Rational Thinking about Irrational Pricing

RATIONAL THINKING ABOUT IRRATIONAL PRICING

Depressed investors caused depressed stock market prices. Selling pressure mounts and drives prices down. Investors possessing even modest degrees of aversion to loss capitulate quickly, and the less fearsome succumb soon after. A downward market spiral ensues.

Value investors avoid these scenarios by forming a clear assessment of their averseness to loss. Only having assessed this characteristic honestly do they brave the choppy waters of stock picking.

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

For the most acutely loss-averse investors, pure value investing is most suitable (Graham was extremely risk averse).

Also read:

1. Stock Market Prices
2. Market metrics P/E and Intrinsic value
3. Rational Thinking about Irrational Pricing
4. The Anxiety of Selling
5. Control Value of Majority Interest

Market metrics P/E and Intrinsic value

DOING LITTLE WITH MARKET PRICE

The most-quoted metric in discussing common stocks is their ratio of price-to-earnings (P/E). This states the relationship between what a stock costs and what benefit it produces.

Many people wrongly believe that value investing involves finding companies boasting low P/E multiples, but:

• not all low P/E stocks are good investments, and
• not all high P/E stocks are bad investments.
• Nor do value investors consider the P/E ratio as an insightful measure for valuation purposes, though it might be useful as a check against overpaying.

The P/E ratio can be used as a screen.

Graham avoided buying stocks unless they were priced at their lowest P/E level during the prior five years.

He also required an earnings-return compared to price (current earnings divided by price = earnings yield) at least twice that prevailing on high-grade corporate bonds.

Other value investors follow these practices. The devices protect against the whims of the marketplace. The market might not be right, but this approach limits the value investor’s exposure from it being wrong.

Value investors resist the temptation to use P/E ratios as supplements to a traditional valuation analysis. This contrasts with devotees of pure DCF analysis in valuation exercises.

When the latter’s results show a wide range of plausible valuations, they often appeal to the P/E ratios of comparable companies as a way to narrow the range.

The approach compares the price of comparable companies to their respective cash flows (P/CF). Suppose a comparable company’s P/CF ratio is 10 (suppose a price of 20 and cash flows of 2). That ratio of 10 is then applied to the subject company. Say its cash flows are 3. Its implied comparables-based value is 30. How much this helps is uncertain. The effort relies entirely on the quality of market pricing for the comparable company. While many finance professionals employ the technique, most value investors do not consider it useful.

Value investors consider the income statement and the balance sheet as sources of information concerning business value. These are superior to market-oriented tools such as the P/E ratio for two reasons.

• First, return on equity captures the full accounting picture, including debt and equity, whereas P/E severs earnings from the balance sheet.
• Second, return on equity is an intrinsic or internal valuation methodology, whereas P/E ratios are products of market or external or valuation processes.

Market metrics (P/E) tell value investors more about Graham’s Mr. Market than about intrinsic value.

Also read:

1. Stock Market Prices
2. Market metrics P/E and Intrinsic value
3. Rational Thinking about Irrational Pricing
4. The Anxiety of Selling
5. Control Value of Majority Interest

Stock Market Prices

MARKET PRICES

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

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

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

FACTORS INFLUENCING MARKET PRICES

Numerous complex factors influence stock market prices. Graham identified two categories of factors:

• speculative and
• investment.

Speculative factors are the jungle of the marketplace and include

• technical aspects of market trading as well as
• manipulative and psychological ones.

Investment factors relate to valuation, principally assessments of financial data, including

• earnings and
• assets.

Factors sharing traits of both the marketplace and valuations, which Graham called future value factors, include

• managerial qualities,
• competitive circumstances, and
• a company’s outlook for sales and profits.

All of these factors are filtered through the lens of the investing public’s attitude, which produces trading decisions and bids and offers in the market. The output is market price.

The idea that anyone can predict the outcome of this process, or that it works in a way that yields prices just equal to value, is far-fetched. Value investing considers trying to measure market sentiment a waste of time. Value investing focuses primarily on business value, not market price.

Emphasizing businesses over prices enables value investor to know that owning stock means owning an interest in a going concern. That mental quality promotes the discipline necessary:

• to define a circle of competence,
• do financial analysis, and
• assess value-price relationships.

Pervasive market price data makes it harder for equity investors to appreciate that they are part owners of a business, making disciplined analysis elusive.

The only reason to consider market sentiment is because in times of general economic despair and market malaise, the odds of successful stock picking rise. Three factors contribute:
(1) There are more companies likely to be price below value,
(2) There are fewer investment competitors likely to wade into the thicket, and
(3) The media and regulatory pressure tend to promote quality management and conservative accounting.

Also read:

1. Stock Market Prices
2. Market metrics P/E and Intrinsic value
3. Rational Thinking about Irrational Pricing
4. The Anxiety of Selling
5. Control Value of Majority Interest

The bond bubble is an accident waiting to happen

The bond bubble is an accident waiting to happen
The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever.

Ambrose Evans-PritchardLast Updated: 12:22PM GMT 12 Jan 2009
Comments 71 Comment on this article
They are betting too that debt deflation will overwhelm the effects of near-zero interest rates across the G10 and nullify a £2,000bn fiscal blast in the US, China, Japan, Britain, and Europe.
Above all, they are betting that the Federal Reserve chief Ben Bernanke will fail to print enough banknotes to inflate the US money supply, despite his avowed intent to do so.
Yields on 10-year US Treasuries have fallen to 2.4pc – a level that was unseen even in the Great Depression. This is "return-free risk", said bond guru Jim Grant.
It is much the same story across the world. Yields are 1.3pc in Japan, 3.02pc in Germany, 3.13pc in Britain, 3.26pc in Chile, 3.47pc in France, and 5.56pc in Brazil.
"Get out of Treasuries. They are very, very expensive," said Mohamed El-Erian, the investment chief at the Pimco, the world's top bond fund, in a Barron's article last week.
It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets.
These countries are themselves bleeding as exports collapse. Most face capital flight. The whole process that fed the bond boom from 2003 to 2008 is now going into reverse.
Woe betide any investor who misjudges the consequences of this strategic shift.
Russia has lost 27pc of its $600bn reserves since August. The oil and metals crash has left the oligarchs prostrate. China's reserves fell $15bn in October. Beijing has begun to fret about an exodus of hot money – disguised as foreign investment in plant. The exchange regulator is muttering about "abnormal" capital flows out of the country.
China's $1,900bn stash of foreign bonds is a by-product of holding down the yuan to boost exports.
This mercantilist ploy is no longer necessary, since the currency is weakening. Beijing needs the money at home in any case to prop up the Chinese economy – now in trouble. Even Japan has slipped into trade deficit.
Clearly, the US and European governments cannot rely on Asia to plug the $3,500bn hole in their budgets this year.
Asians are just as likely to be net sellers of their bonds. Which implies that central banks may have to "monetize" our deficits.
James Montier, from Société Générale, has examined US bonds back to 1798. Yields have never been this low before, except under war controls in the 1940s when the price was set by dictate.
That episode is not a happy precedent. The Fed drove the 10-year bond down to 2.25pc, much as it is doing today with mortgage bonds. It helped America win World War Two, but ended in tears for bond holders in 1946 when inflation jumped to 18pc.
Mr Montier said yields have averaged 4.5pc over two centuries, with a real return of around 2pc. By that benchmark, the market is now banking on a decade of deflation.
Investors have drawn a false parallel with Japan's Lost Decade, when bond yields kept falling, forgetting that Tokyo waited seven years before resorting to the printing press. Mr Bernanke has no such inhibitions. He has hit the nuclear button in advance.
"Today's yields are woefully short of the estimated fair value under normal conditions. There maybe a (short-term) speculative case for buying bonds. However, I am an investor, not a speculator," he said
Of course, we may already be so deep into debt deflation that bonds will rally regardless. Fresh data suggest that Japan's economy contracted at a 12pc annual rate in the fourth quarter of 2008; the US, Germany, and France shrank at a 6pc rate, and Britain shrank at 5pc.
If sustained, these figures are worse than 1930, though not as bad as the killer year of 1931. The UK contraction from peak to trough in the Slump was 5pc. Gordon Brown will be lucky to get off so lightly.
The Fed's December minutes reek of fear. The Bernanke team is no longer sure that stimulus will gain traction in time.
The Fed's "Monetary Multiplier" has collapsed, falling below 1. This is unthinkable. We are in a liquidity trap.
So yes, printing money is not as easy as it looks, but to conclude that the Fed cannot bring about inflation is a leap too far.
The Fed has only just started to debauch in earnest, buying $600bn of mortgage bonds to force home loans down to 4.5pc. US mortgage rates have dropped 150 basis points in two months.
My tentative guess is that Bernanke's blitz will "work" – perhaps later this year. Markets will start to look beyond deflation. They will remember that the Fed is boosting its balance sheet from $800bn to $3,000bn, and that it sits on an overhang of bonds that must be sold again.
"The euthanasia of the rentier" will wear off, to borrow from Keynes. That is when the next crisis begins.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4218210/The-bond-bubble-has-long-since-burst-investors-ignore-this-at-you-peril.html

Hedge funds suffer worst year on record

Hedge funds suffer worst year on record
Hedge funds had their worst year on record in 2008 with up to 300 funds worldwide closing down.

By Helia EbrahimiLast Updated: 8:55AM GMT 15 Jan 2009
Research by Hedgefund Intelligence also revealed an average 12pc fall in the value of hedge funds' investments.
By a median figure, hedge funds in Europe outperformed their American and Asian peers for the first time, down only 4.6pc in the 12 months, according to research based on data from 1,500 funds.
Although 2008 was the industry's worst annual performance, the results show the sector did not perform as poorly as has been suggested by some commentators. It also outperformed the FTSE 100, which fell 31pc, and the Dow, which plunged 34pc.
Some strategies were particularly hard hit, with emerging market equity funds crashing 31pc over the year, equity hedge funds down 13pc; and emerging market debt off 10pc.
In contrast, managed futures funds were the clear winners of 2008, up 16.17pc.
Some analysts believe institutional investors forced into redemptions will this year start to re-invest in hedge funds that are performing well. However, with many still forecasting industry assets could be wiped out by, there are likely to be many more casualties in the next 18 months.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4241934/Hedge-funds-suffer-worst-year-on-record.html

Pound heads back to dark days of 1990

Pound heads back to dark days of 1990

By Edmund Conway, Economics Editor
Last Updated: 1:18AM BST 30 Mar 2007


Economists have raised the alarm over the future health of the pound, after new figures showed the current account has yawned to the biggest deficit since 1990.

They warned that sterling faced a significant fall in the coming years as investors realised that the UK is living well beyond its means.

The deficit on the balance of payments rose to a record high of £12.7bn in the final quarter of 2006, the Office for National Statistics said. As a percentage of Britain's gross domestic product, this is 3.8pc, the highest level seen since 1990.

Experts said that the increase in the shortfall was the latest sign of the North Sea's demise as an energy producer and warned that as Britain's oil and gas exports fell in the coming years, the current account would widen to worrying levels.

The increase in the gap was far bigger than economists expected, and they warned that this could have severe consequences for the long-term health of the UK economy. A country with a large current account deficit will often see its currency depreciate in the following years, they said.

However, analysts also warned that the numbers indicated that Britain was starting to lose its talent at earning an unusually high return on its assets abroad.

In previous years, Britain's current account has been supported by the fact that UK firms have tended to earn more on their overseas investments than foreign companies have in the UK.

Michael Saunders, chief UK economist at Citigroup, said this appeared to be changing. He said this rate of return was dropping, and warned that there would soon be "some pretty appalling current account figures", saying the deficit could pass 5pc within two years. This is still far short of the US, where some expect the deficit to surpass 7pc in the coming years, but is still extremely high by the standards of developed countries.

Furthermore, said Mr Saunders, the current flow of money into the UK from the Middle East, which is helping to support the pound, would not last forever.

"So far, the worsening current account deficit has not been a big negative for sterling," he said. "But, at the very least, the worsening current account suggests that the Monetary Policy Committee is unlikely to be able to rely on sterling strength as an alternative source of restraint, rather than higher interest rates.

"And, if sterling weakens (in the absence of UK economic weakness) then the UK's medium term upside inflation risks - and need for interest rates to rise - would be correspondingly greater."

A Treasury spokesman said: "Underlying growth in exports is expected to remain robust this year as growth in UK export markets strengthens on the back of stronger demand from the euro area."

The figures also revealed a sudden dive in the UK's savings ratio, indicating that many Britons are being forced to dig into their savings to finance their current spending. The ratio, which charts the amount of national income being set aside, was 3.7pc in the fourth quarter of 2006. This is the lowest level since 2004, and is far lower than the long-run average.

The drop in savings could prefigure a fall in consumer spending in the coming months as shoppers cut back on their purchases, experts predicted.

And in a further sign that households are tightening their belts, the pace of house price inflation started to slow last month, according to figures from Nationwide. It said this measure of annual property price increases dropped from 10pc to 9.3pc.

After a year of unexpectedly strong growth, many now think the property market is cooling noticeably, although in pockets of the country including London and the South-East, a shortage of supply and massive demand for prime housing have pushed prices higher.

http://www.telegraph.co.uk/finance/2806502/Pound-heads-back-to-dark-days-of-1990.html

Company profits slide as recession takes hold

Company profits slide as recession takes hold
Business profits are likely to dip by a third - more than in the early 1990s recession - experts warned after fresh figures underlined companies' declining fortunes.

By Edmund Conway, Economics EditorLast Updated: 6:39AM GMT 15 Jan 2009

The total amount of profits generated has fallen for a second successive quarter in the latest sign of the economy's deterioration.
Corporate profitability dropped in the third quarter of last year, despite a leap in takings from North Sea oil and gas groups as the crude price shot through record highs. Experts warned that the fall in profits only represented the beginning of a long series of declines during the current UK recession, which according to statistics released earlier this week is likely to be more severe than the slump of the early 1990s.
The net rate of return recorded by private non financial corporations dropped to 13.9pc in the third quarter of 2008, according to the Office for National Statistics. The rate is the lowest since early 2007, and is significantly down from the peak of 14.7pc recorded early last year before the full force of the economic crisis hit.
Roger Bootle, founder of Capital Economics and an economic adviser to Deloitte, said he expected profits ultimately to fall by around a third.
"The extreme cyclicality of profits means that in the early 1990s recession, profits fell, in real terms from peak to trough, by around 25pc. The more severe recession in the early 1980s is fast becoming the more relevant precedent. And back then, profits fell by about 37pc in real terms.
"I find it very hard to share in the general optimism that the recession will last for only a year. The economy will contract further in 2010 as well."

http://www.telegraph.co.uk/finance/economics/4240920/Company-profits-slide-as-recession-takes-hold.html

Never mind the borrowers, savers are the solvent majority

Never mind the borrowers, savers are the solvent majority

Plans to ease the tax burden on savers could lay the foundations for a sustainable recovery and recognise that they, not borrowers, are the main victims of the credit crisis.

By Ian Cowie, Personal Finance Editor Last Updated: 3:40PM GMT 12 Jan 2009
Comments 8 Comment on this article

'Then I won the lottery and decided to live off the interest'

Millions of savers have suffered shrinkage of more than £22bn in their combined annual income as a result of interest rate cuts announced during the last year, according to figures from the Office for National Statistics (ONS). January’s half percentage point reduction by the Bank of England to 1.5pc – the fourth consecutive cut – really puts the tin lid on it.
Of course, it is an ill wind that blows no good. Borrowers will not be the only beneficiaries of the precipitous decline in interest rates. Burglars could be big winners, too, as more people decide there is no point leaving money in the bank.
If you are going to earn next to nothing on your savings, many may decide the mattress beats a deposit account because at least you won’t have to share the meagre proceeds with HM Revenue & Customs (HMRC).
Let me make plain straightaway, that this would be a very bad thing indeed; whichever way you look at it. But, as I have pointed out in this space before, savers have been used and abused for so long now that we can hardly be surprised that many have decided this game is no longer worth the candle – while others are quietly making alternative arrangements.
You only have to look at the way money is flooding into fine wine, antiques and almost any other asset that need not leave a paper trail – or, more currently, digital evidence of payments and profits. We avoided joining the euro more by luck than judgement but are becoming much more like our continental cousins in our attitudes toward the taxman. It took many centuries for Rome to turn into Italy but little more than a decade for the United Kingdom to turn into Little Britain.
The good news is that the opposition parties have at last started to put up a fight on behalf of savers. George Osborne, Shadow Chancellor, told me this week: “Many millions of people whose modest incomes depend on their savings are the innocent victims of this recession.
“We need to help them by simplifying and reducing taxation.
“Around 7m families have savings of £10,000 or more, according to the ONS. The average interest rate for £10,000 savings has dropped nearly three percentage points – from 4.4pc in December, 2007, to 1.53pc now. As a result savers are losing nearly £300 a year.”
That may not sound a huge amount until you consider that the National Pensioners Convention reckons 5m retired people rely on savings to provide more than half their income. So some of the poorest people in the country are involuntarily making some of the biggest donations to this Government’s increasingly desperate attempts to buy off a recession.
To make matters worse, many savers will pay more tax than they need to because of the way HMRC automatically bases bills that fall due this month on income that was received last year – unless it is told to do otherwise. David Rothenberg, of accountants Blick Rothenberg, said: “They must make a self assessment claim to reduce payments on account before January 31.”
So, after all the unkind things I have said over the years about timid Tories failing to fight their corner, it was a tonic to hear Mr Osborne say this week: “We are calling on Gordon Brown to cut taxes for savers and pensioners in the Budget, paid for by slower growth in public spending.
“This will help the innocent victims of Labour’s recession and, over the longer term, build a savings culture by ending Britain’s addiction to debt.”
Long overdue plans to ease the tax burden on savers could lay the foundations for a sustainable recovery from economic recession and recognise that savers – not borrowers – have been the main victims of the credit crisis so far.
Hard-pressed young homebuyers make more photogenic TV than pensioners struggling to survive on fixed incomes but the fact remains that savers outnumber borrowers by seven to one. While the Government has urged lenders to cut the cost of credit savers have suffered returns rapidly shrinking to vanishing point.
No wonder many have responded by concluding that saving is a waste of time. According to the ONS, the percentage of household income set aside as savings stood at more than 10pc in 1997 but had fallen to less than a 20th of that level – 0.4pc – by last year. This decade-long savers’ strike created a fundamental imbalance in the economy and helped to set the scene for the credit crisis.
Put simply, we were saving too little and borrowing too much for far too long. That combustible mix also encouraged the banks to increasingly rely for their capital on institutional money markets – which are now frozen by fear – rather than their traditional mainstay – individual savers.
Now, at long last, Conservative proposals seem to recognise that savers comprise the majority of the public – and offer a better hope of getting out of this mess than Government plans to borrow our way out of debt.
The Conservative plan to scrap the 10p and basic rates of tax on savings will boost bank and building society returns by a quarter for most people. Very few noticed the effects of the Government’s attempt to boost spending by trimming Value Added Tax from 17.5pc to 15pc, despite the massive cost to the Exchequer of reducing VAT. But savers who currently receive £80 of interest after tax at 20pc would certainly notice if this turned into £100 tax-free.
The same is true of the other Tory tax cut proposal to add £2,000 to pensioners’ personal allowances. People aged between 65 and 74 are currently allowed to receive £9,030 this year before they must pay tax, while the age-related personal allowance for those aged 75 or more is £9,180.
Both groups will be able to receive more than £11,000 a year before they need to pay any tax.
Of course, there is the small matter of a General Election to win before the Tory proposals amount to anything more than hot air. But a massive prize awaits the political party which can show it cares about savers.
According to HMRC, about 18m people pay tax on bank and building society deposits of nearly £900bn. Their income has plunged from £35bn a year ago to nearer £13bn today, according to Conservative calculations based on ONS and Moneyfacts figures.
These savers have been largely overlooked in much of the coverage of the economic recession, which has focused instead on the plight of the noisy minority who spent too much on credit cards and other forms of debt. It is high time politicians began to seek the votes of the solvent majority.

http://www.telegraph.co.uk/finance/personalfinance/savings/4127206/Never-mind-the-borrowers-savers-are-the-solvent-majority.html

Spanish-style catastrophe

Staying out of the euro has spared us a Spanish-style catastrophe
Half-built flats and soaring unemployment show that the boom has turned to gloom on the Costa del Sol. And it's a fate that could easily have befallen Britain.

By Jeff RandallLast Updated: 5:43AM GMT 09 Jan 2009
Comments 227 Comment on this article
Marbella
For a place that's called the Sunshine Coast, Spain's Costa del Sol was unusually wet and cold last week. Friday and Saturday were particularly miserable in Marbella, as the rain lashed across the main promenade, forcing restaurants to bring in tables and pull down shutters.
It was as though the weather gods had decided to reflect the country's economic outlook – which is becoming darker by the day. What many in Spain had regarded (foolishly) as an eternal summer of expansion, driven by a breakneck construction boom, has turned into a winter of plunging property prices, failing businesses and an epidemic of redundancies.
Spain's traditional new year greeting is próspero año nuevo. But even in this part of Andalucia, a favourite playground of wealthy sunseekers and golf fanatics, it is hard to find locals who are expecting prosperity in 2009. For a growing number of workers and small-business owners, anything better than a sharp decline in income will be greeted as a triumph.
Like the toros bravos that die in the corrida, Spain's bull market began with impressive vigour but ended up being dragged off through the dirt. Unemployment hit three million yesterday, about 13 per cent of the workforce (double the rate in the UK), the worst it has been for 12 years. Nearly one million of those without jobs have lost them during the past 12 months.
The speed of descent, from fiesta into crisis, has shocked the country's political class and commentariat. Inflation has dropped from 5.3 per cent to 1.5 per cent since the summer. According to the newspaper El Pais: "This situation was impensable [unthinkable] in July".
As historians begin to assess damage from the credit crunch, Spain will surely be singled out as a classic study for what can go wrong inside a monetary union when the policy requirements of its members become hopelessly misaligned. It is simply not possible to pursue the best interests of every participant when some nations are running trade and fiscal surpluses while others clock up huge deficits.
Ten years after it was launched, the euro is propelling Spain towards disaster. In giving up control of domestic interest rates to the European Central Bank, Madrid handed over a vital instrument of macroeconomic management. It is learning to regret that.
For the early part of this millennium, that loss of power seemed not to matter: Spain's outrageous (and in some cases illegal) construction frenzy hid a multitude of sins. At the peak, about 800,000 homes were being built annually on the basis that demand from foreign buyers was limitless.
That dream has vanished, along with the over-supply of cheap money that funded it. Drive down the E-15, the main motorway link between Malaga and Gibraltar, and you will see block after block of half-built apartments, connected neither to essential utilities nor to financial reality. They stand as temples to a religion that ceased to exist when the bubble popped.
The Spanish economy is weak; it needs lower interest rates and a softer currency. Such a prospect, however, doesn't suit Germany, the eurozone's dominant force, so Madrid has to sit and suffer while its people cry for help.
Discomfort is palpable in tourist centres where the purchasing power of British visitors and second-home owners has played a pivotal role in boosting local enterprise. Germans and Swedes have been important, also, but it is on the British that the leisure sector in southern Spain has depended most.
A quick scan of the exchange-rate charts explains why. In the summer of 2000, about 18 months after it was launched, the euro was out of fashion on the world's currency markets. At that time, £1 bought €1.75, making British travellers feel especially wealthy when holidaying in Spain.
Today, however, as the British economy sinks into recession, prompting the Bank of England to slash interest rates to 1.5 per cent (the lowest level in the central bank's 315-year history), it is sterling that looks like a six-stone weakling.
Many in the queue at Gatwick airport's Travelex desk last weekend were shocked to discover that the pound had fallen to below parity against the euro. For them, Spain has become an expensive experience. Old jokes about Costa Notta Lotta are no longer relevant, much less funny.
I was treated by a friend to a round of golf at Rio Real, a middle-ranking course, that is by no means among the priciest. He was charged £172 for two (no buggy). Dinner for three in a modest pizza joint came to £75. One must assume that hoteliers from Morecambe to Margate are cheering wildly.
Competing currencies invariably fluctuate on a daily basis, but not all in the City are expecting a swift recovery of sterling against the euro (even though it has picked up in the past few days). HSBC believes: "In the UK… a weaker currency seems desirable to policy makers… in our eyes all roads lead to a stronger euro."
If that analysis proves correct, parts of Spain will face devastation, and social policies that seemed generous during the go-go years will quickly become unaffordable. For example, in some instances the state pays 70 per cent of salary for up to two years when a worker is made unemployed. How will that be funded if, as some are predicting, Spain's jobless total reaches four million in 2010?
Adding to Madrid's woes is the extraordinary influx of five million immigrants, who boosted the population by about 15 per cent between 1998 and last year. It was always assumed that in tough times many would return home. But for penniless fruit pickers from Africa, life in Spain, even in the harshest economic climate, is often better than what they left behind. The number of foreigners claiming dole payments has doubled and there are mounting tensions as native job-seekers slip down the food chain.
Marbella is not used to life on a budget. Shopkeepers, newspaper vendors and bar staff seem baffled by the downturn in their fortunes. On Sunday, my family and I had dinner in a seafront bodega and were the only customers all night. "What has happened to los Ingleses?" asked the waiter.
The answer is that the United Kingdom never joined the euro. As a result, our government and monetary authorities are free to adopt policies that suit our needs. In today's circumstances, that means the freedom to live with a devaluing currency. This hurts those of us who can still afford to visit Spain, and is unfortunate for British pensioners living abroad, but is a small price to pay for the revival of our domestic industries.
Had Britain been locked into Europe's single currency, at an exchange rate far higher than today's, there is good reason to believe that we, too, would be suffering double-digit unemployment. You won't read this very often under my byline, but Gordon Brown played a blinder in keeping us out.

http://www.telegraph.co.uk/finance/comment/jeffrandall/4177828/Staying-out-of-the-euro-has-spared-us-a-Spanish-style-catastrophe.html

Ireland plans drastic cuts to prevent debt crisis

Ireland plans drastic cuts to prevent debt crisis
Ireland is to demand pay cuts for civil servants and public employees to prevent the budget deficit soaring to 12pc of gross domestic product by next year – becoming the first country in the eurozone to resort to 1930s-style wage deflation to claw back competitiveness.

By Ambrose Evans-PritchardLast Updated: 6:13AM GMT 15 Jan 2009
"We will take whatever decisions are necessary," said premier Brian Cowen. The Taoiseach yesterday denied reports that he invoked the spectre of the International Monetary Fund to terrify the trade unions into submission. But the threat – uttered or not – has been picked up nevertheless by labour leaders.
"The IMF's normal prescription in such situations involves mass dismissals and pay cuts, along with cuts in pensions," said Dan Murphy, head of the public service union, who accepts the need for draconian retrenchment.
The budget deficit will soar to 9.6pc of GDP this year as property tax revenues collapse. It is so far above the EU's Maastricht limit of 3pc that Brussels will have to impose sanctions. It is still rising fast.
"On the basis of existing policy, A General Government Deficit in the range of 11pc to 12pc of GDP is in prospect for each of the years to 2013. This is untenable," said the finance ministry in a fresh revision to its (already dire) Stability Programme. It has drafted a swingeing five-year plan, slashing spending by €16bn (£14.4bn) or 8pc of GDP by 2013.
The markets are watching nervously. Yields on Irish 10-year bonds have risen to 180 basis points over German Bunds. Standard & Poor's has issued a "negative outlook" alert on Ireland's AAA rating, noting that the bank bail-out has increased state liabilities by 228pc of GDP. This guarantee may be tested. While Dublin's "Canary Dwarf" has been a success story – leading a finance sector that makes up nearly 10pc of Irish output – it has also become an Achilles Heel.
Chris Pryce from Fitch Ratings said Ireland had shown great courage by facing up to the full implications of the global crisis earlier than others. "We're very impressed by the vigour of the Irish government," he said. Even so, the public debt will jump from 25pc of GDP in 2007 to 62pc by 2010.
It is a grim moment for the Celtic Tiger after achieving so much as a high-tech hub with an educated work-force and one of the most flexible economies in the world – all qualities that should help the country pull through in the end.
Dublin expects the economy to shrink by 4pc this year as the post-bubble hangover goes from bad to worse. Unemployment will hit 12pc by December, up from 4.9pc in early 2008.
Ireland is paying the price for letting wages spiral upwards during the long boom, eating away at competitiveness. The computer group Dell, Ireland's top exporter, has stunned the country by announcing plans to shift its EU manufacturing arm from Limerick to Poland, taking 4pc of Irish GDP with it. Workers in Eastern Europe are closing the technology gap, and they are much cheaper.
Dublin house prices have fallen 28pc from their peak. Professor Morgan Kelly from University College Dublin – the first to predict last year that Irish banks would need a state rescue – fears that prices will drop 80pc in real terms before the glut of unsold property is cleared.
"It has taken us 10 years to get into this situation. It will in all likelihood take us 10 years to get out of it. Construction will fall to zero for the foreseeable future," he told a Dublin conference. There may be net "demolition".
It is hot debate whether euro membership is making matters worse at this stage. The country has not been able to "get ahead of the curve" over the last year by slashing interest rates. Indeed, Frankfurt raised rates in July.
The euro has jumped almost 30pc against sterling in a year. This amounts to an "asymmetric shock" for Ireland, which depends on Britain for 21pc of its exports. John Whelan, head of the Irish Exporters Association, said the strong euro puts100,000 jobs at risk this year.
"Most companies cannot make money selling into the UK at an exchange rate above 0.80 pence and today the euro is worth 0.91 pence. Currency hedges will run out by March, and the small guys are feeling the full whack instantly," he said.
Mr Whelan said there was a feeling of betrayal that Britain did not join the euro alongside Ireland – or shortly after – despite Labour's pledge to do so.
"We thought Britain would join in 2003, but then Tony Blair lost his popularity in Iraq and never tried," he said.
Finance Minister Brian Lenihan has even accused Britain of pursuing a beggar-thy-neighbour strategy.

http://www.telegraph.co.uk/finance/4241720/Ireland-plans-drastic-cuts-to-prevent-debt-crisis.html

When Pessimism Prevails, It's Time to Get Rich

Robert Kiyosaki Why the Rich Get Richer

When Pessimism Prevails, It's Time to Get Rich
by Robert Kiyosaki

Posted on Tuesday, July 22, 2008, 12:00AM

If you're serious about getting rich, now is the time. We've entered a period of mass-produced pessimism, when bad news is everywhere, and the best time to invest is when optimists become pessimists.

The Weird Turn Pro
Journalist Hunter S. Thompson used to say, "When the going gets weird, the weird turn pro." That's true in investing, too: At the height of every market boom, the weird turn into professional investors. In 2000, millions of people became professional day traders or investors in dotcom companies. Mutual funds had a record net inflow of $309 billion that year, too.
In an earlier column, I stated that it was time to sell all nonperforming real estate. My market indicator? A checkout girl at the local supermarket, who handed me her real estate agent card. She was quitting her job to become a real estate professional.
As a bull market turns into a bear market, the new pros turn into optimists, hoping and praying the bear market will become a bull and save them. But as the market remains bearish, the optimists become pessimists, quit the profession, and return to their day jobs. This is when the real professional investors re-enter the market. That's what's happening now.

Pessimism vs. Realism
In 1987, the United States experienced one of the biggest stock market crashes in history. The savings and loan industry was wiped out. Real estate crashed and a federal bailout entity known as the Resolution Trust Corporation, or the RTC, was formed. The RTC took from the financially foolish and gave to the financially smart.
Right on schedule 20 years later, Dow Industrials and Transports struck their last highs together in July 2007. Since then, nothing but bad news has emerged. In August 2007 a new word surfaced in the world's vocabulary: subprime. That October, I appeared on a number of television shows and was asked when the market would turn and head back up. My reply was, "This is a bad one. The worst is yet to come."
Many of the optimistic TV hosts got angry with me, asking me why I was so pessimistic. I told them, "The difference between an optimist and a pessimist is that a pessimist is a realist. I'm just being realistic."
As we all know, things only got worse in early 2008, with the demise of Bear Stearns and the Federal Reserve stepping in to save investment bankers. In February, many of those optimistic TV (and print) reporters became pessimists -- and when journalists become pessimists, the public follows. By March, mutual funds had a net outflow of $45 billion as investors fled the market.

Surviving the Bad Times
Back in 1987, as savings and loans closed and investors' stock and real estate portfolios were wiped out, my wife, Kim, and I were living in Portland, Ore. Many people were depressed and hiding from the truth. The following year, I said to Kim, "Now is the time for you to begin investing."
In 1989, she purchased a two-bedroom, one-bathroom house for $45,000, putting $5,000 down and earning $25 a month in positive cash flow. Today, she owns over 1,400 units and -- because more people are renting than buying -- she earns hundreds of thousands a year in positive cash flow.
The period from 1987 to 1995 was a rough one, even for the rich. In his book "The Art of the Comeback," my friend Donald Trump writes about being a billion dollars down at the time. Rather than give up, he kept on fighting to survive. He and I often talk about how that period was great for character development.

Two-Year Warning
I believe we're through the worst of the current bust. I know there will be more aftershocks, and the news will continue to be pessimistic for at least two more years, possibly until the summer of 2010.
But the upside to this is that it gives us at least two years to do our market research and find the next big stock or real estate bargain. Before buying, I strongly suggest you study, read books, and take courses on your asset of choice. If your choice is stocks, take a course on stocks or options. If it's real estate, take a course on real estate. Now is the time to learn; not only will you know more than the average person and be in a good position when the market turns, but you'll also meet people with a similar mindset.
You have about two years to get into position. Opportunities this big don't come along often, so this is your time to get rich.

Climbing Bulls, Flying Bears
Am I optimistic for the long-term? Absolutely not. I still believe we're due for the mother of all market crashes, and that the U.S. economy is running on borrowed time -- and I do mean borrowed. I think most baby boomers are in serious financial trouble, and that oil will climb above $200 a barrel. Inflation will also increase, causing more pain for the poor and middle class.
The Fed is flooding the market with nearly a trillion dollars of liquidity, which is why I believe gold under $1,200 an ounce and silver under $30 an ounce are bargains. Gold and silver should peak and decline before 2020, completing two 20-year cycles. My exit is to sell silver around 2015. I plan to hold onto gold, income-producing real estate, oil wells, and stocks.
Most of us know the bull climbs slowly up the stairs, but the bear jumps out the window. I believe the bull is still climbing the stairs, and the bear hasn't jumped yet. But rest assured that it will.

481 Comments


http://finance.yahoo.com/expert/article/richricher/95198

Approaches in a Crumbling Economy

Robert Kiyosaki Why the Rich Get Richer

How the Financial Crisis Was Built Into the System
by Robert Kiyosaki


Posted on Monday, November 24, 2008, 12:00AM
How did we get into the current financial mess? Great question.

Turmoil in the Making
In 1910, seven men held a secret meeting on Jekyll Island off the coast of Georgia. It's estimated that those seven men represented one-sixth of the world's wealth. Six were Americans representing J.P. Morgan, John D. Rockefeller, and the U.S. government. One was a European representing the Rothschilds and Warburgs.
In 1913, the U.S. Federal Reserve Bank was created as a direct result of that secret meeting. Interestingly, the U.S. Federal Reserve Bank isn't federal, there are no reserves, and it's not a bank. Those seven men, some American and some European, created this new entity, commonly referred to as the Fed, to take control of the banking system and the money supply of the United States.
In 1944, a meeting in Bretton Woods, N.H., led to the creation of the International Monetary Fund and the World Bank. While the stated purposes for the two new organizations initially sounded admirable, the IMF and the World Bank were created to do to the world what the Federal Reserve Bank does to the United States.
In 1971, President Richard Nixon signed an executive order declaring that the United States no longer had to redeem its paper dollars for gold. With that, the first phase of the takeover of the world banking system and money supply was complete.
In 2008, the world is in economic turmoil. The rich are getting richer, but most people are becoming poorer. Much of this turmoil is directly related to those meetings that took place decades ago. In other words, much of this turmoil is by design.

Power and Domination
Some people say these events are part of a grand conspiracy, and that might well be. Some people say they represent the struggle between capitalists, communists and socialists, and that might be, too.
I personally don't participate in the debate over a possible global conspiracy; it's a waste of time. To me, the wider struggle is for power and domination. And while this struggle has done a lot of good — and a lot of bad — I just want to know how to avoid becoming its victim. I see no reason to be a mouse trying to stop a herd of elephants from fighting.
Currently, many people are suffering due to high oil price, the slowdown in the economy, loss of jobs, declines in home values, increased bankruptcies and businesses closings, savings being wiped out, the plummeting stock market, and rising inflation. These realities are all direct results of this financial power struggle, and millions of people are its victims today.

An Extreme Example
I was in South Africa in July of this year. During my television and radio interviews there, I was often asked my opinion on the world economy. Speaking bluntly, I said that South Africans had a better opportunity of comprehending the global turmoil because they're neighbors to Zimbabwe, a country run by Robert Mugabe.
In my interviews, I said, "What Mugabe has done to Zimbabwe, the Federal Reserve Bank and the IMF are doing to the world." Obviously, my statements disturbed many of the journalists. I did my best to comfort them and assure them I was not an anarchist. I explained, as best I could, that Zimbabwe was an extreme example of an out of control power struggle.
After they were assured I was only using Zimbabwe to illustrate my point, I said, "If you want to understand the world economy, take a refugee from Zimbabwe to lunch." I advised them to ask the refugee these questions:
1. How fast did the economy turn?
2. When did you know that you were in financial trouble?
3. When did you finally decide to leave Zimbabwe?
4. If you could do things differently, what would you have done?

Three Approaches to a Crumbling Economy
I spoke to three young couples from Zimbabwe while I was in South Africa. Two couples were recent refugees now living in South Africa, and one couple still lives in Zimbabwe. All three couples had interesting stories to tell.

One couple said that they would have quit their jobs earlier. Instead, they hung on, hoping the economy would change. Then, virtually overnight, the value of the Zimbabwean dollar dropped and inflation went through the roof. Even though they received pay raises, the couple couldn't survive and soon depleted their savings. They left Zimbabwe by car with almost nothing. If they could've done something differently, they told me, they would have started a business in Zimbabwe and began exporting products to South Africa, so that they would have had South African currency and a bank account there before they fled.

The second couple that fled the country said they saved money and paid off their house and other debts even as the Zimbabwean dollar fell in value. Looking back, they say they would've saved nothing and gotten deeply in debt in Zimbabwe, allowing them to pay off their debt with the cheaper dollars. Instead, they fled after they lost their jobs, leaving behind their house and owning $200,000 in nearly worthless Zimbabwean dollars.

The third couple still lives in Zimbabwe. When they saw the writing on the wall, they set up a business in South Africa and, with the profits, began acquiring tangible assets in Zimbabwe. Often, they'll buy an asset in Zimbabwe and pay the seller in South African currency. They believe that once Mugabe is gone and order is restored, they'll be in a strong financial position.

Many Problems, Few Solutions
There are three major problems with the events of 1913, 1944, and 1971.
The first is that the Fed, the World Bank, and the IMF are allowed to create money out of nothing. This is the primary cause of global inflation. Global inflation devalues our work and our savings by raising the prices of necessities.
For example, when gas prices soared, many people said that the price of oil was going up. In reality, the main cause of the high price of oil is the decreasing value of the dollar. The Fed, the World Bank, and the IMF, like Zimbabwe, are mass-producing funny money, thereby increasing prices and devaluing our quality of life.
The second problem is that our economic crises are getting bigger. In the 1970s, the Fed faced and solved million-dollar crises. In the 1980s, it was billion-dollar crises. Today, we have trillion-dollar crises. Unfortunately, these bigger crises mean more funny money entering the system.

Apocalypse Soon
The third problem is that in 1913, the Fed only protected the large commercial banks such as Bank of America. After 1944, the Fed, the World Bank, and the IMF began bailing out Third World nations such as Tanzania and Mexico. Then, in 2008, the Fed began bailing out investment banks such as Bear Sterns, and its role in the Fannie Mae and Freddie Mac debacle is well known. By 2020, the biggest of bailout of all will probably occur: Social Security and Medicare, which will cost at least a $100 trillion.
Even if we find more oil and produce more food, prices will continue to rise because the value of the dollar will continue to decline. The dollar has lost over 90 percent of its value since the Fed was created. The U.S. dollar will continue to decline because of those seven men on Jekyll Island in 1910.
Granted, the funny-money system has done a lot of good — it has improved the world and made a lot of people rich. But it's also done a lot of bad. I believe somewhere between today and 2020, the system will break. We're on the eve of financial destruction, and that's why it's in gold I trust. I'd rather be a victor than a victim.


http://finance.yahoo.com/expert/article/richricher/124339

What makes you rich is your financial intelligence

Robert Kiyosaki Why the Rich Get Richer

Paying a High Price for Bad Advice
by Robert Kiyosaki

Posted on Sunday, January 11, 2009, 12:00AM
At this time of financial crisis, people are seeking good, relevant advice. But this can be hard to find.

The following is typical of a question you would see in a financial publication -- and its less-than helpful answer:

Q: What can someone whose 401(k) is down do to rebuild their retirement savings?
A: For anyone who is at least five years from retirement, there is probably time for their investments to right themselves.
Resist the urge to take money out of a 401(k) or to stop making contributions to it. Research has shown that dollar-cost averaging -- investing at given intervals -- pays off well in times of crisis.
Check whether the wild market swings have thrown off your asset allocation -- the specific mix of stocks and bonds that makes sense for an individual's financial goals and risk tolerance. If so, then rebalance it by selling shares that are overvalued and buying those that are below optimal levels. Focus on low cost....
Blah, blah, blah.

How naive do the so-called financial experts think people are? Well, obviously, many people are that naive because millions keep listening to the same old advice again and again.

The Same Old Story
So what is wrong with those giving the advice and those following it? Now that the markets have crashed and trillions have been lost, these so-called experts continue on like mindless parrots, saying over and over again, "Polly wants you to invest in a well-diversified portfolio of mutual funds."
Don't they know the market has changed? Don't they know the global economy is contracting, not expanding? Don't they know their advice is bad regardless of whether the market is expanding or contracting? Doesn't the general public realize that most financial "experts" are not professional investors? They're either sales people or journalists -- people who earn money via commissions or a paycheck. And even the people running our biggest investment banks -- or what use to be investment banks -- are compensated via commissions or a paycheck. They are not investors. They are employees working for banks.
So my advice is, be very careful whom you take financial advice from -- and that includes me. My guidance, after all, does not work for 80 percent of the people. My suggestions are not right for those who work for a paycheck or for commissions, nor do they work for those who save money in the bank or a retirement account.

The Right Advice for the Right Audience
My advice is for people who are entrepreneurs or professional investors. I have had a "real" job for only four years of my life, which means I only collected a traditional paycheck for that very short period of time. I do not have a retirement account. If my businesses or my investments are not profitable, then I don't eat. And I like to eat.
I chose to live my life this way because this financial lifestyle keeps me honest. It also keeps me wary and very suspicious of financial experts who offer inane advice. I personally cannot live on such advice. My businesses and investments need to be profitable monthly and pay me monthly, regardless of whether the economy is expanding or contracting.
I don't live in some fairytale world with the hope that the markets will right themselves in five years. I don't keep putting money into a losing venture such as a retirement plan filled with stocks, bonds, and mutual funds. I do not live on false promises. I cannot afford to live on bad advice.

Some Serious Questions
My questions to financial journalists and others who are doling out poor counsel: "What if your advice is wrong in five years? What happens if the markets don't come back? What happens if the markets just stay flat or crash even further? What happens if the markets recover and then crash when the person following your advice is in their late eighties?"
My advice for those seeking financial advice: Look for investments that pay you monthly or quarterly, regardless of whether the markets are up or down or whether the economy is expanding or contracting. Stop listening to those pseudo financial experts with crystal balls and journalism degrees.
The following are tidbits of information to keep in mind as you consider your financial options:
1. I learned my investment philosophy at the age of nine by playing Monopoly. In the game, if I had one green house, I was paid $8. If I had two green houses, then I was paid $16.
I began playing Monopoly for real when I was 26 years old. Today my wife and I have approximately 1,400 little green houses -- each paying us monthly. You do not have to be a rocket scientist or have a Harvard degree to play Monopoly for real. Today's depressed real estate market is the best time to start buying little green houses, even if credit is tight.
In 1987 the stock market crashed. That crash was followed by the crash of the Savings and Loan industry. Those two crashes led to the crash of the real estate market. The economy stayed down from 1987 to 1995. Even though my wife and I were strapped for cash and bankers did not want to lend to small investors, we found ways of putting deals together by using seller financing and creative financing, or simply taking over properties that the bank did not want on its books.
Most financial experts discourage people from doing what I do. They often say that it is risky -- and it certainly can be. But, in my opinion, following their advice of putting money into a savings account and investing in a 401(K) is even riskier in this volatile economy.
2. Today, as the economy is contracting, cash is king. Yet because the Federal Reserve is printing trillions of Monopoly dollars in order to stop deflation, in a few years we could see a hyperinflationary period. Hyperinflation will wipe out the value of a saver's holdings and eventually destroy most mutual funds as the government begins to raise interest rates in an attempt to stem inflation. In a hyperinflationary period, gold and silver will be king.
3. I am not actually recommending gold, silver, or real estate. Assets do not make you rich. Assets can make you poor if you are not careful. In 1980 gold and silver hit all-time highs, gold hitting $800 an ounce and silver $50 an ounce. So the suckers jumped in and were slaughtered. The same thing happened with real estate in 2004.
If you do not know what you are doing, no asset can make you rich. Ultimately, what makes you rich is your financial intelligence. Your greatest asset is your brain -- so take care of it and protect it from bad advice.

http://finance.yahoo.com/expert/article/richricher/133569;_ylt=Akwical0lHGQqFTKToSXlTq7YWsA

Understanding ROE: a handy performance yardstick

Japan: Where Capital Goes to Die
By Toby Shute January 14, 2009 Comments (3)

Ah, Japan: land of the rising sun, homeland of the hot dog-eating champions, and capital-sucking vortex.

"Capital-sucking vortex?" That's a wee bit harsh, no?

No, it's really not Japan is where capital goes to die, and I have the stats to prove it.

Firing up my super-duper stock screener (not sold in stores), I see 2,371 companies with a primary listing on the Tokyo Stock Exchange. That excludes non-Japanese firms that happen to have local listings, like Dow Chemical (NYSE: DOW) and Aflac (NYSE: AFL). Out of all those businesses, how many do you think managed a greater-than -4% return on equity -- a solid but not stunning result -- over each of the years 2005, 2006, and 2007?

Make sure you don't guess too high, or you'll be disqualified. I'll give you a hint: The answer is less than 800.

The price is wrong! In fact, only 35 firms hit that mark! Add in the 925 companies on the Jasdaq exchange, plus the stragglers listed on other local exchanges, and the number climbs to ... 36. In total, fewer than 1% of Japanese equities pass this simple test of Capital Allocation 101.

Why does return on equity (ROE) matter to Foolish investors?

Here's a primer, but the simple fact is that the "E" in ROE is shareholders' money. If management is retaining earnings to reinvest in the business, one of its basic requirements is to continuously generate an attractive return on the owners' investment. There are plenty of "profitable" companies in Japan, but those wealth-withering single-digit returns on equity just don't cut the wasabi.

Return on equity isn't the end-all and be-all of performance yardsticks, but it's a very handy one, especially if you remember that managers can juice this figure by taking on more debt. Note that I didn't limit my Japanese search to a maximum level of indebtedness. Some of the companies that passed the test only did so by leveraging to the hilt.
Do we avoid the archipelago entirely? After running this sobering screen, I'll definitely refrain from throwing investment dollars at something like the iShares MSCI Japan Index (NYSE: EWJ), no matter how cheap the broad market looks.

However, I'm not going to rule out every single Japanese company. After all, I've got three dozen here that are at least worth a look.

Take Komatsu, for example. This equipment heavyweight is the Japanese version of Deere (NYSE: DE). After checking out the numbers, I'm tempted to say that Komatsu is the superior firm.

These two outfits throw off about the same level of revenue, but Komatsu sports slightly fatter margins. In trying to suss out the difference, one statistic really jumped out at me. On its website, Komatsu lists 39,267 employees on a consolidated basis, whereas Deere recently claimed 56,700 full-timers. The resulting revenue-per-employee figure suggests that Komatsu's operations are a good deal more efficient.

I would also note that Komatsu has managed to post good returns on equity without employing nearly as much balance-sheet leverage as Deere.

Another interesting group of firms are the so-called sogo shosha, or general trading companies. Mitsubishi, Mitsui (Nasdaq: MITSY), Itochu, and Marubeni all passed my simple return-on-equity screen.

What do these firms trade, exactly? Well, pretty much everything, from textiles to food products to petroleum. Some of these companies date back centuries; they seem like a natural outgrowth of the nation's limited resource endowment.

I've run across several of these firms in my energy-sector coverage, from Mitsui's profitable Petrobras (NYSE: PBR) partnership to Itochu's dinged deepwater venture. They're interesting businesses, but I find them nearly impossible to analyze. If you're a fan of conglomerates like General Electric (NYSE: GE), then the Japanese trading houses may be right up your alley.

A Foolish final word I'm still parsing this list of Japanese firms, but here's a preliminary observation. Of the 36 firms, only six have a market capitalization north of $10 billion. In other words, the big boys are blowing it. That should make you even more wary of taking an index-based approach to your Japan exposure, unless you pick up one of the small-cap ETFs.

In Japan, just as we've discovered here at home, the market's best stocks are ignored, obscure, and small.


Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy, and possesses a strong affinity for robots.

http://www.fool.com/investing/international/2009/01/14/japan-where-capital-goes-to-die.aspx

The 2007-08 Financial Crisis In Review

The 2007-08 Financial Crisis In Review
by Manoj Singh

More From Investopedia
Who Is To Blame For The Subprime Crisis?
Economic Meltdowns: Let Them Burn Or Stamp Them Out?
What Causes A Currency Crisis?
Top 5 Signs Of A Credit Crisis

When the Wall Street evangelists started preaching "no bailout for you" before the collapse of British bank Northern Rock, they hardly knew that history would ultimately have the last laugh. With the onset of the global credit crunch and the fall of Northern Rock, August 2007 turned out to be just the starting point for big financial landslides. Since then, we have seen many big names rise, fall, and fall even more. In this article, we'll recap how the financial crisis of 2007-08 unfolded. (For further reading, see Who Is To Blame For The Subprime Crisis?, The Bright Side Of The Credit Crisis and How Will The Subprime Mess Impact You?)

Before the Beginning

Like all previous cycles of booms and busts, the seeds of the subprime meltdown were sown during unusual times. In 2001, the U.S. economy experienced a mild, short-lived recession. Although the economy nicely withstood terrorist attacks, the bust of the dotcom bubble, and accounting scandals, the fear of recession really preoccupied everybody's minds. (Keep learning about bubbles in Why Housing Market Bubbles Pop and Economic Meltdowns: Let Them Burn Or Stamp Them Out?)

To keep recession away, the Federal Reserve lowered the Federal funds rate 11 times - from 6.5% in May 2000 to 1.75% in December 2001 - creating a flood of liquidity in the economy. Cheap money, once out of the bottle, always looks to be taken for a ride. It found easy prey in restless bankers - and even more restless borrowers who had no income, no job and no assets. These subprime borrowers wanted to realize their life's dream of acquiring a home. For them, holding the hands of a willing banker was a new ray of hope. More home loans, more home buyers, more appreciation in home prices. It wasn't long before things started to move just as the cheap money wanted them to.

This environment of easy credit and the upward spiral of home prices made investments in higher yielding subprime mortgages look like a new rush for gold. The Fed continued slashing interest rates, emboldened, perhaps, by continued low inflation despite lower interest rates. In June 2003, the Fed lowered interest rates to 1%, the lowest rate in 45 years. The whole financial market started resembling a candy shop where everything was selling at a huge discount and without any down payment. "Lick your candy now and pay for it later" - the entire subprime mortgage market seemed to encourage those with a sweet tooth for have-it-now investments. Unfortunately, no one was there to warn about the tummy aches that would follow. (For more reading on the subprime mortgage market, see our Subprime Mortgages special feature.)

But the bankers thought that it just wasn't enough to lend the candies lying on their shelves. They decided to repackage candy loans into collateralized debt obligations (CDOs) and pass on the debt to another candy shop. Hurrah! Soon a big secondary market for originating and distributing subprime loans developed. To make things merrier, in October 2004, the Securities Exchange Commission (SEC) relaxed the net capital requirement for five investment banks - Goldman Sachs (NYSE:GS), Merrill Lynch (NYSE:MER), Lehman Brothers, Bear Stearns and Morgan Stanley (NYSE:MS) - which freed them to leverage up to 30-times or even 40-times their initial investment. Everybody was on a sugar high, feeling as if the cavities were never going to come.

The Beginning of the End

But, every good item has a bad side, and several of these factors started to emerge alongside one another. The trouble started when the interest rates started rising and home ownership reached a saturation point. From June 30, 2004, onward, the Fed started raising rates so much that by June 2006, the Federal funds rate had reached 5.25% (which remained unchanged until August 2007).

Declines Begin
There were early signs of distress: by 2004, U.S. homeownership had peaked at 70%; no one was interested in buying or eating more candy. Then, during the last quarter of 2005, home prices started to fall, which led to a 40% decline in the U.S. Home Construction Index during 2006. Not only were new homes being affected, but many subprime borrowers now could not withstand the higher interest rates and they started defaulting on their loans.

This caused 2007 to start with bad news from multiple sources. Every month, one subprime lender or another was filing for bankruptcy. During February and March 2007, more than 25 subprime lenders filed for bankruptcy, which was enough to start the tide. In April, well-known New Century Financial also filed for bankruptcy.

Investments and the Public
Problems in the subprime market began hitting the news, raising more people's curiosity. Horror stories started to leak out.

According to 2007 news reports, financial firms and hedge funds owned more than $1 trillion in securities backed by these now-failing subprime mortgages - enough to start a global financial tsunami if more subprime borrowers started defaulting. By June, Bear Stearns stopped redemptions in two of its hedge funds and Merrill Lynch seized $800 million in assets from two Bear Stearns hedge funds. But even this large move was only a small affair in comparison to what was to happen in the months ahead.

August 2007: The Landslide Begins

It became apparent in August 2007 that the financial market could not solve the subprime crisis on its own and the problems spread beyond the United State's borders. The interbank market froze completely, largely due to prevailing fear of the unknown amidst banks. Northern Rock, a British bank, had to approach the Bank of England for emergency funding due to a liquidity problem. By that time, central banks and governments around the world had started coming together to prevent further financial catastrophe.

Multidimensional Problems

The subprime crisis's unique issues called for both conventional and unconventional methods, which were employed by governments worldwide. In a unanimous move, central banks of several countries resorted to coordinated action to provide liquidity support to financial institutions. The idea was to put the interbank market back on its feet.

The Fed started slashing the discount rate as well as the funds rate, but bad news continued to pour in from all sides. Lehman Brothers filed for bankruptcy, Indymac bank collapsed, Bear Stearns was acquired by JP Morgan Chase (NYSE:JPM), Merrill Lynch was sold to Bank of America, and Fannie Mae and Freddie Mac were put under the control of the U.S. federal government.

By October 2008, the Federal funds rate and the discount rate were reduced to 1% and 1.75%, respectively. Central banks in England, China, Canada, Sweden, Switzerland and the European Central Bank (ECB) also resorted to rate cuts to aid the world economy. But rate cuts and liquidity support in itself were not enough to stop such a widespread financial meltdown.

The U.S. government then came out with National Economic Stabilization Act of 2008, which created a corpus of $700 billion to purchase distressed assets, especially mortgage-backed securities. Different governments came out with their own versions of bailout packages, government guarantees and outright nationalization.

Crisis of Confidence After All

The financial crisis of 2007-08 has taught us that the confidence of the financial market, once shattered, can't be quickly restored. In an interconnected world, a seeming liquidity crisis can very quickly turn into a solvency crisis for financial institutions, a balance of payment crisis for sovereign countries and a full-blown crisis of confidence for the entire world. But the silver lining is that, after every crisis in the past, markets have come out strong to forge new beginnings.

To read more about other recessions and crises, see A Review Of Past Recessions.

by Manoj Singh, (Contact Author Biography)
Manoj Singh is a central banker and a freelance writer. Apart from writing for Investopedia, he and his spouse write a weekly column on economics and finance for a financial daily.http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp

http://www.investopedia.com/articles/economics/09/financial-crisis-review.asp

How to Understand a Trillion-Dollar Deficit

How to Understand a Trillion-Dollar Deficit
By Barbara Kiviat Sunday, Jan. 11, 2009

"My favorite way to think of it is in terms of seconds," says David Schwartz, a children's book author whose How Much Is a Million? tries to wrap young minds around the concept. "One million seconds comes out to be about 11½ days. A billion seconds is 32 years. And a trillion seconds is 32,000 years. I like to say that I have a pretty good idea what I'll be doing a million seconds from now, no idea what I'll be doing a billion seconds from now, and an excellent idea of what I'll be doing a trillion seconds from now."


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$1.2 Trillion Deficit Expected for 2009

Actually, the deficit is on track to hit $1.2 trillion this year, but what's $200 billion among friends?

Seriously, what is it? To the average person, a number that big probably doesn't mean much. At some point long before the hundred-billion-dollar mark, large numbers simply become figures on the page, well beyond human scale and intuitive understanding. And yet as discussion about the economy and the impressive numbers that come along with it continue to dominate the news, it may be more important than ever to try to understand. Is a $700 billion financial-industry bailout a lot? Is a $775 billion economic-stimulus package enough? (See the worst business deals of 2008.)

Unfortunately, our puny human brains aren't particularly up to the task. Go back thousands of years and think about the simpler times of human existence. "We had a few friends; we had to be scared of a few animals. A trillion didn't come up very often," says Temple University mathematician John Allen Paulos, whose book Innumeracy addresses the topic. "There is a sense that when numbers are too big or too small, the brain just shuts off," says Colin Camerer, a professor of behavioral economics at the California Institute of Technology. "People either don't think about it at all or there is fear, an exaggerated reaction."

The genius of our numbering system is that we can signify massive quantities in short spaces. One billion takes no longer to write than one million does, points out Andrew Dilnot, an economist at Oxford University and author of The Numbers Game.

But that similarity trips us up when it comes time to imagine how those figures translate to the real world, where three more zeros make all the difference. "My favorite way to think of it is in terms of seconds," says David Schwartz, a children's book author whose How Much Is a Million? tries to wrap young minds around the concept. "One million seconds comes out to be about 11½ days. A billion seconds is 32 years. And a trillion seconds is 32,000 years. I like to say that I have a pretty good idea what I'll be doing a million seconds from now, no idea what I'll be doing a billion seconds from now, and an excellent idea of what I'll be doing a trillion seconds from now."
A common strategy for beginning to understand big numbers is to devise visual representations. One time, sitting at a baseball game in Philadelphia, Paulos started counting seats along the first-base line. Multiplying the number of seats in a row by the number of rows, Paulos came up with a section of the stadium that he figured contained about 10,000 seats — an image he can now think back to whenever a person starts talking about tens of thousands of a particular thing. When numbers get too large, though, that method breaks down. A stack of one trillion $1 bills would reach more than a quarter of the way to the moon — replacing one incomprehensible thought with another doesn't do much good.

We next move on to more formal manipulations. When trying to comprehend a trillion-dollar deficit, you might calculate how much money that represents per person in the U.S. One trillion dollars divided by 300 million Americans comes out to $3,333. Then you search for a useful comparison. A convenient — though perhaps unsettling — comparison is to the amount of credit-card debt carried by the average person in this country. That figure is $3,245. "So a good way of thinking about government debt financing is that it's similar to what the average person is doing," says Camerer.

In The Numbers Game, Dilnot and his co-author, journalist
 Michael Blastland, suggest dividing government spending by the number of citizens and the number of weeks in a year. A $700 billion bailout thereby translates into $45 per week for each American man, woman and child. Going one step further, it comes out to $6 a day. Are you willing to pay $6 a day to have a functioning financial system?

Just be careful once you start dividing and dividing again. It's often easy to come up with big denominators that make sense, though ultimately too much dividing reduces numbers to another sort of uselessness. Six dollars a day is also 25 cents an hour, or less than half a penny a minute. Would you be willing to pay less than half a penny a minute?

In a society where people routinely don't stop to pick up a penny off the ground, the better question might be: Is there anything you wouldn't be willing to pay half a penny for?
It's something to think about.

See pictures of the stock-market crash of 1929.
See pictures of the recession of 1958.

http://www.time.com/time/business/article/0,8599,1870699,00.html?xid=feed-yahoo-biztech

Pandit: Citi undergoing "long-term transformation"

Pandit: Citi undergoing "long-term transformation"
By MADLEN READ, AP Business Writer Madlen Read, Ap Business Writer

NEW YORK – Citigroup's CEO Vikram Pandit said Wednesday that the company is going through a "long-term transformation," a day after the embattled bank sold control of its Smith Barney brokerage to Morgan Stanley.
Speculation has been growing that Pandit, who for months supported the model of Citigroup as a "universal bank," will be taking further steps to dismantle the conglomerate.
"While we are embarked on a long-term transformation of Citi, our core mission is unchanged," Pandit wrote in a memo to employees obtained by The Associated Press.
"Our goal is to streamline our operations, strengthen our balance sheet, position ourselves to take advantage of historic global growth opportunities, and deliver to clients all the benefits of our strength, insight, and unique global reach."
Analysts are expecting more details about which businesses Citigroup plans to jettison when the company releases fourth-quarter results on Friday — nearly a week earlier than originally planned.
Citigroup shares fell $1.37, or 23 percent, to $4.53 on Wednesday.
On Tuesday, Morgan Stanley and Citigroup agreed to merge their retail brokerages. Morgan Stanley is paying Citigroup $2.7 billion for a 51 percent stake in the joint venture. Citigroup will have a 49 percent stake. The new unit — Morgan Stanley Smith Barney — will have more than 20,000 advisers, $1.7 trillion in client assets; and serve 6.8 million households around the world, the companies said.
Citigroup will recognize a pretax gain of about $9.5 billion because of the deal.

http://news.yahoo.com/s/ap/20090114/ap_on_bi_ge/citigroup_ceo;_ylt=AqZ31iUOTghy9MXvY3OOhYiyBhIF