Money made easy for young adults

http://www.whataboutmoney.info/


Money made easy for young adults
A user-friendly website from the City regulator offers impartial help to financial novices.

By Chris Pond
Last Updated: 12:46PM GMT 02 Mar 2009

The FSA's new website has advice on subjects such as student finance and budgeting Photo: GETTY
With many people now feeling the pinch of the credit crunch, getting on top of your finances and maintaining a healthy bank balance has never been more important.

It can be a daunting prospect for young adults who may be managing their own finances for the first time, and might not know where to find unbiased financial guidance.

Struggling with the pressures of financial unease themselves, parents of young adults embarking on those first independent steps may have additional concerns about how their children will cope with managing their money.

Research by the Financial Services Authority (FSA) has revealed that 16 to 24-year-olds are the most at risk when it comes to money, particularly with regards to planning ahead and choosing financial products.

A helping hand is now available in the form of www.whataboutmoney.info, a website launched by the FSA in June last year to offer impartial financial information to young adults aged 16-24.

The site forms part of the FSA's National Strategy for Financial Capability, which aims to improve the financial capability of all consumers in the UK. The website encourages young people to take charge of money matters and aims to provide information on the money issues important to them now.

A key feature to help users find information relevant to them is the "life stage guides". These offer tips on getting to grips with money issues affecting young people during the life-changing events they will go through, such as leaving school or going to college, getting their first job or their own place.

Each easily digestible guide outlines the top five need-to-know tips, has a video case study and displays links to further information from other resources.

The site is also divided into pages examining the key financial concerns that young adults face. "Getting money" is split into sections that look at jobs, benefits, starting a business, ways to borrow and manage money responsibly. "Spending money" looks at parting with cash – from getting a phone to running a home.

"Keeping money" helps to make sense of bank accounts, savings and investments, while "Student money" covers the facts about student finance. The "Budgeting tools" section simplifies money management, with links to external resources and applications such as budget and loan calculators, to enable users to monitor and evaluate incomings and outgoings.

The website has also recently been enhanced with "Real life economist" blogs. The "Real life economists" are a group of 16 to 24 year-olds at various life stages that feature throughout the website, providing an insight into the financial lives of young adults in similar positions.

Robyn Cooper, for example, is self-employed – a part-time actress who owns and runs her own small business, while Ian Stuart is a 16-year-old college student. The interactive blog section allows them to share their views on money matters with the website's users, who are then free to post their own comments and responses.

The "Questions & Answers" section outlines the top 10 queries, covering topics such as tax and loans, for simple, quick advice. Users can also send through their own personal queries to which they'll receive a free and personal written response within three working days.

For young adults wanting to know more about current money issues they may face, the "In the spotlight" page provides an update.

The aim is to give users clear-cut information on current topics such as interest rate changes and payday loans and explain how they might affect them. Users will also find a link here to the latest news on firms or products that are regulated by the FSA.

Whataboutmoney.info is an evolving tool for young adults that is being continually improved with new and up-to-date content. The site is an accessible and, more importantly, impartial resource for young adults (and even parents) that could help them to understand better money matters and, in turn, to stand them in good stead for planning and investing in their future.

Chris Pond is director of financial capability at the Financial Services Authorit

http://www.telegraph.co.uk/finance/personalfinance/consumertips/4927132/Money-made-easy-for-young-adults.html

Gold update: Sixth day of falls in New York

Gold update: Sixth day of falls in New York
Gold has fallen in New York for a sixth straight session as some investors sold the precious metal to cover losses in equity markets. Silver also declined.

By Bloomberg staffLast Updated: 4:30PM GMT 02 Mar 2009
Gold futures for April delivery fell $2, or 0.2pc, to $940.50 an ounce at 10.10am on the Comex division of the New York Mercantile Exchange. The metal dropped 6pc last week.
In London, gold for immediate delivery lost $1.88, or 0.2pc, to $940.47 an ounce in early afternoon trading. The precious metal has earlier risen by as much as 1.7pc.
In February gold climbed by 1.5pc, the fourth consecutive monthly gain, while the Standard & Poor’s 500 Index fell by 11pc. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, reached a record 1,029.3 metric tons on February 26.
“As things get a little uglier in the stock market, we might see some selling of gold for margin calls,” said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago. “There’s some weight on gold now.”
Silver futures for May delivery declined 20.5 cents, or 1.6pc, to $12.905 an ounce. The metal rose 4.3pc in February.
News, comment and analysis on gold on our new dedicated page

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/4928372/Gold-update-Sixth-day-of-falls-in-New-York.html

FTSE loses billions of pounds within hours

FTSE loses billions of pounds within hours
Billions of pounds have been wiped off the value of Britain's leading companies after losses at HSBC and AIG drove share prices to a six-year low.

By Graham Ruddick and Myra Butterworth
Last Updated: 5:37PM GMT 02 Mar 2009

HSBC Hldgs
The FTSE 100 index of top UK shares dropped after HSBC confirmed a £12.5 billion rights issue.

It fell by 5.3 per cent and below the 3,700 mark for the first time since April 2003, losing investors £47.7 billion.

The sharp decline took the FTSE 100 below the lows experienced last October as UK banks teetered on the edge of collapse and were bailed out by the Government.

It came as analysts expressed concerns about the state of the UK economy, saying the financial crisis could spill over into other industries.

Investors were spooked by HSBC's rights issue after the UK's biggest bank asked for extra cash from shareholders to boost its balance sheet.

The request was made despite HSBC being one of the British banks least affected by the credit crisis.

HSBC's share issue is the biggest ever in Britain, surpassing the £12 billion request by Royal Bank of Scotland last year before it was forced into state support.

HSBC said the rights issue should help its 'ability to deal with the impact of an uncertain economic environment and to respond to unforeseen events'.

The move sent shares in HSBC down almost 19 per cent and also pulled Standard Chartered, which like HSBC conducts a significant amount of business in Asia, down by a similar amount.

Other UK banks also saw their share price tumble, including Royal Bank of Scotland (which closed down 2.6 per cent), Lloyds Banking Group (down 15 per cent) and Barclays (down 6 per cent).

At the same time, one of the world's largest insurers AIG - which was first saved from collapse in September with a package that grew to $150 billion last year - has had to ask for help again after failing to sell enough assets to repay the US.

Simon Denham, managing director of spread-betting company Capital Spreads, said: "The slowly falling indices are dragging ever more of the total economy into the mire and there is a very real possibility of the problem accelerating into an absolute disaster as opposed to a problem mainly constrained to the financial sector at the moment."

The FTSE 100 has not closed below 3,700 since the outbreak of war in Iraq at the end of March 2003. It was at 3,625.83 at the close of play.

David Buik of BGC Partners pointed out that the FTSE 100 is now lower than when Tony Blair won the 1997 general election. "What a waste of a decade that was," he said.

http://www.telegraph.co.uk/finance/newsbysector/epic/hsba/4928648/FTSE-losses-billions-of-pounds-within-hours.html

Irrational fears erode Buffett premium

Irrational fears erode Buffett premium
Berkshire Hathaway shares lost more than 30pc in 2008, and more since. The value of the investment group's investment portfolio fell just 10pc.

By Richard Beales, breakingviews.com
Last Updated: 10:38AM GMT 02 Mar 2009

Warren Buffett, chief executive, doesn't focus on the share price. But the Sage of Omaha says risks, formerly under-appreciated in the investment world, are now being overpriced. And as that corrects, shares of the billionaire's investment company could benefit.

Buffett admits he "did some dumb things", like buying billions of dollars of ConocoPhillips stock when energy prices were near their peaks.

Even so, the per-share book value, or assets minus liabilities, of Berkshire's holdings fell a smidgeon less than 10pc in 2008 - against a 37pc loss on the S&P 500 index and a near-20pc fall for the average hedge fund. In that context, the Nebraskan investor's worst performance since 1965 - and only his second annual decline in book value - doesn't look so bad.

Berkshire shares tell a different story. At the end of 2007, they traded at a premium to book value of more than 80pc. By the end of last year, the premium had shrunk to less than 40pc. Now, it's only just more than 10pc based on the year-end book value, admittedly now too high.

Buffett sees the economy in a "shambles" through 2009 and probably beyond. That affects both Berkshire's own businesses and those of companies whose stock it owns. But other potential worries look less rational. One centres on derivatives. Berkshire has written put options on global stock indexes and various derivatives on corporate credit.

These have generated $13bn-odd of paper losses between them so far. Yet not only is Buffett's record comforting as to the eventual outcomes, the exposure is scaled to Berkshire's capacity - unlike, say, that of the flailing American International Group. An improbable total loss on the credit derivatives, for instance, would absorb only half Berkshire's cash on hand.

A fearful market could be focusing too much on the unhappy keywords attached to Berkshire: finance, derivatives, investments and insurance, to name a few. When irrational fears start to subside, the Buffett premium could return. While it might be damped by the fact that the 78-year-old isn't immortal, that could still help Berkshire stock even before the underlying investments turn around.


http://www.telegraph.co.uk/finance/breakingviewscom/4926633/Irrational-fears-erode-Buffett-premium.html

China built enormous stake in US equities just before crash

China built enormous stake in US equities just before crash
The Chinese government more than tripled its investments in the US stock market to $99.5bn (£70 bn) just months before the financial crisis, it has emerged.

By Malcolm Moore in Shanghai
Last Updated: 3:06PM GMT 02 Mar 2009

The People's Bank of China in Beijing. The shift into riskier investments was the result of a power-struggle between the central bank and the Ministry of Finance.

Provisional figures from the US Treasury department showed that Beijing was holding $99.5bn of shares in June 2008, up from $29bn in 2007. Two years ago, China only held $4bn in US equities, preferring to concentrate on Treasury bills.

However, economists said the latest figures suggested that China may have bought as much as $150bn of equities worldwide, or 7pc of its vast foreign exchange reserves.

Brad Setser, an economist with the Council on Foreign Relations, a US think tank, said the State Administration of Foreign Exchange (SAFE), a branch of the Chinese central bank charged with looking after the foreign reserves, was responsible for the buying spree.

Last year, a Sunday Telegraph investigation revealed that SAFE had built holdings of £9bn in companies listed in London. The new figures suggest that SAFE has now become one of the largest sovereign wealth funds in the world, although it is likely to have been badly burned by falling markets during the financial crisis.

The shift into riskier investments was the result of a power-struggle between China’s central bank and the Ministry of Finance, both of which wanted to show they were capable of managing China’s huge wealth.

The Ministry of Finance runs the $200bn China Investment Corporation (CIC), the country’s official sovereign wealth fund, but has been heavily criticised for taking loss-making stakes in Blackstone and Morgan Stanley.

Mr Setser estimates that only $8bn of the $99.5bn of US equities were bought by CIC, with the rest being purchased by SAFE. “SAFE wanted to show that it could manage a portfolio of 'risk’ assets,” he said, in order to make sure that more of its funds were not passed over to CIC.

However, an official from the China Banking Regulatory Committee said that SAFE had little idea of how to make overseas investments, and lacks a proper team of analysts and stock-pickers.

The head of SAFE, Hu Xiaolian, is one of the few women at the top of a major Chinese government department. However, she has little commercial experience, having spent her entire career at the central bank and graduated from the bank’s own university.

Nevertheless, Arthur Kroeber, an economist at Dragonomics in Beijing, said China is likely to continue buying equities despite the slumping markets.

“They would have seen a considerable erosion in value by now, but I think they are absolutely playing a long game. Fundamentally, what choice do they have? What short game is there that is making money these days?” he said.

“SAFE is saying: the market may be problematic, but if we buy now for the long-term, we’ll probably finish up.” He added that the Chinese public was relatively content with the management of the country’s wealth, since SAFE does not disclose any information about its buying activities.

“As long as they don’t build a big stake in a high-profile company that blows up, they will be ok,” he said, adding that he thought it was possible for the central bank to put as much as 10pc of its foreign reserve holdings into equities. “I would be surprised, however, if they were authorised to put more than 10pc into shares,” he said.


http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4927567/China-built-enormous-stake-in-US-equities-just-before-crash.html

Warren Buffett loses billions

Warren Buffett loses billions
Berkshire Hathaway drops $10.9bn in investor's worst year since 1965.

By Richard Tyler
Last Updated: 8:07PM GMT 28 Feb 2009

Warren Buffett Billionaire Warren Buffett, the Sage of Omaha, has recorded his worst financial performance since taking over famed US investment group Berkshire Hathaway in 1965.

The group's net worth dropped by $10.9bn (£7.6bn) in the final quarter of 2008 to end the year at $109.2bn.

His investments and broad mix of insurance, utility, manufacturing and services businesses barely broke even, with quarterly net income sinking 96pc to $117m.

In his annual letter to shareholders, released yesterday, Mr Buffett pointed the finger at $4.61bn of pre-tax losses booked on falls in the market value of 251 derivative contracts that he had personally approved. These included 15-20 year bets that the FTSE 100 and S&P 500 would recover all their recent losses.

Mr Buffett described derivatives as "dangerous", but he remained convinced that they were a good bet. "I believe each contract we own was mispriced at inception, sometimes dramatically so. If we lose money on our derivatives, it will be my fault," he wrote.

Nineteen of top 20 stocks in Berkshire's US portfolio, valued at $51.9bn, fell last year. Coca-Cola, its top holding, dropped 26pc and American Express plunged 64pc.

Mr Buffett, 78, said he would maintain Berkshire's "Gibraltar-like financial position" during 2009 by retaining "huge amounts of excess liquidity, near-term obligations that are modest and dozens of sources of earnings".

But he offered a gloomy outlook, saying: "The [US] economy will be in shambles throughout 2009 – and probably well beyond."

He also upped his attack of the US government's bail-out of his insurance and banking rivals. "Though Berkshire's credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing," he wrote. "At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one."

He said he would continue to buy shares and bonds from companies. "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down," he quipped. However, he hinted that his focus this year would be in snapping up companies at bargain prices that had the potential for solid earnings growth in the future. "We like buying underpriced securities, but we like buying fairly-priced operating businesses even more," he wrote.

Despite his near-mythical status, Mr Buffett readily admitted that he was fallible. "During 2008 I did some dumb things in investments," he said, pointing to his decision to increase the fund's stake in oil and gas giant ConocoPhillips at peak prices as he did not anticipate the dramatic fall in energy prices in the second half of the year. It cost Berkshire shareholders several billion dollars.

Berkshire Class A shares closed on Friday at $78,600 (£55,138) and have fallen 44pc since the end of February 2008. Over the last 44 years, the value of Berkshire's net assets has rocketed from $19 to $70,530 a share, a growth rate of 20.3pc compounded annually.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4885828/Warren-Buffett-loses-billions.html



From The Sunday TimesMarch 1, 2009

Warren Buffett: ‘I was dumb in 2008’
‘Sage of Omaha’ admits his mistakes contributed to company’s worst year everDominic Rushe
WARREN BUFFETT admitted yesterday that he did “some dumb things” in 2008, as the world’s richest investor announced that Berkshire Hathaway, his company, had its worst year on record.

In his annual letter to shareholders, Buffett said his investments lost $11.5 billion (£8 billion) last year.

He also offered a gloomy outlook for the year ahead. “The economy will be in shambles throughout 2009 – and for that matter, probably well beyond,” Buffett wrote.

The firm was hit by the deteriorating economy, the collapse of the credit markets and share prices and the second-worst hurricane season on record.

Berkshire owns a wide portfolio of companies, including leading American insurers and has stakes in firms such as American Express, Coca-Cola, Goldman Sachs and Tesco.

This diversity and Buffett’s cautious approach saved the firm from further losses, but he admitted that he contributed to the fall through some “dumb” moves of his own.

The man known as the “Sage of Omaha” said he spectacularly mistimed his purchase of Conoco Phillips stock last year when oil prices were near their peak. They have fallen by $100 a barrel since last July.

“I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong,” he wrote.

Conoco Phillips shares closed at $37.35 on Friday, less than half the price they fetched last spring and summer when Buffett was buying.

Buffett also said he made a $244m investment in two Irish banks “that appeared cheap to me”. At the year end Berkshire wrote down the holdings to their market value of $27m, an 89% loss on the investment. The stocks have since declined further.

The measurement Berkshire uses to track its performance, book value per share, fell 9.6% in 2008, its biggest decline since Buffett took over the company in 1965.

Berkshire still beat the Standard & Poor’s 500-stock index, which fell 37% last year, including dividends. It was only the second year that Berkshire has posted negative results. In 2001 Berkshire’s book value per share fell 6.2%.

Buffett sees little hope of a quick recovery. While he argues that the American government was right to take “strong and immediate action”, he believes the short-term consequences are likely to be bad. Doling out economic medicine “by the barrel” is likely to trigger an “onslaught of inflation”, he wrote.

“Moreover, big industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”

But long term, Buffett remains bullish on the prospects for the American economy. “Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21.5% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years.

“America has had no shortage of challenges. Without fail, however, we’ve overcome them,” wrote Buffett. “America’s best days lie ahead.”

http://business.timesonline.co.uk/tol/business/markets/article5822125.ece

Stocks to fall AT LEAST another 40%! Here's why ...

On Mon, 2/9/09, Money and Markets <eletter@moneyandmarkets.com> wrote:

Stocks to fall AT LEAST another 40%! Here's why ...
by Martin D. Weiss, Ph.D.

With the U.S. economy now reeling from the fastest job collapse since the Great Depression ...
With the Treasury Secretary ready to introduce yet another bank bailout plan this week ...
And as we suffer through the uncontrollable bust of the largest-ever speculative bubble of all time ...
You don't need a Ph.D. in economics to recognize that there's much more pain to come.
But how much pain? And precisely how FAR can the stock market decline? Not many people can provide that answer with precision.
But of all the analysts I know in the world today, one of those who provides the most reasoned — and most well-documented — answer is, not surprisingly, far away from Wall Street.
He is Claus Vogt, writing from Berlin.
Claus is the co-editor of Sicheres Geld, the German-language edition of our Safe Money Report.
He also edits the German edition of our International ETF Trader. And unlike nearly all his peers in Germany, Claus delivered overall gains in the high double digits last year, even as global markets tumbled.
Perhaps most impressive, thanks largely to Claus' input, the bank he advises was one of the very few in Europe that actually made good money for their clients last year.
The key to his success: The ability to watch the U.S. economy from afar, track it closely, and forecast it accurately.
A case in point: Well before the U.S. housing bubble burst, Claus Vogt and co-author Roland Leuschel wrote the book, Das Greenspan Dossier, in which they predicted:
"When the U.S. real estate bubble bursts, it will not only trigger a recession and a stock market crash, but it will jeopardize the whole financial system, especially Fannie Mae and Freddie Mac, the two U.S. — mortgage giants taking center stage in this huge bubble."
Amazingly, in that one short paragraph, they captured the full range of events unfolding today — a scenario that almost every Wall Street or Washington expert missed by a mile.
That's why I have asked Claus to contribute more regularly to Money and Markets. That's also why I have asked him to tell us how far the U.S. stock averages are likely to fall — and why.
The report below is his answer.

Why U.S. Stocks Could Fall
AT LEAST Another 40%
by Claus Vogt
Every major fundamental indicator relied upon by stock market analysts is unanimously pointing to a stock price plunge of at least another 40% from current levels. That would take ...
The S&P 500 down to the 500 level ...


The Dow Jones Industrials to below 5000, and ...


The Nasdaq to the low 900s.
Don't be surprised. To understand why, you need only step back from the trees and see the obvious chain of cause and effect:
You know that the major factor behind the current business cycle was — and is — a worldwide housing bubble and bust.
You also know that the bubble was driven by the speculative surge in mortgages and equity loans.
What you may not know is that, according to former Fed Chairman Alan Greenspan, that bubble accounted for 50% to 70% of GDP growth in recent years.
So it should come as no surprise that as soon as the mortgages and equity loans dried up, consumption and GDP growth began to take a huge hit.
Worse, the real estate bubble distorted the entire structure of the U.S. economy:
It created grossly misplaced investments — second homes nobody really needed, massive numbers of people drawn into the real estate business as brokers and lenders, plus a whole new industry built around mortgage-backed securities.


It created broad instability — too much consumption, too little savings, too many imports of goods from China and elsewhere — not to mention a huge current account deficit.


It fostered unsound risk-taking by the financial sector — from Bear Stearns to Lehman Brothers, from Washington Mutual to Citibank, from Merrill Lynch to the hedge fund industry. And ...


The end result was one of the largest, most unstable and most risky economic environments of modern times.
But now, with the bursting of the bubble,
The U.S. faces the monumental task of bringing this highly distorted economy back into alignment and putting the country back on a sound footing.
Investments that are not viable must be abandoned or aborted. A new equilibrium must be found. New price levels for stocks and all assets must be reached.
The two words commonly associated with this natural process? Recession and depression!
But you ask: Why so severe? And why must stocks fall so far?
For the simplest answer, consider the rule of thumb that has almost always held true concerning speculative bubbles: The bigger the bubble, the greater the distortions; and the greater the distortions, the graver the inevitable correction.
This rule alone leads me to expect a long, severe decline in the economy and the stock market; and this basic reasoning, in itself, supports my forecast for a 40%-or-more plunge in the broad stock market averages. But let's also take a look at the rest of my supporting arguments ...
Argument #1
U.S. Home Prices Continue to Fall
Consider the facts:
Despite the unprecedented home price declines to date, the median price of an American home (compared to the median income a family earns) is still 15% above its average level of recent decades. In other words, homes are still overpriced by 15% or more.


If you take the bubble years of 2002 — 2006 out of the equation, as any reasonable analyst would, then U.S. home prices are actually 20% out of whack.


But that assumes the median income of U.S. households will not go down. If you factor in declines in income, home prices can fall even further.


Moreover, once a bubble has burst, price corrections don't typically stop at some average statistical level; they overshoot to the downside.
Bottom line: You can expect home prices to continue to tumble. And you can expect all the ugly financial consequences of falling home prices to stay with us in the coming quarters — huge losses and bankruptcies in the banking sector.

Argument #2
The Current Crisis Is GLOBAL, Hitting
The Whole World Simultaneously
And Providing No Outside Support
To Offset U.S. Domestic Weakness
In 1990, when Japan's real estate bubble burst, the rest of the world was booming, helping Japan's export industry.
Unfortunately we don't have that kind of a cushion today. Quite the contrary, instead of relief from exports to other countries, the U.S. export sector is getting slammed by falling overseas demand. And a rising dollar will only make U.S. goods more expensive abroad, depressing demand and aggravating this problem.
Additionally, as usual in bad times, there are already strong hints of protectionism emerging around the word; the same kind of beggar-thy-neighbour policies that aggravated the Great Depression are gaining traction globally.

Argument #3
Based on Earnings, Stocks
Are Still FAR From Cheap
Let's start with the most widely followed fundamental indicator: P/E or the price/earnings ratio.
Right now the trailing 12-month P/E of the S&P 500 is 18. In other words, the average stock in the index is selling for 18 times its earnings of the past year.
That, in itself, is a very high multiple. It means that, on average, investors will have to wait a full 18 years before the investment they make in a company is matched by the accumulated earnings of the period (assuming the company can maintain its current level of profits).
Yes, 18 times earnings is much lower than it was in 1999 or 2000. But historically, 18 is still very high — even considering today's low interest rates.
See for yourself by taking a look at the following graph going all the way back to 1925. In this graph ...

Source: http://www.decisionpoint.com/

The black line shows the S&P 500 Index ...


The red line shows how the S&P would have behaved if it had a constant P/E of 20, a level considered overvalued, and ...


The green line shows how it would have behaved if it had a P/E of 10, which is borderline undervalued.
For 70 long years, from 1925 to 1995, the S&P rarely reached the overvalued level and even more rarely exceeded it. In contrast, this graph makes it very clear that the period between 1995 and 2008 is an extreme aberration in terms of this all-important stock market fundamental. It leaves no doubt that ...
In the long history of the U.S. stock market, stocks have almost always been much more moderately priced. But in the current period, stocks have been, and remain, broadly overpriced.
That alone argues for lower stock prices. But the argument is even stronger when you look at these two-decade spans:
The 1930s and 1940s, plus


The 1970s and 1980s
These two periods included secular (long-term) bear markets. And as you can see, during those periods, the S&P 500 often fell to levels corresponding to a P/E of less than 10.
That was especially true when the cyclical downturns in the market were accompanied by severe recessions, similar to what we're already experiencing today. Indeed ...
The P/E of the S&P 500 dropped to 7 during the recession of the mid-1970s — and it did it again in the recession of the early 1980s.
Even if the economic contraction could somehow be less severe this time ... even assuming no decline in corporate earnings ... and even if the P/E only declines from its current level of 18 to about 10 ... that alone would take the S&P 500 Index to my target level of 500 or lower!
Thus ...
If the P/E of the average S&P stock were to plunge to 7 again, the market would fall to much lower levels, and ...


If you factor in falling corporate earnings, it could fall STILL further.
So you can see that 500 for the S&P Index is not just a reasonable target. It's actually a conservative target, erring on the side of predicting fewer adverse consequences than may actually be the case.

Argument #4
Based on Dividend Yields, U.S.
Stocks Are Equally Overvalued
The dividend yield of the S&P 500 stocks — how much you can earn in dividends per dollar invested — draws an equally bleak picture:
After being extremely depressed during the recent bubble years, the dividend yield of the S&P 500 has recovered somewhat to 3.39%. But despite this improvement, history tells us that the current level still signals a highly overvalued market.


Solid, long-term buying opportunities don't come until you can get a dividend yield of 6% or more. But to reach that level, the dividend yield on S&P stocks needs to rise by 2.61 percentage points (3.39 + 2.61 = 6.00).


Assuming no further dividend cuts or cancellations, to get those extra 2.61 points in yield, the price of the average S&P 500 stock would have to fall by 43.5%. (A stock selling for, say, $100 today and yielding 3.39% would have to fall to $56.50 to yield 6.00% — a stock price decline of 43.5%.)
In sum, the message from this fundamental indicator fully supports the conclusion I reached based on the P/E ratio: The market would have to fall by AT LEAST 40% or so — and that's assuming there are no further dividend cuts. But with dividend cuts inevitable, stocks will have to fall even further to match the 6% yield that might make them attractive again.



Argument #5
Earnings Are Falling, and
Doing So Conspicuously!
Earnings and earnings estimates are already down substantially since 2007, with no sign of let-up.
The following chart shows you the S&P 500 along with the GAAP-based earnings for its component stocks.
As you can see, the earnings are already down from $85 at the top of the cycle to $46 in the fourth quarter of last year. And earnings estimates for the first quarter 2009 are nearly 10% lower, at $42.
The dire situation we're in today: Companies' lack of pricing power — and a recession that leaves hardly any sector unscathed — virtually guarantees further declines in earnings, making the current market valuations even further out of line.




Source: http://www.decisionpoint.com/

Argument #6
Earnings Will STAY Depressed
Longer Than Usual!
Among S&P 500 companies, profit margins reached an all-time high during this cycle, meaning that they must now fall back to a more normal level. This is what has happened in every major recession, and it's what almost inevitably will happen this time as well.
Specifically ...
In 1966, profit margins hit a high of 6% and then fell back to 3.5% in 1970.


In 1978, they rallied back up to 6% and then came all the way down to 2% by 1986.


In 1997, they rose again to 5.5% and fell back to below 3% in 2002. And now ...


In 2006, propelled by the big debt and high leverage of the recent bubble, they reached a record high of more than 8%.
But now, having started on a downward path again, it's highly improbable that profit margins will recover anytime soon.

Argument #7
Debt and Leverage Are Gone!
The facts here are even more shocking:
At the top of this cycle, the profits of the financial sector reached up to 30% of all S&P 500 earnings — thanks to psychedelic leveraging and drunken risk-taking.


Now, nearly all the extreme leverage in the financial sector — and nearly all the leverage financial institutions were providing other industries through 2007 — is no more.
Without a doubt, the forced sobering of the banking industry will have a long-lasting impact, and there is no way we can expect an early comeback of the old greedy days of Wall Street.

Argument #8
The Undeniable History of
Speculative Bubbles
Throughout history, after the bursting of every speculative bubble, prices almost invariably revert back to the level corresponding to the beginning of the bubble. In other words ...
Whatever boost the bubble gives to prices and values ... the ensuing bust inevitably takes it ALL back.
This held true for the global stock market bubble that burst in 1929 and for the Japanese stock and real estate bubbles that burst in the early 1990s. And if you go all the way back to the South Sea bubble, which burst in 1720, you will see this very same pattern.
So our task is simple: To identify the price level of the S&P 500 at the juncture when this entire moon shot was first launched.
And based on objective measures like the S&P's dividend yield or P/E ratio, we know quite well where and when that was:
The U.S. stock market bubble began in 1995, when the S&P 500 broke above the 500 level ... and it reached its climax in 2000, when the P/E ratio of U.S. stocks reached nosebleed levels of 38 on the S&P 500 and more than 200 on the Nasdaq.
Plus, there can now be little doubt that ...
Ever since 2000, the U.S. stock market has been in a protracted bear market!
To be sure, after the first two years of the bear market in 2000-2002, the Fed engineered a real estate bubble, which, in turn, produced a parallel stock market rally that prevailed during most of the middle years of this decade.
But now we can look back at the entire mid-decade rally and see it for what it really was: A mere interlude in a nine-year bear market (so far!) that began at the turn of the millennium.
So, looking back at history and looking ahead, it would not be unusual in the least to see the S&P 500 fall all the way back to the original starting level of approximately 500 for the S&P, validating and revalidating my forecast.

Will This Bear Market and Recession EVER End?
Of course it will, eventually. And when it does, incredible bargain opportunities will abound. But to make sure you can buy them, you must do two things:
(1) Keep your assets intact and ...
(2) Wait patiently for that day.
Wait for the damage of the bust to play itself out. Wait for P/E ratios to come back down to their lower range, corresponding to deep recessions of the past. Wait for at least 6% dividend yields. Then, start thinking about investing in a recovery.
Plus, there's one more thing you can do: Starting right now, you can grow your assets significantly DURING the decline.
Later this month, I will show you precisely how I'm planning to accomplish each of those goals with a new million-dollar contrarian portfolio I am managing.
I will make the trek from Berlin to Palm Beach, join Martin in an online video seminar, and lay it all out for you piece by piece, step by step.
Stand by for the invitation via email. And in the meantime, I look forward to getting your personal and direct input into how you think a dream portfolio should be handled in these tough times.
Best wishes from Berlin,
Claus

HSBC takes £17bn hit on bad loans

From The Sunday TimesMarch 1, 2009

HSBC takes £17bn hit on bad loans
Bank set to launch Britain’s biggest rights issue to guard against the global recessionIain Dey and John Waples

HSBC is to own up to the full horror of its American sub-prime business, Household, when it unveils a £7 billion goodwill write-off in addition to a £17 billion provision against rising bad loans.

The provisions will be announced tomorrow alongside a heavily discounted £12 billion rights issue — the biggest ever held in Britain — and a dividend cut, as Stephen Green, the bank’s chairman, moves to shore up its balance sheet.

The fundraising will make HSBC the strongest bank in the world that has not received a cash injection from the state.

Its tier-one ratio, a key measure of financial strength, will rise from 8.5% to 10.5%. Analysts say it will provide a $40 billion (£28 billion) buffer against further bad debts.

Even after the dividend is halved, the annual yield is expected to be about 5.5%, making it one of the highest in the FTSE 100. And despite the scale of the bad debts, the group will still be profitable.

The HSBC board has decided to waive its bonuses in light of the fundraising, including an estimated £1m bonus for chief executive Michael Geoghegan.

Household has now lost the bank more than $30 billion since the summer of 2006 — more than twice what HSBC paid for the bank just six years ago.

Large parts of the operation will now be closed down and almost all the value attributed to the business will be wiped out. Out of the $24 billion of provisions, two-thirds was against Household.

HSBC briefed its biggest investors about the rights issue on Friday and yesterday morning spoke to a further 30 banks. The offering is being underwritten by Goldman Sachs and JP Morgan Cazenove.

The decision to press ahead with the fundraising follows a worsening economic outlook for Asia, Europe, Latin America and the US.

- Lloyds Banking Group is poised to re-open negotiations with the Treasury over plans to dump £250 billion of toxic loans into the government’s asset-protection scheme.

Talks broke down last week after the government told Lloyds it would have to pay higher fees to take part than Royal Bank of Scotland.

As part of the deal, the government stake in Lloyds is expected to rise above 50%. Lloyds will also have to agree to defer bonuses for top managers over two years.


http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5822089.ece


Related Links
Toxic loans an unknown bill to taxpayers
HSBC’s triumph has been to stay independent

All Around the World, Trade Is Shrinking

All Around the World, Trade Is Shrinking
By FLOYD NORRIS
Published: February 27, 2009

The world trading system, whose growth was deemed an inevitable part of globalization only a year ago, is now shrinking rapidly.

Falling Exports

Japan, a country built in large part on exports, reported this week that its exports in January were worth $47.2 billion, the lowest monthly total in more than four years and down 34 percent from the same month a year ago.

Even in the global recession of the 1970s, Japanese exports never dropped that fast.

Most major European countries have not reported on January trade as yet, and the United States figures will not be out until March 13. But the rapid fall in trade has been experienced in virtually every country that has reported figures for January, as is shown in the accompanying graphs.

A year ago, businesses in many developing countries were confident that they could ride out an American recession, if need be, without major problems. Not only were other industrialized countries still growing, but the volume of trade was growing between developing countries, and there seemed to be little reason that would suffer.

Nonetheless, that is happening, perhaps because much of that trade was in items destined to be sent on to industrialized markets after further work. China’s overall exports were down 17 percent in January compared with a year ago, even though exports to Japan and the United States were off by 10 percent or less. Shipments to other Asian countries were off by much more, including a drop of 29 percent in exports to South Korea.

Chinese shipments to India were growing at an annual rate of more than 50 percent as recently as last summer. But in January, they declined by 18 percent.

The 17 percent drop for overall Chinese exports, while large, is still modest compared with the declines being felt by other developing economies. The three largest economies in South America — Argentina, Brazil and Chile — reported declines of 27 to 42 percent. Exports from Taiwan were off 46 percent, and those from Singapore fell by 41 percent.

The shrinkage of world trade may continue for some time, as recession-induced falls in demand are intensified by protectionist policies aimed at shoring up local industries. Developing countries without large foreign currency reserves may also be hurt by a drying up of credit to finance investment and trade.

China is trying to offset the impact of the world recession with a broad stimulus program aimed at increasing local demand for products. But that option is not available for many countries, which do not have large foreign currency reserves and will take in less in taxes as unemployment rises amid factory layoffs.

Floyd Norris’s blog on finance and economics is at nytimes.com/norris.

http://www.nytimes.com/2009/02/28/business/economy/28charts.html?ref=worldbusiness

Propping Up a House of Cards: AIG

Talking Business
Propping Up a House of Cards

By JOE NOCERA
Published: February 27, 2009

Next week, perhaps as early as Monday, the American International Group is going to report the largest quarterly loss in history. Rumors suggest it will be around $60 billion, which will affirm, yet again, A.I.G.’s sorry status as the most crippled of all the nation’s wounded financial institutions. The recent quarterly losses suffered by Merrill Lynch and Citigroup — “only” $15.4 billion and $8.3 billion, respectively — pale by comparison.

Related
Times Topics: American International Group Inc.

At the same time A.I.G. reveals its loss, the federal government is also likely to announce — yet again! — a new plan to save A.I.G., the third since September. So far the government has thrown $150 billion at the company, in loans, investments and equity injections, to keep it afloat. It has softened the terms it set for the original $85 billion loan it made back in September. To ease the pressure even more, the Federal Reserve actually runs a facility that buys toxic assets that A.I.G. had insured. A.I.G. effectively has been nationalized, with the government owning a hair under 80 percent of the stock. Not that it’s worth very much; A.I.G. shares closed Friday at 42 cents.
Donn Vickrey, who runs the independent research firm Gradient Analytics, predicts that A.I.G. is going to cost taxpayers at least $100 billion more before it finally stabilizes, by which time the company will almost surely have been broken into pieces, with the government owning large chunks of it. A quarter of a trillion dollars, if it comes to that, is an astounding amount of money to hand over to one company to prevent it from going bust. Yet the government feels it has no choice: because of A.I.G.’s dubious business practices during the housing bubble it pretty much has the world’s financial system by the throat.
If we let A.I.G. fail, said Seamus P. McMahon, a banking expert at Booz & Company, other institutions, including pension funds and American and European banks “will face their own capital and liquidity crisis, and we could have a domino effect.” A bailout of A.I.G. is really a bailout of its trading partners — which essentially constitutes the entire Western banking system.
I don’t doubt this bit of conventional wisdom; after the calamity that followed the fall of Lehman Brothers, which was far less enmeshed in the global financial system than A.I.G., who would dare allow the world’s biggest insurer to fail? Who would want to take that risk? But that doesn’t mean we should feel resigned about what is happening at A.I.G. In fact, we should be furious. More than even Citi or Merrill, A.I.G. is ground zero for the practices that led the financial system to ruin.
“They were the worst of them all,” said Frank Partnoy, a law professor at the University of San Diego and a derivatives expert. Mr. Vickrey of Gradient Analytics said, “It was extreme hubris, fueled by greed.” Other firms used many of the same shady techniques as A.I.G., but none did them on such a broad scale and with such utter recklessness. And yet — and this is the part that should make your blood boil — the company is being kept alive precisely because it behaved so badly.
•
When you start asking around about how A.I.G. made money during the housing bubble, you hear the same two phrases again and again: “regulatory arbitrage” and “ratings arbitrage.” The word “arbitrage” usually means taking advantage of a price differential between two securities — a bond and stock of the same company, for instance — that are related in some way. When the word is used to describe A.I.G.’s actions, however, it means something entirely different. It means taking advantage of a loophole in the rules. A less polite but perhaps more accurate term would be “scam.”
As a huge multinational insurance company, with a storied history and a reputation for being extremely well run, A.I.G. had one of the most precious prizes in all of business: an AAA rating, held by no more than a dozen or so companies in the United States. That meant ratings agencies believed its chance of defaulting was just about zero. It also meant it could borrow more cheaply than other companies with lower ratings.
To be sure, most of A.I.G. operated the way it always had, like a normal, regulated insurance company. (Its insurance divisions remain profitable today.) But one division, its “financial practices” unit in London, was filled with go-go financial wizards who devised new and clever ways of taking advantage of Wall Street’s insatiable appetite for mortgage-backed securities. Unlike many of the Wall Street investment banks, A.I.G. didn’t specialize in pooling subprime mortgages into securities (CDO). Instead, it sold credit-default swaps.
These exotic instruments acted as a form of insurance for the securities. In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage. “It was a way to exploit the triple A rating,” said Robert J. Arvanitis, a former A.I.G. executive who has since become a leading A.I.G. critic.
Why would Wall Street and the banks go for this? Because it shifted the risk of default from themselves to A.I.G., and the AAA rating made the securities much easier to market. What was in it for A.I.G.? Lucrative fees, naturally. But it also saw the fees as risk-free money; surely it would never have to actually pay up. Like everyone else on Wall Street, A.I.G. operated on the belief that the underlying assets — housing — could only go up in price.
That foolhardy belief, in turn, led A.I.G. to commit several other stupid mistakes. When a company insures against, say, floods or earthquakes, it has to put money in reserve in case a flood happens. That’s why, as a rule, insurance companies are usually overcapitalized, with low debt ratios. But because credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn’t have to put anything aside for losses. And it didn’t. Its leverage was more akin to an investment bank than an insurance company. So when housing prices started falling, and losses started piling up, it had no way to pay them off. Not understanding the real risk, the company grievously mispriced it.
Second, in many of its derivative contracts, A.I.G. included a provision that has since come back to haunt it. It agreed to something called “collateral triggers,” meaning that if certain events took place, like a ratings downgrade for either A.I.G. or the securities it was insuring, it would have to put up collateral against those securities. Again, the reasons it agreed to the collateral triggers was pure greed: it could get higher fees by including them. And again, it assumed that the triggers would never actually kick in and the provisions were therefore meaningless. Those collateral triggers have since cost A.I.G. many, many billions of dollars. Or, rather, they’ve cost American taxpayers billions.
The regulatory arbitrage was even seamier. A huge part of the company’s credit-default swap business was devised, quite simply, to allow banks to make their balance sheets look safer than they really were. Under a misguided set of international rules that took hold toward the end of the 1990s, banks were allowed use their own internal risk measurements to set their capital requirements. The less risky the assets, obviously, the lower the regulatory capital requirement.
How did banks get their risk measures low? It certainly wasn’t by owning less risky assets. Instead, they simply bought A.I.G.’s credit-default swaps. The swaps meant that the risk of loss was transferred to A.I.G., and the collateral triggers made the bank portfolios look absolutely risk-free. Which meant minimal capital requirements, which the banks all wanted so they could increase their leverage and buy yet more “risk-free” assets. This practice became especially rampant in Europe. That lack of capital is one of the reasons the European banks have been in such trouble since the crisis began.
•
At its peak, the A.I.G. credit-default business had a “notional value” of $450 billion, and as recently as September, it was still over $300 billion. (Notional value is the amount A.I.G. would owe if every one of its bets went to zero.) And unlike most Wall Street firms, it didn’t hedge its credit-default swaps; it bore the risk, which is what insurance companies do.
It’s not as if this was some Enron-esque secret, either. Everybody knew the capital requirements were being gamed, including the regulators. Indeed, A.I.G. openly labeled that part of the business as “regulatory capital.” That is how they, and their customers, thought of it.
There’s more, believe it or not. A.I.G. sold something called 2a-7 puts, which allowed money market funds to invest in risky bonds even though they are supposed to be holding only the safest commercial paper. How could they do this? A.I.G. agreed to buy back the bonds if they went bad. (Incredibly, the Securities and Exchange Commission went along with this.) A.I.G. had a securities lending program, in which it would lend securities to investors, like short-sellers, in return for cash collateral. What did it do with the money it received? Incredibly, it bought mortgage-backed securities. When the firms wanted their collateral back, it had sunk in value, thanks to A.I.G.’s foolish investment strategy. The practice has cost A.I.G. — oops, I mean American taxpayers — billions.
Here’s what is most infuriating: Here we are now, fully aware of how these scams worked. Yet for all practical purposes, the government has to keep them going. Indeed, that may be the single most important reason it can’t let A.I.G. fail. If the company defaulted, hundreds of billions of dollars’ worth of credit-default swaps would “blow up,” and all those European banks whose toxic assets are supposedly insured by A.I.G. would suddenly be sitting on immense losses. Their already shaky capital structures would be destroyed. A.I.G. helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing. It would be funny if it weren’t so awful.
I asked Mr. Arvanitis, the former A.I.G. executive, if the company viewed what it had done during the bubble as a form of gaming the system. “Oh no,” he said, “they never thought of it as abuse. They thought of themselves as satisfying their customers.”
That’s either a remarkable example of the power of rationalization, or they were lying to themselves, figuring that when the house of cards finally fell, somebody else would have to clean it up.
That would be us, the taxpayers.

http://www.nytimes.com/2009/02/28/business/28nocera.html?em=&pagewanted=all

You've Sold Your Stocks. Now What?

You've Sold Your Stocks. Now What?
Thursday, February 26, 2009
provided by


Back in the summer of 2007, Ben Mickus, a New York architect, had a bad feeling. He and his wife, Taryn, had invested in the stock market and had done well, but now that they had reached their goal of about $200,000 for a down payment on a house, Mr. Mickus was unsettled. “Things had been very erratic, and there had been a lot of press about the market becoming more chaotic,” he said.

In October of that year they sat down for a serious talk. Ms. Mickus had once lost a lot of money in the tech bubble, and the prospect of losing their down payment made Mr. Mickus nervous. “I wanted to pull everything out then; Taryn wanted to keep it all in,” he said. They compromised, cashing in 60 percent of their stocks that fall — just before the Dow began its slide.

A couple of months later, with the market still falling, Ms. Mickus was convinced that her husband was right, and they sold the remainder of their stocks. Their down payment was almost completely preserved. Ms. Mickus said that in private they had “been feeling pretty smug about it.”

“Now our quandary is, what do we do going forward?” Ms. Mickus said.

Having $200,000 in cash is a problem many people would like to have. But there is yet another worry: it’s no use taking money out of the market at the right time unless it is put back in at the right time. So to get the most from their move, the Mickuses will have to be right twice.

“Market timing requires two smart moves,” said Bruce R. Barton, a financial planner in San Jose, Calif. “Getting out ahead of a drop. And getting back in before the recovery.”

It’s a challenge many investors face, judging from the amount of cash on the sidelines. According to Fidelity Investments, in September 2007 money market accounts made up 15 percent of stock market capitalization in the United States. By December 2008, it was 40 percent.

“In 2008 people took money out of equities and took money out of bond funds,” said Steven Kaplan, a professor at the Booth School of Business at the University of Chicago.

He cited figures showing that in 2007 investors put $93 billion into equity funds. By contrast, in 2008 they took out $230 billion.

Michael Roden, a consultant to the Department of Defense from the Leesburg, Va., area, joined the ranks of the cash rich after a sense of déjà vu washed over him in August 2007, as the markets continued their steep climb. “I had taken quite a bath when the tech bubble burst,” he said. “I would never let that happen again.”

With his 2002 drubbing in mind, he started with some profit taking in the summer of 2007, but as the market turned he kept liquidating his investments in an orderly retreat. But he was not quite fast enough.

“When Bear Stearns went under I realized something was seriously wrong,” he said. The market was still in the 12,000 range at that time. When the Federal Reserve announced it would back Bear Stearns in March 2008, there was a brief market rebound. “I used that rally to get everything else out,” he said.

Mr. Roden said he had taken a 6 percent loss by not liquidating sooner, which still put him ahead of the current total market loss. Now he has about $130,000, with about 10 percent in gold mutual funds, 25 percent in foreign cash funds and the rest in a money market account.

“I am looking for parts of the economy where business is not impaired by the credit crunch or changes in consumer behavior,” he said. He is cautiously watching the energy markets, he said, but his chief strategy is “just trying not to lose money.”

As chief financial officer of Dewberry Capital in Atlanta, a real estate firm managing two million square feet of offices, stores and apartments, Steve Cesinger witnessed the financial collapse up close. Yet it was just a gut feeling that led him to cash out not only 95 percent of his personal equities, but also those of his firm in April 2007.

“I spent a lot of time trying to figure out what was happening in the financial industry, and I came to the conclusion that people weren’t fessing up,” he said. “In fact, they were going the other way.”

Now, he said, “We have cash on our statement, and it’s hard to know what to do with it.”

Having suffered through a real estate market crash in Los Angeles in the early 1990s, Mr. Cesinger is cautious to the point of re-examining the banks where he deposits his cash. “Basically, I’m making sure it’s somewhere it won’t disappear,” he said.

The F.D.I.C. assurance doesn’t give him “a lot of warm and fuzzy,” Mr. Cesinger said. “My recollection is, if the institution goes down, it can take you a while to get your money out. It doesn’t help to know you’ll get it one day if you have to pay your mortgage today.”

His plan is to re-enter the market when it looks safe. Very safe. “I would rather miss the brief rally, be late to the party and be happy with not a 30 percent return, but a bankable 10 percent return,” he said.

Not everyone is satisfied just to stem losses. John Branch, a business consultant in Los Angeles, said his accounts were up 100 percent from short-selling — essentially betting against recovery. “The real killer was, I missed the last leg down on this thing,” Mr. Branch said. “If I hadn’t missed it, I would be up 240 percent.”

Mr. Branch said he had seen signs of a bubble in the summer of 2007 and liquidated his stocks, leaving him with cash well into six figures. Then he waited for his chance to begin shorting. The Dow was overvalued, he said, and ripe for a fall.

Shorting is a risky strategy, which Mr. Branch readily admits. He said he had tried to limit risk by trading rather than investing. He rises at 4:30 a.m., puts his money in the market and sets up his electronic trading so a stock will automatically sell if it falls by one-half of 1 percent. “If it turns against me, I am out quickly,” he said. By 8, he is off to his regular job.

Because Mr. Branch switches his trades daily based on which stocks are changing the fastest, he cannot say in advance where he will put his money.

And if he did know, he’d rather not tell. “I hate giving people financial advice,” he said. “If they make money they might say thank you; if they miss the next run-up, they hate you.”

http://finance.yahoo.com/retirement/article/106655/You've-Sold-Your-Stocks-Now-What;_ylt=At2xBlsXPsWlCuNeEFN6PP5O7sMF?

5 New Investing Rules for Retirement

5 New Investing Rules for Retirement
by Katy Marquardt
Monday, January 12, 2009
provided by

Many of the old rules for retirement investing no longer apply. Facing longer life spans, increasing healthcare costs, and a market in crisis, retirees will need more growth in their portfolios during the coming years and decades. At the same time, they need the assurance that a 37 percent market drop--as we saw in 2008--won't completely devastate their remaining nest egg. A growing number of financial planners are rethinking the conventional wisdom. (Remember the old adage that you should subtract your age from 100, and devote that percentage of your portfolio to stocks?) Here are five new rules to consider:

Separate your investments into different pots.

Often, investors in retirement lump all of their money together, with which they pursue one strategy, says Eric Bailey, managing principal of Captrust Advisers in Tampa. His firm, which works with pensions, endowments, and high net-worth individuals, takes an approach ripped straight from the institutional investors' playbook. Clients' money is separated into three categories:

• Short-term funds reside in very low-risk investments, such as high-quality bonds;
• intermediate-term money goes in a balanced mix of stocks and bonds--such as a 50-50 or 60-40 split; and
• long-term investments starting with five-year time horizons are heavier on stocks.

"This way, you can take advantage of a market sell-off with your long-term investments and you'll avoid needing to liquidate investments when stocks are down," Bailey says.

Don't reach too far for yield.

Cash may be king in this market, but decent yields are hard to find. Treasuries present the ultimate in safety, but the pay is meager: The one-year bill currently yields just 1.1 percent and the five-year 2.2 percent. Unfortunately, if you're looking for a bigger payout, you'll have to take on some risk. Says Oliver Tutt, managing director of Newport, R.I.-based Randall Financial Group: "You'll have to make a trade-off somewhere, particularly if you're dealing with large amounts of money." Stick with quality: If you're considering a bond fund, for example, be sure to look under the hood at its various holdings and review the fund's prospectus to see what types of bonds--and credit ratings--it targets. "Quality is always important, but more than ever it is now," says Bill Walsh, chief executive officer of Hennion & Walsh, an asset management firm based in Parsippany, N.J. "Know what you're buying."

Make it a muni.

Government bonds are airtight when it comes to safety, but their yields are near all-time lows. As an alternative for retired investors in the upper tax brackets, municipal bonds are worth considering. With munis, investors get the benefit of tax-free income, less volatility than corporate bonds, and, theoretically, more safety. "Right now, there's more value in munis than almost every other area. But be sure you know the issuer," says Walsh. Among munis, he recommends high-grade, general-obligation bonds and essential-purpose bonds such as the sewer authority. "Stay away from things like nursing home bonds, which could go out of business," he says. Walsh prefers single-issue bonds over bond funds, which "will work, but you have to be careful," because there is no set maturity date, no set yield, and managers can sometimes buy outside of that asset class.

Go for dividends.

It's a no-brainer that quality matters in a market like this. But how do you know if a stock is "quality"? Dividends are one indicator. That's because dividend income--which is essentially a portion of company profits paid out to shareholders--helps offset fluctuations in a stock's share price, creating a cushion during turbulent markets. "During trying times, dividend-paying stocks tend to do well," says Paul Alan Davis, portfolio manager of the Schwab Dividend Equity Fund. Davis also looks for companies on solid footing, which have plenty of cash and aren't in "financial straits." During the first 11 months of year, Davis says, the S&P's dividend-paying stocks fell by roughly 36 percent; meanwhile, nondividend payers were down about 45 percent. You'll find those dividend payers in more developed industries such as consumer staples, utilities, and healthcare. Examples include Philip Morris, Coca-Cola, General Mills, Bristol-Myers Squibb, and Pfizer.

Consider "alternatives":

This asset class, which is used most often by pensions and other institutional investors, runs the spectrum from commodities and annuities to real estate. But individual investors can also use them to dramatically reduce volatility in their portfolios, says Gary Hager, founder and chief executive of Integrated Wealth Management in Edison, N.J. He likes real estate investment trusts, or REITs, which have historically provided a smooth ride for investors. A sample portfolio from 1978 through 2007 shows that putting 10 percent of equity holdings in U.S. REITs improved returns by 0.3 percent and cut volatility by 0.9 percent, compared with investing in stocks alone, according to The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly. Other alternative investments to consider include commodities and inflation-protected securities, both of which are offered in ETF form.

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

http://finance.yahoo.com/retirement/article/106421/5-New-Investing-Rules-for-Retirement;_ylt=Am2QlvwWI5XxfPfoUEFikj1T0tIF

More from USNews.com: • Why You Should be an Optimistic Investor in 2009 • 7 Ways to Save for Retirement During a Recession • Best Places to Retire

Your financial advisers: Rules for the New Reality

Rules for the New Reality
by Ron LieberThursday, February 26, 2009
provided by
Back in September, before we were all inured to the tottering nature of so many financial giants, investors were looking for someone to blame.

More from NYT.com: • How About a Stimulus for Financial Advice? • Coaches for a Game of Money• Readers Weigh in With Tips on Jobs and Money

So when Prince & Associates, a market research firm in Redding, Conn., polled people with more than $1 million in investable assets, it wasn’t any great surprise that 81 percent intended to take money out of the hands of their financial advisers. Nearly half planned to tell peers to avoid them, while 86 percent were going to recommend steering clear of their firms.

In January, Prince took another poll of people with similar assets, and only a percentage in the teens had engaged in trash-talking. Just under half of the investors had taken money away from their advisers.

All of the bad feelings, however, raised a simple question that’s even more essential when we’ve all been so severely tested. What, exactly, does your wealth manager owe you? And what can you never reasonably expect?

Some of the answers are basic. Your financial advisers should have impeccable credentials. They should be free of black marks on their regulatory or disciplinary records. They should agree, on Day 1, to act solely in your best interest, not theirs or those of any company that might toss them a commission.

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But other standards are less obvious, and the carnage in the markets provides an excellent opportunity to review them.

What You Should Expect

A Long Look at Risk

Most of us aren’t honest with ourselves about how much investment risk we can handle. Even worse, we tend to change our minds at market tops and bottoms, making the wrong choices at precisely the wrong moments.

An accurate assessment of risk is important. But you can view risk in many ways.

David B. Jacobs of Pathfinder Financial Services in Kailua, Hawaii, usually starts with risk capacity. Young people have a great deal of risk capacity, since they have their whole career ahead of them to make up for any mistakes. A football player might have much less risk capacity, since he could have only a few years of high earnings. And some retirees have plenty of risk capacity, if they have a solid pension.

Then Mr. Jacobs moves to risk need. Need is driven by goals. Someone with no heirs and $20 million in municipal bonds might not care so much about significantly growing the portfolio. But if that person suddenly becomes passionate about a cause, he or she may want to double that amount in a decade to create an endowment or put up a building.

Only then does risk tolerance become a factor. “You have to help people visualize what the risk means,” Mr. Jacobs said. “If a year from now, your $1 million is $700,000, how would it change your life? Does that mean you can’t go visit your grandchildren? I’m trying to dig down and make people think of exactly what their day would be like.”

A Balance Sheet Audit

Diversifying the risks in your portfolio is merely the beginning of the process. Burt Hutchinson, of Fischer & Hutchinson Wealth Advisors in Bear, Del., trained as an accountant before earning his certified financial planner designation. He believes in tax diversification too, across a range of savings vehicles with different tax rules.

He wants his firm to act as a sort of personal chief financial officer, looking at liabilities as well as assets and at spending as much as saving. “How are you tracking your cash flow?” he will ask. “Is it increasing? Decreasing? Do you have any idea where it’s going?” He says that a good financial planner should ask to see your tax return, not just your investment portfolio.

Customization

A 100-page financial plan lands with a thud and comes with fancy leather binding. What you might not know, however, is that off-the-shelf software probably produced most of it.

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Not that there’s anything wrong with computer projections. But most people’s financial lives, even those of the wealthy, do not contain 100 pages of complications. And enormous financial plans can be overwhelming and difficult to follow.

“Plans need not be over 10 to 15 pages,” said Timothy J. Maurer of the Financial Consulate in Hunt Valley, Md. “But every bit of it should be customized.”

To eat the same dog food

When Dr. Marc Reichel, an anesthesiologist from Beaufort, S.C., grew tired of stockbrokers pitching investments they would never use themselves, he queried a new adviser about her own portfolio. “Unlike with my previous experiences, she said, ‘Sure, this is what I have, take a look,’ ” he said. “And it wasn’t just a one-time thing. It was ongoing.”

Dr. Reichel has been with that planner, Sheila M. Chesney, of Chesney & Company in Sheldon, S.C., for nearly a decade. “The only way I could feel like I did a good job was to say that I’m doing the same thing,” she said. “If it wasn’t working for me, I wouldn’t be doing it.”
Boredom

You have the right to be bored by your financial life. There is no shame in putting things on autopilot, saving the same percentage of your income in a diverse collection of index funds for decades on end.

This philosophy drew skepticism in the 1990s for Spencer D. Sherman, when his clients wondered why he wasn’t putting them in individual technology stocks. But Mr. Sherman, a financial planner and the author of “The Cure for Money Madness,” thinks his clients would be better off seeking thrills far away from the financial markets.

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“If you’re in a diversified passive portfolio, you have nothing to talk about at a cocktail party,” he said. “But why don’t people make investments a smaller part of their lives? It almost seems like people need to fulfill that desire for excitement somehow, and investing is an easy way to do it.”

What You Should Not Expect

Market Timing

It would’ve been nice if every wealth manager had moved clients to 100 percent cash positions around the middle of last year. The truly prescient might have put some money down on exchange traded funds that bet on the decline of various stock indexes.

But those who did probably didn’t call the top in 2000, or get back into the market in early 2003. Nor will they know when the current bear market will end. For the same reasons that most mutual fund managers consistently underperform market indexes over the long haul, especially after taxes and fees, your adviser is not clairvoyant, either.

“In the 1990s, a lot of people wanted to know how much we were going to beat the market by and our strategy for market timing,” said Laura H. Mattia, wealth management principal with Baron Financial Group in Fair Lawn, N.J. Most people know better now, after riding the roller coaster for a decade or watching the unraveling in recent months.

Low Risk, High Return

After market timing, Ms. Mattia said, this fiction is the second of two great false beliefs in money management. “It’s the same as wanting to believe in a magic pill that will cause you to lose 20 pounds,” she said. “People are looking for the easy way of achieving their goals, but things just aren’t always necessarily so easy.”

The notion seemed abstract until December. Then, after years of smooth supposed returns, prosecutors accused the wizard Bernard L. Madoff of making it all up. Recently, the Texas financier Robert Allen Stanford came under scrutiny for peddling high-yielding C.D.’s that may have been too good to be true. Anyone who utters the phrase “low risk, high return” deserves close examination.

To Be a Pest

Remember that you hire advisers in order to set some clear, long-term goals — which probably shouldn’t change every day in reaction to the ups and downs of the markets.

“One of my biggest roles is to take the emotion out and be a calming force,” said Lon Jefferies of Net Worth Advisory Group in Midvale, Utah. “If clients want to continually change their risk tolerance when the market drops another 300 points, that’s going to make it impossible for the relationship to succeed, because they’re changing the rules almost every day.”

Rather than calling every day to second-guess yourself and your adviser, set aside dates to sit down and examine your feelings.

Certainty

This one may be the toughest to swallow. Jay Hutchins, of Comprehensive Planning Associates in Lebanon, N.H., never promises an outcome. The past year, he said, should make it easier for new clients to understand why.

Even a collection of Treasury bills and top-rated, immediate fixed annuities is not enough to establish certainty in his mind. “When you decide you’re going to build a house, you build the building accordingly and with prudence, depending on whether tornadoes or earthquakes are most likely to threaten it,” he said. “Then, an airplane flies into it. Did you do anything wrong to fail to plan for an airplane crash? Of course not. You plan for what is going to be most likely.”

While Mr. Hutchins is not yet ready to predict a return to the 1930s, he doesn’t believe it makes sense to place the likelihood of it happening at zero either.

Life, in general, is unpredictable.

And for the adviser, that uncertainty should be cause for some modesty.

Milo M. Benningfield, of Benningfield Financial Advisors in San Francisco, notes that we tend to value aggressiveness. “But when I think about the meltdown, I feel like it was overconfidence,” he said. “It was a colossal lack of modesty that led people to underestimate the risk involved and believe that they understood things more than they did.”

So to him, a big part of being modest is recognizing your own limits. “You’re more inclined to say, What if I’m wrong?” he said, adding that he often reaches out for help on insurance and estate planning matters. “I think the definition of incompetence is failing to recognize that you don’t know something.”

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