Is now the time to bail out?
A volatile market isn't necessarily a bad market. But selling when stocks are down is usually a bad idea.
By the Mole, Money Magazine's undercover financial planner
October 29, 2008: 5:47 AM ET
NEW YORK (Money) -- Question: I know market timing is a loser's game. However, I do think there is abundant evidence that the next 12-18 months are going to be very difficult for equities. Do you see any merit in trimming some equity holdings, parking the proceeds in short-term bonds or cash, and committing to immediately dollar-cost averaging back into the market on a monthly fixed schedule?
The Mole's Answer: Your question is a very sophisticated way of asking whether you should bail from the market right now. While I don't know your total situation, I can tell you that selling after equities are down by 40% is usually a bad thing.
First of all, I wholeheartedly agree with your statement that market timing is a loser's game. Many studies have shown the systematically bad job that individual investors do of timing the market.
We are constantly testing the market winds. When conditions are favorable, we increase our exposure. When conditions become so far from favorable that they're in another zip code, such as what we're currently experiencing, we decrease our exposure.
Unfortunately, we tend to do both of these things after the fact. Truth be told, we all want stock returns during bull markets and money market returns in bear markets. But as much as we may want them, no one really knows exactly how to get them, since we can't predict when bear markets and bull markets are beginning or ending.
Second, when you state that the next 12-18 months are likely to be "difficult" for equities, I'm not sure I agree with you. If by "difficult," you mean volatile, then you are probably right.
The last few weeks in the stock market has set all sorts of records for volatility. Emotions are running wild and there is a likelihood that this volatility will not end anytime soon.
But I would not agree that this translates into a bad period for the stock market. Primarily because the stock market is a better buy today than it was last year. In fact, I can quantify it by saying it's a 40% better value.
Which begs the question, why wasn't I getting as many inquiries about selling last year when the market was hitting new highs?
But that's a rhetorical question - the answer is that we humans have a tendency to predict the future based on the recent past.
This "recency bias," as it's known in the financial planning world, has us thinking inside the box of current events. If the market is thriving, as it was between 2003 and 2007, then we believe it will always be thriving. And in times like these when the sustained market dive is giving us all nose bleeds, we believe we'll never pull out of it.
Onto your question of whether you should sell now with a commitment to buy back in with periodic purchases, also known as dollar-cost averaging. As sophisticated and well thought out as this sounds, it still means selling your equities after they are down by 40%, and still equals market timing.
A better time to consider selling would have been last year after equities had more than doubled.
I can't tell you how the stock market will perform over the next 12 -18 months. No one can. It may very well turn out to be the right thing to do but the odds are very much against you.
Studies actually quantify that we pay an average penalty of 1.5% annually for timing the stock market and chasing the hot performers. Many of us come up with all sorts of rationale for doing what we're doing, but it ultimately just results in outsmarting ourselves.
The fact that you say you will commit to buying back periodically is a bit confusing. I'm glad you realize the market doesn't signal to us that we have hit bottom and that now is the time to buy, but it also hasn't sent you a signal that now is the time to sell.
Systematic rebalancing would have had you selling some of your stocks between 2002 and 2007, as they were skyrocketing. Now is probably when you should be buying.
My advice: Find an asset allocation that is right for you and stick to it. Try to rebalance in times like these, which actually means buying more stocks. Remember that investing during a rough economy can be the right thing to do. If someone tells you that you can have the upside of the market without the risk, don't believe them.
The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail him at http://money.cnn.com/2008/10/28/pf/Ask_the_mole.moneymag/mailto:themole@moneymail.com. Send feedback to Money Magazine
Find this article at: http://money.cnn.com/2008/10/28/pf/Ask_the_mole.moneymag/index.htm
Saturday, 22 November 2008
Friday, 21 November 2008
Focus on Return on Equity
The Key to Finding Stocks that Will Make You Rich? Focus on Return on Equity
By Joshua Kennon, About.com
Countless successful investors, businessmen, and financiers have emphatically stated, and proven through their own career, over long periods of time, the performance of a stock most closely correlates with the return earned on shareholders’ equity.
As one well known investor put it, even if you buy a business at a huge discount, if you hold the stock for five, ten years or more, it’s going to be highly unlikely that you will be able to earn more than the ROE generated by the underlying enterprise.
Likewise, even a more reasonable price or a slightly higher price-to-earnings ratio for a better business that earns, say sixteen or seventeen percent on capital, you’re going to have very, very good results over a twenty or thirty year period.
An excellent example is Johnson & Johnson. According to the company’s most recent annual report, “In 2006, we logged our 74th year of sales increases, our 23rd consecutive year of earnings increases adjusted for special charges and our 44th consecutive year of dividend increases. This is a record matched by very few, if any, companies in history.” The firm is diversified throughout the medical supplies, pharmaceutical, and consumer product fields. These include household names such as Tylenol, Band-Aid, Stayfree, Carefree, K-Y, Splenda, Neutrogena, Benadryl, Sudafed, Listerine, Visine, Lubriderm, and Neosporin, not to mention the eponymous baby care products such as powder, lotion, and oil. Compared to the S&P 500, the stock currently trades at a lower p/e ratio, a lower price to cash flow ratio, a lower price to book ratio, and boasts a higher cash dividend yield, all while earning a much higher return on assets and return on equity than the average publicly traded company!
Investing is a game of weighing odds and reducing risk. Can you guarantee that you will beat the market? No. You can, however, increase the chances of that happening by focusing on companies that have comparable profiles – established histories, management with huge financial interest in the company, a history of executing well, discipline in returning excess capital to shareholders through cash dividends and share repurchases, as well as a focused pipeline of opportunities for future growth. These are the stocks that have better chances of compounding uninterrupted, meaning less of your money goes to commissions, market maker spread, capital gains taxes, and other frictional expenses. That small advantage can lead to enormous gains in your net worth; only 3% more each year, over an investing lifetime (say, fifty-years), is triple the wealth!
The biggest challenge is the fact that very few firms are actually able to maintain high returns on equity over substantial stretches of time because of the breathtaking ruthlessness of capitalism. Of course, as consumers, we all benefit from this in the form of a higher standard of living through lower costs, but for owners, it can mean volatility and financial setback. That’s why you must settle inside of yourself the question of exactly how large a company’s competitive “moat” is, factoring that into your valuation. Do you think someone will be able to unseat Coca-Cola as the dominant soft drink company in the world? How about Microsoft? The latter would certainly seem more vulnerable than the former, but both are much better off than a marginal steel company trying to eek out a profit in a commodity-like business with little or no pricing power and few, if any, barriers of entry.
http://beginnersinvest.about.com/od/investstrategiesstyles/a/aa110107a_roe.htm
By Joshua Kennon, About.com
Countless successful investors, businessmen, and financiers have emphatically stated, and proven through their own career, over long periods of time, the performance of a stock most closely correlates with the return earned on shareholders’ equity.
As one well known investor put it, even if you buy a business at a huge discount, if you hold the stock for five, ten years or more, it’s going to be highly unlikely that you will be able to earn more than the ROE generated by the underlying enterprise.
Likewise, even a more reasonable price or a slightly higher price-to-earnings ratio for a better business that earns, say sixteen or seventeen percent on capital, you’re going to have very, very good results over a twenty or thirty year period.
An excellent example is Johnson & Johnson. According to the company’s most recent annual report, “In 2006, we logged our 74th year of sales increases, our 23rd consecutive year of earnings increases adjusted for special charges and our 44th consecutive year of dividend increases. This is a record matched by very few, if any, companies in history.” The firm is diversified throughout the medical supplies, pharmaceutical, and consumer product fields. These include household names such as Tylenol, Band-Aid, Stayfree, Carefree, K-Y, Splenda, Neutrogena, Benadryl, Sudafed, Listerine, Visine, Lubriderm, and Neosporin, not to mention the eponymous baby care products such as powder, lotion, and oil. Compared to the S&P 500, the stock currently trades at a lower p/e ratio, a lower price to cash flow ratio, a lower price to book ratio, and boasts a higher cash dividend yield, all while earning a much higher return on assets and return on equity than the average publicly traded company!
Investing is a game of weighing odds and reducing risk. Can you guarantee that you will beat the market? No. You can, however, increase the chances of that happening by focusing on companies that have comparable profiles – established histories, management with huge financial interest in the company, a history of executing well, discipline in returning excess capital to shareholders through cash dividends and share repurchases, as well as a focused pipeline of opportunities for future growth. These are the stocks that have better chances of compounding uninterrupted, meaning less of your money goes to commissions, market maker spread, capital gains taxes, and other frictional expenses. That small advantage can lead to enormous gains in your net worth; only 3% more each year, over an investing lifetime (say, fifty-years), is triple the wealth!
The biggest challenge is the fact that very few firms are actually able to maintain high returns on equity over substantial stretches of time because of the breathtaking ruthlessness of capitalism. Of course, as consumers, we all benefit from this in the form of a higher standard of living through lower costs, but for owners, it can mean volatility and financial setback. That’s why you must settle inside of yourself the question of exactly how large a company’s competitive “moat” is, factoring that into your valuation. Do you think someone will be able to unseat Coca-Cola as the dominant soft drink company in the world? How about Microsoft? The latter would certainly seem more vulnerable than the former, but both are much better off than a marginal steel company trying to eek out a profit in a commodity-like business with little or no pricing power and few, if any, barriers of entry.
http://beginnersinvest.about.com/od/investstrategiesstyles/a/aa110107a_roe.htm
Four Investment Objectives Define Strategy
Four Investment Objectives Define Strategy
By Ken Little, About.com
In broad terms, four main investment objectives cover how you accomplish most financial goals.
These investment objectives are important because certain products and strategies work for one objective, but may produce poor results for another objective.
It is quite likely you will use several of these investment objectives simultaneously to accomplish different objectives without any conflict.
Let’s examine these objectives and see how they differ.
Capital Appreciation
Capital appreciation is concerned with long-term growth. This strategy is most familiar in retirement plans where investments work for many years inside a qualified plan.
However, investing for capital appreciation is not limited to qualified retirement accounts. If this is your objective, you are planning to hold the stocks for many years.
You are content to let them grow within your portfolio, reinvesting dividends to purchase more shares. A typical strategy employs making regular purchases.
You are not very concerned with day-to-day fluctuations, but keep a close eye on the fundamentals of the company for changes that could affect long-term growth.
Current Income
If your objective is current income, you are most likely interested in stocks that pay a consistent and high dividend. You may also include some top-quality real estate investment trusts (REITs) and highly-rated bonds.
All of these products produce current income on a regular basis.
Many people who pursue a strategy of current income are retired and use the income for living expenses. Other people take advantage of a lump sum of capital to create an income stream that never touches the principal, yet provides cash for certain current needs (college, for example).
Capital Preservation
Capital preservation is a strategy you often associate with elderly people who want to make sure they don’t outlive their money.
Retired on nearly retired people often use this strategy to hold on the detention has.
For this investor, safety is extremely important – even to the extent of giving up return for security.
The logic for this safety is clear. If they lose their money through foolish investment and are retired, it is unlike they will get a chance to replace it.
Investors who use capital preservation tend to invest in bank CDs, U.S. Treasury issues, savings accounts.
Speculation
The speculator is not a true investor, but a trader who enjoys jumping into and out of stocks as if they were bad shoes.
Speculators or traders are interested in quick profits and used advanced trading techniques like shorting stocks, trading on the margin, options and other special equipment.
They have no love for the companies they trade and, in fact may not know much about them at all other than the stock is volatile and ripe for a quick profit.
Speculators keep their eyes open for a quick profit situation and hope to trade in and out without much thought about the underlying companies.
Many people try speculating in the stock market with the misguided goal of getting rich. It doesn’t work that way.
If you want to try your hand, make sure you are using money you can afford to lose. It’s easy to get addicted, so make sure you understand the real possibilities of losing your investment.
Conclusion
Your investment style should match you financial objectives. If it doesn’t, you should see professional help in dealing with investment choices that match you financial objectives.
http://stocks.about.com/od/investingstrategies/a/021906technque.htm
By Ken Little, About.com
In broad terms, four main investment objectives cover how you accomplish most financial goals.
These investment objectives are important because certain products and strategies work for one objective, but may produce poor results for another objective.
It is quite likely you will use several of these investment objectives simultaneously to accomplish different objectives without any conflict.
Let’s examine these objectives and see how they differ.
Capital Appreciation
Capital appreciation is concerned with long-term growth. This strategy is most familiar in retirement plans where investments work for many years inside a qualified plan.
However, investing for capital appreciation is not limited to qualified retirement accounts. If this is your objective, you are planning to hold the stocks for many years.
You are content to let them grow within your portfolio, reinvesting dividends to purchase more shares. A typical strategy employs making regular purchases.
You are not very concerned with day-to-day fluctuations, but keep a close eye on the fundamentals of the company for changes that could affect long-term growth.
Current Income
If your objective is current income, you are most likely interested in stocks that pay a consistent and high dividend. You may also include some top-quality real estate investment trusts (REITs) and highly-rated bonds.
All of these products produce current income on a regular basis.
Many people who pursue a strategy of current income are retired and use the income for living expenses. Other people take advantage of a lump sum of capital to create an income stream that never touches the principal, yet provides cash for certain current needs (college, for example).
Capital Preservation
Capital preservation is a strategy you often associate with elderly people who want to make sure they don’t outlive their money.
Retired on nearly retired people often use this strategy to hold on the detention has.
For this investor, safety is extremely important – even to the extent of giving up return for security.
The logic for this safety is clear. If they lose their money through foolish investment and are retired, it is unlike they will get a chance to replace it.
Investors who use capital preservation tend to invest in bank CDs, U.S. Treasury issues, savings accounts.
Speculation
The speculator is not a true investor, but a trader who enjoys jumping into and out of stocks as if they were bad shoes.
Speculators or traders are interested in quick profits and used advanced trading techniques like shorting stocks, trading on the margin, options and other special equipment.
They have no love for the companies they trade and, in fact may not know much about them at all other than the stock is volatile and ripe for a quick profit.
Speculators keep their eyes open for a quick profit situation and hope to trade in and out without much thought about the underlying companies.
Many people try speculating in the stock market with the misguided goal of getting rich. It doesn’t work that way.
If you want to try your hand, make sure you are using money you can afford to lose. It’s easy to get addicted, so make sure you understand the real possibilities of losing your investment.
Conclusion
Your investment style should match you financial objectives. If it doesn’t, you should see professional help in dealing with investment choices that match you financial objectives.
http://stocks.about.com/od/investingstrategies/a/021906technque.htm
Preparing Your Portfolio Is the Most Important Action You Can Take
The One Factor Stock Investors Can Control
Preparing Your Portfolio Is the Most Important Action You Can Take
By Ken Little, About.com
When the stock market is running very hot or very cold, it is on everyone’s mind and few conversations last very long before turning to the latest numbers.
Whether it is the dot.com boom of the 1990s or the credit crisis of 2007, when the market is erratic and volatile, people are engaged.
The factors that lead to a boom-bust cycle in the market are important. Investment professionals and regulators spend a great deal of time trying to understand what happens in the market during these periods.
Individual investors have little influence on the market. While it is important to understand what happens and why, that is not the most important consideration for individual investors.
Stock Investors Important Influence
The most important influence on how your portfolio performs is how well you have prepared it. Preparation is the only factor you can influence.
Preparation means adopting a reasonable allocation between stocks, bonds and cash. It also means diversifying you holdings by industry sector, company size and growth and value stocks.
Most investors should consider a bond allocation equal to their age. For example, a 45 year-old investor should have 55 percent in stocks and 45 percent in bonds.
You can’t know with any assurance which turns the market will take - even industry professionals don’t know.
However, if you have five or more years before you need to convert holdings to cash, the odds are good that your portfolio will do as well as possible if you maintain a reasonable allocation.
There are no guarantees in investing. You assume that over the long-term your holdings will grow, however an assumption, even one based on historical truths, is not a guarantee.
Establishing an Allocation
Establishing an allocation and maintaining it is a challenging exercise. Here’s why:
Assume your allocation was 60 percent stocks and 40 percent bonds. If stocks are shooting up, the temptation is to put more money into the hot side of your allocation - ride the gains up.
What this often means is investors pay inflated prices. When the boom collapses as they all do, investors are either stuck with stock worth much less than they paid or they bail out with a loss.
The rational way to approach a rapidly expanding market is to watch your allocation and when it becomes out of balance, sell off stocks and add to bonds. This may let you take profits, but you may miss out on some future gains.
In a rapidly dropping market, investors should consider buying stocks to maintain balance. You may be able to buy stocks at depressed prices, which increases the odds of significant gains when the market returns.
Many investors would find their losses were lower and their gains higher if they would maintain a reasonable allocation regardless of what the market does.
If you can take a long-term approach, you could look at your holdings once a year (or maybe once a quarter in very volatile markets) and make adjustments.
The remainder of the time avoid the temptation to buy during a boom or sell during a bust.
http://stocks.about.com/od/investingstrategies/a/102608portfolio.htm
Preparing Your Portfolio Is the Most Important Action You Can Take
By Ken Little, About.com
When the stock market is running very hot or very cold, it is on everyone’s mind and few conversations last very long before turning to the latest numbers.
Whether it is the dot.com boom of the 1990s or the credit crisis of 2007, when the market is erratic and volatile, people are engaged.
The factors that lead to a boom-bust cycle in the market are important. Investment professionals and regulators spend a great deal of time trying to understand what happens in the market during these periods.
Individual investors have little influence on the market. While it is important to understand what happens and why, that is not the most important consideration for individual investors.
Stock Investors Important Influence
The most important influence on how your portfolio performs is how well you have prepared it. Preparation is the only factor you can influence.
Preparation means adopting a reasonable allocation between stocks, bonds and cash. It also means diversifying you holdings by industry sector, company size and growth and value stocks.
Most investors should consider a bond allocation equal to their age. For example, a 45 year-old investor should have 55 percent in stocks and 45 percent in bonds.
You can’t know with any assurance which turns the market will take - even industry professionals don’t know.
However, if you have five or more years before you need to convert holdings to cash, the odds are good that your portfolio will do as well as possible if you maintain a reasonable allocation.
There are no guarantees in investing. You assume that over the long-term your holdings will grow, however an assumption, even one based on historical truths, is not a guarantee.
Establishing an Allocation
Establishing an allocation and maintaining it is a challenging exercise. Here’s why:
Assume your allocation was 60 percent stocks and 40 percent bonds. If stocks are shooting up, the temptation is to put more money into the hot side of your allocation - ride the gains up.
What this often means is investors pay inflated prices. When the boom collapses as they all do, investors are either stuck with stock worth much less than they paid or they bail out with a loss.
The rational way to approach a rapidly expanding market is to watch your allocation and when it becomes out of balance, sell off stocks and add to bonds. This may let you take profits, but you may miss out on some future gains.
In a rapidly dropping market, investors should consider buying stocks to maintain balance. You may be able to buy stocks at depressed prices, which increases the odds of significant gains when the market returns.
Many investors would find their losses were lower and their gains higher if they would maintain a reasonable allocation regardless of what the market does.
If you can take a long-term approach, you could look at your holdings once a year (or maybe once a quarter in very volatile markets) and make adjustments.
The remainder of the time avoid the temptation to buy during a boom or sell during a bust.
http://stocks.about.com/od/investingstrategies/a/102608portfolio.htm
A Look at Growth, Income and Value Investing
Investing Philosophies - Part One
A Look at Growth, Income, and Value Investing
By Ken Little, About.com
Developing an investing philosophy may seem like an academic exercise, however over time, it will help shape your thinking about the types of stocks that work for your portfolio.
This first of a two-part series looks at the three main investing philosophies:
Growth
Value
Income
Most investors fall into one or a combination of these investing philosophies.
Growth Investors
As the name implies, growth investors look for the rising stars. They are interested in companies that have high potential for earning growth. High earning growth invariable leads to high stock prices – at least in theory. Growth investors are willing to bet on young companies that show promise of becoming leaders in their industry.
The technology stocks, especially during the late 1990s, were the perfect example of growth stocks. Many of these young companies started with an idea and nothing more and now are large successful companies.
Of course, a great many more of those same technology companies started out with an idea and nothing more and ended up where they started. Which is to say that growth investing carries the risk that some of your investments are going to fail. As much as Americans like success stories, there are more failures than successes when it comes to market leadership.
Value Investors
Value investors look for the stocks that the market has overlooked. Value doesn’t mean cheap as in low per share price, but under priced relative to the value of the company.
These are stocks the market has passed over while chasing some other industry sector or more glamorous investments. The value investor looks for stocks with a low price/earnings ratio meaning the market is not willing to pay much in the way of a premium for the stock.
Of course, the value investor needs to make sure there in nothing wrong with the company that would warrant a low stock price other than neglect or market inattention. Assuming the company is solid, the value investor’s strategy is to buy and hold the stock, anticipating the future time when the market will recognize the company’s worth and bid the stock up to its true value.
Income Investors
Income investing is the most straight-forward of all philosophies and the most conservative. Income is the motivation and investors target companies paying high and consistent dividends.
People near or in retirement are fond of this strategy for obvious reasons. The companies that qualify for the income investor tend to be large and well-established. There is always some risk involved in investing in stocks, however this remains the most conservative of the investing philosophies.
If the stock price increases, that’s icing on the cake for the income investor who would probably trade some capital appreciation for a higher dividend.
Conclusion
These three investing philosophies take in a large number of investors, however it is not required that you fall purely in one camp or another. As a practical matter, you will likely modify your investing philosophy as your life circumstances change.
http://stocks.about.com/od/investingphilisophies/a/Investphilone.htm
A Look at Growth, Income, and Value Investing
By Ken Little, About.com
Developing an investing philosophy may seem like an academic exercise, however over time, it will help shape your thinking about the types of stocks that work for your portfolio.
This first of a two-part series looks at the three main investing philosophies:
Growth
Value
Income
Most investors fall into one or a combination of these investing philosophies.
Growth Investors
As the name implies, growth investors look for the rising stars. They are interested in companies that have high potential for earning growth. High earning growth invariable leads to high stock prices – at least in theory. Growth investors are willing to bet on young companies that show promise of becoming leaders in their industry.
The technology stocks, especially during the late 1990s, were the perfect example of growth stocks. Many of these young companies started with an idea and nothing more and now are large successful companies.
Of course, a great many more of those same technology companies started out with an idea and nothing more and ended up where they started. Which is to say that growth investing carries the risk that some of your investments are going to fail. As much as Americans like success stories, there are more failures than successes when it comes to market leadership.
Value Investors
Value investors look for the stocks that the market has overlooked. Value doesn’t mean cheap as in low per share price, but under priced relative to the value of the company.
These are stocks the market has passed over while chasing some other industry sector or more glamorous investments. The value investor looks for stocks with a low price/earnings ratio meaning the market is not willing to pay much in the way of a premium for the stock.
Of course, the value investor needs to make sure there in nothing wrong with the company that would warrant a low stock price other than neglect or market inattention. Assuming the company is solid, the value investor’s strategy is to buy and hold the stock, anticipating the future time when the market will recognize the company’s worth and bid the stock up to its true value.
Income Investors
Income investing is the most straight-forward of all philosophies and the most conservative. Income is the motivation and investors target companies paying high and consistent dividends.
People near or in retirement are fond of this strategy for obvious reasons. The companies that qualify for the income investor tend to be large and well-established. There is always some risk involved in investing in stocks, however this remains the most conservative of the investing philosophies.
If the stock price increases, that’s icing on the cake for the income investor who would probably trade some capital appreciation for a higher dividend.
Conclusion
These three investing philosophies take in a large number of investors, however it is not required that you fall purely in one camp or another. As a practical matter, you will likely modify your investing philosophy as your life circumstances change.
http://stocks.about.com/od/investingphilisophies/a/Investphilone.htm
Three Main Influences on Stock Prices
Three Main Influences on Stock Prices
By Ken Little, About.com
There are three main areas of influence that move a stock’s price up or down. If you understand these influences, it will help you decide whether the price movement is a buy, sell or sit tight signal.
Fundamentals
Clearly, the most direct influence on a stock’s price is a change in the economic fundamentals of the business.
If revenues and profits are on a steep upward trend with no indication of leveling off, you can expect to see the stock price rise as investors bid up this attractive company.
On the other hand, if the profit picture is flat or, worse, declining with no change in sight, look for investors to abandon the stock and the price to fall.
These are simple examples of changes in fundamentals. Other, more complex and subtle changes can occur that may not dramatically affect the stock price immediately (increased debt, a poor acquisition and so on can also trigger price changes).
The point is that changes in the underlying business have a direct impact on the stock’s price. Smart investors spot the subtle changes before they become price-movers and take the appropriate action.
Sector Changes
Changes in the stock’s sector can have positive or negative affects on price too. Some sectors or industries are cyclical in nature and you should know that would affect price.
However, when whole sectors catch of fire (think dot.com stocks) or burn up (think dot.com stocks, again), even those companies that have solid fundamentals are pulled along with the rest of the sector.
You may hold a stock that is a victim of “guilt by association” when an industry falls out of favor. Likewise, stocks can see prices artificially inflated if they find themselves in the right industry at the right time.
Market Swings
The market goes up and the market goes down. That’s about all you can say with certainty concerning the stock market.
As the market moves up and down, your stock may move with or against it. Most large-cap stocks will follow the market to some degree, but smaller companies may not get the same push every time.
In general, a strong market move either up or down will carry more stocks with it than not, so your stock may be up or down for no other reason than the market was up or down.
Conclusion
How do you use this information?
A change in fundamentals may be an opportunity to buy more shares of a growing company or it may signal the time to sell if the changes are for the worse.
A change in the sector is usually temporary so most long-term investors will ride out dips due to these factors. However, if something drastically changes in the stock’s industry due to regulation or a new technology, for example, you may want to reevaluate your position. Is the company capable of adapting or do you own a dinosaur?
Market swings that move your stock’s price can be opportunities to buy additional shares (assuming all the company’s fundamentals still checkout). If the rising market pushes up your stock’s price, it may be time to take a profit on part of your holdings and wait for the price to come back down to earth to reinvest.
http://stocks.about.com/od/evaluatingstocks/a/0317threefact.htm
By Ken Little, About.com
There are three main areas of influence that move a stock’s price up or down. If you understand these influences, it will help you decide whether the price movement is a buy, sell or sit tight signal.
Fundamentals
Clearly, the most direct influence on a stock’s price is a change in the economic fundamentals of the business.
If revenues and profits are on a steep upward trend with no indication of leveling off, you can expect to see the stock price rise as investors bid up this attractive company.
On the other hand, if the profit picture is flat or, worse, declining with no change in sight, look for investors to abandon the stock and the price to fall.
These are simple examples of changes in fundamentals. Other, more complex and subtle changes can occur that may not dramatically affect the stock price immediately (increased debt, a poor acquisition and so on can also trigger price changes).
The point is that changes in the underlying business have a direct impact on the stock’s price. Smart investors spot the subtle changes before they become price-movers and take the appropriate action.
Sector Changes
Changes in the stock’s sector can have positive or negative affects on price too. Some sectors or industries are cyclical in nature and you should know that would affect price.
However, when whole sectors catch of fire (think dot.com stocks) or burn up (think dot.com stocks, again), even those companies that have solid fundamentals are pulled along with the rest of the sector.
You may hold a stock that is a victim of “guilt by association” when an industry falls out of favor. Likewise, stocks can see prices artificially inflated if they find themselves in the right industry at the right time.
Market Swings
The market goes up and the market goes down. That’s about all you can say with certainty concerning the stock market.
As the market moves up and down, your stock may move with or against it. Most large-cap stocks will follow the market to some degree, but smaller companies may not get the same push every time.
In general, a strong market move either up or down will carry more stocks with it than not, so your stock may be up or down for no other reason than the market was up or down.
Conclusion
How do you use this information?
A change in fundamentals may be an opportunity to buy more shares of a growing company or it may signal the time to sell if the changes are for the worse.
A change in the sector is usually temporary so most long-term investors will ride out dips due to these factors. However, if something drastically changes in the stock’s industry due to regulation or a new technology, for example, you may want to reevaluate your position. Is the company capable of adapting or do you own a dinosaur?
Market swings that move your stock’s price can be opportunities to buy additional shares (assuming all the company’s fundamentals still checkout). If the rising market pushes up your stock’s price, it may be time to take a profit on part of your holdings and wait for the price to come back down to earth to reinvest.
http://stocks.about.com/od/evaluatingstocks/a/0317threefact.htm
Thursday, 20 November 2008
The Myth of EPS Growth
The myth of EPS growth
Impact of Retained earnings on EPS
When EPS growth is entirely due to profits from retained earnings, the increased EPS percentage measures the impact of ROE on those retained earnings.
For instance,
Half of profit is retained: If ROE is 20 percent, half the profit is retained and ROE in the following year remains steady at 20 percent, EPS will increase by 10 percent.
All profit is retained: If all profit is retained and reinvested at 20 percent, EPS will increase by 20 per cent.
All profit is distributed: If all profit were distributed, irrespective of ROE, EPS growth would be zero.
Impact of borrowings (debt) on EPS
Increasing borrowings (debt) on EPS: However, even if all profits were distributed as dividends and the business increased its borrowings, EPS would increase. So an increase in EPS might simply signify an increase in debt.
Decreasing borrowings (debt) on EPS: Conversely, if borrowings were reduced and ROFE exceeded the cost of debt, EPS would decline.
Impact of new capital issues on EPS
When equity per share increases by virtue of new capital issues that exceed the current equity per share, EPS can increase when the business performance (ROE) declines.
So the positive news of an increase in EPS might disguise the fact that value has declined by virtue of diminished profitability.
Because management seems to be as equally ignorant of this factor as the market, focusing on EPS growth can make bad capital-allocation (acquisitions) decisions appear beneficial.
When new shares are issued at a price that exceeds the book value of equity per share, the EPS of a company with a modest business performance can increase quite dramatically.
For instance, a company with a ROE of 10 per cent, $500 million equity and 100 million shares on issue will have an EPS of $0.50 on its equity of $5.00 per share. Given a P/E ratio of 15, the $5.00 equity per share will be priced at $7.50 ($0.50 x 15).
New shares are issued at a price > the book value of equity per share: If the company issues a further 100 million shares at its market price of $7.50, raising $750 million, the 200 million shares on issue will have an equity of $1.25 billion or $6.25 per share.
If the modest ROE of 10 percent is maintained on the increased capital, EPS will grow by 25 percent. That is: equity $1.25 billion / 10% = $125 million / 200 million shares = EPS of 62.5c.
If the P/E ratio of 15 is maintained, the shares will now be priced at 62.5c x 15 = $9.36.
New shareholders whose generosity increased the original shareholders’ equity by 25 per cent to $6.25 a share, having paid $7.50 for stock now priced at $9.36, will be under the impression they made a sound investment decision.
When a company regularly issues shares at prices that exceed the current equity per share, the false impressions of EPS growth will give support and impetus to its share price.
New shares are issued at a price = the book value of equity per share: If the new shares had been issued with the $5.00 equity per share, a price that is closer to the value, EPS would have remained unchanged and EPS growth would be zero.
Does this mean that the lack of EPS growth diminishes the value of the business? Of course not, it is still the same business.
New shares issued at a price > the book value of equity per share, but the ROE declines: When new capital issues are made at prices that exceed the equity per share, EPS will not necessarily decline when the business performance declines. If ROE declined to 8 percent in the example given, EPS will be unchanged: equity $6.25 x ROE 8 percent = EPS 50c.
Conclusion:
The coloured bar charts of profit, dividends and EPS growth in an annual report, although correctly stated, can give an entirely misleading impression. The ever-increasing height of the EPS, profit and dividend columns in the bar chart have nothing whatsoever to do with the business performance.
Because both management and market participants fail to recognise the importance of ROE and ROFE, you are unlikely to ever see them depicted by way of a bar chart in the annual report, or for that matter in an analyst’s research. If you do, take a good look at the company because the CEO is likely to be one of that rare breed who truly understands the impact of capital-allocation decisions.
Using Charlie Munger’s terminology, such a CEO can be likened to a two-legged man competing with one-legged men in an arse-kicking contest. Much better for management, so the thinking goes, to treat shareholders like fools by depicting graphs that move in continuous upward direction.
So what does EPS growth tell us? Essentially nothing, and it should therefore, be disregarded as another misleading indicator that leads to erratic pricing.
Impact of Retained earnings on EPS
When EPS growth is entirely due to profits from retained earnings, the increased EPS percentage measures the impact of ROE on those retained earnings.
For instance,
Half of profit is retained: If ROE is 20 percent, half the profit is retained and ROE in the following year remains steady at 20 percent, EPS will increase by 10 percent.
All profit is retained: If all profit is retained and reinvested at 20 percent, EPS will increase by 20 per cent.
All profit is distributed: If all profit were distributed, irrespective of ROE, EPS growth would be zero.
Impact of borrowings (debt) on EPS
Increasing borrowings (debt) on EPS: However, even if all profits were distributed as dividends and the business increased its borrowings, EPS would increase. So an increase in EPS might simply signify an increase in debt.
Decreasing borrowings (debt) on EPS: Conversely, if borrowings were reduced and ROFE exceeded the cost of debt, EPS would decline.
Impact of new capital issues on EPS
When equity per share increases by virtue of new capital issues that exceed the current equity per share, EPS can increase when the business performance (ROE) declines.
So the positive news of an increase in EPS might disguise the fact that value has declined by virtue of diminished profitability.
Because management seems to be as equally ignorant of this factor as the market, focusing on EPS growth can make bad capital-allocation (acquisitions) decisions appear beneficial.
When new shares are issued at a price that exceeds the book value of equity per share, the EPS of a company with a modest business performance can increase quite dramatically.
For instance, a company with a ROE of 10 per cent, $500 million equity and 100 million shares on issue will have an EPS of $0.50 on its equity of $5.00 per share. Given a P/E ratio of 15, the $5.00 equity per share will be priced at $7.50 ($0.50 x 15).
New shares are issued at a price > the book value of equity per share: If the company issues a further 100 million shares at its market price of $7.50, raising $750 million, the 200 million shares on issue will have an equity of $1.25 billion or $6.25 per share.
If the modest ROE of 10 percent is maintained on the increased capital, EPS will grow by 25 percent. That is: equity $1.25 billion / 10% = $125 million / 200 million shares = EPS of 62.5c.
If the P/E ratio of 15 is maintained, the shares will now be priced at 62.5c x 15 = $9.36.
New shareholders whose generosity increased the original shareholders’ equity by 25 per cent to $6.25 a share, having paid $7.50 for stock now priced at $9.36, will be under the impression they made a sound investment decision.
When a company regularly issues shares at prices that exceed the current equity per share, the false impressions of EPS growth will give support and impetus to its share price.
New shares are issued at a price = the book value of equity per share: If the new shares had been issued with the $5.00 equity per share, a price that is closer to the value, EPS would have remained unchanged and EPS growth would be zero.
Does this mean that the lack of EPS growth diminishes the value of the business? Of course not, it is still the same business.
New shares issued at a price > the book value of equity per share, but the ROE declines: When new capital issues are made at prices that exceed the equity per share, EPS will not necessarily decline when the business performance declines. If ROE declined to 8 percent in the example given, EPS will be unchanged: equity $6.25 x ROE 8 percent = EPS 50c.
Conclusion:
The coloured bar charts of profit, dividends and EPS growth in an annual report, although correctly stated, can give an entirely misleading impression. The ever-increasing height of the EPS, profit and dividend columns in the bar chart have nothing whatsoever to do with the business performance.
Because both management and market participants fail to recognise the importance of ROE and ROFE, you are unlikely to ever see them depicted by way of a bar chart in the annual report, or for that matter in an analyst’s research. If you do, take a good look at the company because the CEO is likely to be one of that rare breed who truly understands the impact of capital-allocation decisions.
Using Charlie Munger’s terminology, such a CEO can be likened to a two-legged man competing with one-legged men in an arse-kicking contest. Much better for management, so the thinking goes, to treat shareholders like fools by depicting graphs that move in continuous upward direction.
So what does EPS growth tell us? Essentially nothing, and it should therefore, be disregarded as another misleading indicator that leads to erratic pricing.
Growth
There is a huge difference between the business that grows and requires lots of capital to do so and the business that grows and doesn’t require capital. (Warren Buffett, 1994 Berkshire AGM)
Growth
When a company is said to be “growing its business” or simply “growing”, it means that the business is using its retained profits or new capital to expand its existing business or to acquire other ready-made businesses.
Organic growth: Growth is said to be organic when a company is using retained profits and debt to expand its existing operations.
The ability to increase market share or penetrate new markets without compromising profit margins indicates a healthy demand for the company’s products or services. Such businesses therefore normally make good long-term investments.
Growth by acquiring other businesses: Companies with limited potential to expand organically might grow externally by acquiring other businesses using existing resources or new capital.
If profitability or ROFE (return on funds employed) from a new acquisition is less than the ROFE in the existing business, the decline in overall profitability will reduce the per-share value.
Because capital-allocation decisions are the Achilles heel of most businesses, companies on the acquisition trail should be treated with caution.
Acquisitions that come at a price that is hard for seller to refuse, while increasing profit in absolute terms, frequently lead to diminished profitability and therefore loss of per-share value.
Growth
When a company is said to be “growing its business” or simply “growing”, it means that the business is using its retained profits or new capital to expand its existing business or to acquire other ready-made businesses.
Organic growth: Growth is said to be organic when a company is using retained profits and debt to expand its existing operations.
The ability to increase market share or penetrate new markets without compromising profit margins indicates a healthy demand for the company’s products or services. Such businesses therefore normally make good long-term investments.
Growth by acquiring other businesses: Companies with limited potential to expand organically might grow externally by acquiring other businesses using existing resources or new capital.
If profitability or ROFE (return on funds employed) from a new acquisition is less than the ROFE in the existing business, the decline in overall profitability will reduce the per-share value.
Because capital-allocation decisions are the Achilles heel of most businesses, companies on the acquisition trail should be treated with caution.
Acquisitions that come at a price that is hard for seller to refuse, while increasing profit in absolute terms, frequently lead to diminished profitability and therefore loss of per-share value.
Red Flags and Pitfalls for Avoiding Financial Fakery
Aggressive accounting: There are literally dozens of techniques that are perfectly legal and aboveboard, but which have the efect of fooling an observer into thinking that a firm has posted true operational improvements when all it has really done is moved some numbers around. You need to know how to identify what’s known as aggressive accounting so you can avoid the companies that practice it.
Outright fraud: Even worse than aggressive accounting is outright fraud. The hucksters of the world are naturally attracted to the stock market because it is the perfect arena for profiting from the greed and carelessness of others. Knowing the signs of potential fraud can save you a lot of financial pain.
It is not hard either. Although you might need a CPA to understand exactly how an aggressive or fraudulent firm is exaggerating its results, you don’t need to be an expert to recognize the warning signs of accounting chicanery.
SIX (6) Red Flags
Watching for these 6 warning signs will help you avoid maybe two-thirds (2/3) of potential accounting-related blowups.
1. Declining Cash Flow
Watch cash flow. Over time, increases in a company's cash flow from operations should roughly track increases in net income.
2. Serial Chargers
Be wary of firms that take frequent one-time charges and write-downs. Frequent charges are open invitation to accounting hanky-panky because firms can bury bad decisions in a single restructuring charge.
3. Serial Acquirers
Firms that make numerous acquisitions can be problematic - their financials have been restated and rejiggered so many times that it's tough to know which end is up. Acquisitions increase the risk that the firm will report a nasty surprise some time in the future.
4. The Chief Financial Officer or Auditor Leave the Company
Who watches the watchmen? When it comes to financial reporting, those watchmen are the chief financial officer (CFO) and the corporate auditors. If you see a CFO leaves a company that's already under suspicion for accounting issues, you should think very hard about whether there might be more going on than meets the eyes. If a company changes auditors frequently or fires its auditors after some potentially damaging accounting issue has come to light, watch out.
5. The Bills Aren’t Being Paid
You should track how fast the A/R are increasing relative to sales - the two should roughly track each other. A/R measures goods that are sold, but not yet paid for. It is simply not possible for A/R to increase faster than sales for a long time - the company is paying out more money (as finished goods) than it is taking in (through cash payments). On the credit front, watch the "allowance for doubtful accounts."
6. Changes in Credit Terms and Accounts Receivable.
Check the company's filing for any mentions of changes in credit terms for customers, as well as for any explanation by management as to why A/R has jumped.
SEVEN (7) Other Pitfalls to Watch Out for.
Watch out also for the following ways that firms can embellish their financial results.
1. Gains from Investments
An honest company breaks out these sales, and reports them below the “operating income” line on its income statement. The most blatant means of using investment income to boost results is to include it as part of revenue.
2. Pension Pitfalls
Pensions can be a big burden for companies with many retirees because if the assets in the pension plan don't increase quickly enough the firm has to divert profits to prop up the pension.
3. Pension Padding
To find out how much profits decreased because of pension costs or increased because of pension gains, go to the line in the pension footnote labeled either “net pension/postretirement expense,” “net pension credit/loss,” “net periodic pension cost,” or some variation.
4. Vanishing Cash Flow
If you are analyzing a company with great cash flow that also has a high flying stock, check to see how much of that cash flow growth is coming from options-related tax benefits.
5. Overstuffed Warehouses
When inventories rise faster than sales, there’s likely to be touble on the horizon.
6. Change is Bad
Firms can make themselves look better by changing any one of a number of assumptions in their financial statements.
7. To expense or Not to Expense
Companies can fiddle with their costs by capitalizing them.
Investor’s Checklist: Avoiding Financial Fakery
Outright fraud: Even worse than aggressive accounting is outright fraud. The hucksters of the world are naturally attracted to the stock market because it is the perfect arena for profiting from the greed and carelessness of others. Knowing the signs of potential fraud can save you a lot of financial pain.
It is not hard either. Although you might need a CPA to understand exactly how an aggressive or fraudulent firm is exaggerating its results, you don’t need to be an expert to recognize the warning signs of accounting chicanery.
SIX (6) Red Flags
Watching for these 6 warning signs will help you avoid maybe two-thirds (2/3) of potential accounting-related blowups.
1. Declining Cash Flow
Watch cash flow. Over time, increases in a company's cash flow from operations should roughly track increases in net income.
2. Serial Chargers
Be wary of firms that take frequent one-time charges and write-downs. Frequent charges are open invitation to accounting hanky-panky because firms can bury bad decisions in a single restructuring charge.
3. Serial Acquirers
Firms that make numerous acquisitions can be problematic - their financials have been restated and rejiggered so many times that it's tough to know which end is up. Acquisitions increase the risk that the firm will report a nasty surprise some time in the future.
4. The Chief Financial Officer or Auditor Leave the Company
Who watches the watchmen? When it comes to financial reporting, those watchmen are the chief financial officer (CFO) and the corporate auditors. If you see a CFO leaves a company that's already under suspicion for accounting issues, you should think very hard about whether there might be more going on than meets the eyes. If a company changes auditors frequently or fires its auditors after some potentially damaging accounting issue has come to light, watch out.
5. The Bills Aren’t Being Paid
You should track how fast the A/R are increasing relative to sales - the two should roughly track each other. A/R measures goods that are sold, but not yet paid for. It is simply not possible for A/R to increase faster than sales for a long time - the company is paying out more money (as finished goods) than it is taking in (through cash payments). On the credit front, watch the "allowance for doubtful accounts."
6. Changes in Credit Terms and Accounts Receivable.
Check the company's filing for any mentions of changes in credit terms for customers, as well as for any explanation by management as to why A/R has jumped.
SEVEN (7) Other Pitfalls to Watch Out for.
Watch out also for the following ways that firms can embellish their financial results.
1. Gains from Investments
An honest company breaks out these sales, and reports them below the “operating income” line on its income statement. The most blatant means of using investment income to boost results is to include it as part of revenue.
2. Pension Pitfalls
Pensions can be a big burden for companies with many retirees because if the assets in the pension plan don't increase quickly enough the firm has to divert profits to prop up the pension.
3. Pension Padding
To find out how much profits decreased because of pension costs or increased because of pension gains, go to the line in the pension footnote labeled either “net pension/postretirement expense,” “net pension credit/loss,” “net periodic pension cost,” or some variation.
4. Vanishing Cash Flow
If you are analyzing a company with great cash flow that also has a high flying stock, check to see how much of that cash flow growth is coming from options-related tax benefits.
5. Overstuffed Warehouses
When inventories rise faster than sales, there’s likely to be touble on the horizon.
6. Change is Bad
Firms can make themselves look better by changing any one of a number of assumptions in their financial statements.
7. To expense or Not to Expense
Companies can fiddle with their costs by capitalizing them.
Investor’s Checklist: Avoiding Financial Fakery
- The simplest way to detect aggressive accounting is to compare the trend of net income with the trend in cash flow from operations. If net income is growing quickly while cash flow is flat or declining, there is a good chance of trouble lurking.
- Companies that make numerous acquisitions or take many one-time charges are more likely to have aggressive accounting. Be wary if a firm’s chief financial officer leaves or if the firm changes auditors.
- Watch the trend of accounts receivable relative to sales. If accounts receivable is growing much faster than sales, the company may be having trouble collecting cash from its customers.
- Pension income and gains from investments can boost reported net income, but don’t confuse them with solid results from the company’s core operations.
Bernanke May Find Deflation `Back on the Table' as Fed Concern
Bernanke May Find Deflation `Back on the Table' as Fed Concern
By Steve Matthews
Nov. 20 (Bloomberg) -- Five years after Federal Reserve Chairman Ben S. Bernanke helped stamp out the risk of deflation, the threat is returning as the financial crisis and a worsening economic slump pull inflation lower.
Fed policy makers now predict the U.S. economy will contract until the middle of next year, according to minutes of their Oct. 28-29 meeting released yesterday in Washington. Government figures showed that consumer prices excluding food and fuel costs fell for the first time since 1982 last month.
The minutes, along with a slide in financial stocks to the lowest level in 13 years, increased the odds that the Fed will cut its benchmark interest rate next month. Bernanke may also need to revisit the unorthodox policy options, such as purchases of U.S. government debt, that he outlined as a board member in 2003, Fed watchers said.
``The Federal Reserve put deflation back on the table as a significant policy concern,'' said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington. ``There does not appear to be any barrier to lowering'' main rate below the current 1 percent level, he said.
Deflation, or prolonged declines in prices, hurt the economy by making debts harder to pay off and lenders more reluctant to extend credit. Japan is the only major economy to have suffered the phenomenon in modern times.
`Lesson' for Kohn
``A lesson I take from the Japanese experience is not to let that get ahead of us, to be aggressive,'' Bernanke's deputy, Vice Chairman Donald Kohn, said in answering questions after a speech yesterday in Washington. ``Whatever I thought that risk was four or five months ago, I think it is bigger now even if it is still small.''
Kohn and Bernanke were both at the Fed in 2003, when the central bank's preferred consumer-price gauge reached a low of 1.3 percent, spurring then-Chairman Alan Greenspan to cut the key rate to 1 percent.
Some policy makers saw a risk last month that the inflation rate will fall below their mandated goal of ``price stability.'' ``Aggressive easing should reduce the odds of a deflationary outcome,'' they said, while noting that the low federal funds rate target ``would pose important policy challenges'' in that case.
The Fed's actions so far, including unprecedented injections of liquidity, haven't been enough to spur lending. Banks may make it even harder to get loans as their share prices plummet. Citigroup Inc. closed at a level unseen since 1995. The Standard & Poor's 500 Financials Index fell 12 percent to 139.84.
Hedge-Fund Risk
Fed officials expressed concern at last month's meeting at the risk for ``financial strains to intensify if some investors, such as hedge funds, found it necessary to sell assets and as lending institutions built reserves against losses.''
``Credit availability certainly hasn't increased,'' said Lyle Gramley, a former Fed governor.
``That has to be a major concern for the Fed because historically the way we get out of recessions is having the Fed push down hard on the accelerator. If that is not working very well, we have to look somewhere else for salvation.''
Future action by the central bank might include ``aggressively buying long-term Treasury issues,'' Gramley, now a Washington-based senior economic adviser for Stanford Group Co., said in a Bloomberg Television interview.
Fannie, Freddie
Michael Feroli, a JPMorgan Chase & Co. economist who used to work at the Fed, said the central bank could also purchase the debt of Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the government in September.
``Before ramping up'' such programs, the Fed might ``first communicate to the markets that the nature of the current economic woes should keep rates low for an extended period,'' Feroli wrote in a note yesterday.
The Fed's balance sheet has already doubled to almost $2 trillion as officials introduced programs to inject liquidity into the economy.
``Several'' participants at last month's Federal Open Market Committee meeting judged the extraordinary programs will need to be ``unwound appropriately as the financial situation normalized,'' the minutes said.
Bernanke, a scholar of the Great Depression and former Princeton University professor, detailed possible assets the Fed could buy to fight deflation in a November 2002 speech when he was a governor. ``Sustained deflation can be highly destructive'' and ``should be strongly resisted,'' he said.
Ready to Act
Fed officials at last month's meeting ``agreed to take whatever steps were necessary to support the recovery.''
Policy makers projected the Fed's preferred gauge of inflation at 1.5 percent to 2 percent next year, with a further slowdown in the next two years, reaching 1.3 percent to 1.7 percent in 2011, yesterday's report showed.
Some officials ``suggested that additional policy easing could well be appropriate at future meetings,'' the minutes said.
``The door is wide open for a rate cut of half-a-point at the December 16 meeting,'' said Allen Sinai, chief economist at Decision Economics in New York. He predicts the central bank will pare the main interest rate to 0.25 percent in January.
To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net Last Updated: November 20, 2008 00:07 EST
http://www.bloomberg.com/apps/news?pid=20601087&sid=aBncZw9DlhRI&refer=worldwide#
To buy a stock, you need confidence in the earnings
Goldman Shares Sink to Lowest Price Since 1999 IPO (Update1)
By Christine Harper and Nick Baker
Nov. 19 (Bloomberg) -- Goldman Sachs Group Inc. closed at its lowest price since the firm first sold shares for $53 apiece to the public in 1999, as the profit outlook darkens for a company that set a record for Wall Street earnings last year.
The stock fell $6.85, or 11 percent, to $55.18 in New York Stock Exchange composite trading, giving the company a market value of $26 billion. The New York-based firm's value reached a high of $105 billion, or $248 per share, on Oct. 31, 2007.
Goldman, which converted from the biggest U.S. securities firm into a bank holding company in September, dropped along with other bank and brokerage stocks including Morgan Stanley and Citigroup Inc. today as investors questioned how the industry can recover from more than $700 billion of writedowns and credit losses as economic growth slows.
``Investors are walking away from financial companies until they have a better idea of the earnings power of the entire sector,'' said David Killian, a portfolio manager at Valley Forge Advisors LLC in King of Prussia, Pennsylvania, which manages $490 million including Goldman shares. ``In order to have confidence to buy a stock you need confidence in the earnings.''
Morgan Stanley, which was the second-biggest U.S. securities firm before becoming a bank holding company alongside Goldman, slid $1.78 today, or 15 percent, to $10.25. Citigroup, the second-biggest U.S. bank by assets, dropped $1.96, or 23 percent, to $6.40. All three companies are based in New York.
Profits Dwindle
Goldman surpassed rivals including Merrill Lynch & Co. and Morgan Stanley since going public in May 1999 to become the largest U.S. securities firm by market value and the most profitable in Wall Street history. On their first day of trading in 1999, Goldman's shares climbed 33 percent to $70.375.
Last year, the company became one of about a dozen in the U.S. with a stock price above $200. This year, profits are down 47 percent in the first nine months and some analysts expect the firm to report its first quarterly loss as a public company.
Morgan Stanley's profit has dropped 41 percent so far this year, while Citigroup has reported four consecutive quarterly losses. Goldman and Morgan Stanley each received $10 billion from the U.S. government last month as part of a rescue plan for the financial industry; Citigroup got $25 billion. In all, nine banks received capital injections.
Investors are concerned that return on equity, a measure of how effectively shareholder money is invested, will shrink because the banks are reducing their leverage, or ratio of assets to equity, to cut their reliance on debt-funding.
``A lot of the selling is questioning the business models of these big banks and investment banks,'' said Noman Ali, a money manager at MFC Global Investment Management in Toronto, which oversees $20 billion of U.S. stocks. ``If you don't know what the business model is going to be like going forward, and clearly it's not going to be levered 40 to one, the days of 30 percent ROE are going to be gone.''
To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Nick Baker in New York at nbaker7@bloomberg.net. Last Updated: November 19, 2008 17:10 EST
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Buffett's Berkshire Falls Most in at Least 23 Years
Buffett's Berkshire Falls Most in at Least 23 Years (Update2)
By Hugh Son and Linda Shen
Nov. 19 (Bloomberg) -- Warren Buffett's Berkshire Hathaway Inc. fell the most in at least 23 years, dropping for the eighth straight day since reporting a 77 percent decline in third- quarter profit.
The stock plunged $11,550, or 12 percent, to $84,000 in New York Stock Exchange composite trading and has slipped 41 percent this year, compared with the 45 percent drop in the Standard & Poor's 500 Index. Berkshire, based in Omaha, Nebraska, rose in 17 of the past 20 years.
``There's nothing fundamentally wrong with Berkshire, what's really happening is people are wondering if there's something fundamentally wrong with the economy, and Berkshire is in some ways a bit of a proxy for that,'' said Michael Yoshikami, president of YCMNet Advisors in Walnut Creek, California, which manages $850 million including Berkshire shares.
Berkshire has posted four straight profit declines, the worst streak in at least 13 years, on falling returns at insurance businesses and investment losses. Buffett, ranked by Forbes magazine as the richest American, has committed at least $28 billion this year to acquire companies, finance buyouts and purchase securities as prices fell and competitors were hobbled by limited access to credit.
Berkshire's shareholder equity, a measure of assets minus liabilities, fell by about $9 billion in October on declines in debt and equity markets, the firm said Nov. 7. American Express Co., the credit-card company that is one of Berkshire's top 10 stock holdings, plunged 47 percent since Sept. 30 as borrower defaults increased. Wells Fargo & Co., Berkshire's No. 2 investment, dropped about 35 percent.
`Under Pressure'
``Many of the companies Berkshire owns, such as American Express, are under pressure,'' Yoshikami said. ``What you're seeing is a systematic de-leveraging process taking all financials down, including good-quality financials.''
Berkshire shareholders including Mohnish Pabrai, head of Pabrai Investment Funds, have said investors are concerned about losses on the company's $37 billion bet on world equity values more than a decade from now. Buffett sold contracts to undisclosed counterparties for $4.85 billion protecting the buyers against declines in four stock indexes including the S&P 500.
Under the agreements, Berkshire will pay as much as $37 billion if, on specific dates beginning in 2019, the indexes are below the point where they were when he made the agreements. By Sept. 30, Berkshire had written down the contracts by $6.73 billion as the S&P declined for a fourth straight quarter.
Credit-Default Swaps
The cost to protect against Berkshire being unable to meet its debt payments, based on credit-default swaps, has more than tripled in two months.
The swaps jumped to 475 basis points today from 129 points two months ago, according to CMA Datavision. That translates to $475,000 a year to protect $10 million for five years.
Jackie Wilson, a spokeswoman for Berkshire, didn't immediately return a message seeking comment.
To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net Last Updated: November 19, 2008 17:58 EST
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Asia-Pacific Growth May Halve in 2009 as U.S. Slows, PECC Says
Asia-Pacific Growth May Halve in 2009 as U.S. Slows, PECC Says
By Kartik Goyal
Nov. 20 (Bloomberg) -- Growth in the Asia-Pacific region may expand in 2009 at less than half the pace of the previous two years as the global financial crisis causes the U.S. economy to contract, the Pacific Economic Cooperation Council said.
Growth in the 16 economies tracked by the council may slow to 1.2 percent next year from 3.6 percent in 2008 and 3.5 percent in 2007, it said in a statement today. The estimate includes the performance of the U.S., Chile, Peru and Japan.
The worst financial crisis since the Great Depression has pushed economies from Japan to Europe into recession, prompting policy makers around the world to cut interest rates and spend to stimulate growth. Still, falling commodity prices will help reduce Asian import costs while weakening currencies will make the region's exports more competitive, the PECC said.
``The U.S. sub-prime mortgage crisis has turned into an international financial crisis but it is not yet certain that the ensuing global downturn will result in a severe recession in Asia,'' the group said. ``In the near term, the focus for Asian governments will be to defend against further contagion effects.''
East Asia's growth is forecast to slip to 3.4 percent from 3.9 percent this year, the independent non-government group said.
The U.S. economy will probably shrink 0.5 percent in 2009 before recovering in 2010 with 2.4 percent growth, the PECC predicts. Japan may grow 0.8 percent next year, and China's growth will slow to 9 percent from 9.3 percent this year and 11.9 percent in 2007, it said.
China's growth will be supported by stronger domestic demand and government spending, the group said. China holds about half of Asia's estimated $4 trillion in foreign reserves, and surplus funds in Asia and Gulf states will be needed to recapitalize the U.S. banking industry and finance the government's deficits, it said.
``While the U.S. dollar has risen sharply since the crisis because of a flight to quality, the medium-term outlook for the greenback is more gloomy,'' said the PECC. ``With the U.S. dollar at current highs, the temptation for Asian central banks to diversify away from the dollar in the year ahead will be greater than ever. As the credit crunch eases, interest rates in the U.S. will have to rise in order to attract investment capital from the rest of the world.''
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net. Last Updated: November 19, 2008 11:00 EST
http://www.bloomberg.com/apps/news?pid=20601081&refer=australia&sid=aoldAQKBpOaM#
By Kartik Goyal
Nov. 20 (Bloomberg) -- Growth in the Asia-Pacific region may expand in 2009 at less than half the pace of the previous two years as the global financial crisis causes the U.S. economy to contract, the Pacific Economic Cooperation Council said.
Growth in the 16 economies tracked by the council may slow to 1.2 percent next year from 3.6 percent in 2008 and 3.5 percent in 2007, it said in a statement today. The estimate includes the performance of the U.S., Chile, Peru and Japan.
The worst financial crisis since the Great Depression has pushed economies from Japan to Europe into recession, prompting policy makers around the world to cut interest rates and spend to stimulate growth. Still, falling commodity prices will help reduce Asian import costs while weakening currencies will make the region's exports more competitive, the PECC said.
``The U.S. sub-prime mortgage crisis has turned into an international financial crisis but it is not yet certain that the ensuing global downturn will result in a severe recession in Asia,'' the group said. ``In the near term, the focus for Asian governments will be to defend against further contagion effects.''
East Asia's growth is forecast to slip to 3.4 percent from 3.9 percent this year, the independent non-government group said.
The U.S. economy will probably shrink 0.5 percent in 2009 before recovering in 2010 with 2.4 percent growth, the PECC predicts. Japan may grow 0.8 percent next year, and China's growth will slow to 9 percent from 9.3 percent this year and 11.9 percent in 2007, it said.
China's growth will be supported by stronger domestic demand and government spending, the group said. China holds about half of Asia's estimated $4 trillion in foreign reserves, and surplus funds in Asia and Gulf states will be needed to recapitalize the U.S. banking industry and finance the government's deficits, it said.
``While the U.S. dollar has risen sharply since the crisis because of a flight to quality, the medium-term outlook for the greenback is more gloomy,'' said the PECC. ``With the U.S. dollar at current highs, the temptation for Asian central banks to diversify away from the dollar in the year ahead will be greater than ever. As the credit crunch eases, interest rates in the U.S. will have to rise in order to attract investment capital from the rest of the world.''
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net. Last Updated: November 19, 2008 11:00 EST
http://www.bloomberg.com/apps/news?pid=20601081&refer=australia&sid=aoldAQKBpOaM#
Wednesday, 19 November 2008
Stock markets discount everything
Wednesday November 19, 2008
Stock markets discount everything
Current prices reflect all potential returns and risks
A LOT of investors find it difficult to predict the stock market’s movement. They cannot understand why whenever the market is faced with a lot of bad news, instead of tumbling, it goes up.
Each time the market has a lot of good news and they feel that it is the right time to buy stocks, the market drops. As a result, investors always enter the market at the wrong time and end up buying stocks at higher prices and selling them at lower prices.
In this article, we will look at whether the current market prices are reflecting all the information, including the good and bad news.
According to Eugene Fama, a market is considered efficient if the current market prices reflect all available information.
In an efficient market, investors will not be able to make money from the information they own as all the potential returns or risks are already reflected in the stock prices.
If you are an efficient market believer, you will believe it is not possible to make money from whatever available information such as stock prices, trading volume, the company’s financial statement or any insider information.
The best price to purchase any stock will be the current price as it reflects all the potential returns and risks involved in the company.
Recently, the Dow Jones Industrial Average surged from a low of 8,175.77 on Oct 27 to a high of 9,625.28 on Nov 4, the day of the US presidential election.
Despite higher stock prices, not many investors dared enter the market as they were uncertain if Barack Obama could win the election.
Obama’s landslide victory led many investors to believe it was the right time to purchase stocks but the Dow tumbled 486 points to close at 9,139.27 the very next day after the presidential election.
Our local investors, who rushed in to purchase stocks in the belief that the US market would soar following Obama’s victory, were deeply disappointed as the market did not behave as predicted.
The main reason behind this phenomenon was because the positive news of Obama’s victory had already been reflected in stock prices.
As a result, when the actual incident happened, the market tumbled instead of surging. Besides, after the short-lived euphoria on the US election, the US stock market still needed to reflect the poor fundamentals of the US economy and the possible economic recession. Hence, whenever we intend to take position on any positive or negative news, we need to determine whether that information is already reflected in the stock prices.
On Monday, even though the official data showed that Japan had slipped into recession, Japanese stocks shrugged off the news by closing higher.
Most investors could not understand why Japan’s stock market could close higher on such big negative news. Again, the main reason for this was the news on possible recession had already been reflected in Japanese stock prices.
In fact, some traders or investors might have over-reacted to the economic recession. Hence, when the Japanese government announced the actual numbers, investors reacted positively to the numbers as not being as bad as what they had predicted.
Since August 2007, markets in the Asia-Pacific have experienced several waves of massive selling. Each time the Asia-Pacific and European markets tumbled by more than 5%, raising investor concern over further crashes on the overnight US market, in most instances, the Dow would close higher as most of the negative news had been reflected in the stock prices.
Hence, we should not be too pessimistic whenever we encounter a lot of negative news. We need to sit back and think whether this negative news has been reflected in the stock prices.
Sometimes it may be the right time to purchase instead of selling stocks. In most instances, as a result of our panic selling, some investors end up regretting they sold the stocks too early. If they had more patience and had waited for a few days, they might have been able to sell at higher prices.
In conclusion, whenever we receive any positive or negative news, whether we are able to take advantage of it will very much depend on whether the information has been reflected in the stock prices.
If the stock prices have reacted to the news prior to the announcement, investors will not be able to benefit from the information.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2008/11/19/business/2580026&sec=business
Stock markets discount everything
Current prices reflect all potential returns and risks
A LOT of investors find it difficult to predict the stock market’s movement. They cannot understand why whenever the market is faced with a lot of bad news, instead of tumbling, it goes up.
Each time the market has a lot of good news and they feel that it is the right time to buy stocks, the market drops. As a result, investors always enter the market at the wrong time and end up buying stocks at higher prices and selling them at lower prices.
In this article, we will look at whether the current market prices are reflecting all the information, including the good and bad news.
According to Eugene Fama, a market is considered efficient if the current market prices reflect all available information.
In an efficient market, investors will not be able to make money from the information they own as all the potential returns or risks are already reflected in the stock prices.
If you are an efficient market believer, you will believe it is not possible to make money from whatever available information such as stock prices, trading volume, the company’s financial statement or any insider information.
The best price to purchase any stock will be the current price as it reflects all the potential returns and risks involved in the company.
Recently, the Dow Jones Industrial Average surged from a low of 8,175.77 on Oct 27 to a high of 9,625.28 on Nov 4, the day of the US presidential election.
Despite higher stock prices, not many investors dared enter the market as they were uncertain if Barack Obama could win the election.
Obama’s landslide victory led many investors to believe it was the right time to purchase stocks but the Dow tumbled 486 points to close at 9,139.27 the very next day after the presidential election.
Our local investors, who rushed in to purchase stocks in the belief that the US market would soar following Obama’s victory, were deeply disappointed as the market did not behave as predicted.
The main reason behind this phenomenon was because the positive news of Obama’s victory had already been reflected in stock prices.
As a result, when the actual incident happened, the market tumbled instead of surging. Besides, after the short-lived euphoria on the US election, the US stock market still needed to reflect the poor fundamentals of the US economy and the possible economic recession. Hence, whenever we intend to take position on any positive or negative news, we need to determine whether that information is already reflected in the stock prices.
On Monday, even though the official data showed that Japan had slipped into recession, Japanese stocks shrugged off the news by closing higher.
Most investors could not understand why Japan’s stock market could close higher on such big negative news. Again, the main reason for this was the news on possible recession had already been reflected in Japanese stock prices.
In fact, some traders or investors might have over-reacted to the economic recession. Hence, when the Japanese government announced the actual numbers, investors reacted positively to the numbers as not being as bad as what they had predicted.
Since August 2007, markets in the Asia-Pacific have experienced several waves of massive selling. Each time the Asia-Pacific and European markets tumbled by more than 5%, raising investor concern over further crashes on the overnight US market, in most instances, the Dow would close higher as most of the negative news had been reflected in the stock prices.
Hence, we should not be too pessimistic whenever we encounter a lot of negative news. We need to sit back and think whether this negative news has been reflected in the stock prices.
Sometimes it may be the right time to purchase instead of selling stocks. In most instances, as a result of our panic selling, some investors end up regretting they sold the stocks too early. If they had more patience and had waited for a few days, they might have been able to sell at higher prices.
In conclusion, whenever we receive any positive or negative news, whether we are able to take advantage of it will very much depend on whether the information has been reflected in the stock prices.
If the stock prices have reacted to the news prior to the announcement, investors will not be able to benefit from the information.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2008/11/19/business/2580026&sec=business
Monday, 17 November 2008
World oil prices sink below 60 dollars on recession fears
Agence France-Presse - 11/7/2008 2:48 AM GMT
World oil prices sink below 60 dollars on recession fears
World oil prices sank below 60 dollars in Asian trade Friday, with the market gripped by worries energy demand would be hit by a global economic downturn, dealers said.
New York's main contract, light sweet crude for December delivery briefly traded below the 60-dollar level at 59.97 dollars, its lowest level since March 2007, but later regained some ground to trade at 60.52 dollars.
The New York contract closed Thursday 4.53 dollars lower at 60.77 dollars.
Brent North Sea crude for December delivery was off 81 cents to 56.62 dollars a barrel from Thursday's close of 57.43 dollars.
Fears of a sharp global downturn intensified after the International Monetary Fund said Thursday that advanced economies would contract in 2009 for the first time since World War II.
In sharp downward revisions to its last economic projections made less than a month ago, the IMF said advanced economies would now shrink by 0.3 percent in 2009. The organisation had previously predicted a 0.5 percent growth.
Oil prices have plunged from record highs above 147 dollars a barrel in July on worries that slowing global growth, especially in the United States, would hit energy demand.
The United States is the world's biggest energy user.
"The big issue that remains a drag on investor sentiment is the parlous state of the global economy," said analysts from State Street Global Markets, the investment research and trading arm of US financial services provider State Street Corporation.
"This slowdown will spare no part of the globe," they said in a report.
On Thursday, the European Central Bank (ECB) and the Bank of England (BoE) were the latest to slash interest rates in a bid to shore up flagging economies following similar moves by Asian central banks and the US Federal Reserve.
The ECB cut its main lending rate by half a percentage point to 3.25 percent while the Boe slashed its key lending rate by a record 1.5 percentage points to 3.0 percent -- the lowest level in more than half a century -- as Britain heads towards recession.
Analysts said the sharp interest rate cuts by the BoE could indicate things were even worse than previously thought.
"The fear is now that the situation could be much more dire than first perceived," said Joshua Raymond, market strategist at City Index.
The British economy is on the verge of a recession after contracting in the third quarter for the first time since 1992. The European Commission forecast this week a similar fate awaited the 27-nation European Union by year's end.
Meanwhile, the International Energy Agency said Wednesday that it expected the price of oil to rebound above 100 dollars and eventually reach 200 dollars by 2030.
In a report on the global energy outlook, the agency said the price would average 100 dollars a barrel from 2008 to 2015.
burs-bh
http://news.my.msn.com/regional/article.aspx?cp-documentid=1774126
--------
Agence France-Presse - 11/6/2008 6:35 AM GMT
World oil prices extend losses on demand worries
World oil prices extended losses in Asian trade Thursday on concerns that demand is weakening in the United States, the world's biggest energy user, dealers said.
New York's main contract, light sweet crude for December delivery was off 74 cents to 64.56 dollars from its close of 65.30 dollars in the United States Wednesday. The contract fell 5.23 dollars Wednesday.
Brent North Sea crude for December delivery eased 73 cents to 61.14 dollars a barrel from 61.87 dollars. It dropped 4.57 dollars Wednesday.
Latest data released Wednesday by the US Department of Energy (DoE) showed US gasoline stockpiles jumped 1.1 million barrels in the week ended October 31, confounding market expectations for a drop of 600,000 barrels.
The DoE said crude reserves held steady instead of rising the 1.2 million barrels forecast by analysts.
US energy demand continued to decline. Americans consumed 6.7 percent less crude in the past four weeks compared with the same period a year ago, the government data showed.
"It's very difficult to sustain price rallies, especially since the demand deterioration theory is still intact," Jim Ritterbusch, president of the oil trading advisory firm Ritterbusch and Associates, was quoted as saying by Dow Jones Newswires.
Crude prices have more than halved since hitting record levels of above 147 dollars in July on concerns about the faltering global economy.
Members of the Organisation of Petroleum Exporting Countries, which pumps about 40 percent of the world's oil, have started to cut output in November as part of the cartel's plans to shore up prices.
The cartel announced in an emergency meeting last month it would cut output by 1.5 million barrels a day to 27.3 million bpd from November.
burs-bh/jw
http://news.my.msn.com/regional/article.aspx?cp-documentid=1742238
World oil prices sink below 60 dollars on recession fears
World oil prices sank below 60 dollars in Asian trade Friday, with the market gripped by worries energy demand would be hit by a global economic downturn, dealers said.
New York's main contract, light sweet crude for December delivery briefly traded below the 60-dollar level at 59.97 dollars, its lowest level since March 2007, but later regained some ground to trade at 60.52 dollars.
The New York contract closed Thursday 4.53 dollars lower at 60.77 dollars.
Brent North Sea crude for December delivery was off 81 cents to 56.62 dollars a barrel from Thursday's close of 57.43 dollars.
Fears of a sharp global downturn intensified after the International Monetary Fund said Thursday that advanced economies would contract in 2009 for the first time since World War II.
In sharp downward revisions to its last economic projections made less than a month ago, the IMF said advanced economies would now shrink by 0.3 percent in 2009. The organisation had previously predicted a 0.5 percent growth.
Oil prices have plunged from record highs above 147 dollars a barrel in July on worries that slowing global growth, especially in the United States, would hit energy demand.
The United States is the world's biggest energy user.
"The big issue that remains a drag on investor sentiment is the parlous state of the global economy," said analysts from State Street Global Markets, the investment research and trading arm of US financial services provider State Street Corporation.
"This slowdown will spare no part of the globe," they said in a report.
On Thursday, the European Central Bank (ECB) and the Bank of England (BoE) were the latest to slash interest rates in a bid to shore up flagging economies following similar moves by Asian central banks and the US Federal Reserve.
The ECB cut its main lending rate by half a percentage point to 3.25 percent while the Boe slashed its key lending rate by a record 1.5 percentage points to 3.0 percent -- the lowest level in more than half a century -- as Britain heads towards recession.
Analysts said the sharp interest rate cuts by the BoE could indicate things were even worse than previously thought.
"The fear is now that the situation could be much more dire than first perceived," said Joshua Raymond, market strategist at City Index.
The British economy is on the verge of a recession after contracting in the third quarter for the first time since 1992. The European Commission forecast this week a similar fate awaited the 27-nation European Union by year's end.
Meanwhile, the International Energy Agency said Wednesday that it expected the price of oil to rebound above 100 dollars and eventually reach 200 dollars by 2030.
In a report on the global energy outlook, the agency said the price would average 100 dollars a barrel from 2008 to 2015.
burs-bh
http://news.my.msn.com/regional/article.aspx?cp-documentid=1774126
--------
Agence France-Presse - 11/6/2008 6:35 AM GMT
World oil prices extend losses on demand worries
World oil prices extended losses in Asian trade Thursday on concerns that demand is weakening in the United States, the world's biggest energy user, dealers said.
New York's main contract, light sweet crude for December delivery was off 74 cents to 64.56 dollars from its close of 65.30 dollars in the United States Wednesday. The contract fell 5.23 dollars Wednesday.
Brent North Sea crude for December delivery eased 73 cents to 61.14 dollars a barrel from 61.87 dollars. It dropped 4.57 dollars Wednesday.
Latest data released Wednesday by the US Department of Energy (DoE) showed US gasoline stockpiles jumped 1.1 million barrels in the week ended October 31, confounding market expectations for a drop of 600,000 barrels.
The DoE said crude reserves held steady instead of rising the 1.2 million barrels forecast by analysts.
US energy demand continued to decline. Americans consumed 6.7 percent less crude in the past four weeks compared with the same period a year ago, the government data showed.
"It's very difficult to sustain price rallies, especially since the demand deterioration theory is still intact," Jim Ritterbusch, president of the oil trading advisory firm Ritterbusch and Associates, was quoted as saying by Dow Jones Newswires.
Crude prices have more than halved since hitting record levels of above 147 dollars in July on concerns about the faltering global economy.
Members of the Organisation of Petroleum Exporting Countries, which pumps about 40 percent of the world's oil, have started to cut output in November as part of the cartel's plans to shore up prices.
The cartel announced in an emergency meeting last month it would cut output by 1.5 million barrels a day to 27.3 million bpd from November.
burs-bh/jw
http://news.my.msn.com/regional/article.aspx?cp-documentid=1742238
Lessons from Sovereign Wealth Funds
Agence France-Presse - 11/9/2008 3:50 AM GMT
Sovereign wealth funds turning cautious: analysts
Cash-rich sovereign wealth funds from Asia and the Middle East may be turning cautious after getting burnt by investments in Western firms hit by the current financial turmoil, analysts said.
Despite fresh opportunities, prudence now prevails as countries that own the funds sit on massive paper losses from investments made just before problems in the US housing market erupted into a full-blown global crisis.
Their multi-billion-dollar forays into Western financial giants such as Citigroup and Merrill Lynch appeared to be good bargains but the banking shakeout has since sharply reduced the value of their holdings.
"I think they've been burnt... They are not sure this is the right time and they are more cautious," said Zanny Minton-Beddoes, a Washington-based editor with The Economist, the widely-respected current affairs weekly.
"They put a lot of capital into financial institutions earlier on and they lost a lot of money," Minton-Beddoes, a former economist with the International Monetary Fund, told AFP.
Since last year, financial institutions hit by the unfolding slump in the US housing market have sought and received billions of dollars in fresh capital from sovereign wealth funds created to invest national savings and surpluses fed by crude-oil windfalls in the Gulf and rapid industrialisation in Asia.
The funds have come under increasing scrutiny after making high-profile investments in distressed banks and companies.
They were also criticised as too opaque in their operations and, in some cases, stakes in strategic sectors like telecommunications were seen as potential threats to national security.
The IMF has estimated that sovereign wealth funds collectively hold total assets of between 1.9 trillion and 2.8 trillion dollars and could be worth 12 trillion dollars by 2012, while the UN Conference on Trade and Development puts their current holdings at about 5.0 trillion dollars.
Christopher Balding, a researcher with the University of California, said sovereign wealth funds are by nature risk-averse and the ongoing financial turmoil would further accentuate that position.
"The current turmoil will, in my estimation, only reinforce the inherent conservative investment outlook," Balding, who specialises in international economics and sovereign wealth funds, told AFP.
"Right now there is a lot of fear in the marketplace from all investors... Sovereign wealth funds are not interested in making more large investments because of how their previous investments have turned out."
Singapore was among the most prominent investors with its two main funds, Temasek Holdings and the Government of Singapore Investment Corp (GIC), emerging as sought-after sources of capital by ailing Western financial firms.
Temasek invested 8.3 billion US dollars into Merrill Lynch, which was later acquired by Bank of America in an all-stock deal worth 50 billion dollars, while GIC pumped billions into Citigroup and Swiss banking behemoth UBS.
In response to AFP queries, GIC and Temasek both said they would continue to explore all investment opportunities but declined to give further details.
Funds from the oil-rich Middle East were also courted in the West.
The state-owned Kuwait Investment Authority injected a total of 5.0 billion dollars in Citigroup and Merrill Lynch in January this year.
The Abu Dhabi Investment Authority, controlled by the largest member of the United Arab Emirates, poured 7.52 billion dollars into Citigroup late last year.
Analysts said sovereign wealth funds from Asia and the Middle East would continue to be major financiers, but any potential partnerships would be carefully weighed before the cheque book is taken out.
"Western financials need the capital and they (sovereign wealth funds) have the capital... I just think they will be carefully considered," said Minton-Beddoes.
Michael Backman, an author of several business books on Asia, said now is the time for the region's funds to look at long-term investments in Western firms.
"It's a good time to have a lot of cash. Assets are being over-sold and there will be plenty of bargains," Backman told AFP from London.
"It's an excellent opportunity for sovereign wealth funds to diversify to the developed economies and to do it at bargain basement prices."
http://news.my.msn.com/regional/article.aspx?cp-documentid=1777581
Sovereign wealth funds turning cautious: analysts
Cash-rich sovereign wealth funds from Asia and the Middle East may be turning cautious after getting burnt by investments in Western firms hit by the current financial turmoil, analysts said.
Despite fresh opportunities, prudence now prevails as countries that own the funds sit on massive paper losses from investments made just before problems in the US housing market erupted into a full-blown global crisis.
Their multi-billion-dollar forays into Western financial giants such as Citigroup and Merrill Lynch appeared to be good bargains but the banking shakeout has since sharply reduced the value of their holdings.
"I think they've been burnt... They are not sure this is the right time and they are more cautious," said Zanny Minton-Beddoes, a Washington-based editor with The Economist, the widely-respected current affairs weekly.
"They put a lot of capital into financial institutions earlier on and they lost a lot of money," Minton-Beddoes, a former economist with the International Monetary Fund, told AFP.
Since last year, financial institutions hit by the unfolding slump in the US housing market have sought and received billions of dollars in fresh capital from sovereign wealth funds created to invest national savings and surpluses fed by crude-oil windfalls in the Gulf and rapid industrialisation in Asia.
The funds have come under increasing scrutiny after making high-profile investments in distressed banks and companies.
They were also criticised as too opaque in their operations and, in some cases, stakes in strategic sectors like telecommunications were seen as potential threats to national security.
The IMF has estimated that sovereign wealth funds collectively hold total assets of between 1.9 trillion and 2.8 trillion dollars and could be worth 12 trillion dollars by 2012, while the UN Conference on Trade and Development puts their current holdings at about 5.0 trillion dollars.
Christopher Balding, a researcher with the University of California, said sovereign wealth funds are by nature risk-averse and the ongoing financial turmoil would further accentuate that position.
"The current turmoil will, in my estimation, only reinforce the inherent conservative investment outlook," Balding, who specialises in international economics and sovereign wealth funds, told AFP.
"Right now there is a lot of fear in the marketplace from all investors... Sovereign wealth funds are not interested in making more large investments because of how their previous investments have turned out."
Singapore was among the most prominent investors with its two main funds, Temasek Holdings and the Government of Singapore Investment Corp (GIC), emerging as sought-after sources of capital by ailing Western financial firms.
Temasek invested 8.3 billion US dollars into Merrill Lynch, which was later acquired by Bank of America in an all-stock deal worth 50 billion dollars, while GIC pumped billions into Citigroup and Swiss banking behemoth UBS.
In response to AFP queries, GIC and Temasek both said they would continue to explore all investment opportunities but declined to give further details.
Funds from the oil-rich Middle East were also courted in the West.
The state-owned Kuwait Investment Authority injected a total of 5.0 billion dollars in Citigroup and Merrill Lynch in January this year.
The Abu Dhabi Investment Authority, controlled by the largest member of the United Arab Emirates, poured 7.52 billion dollars into Citigroup late last year.
Analysts said sovereign wealth funds from Asia and the Middle East would continue to be major financiers, but any potential partnerships would be carefully weighed before the cheque book is taken out.
"Western financials need the capital and they (sovereign wealth funds) have the capital... I just think they will be carefully considered," said Minton-Beddoes.
Michael Backman, an author of several business books on Asia, said now is the time for the region's funds to look at long-term investments in Western firms.
"It's a good time to have a lot of cash. Assets are being over-sold and there will be plenty of bargains," Backman told AFP from London.
"It's an excellent opportunity for sovereign wealth funds to diversify to the developed economies and to do it at bargain basement prices."
http://news.my.msn.com/regional/article.aspx?cp-documentid=1777581
Asia faces sharper slowdown next year: Morgan Stanley
Agence France-Presse - 11/11/2008 11:06 AM GMT
Asia faces sharper slowdown next year: Morgan Stanley
Asia is staring at a much sharper economic slowdown next year than earlier anticipated because of a deepening global recession, US bank Morgan Stanley said Tuesday.
The region is now expected to grow by 5.5 percent in 2009 instead of a previously forecast 6.4 percent, said Chetan Ahya, a Morgan Stanley economist for Southeast Asia and India.
Australia, South Korea, India and Indonesia will be vulnerable to financial contagion because of large current account deficits, while export-dependent countries will also suffer, he said at a news conference.
While downside risks could further drag the forecast growth rate to below 5.0 percent, it is unlikely to drop near the 2.4 percent expansion rate seen during the Asian financial crisis in 1997 and 1998, he said.
"The risk right now is it could dip below 5.0 percent," but not close to the levels of a decade ago, he said.
Ahya added that in 1997 and 1998 the gross domestic product (GDP) of five key Asian economies contracted between 4.0 and 13 percent, a situation which is unlikely during the current turmoil.
Ahya said the US economy is likely to shrink by 1.3 percent next year and the European economy should contract by 0.6 percent, more drastic than earlier projections.
Because of this, "Asia is unlikely to emerge unscathed in an environment where the global economy is likely to see a deeper recession," Morgan Stanley the bank said in a report.
It said the region's economies will start a "tepid" rebound in 2010.
The bank projects Asian economies outside Japan to grow by 6.9 percent in 2010, faster than the forecast global growth rate of 3.6 percent, but lower than the expected 7.6 percent expansion in 2008.
"We're not looking for the same kind of (high-growth) environment to come back soon. In that sense, we're looking for the duration of this global risk aversion to be longer than what we had all expected," Ahya said.
http://news.my.msn.com/regional/article.aspx?cp-documentid=1780901
Asia faces sharper slowdown next year: Morgan Stanley
Asia is staring at a much sharper economic slowdown next year than earlier anticipated because of a deepening global recession, US bank Morgan Stanley said Tuesday.
The region is now expected to grow by 5.5 percent in 2009 instead of a previously forecast 6.4 percent, said Chetan Ahya, a Morgan Stanley economist for Southeast Asia and India.
Australia, South Korea, India and Indonesia will be vulnerable to financial contagion because of large current account deficits, while export-dependent countries will also suffer, he said at a news conference.
While downside risks could further drag the forecast growth rate to below 5.0 percent, it is unlikely to drop near the 2.4 percent expansion rate seen during the Asian financial crisis in 1997 and 1998, he said.
"The risk right now is it could dip below 5.0 percent," but not close to the levels of a decade ago, he said.
Ahya added that in 1997 and 1998 the gross domestic product (GDP) of five key Asian economies contracted between 4.0 and 13 percent, a situation which is unlikely during the current turmoil.
Ahya said the US economy is likely to shrink by 1.3 percent next year and the European economy should contract by 0.6 percent, more drastic than earlier projections.
Because of this, "Asia is unlikely to emerge unscathed in an environment where the global economy is likely to see a deeper recession," Morgan Stanley the bank said in a report.
It said the region's economies will start a "tepid" rebound in 2010.
The bank projects Asian economies outside Japan to grow by 6.9 percent in 2010, faster than the forecast global growth rate of 3.6 percent, but lower than the expected 7.6 percent expansion in 2008.
"We're not looking for the same kind of (high-growth) environment to come back soon. In that sense, we're looking for the duration of this global risk aversion to be longer than what we had all expected," Ahya said.
http://news.my.msn.com/regional/article.aspx?cp-documentid=1780901
Is it time to get back into the market?
Fear index shows its time to buy
By David Uren November 17, 2008 12:00am
Some experts are saying its time to get back into the market
But more economic pain is in store
Markets: The latest trading news and share prices
AFTER each thumping day of share market falls, a few hopeful investors open their wallets and, following Warren Buffett's dictum to "be greedy when others are fearful'', buy a few stocks.
Often as not, they are thumped again the next day, but sooner or later, the wisdom of hindsight will illuminate their vision, The Australian reports.
If you accept the latest economic forecasts from either Treasury, or the more pessimistic ones from the Reserve Bank, the time to buy is now. An outlook in which the economy slows this year and next to somewhere between 1.5 to 2.25 per cent before rising back above 3 per cent in 2010-11 will soon reveal that stocks have been over-sold.
These forecasts imply little growth in profit, but no great falls over the next 18 months or so, with a return to robust growth thereafter. It is the uncertainty around those growth forecasts that is the problem.
Since the beginning of this year, every time anyone revisits their economic forecasts, they have been revising them down.
There was barely four weeks between the last two sets of downward revisions by the International Monetary Fund and then only a week before the OECD put out some even more pessimistic numbers.
So far, all Australia has seen is a lot of market action that has made people nervous. Shares have plunged, and the less visible money markets have been volatile beyond precedent.
That market punishment has been stretched out over the better part of a year, but there has been little real economic fallout, at least in this country.
Treasury secretary Ken Henry could put the telescope to his eye last week and, looking backwards at the 4.3 per cent unemployment rate and 11 per cent growth in gross company profits in the June quarter, declare that Australia had little to fear from the economic squalls ahead.
The Reserve Bank, which has long been a fan of equities, published the first chart in its quarterly economic review last week, showing that the share market has now taken values far below their long-term average relationship with profits. This is so, whether the comparison is with historic earnings or analysts' projections of future profits.
The second chart, prepared by University of California professor James Hamilton, makes the same point for the United States market, but over a 130 year time span.
He says the academic literature has established that the ratios of price to earnings and dividends to earnings do not wander too far from their long-term historical averages.
"The implication of that finding is that when prices are high relative to dividends and earnings, you can expect below-average stock returns,'' he says, and vice versa.
At present, with price earnings ratios below the long-term average, superior long-term returns are to be won.
A similar point was made recently by the Reserve Bank's deputy governor, Ric Battellino. The prospective earnings yield on Australian shares now stands at 11 per cent, almost double the long-term average.
"When the yield has risen to these levels in the past, the return on shares over the subsequent 10 years has almost always been well above average,'' he says.
The damage to the real economy is coming. We're seeing it around the world as lay-offs mount, industrial production slumps and one economy after another records quarters of contraction.
It is certainly true that the Australian economy has some insulation. It enters the economic downturn with a strong budget surplus and high corporate profitability. The floating exchange rate provides a buffer, and will help to extend the last gasp of the commodities boom.
Some of these strengths may prove ephemeral, however. Profit levels are the most obvious.
Gross profits have reached a record 27.8 per cent of the economy, a long way north of the long-term average of 20.0 per cent.
Read the full article at The Australian.
By David Uren November 17, 2008 12:00am
Some experts are saying its time to get back into the market
But more economic pain is in store
Markets: The latest trading news and share prices
AFTER each thumping day of share market falls, a few hopeful investors open their wallets and, following Warren Buffett's dictum to "be greedy when others are fearful'', buy a few stocks.
Often as not, they are thumped again the next day, but sooner or later, the wisdom of hindsight will illuminate their vision, The Australian reports.
If you accept the latest economic forecasts from either Treasury, or the more pessimistic ones from the Reserve Bank, the time to buy is now. An outlook in which the economy slows this year and next to somewhere between 1.5 to 2.25 per cent before rising back above 3 per cent in 2010-11 will soon reveal that stocks have been over-sold.
These forecasts imply little growth in profit, but no great falls over the next 18 months or so, with a return to robust growth thereafter. It is the uncertainty around those growth forecasts that is the problem.
Since the beginning of this year, every time anyone revisits their economic forecasts, they have been revising them down.
There was barely four weeks between the last two sets of downward revisions by the International Monetary Fund and then only a week before the OECD put out some even more pessimistic numbers.
So far, all Australia has seen is a lot of market action that has made people nervous. Shares have plunged, and the less visible money markets have been volatile beyond precedent.
That market punishment has been stretched out over the better part of a year, but there has been little real economic fallout, at least in this country.
Treasury secretary Ken Henry could put the telescope to his eye last week and, looking backwards at the 4.3 per cent unemployment rate and 11 per cent growth in gross company profits in the June quarter, declare that Australia had little to fear from the economic squalls ahead.
The Reserve Bank, which has long been a fan of equities, published the first chart in its quarterly economic review last week, showing that the share market has now taken values far below their long-term average relationship with profits. This is so, whether the comparison is with historic earnings or analysts' projections of future profits.
The second chart, prepared by University of California professor James Hamilton, makes the same point for the United States market, but over a 130 year time span.
He says the academic literature has established that the ratios of price to earnings and dividends to earnings do not wander too far from their long-term historical averages.
"The implication of that finding is that when prices are high relative to dividends and earnings, you can expect below-average stock returns,'' he says, and vice versa.
At present, with price earnings ratios below the long-term average, superior long-term returns are to be won.
A similar point was made recently by the Reserve Bank's deputy governor, Ric Battellino. The prospective earnings yield on Australian shares now stands at 11 per cent, almost double the long-term average.
"When the yield has risen to these levels in the past, the return on shares over the subsequent 10 years has almost always been well above average,'' he says.
The damage to the real economy is coming. We're seeing it around the world as lay-offs mount, industrial production slumps and one economy after another records quarters of contraction.
It is certainly true that the Australian economy has some insulation. It enters the economic downturn with a strong budget surplus and high corporate profitability. The floating exchange rate provides a buffer, and will help to extend the last gasp of the commodities boom.
Some of these strengths may prove ephemeral, however. Profit levels are the most obvious.
Gross profits have reached a record 27.8 per cent of the economy, a long way north of the long-term average of 20.0 per cent.
Read the full article at The Australian.
Investment Considerations in a Bear Market
Investment Considerations in a Bear Market
Making Smart Decisions When Markets Are Volatile Can Pay Off
By Jeremy Vohwinkle
The idea of investing is to make your money grow, but there are times when the stock market doesn’t want cooperate. Regular market fluctuations are common and expected, but extended periods of decline can strike fear in even seasoned investors. These bear markets can last months or even years. So, what should you do when faced with a bear market?
Examine Your Investment Objective
The first thing anyone should do before making changes to their portfolio is to think about what the purpose of the investment is. Is it money for retirement? College savings? A down payment on a house? Each of these investment goals have to be treated differently, and you need take into account what the money is going to be used for before you can decide if any changes need to be made.
The investment objective is important because it primarily deals with a specific time horizon. If you’re 35 years old and saving for retirement, you know that your money has a few decades left to grow. On the other hand, if you’re 35 and preparing to send your child off to college in 8 years, that is a completely different scenario.
Consider Your Risk Tolerance
Most people make changes to their investments because of losses. When you begin to see your account drop in value, it’s only natural to want to stop this from happening. Unfortunately, this type of behavior is reactionary, and it can often do more harm than good.
If the idea of seeing a loss on your statement has you feeling uneasy and ready to make changes, then chances are you’re taking on more risk than you should be. You should be allocating your investments in a way that minimizes risk, maximizes returns, and allows you to sleep at night regardless of what the market is doing. If you’re losing sleep because of a few bad days in the market, it’s time to reconsider how much risk you’re willing to take.
Don’t Chase the Market
You’ve probably heard the saying “buy low and sell high” many times, and we all know that’s how you make money, but the reality is that most people do just the opposite. The average investor will happily put more and more money into the market, and take on more risk when the market and economy is strong, and pull back or stop investing at all when the markets are heading south.
This is the opposite of what you want to do. If you’re only saving and investing when the markets are doing well, and investing little or selling stocks when the markets are down, you’re buying high and selling low, which is a very ineffective way to make money.
If you have a regular investment plan through your 401(k) or individual retirement accounts, keep those investments flowing through good times and bad. Because you’re investing on a regular and frequent interval, you’re buying stocks when they are up, down, and everywhere in-between. This is called dollar-cost averaging, and it is a great way to take some of the volatility out of your portfolio and maximize your overall returns.
Rebalance Your Portfolio
When the markets experience an extended period of growth or decline, it can throw your portfolio out of its original investment mix, or asset allocation. For example, if you’ve determined that a 70% stock and 30% bond portfolio is suitable for you and the stock market has taken a bit of a dive, you might find that after just six months, your investment mix might be at 60% stocks and 40% bonds, or even a 50% mix.
Ideally, you want to maintain your portfolio so that it remains close to your target investment mix. By rebalancing to your target mix, you’re forced to sell some of the investments that have done well, and buy more of the investments that haven’t done as well. This is allowing you to buy low and sell high instead of the reverse.
Shore Up Your Short-Term Investments
Investing your short-term savings takes a different approach from investing for retirement or other long-term goals. The general idea here is not to generate as much money as possible, but instead it is more focused on safety of principal while making as much money as possible.
When the economy is struggling, it pays to have a well-funded emergency fund. A weak economy can put some uncertainty in the air in terms of job security and obtaining credit. This is where your savings can come in handy. If you have the cash on hand in the event of an emergency, you don’t have to worry about using credit cards or possibly hurt your credit score.
So, when it comes to your savings, whether an emergency fund, money for a down payment on a house or a vehicle, or just the extra spending money you like to keep on hand, you want to make sure it’s safe and working as hard as it can for you. There are a number of places to safely keep your cash, so you’ll want to explore all the different options. It’s also a good idea to make sure your money is FDIC insured so that if times get really tough and your bank goes under, you’ll be protected.
http://financialplan.about.com/od/personalfinance/a/BearInvesting.htm
Making Smart Decisions When Markets Are Volatile Can Pay Off
By Jeremy Vohwinkle
The idea of investing is to make your money grow, but there are times when the stock market doesn’t want cooperate. Regular market fluctuations are common and expected, but extended periods of decline can strike fear in even seasoned investors. These bear markets can last months or even years. So, what should you do when faced with a bear market?
Examine Your Investment Objective
The first thing anyone should do before making changes to their portfolio is to think about what the purpose of the investment is. Is it money for retirement? College savings? A down payment on a house? Each of these investment goals have to be treated differently, and you need take into account what the money is going to be used for before you can decide if any changes need to be made.
The investment objective is important because it primarily deals with a specific time horizon. If you’re 35 years old and saving for retirement, you know that your money has a few decades left to grow. On the other hand, if you’re 35 and preparing to send your child off to college in 8 years, that is a completely different scenario.
Consider Your Risk Tolerance
Most people make changes to their investments because of losses. When you begin to see your account drop in value, it’s only natural to want to stop this from happening. Unfortunately, this type of behavior is reactionary, and it can often do more harm than good.
If the idea of seeing a loss on your statement has you feeling uneasy and ready to make changes, then chances are you’re taking on more risk than you should be. You should be allocating your investments in a way that minimizes risk, maximizes returns, and allows you to sleep at night regardless of what the market is doing. If you’re losing sleep because of a few bad days in the market, it’s time to reconsider how much risk you’re willing to take.
Don’t Chase the Market
You’ve probably heard the saying “buy low and sell high” many times, and we all know that’s how you make money, but the reality is that most people do just the opposite. The average investor will happily put more and more money into the market, and take on more risk when the market and economy is strong, and pull back or stop investing at all when the markets are heading south.
This is the opposite of what you want to do. If you’re only saving and investing when the markets are doing well, and investing little or selling stocks when the markets are down, you’re buying high and selling low, which is a very ineffective way to make money.
If you have a regular investment plan through your 401(k) or individual retirement accounts, keep those investments flowing through good times and bad. Because you’re investing on a regular and frequent interval, you’re buying stocks when they are up, down, and everywhere in-between. This is called dollar-cost averaging, and it is a great way to take some of the volatility out of your portfolio and maximize your overall returns.
Rebalance Your Portfolio
When the markets experience an extended period of growth or decline, it can throw your portfolio out of its original investment mix, or asset allocation. For example, if you’ve determined that a 70% stock and 30% bond portfolio is suitable for you and the stock market has taken a bit of a dive, you might find that after just six months, your investment mix might be at 60% stocks and 40% bonds, or even a 50% mix.
Ideally, you want to maintain your portfolio so that it remains close to your target investment mix. By rebalancing to your target mix, you’re forced to sell some of the investments that have done well, and buy more of the investments that haven’t done as well. This is allowing you to buy low and sell high instead of the reverse.
Shore Up Your Short-Term Investments
Investing your short-term savings takes a different approach from investing for retirement or other long-term goals. The general idea here is not to generate as much money as possible, but instead it is more focused on safety of principal while making as much money as possible.
When the economy is struggling, it pays to have a well-funded emergency fund. A weak economy can put some uncertainty in the air in terms of job security and obtaining credit. This is where your savings can come in handy. If you have the cash on hand in the event of an emergency, you don’t have to worry about using credit cards or possibly hurt your credit score.
So, when it comes to your savings, whether an emergency fund, money for a down payment on a house or a vehicle, or just the extra spending money you like to keep on hand, you want to make sure it’s safe and working as hard as it can for you. There are a number of places to safely keep your cash, so you’ll want to explore all the different options. It’s also a good idea to make sure your money is FDIC insured so that if times get really tough and your bank goes under, you’ll be protected.
http://financialplan.about.com/od/personalfinance/a/BearInvesting.htm
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