UK asset value falls for first time since 1992

UK asset value falls for first time since 1992
The value of all the assets in the UK has fallen for the first time in more than a decade and a half, in the latest evidence of the economic trauma wrought by the financial crisis.

By Edmund Conway
Published: 6:39PM BST 03 Aug 2009


The fall was driven largely by a fall in the value of housing which, at £3.7 trillion, constitutes more than half the nation's net worth. Photo: PA Britain was worth £6.95 trillion at the end of 2008, down 2pc from the previous year, according to new figures from the Office for National Statistics (ONS). The total, which has fallen for the first time since the last recession in 1992, takes into account all buildings, roads, factories, cars, trains, machinery and financial assets by the end of 2008, minus debts.

The fall was driven largely by a fall in the value of housing which, at £3.7 trillion, constitutes more than half the nation's net worth.


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According to the ONS, the value of Britain's housing stock dropped by 9.1pc last year – the biggest fall since comparable data began in 1989. It takes the value of the total housing stock down to levels last seen in 2006.

More strikingly, the fall in property prices, when compared with the comparative height of mortgage debt, means that the equity British households own in their homes fell by £423bn, or 14pc, during 2008. Net equity – in other words the extent by which home values are greater than mortgage debt – dropped from 335pc to 274pc in 2008, the lowest cushion since 2002.

Simon Ward, of Henderson New Star, said: "UK households will have to step up their saving to compensate for the huge loss of housing and equity market wealth in 2008, implying mediocre prospects for consumer spending."

Significantly, it is households and non-profit institutions as opposed to financial and non-financial corporations that have borne the biggest brunt of the falls in asset prices. Their assets dropped from £7.5 trillion in 2007 to £6.6 trillion last year – the biggest single one-year drop on record.

Despite the fall, the value of the UK is still equivalent to just under £115,000 for every man, woman and child in the country – and has increased by a factor of more than five since the ONS began keeping national accounts data in 1948.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5967533/UK-asset-value-falls-for-first-time-since-1992.html

'China is the biggest thing to happen in the world economy for a century'

'China is the biggest thing to happen in the world economy for a century'
Fundamentalist view: our regular series in which a leading fund manager or expert at making money grow explains why savers and investors should see things their way

By Tom Ewing
Published: 12:00PM BST 03 Aug 2009

Comments 5 Comment on this article


Old and new: to ensure the Chinese economy was not engulfed by the global malaise, the government injected huge sums into public spending projects Photo: GETTY Fund managers often talk about the "themes" that excite them and how they work those ideas into their investments. China is full of exciting opportunities but I would not call it a theme. It is much bigger than that; it is the most important thing going on in the world this decade and the next.

You might find it surprising that the manager of a UK equity growth fund is as interested in China as the state of British banks and whether M&S will increase its dividend. But what is happening in China is as important to your investments as what happens here. Not to have a view on it in your portfolio would be a huge mistake.


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China is a long way away; culturally and geographically. As a result, some investors here often dismiss China as something happening to someone else. Their scepticism about the scale of activity means they enjoy belittling this emerging economic superpower. The fact is, without China propping it up, the global economy would be in a worse state than it currently is. It matters to us all whether or not Chinese growth is sustainable.

I have visited China several times in the past few years and my trip in June demonstrated once more China's glorious ability to astound; even after the financial crisis.

The main shopping street of any one of a hundred large Chinese cities at 10pm on a Tuesday is virtually indistinguishable from Oxford Street on a busy Saturday afternoon – perhaps with more neon!

China is a reason to be optimistic about the outlook for world growth. Government finances are healthy and consumers are spending as confidence returns. Chinese people, unlike us, are not encumbered by a decade of over-borrowing. Things may be bad in the West, but it's not often that a billion people go through an industrial revolution. In fact, it's never happened before.

To ensure the Chinese economy was not engulfed by the global malaise, the Chinese government injected huge sums of money into public spending projects. Apart from being the catalyst for a stock market recovery last autumn, you can see its impact everywhere. For example, China Railways has been adding track to the network at about 1,000 kilometres a year. This will rise to 10,000 kilometres per year by 2012. To put that into context, the whole UK network is just 16,000 kilometres.

There are critics of this ''overdevelopment''. You can drive along empty eight-lane motorways and wander shopping malls with more staff than customers. Countless suburbs are being developed and redeveloped to provide larger flats and to accommodate the 400 million people moving from rural to urban areas.

I visited Shenyang in north-east China, a city you might not have heard of despite having a population similar to that of Greater London. In just one corner of this one city, there is a construction site of two housing developments with a combined floorspace similar to the whole of London's Docklands.

Rather than see this as a bubble waiting to burst, I see the longer-term opportunity. Properties in Shenyang are selling faster this year than last. Before long the aspirational emergent middle class of China's mushrooming cities will be able to afford cars to fill the roads and to shop in the malls. Urbanisation begets economic growth.

In a broad sense, Chinese growth is affecting asset prices, demand and supply in almost every global industry. More specifically, despite their ingenuity, capital and human resource, the Chinese still look to British companies for certain goods and services.

British technology and engineering is in demand. Longer term, local competition will catch up. Therefore, investors' challenge is to find companies with whom the Chinese will never be able to compete. London's mining sector is an obvious beneficiary of China's lack of natural resources. Less obvious strong positions are those held by Western brands. Diageo, maker of Johnnie Walker, and fashion label Burberry, enjoy premium status among Chinese consumers. It is their very ''un-Chinese-ness'' that creates opportunity.

I am realistic. Rampant growth creates imbalances. This is a long-term story and not without risk. So be careful not to become overexposed and ensure your investments are balanced against many other themes and ideas. However, I am consistently surprised by the failure of many people to appreciate and take advantage of China being the biggest thing to happen in the world economy for a century.

Tom Ewing is portfolio manager at Fidelity UK Growth Fund

http://www.telegraph.co.uk/finance/personalfinance/investing/5964847/China-is-the-biggest-thing-to-happen-in-the-world-economy-for-a-century.html

UK Home owners 'face five years of negative equity'

Home owners 'face five years of negative equity'
Some home owners could be stuck in negative equity for at least another five years as the property market struggles to bounce back, grim figures predict.

Published: 9:09AM BST 03 Aug 2009


'Getting a mortgage can be like winning the lottery,' says the NHF's chief executive Photo: PA House prices will plunge by 12.2pc this year and by a further 4.6pc next year before stabilising in 2011 with a 1.1pc rise, according to research from the National Housing Federation (NHF).

Home owners who bought during the peak of the market in 2007 are likely to be waiting until 2014 to see any profit in their properties, the figures suggest. Homes in England's North West and the east Midlands could be waiting even longer, the figures showed.


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Overall, average prices will rise by 20pc on current values to £227,800 by 2014 as values climb by 8.4pc in 2013 and 6.8pc the following year.

David Orr, the chief executive of the NHF, said: "Our new research shows that while house prices are falling in the short term they will inevitably increase in the long term because of a fundamental undersupply of housing.

"Even though house prices are falling, and are set to remain sluggish in some areas for the foreseeable future, affordability is not improving for many low-to-middle income households."

He added: "For millions of people who want a home, getting a mortgage can be like winning the lottery. First-time buyers and those wanting to buy shared-ownership properties remain victims of a deep freeze in mortgage lending.

"Until lending is freed up, young and lower-income households without access to large deposits will be locked out of the market."

According to Oxford Economics, which produced the figures for the NHF, house prices in England in 2013 will be 3pc below their pre-credit-crunch peak of 2007, but by 2014 they will be 3pc higher.


http://www.telegraph.co.uk/finance/personalfinance/5964212/Home-owners-face-five-years-of-negative-equity.html

Two different approaches to security analysis: the way of prediction (or projection) and the way of protection

Our statement that the current price reflects both known facts and future expectations was intended to emphasize the double basis for market valuations.

Corresponding with these two kinds of value elements are two basically different approaches to security analysis.

• To be sure, every competent analyst looks forward to the future rather than backward to the past, and he realises that his work will prove good or bad depending on what will happen and not on what has happened.
• Nevertheless, the future itself can be approached in two different ways, which may be called the way of prediction (or projection) and the way of protection.
  

Those who emphasize prediction will endeavour to anticipate fairly accurately just what the company will accomplish in future years - in particular whether earnings will show pronounced and persistent growth.

• These conclusions may be based on a very careful study of such factors as supply and demand in the industry - or volume, price and costs - or else they may be derived from a rather naive projection of the line of past growth into the future.
• If these authorities are convinced that the fairly long-term prospects are unusually favourable, they will almost always recommend the stock for purchase without paying too much regard to the level at which it is selling.
• Such, for example, was the attitude with respect to the air-transport stocks - an attitude that persisted for many years despite the distressingly bad results often shown after 1946. We have commented on the disparity between the strong price action and the relatively disappointing earnings record of this industry.

By contrast, those who emphasize protection are always especially concerned with the price of the issue at the time of study.

• Their main effort is to assure themselves of a substantial margin of indicated present value above the market price - which margin could absorb unfavourable developments in the future.
• Generally speaking, therefore, it is not so necessary for them to be enthusiastic over the company's long-run prospects as it is to be reasonably confident that the enterprise will get along.
  

The first, or predictive, approach could also be called the qualitative approach, since it emphasizes prospects, management, and other nonmeasurable, albeit highly important, factors that go under the heading of quality.

The second, or protective, approach may be called the quantitative or statistical approach, since it emphasizes the measurable relationships between selling price and earnings, assets, dividends, and so forth.

• Incidentally, the quantitative method is really an extension - into the field of common stocks - of the viewpoint that security analysis has found to be sound in the selection of bonds and preferred stocks for investment.
  

In our own attitude and professional work, we were always committed to the quantitative approach.

• From the first we wanted to make sure that we were getting ample value for our money in concrete, demonstrable terms.
• We were not willing to accept the prospects and promises of the future as compensation for a lack of sufficient value in hand.
• This has by no means been the standard viewpoint among investment authorities; in fact, the majority would probably subscribe to the view that prospects, quality of management, other intangibles, and "the human factor" far outweigh the indications supplied by any study of the past record, the balance sheet, and all the other cold figures.
  

Thus this matter of choosing the "best" stocks is at bottom a highly controversial one.

• Our advice to the defensive investor is that he let it alone.
• Let him emphasize diversification more than individual selection.

Incidentally, the universally accepted idea of diversification is, in part at least, the negation of the ambitious pretensions of selectivity.

• If one could select the best stocks unerringly, one would only lose by diversifying.
• Yet within the limits of the four most general rules of common-stock selection suggested for the defensive investor there is room for a rather considerable freedom of preference.
• At the worst the indulgence of such preferences should do no harm; beyond that, it may add something worthwhile to the results.
• With the increasing impact of technological developments on long-term corporate results, the investor cannot leave them out of this calculations.
• Here, as elsewhere, he must seek a mean between neglect and overemphasis.

Ref: Intelligent Investor by Benjamin Graham

Double basis for market valuations

Asked a hundred security analysts to choose the "best" five stocks

Every investor would like his list to be better or more promising than the average. Hence the reader will ask whether, if he gets himself a competent adviser or security analyst, he should not be able to count on being supplied with an investment package of really superior merits.

A highly trained analyst ought to be able to use all his skill and techniques to improve substantially on something as obvious as the Dow Jones list. If not, what good are all his statistics, calculations and pontifical judgments?"

Suppose, as a practical test, we had asked a hundred security analysts to choose the "best" five stocks in the Dow Jones Average, to be bought at the end of 1970. Few would have come up with identical choices and many of the lists would have differed completely from each other.

This is not so surprising as it may at first appear. The underlying reason is that the current price of each prominet stock pretty well

• reflects the salient factors in its financial record plus
• the general opinion as to its future prospects.

Hence the view of any analyst that one stock is better buy than the rest must arise to a great extent

• from his personal partialities and expectations, or
• from the placing of his emphasis on one set of factors rather than on another in his work of evaluation.

If all analysts were agreed that one particular stock was better than all the rest, that issue would quickly advance to a price which would offset all of tis previous advantages.

Our statement that the current price reflects both known facts and future expectations was intended to emphasize the double basis for market valuations.

Ref: Intelligent Investor by Benjamin Graham

JTI

FY 09 EPS (Sen) 38.0 PER 12.1(x) Div Yield 4.8(%) ROE 21.2 (%)

EPS GR: last 5 years 7%, last 10 years -0.6%
Historical PE range: last 5 years 11.0 to 13.1, last 10 years 13.1 to 17.0
Historical DY range: last 5 years 8.2% to 6.8%, last 10 years 7.6% to 5.9%


JTI is in a defensive industry. Come rain or shine, its earnings will not be much affected. However, it is in an industry that is regulated negatively by the government. The government is curbing this industry, through various measures. It is anticipated that the growth of this industry will be challenging in the future years. Every year, one will have to worry each time the budget is announced. An unknown is the degree of confidence you have in your personal assessment of how fast JTI can grow its earningsg in this tightly regulated industry.


At the present price, based on historical comparative valuation, it is not exactly a bargain. Therefore, I would probably give this a miss and look elsewhere for undervalued stocks.

(I am only offering my personal view. You should make your own decision always.)

Buffett's view on the best book about investing ever written

Those following the postings recently would have completed 2 important chapters of The Intelligent Investor by Benjamin Graham.

Having read this book a few times, it is amazing how much gems are in this book which are still very relevant.

Let us see what Warren E. Buffett wrote in the Preface to the Fourth Edition of this book.

He wrote:

I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline.

If you follow the behavioural and business principles that Graham advocates - and if you pay special attention to the invaluable advice in Chapters 8 and 20 - you will not get a poor result from your investments. (That represents more of a accomplishment than you might think.) Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock-market folly that prevail during your investing career. The sillier the market's behaviour, the greater the opportunity for the business-like investor. Follow Graham and you will profit from folly rather than participate in it.

To me, Ben Graham was far more than an author or a teacher. More than any other man except my father, he influenced my life. Shortly after Ben's death in 1976, I wrote the following short remembrance about him the Financial Analysts Journal. As you read the book, I believe you'll perceive some of the qualities I mentioned in the tribute.

...


Ref: Intelligent Investor by Benjamin Graham

Everybody can be rich

The One Lucky Break or The One Supremely Shrewd Decision

What can we learn from the two partners who spent a good part of their lives handling their own and other people's funds on Wall Street?

These two partners Graham coyly referred to were Jerome Newman and Benjamin Graham himself.

• Some hard experience taught them it was better to be safe and careful rather than to try to make all the money in the world.
• They established a rather unique approach to security operations,which combined good profit possibilities with sound values.
• They avoided anything that appeared overpriced and were rather too quick to dispose of issues that had advanced to levels they deemed no longer attractive.
• Their portfolio was always well diversified, with more than a hundred different issues represented.
• In this way they did quite well through many years of ups and downs in the general market; they averaged about 20% per annum on the several millions of capital they had accepted for management, and their clients were pleased with the results.

In 1948, an opportunity was offered to the partners' fund to purchase a half-interest in a growing enterprise. For some reason the industry did not have Wall Street appeal at the time and the deal had been turned down by quite a few important houses. But the pair was impressed by the company's possibilities; what was decisive for them was that the price was moderate in relation to current earnings and asset value. The partners went ahead with the acquisition, amounting in dollars to about one-fifth of their fund. They became closely identified with the new business interest, GEICO, which prospered.

• In fact it did so well that the price of its shares advanced to two hundred times or more the price paid for the half-interest.
• The advance far outstripped the actual growth in profits, and almost from the start the quotation appeared much too high in terms of the partners' own investment standards.
• But since they regarded the company as a sort of "family business," they continued to maintain a substantial ownership of the shares despite the spectacular price rise.
• A large number of participants in their funds did the same, and they became millionaires through their holding in this one enterprise, plus later-organized affiliates.

Ironically enough, the aggregate of profits accruing from this single investment decision far exceeded the sum of all the others realized through 20 years of wide-ranging operations in the partners' specialized fields, involving much investigation, endless pondering, and countless individual decisions.

Are there morals to this story of value to the intelligent investor?

• An obvious one is that there are several different ways to make and keep money in Wall Street.
• Another, not so obvious, is that one lucky break, or one supremely shrewd decision - (can we tell them apart?) - may count for more than a lifetime of journeyman efforts.
• But behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplined capacity.
• One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door.
• One must have the means, the judgment, and the courage to take advantage of them.

Of course, we cannot promise a like spectacular experience to all intelligent investors who remain both prudent and alert through the years. We are not going to end with J.J. Raskob's slogan that we made fun of at the beginning: "Everybody can be rich."

• But interesting possibilities abound on the financial scene, and the intelligent and enterprising investor should be able to find both enjoyment and profit in this three-ring circus.
• Excitement is guaranteed.

Ref: Intelligent Investor by Benjamin Graham

Commentary:

Successful investing is about managing risk, not avoiding it.

At first glance, when you realize that Graham put 25% of his fund into a single stock, you might think he was gambling rashly with his investors' money. But then, when you discover that Graham had painstakingly established that he could liquidate GEICO for at least what he paid for it, it becomes clear that Graham was taking very little financial risk. But he needed enormous courage to take the psychological risk of such a big bet on so unknown a stock.

(Graham's anecdote is also a powerful reminder that those of us who are not as brilliant as he was must always diversify to protect against the risk of putting too much money into a single investment. When Graham himself admits that GEICO was a "lucky break," that's a signal that most of us cannot count on being able to find such a great opportunity. To keep investing from decaying into gambling, you must diversify.)

"Investors don't like uncertainty."

But investors have never liked uncertainty - and yet it is the most fundamental and enduring condition of the investing world. It always has been, and it always will be.

At heart, "uncertainty" and "investing" are synonyms.

In the real world, no one has ever been given the ability to see that any particular time is the best time to buy stocks.

Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.

Your probability of being right and your consequences of being wrong: Understanding Pascal's Wager

Before you invest, you must ensure:

• that you have realistically assessed your probability of being right and
• how you will react to the consequences of being wrong.

The investment philosopher Peter Bernstein has another way of summing this up. He reaches back to Blaise Pascal, the great French mathematician and theologian (1623-1662), who created a thought experiment in which an agnostic must gamble on whether or not God exists.

• The ante this person must put up for the wager is his conduct in this life; the ultimate payoff in the gamble is the fate of his soul in the afterlife.
• In this wager, Pascal asserts, "reason cannot decide" the probability of God's existence.
• Either God exists or He does not - and only faith, no reason, can answer that question.
• But while the probabilities in Pascal's wager are a toss-up, the consequences are perfectly clear and utterly certain.

As Bernstein explains:

Suppose you act as though God is and you lead a life of virtue and abstinence, when in fact ther is no god. You will have passed up some goodies in life, but there will be rewards as well. Now suppose you act as though God is not and spend a life of sin, selfishness, and lust when in fact God is. You may have had fun and thrills during the relatively brief duration of your lifetime, but when the day of judgment rolls around you are in big trouble.



Concludes Bernstein: "In making decisions under conditions of uncertainty, the consequences must dominate the probabilities. We never know the future."



Thus, as Graham has reminded you in every chapter of his book, the intelligent investor must focus not just on getting the analysis right. You must also ensure against loss if your analysis turns out to be wrong - as even the best analyses will be at least some of the time.

• The probability of making at least one mistake at some point in your investing lifetime is virtually 100%, and those odds are entirely out of your control.
• However, you do have control over the consequences of being wrong.
• Many "investors" put essentially all of their money into dot-com stocks in 1999; an online survey of 1,338 Americans by Money Magazine in 1999 found that nearly one-tenth of them had at least 85% of their money in Internet stocks.
• By ignoring Graham's call for a margin of safety, these people took the wrong side of Pascal's wager.
• Certain that they knew the probabilities of being right, they did nothing to protect themselves against the consequences of being wrong.

Simply by keeping your holdings permanently diversified and refusing to fling money at Mr. Market's latest, craziest fashions, you can ensure that the consequences of your mistakes will never be catastrophic.

No matter what Mr. Market throws at you, you will always be able to say, with a quiet confidence, "This, too, shall pass away."



Ref: cc Intelligent Investor by Benjamin Graham

The risk is not in our stocks, but in ourselves

Risk exists in another dimension: inside you. If you overestimate how well you really understand an investment, or overstate your ability to ride out a temporary plunge in prices, it doesn't matter what you own or how the market does. Ultimately, financial risk resides not in what kinds of investments you have, but in what kind of investor you are. If you want to know what risk really is , go to the nearest bathroom and step up to the mirror. That's risk, gazing back at you from the glass.

What should you watch for?

The Nobel-prize-winning psychologist Daniel Kahneman explains two factors that characterize good decisions:

• "well-calibrated confidence" (do I understand this investment as well as I think I do?)


• "correctly-anticipated regret" (how will I react if my analysis turns out to be wrong?).

To find out whether your confidence is well-calibrated, look in the mirrow and ask yourself: "What is the likelihood that my analysis is right?"


Think carefully through these questions:

• How much experience do I have? What is my track recrod with similar decisions in the past?


• What is the typical track record of other people who have tried this in the past?


• If I am buying, someone else is selling. How likely is it that I know something that this other person (or company) does not know?


• If I am selling, someone else is buying. How likely is it that I know something that this other person (or company) does not know?


• Have I calculated how much this investment needs to go up for me to break even after my taxes and costs of trading?

Next, look in the mirror to find out whether you are the kind of person who correctly anticipates your regret. Start by asking:

"Do I fully understand the consequences if my analysis turns out to be wrong?"



Answer that question by considering these points:

• If I am right, I could make a lot of money. But what if I'm wrong? Based on the historical performance of similar investments, how much could I lose?


• Do I have other investments that will tide me over if this decision turns out to be wrong? Do I already hold stocks, bonds, or funds with a proven record of going up when the kind of investment I'm considering goes down? Am I putting too much of my capital at risk with this new investment?


• When I tell myself, "You have a high tolerance for risk," how do I know? Have I ever lost a lot of money on an investment? How did it feel? Did I buy more, or did I bail out?


• Am I relying on my willpower alone to prevent me from panicking at the wrong time? Or have I controlled my own behaviour in advance by diversifying, signing an investment contract, and dollar-cost averaging?

You should always remember, in the words of the psychologist Paul Slovic, that "risk is brewed from an equal dose of two ingredients - probabilities and consequences."


Before you invest, you must ensure that you have realistically assessed your probability of being right and how you will react to the consequences of being wrong.





Ref: cc Intelligent Investor by Benjamin Graham

Why not 100% stocks?

Benjamin Graham advises you never to have more than 75% of your total assets in stocks.

But is putting all your money into the stock market inadvisable for everyone?

For a tiny minority of investors, a 100%-stock portfolio may make sense.

You are one of them if you:

• have set aside enough cash to support your family for at least one year
  
  
• will be investing steadily for at least 20 years to come
  
  
• survived the bear market that began in 2000
  
  
• did not sell stocks during the bear market that began in 2000
  
  
• bought more stocks during the bear market that began in 2000
  
  
• have read Chapter 8 of The Intelligent Investor and implemented a formal plan to control your own investing behaviour.

Unless you can honestly pass all these tests, you have no business putting all your money in stocks.

Anyone who panicked in the last bear market is going to panic in the next one - and will regret having no cushion of cash and bonds.

Ref: cc Intelligent Investor by Benjamin Graham

Speculative frenzy grips China

Speculative frenzy grips China
SHANGHAI, Aug 1 – Just a week ago, Candy Xie, 24, was all ready to make a quick buck on China’s roaring stock market.

The waitress had poured her entire savings of 7,000 yuan (S$1,480) into the shares of two companies that had just gone public.

She said she was a firm believer in the folk mantra xin gu bu bai, or “new stocks never fail”, which appears to have beguiled China’s legion of opportunistic retail investors recently.

“Everyone says they are buying new shares so I’m sure I’ll make money speculating on them,” she said on Monday when one of her punts, Sichuan Expressway Company, made a sizzling debut on the Shanghai bourse.

That day alone, the stock shot up by more than four times from its initial public offering (IPO) price of 3.6 yuan. Feverish trading was suspended twice.

The company’s share price fell back to earth the next day.

Although Xie made a small profit after selling off her Sichuan Expressway shares on Thursday, she admits she is now less sure of making money by punting on the roller-coaster Shanghai stock market.

She is but one of the millions of investors putting their hopes in China’s resurgent stock market. It has shot up by some 90 per cent this year, based on the benchmark Shanghai Composite Index, and recently overtook Japan as the world’s second largest behind the United States.

More than a million Chinese have opened new trading accounts in the two weeks leading up to July 24 – an 18-month high – after Beijing lifted a 10-month ban on new listings in June.

They are betting on a bull run driven partly by funds suspected to have leaked from loans meant for China’s 4 trillion yuan stimulus package.

Most of them are looking to capitalise on a fresh crop of IPOs featuring start-ups and tech firms that will be floated on the upcoming ChiNext exchange in Shenzhen, said Zhejiang University commerce professor Li Jiming.

Of these new investors, a large number appear to be “relatively young newbies with low incomes”, said a manager surnamed Li at a brokerage in Beijing’s Dongcheng district.

A large number of these stock market neophytes are from the “post-1980” generation of Chinese aged 29 and younger, according to a report on Xiamen news portal xmfish.com.

It cited a Wang Wei, 18, who opened an account on Monday at the encouragement of his colleagues. He was quoted as saying: “I don’t have much savings, I’ll just invest 10,000 yuan or so first. The market is rising every day, so the pickings should be not bad.”

Even those who had been burnt last year, when the stock market bubble burst amid concerns of overvalued stocks, are venturing back into the market.

Pharmacist Feng Xia, 33, said she did not dare to touch any stocks for a year after the crash. But in May, when the stock market started to gain momentum again, she could not resist the temptation and invested 2,000 yuan into a metal company’s stock at the recommendation of a friend. She made 700 yuan.

Said another returnee, gym trainer Liu Gang, 25: “I lost a lot of money during the last crash. But this time, I have a gut feeling the boom will last for a few months, so I’m going to going to invest all my savings in stocks.”

Alarmingly, about 52 per cent of small investors who snapped up the Sichuan Expressway stock on its debut said they suffered paper losses – to the tune of 30 million yuan, Beijing Youth Daily reported on Thursday.

On Wednesday, a massive sell-off had set in with the Shanghai Exchange plunging 5 per cent on concerns that shares were overpriced and banks may cap their lending targets.

The market posted a strong recovery over the next two days. This followed an affirmation by China’s central bank to follow a “moderately loose” monetary policy to support the nation’s economic recovery, which suggested that it will not rein in lending in the near future.

Banks have unleashed a staggering 7.4 trillion yuan in new loans in the first six months of this year, as part of the government’s stimulus measures.

But about 20 per cent of the loans has reportedly gone into the stock market.

Analysts said that one big red flag of a bubble forming in China’s stock market was the huge turnover on the debut day of trade for China Construction Engineering Corp on Wednesday.

The builder of the “Water Cube” Olympic aquatics centre said its IPO was more than 35 times oversubscribed.

Even those lucky enough to be allotted shares – like Sheng Tao, 45, who applied for about 70,000 shares but got only 2,000 – was in no mood to hold on to the stock as speculative fever escalated.

When asked why he wanted to sell his shares as quickly as possible, the vice-manager of a textile company in Beijing declared: “Now is the time for speculation. I just want to make money and get out quickly.”

Beijing is already starting to pay attention to the retail investors’ frenzy.

State broadcaster China Central Television and People’s Daily, a Communist Party newspaper, have warned about the perils of speculation this week. The country’s bank regulator has also urged commercial banks to ensure loans are not misused.

However, some people argue that such concerns may be premature.

Professor Li noted that with the Chinese economy expected to perform well later this year, a sharp rise in the stock prices of companies with stable performance should not be viewed as a bubble.

“Right now, there is a bubble in certain stocks only, but not for the entire market,” he argued. – ST

News you could use

Stocks are crashing, so you turn on the television to catch the latest market news. But instead of CNBC or CNN, imagine that you can tune in to the Benjamin Graham Financial Network. On BGFN, the audio doesn't capture that famous sour clang of the market's closing bell; the video doesn't home in on brokers scurrying across the floor of the stock exchange like angry rodents. Nor does BGRN run any footage of investors gasping on frozen sidewalks as red arrows whiz overhead on electronic stock tickers.

Instead, the image that fills your TV screen is the facade of the New York Stock Exchange, festooned with a huge banner reading: "SALE! 50% OFF!" As intro music, Bachman-Turner Ovrdrive can be heard blaring a few bars of their old barn-burner, "You Ain't Seen Nothin' Yet." Then the anchorman announces brightly, "Stocks became more atractive yet again today, as the Dow dropped another 2.5% on heavy volume - the fourth day in a row that stocks have gotten cheaper. Tech investors fared even better, as leading companies like Microsoft lost nearly 5% on the day, making them even more affordable. That comes on top of the good news of the past year, in which stocks have already lost 50%, putting them at bargain levels not seen in years. And some prominent analysts are optimistic that prices may drop still further in the weeks and months to come."

The newscast cuts over to market strategist Ignatz Anderson of the Wall Street firm of Ketchum & Skinner, who says, "My forecast is for stocks to lose another 15% by June. I'm cautiously optimistic that if everything goes well, stocks could lose 25%, maybe more."

"Let's hope Ignatz Anderson is right," the anchor says cheerily. "Falling stock prices would be fabulous news for any investor with a very long horizon. And now over to Wally Wood for our exclusive AccuWeather forecast."


Ref: Intelligent Investor by Benjamin Graham

Hardened investors need to pause

Hardened investors need to pause
Tags: commentary Quest Means Business Richard Quest

Written by Richard Quest
Wednesday, 29 July 2009 23:05


HAVE you ever watched a lady walking down the street on very high-heeled shoes that are clearly beyond her abilities? The tottering; the ungainly sway; the break of a spike; the twist of an ankle, and possibly a crashing fall to the floor.

The stock market in recent weeks has been behaving in just such a fashion. Rising from its March low, the S&P 500 is now 44% higher than its lows of early March. The DJ Euro Stoxx 50 has gained 42%.

This rise has taken place while we are still getting horrible numbers showing economies still in recession and unemployment rising. For instance, last week the UK government announced the economy contracted by 0.8% in the second quarter, leading to a 5.6% fall for the year, and yet the FTSE rose 7%!

The market is baffling sedulous investors seeking reasons for the gains, especially while economists continue to offer dark warnings about the future.

I could offer you many reasons to try and explain what is going on. Some will find comfort in the latest earnings reports from major companies.

Analysis by Bloomberg shows 75% of the S&P 500 companies that have reported so far have surpassed expectations. Others will remind me that markets are a leading indicator lighting the way forward, not some rear view mirror like gross domestic product (GDP) or jobless numbers.

And there are those who will delve into the bag of tricks used by technical analysts such as chartists to explain the inexplicable.

None of these reasons make good sense when you put them into the real world where companies are still cutting back.

On my programme Quest Means Business, we do our own analysis of the earnings season with the Q25. This isn't a scientific index!

We take 25 of the biggest companies across a broad range of industries and debate whether they receive red or green marks for their earnings, asking simply “did they meet or beat expectation?”

When we looked closely we saw a lot of window dressing making numbers look rosy. Core revenues were still weak; outlook and guidance were often poor or non-existent. Overall, we got the feeling many companies were just about getting by in horrible trading conditions.

In the end we gave 13 green and 12 red, hardly an endorsement justifying a 40% rise in share prices.

To those readers hoping I am going to square this circle, you will be disappointed. I do, however, have a theory, and it goes like this: Investors are naturally optimistic beasts.

They are driven by looking up the mountain to the next peak, only noticing falls once they have begun. After recent months they have become hardened to further falls. So the market has taken the horse called Optimism and ridden the blighter for all it is worth.

Unfortunately, no one really knows if this is doomed to fail under an ambush of further bad news.

In the end, we have to hope that the markets continue to behave like the young lady in her new, high-heeled shoes.

Upon wearing them, she may totter terrified out of the shop — but it isn't long before experience and confidence take over.

Soon, our lady in heels is negotiating concrete and carpet alike with escalators thrown in. What we need now is that same experience in our investing, which probably means having a pause to allow experience to set in.

Richard Quest is a CNN correspondent based in London, host of the weekday one-hour programme Quest Means Business.

Source: The Edge

Investment Owner's Contract

I, ________, hereby state that I am an investor who is seeking to accumulate wealth for many years into the future.

I know that there will be times when I will be tempted to invest in stocks or bonds because they have gone (or "are going") up in price, and other times when I will be tempted to sell my investments because they have gone (or "are going") down.

I hereby declare my refusal to let a herd of strangers make my financial decisions for me. I further make a solemn commitment never to invest because the stock market has gone up, and never to sell because it has gone down. Instead, I will invest $ xxxx.00 per month, every month, through an automatic investment plan or "dollar-cost averaging program," into the following mutual fund(s) or diversified portfolio(s):

____________,

____________,

____________.


I will also invest additional amounts whenever I can afford to spare the cash (and can affort to lose it in the short run).

I hereby declare that I will hold each of these investments continually through at least the following date (which must be a minimum of 10 years after the date of this contract): __, ____, 20__. The only exceptions allowed under the terms of this contract are a sudden, pressing need for cash, like a health-care emergency or the loss of my job, or a planned expenditure like a housing down payment or a tuition bill.

I am, by signing below, stating my intention not only to abide by the terms of this contract, but to re-read this document whenever I am tempted to sell any of my investments.

This contract is valid only when signed by at least one witness, and must be kept in a safe place that is easily accessible for future reference.


Signed:


Date:


Witnesses:

1. The Sheep

2. The Cow



XXXXXXXXX

Isn't the above an interesting contract?


Ref: Intelligent Investor by Benjamin Graham

U.S. GDP released Friday was better than economists expected.

U.S. Economy Shrank Less Than Expected in Quarter

The government reading on U.S. gross domestic product released Friday was better than economists expected.

By CATHERINE RAMPELL and JACK HEALY
Published: July 31, 2009

The economy’s long, churning decline leveled off significantly from April through June, the government reported on Friday, supporting hopes that the economy would turn around in the second half of the year.

The American economy shrank at an annual pace of 1 percent in the second quarter, after contracting at an annual pace of 6.4 percent earlier this year. Government spending, bolstered by the first payouts from a $787 billion stimulus package, propped up the economy and accounted for 20 percent of the country’s output.

But consumer spending, which makes up about 70 percent of the overall economy, has continued to fall as fearful Americans hold onto their paychecks and whittle down their spending. This has led to concerns about what will happen once stimulus funds peter out.

“The most severe part of the decline is behind us,” said Joshua Shapiro, chief United States economist at MFR. “But it’s hard to say how sustainable whatever bounce we might see will be. It depends largely on whether the consumer has the genuine ability to spend, or if it’s all just government cheese being handed out.”

The increasing reliance on the government to fuel the economy — and the decreasing contributions from consumers — could put the Obama administration and other Democrats in a difficult position. Many economists say that even if the economy has bottomed, the recovery over the coming months or possibly years many be painfully slow.

“We’re going from recession to recovery, but at least early on, it’s not going to feel like one,” said the chief economist at Moody’s Economy.com, Mark Zandi. “For economists, this is a seminal part in the business cycle, but for most Americans, it won’t mean much.”

Bright spots have been seen in stock markets, corporate profits, some housing markets and the pace of job losses. But generally the job market tends to follow the rest of the economy, as employers wait to hire more workers until their businesses strengthen. This means the threat of sustained, double-digit employment in coming months remains.

As long as employers keep slashing jobs, and consumers continue to hurt, pressure may mount on government officials to speed up the recovery.

“At some point it becomes Obama’s economy, not Bush’s economy anymore,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research group in Washington. “He made a big mistake in overselling the first stimulus, and then in celebrating all the ‘green shoots.’ That just opens the door for people to say, ‘Where are my green shoots? I still don’t have a job.’ ”

Unemployment climbed to 9.5 percent in June, leaving a total of 15 million people out of work and looking for jobs. Consumers, wary of losing their jobs or already unemployed, cut their spending by 1.2 percent in the second quarter and saved more than 5 percent of their disposable income, a stark turnaround from their spendthrift behavior during the housing boom.

“Concerns about a possible ‘double-dip’ recession probably would focus mainly on the consumer,” said Nigel Gault, chief United States economist at IHS Global Insight. “If households continue to try to bump up their savings rate, any growth we get in the overall economy could certainly relapse.”

Friday’s report on gross domestic product — a broad gauge of the country’s output — painted a bleaker picture of the recession than earlier estimates had.

The Commerce Department said the economy tumbled downward by 6.4 percent this winter as the country reeled from the shocks of the financial crisis, and it said the economy grew only 0.4 percent in all of 2008, compared to earlier assessments of 1.1 percent growth.

Now, even with jobs still vanishing and wages flat, many forecasters expect the downturn to level off. Economists say that businesses from small manufacturers to big automakers are poised to rebuild their depleted inventories, which fell by an annualized $141 billion in the second quarter. That restocking could spur economic growth later this year.


The Commerce Department’s quarterly assessment offered a tour through a dreary year. The economy withered during each of the last four quarters, its longest contraction since the 1940s. Businesses cut their investments and laid off millions of workers. Imports and exports tumbled.

The country’s gross domestic product fell to $14.15 trillion in the second quarter, from $14.5 trillion in the second quarter of 2008.

In interviews, small-business owners across the country say the ground is slowly reforming under their feet, and that business no longer seems to be careening downward. Indeed, business investment in structures like new factories and office buildings fell at a rate of 8.9 percent in the second quarter after declining by more than 40 percent in the previous three months. And investment in equipment and software, which fell 36 percent this winter, dropped a more modest 9 percent in the second quarter.

But many employers who have laid off employees or scaled back say they are not about to increase their spending or start hiring.

In Nashville, Jerry Robertson laid off one of his 15 employees, cut his budget for advertising and trade shows and moved into a smaller office space to cut costs at his company, which helps trucking companies manage their operations. His business is down about 10 percent from last year, and clients are still falling off his books.

“We do see it not declining as fast as it was, but we don’t see any growth,” Mr. Robertson said. “We’re still going down.”

http://www.nytimes.com/2009/08/01/business/economy/01econ.html?_r=1&hp

Using closed-ended funds

iCap closed ended fund is structured for those investors who are seeking maximum portfolio gain and who are not interested in income. The dividends and the realised capital gains in iCap are reinvested to achieve the objective of maximising capital or portfolio gain. It is not hard to see that iCap closed ended funds should be considered a long-term investment.

Should iCap be trading at a premium? It is presently trading at a discount. Well, let not the manager of the fund pleads on this, let the investors decide. The manager should stay focus on just improving the quality of the fund's portfolio and returns.

If the economy does improve, the market is still very cheap at the present level.

Here are some articles of related interests:
Kinds of closed-ended funds
Closed-ended funds: 2 ways to make and 2 ways to lose money
Closed-ended funds: Why a discount, anyway?
Using closed-ended funds

Can you beat the pros at their own game?

Here are some of the handicaps mutual fund managers and other professional investors are saddled with:

• With billions of dollars under management, they must gravitate toward the biggest stocks - the only ones they can buy in the multimillion-dollar quantities they need to fill their portfolios. Thus many funds end up owning the same few overpriced giants.
• Investors tend to pour more money into funds as the market rises. The managers use that new cash to buy more of the stocks they already own, driving prices to even more dangerous heights.
• If fund investors ask for their money back when the market drops, the managers may need to sell stocks to cash them out. Just as the funds are forced to buy stocks at inflated prices in a rising market, they become forced sellers as stocks get cheap again.
• Many portfolio managers get bonuses for beating the market, so they obsessively measure their returns against benchmarks like the S&P 500 index. If a company gets added to an index, hundreds of funds compulsively buy it. (If they don't and that stock then does well, the managers look foolish; on the other hand, if they buy it and it does poorly, no one will blame them.)
• Increasingly, fund managers are expected to specialize. Just as in medicine the general practitioner has given way to the pediatric allergist and the geriatric otolaryngologist, fund managers must buy only "small growth" stocks, or only "mid-sized value" stocks, or nothing but "large blend" stocks. If a company get too big, or too small, or too cheap, or an itty bit too expensive, the fund has to sell it - even if the manager loves the stock.

Lessons:

So, there's no reason you can't do as well as the pros.

What you cannot do (despite all the pundits who say you can) is to "beat the pros at their own game." The pros can't even win their own game! Why should you want to play it at all?

If you follow their rules, you will lose - since you will end up as much a slave to Mr. Market as the professionals are.

One of Graham's most powerful insights is this: "The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage."

The intelligent investor has the full freedom to choose whether or not to follow Mr. Market. You have the luxury of being able to think for yourself.



Ref: cc Intelligent Investor by Benjamin Graham

What keeps most individual investors from succeeding?

When asked what keeps most individual investors from suceeding.

Graham had a concise answer: "The primary cause of failure is that they pay too much attention to what the stock market is doing currently."

The manic-depressive Mr. Market does not always price stocks correctly.

On March 17, 2000, the stock of Inktomi Corp. hit a new high of $231.625.

• Since they first came on the market in June 1998, shares in the Internet-searching software company had gained roughly 1,900%.
• Just in the few weeks since December 1999, the stock had nearly tripled.

What was going on at Inktomi the business that could make Inktomi the stock so valuable?

• The answer seems obvious: phenomenally fast growth.
• In the three months ending in December 1999, Inktomi sold $36 million in products and services, more than it had in the entire year ending in December 1998.
• If Inktomi could sustain its growth rate of the previous 12 months for just five more years, its revenues would explode from $36 million a quarter to $5 billion a month.
• With such growth in sight, the faster the stock went up, the farther up it seemed certain to go.

But in his wild love affair with Inktomi's stock, Mr. Market was overlooking something about its business.

• The company was losing money - lots of it.
• It had lost $6 million in the most recent quarter, $24 million in the 12 months before that, and $24 million in the year before that.
• In its entire corporate lifetime, Inktomi had never made a dime in profits.
• Yet, on March 17, 2000, Mr. Market valued this tiny business at a total of $25 BILLION. (Yes, that's BILLION, with a B.)

And then Mr. Market went into a sudden, nightmarish depression.

• On September 30, 2002, just two and a half years after hitting $231,625 per share, Inktomi's stock closed at 25 cents - collapsing from a total market value of $25 billion to less than $40 million.

Had Inktomi's business dried up?

• Not at all; over the previous 12 months, the company had generated $113 million in revenues.

So what had changed? Only Mr. Market's mood:

• In early 2000, investors were so wild about the Internet that they priced Inktomi's shares at 250 times the company's revenues.
• Now, however, they would pay only 0.35 times its revenues.
• Mr. Market had morphed from Dr. Jekyll to Mr. Hyde and was ferociously trashing every stock that had made a fool out of him.

But Mr. Market was no more justified in his midnight rage than he had been in his manic euphoria.

• On December 23, 2002, Yahoo! Inc. announced that it would buy Inktomi for $1.65 per share.
• That was nearly seven times Inktomi's stock price on September 30.
• History will probably show that Yahoo! got a bargain.
• When Mr. Market makes stocks so cheap, it's no wonder that entire companies get bought right out from under him.

(As Graham noted in a classic series of articles in 1932, the Great Depression caused the shares of dozens of companies to drop below the value of their cash and other liquid assets, making them "worth more dead than alive.")


Lessons:

Most of the time, the market is mostly accurate in pricing most stocks.

Millions of buyers and sellers haggling over price do a remarkably good job of valuing companies - on average.

But sometimes, the price is not right; occasionally, it is very wrong indeed.

And at such times, you need to understand Graham's image of Mr. Market, probably the most brilliant metaphor ever created for explaining how stocks can become mispriced.

The manic-depressive Mr. Market does not always price stocks the way an appraiser or a private buyer would value a business.

Instead, when stocks are going up, he happily pays more than their objective value; and, when they are going down, he is desperate to dump them for less than their true worth.

Is Mr. Market still around? Is he still bipolar? You bet he is.


Ref: cc Intelligent Investor by Benjamin Graham

Think for Yourself

In 1999, when Mr. Market was squealing with delight, American employees directed an average of 8.6% of their paychecks into their 401(k) retirement plans.

By 2002, after Mr. Market had spent three years stuffing stocks into black garbage bags, the average contribution rate had dropped by nearly one-quarter, to just 7%.

Lessons:

The cheaper stocks got, the less eager people became to buy them - because they were imitating Mr. Market, instead of thinking for themselves.

Would you willingly allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels?

Would you ever agree to be euphoric just because he is - or miserable just because he thinks you should be?

Of course not. You'd insist on your right to control of your own emotional life, based on your experiences and your beliefs.

But, when it comes to their financial lives, millions of people let Mr. Market tell them how to feel and what to do - despite the obvious fact that, from time to time, he can get nuttier than a fruitcake.

One of Graham's most powerful insights is this: "The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage."

The intelligent investor has the full freedom to choose whether or not to follow Mr. Market. You have the luxury of being able to think for yourself.


Ref: cc Intelligent Investor by Benjamin Graham

Do business with Mr. Market only when it serves Your Interests.

The stock of CMGI, an "incubator" or holding company for Internet start-up firms, went up an astonishing 939.9% in 1999. Meanwhile, Berkshire Hathaway - the holding company through which Graham's greatest discipline, Warren Buffett, owns such Old Economy stalwarts as Coca-Cola, Gillette, and the Washington Post Co. - dropped by 24.9%.

But then, as it so often does, the market had a sudden mood swing. The stinkers of 1999 became the stars of 2000 through 2002.

As for those two holding companies, CMGI went on to lose 96% in 2000, another 70.9% in 2001, and still 39.8% more in 2002 - a cumulative loss of 99.3%. Berkshire Hathaway went up 26.6% in 2000 and 6.5% in 2001, then had a slight 3.8% loss in 2002 - a cumulative gain of 30%.

Lessons:

By refusing to let Mr. Market be your master, you transform him into your servant. After all, even when he seems to be destroying values, he is creating them elsewhere.

• In 1999, the Wilshire 5000 index - the broadest measure of U.S. stock performance - gained 23.8%, powered by technology and telecommunications stocks.
• But 3,743 of the 7,234 stocks in the Wilshire index went down in value even as the average was rising.
• While those high-tech and telecom stocks were hotter , thousands of "Old Economy" shares were frozen in the mud - getting cheaper and cheaper.

The intelligent investor shouldn't ignore Mr. Market entirely. Instead, you should do business with him - but only to the extent that it serves your interests.

Mr. Market's job is to provide you with prices; your job is to decide whether it is to your advantage to act on them. You do not have to trade with him just because he constantly begs you to.

Ref: cc Intelligent Investor by Benjamin Graham

Controlling Yourself at Your Own Game: You are your own Worst Enemy

If you listen to financial TV, or read most market columnists, you'd think that investing is some kind of sport, or a war, or a struggle for survival in a hostile wilderness.

But investing isn't about beating others at their game.

It's about controlling yourself at your own game.

The challenge for the intelligent investor is not to find the stocks that will go up the most and down the least, but rather to prevent yourself from being your own worst enemy - from buying high just because Mr. Market says "Buy!" and from selling low just because Mr. Market says "Sell!"

If your investment horizon is long - at least 25 or 30 years - there is only one sensible approach: Buy every month, automatically, and whenever else you can spare some money. (For many, the single best choice for this lifelong holding is a total stock-market index fund. )

After all, the whole point of investing is not to earn more money than average, but to earn enough money to meet your own needs. "Who cares? All I know is, my investments earned enough for me to end up in ----?"

The best way to measure your investment success is not by whether you're beating the market but by whether you've put in place a financial plan and a behavioural discipline that are likely to get you where you want to go. In the end, what matters isn't crossing the finish line before anybody else but just making sure that you do cross it.

Ref: cc Intelligent Investor by Benjamin Graham

Controlling the Controllable

Recognize that investing intelligently is about controlling the controllable.

You can't control whether the stocks or funds you buy will outperform the market today, next week, this month, or this year; in the short run, your returns will always be hostage to Mr. Market and his whims.

But you can control:

• your brokerage costs, by trading rarely, patiently, and cheaply
• your ownership costs, by refusing to buy mutual funds with excessive annual expenses
• your expectations, by using realism, not fantasy, to forecast your returns
• your risk, by deciding how much of your total assets to put at hazard in the stock market, by diversifying, and by rebalancing
• your tax bills, by holding stocks for at least one year and, whenever possible, for at least five years, to lower your capital-gains liability
• and, most of all, your own behaviour.

Ref: cc Intelligent Investor by Benjamin Graham

Urgent Strategy Update

Hello — this is Martin Weiss with an important strategy update.
It's only fair to acknowledge that the economic depression I foresaw in my book and in my reports is unfolding more slowly than I had expected.
For reasons I'll explain in a moment, the next phase of the crisis we've been warning you about has been delayed, and this change demands a parallel change in our short- and medium-term investment outlook.
The real estate bust we forecast four years ago has happened, but right now, the housing market appears to be stabilizing.
The depression I've written about extensively is here, but it's not as deep as I expected it would be by this time.
The first phase of the banking collapse I alerted you to has struck, but the second phase has been delayed.
The stock market has plunged, but this bear market rally has lasted longer than I believed it would.
My long-term outlook has not changed by one iota! All of this simply means that the calm before the next phase of this financial storm may be prolonged. And at a time like this, it is absolutely essential that intelligent and prudent investors adjust with the times — in our case, to adjust our shorter-term outlook, strategy and recommendations.
But before we talk about the forces that have prolonged this crisis, let's take a look at what has not changed:
First and foremost, the federal government is deeper in debt than ever. Washington now owes $15 trillion. Worse, it's adding as much as $2 trillion to the national debt this year alone and pushing new spending bills that, if passed, will make these record-shattering deficits even worse.
Second, toxic assets are still piling up in the U.S. banking system. Three new waves of defaults in adjustable-rate mortgages — each larger than the previous one — are still bearing down on us.
Third, unemployment is approaching depression-era levels and still rising.
Fourth, corporate and personal bankruptcies are off the charts and also still rising.
Fifth, the finances of our state and local governments are still a mess. Their tax revenues are plunging. Their costs to fund social safety nets are surging. Their deficits are exploding.
All of these very dangerous fundamentals are still in place, just as we've told you. But two forces have been introduced into the mix.


Force#1 is a short-term shift in investor psychology: Washington has been able to temporarily tamp down the FEAR on Wall Street.
It took a heck of a lot more money than they had imagined would ever be needed — trillions in spending and lending, trillions more in guarantees. And while none of this does a single thing to correct the nation's underlying problems with excess debt, they have had a positive impact on investor confidence — for now.
For now at least, they have been able to smother the fires that just a few months ago were burning out of control.
At the same time, they have convinced many investors to resume taking RISK. And in the case of some major investors, like big investment banks, we see more risk-taking now than at any time in history.
Goldman Sachs is a prime example. Emboldened by the belief that big banks are "too big to fail" — Goldman is now taking double the risk it was taking before this crisis began.
In short, although our leaders have done virtually nothing to solve the fundamental problems that caused this crisis, Washington does seem to have bought some time.
How much time? That remains to be seen.
But for some clues, we've taken a closer look at Japan's "lost decade" of the 1990s.
Before their lost decade, Japan experienced a massive bubble economy, which included many of the same elements we saw in our own bubble — massive speculation in real estate, huge risks taken by banks and a great gambling fever in stocks.
But beginning in early 1990, that bubble burst. Much like we've seen here today, their stock averages plunged, with the Nikkei Index crashing 62 percent. Much like in our crisis, real estate prices collapsed, brokerage firms failed, and big banks were buried in a morass of toxic paper.
And just like Washington today, their government threw everything, including the kitchen sink, at the crisis.
They slashed official interest rates to zero — just like Washington has.
They introduced a major stimulus package — just like Washington has.
They kept zombie banks alive — just like Washington is doing right now.
They tamped down the fear. They bought time. They attacked the symptoms of their economic disease. But they never addressed the causes.
Their massive bailouts and handouts postponed the day of reckoning. But then months later, the next major decline began. And this cycle repeated itself — not just once, but several times during their lost decade.
Even after prolonged bear market rallies, the Nikkei made new lows, again and again.
So the lesson from Japan is clear: It is possible that the U.S. economy and the U.S. markets will muddle through and even recover for months at a time.
We may see the economy stabilize for several quarters.
We may see this bear market rally prolonged as investors continue to take more and more risk.
And you will certainly hear more voices proclaiming that "the crisis is over," and "the recession is behind us" ...
... until, that is, the next wave of bad news crushes the economy and the next phase of this deep, long-term bear market begins, when stocks plunge again, busting through their lows.
In Japan, the Nikkei ultimately fell more than 80 percent from its peak. Don't be surprised to see the same happen here.
It's no coincidence that this change we're making now puts our outlook in closer alignment with the outlook of the Foundation for the Study of Cycles, whom we've partnered with in recent months. That partnership was a major evolution for my company, helping us to significantly enhance a key aspect of our research.
As everyone knows, it's one thing to see the direction of change. And if the last few years have proven anything, it's that we have foreseen those changes well ahead of time: The housing bust, the mortgage mess, the banking crisis, the stock market crash and the economic disaster.
But it's another thing to spot the precise timing of major turning points in the economy and the markets — and that's what this 75-year-old Foundation is helping us do more effectively.
Looking ahead, the Foundation sees the same perfect storm we see. They see the next phase of this great bear market starting to strike again next year.
So that's the first change in our outlook: It now seems likely that the next major downward phase of this crisis could be postponed for several months, perhaps even until next year.


Force #2 is the fact that the economies and stock markets in Brazil, India, China and other key countries have entered an important bullish phase, giving us many opportunities to go for substantial profits overseas.
Plus, now that Washington has bought some time for the U.S. economy, the path is clearer to pursue opportunities in U.S. stocks that derive a big portion of their revenues from the most promising regions overseas.
I am ready; indeed, eager to harness this medium-term profit potential and I hope you are too.
I was brought up in Latin America and I have lived in East Asia. I have studied every major world language except Arabic. I have been to every continent except Antarctica.
More important, I've assembled an international team of experts with decades of experience overseas and global investments. We know where the opportunities are — and where the pitfalls lie.
Beware, though: The U.S.-led debt crisis will return, and when it does, it will do so with a vengeance. Knowing when the next phase of this crisis is most likely to unfold will be crucial to protecting your capital.
So my message to you today is clear: This crisis is not over. Do not let down your guard. Do not plunge headlong into risk. But at the same time, do not ignore the short- and medium-term opportunities to grow your wealth.
Invest moderately, use prudent downside protection and cash management strategies and always have a clear exit plan.
Please be assured that, as always, you are our first priority. We are absolutely dedicated to helping you not only preserve your capital but also grow your wealth no matter how long the next phase of this crisis is delayed or how suddenly it strikes.
My staff and I are working diligently to improve every aspect of our service to you. And now that we have exclusive rights to the time-honored research of the Foundation for the Study of Cycles, we feel we're even better equipped to help you time your investment decisions in virtually every market environment. We here to help you cautiously harness the profit opportunities — both as foreign economies grow stronger and when the bear returns to the U.S.
Good luck and God bless!



About Money and MarketsFor more information and archived issues, visit http://www.moneyandmarkets.com/

Instead of fearing a bear market, you should embrace it.

Your Money and Your Brain

Why, then, do investor find Mr. Market so seductive? It turns out that our brains are hardwired to get us into investing trouble; humans are pattern-seeking animals. Psychologists have shown that if you present people with a random sequence - and tell them that it's unpredictable - they will nevertheless insist on trying to guess what's coming next. Likewise, we "know" that the next roll of the dice will be a seven, that a baseball player is due for a base hit, that the next winning number in the Powerball lottery will definitely be 4-27-9-16-42-10- and that this hot little stock is the next Microsoft.

Groundbreaking new research in neuroscience shows that our brains are designed to perceive trends even where they might not exist. After an event occurs just two or three times in a row, regions of the human brain called the anterior cingulate and nucleus accumbens automatically anticipate that it will happen again. If it does repeat, a natural chemical called dopamine is released, flooding your brain with a soft euphoria. Thus, if a stock goes up a few times in a row, you reflexively expect it to keep going - and your brain chemistry changes as the stock rises, giving you a "natural high." You effectively become addicted to your own predictions.

But when stocks drop, that financial loss fires up your amygdala - the part of the brain that processes fear and anxiety and generates the famous "fight or flight" response that is common to all cornered animals. Just as you can't keep your heart rate from rising if a fire alarm goes off, just as you can't avoid flinching if a rattlesnake slithers onto your hiking path, you can't help feeling fearful when stock prices are plunging.

In fact, the brilliant psychologists Daniel Kahneman and Amos Tversky have shown that the pain of financial loss is more than twice as intense as the pleasure of an equivalent gain. Making $1,000 on a stock feels great - but a $1,000 loss wields an emotional wallop more than twice as powerful. Losing money is so painful that many people, terrified at the prospect of any further loss, sell out near the bottom or refuse to buy more.

That explains why we fixate on the raw magnitude of a market decline and forget to put the loss in proportion. So, if a TV reporter hollers, "The market is plunging - the Dow is down 100 points!" most people instinctively shudder. But, at the Dow's recent level of 8,000 that's a drop of just 1.2%. Now think how ridiculous it would sound if, on a day when it's 81 degrees outside, the TV weatherman shrieked, "The temperature is plunging - it's dropped from 81 degrees to 80 degrees!" That, too, is a 1.2% drop. When you forget to view changing market prices in percentage terms, it's all too easy to panic over minor vibrations. (If you have decades of investing ahead of you, there's a better way to visualize the financial news broadcasts: see---).

In the late 1990s, many people came to feel that they were in the dark unless they checked the prices of their stocks several times a day. But, as Graham puts it, the typical investor "would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment." If, after checking the value of your stock portfolio at 1:24 p.m., you feel compelled to check it all over again at 1:37 p.m., ask yourself these questions:

• Did I call a real-estate agent to check the market price of my house at 1:24 p.m.? Did I call back at 1:37 p.m.?
• If I had, would the price have changed? If it did, would I have rushed to sell my house?
• By not checking, or even knowing, the market price of my house from minute to minute, do I prevent its value from rising over time?

The only possible answer to these questions is of course not! And you should view your portfolio the same way. Over a 10- or 20- or 30- year investment horizon, Mr. Market's daily dipsy-doodles simply do not matter. In any case, for anyone who will be investing for years to come, falling stock prices are good news, not bad, since they enable you to buy more for less money. The longer and further stocks fall, and the more steadily you keep buying as they drop, the more money you will make in the end - if you remain steadfast until the end. Instead of fearing a bear market, you should embrace it. The intelligent investor should be perfectly comfortable owning a stock or mutual fund even if the stock market stopped supplying daily prices for the next 10 years.

Paradoxically, "you will be much more in control," explains neuroscientist Antonio Damasio, "if you realize how much you are not in control." By acknowledging your biological tendency to buy high and sell low, you can admit the need to dollar-cost average, rebalance, and sign an investment contract. By putting much of your portfolio on permanent autopilot, you can fight the prediction addiction, focus on your long-term financial goals, and tune out Mr. Market's mood swings.

Ref: Intelligent Investor by Benjamin Graham

Happiness of the Wise

The happiness of those who want to be popular depends on others; the happiness of those who seek pleasure fluctuates with moods outside their control; but the happiness of the wise grows out of their own free acts. - Marcus Aurelius

Non-convertible Preferred Stocks

1. It is hardly worthwhile to talk about nonconvertible preferred stocks, since their special tax status makes the safe ones much more desirable holdings by corporations – e.g., insurance companies – than by individuals.
2. The poorer-quality ones almost always fluctuate over a wide range, percentage wise, not too differently from common stocks. We can offer no other useful remark about them.

Ref: Intelligent Investor by Benjamin Graham

"Long-term Bond of the Future"

This may be a good place to make a suggestion about the “long term bond of the future.”

1. Why should not the effects of changing interest rates be divided on some practical and equitable basis between the borrowers and the lender?
2. One possibility would be to sell long-term bonds with interest payments that vary with an appropriate index of the going rate.
3. The main results of such an arrangement would be: (1) the investor’s bond would always have a principal value of about 100, if the company maintains its credit rating, but the interest received will vary, say, with the rate offered on conventional new issues; (2) the corporation would have the advantages of long-term debt – being spared problems and costs of frequent renewals of refinancing – but its interest costs would change from year to year.

Over the past decade the bond investor has been confronted by increasingly serious dilemma:

1. Shall he choose complete stability of principal value, but with varying and usually low (short-term) interest rates?
2. Or shall he choose a fixed-interest income, with considerable variations (usually downwards, it seems) in his principal value?

It would be good for most investors if they could compromise between these extremes, and be assured that neither their interest return nor their principal value will fall below a stated minimum over, say, a 20-year period.

1. This could be arranged, without great difficulty, in an appropriate bond contract of a new form.
2. Important note: In effect the U.S. government has done a similar thing in its combination of the original savings-bonds contracts with their extensions at higher interest rates.
3. The suggestion we make here would cover a longer fixed investment period than the savings bonds, and would introduce more flexibility in the interest-rate provisions.

Ref: Intelligent Investor by Benjamin Graham

Price Fluctuations of Convertible Bonds and Convertible Preferred Stocks

1. The price fluctuations of convertible bonds and preferred stocks are the resultant of three different factors: (1) variations in the price of the related common stock, (2) variations in the credit standing of the company, and (3) variations in general interest rates.
2. A good many of the convertible issues have been sold by companies that have credit ratings well below the best. Some of these were badly affected by the financial squeeze in 1970.
3. As a result, convertible issues as a whole have been subjected to triply unsettling influences in recent years, and price variations have been unusually wide.
4. In the typical case, therefore, the investor would delude himself if he expected to find in convertible issues that ideal combination of the safety of a high-grade bond and price protection plus a chance to benefit from an advance in the price of the common.

Ref: Intelligent Investor by Benjamin Graham

Unpredictable Price Movements of Bonds

1. If it is virtually impossible to make worthwhile predictions about the price movements of stocks, it is completely impossible to do so for bonds.
2. In the old days, at least, one could often find a useful clue to the coming end of a bull or bear market by studying the prior action of bonds, but no similar clues were given to a coming change in interest rates and bond prices.
3. Hence the investor must choose between long-term and short-term bond investments on the basis chiefly of his personal preferences.

If he wants to be certain that the market values will not decrease, his best choices are probably U.S. savings bonds, Series E or H.

1. Either issue will give him a 5% yield (after the first year), the Series E for up to 5 ½ years, the Series H for up to ten years, with a guaranteed resale value of cost or better.
2. If the investor wants the 7.5% now available on good long-term corporate bonds, or the 5.3% on tax-free municipals, he must be prepared to see them fluctuate in price.
3. Banks and insurance companies have the privilege of valuing high-rated bonds of this type on the mathematical basis of “amortized cost,” which disregards market prices; it would not be a bad idea for the individual investor to do something similar.

Ref: Intelligent Investor by Benjamin Graham

High-grade Bond Market

Since 1964 record movements in both directions have taken place in the high-grade bond market.

1. Taking “prime municipals” (tax-free) as an example, their yield more than doubled, from 3.2% in January 1965 to 7% in June 1970. Their price index declined, correspondingly, from 110.8 to 67.5.
2. In mid-1970 the yields on high-grade long-term bonds were higher than at any time in the nearly 200 years of this country’s economic history.
3. Twenty-five years earlier, just before our protracted bull market began, bond yields were at their lowest point in history; long-term municipals returned as little as 1%, and industrials gave 2.4% compared with the 4 1/2 to 5% formerly considered “normal.”

Those of us with a long experience on Wall Street had seen Newton’s law of “action and reaction, equal and opposite” work itself out repeatedly in the stock market – the most noteworthy example being the rise in the DJIA from 64 in 1921 to 381 in 1929, followed by a record collapse to 41 in 1932.

1. But this time the widest pendulum swings took place in the usually staid and slow-moving array of high-grade bond prices and yields.
2. Moral: Nothing important on Wall Street can be counted on to occur exactly in the same way as it happened before. This represents the first half of our favorite dictum: “The more it changes, the more it’s the same thing.”

Ref: Intelligent Investor by Benjamin Graham

Fluctuations in Bond Prices

Long-term bond market prices and interest rates changes

1. The investor should be aware that even though safety of its principal and interest may be unquestioned, a long-term bond could vary widely in market price in response to changes in interest rates.
2. Because of their inverse relationship the low yields correspond to the high prices and vice versa.
3. Note that bond prices do not fluctuate in the same (inverse) proportion as the calculated yields, because their fixed maturity value of 100% exerts a moderating influence.
4. However, for very long maturities, prices and yields change at close to the same rate.

Ref: Intelligent Investor by Benjamin Graham