Warren Buffett's Berkshire Hathaway Cuts Johnson & Johnson Stake By Half

Tuesday, 17 Feb 2009
Warren Buffett's Berkshire Hathaway Cuts Johnson & Johnson Stake By Half

Posted By: Alex Crippen
Topics:Warren Buffett
Companies:Wesco Financial Corp Wellpoint Inc Washington Post Company Wal-Mart Stores Inc United Parcel Service Inc Union Pacific Corp USG Corporation Torchmark Corp Suntrust Preferred Capital I Sanofi-Aventis SA Norfolk Southern Corp Nike Inc Moody's Corp M & T Bank Corp Lowe's Companies Inc Kraft Foods Inc. Iron Mountain Incorporated Home Depot Inc General Electric Gannett Inc Costco Wholesale Corporation Comcast Corp Coca Cola Co Bank of America Corp American Express Co Wells Fargo and Co Unitedhealth Group Inc Burlington Northern Santa Fe Corp NRG Energy, Inc. Ingersoll-Rand Co Ltd Eaton Corp US Bancorp Procter & Gamble Co CARMAX INC Conocophillips Nalco Holding Company Johnson and Johnson Berkshire Hathaway Inc.

Warren Buffett's Berkshire Hathaway has just released its fourth quarter stock portfolio snapshot.
Instead of asking what Buffett has been buying, we should have been wondering what Buffett has been selling.
Most notably, Berkshire slashed its holdings in Johnson and Johnson to just 28.6 million shares as of December 31. That's a drop of almost 54 percent. It had reported holding 61.8 million shares as of the end of the third quarter on September 30.
That brings Berkshire's stake in J&J down to just under 4 percent from almost 8 percent.

RELATED LINKS
Cramer: Buffett 'Selling America'
Cramer: Don't Follow Buffett this Time
Market Tips: Defensive Plays are Passé, Expensive

Johnson and Johnson's shares price fell almost 18 percent during the fourth quarter. We don't know whether Buffett avoided any or all of that drop since the filing doesn't say when the shares were sold. We do know that the stock is down another 6.4 percent year-to-date, a drop that Berkshire has avoided on the 33.2 million shares sold. Based on their December 31 close, those 33 million shares were worth about $2 billion.

Berkshire also made a sizable cut in its holdings of another healthcare company, Procter & Gamble [PG 50.25 -0.88 (-1.72%) ]. That stake fell 9 percent to 96.3 million shares from 105.8 million.

Berkshire's smaller cuts in Q4:

ConocoPhillips [COP 39.44 -2.35 (-5.62%) ] fell 4.8 percent to 79.9 million shares

CarMax [KMX 8.73 0.10 (+1.16%) ] dropped 4.4 percent to 17.6 million shares

US Bancorp [USB 10.58 -0.30 (-2.76%) ] reduced by 7.4 percent to 67.6 million shares

Buffett wasn't just selling in the fourth quarter. Berkshire increased these holdings:

NRG Energy [IR 15.83 -0.22 (-1.37%) ] soared 44 percent to 7.2 million shares

Ingersoll-Rand [IR 15.83 -0.22 (-1.37%) ] increased by 38.1 percent to 7.8 million shares

Eaton [ETN 40.28 -0.44 (-1.08%) ] jumped by 10 percent to 3.2 million shares


And there's one new stake: about 8.7 million shares of Nalco Holding. [NLC 11.31 -0.29 (-2.5%) ]

On its web site, the company describes itself as "the leading integrated water treatment and process improvement company in the world."

At today's closing price of $11.06, the Nalco stake is worth just $96 million. (The stock is getting a 6 percent boost in after-hours trading.)

And Buffett is holding tight on his big financial holdings, including stakes in American Express [AXP 12.97 0.10 (+0.78%) ] and Wells Fargo [WFC 10.91 -1.10 (-9.16%) ].

Overall, the dollar value of Berkshire's disclosed stock portfolio fell 25.8 percent to just under $52 billion as of December 31, down from almost $70 billion on September 30.
Our Berkshire Hathaway Portfolio Tracker shows the portfolio holdings as of December 31 are worth $41.4 billion, using today's closing prices

So what happened to Buffett's high-profile call last October to buy U.S. stocks?

He said then he was buying domestic equities for his personal account. Apparently he felt Berkshire's money could be put to better use elsewhere. One alternative we know about are Berkshire high-interest rate loans to well-known companies facing tough times, such as Tiffany, Swiss Re, Harley-Davidson, Goldman Sachs, and General Electric.

Bloomberg quotes Buffett-style investor Mohnish Pabrai as saying before the portfolio filing, "Buffett has shown a preference over the past couple years toward buying whole companies, the debt markets or other private deals."
That's certainly evident in today's filing.

Here are the details from tonight's Berkshire Hathaway portfolio snapshot as of December 31, compared to the filing for September 30.

ADDED STAKES
Constellation Energy added at 19,894,322 shares. Berkshire obtained these shares in mid-December as part of its break-up fee after Constellation agreed to be acquired by Électricitié de France and canceled its tentative deal with Berkshire's MidAmerican Energy Holdings. Subsequent filings show that Berkshire sold over five million shares in January and early February, bringing its holdings down to 14,831,107 shares as of February 6.
[CEG 21.60 -1.22 (-5.35%) ]

Nalco Holding added at 8,739,100 shares.
[NLC 11.31 -0.29 (-2.5%) ]


INCREASED STAKES

Burlington Northern increased 9.9% to 70,089,829 shares from 63,785,418 shares.
(Berkshire reported holding 76,777,029 shares as of January 30.)
[BNI 61.84 0.07 (+0.11%) ]

Eaton Corp. stake increased 10.0% to 3,200,000 shares from 2,908,700 shares. Eaton was a new holding as of the end of the third quarter.
[ETN 40.28 -0.44 (-1.08%) ]

Ingersoll-Rand stake increased 38.1% to 7,782,600 shares from 5,636,600 shares.
[IR 15.83 -0.22 (-1.37%) ]

NRG Energy stake increased 44.0% to 7,200,000 shares from 5,000,000 shares. The stake was also up in the third quarter, increasing by 54.4%.
[NRG 19.80 -0.12 (-0.6%) ]


DECREASED STAKES

Carmax stake decreased 4.4% to 17,636,500 shares from 18,444,100 shares from 21,300,000 shares.
[KMX 8.73 0.10 (+1.16%) ]

ConocoPhillips stake decreased 4.8% to 79,896,273 shares from 59,688,000 shares.
[COP 39.44 -2.35 (-5.62%) ]

Johnson & Johnson stake decreased 53.7% to 28,611,591 shares from 61,754,448 shares.
[JNJ 54.65 -1.28 (-2.29%) ]

Procter & Gamble stake decreased 9.0% to 9,530,990 shares from 105,847,000 shares.
[PG 50.25 -0.88 (-1.72%) ]

US Bancorp stake decreased 7.4% to 67,551,426 shares from 72,937,126 shares. [USB 10.58 -0.30 (-2.76%) ]

UnitedHealth Group stake decreased 1.3% to 6,300,000 shares from 6,379,900 shares. [UNH 27.98 -0.67 (-2.34%) ]

Wells Fargo stake decreased 0.1% to 290,244,868 shares from 290,407,668 shares. [WFC 10.91 -1.10 (-9.16%) ]


UNCHANGED STAKES

American Express unchanged at 151,610,700 shares.
[AXP 12.97 0.10 (+0.78%) ]

Bank of America unchanged at 5,000,000 shares. The stake had dropped 45.1% in the third quarter.
[BAC 3.79 -0.14 (-3.56%) ]

Coca-Cola unchanged at 200,000,000 shares.
[KO 42.84 -0.46 (-1.06%) ]

Comcast unchanged at 12,000,000 shares.
[CMCSA 12.84 -0.15 (-1.15%) ]

Comdisco unchanged at 1,538,377 shares.
[CDCO 7.60 0.10 (+1.33%) ]

Costco Wholesale unchanged at 5,254,000 shares.
[COST 42.76 0.14 (+0.33%) ]

Gannett unchanged at 3,447,600 shares.
[GCI 3.70 -0.16 (-4.15%) ]

General Electric unchanged at 7,777,900 shares.
[GE 9.38 -0.68 (-6.76%) ]

GlaxoSmithKline unchanged at 1,510,500 shares.
[GSK 32.55 -0.77 (-2.31%) ]

Home Depot unchanged at 3,700,000 shares.
[HD 19.46 -0.70 (-3.47%) ]

Iron Mountain unchanged at 3,372,200 shares.
[IRM 19.89 0.07 (+0.35%) ]

Kraft Foods unchanged at 138,272,500 shares.
[KFT 23.51 -0.82 (-3.37%) ]

Lowes Companies unchanged at 6,500,000 shares.
[LOW 15.86 -1.12 (-6.6%) ]

M&T Bank unchanged at 6,715,060 shares.
[MTB 35.10 1.80 (+5.41%) ]

Moody's unchanged at 48,000,000 shares.
[MCO 19.16 -2.91 (-13.19%) ]

Nike unchanged at 7,641,000 shares.
[NKE 42.93 0.12 (+0.28%) ]

Norfolk Southern unchanged at 1,933,000 shares.
[NSC 33.97 -0.07 (-0.21%) ]

Sanofi Aventis unchanged at 3,903,933 shares.
[SNY 28.25 -0.58 (-2.01%) ]

SunTrust Banks unchanged at 3,204,600 shares.
[STI 7.35 0.65 (+9.7%) ]

Torchmark unchanged at 2,823,879 shares.
[TMK 22.07 -2.86 (-11.47%) ]

USG unchanged at 17,072,192 shares.
[USG 5.63 -0.25 (-4.25%) ]

Union Pacific unchanged at 8,906,000 shares.
[UNP 40.03 0.80 (+2.04%) ]

United Parcel Service unchanged at 1,429,200 shares.
[UPS 42.80 -0.13 (-0.3%) ]

Wabco Holdings unchanged at 2,700,000 shares.
[WBC 10.66 -0.21 (-1.93%) ]

Wal-Mart Stores unchanged at 19,944,300 shares.
[WMT 50.02 -0.43 (-0.85%) ]

Washington Post unchanged at 1,727,765 shares.
[WPO 390.30 -1.20 (-0.31%) ]

Wellpoint stake unchanged at 4,777,300 shares.
[WLP 41.45 0.19 (+0.46%) ]

Wesco Financial unchanged at 5,703,087 shares.
[WSC 265.00 -5.00 (-1.85%) ]

Current Berkshire stock prices:

Class A: [US;BRK.A 77000.0 -1600.00 (-2.04%) ]

Class B: [US;BRK.B 2387.0 -129.50 (-5.15%) ]

For more Buffett Watch updates follow alexcrippen on Twitter.

© 2009 CNBC, Inc. All Rights Reserved

http://www.cnbc.com/id/29242870

Why Warren Buffett Isn't a Hypocrite

Thursday, 19 Feb 2009
Why Warren Buffett Isn't a Hypocrite
Posted By: Alex Crippen

Topics:Investment Strategy Warren Buffett
Companies:Goldman Sachs Group Inc General Electric Procter & Gamble Co Johnson and Johnson Berkshire Hathaway Inc.

Warren Buffett is getting some heat from CNBC's Jim Cramer for Berkshire Hathaway's sales of big chunks of stock last fall, including billions of dollars worth of Johnson & Johnson.
On a CNBC Special Report Tuesday, Cramer advised investors not to follow Buffett's lead this time around.
Then Cramer wrote on his site, TheStreet.com, that Buffett was "selling America" even as he was writing an op-ed piece titled Buy American. I Am. for the New York Times.
Last night, on his Mad Money program, Cramer revisited Buffett as he listed what he sees as the 10 biggest myths and misperceptions in the market today.
Cramer is not only accusing Buffett of making bad decisions, he's implying that Buffett has been hypocritically ignoring his own public call in the Times to buy U.S. stocks, misleading all those investors who 'copy' Berkshire's buys and sells.
But there is another way of looking at it.
Buffett was clear in his Times piece that he was buying U.S. stocks for his personal account. For himself, and for many investors, he saw cheap equities as the best way to put cash to work.
But Berkshire has other opportunities to make money that simply aren't available to everyone else. Most notably it can become a lender of last resort to solid companies going through a difficult time, and it can collect a very hefty interest rate for those loans.
Last fall, Buffett wasn't "buying American" for Berkshire, but he was "loaning American." A total of eight billion dollars went to General Electric and Goldman Sachs. Those loans pay 10 percent a year, guaranteed. The major risk is a collapse of these enormous icons of American business, a risk small enough for Buffett to accept.
And those billions of dollars of loans may very well have come from stock sales. After all, Buffett always wants to have a base level of cash on hand and resists borrowing money to finance investments.
Even if Buffett thought Johnson & Johnson would ultimately generate a solid return, it seems unlikely to expect that return would be 10 percent a year.
Buffett is not just looking for good investments for Berkshire, he's looking for the best investments he can find, that carry as little risk as possible.
Loaning billions to GE and Goldman at 10 percent over a few years could easily be a better use of that money than letting it ride in the stock market. (It does imply that he saw the stocks he sold as less likely to move higher than other equities in the portfolio.)
Buffett does not encourage anyone to replicate his Berkshire investments. He wasn't necessarily trying to send a "sell" signal on J&J and P&G, or U.S. stocks in general.
He was probably raising money to take advantage of GE and Goldman's need for quick cash, an opportunity unique to Berkshire Hathaway.

Current stock prices:

Berkshire Class A: [US;BRK.A 77000.0 -1600.00 (-2.04%) ]

Berkshire Class B: [US;BRK.B 2387.0 -129.50 (-5.15%) ]

Johnson & Johnson: [JNJ 54.65 -1.28 (-2.29%) ]

Procter & Gamble:[PG 50.25 -0.88 (-1.72%) ]

General Electric:[GE 9.38 -0.68 (-6.76%) ]

Goldman Sachs:[GS 84.59 -1.42 (-1.65%) ]

For more Buffett Watch updates follow alexcrippen on Twitter.

Questions? Comments? Email me at buffettwatch@cnbc.com

http://www.cnbc.com//id/29282435

Jim Cramer is laying out his case against Warren Buffett's recent stock moves.

Wednesday, 18 Feb 2009
Jim Cramer "Struggles" With Warren Buffett's Stock Moves Because He's "Selling America"

Posted By: Alex Crippen

Topics:Investment Strategy Warren Buffett
Companies:US Bancorp Conocophillips Procter & Gamble Co Johnson and Johnson Berkshire Hathaway Inc.

CNBC's Mad Money host Jim Cramer is laying out his case against Warren Buffett's recent stock moves.
Last night (Tuesday), after Berkshire Hathaway's fourth quarter portfolio snapshot, Cramer warned on CNBC that investors should not follow Buffett's lead because they will not profit "within the time frame they care about." (Transcript and video clip are in the WBW post Jim Cramer Warns Investors: Don't Follow Warren Buffett This Time.)
This morning, on his TheStreet.com site, Cramer goes into greater detail, explaining why he's "struggling with some of the things that Warren Buffett is doing with his cash these days."
Cramer's prime complaint: Warren Buffett was "selling America" last fall when Berkshire reduced its stakes in Johnson & Johnson, Procter & Gamble, ConocoPhillips, and U.S. Bancorp. "What's more American than these stocks?" he asks. (The post notes that Cramer is currently long Johnson & Johnson and ConocoPhillips.)
Cramer draws a contrast with Buffett's "now-fated" October 16 New York Times op-ed piece that argued it was time to buy American stocks. Since then, the major market indexes have continued to plunge, so "those who bought America that day are feeling ... well, downright un-American. Or at least they're feeling poorer."
Cramer says that he is "sensitive" to that Times piece because at the same time he was advising an exit from stocks if investors needed to keep their money safe for a major purchase in the next year.
And he argues that while rich people can afford to buy for the long term as Buffett advises, everyone else can't.
"As long as Buffett was buying and not selling, or as long as he was at least holding, you couldn't knock him. But now it turns out he's putting a terminal value on something we thought we were to hold forever."
While Buffett is "obviously a tremendous investor" and "doesn't have to answer for anything," Cramer continues, "It is fair to say that many, many people relied on his judgment to buy stocks just like the quintessential American names of Procter & Gamble and Johnson & Johnson. To them, what can I say? 'Don't worry about it.'"
Cramer concludes that Buffett's "actions should be scrutinized just like anyone else's," so TheStreet.com is starting its own Buffett Watch. (He cites his friend Doug Kass, "who has been on this case for months now" and who has his own questions today about Berkshire's portfolio.)
"We need to know what's happening. Buffett's firm is too big, and he is too important to ignore. We need to know daily and some institution has to have the guts to do it. Glad it's us."

Current stock prices:

Berkshire Class A: [US;BRK.A 77000.0 -1600.00 (-2.04%) ]

Berkshire Class B: [US;BRK.B 2387.0 -129.50 (-5.15%) ]

Johnson & Johnson:[JNJ 54.65 -1.28 (-2.29%) ]

Procter & Gamble: [PG 50.25 -0.88 (-1.72%) ]

ConocoPhillips: [COP 39.44 -2.35 (-5.62%) ]

U.S. Bancorp: [USB 10.58 -0.30 (-2.76%) ]




For more Buffett Watch updates follow alexcrippen on Twitter.



http://www.cnbc.com/id/29258337/site/14081545


Comment:

Sounds familiar. Cramer vs Buffett, Moolah vs Teng Boo :)

When Will The Next Bull Market Begin?

DOW JONES INDU AVER...(.DJIA)
7365.67 -100.28 (-1.34%%)
Dow

Thursday, 19 Feb 2009
When Will The Next Bull Market Begin?
Posted By: Lee Brodie

When will the next bull market begin? Celebrated investor Doug Kass reveals his prediction to Fast Money -- and what he says just might surprise you!

As you might know Doug Kass is one of the Street's gloomier market prognosticators. But what you might not know is that in an article Kass penned for TheStreet.com called Fear and Loathing on Wall Street Kass wrote, “although it will likely take time for our country to turn around…..there are some early signs of stability/revival.”

That’s right, big bear Doug Kass thinks we might be in the earliest stages of recovery. We found the premise so intriguing that we invited him to join us on Fast Money to expand on his thesis.

Essentially he tells us that there's so much pessimism in the market that you should feel hopeful. Kass says, “as we move into the midway point of the second month of 2009, market participants generally now have the opposite point of view of 14 months ago.”

In other words bearish sentiment is widespread.

“It's so bad out there that some are questioning whether the world's economies will ever recover from the current mess. In doing so, they seem to be ignoring not only an emerging valuation opportunity but a number of events that should conspire to bring us out of the abyss.”

He thinks investors aren’t giving proper weight to the stimulus, the TARP, the foreclosure plan and whatever else the government may do to assuage the crisis. Typically we spend our way out of a recession and these spending initiatives are unprecedented. If the fundamentals of finance hold true, these programs should work.

“My sense is that we don't have to wait (too much longer) for a resumption of a new bull market as policy is going to be aggressive and immediate."

In a nutshell Kass thinks the economy could turn around as early as next year. “I expect (the recession), which began in November/December 2007, to end in early 2010, or about 12 months from now.”

Considering he’s a celebrated bear – and considering some of the dire predictions that are out there – that's not so bad. In fact, that's not so bad at all!

What’s the trade?

“I think you still have to tread carefully,” he tells us. But he also says he’s optimistic about growth in China. As a result he tells the traders to take a hard look at materials and oil services stocks such as Transocean [RIG 59.52 -0.10 (-0.17%) ] and Freeport McMoran [FCX 28.78 0.51 (+1.8%) ].

http://www.cnbc.com/id/29284507

Is Indonesia the country in the best shape in 2009?

Is Indonesia the country in the best shape in 2009?
Indonesia's friendly response to the visit by US Secretary of State Hillary Clinton is the country's latest piece of good news.

By Martin Hutchinson, breakingviews.com
Last Updated: 11:02AM GMT 20 Feb 2009

With GDP growth expected to be 3.5pc in 2009, Indonesia is also suffering only mildly from the downturn.

Elections this year seem likely to result in the continuation of current policies. Islamic, impoverished and with 238m people, Indonesia is surprisingly stable and successful: as its foreign minister said, a "good partner" for the US in the Muslim world.

Indonesia is close to self-sufficiency in oil, but no longer exports it, so it has escaped most of the buffeting from the rise and collapse in petroleum prices. Since its 1998 crisis, it has depended little on foreign direct investment, which peaked at only 2pc of GDP in 2007.

Hence the collapse of global investment flows has also affected it little.

Nevertheless as Indonesia has a GDP per capita of only $3,900, there's a lot that could go wrong. The fact that it hasn't, and that Indonesia seems poised to follow five years of roughly 6pc growth with another year of 3.5pc growth in the worst global recession since the 1930s is a tribute to the political and economic management of President Susilo Bambang Yudhoyono and his long-serving finance minister, Sri Mulyani Indrawati.

Sri Mulyani has proposed a stimulus package, in line with the popular global trend, but of only 1.4pc of GDP, which should not significantly upset Indonesia's budget balance. Legislative and presidential elections this year offer Indonesians the chance to reward the government's competence and polls suggest they are likely to do so.

As its foreign minister, Hassan Wirajuda, told Clinton, Indonesia, as a huge moderate Muslim country, can help the US greatly in reaching out to the Islamic world. It is a large, moderately capitalist country. And it has done well without enormous help from foreign investment, outside policy advice or raw material exports. Indonesia is also a fine economic example to its Islamic neighbours and others.

"Happy is the country that has no history," said Montesquieu. Happier still is the country that has no world-shaking news, other than Clinton's visit.

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

http://www.telegraph.co.uk/finance/breakingviewscom/4732842/Is-Indonesia-the-country-in-the-best-shape-in-2009.html

Nowhere Near End of Crisis: Dr. Doom

Nowhere Near End of Crisis: Dr. Doom
By: Reuters 20 Feb 2009

Nouriel Roubini, one of the few economists who foretold much of the current financial turmoil, Friday said the United States is nowhere near the end of the banking and credit crisis.

"We are still in the third and fourth innings," Roubini told Reuters in an interview, using a baseball analogy to drive home his view that the current cycle is only nearing its midpoint.

"And it's getting worse," said Roubini, a professor at New York University's Stern School of Business and chairman of RGE Monitor, an independent economic research firm.

On Feb. 10, Treasury Secretary Timothy Geithner unveiled his newest bailout plan for banks, including the government's so-called "stress tests" involving all banks with more than $100 billion in capital. Regulators will analyze the banks' books far more closely than previously to see if they have the capital to endure worsening conditions.

"It is the step to form an objective way to decide which banks are illiquid and which ones are insolvent and to take over the insolvent bank," Roubini said. "We have to take over some banks."

Bank of America [BAC 3.79 -0.14 (-3.56%) ] and Citigroup [C 1.95 -0.56 (-22.31%) ] shares plummeted for a sixth straight day Friday, hammered by fears that the U.S. government could nationalize the banks, wiping out shareholders.

Nationalization or receivership of a bank need not be a permanent issue, Roubini added.

"I think of it being a temporary measure -- take them over and clean them up and sell them back to the private sector," Roubini said. "No one is in favor of long-term government ownership of the banking system."

For example, IndyMac was bankrupt and taken over in July.

"Less than six months later the very same group of private investors was willing to buy back the assets and the deposits," he said.

"So it doesn't have to be under government control for years and years. You can do it actually relatively quickly."

All told, Roubini said he sees negative economic growth throughout 2009, predicting that the unemployment rate could reach roughly 10 percent in the next year.

http://www.cnbc.com/id/29301301

Some Insights from Berkshire's Latest 13-F Filing

Morningstar.com

Some Insights from Berkshire's Latest 13-F Filing

Thursday February 19, 1:00 pm ET
By Bill Bergman

Berkshire Hathaway (brk.b.B) (brk.a.B) recently filed its quarterly 13-F statement with the Securities and Exchange Commission. The filing revealed few significant changes in the composition of the firm's equity portfolio in the fourth quarter of 2008. The overall market value of the portfolio deteriorated sharply (about 25%) from the third quarter to the fourth quarter, which is not a surprise in light of market conditions. Together with estimated losses from Berkshire's equity put option positions (see the Stock Strategist article "Our Take on Berkshire's Equity Put Option Positions"), the firm's equity portfolio performance will likely contribute significant losses in the firm's upcoming report on fourth-quarter earnings. From a longer-term perspective, however, we see the recent and possible near-term future weakness in Berkshire's shares as a compelling investment opportunity.

Warren Buffett penned an op-ed piece in October 2008 in The New York Times titled "Buy American. I Am." One might question why Berkshire didn't pursue greater buying activity in the fourth quarter in light of that article, at least on the face of the 13-F filing. But it's worth noting that the firm has been quite active in taking senior equity positions in long-successful companies that have been hit relatively hard by the financial and economic crises. These large transactions required the application of much of Berkshire's previously massive cash position, and included stakes in preferred shares in Goldman Sachs (NYSE:GS - News), General Electric (NYSE:GE - News), and Harley Davidson (NYSE:HOG - News). These multibillion-dollar purchases fall outside of Berkshire's 13-F filing, and they also fall outside the realm of opportunities available to most ordinary investors. Berkshire managers continue to work for their shareholders as the firm applies valuable capital to attractive investment opportunities.

Some of Berkshire's largest common-stock position changes in the fourth quarter were actually sales, including two of the firm's better-performing holdings. Berkshire sold half of its stake in Johnson & Johnson (NYSE:JNJ - News), the best-performing stock in the past few years among its largest seven holdings. Berkshire also shaved about 10% of its position in Proctor & Gamble (NYSE:PG - News). Berkshire still has a substantial position in both of these firms, however, and Morningstar analysts currently have each of these wide-moat stocks rated at 5 stars (Consider Buying). On the buying side, Berkshire added to its holdings in Burlington Northern (NYSE:BNI - News) and Ingersoll Rand (NYSE:IR - News), and established a new position in Nalco (NYSE:NLC - News). We currently have Burlington Northern, Ingersoll Rand, and Nalco rated at 5 stars.

Rather than focusing too closely on short-term changes in the composition of Berkshire's common stock portfolio, we are using the latest 13-F filing to briefly review Berkshire's record from a longer-term perspective. It has clearly been a tough external environment recently; in fact, the market downturn has been so severe that it has cut significantly into longer-term performance records for many managers.

From December 1998 to December 2008, a volatile 10-year period whose endpoints generated a 25% decline in the S&P 500 (even in nominal terms, before inflation), Berkshire Hathaway's equity investments rose from $39.8 billion to more than $60 billion. The growth in Berkshire's aggregate portfolio reflects the allocation of cash flow arising from insurance and other businesses, of course, as well as stock performance. But Berkshire's effective stock selection also played a role--one that has continued to display itself recently, on average, among the firm's largest holdings.

Since Jan. 1, 2008, the S&P 500 has fallen almost 45%, with most of those losses arising since midyear 2008. But Berkshire's seven largest holdings at the outset of 2008 (which made up about 75% of the portfolio market capitalization) have outperformed the S&P 500 significantly, on either a simple or weighted-average basis. This despite the fact that Berkshire is relatively heavily weighted in financial stocks, and its Wells Fargo (NYSE:WFC - News) and American Express (NYSE:AXP - News) holdings have been significant drags. We currently have both of those firms rated at 5 stars as well. For that matter, one doesn't have to look very hard to find stocks in Berkshire's portfolio that we recommend these days, given the market's swoon. (A complete list of Berkshire's latest 13-F holdings and our ratings on those stocks is at the bottom of this article.)

Berkshire's investment record highlights a broader and very interesting investment issue. Last year, we had one of the roughest years for equity ownership since World War II. How have insurance companies whose investment portfolios carry a relatively large allocation to stock holdings (relative to government debt, corporate bonds, and other fixed-maturity investments) stacked up against other insurance companies? One would think those insurers who were invested relatively heavily in equities did worse in the stock market. But that isn't the case, in general or at Berkshire Hathaway.

We've taken a close look at the investment portfolios of 80 insurance companies that we follow here at Morningstar. For that group as a whole, as well as a subset of about 20 larger property & casualty insurance and reinsurance companies, the share of equity in a firm's investment portfolio last year was not significantly associated with the firm's performance in the stock market. The two things that do seem to matter are, first, the share of mortgage and other asset-backed securities in total investments, as well as the amount of capital backing the total investment portfolio. The higher the weighting of investments in mortgage and asset-backed securities, the worse the firm did in the stock market, and the higher the level of capital relative to investments, the better the firm did in the stock market. Berkshire is a relatively heavy investor in equities, but it also has a high level of capital relative to its investment portfolio, and it avoided much of the mess in structured finance that ensnared other insurers.

In some important and underappreciated ways, the equity markets have actually been performing relatively well in the past year or so. At a time when markets for a lot of fancy structured debt vehicles were frozen up, liquidity could easily be had by selling stocks last year. Stock markets performed well from a liquidity standpoint for institutional and mutual fund companies being pressed to raise cash. This can help explain how stock prices have fallen so significantly and pervasively below the fair value estimates we have developed using longer-term assumptions here at Morningstar.

We do not view Berkshire's latest 13-F filing or its equity portfolio with a great deal of alarm. Berkshire's stock has fallen so far as to approximate its book value at the end of the third quarter, a rare thing. Fourth-quarter losses may cut into Berkshire's book value significantly, but getting Buffett et al. anywhere near book seems like a bargain.

To see the table associated with this article, click here:http://news.morningstar.com/articlenet/article.aspx?id=280571

http://biz.yahoo.com/ms/090219/280571.html?.v=1

Ken Rogoff says Fed needs to set inflation target of 6pc to help ease crisis

Ken Rogoff says Fed needs to set inflation target of 6pc to help ease crisis
A leading US economist has called on the Federal Reserve to target an inflation rate of 5pc to 6pc over the next two years to erode the debt burden and slow the pace of job losses.

By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 6:04AM GMT 20 Feb 2009

Professor Kenneth Rogoff, former chief economist of the International Monetary Fund, said the threat of debt deflation called for revolutionary measures as an insurance policy.

"Excess inflation right now would help ameliorate the problem. For that reason, it would be far better to have 5pc to 6pc inflation for a couple of years than to have 2pc to 3pc deflation," he told the Central Banking Journal. The Fed has shifted tentatively to an inflation target, but one anchored nearer "stability".

A number of economists have begun to make similar calls for a radical shift to deliberate monetary debasement, although few have gone as far as suggesting 6pc.

Such proposals cause a furious political reaction because they amount to a forced shift in wealth from savers to debtors.

Prof Rogoff – one of the few economists who recognised the gravity of this crisis early on – admits that his policy is fraught with danger because it could lead to an overshoot down the road, "ending up with 200pc inflation". But there may be no choice at a time when the financial system is "melting down". The Bank of Japan failed to act fast enough in the 1990s because it was "paralysed by fear" that aggressive monetary stimulus would get out of hand.

Prof Rogoff said big fiscal packages have a role to play in backing up a zero interest rate policy and ensuring that consumption does not collapse as house prices plummet, but the key is "determined monetary policy".

There are no good options at this late stage after years of errors. Standard monetary relationships have broken down. "Policy is in effect flying blind," he said.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4701569/Ken-Rogoff-says-Fed-needs-to-set-inflation-target-of-6pc-to-help-ease-crisis.html

The Intelligent Investor

Source: http://www.frankvoisin.com/?p=4

The Intelligent Investor: Introduction
May 6, 2008 – 10:00 pm

I recently started reading Benjamin Graham’s The Intelligent Investor. For those of you who may not have heard of Benjamin Graham, he was a professor at Columbia Business School where he created an approach to investing known as Value Investing, which he first laid out in The Intelligent Investor in 1949. He and David Dodd revised the book several times over the subsequent years before Graham’s death in 1976.

Benjamin Graham taught many of the greatest investors of all time. Among Graham’s students are Warren Buffett, William J. Ruane, Irving Kahn, Walter J. Schloss, and Charles Brandes.
Jason Zweig, a senior writer for Money, Time and CNN, edited and updated the book in 2003 to show Graham’s methodology as applied to events since his death. I will discuss each chapter as I progress through the book, to give you an idea of the key lessons and maybe turn you on to Value Investing.

Warren Buffett, currently the richest person in the world, prefaced the book by saying the following:
“I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.”

How’s that for a reference? When the greatest investor of all time says your book has been the best investment book ever written, you know you’re on to something good!

Graham writes the book with five core principles in mind that should guide all investing:

1. A stock is not just a ticker symbol. It is an ownership interest in a business with an underlying value that does not depend on its share price.
   


2. The market always swings between unsustainable optimism (making stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.
   


3. The future value of every investment is a function of present price. The higher you pay, the lower your return will be.
   


4. No matter how careful you are, no investor can eliminate the risk of being wrong. You must build in a margin of safety - never overpay.
   


5. The secret to financial success is inside yourself. Be a critical thinker with patient confidence. Develop discipline and courage.

I reproduce in part these core principles as they govern the remainder of the book, and the basis of value investing. According to Graham, the success of an investor is based as much on his attitude as it is on the investments.

Graham does not, like many of today’s authors of investment books, promise to teach you how to beat the market. Instead, he says the book aims to teach you:

• how to minimize the odds of suffering irreversible losses;
  


• how to maximize the odds of achieving sustainable gains; and
  


• how to have the right attitude and behaviour for achieving your potential.
  

The introduction is straightforward and helps set the tone for the remainder of the book. Graham uses present-day (at the time he was writing) trends to illustrate the core principles and proper behaviour for an intelligent investor.

Jason Zweig points to the failure of many investors and analysts (including Mad Money’s Jim Cramer) to follow these principles in the lead-up to the dot com bubble. These investors failed to recognize that the tech stocks were not based on real underlying value and instead were being pushed ever higher by irrational optimism. Once the market corrected to represent that real underlying value (or lack thereof), a great deal of wealth was destroyed. Warren Buffett and other Graham disciples never got involved in the tech bubble and escaped largely unscathed.

More Information:
Benjamin Graham Wikipedia Article
The Intelligent Investor Wikipedia Article
Chapter Review Navigation:Introduction Ch 1 Ch 2 Ch 3 Ch 4 Ch 5 Ch 6 Ch 7 Ch 8 Ch 9 Ch 10 Ch 11 Ch 12 Ch 13 Ch 14 Ch 15 Ch 16 Ch 17 Ch 18 Ch 19 Ch 20

Fooled by randomness - The hidden role of chance in the markets and in life

'Fooled by randomness'
reviewed by Mark Wainwright


Fooled by randomness - The hidden role of chance in the markets and in life


If you watch a steam engine, you may not know how it works but you can soon get a fairly good idea of its behaviour, and you can predict its future behaviour accurately. Even though you don't understand its workings, you can see it's a pretty simple machine, so you can trust it to behave in a simple way: you have confidence in your predictions based on a short sample of its behaviour.


Most things in life are not like steam engines, but people treat them as if they were. Life in general, and markets in particular, involve large random factors, have complicated stochastic structures, and regularly spring nasty surprises. Their behaviour over short timespans may have so little significance as to be nothing but noise. Extrapolation is impossible or meaningless. Yet try as we might, we continue to see patterns where none exist, misunderstand the role of randomness, seek explanations for chance phenomena, and believe that we know more about the future than we do. And that is the point of this book.

Nassim Nicholas Taleb is a market trader and a professional skeptic. He claims mathematical naivety, but he is clear on one thing: the importance of understanding the structure of random events, their significance and, especially, insignificance. He clearly sees that this understanding is more important than actual calculations: "Mathematics is principally a tool to meditate, rather than to compute". He has seen innumerable traders go to the wall - "blow up", in the picturesque jargon of the trade - when a seemingly successful career is brought to a spectacular end by some "unexpected" market collapse. "No-one could have predicted that", they say, sadly shaking their heads as they leave the trading floor. They have been fooled by randomness.

There are many ways of being the fool of randomness. One, as here, is to fail to predict the rare event. Nothing can be more certain than that the unexpected will happen sooner or later, but lulled into a sense of security by the periods of relative calm between, people forget to allow for it. Another is to see significance in some random pattern. Taleb explains with crystal clarity why the more often you look at some fluctuating quantity (the value of your share portfolio, for example), the less meaning your observations have. Yet he sees traders who watch prices move up and down in real time on screen - the changes are so small as to be completely random - and think they are learning something.

Another, more insidious, is the "survivorship bias": in a random population, some items will be more visible than others. Say we have a collection of traders whose strategies do no better than random: they will have a good year half the time, a bad year the other half. Half of them will have a good year. A quarter will have two good years in a row, and so on. One in 32 will do well five years running. Of course, it never occurs to them that their success is random: they attribute it to their superior strategy, and imagine they are in the top 3% of traders. The rest of us see an advertisement for an investment fund showing a consistent good performance over five years. "They must be good", we think, not stopping to think that there are many, many competing funds and it is ones who are doing well whose advertisements we will see, even if their success is entirely due to chance.

Taleb's examples are by no means restricted to markets. Random fluctuations and the survivorship bias exist in all fields. And by another effect he notes, they can be magnified by a positive feedback loop: he calls the effect "bipolarity". An actor who flukes an audition becomes known to more people (and directors), and as a result gets more parts and becomes even more well-known. A disastrous piece of software makes a fluke distribution deal, and then suddenly everyone wants it so they are compatible with everyone else.

We are built to see patterns, to find causes for things, and to believe in our own rationality. We cannot help doing it. The attraction of Taleb's book is that he is very well aware of this. He knows nothing he says can dispel the illusions created by randomness, and that he is as susceptible to them as anyone. His only advantage is that he is aware of the failing, and can try to play tricks on himself to circumvent it - by denying himself access to junk information, for example. The book's short but excellent final section deals with this Zen-like problem of trying to break oneself out of a mould of thinking that cannot be broken, even though one recognises its shortcomings.

Taleb's prose is racy and readable, even if it occasionally betrays a charmingly non-native command of English; his publisher, one feels, could at least have provided a copy-editor, if only to remove almost all occurrences of the word "such", on the uses of which the author's views are eccentric. But it seems quite possible that his headstrong personality led him to refuse any interference. His style is idiosyncratic and vigorous, but none the worse for that.

Taleb himself, incidentally, whose family were ruined in the Lebanese civil war, is the founder of a firm which thrives on unexpected events. He reckons that whereas other traders, by forgetting the rare, unexpected events, notch up steady profits which are wiped out by occasional catastrophic losses, he can take an opposite strategy, which he calls "crisis hunting". He did very well out of the market crash in 1998. He seems to be at home in several languages, and to have a fine appreciation of high culture. Yet strangely, the one question he does not ask is that of the value of what he is doing. Does anyone, apart from himself (or whoever's money he is investing), gain by the work he does? Does it contribute in any way to the wellbeing of mankind? It is not, of course, a question that one expects a book by a market investor to address, but there is nothing typical about this book. With his sensitivity to questions of what is valuable and important, it would be surprising if he has not considered this question, but he is silent about it in the book.

On the other hand, whatever the worth of his trading work, he has written this book, and that itself is a contribution of enormous value. The book is classified as "General Business/Finance/Investment", but it is nothing so specialised: many of his anecdotes are drawn from finance, but what Taleb has written is a manual of how to think. I recommend it to all Plus readers.


Book details:
Fooled by randomness
Nassim Nicholas Taleb
hardback - 223 pages (2001)
Texere Publishing
ISBN: 1587990717


http://plus.maths.org/issue20/reviews/book1/index.html





Also read:
frankly speaking
http://www.frankvoisin.com/?p=52

1. Fooled By Randomness - Introduction
2. Fooled By Randomness - Part 1
3. Fooled By Randomness - Part 2
4. Fooled By Randomness - Part 3

Read This Before You Sell All Your Stocks

Read This Before You Sell All Your Stocks
By Tim Hanson February 18, 2009 Comments (6)

We knew it was coming, but it's the news we've all been dreading. Yet there it was recently, front and center in The Wall Street Journal:
"Rank-and-file investors are losing faith in stocks."

The story is predictable

Yesterday, after all, we experienced yet another near-4% drop, plunging stocks close to their bear-market lows of November. Small investors, shell-shocked by losses this year, are selling what's left of their stocks and stashing cash in bonds and FDIC-insured CDs. According to recent data from the Investment Company Institute (and reported by the Journal), "Investors pulled a record $72 billion from stock funds overall in October alone ... [and] fund companies say withdrawals have remained heavy."

Indeed, Journal writer E.S. Browning profiles three such investors.

• The first, a 52-year-old, was "a big believer in stocks in the late 1990s" but is now putting all of his cash in CDs.
• The second was an aggressive investor in the 1990s, but moved to "a more conservative mix after the 2001 terrorist attacks" and has since become more conservative.
• And the third, a 25-year-old, loved stocks when he was earning 10% to 20% per year earlier this decade, but has now "shifted his retirement savings to corporate bonds, a money market fund, and a few utility funds."

That'll work out well

Look, let's get this out of the way right now. There's a place for bonds, CDs, and smart asset allocation in every portfolio. But what these three investors have in common is that they were buying stocks when they were high and going higher and are now selling stocks when they're low and (potentially) going lower.

In other words, they bought high and sold low ... exactly the opposite of what you want to do as an investor!

Now, I can understand the 52-year-old's motives better than the 25-year-old's. The former is nearing retirement and wants the security of a stable cash nest egg. But the latter is at least 30 years (probably more) from retirement and is likely dooming himself to decades of subpar returns.

Provided the reporting is accurate, of course

Given plummeting interest rates, the best money market rate I can find today is 3% per year. At that rate, $10,000 will turn into about $24,000 over 30 years.

As for stocks, they don't generally decline 40% per year (as they did in 2008) all that often (though such declines are difficult to predict). In fact, over the trailing-30-year period stocks have returned about 7.6% per year -- which would turn that same $10,000 into about $90,000 ... a pretty darn big difference.

All of this is to say, if you have plenty of time until retirement (let's call it 10 years or more), now is the time to be a buyer of stocks. Given depressed valuations, you may even do better than 7.6% per year. And even if you're nearing or in retirement, chances are you have some money that you don't intend to spend for another 20 or 30 years. Those long-term savings are also a candidate for the stock market, though again, you'll want to have a sound asset-allocation game plan in place before you invest.

Think about it

If you believe Google (Nasdaq: GOOG) and Amazon.com (Nasdaq: AMZN) will be dominantly profitable media titans 25 years from now, would it be better to buy the stocks today at $350 and $60, respectively, or to have done so 12 months ago when they were 15% to 30% higher?

That's not to say they can't go lower from here, but when you buy stocks, you should do so with the same time horizon as your money.

Similarly, if you believe China is the next global economic superpower, then you can't beat today's prices for China Mobile (NYSE: CHL) and PetroChina (NYSE: PTR), the country's telecom and energy giants, respectively.

Finally, even if you don't believe in any individual stocks, you can still park your long-term money in a low-cost total market index fund (Vanguard's Total Stock Market Index (VTSMX) is a good choice), which will give you exposure to fantastic, dividend-paying firms such as Coca-Cola (NYSE: KO), Procter & Gamble (NYSE: PG), and Microsoft (Nasdaq: MSFT).

Yet these are the stocks investors are selling today. It just doesn't seem to be the smartest long-term move.


This is ...At Motley Fool Global Gains, we believe in taking advantage of temporary market downturns to position our portfolios for the long term. We also believe that thanks to development in places such as China, India, and Brazil, the next decade will prove to be a very exciting and profitable time to be an investor.
If you agree, then click here to join us free at Global Gains, where we identify two of the world's best buying opportunities each and every month.

Rather than run from stocks, we are taking advantage of current volatility to buy some of the world's best companies. You should consider the same.

To learn more about a free one-month guest pass to Global Gains, and to learn about our new asset-allocation guide to help our members better identify the stocks and funds that fit in their portfolios and in what percentages, just click here for more information.

Tim Hanson does not own shares of any company mentioned. The Motley Fool owns shares of Procter & Gamble. Amazon.com is a Motley Fool Stock Advisor recommendation. Microsoft and Coca-Cola are Inside Value selections. Google is a Rule Breakers pick. Please congratulate the Fool's disclosure policy on declaring itself the world's best.

http://www.fool.com/investing/international/2009/02/18/read-this-before-you-sell-all-your-stocks.aspx

Inflation explained

From Times Online

November 3, 2008

Inflation explained

David Budworth
Savers need to take the threat of inflation very seriously because it can erode the value of deposits at startling speed. If the value of your savings does not keep pace with rising prices, its buying power will be depleted quickly - and you may not be aware of it until it is too late.

Here we explain why inflation matters and what you can do to combat it.

What is inflation?

Inflation is a general rise in prices across the economy. The inflation rate is a measure of the average change over a period, usually 12 months.

There are two main measures. The consumer prices index (CPI) was adopted as the Government's preferred measure in 2003 and is used by the Bank of England for the purpose of inflation targeting. The target is 2 per cent, but inflation is currently a lot higher. In September it hit 5.2 per cent, which means that prices overall are 5.2 per cent higher than in September last year.

The oldest measure of inflation, the retail prices index (RPI), dates back to before the First World War. In September the RPI stood at 5 per cent.

What is the difference between RPI and CPI, and which is more useful?

The CPI excludes most housing costs. Rents are included, but house prices, council tax and mortgage payments are not. This usually means that CPI inflation is lower than RPI inflation, although this is not always the case.

Everyone should keep an eye on the CPI for an indication of whether interest rates are likely to rise or fall.

For anyone in receipt of a pension or benefits, though, the RPI is the one to watch because increases remain linked to the RPI rather than the CPI. Inflation-linked products, such as index-linked gilts, are also linked to the RPI.

Remember, though, that both of these official measures are calculated on the basis of an average notional shopping basket, but an individual’s spending patterns can differ dramatically. The Office for National Statistics has an inflation calculator that enables you to enter your personal expenditure patterns to calculate an approximate personal rate of inflation (see websites below).

Why does this matter to my savings?

Savings must grow by at least the rate of inflation to maintain their value. If they rise in nominal terms but fail to beat inflation, their real value will fall in terms of purchasing power.

With the CPI at 5.2 per cent, higher-rate payers need to earn at least 8.63 per cent gross interest before they start to make a positive return. Basic-rate taxpayers require at least 6.5 per cent.

If your savings account does not match or beat this rate you are effectively losing money.

Here is a guide to the interest that basic and higher-rate taxpayers need to earn to match inflation

Inflation rate of 5%

Basic-rate taxpayers need 6.25%

Higher-rate taxpayers need 8.34%

Inflation rate of 4%

Basic-rate taxpayers need 5%

Higher-rate taxpayers need 6.25%

Inflation rate of 3%

Basic-rate taxpayers need 3.75%

Higher-rate taxpayers need 5%

Inflation rate of 2%

Basic-rate taxpayers need 2.5%

Higher-rate taxpayers need 3.34%

Inflation rate of 1%

Basic-rate taxpayers need 1.25%

Higher-rate taxpayers need 1.66%

Do any savings accounts provide protection against inflation?

Index-linked savings certificates from National Savings & Investments (NS&I), which are backed by the Government, are tax-free and guaranteed to keep pace with the RPI for a fixed term.

The return is made up of a set interest rate plus the RPI figure, fixed for three or five years. You can invest up to £15,000 per issue, so you could shelter £30,000 in both the three and five-year plans.

You have to tie up your money for the fixed term to receive the advertised rate.

Look out for inflation-beating savings accounts and Isas from banks and building societies, too.


Five news stories
Rising gas bills send inflation to 16-year high
Food price inflation spirals to 9.5 per cent
Inflation surge adds £3 billion to welfare bill
Inflation may have peaked
Interest rates to drop to 50-year low
Five features
Sounds like the Seventies
Safeguard your life from rising inflation
How you can beat rising inflation
Inflation is poised to peak then slide
The inflation impact: how we're paying
Five websites
Office for National Statistics (inflation calculator)
Bank of England
Economicsuk ( the personal website of David Smith, Economics Editor of The Sunday Times)
Timesonline's Economics homepage
National Savings & Investments

Related Links
How to save
National Savings & Investments explained

http://www.timesonline.co.uk/tol/money/reader_guides/article5001065.ece

Eastern European crisis may put us all in the goulash

From The TimesFebruary 19, 2009

Eastern European crisis may put us all in the goulash
Ian King, Deputy Business Editor

After building quietly for months, the next stage of the global financial crisis is upon us, with the economies of Eastern Europe the latest to be hit. Hungary's stock market fell by 7 per cent yesterday and its Czech equivalent by nearly 4 per cent - while Poland, earlier down by almost six 6 per cent, rallied only once Warsaw had sold some of its euros on foreign exchange markets to prop up the zloty.

The trigger for this chaos was comments on Tuesday from Moody's and Standard & Poor's, the ratings agencies, articulating the concerns many observers have had in recent months. Having enjoyed a boom in the past decade, demand for the region's exports has collapsed and investment with it, while job losses are rising - one reason why not all the Poles have yet left Britain for home.

All this means that doubts over whether the governments and companies of Central and Eastern Europe will be able to service their debts are very much to the fore. Much of the borrowing in these countries during the bubble was not done in their own currencies but in others, such as the euro and the Swiss franc, which means that there will almost certainly be defaults.

The zloty, for example, has lost a third of its value against the euro since last summer, with Hungary's forint down 23 per cent and the Czech crown down by about 17 per cent in the same period.

The impact of these debt defaults will be felt fiercely in some Western European economies, particularly Austria, whose banks have lent the equivalent of a quarter of the country's GDP to the region. Sweden's banks are also heavily exposed. Consultancy Capital Economics calculates that Swedish banks have lent $90 billion (£63 billion) - nearly one fifth of Sweden's GDP - to “high-risk” countries, mainly in the Baltics, while the banking systems of many of the worst-hit economies, including those of Estonia, Slovakia and Lithuania, are now almost entirely foreign-owned.

While Raiffeisen and Erste Bank, of Austria, are regarded as the two institutions most significantly at risk, it is not just the Viennese who risk seeing their capital waltz off into oblivion. ING, the Dutch bank, Commerzbank, of Germany, and Société Générale, of France - which owns the Russian Rosbank - all saw their shares fall yesterday amid mounting concerns over their exposure to the region. Italy's UniCredit and Belgium's KBC are also heavily exposed.

Apart from the damage to some Western European banks, other companies may also be wounded, such as Telekom Austria, which expanded east amid tough competition in their home markets. And there are other ways in which contagion could spread. Manufacturers in Germany - the linchpin of that country's economy - will suffer as Eastern European rivals enjoy a boost in competitiveness as their currencies collapse in value against the euro.

The bursting of this bubble may damage Britain less severely than other EU nations. While Irish buy-to-let investors were buying up most of Bratislava, Austrian banks were buying their Romanian equivalents and German and French manufacturers were opening plants from Bucharest to Brno, the only British activity in the region seemed to consist of flying to such locations for stag weekends.

That is not to say that this crisis will not drop us in the goulash, too. The crisis was already highlighting the inflexibility of eurozone membership, particularly for those less competitive member states such as Italy and Portugal, who - unlike Britain and Sweden - are unable to devalue their way out of their problems. This has not gone unnoticed - and, in a speech last night, Lorenzo Bini Smaghi, the ECB executive board member, was muttering ominously that the ability of some EU countries to devalue their currency, gaining an economic advantage, was putting the single market's integrity at risk.

Taken to their logical conclusion, his comments sound dangerously like a call to protectionism.

http://business.timesonline.co.uk/tol/business/columnists/article5762544.ece

Corporate bonds: Don't be a fund fashion victim

Corporate bonds: Don't be a fund fashion victim
Bond funds are in vogue – they were the best selling funds last month by a mile. But that might just set the alarm bells ringing...

By Paul Farrow
Last Updated: 6:13PM GMT 18 Feb 2009

Following fashion when it comes to choosing funds can be an expensive mistake.
You could be forgiven for thinking that we have all given up on investing given the torrid performance of shares and bonds over the past year.

But there are early signs that investors' confidence is returning – the latest figures from the Investment Management Association showed that more than £1.5bn was invested in December, a traditionally poor month, for obvious festive reasons.

It could be that investors feel, with significant losses already racked up, that there are opportunities beginning to open up. Or it could be that with returns on cash at pitifully low levels they need to take on a little more risk in a bid to get any sort of return on their money.

Bond funds are in vogue – they were the most popular funds last month by a mile – and that might just set the alarm bells ringing.

The nature of investment – fund groups want to rake in assets, financial advisers want to sell funds and investors want to make gains – means that fads and fashions become inevitable. The most fashionable fund type each year tends to come down with a mighty bump the following year.

Every year certain types of fund reign supreme. We saw it in the technology boom in early 2000 when millions of pounds were invested in technology funds such as Henderson Global Technology at the top of the market. The bubble burst and people were left nursing huge losses.

In 2006 the commercial property phenomenon provided us with another classic example of investors following a fashion. Tens of thousands of them jumped onto the bandwagon (Norwich Union's fund proved extremely popular) just as the market scaled new heights. But those who joined the party late hoping to make a quick buck will have lost as much as 50pc of their money.

The only time it would have paid to be fashionable was in 2003 when everyone rushed to get a piece of the gold action as markets sank to a new low. Those who bought into gold via the BlackRock Gold & General fund have seen the value of their investment rise by 150pc since.

Peter Jordan of Skandia said: "If you blindly follow the themes and fashions you will get a rougher ride – you should stick to asset allocation based on your attitude to risk. Fund picking is a hazardous activity and if people have been burnt by market volatility and are worried what further impact low inflation will have then they need review the asset allocation within their portfolio."

Corporate bond funds are the new black because they offer lower volatility and a decent yield – attractive selling points amid the turmoil and dire rates of interests. They are also deemed an appropriate investment during times of falling inflation. "Corporate bond funds litter the top 10 funds this year," said Mr Jordan.

Many experts continue to believe that corporate bond funds investing in high quality bonds are a decent bet for this year. The arguments in favour of bonds are strong. Corporate bond markets typically recover before equities after times of economic woe. Bond prices are pricing in default rates of 35-40pc – yet, looking back over the years, the worst default rate for investment grade bonds was 2.4pc. Some bonds are yielding upwards of 8pc and a small narrowing of spreads will double the return. (Comment: Barclay's Bank bond)

Unlike with previous fads, investors aren't piling into bond fund because they have made stupendous gains. "This popularity is not based on good past performance but rather on the poor performance of these funds over the past six months," said Jason Walker of AWD Chase de Vere.

The case for investment grade corporate bond funds looks compelling and is worth considering but the bond story is not a no-brainer. The market is illiquid and some bond managers are stuck with poorly performing bonds they cannot sell. What's more, a surge of gilt issuance by our cash-strapped Government means there will be no shortage of stocks for buyers to choose from.

Mark Piper of Collins Stewart said: "There has been a huge increase in the number of investment articles highlighting the opportunities in corporate bonds in recent weeks. While the valuations are not quite as eye-catching as they were in October and November last year, high quality investment grade corporate bonds are still extremely attractive in our opinion, particularly when compared to government bonds and cash deposits."

He added: "The rush for corporate bonds could have all the hallmarks of an early stage mania but as long as you're focusing on senior investment grade debt then the values is real. Our favoured ways of accessing this asset class are via the M&G Corporate Bond fund and Invesco Sterling Bond fund."

Richard Woolnough, a fund manager at M&G, argues that investors who buy bonds now are locking into a high fixed rate of interest, which will be "extremely" attractive as the Bank of England's interest rate heads toward zero.

"With investment grade corporate bond yields now hovering around all-time high levels, the market is effectively saying that about 40pc of all investment grade bonds will default over the next five years, assuming average historical recovery rates. This view is far too pessimistic, which means that investors are being hugely overcompensated for the actual risk of default."

But not everyone is convinced. Gary Potter, a multi manager at investment boutique Thames River, says: "Everyone is piling into corporate bonds and I'm very concerned. They pay a decent coupon, but no one knows how big a hole we are in. There could yet be liquidity issues with bonds and what happens if your fund manager is forced to sell the bonds – you will lose money.

Mr Potter, whose favourite funds include Jupiter Financial Opportunities, Prusik Asia, BlackRock UK Alpha and Cazenove Income & Growth, added: "In today's market it is not solely about the return on your money – it is the return of your money, which is why I'm not afraid to invest in cash. A flat return is better than a 5pc loss."

Mark Harris, a portfolio manager at New Star, is equally cautious, warning investors hell-bent on buying corporate bonds to do their due diligence before buying.

"It appears that the no-brainers for all investors this year are treasuries [government bonds] and corporate bonds. But what if we enter a period in which defaults balloon to levels only seen previously in the Great Depression? While the investment grade corporates may have priced in this possibility, sub investment grade has not.

"Risks remain and credit analysts will have to tread very carefully," said Mr Harris. "While the risk-reward balance for much of the corporate bond market certainly looks appealing relative to equities, it does not mean that we will all definitely make money over 2009. Be careful with your selection of bond funds."

To avoid falling victim to fashion, investment advisers suggest that investors stick to the tried and tested route of asset allocation. In other words, do not put all your eggs in one basket.

Mr Walker warned corporate bond investors in it for the short term that if they do not actively manage the portfolio they will see capital values rise and then fall. "Our clients are medium-term investors and therefore the philosophy is asset allocation and a minimum five-year holding. So our clients will be holding corporate bonds – both high yield and investment grade – to diversify their portfolio and reduce risk," he said.

Mr Jordan added: "Our analysis shows that fund picking is a hazardous activity. People who have relied on this have portfolios that have no science of objectivity behind them whatsoever. If these people have been burnt by market volatility and are worried what further impact low inflation will have, now is the perfect time to review the asset allocation within their portfolio.

"The key will be to understand their attitude to risk, which is likely to be low if they are worried about low inflation, and select an asset allocation in line with that."

By way of a pointer, an analysis of deflation in the new Barclays Equity Gilt Study suggests that unwittingly diversifying into bonds may be no bad thing, given that the prospect of falling prices looms large.

The study found that in extreme inflation conditions, whether deflation or high inflation, portfolio diversification did not seem to be the best approach, given that returns are so heavily concentrated either in resource-based stocks in the case of inflation or in government bonds in the case of deflation.

http://www.telegraph.co.uk/finance/personalfinance/investing/4690549/Corporate-bonds-Dont-be-a-fund-fashion-victim.html

Global investors see Chinese green shoots

Global investors see Chinese green shoots
The world's fund managers have begun to glimpse the first green shoots of recovery and are betting that a powerful rebound in China will revive demand for commodities and lead global industry out of slump.

By Ambrose Evans-Pritchard
Last Updated: 8:46PM GMT 18 Feb 2009

Investors are betting on some green shoots of recovery in China
The latest Merrill Lynch survey of investors shows the highest level of optimism since the credit crunch began, fuelled by tentative hopes that the global cycle is slowly starting to turn.

Michael Hartnett, emerging market strategist at Bank of America Securities-Merrill Lynch, said fund managers had jumped on early signs that China is through the worst.

"China is the one place where policy seems to be working. Credit and the money supply are both growing, and the local equity markets are going through the roof," he said. "There is a feeling they may just be able to pull a rabbit out of the hat."

However, he added: "We think China is a very narrow base for optimism."

The OECD's leading indicators still point down, raising the risk of fresh disappointments for the over-eager. Merrill said oil and industrial commodities are coming back into favour as "a pure way" of playing China's growth without having pick through company balance sheets. But there is a rising suspicion that gold has risen too far, too fast.

Once again, Europe is viewed as the world's "sick man", with a net 70pc of investors expecting the economy to get worse over the next year. The number overweight in cash has risen to 53pc, the highest since the dotcom bust in 2001.

But things may be looking up for Britain.

Gary Baker, head of the region's equity strategy, said sterling's slide is a tonic for stocks listed in London. "A lot of sterling assets are in energy, materials and metal-bashing. These are starting to look very attractive," he said.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4691439/Global-investors-see-Chinese-green-shoots.html

The market gives a thumbs-up to printing money

The market gives a thumbs-up to printing money
Posted By: Edmund Conway at Feb 18, 2009 at 19:58:27 [General]

What would you expect a currency to do when a central bank admits it is about to start printing money imminently? The answer you'll find in the textbooks is pretty clear: it will fall, and fall fast. Just look at Zimbabwe.

But that's precisely the opposite of what happened this morning when the Bank of England said that within weeks it will have the printing presses roaring away. In fact, as you can see from the graph here, after the Bank announced this in its Monetary Policy Committee minutes at around 9.30, people started buying, rather than selling, sterling. Why? What on earth has happened in the topsy-turvy world of currencies that makes traders believe a good investment is a currency that is about to become all the more plentiful? Has everyone lost their senses?



The answer is intriguing, and helps underline precisely how counterintuitive is the policy challenge we face in this economic crisis. People are buying sterling not out of economic ignorance or bloody-mindedness but as a vote of confidence in the Bank of England's economic policy. In other words, they believe quantitative easing - the technical term for printing money - will, in the long run, bring the economy back to health, even if in the short run it could devalue sterling.

Meanwhile, the market is punishing the euro (against which I plotted the pound in this chart) because of the European Central Bank's neanderthal approach to monetary policy. Of all the central banks they are the most reluctant to slash interest rates and start up the presses. This could be a big mistake.

The explanation for this, by the way, goes back to the genesis of each continent's respective central bank. The ECB is the spawn of the German Bundesbank. Its history was shaped by the horrific experience of Weimar Germany's hyperinflation of the 1920s, so it is naturally inclined to fear the worst about inflation. The Federal Reserve's big bugbear, on the other hand is deflation, since that was what afflicted the US in the 1930s.

Anyway, the point is that the market believes (today anyway) that the Federal Reserve, which is already well down the road towards money-printing, and the Bank of England are right, and that the ECB is wrong. I happen to agree.

Quantitative easing is a hard sell - I know that from your comments whenever I write approvingly about it! But if handled properly I genuinely believe it could help prevent this from turning into the recession to end all recessions.

Whether you agree with me or not about that, the one thing we can surely all agree on is that, should the Bank of England pursue this course, it must, must be ready to raised interest rates and pull money back out of the economy when it looks as if deflation has really been averted.

You can count on us at the Telegraph to do our best to make sure it does.

http://blogs.telegraph.co.uk/edmund_conway/blog/2009/02/18/the_market_gives_a_thumbsup_to_printing_money

Fed downgrades economic forecast for this year

Fed downgrades economic forecast for this year

WASHINGTON – The Federal Reserve on Wednesday sharply downgraded its projections for the country's economic performance this year, predicting the economy will actually shrink and unemployment will rise higher. Under the new projections, the unemployment rate will rise to between 8.5 and 8.8 percent this year. The old forecasts, issued in mid-November, predicted the jobless rate would rise to between 7.1 and 7.6 percent.

The Fed also believes the economy will contract this year between 0.5 and 1.3 percent. The old forecast said the economy could shrink by 0.2 percent or expand by 1.1 percent.

The last time the economy registered a contraction for a full year was in 1991, by 0.2 percent. If the Fed's new predictions prove correct, it would mark the weakest showing since a 1.9 percent drop in 1982, when the country had suffered through a severe recession.

The bleaker outlook represents the growing toll of the worst housing, credit and financial crises since the 1930s. All of those negative forces have plunged the nation into a recession, now in its second year.

"Given the strength of the forces currently weighing on the economy," Fed officials "generally expected that the recovery would be unusually gradual and prolonged," according to documents on the Fed's updated economic outlook.

Against that backdrop, unemployment — now at 7.6 percent, the highest in more than 16 years — will keep climbing and stay elevated for quite some time, the Fed predicted.

Fed officials anticipated that unemployment would remain "substantially" higher than normal at the end of 2011 "even absent further economic shocks."

The Fed forecast calls for the jobless rate to dip to between 8 and 8.3 percent next year, and to between 7.5 and 6.7 percent in 2011. All those projections are worse than the Fed's previous estimates and would put unemployment higher than the normal range around 5 percent.

Employment is usually the last piece of the economy to heal once the country is out of recession and in recovery mode. Businesses are usually reluctant to ramp up hiring until they feel confident that any recovery has staying power.

Under the Fed's new projections, the economy should grow between 2.5 and 3.3 percent next year. Fed officials "generally expected that strains in financial markets would ebb only slowly and hence that the pace of recovery in 2010 would be damped," according to the Fed documents.

Fed officials, however, predicted the economy would pick up speed in 2011, growing by as much as 5 percent, which would be considered robust.

Still, given all the economy's problems, there are risks that the Fed's forecasts could turn out to be too optimistic.

And a few Fed officials — none are identified — feared that it could take five or six years for the economy and employment to get back into a sustainable mode of health.

On the inflation front, the weak economy should mean that companies will keep a lid on price increases this year as they try to lure skittish consumers.

The Fed expects prices to rise between 0.3 and 1 percent this year, down from a projection of between 1.3 and 2 percent in the fall. Prices will pick up slightly in 2010 and 2011 as the economy strengthens.

For now, Fed officials are more worried about falling prices, than rising ones.

The Fed didn't use the word "deflation," which is a dangerous bout of falling prices, but officials noted "some risk of a protracted period of excessively low inflation."

Falling prices sound like a gift at first — at least to consumers. But a widespread and prolonged decline can wreak more havoc on the economy, dragging down Americans' wages, and clobbering already-stricken home and stock prices. Dropping prices already are hurting businesses' profits, forcing them to slice capital investments and lay off workers.

America's last serious case of deflation was during the Great Depression in the 1930s. Japan was gripped with a period of deflation during the 1990s, and it took a decade for that country to overcome those problems.

http://news.yahoo.com/s/ap/20090218/ap_on_bi_ge/fed_economy