InsiderAsia model portfolio

InsiderAsia model portfolio
Written by InsiderAsia
Monday, 04 January 2010 00:00

From March 2003 to January 2010 ( a period of 6.75 years), this portfolio has returned a CAGR of 19.2%.

Portfolio review

Our basket of 18 stocks fared extremely well last week, surging 3.2% for the week compared with the FBM KLCI's 0.7% rise. Including our large cash reserves (for which no interest is imputed), the total portfolio value increased by 2.4% to RM524,875.

Our model portfolio's total value and returns represent a significant achievement compared with our initial capital of just RM160,000. We started the model portfolio on March 3, 2003.

Our total profits are very substantial at RM364,875. Of this amount, RM223,866 has already been realised from earlier sales.

Since its inception, our model portfolio has registered a hefty return of 228% compared with our capital of RM160,000. By comparison, the FBM KLCI was up by 96.8% over the same period, even though it has been less representative of the broader market's performance. Plus, our portfolio holds a significant amount of non-interest yielding cash at all times for prudence sake.

We currently have surplus cash of RM127,815 for future investments, and the portfolio's equity weighting currently stands at 76%, which we are comfortable with.

Last week, we had 14 gaining stocks and four losing ones.

HELP International Corp was the week's biggest gainer, rising 11.6% to RM1.92 after reporting a sterling set of final results for FY Oct 2009 that saw net profit rise 31% to a record RM15.5 million despite the recession last year. This continues its double-digit growth trend underscores the education company's resilience and strong branding.

Other major gainers for the week include Muhibbah (up 7%), Faber Group (up 5.2%), Notion VTec (up 5%), Dijaya and Selangor PROPERTIES [] (both up 4.8%). The week's losers were marginal, led by 3A Resources (down 2.6%) and MyEG (down 1.1%)

We are keeping our portfolio unchanged.



Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.


http://www.theedgemalaysia.com/business-news/156667-insiderasia-model-portfolio.html

Cash flow is what matters, not earnings.

Cash flow is the true measure of a company's financial performance, not reported earnings per share.

http://spreadsheets.google.com/pub?key=tN-V5a_7mURGCfW1tcwuQPw&output=html

http://spreadsheets.google.com/pub?key=tufSQpXxzs0bnXVndLmEitA&output=html

At the end of the day, cash flow is what matters, not earnings.

For a host of reasons, accounting-based earnings per share can be made to say just about whatever a company's management wants them to, but cash flow is much harder to fiddle with. 

The statement of cash flows can yield a ton of insight into the true health of a business, and you can spot a lot of blowups before they happen by simply watching the trend of operating cash flow relative to earnings.  One hint:  If operating cash flows stagnate or shrink even as earnings grow, it's likely that something is rotten.



Also read:
Using Yield-based measures to value stocks: Say Yes to Yield
http://myinvestingnotes.blogspot.com/2010/01/using-yield-based-measures-to-value.html

Never forget that buying a stock is a major purchase and should be treated like one

You wouldn't buy and sell your car, your refrigerator, or your DVD player 50 times a year. 

Investing should be a long-term commitment because short-term trading means that you're playing a loser's game.

The costs really begin to add up - both the taxes, the brokerage costs, and the spread - and create an almost insurmontable hurdle to good performance. 

The amount you rack up in commissions and other expenses is money that can't compound for you next year.

Conservative valuation is a crucial part of the investment process.

The key thing to remember for now is simply that if you don't use discipline and conservatism in figuring out the prices you're willing to pay for stocks, you'll regret it eventually.  Valuation is a crucial part of the investment process.

One simple way to get a feel for a stock's valuation is to look at its historical price/earnings ratio (P/E) - a measure of how much you're paying for every dollar of the firm's earnings - over the past 10 years or more.  If a stock is currently selling at a P/E ratio of 30 and its range over the past 10 years has been between 15 and 33, you're obviously buying in at the high end of historical norms.

To justify paying today's price, you have to be plenty confident that the company's outlook is better today than it was over the past 10 years.  Occasionally, this is the case, but most of the time when a company's valuation is significantly higher now than in the past, watch out.  The market is probably overestimating growth prospects, and you'll likely be left with a stock that underperforms the market over the coming years.

Patience

The future is an uncertain place, after all, and if you wait long enough, most stocks will sell at a decent discount to their fair value at one time or another.

Stick to your philosophy and valuation discipline.  Be patient.

Stick to a valuation discipline: For every Wal-Mart, there's a Woolworth's

"If you don't buy today, you might miss the boat forever on the stock."

Sticking to a valuation discipline is tough for many people because they're worried that if they don't buy today, they might miss the boat forever on the stock.

That's certainly a possibility - but it is also a possibility that the company will hit a financial speed bump and send the shares tumbling.  The future is an uncertain place, after all, and if you wait long enough, most stocks will sell at a decent discount to their fair value at one time or another.

As for the few that jsut keep going straight up year after year - well, let's just say that NOT MAKING  money is a lot less painful than LOSING money you already have.  For every Wal-Mart, there's a Woolworth's,

A great company can be a lousy investment. Always incorporate a margin of safety.

The difference between the market's price and our estimate of value is the margin of safety. 

The goal of any investor should be to buy stocks for less than they're really worth. 

Unfortunately, it is easy for estimates of stock's value to be too optimistic - the future has a nasty way of turning out worse than expected.  We can compensate for this all-too-human tendency by buying stocks only when they're trading for substantially less than our estimate of what they're worth (margin of safety).

For example:

There is no question that Coke had a solid competitive position in the late 1990s, and we can make a strong argument that it still does. But those who paid 50x earnings for Coke's shares have had a tough time seeing a decent return on their investment because they ignored a critical part of the stock-picking process:  having a margin of safety.

Not only was Coke's stock expensive, but even if you thought Coke was worth 50x earnings, it didn't make sense to pay full price - after all, the assumptions that led you to think Coke was worth such a high price might have been too optimistic.  Better to have incorporated a margin of safety by paying, for example, only 40x earnings in case things went awry.

Always include a margin of safety into your purchase price

Always include a margin of safety into the price you're willing to pay for a stock. 

If you later realize you overestimated the company's prospects, you'll have a built-in cushion that will mitigate your investment losses. 

The size of your margin of safety should be larger for shakier firms with uncertain futures and smaller for solid firms with reasonably predictabvle earnings. 

For example:

• a 20% margin of safety would be appropriate for a stable firm such as Wal-Mart, but
• you would want a substantially larger one for a firm such as Abercrombie & Fitch, which is driven by the whims of teen fashion.

"A great company may not be a great investment."

You can't just go out and pay whatever the market is asking for the stock because the market might be demanding too high a price.  And if the price you pay is too high, your investment returns will likely be disappointing.

"Buffett says the same thing every year."

That's the whole point of having an investment philosophy and sticking to it. 

If you do your homework, stay patient, and insulate yourself from popular opinion, you're likely to do well. 

It's when you get frustrated, move outside your circle of competence, and start deviating from your personal investment philosophy that you're likely to get into trouble.

When you SHOULD NOT sell

By themselves, share-price movements convey no useful information, especially becasue prices can move in all sorts of directions in the short term for completely unfathomable reasons. The long-run performance of stocks is largely based on the EXPECTED FUTURE CASH FLOWS of the companies attached to them - it has very little to do with what the stocmk did over the past week or month.


The Stock Has Dropped

Always keep in mind that it does't matter what a stock has done since you bought it.  There's nothing you can do to change the past, and the market cares not one whit whether you have made or lost money on the stock.  Other market participants - the folks setting the price of the stock - are looking to the future, and that's exactly what you should do when you're deciding to sell a stock.

The Stock Has Skyrocketed

Again, it matters little how those stocks have done in the past - what's important is how you expect the company to do in the future.  There's not a PRIORI reason for stocks that are up substantially to drop, just as there's no reason for stocks that have tanked to "have to come back eventually."  Most of us would be better investors if we could just block out all those graphs of past stock performance because they convey no useful information about the future.

So when should you sell? 
Here are the five questions you should run through whenever you think about selling a stock, and you'll be in good shape.

Did you make a mistake?
Have the fundamental deteriorated?
Has the stock risen too far above its intrinsic value?
Is there something better you can do with the money?
Do you have too much money in one stock?

A reasonable strategy: Selling fairly valued stock to purchase one that is very undervalued

Is there something better you can do with the money? 

As an investor, you should ALWAYS be seeking to allocate your money to the assets that are likely to generate the HIGHEST RETURN RELATIVE TO THEIR RISK.

There is no shame in selling a somewhat undervalued investment - even one on which you've lost money - to free up funds to buy a stock with BETTER PROSPECTS.

Here is what one investor did.

In early 2003, he noticed that Home Depot was looking awfully cheap.  The stock had been sliding for almost three years, and he thought it was worth about 50% more than the market price at the time.  He didn't have much cash in his account, so he had to sell something if he wanted to buy Home Depot.  After reviewing the stocks he owned, he sold some shares of Citigroup, even though they were trading for about 15% less than what he paid for them.  Why?  Because his initial assessment of Citigroup's value had been too optimistic, and he didn't think the shares were much of a bargain any more.  So, he sold a fairly valued stock to purchase one that he thought was very undervalued.

What about his small loss on the Citi stock?  That was water under the bridge and couldn't be changed.  What mattered was that he had the opportunity to move funds from an investment with a very modest expected return to one with a fairly high expected return - and that was a solid reason to sell.

ALWAYS pay careful attention to valuation. NEVER ignore valuation.

The only reason you should EVER BUY a stock is that you think the business is worth more than it's selling for - not because you think a greater fool will pay more for the shares a few months down the road.

The best way to MITIGATE YOUR INVESTING RISK is to pay careful attention to valuation.  If the market's expectations are low, there's a much greater chance that the company you purchase will exceed them. 

Buying a stock on the expectation of POSITIVE NEWS FLOW or STRONG RELATIVE STRENGTH is asking for trouble.

This one came back to haunt many people over the past few years.  Although it's certainly possible that another investor will pay you 50 times earnings down the road for the company you just bought for 30 times earnings, that's a VERY RISK BET to make.  Sure, you could have made a ton of money in CMGI or Yahoo! during the Internet bubble, but ONLY IF YOU HAD GOTTEN OUT IN TIME.  Can you honestly say to yourself that you would have?

Using Yield-based measures to value stocks: Say Yes to Yield

Say Yes to Yield

1.  Earnings yield

Earnings yield
= Earnings/Price

The nice thing about yields , as opposed to P/Es, is that we can compare them with alternative investments, such as bonds, to see what kind of a return we can expect from each investment. (The difference is that earnings generally grow over time, whereas bond payments are fixed.)

For example:
In late-2003:
Risk-free return from 10-year treasury bond: 4.5%
Earnings yield of Stock with P/E of 20 = 5% (This is a bit better than treasuries, but not much considering the additional risk taken.)
Earnings yield of stock with P/E of 12 = 1/12 = 8.3% (This is much better than the treasury bond. The investor might be induced to take the additional risk.)

2.  Cash return

Cash return
= Free Cash Flow/Enterprise Value
= FCF/(Market capitalization + long term debt – cash)

However the best yield-based valuation measure is a relatively little-known metric called cash return. In many ways, it’s actually a more useful tool than the P/E.

To calculate a cash return, divide free cash flow (FCF) by enterprise value. (Enterprise value is simply a stock’s market capitalization plus its long-term debt minus its cash.)

The goal of the cash return is to measure how efficiently the business is using its capital – both equity and debt – to generate free cash flow.

Essentially, cash return tells you how much free cash flow a company generates as a percentage of how much it would cost an investor to buy the whole company, including the debt burden. An investor buying the whole company would not only need to buy all the shares at market value, but also would be taking on the burden of any debt (net of cash) the company has.


An example of how to use cash return to find reasonably valued investments:
Company A’s
In late 2003,
Market cap = $9.8 billion
Long-term debt = $495 million
Cash in balance sheet = $172 million
Enterprise value = $9,800 + $495 - $172 = $10,100 million or $10.1 billion.

Review its FCF over the past decade
In 2003, FCF = about $600 million

Therefore,
Cash return of Company A = $600/$10,100 = 5.9%

In late 2003:
Yield of 10-year treasuries = 4.5%
Yield on corporate bonds = 4.9% (This is higher but still relatively paltry.)
Cash return of Company A = 5.9% (Looks pretty good. Moreover, this FCF is likely to grow over time, whereas those bond payments are fixed. Thus, Company A starts to look like a pretty solid value.)

Cash return is a great first step to finding cash cows trading at reasonable prices, but don’t use cash return for financials or foreign stocks.
• Cash flow isn’t terribly meaningful for banks and other firms that earn money via their balance sheets.
• A foreign stock that looks cheap based on its cash return may simply be defining cash flow more liberally, as the definitions of cash flow can vary widely in other countries.


----

Free Cashflow to Capital

FCF/Capital
=FCF/ Total Capital Employed
= FCF/TOCE
= FCF / (Total shareholders equity + Debt)

The Stock Performance Guide published by Dynaquest Sdn. Bhd. gives data on Free Cashflow (FCF) to Capital.  FCF is the amount of nett cashflow left after paying for re-investment in fixed and current assets. FCF measures the ability of a firm to pay out dividend.

FCF/Capital compares the FCF of a firm with the total capital employed (defined as total shareholders equity & debt). The higher is this ratio, the more efficiently is the firm using its capital.

Cash cows are those companies with FCF/Capital of > 10%.

FCF/Capital is not the same as Cash Return discussed above.

Stock Market Operators: Do they exist?

I believe that most of us have heard of stock market operators. They are known by many different names and they are constantly the blame for our financial losses. In some parts of the world, they are known as sharks, syndicates, big bosses, speculators, liars, cheaters or stock market manipulators. Some of us cheer their existence and their operations while some cursed them as if they are the culprits to our financial ruins. Are they our friends or foes? As the famous saying goes, know thy foes and you will have the upper hand in battle. In this post, I will challenge and dare you to swim with the sharks and eat from the crumbs of their feeds and not to be their feed. Here I would like to bring out some of my personal thoughts on this question that most newbie has.


Ok, here is the short answer. Yes, you are right. They existed and their operations are hidden from most people especially the newbie in these financial markets. I believe if we know them and how they operate, we could actually move along with them. In fact, the whole purpose of technical analysis is to determine the balance of demand and supply and the stock market operators are some of the powerful and rich individuals or groups with much buying and selling power. If we are able to track their movement, we will be able to profit from their operations. However, if we are ignorant of their existence, we could be their next meal.

Basic facts of stock market operators are listed below for your reference.

They work individually or in a group.


They rely on the market trends to help them in their mission.


The general publics are their big customers.


They together work with the public listed company owners or insiders.


They have a main mission objective to accomplish.
The bulk of their operation revolved around the accumulation and the distribution of stocks from / to the general publics.


They are rich and powerful figures but they are also humans that have emotions like all of us.


They have extensive credit facilities and lower transaction costs than the retail investors.


They do make mistakes like any one of us. Their mistake costs millions in dollars.
Market news, stock market analyst, corporate announcements, word of mouth advertising, price bidding and order queues are some of their tricks and tools that they used to achieve their main objective.


They don?t try to pick the bottom or the top like most retail investors do. Again, some of them try to do this and it costs them much sorrow and dismay.


They do attempt to manipulate the chart to trick the chartist whether you like it or not.


They are both the buyer and seller in the queue order at any given time.


They are not doing charity work. They existed to make your money. It is important to understand them well as they are big volume buyers and sellers. They can tilt the balance of demand and supply. Understanding the above traits of stock market operators will help to clear some of the myths that we have of them. Remember, they are humans like us. Some of the above points deserved to be elaborated further to bring out the secrets of trading methodologies that we will employ in our technical analysis.

Primary market trends are very important to their success and failures. If they judge wrongly on this, they could go bust easily as the power of leveraging will work against them. Remember this, they cannot fight against the trends and they don?t have the strength to do so. Don?t ever think that they can swim against the tides.

If their mission objective is to acquire stocks, they might push down the prices to cause temporary market panics to squeeze out the stocks out from the speculators and investors and this is especially true in certain countries where short-selling is not allowed. The success of this technique will depends on what sort of people that are holding the stocks. This will get rid of the intraday and short term traders. However, they will try to maintain the prices around a certain range as to keep the sellers motivated. Usually the public listed company owners and insider will work in tandem to collect the shares from the general public. After they exhausted the fearful speculators and investors, they will then turn their eyes to the stronger speculators and investors by pushing up the prices higher to catch their interests.

If their mission is to distribute stocks, they will push up the stock prices to catch the attention of speculators and investors. They will work with market analyst to create beautiful pictures of the company prospects. They will work with the public listed company owners and insiders to create scarcity of stocks. At this moment of time, they will also announce all the good news while pushing up the stock prices. They will queue up as buyers and sellers in the order queue. They will buy their own stocks to create volume to entice the crowd to follow. As they bid up and down the prices, stocks were distributed without the awareness of the general public.

I believe that this write-up will increase our trading knowledge and make us a wiser trader. I will continue to write of how we can profit from their operation in future posts whenever I managed to get my time organized.


http://stockmarket.tailou.com/viewtopic.php?f=23&t=3807&p=26266

Trying to Time the Market

Market timing is one of the all-time great myths of investing.  There is no strategy that consistently tells you when to be in the market and when to be out of it, and anyone who says otherwise usually has a market-timing service to sell you.

Here is an interesting study in the February 2001 issue of Financial Analysts Journal, which looked at the difference between buy-and-hold and market-timing strategies from 1926 through 1999 using a very elegant method. 

• The authors essentially mapped all of the possible market-timing variations between 1926 and 1999 with different switching frequencies.
• They assumed that for any given month, an investor could be either in T-bills or in stocks and then calculated the returns that would have resulted from all of hte possible combinations of those switches.  (There are 2^12 - or 4,096 - possible combinations between two assets over 12 months.) 
• Then they compared the results of a buy-and-hold strategy with all of the possible market-timing strategies to see what percentage of the timing combinations produced a return greater than simply buying and holding.

The answer?

About 1/3 of the possible monthly market-timing combinations beat the buy-and-hold strategy.  You may be thinking, "I have a 1 in 3 chance of beating the market if I try to time it.  I'll take those odds!"

But, consider these three issues:

1. The result in the paper cited previously overstate the benefits of timing because they looked at each year as a discrete period - which means they ignore the benefits of compounding (as long as you assume that the market will generally rise over long periods of time, that is).
2. Stock market returns are highly skewed - that is, the bulk of the returns (postive and negative) from any given year comes from relatively few days in that year.  This means that the risk of NOT being in the market is high for anyone looking to build wealth over a long period of time.
3. Morningstar has tracked thousand of funds over the past two decades.  Not a single one of these has been able to CONSISTENTLY time the market.  Sure, some funds have made the occasional great call, but none have posted any kind of superior track record by jumping frequently in and out of the market based on the signals generated by a quantitative model.

That is pretty powerful evidence that market timing is not a viable strategy because running a mutual fund is a very profitable business - if someone had figured out a way to reliably time the market, you can bet your life they'd have started a fund to do so.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey

Avoiding Mistakes is the Most Profitable Strategy of All

Learn the seven easily avoidable mistakes that many investors frequently make.  If you steer clear of these, you will start out ahead of the pack.  Resisting these temptations is the first step to reaching your financial goals:

1.  Swinging for the fences
Don't try to shoot for big gains by finding the next Microsoft.  Instead focus on finding solid companies with shares selling at low valuations.

2.  Believing that it's different this time
Understanding the market 's history can help you avoid repeated pitfalls.  If people try to convince you that "it really is different this time," ignore them.

3.  Falling in love with products
Don't fall into the all-too-frequent trap of assuming that a great product translates into a high-quality company.  Before you get swept away by exciting new technology or a nifty product, make sure you've checked out the company's business model.

4.  Panicking when the market is down
Don't be afraid to use fear to your advantage.  The best time to buy is when everyone else is running away from a given asset class.

5.  Trying to time the market
Attempting to time the market is a fool's game.  There's ample evidence that the market can't be timed.

6.  Ignoring valuation
The best way to reduce your investment risk is to pay careful attention to valuation.  Don't make the mistake of hoping that other investors will keep paying higher prices, even if you're buying shares in a great company.

7.  Relying on earnings for the whole story
Cash flow is the true measure of a company's financial performance, not reported earnings per share.

Glove Sector 31.12.2009

http://spreadsheets.google.com/pub?key=t6TE7RNPw5F-C3fpPVBWFKQ&output=html

FBM KLCI closes year up 45%

For the year, the FBM KLCI gained a total of 396 points or 45.2% after rising from 876.8 at the start of the year and ending at 1,272.8. At its lowest point, the index fell to 838 in March.

While the gains were slightly less than most regional bourses, it should be noted that the local stock market and domestic economy was also relatively more resilient during the crisis.

As a comparison, key market indices in China, India, Taiwan and Indonesia surged 78% to 87% for the year. Hong Kong was up 52%, South Korea rose 50% and Singapore was up 64%, but Japan lagged the region with only a 19% gain.
 
http://www.theedgemalaysia.com/business-news/156638-fbm-klci-closes-year-up-45-.html

Public Bank issues RM50m debt notes

Public Bank issues RM50m debt notes

Tags: Public Bank | subordinated notes

Written by Joseph Chin
Thursday, 31 December 2009 18:01

KUALA LUMPUR: PUBLIC BANK BHD [] has issued the fourth tranche of its subordinated notes amounting to RM50 million, which is due on Dec 31, 2019 and callable on Dec 31, 2014.

The bank said on Thursday, Dec 31, the issuance of the RM50 million notes was part of the RM5 billion nominal value subordinated medium term note programme.

"The proceeds raised from the issuance of the fourth tranche of subordinated notes under the subordinated MTN programme shall be used to finance the working capital, general banking and other corporate purposes of Public bank," it said.

Public Bank said the interest payable on each subordinated note issued under the fourth tranche is 4.60% per annum from Dec 31, 2009 up to Dec 31, 2014. Thereafter, the interest on each subordinated note is 5.60% per annum from Dec 31, 2014.

It added the subordinated notes are eligible to be included as Tier 2 capital of the bank.

http://www.theedgemalaysia.com/business-news/156643-public-bank-issues-rm50m-debt-notes.html

Happy New Year 2010

    The moon at the start of 2010

Year to Date KLSE Performance (31.12.2009)

KLSE  1 Year Chart
http://finance.yahoo.com/echarts?s=%5EKLSE#chart1:symbol=^klse;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Important lessons learned from the last 2 years.

1. Always buy good quality stocks.
2. Do not over-diversify.
3. Monitor the business.
4. Do not be influenced by the market price.
5. Do not follow or be influenced by the crowd. The crowd is often wrong.
6. Volatility in the market is a friend, take advantage of it.
7. Always buy at bargain price. Always buy with a margin of safety, at a discount to the fundamental intrinsic value.
8. Do not lose your capital. Even in March 2009, the portfolio still showed a gain.
9. Develop a good investing philosophy and strategy. Stick to them.
10. Invest for the long term.
11. Understand your emotions to greed and fear. Challenge them before reacting. Are these rational or appropriate given the facts?
12. It is often alright to do nothing.

Happy New Year to all.

Stock markets flirt with full bubble territory

Stock markets flirt with full bubble territory
With the FTSE 100 back at levels last seen before the collapse of Lehman Brothers, Martin Hutchinson asks whether there is a bubble brewing in asset prices.

Published: 11:36AM GMT 29 Dec 2009

Rapid increases in the prices of financial assets can be a healthy sign. Markets are doing their job when prices jump because of sudden economic strength or a disruption of supply. But when the causes are more monetary than real, a market bubble is forming. Are markets healthy or unhealthy now?

Observers from the Bank of International Settlements to the Hong Kong central bank are asking the question. And quite right, too. The MSCI World stock price index is up 70pc since March and many commodity prices are rocketing. The Reuters-CRB Metals Index is up 74pc over the past year.

Some portion of those increases is probably healthy. Prices were lowest when the financial and economic worlds were undergoing a near-death experience. Banking systems and the economy are not exactly up and running, but the trends are more positive.

Still, some markets seem to have moved past recovery into excess. The jump in commodities, probably the most "financialised" markets in the world, comes despite ample current inventories and limited recovery in demand.

Global stock markets are in danger of hitting full bubble territory. Analysts expect global market earnings to increase by 30pc in 2010, and investors are already paying a fairly generous 14 times those expected earnings, according to Societe Generale calculations.

The case for a bubble is supported by day-to-day market behaviour -- prices often fall on good economic news. Investors seem to care less about the prospect of stronger demand than about the possibility that the authorities will tighten up financial conditions.

If past practice is any guide, the tightening will be slow in coming. Central bankers have not yet fully cast off their long-established belief that asset prices aren't relevant to their task of keeping inflation at bay, while governments find it hard to abandon the many pleasures of deficit spending.

Recent experience should teach another lesson. Financial excess leads to destabilising market crashes. More distant history suggests that monetary excess frequently leads to retail price inflation. Tighter money might make the recovery less robust over the next year or two, but would make the world safer for the next decade.

http://www.telegraph.co.uk/finance/markets/6905092/Stock-markets-flirt-with-full-bubble-territory.html

Why shares beat property

Why shares beat property
How many realise that shares remain ahead of property over the past quarter century?

By Ian Cowie
Published: 7:42AM GMT 18 Dec 2009

Short of a miraculous surge in the stock market, the end of this month will mark the close of a dismal decade for shares.

Most investors know that the FTSE 100 has never revisited the peak of 6,930 it briefly hit on December 30 1999. But how many realise that shares remain ahead of property over the past quarter century?

Yes, you may very well stretch your eyes. I did, too, when Andrew Bell, head of research at Rensburg Sheppards Investment Managers, first told me.

I was almost as surprised when his graceful consultant, Jain Castiau, talked me into taking a dawn dip with her in the near-freezing waters of the Serpentine this week. At least it wasn't snowing at the time but, hey, that's another story.

Back to the statistics. The comparison, as you can see from the graph on this page, is based on the Halifax house price index and the FTSE 100 total returns index; both being the best-known benchmarks for their respective assets.

Or nearly. Because, as sharp-eyed readers will already have noticed, this version of the Footsie is the "total returns" version. In other words, it includes dividend income.


That is an important difference from the most widely quoted form of the Footsie which, for the purposes of simplicity, only measures changes in capital value or share prices, excluding dividends.

That goes a long way toward explaining why so many people underestimate the value of shares and share-based funds as a means of storing wealth.

Dividends are an important part of the total returns from most shares, but they are completely excluded from the simple snapshots of changes in capital values that form the basis of most television and tabloid stock market analysis.

No wonder the figures look so bad because they are so wrong.

Even after this year's splendid stock market rally, the Footsie is still yielding a shade under 3.4pc. That is, dividends expressed as a percentage of share prices averaged across the 100 stocks in this benchmark index.

So, for example, even if share prices remained frozen for 20 years, you would double your money in less than that time simply by reinvesting dividend income.

Bear in mind that income paid by equities is quoted net of basic rate tax – so most investors would need gross returns of 4.25pc and high earners would need 5.6pc to match the yield on the Footsie.

Few bank or building society deposits pay that much income – although, unlike shares, they do provide a capital guarantee. Bonds and bond funds often pay more – although, unlike shares, fixed interest securities are very vulnerable to inflation.

All things considered, it is daft to ignore dividend income when measuring returns from shares. For starters, the full picture demolishes the cliche of a ''lost decade for shareholders''.

What's that I hear you say? When comparing housing and shares it would be totally unfair to include income from one asset, but not the other. Too true. Mr Bell was scrupulously fair and has factored into his calculation a 5pc rental yield on property, less 1pc maintenance costs.

That's even fairer to bricks and mortar than it sounds because the Investment Property Databank UK Residential Index is currently yielding only 3.2pc gross and, of course, it is much easier to reinvest relatively small sums of income in shares than it is to buy tiny bits of houses.

Needless to say, the total returns from any asset would be much lower if you failed to promptly reinvest income because the compounding effect, so marked over long periods of time, would be absent.

Against all that, it just doesn't feel right to say shares have proved a better bet than bricks and mortar over the past quarter century.

Most shareholders are also homeowners and, while equities have delivered higher returns than most media coverage would suggest, I would hazard the guess that bricks and mortar have contributed more to the total wealth of the majority of homeowners than equities did.

The explanation is gearing. Until recently, almost anyone could fill in a few forms and borrow 100pc of their investment in housing. Such easy credit has never been available for shares.

And, of course, stock-market profits are generally subject to capital gains tax – unless you obtain them via an individual savings account or pension – whereas gains on your home are always CGT-free.

Even so, Mr Bell's comparison remains surprising and encouraging at a time when so much analysis of the stock market is merely depressing.

And it is always true – as I recalled while splashing through the gelid lake in Hyde Park this week – that the more you look, the more you see.


http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/6836526/Why-shares-beat-property.html

Lessons to be learned from the decade that shocked the stock market

Lessons to be learned from the decade that shocked the stock market
It has been a decade that many investors would rather forget.
On December 31, 1999 the FTSE100 closed at 6,930 and 10 years on it still has some distance to go before it regains this peak, sitting at around just 5,300 last week.

By Emma Simon
Published: 7:00AM GMT 28 Dec 2009

1. A guarantee is only as good as the guarantor
Structured products may have been guaranteed by Wall Street investment banks. But once Lehman's went bust, people realised that many of their guaranteed investments weren't as guaranteed as they thought.

2. Don't buy something you don't understand
Financial advisers often point out that many people drive a car without fully understanding how the internal combustion engines works. But those who got lost money in split-capital trusts and precipice bonds will no doubt now think twice before being reassured by such twaddle. If a car breaks down there is always the AA; there isn't any equivalent rescue service when it's your life savings.

3. Higher returns come with higher risks
If you want to better returns than a building society account you need to take more risk with your money. This almost always means you could lose capital.

4. Don't pay more than you have to
The advent of the internet and price comparison sites mean people can now shop around for financial deals and compare prices and products more effectively.

5. Long-term investments don't always mean long-term gains
Just because an investment should be held for a minimum if five years, doesn't mean you will get a positive return at the end of this period, as the "lost decade" for equities demonstrates.

6. Ask how your adviser earns his money
Commission skews judgements; it pays to inquire why comparable products aren't being recommended.

7. Read the small print
What will you be charged if you exceed your overdraft limit? What penalties will be applied if you cash the investment in early? When can the insurer turn down your claim? Such vital information is almost always in the small print.

8. Don't rely on easy credit
Many assumed cheap loans, remortgages and interest-free credit cards would bail them out of any financial difficulty. But these credit lines disappear when times get tough.

9. Don't rely on others to provide a pension
If you want a decent retirement, start saving. Employers have watered down pension schemes while the value of the state pension has declined. Even generous public sector pension look under threat.

10. What goes up also comes down
Shares prices can plummet, house price can fall, and interest rates can tumble – as well as rise sharply too. It's best to plan for such eventualities. They almost always happen.

http://www.telegraph.co.uk/finance/personalfinance/investing/6867372/Lessons-to-be-learned-from-the-decade-that-shocked-the-stock-market.html

Window dressing aka dressing up a portfolio

Definition

The deceptive practice of some mutual funds, in which recently weak stocks are sold and recently strong stocks are bought just before the fund's holdings are made public, in order to give the appearance that they've been holding good stocks all along. also called window-dressing.

Stock market crash is triggered by drastic change in sentiment of market players

A stock market boom can be described as a bubble if there is high probability of a large scale fall in share prices.

 

Stock market crash is not triggered

• by fundamental news or
• by a certain level of share overvaluation.

Instead, it happens because of

• a drastic change in the behavior of market players.

 

This is why the necessary and sufficient conditions for the bursting of a given asset price bubble, applicable in practice, cannot be provided with the tools of mathematical economics.

 

A market crash will ensue with a high likelihood if noise trading becomes dominant, the signals of which are to be found in the following stochastic factors:

 

• Increasing effect of leverage.

 

• Increasing activity on part of the economic policy.

 

• Increasing number of corporate scandals, fraud and corruption.

 

• Fundamentally unjustifiable co-movement of share prices.

 

http://myinvestingnotes.blogspot.com/2009/11/how-to-distinguish-stock-market-bubbles.html

A Decade of Bubbles 2000-2009

"S&P 500 has fallen 23% from 1469.25 in 2000 to its current 1,126.20"

Published: Wednesday December 30, 2009 MYT 10:46:00 AM
String of investment bubbles marked 2000-09


NEW YORK (AP): A string of exploding investment bubbles that started with the dot-coms and ended with mortgages and oil dominated the years from 2000 to 2009. And it looks like the next decade will be no different.

It doesn't seem to matter to many hedge fund traders and other professional investors that the Standard & Poor's 500 index has turned in its first losing performance over the course of a decade, having fallen 23 percent from 1,469.25 at the start of 2000 to its current 1,126.20.

Or that they or other investors helped create and then destroy the bubbles that left stocks worth $2.5 trillion less today than when the decade began - and that's before adding in the effects of inflation.

A mix of investor hubris, ignorance and piles of easy money created the bubbles.

New ideas about where to invest seemed foolproof and greed crowded out doubts.

Many investors looking for the best returns failed to see the potential problems with an Internet business that had no sales plan, or that thousands of expensive homes bought with no down payment might end up in foreclosure.

Now, these investors who fled the last blowups risk running smack into others. The Federal Reserve is keeping borrowing costs low to help revive the economy, and that means there's still plenty of easy money around, helping traders to inflate the price of everything from stocks to commodities such as gold.

"They've put out the biggest punch bowl in U.S. history and people are guzzling from it," said Haag Sherman, chief investment officer at Salient Partners in Houston. It begs several questions: What will be the next bubble? Or is it already here? And, how do individual investors protect their savings?

Some analysts have already been asking if the stock market formed a bubble with its huge rebound this year. The S&P 500 is up 68.9 percent from the 12-year trading low of 666.79, its best performance since the 1930s.

Gold is also suspect. It's above $1,098 an ounce and up 24 percent in 2009. Other possible sources of bubbles include stocks in emerging markets such as China, where the Shanghai index is up 76.4 percent this year.

Analysts say it's in the DNA of markets to let ambition cloud good judgment and that even when investors learn or relearn a lesson about excess, many still forget it.

Moreover, investors still have $3.2 trillion in money market mutual funds that's waiting to be invested, according to iMoneyNet Inc. With so much cash available and investors hankering after big returns, analysts warn that bubbles may be inevitable.

The signs of effervescence can be hard to spot.

"Pets.com was going to have a market cap larger than Exxon Mobil," said David Darst, chief investment strategist for Morgan Stanley Smith Barney in New York, referring to the Web site that collapsed in November 2000, nine months after raising $82.5 million from investors.

He says investors will keep getting tripped up as they find new ways to invest. "Human nature doesn't change," Darst said. "Market mechanisms change but human fear, human greed will be like this decades and centuries hence."

The numbers from this decade tell a stunning story:

>The Nasdaq composite index, powered by the dot-com buying that began in the late 1990s, went all the way up to 5,048.62 in March 2000, then crashed down to 1,114.11 at the depths of the 2002 bear market. It rose as high as 2,859.12 in October 2007, but no one expects it to return to its loftiest levels.

And the indexes don't reflect inflation, taxes and fees, which take the value of an investment down further. Thornburg Investment Management, which analyzed the value of investments beyond the decade, said $100 invested in 1978 would have been worth only $376 thirty years later after accounting for inflation, expenses and taxes.

>Crude oil, sparked by a weaker dollar and worries that oil producers would soon be unable to meet global demand, rose 71 percent in just six months to a high of $147.27 in July 2008. Prices then crashed down to $33.87 in just five months. The plunge was so precipitous that it destroyed several hedge funds that had bet oil would just keep soaring.

>Low borrowing rates and insatiable demand for mortgage debt by investors made it easy to get loans. That helped prop up housing prices and fuel speculation on securities based on those risky mortgages. The peak came in April 2006; after that, home prices fell 31.9 percent to a low in May 2009, according to the S&P/Case-Shiller 20-city index. Along the way, two investment banks that bought mortgage-backed securities collapsed and the government spent hundreds of billions of dollars to prop up many commercial banks.

>Prices for soybeans and corn hit record levels in the summer of 2008 as floods swept the Midwest and damaged key growing regions. In the first six months of the year, corn shot up more than 60 percent and soybeans rose more than 30 percent. The jump in prices was a boon to many traders, but led to food riots in Africa, Asia and the West Indies. By December of last year, both grains had lost half their value.

Analysts say the best way to avoid being caught by other bubbles is to remain vigilant about diversifying, the practice of investing in a variety of assets. It could also mean shedding some of the stronger performers to avoid some of the risks that the winners will falter.

"When something grows too big in the portfolio you have to force yourself to scale it back a little bit," Darst said. "There's no substitute for doing your homework, there's no substitute for asking questions."

By spreading their holdings around and saving more, investors can buffer against what many analysts worry will be the fallout from the low interest rates and easy money that are being used to help revive the economy.

Policymakers also have concerns. Fed Chairman Ben Bernanke said last month a policy favoring cheap borrowing risked setting more traps for investors. He said he didn't see any signs that a bubble is emerging but also acknowledged that it is "extraordinarily difficult" to detect one forming.

Some analysts see bubbles right now. Quincy Krosby, market strategist for Prudential Financial is skeptical of gold's recent surge.

It's easy to see why gold could be in a bubble. Many investors who have bought gold are speculating that inflation will start rising because of all of the money coursing through the financial system. One of gold's greatest appeals is as a hedge against inflation.

"It will move up, but the music always stops," Krosby said of gold.

Simon Laing, a director at Newton Investment Management Ltd. in London, notes that investors are using money borrowed at low rates in the U.S. and Europe to buy stocks in other markets - raising the prospect of new bubbles.

This comes as causes of past bubbles still present obstacles.

"I don't think we've taken the medicine yet," he said. "We've had a decade of bubbles and I still think we're in the same scenario."

Krosby said individuals shouldn't be fooled into thinking that regulators have been able to curtail risk-taking in the past two years since the collapse of the market for securities based on iffy mortgages.

"They're playing in a world where professional traders dominate even though we think we've gone through this tremendous regulatory revolution," she said.

http://biz.thestar.com.my/news/story.asp?file=/2009/12/30/business/20091230104944&sec=business

Favor modest valuations and big, safe dividends.

The recent rally has favored economically sensitive companies—ones whose profits rise quickly as the economy grows. Investors who expect the rally to fizzle ought to swap these for shares of companies whose products sell steadily no matter what. Favor modest valuations and big, safe dividends. Both are still abundant, fortunately. Also, keep ready a generous stash of cash.


http://bx.businessweek.com/investment-banking/view?url=http%3A%2F%2Fwww.smartmoney.com%2Finvesting%2Fstocks%2Fare-we-headed-for-a-third-bubble%2F%3Fcid%3D1122

BELIEVING A BULL MARKET

We are in the midst of a bull market. The market fell off the cliff in 2008. Its nadir was in March 2009. Many stocks were trading below their intrinsic value: intrinsic P/E and intrinsic P/B were much higher than the market P/E and market P/B then.

When market confidence and sentiment turned, the investors rushed in and picked up huge bargains. Many stocks were trading at huge discounts to their intrinsic values. The initial price rise from March to June 2009 was particularly fast and steep. Those who stayed invested throughout the deep recession and/or invested in the early phase of the steep rise are sitting on big gains. Since June/July 2009, many stocks are trading at fair values. Accordingly, these stocks are trading at higher prices within a narrow range.

Still many "glamour" stocks' prices continue the climb. These are the "growth" stocks. At a certain price, these stocks are fairly valued. As the prices climb, beware that the market price may be expensive compared to their fundamentally derived intrinsic values. Momentum trading and various market strategies used by 'investors' in the market tend to create bubbles. Valuation is a skill and is also subjective. Those without this skill (and this would be the majority) may not be anchored on the intrinsic value of the stock as their guide.

The present bull market is about 9 months old. Driven the poor yield from fixed income investments (FDs), the liquidity due to the low interest rates and the low market prices in March 2009, the index has risen fast. The KLSE has risen from the low of around 800 to the present of 1250. Those who rode the rise would have in general obtained an average of 40% to 50% gain since March 2009. During the last bull run in 2007, the KLSE peaked around 1350. From 1250 to 1350, this 100 point rise will translate to a gain of about 8%. It is unlikely for the market to go down to the low of March 2009. However, there hasn't been any significant correction in the present bull run. Some investors would welcome a significant correction to to consolidate the market for the next phase. A correction of 10% to 20% maybe welcomed by various players in the market.

Though the market has risen, particularly the index-linked stocks, opportunities exist for the value stock pickers still.  The year is ending on a good note, it is also a good time to rebalance one's portfolio.

----

http://myinvestingnotes.blogspot.com/2009/01/believing-bull-market.html

BELIEVING A BULL MARKET

When markets are rapidly rising, value investing invariably falls out of favor with the investing public. In an upward racing market, value stocks appear dull and stodgy as the more speculative issues rush toward new market highs. But come the correction, it all looks different. Stable value stocks seem like trusted friends.

Most bull markets have well-defined characteristics. These include:

• Price levels are historically high. 
• Price to earnings ratios are high. 
• Dividend yields are low compared with bond yields (or compared with a stock’s particular dividend yield pattern). 
• Margin buying becomes excessive as investors are driven to borrow to buy more of the high-priced stocks that look attractive to them. 
• There is a swarm of new stock offerings, especially initial public offerings (IPOs) of questionable quality. This bull market is what investment bankers and stock promoters call the “window of opportunity.” Because IPOs so often occur when Wall Street is primed to pay top dollar, seasoned investors joke that IPO stands for “it’s probably overpriced.”

Be patient: Wait for opportunities during correction or panic during a bull market

Great Opportunities to buy companies with durable competitive advantage

a) Correction or panic during a bull market:

Any company with a durable competitive advantage will eventually recover after a market correction or panic during a bull market.

b) Bubble-bursting situation:

But beware. In a bubble-bursting situation,during which stock prices trade in excess of 40 times earnings and then fall to single-digit PEs, it may take years for them to fully recover.

After the crash of 1997, it took until 2007 to match the 1990s bull market highs. There are still companies trading today at below their last decade high price. On the other hand, if you bought during the crash, as Warren Buffett often did, it didn't take you long to make a fortune.

http://myinvestingnotes.blogspot.com/2009/10/opportunities-to-buy-companies-with.html

In the aftermath of the bursting of the bubble

The Aftermath

In the aftermath of the bursting of the bubble, you initially find investors in complete denial. In fact, one of the amazing features of post-bubble markets is the difficulty of finding investors who lost money in the bubble. Investors either claim that they were one of the prudent ones who never invested in the bubble in the first place or that they were one of the smart ones who saw the correction coming and got out in time.

As time passes and the investment losses from the bursting of the bubble become too large to ignore, the search for scapegoats begins. Investors point fingers at brokers, investment banks and the intellectuals who nurtured the bubble, arguing that they were mislead.

Finally, investors draw lessons that they swear they will adhere to from this point on. �I will never invest in a tulip bulb again� or �I will never invest in a dot.com company again� becomes the refrain you hear. Given these resolutions, you may wonder why price bubbles show up over and over. The reason is simple. No two bubbles look alike. Thus, investors, wary about repeating past mistakes, make new ones, which in turn create new bubbles in new asset classes.

http://myinvestingnotes.blogspot.com/search/label/phases%20of%20bubble

Can investors take advantage of bubbles to make money?

Whether investors can take advantage of bubbles to make money seems to be a more difficult question to answer. Part of the reason for the failure to exploit bubbles seems to stem from greed �even investors who believe that assets are over priced want to make money of the bubble � and part of the reason is the difficulty of determining when a bubble will burst.

Over valued assets may get even more over valued and these overvaluations can stretch over years, thus imperiling the financial well being of any investor who has bet against the bubble.

There is also an institutional interest on the part of investment banks, the media and portfolio managers, all of whom feed of the bubble, to perpetuate the bubble.

THE PAUSE AT THE TOP OF THE ROLLER COASTER

There is only one strategy that works for value investors when the market is high – patience. The investor can do one of two things, both of which require steady nerves.

· Sell all stocks in a portfolio, take profits, and wait for the market to decline. At that time, many good values will present themselves. This may sound easy, but it pains many investors to sell a stock when its price is still rising.

· Stick with those stocks in a portfolio that have long-term potential. Sell only those that are clearly overvalued, and once more wait for the market to decline. At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.

But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.

-----

http://myinvestingnotes.blogspot.com/2009/01/pause-at-top-of-roller-coaster.html

The portfolio of one value investor shows what can happen when markets stumble off a cliff. In early September 1987, Walter Schloss’s portfolio was up 53%. The market as a whole had risen 42%, after a DJIA peak of 2722.42. Then in October the market fell off the mountain and the Dow lost 504 points in a single day. The market struggled back and Schloss finished 1987 with a 26% gain while the overall market made only a 5% advance. Schloss followed one of the first rules of investing – don’t lose money. Making up for lost ground puts an investor at a serious disadvantage when calculating long-term average returns.


Schloss is an experienced investor, and not all value investors will do as well in a rising market. It takes patience, “At a guess I’d say that (the value investor) should do a good 20% better than the market over a long period – although not during the most dynamic period of a bull market – if he is rigorous about applying the method,” says author John Train.

As for the hot stocks, when they take a hard hit the investor is cornered. If the stock is sold, the loss becomes permanent. The lost money cannot grow. If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall return.

The Process of Fundamental Analysis

http://spreadsheets.google.com/pub?key=thrIJu34ZkHzDDZwDLtNIHw&output=html

The figure outlines the 5-Step process of fundamental analysis that produces an estimate of the value.
In the last step in the diagram, Step 5, this value is compared with the price of investing.  This step is the investment decision.

The man in charge of US$1tril assets warns about stocks

Updated: Monday December 28, 2009 MYT 1:20:42 PM
The man in charge of US$1tril assets warns about stocks

NEW YORK: Homes are selling at their fastest clip in nearly three years, the unemployment rate is falling and stocks are up 66 percent since their March lows - the best performance since the 1930s. What's not to like?

Plenty, according to Mohamed El-Erian, chief executive of giant bond manager Pimco.

The investor says the recovery may be gaining steam but is no different than a kid who eats too much candy at one of the birthday parties his 6-year-old daughter attends.


FILE PIX - In this Feb. 12, 2008 file photo, Mohamed El-Erian, Co-Chief Executive Officer and Co-Chief Investment Officer of PIMCO, talks about sovereign wealth funds in New York. - AP
"We're on a sugar high," El-Erian says.

"It feels good for a while but is unsustainable."

His point: This burst of economic activity fed by government spending and near-zero interest rates will soon peter out.

As CEO at Newport Beach, Calif.-based Pimco, El-Erian, 51, oversees nearly $1 trillion in assets, more than the gross domestic product of most countries.

So when he talks, people listen.

What he's saying now:

-Stocks will drop 10 percent in the space of three or four weeks, bringing the Standard & Poor's 500 index below 1,000 - though he's not predicting when.


-The unemployment rate will be hovering above 8 percent a year from now.


-U.S. gross domestic product will grow at an average 2 percent or so for years to come - a third slower than we're used to.

El-Erian and his famous partner, Pimco founder Bill Gross, are watched closely because they've made investors a lot of money over the years.

The Pimco Total Return Fund, which at $203 billion is the world's largest mutual fund, has returned an average 7.6 percent annually over 10 years, after fees, versus 6.3 percent for Barclays Capital U.S. Aggregate fixed income index fund.

The hotshots at Pimco have made money by anticipating big moves in the economy and interest rates way before other investors.

In the depths of the financial crisis last year, for instance, Pimco sold some of its Treasury bonds to panicked investors looking for a safe haven and put the proceeds into government-backed mortgages and bank debt - in time to catch the big upswing in prices of those and other riskier securities this year.

Now Pimco is once again changing tack. El-Erian says people are fooling themselves if they think all the bullish data of late means a strong recovery is in the offing.

So he's buying Treasurys and selling riskier stuff.

His bet: Investors will get scared again and want U.S.-guaranteed debt so they know they'll get repaid.

At Total Return, government-related securities, including Treasurys and corporate debt backed by Washington, comprised 48 percent of the fund's holdings in September.

That was up from 9 percent at the beginning of the year.

One of Pimco's newest funds, the Global Multi-Asset Fund, a hybrid stock-bond offering, is 35 percent in equities now, down from 60 percent earlier this year.

Investors betting on stocks or high-yield bonds are likely to be disappointed, El-Erian says.

Markets for those securities are rallying not because people like them but because they hate the puny yields of safer investments like money markets and feel they have no choice but to buy, he says.

He quips that that makes the bull market as likely to last as a forced marriage.

The danger: If stock and junk bond prices start falling, lots of investors are likely to bail, feeding the drop.

Of course, there are plenty of true believers in the bull who are not buying the El-Erian line.

James Paulsen, chief strategist at Wells Capital Management in Minneapolis, with $355 billion under management, has been pounding the table for months to buy stocks.

Just like in the early 1980s, the recovery will take the form of a "V," he says. The reason: Companies have cut inventories and payrolls to the bone, so just a little revenue growth could translate into a bumper crop of profits.

El-Erian says many of the bulls don't appreciate just how much the government props still under the economy are masking its weakness.

Instead of focusing on the fundamentals today, he says, they're looking to the past, expecting a quick economic rebound because that's what's happened before.

We're trained to think the "farther you fall, the higher you'll bounce back," El-Erian says. "We're hostage to the V."

El-Erian says he learned to be open to many different views on the world (and markets) from his father, an Egyptian diplomat who insisted on reading several newspapers everyday, both on the right and the left.

El-Erian had hoped to become a college professor.

But when his father died, he took a job at the International Monetary Fund to support the family.

He rose through the ranks, eventually becoming deputy director.

In 1999 he joined Pimco, where he quickly made a name for himself with some prescient bets on emerging markets.

One of his biggest wins: selling Argentine bonds in 2000 while they were still popular with investors.

When the country defaulted the next year, the emerging markets fund that El-Erian managed returned 28 percent versus negative 1 percent for the Emerging Market Bond Index.

He eventually left to head the group that manages Harvard University's massive endowment, returning to Pimco in January 2008 in time catch the depths of the financial crisis.

El-Erian says we've probably seen the worst of the crisis but consumers, and not just Washington, need to start spending again for the recovery to really take hold.

He doesn't expect that to happen soon. Like in the Great Depression, Americans are saving more and borrowing less - a shift in attitudes toward family finances that Pimco thinks will last a generation.

That, plus the impact of more regulation and higher taxes, El-Erian says, will crimp growth for years to come.

Whatever the merits of that view, Pimco is not exactly knocking the lights out right now. So far this year, the Total Return Fund has returned 14 percent, impressive in normal times but no better than average for similar funds during the rally, according to Morningstar.

The 19.1 percent return for Global Multi-Asset, which El-Erian co-manages, lags two-thirds of its peers.

El-Erian says he sold equities "too early" but is convinced his view on the market will prove correct - even if it strikes many as a tad too pessimistic.

"I'm calling it as I see it," he says. "I'm not optimistic or pessimistic - I'm realistic." - AP

http://biz.thestar.com.my/news/story.asp?file=/2009/12/28/business/20091228081257&sec=business

Chart wise: These stocks continue to climb

Will these stocks continue to climb further uncorrected?

Adventa, Petdag, PBB, LPI, Latexx, GAB, HaiO, HLBank, QL, KPJ, JobSt, KLK, IOICorp, Sime

Chart wise: These stocks settled lower than their recent peaks

The prices of these stocks rose from March 09 and peaked in June 09.  The prices subsequently settled below their peaks.

BStead, LionDiv, KNM, PohKong, POS

Chart wise: These stocks rose and plateau at their peaks

The prices of these stocks started the climb in March over variable periods and all subsequently flatten out at higher prices.

iCap, Coastal, DLady, GenM, Genting, Integra, Maybank, Nestle, Parkson, Tenaga, UMW, Maybulk, UtdPlt, UMCCA, SOP,  KMLoong

Chart wise: This stock is back to its March 09 lows.

Interestingly, the price of this stock is back to its March 09 low.