Intervening to prop up pound is 'recipe for failure', says Brown
PM expected to admit today that he should have been tougher with 'freewheeling bankers'
By Sean O'Grady, Jane Merrick and Brian BradySunday, 1 February 2009
'We do not target our exchange rate': Gordon Brown at the World Economic Forum in Davos yesterday
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Gordon Brown has indicated that he will not intervene to prevent the pound sinking still further against the dollar, the euro and other major currencies.
Speaking at the World Economic Forum in Davos, Switzerland, the Prime Minister suggested that the fate of sterling was a matter for the markets alone: "We do not target our exchange rate." That, he added, would be a "recipe for failure", as it had been when governments tried to "shadow the Deutschmark" and joined the European Exchange Rate Mechanism in the late 1980s and early 1990s.
Mr Brown's comments seem certain to push sterling lower, and may see it hit parity with the euro.
At the same time, Caroline Flint, the Europe minister, appeared to rule out British entry into the single currency, even in the long term. She told The Independent on Sunday: "We are prepared to look at the issues around the euro. This doesn't mean, in principle, that we think we have a journey to the euro. It's about whether it would work for the British economy." Her remarks appeared to be at odds with the position of the Business Secretary, Lord Mandelson, who he said this month that joining the euro remained a long-term policy objective.
Mr Brown will today take some responsibility for failing to get tough with freewheeling banks when he was Chancellor – but he will stop short of a full apology for his role in the recession. "We're toughening up the regulatory system," he will tell BBC1's Politics Show, a move No 10 hopes will tackle claims that he refuses to accept any blame for Britain's plight. "That is an acceptance that it wasn't strong enough to meet what was, effectively... a global financial freezing up."
Market fears centre on the scale of the Government's debts now being piled up, and the possibility that the Treasury will have to take on trillions of pounds-worth of liabilities if the banking system continues to falter. Many liabilities are in foreign currency and large in relation to the UK's GDP, prompting comparison with Iceland, which in effect went bust because of its overextended banks. Economist Willem Buiter has joked about London becoming "Reykjavik-on-Thames".
There are also worries about the state of the economy, and the accumulating bad debts that will accumulate as the UK enters its worst recession in 60 years. The IMF last week forecast that the British economy would shrink by 2.8 per cent in 2009, its worst showing since the Second World War, although Bank of England and Treasury officials seem relaxed about the decline of the pound, in the hope this will boost exports, although there is little evidence of that so far.
Showing considerable irritation about remarks from international investors such as Jim Rogers, who have sold sterling and declared the UK "finished", the Prime Minister said: "We are not going to build our policies around self-interested speculators."
Mr Rogers said recently that he has sold all his sterling assets. And on Tuesday, the billionaire investor George Soros, who "broke the Bank of England" during the 1992 ERM crisis, said he too had been selling, sterling over the past 12 months: "Sterling did fall from around $2 to about $1.40 and at that level the risk-reward balance is no longer compelling. I'm not saying it won't fall any more though – it will continue to fluctuate." Against a basket of currencies, the pound has lost about a third of its value in a year.
There are also concerns in some European circles that the British Government is using the hefty depreciation in the pound against the euro as a sort of stealth protectionism. Mr Brown and the German Chancellor Angela Merkel have warned in Davos about the "retreat to protectionism".
http://www.independent.co.uk/news/uk/politics/intervening-to-prop-up-pound-is-recipe-for-failure-says-brown-1522528.html
Monday 2 February 2009
Rio in talks with Chinalco over £10bn cash injection
Rio in talks with Chinalco over £10bn cash injection
$40bn debt forces miner to consider link-up with China's state-owned giant
By Nick ClarkMonday, 2 February 2009
Rio Tinto is preparing for further talks with China's state-owned mining giant Chinalco over a potential £10bn cash injection to ease its mountain of debts.
FTSE 100-listed Rio, which admitted for the first time last week that it could consider a rights issue, has held negotiations over a potential investment from the Chinese in recent weeks. The group hopes that a deal could be announced as early as its full-year results next week as the latest step in its programme to reduce debts of $40bn. The group has pledged to cut that by $10bn this year.
It is understood that the talks have gone beyond preliminary negotiations, but nothing has been finalised. Details are unclear, but beyond lifting its existing stake, Chinalco could be issued with a convertible bond by Rio. Chinalco could also be interested in taking on some of its mines or take minority positions in some of its more valuable assets.
Rio declined to comment yesterday.
Chinalco has enjoyed a close relationship with Rio since it bought an 11 per cent stake in the group in a dawn raid last February, and it was thought to be keen to up its stake. Rio's boss, Tom Albanese, is interested in teaming up with the Chinese over iron ore projects, and there was talk of the two companies developing infrastructure in Australia last year.
The group is trying to raise funds to cope with its debts. Rio is the most highly leveraged of the mining giants on the London Stock Exchange's blue-chip index. The brunt of the debt was brought on with the $38bn acquisition of the US aluminium group Alcan at the top of the market in 2007. It has to refinance $9bn of debt in October.
Rio launched its planned asset fire sale last week as it offloaded two mines to Brazilian rival Vale in a deal worth $1.6bn. It announced on Friday that it had agreed to sell its Potasio Rio Colorado project in Argentina, and the Corumba iron mine in Brazil. Yet the group has struggled to raise enough interest for its assets as credit remains scarce and potential sellers have failed to come up with adequate offers. Insiders have said it is even willing to listen to bids for its 30 per cent stake in Escondida, the world's largest copper mine.
As well as the sale of "non-core" assets, the company is looking to bolster its savings with a dramatic cost-cutting plan and curb on spending. It intends to cut 14,000 jobs and reduce capital expenditure by $5bn next year.
On Wednesday, for the first time, the group announced it could raise money from shareholders. "In order to preserve maximum flexibility for the group, the boards do not rule out the potential to issue equity as one of the options it has available," it said.
The sector has been hit by the falling demand for commodities, especially from China. Rio's share price had been buoyed in the wake of a hostile takeover attempt by BHP Billiton in 2007, which would have been one of the biggest deals in corporate history. The $58bn merger collapsed in November when BHP walked away, blaming the worsening economic conditions and the fall in commodity prices. The shares plunged and are 76 per cent off their peak in May.
Rival Xstrata announced it would turn to shareholders to raise $5.9bn in a heavily discounted rights issue, to pay down its debts and buy a coal mine. Xstrata has $16.3bn of debt, but it does not need refinancing until 2011.
http://www.independent.co.uk/news/business/news/rio-in-talks-with-chinalco-over-16310bn-cash-injection-1523111.html
$40bn debt forces miner to consider link-up with China's state-owned giant
By Nick ClarkMonday, 2 February 2009
Rio Tinto is preparing for further talks with China's state-owned mining giant Chinalco over a potential £10bn cash injection to ease its mountain of debts.
FTSE 100-listed Rio, which admitted for the first time last week that it could consider a rights issue, has held negotiations over a potential investment from the Chinese in recent weeks. The group hopes that a deal could be announced as early as its full-year results next week as the latest step in its programme to reduce debts of $40bn. The group has pledged to cut that by $10bn this year.
It is understood that the talks have gone beyond preliminary negotiations, but nothing has been finalised. Details are unclear, but beyond lifting its existing stake, Chinalco could be issued with a convertible bond by Rio. Chinalco could also be interested in taking on some of its mines or take minority positions in some of its more valuable assets.
Rio declined to comment yesterday.
Chinalco has enjoyed a close relationship with Rio since it bought an 11 per cent stake in the group in a dawn raid last February, and it was thought to be keen to up its stake. Rio's boss, Tom Albanese, is interested in teaming up with the Chinese over iron ore projects, and there was talk of the two companies developing infrastructure in Australia last year.
The group is trying to raise funds to cope with its debts. Rio is the most highly leveraged of the mining giants on the London Stock Exchange's blue-chip index. The brunt of the debt was brought on with the $38bn acquisition of the US aluminium group Alcan at the top of the market in 2007. It has to refinance $9bn of debt in October.
Rio launched its planned asset fire sale last week as it offloaded two mines to Brazilian rival Vale in a deal worth $1.6bn. It announced on Friday that it had agreed to sell its Potasio Rio Colorado project in Argentina, and the Corumba iron mine in Brazil. Yet the group has struggled to raise enough interest for its assets as credit remains scarce and potential sellers have failed to come up with adequate offers. Insiders have said it is even willing to listen to bids for its 30 per cent stake in Escondida, the world's largest copper mine.
As well as the sale of "non-core" assets, the company is looking to bolster its savings with a dramatic cost-cutting plan and curb on spending. It intends to cut 14,000 jobs and reduce capital expenditure by $5bn next year.
On Wednesday, for the first time, the group announced it could raise money from shareholders. "In order to preserve maximum flexibility for the group, the boards do not rule out the potential to issue equity as one of the options it has available," it said.
The sector has been hit by the falling demand for commodities, especially from China. Rio's share price had been buoyed in the wake of a hostile takeover attempt by BHP Billiton in 2007, which would have been one of the biggest deals in corporate history. The $58bn merger collapsed in November when BHP walked away, blaming the worsening economic conditions and the fall in commodity prices. The shares plunged and are 76 per cent off their peak in May.
Rival Xstrata announced it would turn to shareholders to raise $5.9bn in a heavily discounted rights issue, to pay down its debts and buy a coal mine. Xstrata has $16.3bn of debt, but it does not need refinancing until 2011.
http://www.independent.co.uk/news/business/news/rio-in-talks-with-chinalco-over-16310bn-cash-injection-1523111.html
House prices 'could fall 40 per cent without loan boost'
House prices 'could fall 40 per cent without loan boost'
By Sean Farrell, Financial EditorMonday, 2 February 2009
House prices could drop by a total of 40 per cent unless the Government steps in to boost lending, a report says today. The extreme scenario painted by the Centre for Economics and Business Research (CEBR) would see prices plunge by a record 25 per cent this year after last year's 16 per cent slide.
If the Government's banking bailout is able to boost mortgage approvals to 50,000 a month from the current level of about 32,000, the price fall from peak to trough could be limited to 32 per cent with values bottoming out in the first quarter of 2010, CEBR said. But without effective intervention to increase lending, the total fall would be 40 per cent with prices stagnating until 2012 and not getting above 2003 levels until the following year.
As part of a range of measures to get banks lending again, the Government intends to guarantee mortgage-backed securities to restart the market for securitisation – packaging up of loans for sale to investors. Securitisation provided £200bn of finance for banks in 2007 before the market was paralysed by fears stemming from the sub-prime crisis in the US.
The plan was recommended by Sir James Crosby, the former chief executive of HBOS, who predicted in November that, without action, net lending for house purchases could fall below zero as fewer loans are made than are paid off. Bank of England figures on Friday showed a rise in mortgage approvals to 31,000 in December from 27,000 a month earlier. The surprise increase followed data from the Royal Institution of Chartered surveyors that showed new buyer enquiries beginning to rise.
Halifax, the country's biggest mortgage lender, has pointed out that prices for first-time buyers are now more affordable than for years but potential buyers remain wary of further falls while banks are limiting their lending as bad debts rise.
Benjamin Williamson, an economist at CEBR, said: "The glimmer of light at the end of the tunnel for the beleaguered housing market is that prices and interest rates are now at levels whereby any improvement in lending is likely to lead to substantially increased activity and at the very least a bottoming out in house prices. However, if lending remains close to current very low levels, the spectre of the biggest annual drop in UK GDP since post-war demobilisation in 2009, with concomitant rises in unemployment and collapsing confidence, will likely lead to an acceleration in house price falls."
CEBR said that the crisis in the housing market lay at the heart of the credit crunch and that direct intervention to shore up the supply of mortgages would stimulate activity. The research unit added that a recovering housing market might play a part in a broader boost to consumer confidence that would help revive the economy.
Interesting? Click here to explore further
http://www.independent.co.uk/money/mortgages/house-prices-could-fall-40-per-cent-without-loan-boost-1523110.html
By Sean Farrell, Financial EditorMonday, 2 February 2009
House prices could drop by a total of 40 per cent unless the Government steps in to boost lending, a report says today. The extreme scenario painted by the Centre for Economics and Business Research (CEBR) would see prices plunge by a record 25 per cent this year after last year's 16 per cent slide.
If the Government's banking bailout is able to boost mortgage approvals to 50,000 a month from the current level of about 32,000, the price fall from peak to trough could be limited to 32 per cent with values bottoming out in the first quarter of 2010, CEBR said. But without effective intervention to increase lending, the total fall would be 40 per cent with prices stagnating until 2012 and not getting above 2003 levels until the following year.
As part of a range of measures to get banks lending again, the Government intends to guarantee mortgage-backed securities to restart the market for securitisation – packaging up of loans for sale to investors. Securitisation provided £200bn of finance for banks in 2007 before the market was paralysed by fears stemming from the sub-prime crisis in the US.
The plan was recommended by Sir James Crosby, the former chief executive of HBOS, who predicted in November that, without action, net lending for house purchases could fall below zero as fewer loans are made than are paid off. Bank of England figures on Friday showed a rise in mortgage approvals to 31,000 in December from 27,000 a month earlier. The surprise increase followed data from the Royal Institution of Chartered surveyors that showed new buyer enquiries beginning to rise.
Halifax, the country's biggest mortgage lender, has pointed out that prices for first-time buyers are now more affordable than for years but potential buyers remain wary of further falls while banks are limiting their lending as bad debts rise.
Benjamin Williamson, an economist at CEBR, said: "The glimmer of light at the end of the tunnel for the beleaguered housing market is that prices and interest rates are now at levels whereby any improvement in lending is likely to lead to substantially increased activity and at the very least a bottoming out in house prices. However, if lending remains close to current very low levels, the spectre of the biggest annual drop in UK GDP since post-war demobilisation in 2009, with concomitant rises in unemployment and collapsing confidence, will likely lead to an acceleration in house price falls."
CEBR said that the crisis in the housing market lay at the heart of the credit crunch and that direct intervention to shore up the supply of mortgages would stimulate activity. The research unit added that a recovering housing market might play a part in a broader boost to consumer confidence that would help revive the economy.
Interesting? Click here to explore further
http://www.independent.co.uk/money/mortgages/house-prices-could-fall-40-per-cent-without-loan-boost-1523110.html
Russia and China Blame Crisis on Debt Binge
Russia and China Blame Crisis on Debt Binge
Topics:Stock Market Banking European Central Bank Credit Economy (U.S.) Economy (Global)
By: Reuters 29 Jan 2009 02:20 AM ET
China and Russia blamed debt-fueled consumption on Wednesday for massive financial collapse and called for global cooperation to repair the world economy.
"The existing financial system has failed," Putin told business and political leaders holding their annual World Economic Forum in this Swiss ski resort.
Growth was based on greed where one center printed money without respite and consumed wealth, and another manufactured cheap goods and saved money, he said.
His clear swipe at the United States was echoed by Chinese Premier Wen Jiabao, who said the bad macroeconomic policies and unsustainable growth models of some countries "characterized by prolonged low savings and high consumption" were primary reasons for the crisis.
Wen also blamed the "blind pursuit of profit."
Despite the criticism of Western policies, both China and Russia pledged their support for open markets, refuted protectionism and called for the Group of 20 major economies to work swiftly toward a global regulatory system that would put world markets and financial institutions on a safer footing.
Certainly government solutions are in the driver's seat at meetings of business leaders and politicians in the Swiss mountain resort, a reversal from the usual gathering where Wall Street tycoons rule.
European Central Bank chief Jean-Claude Trichet joined the call for profound reforms to drag the economy back to health and said the G20, whose leaders hold a summit in April, was doing "good work" on policies.
"Everybody can see the present system is too fragile, and we have to reintroduce an element of resilience ... and we need to do that without any consideration of any kind of vested interest," he told Reuters Television.
Grim Mood
Crisis-hit bankers are thin on the ground at the meeting, and the few who did express concerns that governments would stretch too far on the regulatory front and stifle growth got scant hearing. They were promptly reminded that governments are bailing many of them out.
The mood among business people was grim. The International Monetary Fund forecast the world economy would slow to a near standstill this year, warning that deflation risks were rising.
A poll by PricewaterhouseCoopers of more than 1,100 CEOs found that just 21 percent of CEOs said they were very confident of growing revenue in the next 12 months, down from 50 percent a year ago.
Most business leaders said they expected no more than a slow and gradual recovery over the next three years.
RELATED LINKS
Current DateTime: 02:00:32 02 Feb 2009LinksList Documentid: 28901357
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"There are no silver bullets. My sense is 18 to 24 months of a very tough economic environment," Maria Ramos, chief executive of Transnet, South Africa's rail and logistics company, told Reuters.
Stephen Roach, Morgan Stanley's Asia chairman, agreed it would be "a long slog" over the next three years.
"Forty percent of the world's wealth was destroyed in the last five quarters. It is an almost incomprehensible number," said Stephen Schwarzman, chairman of the leading private equity company Blackstone Group. "Business will be very different."
Currency Row
Before Wen's speech, a row intensified over Beijing's exchange rate policy after new U.S. Treasury Secretary Timothy Geithner branded China a currency manipulator last week, using a term the previous administration avoided for years.
A Chinese diplomat said Washington had enough evidence to know China does not manipulate its exchange rate.
"I don't think it's fair all of a sudden to change the position of the U.S. government," the diplomat said in London, one of the European capitals Wen will visit after Davos.
Wen did not address the row directly in his speech, although his comment on the low savings rate was an indirect reminder that China is financing the United States.
Slideshow: Who's Who in Davos
He expects China to post 8 percent growth this year -- not much different from 2008 but down from 13 percent in 2007. The China slowdown coupled with recession in the major developed economies has pushed the global economy into severe recession.
That grim scenario has left sovereign fund Dubai International Capital wary of making big long-term investments even though it sees asset prices at reasonable levels.
"We're still very nervous about making some big bets -- we see the financial crisis getting worse. There's not going to be a magic wand solution to the problem," Chief Executive Sameer al-Ansari told Reuters.
Copyright 2009 Reuters.
http://www.cnbc.com/id/28901277
Topics:Stock Market Banking European Central Bank Credit Economy (U.S.) Economy (Global)
By: Reuters 29 Jan 2009 02:20 AM ET
China and Russia blamed debt-fueled consumption on Wednesday for massive financial collapse and called for global cooperation to repair the world economy.
"The existing financial system has failed," Putin told business and political leaders holding their annual World Economic Forum in this Swiss ski resort.
Growth was based on greed where one center printed money without respite and consumed wealth, and another manufactured cheap goods and saved money, he said.
His clear swipe at the United States was echoed by Chinese Premier Wen Jiabao, who said the bad macroeconomic policies and unsustainable growth models of some countries "characterized by prolonged low savings and high consumption" were primary reasons for the crisis.
Wen also blamed the "blind pursuit of profit."
Despite the criticism of Western policies, both China and Russia pledged their support for open markets, refuted protectionism and called for the Group of 20 major economies to work swiftly toward a global regulatory system that would put world markets and financial institutions on a safer footing.
Certainly government solutions are in the driver's seat at meetings of business leaders and politicians in the Swiss mountain resort, a reversal from the usual gathering where Wall Street tycoons rule.
European Central Bank chief Jean-Claude Trichet joined the call for profound reforms to drag the economy back to health and said the G20, whose leaders hold a summit in April, was doing "good work" on policies.
"Everybody can see the present system is too fragile, and we have to reintroduce an element of resilience ... and we need to do that without any consideration of any kind of vested interest," he told Reuters Television.
Grim Mood
Crisis-hit bankers are thin on the ground at the meeting, and the few who did express concerns that governments would stretch too far on the regulatory front and stifle growth got scant hearing. They were promptly reminded that governments are bailing many of them out.
The mood among business people was grim. The International Monetary Fund forecast the world economy would slow to a near standstill this year, warning that deflation risks were rising.
A poll by PricewaterhouseCoopers of more than 1,100 CEOs found that just 21 percent of CEOs said they were very confident of growing revenue in the next 12 months, down from 50 percent a year ago.
Most business leaders said they expected no more than a slow and gradual recovery over the next three years.
RELATED LINKS
Current DateTime: 02:00:32 02 Feb 2009LinksList Documentid: 28901357
Stocks Could Drop 20%, No Safe Haven: Dr. Doom
Soros: 'Bad Bank' for Troubled Assets Is Bad Idea
Economic Crisis Brings New Set of Hazards: CEOs
Putin calls financial crisis a 'perfect storm'
"There are no silver bullets. My sense is 18 to 24 months of a very tough economic environment," Maria Ramos, chief executive of Transnet, South Africa's rail and logistics company, told Reuters.
Stephen Roach, Morgan Stanley's Asia chairman, agreed it would be "a long slog" over the next three years.
"Forty percent of the world's wealth was destroyed in the last five quarters. It is an almost incomprehensible number," said Stephen Schwarzman, chairman of the leading private equity company Blackstone Group. "Business will be very different."
Currency Row
Before Wen's speech, a row intensified over Beijing's exchange rate policy after new U.S. Treasury Secretary Timothy Geithner branded China a currency manipulator last week, using a term the previous administration avoided for years.
A Chinese diplomat said Washington had enough evidence to know China does not manipulate its exchange rate.
"I don't think it's fair all of a sudden to change the position of the U.S. government," the diplomat said in London, one of the European capitals Wen will visit after Davos.
Wen did not address the row directly in his speech, although his comment on the low savings rate was an indirect reminder that China is financing the United States.
Slideshow: Who's Who in Davos
He expects China to post 8 percent growth this year -- not much different from 2008 but down from 13 percent in 2007. The China slowdown coupled with recession in the major developed economies has pushed the global economy into severe recession.
That grim scenario has left sovereign fund Dubai International Capital wary of making big long-term investments even though it sees asset prices at reasonable levels.
"We're still very nervous about making some big bets -- we see the financial crisis getting worse. There's not going to be a magic wand solution to the problem," Chief Executive Sameer al-Ansari told Reuters.
Copyright 2009 Reuters.
http://www.cnbc.com/id/28901277
Australian House Prices Fall, More Rate Cuts Coming
Australian House Prices Fall, More Rate Cuts Coming
Topics:Banking Interest Rates Inflation Economy (Global) Australia & New Zealand
Sectors:Banks
By: Reuters 01 Feb 2009 11:58 PM ET
Australian house prices fell last year as tightening credit conditions and a sharp downturn in the economy put paid to the double-digit growth enjoyed in 2007, dealing a further blow to household wealth and pointing towards more rate cuts.
Government data out on Monday showed prices of established houses fell 3.3 percent in the fourth quarter compared to the same period in 2007, when they were running hot at 14.0 percent.
The drop in wealth, already undermined by sliding equity and pension values, only added to expectations of another big cut in interest rates when the Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday.
Investors are pricing in a cut of 100 basis points in the key cash rate to a record low of 3.25 percent, bringing its easing since September to a massive 4 percentage points.
"The news has been so dismal that they almost have to cut by 100 basis points, and an even bigger move can't be ruled out," said Michael Workman, a senior economist at Commonwealth Bank. "That won't be the end either," he added. "The market's already pricing in rates under 2 percent."
The Australian government is also expected to announce a second package of fiscal stimulus measures, perhaps as soon as this week, in an attempt to limit any rise in unemployment.
Prime Minister Kevin Rudd on Monday told a news conference the government would "move heaven and earth" to support the economy even as the global recession blew a hole in its tax take.
Warning of a return to budget deficits after years of plenty, Rudd said tax revenues over the next four years were expected to be lower by a staggering A$115 billion ($73 billion). That is equivalent to over a third of annual tax revenues, or 10 percent of gross domestic product.
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"But this government will leave no stone unturned when it comes to taking all necessary measures to continue to support growth and jobs," he said.
The depth of the trouble was illustrated by a monthly survey of 200 manufacturers, which showed activity contracted for the eighth straight month in January.
The Australian Industry Group/PriceWaterhouseCoopers Performance of Manufacturing Index (PMI) edged up a seasonally adjusted 2.9 points to 36.6, but remained far below the 50 threshold separating growth from contraction.
Relatively Resilient
The steep cuts in interest rates seemed to be offering some support to house prices as the pace of decline slowed on a quarter-to-quarter basis.
Prices dipped a smaller-than-expected 0.8 percent in the fourth quarter, compared to the third quarter when they sank 2.4 percent.
In any case, the annual losses of 3.3 percent in Australia are relatively modest compared to declines of 15 to 20 percent suffered in the United States and Britain.
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This was partly thanks to still high levels of skilled migration and a rising population. There are also far fewer unsold homes in Australia, which had never gone though the huge building boom that left so much stock in the United States.
Monetary policy was having more of an impact as the main variable mortgage in Australia is benchmarked off the central bank's cash rate, unlike in the U.S. where the most popular fixed rate mortgages are tied to Treasury yields.
Rory Robertson, interest rate strategist at Macquarie, noted that the headline variable mortgage rate had fallen to around 6.85 percent, from 9.6 percent before the central bank began easing.
"Big RBA-driven mortgage rate reductions obviously have provided major support for local home prices through recent global gloom and doom," he said.
Should the central bank cut as expected on Tuesday, the mortgage rate could drop to 6.0 percent or less, near its lowest since 1970.
"House prices will come under further pressure as unemployment trends higher," Robertson added. "But mortgage rates will continue to be reduced to new generational lows, providing great support to most homebuyers."
Copyright 2009 Reuters.
http://www.cnbc.com/id/28971613
Topics:Banking Interest Rates Inflation Economy (Global) Australia & New Zealand
Sectors:Banks
By: Reuters 01 Feb 2009 11:58 PM ET
Australian house prices fell last year as tightening credit conditions and a sharp downturn in the economy put paid to the double-digit growth enjoyed in 2007, dealing a further blow to household wealth and pointing towards more rate cuts.
Government data out on Monday showed prices of established houses fell 3.3 percent in the fourth quarter compared to the same period in 2007, when they were running hot at 14.0 percent.
The drop in wealth, already undermined by sliding equity and pension values, only added to expectations of another big cut in interest rates when the Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday.
Investors are pricing in a cut of 100 basis points in the key cash rate to a record low of 3.25 percent, bringing its easing since September to a massive 4 percentage points.
"The news has been so dismal that they almost have to cut by 100 basis points, and an even bigger move can't be ruled out," said Michael Workman, a senior economist at Commonwealth Bank. "That won't be the end either," he added. "The market's already pricing in rates under 2 percent."
The Australian government is also expected to announce a second package of fiscal stimulus measures, perhaps as soon as this week, in an attempt to limit any rise in unemployment.
Prime Minister Kevin Rudd on Monday told a news conference the government would "move heaven and earth" to support the economy even as the global recession blew a hole in its tax take.
Warning of a return to budget deficits after years of plenty, Rudd said tax revenues over the next four years were expected to be lower by a staggering A$115 billion ($73 billion). That is equivalent to over a third of annual tax revenues, or 10 percent of gross domestic product.
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"But this government will leave no stone unturned when it comes to taking all necessary measures to continue to support growth and jobs," he said.
The depth of the trouble was illustrated by a monthly survey of 200 manufacturers, which showed activity contracted for the eighth straight month in January.
The Australian Industry Group/PriceWaterhouseCoopers Performance of Manufacturing Index (PMI) edged up a seasonally adjusted 2.9 points to 36.6, but remained far below the 50 threshold separating growth from contraction.
Relatively Resilient
The steep cuts in interest rates seemed to be offering some support to house prices as the pace of decline slowed on a quarter-to-quarter basis.
Prices dipped a smaller-than-expected 0.8 percent in the fourth quarter, compared to the third quarter when they sank 2.4 percent.
In any case, the annual losses of 3.3 percent in Australia are relatively modest compared to declines of 15 to 20 percent suffered in the United States and Britain.
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More Asia Pacific News
This was partly thanks to still high levels of skilled migration and a rising population. There are also far fewer unsold homes in Australia, which had never gone though the huge building boom that left so much stock in the United States.
Monetary policy was having more of an impact as the main variable mortgage in Australia is benchmarked off the central bank's cash rate, unlike in the U.S. where the most popular fixed rate mortgages are tied to Treasury yields.
Rory Robertson, interest rate strategist at Macquarie, noted that the headline variable mortgage rate had fallen to around 6.85 percent, from 9.6 percent before the central bank began easing.
"Big RBA-driven mortgage rate reductions obviously have provided major support for local home prices through recent global gloom and doom," he said.
Should the central bank cut as expected on Tuesday, the mortgage rate could drop to 6.0 percent or less, near its lowest since 1970.
"House prices will come under further pressure as unemployment trends higher," Robertson added. "But mortgage rates will continue to be reduced to new generational lows, providing great support to most homebuyers."
Copyright 2009 Reuters.
http://www.cnbc.com/id/28971613
All Big US Banks Must Go to Fix Crisis: Economist
All Big US Banks Must Go to Fix Crisis: Economist
By: Kim Khan 30 Jan 2009 12:55 PM ET
The creation of a government bad bank to buy toxic assets is necessary, but then the government will need to take control of and restructure major banks to fix the system, one economist at the World Economic Forum in Davos told CNBC.com.
"They have to do a bad bank," Harvard Economics Professor Ken Rogoff said. But "if that's all they do then it's idiotic."
Institutions like Citi and Bank of America will have to go, boards will have to be fired and equity stakeholders will be wiped out, Rogoff said.
The plan could mirror the one Sweden implemented, where all troubled banks were nationalized, their balance sheets were cleaned up and the good parts of the businesses were sold to the private sector.
That solution was "much cleaner," he said.
Sweden’s banks were effectively bankrupt in the early 1990s, but the government pulled off a rapid recovery that actually helped taxpayers make money in the long run.
RELATED LINKS
Current DateTime: 01:40:34 02 Feb 2009LinksList Documentid: 28928698
Time to Can Bonus System?
Bonuses Hard to Recover
Obama's First 100 Days
Dimon: JPMorgan Has "Plenty of Capital"
The government placed banks with troubled assets into a so-called bad bank, where they could be held and then sold when market and economic conditions improved.
In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending, but wiped shareholders out in the process.
Officials from the Obama administration are holding around the clock meetings with senior Wall Street executives on how to create a new government bank to buy bad assets from major financial firms.
However, people with direct knowledge of the talks tell CNBC there is no consensus on how such an entity would work or whether a plan could materialize any time soon or possibly ever.
Jobs Won't Come Back this Year
Looking to the overall economy, it unlikely the job market will improve this year, Rogoff told CNBC.
"I'm afraid unemployment is going to keep rising until at least 2010," he said.
The US is in "a very deep financial recession" and in those situations unemployment rises for almost five years, he added.
US housing and jobless claims data on Thursday showed there was no end in sight for the gloomy economy, while Japan's industrial outlook plunged by a record pace in December, contributing to the bleak picture of the world slowdown.
Baccardax: Bad Banks Are Good ... Aren't They?
© 2009 CNBC.com
http://www.cnbc.com/id/28928650?__source=yahoorelatedstorytext&par=yahoo
By: Kim Khan 30 Jan 2009 12:55 PM ET
The creation of a government bad bank to buy toxic assets is necessary, but then the government will need to take control of and restructure major banks to fix the system, one economist at the World Economic Forum in Davos told CNBC.com.
"They have to do a bad bank," Harvard Economics Professor Ken Rogoff said. But "if that's all they do then it's idiotic."
Institutions like Citi and Bank of America will have to go, boards will have to be fired and equity stakeholders will be wiped out, Rogoff said.
The plan could mirror the one Sweden implemented, where all troubled banks were nationalized, their balance sheets were cleaned up and the good parts of the businesses were sold to the private sector.
That solution was "much cleaner," he said.
Sweden’s banks were effectively bankrupt in the early 1990s, but the government pulled off a rapid recovery that actually helped taxpayers make money in the long run.
RELATED LINKS
Current DateTime: 01:40:34 02 Feb 2009LinksList Documentid: 28928698
Time to Can Bonus System?
Bonuses Hard to Recover
Obama's First 100 Days
Dimon: JPMorgan Has "Plenty of Capital"
The government placed banks with troubled assets into a so-called bad bank, where they could be held and then sold when market and economic conditions improved.
In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending, but wiped shareholders out in the process.
Officials from the Obama administration are holding around the clock meetings with senior Wall Street executives on how to create a new government bank to buy bad assets from major financial firms.
However, people with direct knowledge of the talks tell CNBC there is no consensus on how such an entity would work or whether a plan could materialize any time soon or possibly ever.
Jobs Won't Come Back this Year
Looking to the overall economy, it unlikely the job market will improve this year, Rogoff told CNBC.
"I'm afraid unemployment is going to keep rising until at least 2010," he said.
The US is in "a very deep financial recession" and in those situations unemployment rises for almost five years, he added.
US housing and jobless claims data on Thursday showed there was no end in sight for the gloomy economy, while Japan's industrial outlook plunged by a record pace in December, contributing to the bleak picture of the world slowdown.
Baccardax: Bad Banks Are Good ... Aren't They?
© 2009 CNBC.com
http://www.cnbc.com/id/28928650?__source=yahoorelatedstorytext&par=yahoo
The Market's Latest Victim: 'Buy-And-Hold' Strategy
The Market's Latest Victim: 'Buy-And-Hold' Strategy
Friday January 30, 2009, 1:25 pm EST
As traditional market signposts lose their relevance, so does the traditional "buy-and-hold" strategy that investors have followed for decades.
Market pros in increasing numbers are eschewing the usual investing strategies and watching technical levels as their guides for making money. They examine temporary market tops and bottoms as guidelines when to sell and buy, and are in many cases utilizing funds rather than individual stocks to make their plays.
Earnings and economic data have proven unreliable to gauge the long-term prospects for the market, which has become a trader's battlefield. Money that once stayed put for three to five years can now get moved in three to five days or sooner.
"What's happening is people have learned that if you don't take a profit it goes away," says Kathy Boyle, president of Chapin Hill Advisors in New York. "Even somebody who's really biased towards buy-and-hold is giving up."
The phenomenon has been on display markedly since earnings season kicked into gear this month.
More than half the company's in the Standard & Poor's 500 have beaten earnings expectations, yet the stock index has dropped nearly 7 percent.
The economic data, meanwhile, have been close to expectations.
Friday's report on fourth-quarter GDP was actually better than what Wall Street predicted-though at a 3.7 percent drop, the numbers were hardly encouraging.
But investors seem to be ignoring the data.
Instead, they've turned towards more of a trader's mentality, pushing the Dow back up when it approaches 8,000 and the S&P when it falls near 800. It's a trend that bucks the traditional long-term horizon most investors are supposed to take, but for many it's working.
"The idea of saying valuations are historically low so we're just going to buy and hold, that comes at great peril over the next year or two," says Lee Schultheis, founder and chief investment strategist at AIP Funds in Harrison, N.Y. "But also being overly bearish might also come at peril if the government's able to get ahead of the curve on the liquidity-credit issue. Once that gets solved equities will have the opportunity to advance."
Indeed, Boyle has moved nimbly in and out of positions in exchange-traded funds--these days mostly those with a bullish look on the market. She expects a run higher for the market to last into mid-February, when stocks will move lower and Boyle will quit or reverse her positions.
Dealing with the market's intense moodiness is all part of the job these days.
"People get hopeful and say, 'oh good,' and pile in, or they get depressed and they hit the support level," Boyle says. "It certainly makes for an interesting day every day."
A Better Mood-For Now
Even as the market was surrendering the gains it saw earlier in the week, there was plenty of enthusiasm for the market to go higher.
Ben Lichtenstein, a long-time bear who had been warning through much of 2008 about the pressures facing the market, reiterated on CNBC that he thinks stocks are in for a nice gain, with the S&P 500 flirting with the mid-900s if it breaks through 880.
"Everybody expected the worst to happen and it's slowly starting to fade out a little bit," he said. "I think the energy's only to the upside right now." See full comments in video.
Lichtenstein, of Tradersaudio.com, could be expected to follow technical levels.
But those with a traditional investors' horizon of 18 months and beyond are following suit, moving through positions in a way that would be discouraged in a normal market.
Some advisors are disturbed at the trend.
"If the time frame is 18 months to two years I'm very bullish. If the time frame is this afternoon your guess is as good as mine, but unfortunately that seems to be what people are looking at," says Randy Carver, president of Carver Financial Services/Raymond James in Mentor, Ohio. "I think the public is just kind of beat down, at the point of capitulation. People are just resigned to the fact that it's bad."
Some Companies Take a Hit
One case in point for the strange logic in trading is Caterpillar.
The Dow component and construction manufacturing behemoth would seem well poised for a good year considering President Obama's stress on infrastructure programs in his stimulus plan that the House recently passed.
Yet Caterpillar (NYSE:CAT - News) shares have been under intense pressure, dropping about 9 percent this week, as it announced 22,000 layoffs and
Goldman Sachs added the company to its conviction sell list
. Under other circumstances, such a stock might be considered a solid long-term hold, but with all the uncertainty in the economy it's being sold off aggressively.
"Everybody's afraid to trust the fundamentals. Everybody's afraid of what these numbers are going to mean," Boyle says. "You have this continued slew of layoffs as the earnings come out. Everybody's getting used to lowered expectations but at the same time they're throwing in 'we're laying off another 20,000 people.' That hurts the economy."
For protection against the whipsaw turns in the market while capitalizing on a long-term bullish philosophy, Carver is playing a battery of ETFs that follow individual sector movements as well as gains in the broad market.
He likes several of those in the iShares family: the S&P 500 Index (NYSEArca:IVV - News), the Russell Midcap Index (NYSEArca:IWR - News) and the S&P SmallCap 600 Index (NYSEArca:IJR - News), and outside that group, the Vanguard Total Stock Market (NYSEArca:VTI - News), which essentially is a play on everything, even Over The Counter companies not listed on the major exchanges.
Such enthusiasm isn't universal, with a level of caution also prevalent that accompanies technical trading.
With all of the obstacles facing the market, regaining investor confidence will be critical before buy-and-hold positions become popular again.
"You need that confidence, that psychology to be restored," Schultheis says. "We need to know government's ahead of the curve, that they're not playing whack-a-mole, that we can now act and spend in a more normal fashion because we have a more reasonable expectation of what we see coming down the road. Then and only then will there be an opportunity for a sustained advance in equities."
http://finance.yahoo.com/news/The-Markets-Latest-Victim-cnbc-14210150.html
Friday January 30, 2009, 1:25 pm EST
As traditional market signposts lose their relevance, so does the traditional "buy-and-hold" strategy that investors have followed for decades.
Market pros in increasing numbers are eschewing the usual investing strategies and watching technical levels as their guides for making money. They examine temporary market tops and bottoms as guidelines when to sell and buy, and are in many cases utilizing funds rather than individual stocks to make their plays.
Earnings and economic data have proven unreliable to gauge the long-term prospects for the market, which has become a trader's battlefield. Money that once stayed put for three to five years can now get moved in three to five days or sooner.
"What's happening is people have learned that if you don't take a profit it goes away," says Kathy Boyle, president of Chapin Hill Advisors in New York. "Even somebody who's really biased towards buy-and-hold is giving up."
The phenomenon has been on display markedly since earnings season kicked into gear this month.
More than half the company's in the Standard & Poor's 500 have beaten earnings expectations, yet the stock index has dropped nearly 7 percent.
The economic data, meanwhile, have been close to expectations.
Friday's report on fourth-quarter GDP was actually better than what Wall Street predicted-though at a 3.7 percent drop, the numbers were hardly encouraging.
But investors seem to be ignoring the data.
Instead, they've turned towards more of a trader's mentality, pushing the Dow back up when it approaches 8,000 and the S&P when it falls near 800. It's a trend that bucks the traditional long-term horizon most investors are supposed to take, but for many it's working.
"The idea of saying valuations are historically low so we're just going to buy and hold, that comes at great peril over the next year or two," says Lee Schultheis, founder and chief investment strategist at AIP Funds in Harrison, N.Y. "But also being overly bearish might also come at peril if the government's able to get ahead of the curve on the liquidity-credit issue. Once that gets solved equities will have the opportunity to advance."
Indeed, Boyle has moved nimbly in and out of positions in exchange-traded funds--these days mostly those with a bullish look on the market. She expects a run higher for the market to last into mid-February, when stocks will move lower and Boyle will quit or reverse her positions.
Dealing with the market's intense moodiness is all part of the job these days.
"People get hopeful and say, 'oh good,' and pile in, or they get depressed and they hit the support level," Boyle says. "It certainly makes for an interesting day every day."
A Better Mood-For Now
Even as the market was surrendering the gains it saw earlier in the week, there was plenty of enthusiasm for the market to go higher.
Ben Lichtenstein, a long-time bear who had been warning through much of 2008 about the pressures facing the market, reiterated on CNBC that he thinks stocks are in for a nice gain, with the S&P 500 flirting with the mid-900s if it breaks through 880.
"Everybody expected the worst to happen and it's slowly starting to fade out a little bit," he said. "I think the energy's only to the upside right now." See full comments in video.
Lichtenstein, of Tradersaudio.com, could be expected to follow technical levels.
But those with a traditional investors' horizon of 18 months and beyond are following suit, moving through positions in a way that would be discouraged in a normal market.
Some advisors are disturbed at the trend.
"If the time frame is 18 months to two years I'm very bullish. If the time frame is this afternoon your guess is as good as mine, but unfortunately that seems to be what people are looking at," says Randy Carver, president of Carver Financial Services/Raymond James in Mentor, Ohio. "I think the public is just kind of beat down, at the point of capitulation. People are just resigned to the fact that it's bad."
Some Companies Take a Hit
One case in point for the strange logic in trading is Caterpillar.
The Dow component and construction manufacturing behemoth would seem well poised for a good year considering President Obama's stress on infrastructure programs in his stimulus plan that the House recently passed.
Yet Caterpillar (NYSE:CAT - News) shares have been under intense pressure, dropping about 9 percent this week, as it announced 22,000 layoffs and
Goldman Sachs added the company to its conviction sell list
. Under other circumstances, such a stock might be considered a solid long-term hold, but with all the uncertainty in the economy it's being sold off aggressively.
"Everybody's afraid to trust the fundamentals. Everybody's afraid of what these numbers are going to mean," Boyle says. "You have this continued slew of layoffs as the earnings come out. Everybody's getting used to lowered expectations but at the same time they're throwing in 'we're laying off another 20,000 people.' That hurts the economy."
For protection against the whipsaw turns in the market while capitalizing on a long-term bullish philosophy, Carver is playing a battery of ETFs that follow individual sector movements as well as gains in the broad market.
He likes several of those in the iShares family: the S&P 500 Index (NYSEArca:IVV - News), the Russell Midcap Index (NYSEArca:IWR - News) and the S&P SmallCap 600 Index (NYSEArca:IJR - News), and outside that group, the Vanguard Total Stock Market (NYSEArca:VTI - News), which essentially is a play on everything, even Over The Counter companies not listed on the major exchanges.
Such enthusiasm isn't universal, with a level of caution also prevalent that accompanies technical trading.
With all of the obstacles facing the market, regaining investor confidence will be critical before buy-and-hold positions become popular again.
"You need that confidence, that psychology to be restored," Schultheis says. "We need to know government's ahead of the curve, that they're not playing whack-a-mole, that we can now act and spend in a more normal fashion because we have a more reasonable expectation of what we see coming down the road. Then and only then will there be an opportunity for a sustained advance in equities."
http://finance.yahoo.com/news/The-Markets-Latest-Victim-cnbc-14210150.html
Saturday 24 January 2009
Having A Plan: The Basis Of Success
Having A Plan: The Basis Of Success
by Chad Langager (Contact Author Biography)
"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework." Warren E. Buffett (Preface to "The Intelligent Investor" by Benjamin Graham)
Any veteran market player will tell you, it's vital to have a plan of attack. Formulating the plan is not particularly difficult, but sticking to it, especially when all other indicators seem to be against you, can be. This article will show why a plan is crucial, including what can happen without one, what to consider when formulating one as well as the investment vehicle options that best suit you and your needs.
The Benefits
As the "Sage of Omaha" says, if you can grit your teeth and stay the course regardless of popular opinion, prevailing trends or analysts' forecasts, and focus on the long-term goals and objectives of your investment plan, you will create the best circumstances for realizing solid growth for your investments.
Maintain Focus
By their very nature, financial markets are volatile. Throughout the last century, they have seen many ups and downs, caused by inflation, interest rates, new technologies, recessions and business cycles. In the late 1990s, a great bull market pushed the Dow Jones Industrial Average (DJIA) up 300% from the start of the decade. This was a period of low interest rates and inflation and increased usage of computers - all of these fueled economic growth. The period between 2000 and 2002, on the other hand, saw the DJIA drop 38%. It began with the bursting of the internet bubble, which saw a massive sell-off in tech stocks and kept indexes depressed until mid-2001, during which there was a flurry of corporate accounting scandals as well as the September 11th attacks, all contributing to weak market sentiment.
Amid such a fragile and shaky environment, it's crucial for you to keep your emotions in check and stick to your investment plan. By doing so, you maintain a long-term focus and thus assume a more objective view of current price fluctuations. If an investor had let their emotions be their guide near the end of 2002 and sold off all their positions, they'd have missed a 44% rise in the Dow from late-2002 to mid-2005.
Sidestepping the Three Deadly Sins
The three deadly sins in investing play off three major emotions: fear, hope and greed.
Fear has to do with selling too low - when prices plunge, you get alarmed and sell without re-evaluating your position. In such times, it is better to review whether your original reasons (i.e. sound company fundamentals) for investing in the security have changed. The market is fickle and, based on a piece of news or a short-term focus, it can irrationally oversell a stock so its price falls well below its intrinsic value. Selling when the price is low, which causes it to be undervalued, is a bad choice in the long run because the price may recover.
The second emotion is hope, which, if it is your only motivator, can spur you to buy stock based on its price appreciation in the past. Buying on the hope that what has happened in the past will happen in the future is precisely what occurred with internet plays in the late '90s - people bought nearly any tech stock, regardless of its fundamentals. It is important that you look less at the past return and more into the company's fundamentals to evaluate the investment's worth. Basing your investment decisions purely on hope may leave you with an overvalued stock, with which there is a higher chance of loss than gain.
The third emotion is greed. If you are under its influence, you may hold onto a position for too long, hoping for a few extra points. By holding out for that extra point or two, you could end up turning a large gain into a loss. During the internet boom investors who were already achieving double-digit gains held on to their positions hoping the price would inch up a few more points instead of scaling back the investment. Then when prices began to tank, many investors didn't budge and held out in the hopes that their stock would rally. Instead, their once large gains turned into significant losses.
An investment plan that includes both buying and selling criteria helps to manage these three deadly sins of investing. (For further reading, see When Fear And Greed Take Over, The Madness of Crowds and How Investors Often Cause The Market's Problems.)
The Key Components
Determine Your Objectives
The first step in formulating a plan is to figure out what your investment objective is.
Without a goal in mind, it is hard to create an investment strategy that will get you somewhere. Investment objectives often fall into three main categories: safety, income and growth. Safety objectives focus on maintaining the current value of a portfolio. This type of strategy would best fit an investor who cannot tolerate any loss of principal and should avoid the risks inherent in stocks and some of the less secure fixed-income investments.
If the goal is to provide a steady income stream, then your objective would fall into the income category. This is often for investors who are living in retirement and relying on a stream of income. These investors have less need for capital appreciation and tend to be adverse to stock market risks.
Growth objectives focus on increasing the portfolio's value over a long-term time horizon. This type of investment strategy is for relatively younger investors who are focused on capital appreciation. It's important to take into account your age, your investment time frame and how far you are from your investment goal. Objectives should be realistic, taking into account your tolerance for risk.
Risk Tolerance
Most people want to grow their portfolio to increase wealth. But there remains one major consideration - risk. How much, or how little, of it can you take? If you are unable to stomach the constant volatility of the market, your objective is likely to be safety or income focused. However, if you are willing to take on volatile stocks then a growth objective may suit you. Taking on more risk means you are increasing your chances of realizing a loss on investments, as well as creating the opportunity of greater profits. However, it is important to remember that volatile investments don't always make investors money. The risk component of a plan is very important and requires you to be completely honest with yourself about how much potential loss you are willing to take. (For further reading, see Determining Risk And The Risk Pyramid and our tutorial on Risk and Diversification.)
Asset Allocation
Once you know your objectives and risk tolerance, you can start to determine the allocation of the assets in your portfolio. Asset allocation is the dividing up of different types of assets in a portfolio to match the investor's goals and risk tolerance. An example of an asset allocation for a growth-oriented investor could be 20% in bonds 70% in stocks and 10% in cash equivalents.
It is important that your asset allocation is an extension of your objectives and risk tolerance. Safety objectives should comprise the safest fixed-income assets available like money market securities, government bonds and high-quality corporate securities with the highest debt ratings. Income portfolios should focus on safe fixed-income securities, including bonds with lower ratings, which provide higher yields, preferred shares and high-quality dividend-paying stocks. Growth portfolios should have a large focus on common stock, mutual funds or exchange-traded funds (ETFs). It is important to continually review your objectives and risk tolerance and to adjust your portfolio accordingly.
The importance of asset allocation in formulating a plan is that it provides you with guidelines for diversifying your portfolio, allowing you to work towards your objectives with a level of risk that is comfortable for you. (For further reading, see The Importance of Diversification and The Dangers of Over-Diversification, as well as Five Things To Know About Asset Allocation and Asset Allocation Strategies.)
The Choices
Once you formulate a strategy, you need to decide on what types of investments to buy as well as what proportion of each to include in your portfolio. For example if you are growth oriented, you might pick stocks, mutual funds or ETFs that have the potential to outperform the market. If your goal is wealth protection or income generation, you might buy government bonds or invest in bond funds that are professionally managed.
If you want to choose your own stocks it is vital to institute trading rules for both entering and exiting positions. These rules will depend on your plan objectives and investment strategy. One stock trading rule - regardless of your approach - is to use stop-loss orders as protection from downward price movements. While the exact price at which you set your order is your own choice, the general rule of thumb is 10% below the purchase price for long-term investments and 3-5% for shorter-term plays. Here's a reason to use stops to cut your losses: if your investment plummets 50%, it needs to increase 100% to break even again. (For further reading, see Ten Steps To A Winning Trading Plan.)
You may also consider professionally managed products like mutual funds, which give you access to the expertise of professional money managers. If your aim is to increase the value of a portfolio through mutual funds, look for growth funds that focus on capital appreciation. If you're income-orientated, you'll want to choose funds with dividend-paying stocks or bond funds that provide regular income. Again, it is important to ensure that the allocation and risk structure of the fund is aligned with your desired asset mix and risk tolerance.
Other investment choices are index funds and ETFs. The growing popularity of these two passively managed products is largely due to their low fees and tax efficiencies; both have significantly lower management expenses than actively managed funds. These low-cost, well-diversified investments are baskets of stocks that represent an index, a sector or country, and are an excellent way to implement your asset allocation plan.
Summary
An investment plan is one of the most vital parts for reaching your goals - it acts as a guide and offers a degree of protection. Whether you want to be a player in the market or build a nest egg, it's crucial to build a plan and adhere to it. By sticking to those defined rules, you'll be more likely to avoid emotional decisions that can derail your portfolio, and keep a calm, cool and objective view even in the most trying of times.
However, if all of the above seems like too tall an order, you might want to engage the services of an investment advisor, who will help you create and stick to a plan that will meet your investment objectives and risk tolerance.
by Chad Langager, (Contact Author Biography)
Chad Langager is the Senior Financial Editor for Investopedia.com. Chad graduated from the University of Alberta Business School with a degree in finance.
http://www.investopedia.com/articles/pf/05/061005.asp?partner=WBW
by Chad Langager (Contact Author Biography)
"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework." Warren E. Buffett (Preface to "The Intelligent Investor" by Benjamin Graham)
Any veteran market player will tell you, it's vital to have a plan of attack. Formulating the plan is not particularly difficult, but sticking to it, especially when all other indicators seem to be against you, can be. This article will show why a plan is crucial, including what can happen without one, what to consider when formulating one as well as the investment vehicle options that best suit you and your needs.
The Benefits
As the "Sage of Omaha" says, if you can grit your teeth and stay the course regardless of popular opinion, prevailing trends or analysts' forecasts, and focus on the long-term goals and objectives of your investment plan, you will create the best circumstances for realizing solid growth for your investments.
Maintain Focus
By their very nature, financial markets are volatile. Throughout the last century, they have seen many ups and downs, caused by inflation, interest rates, new technologies, recessions and business cycles. In the late 1990s, a great bull market pushed the Dow Jones Industrial Average (DJIA) up 300% from the start of the decade. This was a period of low interest rates and inflation and increased usage of computers - all of these fueled economic growth. The period between 2000 and 2002, on the other hand, saw the DJIA drop 38%. It began with the bursting of the internet bubble, which saw a massive sell-off in tech stocks and kept indexes depressed until mid-2001, during which there was a flurry of corporate accounting scandals as well as the September 11th attacks, all contributing to weak market sentiment.
Amid such a fragile and shaky environment, it's crucial for you to keep your emotions in check and stick to your investment plan. By doing so, you maintain a long-term focus and thus assume a more objective view of current price fluctuations. If an investor had let their emotions be their guide near the end of 2002 and sold off all their positions, they'd have missed a 44% rise in the Dow from late-2002 to mid-2005.
Sidestepping the Three Deadly Sins
The three deadly sins in investing play off three major emotions: fear, hope and greed.
Fear has to do with selling too low - when prices plunge, you get alarmed and sell without re-evaluating your position. In such times, it is better to review whether your original reasons (i.e. sound company fundamentals) for investing in the security have changed. The market is fickle and, based on a piece of news or a short-term focus, it can irrationally oversell a stock so its price falls well below its intrinsic value. Selling when the price is low, which causes it to be undervalued, is a bad choice in the long run because the price may recover.
The second emotion is hope, which, if it is your only motivator, can spur you to buy stock based on its price appreciation in the past. Buying on the hope that what has happened in the past will happen in the future is precisely what occurred with internet plays in the late '90s - people bought nearly any tech stock, regardless of its fundamentals. It is important that you look less at the past return and more into the company's fundamentals to evaluate the investment's worth. Basing your investment decisions purely on hope may leave you with an overvalued stock, with which there is a higher chance of loss than gain.
The third emotion is greed. If you are under its influence, you may hold onto a position for too long, hoping for a few extra points. By holding out for that extra point or two, you could end up turning a large gain into a loss. During the internet boom investors who were already achieving double-digit gains held on to their positions hoping the price would inch up a few more points instead of scaling back the investment. Then when prices began to tank, many investors didn't budge and held out in the hopes that their stock would rally. Instead, their once large gains turned into significant losses.
An investment plan that includes both buying and selling criteria helps to manage these three deadly sins of investing. (For further reading, see When Fear And Greed Take Over, The Madness of Crowds and How Investors Often Cause The Market's Problems.)
The Key Components
Determine Your Objectives
The first step in formulating a plan is to figure out what your investment objective is.
Without a goal in mind, it is hard to create an investment strategy that will get you somewhere. Investment objectives often fall into three main categories: safety, income and growth. Safety objectives focus on maintaining the current value of a portfolio. This type of strategy would best fit an investor who cannot tolerate any loss of principal and should avoid the risks inherent in stocks and some of the less secure fixed-income investments.
If the goal is to provide a steady income stream, then your objective would fall into the income category. This is often for investors who are living in retirement and relying on a stream of income. These investors have less need for capital appreciation and tend to be adverse to stock market risks.
Growth objectives focus on increasing the portfolio's value over a long-term time horizon. This type of investment strategy is for relatively younger investors who are focused on capital appreciation. It's important to take into account your age, your investment time frame and how far you are from your investment goal. Objectives should be realistic, taking into account your tolerance for risk.
Risk Tolerance
Most people want to grow their portfolio to increase wealth. But there remains one major consideration - risk. How much, or how little, of it can you take? If you are unable to stomach the constant volatility of the market, your objective is likely to be safety or income focused. However, if you are willing to take on volatile stocks then a growth objective may suit you. Taking on more risk means you are increasing your chances of realizing a loss on investments, as well as creating the opportunity of greater profits. However, it is important to remember that volatile investments don't always make investors money. The risk component of a plan is very important and requires you to be completely honest with yourself about how much potential loss you are willing to take. (For further reading, see Determining Risk And The Risk Pyramid and our tutorial on Risk and Diversification.)
Asset Allocation
Once you know your objectives and risk tolerance, you can start to determine the allocation of the assets in your portfolio. Asset allocation is the dividing up of different types of assets in a portfolio to match the investor's goals and risk tolerance. An example of an asset allocation for a growth-oriented investor could be 20% in bonds 70% in stocks and 10% in cash equivalents.
It is important that your asset allocation is an extension of your objectives and risk tolerance. Safety objectives should comprise the safest fixed-income assets available like money market securities, government bonds and high-quality corporate securities with the highest debt ratings. Income portfolios should focus on safe fixed-income securities, including bonds with lower ratings, which provide higher yields, preferred shares and high-quality dividend-paying stocks. Growth portfolios should have a large focus on common stock, mutual funds or exchange-traded funds (ETFs). It is important to continually review your objectives and risk tolerance and to adjust your portfolio accordingly.
The importance of asset allocation in formulating a plan is that it provides you with guidelines for diversifying your portfolio, allowing you to work towards your objectives with a level of risk that is comfortable for you. (For further reading, see The Importance of Diversification and The Dangers of Over-Diversification, as well as Five Things To Know About Asset Allocation and Asset Allocation Strategies.)
The Choices
Once you formulate a strategy, you need to decide on what types of investments to buy as well as what proportion of each to include in your portfolio. For example if you are growth oriented, you might pick stocks, mutual funds or ETFs that have the potential to outperform the market. If your goal is wealth protection or income generation, you might buy government bonds or invest in bond funds that are professionally managed.
If you want to choose your own stocks it is vital to institute trading rules for both entering and exiting positions. These rules will depend on your plan objectives and investment strategy. One stock trading rule - regardless of your approach - is to use stop-loss orders as protection from downward price movements. While the exact price at which you set your order is your own choice, the general rule of thumb is 10% below the purchase price for long-term investments and 3-5% for shorter-term plays. Here's a reason to use stops to cut your losses: if your investment plummets 50%, it needs to increase 100% to break even again. (For further reading, see Ten Steps To A Winning Trading Plan.)
You may also consider professionally managed products like mutual funds, which give you access to the expertise of professional money managers. If your aim is to increase the value of a portfolio through mutual funds, look for growth funds that focus on capital appreciation. If you're income-orientated, you'll want to choose funds with dividend-paying stocks or bond funds that provide regular income. Again, it is important to ensure that the allocation and risk structure of the fund is aligned with your desired asset mix and risk tolerance.
Other investment choices are index funds and ETFs. The growing popularity of these two passively managed products is largely due to their low fees and tax efficiencies; both have significantly lower management expenses than actively managed funds. These low-cost, well-diversified investments are baskets of stocks that represent an index, a sector or country, and are an excellent way to implement your asset allocation plan.
Summary
An investment plan is one of the most vital parts for reaching your goals - it acts as a guide and offers a degree of protection. Whether you want to be a player in the market or build a nest egg, it's crucial to build a plan and adhere to it. By sticking to those defined rules, you'll be more likely to avoid emotional decisions that can derail your portfolio, and keep a calm, cool and objective view even in the most trying of times.
However, if all of the above seems like too tall an order, you might want to engage the services of an investment advisor, who will help you create and stick to a plan that will meet your investment objectives and risk tolerance.
by Chad Langager, (Contact Author Biography)
Chad Langager is the Senior Financial Editor for Investopedia.com. Chad graduated from the University of Alberta Business School with a degree in finance.
http://www.investopedia.com/articles/pf/05/061005.asp?partner=WBW
Financial crisis: just how big is Britain's toxic debt?
Financial crisis: just how big is Britain's toxic debt?
An army of accountants is combing through the books, trying to establish just how much the toxic assets of the bailed-out banks are actually worth. At stake, says the Government, is the future of Britain's economy.
By Gordon Rayner
Last Updated: 7:27PM GMT 23 Jan 2009
Toxic asset: Sir Fred Goodwin of RBS has seen his reputation collapse Photo: REUTERS
Toxic asset: Sir Fred Goodwin of RBS has seen his reputation collapse Photo: REUTERS
Before he was unceremoniously fired as chief executive of Royal Bank of Scotland, Sir Fred Goodwin often said that he had turned the 280-year-old institution into "a sausage machine".
RBS, like other banks, was buying and selling pre-packaged parcels of debt, which started out as mortgages and loans but were put through a corporate mincer and wrapped into packages containing small pieces of hundreds, if not thousands, of loans. Rather like sausages, no one could be entirely sure what was in them – but as long as they paid a decent rate of interest and the bonuses kept flowing, no one cared.
As we all now know, those parcels had been bulked up with sub-prime loans, which became effectively worthless "toxic assets" when the US housing market crashed.
Confirmation yesterday that the bankers' avarice has officially plunged Britain into recession added to the growing bewilderment as to exactly why we are on the hook for almost £1 trillion in bail-outs and guarantees.
No one even knows exactly how many of these toxic assets British banks are holding, and how much more it might cost the taxpayer to get out of this unholy mess – which is why an army of accountants is about to begin the daunting, if not downright impossible, task of tracking down and putting a value on all the debts of all the banks in which the taxpayer has taken a stake.
In effect, to borrow Sir Fred's analogy, the Government-appointed debt hunters will be carrying out the accounting equivalent of dissecting all of those sausages and turning the constituent parts back into pigs. It will be a laborious, thankless task which is likely to take at least six months. But according to the Government, nothing less than the future of Britain's economy depends on it.
The reason all the rescue packages have failed is that no one has yet calculated the full extent of these toxic assets – and nothing spooks the City so much as uncertainty. Lord Myners, the minister organising the hunt, says his sleuths will have to deal with "well over a billion items of individual data for each bank".
The desperate need for some hard and fast facts was underlined on Monday, when the value of banking shares collapsed, despite the announcement of a raft of new measures. Gordon Brown is said to have been taken aback by the City's panicked reaction to RBS's announcement of a £28 billion loss, the largest in British corporate history.
Experts say the losses reveal the markets' fear of more bad news to come. Despite the Government pledging £954 billion so far – or £31,800 per taxpayer – some analysts believe another £200 billion in insurance may be needed to protect the banks fully against future losses. But no one is willing to predict that it won't be more, just as no one can be sure that our children, or even our grandchildren, won't still be paying off the debts the nation is accruing, as this economic black hole swallows a seemingly limitless amount of our money.
In other words, until the number-crunching is done, there is no prospect of an end to the crisis. "The problem is that we don't really know just where these bad assets are, and the banks are not going to 'fess up," explains Peter Spencer, professor of economics at York University. "As things stand, it is a near-bottomless pit, and no one knows how smelly the stuff at the bottom is."
The Prime Minister is pinning his hopes on the Asset Protection Scheme, announced this week, which will assess the exact extent of the toxic assets (currently estimated at £200-350 billion). The theory goes that once the banks know the worst-case scenario, and are insured against it by the taxpayer, they will be able to start lending again.
But the Government-appointed investigators, drawn mainly from Goldman Sachs, Credit Suisse and Deutsche Bank, will be entering uncharted waters when they set up shop in the offices of banks such as RBS. Few people on the planet understand the complexities of such opaque instruments as collateralised debt obligations (the technical term for those minced-up sausages of debt, of which £2 trillion were traded in 2006, £188 billion of it in the UK). In some cases they were dreamed up by real-life rocket scientists, poached by Wall Street from Nasa's labs in California.
Until as recently as 2000, British banks lent only as much money as they held on deposit. But the availability of cheap financing on the money markets enabled banks such as Northern Rock to lend up to seven times the amount in their coffers.
Rather than holding on to people's mortgages, the banks packaged them up with other loans and sold them on to investors, who could repackage and sell them on again and again. Unpicking these bundles of debt may involve tracking down and valuing the assets on which they are based – such as houses or commercial properties, or even part-shares of them.
Nor will the vastly complex, and vastly expensive, hunt be confined to Britain. To pick just one example, RBS acquired 26 other companies during Sir Fred's eight-year reign, leaving it with £250 billion of foreign loans in the more than 50 countries where it has offices. These include Vietnam, Columbia, Uzbekistan and Pakistan, where RBS is the second-largest foreign bank – there are even seven branches in Kazakhstan, all of which are now 70 per cent owned by the British taxpayer.
Many of those loans will be sound, but the investigators must sniff out those that are not. "It will be a very intensive job and we will need to get professional support," one Treasury source says. "It's complicated, but if you didn't have these complicated problems, there wouldn't be a crisis in the first place."
But how could the banks lose control to such an extent?
"Greed is part of the answer," says Vince Cable, the Liberal Democrat Treasury spokesman. "We have had a bonus culture in which profits were the only motivating factor, and bankers were getting enormous bonuses on the back of very highly leveraged deals. It's also the case that even some of the bosses didn't understand the things they were trading in, because they had become so complicated. The banking regulators knew this and should have put a stop to it, but they didn't."
It wasn't just the executives who failed to understand what was going on – the Prime Minister and his team were equally clueless. Treasury officials who began going through the books of RBS when the Government took a majority share last year were horrified at the way the bank had been run, as it borrowed more and more money to fund more ambitious deals, such its share of the £49 billion takeover of Dutch bank ABN-Amro in 2007.
The previously lionised Sir Fred has now been labelled "the world's worst banker", with growing calls for him to be stripped of his knighthood. Although the Financial Services Authority insists that there is no evidence he broke any rules, many investors who have lost money believe he was less than candid about the state of the bank's finances and recklessly overstretched himself in the battle for ABN-Amro.
In America, RBS's subsidiaries are already the subject of two separate investigations. The Securities and Exchange Commission and New York's attorney general are both looking into the exposure of RBS-owned companies to the sub-prime mortgage crisis.
Although he has said he is "angry" with Sir Fred, Mr Brown refused to be drawn this week on what action, if any, should be taken against his former friend, who was a valued adviser during his time as Chancellor.
Nor has anyone at the Treasury offered an estimate of how much it will cost to work out the value of the toxic assets.
Yet many of the country's leading economists believe that there is an alternative to the scheme: to nationalise the entire banking system to restore confidence, and take control of lending once and for all.
George Magnus, chief economic adviser to UBS Investment Bank, and the man credited with being the first to predict the current global recession, says: "There is a danger that a few months down the line further measures will be needed to shore up the banks. It would be cleaner, neater and cheaper just to call a spade a spade and take them into public ownership.
"That would enable the Government to set up a 'bad bank' that could take on these toxic assets and hold on to them for 50 years if necessary, until their value rose and the taxpayer saw a return.
"In the meantime, once the crisis is over, they could refloat the banks, as they did in Sweden in 1992. I just don't understand the hang-up the Government has with nationalisation."
Professor Tim Congdon, a former adviser to the Treasury, agrees. "The idea of having these civil servants poring over the banks' books is barmy. There are much simpler solutions, such as the Government borrowing from the banks to increase the amount of money in the system."
One thing all sides are agreed on is the need for a return to old-fashioned banking, preferably without so much as a rocket scientist – or sausage machine – in sight.
The UK economy: an analysis and some predictions
The UK economy: an analysis and some predictions
The Daily Telegraphy's Economics Editor Edmund Conway offers an analysis of the current position of the UK's economy and some predictions for what lies ahead.
By Edmund Conway
Last Updated: 7:36PM GMT 23 Jan 2009
Comments 0 Comment on this article
There are two possible paths the UK economy could take in the coming years. Neither will be pretty; both involve a recession. But whereas one path sees the UK recover from the current slump within around a year, the other foretells a depression that lasts for many years, effectively lopping a major chunk of wealth off the size of the UK economy. No-one can predict with any degree of accuracy which one is more likely, but the dismal gross domestic product figures from the Office for National Statistics yesterday have, sadly, made the latter outcome that bit more likely.
What is relatively simple is to predict the next year for the economy.
As companies' profits continue to shrink, unemployment will climb higher still. The jobless total, which is just below the 2 million mark, will rise towards 3 million by the end of the year, and will probably edge higher still after that. This will ensure that while the recession seems at this moment to be a relatively abstract term for most Britons, by 2010 it will be a very real social issue.
House prices will continue to fall, with 2009 being similarly gloomy for the property market; as values drop many hundreds of thousands more homeowners will find themselves in negative equity, where the value of their home is worth less than their mortgage. This does not matter for those who retain their jobs, but the rise in redundancies means many simply won't have the luxury of remaining in their home until its price rises back above their mortgage.
The big question, however, concerns 2010.
By then, the Bank of England will most likely have cut interest rates to zero and will be actively pumping cash into the economy. By then, such a move will seem less controversial than it does now, since deflation will be the biggest threat - not inflation. But the threat is that the UK becomes trapped in a deflationary spiral, with prices falling faster and faster, and trapping more families in negative equity. Such spirals can be even more dangerous and intractable than bouts of hyperinflation. That, after all, was what happened in the 1930s; that is the depression trap that the UK faces.
The Bank of England believes that it has the power to prevent such an eventuality. The problem is that no central bank has ever successfully warded off a deflationary depression before. Ask Japan: it is still stuck on a depression that has lasted for longer than a decade.
http://www.telegraph.co.uk/finance/financetopics/recession/4326173/The-UK-economy-an-analysis-and-some-predictions.html
The Daily Telegraphy's Economics Editor Edmund Conway offers an analysis of the current position of the UK's economy and some predictions for what lies ahead.
By Edmund Conway
Last Updated: 7:36PM GMT 23 Jan 2009
Comments 0 Comment on this article
There are two possible paths the UK economy could take in the coming years. Neither will be pretty; both involve a recession. But whereas one path sees the UK recover from the current slump within around a year, the other foretells a depression that lasts for many years, effectively lopping a major chunk of wealth off the size of the UK economy. No-one can predict with any degree of accuracy which one is more likely, but the dismal gross domestic product figures from the Office for National Statistics yesterday have, sadly, made the latter outcome that bit more likely.
What is relatively simple is to predict the next year for the economy.
As companies' profits continue to shrink, unemployment will climb higher still. The jobless total, which is just below the 2 million mark, will rise towards 3 million by the end of the year, and will probably edge higher still after that. This will ensure that while the recession seems at this moment to be a relatively abstract term for most Britons, by 2010 it will be a very real social issue.
House prices will continue to fall, with 2009 being similarly gloomy for the property market; as values drop many hundreds of thousands more homeowners will find themselves in negative equity, where the value of their home is worth less than their mortgage. This does not matter for those who retain their jobs, but the rise in redundancies means many simply won't have the luxury of remaining in their home until its price rises back above their mortgage.
The big question, however, concerns 2010.
By then, the Bank of England will most likely have cut interest rates to zero and will be actively pumping cash into the economy. By then, such a move will seem less controversial than it does now, since deflation will be the biggest threat - not inflation. But the threat is that the UK becomes trapped in a deflationary spiral, with prices falling faster and faster, and trapping more families in negative equity. Such spirals can be even more dangerous and intractable than bouts of hyperinflation. That, after all, was what happened in the 1930s; that is the depression trap that the UK faces.
The Bank of England believes that it has the power to prevent such an eventuality. The problem is that no central bank has ever successfully warded off a deflationary depression before. Ask Japan: it is still stuck on a depression that has lasted for longer than a decade.
http://www.telegraph.co.uk/finance/financetopics/recession/4326173/The-UK-economy-an-analysis-and-some-predictions.html
Recession And Depression: They Aren't So Bad
Recession And Depression: They Aren't So Bad
by Chris Seabury (Contact Author Biography)
More From Investopedia
Recession: What Does It Mean To Investors?
The Ups And Downs Of Investing In Cyclical Stocks
How Influential Economists Changed Our History
Recession-Proof Your Portfolio
Recessions and depressions have occurred many times throughout history. To many, they bring fear and uncertainty, but they are actually a natural part of the economic cycle. Unfortunately, there are a lot of myths surrounding market cycles, but in order understand them, we must look beyond these myths. In this article, we'll examine recession and depression, how they work and what they really mean for investors.
What Is a Recession?
First, let's take a look at recessions. There are two definitions of recession:
by Chris Seabury (Contact Author Biography)
More From Investopedia
Recession: What Does It Mean To Investors?
The Ups And Downs Of Investing In Cyclical Stocks
How Influential Economists Changed Our History
Recession-Proof Your Portfolio
Recessions and depressions have occurred many times throughout history. To many, they bring fear and uncertainty, but they are actually a natural part of the economic cycle. Unfortunately, there are a lot of myths surrounding market cycles, but in order understand them, we must look beyond these myths. In this article, we'll examine recession and depression, how they work and what they really mean for investors.
What Is a Recession?
First, let's take a look at recessions. There are two definitions of recession:
- one defines a recession as two consecutive quarters of negative economic growth, and
- the second (according to the National Bureau of Economic Research (NBER)) defines a recession as a significant decline in national economic activity that lasts more than just a few months.
How It Works
The growth of our economy rests upon the balance between the production and consumption of goods and services. As the economy grows, so do incomes and consumer spending, which continues the cycle of growth. However, because the world is not perfect, at some point, the economy has to slow. This slow down could be caused by something as simple as an oversupply, where producers manufacture too many goods. When this happens, the demand for those goods will drop. This causes earnings to slow, incomes to drop and the equity markets to fall. (To learn more, read Understanding Supply Side Economics.)
Historical Examples
Since the mid-1850s the U.S. had 32 recessions, and according to the NBER, most have varied in length, with the average recession lasting 10 months. The shortest recession on record lasted six months, from January 1980 to July 1980. Two of the longest recessions lasted for 16 months. These were the recessions of November 1973 to March 1975 and July 1981 to November 1982.
What Is a Depression?
A depression is a severe economic catastrophe in which real gross domestic product (GDP) falls by at least 10%. A depression is much more severe than a recession and the effects of a depression can last for years.
It is known to cause calamities in banking, trade and manufacturing, as well as falling prices, very tight credit, low investment, rising bankruptcies and high unemployment. As such, getting through a depression can be a challenge for consumers and businesses alike, given the overall economic backdrop. (To learn more, read The Importance Of Inflation and GDP.)
How It Works
Depressions occur when a number of factors come together at one time. These factors start off with overproduction and decreasing demand and are followed by fear that develops as businesses and investors panic. The combination of excess supply and fear causes business spending and investments to drop. As the economy starts to slow, unemployment rises and wages drop. These falling wages cause consumers to cut back spending even more, putting additional pressure on unemployment and wages. This begins a cycle in which the purchasing power of consumers is eroded severely making them unable to make their mortgage payments; this forces banks to tighten their lending standards, which eventually leads to bankruptcies.
Historical Examples
Throughout history, there are several examples of depressions. The most well-known is the Great Depression of the 1930s. However, this one title actually covers two depressions that took place during that time. The first depression occurred from August 1929 to March 1933, during which GDP growth declined by 33%. The second depression ran from May 1937 to June 1938, during which GDP growth declined by 18.2%. In addition, the Great Depression was preceded by another economic depression, which occurred from 1893 to 1898. (To learn more, read What Caused The Great Depression?)
What Can We Learn?
Recessions and depressions provide us with both negatives and positives that we can use to gain a greater understanding of how they work and how to survive them.
Negatives of Recessions and Depressions
There are many negative consequences of recessions and depressions. Let's take a look at a few:
1. Rising unemployment
Generally, rising unemployment is a classic sign of both recessions and depressions. As consumers cut their spending, businesses cut payrolls in order to cope with falling earnings. The difference between the two is that the unemployment rate in a recession is less severe than in a depression. As a basic rule, the unemployment rate for a recession is in the 5-11% range; by contrast, the unemployment during the first period of the Great Depression (1929-1933) went from 3% in 1929 to 25% by 1933.
2. Economic downturn
Recessions and depressions create a massive unwinding in the economy. During times of growth, businesses keep increasing supplies to meet consumer, demands, but at some point there will be too much supply in the economy. When this happens, the economy slows as demand drops. Recessions and depressions allow us to clear out the excesses of the economy, but the process can be painful and many suffer during this time.
3. Fear
Recessions and depressions create high amounts of fear. As the economy slows and unemployment rises, many consumers become fearful that things will not improve anytime soon. This fear causes them to cut back on spending, causing the economy to slow even more. (For related reading, see When Fear And Greed Take Over.)
4. Sinking values
Asset values sink in recessions and depressions because earnings slow along with the economy. This causes stock prices to fall because of the slowing earnings and negative outlooks from companies. In turn, these falling prices cause new investments for expansion to slow and can affect the asset values for many people.
Positives of Recessions and Depressions
There are many positives that take place as a result of recessions and depressions. They include:
1. Getting rid of excess
Economic decline allows the economy to clean out the excesses. During this process, inventories drop to more normal levels, allowing the economy to experience long-term growth as demand for products picks back up.
2. Balancing economic growth
Recessions and depressions help keep economic growth balanced. If the economy grew unchecked at an expansionist rate for many years, this could lead to uncontrolled inflation. By having recessions and depressions, consumers are forced to cut back in response to falling wages. These falling wages force prices to drop, creating a situation in which the economy can grow at normal levels without having prices run away.
3. Creating buying opportunities
Tough economic times can create massive buying opportunities in huge asset classes. As the economy runs its course, the markets will readjust to an expanding economy. This provides investors with an opportunity to make money as these low asset prices move back to normal.
4. Changing consumer attitudes
Economic hardship can create a change in the mindset of consumers. As consumers stop trying to live above their means, they are forced to live within the income they have. This generally causes the national savings rate to rise and allows investments in the economy to increase once again. (For related reading, see Stop Keeping Up With the Joneses - They're Broke.)
Conclusion
Clearly, both recessions and depressions have many effects on the overall economy. To survive and thrive in these environments requires that you understand what causes them and how those causes create positive and negative effects on the overall economy.
Some of the positive effects include taking the excesses out of the economy, balancing economic growth, creating buying opportunities in different asset classes and creating changes in consumer attitudes.
The negative effects include rising unemployment, a severe slowing in the economy, the creation of fear and the destruction of asset values.
It is by carefully understanding what recessions and depressions are that we can learn how to spot them - and protect investments from them.
by Chris Seabury, (Contact Author Biography)
http://www.investopedia.com/articles/economics/09/lessons-recessions-depressions.asp?partner=basics
Millionaire widow becomes cleaner after losing fortune in Madoff's alleged Ponzi scheme
Millionaire widow becomes cleaner after losing fortune in Madoff's alleged Ponzi scheme
A millionaire widow who lost her fortune to Bernard Madoff's alleged $50 billion Ponzi scheme has turned to cleaning and care work to make ends meet.
By Catherine Elsworth in Los Angeles Last Updated: 5:09PM GMT 23 Jan 2009
But after Mr Madoff's alleged confession that the scheme was 'all just one big lie', a revelation that shook the investment world, Mrs Ebel realised she had nothing Photo: GETTY
Maureen Ebel, 60, of West Chester, Pennsylvania, thought she had $7.3 million invested with the New York financier when he was arrested last month and charged with running a massive hedge fun scam, possibly the largest financial fraud in history.
But after Mr Madoff's alleged confession that the scheme was "all just one big lie", a revelation that shook the investment world, Mrs Ebel realised she had nothing.
She went from an annual income from her investments of 400,000 dollars to worrying about how to pay her next bill and picking up coins in the street.
In less than a week following Madoff's arrest, Mrs Ebel found a job caring for a 93-year-old woman, cleaning her home and ironing.
"This is my fate," the retired nurse, whose doctor husband died in 2000 aged 53, told the Philadelphia Inquirer. "I was married, had a fabulous marriage to a man I loved and worshipped, a physician. We travelled. We had a very fine life. And he's dead. He died, and every penny I had in the world has gone."
Mrs Ebel, one of hundreds if not thousands of investors who together lost tens of billions of dollars in the scheme, has raised some cash by selling off jewellery and a painting and returned thousands of dollars worth of items recently bought on credit cards.
She is now desperately trying to offload her two-bedroom holiday home near West Palm Beach, Florida, and Lexus SUV while calculating that to afford her mortgage, she must return to nursing and take in a lodger.
Mrs Ebel's uncle Leonard, 80, introduced her to Madoff's fund after her husband's death.
"At that time, when he got me into Madoff, he had been a Madoff investor for 25 years," she told the Philadelphia Inquirer. "And now he's a Madoff investor and broke after 30 years."
She initially invested 4.5 million dollars and received detailed monthly statements and a cheque four times a year. She has registered with the FBI as a victim of Madoff's scheme.
Now when she visits Florida she says she feels "like an alien".
"Everyone is going riding their horses and playing tennis, playing golf," Mrs Ebel said. "If there's a nickel on the street, I'm picking it up."
Comment:
This story illustrates the importance of acquiring investment knowledge early in life. These riches to rags stories provide many learning points too.
Friday 23 January 2009
Introduction to Currencies
Education
Introduction to Currencies
Floating Rates Versus Fixed Rates
Basic Concepts For the Currencies Market
What Affects Currency Values?
Fundamental Factors That Affect Currency Values
Why Central Banks and Interest Rates Are so Important
Types of Currency Trading Instruments
Currency ETFs Simplify Trading
Getting Started in Currency Futures
How to Trade Currencies
I’m Ready to Trade. Where Do I Start?
Getting Started In Currencies
Introduction to Currencies
Floating Rates Versus Fixed Rates
Basic Concepts For the Currencies Market
What Affects Currency Values?
Fundamental Factors That Affect Currency Values
Why Central Banks and Interest Rates Are so Important
Types of Currency Trading Instruments
Currency ETFs Simplify Trading
Getting Started in Currency Futures
How to Trade Currencies
I’m Ready to Trade. Where Do I Start?
Getting Started In Currencies
Buffett-Style Buy And Hold
Investing Strategies
Buffett-Style Buy And Hold
Drew Tignanelli, 01.22.09, 03:52 PM EST
Buy good values, hold them until they're fully priced and move along, unless the business keeps improving.
Warren Buffett is not a buy-and-hold investor, so why are you?
The concept of buy and hold is nothing more than a sales pitch that was created by the financial services industry in the last secular bull market preparing for the next secular bear market (what we are currently experiencing). The industry is the only one making money on the buy-and-hold myth. They even use Buffett as the poster boy for this philosophy, but when you read his biography Snowball and study his investment moves, he certainly is not a buy-and-hold investor.
Yes, Buffett started buying Geico in 1950 and owns the whole company today. Yes, he has owned The Washington Post (nyse: WPO - news - people ) for 30-plus years. He also owned Freddie Mac (nyse: FRE - news - people ) and sold it after 15 years. He has owned Petro China (nyse: PTR - news - people ) and sold it after three years. He even owned Hospital Corp. of America and sold it in less than a year.
The truth is that Warren is a risk manager and buys what he believes is a good value. Value can arise from income, assets, economic expectations, company expectations or intrinsic values. He wants to own a good company run by good people and buy it for a good price. He then constantly monitors his thesis for owning the property and will sell when he admits his assessment was wrong, the situation has changed or the value has been extravagantly realized. Sometimes that happens in a few days, a few weeks, a few years or a few decades, and he has not been investing long enough to say if it would be a few centuries.
Risk, in fact, is wrongly assessed as the volatility of an asset. The emerging markets are assumed risky, because the past trading range can be up or down double digits. When China declines as it did in 2008 by 65%, I would suggest that there is less risk today in China's market than in the U.S. market, which went down only 38% in 2008. American investors have a false belief that our markets are more developed and therefore less risky, but I would say due to our economic and demographic landscape the general U.S. market is riskier, especially considering the significant discount difference that took place in 2008. As a shopper I would not be attracted to a DVD player marked down 30% as compared to the latest iPhone 3G marked down 60%. This is in essence what is happening in the mature U.S. vs. the upcoming China.
Special Offer: Economist and Forbes columnist Gary Shilling warned in 2005 of the housing crash, the credit crunch and the deep recession to follow. Think the problems have passed? Click here for advice to keep your wealth with Gary Shilling's Insight.
Risk is about the price you pay and what you get for that price. If I know what I own for the price I paid, then the daily price other investors are willing to pay is irrelevant. The flip side of buying a solid asset at a good price is selling that solid asset at an irrational price. It may also mean selling an asset when the economic conditions have shifted, reducing future value.
Risk managers focus on not losing money and not on making money (although you have to wonder what at all they were doing at the big Wall Street firms these past few years). The most ridiculous concept young people have learned is, "I am young so it is OK if my account goes down 50%, because I have time for it to come back." A young Buffett would consider that foolish. Buy a great asset at a great price so that it is less likely to go down, but if it does you know for sure it will come back. If you buy a mediocre asset at a bad price, it may never come back, or it may take many years for it to recover. This defines the average American investor trying diligently to be a long-term buy-and-hold investor, but after 10 years of losing money their patience is running thin. American markets are currently mediocre assets at a fair price but certainly not a cheap price.
Comment On This Story
It is true you cannot time the market, but you can tell in general when the risk reward ratio is not in your favor. You can also tell where the price decline of a good long-term asset is reflecting value and lower risk due to the price decline. Great examples of these value opportunities today are the Asian tigers and commodity companies. If you buy into these ideas, then make sure you understand why so that you can be ready to sell in the future when new investors and economic shifts have consumed the opportunity.
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The sell decision is the key of a great investor, more so than the buy decision. Buffett knew it was time to unload Freddie Mac because things changed. He also knew that Geico was still a great company after 50 years.
Many professional and amateur investors want a simple investment concept that takes minimal effort, but great investing takes work and requires an understanding of some concepts that are worth learning.
It's important to have a good understanding of economics and how governmental policy, currency movements, tax policy, interest rates and monetary policy impact the risk of a country's market for stocks and bonds. You also need to understand the drivers of investment values and where market prices stand in relation.
Also keep in mind that market movements are both rational and irrational. The market you see daily is the inefficient market that is irrational, emotional and psychologically driven by investors overcome with greed and fear. The invisible, efficient market is driven by smart investors who seek value and buy assets priced right for a solid risk-reward opportunity. This efficiency can take days, weeks, months or years to be realized.
You need to be a risk manager like Buffett.
Drew Tignanelli is president of The Financial Consulate, a financial advisory firm in Hunt Valley, Md.
http://www.forbes.com/2009/01/22/buffett-value-investing-fan-is-in_dt_0122investingstrategies_fan.html?partner=alerts
My comment: Buy, hold and selective selling
Buffett-Style Buy And Hold
Drew Tignanelli, 01.22.09, 03:52 PM EST
Buy good values, hold them until they're fully priced and move along, unless the business keeps improving.
Warren Buffett is not a buy-and-hold investor, so why are you?
The concept of buy and hold is nothing more than a sales pitch that was created by the financial services industry in the last secular bull market preparing for the next secular bear market (what we are currently experiencing). The industry is the only one making money on the buy-and-hold myth. They even use Buffett as the poster boy for this philosophy, but when you read his biography Snowball and study his investment moves, he certainly is not a buy-and-hold investor.
Yes, Buffett started buying Geico in 1950 and owns the whole company today. Yes, he has owned The Washington Post (nyse: WPO - news - people ) for 30-plus years. He also owned Freddie Mac (nyse: FRE - news - people ) and sold it after 15 years. He has owned Petro China (nyse: PTR - news - people ) and sold it after three years. He even owned Hospital Corp. of America and sold it in less than a year.
The truth is that Warren is a risk manager and buys what he believes is a good value. Value can arise from income, assets, economic expectations, company expectations or intrinsic values. He wants to own a good company run by good people and buy it for a good price. He then constantly monitors his thesis for owning the property and will sell when he admits his assessment was wrong, the situation has changed or the value has been extravagantly realized. Sometimes that happens in a few days, a few weeks, a few years or a few decades, and he has not been investing long enough to say if it would be a few centuries.
Risk, in fact, is wrongly assessed as the volatility of an asset. The emerging markets are assumed risky, because the past trading range can be up or down double digits. When China declines as it did in 2008 by 65%, I would suggest that there is less risk today in China's market than in the U.S. market, which went down only 38% in 2008. American investors have a false belief that our markets are more developed and therefore less risky, but I would say due to our economic and demographic landscape the general U.S. market is riskier, especially considering the significant discount difference that took place in 2008. As a shopper I would not be attracted to a DVD player marked down 30% as compared to the latest iPhone 3G marked down 60%. This is in essence what is happening in the mature U.S. vs. the upcoming China.
Special Offer: Economist and Forbes columnist Gary Shilling warned in 2005 of the housing crash, the credit crunch and the deep recession to follow. Think the problems have passed? Click here for advice to keep your wealth with Gary Shilling's Insight.
Risk is about the price you pay and what you get for that price. If I know what I own for the price I paid, then the daily price other investors are willing to pay is irrelevant. The flip side of buying a solid asset at a good price is selling that solid asset at an irrational price. It may also mean selling an asset when the economic conditions have shifted, reducing future value.
Risk managers focus on not losing money and not on making money (although you have to wonder what at all they were doing at the big Wall Street firms these past few years). The most ridiculous concept young people have learned is, "I am young so it is OK if my account goes down 50%, because I have time for it to come back." A young Buffett would consider that foolish. Buy a great asset at a great price so that it is less likely to go down, but if it does you know for sure it will come back. If you buy a mediocre asset at a bad price, it may never come back, or it may take many years for it to recover. This defines the average American investor trying diligently to be a long-term buy-and-hold investor, but after 10 years of losing money their patience is running thin. American markets are currently mediocre assets at a fair price but certainly not a cheap price.
Comment On This Story
It is true you cannot time the market, but you can tell in general when the risk reward ratio is not in your favor. You can also tell where the price decline of a good long-term asset is reflecting value and lower risk due to the price decline. Great examples of these value opportunities today are the Asian tigers and commodity companies. If you buy into these ideas, then make sure you understand why so that you can be ready to sell in the future when new investors and economic shifts have consumed the opportunity.
Related Stories
Wisdom From The Value Crowd
Holding A Candle To Buffett
Investing Books For The Stockings
Buying Stocks On The Way Down
Out Of Treasuries And Boldly Into The Fire
Related Videos
Microsoft's Surprise
BAC Kicks Out Thain
Apple Beats, Intel Cuts
Green Energy Train Wreck
Small Will Be Big In 2009
Stories
Videos
The sell decision is the key of a great investor, more so than the buy decision. Buffett knew it was time to unload Freddie Mac because things changed. He also knew that Geico was still a great company after 50 years.
Many professional and amateur investors want a simple investment concept that takes minimal effort, but great investing takes work and requires an understanding of some concepts that are worth learning.
It's important to have a good understanding of economics and how governmental policy, currency movements, tax policy, interest rates and monetary policy impact the risk of a country's market for stocks and bonds. You also need to understand the drivers of investment values and where market prices stand in relation.
Also keep in mind that market movements are both rational and irrational. The market you see daily is the inefficient market that is irrational, emotional and psychologically driven by investors overcome with greed and fear. The invisible, efficient market is driven by smart investors who seek value and buy assets priced right for a solid risk-reward opportunity. This efficiency can take days, weeks, months or years to be realized.
You need to be a risk manager like Buffett.
Drew Tignanelli is president of The Financial Consulate, a financial advisory firm in Hunt Valley, Md.
http://www.forbes.com/2009/01/22/buffett-value-investing-fan-is-in_dt_0122investingstrategies_fan.html?partner=alerts
My comment: Buy, hold and selective selling
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