Bear Markets Do Wonders for Retirement

Bear Markets Do Wonders for Retirement

by Joe Mont
Tuesday, October 27, 2009

The six-month bear market that wiped out nearly half of Americans' retirement savings threatens to scare away the class of investor who has the most to gain from it: young people.

Mutual fund manager T. Rowe Price says in a study that those who began to systematically invest in equities in severe bear markets were "significantly better off 30 years later than investors who began in bull markets."

The analysis charted four hypothetical investors who each contributed $500 a month (15 percent of a $40,000 annual salary) toward a retirement account that replicated the S&P 500 Index over three decades. The starting date marked a severe stock-market downturn: 1929, 1950, 1970 and 1979.

The four investors were initially hard-hit. The S&P 500, for example, had an annualized return of minus 0.9 percent from 1929 to 1938, the second-worst 10-year period in history. The benchmark index grew a mere 5.9 percent in the recessionary era of the 1970s.

But for all four investors, there was good news to go with the bad: They had the opportunity to buy at low prices, accumulating more shares for what would be coming bull markets.

By the end of their first decade, the investors were poised to shake off market drops. The projections built upon 1950 and 1979 showed the greatest success. The S&P 500 returned an annualized 19.4 percent from 1950 to 1959, and 16.3 percent from 1979 to 1988, and their nest eggs swelled to $152,359 and $137,370, respectively.

The study makes its point in dramatic fashion by pointing out that a 30-year investment that began in 1929 ended with a total gain of 960 percent. The investor who started in 1970 fared even better: 1,753 percent.

By comparing the results with investors who began saving during bull markets in the 1980s and 1990s, the four investors did twice as well with their money.

"As counterintuitive as it may feel, it is actually a silver lining that the prices have gone down," says Stuart Ritter, assistant vice president of T. Rowe Price Investment Services. "For young investors still in the accumulation phase, it is better to have the bear market first, because then you buy a whole lot of shares at a lower price than when the bull market hits."

Ritter, who also teaches a class on personal finance at John Hopkins University in Baltimore, says the younger generation is starting to embrace that message despite rampant pessimism.

"They see older people panicking, and they understand why," he says. "But they are saying, 'Gee, 2008 felt bad and people worried about it, but I'm 22 years old and it's a long time before I am going to use this money.' It is a little bit easier for them to put 2008 in perspective, which I find interesting because, for their investing lifetime, 2008 represents all of it. But they are still pretty good at putting it in perspective and saying, 'It is just one year. I have a whole lot more ahead of me.' "

Ritter says it's a challenge to keep investors, young and old, from overreacting to bubbles and cycles.

"How do we change people's perspective from what happened in the past 18 months into the broader perspective that is appropriate for their goals and time horizon?" he says. "We see it at both times [bull and bear]. At the peak of the tech boom, all people see is that, 'Tech stocks always go up; why shouldn't I have everything in stocks?' With the real-estate boom, it was, 'Real estate has been doubling; why don't I have everything in real estate?' Then it was, 'Oh, no, 2008 was a disaster; why would anyone have anything in stocks.' It is just a different variation on the same theme. Our advice is to look beyond the short term and be appropriately invested for your time horizon."

http://finance.yahoo.com/focus-retirement/article/108005/bear-markets-do-wonders-for-retirement;_ylt=AhH8Y2ATfFWh212MY3qwLOCVBa1_;_ylu=X3oDMTFiazVuNXNiBHBvcwMxMgRzZWMDZmlkZWxpdHlBcmNoaXZlBHNsawNiZWFybWFya2V0c20-?mod=fidelity-buildingwealth

Retiring on Investment Interest: Can It Be Done?

Retiring on Investment Interest: Can It Be Done?
Sponsored by
by Steven P. Orlowski, CFP
Thursday, October 29, 2009
provided by


The first and sometimes only retirement income plan that comes to mind for the average investor is interest only. Interest only is just what it sounds like: you are invested in interest-bearing investments and whatever interest you earn is the money you spend. This is a simple strategy, but it isn't as easy to implement as you might imagine.

The simplicity of the strategy is one of its appeals. Who hasn't thought of retirement that way? You retire with $1 million and invest the total in a portfolio of fixed-income investments at 6% and live off of the interest ($60,000 per year plus Social Security and your pension if you're so lucky). Then, at death, you leave behind the entire $1 million you started with. What could be better? As it turns out, there are some serious flaws to this approach. Let's take a look.

The Principal Principle


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• 5 Retirement Questions Everyone Must Answer

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For starters, interest only means interest only. The principal is out of reach. This can be referred to as the "principal principle". You need all of the principal to create the income, therefore the entire principal is off limits, unless you want a declining principal balance and declining income. Let's say you implement this strategy and then need to buy a car, or put a roof on the house, and withdraw $30,000 to do it. In this case, you are left with $970,000 in principal. As a result, your income will decline from $60,000 per year to $58,200 (6% of $970,000). So even if you don't withdraw any more money for the rest of your life except the $60,000 per year in income (ignoring inflation for now), then you will still be reducing your principal every year, and by ever-increasing amounts. In year two, your principal will fall to $968,200, causing you to earn less and requiring you to withdraw even more principal in the years to come.

When Interest Only Works

A true interest-only strategy can work only for those with excess capital. If you retire with $1 million but only need $55,000 per year of supplemental income, keeping with our 6% assumption, you will need $917,000 to produce your income. That will leave you with $83,000 that could be used for emergencies or irregular expenditures.

The structure of the interest-only portfolio is simple, which can give you plenty of room to customize the portfolio for your personal preferences. The first consideration is the average yield of the portfolio. If you know you need $25,000 per year and you have $500,000 to invest, then divide $25,000 by $500,000 (25/500) and you'll get 0.05, or 5%, your cash-flow requirement. You'll also need to consider taxes, depending on what type of account you have (tax-deferred or not). Certain types of fixed-income securities may or may not be appropriate.

Once you've determined the yield you need, it's time to go shopping. Even though the yield on a fixed-income security may be lower than your target, it may still fit as a piece of your portfolio. In order to boost the average yield, you can look to other bond types, like agency, corporate and even foreign bonds. Ultimately, each investor needs to be aware of the risk inherent in each type of bond, like the risk of default or market risk and the likelihood of large price fluctuations. You can even lose money with Treasuries if you sell them at the wrong time.

In addition to diversifying the portfolio by type of bond, you can and should also buy bonds with varying maturities (called laddering). This will help you hedge against some of the aforementioned risks.

Mutual Funds and Interest Only

Some investors try to use mutual funds for their interest-only strategies, but this is not really interest only. Theoretically, it could work, so long as the funds being used pay out a consistent amount of interest. But since bonds mature, bond mutual funds' interest payments don't stay the same. In years of lower interest, you'd likely be forced to liquidate principal, which is more akin to a systematic withdrawal plan, which is in violation of the principal principle. Investing in a portfolio of mutual funds is easier than building a portfolio of fixed-income securities but it does not provide the same benefits.

Deferred Annuities

Another useful tool is the fixed deferred annuity. A fixed deferred annuity is an interest-bearing account with similar characteristics to a certificate of deposit (CD). Unlike a CD, it is not FDIC insured, although most have guaranteed principal and interest. Deferred annuities are often overlooked as an option, but the interest rates on fixed annuities are frequently, if not usually, higher than CDs and Treasuries; they also provide a high level of safety.

Remember that there are many types of annuities. For an interest-only strategy, a fixed deferred annuity is appropriate. A fixed immediate (income) annuity is not; neither is a variable deferred or variable immediate annuity. You want predictable interest coupled with safety of principal. Immediate annuities use up the principal and variable annuities, like mutual funds, can decline (or increase) in value. Each type has its place, but for an interest-only strategy, fixed deferred is the one.

The Hidden Problem: Inflation

Inflation will likely always be a problem. The historical rate of inflation is about 3% per year. In our original scenario - the retiree with $1 million and a 6% yield - we ignored the impact of inflation. Unfortunately, that person might immediately experience erosion of the portfolio because by year two, $60,000 could be insufficient. This is critical. We don't want to accidentally violate the principal principle, but if we do violate it, we want to do so intentionally. Some people do retire and decide up front to allow some erosion. Managed erosion is OK. Accidental erosion is not. Therefore, when establishing a retirement income plan, you need to inflate your income need to the end of your planning period (life expectancy). Our fictional retiree would not be living on $60,000 for long after inflation is taken into consideration. This is a big strike against interest only. A portfolio of fixed-income securities offers little to no opportunity for inflation protection (except for Treasury inflation protected securities (TIPS)). This is also why you really need to have excess savings to do interest-only properly.

The Bottom Line

Ideally, if you've done your homework and have accurately concluded that interest only is not only doable but sustainable, you'll want to blend your holdings, using bonds, CDs and annuities, into a "rainbow portfolio". All portfolios, regardless of strategy, should have elements of a rainbow in them. A rainbow covers the entire spectrum of color, which means that a rainbow portfolio should be as well diversified as possible. Use many types of securities and stagger the maturities to create that ladder. You'll be happier and more successful if you do.

Be thorough and careful when working out the numbers. Interest-only portfolios can work, but if you assume that one will work for you without working out the details, you may find yourself without adequate retirement funds.

by Steven P. Orlowski

Steven P. Orlowski, CFP® is President of Orlowski Financial Counsel, LLC, a Registered Investment Advisor providing fee-based Financial Planning, Portfolio Management and Insurance and Investment Advisory services. Steven is a twenty year veteran of the financial services industry, having served in the capacity of a stock broker, trader, financial planner and portfolio manager during that time.

http://finance.yahoo.com/focus-retirement/article/108036/retiring-on-investment-interest-can-it-be-done;_ylt=AkcUF0S50n0tA9ITMnCqZ8SVBa1_;_ylu=X3oDMTFiNWI2ODRnBHBvcwMyNgRzZWMDZmlkZWxpdHlBcmNoaXZlBHNsawNyZXRpcmluZ29uaW4-?mod=fidelity-managingwealth

How to Make Your Money Last

How to Make Your Money Last

by Walter Updegrave
Wednesday, September 23, 2009

There are ways to guarantee you won't run out of income, regardless of what the market does next — but you'll have to make some tradeoffs to do so.

Once you have your Social Security strategy down, there's just one little retirement question left to consider: How can you make the money that you've so diligently saved provide the life you want for as long as you live? Oh. That.

Figuring out how to draw secure retirement income from a portfolio is a challenge in the best of times; today it's made more complicated by fear. Having seen the worst-case scenario unfold in the past year, you've probably gone into loss-avoidance mode. But deflecting market risk leaves you vulnerable to inflation risk — and the risk that you'll outlive your money. So hiding in cash won't save you.

"No one investment can protect you from every risk you'll face," says John Ameriks, head of Vanguard Investment Counseling & Research. What you need, rather, is a basket of investments that provides:

1. Stable income you're not likely to outlive.

2. The potential for that income to grow to beat inflation.

3. The ability to access cash to meet unexpected needs.

4. Adequate protection from market downturns.

Here are three smart strategies to achieve those goals. The second offers the best chance of making your money last; however, you'll lose access to a big chunk of your savings. The others give you more control, but less certainty. There's no free lunch in retirement — but the menu that follows presents some interesting options.

Strategy 1: The Traditional Stock-and-Bond Portfolio

You're a Candidate if ...

You have enough income from Social Security and pensions to cover most of your basic expenses (so you could weather a market storm) and/or you're confident in your ability to manage your portfolio.

The Premise: You invest in a diversified portfolio of stocks, bonds, and cash that has the potential to generate current income and capital gains. You pull out money as needed, starting off with a 4% annual withdrawal — $40,000 on a $1 million portfolio — then increasing the dollar amount by the inflation rate each year.

Done correctly, this gives you a 77% shot of your money lasting 30 years, says Ibbotson Associates. The higher the withdrawal rate, the lower your odds. So this strategy may not work if you need more income than 4% would provide.

The Drawbacks: A sizable loss early in retirement could undo you. If your portfolio loses 20% the first year, the chances of your savings lasting 30 years could drop to roughly 50%. Alternatively, if the market does well over the long run, you could be left with a huge sum late in life, so you would have lived more frugally than you had to.


How to Pull It Off: Allocation is key. Going 100% into bonds might protect you from a market meltdown, but such cataclysms are rare. And you'd lose out on inflation protection. Loading up on stocks gives you a better shot at increasing your income, yet you may get mauled by a bear market. So aim for the middle ground: For someone just entering retirement, a broadly diversified fifty-fifty stock-to-bond blend like the one in the chart above, right is a reasonable starting point.

You also have to be flexible with withdrawals. In a declining market you may have to skip the inflation boost or scale back the amount you draw down. Conversely, if the markets go on a run, you may be able to take more. Check yearly at T. Rowe Price's Retirement Income Calculator.

Finally, be strategic in the way you tap assets. Start with taxable accounts; then tax-deferred (401(k)s and traditional IRAs); then tax-free Roths. That way the latter accounts compound longer without the drag of taxes, so you can build bigger balances and draw more income over time.

Strategy 2: Stocks, Bonds — and an Immediate Annuity

You're a Candidate if ...

You need more income for basic expenses than you'll get from Social Security and pensions. Or you'd like to avoid subjecting all your savings to market volatility.

The Premise: Invest a portion of your savings in a lifetime immediate annuity, an insurance product that will send you fixed monthly checks for as long as you and/or your spouse live. You'll manage the rest of your portfolio as in Strategy 1. The payoff: You'll have another layer of guaranteed income and still have funds to tap.

This strategy provides longer income security than the first because the payout from an immediate annuity can't be easily matched by another sure-bet investment. Recently immediate annuities paid out roughly 8% for a 65-year-old man, or about $40,000 a year on $500,000. You'd have to invest significantly more to get the same assured lifetime income from long-term Treasuries. The reason immediate annuities pay so well? Investors' money is pooled, allowing insurers to essentially transfer funds from early croakers to those who hang on past life expectancy.

The Drawbacks: Once you hand over, say, a few hundred grand for an immediate annuity, you typically give up access to the money. You can't use it for a new roof or a vacation in France, or pass it down to your kids. Plus, if you're hit by a bus early in retirement, the annuity will have paid out less than you put in. For those reasons, many people perceive immediate annuities as potentially wasted money.


Another concern: Annuity payments are usually fixed, meaning they'll be worth less over time because of inflation. A few insurers offer inflation-adjusted immediate annuities, but the payouts start considerably lower.

Finally, while annuities eliminate market and longevity risk, they introduce another risk: Your income security is based on the financial health of the insurer.

How to Pull It Off: In reality, money in an annuity is no more "wasted" than the premiums you pay to insure your house. So try to get over that psychological hurdle, since this strategy presents your best chance of maintaining income.

To make it work, you want to devote enough to the annuity so that the income, along with Social Security and pensions, covers your basic expenses. But you don't want to go overboard, as you'll lose too much liquidity. Plus, you'll need to use what's left to try to beat inflation, since your annuity payments won't.

There's no one "right" mix. Splitting savings fifty-fifty between an immediate annuity and a diversified portfolio can provide the same 4% inflation-adjusted income as in Strategy 1 — but with a 99% chance of lasting 30 years. If you can live with less certainty, you can boost your income to, say, 4.5% by drawing more from your portfolio. Or, you could invest less in the annuity.

Consider buying in stages. That prevents you from over-committing and from investing all your money when interest rates — which drive payouts — are lowest. To mitigate the risk of insurer failure, stick to companies highly rated by Standard & Poor's and A.M. Best, then spread your money among two or three companies. Check at nolhga.com that the amount you'll invest with each company is covered by your state's insurance guaranty association.

Strategy 3: All of the Above, Plus a Variable Annuity

You're a Candidate if ...

You need more income than Social Security and pensions will provide, but you want access to more of your savings than Strategy 2 allows.

The Premise: While maintaining a stock/bond portfolio, you'll also invest a portion of savings in an immediate annuity and a portion in a variable annuity with a guaranteed lifetime withdrawal benefit (a.k.a. VA with GLWB), an investment account promising a minimum withdrawal for the rest of your life.

In a VA with GLWB, you choose the investments, within limits. You can dip into the account as needed. And you can typically leave the greater of (a) the account balance or (b) your original investment minus withdrawals to your heirs. So it's more flexible than an immediate annuity.

The other advertised benefit: Your income has the potential to grow if your investments appreciate. Say you invest $250,000 and are guaranteed 5%, or $12,500 a year. If, on your contract anniversary date, a rising market has pushed your balance to $300,000 after fees, your 5% will be applied to that amount, boosting your income to $15,000.

Even if a market crash later knocks your account to $200,000, you're still guaranteed 15 grand (though if you want to cash out, you're limited to the actual account value).

The Drawbacks: Flexibility comes at a price. First, variable annuities pay significantly less than immediate annuities, only about 5% for a 65-year-old. Second, the plans come with such high fees, often 3% or more a year, that it's difficult for your account value to grow at all, let alone keep pace with inflation. Third, though you can draw more than your guaranteed amount from the account, doing so will reduce your income for future years. Last, you face the same insurer risks as in Strategy 2.

How to Pull It Off: The high fees and low payout of the VA explain why you need an immediate annuity in the mix: Without it, the odds of maintaining your target income are slightly lower than with a stock/bond portfolio alone.

Together you want the payouts, along with Social Security and pensions, to cover your basic expenses. So how much in each? The more you put in the variable annuity vs. the immediate, the more of your assets you'll have access to.

In exchange, you'll settle for a lower guaranteed payout. A reasonable mix: Put 25% of savings into an immediate annuity, put 25% in a VA, and invest the other 50%. That gives you a 92% chance of getting the income you want for 30 years. You'll end up giving away more of your savings to fees than with the other strategies, but, alas, you have to pay for security one way or another.

http://finance.yahoo.com/focus-retirement/article/107791/how-to-make-your-money-last.html;_ylt=AlsUAXxZXh4WfyMFKaxAuD.VBa1_;_ylu=X3oDMTFiYmtsc242BHBvcwMyOQRzZWMDZmlkZWxpdHlBcmNoaXZlBHNsawNob3d0b21ha2V5b3U-?mod=fidelity-managingwealth

Rebalance your portfolio without selling a thing

Rebalance your portfolio without selling a thing

The market's ups and downs mean your portfolio may have strayed way off your target asset mix. Rebalance by putting the $50,000 into asset classes that have fallen in value. You won't have to sell winners, so you reduce transaction costs and potentially minimize your tax bill.

What to do with $50,000 now: Buy these 10 stocks

What to do with $50,000 now

Low interest rates and the recent stock market surge make this a challenging time to find the best places for your extra cash.
6 of 10

Buy these 10 stocks

According to Pat Dorsey, director of equity research at Morningstar (and a Money columnist), high-quality blue chips present the best opportunities now. He likes these 10, all of which offer above-average dividends.

Stock: Abbott Labs
Why now? Diversification -- plus few patents set to expire -- equals good prospects for the drugmaker.

Stock: BB&T
Why now? Unlike some other financial firms, this plain-vanilla regional lender has a conservative balance sheet.

Stock: Diageo ADR
Why now? As consumers worldwide resume spending, the owner of brands like Tanqueray and Smirnoff should profit.

Stock: Exxon Mobil
Why now? Its sheer scale, plus great capital-allocation skill, positions the energy giant well.

Stock: Novartis ADR
Why now? Novartis has a top-tier new-drug pipeline plus a good record of returning cash to shareholders.

Stock: Paychex
Why now? This payroll company offers good pricing power and strong margins.

Stock: Philip Morris
Why now? Growth is slowing, but Big Mo still has fat margins and a healthy dividend.

Stock: Realty Income
Why now? This retail landlord offers a high yield combined with consistent, modest income growth.

Stock: Southern Co.
Why now? An electricity producer and distributor, Southern Co. is a reliable juggernaut that's positioned well for growth.

Stock: Sysco
Why now? This strong food-products marketer and distributor delivers high returns on capital.

http://money.cnn.com/galleries/2009/moneymag/0910/gallery.spend_50000.moneymag/6.html

Does Buffett's Big Acquisition Signal a Market Bottom?

Does Buffett's Big Acquisition Signal a Market Bottom?
By Ron DeLegge, Editor
On 5:32 pm EST, Tuesday November 3, 2009

Warren Buffett is finally spending some of Berkshire Hathaway's cash hoard. And he's buying a railroad company. As the greatest investor of our generation, does his latest acquisition signal a market bottom?

Dissecting the Deal

Buffett's firm, Berkshire Hathaway (NYSE: BRK-A - News), agreed to buy Burlington Northern Santa Fe Corp. (NYSE: BNI - News) for $100 a share valuing the deal at $44 billion.

Over the past year, Burlington's stock price has lagged the performance of its peer benchmark, the Dow Jones Transportation Average (NYSEArca: IYT - News).

How much did Buffett pay?

The analysts surveyed by Bloomberg, say he paid 18.2 times Burlington's 2010 estimated earnings, which is higher than the S&P 500's multiple according to the same analysts. Not very Buffett like, especially considering he rarely pays a premium when putting new capital to work. The only other plausible explanation is that Buffett sees hidden value in Burlington.

A Consummate Contrarian

As a contrarian to the bone, Buffett decided to pull the trigger on a company within an ailing industry sector. Through the November 2nd market close, transportation stocks have lagged the entire U.S. stock market (NYSEArca: VTI - News) by a substantial margin of 15.94%.

The recent activity of rail traffic is depressed. This is a key barometer of economic health.

The Association of American Railroads reported that for the week ending October 10th, 2009, rail traffic declined 17.2% compared to the same week in 2008. The report also shows weak demand for the transportation of goods throughout the entire U.S. On the East coast, carloads were down by 19.7% and in the West they were off by 15.4%.

Interpreting the Deal

As an insurance executive, Buffett knows a thing or two about betting. And over the years most of his bets (at least the important ones) have paid off handsomely. Some, however, did not.

In the early 1990s, Buffett's $358 million investment in U.S. Airways was virtually wiped out. In a letter to shareholders he quipped, 'How do you become a millionaire? First, you become a billionaire then you invest in an airlines company.'

With this latest deal, even Buffett himself admits that the Burlington deal is a gamble.

'It's an all-in wager on the economic future of the United States,' he said.

Conclusion

No doubt, analysts, fund managers and others with a bullish bias have already begun misinterpreting Buffett's $44 billion gamble as a sure sign the worst is over. It's time to break out the champagne!

A bedazzling 80% of economists now believe the worst economic recession of our generation is over. And around 100% of them never saw the recession coming.

Even though Warren Buffett's latest buy may be viewed as an act of genius, it may not necessarily signal that a market bottom has been reached. This was recently covered in 'What's Next- Minor Correction or Major Collapse.'

Regardless, the belief that Warren Buffett can do no wrong is an investment myth that won't die soon. His billions prove that he's always right, right?

It calls to mind the wonderful lyrics in a song from Fiddler on the Roof.

'When you're rich, they think you really know.'

http://finance.yahoo.com/news/Does-Buffetts-Big-Acquisition-etfguide-2790244804.html;_ylt=AjJvqpl4d2AWWb6ET8y2luy7YWsA;_ylu=X3oDMTFhZnVrbWZwBHBvcwMxBHNlYwNzcGVjaWFsRmVhdHVyZXMEc2xrA2RvZXNidWZmZXR0cw--?x=0

Chinese steel market to face uncertainties till 2009 end

Chinese steel market to face uncertainties till 2009 end
Updated: 2009-11-02 11:36:22

　　The high inventories and the imbalance between supply and demand have affected market players’ confidence to Chinese steel market. But the rebound in the middle of October is given a positive impression to players, though it just remains a short time, especially the increase of HR price.
　　
　　Chinese steel market situation has witnessed lot of uncertainties and ups and downs in the last two months of 2009 due to following factors
　　
　　1. High level of production
　　According to the data of National Bureau of Statistics, total volume of plate is 231 million tonnes in the first nine months of 2009 up by 5.4%YoY. HRC and medium strip occupy 119 million tonnes up by 11.5% YoY. In other words, due to high rate of increase, the imbalance between supply and demand has surfaced clearly.
　　
　　To know more details on steel prices subscribe to services of http://www.steelprices-china.com/ by registering or send a mail to admin@steelprices-china.com with contact details.
　　
　　(Sourced from http://www.steelprices-china.com/)
　　

Financial markets are highly reflexive as George Soros pointed out

Financial markets are highly reflexive as George Soros pointed out 25 years ago, and as a result, equity prices are dependent on the past. Momentum is a constant component of price formation. Also, the structural dynamics of the money management business are clearly heavy influences in stock prices -- the heavy hand of relative performance among money managers and the problem of career and business risk are two of the most important influences in the process of pricing investments. Tax issues and the changing regulatory environment are certainly more important drivers of prices than the Gaussian distribution. Not to mention social contagion, feedback loops, and of course changing technology.

The smart money manager must rely on a much more sophisticated framework than just the bell curve. I like to approach my investments following a 4 level framework (ex hedge fund manager turned media entrepreneur Todd Harrison follows a similar approach):

Structural overview. An analysis of the political, regulatory and technological environment.

Fundamental overview. Valuation analysis like Cyclically Adjusted Price/Earnings ratios and others.

Technical market make-up. Momentum, mean reversion, support and resistance, volatility.

Sentiment overview. A comprehensive behavioral analysis.

Comprehension of financial markets and the risks they inherently breed is a never ending process. As elegant as Beta and EMH were they were clearly not the answer.

http://www.safehaven.com/article-14922.htm

Warren Buffett’s takeover of Burlington Northern Santa Fe Corp.

Buffett Takeover Reduces Successor’s Need for ‘Amazing Insight’
Share Business ExchangeTwitterFacebook| Email | Print | A A A By Andrew Frye

Nov. 3 (Bloomberg) -- Warren Buffett’s takeover of Burlington Northern Santa Fe Corp. may reduce his successor’s need for “amazing insight” to lead Berkshire Hathaway Inc.

The deal for the largest U.S. railroad gives Buffett the “elephant”-sized acquisition he’s been looking for to deploy accumulated earnings from Berkshire’s insurance units and investments. Buffett who is vetting candidates for CEO of the company he built over four decades, called his biggest purchase “an all-in wager” on the future of the U.S. economy.

“He knew long ago that his time was limited,” said David Carr, chief investment officer at Oak Value Capital Management Inc. in Chapel Hill, North Carolina. Buffett, 79, has been structuring the company so that it doesn’t have to rely on the next leader for “making deals that require amazing insight.”

Buffett, the world’s most celebrated investor, adds a business in Burlington that was profitable every quarter for at least a decade and remains shielded from competition by its rail network. The purchase marks a shift from Buffett’s strategy in the recession of drawing down Omaha, Nebraska-based Berkshire’s cash hoard, valued at more than $24 billion at the end of June, to finance firms including Goldman Sachs Group Inc.

Berkshire agreed to pay $26 billion for the stake in Fort Worth, Texas-based Burlington it didn’t already own and assume $10 billion in net debt.

‘Opportunities Have Changed’

“It’s kind of like dumbing down the asset base,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of the hedge fund Ram Partners LP in Greenwich, Connecticut. “It suggests that the long-term opportunities have changed, and going forward Berkshire is not much more than a general call on the American economy, whereas in the past it was a call on Buffett’s investment acumen.”

The deal culminates a search by Buffett that sent him to Europe looking for possible acquisitions and lamenting in letters to shareholders that he and Vice Chairman Charles Munger couldn’t find companies they considered large enough to meaningfully add to annual earnings. Buffett didn’t return a message seeking comment left with his assistant Carrie Kizer.

Burlington, with pretax income of $3.37 billion on revenue of $18 billion last year, would be Berkshire’s second-largest operating unit by sales. Berkshire’s McLane unit, which delivers food to stores and restaurants by truck, earned $276 million on revenue of $29.9 billion in 2008. Berkshire’s largest business overall is insurance, including the Geico Corp. unit.

Sokol, Jain

By expanding operations outside of finance, Berkshire’s operations more closely match the expertise of David Sokol, chairman of Berkshire’s energy business, said Alice Schroeder, the author of “The Snowball,” an authorized biography of Buffett, and a Bloomberg News columnist. Buffett added to Sokol’s duties this year by naming him to head Berkshire’s money-losing plane-leasing unit.

Sokol and Buffett’s reinsurance lieutenant Ajit Jain are among Berkshire executives included on media lists of potential successors. Buffett hasn’t publicly said who will replace him.

Buffett has joked that he built Berkshire so it could be run by a cardboard cutout or the bust of Benjamin Franklin that Munger keeps in his office, Schroeder wrote in the book.

Berkshire will continue to generate cash, giving Buffett the chance to make additional deals in years to come, said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington.

“I don’t think he’s ready to give up control,” Martin said. The Burlington deal is “classic Buffett, I think he’s found a good buy at a good time with a company that has good earnings prospects.”

Buffett built Berkshire into a $150 billion company buying firms that he deems to have durable competitive advantages. His largest purchases include the 1998 deal for General Reinsurance Corp. for more than $17 billion. Buffett expanded into power production with the purchase of MidAmerican Energy Holdings Co., and last year bought Marmon Holdings Inc., the collection of more than 100 businesses, from the Pritzker family. Marmon’s Union Tank Car unit manufactures and leases railroad cars.

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net;

Last Updated: November 3, 2009 14:56 EST

http://www.bloomberg.com/apps/news?pid=20601170&sid=auTdgkJ6zurk

http://www.bloomberg.com/apps/news?pid=specialreport&srnum=2

http://www.bloomberg.com/apps/news?pid=20601170&sid=acCmNIfVFMZc
Buffett Takes 10 Days to Seal Biggest Deal in Career

The inflation in China's mainland cast a shadow over Chinese economic performance.

MARKET WATCH NO. 27, 2008


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Date：2008-7-9 10:33:00
Source：[BiMBA] Browse：[106] Comments：[0]


TO THE POINT: The inflation in China's mainland cast a shadow over Chinese economic performance. Most recently, it was further jacked up by rising electricity and refined oil prices. The mainland refined oil prices were edging up in line with international levels, putting more pressure on consumers. One-year iron ore prices also lifted substantially up 96.5 percent. China Development Bank was determined to buy more Barclays shares, ignoring market uncertainties. Merrill Lynch warned of risk growth in 2009.

By LIU YUNYUN

Chain Effects of Oil Price Hikes

Chinese mainland refined oil price hikes have caused a series of chain effects on both major oil consumption enterprises as well as people’s lives, resulting in jitters about inflation.

Beginning on June 20, the benchmark gasoline and diesel oil retail prices were marked up by 1,000 yuan ($145) per ton, while the price of aviation kerosene was up by 1,500 yuan ($218) per ton.

The Central Government controls refined oil prices. The last time such hikes took place was last November, when international crude oil price reached around $90 per barrel. The international oil price has surged nearly 50 percent since then.

Inflation is expected to go up along with oil prices. Merrill Lynch & Co. Inc.published a report on June 20, arguing that, although the National Development and Reform Commission (NDRC) forbids price increases in public utilities and taxies, the impact of such hikes will be quickly passed on to consumers through other channels, especially food prices in urban areas. Merrill Lynch thus raised its annual consumer price index inflation forecast in 2008 to 7.5 percent from the previous 6.9 percent.

Impact on listed companies: Share prices of two mainland oil giants-China Petroleum & Chemical Corp. and PetroChina Co.-climbed upon the news. The markets expected the price hikes would cover some of their losses in the refined oil section, though it was still one third less than that of the international prices.

Other A-share listed companies were not so optimistic. Some complained the price hike would push up their production costs, and pose a negative impact on their revenue. For instance, Jiangsu Qionghua Hi-tech Co. Ltd. published a notice on June 23, noting this round of price hikes would add 1.15 million yuan ($164,000) to their costs in the second half of this year.

On airlines: Chinese airlines will have to bear the biggest burden. Tianxiang Investment Consulting Co. Ltd. estimated in its June 20 report that airlines’ profitability will deteriorate. The whole aviation industry is expected to spend an extra 10 billion yuan ($1.43 billion) on fuels. Earnings per share of Air China Co. Ltd., China Southern Airlines Co. Ltd., and China Eastern Airlines Corp. Ltd. will go down 0.15 yuan, 0.75 yuan and 0.45 yuan respectively, according to Tianxiang Investment Consulting.

However, National Business Daily cited an anonymous NDRC official stating that the government would come to the rescue. It was reportedly to raise fuel surcharge up to 50 percent of the original prices to offset losses incurred by airlines. Tianxiang argued the surcharge hike could only cover 60 percent of the cost surge.

On public transportations and railways: The prices of public transportation, taxi and railways were forbidden to rise, according to an NDRC emergency notice on June 23. It ordered local governments to strictly check the chain effects of oil and electricity price hikes.

The NDRC urged operators to find other ways to increase profitability, and vowed to cut tolls for vehicles carrying agricultural products.

Compromising on Iron Ore

China’s leading steel mill, Baosteel Corp. Ltd. agreed with Australian suppliers to an increase of 96.5 percent on iron ore prices, much higher than the 65-71 percent increase set with Brazilian suppliers. The agreement was reached after months of arduous negotiation as suppliers required higher freight fee.

Analysts expected the earnings of Chinese steel mills would go down, but the mills would quickly pass the cost surge onto consumers to offset the rising cost. The move would eventually jack up the runaway inflation.

Baosteel agreed on June 23 to pay 96.5 percent more to Australian Rio Tinto’s Pilbara Blend Lump for 12 months beginning April 1, 2008. In February, Baosteel had agreed to pay 65-71 percent more to Brazil’s Cia Vale do Rio Doce for ore fines.

The Australian side argued the shipping cost from Australia to China was much lower than that from Brazil to China, thus demanded a higher shipping fee from the Chinese side.

Baosteel stated in a notice to Xinhua News Agency that the iron ore price was set after “friendly negotiation,” and showed “both sides’ commitment to safeguarding sound market order and maintaining long-term friendly cooperation.”

Major suppliers are calling the shots in deciding iron ore prices, posing enormous pressure on domestic steel makers. Judging by Japanese experience, the Chinese companies should buy stocks and aim to become one of the major shareholders of suppliers, therefore they will be able to share the profit of rising iron ore prices, said Shan Shanghua, Vice Secretary of China Iron and Steel Association.

CDB Defied Market Turbulence

Amid global financial market turmoil, China Development Bank (CDB) stated it would increase its presence in the British bank Barclays Plc by acquiring more of Barclays shares.

Barclays, Britain’s fourth largest lender, announced on June 25 it would raise approximately 4.5 billion pounds ($9 billion) through the issue of 1.58 billion new ordinary shares.

CDB did not reveal how much more it would spend on Barclays. But a CDB official said the decision was aimed at consolidating the bank’s position as Barclays’ biggest shareholder and showing its confidence in the British bank’s strategy and prospects, according to Xinhua News Agency.

Barclays Chief Executive Officer John Varley said in a press conference he would use half the proceeds to bolster the bank’s capital adequacy, while the rest will be used for other business opportunities, including possible acquisitions, increasing consumer lending in Asia, and investment banking in the United States.

However, the depressing international financial markets had increased uncertainties for this transaction. CDB became a major shareholder of Barclays last year, and is now holding 3.1 percent of Barcalys’ shares. CDB bought Barclays shares at about 7.2 pounds, but the latter’s share prices has dropped half to around 3.3 pounds at present.

Xi Yangjun, financial professor at Shanghai University of Finance and Economics, believed it was a golden opportunity to buy Barclays shares. “The bank’s share price is at a very low level, mainly because of the subprime mortgage crisis. But the bank’s internal management did not show any problem,” said Xi.

Easing Energy Tension

China’s first coalbed methane (CBM) pipeline is expected to function at the end of this year, after which CBM will run from Shanxi Province to the east part of the country.

China National Petroleum Corp. (CNPC) announced the pipeline, 35 km long, would be capable of carrying 3 billion cubic meters of CBM each year.

CBM is a new energy source with no pollution and high in caloric value. It is a form of natural gas extracted from coal beds. In recent decades it has become an important source of energy in the United States, Canada, and other countries.

CNPC stated that natural gas supplies will fall 60 billion cubic meters short of demand in China by 2010. “The project will make use of CBM in a more economic way and supplement sources for the west-east gas pipeline and ease the gas supply strain,” CNPC said in a public statement on its website.

From BEIJING REVIEW:
http://www.bjreview.com/business/txt/2008-06/30/content_130473_2.htm

Risk versus Uncertainty: Known knowns, known unknowns and unknown unknowns

Risk versus Uncertainty: Frank Knight’s “Brute” Facts of Economic Life
By William Janeway
Published on: Jun 07, 2006

Dr. William H. Janeway, Vice Chairman, Warburg Pincus, received his doctorate in economics from Cambridge University where he was a Marshall Scholar. He was Valedictorian of the Class of 1965 at Princeton University. Prior to joining Warburg Pincus in 1988, where he was responsible for building the Information Technology practice, he was Executive Vice President and Director at Eberstadt Fleming. Dr. Janeway is a director of BEA Systems, Manugistics, Scansoft and UGS. He is also a member of the board of directors of the Social Science Research Council and a member of the board of Trustees of Cambridge in America, University of Cambridge. He is a Founder Member of the Board of Managers of the Cambridge Endowment for Research in Finance (CERF).

“…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.”—Donald Rumsfeld

“Ah, what a dusty answer gets the soul, When hot for certainties in this our life”—George Meredith

Donald Rumsfeld’s characteristically idiosyncratic gloss on George Meredith’s existential meditation attracted derision across many constituencies. But Rumsfeld summarized a way of structuring our understanding of the world that has profound and immediate relevance. Most particularly, over the past generation, the application of increasingly powerful and sophisticated computerized statistical analysis has interacted with the work of theoreticians of finance to transform the capital markets in the U.S. and around the world. Our mastery of “known unknowns”—i.e., well-defined probabilities—has increased enormously, transformationally. The measurement and management of “risk” has become a major concern of all financial institutions and their regulators, especially since the collapse of Long Term Capital Management (LTCM) in 1998. At the same time, proposals to privatize Social Security and, more generally, to rely on “risk-managed” financial markets for economic security find their theoretical rationalization in the teachings of “modern” finance. And yet, as Rumsfeld and Meredith assert in their very different ways, there is another category of the world’s possible outcomes that lies beyond the reach of modern, market-based, risk management techniques.

More than eighty years ago, Frank Knight set out to parse the difference between risk and uncertainty and the significance of that difference. In Risk, Uncertainty and Profit, Knight distinguished between three different types of probability, which he termed: “a priori probability”; “statistical probability” and “estimates”. The first type “is on the same logical plane as the propositions of mathematics”; the canonical example is the odds of rolling any number on a die. “Statistical probability” depends upon the “empirical evaluation of the frequency of association between predicates” and on “the empirical classification of instances”. When “there is no valid basis of any kind for classifying instances”, only “estimates” can be made.1 In contemporary Bayesian parlance, in the first case, the probability distribution of the prior and all its moments are known definitionally; in the second case they are specified by statistical analysis of well-defined empirical data; in the third case such data as exists do not lend themselves to statistical analysis.

This last case is what interested Knight the most, as an economist exploring the world of business and the nature of profit in that world. Knight identified the “confusion” between “the problem of intuitive estimation” with “the logic of probability”, whether a priori or statistical2:

The liability of opinion or estimate to error must be radically distinguished from probability or chance of either type, for there is no possibility of forming in any way groups of instances of sufficient homogeneity to make possible a quantitative determination of true probability. Business decisions, for example, deal with situations which are far too unique, generally speaking, for any sort of statistical tabulation to have any value for guidance. The conception of an objectively measurable probability or chance is simply inapplicable…3

“[A]t the bottom of the uncertainty problem in economics”, Knight noted, “is the forward-looking character of the economic process itself.” 4 The post-Keynesian economist Paul Davidson defined the problem as the inapplicability of the “ergodic axiom”:

The economic system is moving through calendar time from an irrevocable past to an uncertain and statistically unpredictable future. Past and present market data do not necessarily provide correct signals regarding future outcomes. This means, in the language of statisticians, that economic data are not necessarily generated by an ergodic stochastic process. Hicks has stated this condition [in language that prefigures Rumsfeld] as: “People know that they just don’t know”.5

When Knight turned to the role of profit as the reward to the entrepreneur for bearing inevitable uncertainty, he characterized these facts of economic life in the most stark of terms:

Profit arises out of the inherent, absolute unpredictability of things, out of the sheer, brute fact that the results of human activity cannot be anticipated and then only in so far as even a probability calculation in regard to them is impossible and meaningless.6

I have documented what Frank Knight meant by “uncertainty” to clarify what is at stake in applying the calculus of financial “risk” to issues of economic and, indeed, social security. More than fifty years ago, “mainstream” economics launched itself on the grand project to formalize the principles of economics in rigorous mathematics. Unsurprisingly, such a system was as incapable of incorporating Knight’s “uncertainty” as it was of addressing the “extreme precariousness” of expectations and confidence described so eloquently in Chapter 12 of Keynes’ General Theory.7 For a time, the “rational expectations hypothesis” (REH) served as a sort of placeholder for serious consideration of the fundamental issues that Knight addressed and the consequences of which Keynes explored. It is not, I believe, an excessive caricature of REH to say that it turns on the assumptions that (1) all market participants have equal access to the same data; (2) all market participants share one model of how the world works, application of which translates data into meaningful and actionable information; and (3) that model happens to be “the truth” (and is identified recursively with “mainstream” general equilibrium theory). In this world, bubbles and panics cannot exist. All risks can be priced and insured or effectively hedged through the construction of appropriate contingent, derivative securities markets which are assumed to exist.

Application of REH to the capital markets of real economies generates a problem. REH defines a market in which the only occasion for any participant to trade is an externally generated “shock”: price volatility, identified with market risk, should be very low and aligned with the incidence of such shocks. However, empirical studies of the capital markets have identified three “puzzles”: the volatility of stock prices is too great, the risk-free interest rate is too low, and the “equity risk premium” (the return from investing in stocks compared with owning risk-free debt) is far too high to be compatible with REH. And the cluster of capital market shocks around the turn of the millennium seems to have decisively challenged the usefulness of a theory that hardly appeared consistent with the Asian Flu, the Russian Default, the collapse of LTCM, and the great NASDAQ boom and bust. In consequence, a variety of imaginative approaches are being actively deployed to understand the empirical “puzzles” generated by the attempt to explain—or, rather, explain away—the functioning of the capital markets through the application of REH.8 In different ways, this work, which serves to confirm the common sense of the market, is implicitly (sometimes explicitly) re-engaging with Knight, as it variously incorporates such building blocks for theory as “heterogeneous beliefs”, “endogenous uncertainty” and “fat-tailed Bayesian priors”.

When the domain of interest is dominated by uncertain estimates, your (more or less well informed) guess is as good as mine. This is what makes horse races—and securities markets. But, in the case of the stock market, what do you and I each need to guess? In his classic deployment of the metaphor of the “beauty contest”, Keynes captured the challenge:

…[P]rofessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.9

Keynes never reduced his intuition, informed by his years of successful investing, to a formal, empirically testable model; indeed, before the development of stochastic calculus and game theory, it may not have been possible for him to do so. But the disparity between financial reality and modern, mathematically formalized economic theory has long been observable to those who have cared to look. A short generation ago, Frank Hahn began a series of lectures on money and finance with an observation pertaining to the social construction of the asset we call “money”:

The most serious challenge that the existence of money poses to the theorist is this: the best developed model of the economy cannot account for it.10

The “precautionary” motive for holding cash is among those enumerated by Keynes in his analysis of liquidity preference and has a long history in the literature on money and banking. Hahn and Solow, in their collaborative Critical Essay on Modern Macroeconomic Theory, elaborate on this:

Uncertainty enters the demand for money in two ways. First, it affects the calculation of the relative advantage of different assets including money. It also enters through considerations of liquidity or flexibility. Transaction costs will make it costly to change a portfolio choice once made. Agents know that as the future unfolds…their probability calculations will change. There is thus a probability that a portfolio choice, once made, is not optimal in light of what will be learned. This consideration, when combined with transaction costs, leads to a premium on “liquid” or low-transaction-cost assets…It is not hard to see how all of this provides a motive for holding money.11

Hahn, alone and with Solow, was observing the disparity between the Arrow-Debreu model and its derivatives—wherein all markets can simultaneously clear because all contingencies can be efficiently and effectively hedged—with the institutionalized reality of cash holdings across all observable economic systems.

Of course, this appreciation of the fine calculations by rational agents as they assess their (changing) optimal portfolios need not conceal the relevance of such analysis to the circumstance of the “agents” who face utter financial loss from the collapse of an Enron or the impact of a Katrina. Holding cash is how people self-insure against the uninsurable uncertainties of economic life, as distinct from the insurable risks. The proliferation of social security systems across the developed world since Bismarck’s innovation in 1891 further confirms the inability of markets to generate adequate hedges, sufficient in scale and distributed fairly enough to pre-empt successful appeal to the political process by market participants threatened with ruin. The evident failure of the Bush administration’s efforts at social security “reform” suggests that, in the nation where market forces are most explicitly respected, popular recognition persists that effective insurance against life’s uncertainties ultimately depends upon the power of the state.

If social security is the explicit institutionalization of state insurance against economic and financial uncertainty, more deeply rooted still in the institutional history of capitalism is the central bank’s role as lender of last resort. In 1873, Walter Bagehot, editor of The Economist, laid out in Lombard Street an analytical description of the British financial system as it had evolved to date. His most controversial and lasting contribution was the detailed discussion of “the duties which the Bank of England is bound to discharge as to its banking reserve”. It was controversial because

…first…the Bank has never by any corporate act or authorized utterance acknowledged the duty, and some of its directors deny it; …second (what is even more remarkable) no resolution of Parliament, no report of any Committee of Parliament (as far as I know), no remembered speech of a responsible statesman, has assigned or enforced that duty on the Bank; third (what is more remarkable still), the distinct teaching of our highest authorities has often been that no public duty of any kind is imposed on the Banking Department of the Bank…12

Bagehot provided a succinct definition of and rationale for the Bank’s “duty”:

…the Bank of England is bound…not only to keep a good reserve against a time of panic, but to use that reserve effectively when that time of panic comes. The keepers of the Banking reserve…are obliged then to use that reserve for their own safety. If they permit all other forms of credit to perish, their own will perish immediately and in consequence.13

In the central bank-less United States, the story of how the Panic of 1907 initiated the process that led seven years later to the creation of the Federal Reserve is well known. Equally well known is the world-historical failure of the Federal Reserve to perform its Bagehotian duty in the cumulative crisis of 1931-33: perhaps if the Governors of the Federal Reserve in 1931 had been proprietors of a private banking institution, they would have appreciated that unchecked financial panic means economic ruin. What is not well-known is the story of the first successful exercise of Bagehot’s “duty” by the Federal Reserve some sixty years later. In June 1974, in the context of the first Oil Crisis and the loss of presidential authority due to Watergate, Chairman Arthur Burns—not the most highly regarded of American central bankers—responded to the failure of the German Herstatt Bank and the consequent foreign exchange settlement crisis by quietly but effectively invoking the provisions of the Federal Reserve Act that authorized the regional Reserve Banks to accept as collateral any assets (including , as I recall, desks and chairs) of their member banks. Since 1987, the evolution of the “Greenspan Put” has finally institutionalized the Fed’s role of lender of last resort in an uncertain world.

Access to liquidity, then, is how we seek to deal with Knight’s brute fact. But liquidity is a most perverse substance. First-generation purveyors of “modern portfolio theory” modeled liquidity as a stable attribute of particular securities, statistically derived from observation of price and volume data over time. But, as the partners, clients and counter-parties of LTCM all learned, liquidity—and such other statistical properties of securities as correlations—are, in fact, the variable attributes of markets. And the worst of it is this: liquidity declines more than proportionally with the intensity of the demand for it. The more you need cash, the higher the price you have to pay to get it. And when average opinion comes to believe that average opinion will decide to turn assets into cash, then liquidity may be confidently expected to go to zero. By definition, no market can hedge this risk; no individual participant is rich enough not to need the hedge.

Bagehot defined the need and the remedy that Greenspan has finally institutionalized in America and for the world. But, if the uncertainty that each market participant, each citizen, faces is underwritten by the one power that can create all the liquidity any may require on demand, then the balance between greed and fear has been shifted and shifted materially. The “moral hazard” that arises when the insured farmer no longer need apply himself assiduously to keep his barn from burning becomes a generalized influence on all calculating economic agents. Some 75 years ago, Andrew Mellon gave President Hoover the definitive rationale for refusing to respond to the financial crisis:

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate…People will work harder, live more moral lives.” 14

Mellon’s construct is helpful, at least to the student looking back if not to the well-meaning but bewildered President he was confronting. For it poses the stark choice that both generates and informs political discussion in this domain. A social science that evades Knight’s brute facts and Mellon’s correspondingly brutal prescription will contribute little to those seeking to formulate pragmatic responses to Meredith’s dusty answer. A social science that builds on Knight’s deep intuitions can contribute much.


http://privatizationofrisk.ssrc.org/Janeway/

Investment under market and climate policy uncertainty

 

Investment under market and climate policy uncertainty

 

Sabine Fuss, a, , Jana Szolgayovaa, Michael Obersteinera and Mykola Gustia

 

aInternational Institute of Systems Analysis, Schlossplatz 1, A-2361 Laxenburg, Austria

 

Abstract

 

Climate change is considered as one of the major systematic risks for global society in the 21st century. Yet, serious efforts to slow the accumulation of emissions are still in their primordial stage and policy makers fail to give proper long-term signals to emitters. These days, investors do not only face uncertainty from volatile prices in the traditional markets, but also from the less conceivable uncertainty of stricter climate change policy.

This paper investigates the impact of learning about the commitment of government to a climate policy regime in a real options framework. Two types of uncertainty are distinguished:  

• market-driven price volatility around a mean price and
• bifurcating price trajectories mimicking uncertainty about changing policy regimes.  

One of the findings is that the producer facing market uncertainty about CO2 prices invests into carbon-saving technology earlier than if the actual price path had been known on beforehand. This is not a typical real options outcome, but the result of optimizing under imperfect information, which leads to decisions that are different from the optimal strategies under full information.

On the other hand, policy uncertainty induces the producer to wait and see whether the government will further commit to climate policy. This waiting is a real options effect.

In other words, if learning about government commitment is more valuable than investing into mitigation technologies immediately, the option value exceeds the value of the technology and investment will be postponed. This might lead to supply shortages and limited diffusion of less carbon-intensive technology.

 

Keywords: Policy uncertainty; Real options; Electricity planning

http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V1T-4S26RY3-1&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&_docanchor=&view=c&_searchStrId=1076869927&_rerunOrigin=google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=211ffe0641bd2bfe5faa9d97f7816e5b

An example of project planning and budgeting

Uncertainties
This section discusses the degree of uncertainties in respect of a development of the Southeast Shore of False Creek, based on the Creekside Landing concept. Please note that the cost estimates quoted are order of magnitude, and detailed design will be required to enable more reliable cost estimates to be produced.

Cash Flow and Capital Requirement
A substantial expenditure will have to be made before revenue can be generated. A summary of the projected expenditures and capital requirement is as follows:

Read further here: http://vancouver.ca/ctyclerk/cclerk/970424/kwokreport/report07.htm

Wedding: Spend Less But Love As Much

Spend Less But Love As Much
By Quynh Thu
Friday, October 16,2009,17:41 (GMT+7)


Saigon is entering its wedding season as marrying couples are preparing for their lifetime moment

Jacqueline Felton, 30, and Michael Aldred, 29, the two romantic police officers in Devon, England, became world-famous in September after Reuters featured their wedding story on September 9. The couple had intended to enter the wedlock one year earlier on August 8, 2008. However, they decided to switch their wedding reception party to the famous 999 emergency number because the triple 9 date was only once every 100 years and they had the once-in-a-lifetime chance. Reuters reported that about 20,000 couples worldwide chose the “999” date for their marriages.

Several marrying couples in HCM City were part of the figure. Yet most others have waited patiently for a later date as the wedding season in this city has come. Although Saigonese brides and grooms marry each other throughout the year, the “wedding season,” which attracts the largest number of couples in Saigon, starts from October of one year and extends to January of the following year just before Tet, the Lunar New Year.

In Canada, for example, many couples get married in summer because the weather is fine. Then, why is this time around toward the end of the year the “official mating season” in Saigon?

Saigon Stories has found at least two reasons for the date. First, although Saigonese are living in a modern society, they still in one way or another stick to tradition. The wedding date is believed by many to be important and thus should be on “lucky days.” More often than not, couples have a fortuneteller pick a date for their marriages. As a tradition, “lucky days” for wedding are often in the last months of the lunar year (from October to January of the year that follows).

The second reason is even more convincing in Saigon Stories’ opinion. As wedding ceremonies are a significant event marrying couples and their families in Vietnam could afford only with meticulous—or to be more precise, exhausting in most of the cases—preparations, it takes them a long time until the end of the year to get everything ready.

What is special about the 2009 wedding season versus the previous years?


Well, the current economic hardship is forcing brides and grooms to think twice when it comes to their wedding budget. Therefore, restaurants across the city are offering promotions to couples.

What is special about wedding parties in HCM City is that there are many establishments specializing in this kind of business. They have big restaurants which are specifically designed to host wedding receptions, and they have been running lucrative business.

Reuters reported that about 100 people attended the Aldreds’ wedding ceremony. This turnout is expected of some wedding reception parties in HCM City. However, the average number of guests to a wedding party here is often higher. Consequently, the costs of the reception party normally account for the largest proportion couples spend for their wedding.

This year, the economic sector which may have incurred the biggest losses is possibly the jewelry business. Data show that last year, sales of diamond jewels tumbled by a third on the year before because couples had to tighten the purse strings. This year, the market remains flat at best, if not worse. On the gold market, record gold price hikes have definitely dented jewel sales compared with the previous years although jewel manufacturers hope that this wedding season could help reverse to a certain extent plunging sales during the first months of the year.

If you’re still a newcomer to HCM City, you may wonder what people normally do during a wedding reception at a restaurant. This is also the first difference between a wedding ceremony in HCM City and one in a Western country where wedding parties are sometimes held in the garden or backyard of a house.

Coming to a wedding ceremony here in HCM City, invited guests will first meet the bride and groom who are often standing at the entrance to welcome them. After being greeted by the couple, guests will meet receptionists sitting behind a table on which a box is placed so that guests can put in complimentary money for the couple. Guests can give gifts, too. But nowadays, cash is preferred at wedding receptions. Some notes should be given to the receptionists: They are either close relatives or the closest friends of the bride or the groom because they have to keep the money and the gifts.

Guests then get seated at the tables in the hall, waiting for the official ceremony. At due time, the bride and groom will appear hand in hand to proceed to the stage. The difference from a Western wedding ceremony is that the bride’s father does not accompany her. Instead, after the couple has already been on the stage, their parents will be invited to join them. One of the parents, often the groom’s father, will make a speech expressing thanks to all guests.

Next, the new wife and husband are toasted in champagne and together they cut the wedding cake which is often very big and multistage. Then everybody can enjoy meals served by waiters and waitresses at the restaurant. In the meantime, the bride and the groom, often accompanied by their parents, will come to every table to thank guests in person.

Saigon Stories can also pick some differences between the above wedding procedures and those in a Western wedding ceremony. Although Vietnamese marrying couples love each other as much as their Western counterparts do, Vietnamese brides and grooms do not exchange kisses during their parties (but they surely do later).

As expected, music forms part of the joy of a wedding ceremony both here and abroad. While dancing often finishes off a Western wedding party, a music band and several singers are invited to perform at a party in HCM City. Another note: With the dancing, a Western wedding reception may extend until, say, two o’clock in the morning; one in HCM City would often end 10 p.m. at most.

Economic crises may force people to spend less but they cannot force them to have less love. We hope so for marrying couples.


http://english.thesaigontimes.vn/Home/lifestyle/sgstory/6995/

The story behind the US$1-billion revenue of gold trading floors in Vietnam

Not All That Glitters Is Gold
By Hai ly
Friday, October 30,2009,00:55 (GMT+7)


A gold trading floor with healthy liquidity should enable investors to place and match orders equal to thousands of taels each when gold prices jump or plunge

The story behind the US$1-billion revenue of gold trading floors

For the first time in history, gold prices exceeded US$1,050 an ounce, prompting the international and local media to predict that they may climb to US$1,100-1,200. Many individual investors on gold trading floors have incurred losses by betting on falling prices. “When prices first rose, a number of investors did not attempt to cut losses, but continue selling gold. However, a prolonged period of price increase has eroded their endurance. When global prices underwent a correction phase, investors could no longer withstand the losses. At that time, banks also started to step in. Together with owners of gold trading floors, they have dealt with the accounts of these investors,” said Nguyen Duc Thai Han, deputy general director of the Asia Commercial Bank (ACB).

Reaching US$1 billion

Unlike the sale of gold bars, the operations of most gold trading floors currently fall under two categories. Some gold trading floors such as those operated by SBJ (Sacombank Jewelry) and ACB allow investors to engage in mutual transactions. Others, meanwhile, require investors to place their orders with the owners of the trading floors, who will, in turn, place these orders with international trading floors. Their revenue is hard to measure. Both investors and management agencies should be concerned about the actual liquidity of domestic gold trading floors. Some trading floors put their daily order-matching volumes at 200,000-300,000 taels, or even 400,00 taels. The total revenue reaped by gold trading floors reaches US$1 billion per day, which far outshines that of the stock market.

Reality, however, is not so shiny. A close look at order-matching volumes at some gold trading floors has provided some surprising insights. In general, the value and volume of gold traded soars when gold prices fluctuate drastically. This also holds true for stocks and many material commodities. However, at many gold trading floors, trading volumes actually surge when global gold prices vary little. It is possible that owners of gold trading floors have placed orders worth hundreds or thousands of taels apiece when price disparity is insignificant, so as to generate staggering revenue. This, in turn, makes gold trading floors more competitive and appealing to investors. Investors may then open accounts at gold trading floors which capture their attention.

Should this be the case, are the actual trading volumes at domestic gold trading floors as enormous as many people think? A gold trading floor with healthy liquidity should enable investors to place and match orders equal to thousands of taels each when gold prices jump or plunge. How many gold trading floors actually satisfy this criterion? Or are they manipulating their revenue to lure investors?

It is vital for the authorities, especially the State Bank of Vietnam (SBV), which compiles and implements regulations governing gold trading floors, to accurately evaluate the scale of these floors. What is the appropriate deposit for gold trading? How much gold should banks keep to ensure liquidity? What about trading gold on accounts held by credit institutions? These are all controversial issues. There should also be regulations concerning the financial capabilities and business skills of both owners of gold trading floors and investors. At present, local gold prices move in tandem with their global counterparts and are also influenced by international speculation. Gold trading, therefore, comes with both high returns and high risks. Is this activity suitable for all investors? Unless the authorities can provide a satisfactory answer to this question, effectively managing gold trading floors is an uphill task.

On the other hand, the revenue which banks reap from gold trading floors also varies as gold prices fluctuate. The turnover comes from three sources:
1. trading fees of some VND2,000 per tael (or VND4,000 per tael if they are collected from both buyers and sellers);
2. overnight loans of gold and the dong, offered to gold trading accounts at gold trading floors (this activity is not related to mobilizing and lending loans as credit);
3. trading gold, domestically or otherwise, via accounts or purchase of gold bars.

For instance, ACB’s revenue generated by gold trading topped VND1 trillion last year, including VND1.4-1.5 billion of daily trading fees. ACB has been a member of the Dubai gold trading floor for three months, where the bank carries out its own transactions rather than those requested by its individual investors. This move has also sheltered ACB against drastic changes in the domestic gold market.

In developed countries, individuals access international stock, bond, foreign currency and gold markets, from the U.S. and Europe to Australia and Japan via brokers. This is not yet the case in Vietnam, where the necessary conditions have not been in place. Still, the proliferation of domestic gold trading floors makes it important for the Government to manage such activity efficaciously when it is allowed. Misleading revenue figures posted by gold trading floors will ineluctably trigger unhealthy competition and hamper the interest of investors.


http://english.thesaigontimes.vn/Home/business/trade/7199/

Wood Market Picks Up Speed in Vietnam

 

Wood Market Picks Up Speed
By Pham Quang Dieu & Nguyen Quoc Chinh
Thursday, October 29,2009,16:21 (GMT+7)

 

After a long period of robust growth, Vietnam’s wood export revenue plunged by nearly 10% for the first time. However, wood export has posted encouraging month-on-month performance, which has shown signs of recovery.

 

Currently, over 80% of the timber used to make wood products in Vietnam is imported, which spells trouble for the country’s wood export. In 2007 and 2008, Vietnam imported an average of 3.5 million cubic meters of timber annually, with sawn timber taking a lion’s share (2.28 million cubic meters, or 65%). This translates into over US$1 billion worth of imported timber, which caters mainly to the wood export sector.

 

Meanwhile, global demand, especially from main markets such as the U.S., Japan and Germany, exerts a tremendous influence on Vietnam’s wood export revenue. Since 2000, rising demand from these markets have boded well for Vietnam’s wood export earnings. In the first five months of 2009, orders from these markets plummeted year-on-year, Vietnam’s wood export ran into serious trouble. Wood export to the U.S., Germany and Japan nosedived by 37.23%, 18.3% and 17.17% respectively. Therefore, despite enormous efforts, Vietnam’s wood export generated merely US$982 million, down 10.4%.

 

Vietnam’s wood export hinges substantially on seasonal factors as wood processing entails several phases. 

• It takes three to four months to purchase timber and process it to meet orders. As these orders are usually placed in the first eight months of a year, the last four months often see export revenue peak.
• Figures from 2007 and 2008 showed that wood export earnings in the last four months were 12.57% higher than in the previous four months and 17.81% higher than in the first four months.
• Although the global financial crisis adversely affected wood export in late 2008, export value in the last four months were still 11.6% higher than in the previous four months and 21.07% higher than in the first four months.

Moreover, wood export policies implemented by Vietnam and wood-importing countries also play a part. For instance, in June 2008, the U.S. Congress passed the Farm Bill with stringent regulations on the origin of wood products imported into this country. In April 2009, the Lacey Bill on the origin of foreign wood and wood products in the U.S. also came into effect and imposed more challenges as the timber which Vietnam purchases from Myanmar, Laos and Cambodia is often of dubious origin.

 

On September 23, 2008, the Ministry of Finance isssued Official Letter 11270/BTC-CST to impose export taxes on products made of imported materials. Consequently, wood exporters saw export taxes rising from 0% to 10% and encountered numerous problems as wood export is most robust in the last four months of a year. Fortunately, in view of such trouble, the ministry issued Official Letter 965/BTC-CST dated January 21, 2009, which allowed those which had paid the taxes to get refunds and removed the 10% export tax on wood exports. The decision was immensely beneficial to wood exporters.

 

Signs of recovery

 

The third-quarter report on Vietnam’s wood export and prospects said that two factors which left profound impacts on this activity were

• imported materials and
• demand from main export markets.

 

In March 2009, global timber prices rose slightly while Vietnam’s timber import started inching up thanks to increasing numbers of orders. Problems in the forex markets were also tackled, so enterprises no longer worried about the shortage of foreign currencies used for purchasing timber. In May 2009, the U.S. economy also showed signs of recovery, and the housing market warmed up. Encouraging signals also emerged in Japan and Europe in July and August 2009. Therefore, Vietnam’s export revenue has fared better and posted month-on-month increase since May. At present, wood processing enterprises have received many orders. These indicate that Vietnam’s wood processing sector is on the path to recovery.

 

As a result, AGROINFO predicts that export prices for Vietnam’s wood products will follow global trends and fall by some 11.94% year-on-year. However, since demand for them from main markets has seemed to recover and the wood export sector has entered the peak season, it may reap revenue of US$2.8 billion in 2009, comparable to that in 2008.

 

 

http://english.thesaigontimes.vn/Home/business/trade/7196/

Opportunities in a crisis: Lessons from the past

In any crisis, there are also opportunities.  Here is an article of lessons from the past.



UK buy-out market starting to reflect increasing market uncertainties
16 Oct 2001.
Source: AltAssets.

Conditions in the UK buy-out market are beginning to reflect the increasing uncertainty in financial markets since the global economic downturn was given extra impetus by last month's terrorist attacks on the US, according to the latest research from Royal Bank Private Equity and Unquote UK Watch.


Both the number and the value of deals in the £10m-plus buy-out market dipped significantly in September. Deal value fell to £21.3bn in the twelve months to the end of September, compared with a nine-year high of £23.5bn in late summer. The number of deals fell from a high of 155 in May and June to 132 in September.

Price/earnings ratios also showed a declining trend and are now at levels not seen since 1996. They are currently at just below 11, compared with more than 12 or 13 for most of the past five years.

Mark Nicholls, managing director of Royal Bank Private Equity, said: ‘The decline in the number of deals and downward trend in p/e ratios revealed by the UK Watch statistics confirms the trend we have seen in the market over the last six months when growing uncertainties had already made their mark on the valuations that private equity players are putting on target companies.'

He said the situation appeared to have deteriorated since the middle of September but insisted business had not ground to a halt and there was still some activity.

‘In spite of an unpredictable economic situation, deals are still being looked at and investments made; there will continue to be companies seeking to dispose of non-core businesses and investors who see growth opportunities in them,' Nicholls said.

Copyright © 2001 AltAssets

http://www.altassets.net/private-equity-news/by-region/europe/article/nz332.html

Managing risk in a turbulent economy an ever-increasing challenge for farmers

Managing risk in a turbulent economy an ever-increasing challenge for farmers
Nov 2, 2009 12:16 PM, By Paul L. Hollis, Farm Press Editorial Staff

Anyone reading this well knows that even when the U.S. general economy is humming along at a brisk pace, farming — and managing the inherent risk — is a tremendous challenge. When the economy is tanking, and the commodity markets are made even more complex by the involvement of various hedge and index funds, the risk becomes greater.

Mississippi State University Extension Economist John Anderson had some interesting things to say about managing risk in a turbulent economy during an Extension marketing meeting this past summer.

The volatility of commodity markets, especially in the past couple of years, have created many risks for producers, says Anderson, adding that his primary concern as an economist is that some farmers really haven’t recognized the nature of commodity markets.

An example of this volatility can be seen in the dramatic swings in wheat and corn prices, just in the last two years, he says. “Whatever commodity we’re talking about, we’ve been dealing with a lot of price volatility. Corn went from $8 down to about $4.50 per bushel, but many producers see this and say that corn is still at historically high levels. We need to understand the nature of commodity markets because they have unique characteristics that make the situation dangerous for producers.”

Pointing out some of these unique characteristics is what makes an economist a sort of “wet blanket,” says Anderson, and helps economics earn the nickname, “the dismal science.” But it is necessary that producers become familiar with these characteristics.

The first characteristic of a commodity market, he says, is that there are a large number of producers, and these producers are producing and marketing an undifferentiated product. In other words, if you’re growing corn, your corn is pretty much the same as another grower’s corn. Also, in a commodity market, there is no ability to set prices — producers are strictly price takers.

“And what really makes me a wet blanket is when I tell you that in the long-run, economic profits in a commodity market are zero,” says Anderson. “This is because costs of production quickly adjust when profits are high. Costs go up quickly. Corn was at a good price, but costs adjusted to $8 per bushel.”

Back in 2005, he says, if a producer could look ahead and predict $4.50 corn, he would have thought he wouldn’t be able to spend all of the money he’d make. But now, this same producer is thinking there’s no way he can make money with $4.50 corn.

“All costs have gone up, and that’s why this price volatility is so difficult to deal with,” says Anderson. “While $7 or $8 corn is great, you have to be prepared for when it goes back down. You can get burned on the cost side.”

The implications for producers of these volatile markets are many, he says, including that there is far less margin for error than in the past. “There’s more money on the table in each production cycle, and the consequences of being on the wrong side of the markets is much more severe. There are major input risks as well as output price risks, and there are fewer tools for managing the input risks than there are for managing the output side.”

This is why it’s important that farmers aggressively manage costs at all times, says Anderson. Producers today are good, efficient managers, but they can’t become complacent, he adds. Also, the short gains from high-price periods need to be used to build equity.

“One of my pet peeves is when we talk about ‘new price plateaus,’ because that encourages growers to go out and buy a lot of new equipment,” he says.

There also are implications for policy makers in these volatile markets, says Anderson. “One of these is that policy efforts aimed at raising prices through increasing demand — such as bioenergy policy — will not improve farm profits in the long run. From the supply side, this phenomenon is usually recognized as the technology treadmill. But from the demand side, the effect is usually downplayed or ignored.”

It also needs to be recognized, he says, that there really is no such thing as a new price plateau in the commodity markets. “A persistent increase in price reflects a persistent increase in the cost of production. If there’s a new price plateau, then there’s a new cost plateau underneath it. We get into a lot of trouble thinking prices will be high for the next five years.”

e-mail: phollis@farmpress.com

http://southeastfarmpress.com/news_archive/risk-management-1102/