The ABCs of Screwball Economics

The ABCs of Screwball Economics
By Alyce Lomax April 13, 2009 Comments (2)

We've had TARP (and the return of the TARP), we've had TALF, now we've got the PPIP. Our government's interventions into the economy have come hand in hand with a great propensity for acronyms that are becoming less clever all the time. (I mean, come on, PPIP?)

I've got some great acronyms for what I think these are going to do for our economic situation, but most are not appropriate for our family-friendly site. Here's one that makes it through: SNAFU. Or how about ROFLMAO, if you've got a gallows sense of humor. I still see little possibility that the government's actions are going to help our economic situation in the least.

IPS (It's the price, stupid)

The new PPIP basically fails to admit what more and more people have been arguing, and that is that the major banks like Bank of America (NYSE: BAC), Citigroup (NYSE: C), and Wells Fargo (NYSE: WFC) don't have liquidity problems, but rather solvency problems.

There is toxic garbage on their books (and continued lack of transparency on them). The prevailing idea that it's acceptable to price these assets at fantasy levels sounds absurd to me, but the banks want to price these assets at unrealistic levels, and the recent loosening of mark-to-market rules pretty much tells you what you need to know -- somebody wants the fantasy to continue. (Even worse, some are wondering if the banks are just going to sell the assets to one another, with government help.)

The real marketplace wants to price those toxic assets, as low-down and nasty as those prices may be, and doesn't want to pay artificially inflated prices. (Meanwhile, why would we want the government to subsidize purchase of these assets at artificially high prices anyway?). Suffice it to say, it doesn't follow that prices should be whatever these companies decide they should be and the government should support that.

IDS (It's the debt, stupid)

The government's programs have been geared toward stimulating lending again. But here's the thing that's been driving me crazy for ages: There's a heck of a lot of indebtedness in our system already; it's part of the problem, and that goes for corporations, consumers, and our government itself.

Of course, the government wants to kick up lending again. Our past economic growth was based on an artificial daisy chain fed into by bubbly asset prices, low interest rates, and the inevitable loads and loads of debt being taken on. Of course, this has to correct because if you really think about it, it's been utterly unsustainable, but nobody wants to take the inevitable medicine. The smart consumers and companies that didn't dig themselves into massive debt holes probably don't want to borrow right now. So, who's left?

Consumers were melting the MasterCard (NYSE: MA) and Visa (NYSE: V) cards buying up Coach (NYSE: COH) handbags and Tiffany baubles, or flat-screen TVs or Sirius XM (Nasdaq: SIRI) radios. Unfortunately, we can now gather that a heck of a lot of their spending wasn't based on real income, but rather subsidized by debt or taking equity out of their bubbly priced homes. Now many consumers are busted broke, with slashed credit lines, defaulted loans, and lost jobs. Should they borrow more?

Meanwhile, many corporations loaded up on debt, too. I remember thinking it was weird for companies to take on debt to say, pay dividends or buy back shares (much less to finance their operations). Back then, it made sense to just about everybody, and everybody was doing it. But now? It's pretty clear that many companies weren't concerned about a rainy day coming, a day when it might become difficult for them to service that debt. Well, it's come. Should they borrow more?

IES (It's the economy, stupid)

It's morally reprehensible that the government should expect already overly indebted consumers to keep on borrowing to reinflate our deflating economy. Some of us are concerned that our economy has been an accident waiting to happen, given the fact that consumer spending represents 70% -- the lion's share -- of GDP. The emphasis on services and the financial industry's love for pushing pieces of paper around has put us in a precarious position indeed, as has the emphasis on debtor spending to make our economic world go round.

Meanwhile, it looks like my fears of a zombie apocalypse economy are coming to pass. Throwing good money after bad not only robs taxpayers, but it also robs healthy companies of capital as the zombies are kept alive. Propping up losers means that soon, all we'll have are losers, and an awfully big bill to pay.

BBIAF, with more bad acronyms

There are many arguments emanating from many different schools of thought about what to do. I've always thought that the government should stay out of this so we could have a difficult, but likely shorter lived, correction, clear out the artificial excess, and get to work on moving back to an economy with real innovation and truly healthy businesses -- all the while leaving bubbly fakery behind.

I know many people don't agree with my point of view, but it seems like more and more people from many different economic camps are starting to come around to the idea that the fixes from government intervention from both the previous administration and the current one are simply helping politically connected bankers and doing little to actually fix what ails the real economy. The word "oligarchy" seems to be cropping up an awful lot, in fact.

Let's hope that the next acronym program won't be one that denotes being completely out of luck, but after endless government interventions that don't seem to help and seem more likely to hurt, it's starting to feel like that's our destiny. Let's hope not.


Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.

http://www.fool.com/investing/general/2009/04/13/the-abcs-of-screwball-economics.aspx

Market Strategies Review Notes I (January 2009)

AVERAGING DOWN
Averaging Down: Good Idea Or Big Mistake?


THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
THRIVING IN EVERY MARKET
MR. MARKET
SUITABLE SECURITIES AT SUITABLE PRICES
PAYING RESPECT TO THE MARKET
TIMING VERSUS PRICING
BELIEVING A BULL MARKET
THE PAUSE AT THE TOP OF THE ROLLER COASTER
MAKING FRIENDS WITH A BEAR
BARGAINS AT THE BOTTOM
SIGNS AT THE BOTTOM
BUYING TIME
IF YOU ABSOLUTELY MUST PLAY THE HORSES


BALANCE SHEET VALUE: ASSETS AT WORK
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary


INCOME STATEMENT VALUE
Income Statement Value: The Earnings Payoff
Adjustments in Current Earnings figure
Avoid Pro Forma financial figures
Avoid Extrapolated Future Earnings Growth figures
Estimating Growth in Value Investing
Franchise Value
GROWTH'S VALUE
GROWTH'S VALUE (illustrations)


CASH FLOW STATEMENT VALUE
Cash Flow Statement Value
Discounted Cash Flow valuation method
Hazards of the Future and Limitations of DCF


UNDERSTANDING DISCOUNT RATES
Understanding Discount Rates
Risk-free rate
Traditional Method: Discount rate or WACC (I)
Traditional Method: Discount rate or WACC (II)
Modern Portfolio Theory
Portfolio Theory: Market Risk Premiums
Portfolio Theory: Beta
Is the market efficient, always?
Discount Rate Determinations: Summary


STOCK MARKET PRICES
Stock Market Prices
Market metrics P/E and Intrinsic value
Rational Thinking about Irrational Pricing
The Anxiety of Selling
Control Value of Majority Interest


10 TENETS OF VALUE INVESTING
MR. MARKET PRINCIPLE
BUSINESS ANALYST PRINCIPLE
REASONABLE PRICE PRINCIPLE
PATSY PRINCIPLE
CIRCLE OF COMPETENCE PRINCIPLE ****
MOAT PRINCIPLE
MARGIN OF SAFETY PRINCIPLE ****
IN-LAW PRINCIPLE
ELITISM PRINCIPLE
OWNER PRINCIPLE


SUBSETS OF RISKS:
Partitioning Risk
Business risk
Financial risk
Purchasing power risk
Interest rate risk
Foreign exchange risk
Political risk
Social risk


Also read:
My Investment Philosophy and Strategy
****Investment Philosophy, Strategy and various Valuation Methods

Derivatives trading crackdown begins

Derivatives trading crackdown begins

Banks start talks on bringing order to chaotic derivatives market for credit default swaps

Elena Moya guardian.co.uk,
Tuesday 7 April 2009 16.30 BST Article history

An attempt to bring order to the chaotic, multibillion-pound world of credit derivatives began in London today with moves to standardise contracts in the market.

Banks last year traded about $54tn of credit default swaps (CDSs), contracts that protect investors against the default of a bond or loan, but the global financial crisis triggered the collapse of the market, bringing down AIG, the world's biggest insurer.

The G20 summit in London last week made it a priority to bring order to the market and today specialists from banks including UBS and Morgan Stanley agreed to trade standardised contracts, as well as organise committees that would oversee cases where there was a default.

"The proposed changes provide a means to guarantee greater unanimity of results across positions, add more openness and transparency to the process, and give formal representation to members of the buy-side community," said Markit, a leading provider of data on CDSs.

The London-based firm has also started to publish CDS pricing data on its website. Apart from CDSs on specific corporate loans or bonds, the public can also see the price investors pay to protect themselves against debt issued by sovereign countries such as Britain or the US. The riskier a country is perceived to be, the more expensive its insurance.

"Regulators are very keen to see this being put into place," said David Austin, a director at Markit.

As the unsupervised market grew after 2000, the number of CDSs issued rose well above the number of loans or bonds outstanding, as any bank could issue these insurance products and receive hefty fees for them.

AIG issued large amounts of CDSs on products that contained sub-prime mortgages, and could not honour the payments when they defaulted. It was like selling insurance on a car to five people, even if only one owned the car. If the car crashed, five people claimed the insurance. AIG is now partially nationalised.

With so many CDSs linked to a particular loan or bond, creditors queue to receive payments but some will not be paid because there are more contracts than real lenders. With corporate defaults expected to soar, a better way of dealing with payments after a default is needed.

Standard contracts are seen as a first step towards a central clearing house – a place where all banks contribute collateral to be used as a lifeline in case a bank or institution collapses. At present, banks trade with each other, not through a central house.

The G20 said last week it would push for the creation of centralised clearing houses as a way of improving market confidence. US and European governments are spending billions of pounds to insure the banks' worst assets, or to buy them from their books, in order to restore inter-bank lending and kick-start the economy.

http://www.guardian.co.uk/global/2009/apr/07/derivatives-trading-crackdown

Which shares for income?

Which shares for income?

The yield on BT of 19pc sounds good, but remember the adage "if it looks too good to be true, it probably is.

By Gavin Oldham
Last Updated: 6:47PM BST 10 Apr 2009

With the equity market close to a six-year low and with equity yields at historically high levels compared with gilts, the temptation is there for investors to switch into shares: not only in the hunt for income but also factoring in that one day the equity market will recover.

The challenge is, however, to find those rewards without shouldering too much risk; because whereas cash savings can face risk of default, it is in equities that you face investment risk.

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Is silver the new gold?
US fund manager declares war on UK trackers
Inflation: how to protect your portfolio
Deflation: How to protect your portfolio
Investors 'ready to return to stock market'

However, it is also worth remembering that since 1900 high-yielding shares have outperformed the stock market as a whole, 85pc of the time over 10-year periods. They've also outperformed the market since September 2008, when the markets really went into freefall.

As an example of the relationship between risk and yield, let's compare two blue chips with apparent dividend attractions: BP and BT.

This week, the yield on BT is 19pc net of basic-rate tax. Sounds good, but remember the adage "if it looks too good to be true, it probably is". Every analyst in the City expects BT to cut its dividend next time around. Investors should be cautious of above-average share yields: the market is telling you "the higher the yield the higher the risk".

BP has a yield of 9pc. Recently, there has been speculation that the low oil price may force the company to cut the dividend. This has proved unfounded, as BP's management has said the dividend will be maintained this year and it will try to maintain it into 2010, even if the oil price stays at current levels. So here we have some medium-term visibility and potential for capital growth if the oil price rises over the medium term.

When considering an investment for yield, note the dividend cover; this is how many times the profits cover the dividend and is an indicator of whether a company will be able to pay future dividends at the current rate or higher. It is calculated by dividing the net earnings per share by the net dividend per share.

For example, if a company has earnings per share of 5p and it pays out a dividend of 2.5p, the dividend cover will be 5/2.5 = 2. The higher the cover, the better the chance of maintaining the dividend if profits fall. However, a lower figure may be acceptable if the group's profits are relatively stable.

So a good portfolio of equity income shares would feature mainstream companies with good dividend cover and a relatively recession-proof business (such as energy), plus a good helping of the FTSE 100 iShare – a form of exchange traded fund (ETF) marketed by Barclays – to provide some extra diversification, and to provide the opportunity to take advantage of market volatility.

Such a portfolio might include BP, yielding 9pc with 2.6 times dividend cover; GlaxoSmithKline, yielding 5.5pc with 1.6 times cover; National Grid, yielding 6.5pc with 2 times cover; Scottish & Southern, yielding 5.7pc (1.7); Shell, yielding 4.2pc (3.5); Vodafone, yielding 6pc (1.8) plus the FTSE iShare yielding 5.1pc with no cover calculation available.

An investment of £12,000 could therefore give you about £710 income over a full year, an overall yield of 5.9pc.

These equity shares could provide a relatively stable source of income combined with the potential for capital growth. There is, of course, a risk of further setbacks in the markets that could take your investment value lower, but with blue-chip companies like these it's a relatively low-risk portfolio as equities go.

Keep in touch with the companies you've invested in: if you hold the shares in an Isa or a broker's nominee, opt in for shareholder communications direct from the company. It's your right to be kept informed and it shouldn't cost you extra.

Your holding in the FTSE 100 iShare may provide the opportunity to do some tactical purchases or sales. Rather than buying the whole holding at once, you could invest in £1,000 steps as the market falls back, then set a limit at, say, 10pc up on your purchase price to sell as the market strengthens.

This way you can take advantage of short-term volatility to improve the return on the portfolio as a whole. Finally, if you're a taxpayer make sure you use your Isa allowance to minimise your income tax bill.

Gavin Oldham is chief executive of the Share Centre

http://www.telegraph.co.uk/finance/personalfinance/investing/5131421/Which-shares-for-income.html

How and Why Do Companies Pay Dividends?

How and Why Do Companies Pay Dividends?
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)

Look anywhere on the web and you're bound to find information on how dividends affect stockholders: the information ranges from a consideration of steady flows of income, to the proverbial "widows and orphans", and to the many different tax benefits that dividend-paying companies provide. An important part missing in many of these discussions is the purpose of dividends and why they are used by some companies and not by others. Before we begin describing the various policies that companies use to determine how much to pay their investors, let's look at different arguments for and against dividends policies. (Read more about widows and orphans in Widow And Orphan Stocks: Do They Still Exist?)


Arguments Against Dividends

First, some financial analysts feel that the consideration of a dividend policy is irrelevant because investors have the ability to create "homemade" dividends. These analysts claim that this income is achieved by individuals adjusting their personal portfolios to reflect their own preferences. For example, investors looking for a steady stream of income are more likely to invest in bonds (in which interest payments don't change), rather than a dividend-paying stock (in which value can fluctuate). Because their interest payments won't change, those who own bonds don't care about a particular company's dividend policy.

The second argument claims that little to no dividend payout is more favorable for investors. Supporters of this policy point out that taxation on a dividend is higher than on a capital gain. The argument against dividends is based on the belief that a firm that reinvests funds (rather than paying them out as dividends) will increase the value of the firm as a whole and consequently increase the market value of the stock.

According to the proponents of the no dividend policy, a company's alternatives to paying out excess cash as dividends are the following: undertaking more projects, repurchasing the company's own shares, acquiring new companies and profitable assets, and reinvesting in financial assets. (Keep reading about capital gains in Tax Effects On Capital Gains.)

Arguments For Dividends

In opposition to these two arguments is the idea that a high dividend payout is important for investors because dividends provide certainty about the company's financial well-being; dividends are also attractive for investors looking to secure current income. In addition, there are many examples of how the decrease and increase of a dividend distribution can affect the price of a security.

Companies that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions; these companies would be positively affected by increasing dividend payouts or making additional payouts of the same dividends.

Furthermore, companies without a dividend history are generally viewed favorably when they declare new dividends. (For more, see Dividends Still Look Good After All These Years.)

Dividend-Paying Methods

Now, should the company decide to follow either the high or low dividend method, it would use one of three main approaches: residual, stability, or a hybrid compromise between the two.

Residual
Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met. These companies usually attempt to maintain balance in their debt/equity ratios before making any dividend distributions, which demonstrates that they decide on dividends only if there is enough money left over after all operating and expansion expenses are met.

For example, let's suppose that a company named CBC has recently earned $1,000 and has a strict policy to maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity).

Now, suppose this company has a project with a capital requirement of $900. In order to maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project by using debt ($300) and two-thirds ($600) by using equity. In other words, the company would have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual amount of $400 ($1,000 - $600) for dividends. On the other hand, if the project had a capital requirement of $1,500, the debt requirement would be $500 and the equity requirement would be $1,000, leaving zero ($1,000 - $1,000) for dividends. If any project required an equity portion that was greater than the company's available levels, the company would issue new stock.

Stability
The fluctuation of dividends created by the residual policy significantly contrasts with the certainty of the dividend stability policy. With the stability policy, companies may choose a cyclical policy that sets dividends at a fixed fraction of quarterly earnings, or it may choose a stable policy whereby quarterly dividends are set at a fraction of yearly earnings. In either case, the aim of the dividend stability policy is to reduce uncertainty for investors and to provide them with income.

Suppose our imaginary company, CBC, earned the $1,000 for the year (with quarterly earnings of $300, $200, $100, $400). If CBC decided on a stable policy of 10% of yearly earnings ($1,000 x 10%), it would pay $25 ($100/4) to shareholders every quarter. Alternatively, if CBC decided on a cyclical policy, the dividend payments would adjust every quarter to be $30, $20, $10 and $40 respectively. In either instance, companies following this policy are always attempting to share earnings with shareholders rather than searching for projects in which to invest excess cash.

Hybrid
The final approach is a combination between the residual and stable dividend policy. Using this approach, companies tend to view the debt/equity ratio as a long-term rather than a short-term goal. In today's markets, this approach is commonly used by companies that pay dividends. As these companies will generally experience business cycle fluctuations, they will generally have one set dividend, which is set as a relatively small portion of yearly income and can be easily maintained. On top of this set dividend, these companies will offer another extra dividend paid only when income exceeds general levels.

Conclusion

If a company decides to pay dividends, it will choose one of three approaches: residual, stability or hybrid policies. Which a company chooses can determine how profitable its dividend payments will be for investors - and how stable the income.To read more on this subject, see Dividend Facts You May Not Know.

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


http://investopedia.com/articles/03/011703.asp?partner=basics4bb

How Low Can The Market Go?*

How Low Can The Market Go?*
Henry Blodget

Mar. 5, 2009, 4:49 PM59


*UPDATE: After today's 4% drop, the S&P 500 is now at 680, an 11.85 P/E.

EARLIER: On days like today, it helps to look at the silver lining. Here it is: The farther stocks fall, the cheaper they get--and the higher the expected long-term return becomes. Unfortunately, that doesn't mean we don't have a long way to go on the downside.

There were four massive stock bubbles in the 20th Century: 1901, 1929, 1966, and 2000. During each of these bubble peaks, the S&P 500 neared or exceeded 25X on professor Robert Shiller's cyclically adjusted P/E ratio.* After the first three of these peaks, the S&P 500 PE did not bottom until it hit 5X-8X. We're still in the middle of the last one.

The most recent bubble peak, 2000, was by far the most extreme we have ever experienced. In 2000, the S&P 500 by prof. Shiller's measure exceeded 40X (it had never before exceeded 30X). With the S&P 500 hitting 700 today, the PE has now fallen back to 12X. (See chart above.)

Three major bubbles are not enough historical precedent to confidently conclude where the S&P 500 will bottom this time around, but it seems reasonable to conclude that the trough will be in line with--or below--the preceeding lows (Given that we just had the highest peak in history by a mile, it doesn't seem absurd to think that we might be headed for the lowest trough in history by a mile.)

So where are we now?

Based on Professor Shiller's latest numbers, we're at about a 12X P/E. (Prof. Shiller's last update was at 805 on the S&P 500, which produced a 14X P/E. Plugging in today's 700 on the same earnings number, we get about a 12X P/E). The 12X PE compares favorably to the long-term arithmetic average of 16X, but it's still way above the historical troughs of 5X-8X.

So where would the S&P bottom if we hit the previous trough PE lows? It depends how we get there.

If the stock market stops falling and earnings eventually begin to grow again, we would be close to the bottom: The market could simply move sideways for 5-10 years while earnings growth gradually reduced the PE to the 5X-8X range. This is what happened in the 1970s.

Alternatively, the market could just keep dropping, as it did in the early 1930s.

Using Professor Shiller's latest earnings data, here's where the numbers would fall out if the market just kept dropping and 10-year average earnings didn't grow from today's level:

P/E S&P 500 Level

10X 575
8X 460 (highest previous trough low)
7X 400 (average previous trough low)
6X 350
5X 300 (lowest previous trough low)

In short, if the S&P fell straight to the high-end of its previous trough range (8X PE, or 460), it would fall another 35% from today's level (700)

If the S&P fell straight to the low-end of its previous trough range (5X PE, or 300), it would fall another 55+% from today's level.

Here's hoping we don't set a new low on the downside.


--------------------------------------------------------------------------------

* Shiller's "cyclically adjusted" PE takes an average of 10 years of S&P 500 earnings instead of using a single year's. Why? Because the business cycle makes single-year earnings misleading. In boom times, profit margins are high, and P/Es look artificially low (and stocks look misleadingly cheap). In busts, profit margins collapse, and P/Es look artificially high (and stocks look misleadingly expensive--as is the case this year). Shiller's cyclically-adjusted PE mutes the effect of the business cycle and, therefore, provides a much more informative and predictive PE ratio.

Here's a link to Professor Shiller's site, where you can download an Excel spreadsheet with all of the S&P 500 data >

http://www.businessinsider.com/new-low-on-shiller-pe-12x-normal-trough-low-is-8x-2009-3

Today's Bear Market Now Not As Bad As The Great Crash!

Today's Bear Market Now Not As Bad As The Great Crash!
Henry BlodgetApr. 6, 2009, 6:17 AM7

We are happy to report, via Doug Short, that today's bear market is no longer as bad as the Great Crash, as measured by depth-of-decline-over-time. Thanks to the rally of the past month, we've crawled back above the Great Crash trendline.

It's worth noting, however, that the rip-roaring bull market of the past month does bear an unnerving resemblance to a similar pattern in 1931...before the last leg of the Great Crash took the DOW from down 50% to down 89%.

Visit dshort.com for an interactive version of this chart, as well as a bunch of other cool charts and analyses >

Is the Stock Market Cheap?

In times of critical importance, the conventional P/E ratio often lags the index to the point of being useless as a value indicator. "Why the lag?" you may wonder. "How can the P/E be at a record high after the price has fallen so far?" The explanation is simple. Earnings fell faster than price. In fact, the negative earnings of Q4 is something that has never happened before in the history of the S&P Composite.

The P/E10 Ratio

Legendary economist and value investor Benjamin Graham noticed the same bizarre P/E behavior during the Roaring Twenties and subsequent market crash. Graham collaborated with David Dodd to devise a more accurate way to calculate the market's value, which they discussed in their 1934 classic book, Security Analysis. They attributed the illogical P/E ratios to temporary and sometimes extreme fluctuations in the business cycle. Their solution was to divide the price by the 10-year average of earnings, which we'll call the P/E10. In recent years, Yale professor Robert Shiller, the author of Irrational Exuberance, has reintroduced the P/E10 to a wider audience of investors.

Is the Stock Market Cheap?



April 3, 2009 revised April 6th


An old-fashioned way to answer this question is to look at the historic Price-to-Earnings (P/E) ratio using reported earnings (as opposed to earnings estimates).


The "price" part of the P/E calculation is available in real time on TV and the Internet. The "earnings" part, however, is more difficult to find. The authoritative source is the Standard & Poor's website, where the latest earnings are posted on the earnings page in a linked Excel file (see column D). More...

140 Years Of Bull And Bear Markets

140 Years Of Bull And Bear Markets
Henry BlodgetApr. 6, 2009, 3:25 PM

Doug Short has created a nice snapshot of 140 years of market history. It's a logarithmic chart, so it shows the impact of percentage rather than absolute price moves, and prices have been adjusted for inflation. Note that the chart is price-only: It does not include the impact of dividends.

Key points:

Bull and bear markets have always been with us (duh)

The market spends about half the time above trend and half below trend (duh)

The market has been above trend for about 20 years (ruh roh)

The trough-to-peak 18-year bull market that peaked in 2000 (+666%) was the biggest in history by a mile (ruh roh)

In the 5-year bull market in the middle of the Great Depression (1932-1937), the S&P jumped 266% (five years is a long time--don't want to miss that)

20 years after the 1929 peak, the S&P traded at half its 1929 value (ruh roh)





Doug short has more thoughts at dshort.com >

See Also:
Today's Bear Market Is No Longer Worse Than The Great Crash!

How Bear Markets End

Posted April 7, 2009 05:15 PM (EST)

How Bear Markets End

Doug Short has taken a detailed look at the 10 bear markets and bear-market-recoveries since 1950. You can click through a slideshow showing each of these periods in detail here >

Importantly, Doug's charts do not include the horrific bear market of 1929-1932, which puts all of the post-war ones to shame. To get a more detailed sense of how that one "bottomed," click through to the last slide, which overlays our current bear market on top of the three nastiest ones in the last century.

Some key points:

* The 10 bear markets since 1950 have bottomed down 20% to 57% (the low in the current cycle) off the peak. The current bear is by far the worst since the Great Crash, which bottomed down 89%.

* The bear phases of these markets lasted from 3 - 30 months (we're currently in month 17). The drop from 1929-1932 was also about 30 months.

* Most of these markets offered some sort of "retest" of the low. Importantly, however, some did not. (As always, beware confident "technical" analysts)

* As this additional chart shows, the S&P is now trading about in-line with its long-term price trend after 15 years of trading above it. So even if we have put in the bear-market bottom, it is likely that the S&P will eventually trade below trend for a considerable period of time.

Click to Start >

See Also: 140 Years Of Bull And Bear Markets

How to Start a Business with No Money

Posted April 8, 2009 04:35 PM (EST)

How to Start a Business with No Money

Is it possible to start a business with little or no money? Absolutely. In fact, back in 2004 that's exactly what I did. I launched World 50, investing only $400.00, and that was to buy stationary to print invoices.

This was good news for me, because I had no money. Zilch, nada, goose egg, the bagel. And I quickly discovered that investors don't want to invest in you anyway until the model is proven, and then take everything for their investment. Bad idea, particularly if you don't have a track record.

I learned that with the right approach, starting a business with no money is not only possible; it results in a better company. Here are some tips:

1) Live off your current job as long as possible. There is no reason you cannot explore and experiment through your entire first year of launching a new business while holding down another full time job. The first year is about ideation, about coming up with bad ideas and letting other people explain to you why they are bad, and how they can be better. You can nurture and grow the idea, and also build the initial wave of enthusiasm with prospective customers and employees all while moonlighting.

Got fired? Even better. After the first few weeks of a job search, no one can spend 50+ hours a week focused entirely on finding employment. Think Jack Nicholson in The Shining. Use your non-search time to gestate and spin-up a new idea. It's healthy, and may really lead to something. This is what happened to me.

2) Let your customers fund your working capital. This is key, although it is not possible for every business model. Developing, testing and manufacturing many products requires significant capital up front. But for a service business, it is much easier. My company sold annual subscription memberships to executives. The fees were required to be paid up front, but our costs were not incurred until months later. With no salary (living on a couple months of severance) and no immediate expenses, we quickly built up a bank account of $300k and rising.

Even if your idea does require making a product, it can be launched inexpensively. My good friend, Sara Blakely, started the amazingly successful company Spanx with less than five thousand dollars. She researched and wrote most of the patent on her own (using attorneys for the clean up), then begged and borrowed to find a plant to make her prototype. From there, she lined up orders, and the cash flow equation fell into place.

3) Outsource your sales department. You can't afford to hire (or commit to) high-ticket sales people. Find companies who already have a relationship with your target customers, and rope them in. World 50 sold to the highest level executives in world, and I had a small problem - I didn't personally know a single one! But I was able to talk Accenture, Bain, Omnicom, WPP and others into making all the introductions for me - all I had to do was close the sale.

In fact, these partner companies quickly became so excited about my new business that they donated all of our branding work, technology development and PR - and each actually paid me $50,000 for the right to do so! Now that may be hard to replicate, but if you can find ways to get your partners excited, you can get them to contribute.

4) You don't need to give away equity. Many people I have spoken with think that if you don't have cash, then the only way to launch is to give away lots of equity - to partners, to employees, to initial customers. Not so. I seriously considered giving our first customers and partners equity in the company to get them to participate. But as it turned out...they didn't want it! Customers could easily sign up and write me a check, it was a simple transaction - but if they received even one share of equity, it went to their legal department - and good luck wading through that mess. As for my service provider partners? They just wanted to participate in what my company was doing, and NOT have any brand liability in case I screwed things up. Take the high rode. I kept 100% of the equity.
***
In the end, launching a company with no money will force you to

1) build a better model which has sustainable cash flow right out of the gate - one of the most important things,

2) truly engage your partners - you are unlikely to succeed without them (money or not), and

3) retain control! You need to steer the ship, not your partners or customers, and certainly not your external investors ("Hey Rick, it's been 3.5 years - time to sell!").

The bottom line is this: If you can't earn the interest and attention of customers, partners and employees, you WON'T be able to buy it. And if you can, then why pay for it?

This post was originally published at RickSmith.me

Comparing Recessions: Chart

10.4.2009

Comparing Recessions: Chart

Earning season is in high gear, so it is a good time to take a look at the earning performance of the S&P 500.

This chart from Standard & Poors, pointed out by Chart Of The Day, gives some perspective.

The graph compares the earnings performance of the current recession, shown in the solid red line, to that of the 2001 recession in the dashed gold line, and the earnings performance from 1936 through 2006, shown as the dashed blue line.

As today's chart illustrates, the current decline in earnings is several orders of magnitude greater than the average decline during a recession. The current decline is also more severe than what was the most severe earnings decline on record - the decline that began in 2001 (gold dashed line).

Why not start a Trust Fund for your child?

From Times Online
February 20, 2008


The beginner's guide to Child Trust Funds

James Charles

Child Trust Funds (CTFs) were introduced by the Government in 2005 to encourage parents to save for their children's future About three million children now have funds.

Children gain access to the pot of cash in a CTF only when they turn 18, but nobody else, including parents, can access the money before that point. The interest earned by savings in a CTF are tax-free.

Who is eligible?

Any child born after September 1, 2002, who qualifies for child benefit, is eligible for a CTF. Children born after the introduction of CTFs in April 2005 are enrolled automatically. The Government sends parents a £250 voucher to open a fund and they can invest this in either a savings account or one that invests in stocks and shares (see below for information on the types of funds available).

How to save

Background
The beginner's guide to Child Trust Funds
National Savings & Investments explained
How to budget
Background
The beginner's guide to current accounts
How to reclaim bank charges
Bonds explained
Related Links
Those who save make best use of child funds
Labour caves in over charges for child trust funds


Families on income support are given a total of £500.

When children reach the age of seven they are sent a further £250 or £500 by the Government.
The Government will open a stakeholder Child Trust Fund automatically if a child's parents fail to do so within 12 months of the voucher being issued.

Parents of children born between September 2002 and April 2005 should apply for their children retrospectively. For more information, or if you have not received the voucher, call the Child Trust Fund helpline on 0845 3021470 or textphone on 0845 3667870.

Who can contribute?

Parents and relatives are encouraged to make regular contributions to the trust fund, although they can do so whenever they choose.

The maximum that can be paid into an account is £100 a month, or £1,200 a year. Government contributions do not count towards this limit.

The average amount that parents deposit each month is £23, according to figures from Revenue & Customs. Other research, by Nationwide Building Society, found that 60 per cent of CTF accounts received no additional contributions at all.

What are the benefits?

The idea is that the nest egg should grow in value over time. When children have access to the cash at the age of 18, they can then use it to pay for university, a deposit on a house or anything else they choose.

You can find out how big a fund will be when a child reaches the age of 18 by using a Child Trust Fund calculator.

The three options

There is a huge range of different CTFs available, particularly if you go online. It seems that everyone from Asda to Legal & General offer CTFs of some description. Indeed, there are many funds catering for niche markets, such as ethical or shariah compliant funds.

There are three main types of fund.

Savings accounts:

A savings account is the most secure option and mirrors the deposit accounts available on the high street, though the rates are usually a little better. There are also no tax liabilities.

Stakeholders:

Most experts recommend opting for a stakeholder equity fund, as these take advantage of stock market growth and are likely to produce a greater return than cash-only acccounts over the longer term. Your cash is invested in the stock market but is managed by your fund provider. Parents have a limited choice of the types of funds in which the money is invested.

The Government has made sure that the level of risk is small. When a child reaches the age of 13 the money will be moved to safer, cash-based accounts.

The Government has also capped the annual management charge on stakeholder CTFs at 1.5 per cent.

Stocks and shares:

The final option is a purely stock market-based option. This is the riskiest form of investment and allows for the greatest degree of investment freedom. Parents should remember that the management fees on these investments are not capped in the same way as stakeholder CTFs.

Over the long term it is likely that the return on stock market investments will be greater than cash investments, but parents should be aware that the value of the CTF can go down as well as up, although this is unlikely.


Five news stories
Labour caves in over charges for child trust funds
The 3Rs: reading, writing and interest rates
One in four parents ignore CTF
Teenagers urge curbs on spending CTF money
Parents spoilt for choice
Five features
Child funds grow up
The best places for your child trust funds
Make your child a millionaire
Parents’ alternatives to a child trust fund
Gifts that are not just for Christmas
Five websites
Child Trust Fund
HM Revenue and Customs
Direct.gov.uk - Parents Guide
Money Extra
Stakeholder Saving

Wells Fargo Gives Wall Street a Reason to Run

Wells Fargo Gives Wall Street a Reason to Run

By JACK HEALY and ERIC DASH
Published: April 9, 2009

Stock markets surged higher on Thursday after Wells Fargo, the nation’s largest consumer bank, said that it expected to report record profit for the first three months of the year, kindling hopes that financial companies may finally be closing the book on quarter after quarter of wrenching losses.

As financial stocks soared, the Dow Jones industrial average rose 225 points as trading near a close, crossing above 8,000 points. The broader Standard & Poor’s 500-stock index was 3.5 percent higher, increasing the gains of a bear-market rally that has lifted stocks more than 20 percent since it began one month ago. The technology-heavy Nasdaq rose 3.4 percent.

Just three months ago, Wells Fargo announced that it had lost $2.55 billion as the economy foundered and the bank absorbed billions of losses from the acquisition of the Wachovia Corporation. But a statement on Thursday, Wells Fargo said it expected to report $3 billion in profit for the first quarter of 2009, far exceeding Wall Street’s expectations, and said it was issuing mortgages at a fast clip.

Investors took the statement from Wells Fargo, whose shares gained 20 percent, as another harbinger that the tattered economy may be bottoming out.

Other major banks like Citigroup, JPMorgan Chase and Bank of America, which reported billions in losses last quarter, have said that they expected to be profitable this year, and wisps of less-bad data from the housing market, manufacturers and consumer surveys are giving rattled investors new hopes that a bottom is in sight.

But experts warn that corporate losses are simply radiating outward from financial firms to other corners of the economy, and they say the economy’s thin green shoots and bear-market gains could turn to dust if rising unemployment forces deeper, unexpected contractions in consumer spending and corporate profits.

Analysts expect that earnings for companies in the S.&P. 500 fell 37 percent in the first months of the year, and they say many of the losses will be borne by retailers, energy companies and businesses that make products like chemicals and building materials.

“What you’re now seeing is the nonfinancial segment really start to tail off,” said Nicholas Bohnsack, sector strategist at Strategas Research Partners.

Oil prices settled at $52.05 a barrel in New York trading, up $2.67.

In Asia, Japan’s Nikkei rose 3.7 percent after Japan announced its biggest-ever economic stimulus plan, a $154 billion package of subsidies and tax breaks that aims to stem a deepening recession in the world’s second-largest economy.

In Europe, the FTSE 100 in London gained 1.4 percent, the DAX index in Frankfurt rose 3 percent, and CAC-40 in Paris rose 1.8 percent.

http://www.nytimes.com/2009/04/10/business/10markets.html?_r=1&hpw

Could the IMF run out of money?

Bailing Out the Bailers
Could the IMF run out of money?
By Karim Bardeesy Posted Wednesday, October 29, 2008 - 6:21pm

Who’s your bailout daddy? Well, if you’re Ukraine, Iceland, Hungary, Belarus, and Pakistan right now, it’s the International Monetary Fund. New loan commitments made by the IMF in the last two weeks already exceed $30 billion; requests for billions more could be forthcoming. Which raises a troubling question: Could the IMF run out of cash?

Unlikely, but the IMF may have seen its financial heyday. It was created during the 1944 Bretton Woods conference to help manage the international monetary system and accumulated healthy reserves of currency after World War II. It continues to be funded by “quotas” charged to each member country largely based on the size of its economy. The quotas are a one-time charge, though. If the IMF needs more money, it has to go back to its member countries, and they’re in tough shape right now. The most powerful among them—the United States and the European Union—are shoveling money out the door to deal with their own problems, creating new debt to buy bank shares.

That said, right now the fund is flush and the balance sheet is strong. It now has the equivalent of $201 billion available to be lent out. (It calls this its “one-year forward commitment capacity.”) Before the meltdown, there was “only” around $18 billion in debt outstanding, half from Turkey and the remainder from poorer African, Caribbean, and Central Asian countries.

There’s gold, too. The IMF owns, at last reckoning, more than $9 billion worth of the stuff (but an 85 percent supermajority of its membership is required to sell or buy any of it). The IMF can also borrow more money from wealthy member countries, with up to $53 billion extra available through two supplementary agreements if need be. And flailing countries can turn elsewhere for financing; the United States gave cash and loan guarantees worth $20 billion directly to Mexico in 1995.

In emergency situations, when a country is having trouble paying back loans that are due imminently, a SWAT team will go to the supplicating country to figure out what policies and how much short-term financing are needed. The IMF doesn’t quite carry the Domino’s half-hour guarantee, but it claims to be able to have a decision back to you in as little as 48 hours after its board receives a report on the situation. Only the hardiest currencies, like yen and U.S. dollars, are lent out (although a few Botswanan pulas might be out on offer).

The aid doesn’t come for free. There are loan repayments—the IMF actually takes a cut on every deal, lending out to needy countries at a higher interest rate than it pays back to “donor” countries. Plus, the IMF might insist that the receiving country commit to cutting domestic food subsidies or reduce its budget deficit—“structural adjustment” policies that formed part of the “Washington consensus” in the 1980s and 1990s and which still inspire anti-globalization types to pull out their black balaclavas. The IMF remembers the bitter taste those policies left with local populations and has pledged “fewer and more targeted” conditions this time around (and on Wednesday agreed to waive austerity measures in emerging economies). But if a country stalls in its reforms, the IMF can stop the flow of cash—a pretty big stick when, say, Turkey is sitting at its kitchen table with bills to pay.

While there may be a lot of money tucked away that countries can use to bail one another out, recent events have put the IMF in a tough spot, both financially and politically. Like any other multinational agency, the IMF is only as good as its member countries. If a big country, say, South Korea, feels the heat from international lenders, the IMF could be looking at a $50 billion or $100 billion request. After the Asian financial crises of the mid-1990s, the IMF’s forward commitment capacity fell as low as 20 billion “Special Drawing Rights” (an IMF unit then equivalent to around $27 billion); it tripled only after the IMF increased the quota it charged member countries by 45 percent. Will there be political will to supplement the IMF in the coming weeks? Or will a new fund, topped up by new currency reserves, be necessary, as Gordon Brown has mused? In the “New Bretton Woods” era, the IMF might not go under, but it may get left behind.

Explainer thanks Massachusetts Institute of Technology professor and former IMF chief economist Simon Johnson, co-founder of baselinescenario.com and Yoshiko Kamata and Bill Murray of the International Monetary Fund.

http://www.thebigmoney.com/articles/explainer/2008/10/29/bailing-out-bailers

Inflation Expectations for Beginners

Inflation Expectations for Beginners

James Kwak Apr 9, 2009
For a complete list of Beginners articles, see Financial Crisis for Beginners.

Only a few years ago, the accepted remedy for a recession was for the Federal Reserve to lower interest rates - namely, the Federal funds rate. Now, however, the economy has been stuck in recession for over fifteen months and the Federal funds rate has spent the last several months at zero. (The Fed funds rate cannot ordinarily be negative, because one bank won’t lend $100 to another bank and accept less than $100 in return; it always has the option of just holding onto its $100.) As a result, the Fed has resorted to other policy tools, most notably large-scale purchases of agency and Treasury securities, funded by creating money. (Here’s James Hamilton’s analysis.)

As the Fed’s monetary policy plays a more prominent role in the response to the economic crisis, there will be more talk of inflation or, more accurately, inflation expectations. While inflation is what affects the purchasing power of the money in your wallet, inflation expectations are what affect people’s behavior in ways that have a long-term economic impact. Take the case of wage negotiations, for example: a union that believes inflation will average 5% over the life of a contract will demand higher wage increases than a union that believes inflation will average only 1%. Once those higher wages are built into the contract, the employer is forced to raise prices in order to cover those wage increases, and inflation begins to ripple through the economy.

One of the major objectives of modern monetary policy is to control inflation expectations, because controlling inflation expectations is the first step to controlling inflation. If there is a short-term burst of inflation - as we had a year ago, if you look at headline inflation numbers that include the prices of food and energy - the macroeconomic consequences can be limited if people believe that the Fed can and will bring inflation under control.

Unfortunately, it is impossible to know exactly what people’s inflation expectations are; in fact, it may not even be a sensible question, since different people have different understandings of what inflation is. However, there are three main approaches to estimating inflation expectations.

1. Inflation-indexed government bonds. (If you need a refresher on how a bond works, read the first part of this article.)

A traditional bond is a stream of payments that is fixed in nominal terms: for example, $100 in 10 years, and 6% interest, paid semi-annually ($3 every 6 months). Such a bond is not inflation-indexed; if inflation goes up, the purchasing power of that $100 goes down, and it’s too bad for the bondholder.

An inflation-indexed bond, by contrast, pays an amount that is indexed to some measure of inflation. In the U.S., where these bonds are called Treasury Inflation Protected Securities (TIPS), we use the Consumer Price Index. A TIPS bond may have a $100 face value and pay a 2% interest rate. However, every 6 months, that $100 face value is adjusted to reflect the change in the CPI, and the interest payment is calculated as a percentage of the adjusted value of the bond. Then, after 10 years, the bondholder gets back not $100, but $100 times the ratio between the CPI at the end of the period and the CPI at the beginning of the period. This way the bondholder is guaranteed a 2% real return (assuming he paid $100 for the bond), no matter what the rate of inflation is in the interim.

The implied inflation expectation, then, is the difference between the yield on an ordinary bond and the yield on an inflation-indexed bond with the same maturity. If the 5-year Treasury has a yield of 4% and the 5-year TIPS has a yield of 2%, then inflation expectations for the next five years are (about) 2% per year. The reasoning is that in order to buy the regular bond as opposed to the inflation-indexed bond, an investor has to be paid a higher yield to compensate him for the level of inflation that he expects.

Actually, in addition to expected inflation, the Treasury investor also has to be paid an inflation risk premium because, all things being equal, it is better not to have inflation risk than to have it. So the implied inflation expectation is actually slightly less than the spread between the regular and the inflation-indexed bonds. If you didn’t follow that, don’t worry, just remember that, roughly speaking, Treasury yield = TIPS yield + expected inflation.

2. Inflation swaps.

These are a type of derivative contract, where the payments under the contract depend on the value of an inflation index, such as the CPI. The swap has a nominal value of, say, $100, but $100 never changes hands. Instead, at the end of some period of time, party A pays party B a fixed rate of interest on $100 - say 2.5% per year. At the end of the period, B pays A the cumulative percentage change in the inflation index over the period. Assuming A has $100 in his pocket, he has now hedged the inflation risk on that $100, because no matter what happens, at the end of the period he will get an amount that compensates him for the impact of inflation on his $100. The price of this hedge is $2.50 per year. (Because these are over-the-counter contracts, there many variations on this, including swaps with periodic coupon payments.)

For the same reasons described above, the implied inflation expectation is roughly 2.5% per year: party B thinks inflation will be less than 2.5% per year, and therefore is willing to take 2.5% and pay the amount of inflation; party A thinks inflation will be more than 2.5% per year, and therefore is willing to pay 2.5% per year to get the amount of inflation back. So the market clears at 2.5%. (Actually, for the exact same reasons as with bonds - party B has to be paid an inflation risk premium for absorbing the risk in this trade - the inflation expectation is slightly less than 2.5% per year. There are also some complications having to do with the lag in the publication of inflation indices, but let’s ignore that for now.)

One curiosity is that the inflation-indexed bond method and the inflation swap method can produce different estimates. Theoretically this should not happen, because if two products that will have the same price in the long term (since they are based on the same index) have different prices today, there should be an arbitrage opportunity. Why this happens in practice is discussed on pp. 5-6 of this Bank of England paper. (Thanks to Bond Girl for pointing out the paper.)

3. Surveys.

You can also just ask people what they think inflation will be. Economists ordinarily prefer markets, under the principle that when people are paying money they are signaling what they really believe. But if you think there are sufficient problems with the markets you may want to go with surveys. Tim Duy has a post with a number of charts, including one of an inflation expectations survey.

So what do things look like today?

For more on measuring inflation expectations, there is a short primer from the San Francisco Fed, as well as the Bank of England paper mentioned above.

http://www.rgemonitor.com/us-monitor/256336/inflation_expectations_for_beginners

Pensions crisis means we will all be retiring later

Pensions crisis means we will all be retiring later
The economic crisis will force people to work longer.

By Hugo Dixon, breakingviews.comLast Updated: 12:29PM BST 08 Apr 2009

Higher fiscal deficits will make generous state pensions even more unaffordable, while the fall in asset prices is hammering private pension plans. There are three ways to cope: higher taxes, poorer old people and delayed retirement. All of these will be tried. But the last is by far the best.

Even before the crisis hit, the so-called demographic time-bomb was a worry for most rich countries and some poor ones. Thanks to better health care and a sharp drop in the average number of children per family, more old people will need to be supported by fewer workers.

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In many countries, the crunch point is coming in the next few years, as the last big bulge of babies, born after the Second World War, reaches retirement age. Statisticians measure the "dependency ratio" - the number of people over 65 as a percentage of those aged 15-64. By 2030, this ratio will have increased to 33 in the US, 40 in the UK and 65 in Japan - from 19, 25 and 35 respectively in 2010, according to the United Nations.

Traditionally, families took care of their own. But in rich countries, the government is now the main pension provider. The greying of the population was always going to squeeze government budgets. But the crisis has made a tough situation even worse, as Barack Obama, Gordon Brown and their peers have engaged in fiscal stimulation in an attempt to prevent the recession turning into a slump. The International Monetary Fund expects government debt in advanced G20 countries to jump from 79pc of GDP in 2007 to 104pc in 2014. That doesn't leave much room for pension-related borrowing.

In the UK and a few other countries, private pension plans are an important source of retirement income. Pension experts have long hoped they could step in when governments ran out of funds. But the crisis has also damaged them.

Private pensions come in two types. First, there are those provided by some companies which guarantee retired people a fixed percentage of their final salaries. The companies set up pension funds, portfolios which are supposed to make sure the retirees get what they deserve. The employers are on the hook to pay the pensioners, whatever happens to the funds' value.

The market tumble means that more companies are going to be called on to top up their pension funds. These "defined benefit" schemes have been on the retreat over the past 20 years, as companies have viewed them increasingly as toxic liabilities. The crisis could prove their final death-knell.

Second, there are pensions which depend entirely on a pot of funds accumulated and invested over the years - either by the individual or with some help from the employer. Thanks to the crisis, those pots have shrunk, bringing down the size of people's future pensions.

Pension funding is a problem. But it is important not to forget the good news: people are living longer and more healthily. What's more, if they are going to live to the age of 85, do they really want to retire at the age of 65 and slump down in front of the television getting depressed and lonely for 20 years?

Far better - for them and for their children - to work a few more years, keep their minds engaged and retire with a bigger pension.

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

http://www.telegraph.co.uk/finance/breakingviewscom/5124777/Pensions-crisis-means-we-will-all-be-retiring-later.html

Business failures could be avoided

Business failures could be avoided

Hundreds of small businesses failures in the first quarter could have been avoided if owners had not ignored early warning signs and used a '33 week window' to save their venture according to research.

By Roland Gribben Last Updated: 9:37PM BST 06 Apr 2009


An estimated 880 small companies, accounting for one in six of insolvencies in the period, closed their doors because they had not taken remedial action early enough or failed to carry out any forecasting, the report adds.

Business adviser Tenon Recovery, which used its own client base for the research, estimates that a company has 33 weeks to discover whether turnaround initiatives could work after determining that future prospects are bleak. (i.e. half a year)

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The remedies include

1. establishing key business indicators,
2. forecasting cash needs on a weekly basis,
3. outsourcing specialist jobs like bookkeeping,
4. reviewing and swapping suppliers, and
5. continuous spending reviews.

Carl Jackson, head of Tenon Recovery, said many enrepreneurs "have little or no experience of operating in a recession and... are not used to having to keep such a close eye on their business".


http://www.telegraph.co.uk/finance/yourbusiness/5116161/Business-failures-could-be-avoided.html

Fund management: A game of luck?

Fund management: A game of luck?

A large part of the active versus passive debate has always revolved around whether an active manager's returns are through luck or judgement.

Last Updated: 8:14AM BST 08 Apr 2009

The debate was reignited at the end of last year when Inalytics, a specialist firm that helps pension funds to select and monitor equity managers, published research which showed managers typically get only half of their decisions correct.

The research, based on an examination of 215 long-only funds worth a combined £99 billion, found that the average manager's ability to identify winners and losers was no better than 50-50. Put simply, they would do no worse tossing a coin.

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The research looked at two measurements of fund manager skill: what it termed the hit rate and the win/loss ratio. The hit rate shows the number of correct decisions as a percentage of the total number of decisions. The win/loss ratio is a comparison of the alpha generated from good decisions with the alpha lost from the poor decisions. To judge these, Inalytics daily analysed every purchase/sale, underweight and overweight made by the fund managers.

Rick di Mascio, the chief executive and founder of Inalytics, says: "The industry maxim suggests that six correct decisions out of 10 would constitute good performance. However, we did not find one manager who got six out of 10. The average was five out of 10 (49.6pc) and the really good managers only managed to get a 53pc hit rate, which was a surprise as we expected the best manager to be a lot higher."

To compensate for this, di Mascio says the average manager is able to generate good gains from "winners" to offset the losses from "losers". According to the research, the average win/loss ratio was 102pc, which means the alpha gained from good decisions was 2pc higher than that lost from the poor decisions.

"The good managers had a win/loss ratio of 120pc, with the best getting up to 130-140pc," says di Mascio. "This is where the skill comes in, running your winners and cutting out the losers. It's what differentiates the also-rans from the best. There is nowhere to hide with these numbers."

http://www.telegraph.co.uk/finance/personalfinance/investing/5093111/Fund-management-A-game-of-luck.html