Home Prices Seem Far From Bottom

Home Prices Seem Far From Bottom
by Vikas Bajaj
Friday, October 17, 2008

The American housing market, where the global economic crisis began, is far from hitting bottom.

Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession.

In hard-hit areas like California, Florida and Arizona, the grim calculus is the same: More and more homes are going up for sale, but fewer and fewer people are willing or able to buy them.

More from NYTimes.com: • Don't Be Rushed Into Buying Stock • Start-Ups Give Idaho an Identity Beyond Potatoes • The Frugal Teenager, Ready or Not

Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates -- all of which will reduce the already diminished pool of would-be buyers.
"The No. 1 thing that drives housing values is incomes," said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania. "When incomes fall, demand for housing falls."

Despite the government's move to bolster the banking industry, home loan rates rose again on Tuesday, reflecting concern that the Treasury will borrow heavily to finance the rescue.
On Wednesday, the average rate for 30-year fixed rate mortgages was 6.75 percent, up from 6.06 percent last week. While banks are moving aggressively to sell foreclosed properties, the number of empty homes is hovering near its highest level in more than half a century.

As of June, 2.8 percent of homes previously occupied by an owner were vacant. Nearly 1 in 10 rentals was without a tenant. Both numbers are near their highest levels since 1956, the earliest year for which the Census Bureau has such data.

At the same time, the number of people who are losing jobs or seeing their incomes decline is rising. The unemployment rate has climbed to 6.1 percent, from 4.4 percent at the end of 2007, and wages for those who still have a job have barely kept up with inflation.

In New York and other cities that rely heavily on the financial sector, economists expect that job losses will increase and that pay heavily tied to year-end bonuses will decline significantly.
One reliable proxy of housing values -- the ratio of home prices to rents -- indicates that in many cities prices are still too high relative to historical norms.

In Miami, for instance, home prices are about 22 times annual rents, according to analysis by Moody's Economy.com. The average figure for the last 20 years is just 15 times annual rents. The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.

The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.

It increased the most on the coasts and somewhat less in the middle of the country.

Economy.com's calculations show that while it remains elevated in many places, the ratio has fallen sharply to more normal levels in places like Sacramento, Dallas and Riverside, Calif.
The current housing downturn is much more national in scope and severe than any other in the postwar period, partly because of the proliferation of risky lending practices. Today, foreclosures are running ahead of the downturn in the economy, a reversal of previous housing slumps.

"We are in uncharted waters," said Brian A. Bethune, an economist at Global Insight, a research firm.

Colleen Pestana, a real estate agent in Orange County in California, said many people losing their homes in Southern California used to work at mortgage and real estate companies. Many of them bet heavily on real estate by upgrading to bigger houses every few years. Now, many are losing their homes.

At the same time, Ms. Pestana said, her clients who are looking to buy are having a harder time lining up financing. One of her clients recently had to give up on a home after the lender that had offered a pre-approved loan changed its mind -- a frequent occurrence, according to real estate agents and mortgage brokers.

"I am working harder than I have ever had to work to get a deal together and keep it together," said Ms. Pestana, who has been a real estate agent for seven years.

To cushion themselves from potential losses if homes lose value, Fannie Mae and Freddie Mac, the mortgage finance companies that the government took over in September, have increased fees on loans made to borrowers who have good but not excellent credit records, even those who are making down payments as big as 30 percent.

Those higher fees are generally invisible to borrowers because banks factor them into mortgage interest rates. While the national average rate for a 30-year fixed-rate mortgage is now 6.75 percent, according to HSH Associates, mortgage brokers say the rates for many borrowers in the Southwest or Florida can be as high as 8 percent, especially for so-called jumbo loans that are too big to be sold to Fannie Mae and Freddie Mac. (Those loan limits vary by area from $417,000 to roughly $650,000.)

Higher interest rates result in bigger monthly payments, pricing some potential buyers out of the market. For example, monthly payments are $2,700 on a 6 percent 30-year, fixed-rate loan of $450,000. If the interest rate rises to 7 percent, those monthly payments jump to $3,000. All things being equal, when rates rise prices generally fall.

This month, Fannie and Freddie canceled a fee increase that would have applied to markets where home prices are falling, but the companies still have many other fees in place. In an effort to help drive down rates, the Treasury Department has announced plans to buy mortgage-backed securities issued by Fannie and Freddie. The government also recently increased the amount of loans the companies can buy and hold.

Still, those efforts will take time to have an impact and it is not clear whether they will be sufficient to get banks to lend more freely, especially in areas where jumbo loans make up a bigger percentage of lending, like New York and parts of California and Florida. Economists say that prices in those places will probably fall further.

In some of those places, price declines are being driven by a sharp increase in sales of foreclosed homes.

More from Yahoo! Finance: • Towns That Could Be Hit Hardest by the Financial Crisis • Most And Least Expensive U.S. Cities For Homeowners • Top 5 Inexpensive Ways to Boost Your Home's Value
Visit the Real Estate Center

Hudson & Marshall, a Dallas-based auctioneer that holds sales for lenders, reports that banks are accepting prices that they refused to consider just 12 months earlier. In a recent auction of 110 foreclosed homes in the Las Vegas area, for instance, the auctioneer's clients accepted 90 percent of the bids submitted by buyers, up from 60 percent a year earlier, said David T. Webb, a co-owner of the company.

Single-family home prices in Las Vegas have already fallen 34 percent from their peak in the summer of 2006, according to the Standard & Poor's Case-Shiller home price index. Prices in San Diego have fallen 31 percent since late 2005.

While those declines have been painful to homeowners in those cities, economists said the quick decline might help the markets reach bottom faster than in previous housing cycles, said Edward E. Leamer, an economist at the University of California, Los Angeles. In a previous boom, home prices peaked in the Los Angeles area in 1990 but did not hit bottom until 1996. Prices remained near that low for more than a year before starting to climb again.

"In some areas of California, we are really at appropriate levels," Mr. Leamer said of current home prices. But he added: "The risk is that we are going to get some overshooting, meaning that prices will be lower than they ought to be."

In Florida, Jack McCabe, a real estate consultant, said that while some cities, like Fort Myers, are showing tentative signs of a rebound, others like Miami and Fort Lauderdale are still under pressure. Two homes on his street in Fort Lauderdale that sold for about $730,000 apiece in 2005 recently sold for $400,000 -- a 44 percent decline.

"The rocket has run out of fuel, and now it's plunged back down to earth," he said.
Tara Siegel Bernard contributed reporting.

http://finance.yahoo.com/real-estate/article/105964/Home-Prices-Seem-Far-From-Bottom

Your Once-in-a-Lifetime Investing Opportunity

Your Once-in-a-Lifetime Investing Opportunity
By Chuck Saletta

December 3, 2008


"Panic" might be too weak a word for what's going on out there. It's not just that the stock market has been affected -- the far larger lending market has seized up as well. Banks don't want to lend to each other, much less those of us out here in the real world, and the bond markets remain off-limits to all but the strongest of borrowers.


And all of that is leaving everyone terrified. The long-term future simply doesn't matter all that much to a company that risks oblivion in the next week if it can't roll over its maturing debt or cover tomorrow's margin call.


The companies hit hardest by this mess have been the ones that were built on the presumption of easy, cheap, and unlimited credit. Homebuilders like Centex (NYSE: CTX) are in a world of hurt, and even the strongest automobile titans like Toyota (NYSE: TM) are feeling the impact of the credit crunch. But it was investment banks and financial institutions -- the largest and fiercest players on Wall Street -- that were literally ground zero for this implosion.


The list of companies brought down by the implosion -- Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac -- includes some of the most notable names on Wall Street. The list of companies struggling to survive the economic downturn grows longer by the day. And that's creating a once-in-a-lifetime investing opportunity -- for you.


It's your turn There are unbelievable bargains available now, the likes of which we haven't seen since the days of Benjamin Graham. Under less unusual circumstances, Wall Street's financial wizards would be leveraging themselves to the hilt to take advantage of the market's current conditions. But with their funds cut off, redeemed, or diverted into mere survival, they're forced to sit on the sidelines, rendered completely unable to act.
That's where you come in. As long as you have the patience to wait out the volatility, you can buy those very same bargains (without the leverage) and be richly rewarded when things return to normal.


The country, the stock market, and the strongest companies of the era survived the Great Depression. We'll get through this mess, too. Much the way Benjamin Graham and his protege Warren Buffett did after past catastrophes, the superinvestors of this generation will make their fortunes buying on the heels of this one.


Where to play



Even if you don't aspire to be the next Graham or Buffett (and don't have $5 billion sitting around with which to invest in a struggling company), there are plenty of bargains available to you right now.


But be careful out there -- not every company that has fallen is legitimately cheap. We're in the throes of a global economic rout, after all, and many companies deserve their slashed share prices.


Those whose prices have dropped as a result of forced selling or general market malaise, on the other hand, are the most likely to reward their shareholders for holding on through this mess.

They typically have

• Strong balance sheets,


• Reasonable or cheap valuations, and


• Moats protecting their core businesses.
  

Companies like these, for instance:
Company/Moat/Value proposition
Wal-Mart
(NYSE: WMT)
Unparalleled supply chain.Scale to leverage best prices.
Trailing P/E below 16;$5.9 billion in cash on hand.
Microsoft
(Nasdaq: MSFT)
So dominant, it's routinely classified as a monopoly.Nobody likes Vista, but they're buying it anyway.
Trailing P/E below 11;$19.7 billion in cash on hand.
Altria
(NYSE: MO)
In spite of knowing better, people still smoke.Government-enforced market-share protection thanks to master settlement agreement.
Forward P/E around 9;more cash on hand than total debt.
Oracle
(Nasdaq: ORCL)
Dominant position in database market gives it leverage in related business software categories.
Trailing P/E below 15;more cash on hand than total debt.
Verizon
(NYSE: VZ)
Captive markets for line-based phone services.Already built-out cellular network.
Trailing P/E below 15;total debt less than 1/2 of revenue.

Although these companies are likely to be affected by the U.S.'s newly declared year-old recession and the general tightening of consumer credit, their basic businesses are solid. Solid businesses, clean balance sheets, and cheap prices compared to intrinsic value mean these are the types of opportunities you should be taking advantage of right now -- while you still can.

This won't last forever

In ordinary times, companies this strong would not be available at such attractive prices. These deals are available only because the global financial meltdown has knocked out so very many of the institutional investors who would ordinarily bid these companies up much higher.

If you want to pay bargain-basement prices for some of the strongest businesses around, this is when you should pounce. It's not easy to buy when everyone is panicking, but it's precisely how generations of successful value investors have made their fortunes.

At Motley Fool Inside Value, we're taking advantage of the brief window we've been given -- and we're excited to buy companies like these at such reasonable prices. You can get a free, 30-day trial, with all of our recommendations but no obligation to subscribe, just by clicking here.
At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Microsoft. Wal-Mart and Microsoft are Motley Fool Inside Value selections. The Fool's disclosure policy knows the corporate American Express number but isn't telling.

http://www.fool.com/investing/value/2008/12/03/your-once-in-a-lifetime-investing-opportunity.aspx



Also read:

http://financialfellow.com/2008/11/24/yet-another-reason-to-start-saving-for-retirement-early/

The Future for Home Prices (For Property Investors)

DECEMBER 2, 2008
The Future for Home Prices

Americans still see real estate as their best shot at wealth. It may be wishful thinking.
By JAMES R. HAGERTY

Over the past few years, Americans have had a brutal lesson in the risks of real estate. House prices have crashed more than 35% in some parts of the country, millions of people are losing their homes to foreclosure, and banks are failing.

The takeaway?

Many Americans still see real estate as their best shot at wealth. In survey after survey, people expect prices to bounce back -- in some cases, as soon as six months from now.

The Journal Report
See the complete Your Money Matters report.

Those hoping for a quick rebound are likely to be disappointed. Economists and other pros generally say home prices won't bottom out before the second half of 2009, and some don't see a bottom until 2011 or 2012. Even when they stop falling, prices may scrape along the bottom of the rut for years.

Down the Road

And longer term? Over the next 10 to 20 years, housing economists expect prices will rise again -- but, on average, probably not nearly as much as they've averaged over the past decade. That isn't to say that some places won't experience booms (and busts). But, the experts say, you should generally expect house prices to rise just a bit more than inflation and roughly in line with household income.

Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.

Other experts make similarly modest predictions. William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology, says he expects house prices to increase at a rate roughly one percentage point higher than inflation over the long term. Celia Chen, director of housing economics at Moody's Economy.com, a research firm, expects house prices to increase an average of around 4% a year over the next couple of decades.

Some experts say it's a bad idea to count on your home rising in value at all. People should think of their own homes mainly as places to live, not as investments, advises Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley. Sure, home mortgages provide tax benefits, and most homes appreciate in value over the long run, he says, but there is always risk.

For all of those forecasts, many Americans are undaunted. Consider three surveys, all from October.

In a poll of 2,000 adults, real-estate-data provider Zillow.com found that 61% believed the value of their home would either remain level or rise over the next six months. Another survey of more than 1,000 homeowners, sponsored by real-estate-services firm Realogy Corp., found that 91% thought that owning a home was the best long-term investment they could make. And an online survey of 5,000 people commissioned by Citigroup found that just 32% believed it was a good time to invest in stocks -- but 51% said it was a good time to buy a home.
Real Time Economics

The S&P/Case-Shiller home-price index showed accelerating price declines in September. See a sortable chart of home prices, by metro area.

"I just believe in real estate," says Jason Schram, a lawyer in Chicago who has bought two rental properties this year at what he considers fire-sale prices. "I've seen over and over people I know build wealth through rental real estate, and that's the path I intend taking, even though it's a bit bumpy at the moment."

Location, Location

So, as homeowners and buyers look ahead, what factors will determine whether their homes are really likely to rise in value, rather than just in their dreams? What are some of the bullish signs -- and some of the bearish ones?

In the long term, house prices are driven by fundamentals that are hard to predict:

• immigration,
• birth rates,
• the size and nature of households, and
• incomes.

The trick is to figure out where job and income growth will be strongest and where immigrants and others will want to live. (My Comment: Selangor, Malaysia :) )

William Frey, a demographer and senior fellow at the Brookings Institution, a think tank in Washington, says young people and immigrants are likely to flow to Florida, Georgia, the Carolinas, Tennessee, Virginia, Nevada, Arizona and some of the more affordable interior parts of California.

These areas generally have lower housing costs than the Pacific Coast or Northeast and job growth from modern industries and leisure businesses, he says. Areas with little immigration and low growth or falling populations are likely to include Michigan, Ohio, the Dakotas, Iowa, western Pennsylvania and upstate New York, Mr. Frey says.

Hit Parade

Newland Communities LLC, a San Diego-based planner and developer of neighborhoods, employs a full-time researcher to study long-term housing demand and ranks metro areas in terms of their growth prospects. Among those near the top of Newland's hit parade are Washington, D.C., Raleigh and Charlotte, N.C., Atlanta, Dallas, Houston, Phoenix and Las Vegas, says Robert McLeod, the developer's chief executive.

All of them, Newland believes, will keep growing because they have well-diversified regional economies and other attractions, including mild climates. With the exception of Washington, they all have fairly affordable housing costs. Washington has a highly educated work force, high incomes, a stable source of government-related jobs and rapidly expanding technology firms, Newland says.

"The older industrial cities are going to suffer" from shrinking employment and forbidding weather, says Mr. Rosen of the University of California. Some Sun Belt cities, including Atlanta, also could languish if traffic jams and sprawl ruin their charms, he says.

Among metro areas that Mr. Rosen expects to do well in the long run are Albuquerque, N.M.; Boise, Idaho; Salt Lake City; Seattle; Portland, Ore.; Denver and Colorado Springs, Colo. He says those places generally offer "urban vitality" and "easy access to outdoor activities" combined with affordable housing and good job-growth prospects from modern industries, such as biotechnology.

Still, just looking at population trends isn't enough. Prices in the crowded coastal areas tend to be more volatile, rising and then falling much faster during booms and busts than do inland areas, Mr. Case notes. Shortages of land and building restrictions make it hard for builders to respond quickly when demand for housing rises in coveted neighborhoods near the coasts; further inland, it's usually much easier to find vacant homes or land, and so sudden movements in prices are less likely.

For instance, despite rapid growth, home prices in Texas cities have tended to climb only gradually. Those cities typically have plenty of room to sprawl, and Texas regulates land use less strictly than many other states. Supply swells to meet demand.

The Wonder Years

What's more, no one can assess the outlook for housing without considering the effects of 78 million aging baby boomers. For instance, some housing experts believe the boomers will be much less likely than their parents to settle for sun and golf in their retirement; they may prefer urban settings with lots of cultural life or to live nearer friends and families. That could mean higher demand -- and increased prices -- for housing in urban neighborhoods.

Most of this is just guesswork, though. "A lot of people have theories about the baby boomers," says Mr. Frey, the Brookings demographer, but boomers always have tended to confound expectations.

Dowell Myers, a professor of urban planning and demography at the University of Southern California, warns that the retirement of boomers over the next two decades is likely to depress house prices in many areas. As boomers relocate to retirement homes and cemeteries, there will be a lot more sellers than buyers in parts of the country, he says.

"It's going to really mess up the housing market," says Mr. Myers. He predicts that this "generational correction" will be larger and longer-lasting than the current slump.

To get a sense of the effects of aging boomers, Mr. Myers looks at the number of Americans 65 and over per 1,000 working-age people. He sees that number soaring to 318 in the year 2020 and 411 in 2030 from 238 in 2000.

Many people over 65 buy homes, of course, but as they get older they become more likely to sell than buy. People aged 75 to 79 are more than three times as likely to be sellers than buyers, Mr. Myers says.

In some areas, younger people will be happy to buy (and probably renovate) those boomer nests. The problem, Mr. Myers says, will be in places where lots of older people are selling and few young people are settling down. He says the effects will be strongest in the "coldest, most congested and most expensive states rather than the high-growth states of the South or West." Among the states where Mr. Myers sees downward pressure on prices within the next decade: Connecticut, Pennsylvania, New York and Massachusetts.

Of course, applying demographic trends to house-price forecasts can be hazardous. Economists N. Gregory Mankiw and David Weil predicted in a paper in 1989 that demographic trends would lead to a "substantial" fall in real, or inflation-adjusted, home prices over the next two decades "if the historical relation between housing demand and housing prices continues." They reasoned that baby boomers were coming to the end of their prime house-buying years and that the smaller baby-bust generation would bring lower demand for housing.

That warning proved, at a minimum, premature. Despite the recent drop, the average U.S. home price is up about 35% in real terms since the end of 1989, according to the Ofheo index. Messrs. Mankiw and Weil both declined to comment.

Few people who invest in housing have time to follow these academic debates. For nearly four decades, Rich Sommer and his wife, Carolyn, have been investing in rental properties in and near Stevens Point, Wis. Mr. Sommer describes real estate as a good way "to get rich slowly." He and his wife, both former schoolteachers, gradually have built their net worth from zero to around $2.5 million through their rental properties. They have dealt with countless plumbing emergencies, evicted deadbeats and even once had to clean up after a suicide in one of their properties.

Still, he hasn't been hit very hard by the real-estate crash, in part because the Midwest is much less vulnerable to booms and busts than coastal areas. When asked what he would do if someone handed him $1 million today, Mr. Sommer doesn't hesitate: He would put it into real estate.—Mr. Hagerty is a staff reporter for The Wall Street Journal in Pittsburgh.
Write to James R. Hagerty at bob.hagerty@wsj.com



http://online.wsj.com/article/SB122764977315457619.html

Recession Survival Guide

Your 2009 Recession Survival Guide
by Kimberly Palmer, James Pethokoukis, and Luke Mullins



Tuesday, December 2, 2008


So you think it's bad news that a recession has been "officially declared"? (Turns out, it started back in December of last year.) Puh-lease. First of all, it shouldn't be news to anyone that the economy has been in the tank for a while. Unemployment has been climbing (from 4.4 percent in March 2007 to 6.5 percent now), and the stock market has been plummeting (down roughly 40 percent so far this year). Ouch!


Second, the recession announcement by the National Bureau of Economic Research can be a handy catalyst for action. Now that there's not a shadow of a doubt that the economy is terrible, you can look ahead to 2009, make smart plans to weather the downturn, and--if you're savvy--figure out how to take advantage of the tough times we'll be facing all next year:


The Economic Outlook


Oh, it's going to be nasty out there. Not so nasty that your great-grandparents will quit telling those Great Depression stories, but bad nonetheless. For a while, economists thought we might luck out and get away with a downturn no worse than the 1990-91 recession. That one lasted eight months, with back-to-back quarters of negative GDP growth of 2.9 percent and 2 percent. Unemployment rose from 5.2 percent to 7.8 percent. But now it looks as if the 1981-82 downturn is the better comparison. It lasted 16 months, had several quarters where the economy shrank 3 percent more, and saw unemployment rise as high as 10.8 percent. So what about the recession of 2008-2009?


Weakening big picture.



There have been two quarters so far during the recession where the economy has gotten smaller, each time by less than 1 percent. Those days are over. "We are currently forecasting a 4 percent decline in real GDP in the fourth quarter, placing it among the worst quarters for economic growth in the postwar period," says Jason Trennert of Strategas Research. The first three months of next year could be just as bad. And even once the economy begins to grow again, the overhang from the credit crisis will probably crimp significant growth until until 2010.


Worsening unemployment.



It's the sharp jump in job losses that really pushed the NBER to make its recession call. And things only seem to be getting worse. "Current conditions in the economy are terrible," notes IHS Global Insight economist Brian Bethune. "Employment continues to go south, the unemployment rate is ramping up sharply, and households are seeing their net financial worth evaporate before their eyes on a daily basis." Economists say that an 8 percent unemployment rate is likely--and 10 percent is not out of the question. Even worse, more people without jobs will make it that much tougher for the housing market to rebound anytime soon.


Sickly stock market.



The stock market often begins to perk up about three to six months before the end of a recession. But economist Michael Darda of MKM Advisers says the time to buy has yet to arrive. "We don't expect the current recession to end until late 2009, which means equities may not put in a durable bottom until the first half of 2009."


Tight credit.



Since the housing bubble started to unravel, credit card companies have been cutting credit limits and, in some cases, raising interest rates, partly because they fear more consumers will default as financial stress spreads. "We haven't hit bottom yet in terms of credit card companies trying to protect themselves," says Justin McHenry, president of IndexCreditCards.com. Even if the Federal Reserve continues to hold down interest rates, McHenry says credit card companies will probably raise rates and cut credit limits through early 2009. That means people who have credit cards with decent rates should hold onto them, because they might not find a better deal elsewhere.


Food prices may drop.



After spikes in the prices of milk, eggs, and other staples earlier this year, shoppers may be in for some relief in 2009. The price increases were partly caused by the high price of gasoline, which is used to transport much of our food. Now gas prices are dropping, leading some analysts to expect lower supermarket prices. But it won't happen overnight, because the cost of diesel is still high, and farmers need to recover from the high input costs they faced over the summer.


How to Weather the Storm


Even though you can't control the economy, you don't have to just sit there and be buffeted by these big economic forces. You can do stuff!


Live below your means.



Some people are shopping for this year's holiday gifts while still paying off their 2007 purchases, says Gail Cunningham of the National Foundation for Credit Counseling. Now's the time to re-evaluate those habits, she says, before piling on even more debt. You can make sure you pay as little as possible for gifts by using online comparison websites. Another option is taking advantage of layaway programs at retailers that let you pay off purchases before you bring them home. That way, you avoid paying high interest rates to credit card companies.


Bolster that emergency cushion.



Even in flush times, financial advisers say consumers should have about six months' worth of expenses in their bank account to guard against job loss or other emergencies. Now, with the unemployment rate headed toward 7 percent, it's more important than ever.


Toughen up your portfolio.



It doesn't matter how smart your investing strategy is if you won't stick with it. And the roller-coaster stock market is sure making that tough to do. Jittery investors might want to think about stashing somewhere between 30 and 40 percent of their portfolio in less risky investments, such as bond funds, treasury bills, or money market funds. But don't overdo it. Investors who are decades away from retirement should keep the bulk of their portfolios in stocks. If you want to dial down your risk, look to stock funds that have been bucking the bear, such as Apex Mid Cap Growth and Reynolds Blue Chip Growth. Also, exchange-traded funds, which look like mutual funds but trade like stocks, give you more diversified exposure to a particular sector or industry than betting on individual issues.


Save for a down payment.



Unlike in the housing-boom days, borrowers will have to be able to make a sizable down payment to qualify for the lowest mortgage interest rates. So if you're looking to go bargain hunting in real estate, begin setting aside a little bit of cash each paycheck to put toward a down payment. When you begin to feel better about your job security, you'll be ready to take the plunge.


How to Take Advantage of the Bad Times


Time to stop surviving and shift to thriving. It's an ill wind that doesn't blow some good, and you need to make the most of the opportunities that are out there.


Energize your career.



Don't just worry about keeping your job--make it better. Lean times present an opportunity for niche employees to put other skills to work and rebuild their reputations as go-to multitaskers. Employees should actively try to pick up the work of their departed peers. Also, volunteering to take on new responsibilities can pave the way for a negotiation in six to eight months, when an employee can prove that the job has evolved and is now worth more on the market. A new outlook and approach like this will help you hold on to your current job, or pave the way to your new career.


Refinance your home.



Recent Federal Reserve announcements intended to ease the financial crisis have sharply reduced 30-year fixed mortgage rates, to 5.5 percent at the start of the week vs. 6.2 percent just two weeks earlier, according to HSH Associates. "Recession equals lower Treasury rates, which equals lower mortgage rates, which equals a great opportunity to refinance," says Mike Larson, a real estate analyst at Weiss Research.


Buy a home.



Home prices nationally have already fallen more than 20 percent from their 2006 peak, and in certain boom-and-bust states the declines have been even more precipitous. So if you've got a stable job, good credit, a down payment, and a strong stomach, there are certainly buying opportunities out there for you. "I can point to properties here in [Florida] that are off 40 to 50 percent from their peak bubble levels," says Larson, who is based in Florida. "This is creating an opportunity."


More from Yahoo! Finance: • The $64,000 Question: Who Wants to Be a Millionaire?• The Bright Side: Deep Retailer Discounts• 4 Ways to Get the Most Out of Holiday Sales
Visit the Banking & Budgeting Center


Look for the next great stock investments.



Not only can you pretty much count on next year being one of lousy economic growth, you can for sure count on Barack Obama being president. And there are a few stocks out there that could get a boost from an Obama administration, including Chesapeake Energy (natural gas) and AeroVironment (aerial vehicles for Afghanistan). Also, keep an eye out for "growthy" (high earnings growth) small stocks, especially techs, which often are the first ones to rise when a new economic expansion nears. Hey, the recession can't last forever, right?


Forget about keeping up with the Joneses.



Since almost everyone's budgets are strained right now, cutting back is en vogue. Pollster John Zogby has found that a growing segment of the population has become more focused on spiritual fulfillment than on material success. Similarly, futurist Faith Popcorn's research shows that the concept of "frugality" has taken hold among families, with parents increasingly teaching their children to reconsider how much they consume and whether they could do with less. The "new frugality" movement, as she calls it, will usher in a new set of values for the next generation, she says.


Negotiate almost everything.



From credit cards to clothes, companies are open to making deals as they struggle to keep customers. "If you're a good customer, [credit card companies] may be more apt to negotiate your rate because they don't want to lose you," says McHenry of IndexCreditCards.com. At farmers markets and clothing boutiques, simply asking, "Can I get a discount?" can lead to a lower price. Paying with cash increases the chances of making a deal because it allows retailers to avoid credit card transaction fees.


Copyrighted, U.S.News & World Report, L.P. All rights reserved.



http://finance.yahoo.com/banking-budgeting/article/106242/Your-2009-Recession-Survival-Guide

Asian Countries Foreign Exchange Reserves

Asia and the art of war chests
By Rupert Walker
2 December 2008

Asian policymakers have built up protective foreign exchange reserves to ensure history doesn’t repeat itself.

Policymakers throughout Asia have had an overriding objective over the past decade. They have been determined to avoid a repeat of the crisis unleashed in 1997-1998, that exploded the myth of the “Asian miracle”, sending their economies into deep and protracted recessions. They would also rather avoid having to borrow from the International Monetary Fund again and be forced to impose a raft of measures demanded by the agency’s functionaries – measures which 10 years ago induced poverty and social unrest.

To reach this objective they stored up cash. Many governments built up “large protective buffers” against the balance of payment shocks that had put them under so much pressure in the late-90s, says Subir Gokarn, chief economist for Asia-Pacific at Standard and Poor’s, in a report published in early November. Basically, they created war chests of accumulated foreign exchange reserves, by absorbing their current and capital account surpluses. As a result, “healthy foreign exchange reserves are likely to buffer most Asia-Pacific economies during the (current) global slowdown”.

And despite foreign investors leaving regional equity markets in droves, as they either unwind yen carry trades and deleverage, or simply switch into the “safe-haven” of US Treasury securities, the drain on reserves hasn't been that severe.

Among the emerging economies in Asia, Vietnam has suffered the biggest fall in foreign exchange reserves – they now amount to almost 15% less than the 2008 peak – and among the developed economies New Zealand has experienced a 25% decline. The falls in China, Hong Kong, the Philippines and Taiwan have been non-existent or negligible.

Gokarn argues that one reason why the reserves have not declined more is that the region's emerging economies typically used the capital outflow to allow their currencies to depreciate, which meant they could offset the sharp appreciation that most of these currencies experienced in 2007.

He points out that Asia’s growth during the past 10 years has made it an “attractive destination for global investment flows that have been, in turn, facilitated by capital market reforms in many of these countries”. Large current account surpluses and net positive capital inflows would normally have put tremendous appreciation pressure on the region’s currencies – and made them exposed to a rapid depreciation if and when conditions changed.

Restraining currency appreciation

Twin surpluses should have put upward pressure on their currencies, but the authorities sold them and then sterilised the excess domestic currency in their financial systems to avoid monetary instability by issuing shorter-dated central bank bonds.

The depreciation has been particularly sharp since August 2008, when outward capital flows rose significantly. Six months ago, economists worried that any depreciation of domestic currencies might reinforce inflationary pressures due to rising commodity, oil and food prices. But, of course, the subsequent dramatic decline in these prices means that is not an issue now.

Comparisons have been made with the 1997-1998 crisis, although the problems then were largely home-grown whereas today the region is suffering from a deleveraging, liquidity drought and credit contraction that originated in the US and Europe. This contagion, which largely rebuts the de-coupling argument posited by some economists at the beginning of the year, has been exacerbated by a much closer integration between the financial systems worldwide.

The recurrent debt and currency crises associated with sudden withdrawals of Western money led to a rethinking by governments in Asian countries, inspired largely by China. In the past they’d followed orthodox thinking by borrowing from wealthy nations to finance domestic investment and drag their populations out of poverty. But China insisted that foreign capital should be injected as direct investment. Rather than simply providing debt to fund industrial development, the Chinese persuaded foreigners to build factories that couldn’t suddenly be up-rooted when confidence slipped.

Financial imbalances

Paradoxically, it has largely been re-routed Chinese savings which have financed much of China’s investment. Cash from household savings or corporate retained profits have been lent to the United States, fuelling that country’s consumer spending boom, and have then been channelled back to China as export earnings.

To ensure that its exports stayed cheap, China has kept the renminbi from appreciating beyond a prescribed rate by buying billions of dollars in world markets. Today China has foreign exchange reserves of more than $1.9 trillion and has surpassed Japan as the biggest holder of US treasury securities. Other Asian countries have adopted a similar strategy. For example, India entered the current crisis with around $300 billion of foreign reserves, which provide a comfortable level of “self-insurance” against capital flight.

This has led some commentators, such as the economic historian Niall Ferguson, to argue that these “financial imbalances” are the main cause of the excesses that produced the current crisis. Asia kept lending and the US (and Europeans) kept borrowing. The Asian savings glut supported a surge of consumer and corporate leverage, funding hedge funds and private equity firms, and of course, the US mortgage market which fuelled the rapid growth of derivative instruments.

Nevertheless, as Gokarn says, “it is now evident that for almost all the region's economies those handy reserves have allowed countries to avoid a potential balance-of-payments meltdown, especially as the flow of capital has reversed so sharply in the past few months”.

Whether this will hold true for the future is another matter. There is a standard Greenspan-Guidotti rule that says that reserves should cover external debt falling due within one year – but that is insufficient when foreign borrowings by private companies and overseas holdings in equity markets are taken into account. Also, debt coverage can soon disappear.

Korea, for instance, had about $240 billion of reserves – the sixth biggest in the world – at the beginning of November, which easily covers the $80 billion of short-term debt owed and even exceeds the $235 billion total external loans owed by Korean banks. But the central bank has been spending up to $280 million a week to inject liquidity into the country’s banking system, and in the first six months of the year, net foreign direct investment turned negative for the first time since 1980 as investors pulled out a net $886 million, according to the Bank of Korea.

Spending the reserves

“For Asia, the problem is not inadequate foreign exchange reserves,” says TJ Bond, Asia economist at Merrill Lynch. “It is uncertainty about how existing reserves will be used to meet maturing debt obligations and foreign sales of domestic assets.” Already, however, some of that uncertainty is being resolved.

Transparent foreign exchange intervention and currency swap agreements between the US Federal Reserve and Korea and Singapore worth $30 billion each have helped. Plus, regional currency swap agreements between 13 Asian countries (led by China, Japan and Korea) have created a pool of foreign exchange reserves to be tapped to protect their own currencies – an extension of the 2005 "Chiang Mai Initiative". The deal allows them to lend each other money at favourable terms if help is needed to stabilise exchange rates.

Capital controls restricting resident capital flight might also be an option. This was the approach taken by Malaysia a decade ago which protected the country from the worst of the crisis which afflicted other Asian economies.

But another problem is that by building up foreign exchange reserves by promoting export earnings through a competitive exchange rate, Asian economies make themselves vulnerable to growth slowdowns in the countries they export to.

On the other hand, although currency depreciation won’t help exporters as economies throughout the world fall into recession, they should be able to take advantage of any eventual recovery in consumer spending in major export markets.

Certainly, intraregional trade has lessened the export dependence on the US over the past decade, as richer Asian countries have proved increasingly significant markets for Asian exports. But, this affluence has had a cost which would make the region especially vulnerable, had it not been for policies introduced to prevent a repeat of the devastation that afflicted the region at the end of the last century.

© Haymarket Media Limited. All rights reserved.

http://www.financeasia.com/article.aspx?CIaNID=90196

A Young Analyst on Wall Street, Benjamin Graham

An Enterprising Young Analyst on Wall Street by the name of Benjamin Graham

In the early 1930s an enterprising young analyst on Wall Street by the name of Benjamin Graham noticed that the vast majority of hotshot stock pickers on Wall Street didn’t care at all about the long-term economics of the businesses that they are busy buying a selling. All they cared about was whether the stock prices, over the short run, were going up or down.

Graham also noticed that these hot stock pickers, while caught up in their speculative frenzy, would sometimes drive up the stock prices to ridiculous levels in relation to the long-term economic realities of the underlying businesses. He also realized that these same hotshots would sometimes send stock prices spiraling to insane lows that similarly ignored the businesses’ long term prospects. It was in these insane lows that Graham saw a fantastic opportunity to make money.

Graham reasoned that if he bought these “oversold businesses” at prices below their long-term intrinsic value, eventually the market would acknowledge its mistake and revalue them upward. Once they were revalued upward, he could sell them at a profit. This is the basis for what we know today as value investing. Graham was the father of it.

What we have to realize, however, is that Graham really didn’t care about what kind of business he was buying. In his world every business had a price at which it was a bargain. When he started practicing value investing back in the 1930s, he was focused on finding companies trading at less than half of what they held in cash. He called it “buying a dollar for 50 cents.” He had other standards as well, such as never paying more than 10 times a company’s earnings and selling the stock if it was up 50%. If it didn’t go up within 2 years, he would sell it anyway.

Yes, his perspective was a bit longer than that of the Wall Street speculators, but in truth he had zero interest in where the company would be in ten years.

Also read:
Warren seeks Companies with Durable Competitive Advantage
Young Warren Buffett learned under Graham
A Young Analyst on Wall Street, Benjamin Graham
Knowing the Stock Market and its Major Players
The Time To Sell
The Right Time To Buy A Fantastic Business
Warren Buffett’s Concept of Equity Bond in action....
Warren Buffett's concept of Equity Bond

Recession Dating: When in Doubt, Wait for a Crisis

REAL TIME ECONOMICS Real Time Economics

Economic insight and analysis from The Wall Street Journal.

December 1, 2008, 7:04 pm
Recession Dating: When in Doubt, Wait for a Crisis


Travel back to the first half of the year, after an asset bubble burst, and you’ll find a group of economists struggling with the question of whether the nation is in a recession. Payrolls hit a clear peak and started declining, the unemployment rate was rising and Americans were talking increasingly about a troubled economy. The common recession definition — two straight quarters of falling economic output — was far from being met, since official economic data hadn’t even shown a single quarter of contracting GDP yet.


Then a major international crisis hits, economic data start looking uglier and the recession question is effectively settled.Those were the circumstances of the U.S. recession call in 2008 — and in 2001. The worsening of the financial crisis in September proved to be the clarifying event that the 9/11 terrorist attacks became seven years earlier for the National Bureau of Economic Research’s Business Cycle Dating Committee. In both cases, GDP releases (or revisions of earlier figures) that weren’t available in the first half of the year later showed that a contraction clearly was in the works. But making the recession call in real time proved difficult based only on output. So the committee used nonfarm payrolls to identify the recession’s starting point in both cases.


The NBER committee, the nation’s generally accepted recession arbiter, restarted its activity this year after the labor market started contracting. But a few months of mild payroll declines weren’t enough to call a recession without a single quarter of declining GDP, given the chance that the economy could turn around quickly. (The fourth quarter 2007 contraction didn’t show up until the government’s GDP revisions came out in late July.) Then September 2008 hit, promising to worsen the housing and credit crises.


“Employment declined less than is normal in a recession until about September,” said Stanford University economist Robert Hall, chair of the NBER’s recession-dating committee. Until that point the committee didn’t expect to take action until next year, Mr. Hall said in an interview today. “Then so many negative numbers came through that made it completely clear this was a recession.”


Once that was established, the key task became identifying the precise starting point for the NBER’s monthly chronology. “The sudden worsening of the financial crisis since the end of the summer obviously sent the economy into a nosedive,” said Harvard University economist Jeffrey Frankel, a committee member. “There’s no doubt for a few months we’ve been in recession. The only question is whether you want to count the shallower period.”


The committee’s explanation of its decision today ran through the various measures it generally considers (including real personal income, wholesale-retail sales and industrial production), noting flaws in just about every one of them except employment. GDP fell in this year’s third quarter and the fourth quarter of 2007, but not in the two quarters in between. Gross domestic income peaked in the third quarter of 2007, fell in the two quarters that followed, then rose for a quarter and fell again in this year’s third quarter. The different figures — whose discrepancies (debated all year) eventually may be revised away next July — still suggest a rough plateau in economic activity from the third quarter of 2007 to the second quarter of 2008, Mr. Frankel said. “Any way of doing this is imperfect given how the two main output measures give such different answers,” he said.


With ambiguous GDP data, the payroll figures proved critical to calling the start of the recession just as they did in 2001. But if the committee follows the 2001 recession playbook again, employment won’t be key to marking the end of the recession. After a lengthy debate, the NBER committee dated the end of the recession to November 2001 even though payrolls continued declining into 2003. It explained its call in 2003: “From October to November, industrial production and sales fell sharply, employment fell moderately, personal income rose very slightly, and monthly real GDP rose moderately. Based on this information, the committee concluded that the economy reached a trough in November.” (The highly subjective nature of the call may be one reason the government never got involved in recession dating or even selected a group — the NBER or otherwise — for the task. But government economic statistics use NBER recession dates, making the committee the semi-official keeper of the nation’s business cycle chronology.)


GDP contractions continuing through June 2009 — as many economists forecast — would put the current recession at a year and a half, or two months longer than the worst two downturns since the Great Depression. With the economic outlook still so uncertain, we’ll probably have to wait until late 2009 or even 2010 before getting that call from the committee.


— Sudeep Reddy




Earlier on RTE:
Waiting For The Recession Call
A Recession Announcement Coming? Probably, But Not Soon
The GDP Debate: Did a Recession Start in 2007?
If It Is a Recession, the Longest in a Quarter Century?
Economists Weigh Possibility of a Recession Amid Economic Growth


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Avoid These Investment 'Bargains'

Avoid These Investment 'Bargains'
When is "such a deal" not such a great buy?

Christine Benz is Morningstar's director of personal finance, editor of Morningstar PracticalFinance, and author of the Morningstar Guide to Mutual Funds. Meet Morningstar's other investing specialists.

Like an extended warranty on a new appliance or the time-share pitch that's disguised as a "free" vacation, savvy consumers know that some deals that look good on the surface aren't all they're cracked up to be once you read the fine print. The same holds true in the investing marketplace.

A few months back, I shared some tips for unearthing a few true investment bargains. But what about those investments that seem like good deals but really aren't? I'll discuss some of them in this week's article.

Looking for Securities with a Cheap Share Price

Ford Motor and General Motors are currently trading at less than $2 and $3 per share, respectively. When storied companies like these two hit the skids, it may look tempting to gobble up their stocks in a bet that they won't go belly-up. After all, you can buy 100 shares of each for less than $500, and if they do manage to resuscitate themselves, you could stand to gain big. That's not the stupidest idea in the world--as long as you go in knowing that it's similar to a bet you might place in Vegas. If your bet works out, you're buying the drinks. If not, you could lose everything, as equity shareholders would likely lose almost everything if the two companies ended up in bankruptcy court. (For proof that gambling on near-busted companies is a risky proposition, just talk to shareholders of Fannie Mae, Freddie Mac , and American International Group

Hoarding Company Stock--Even When You've Bought It at a Discount

Many publicly traded companies give their employees the opportunity to purchase their stock at a discount to the current share price. That might seem like a good deal. But loading up on your company's stock can be dangerous, particularly if you're hoarding shares of your company at the expense of building a well-diversified portfolio. Remember: You already have a lot tied up in your company's financial health and your industry via your job, so it's a mistake to compound that effect by socking a disproportionate share of your portfolio into your employer's stock. To be on the safe side, limit employer stock to no more than 5% of your overall portfolio.

Buying a Cheap Fund, Then Paying Commissions on Small Purchases

Exchange-traded funds have recently taken off in the marketplace, in part because their expenses can be lower than mutual funds that invest in the same basket of securities. Before you venture whole-hog into ETFs, however, take a step back and think about your investment style. If you plan to make a lump-sum investment and let it ride, the ETF may well be the best bet for you. However, that's not so if you trade frequently or make small purchases at regular intervals (and dollar-cost-averaging is a great way to invest, by the way). That's because you'll pay a commission to buy and sell ETFs, and those charges could quickly erode any cost savings versus plain-vanilla mutual funds. Ditto for paying a transaction fee to buy a fund in a mutual fund supermarket or buying a front-load fund, even if its expenses are low.

http://news.morningstar.com/articlenet/article.aspx?id=265385

Where the Herd's Headed

NOVEMBER 20, 2008, 6:34 P.M. ET
Where the Herd's Headed

Merrill's monthly survey of fund managers shows some movement into stocks and bonds. Should you follow?
By BRETT ARENDS


My favorite monthly publication has just come in. No, not The Atlantic, Forbes, or GQ.
The Merrill Lynch Global Fund Manager survey.

OK, I admit it. I'm a stock market nerd. I love this stuff. The survey offers probably the best insights into what the big institutional money managers think about the market. Where they are placing their bets. And, sometimes, what they might do next.

It's a contrarian's bible. These are the people who move markets. So the assets they already own too much of are going to have a hard time outperforming, because who is left to buy more? Meanwhile, the reverse can be true for those investment classes they are currently neglecting.
The latest issue is a fascinating read. The big money crowd, the world's best financial minds, have looked at the wreckage of the worst financial crisis in 80 years. They considered the parade of humiliating fiascoes on Wall Street. And the bumbling and eye-watering extravagance in Washington. And yet the two asset classes they still seem to like are IOUs issued by the federal government, and stocks on Wall Street.

Go figure.

If you are thinking about investing in equities, you should know that institutional investors are already overexposed to U.S. stocks at the expense of the rest of the world. A thumping 55% of the fund managers surveyed now have more money in U.S. equities than their benchmark would require: Just 19% say they are under-invested in Wall Street.

Meanwhile, the picture for British and European equities is almost exactly reversed. Nearly half the fund managers say they are underinvested there.

Of course there is a lot of economic misery to come in Europe – especially in Britain, whose real estate bubble has only just begun to deflate.

Yet it's unclear whether this bad news is already factored into share prices there. British and European share indices have more than halved since last year's peaks and are now trading on multiples last seen in the mid 1980s. Several shrewd value managers are arguing that Europe – and Japan – now offer the best long-term buys.

As for bonds: I've been trying for weeks to understand fully why anyone would lend money to the federal government for thirty years, let alone at today's anemic interest rates.

The bailout parade slowly making its way through Washington, each package dazzling the crowd with its size and extravagance, is surely going to lead to slow-motion default in years to come through devaluation and inflation. That's a disaster scenario for bonds.

Nor could I understand why the only Treasurys that were unloved were TIPS – the ones that actually have inflation protection.

Now I know. These fund managers, the people who move the market, have suddenly written off inflation as a near impossibility. A startling 87% think core inflation will be lower a year from now than it is today. Just 5% think inflation might be higher.

Complacency?

You make the call. Note that just a few months ago more than four-fifths of these guys thought inflation was going to be higher than normal. So it's fair to say they're capable of changing their minds, dramatically, in a short period.

Heaven help anyone in the way when the herd suddenly changes direction.

At the moment, 84% of the fund managers think the global economy is already in recession.
One startling fact: Hardly any professional fund managers believe Wall Street analysts anymore. A whopping 90% told the Merrill Lynch survey they thought the consensus earnings estimates on the Street for the next year were too high. Amazingly, 59% called the estimates "far" too high.

That's a pretty damning indictment.

Doomsayers claim that stock markets must fall further because earnings forecasts have to come down.

Sure, Wall Street analysts remain laughably bullish. But it turns out no one with any money believes them anyway.

Write to Brett Arends at brett.arends@wsj.com

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http://online.wsj.com/article/SB122468950688858589.html

A Bout of Irrational Pessimism?

NOVEMBER 17, 2008, 1:54 P.M. ET
A Bout of Irrational Pessimism?

Fund manager Marty Whitman says investor panic – and not declining businesses – have sunk current market valuations. Is he right?

By BRETT ARENDS

Legendary fund manager Marty Whitman is pinning the blame squarely on an "irrational" stock market meltdown for this year's hefty losses at his Third Avenue Value fund.

"As far as we are concerned," Mr. Whitman declares in his latest shareholder letter to investors, "the fund's poor 2008 performance is attributable to an irrational stock market, not any fundamental deterioration in the businesses in which [Third Avenue Funds] has invested."
It's a pretty bold claim, in the face of a 50% loss over the past year. But is it wrong?

What triumphant bears are apt to forget is that a stock market which is capable of "irrational exuberance" - and the jury on this is surely now in - is just as capable of irrational panic, worry and gloom.

If stock market valuations were wrong when they were soaring last year, who is to say that they are correct now?

Mr. Whitman's colleague Curtis Jensen, co-chief investment manager at Third Avenue, reinforced the view in an interview last week.

Some current valuations, Mr. Jensen said, are "ridiculous" and anticipate virtual "armageddon."

Mr. Whitman and Mr. Jensen see some of the best opportunities in high-yield bonds. "There are unprecedented opportunities in the distressed debt market," Mr. Jensen said. "You are able to buy very senior securities today (offering) equity-like returns." That means bonds backed by collateral or strong covenants, with priority claims in the event of insolvency, that in some cases still offer likely yields to maturity "in the high teens" or higher, in Mr. Jensen's view.

Examples include certain bonds issued by General Motors Acceptance Corp and by the trucking company Swift Transportation. Mr. Jensen's Third Avenue Small Cap Value bought the Swift bonds at about 60% of par value, and he expects either a yield to maturity of 19% -- or a valuable slice of equity in the firm if Swift is forced into a financial restructuring.

The last time Third Avenue saw such opportunities was in the early 1990s, he adds.

Mr. Whitman, writing to shareholders, said some of the distressed loans bought recently might offer yields to maturity as high as 54%

Third Avenue disclosures show that in the past few months the firm's funds have been aggressively buying certain bonds issued by General Motors Acceptance Corp., among others. Mr. Jensen, in his Third Avenue Small Cap Value, has bought IOUs issued by the trucking company Swift Transportation at about 60% of par value. He expects a yield to maturity of 19% -- or a valuable slice of equity in the firm if it is forced into a financial restructuring.

By contrast to this "off-piste" skiing in the debt markets, Third Avenue is sticking to the gentlest runs in the matter of equities. Managers are looking for cash generators with solid balance sheets that won't need to tap the markets for extra cash any time soon. No one knows how or when this market will turn. The indices may languish for years. But bottom-up value managers, like those at Third Avenue, claim they're now seeing the best opportunities in generations.

Marty Whitman, for his part, has been through market panics for over 50 years. In his letter, he argues "today the opportunity of a lifetime seems to be present for passive investors who follow a few simple caveats." Among Mr. Whitman's caveats: Be a buy and hold investor; avoid investing with borrowed funds; and avoid shares of any companies which need, in his words, "relatively continual access to capital markets if they are to remain going concerns." Acconding to Mr. Whitman, those companies include financials such as Goldman Sachs and even companies like General Electric. "Deep value and high quality alone are not sufficient conditions for investing in common stocks," writes Mr. Whitman. "Deep value pricing and high quality assets must be accompanied by creditworthiness."

Write to Brett Arends at brett.arends@wsj.com

http://online.wsj.com/article/SB122692731966133143.html

Joe Investor, the Markets Are All Yours Now

THE INTELLIGENT INVESTOR
NOVEMBER 15, 2008
Joe Investor, the Markets Are All Yours Now
By JASON ZWEIG

The tables have turned.

For the past couple of decades, the markets have been dominated by institutional investors who devoured bargains so fast and in such bulk that individual investors were usually left, at best, with a few scraps.

But pension funds, hedge funds, mutual funds and other institutions are under siege as their portfolios implode and investors redeem their shares, forcing the fund managers to raise cash.

Advantage Goes to the Individual Investor

Personal Finance columnist Jason Zweig explains why individuals have a big advantage over institutional investors in the market right now. (Nov. 14)

Virtually every investment that carries any risk is on sale. Stocks and bonds, at home and abroad, have had their prices slashed by up to 45% this year. Yet at the very moment when bargains abound, many of the giants who normally would buy can do nothing but sell.

Welcome to a buyer's market without buyers.

This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: "The question that hardly anyone ever thinks about is: Who's on the other side of my trade, and why are they willing to be losers if I'm going to be a winner?" Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, "You can -- and probably do -- have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price."

You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing. Sooner rather than later, institutions will no longer need to beg for cash, they will regain the upper hand over individuals, and the tables will turn again.

While blue-chip stocks are still cheap, as I've said many times lately, there are some areas where the liquidity drought borders on desperation.

Corporate bonds.

A year ago, corporate bonds outyielded Treasurys by 1.6 percentage points; now, the spread is more than five. Top-quality corporate debt is yielding 7% and up. Consider cheap, well-run funds like Harbor Bond, Loomis Sayles Bond or . Convertible bonds are yielding 12% and more; here, the easiest choice is Vanguard Convertible Securities.

Municipal bonds.

The tax-free securities issued by state and local governments have gotten so cheap that in many cases you would have to earn 7% or 8% before tax to match their yield. Vanguard, T. Rowe Price and Fidelity offer a wide range of muni funds at low cost.

Emerging markets.

Stocks and bonds in the developing world have been decimated. Emerging-market stocks have fallen nearly 60% in 2008. The bonds have dropped about 20%, producing the highest yields in about a decade. For stocks, Vanguard Emerging Markets ETF is a good choice; T. Rowe Price Emerging Markets Bond fund is a solid way to play the debt.

TIPS.

Larry Swedroe of Buckingham Asset Management in St. Louis recently bought 8-year Treasury Inflation-Protected Securities with a yield of 3.7%. "That is crazy," he marvels, since the same day the 5-year TIPS yielded 2.6% and the 10-year yielded 2.7%. Such fat yields in excess of inflation on a risk-free investment are a rare opportunity. Put TIPS in a tax-free retirement account; learn more at www.treasurydirect.gov.

Subscribe to an RSS feed for the Intelligent Investor and get notified when new columns appear, at online.wsj.com/xml/rss/3_7438.xml.

Closed-end funds.

These neglected fund/stock hybrids are at their cheapest in years. Closed-ends often trade at a discount to the market value of their holdings. In many cases, you now can get $1 in assets for 85 cents. That augments the yield on funds that hold corporate or municipal bonds. A handy starting point for research is www.closed-endfunds.com. Be sure the fund is "unleveraged," meaning that it does not borrow money, and avoid any fund with annual expenses over 1%.

Real estate.

REITs, or real-estate investment trusts, have been gutted in the housing crisis, losing more than 40% so far this year after an 18% drop in 2007. Many REITs are now priced as if people and businesses will never again want roofs over their heads. The safest choice: a basket holding dozens of real-estate bundles, like Vanguard REIT Index fund.

Finally, if you have cash and courage, consider a vacation property or second home. Nearly two-thirds of the condominiums built in and around Myrtle Beach, S.C. during the boom remain unsold as of June, says the National Association of Home Builders. A similar supply glut has clogged markets in other getaways like Tampa, Fla., and San Diego. With due diligence, you could get both a high financial and a high psychic return.

Email: intelligentinvestor@wsj.com.

http://online.wsj.com/article/SB122671161003230223.html

In This Market, Dividends Look Great

OCTOBER 19, 2008
In This Market, Dividends Look Great
By GREGORY ZUCKERMAN


The brutal drops in stock prices in recent weeks have devastated investors' portfolios. That's the bad news.

The good news: The stock-market plunge has also made a number of quality companies paying hefty dividends much cheaper -- boosting their "dividend yield," or the annualized dividend as a percentage of the stock price. That has some analysts recommending these shares to investors eager for some ballast in a rough market.

Indeed, stocks such as Coca-Cola, Altria Group and Merck sport dividend yields ranging from 3.4% to 6.6% and are considered relatively safe picks even in a painful global recession.

But some high-dividend stocks can be dangerous, especially as corporate profits fall, cash flows shrink and companies find it more difficult to make these payments to shareholders. Dividends generally are the second expenditure that companies trim to conserve cash in a downturn, after stock buybacks. Some investors piled into Bank of America in the past few months, attracted by a dividend yield that topped 7%. But earlier this month, the bank slashed its dividend in half, sending its shares lower.

Look Beyond Yields

In selecting stocks, "a pure dividend view misses the risk of earnings adjustments that could force future dividend cuts," says Tobias Levkovich, Citigroup's chief U.S. equity strategist. "There is lots of risk for industrial, energy and materials firms that likely will suffer margin deterioration as the global economy slows and internal cash needs grow.

"Conversely," he adds, "financial and health-care companies may be in a far better position, as many diversified financial stocks already have gone through dividend reductions, while health-care entities are generally less cyclical."

Last week, stocks went on a roller-coaster, soaring on Monday, tumbling later in the week, and finishing the week with the Dow Jones Industrial Average up 4.8%.

The turbulence makes companies that pay a reliable, hefty dividend much more attractive. Coca-Cola, for example, has a 3.4% yield and has been on a roll, despite the weakening global economy. Coke posted better-than-expected third-quarter profit growth of 14%, as strong growth from international markets helped offset weakening U.S. beverage sales. About 81% of Coke's profit came from foreign markets last year, and the company has expanded in emerging markets. Coke's revenues from Latin America, a relative bright spot in the globe, jumped 24% in the third quarter.

Drug companies like Merck have had more challenges, amid a paucity of blockbuster new drugs and a weakening dollar. But Merck now trades for less than nine times its 2009 expected earnings, and its dividend -- producing a yield of 5.3% -- is viewed as relatively safe.

Consider Utilities

Although utilities' shares have fallen sharply, some investors and analysts see their dividends as stable, and argue that the shares could be strong because they will outperform in a downturn. Goldman Sachs recommends American Electric Power, Consolidated Edison and Entergy. These stocks have dividend yields between 3.7% and 6%.

Whitney Tilson, who helps run hedge fund T2Partners, is a fan of tobacco maker Altria, which has a 6.6% dividend yield and may not see much of a sales slump in a downturn.

He also likes Crosstex Energy LP, a master limited partnership that operates natural-gas pipelines and processing and treatment plants. The stock has tumbled 57% in the past year, but the dividend has risen to an annualized $2.52, for a yield of 17.3%. Mr. Tilson says he expects the payout won't be cut.

Freeport-McMoRan Copper & Gold has a 6.1% dividend yield and trades for less than five times its expected 2009 earnings. The catch? It has suffered as commodity prices have plunged. Shares have been dumped by hedge funds -- former fans of the stock that have found themselves under heavy pressure lately and eager to raise cash. Any stabilization of commodity prices likely would leave the company in a strong position, analysts say.

But investors should be careful about high-dividend payers. Some analysts say investors should be wary before buying shares of CIT Group, a lender that sports an 8.5% dividend yield, because the company could see rougher times in the months ahead. The company cut its annualized dividend from $1 to 40 cents earlier this year.

A CIT spokesman says "the dividend is paid at the Board's discretion and serves as an indication of their confidence in CIT's long-term earnings potential."

'Unsustainable' Dividend

Another stock to be wary of: McClatchy, a newspaper company with a dividend yield of 10.2%, even after recently halving its payout. "Their dividend is unsustainable and will likely be cut" again, says Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "It's a tough business, in this environment especially."

Richard Tullo, an independent analyst, also is concerned about whether New York Times and Eastman Kodak can continue to pay dividends producing yields of 7.4% and 4.1%, respectively. The Times's "rich dividend may be sacrificed, as earnings will remain weak and as the company will have to move to strengthen its balance sheet," Mr. Tullo says, adding that Kodak's dividend could be cut as the company diversifies into new businesses.

Representatives of McClatchy, New York Times and Kodak declined to comment.

Mr. Tilson urges continued caution regarding many financial shares. "We would stay away from almost all high-yielding financials," he says. A high dividend yield for a bank or other firm under pressure "indicates the skepticism investors have that the company will stay alive…. Also, the government could force them to eliminate the dividend" to conserve needed cash.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com

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