often meet someone who is very happy with their ability to pick the right stocks, because they have backed one that has performed well.

But in the same way that a rising tide lifts all boats, even the rusty ones, many stocks do well in a bull market, even if they're nothing special. So the profit may have more to do with favourable big picture events at the time, such as a strong economy or falling interest rates, than with anything company specific. This really means that the person was lucky rather than skilful.

Be mindful of the old chestnut that 'everyone is a hero in a bull market'. As prices went higher and higher, they increased their investment sizes, so that when the crash came they had far more money at risk than they would have imagined just a year earlier. It ended badly. Profits tempted them in, and losses forced them out.

Bull and Bear Stock Markets Two Sides of Same Coin

Bull and Bear Stock Markets Two Sides of Same Coin
By Ken Little, About.com

Bull and bear stock markets are two sides of the same coin.
Long-time investors know that bear markets are setting up the next bull market.
They also know that bull markets don’t run forever.
The longest running bull market ever was from 1990 – 2000.

Bull or Bear Market
It is impossible to know when a bull or bear market is officially over except through the 20-20 vision of history.
All bull and bear markets will exhibit periods that look like reversals, but are just momentary before the bull or bear regains control.
We now know that the bull market ended in March 2000, but at that moment, it wasn’t clear the party was over.
The three-year bear market that followed was pushed by the tragedy of 9/11 and a recession.

Bottom of Market
CNN pointed out that the Dow bottomed out at 776 in October of 2002.
From that point, the market has gone on to record heights.
Long the way, there have been some significant dips, but followed by a continuation of strong upward pressure.
This is all easy to see now, but when you are gasping for air as your portfolio value plummets, it’s not so easy to step back for perspective.
In the end, good companies have a better chance of weathering storms the sweep the market and the economy.

Necessary Bears
Bear markets perform the necessary service of deflating values and sweeping the market clean of stocks that are weak and riding on fads alone.
Your faith in solid fundamentals will usually pay off over time, but even a great company’s stock can get banged around in a tough market.
The lesson here is that stocks, as illustrated by the Dow, are good long-term investments, but dangerous short-term bets.

Comment: According to Suze Orman, we are in a secular bear market starting from the year 2000. She opines this will last 15 years. In between 2000 and 2015, there will be the occasional cyclical bull market lasting a few months to a few years.

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