The Anxiety of Selling

A vexing question facing investors during market sell-offs is whether to join the pack.  For value investors, the answer is no, but the more pertinent question is when to sell.

Value investors set selling criteria at the time of purchase.  Their attitude in buying is to select stocks that are least likely ever to trigger the criteria for selling.

But business change, and when they deteriorate, their shares should be sold, just as the owner of a business sometimes must decide to close down.  When selecting stocks, value investors specify what deterioration means for purpose of selling.  The logic is simple:  The same factors used to select and avoid stocks are used to decide which stocks to sell and when.


Sales are indicated when the key factors supporting an original buy are gone.
Here is a summary of such factors:

Internal:  dubious management behaviour, vague disclosure or complex accounting, aggressively increased merger activity, dizzying executive compensation packages.

External:  intensifying new competition, disruptive technological onslaughts, deregulation, declining inventory and receivables turns.

Economic:  shrunken profit margins; declining returns on equity, assets, and investment; earnings erosion; debt increased aggressively in relation to equity; deterioration in current and quick ratios.

Value investor avoid selling when bad news is temporary.  Single-quarter profit margin slippage should provoke questions, but not sales orders.  If investigation shows deeper problems, then the condition might be permanent and selling indicated.  Permanent deterioration requires more evidence.

When in doubt concerning whether deterioration is temporary or permanent, value investing might include a hedging strategy.  This would call for selling SOME BUT LESS THAN ALL SHARES HELD.

Value investors never sell solely due to falling market prices ('emotional value').  They require some evidence related to the declining intrinsic value of the business to warrant a revision in the hold-or-sell calculus.  Stock price fluctuations are far too fickle to influence such an important decision.

In the case of a preset policy to sell when price reaches a certain high level (overpriced), many value investors follow the same mixed strategy adhered to when unsure whether a development is permanent or temporary:  SELLING SOME, BUT NOT ALL.


Main Points:
Many financial experts advise the selling of part of the stock. The rest is left to grow further. In this way you get part of your profits and let the rest generate further returns.

Know When to Sell

Don't sell just because the price has gone up or down, but give it some serious thought if one of the following things has happened. 

• Did you make a mistake buying it in the first place?
• Have the fundamentals deteriorated?
• Has the stock risen too far above its intrinsic value?
• Is there something better you can do with the money, that is, you can find better opportunities?
• Do you have too much money in one stock, taking up too much space in your portfolio?

When should a stock be sold?

In a portfolio of good quality stocks bought at fair or bargain price, there are usually few reasons for selling.  However, the businesses of these companies need to be tracked regularly and their quarterly results announcements followed.

When should a stock be sold?  

Firstly, if the fundamentals of the stock are deteriorating, the stock should be sold urgently.  

Another good reason would be when the stock is overpriced.

• Be alert when the PE of the stock has risen by more than 50%above its usual average PE. 
• Reappraise the fundamentals and valuations of this stock, in particular, its future earnings growth potential. 

It maybe timely to cash out on a portion or all of a stock if

• the present high PE cannot be justified or
• if the present high PE has run ahead of the fundamentalsof the stock.

Related:
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

Factors influencing decision making process-Stock Market

Rational Thinking about Irrational Pricing

Depressed investors cause depressed stock market prices.

Selling pressure mounts and drives prices down.  Investors possessing even modest degrees of aversion to loss capitulate quickly, and the less fearsome succumb soon after.

A downward spiral ensues.

Value investors avoid these scenarios by forming a clear assessment of their averseness to loss.  

Only having assessed this characteristic honestly do they brave the choppy waters of stock picking.  

One way to grasp one's own loss aversion is to recognize that most people experience the pain of loss as a multiple compared to the joy of gain.  The average person greets losses with aversion on the order of about 2.5 times their reception of winnings.

The greater one's loss aversion, the greater value investing's appeal.  For the most acutely loss-averse investors, pure value investing is most suitable (Graham was extremely risk averse).

Value Investing: Intrinsic Values versus Emotional Values (Market Prices)

Value investing works if stock prices fluctuate around business value.  ONLY then can stocks be bought at discounts to business value (or sold at premiums to business value).

Value investors believe that markets price stocks in ways that produce such gaps.

Graham's metaphor described this behaviour as Mr. Market, viewing market action as the collective psychological behaviour of human beings prone to periods of excessive optimism and pessimism.  The conception yields several insights for what value investing is.

Numerous complex factors influence stock market prices.  The idea that anyone can predict the outcome of this process (market timers), or that it works in a way that yields prices just equal to value (efficient market hypothesis followers), is far-fetched.  Value investing considers trying to measure market sentiment a waste of time.  Value investing focuses primarily on business value (intrinsic value), not market price (emotional value placed by the market.).

Emphasizing businesses over prices enables value investors to know that owning stock means owning an interest in a going concern.

• That mental quality promotes the discipline necessary to define a circle of competence, do financial analysis, and assess value-price (intrinsic value-emotional value) relationships.  
• Pervasive market price data makes it harder for equity investors to appreciate that they are part owners of a business, making disciplined analysis elusive.

The only reason to consider market sentiment is because in times of general economic despair and market malaise, the odds of successful stock picking rise.  Three factors contribute:

1. there are more companies likely to be priced below value,
2. there are fewer investment competitors likely to wade into the thicket, and,
3. the media and regulatory pressure tend to promote quality management and conservative accounting.

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

When Buying a Stock, Plan Your Goodbye

PERSONAL FINANCE
JANUARY 14, 2007

When Buying a Stock, Plan Your Goodbye


By ANJALI CORDEIRO

Added a new stock to your portfolio? It's time to think about selling.

No, we don't mean you should unload that promising new holding tomorrow. But what you should do, before any more time goes by, is think carefully about when you might sell down the road.

Choosing when to let go of a stock can be tricky. 

• Investors are often reluctant to admit they were wrong and tempted to hang on to losers in the hope of a turnaround. 
• Judging when a winning stock has peaked can be just as perplexing.

A well-thought-out game plan for when to sell raises the odds that your decision will be rational rather than emotional. That may help maximize your returns.

"The sell decision is the most important decision you can make" in investing, says Barry James, president of James Advantage Funds in Xenia, Ohio. "Even if you buy randomly and have a good sell discipline, you can probably outperform the market over a period of time."

Here's a look at a few selling strategies professionals rely on.

Sell When Profits Deteriorate
A sharp earnings disappointment can be a good signal to sell because it is often followed by more bad news, says David Kovacs, a senior portfolio manager at Turner Investment Partners in Berwyn, Pa. "It's easier to sell and move on to another idea, rather than holding on to the stock and seeing potentially significant further declines," he says.

In 2004, he and other holders saw shares of eBay (EBAY) soar from $32 to around $58 by year end. But in January 2005, the stock plunged to almost $40 on a weak financial forecast, and that's about when Mr. Kovacs's firm sold. The stock tumbled further, back into the low 30s, over the next three months. (These prices are adjusted to reflect a 2005 stock split.)

"When the first chunk of bad news comes out, don't just sit there," concurs Daniel Morgan, portfolio manager at Synovus Investment Advisors in Atlanta. This can be particularly applicable to smaller, fast-growing companies that trade largely on expectations of future growth.

Still, Mr. Morgan cautions investors to sell only if the news reflects a fundamental shift in the business. Remarks from television pundits or analysts are usually bad reasons to sell a stock, he says.

Pick a Price Target
Vince Gallagher, co-portfolio manager of Needham Growth Fund in New York, says that when his fund buys a stock, the managers usually have a target sale price based on the earnings outlook and the potential for the company to grow its business.

For instance, they bought disk-drive company Seagate Technology (STX) at around $12 a share when it went public at the end of 2002. The team decided to reconsider their position when the stock got to about $25, because they felt at that price the stock would be trading at a hefty multiple to expected future earnings. In late 2003 the stock crossed $25, and the fund did sell some of its shares, but not all.

In hindsight, Mr. Gallagher wishes the fund had sold more, because the stock started falling soon after. "You can get carried away with a stock when it does well," he notes. "The lesson we've learned is that you should have a target when you buy a stock, and you should stick to the target."

Mr. Gallagher does, however, suggest investors rethink their price target if there is a big change in earnings or sales.

Monitor Reality vs. Rationale
Investors need to be very clear on why they bought a stock; they should review their rationale periodically and should also rethink the position when the reason no longer holds, says Craig Hodges, co-portfolio manager of the Hodges Fund in Dallas.

In simple terms, he says: "If the story changes [for the worse], get out of the stock."

About four years ago, his fund bought XM Satellite Radio (XMSR) at around $3 a share. Mr. Hodges initially thought the stock was worth $15 to $16, but raised his target as he saw XM wasn't just signing up individuals, but was also brokering deals with car companies. He figured the subscriber growth would eventually lead the company to profitability.

Mr. Hodges sold at around $35 in early 2005, sometime after an annual meeting at which executives of the still-unprofitable firm "spoke about subscriptions, but said nothing about making money." His thesis of how subscription levels would help the firm's financials hadn't played out as expected; the stock seemed pricey.

His decision to sell proved astute, since he bagged a tidy profit and the shares started sliding soon after. XM Satellite closed Friday at $17.12. a share. Mr. Hodges's firm recently repurchased the stock at a much cheaper $10.

Keep an Eye on Trends
If the market appears to be trending lower, investors may want to pare their positions slightly, suggests Mr. Morgan of Synovus. But "you don't want to sell out completely," he says. "You want to take some money off the table to preserve capital and then re-examine the market at a later date."

At such times, investors may want to first pull out of their smallest, riskiest and most volatile holdings, says Scott Billeadeau, director of small- and mid-cap growth strategies at Fifth Third Asset Management in Minneapolis.

That said, some professionals believe investors can generate solid returns by focusing solely on finding promising stocks -- and not trying to "time" the market.

"A lot of times when things look the bleakest, is when the market does well," says Mr. Hodges. "We've given up on the market prediction business and just focus on individual companies."

Compare P/E to the Past
Investors should consider selling a stock if its price-to-earnings ratio rises well above its historical levels, says Mark Coffelt, chief investment officer for the Texas Capital Value Funds in Austin.

But a slight overvaluation may not be a sure reason to sell, he has found. Mr. Coffelt's firm bought employment-services concern Manpower (MAN) in 2005 at a P/E ratio of 19 -- lower than its historical average of about 21 -- and sold last year at around $62, when the ratio was 22.

The stock rose about 40% over that period, and the holding period was long enough to qualify for long-term capital-gains tax treatment. Still, the stock has risen further, closing Friday at $76.43.

"It wasn't severely overvalued, and we could have held it a little longer," Mr. Coffelt now says. "In hindsight, you always know what you should have done."





http://online.wsj.com/article/SB116873345610176393.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

Evaluating a Stock

HOW-TO GUIDE HOME
INVESTING

Evaluating a Stock

Main points:

The most common measure of a stock is the price/earnings, or P/E ratio, which takes the share price and divides it by a company's annual net income.

Generally, stocks with P/Es higher than the broader market P/E are considered expensive, while lower-P/E stocks are considered not so expensive.

Don't automatically go for stocks with low P/Es simply because they are cheaper. Cheap stocks aren't always good stocks.


The following is adapted from “The Complete Money and Investing Guidebook” by Dave Kansas.

In assessing investments such as stock, investors consider the stock’s valuation, strategy, plans for diversification and appetite for risk. Stocks are evaluated in many ways, and most of the common measuring sticks are easily available online or in the print and online versions of The Wall Street Journal.

The most basic measure of a stock’s worth involves that company’s earnings. When you buy a stock, you’re acquiring a piece of the company, so profitability is an important consideration. Imagine buying a store. Before deciding how much to spend, you want to know how much money that store makes. If it makes a lot, you’ll have to pay more to acquire it. Now imagine dividing the store into a thousand ownership pieces. These pieces are similar to stock shares, in the sense that you are acquiring a piece of the business, rather than the whole thing.

The business can pay you for your ownership stake in several ways. It can give you a portion of the profits, which for shareholders comes in the form of a periodic dividend. It can continue to expand the business, reinvesting money earned to increase profitability and raise the overall value of the business. In such cases, a more valuable business makes each piece, or share, of the business more valuable. In such a scenario, the more valuable share merits a higher price, giving the share’s owner capital appreciation, also known as a rising stock price.

Not every company pays a dividend. In fact, many fast-growing companies prefer to reinvest their cash rather than pay a dividend. Large, steadier companies are more likely to pay a dividend than are their smaller, more volatile counterparts.

The most common measure for stocks is the price to earnings ratio, known as the P/E. This measure, available in stock tables, takes the share price and divides it by a company’s annual net income. So a stock trading for $20 and boasting annual net income of $2 a share would have a price/earnings ratio, or P/E, of 10. Market experts disagree about what constitutes a cheap or expensive stock. Historically, stocks have averaged a P/E in the mid teens, though in recent years, the market P/E has been higher, often nearer to 20. As a general rule of thumb, stocks with P/Es higher than the broader market P/E are considered expensive, while stocks with a below-market P/E are considered cheaper.

But P/Es aren’t a perfect measure. A company that is small and growing fast may have a very high P/E, because it may earns little but has a high stock price. If the company can maintain a strong growth rate and rapidly increase its earnings, a stock that looks expensive on a P/E basis can quickly seem like a bargain. Conversely, a company may have a low P/E because its stock has been slammed in anticipation of poor future earnings. Thus, what looks like a “cheap” stock may be cheap because most people have decided that it’s a bad investment. Such a temptingly low P/E related to a bad company is called a “value trap.”

Other popular measures include the dividend yield, price-to-book and, sometimes, price-to-sales. These are simple ratios that examine the stock price against the second figure, and these measures can also be easily found by studying stock tables.

Investors seeking better value seek out stocks paying higher yields than the overall market, but that’s just one consideration for an investor when deciding whether or not to purchase a stock.

Picking stocks is much like evaluating any business or company you might consider buying. After all, when you buy a stock, you’re essentially purchasing a stake in a business.


http://guides.wsj.com/personal-finance/investing/how-to-evaluate-a-stock/?mod=rss_WSJBlog/#mod=how_to_widget

How to Time The Market

COMMON SENSE
SEPTEMBER 25, 2010
How to Time The Market

By JAMES B. STEWART

Is the stock market losing its predictive powers?

We know the market anticipates economic activity, which is why it is pointless to buy stocks only after good news has been published. Stock prices are one of the leading economic indicators. The rule of thumb has always been that stocks anticipate the broad economy by about six months.

But now that it is official, and we know from the National Bureau of Economic Research that the Great Recession began in December 2007 and ended in June 2009, the market's crystal ball is looking a little cloudy.

The Standard & Poor's 500-stock index peaked at 1565 in October 2007. By Nov. 23 it had dropped nearly 8%, a painful fall but not the bear-market drop of 20% or more that traditionally signals a recession. As the recession actually started, the market actually rallied, with the S&P reaching 1427 in May 2008. The market gave investors little or no warning of the grave crisis to come.

The S&P hit a bottom of 677 in March 2009, less than three months before the recession ended, and rose a sharp 30% by May. That was a pretty clear signal, although the forecast came three months late.

Given that it reflects the collective wisdom of millions of investors, the market may be the best prognosticator we have. But it's just not good enough. These recent results reinforce my belief—and a fundamental premise of this column—that no one can predict the future. It is not only futile but counterproductive to invest based on our feelings about where the market is headed next. Sadly, for most investors that approach leads to buying high and selling low, which is anathema to the Common Sense system.

I believe in a disciplined approach to personal investing that minimizes emotions in decision-making, respects the past, which is knowable, and never tries to predict the future, which is not. I share my decisions in this column and the results are on display for all to see.

By following the Common Sense system, I never buy stocks at a market peak, and I never sell at a bottom. Like all investors, my aim is to buy lower and sell higher. I don't claim to have perfect timing. No one can identify markets tops and bottoms with any consistency. But my goal is to earn a profit, and over the long term, beat the market averages. So far it's worked. (A hypothetical portfolio using the strategy would have outperformed the S&P 500 even during the most volatile stretch of the financial crisis.)

The Common Sense system is also simple to execute. It requires no computers or high-speed trading capacity. Indeed, it doesn't require much trading at all, which is why you won't find a stock tip in this column every week. It's designed for average investors, not professionals.

I am a working journalist, not a stockbroker or hedge-fund manager. But I firmly believe anyone can manage their own investment portfolios and outperform a simple buy-and-hold index approach.

Here is how the system works: When the market is dropping, I buy stocks at intervals of 10% declines from the most recent peak. When it is rising, I sell at intervals of 25% gains from the most recent low.


These figures are roughly one-half the historical average losses of 20% in bear markets and gains of 50% in bull markets since 1979. They are round numbers and the math is easy to do in your head.

I use the Nasdaq composite index as my benchmark, partly because I had mostly Nasdaq-listed stocks when I began the system, and also because the Nasdaq is a little more volatile than the S&P 500 or Dow Jones Industrials, which provides more trading opportunities. Investors who want to buy and sell a little less often might prefer another index, but the Nasdaq has worked well for me.

I always alert readers when a new threshold is reached and share my decision to buy or sell. The current targets are about 2025 and 2600, respectively.

Easy as this system sounds—and it is simple in concept—it is amazing how it difficult it sometimes feels. I remember vividly being at a cocktail party in October 2008. Everyone was boasting about their recent decision to bail out of the stock market. When my turn came, and I said I had bought stocks that very morning, they looked at me like I was from Mars. The S&P 500 was trading at about 840 that day. On Friday, it closed at 1149.

Of course there is much more to this column than reacting to broad moves in the market averages. As a journalist, I am constantly translating news into investment strategies that I both implement myself and share with readers. My overall exposure to the market may be constant, but I often substitute stocks and sectors.

Most of all, I find investing and thinking about markets to be both stimulating and fun. It is an adventure and a learning experience as well as financially rewarding. I hope you will continue to share it with me.

—James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal-investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/commonsense.

http://online.wsj.com/article/SB10001424052748704062804575509811560989940.html?mod=WSJ_article_related

Gold and Silver Prices Signal the Destruction of the Dollar (video)

The age of the dollar is drawing to a close

The age of the dollar is drawing to a close
Currency competition is the only way to fix the world economy, says Jeremy Warner.

By Jeremy Warner
Published: 7:04AM GMT 05 Nov 2010

Dollar hegemony was itself a major cause of both the imbalances and the crisis Photo: BLOOMBERG

Right from the start of the financial crisis, it was apparent that one of its biggest long-term casualties would be the mighty dollar, and with it, very possibly, American economic hegemony. The process would take time – possibly a decade or more – but the starting gun had been fired.

At next week's meeting in Seoul of the G20's leaders, there will be no last rites – this hopelessly unwieldy exercise in global government wouldn't recognise a corpse if stood before it in a coffin – but it seems clear that this tragedy is already approaching its denouement.

To understand why, you have to go back to the origins of the credit crunch, which lay in the giant trade and capital imbalances that have long ruled the world economy. Over the past 20 years, the globe has become divided in highly dangerous ways into surplus and deficit nations: those that produced a surplus of goods and savings, and those that borrowed the savings to buy the goods.

It's a strange, Alice in Wonderland world that sees one of the planet's richest economies borrowing from one of the poorest to pay for goods way beyond the reach of the people actually producing them. But that process, in effect, came to define the relationship between America and China. The resulting credit-fuelled glut in productive capacity was almost bound to end in a corrective global recession, even without the unsustainable real-estate bubble that the excess of savings also produced. And sure enough, that's exactly what happened.

When politicians see a problem, especially one on this scale, they feel obliged to regulate it. But so far, they've been unable to make headway. This is mainly because the surplus nations are jealous defenders of their essentially mercantilist economic models. Exporting to the deficit nations has served them well, and they are reluctant to change.

Ironically, one effect of the policies adopted to fight the downturn has been to reinforce the imbalances. Fiscal and monetary stimulus in the US is sucking in imports at near-record levels. The fresh dose of quantitative easing announced this week by the Federal Reserve will only turn up the heat further.

What can be done? China won't accept the currency appreciation that might, in time, reduce the imbalances, for that would undermine the competitiveness of its export industries. In any case, it probably wouldn't do the trick: surplus nations have a habit of maintaining competitiveness even in the face of an appreciating currency.
Unable to tackle the problem through currency reform, the US has turned instead to the idea of measures to limit the imbalances directly, through monitoring nations' current accounts. This has already gained some traction with the G20, which has agreed to assess the proposal ahead of the meeting in Seoul. As a way of defusing hot-headed calls in the US for the imposition of import tariffs, the idea is very much to be welcomed, as a trade war would be a disaster for all concerned. China, for one, has embraced the concept with evident relief.

Unfortunately, the limits as proposed would be highly unlikely to solve the underlying problem. Similar rules have failed hopelessly to maintain fiscal discipline in the eurozone. What chance for a global equivalent on trade? With or without sanctions, the limits would be manipulated to death. And even if they weren't, the proposed 4 per cent cap on surpluses and deficits would only marginally affect the worst offenders: for a big economy, a trade gap of 4 per cent of GDP is still a massive number, easily capable of creating unsafe flows of surplus savings.


No, globally imposed regulation, even if it could rise above lowest-common-denominator impotence, is unlikely to solve the problem, although it might possibly stop it getting significantly worse. But what would certainly fix things would be the dollar's demise as the global reserve currency of choice.

As we now know, dollar hegemony was itself a major cause of both the imbalances and the crisis, for it allowed more or less unbounded borrowing by the US from the rest of the world, at very favourable rates. As long as the US remained far and away the world's dominant economy, a global system based on the dollar still made some sense. But America has squandered this advantage on credit-fuelled spending; with the developing world expected to represent more than half of the global economy within five years, dollar hegemony no longer makes any sense.

The rest of the world is now openly questioning the merits of a global currency whose value is governed by America's perceived domestic needs, while the growth that once underpinned confidence in its ability to repay its debts has never looked more fragile.

Already, there are calls for alternatives. Unwilling to wait for one, the world's central banks are beginning to diversify their currency reserves. This, in turn, will eventually exert its own form of market discipline on the US, whose ability to soak the rest of the world by issuing ever more greenbacks will be correspondingly harmed.

These are seismic changes, of a type not seen for a generation or more. I hate to end with a cliché, but we do indeed live in interesting times.


http://www.telegraph.co.uk/finance/comment/jeremy-warner/8111918/The-age-of-the-dollar-is-drawing-to-a-close.html

Millions of UK home owners face restricted lending

Millions of home owners face restricted lending

More than 5m home owners will become “mortgage prisoners” or be forced to move to a cheaper area if new mortgage rules are introduced, lenders have warned.

By Myra Butterworth, Personal Finance Correspondent
Published: 4:37PM GMT 04 Nov 2010
95 Comments

The Council of Mortgage Lenders unveiled new figures yesterday suggesting tough new lending restrictions will lead to 2.2 million existing home owners being refused a new mortgage. These so-called “mortgage prisoners” would be trapped in their homes, unable to remortgage or move.

A further 3.4 million home owners would be able to obtain a new mortgage, but they would be offered less than the amount they would have been able to borrow previously, forcing them to move to a cheaper property.

The strict new rules on how much a person can borrow are expected to be introduced next year by the City regulator, the Financial Services Authority. They evolved after banks were accused of giving large loans to borrowers who could not afford them.

Under then FSA’s proposals, the amount a person could borrow would be restricted by taking into account future rises in interest rates and whether they could afford their monthly payments based on a repayment mortgage rather than an interest-only deal.

But the CML said the FSA had “got it wrong” as the rules would actually end up hurting more borrowers than they helped.

Speaking in London at the publication of the research, Michael Coogan, the director general of the CML, described the new rules as “an overreaction to past problems”.

He said: “The FSA is not prepared to change its basic approach on income verification and affordability. This will have market consequences – we think they are intended, and they would seriously undermine the mortgage market in the future.”

Research released by the CML earlier this week showed 45 per cent of people taking out a mortgage this year would have been hit by the FSA’s new rules if they were already in force.

It comes as economists warned that housing market data had already become “increasingly negative”.

Paul Diggle, a property economist at Capital Economics said: “The stock of unsold properties on the market expanded once again and mortgage market activity remains extremely depressed.

“Most of the house price indices are pointing to a weakening house price trend. With the economic recovery set to lose momentum, we expect housing market activity and house prices to fall further next year.”

Falling house prices raise the prospect of increasing numbers of home owners falling into negative equity, where their mortgage is greater than the value of their home.

A separate report by ratings agency Standard & Poor’s disclosed that more than one in 10 mortgages in the North West were in negative equity at the end of June.

The FSA said the new rules were aimed at replacing risky lending and unaffordable borrowing with “common sense standards”.


It said home owners were benefiting from historically low interest rates, and that 46 per cent of households had little or no money left after their mortgage and other bills were deducted from their income.

A spokesman for the FSA said: “Even a modest rise in interest rates could lead to a significant increase in the number of families suffering financial distress. This is why it is imperative that we ensure lenders act responsibly and do not return to irresponsible practices, in order to protect consumers from taking on mortgages they cannot afford and potentially losing their homes.”

http://www.telegraph.co.uk/finance/personalfinance/8110719/Millions-of-home-owners-face-restricted-lending.html

UK economy in danger of being sucked into Ben Bernanke's great inflation

UK economy in danger of being sucked into Ben Bernanke's great inflation

Markets were in party mood on Thursday. But traders' hangovers this morning have less to do with celebrating a market discounting strong economic growth and a lot more to do with equities being seen as a refuge.

By Damian Reece, Head of Business
Published: 6:00AM GMT 05 Nov 2010

Ben Bernanke hopes the $600bn cash injection will re-float the sunken American property market.

The great inflation is under way, its source is the US but we are close to being sucked in too.
Investors are fleeing into equities as a hedge against inflation. The US is now being run by experimental economics, a $600bn (£372bn) experiment to be precise as Ben Bernanke, chairman of the US Federal Reserve, hopes to re-float the sunken American property market and punish savers, transferring wealth to debtors through negative real interest rates.

Bernanke's hoped for by-product of reopening the liquidity floodgates is to stimulate every American's favourite past time – spending. The risk that much of the cash that the Fed is pumping into the US economy will simply be hoarded by banks to reduce their own leverage has been dismissed by Bernanke, a decision which could be his biggest mistake.

This is the man that missed the significance of America's deteriorating mortgage scene in 2006, believing firmly that toxicity had been diluted through the credit markets.

Now he wants inflation higher and interest rates lower to provide a massive one-off refinancing for US householders still in negative equity. By reflating property prices, and keeping the heat under equity prices, he is hoping to trigger a "wealth" effect on main street.

The other constituency in deep debt is the government, running an enormous deficit. President Barack Obama, left helpless by the mid-term elections, will also receive a bail-out through quantitative easing because, as with US households, he will inflate his way out of debt as the ratio of deficit to GDP improves. And if the numbers look better then the less pressure there is to cut spending and raise taxes to sort the deficit.

Our own quantitative easing habit has been put on hold but an official Bank rate of 0.5pc is keeping the inflationary burners alight. As if the Bank of England's Monetary Policy Committee needed any encouragement, George Osborne yesterday reminded the Treasury Select Committee that his tight fiscal policy allowed "flexibility" in monetary policy.

I doubt flexibility to increase rates to head off inflation is what he had in mind when he said that. Flexible monetary policy is fine, as long is its flexible downwards and consistently inflationary. As if on cue, Simon Ward of Henderson Global Investors yesterday predicted CPI would hit 4pc by early 2011.

Britain's saving grace is Osborne's fiscal consolidation plan and supply side reform to boost employment and new business formation.

But the risk is that increasing inflation will dampen the Chancellor's ardour to pursue his much needed reforms, leaving us without the policies enacted to deliver sustainable growth and with prices out of control.


http://www.telegraph.co.uk/finance/comment/damianreece/8111484/UK-economy-in-danger-of-being-sucked-into-Ben-Bernankes-great-inflation.html

Homebuyers who rely on a mortgage valuation report commissioned by their lender, often find they have been ‘penny wise but pound foolish’.

A nasty surprise for 'penny wise' homebuyers despite falling house prices


By Ian Cowie Your Money 
Last updated: November 5th, 2010


Homebuyers who rely on a mortgage valuation report commissioned by their lender, rather than paying more for some form of professional survey, often find they have been ‘penny wise but pound foolish’. That is the main conclusion of analysis of more than 1,000 property purchasers where a quarter of those who relied solely on mortgage valuations needed unexpected building work after completion, at an average cost of more than £1,800.

Cynics may say the conclusion is no surprise when you consider that this report was commissioned by the Royal Institution of Chartered Surveyors(RICS). After all, you wouldn’t ask a barber if you needed a haircut, would you? Against that, the sums of money involved in buying a home make the argument for expert advice compelling. When you are about to sign a contractual commitment to spend several years’ gross earnings, why blind yourself to some of the risks involved and strip yourself of valuable insurance for the price of a week or two’s wages?

Many homebuyers have no idea how little they will get when they settle for a valuation report – or how much they might be able to knock off the asking price, particularly in a weak market where house prices are falling, when they are armed with a survey setting out the property’s faults and any work that needs to be done.

For example, RICS found that nearly six in 10 homebuyers wrongly imagined that a valuation report included an assessment of the
building’s condition, including searching for damp and structural movement. One in three mistakenly believed it included advice on legal issues that a solicitor should investigate.

For important information like this, you have to pay for a building survey or – at bare minimum – a homebuyers’ report. Rosemary Rogers, a director of property experts reallymoving.com, explained: “As a general rule, a homebuyer’s report is usually sufficient for homes less than 50 years old and in a good state of repair. It uses a standard format and will include a valuation. A building survey, on the other hand, will be a more in-depth examination of a building’s structure and is recommended for older, dilapidated or extensively-altered properties.

“Neither need be expensive. In fact, the average cost of a survey has dropped by almost 25 per cent in the last 10 years, with a homebuyers’ report costing £342 on average or £423 for a building survey.”

That’s a small price to pay for valuable insurance – as Ed Mead, a director of estate agents Douglas & Gordon, points out: “The main
reason to get a survey is that if anything does go wrong, you have a comeback on the surveyor via their professional indemnity. Don’t go with a lender’s recommendation, always stay independent.”

Giles Cook, a director of estate agents Chesterton Humberts, warns against false economies: “Having a property surveyed will help
prospective owners avoid nightmare situations that can rack up enormous costs in future.

“There are rarely instances where a homebuyers report might suffice, as – even if you are buying an apartment above ground floor level and below the top floor – you will be responsible for contributing to repairs to the outer fabric of the building.  It’s essential to check that a sinking fund is in place for any apartment building, especially if the survey highlights repairs are needed

“Expect the worst from a survey, as it will always provide a critical report and find fault wherever possible; that is what surveyors are
paid to do.  Many of the findings will be suggestions and will list repairs that are not necessarily urgent. However, homebuyers should always seek a second opinion where aspects of the report are worrying, one that corresponds with the problem it addresses, for example a damp specialist or electrician.”


Even bad news can be good news for purchasers who are well-informed before completion. RICS reckons three quarters of homebuyers who paid for a building survey were able to negotiate a lower price. Information is power when it comes to property – particularly in a buyers’ market when vendors are increasingly vulnerable to haggling.

http://blogs.telegraph.co.uk/finance/ianmcowie/100008499/a-nasty-surprise-for-penny-wise-homebuyers-despite-falling-house-prices/

Why are passive funds not more popular? The key to successful active investing – it is vital to monitor your portfolio. Yet many individual investors fail to do this.

Keep your investments on track


Funds that passively track the market are less popular than those with active managers, who try to beat the market. But some say they offer more certainty for lower charges. Which should you choose? Niki Chesworth investigates.

Published: 11:18AM GMT 01 Nov 2010

Active approach: whether you choose a tracker or a managed fund, the key is to keep an eye on their performance

Warren Buffett, the investment guru, has said the best way for most investors to own common stocks is through an index fund that charges minimal fees, saying they will "beat the net results delivered by the great majority of investment professionals".

Tracker funds are not only a lower-cost way to invest — because they do not have the expense of paying a team of active fund managers — they offer the certainty of passively tracking a given stock market index. They therefore should not significantly underperform the market, something actively managed funds cannot guarantee.

So it may come as no surprise that the total amount invested in tracker funds managed by UK investment companies soared from £20bn in 2008 to nearly £28bn at the end of last year, according to the Investment Management Association (IMA).

But delve behind these figures and it's apparent this increase was not because these funds were increasingly popular with investors — merely a reaction that tracker funds track the market and the markets bounced back sharply.

Only 5.5pc of all funds under management are held in tracker funds according to the IMA but when it comes to sales, they are attracting just 2.5pc of individual investors' money.

With criticism in the media that investment charges are impacting on the performance of some actively managed funds – as well as reports that some active managers fail to match their benchmark index let alone beat it – why are passive funds not more popular?

"While trackers appeal to institutional investors such as pension funds and charities, which have long-term objectives and are in the main happy to accept market risk but at no more cost than is necessary, individual investors want their fund managers to deliver alpha, they want to beat the market," says Justine Fearns, research manager of independent advisers AWD Chase de Vere.

"Investors believe that if they pick the right active managers, they may be able to get that extra bit of performance."

Fearns also believes the poor sales of trackers is a reaction of the stock markets. She says: "Traditionally, trackers are used in more developed markets where news and information is readily available and it has been more difficult for active fund managers to consistently beat the market.

"In contrast, information is not always as free Ḁowing in underdeveloped markets, which creates more opportunity for active fund managers to beat the market.

"Similarly, in volatile and uncertain markets, like we have seen recently, individual assets can become mispriced, creating investment opportunity. This applies to both developed and underdeveloped markets and lends itself far more to an active stock-picking approach.

"If you know the market is going to perform strongly then you can get a good market return quite cheaply through a tracker. But when the markets start to come down, you will suffer the full effects of market falls with a tracker fund. So investors can tactically look to protect the downside with an actively managed fund."

Bearing the brunt of short-term falls in markets is one reason why those prepared to take a long-term view — institutional investors — may see the attraction of tracker funds better than individual investors.

Tracker funds have to blindly follow their given benchmark index which can cause sharp falls in the fund's value.

"This is the major drawback of tracker funds," says John Kelly of Chelsea Financial Services. "Even if the sector is overbought or likely to fall, the tracker has to buy it because it has to track the whole of the market."

Fearns says that low sales of tracker funds may also react investors' financial objectives.

"With interest rates low, many investors are looking for income from their portfolio and while a tracker will have an element of yield it will not match that paid by the best equity income and bond funds," she says.

The issue of tracker fund performance has also come under the spotlight. Some trackers buy shares in all the companies that make up the index they follow. Others use complex financial instruments to track that index. Although both types aim to track their benchmark, performance can still vary – and once charges are deducted there can be a consistent slight underperformance.

One recent survey found that while the FTSE All Company sector grew 372.50pc over the last 20 years, tracker funds showed just 330.9pc growth. However, much depends on which indices you compare — among the top 20 UK funds over the past five years is a mid-cap tracker which beat most of the 300 funds in the UK All funds sector.

However, the same claims of underperformance can also apply to actively managed funds – but with actively managed funds this can be far greater.

"There are some poorly performing active funds but if you do the research and get the right advice, you should consistently outperform the benchmark," adds Chelsea Financial Services' Kelly.

"However, with actively managed funds you do need to actively review them – ideally at least every quarter – as the funds you need to hold will change."

This is the key to successful active investing – it is vital to monitor your portfolio. Yet many individual investors fail to do this.

And performance also depends on what investors track.

Trackers are not confined to just the UK. It is possible to track global technology stocks, the global health and pharmaceuticals index and the major markets around the world — from Japan to the US and Europe — gaining access to sectors and geographical diversity for less than an actively managed fund and without the risk of buying the "wrong" fund that underperforms the benchmark.

So which is best?

"There is a place for both types of investment style – a tracker could provide long-term capital growth, but active managers may be able to outperform the market," says Fearns. "It's about balance — a balance of investments, risks and management styles."

However, investors who are passive about monitoring and reviewing their active funds may be better off with passive investments. John Kelly sums up the problem: "Inertia is the biggest destroyer of returns."

Written by Telegraph.co.uk as part of Smart Investment Month in association with Legal & General Investments

http://www.telegraph.co.uk/sponsored/finance/smart-investment-guide/8101976/Keep-your-investments-on-track.html?utm_source=tmg&utm_medium=TD_8101976&utm_campaign=lg0611