Buffett, a Defense of the Oracle of Omaha

Buffett, a Defense of the Oracle of Omaha
David MacDougall
02/12/09 - 10:58 AM EST
It may be too early to count out the Oracle of Omaha.

Some journalists and investors, perhaps suffering from Schadenfreude, have argued that Warren Buffett, chairman and chief executive officer of Berkshire Hathaway(BRK-A Quote - Cramer on BRK-A - Stock Picks), might be nearing the end of his long track record of phenomenal performance.

They point to investments that have fallen more than stock-market benchmarks, as well as a huge derivative book that is sustaining billions of dollars in market-to-market losses during the worst financial crisis in 75 years.

Buffett, who became the world's richest man about a year ago and has since slipped to second place behind Bill Gates, has beaten the U.S. benchmark S&P 500 Index 37 times from 1965 to 2007, according to data published in Berkshire Hathaway's 2007 letter to shareholders. Investors of Berkshire, a holding company weighed heavily toward insurance holdings including GEICO, had an average annual gain of 21.1% during that time, twice as much as the S&P 500's 10.3% advance.

Buffett hasn't fallen into ruts. The few cases of underperformance are aberrations that have quickly reversed course. In 1999, Berkshire trailed the S&P 500 by 20.5 percentage points. A year later, the company's stock beat the benchmark by 15.6 percentage points. The average outperformance following an underperforming year is 19.4 percentage points.

Although Berkshire has large stakes in publicly traded companies, much of its success comes from investments in private firms. Berkshire has private portfolio companies involved in industries such as home furnishing, athletic wear, candy, jewelry and electrical components, to list a few. Those investments follow Buffett's criteria for investing: solid management with a wide "moat," meaning an easily defensible position in the industry.

None of the private portfolio companies is sexy, which is a reason for their success. It is unlikely that any of them will crash and burn because of excessive leverage or an out-of-control derivatives book.

Beyond investments in retailers and public companies, Berkshire's biggest holdings are in the insurance industry. In 2007, Berkshire posted $3.37 billion in pretax profits from underwriting at insurers, which include GEICO, General Re and National Indemnity.

There are no indications from Buffett that any of Berkshire Hathaway's portfolio companies have significant exposure to the toxic assets that have been weakening the competition. This is due to Buffett's ability to identify businesses that are sustainable and worthy of the Berkshire Hathaway seal of approval.

Still, Buffett has made substantial derivative investments, which may be a surprise to some. While "derivative" has become a buzzword that makes many stomachs turn, Buffett's exposure is far tamer than any of the books that have been sinking investment firms throughout 2008.

Seventy-three percent of Berkshire's $9.25 billion derivative book comes in the form of European "put" contracts written by Berkshire Hathaway at the market price for the S&P 500 and three foreign markets with a weighted average remaining life of about 13 1/2 years. Since these are European option contracts, meaning they can only be exercised at expiration, Berkshire Hathaway will only lose money if the index's value at expiration falls below the level it was when the contract was written.

The remainder of the derivative book is in credit default swaps. However, the main hit on the derivative book comes from market-to-market accounting, which forces Berkshire to write down the put contracts to the current fair value, even though Buffett has said he has no plans to sell the contracts before expiration. Those losses will most likely reverse themselves in the coming years as the market rises and credit markets improve.

Buffett has been active in the financial crisis, and injected capital into an ailing bank with more favorable terms than the U.S. government has. In September, he bought $5 billion worth of preferred stock in Goldman Sachs(GS Quote - Cramer on GS - Stock Picks) along with warrants to purchase an additional $5 billion in common stock at a strike price of $115 a share. The preferred stock carries a hefty 10% annual dividend, which will bring in $500 million every year for Berkshire Hathaway, more than the zero percent the government will be yielding on its injected capital.

Criticism of Berkshire's public holdings may be justified with the benefit of hindsight. Some fault Buffett for missing out on a profitable exit from Coca-Cola(KO Quote - Cramer on KO - Stock Picks) at its peak of $86.13 in 1998. Clairvoyance is a lofty expectation even for an oracle.

Buffett has described himself as a long-term investor. Quick exits should not be expected and could even be regarded as a violation of his mandate. Investors ought to realize that Berkshire's portfolio will change little from year to year. Especially for holdings like Coca-Cola, in which Berkshire holds more than 8%, any exit would be very difficult due to the sheer size of the investment.

The composition of Buffett's current publicly traded portfolio, or what was available as of Sept. 30, seems ideal under normal market conditions. It provides for the benefits of diversification with a mix of blue-chip companies in wide-ranging industries.

When the holdings are compared to TheStreet.com Ratings data, a positive picture emerges. While the current universe of rated stocks has only 9% listed as "buy," Buffett's portfolio comprises 19.4% "buy"-rated stocks. All of those shares outperformed the S&P 500 by double digits in 2008.

Stocks in the portfolio with a "hold" rating account for the vast majority. Sixty-seven percent of the Berkshire portfolio has a "hold" rating from TheStreet.com Ratings. A "hold" rating means a stock will probably perform in line with the market. Forty-four percent of stocks rated by TheStreet.com Ratings are "hold." The average outperformance of the "hold"-rated securities of Berkshire Hathaway was 6.4 percentage points in 2008.

Buffett holds some stocks rated "sell" by TheStreet.com Ratings. They comprise 13.8% of the portfolio. Of the stocks rated by TheStreet.com Ratings, 47.25% are rated "sell." In all, Buffett's holdings as of Sept. 30, if equally weighted, beat the S&P 500 by 5.4 percentage points in 2008.

TheStreet.com Ratings' model can be described as "safety first." Neither the model nor Buffett like excessive risk, volatility or debt, and those aversions fare well in a recession.

Buffett Holdings Ranked by
TheStreet.com Ratings

TheStreet.com Ratings



Much of Berkshire's performance is dependent on Buffett's actions after the crash in October. Until the results are available for that time period later this month, we are left to speculate on the possibilities. No investment manager can promise gains, but Buffett is more consistent and honest than most. Just because he isn't ringing up a positive return doesn't mean he has lost his edge.

http://www.thestreet.com/story/10463620/1/buffett-a-defense-of-the-oracle-of-omaha.html

Financial Crisis: Mark to Market Accounting Demystified

Financial Crisis: Mark to Market Accounting Demystified
written by Andy on Wednesday, October 8, 2008

Of late there has been a lot of negative press around the accounting requirements for companies and the methods by which they have to value their assets. Some critics and company executives have even attributed the accounting requirements, and specifically the Mark to Market valuation method, as a major cause behind the rapid failure of some of our largest financial institutions, because they were forced to value assets at unrealistically low levels. The Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) which sets accounting rules for companies, are being pressured by lawmakers, corporation and big investors to overhaul or suspend the current Mark to Market accounting rules that these companies have to follow. This type of accounting (like leverage), works great in boom times but can place a lot of pressure on companies and their stock prices when asset values fall. As an investor it is important to have a general understanding of how this type of accounting works in order to get a better of the state of the company's real financial health (and so you know what those pundits on CNBC are talking about!). Here, Tony Parker assists in breaking down Mark to Market accounting in an easy to understand format with examples and why it is causing so many headaches for companies.

What is it?

The act of assigning a value to an asset based on it current market value (what it could sell for today) as determined by the going "market price". For example, your house may have been worth $300,000 on 1/1/2007 but today according to the market it is worth $230,000. If you kept track of your assets like a company did, you would be required to "write-down" the value of your house by $70,000 to reflect the fact that if you had to immediately liquidate that asset (your house), it would not bring the kind of cash it would have about two years earlier.

Why was it implemented?

It was primarily intended to prevent shady accounting practices that hide underlying liabilities. The Accounting Standards bodies were concerned that companies were keeping "bad" assets on their books instead of "writing them down" to their real value (assigning a new, lower value to the asset). Mark to Market gives investors a much better "picture" of the health of the company if their assets are correctly priced (i.e. market price).

Example: Ford is holding 100,000 F-150 trucks on a storage lot. Ford originally valued these at $20,000 each. So, Ford books this as an asset with a value of $2,000,000 (100,000 x $20,000). But several months go by and Ford has not sold these trucks (high gas prices, economy, etc.). Now it is 6 months later and Ford must mark to market the value of those trucks for their quarterly reporting. Over the six months the true market value of trucks has dropped to $15,000 (based on what customers are currently paying). In this case, Ford should write-down the total value of the trucks to $1,500,000. This means Ford's assets (the trucks) have fallen in value by $500,000.

So why is this important?

To keep it simple, the most basic thing in accounting is the equation: Assets – Liabilities = Equity or, in common terms, Assets (things owned) minus Liabilities (debt) = Equity (value of the company - reflected in the stock price). If you reduce the value of the assets, then the value of the company must drop, thereby pushing down the equity (stock price). So continuing with the example above, Ford's share price will drop as the value of it's assets (trucks) are marked down. So do you see now how the falls in assets prices can quickly translate to stock prices drops under mark to market accounting?

Why is it causing so much controversy?

The Mark to Market rule works well until you cannot get a realistic price for an asset. Currently, many of the Mortgage Backed Securities (a combination of many mortgages pulled together as one security) that are behind the financial crisis have NO market and hence almost impossible to assign a fair value (unlike those of Ford trucks). Because of their perceived risk and unknown exposure nobody wants them and in many cases if there is no demand they become worthless ($0 value). This obviously is NOT true. Even if the value is 5 cents on the dollar, they still have a value. But the securities are so complex and the economic environment so uncertain, that nobody is willing to "stick their neck out" and try to pick the correct price.

Here is an analogy: Say there is a unique subdivision with 100 gorgeous houses. If these houses were any place "normal" they would be worth $1,000,000 each. But this subdivision sits on top of an old graveyard. Now most people would never pay full price for a house sitting on top of a graveyard (the potential for ghosts and all!). But what is each house worth? Some people probably would not care much about the graveyard as long as they got $200,000 off the selling price. So, is $800,000 the Mark to Market price? On the other hand, some people would only buy one of the homes if it were substantially discounted, say to ¼ of the original price. So, is $250,000 the Mark to Market price?

Now lets add one more obstacle. Let's say – as is currently happening – it is very, very difficult to get a loan (mortgage). There is then the potential that NOBODY would buy one of the homes, because they could not get a mortgage, even though they may have been able to get a big discount. One financial quarter (3 months) goes buy and none of the homes sell. What is the Mark to Market value of these homes now? Without any direct comparisons (after all, this is like no other subdivision), the Mark to Market value would be ZERO. We know that is not true, but if the accountants assign an arbitrary value, say $700,000, they may get in trouble if later they are required to write-down the value of those homes to $250,000 each, when they find out very few people are comfortable living on top of a graveyard. So the problem is: What value should you assign to an asset that has no current market (no buyers)? By the letter of law you value them at current value – zero in this example – but as you can see that is hardly fair.

This is essentially the problem currently choking financial markets with MBS and other housing based instruments. Critics of the Mark to Market accounting rules say that they cause banks to undervalue assets that have a real value based on fire-sale prices in a frozen market.



"A vast majority of mortgages, corporate bonds, and structured debts are still performing. But because the market is frozen, the prices of these assets have fallen below their true value. Firms that are otherwise solvent must price assets to fire-sale values. Not only does this make them ripe for forced liquidation, but it chases away capital and leads to a further decline in asset values," wrote Brian Wesbury in the WSJ.

Conclusion and Opinions

Tony - My personal recommendation is to keep the Market to Mark rule, but in cases where you cannot come up with a reasonable value – because of usual economic forces or a sufficiently liquid market – then guess conservatively and highlight the item to investors in the financial statements, so they can determine whether the value assigned is reasonable to them.


Andy - One point to note is that even if Mark-to-Market rules were suspended, it won't change the makeup of a company's balance sheet. If investors decide certain company's assets are toxic (like MBS nowadays) then it won't matter how a company accounts for them in its books - they will be assigned a zero or negative value by default. To get out of the current financial crisis, investors need to have confidence in the financial assets/instruments of these companies. That is what the government is trying to primarily do with the bailout bill – restore investor confidence by buying and creating a fair market value for these "bad" and illiquid assets. However, judging by recent market action it doesn't look to be working too well.

http://www.savingtoinvest.com/2008/10/financial-crisis-mark-to-market.html

Government thwarts lending, banks claim

Posted on Tue, Feb. 03, 2009

Government thwarts lending, banks claim
Comments (1) Recommend (1)
BY STEVENSON JACOBS
Associated Press

NEW YORK - Banks that are being scolded by the government for not lending are blaming a new obstacle: the government itself.

Fearing more bank failures, federal regulators are forcing institutions to hold more money in reserve and scrutinizing loans. But bank executives complain that the extra oversight thwarts their ability to quickly pump billions of bailout dollars into the ailing economy.

Banks say they are caught in a frustrating Catch-22: How can they make more loans when creditworthy borrowers are scarce, their balance sheets are saddled with bad debt and regulators are hounding them to horde cash?

"We want to lend, but the regulators are flat-out telling us, 'Get your capital up.' Then there's Congress telling you to lend it all out," said Greg Melvin, a board member at FNB, a Hermitage, Pa.-based bank that got $100 million in bailout money.

"Two arms of the government are saying exactly the opposite thing -- it's ridiculous," added Melvin, who is also chief investment officer at investment firm C.S. McKee.

Regulators say they are only being careful, and they deny slowing lending.

"We don't believe that prudence and increased lending are mutually exclusive -- they go hand in hand," said Andrew Gray, a spokesman for the Federal Deposit Insurance Corp.

The tit-for-tat marks the latest problem for the government's financial bailout, known as the Troubled Asset Relief Program, or TARP.

The government rolled out the $700 billion bailout late last year, hoping that injecting money into banks would expand lending and ease the credit crisis. But in a survey released Monday, the Federal Reserve said many banks are making it harder to get credit cards, mortgages and other loans.

Regulators have long required banks to keep a minimum level of capital on their books to stay in business. It was typically a figure equal to 10 percent of assets.

But as the financial crisis has worsened, many banks say they have been told to keep capital equal to at least 12 percent of assets. At the same time, regulators are combing through banks' loan applications and flagging those considered too risky.

It's unclear how broadly the stricter rules are being applied. But interviews with bank executives indicate that healthy and troubled banks are facing more stringent oversight, regardless of whether they have received bailout money.

The goal is to keep banks from getting into more trouble. But to comply, some banks say they have little choice but to scale back lending -- sometimes even to creditworthy borrowers.

Four government regulators oversee the country's roughly 8,500 federally insured banks and thrifts: the FDIC, the Office of Thrift Supervision, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

Regulators shut down 25 banks last year and closed three so far this year because their capital levels fell too low. Meanwhile, regulators have ordered several banks to stop lending until they get more capital.

But the credit crisis has made it harder for banks to raise private capital. And the government doesn't want to give bailout money to banks that might later fail.

The harsh climate has taken a toll on banks such as Los Angeles-based First Federal Bank of California. It was forced to halt lending last month after its regulator, the Office of Thrift Supervision, said it needed more cash to absorb future losses on adjustable-rate mortgages.

Chief executive Babette Heimbuch said her bank wanted to keep lending but had a "difference of opinion" with the OTS over what its cumulative losses were and how quickly it will see them.

"They basically told us to stop lending," she said.

While the Treasury wants banks to lend, "the regulators have a whole different mind-set: They want to protect the insurance funds," Heimbuch said, referring to money that regulators use to insure bank deposits.

Regulators see things differently.

William Ruberry, a spokesman for the OTS, said its No. 1 mission is to safeguard the institutions it oversees. He denied that such efforts were slowing lending.

"We want our institutions to lend, but we want them to lend in a safe and sound way," Ruberry said. "We think creditworthy borrowers shouldn't have a hard time finding loans."

http://www.kansas.com/business/banking/story/686222.html

Credit crunch

Synchronised drowning
By Christopher Hughes

Credit crunch: More than 18 months into the financial crisis, some observers are saying that things just might have stopped getting worse. But even cautious optimism is hard to square with what companies are saying and doing.

True, some recent business surveys – in the US, eurozone, UK and China – showed sentiment rising, albeit from dismal levels. The Baltic Dry Index of shipping rates has doubled although it is still down 90% from its peak last May. Goldman Sachs said its Global Leading Indicator (GLI) suggests “a trough in the global industrial cycle may be in sight”.

But the credit crisis continues to advance with tragic predictability. Ferretti, the Italian yacht maker which epitomised the easy wealth and casual leverage of the credit boom, has skipped an interest payment on its acquisition debt, according to Bloomberg. Hammerson, a UK commercial property developer, announced a rights issue on Monday. And Germany's Schaeffler is battling against a break-up after loading up on debt to gain control of Continental, another heavily indebted German car parts maker.

This is a global crisis. India’s largest discount retailer, Subhiksha Trading Services, suffered widespread vandalism this weekend after running out of cash to pay security staff. The company reportedly admitted to having “mucked up on not raising equity”. In the Far East, suffering is the order of the day. Japanese carmaker Nissan forecasts big losses and Korean electronics producer LG warns revenues, expressed in dollars, will be down 20% this year.

Of course, bad news will keep flowing freely until well after the recession’s trough is crossed. So perhaps the worst is indeed almost upon us. But a more plausible interpretation of the less bad surveys is that the rate of decline has slowed. After the failure of Lehman Brothers last September, credit markets were frozen and modest GDP growth turned suddenly into rapid shrinkage. The shrinkage may now be proceeding at a more moderate pace.

But whether the times are pitch black or only very stormy, there are always opportunities to make money, if only from companies under pressure. Private equity firms specialising in secondary buyouts see rich pickings in the portfolios of capital-constrained banks that are looking to sell what assets they can. And Frank Quattrone, the former Credit Suisse banker who became synonymous with the excesses of the technology boom, is expanding his boutique advisory firm into London. He expects a spurt in tech mergers. As they say, there is always a bubble inflating somewhere.

chris.hughes@breakingviews.com

http://www.breakingviews.com/2009/02/09/credit%20crunch.aspx?sg=telegraph2

Europe's leaders need to wake up to their own recession

Europe's leaders need to wake up to their own recession
French and German leaders have repeatedly called for an overhaul of the global financial system.

By Pierre Briançon, breakingviews.com
Last Updated: 1:09PM GMT 13 Feb 2009

In spite of a poor personal relationship and differences on many other matters, Nicolas Sarkozy and Angela Merkel seem to agree on what the French president calls "the reform of capitalism". Calls for more regulation on banks, hedge funds, rating agencies, short-selling or tax heavens - to name only a few - play well in both Paris and Berlin.

There's a bit of schadenfreude in continental Europe at the crisis of the now much-criticised "Anglo-Saxon" model. That's understandable, after years of being talked down to by the model's practitioners and leading beneficiaries in the City and Wall Street - even though French and German banks tried hard to play with the big boys. But European leaders understandably want to seize the moment to push for greater coordination of global rules, so that tighter regulations in one country won't be undercut by deregulation in another.

Global reforms are certainly desirable, but regulation should not be at the top of the European agenda right now. There are more pressing matters.

The recession is deepening throughout the continent and governments have failed to come up with credible stimulus packages. Germany's GDP is expected to contract by some 2pc this year, France's by more than 1pc. EU members have responded with some sensible ideas, but many are tempted by the dangerous sirens of protectionism and economic nationalism - most recently demonstrated by the French auto industry bailout plan.

This weekend's meeting of finance ministers from the G7 group of industrialised countries in Rome will be the first opportunity for European finance ministers to meet Tim Geithner, their new US colleague. Instead of trying to put regulation on top the agenda, the Europeans should focus on the deepening recession.

Without sensible and coordinated policies to share the economic pain and get the financial system back in operation, the bad times could become much worse. If governments don't rise to the urgent economic and financial challenges, they may find there won't be much left to regulate.

For more agenda-setting financial insight, visit www.breakingviews.com


http://www.telegraph.co.uk/finance/breakingviewscom/4611966/Europes-leaders-need-to-wake-up-to-their-own-recession.html

50 ways to save cash

50 ways to save cash
In hard times, it's more important than ever to ensure that you pay no more than necessary for the essentials of life. Here are 50 ways to get the most from your money.

By Emma Simon
Last Updated: 1:56PM GMT 13 Feb 2009

Hard times make it more important than ever to ensure you do not pay more than necessary for goods and services, while making your savings work as hard as possible for your benefit.

Many hard-working families are feeling the pinch as the economy nosedives, savings rates plummet and cheap credit deals have vanished from the high street. But saving money may be easier than you think. While the weather remains inclement and the children are off school next week, why not take some time to spring-clean your finances?

The Telegraph has compiled 50 ways for families to save money. Work through the list by following the links below and see how much healthier and wealthier your pocket feels (links open in new windows).

Mortgages: Nos 1-7
Credit cards: Nos 8-14
Current accounts: Nos 15-19
Savings: Nos 20-26
Household bills: Nos 27-33
Insurance: Nos 34-41
Pensions and benefits: Nos 42-43
Shopping: Nos 44-48
Investment: Nos 49-50


http://www.telegraph.co.uk/finance/personalfinance/consumertips/4611025/50-ways-to-save-cash.html

Chinalco eventually gets what it wants from Rio Tinto

Chinalco eventually gets what it wants from Rio Tinto
Chinalco is making good on Rio Tinto.

By Una Galani, breakingviews.com
Last Updated: 3:05PM GMT 12 Feb 2009

One year since its audacious dawn raid, the Chinese state-owned aluminium group is set to double its stake in the Anglo-Australian miner. Chinalco overpaid back then, but the holding made sure it was first port of call for a proposed $20bn (£14bn) rescue package for Rio.

In the new deal, the Chinese have agreed to buy US$7.2bn of convertible bonds, at face value, and spend $12.3bn on stakes of up to 50pc in a number of Rio's mining assets. If the bonds are converted into shares, Chinalco would double its total stake in the dual-listed miner to 18pc and get to nominate two directors to Rio's board.

The new investment helps dull the financial pain of buying at close to the peak of the market. Last year it paid $85 a share, based on current exchange rates. It is hard to translate the value of the mine interests into a Rio share price, but people close to the situation suggest the equivalent price for the new proposed investment package is more than $50 a share. That is well above Rio's current $27 share price, but this is meant to be a long-term investment.

Indeed, Chinalco didn't get into Rio merely in search of a financial return. The original investment was widely considered a spoiler for rival BHP Billiton's proposed merger with Rio. The Chinese authorities were openly hostile to a deal that would have created a much more powerful supplier of iron ore and other key commodities. The move by state-owned Chinalco probably helped scupper the plan.

China may be suffering now, but it will always be hungry for commodities. There is no better way to keep prices down than to keep supply ample. Chinalco's latest deal will put the country in a position to do exactly that. Providing the transaction doesn't get blocked by Rio's frustrated shareholders or the Australian foreign investment board, Chinalco will have extracted what it really wanted.

For more agenda-setting financial insight, visit www.breakingviews.com

http://www.telegraph.co.uk/finance/newsbysector/energy/4601828/Chinalco-eventually-gets-what-it-wants-from-Rio-Tinto.html

Opportunity Knocks: Has the oil price bottomed?

Opportunity Knocks: Has the oil price bottomed?
Few areas have escaped the stock market down turn – some have performed worst than others. The price of oil has fallen from a peak of $147 to around the $40 mark which could be throwing up a buying opportunity.

By Paul Farrow
Last Updated: 9:44AM GMT 13 Feb 2009

The oil price has fallen from a peak of $147 to around $44 a barrel Photo: BLOOMBERG NEWS
The financial crisis has left many assets and sectors battered and bruised. The stock market is down by more than 30pc over the past year. The global economy is on its knees but history suggests that equity markets will begin their recovery before GDP figures start to show strength again.

Investors who will gain the most will be those with either the nous or the brass neck to get in early. There are some fund managers that reckon that the fall in the oil price could open such an opportunity. The question is whether those investing in the sector now are jumping the gun?

Oil reached a peak of just under $150 a barrel last year – today it stands at jaround $40. The demand that pushed the price to record highs has slumped as many global economies have slowed. Some analysts are reticent to suggest how long the global recession will last, but when the stimulus injected by central banks begins to filter through the demand for oil will pick up.

Several already believe that investors should start to look at oil – they do not say the price has bottomed or a spike in the price is imminent, but they reckon that a floor cannot be too far away.

Demand for oil has collapsed because of the very weak economic conditions, and the price of oil has fallen as a result. Production is also falling – non-OPEC production peaked last year and is now on the decline.

This week, crude fell after the US Energy Information Administration revised down its 2009 global oil demand forecast by 400,000 barrels per day from its previous outlook, predicting demand will fall by 1.17 million bpd this year from 2008 levels. US crude stands at around $34 a barrel. London Brent stands at $45 a barrel.

But Killik, the stockbrokers sent a note to investors reckoning the "momentum is negative and crude is approaching oversold levels – short-term traders should go long at current levels with a tight stop loss'.

Mick Gilligan, an analyst at Killik says the price of oil is wrong in the medium term and says that his clients are buying exchange traded funds to benefit from the low price – particularly US oil which is lower than the price of Brent crude.

Chris Wheaton, Director, RCM, the specialist equity company of Allianz Global Investors, says: "Oil has been included in the January sales. Even if oil is only $50/barrel in 2010 it makes for a great investment opportunity right now. Low prices are encouraging more energy use – for example, gasoline demand in the US is now at the same level it was last year despite all the talk of a weak US economy. Sometime in 2009 or early 2010 we expect oil demand across the world to start to grow again.

"The credit crunch and uncertainty over oil prices are causing investment in new oil fields to be put on hold. However the big trends, such as rising energy use across emerging markets and natural declines in existing oil production won't disappear and will continue to push oil prices higher. This means were certainly going to have $100/barrel oil again by 2013, and makes longer-term investments in energy at today's prices look very attractive."

Robin Batchelor manager of the Blackrock World Energy fund says that both oil and gas prices are trading below their marginal costs, which are unsustainable for any reasonable time frame – but he admits that economic woes do raise concerns on the demand side of the equation.

He says:"However, energy equities are trading at P/E multiples at a discount to the broader market and are generally supported by asset valuations. Almost all the companies in the portfolio are well-capitalised and generating cash. At some point in the relatively near future, we believe fundamental factors will regain their importance as investors again return to traditional valuation techniques."

Gary Dugan, Chief Investment Officer, EMEA, Merrill Lynch GWM, reckons that for those who want to trade oil, we are very close to buying levels – anything below $35 is a buying opportunity.

He says: "When the oil price starts to move towards $30 a barrel it starts to cost more to extract oil than producers can get by selling it, so production facilities get shut down as they become uncommercial. We expect the annual production of oil to fall by as much as 5pc a year over the next five years, which should create a floor for the oil price. We believe that oil will bottom out at around $30, and will average between $40 and $45 over the course of 2009, subsequently rising to around $55-60."

But before investors rush to get a piece of the action, there are some who are not so sure now is the time.

Ian Henderson, who manages the JPMorgan Natural Resources Fund, is not convinced that now is the ideal time to invest in oil related plays – mainly due to the uncertainty of the US, which he says will dictate sentiment. He continues to bet on gold which makes up the lionshare of his portfolio at this juncture.

"The long-term view remains in tact but there is so much global uncertainty. But there are dozens of cargo ships floating around refineries because demand for oil is weak -there is plenty of oil floating around – it could be that we will have to wait until that is through the system before the price rises," he says. "However, many oil companies have strong balance sheets having been buoyed by the high price in the past which makes some oil stocks a useful hold for those looking for dividends – although so too do the likes of Vodafone and Glaxo."

For investors wanting to take advantage of any future rises in the price of oil, there are a number of choices. You could invest directly in the shares of the oil majors and production and service companies. Other options include investing in funds that look at the oil sector (Guinness Global Energy, JPM Natural Resources, Investec Energy), or in an exchange-traded fund, which is an investment vehicle that holds assets such as stocks or bonds.

Oil shares do not move directly in line with the oil price because there are other factors at work such as management skill, debt and the costs of distribution. However, there is a correlation over the longer term and they are paying decent dividends.

Remember that oil stocks in the UK make up a significant chunk of the FTSE100 so any tracker fund or General UK Growth fund that does not veer too much away from the index will benefit from any pick up in demand for oil – and those bumper dividend payments.

http://www.telegraph.co.uk/finance/personalfinance/investing/4609834/Opportunity-Knocks-Has-the-oil-price-bottomed.html

Pros and cons of corporate bonds.

'Fixed interest of 6.4pc for the next 10 years. What's the catch?'
This week's Diary of a Private Investor looks at the pros and cons of corporate bonds.

By James Bartholomew
Last Updated: 12:17PM GMT 12 Feb 2009

There has been much talk about how savers cannot get a decent rate of interest on money any more. But there is one place where savers can get pretty good rates: corporate bonds. A fixed return of 5pc a year is easily available with little risk. Rates of up to 8pc can be had for those willing to face more danger.

I have bought into corporate bonds for two reasons. One is to get the good yields. The other is because I read recently that a rise in corporate bond prices has preceded all, or at least most, bull markets in shares for many decades. So I hope that the corporate bond market will give me a prompt when it is time to go full-bloodedly back into shares.

What are corporate bonds? They are debt issued by companies in the form of tradable securities. For example, I hold some bonds that were issued by British American Tobacco (or a subsidiary, BAT International Finance, to be precise).

These bonds are due to be repaid in 2019. The "coupon" or rate of interest for a nominal £100 of stock is 6.375pc. But the bonds are quoted at the moment at a fraction below that nominal value, which means the yield is a tiny bit higher. So there it is: fixed interest of about 6.4pc for the next 10 years. What is the catch?

Well, there are a few problems but none that has deterred me. One difficulty is that the market in corporate bonds is a lot less liquid than in shares. It is not always easy to get stock at a price close to the supposed middle price shown by various sources.

The free source I have been using is www.fixedincomeinvestor.co.uk, where you can find a long table of bonds if you go to "bond prices and yields" and then "GBP bonds (Corporate and Non-Gilt)". When I bought the BAT bonds I certainly had to pay 3pc or 4pc above the price quoted. The same happened when I bought some British Telecommunications PLC 8.625pc bonds repayable in March 2020.

But the biggest discrepancy came when I was attracted by the bonds issued by Enterprise Inns with a coupon of 6.5pc but quoted at a mere £40 for £100 nominal of stock. The bond is repayable in full in 2018 so the yield to redemption – which includes the capital gain – looked like a whopping 21.7pc.

But when I got on to my broker to see if I could buy some, I was told the best actual offer was at £66. The price on the screen proved to be pretty theoretical so I held off. Then I read an article that suggested Enterprise Inns might be in danger of breaching the covenants attached to its bonds.

I rang Enterprise Inns hoping that, as an owner of shares in the company, a prospective owner of its bonds and a financial journalist, it might explain more about its covenants. Without going into detail, my attempts to glean information from its investor relations officer (off sick) and its press office proved less than wholly successful.

I was instructed via an outside press relations company to send questions by email. A bad sign. Finally I managed to have a useful conversation with this press company. But the reluctance by Enterprise Inns to communicate left me thinking "why don't they want to talk?"

How safe are corporate bonds? It depends on the company. Safer than Enterprise Inns bonds are those issued by Tesco. They are repayable in 2019 and have a coupon of 5.5pc. They are quoted as I write at 102.4 so the redemption yield is 5.1pc. That is not big enough to tempt me but for those who are desperate for safe income, it is.

Unlike many bonds, this one can also be bought in small amounts – the minimum is apparently £1,000 of nominal stock. Another bond that can be bought on a small scale is issued by Compass Group.

For people who don't want to invest directly, investment management companies can sell you a fund invested in a spread of corporate bonds.

Corporate bonds are a kind of halfway house. They are not as safe as government bonds but they are safer than shares, ranking above them if a company goes bust. The encouraging thing, as far as shares are concerned, is that since November corporate bond prices have been rising.


http://www.telegraph.co.uk/finance/personalfinance/investing/4600899/Fixed-interest-of-6.4pc-for-the-next-10-years.-Whats-the-catch.html

Your Best Chance to Profit in 2009

Your Best Chance to Profit in 2009
By Richard Gibbons February 12, 2009 Comments (0)

If, after 2008, you're still looking at the stock market as a way to fund your retirement, most people probably consider you a few congressmen short of a bailout. (Zing!) It's probably progressed far beyond the point of people refusing to make eye contact with you. In all likelihood, your dog is, too.

Yes, it's tough proclaiming yourself a bull after a year in which every bull became a steer.
But there are a few perks. Like getting the profits that come from buying stocks at what could be some of the best prices you'll ever see.

A brief history of 2008
Last year was a fantastic demonstration of what happens when, in a highly leveraged world, everyone needs liquidity at the same time.

Anyone who borrowed to buy mortgage-backed securities needed cash as mortgage values plummeted. Investment banks like Bank of America (NYSE: BAC) prey Bear Stearns needed cash as the mortgage-backed securities on their books began to fall. Retail banks like Wells Fargo's (NYSE: WFC) Wachovia needed cash to maintain their capital ratios as defaults escalated. AIG needed cash to balance its losses in credit default swaps. Hedge funds needed cash to fund redemptions and reduce leverage as assets declined.

The problem is, when everyone needs cash, the only way to get it is to sell off assets. And that's what investors did, dumping almost every asset class with the exception of ultra-safe Treasuries. The stock market took it on the chin.

An overreaction
That's not to say that the market collapsed simply because everyone cashed out. The problems in our economy are real. We've seen huge bankruptcies, the unemployment rate has spiked beyond 7%, and consumer confidence is low. Companies that need cash are finding it tough raising money at reasonable costs.

But the carnage in the market isn't limited to the shaky companies that are likely to suffer the most. The S&P 500 contains the biggest, most successful, and most stable businesses in America. Yet more than 94% of the companies in the S&P 500 fell during 2008. Over 30% lost more than half their value! Certainly, deteriorating business prospects are responsible for some of that drop. But based on valuations, it seems likely that stock investors are selling because they must. Like everyone else, they need the cash.

And that's a really great thing if you're not one of Wall Street's forced sellers.

The sweet spot
Large-cap value stocks could be the best way to exploit this opportunity. I'm not just talking about slow-growing companies trading at low single-digit earnings multiples, but also compellingly cheap growth stocks.

For instance, these days, the universe of large-cap value stocks includes Apple (Nasdaq: AAPL). Apple has huge barriers to competition, $25 billion of cash on its balance sheet, an innovative culture, a 19% estimated annual growth rate going forward, and is trading for about 9 times free cash flow. At these prices, Apple is a large-cap value stock.

So why are large-cap value stocks a great investment these days?
Not because these stocks are certain to outperform the other categories under all circumstances, but because they present the ideal trade-off between risk and reward in these troubling times.

While there's a good chance that the economy will start showing signs of life sometime in 2009, there's a possibility that things will get even worse. When you're betting your retirement, you should own businesses that can survive the worst-case scenario.

Low risk, high reward
Generally, large-cap stocks fit that criterion. They have the most stable cash flows, the most well known brands, the greatest economies of scale, and the best chance of recovering from mistakes.

Would you put your money on Coca-Cola (NYSE: KO) to withstand a depression, or Jones Soda (Nasdaq: JSDA)? Would you bet on CVS (NYSE: CVS), or Rite-Aid (NYSE: RAD)? These two examples may be somewhat hyperbolic, but it's absolutely true that powerhouses like Coke and CVS are far more likely to survive than companies with smaller moats because they have the financial clout, the economies of scale, and the proven, winning business models.

In normal times, you'd really have to pay up for these sorts of dominant companies. But thanks to forced selling from investors struggling to raise cash, right now you can buy some excellent businesses extremely cheaply.

The S&P 500 is trading at just over 12 times 2009 earnings estimates, its lowest earnings multiple since the 1980s. What's more, due to the poor economy, the earnings of these powerhouse companies will be depressed in 2009, which means that the normalized earnings multiple is even more compelling. Large-cap stocks are extremely cheap, and I believe will offer superior returns over the next few years.

The Foolish bottom line
Of course, you still have to be careful -- as 2008 has shown us, you can't just throw a dart at the S&P 500 and expect to avoid a blow-up. You still need to pay attention to balance sheets and how much cash companies are bringing in during these troubling times.

But if you're alert, you can find the stocks right now that will pay for your retirement. So, now is a good time to start buying large-cap value stocks.

This article was originally published on January 8, 2009. It has been updated.

Fool contributor Richard Gibbons knows all too well the pain of becoming a steer. He doesn't own shares of any companies mentioned in this article. Apple is a Motley Fool Stock Advisor recommendation. Coca-Cola is an Inside Value pick. Bank of America is a former Income Investor choice. The Fool's disclosure policy wears a large cap to avoid sunburn.

http://www.fool.com/investing/value/2009/02/12/your-best-chance-to-profit-in-2009.aspx?source=iflfollnk0000001

Investments for a Recession

Investments for a Recession
By Selena Maranjian February 12, 2009 Comments (2)


Are you ready for a prolonged recession, a downturn in the stock market and economy? What can you do to prepare for it? Well, a bunch of things. One strategy that has received a lot of attention lately is investment in exchange-traded funds (ETFs), which focus on stocks outside the U.S. and on "defensive," or recession-resistant, industries.

Global ETFs
There are a variety of ETFs that invest globally. For instance, the Vanguard All World ex-US (VEU) ETF has half of its assets in Europe and another third in Asia. Of course, foreign companies and economies are still affected by what happens in the U.S., so you won't completely avoid the effects of the current recession. But with more than 2,000 holdings, including Nokia (NYSE: NOK), Toyota Motors (NYSE: TM), and BP (NYSE: BP), you'll at least get plenty of diversification.

One area many people think of as a defensive industry is the consumer-staples sector. Many companies in the sector, such as Procter & Gamble (NYSE: PG), Altria (NYSE: MO), and Coca-Cola (NYSE: KO), are often thought to be as close to recession-proof as you can get. Still, don't expect miracles. Inflation and the rising cost of raw materials can put pressure on these companies' profits, too.

Looking for income
Dividend stocks are another place to turn when you have recession on your mind. The iShares Dow Jones Select Dividend Index (DVY) ETF can help you out. It offers bits of about 100 dividend payers, such as Merck (NYSE: MRK), for the price of one. Many of these companies tend to be in defensive industries, such as the aforementioned consumer staples, pharmaceuticals, and utilities, although some are also in the recently beleaguered financial sector. This ETF's yield is almost 7%.

Putting some bonds in your portfolio can add a healthy dose of diversification, too. Some municipal bonds currently yield more than comparable Treasury bonds do, even though they pay tax-free income. But remember that in the long run, stocks have usually trounced bonds, so don't go nutty with them unless you're in or nearing retirement. And be especially careful of esoteric securities like emerging-market debt, because the risks can be extremely high.

Keep in mind
Of course, safety in a recession involves more than just having the right investment mix (and I wouldn't even argue with those who advise not changing your mix at all, but just sticking with your convictions and waiting out the recession). For example, you should also:
Have an emergency fund in which you aim to keep between three and six months' worth of living expenses in short-term investments. These can be critical if you suddenly lose your job (hey, it happens, and more often in a recession) or encounter other unexpected big-ticket expenses (an operation or a new roof). Get more guidance in our savings area.

Develop a healthy perspective on recessions.
Welcome them, because they tend to bring bargains in the stock market. While others panic and sell, review your watch list regularly with a box of tissues nearby to help contain your drooling.

Learn more in these articles:
An Opportunity We Haven't Seen in 50 Years
The Best Stock to Own
The 10 Best Dividend Stocks of the Past Decade

http://www.fool.com/investing/dividends-income/2009/02/12/investments-for-a-recession.aspx

Wall Street IB: 12 months losses exceeded last 25 years profits

Speaking at the World Economic Forum in Davos, Switzerland a few weeks ago, Russian Prime Minister Vladimir Putin declared he would break from the recent pastime of blaming America for the world's economic struggles.

"Virtually every speech on this subject [has] started with criticism of the United States. But I will do nothing of the kind. … I just want to remind you that, just a year ago, American delegates speaking from this rostrum emphasized the U.S. economy's fundamental stability and its cloudless prospects. Today, investment banks, the pride of Wall Street, have virtually ceased to exist. In just 12 months, they have posted losses exceeding the profits they made in the last 25 years."

http://www.fool.com/investing/international/2009/02/12/why-russia-is-collapsing.aspx?source=iedsitmrc0000001

Permanent loss of capital vs. stock price drop

7 Stocks That Could Cause Permanent Losses
By Alex Dumortier, CFA
February 12, 2009 Comments (1)

In a recent research note to clients, Societe Generale investment strategist James Montier identified 42 stocks worldwide that he believes threaten investors with a permanent loss of capital.

So what?
Montier is not your run-of-the mill investment strategist, which is one of the reasons I follow him. For instance, he once published a research note on the psychology of happiness with 10 suggestions, including the following: "Have sex (preferably with someone you love)."

Don't be fooled by this unorthodox style, though. Montier is no charlatan -- he's an expert on behavioral finance, and his work is steeped in the no-nonsense principles of value investing, as laid out by legendary teacher-investor Ben Graham.

In other words, it's worth your time and money to listen to what he has to say -- particularly on a matter as serious as preserving your assets.

Permanent loss of capital vs. stock price drop
First, let me emphasize what value investors refer to by a permanent loss of capital. Whether stock losses are permanent can be determined only if you have a notion of the stock's intrinsic value. Two sets of circumstances can result in permanent loss:

1. Either your cost basis was materially higher than the intrinsic value, or
2. the intrinsic value itself has declined.
   

It's vital to understand that a drop in stock price does not cause a permanent loss of capital. Rather, if there is a mismatch between price and intrinsic value, there will be a downward adjustment in the stock price -- don't confuse cause and effect. Furthermore, not all stock-price drops are the product of latent permanent losses -- they may have other causes, such as forced selling and investor irrationality.

The trinity of risks
Now that we know what it is we are trying to avoid, let's focus on the three factors Montier refers to as the "trinity of risks" that can produce such losses:

1. Valuation risk: If earnings are at a cyclical high, the current P/E may be masking an overvalued stock. Montier uses an adjusted P/E ratio that replaces current earnings per share (EPS) in the denominator with a 10-year average EPS. This approach smooths out the effect of earnings volatility and comes straight from the Ben Graham playbook. When screening for danger, Montier looks for stocks that have an adjusted P/E ratio of greater than 16.

2. Balance sheet / financial risk: Excessive leverage can put a company into bankruptcy, no matter how sound the underlying business. Investors need to be particularly sensitive to financial risk in an environment that combines a contracting economy and tight credit.

The Z-Score is a statistical indicator of bankruptcy risk developed by Edward Altman of NYU. Montier's screen identifies companies with a Z-score below 1.8, the "distressed" range in which companies run a significant risk of bankruptcy.

3. Business / earnings risk: If current earnings are significantly higher than their recent historical average, investors may extrapolate future earnings from an inflated base and award the stock a valuation it doesn't deserve. This risk is exacerbated at the tail of a bubble. Montier looks for companies with current earnings per share that are double or more the 10-year average.

Using Montier's three criteria, I ran a screen and came up with 19 mid- and large-cap U.S. stocks. The following table contains seven of them:

Stock
Adjusted Price/ Earnings Ratio*
Z-Score
Current EPS/ 10-year Average EPS*

Wynn Resorts (Nasdaq: WYNN)
73.3
1.32
5.8

CME Group (Nasdaq: CME)
29.9
0.69
2.6

XTO Energy (NYSE: XTO)
26.4
1.44
2.6

Transocean (NYSE: RIG)
26.2
1.74
6.9

Williams (NYSE: WMB)
24.0
1.20
2.5

NYSE Euronext (NYSE: NYX)
18.5
1.39
2.6

Norfolk Southern
17.5
1.79
2.11


*Note that, in certain cases, the average earnings were calculated over fewer than 10 years for lack of data. Source: Capital IQ, a division of Standard & Poor's, as of Feb. 3, 2009.


A couple of surprise guests
I was surprised to find exchange operators CME Group and NYSE Euronext on the list, as theirs is a sector I find attractive right now. Perhaps this illustrates one of the limitations of mechanically screening by adjusted P/E and comparing current earnings to the 10-year average: It doesn't allow you to distinguish between secular increases (or declines) in earnings and cyclicality. Both companies became publicly traded within the past 10 years, so their focus on profit growth is boosted.

Here's an extreme example: Google's (Nasdaq: GOOG) earnings per share have, on average, doubled every year over the past five years; in this instance, it's pretty clear that using the 10-year average EPS to calculate the P/E would actually muddy the waters. An average earnings figure calculated over a period of strong growth is inadequate to describe the company's true earnings power at the end of the period.

Safety first
All the same, the results should give investors pause -- the other companies in the table are clearly cyclical, particularly those in the energy sector (Transocean, XTO Energy, and Williams). Cyclical or not, if you own any of the stocks in the table, it may be worth revisiting your analysis in light of these results.

James Montier's methodology is an excellent illustration of the way value investors think about avoiding permanent losses. The team at Motley Fool Inside Value follows the same principles to help their members sidestep sinkholes and invest in well-run, well-capitalized businesses trading at cheap prices.

Fool contributor Alex Dumortier, CFA, has no beneficial interest in any of the companies mentioned in this article. Google and NYSE Euronext are Motley Fool Rule Breakers picks. The Motley Fool has a disclosure policy.

http://www.fool.com/investing/value/2009/02/12/7-stocks-that-could-cause-permanent-losses.aspx

Follow the leader? Insight into insider stock buys

Follow the leader? Insight into insider stock buys
Insider purchases and sales noteworthy milestones but no road map to investing success
Dave Carpenter, AP Personal Finance Writer
Wednesday February 11, 2009, 5:21 pm EST


Yahoo! Buzz Print CHICAGO (AP) -- When a top executive buys or sells shares of his company in great number, it could be a telltale signal of what lies ahead for all investors.

But be careful before you follow in a CEO's footsteps. Knowing how much stock to put into an insider's actions, literally and figuratively, is a tricky business.

"The most important aspect that the lay investor should keep in mind is that it is a first screen," said Jonathan Moreland, director of research at InsiderInsights.com. Despite that caveat, though, "it's the best one that I know of," he added.

Assessing insider transactions is a lot more useful as an investing tool than it used to be.

That's because a publicly traded company's officers, directors and anyone who owns more than 10 percent of the shares is required to report any purchases or sales of their company's stock to the U.S. Securities and Exchange Commission within two business days. This means they can be quickly digested by investors checking the SEC Web site and any number of financial sites such as Yahoo Finance and MSN Money.

Until corporate scandals including Enron and WorldCom prompted reforms in 2002, companies had up to 41 days after transactions were made to report. Fortunes have been made or lost in less time.

The latest high-profile insider purchase to draw attention in a down market is that of Bank of America Corp. chief executive Ken Lewis, who spent more than $2 million buying 400,000 shares of his struggling bank in late January and early February.

So far, so good. Bank of America shares climbed back above $6 on Wednesday, well above Lewis' purchase price of about $5.40 per share.

These stories frequently have unhappy endings, though, for investors who try to emulate an insider's buys.

Take the case of Krispy Kreme Doughnuts Inc. Two days after the company reported its first-ever loss in May 2004, CEO Scott Livengood bought 24,000 shares at $20.77 in an apparent show of confidence. His total cost: More than $498,000, almost equivalent to a year of his salary.

Some investors believed that was a promising sign of better things to come, at a time when overexpansion and changing dietary habits had both hurt results and the stock price had been cut in half in a matter of months.

But if you bet dollars to doughnuts on it being a strong buy signal, you'd have been very wrong. Eight months of continuously bad news followed -- including plunging profits, a federal securities investigation and allegations of corporate deceit -- Livengood was out as CEO and the stock price was under $9. Today each share is worth just over $1.

Similarly, Dell Inc. CEO Michael Dell bought $100 million of the computer maker's stock last September.

Talk about bad timing. The shares lost more than half their value in 10 weeks during the market meltdown. As of this week Michael Dell had lost $55 million on the investment.

A wildly unpredictable economy like this one, in other words, makes it even harder to interpret the significance of insider transactions.

"When you see an executive put large sums of money on the line, clearly that's a signal that he feels very confident," said Jason O'Donnell, a senior research analyst with Boenning & Scattergood Inc. in West Conshohocken, Pa. "But that doesn't necessarily mean that the stock's going to go up."

While it's hard to imagine that a $100 million stock purchase like Dell's was simply window dressing or a statement to investors, it's possible that smaller purchases could be aimed largely at drumming up more buying.

Vita Nelson, editor and publisher of The MoneyPaper, a Rye, N.Y.-based financial newsletter, says executives could be playing off the widespread notion that insiders have an early read on where the company is going.

"They may hope that the publicity of their having bought will have a positive effect on the direction of the market price," she said.

Other reasons to be wary of insider purchases: They could be happening because of company requirements that require C-level executives to own a certain amount of shares. They could have been made with company loans -- check the company's SEC filings. Or the executives could just be putting company-awarded stock options to work, which would signify less of a personal commitment.

Savvy investors will view a CEO's big buy in context.

Lewis, for example, made more than $20 million in 2007, so a $2 million purchase was the equivalent of roughly a month's pay -- substantial but not exactly betting the ranch. On the other hand, he was joined by more than a dozen Bank of America officers and directors who made large purchases at the same time -- a collective vote of confidence rather than an individual one.

Insider sales should be viewed with similar caution. An investor's instinct when a top executive sells thousands of shares would be that the stock price is heading lower and it's time to follow suit. But the executive could also be selling because she needs the cash for personal reasons.

One good overall indicator is how much of a stake insiders have in their companies. In general, the more shares they own, the better for investors. So if they are selling large percentages of their overall holdings, that could be a stronger signal to jump ship.

But don't drive yourself crazy trying to assess the meaning of a big transaction if the evidence seems mixed. It's best not to view insider moves in isolation, advises Wayne Thorp, a financial analyst for the American Association of Individual Investors in Chicago.

"You're building a mosaic to decide whether you want to be invested in a company," said Thorp. "This is just one piece of the puzzle."

Securities and Exchange Commission http://www.sec.gov

http://finance.yahoo.com/news/Follow-the-leader-Insight-apf-14325813.html;_ylt=AuU4A5xCJXZ4MquWq6DJEaC7YWsA

Investing for income: 'By any measure, these yields look enticing'

Investing for income: 'By any measure, these yields look enticing'
As interest rates fall towards zero, equity income funds and bonds could be better bet than cash.

By Kara Gammell
Last Updated: 3:32PM GMT 11 Feb 2009

The rate cut last week left many savers receiving virtually nothing from their capital. But for savers willing to take a bit of risk, there are ways to generate a decent income.

Darius McDermott, managing director of Chelsea Financial Servies, said: "By any historic measure, equity and bond fund yields are looking enticing – not to mention discounts on investment trusts.

"There are serious dangers, namely the worsening economic picture and the state of the banking system which will affect capital growth – but attractive income payments should soften the blow to investors somewhat while we await a pickup in markets."

James Davies, investment research manager at Chartwell, said: "As long as investors are prepared to hold investments for the medium to long term and are comfortable with a degree of capital volatility, now is the right time to be turning to market-linked investments to meet your income."

Drawing income from cash accounts is looking less and less attractive – particularly when you factor in tax and inflation, said Mr McDermott.

Mark Dampier, head of research at independent financial advisers Hargreaves Lansdown, offered a warning for return-hungry investors: "Take great care and always understand exactly what you are buying. While a 1 per cent interest rate may be poor, other asset classes have capital risk. Don't forget that the general rule is the higher the yield the bigger the risk."

For investors who want to look at equity income, Mr Dampier advised funds such as Invesco Perpetual Income, Artemis Income, Threadneedle Alpha Income and Psigma Income. "Also, consider overseas income funds like Argonaut European Income, which has a good yield of 6 per cent," he added.

Equity income funds invest in the shares of companies which pay good dividends. Mr McDermott suggested Schroder Income Maximiser, which has a yield of 7 per cent.

Corporate debt, although far more risky than lending money to the Government by buying gilts, is another area where income can be high. These bonds are IOUs issued by companies and are graded according to the likelihood of the issuer defaulting on debts.

Mr Dampier recommended buying a selection of bonds, which is easiest in a fund. "Try Jupiter Corporate Bond, M&G Optimal Income, Investec Sterling Bond and Invesco Perpetual Corporate Bond," he said.

Mr McDermott suggested Henderson Strategic corporate bond, with a yield of 8.4 per cent. Jupiter yields 5.1 per cent, M&G yields 6.9 per cent, Investec Sterling yields 5.9 per cent and Invesco Perpetual yields 6.4 per cent.

Nick Raynor, investment adviser at The Share Centre, said: "More people are looking at shares because of poor returns from savings accounts." Mr Raynor tipped Vodafone. "With a yield of over 5 per cent, Vodafone has just published very good figures."

For a quarterly dividend, Mr Raynor suggested BP, which pays 6.5 per cent, and National Grid and GlaxoSmithKline, which pay 5.2 per cent and 4.4 per cent respectively. "These companies sell things that the population can't do without, which means there is always room for growth."

http://www.telegraph.co.uk/finance/personalfinance/investing/4582273/Investing-for-income-By-any-measure-these-yields-look-enticing.html

Savers are going to bear the brunt of the Bank of England's attempts to revive the economy

Mervyn King suggests savers will be sacrificed as rates fall
Savers are going to bear the brunt of the Bank of England's attempts to revive the economy, the Bank of England Governor Mervyn King has warned.

By Myra Butterworth and Edmund Conway
Last Updated: 4:35PM GMT 11 Feb 2009

Comments 27 Comment on this article

Mr King expressed sympathy for savers, but indicated that they will be sacrificed as interest rates are cut further in a bid to revive the economy.

He said: "I have every sympathy with savers – they are certainly not responsible for the current difficulties – but suppose we were to put up interest rates?

"That might benefit savers in the short run, but is anyone seriously suggesting that would help the British economy get through the recession? No. We have to take action to increase the supply of money in the economy, to increase spending in the short run, in order to dampen the strength of the recession."

The Bank of England is widely expected to reduce rates to zero per cent at its next meetings in March or April.

Mr King explained: "Given that we are in such a deep recession in the short run, I think that if we were not to take measures to stimulate the economy, then savers would find they are actually much worse off – there would be even higher unemployment and even more of a downturn in the economy. That is the paradox of policy."

The Bank of England has cut the Bank Rate from 5 per cent to just 1 per cent in the past five months – and high street banks have responded by reducing the rates they offer savers.

Savings rates are now at their lowest ever level, according to the Bank of England's own records, with notice accounts offering an average of just 0.29 per cent and cash individual savings accounts (Isas) paying an average rate of 1.38 per cent.

Financial experts and charities warned lower rates will bring further misery to savers this year.

Sean Gardner, of the personal finance website MoneyExpert.com, said: "The Bank of England has tried to jump start the economy by slashing interest rates to previously unheard of lows. But these efforts come at a price and it's savers who have been sacrificed.

"Savers outnumber borrowers seven to one and it's the returns on their hard earned cash that will be crushed every day that the base rate stays so low."

Rebecca Ward, of the poverty charity Elizabeth Finn Care, said: "The latest interest rate reduction is a further kick in the teeth for people on low incomes who are struggling to eke out from their savings a life beyond mere subsistence survival."

Mr King's comments come as The Daily Telegraph calls for pensioners to be given a tax cut on the income earned from their savings and investments through its Justice for Pensioners campaign.

The Chancellor, Alistair Darling, has said he will look at measures to help these savers in the Budget, due in March or April.

Phil Jones, personal finance campaigner at consumer group Which?, said: "We've seen some very worrying data and savers will be very concerned. Banks cannot have their cake and eat it: if banks are not passing on cuts to borrowers they should not be passing on cuts to savers."

http://www.telegraph.co.uk/finance/personalfinance/savings/4592271/Mervyn-King-suggests-savers-will-be-sacrificed-as-rates-fall.html

European bank bail-out could push EU into crisis

European bank bail-out could push EU into crisis
A bail-out of the toxic assets held by European banks' could plunge the European Union into crisis, according to a confidential Brussels document.

By Bruno Waterfield in Brussels
Last Updated: 3:50PM GMT 11 Feb 2009

“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned.

"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”

The secret 17-page paper was discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday.

National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

The Commission figure is significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.

In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart.

“Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance,” the EC paper warned.


http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4590512/European-banks-may-need-16.3-trillion-bail-out-EC-dcoument-warns.html

Why Do Companies Care About Their Stock Prices?

Why Do Companies Care About Their Stock Prices?
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)

Here's the irony of the situation: companies live and die by their stock price, yet for the most part they don't actively participate in trading their stocks within the market. Companies receive money from the securities market only when they first sell a security to the public in the primary market, which is commonly referred to as an initial public offering (IPO). In the subsequent trading of these shares on the secondary market (what most refer to as "the stock market"), it is the regular investors buying and selling the stock who benefit from any appreciation in stock price. Fluctuating prices are translated into gains or losses for these investors as they shift ownership of stock. Individual traders receive the full capital gain or loss after transaction costs.

The original company that issues the stock does not participate in any profits or losses resulting from these transactions because this company has no vested monetary interest. This is what confuses many people.

Why then does a company, or more specifically its management, care about a stock's performance in the secondary market when this company has already received its money in the IPO? Read on to find out.

Those in Management are Often Shareholders Too
The first and most obvious reason why those in management care about the stock market is that they typically have a monetary interest in the company. It's not unusual for the founder of a public company to own a significant number the outstanding shares, and it's also not unusual for the management of a company to have salary incentives or stock options tied to the company's stock prices. For these two reasons, management acts as stockholders and thus pay attention to their stock price.

Wrath of the Shareholders
Too often investors forget that stock means ownership. The job of management is to produce gains for the shareholders. Although a manager has little or no control of share price in the short run, poor stock performance could, over the long run, be attributed to mismanagement of the company. If the stock price consistently underperforms the shareholders' expectations, the shareholders are going to be unhappy with the management and look for changes. In extreme cases shareholders can band together and try to oust current management in a proxy fight. To what extent shareholders can control management is debatable. Nevertheless, executives must always factor in the desires of shareholders since these shareholders are part owners of the company.

Financing
Another main role of the stock market is to act as a barometer for financial health. Analysts are constantly scrutinizing companies and reflecting this information onto its traded securities. Because of this, creditors tend to look favorably upon companies whose shares are performing strongly. This preferential treatment is in part due to the tie between a company's earnings and its share price. Over the long term, strong earnings are a good indication that the company will be able to meet debt requirements. As a result, the company will receive cheaper financing through a lower interest rate, which in turn increases the amount of value returned from a capital project.

Alternatively, favorable market performance is useful for a company seeking additional equity financing. If there is demand, a company can always sell more shares to the public to raise money. Essentially this is like printing money, and it isn't bad for the company as long as it doesn't dilute its existing share base too much, in which case issuing more shares can have horrible consequences for existing shareholders.

The Hunters and the Hunted
Unlike private companies, publicly traded companies stand vulnerable to takeover by another company if they allow their share price to decline substantially. This exposure is a result of the nature of ownership in the company. Private companies are usually managed by the owners themselves, and the shares are closely held. If private owners don't want to sell, the company cannot be taken over. Publicly-traded companies, on the other hand, have shares distributed over a large base of owners who can easily sell at any time. To accumulate shares for the purpose of takeover, potential bidders are better able to make offers to shareholders when they are trading at lower prices.

For this reason, companies would want their stock price to remain relatively stable, so that they remain strong and deter interested corporations from taking them.On the other side of the takeover equation, a company with a hot stock has a great advantage when looking to buy other companies. Instead of having to buy with cash, a company will simply issue more shares to fund the takeover. In strong markets this is extremely common - so much that a strong stock price is a matter of survival in competitive industries.

Ego
Finally, a company may aim to increase share simply to increase their prestige and exposure to the public. Managers are human too, and like anybody they are always thinking ahead to their next job. The larger the market capitalization of a company, the more analyst coverage the company will receive. Essentially, analyst coverage is a form of free publicity advertising and allows both senior managers and the company itself to introduce themselves to a wider audience.

For these reasons, a company's stock price is a matter of concern. If performance of their stock is ignored, the life of the company and its management may be threatened with adverse consequences, such as the unhappiness of individual investors and future difficulties in raising capital.

by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.

http://www.investopedia.com/articles/basics/03/020703.asp?partner=NTU2