Unfunded Liabilities And Cheap Stocks

Unfunded Liabilities And Cheap Stocks
Brian S. Wesbury and Robert Stein 09.15.10, 6:00 AM ET

Despite cries of "uncertainty" that reverberate through the financial markets, U.S. equities remain grossly undervalued. Risk premiums are exceedingly high. Too high!

In total, S&P 500 companies reported after-tax annualized earnings of $716 billion in the second quarter and had a market capitalization of $9.3 trillion. In other words, for every $100 in market value, the companies in the S&P 500 were generating $7.70 in after-tax profits--an "earnings yield" of 7.7%.

Comparing that earnings yield to the 10-year Treasury yield (currently 2.8%) reveals a gap of nearly five percentage points, the largest such gap since the late 1970s. And with profits expected to continue their upward climb, this gap is highly likely to increase even more in the next few quarters.

Relative to bonds, stocks are undervalued by a considerable margin. So what's holding investors back? Why are bond flows continuing to outpace equity flows?

One reason is fear of government spending. Current deficits and future deficits related to Social Security and Medicare are one reason. Every dollar the government spends must eventually be paid for by taxpayers. If these higher future taxes confiscate enough corporate profits, then the market will reflect that fact today with lower prices. So is the market discounting these costs accurately? Let's crunch the numbers.

The Trustees report for Social Security and Medicare estimates the present value of all unfunded entitlement benefits are roughly $50 trillion. On the same present value basis, this is equal to 3.8% of future GDP. In other words, rather than taxing 19% of GDP (as the Congressional Budget Office predicts for 2012-'13), total tax revenue would need to climb to 22.8% of GDP--an increase in tax revenues of 20% from everyone and everything that the federal government already taxes. In other words, a 10% tax rate will need to rise to 12%.

Of course everyone realizes that a 20% tax hike would never generate 20% more revenue. A dynamic model would forecast slower economic growth and more unemployment if the government hiked taxes by this much. This is why some are advocating benefit cuts. But, for our purpose here (analyzing the impact of paying for unfunded liabilities) we assume tax hikes are the only method used.

A 20% increase in corporate taxes as well as taxes on capital gains and dividends, would reduce total returns to shareholders by roughly 11%. This would reduce the earnings yield (currently 7.7%) to about 6.9%--more than 4 percentage points above current 10-year Treasury yields.

Don't take this the wrong way. We are certainly not advocating a massive tax hike to fix Social Security and Medicare. Raising tax rates will hurt the economy. Moving to private accounts would be our preferred solution. But the current level of fear about the costs of fixing these entitlement problems is out of proportion to reality. Things are far from perfect, but the stock market is grossly undervalued.

Brian S. Wesbury is chief economist and Robert Stein senior economist at First Trust Advisors in Wheaton, Ill. They write a weekly column for Forbes. Wesbury is the author of It's Not As Bad As You Think: Why Capitalism Trumps Fear and the Economy Will Thrive.

http://www.forbes.com/2010/09/14/equities-stocks-investing-opinions-columnists-brian-wesbury-robert-stein.html?partner=popstories

Top Ten Dividend-Yielding Stocks

Posted by YCharts

Dow 10,000. The market closed above this key level for the first time on March 29, 1999. Richard Grasso, then the chairman of the New York Stock Exchange and New York City Mayor Rudolph Giuliani broke out the Dow 10,000 hats. Now, more than a decade later the Dow sits at 10,463. Given the lack of performance of the Dow Jones Industrial Average, many investors might think this is the last place to look for solid investments.
So, the Dow hasn’t moved in 10 years and treasury yields continue the descent that started in the early 80’s.

The lack of Dow performance has created an opportunity to buy blue chip companies that yield higher than treasuries and have potential upside in the stock prices. Of the 30 companies in the Dow, the 10 below represent the top dividend yielding stocks in the Dow Jones Industrial Average with earnings yields in excess of the 10 year treasury yield that are not overly levered. We sorted the companies by dividend yield and highlight some of the key trends for each company that investors may want to consider.
Merck (MRK) – Dividend Yield 4.15%
Not only does Merck pay a strong dividend, it’s earnings yield is near 12%. The company averaged over $1.4B a quarter in free cash flow over the last 10 years with profit margins consistently over 20%. Merck sports a PE Ratio under 9 and is trading at the low end of it’s historical multiple.
Kraft (KFT) – Dividend Yield 3.77%
Kraft’s stock price slid from it’s peak in the 40’s during the first quarter of 2002 down to the low 20’s in late 2008. During this time, Kraft’s book value per share rose dramatically and now represents over 70% of the stock price.
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Chevron (CVX) – Dividend Yield 3.5%
Chevron manages to grow revenue consistently in the 20% range with profit margins in the 7 to 10% zone.
Johnson & Johnson (JNJ) – Dividend Yield 3.35%
Look at the free cash flow for J&J. The trend is solid and the company is trading at a low multiple to revenues.
Intel (INTC) – Dividend Yield 3.34%
Intel’s cash on hand is a healthy $18 billion. The company consistently puts up mid 20% profit margins and is trading near all time lows on a price to sales basis.
Home Depot (HD) – Dividend Yield 3.10%
Home Depot trades at a far cry from the $130 billion it was worth back in 1999. Revenue growth averages 5% and the company has taken on a fair amount of debt in recent years. Home Depot’s PE Ratio is 17 which may be a little rich given the top line growth rate.
Procter & Gamble (PG) – Dividend Yield 2.98%
P&G is ranked No. 1 or 2 in almost all of its markets, and in many product lines it has huge market share. That makes it tough to grow. Sales for fiscal 2010 were $78.9 billion, up about 3%. Profit from continuing operations was essentially flat at $10.9 billion.
Coca-Cola (KO) – Dividend Yield 2.90%
Coke-Cola has traded sideways for the last 10 year but it’s valuation as measured by the price to sales ratio is at historical lows and free cash flow continues to rise.
McDonalds (MCD) – Dividend Yield 2.87%
McDonald’s has raised its dividend each and every year since paying its first dividend in 1976. MCD switched to quarterly payments in 2008. In 2009, the company returned over $5.1 billion to shareholders through share repurchases and dividends paid, bringing the three-year total to $16.6 billion under the Company’s $15 billion to $17 billion cash return to shareholders target for 2007 through 2009.
Exxon (XOM) – Dividend Yield 2.78%
Exxon’s market cap is over $311B with an earnings yield of 8.5% and a solid dividend yield. Exxon’s profit margins averaged 8% over the last decade with revenues increasing over 200%.
The Dow components represent large, stable companies with rich histories. The Dow hasn’t moved in 10 years, but many of the companies mentioned have increased their dividends and earnings significantly. Investors know that stock prices follow earnings over the long-term. So this may be the time to buy some of the Dow high yielders, and if the prices continue to flatline, at least you get paid to wait.

Five Stock Sectors To Hold If The Market Crashes

Personal Finance
Five Stock Sectors To Hold If The Market Crashes
 
Tim Begany, 09.13.10, 8:00 PM ET

Let's face it, it wouldn't take much right now to put stocks into a major tailspin. Things like an escalation of hostilities on the Korean peninsula, another surprise uptick in unemployment and unexpected earnings disappointments could send the market plunging 10-20% or more.

It's hard to resist the urge to dump equities when the market goes south. But there are always stocks worth holding through a calamity because they're likely to persevere, reward you over the long haul, and maybe even provide a smoother ride in terms of price volatility. At current prices, these companies are already attractive values and would become virtually irresistible if the market crashed. Here are some examples in various sectors.

Consumer Services/Retail
This area is always very iffy in a weak economy, but fans of consumer-oriented stocks shouldn't let a correction cow them into ditching the higher-quality names such as Home Depot, Lowe's and Costco. That's because companies like these are considered "defensive," meaning they're large enough and sturdy enough to hold up well in tough times. Home Depot, Lowe's and Costco all survived the recent recession in fine shape and are positioned for profitable long-term expansion.

Industrials
Industrial stocks usually do particularly well early in a recovery, which is where we are now, so it's not a good idea to sell them when they're plodding through a recession or during a panic. You probably would have regretted dumping diesel engine maker Cummins the last time the market crashed and the economy receded. Analysts foresee an increase in Cummins' earnings to around $8 per share by 2014 from the current level of $3.84 a share.

Consumer Discretionary
You don't want to panic and sell good stocks in this sector for the same reason you'd keep a worthy industrial stock during a downturn. When the economy starts to recover, it's going to come back. And if it sells something people really seem to want, a crash and recession might not slow it up much at all. Take McDonald's, for example. The company has consistently made money for investors through good times and bad with nearly half the volatility of the overall stock market, as indicated by a beta of 0.55.

Consumer Staples
These stocks are important to own because consumer staples are products people need even if the market tanks or a recession is on. Although the latest recession hurt Procter & Gamble, the company is rebounding nicely because most people can't do without things like shampoo, laundry detergent and toilet paper. With new management leading the way, P&G is expected to deliver earnings growth of nearly 10% per year, on average, for some time. Investors can also take comfort in the fact that, like McDonald's, P&G has a very low beta (0.53).

Technology
Not only are tech giants Intel and Cisco Systems already at roughly a 20-25% discount from their 52-week highs, they're both positioned to grow their earnings by about 11% annually going forward. Notably, their betas--1.13 and 1.24, respectively--show that both tend to be somewhat more volatile than the market as a whole. That's OK, though, because the added diversification you get with tech stocks will help to protect your overall portfolio over time, even in a recession.

Where to Be Extra Cautious
While stock picking is risky in general, certain sectors are especially hazardous now. The most obvious are health care and financial services because of sweeping reforms, which are apt to be a drag on those industries although exactly who will be affected most is hard to say. Picking stocks is tough enough, but amidst worries of a double-dip recession, be especially vigilant in what sectors you play.

http://www.forbes.com/2010/09/13/market-collapse-personal-finance-economy-stocks.html?boxes=Homepagemostpopular

Chinese language to be introduced as part of India CBSE curriculum: Sibal

BEIJING: Mandarin, the language spoken by majority of Chinese will soon be part of CBSE curriculum as India and China today discussed modalities to train a large number of Indian teachers to acquire the language skills to make it part of the syllabus.

"China is our powerful neighbour and emerging as a biggest consumer of global resources. We can not wish it away. The best way to introduce China in India is to introduce its language at primary level so that our kids develop interest and knowledge about China," Human Resources Minister Kapil Sibal said.

The issue figured high on his talks with China's Education Minister Yuan Guiren, who promised to work out modalities to train Indian teachers in Chinese language in India.

"Let us get enough Indians to learn Chinese. Let us have a lot of Chinese trainers in India who will teach the young students in schools. That is how we evoke interest in our kids about China. There is no other way to do it," Sibal told Indian journalists here.

Learning it at primary level is better than learning at tertiary level which is more of acidic interest, he said.

"I told Yuan I am willing to introduce Chinese in the CBSE system as a course. I can not do that unless I have standards and a there is a test. That can not happen unless I collaborate with you," said Sibal, who also took part in the World Economic Forum in Chinese city of Tiajin.

The Chinese side said that a two way programme can be worked out to train about 200 teachers. Some can come here to learn and other in India through different methods, the human resources minister said.

Sibal said he has already spoken to CBSE Chairman Vineet Joshi and obtained his consent to make Chinese part of its curriculum. It would be introduced as soon as teachers would be available, he added.

Read more: Chinese language to be introduced as part of CBSE curriculum: Sibal - The Times of India http://timesofindia.indiatimes.com/india/Chinese-language-to-be-introduced-as-part-of-CBSE-curriculum-Sibal/articleshow/6560778.cms#ixzz0zc3RUVYq

Professor Aswath Damodaran teaches Valuation.

Course Description

NYU's Stern Business School Professor Aswath Damodaran teaches Valuation.

Course Index

1. Introduction to Valuation
2. Approaches to Valuation
3. Valuation Riskfree Rates
4. Equity Risk Premiums
5. Equity Risk Premia and Bond Default
6. New ERP for September 2009
7. Hybrid Securities Measurings Earnings
8. Accounting Fraud
9. Working Captial
10. Fundamental Growth
11. Terminal Value
12. Other Missed Assets
13. Valuation Examples
14. Valuing Corporate Governance Lambdas
15. Valuing Companies with R&D
16. Analysis and Application of the PE Ratio
17. PE Ratios continued
18. PEG Ratios
19. Visualizing Cheap Companies
20. Option Pricing Redux
21. Valuing Equity as an Option
22. Acquisition Tests, Price v. Value
23. Closing Thoughts on Value Enhancement

Why History Says Stocks Are the Best Buy Right Now

By Morgan Housel | More Articles
September 10, 2010 | Comments (16)

One persuasive argument for why stocks are a better buy than bonds today is that, for the first time in over half a century, the Dow Jones's dividend yield exceeds the yield on 10-year Treasury bonds.
There's really only one way to justify this: panic-driven fear over deflation that could make the Great Depression look like a sissy. The market is saying, and saying loudly, that dividend payouts are going to be butchered over the next 10 years. By a lot. Unless you think this is likely -- and if you do, bask in your bond bubble -- there's practically no way to justify the current divergence between dividend and bond yields.
Or is there? One popular argument making the rounds comes from a group who says the past 50-some-odd years of bonds yielding more than stocks was the anomaly, not the current reversal. Their evidence seems bulletproof: Before the 1950s, stocks almost always yielded more than bonds. And shouldn't they? Stocks have a nasty tendency of blowing up, and stockholders stand second in line to bondholders, so investors are right to demand extra yield. Only from the 1950s to circa-2009 was this view thrown out the window.
If you think of markets from this historical perspective, the implications are grim. Perhaps the past 50 to 60 years was one giant equity bubble that's now fraying at the seams. Perhaps we've been fooling ourselves for generations, glued to a cult mentality that says stocks are forever and always superior to bonds, amen. With that cult dying bit by bit, perhaps we're headed back to the pre-1950s days when stocks consistently out-yielded bonds. Woe is our future, basically. That's the argument I've been hearing a lot lately.
But there's a major flaw in it. And it's a simple one: To accurately compare dividend yields over time, you have to assume that dividend payouts as a percentage of net income stay the same. But that's not even close to how history has played out.
In the 1973 version of his classic book The Intelligent Investor, Ben Graham -- Warren Buffett's early mentor -- notes an important shift:

Years ago it was typically the weak company that was more of less forced to hold on to its profits, instead of paying out the usual 60% to 75% of them in dividends. The effect was almost always adverse to the market price of the shares. Nowadays it is quite likely to be a strong and growing enterprise that deliberately keeps down its dividend payments ...

His point, of course, was that dividend payouts as a percentage of net income were falling. And that's exactly what happened. From 1920-1950, the average S&P 500 company paid out 72% of net income in the form of dividends. From 1950-2010, that number dropped to 51%. From 1990-2007, the average was 45%. Over the past year, it's down to 33%. Today, some of the most profitable and fastest-growing companies -- including Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG), and Cisco (Nasdaq: CSCO) -- pay no dividends at all. The slow-growers -- like Altria (NYSE: MO), Verizon (NYSE: VZ) and Consolidated Edison (NYSE: ED) -- are where you find yield. That was unheard of 60 years ago.
More than anything, this explains why stocks consistently out-yielded bonds before 1950. Back then, stocks were essentially just high-yield bonds with variable-rate coupons. Today, companies tend to hoard net income to finance growth, acquisitions, and buybacks. It's inane to compare the two periods without adjusting for that paradigm shift.
What happens when you do? Well, if you model the past to assume that S&P companies have always paid out 33% of net income as dividends, like they do today, then prolonged periods of stocks out-yielding bonds become incredibly rare. There would have been only two such periods in modern history: from 1940-1944, and 1947-1955.
And what's neat about these two periods? They were both phenomenal times to buy stocks. In the 10 years after 1944, stocks surged 161%. In the 10 years following 1955, investors were rewarded with a 145% return -- and both figures don't include dividends.
History is pretty clear on this stuff: When stocks out-yield bonds, it's a great time to buy them. Some patience may be required, but the rewards for those patient few are invariably awesome. Today, with the average large-cap stock out-yielding Treasuries, there's little reason to think patient investors won't be rewarded like champions 10 years from now.
Ben Graham gets the last word: "The market price is frequently out of line with the true value. There is, however, an inherent tendency for these disparities to correct themselves."

http://www.fool.com/investing/general/2010/09/10/why-history-says-stocks-are-the-best-buy-right-now.aspx?source=ihpdspmra0000001&lidx=2

Get Smart About Selling Your Stocks

By Dan Caplinger | More Articles
September 13, 2010 | Comments (1) 

 

If you want to be a successful investor, it's not enough just to make smart stock picks. You also need to figure out when the right time to sell those picks is. If you don't force your investments to justify their place in your portfolio every day, then you run the risk of losing every penny of the hard-earned profits that smart pick made for you.

Learning the hard way
No matter how much you love a stock, there are times when you can save a lot of money by letting it go. For instance, all five of the following companies share something in common:

Company	Gain	Loss
YRC Worldwide (Nasdaq: YRCW)	295% (March 2001 to March 2005)	(99.7%) (March 2005 to June 2010)
Ford Motor (NYSE: F)	117% (March 2003 to June 2004)	(87%) (June 2004 to January 2009)
Sirius XM Radio (Nasdaq: SIRI)	208% (Aug. 2004 to Nov. 2005)	(98%) (November 2005 to December 2008)
Mosaic (NYSE: MOS)	626% (January 2007 to June 2008)	(79%) (June 2008 to November 2008)
Southern Copper (NYSE: SCCO)	709% (June 2005 to October 2007)	(68%) (October 2007 to February 2009)

Source: Yahoo! Finance.

With each of them, you could have made a boatload of money if you'd bought it at the right time. And with each of them, if you didn't see the warning signs ahead of time, you would have lost most or all of the gains that took years to earn.

In particular, bankruptcy threats hit Ford and Sirius during the financial crisis to stop their recoveries in their tracks at least temporarily, and similar problems still plague YRC Worldwide and the outcome remains uncertain. The boom in commodities helped fertilizer maker Mosaic and the Latin America-focused copper company Southern Copper reach big peaks, until the bottom fell out of the commodity markets.

More than just timing
I'll admit that it's easy to throw out these examples in hindsight as stocks you should have avoided once they started going down. But if perfect timing is impossible, then how can you expect to milk every penny of potential profit while getting out at the right minute to avoid losing it?

The answer is that you won't always sell at exactly the right time. But as long as you sell in time to save yourself from potential disaster, then the fact that you leave some money on the table is inconsequential. Here are some things to look out for:

• Shareholders vs. management. When C-level executives seem to be more concerned about golden parachutes and stock option paydays than investors, you need to look for the exits. Sometimes you'll miss out on gains even in spite of executive siphoning of profits, but often you'll get out at what turns out to be the perfect time.
• A disappearing moat. Competitive advantages aren't always permanent. If a company can't defend its territory, the loss of its competitive edge can be devastating to share values.
• Cyclical stocks. It's particularly important to understand when a high-flyer is simply at the top of its ordinary business cycle. For instance, right now Annaly Capital Management (NYSE: NLY) and MFA Financial (NYSE: MFA) are benefiting from low interest rates and relatively high rate spreads. What investors have to look at is what will happen if those conditions change, as they eventually will. If a stock is truly cyclical, then selling at highs with the expectation of picking up shares much cheaper down the road can be the right move.

In addition, you should look to see if the reasons you bought the stock in the first place are still valid. Even if a company has enjoyed big growth, it may have done so for the wrong reasons, in your view. If you can identify unsustainable trends, you'll escape before the rest of the market figures out the disparity.

Stay aware
You won't always time your exit from a troublesome stock perfectly. More important than your actual timing, however, is the fact that you need to go through the thought process of considering selling your investments -- and it should be a regular part of your overall investing strategy. You should never give an investment a free pass, especially if it has created losses for you recently. If you stay vigilant, you'll sometimes succeed in jettisoning a time bomb in your portfolio before it goes off and causes real damage.

Selling stocks should probably be the last thing on your mind right now. Morgan Housel explains why history says now's a great time to buy stocks.


http://www.fool.com/retirement/general/2010/09/13/get-smart-about-selling-your-stocks.aspx

Philip Fisher Investing Legend, Founder of Fisher & Co.

Born in San Francisco in 1907, Philip Fisher was one of the first investment "philosophers" to focus almost exclusively on qualitative and growth factors. He is widely regarded as one of the early seminal thinkers in the evolution of growth stock investing.

Philip Fisher's career began in 1928, when he dropped out of the newly created Stanford Graduate Investment program to take a job as a securities analyst for the Anglo-London bank in San Francisco. Four years later, he founded Fisher & Co., the investment counseling firm he managed until retiring in 1999 at the age of 91.

The author of three books, a Financial Analysts Federation (now the CFA Institute) monograph and the subject of many articles, Philip Fisher's investment principles have been studied and used by countless contemporary finance professionals. Philip Fisher was the first to contribute an analytical framework within which to judge a growth stock and contemplate its potential in growth instead of just price trends and absolute value. He was also a seminal proponent of what are now called concentrated portfolios. His principles espoused identifying long-term growth stocks and their emerging value through the analysis of quality as opposed to choosing short-term trades for initial profit.

At a time when many investment professionals sought profits by betting on business cycles, Philip Fisher favored holding stocks of firms that were well-positioned for long-term growth. This positioning could best be determined by examining factors that are difficult to measure through ratios and other mathematical formulations - the quality of management, the potential for future long-term sales growth, and the firm's competitive advantage.

Philip Fisher outlined his philosophy for the average investor in his book Common Stocks and Uncommon Profits, published in 1958, which became the first investment book to make the New York Times best seller list. He later expanded upon his work in Conservative Investors Sleep Well and Paths to Wealth through Common Stocks, and went on to write, Developing an Investment Philosophy. All his writings, with the exception of Paths to Wealth, have been republished in Common Stocks and Uncommon Profits and Other Writings by Philip Fisher, which is listed under the John Wiley & Sons Publishers Investment Classics publications.

Philip Fisher passed away in San Mateo, CA in March 2004 at the age of 96.

http://www.fisher-investments-press.com/authors/philip-fisher-biography.aspx

Philip A. Fisher: Wrote Key Investment Book

Philip A. Fisher, 96, Is Dead; Wrote Key Investment Book
By STUART LAVIETES
Published: April 19, 2004

Philip A. Fisher, who wrote one of the first investment books to appear on the New York Times best-seller list, ''Common Stocks and Uncommon Profits,'' a 1958 guide to growth-stock investing that the billionaire investor Warren E. Buffett has cited as a major influence on his career, died at his home in San Mateo, Calif., on March 11. He was 96.

His death was reported by his son Kenneth L. Fisher in a column in the current issue of Forbes magazine.

Still in print, ''Common Stocks and Uncommon Profits'' outlines Mr. Fisher's buy-and-hold approach to investing and his method for identifying stocks that have a strong potential for long-term growth. In the book's ''15 Points to Look for in a Common Stock,'' he advised readers to invest in innovative companies that are world leaders in their field, have a commitment to research and development and are led by executives of unquestioned quality and integrity.

He also told readers to limit the number of stocks in their portfolio and to limit turnover even further. ''If the job has been correctly done when a common stock is purchased,'' he wrote, ''the time to sell is almost never.''

Following his own advice, Mr. Fisher invested in technology companies like Texas Instruments and Motorola for the long haul. He bought Motorola stock in 1955, when the company was still a radio manufacturer, and held its shares until his death.

Philip Arthur Fisher was born in 1907 in San Francisco. A graduate of Stanford with a bachelor's degree in economics, and a veteran of the Army Air Corps, he started an investment counseling firm, Fisher & Company, in 1932. He retired in 1999 at 91.

Mr. Fisher's books, which also include ''Paths to Wealth Through Common Stocks''(1960) and ''Conservative Investors Sleep Well''(1975), influenced generations of investors, including Mr. Buffett.

''I sought out Phil Fisher after reading his 'Common Stocks and Uncommon Profits' and 'Paths to Wealth Through Common Stocks' in the early 1960's,'' Mr. Buffett wrote in a 1987 article in Forbes. ''From him I learned the value of the 'scuttlebutt' approach: Go out and talk to competitors, suppliers and customers to find out how an industry or a company really operates.''

In addition to his son Kenneth, of Woodside, Calif., Mr. Fisher is survived by his wife of 61 years, Dorothy; his sister, Caroline E. Fisher of Belmont, Calif.; two other sons, Arthur of Seattle and Donald of Lakeside, Ore.; 11 grandchildren; and 4 great-grandchildren.

Mr. Fisher also offered readers suggestions on finding a portfolio manager. In a 1987 interview with Forbes, he said that he always urged investors to ask for detailed transcripts from prospective advisers to scrutinize their record.

''If they take losses and small losses quickly and let their profits run, give them a gold star,'' he said. ''If they take their profits quickly and let their losses run, don't go near them.''

Photo: Philip A. Fisher (Photo by Forbes magazine, 1968)

http://www.nytimes.com/2004/04/19/business/philip-a-fisher-96-is-dead-wrote-key-investment-book.html

Common Stocks and Uncommon Profits and Other Writings

Common Stocks and Uncommon Profits and Other Writings
by Philip A. Fisher

You can ignore this book, but only at your PERIL!!!!, March 9, 2007

Having been associated with Wall Street for 35 years, I was lucky enough to have been in the same room with Philip Fisher on more than one occasion. He was a completely self-contained man, extremely comfortable in his own skin. He knew who he was, what he was, and what he could be. He possessed zero airs about him. These traits seem to run freely in many MASTER investors, including Warren Buffett .

Many have mentioned that Buffett considers himself to be 85% Benjamin Graham, and 15% Philip Fisher. This needs to be updated. If you spoke with Buffett today, he would tell you that those ratios are distorted, and the reason is Charlie Munger, Warren Buffett's investing partner at Berkshire Hathaway.

Charlie Munger is cut from the same cloth as Philip Fisher. They are growth players, and willing to pay up for a stock. For decades Buffett could NEVER PAY UP for a stock. He wanted them dirt cheap, so cheap in fact that some big plays got away from him forever. I don't know how many years ago, Buffett mentioned in a meeting I attended that he once owned a considerable amount of Disney. It would be a controlling amount in today's market; it got away from him, and tens of billions of dollars in that play alone.

In the old days when Buffett was strictly Graham and Dodd, he could not buy a GROWTH stock. He still cringes at the thought. Munger however taught Buffett to pay up. An example was Flight Safety International for which Buffett paid a previously unheard price-earning ratio. There are people around Buffett who know him well who will tell you that Munger is the superior investor. What you need to know is that sometimes stocks are DIRT CHEAP because they are DIRT, to use a Munger line.

Philip Fisher like Munger is a MASTER INVESTOR worthy of spending whatever time you can spare studying. If you want to walk in the footsteps of a MASTER, you must study the MASTER, and Fisher has a tremendous amount to offer.

I have managed billions of dollars in my lifetime. I am telling you this because you need to know that the SKUTTLEBUTT method that Fisher is famous for is something that anyone can used, starting today. Most of Wall Street research or any research that I have seen over the decades is not worth the paper it is printed on. On more than one occasion I have asked if the paper is soft enough to use for toilet paper.

With the scuttlebutt method, you talk to everyone but the company you are studying. Please allow me to illustrate. If you are thinking of investing in a car company, you start visiting car dealers. You learn the lingo, you read trade periodicals, maybe even a few car magazines, but be careful. Magazines and newspapers are completely jaded in their reporting by how much advertising dollars they receive from certain companies. You didn't know that because no one will ever dare print it.

If a newspaper wants to bury an important story on a company that gives them tremendous advertising dollars, they will run the unfavorable story, but it will be in the Saturday morning edition, which is the least read edition of the week. You need to know these things. I used Scuttlebutt back in the 80's, to accumulate a massive position in Chrysler when it was near bankruptcy. The stock went from $6 to $200 after splits. It isn't hard. You don't need to be a big market player, anybody really can do it.

You do need an inquisitive mind, and I believe an innovative one as well. Fisher was a guy who thought outside the box, and that's why he was immensely rich, as is his son Ken. Philip Fisher is a guy that made a fortune in FMC Corporation, owned it for 30 or more years. He was a ground floor player in Texas Instruments, owned it and made thousands of percent on the stock. He was every bit Buffett's equal, and to Fisher's credit, he gave us the greatest gift of all. He wrote a book, and was open with his readers about how to attain great wealth in the market.

He takes the "Efficient Market Hypothesis" (EMT), and blows it out of the water. His returns and Buffett's are so many standard deviations away from the mean, that EMT can't survive an investigation based on their results.

He gives you a 15-point criteria list to identify the types of companies that meet his screening. He also gives you five don'ts, and then five more to protect you as an investor. What Fisher is really doing is giving you a TEMPLATE to used as an investor. This is what you need. This is no different than going into the Marine Corps, and spending 12 weeks in basic training. Once you're done, you have certain smart behaviors drilled into your psyche so deep that in combat, and investing is combat, you can fall back on these techniques to survive. They become automatic. No matter what investment turns up, you can put it through the filters that have stood the test of time.

In closing, I would like to say one more thing about the Scuttlebutt technique. Recently, I had to make a decision to invest a considerable amount of money in the auto sector. One of the people I consulted with, is a legend in his 90's, who is the greatest mutual fund investor of the 20th century, probably worth over a billion dollars. He says to me in passing, do you know whom Toyota, the greatest car company in the world fears? The answer is the South Korean car companies. That my friends is worth a fortune, and is a 20 year stock play that Philip Fisher would have envied.

http://www.stocksatbottom.com/common_stocks_and_uncommon_profits_philip_a_fisher.html

Ten great investors

Introduction

Context

A select band of great professional investors have shown that it is possible to beat the market averages consistently over long periods. They act as an inspiration and example to less experienced investors. Their methods can also act as a starting point for beginners seeking to familiarise themselves with the basics of growth or value investment.

Prior knowledge required

You will need to understand the distinctions between growth and value investment, and between investing and trading. A knowledge of basic accounting terms, such as return on capital, will also be helpful.

Contents

1. Warren Buffett
2. T Rowe Price
3. Philip A Fisher
4. Kenneth L Fisher
5. Jim Slater
6. Peter Lynch
7. Ralph Wanger
8. William O'Neil
9. Sir John Templeton
10. John Neff
11. Conclusion

http://www.incademy.com/training/Ten-great-investors/Introduction/1040/10002/

Peter Lynch

Ten great investors

6. Peter Lynch

Job description
Now retired, Lynch secured his reputation as one of the most successful fund managers in history while in charge of the Fidelity Magellan fund between 1977 and 1990.

Investment style

Highly active investment in a variety of stocks, with special emphasis on growth and recovery stories, and holding periods ranging from a couple of months to several years.

Profile
Lynch only ever worked for Fidelity, the international investment management firm based in Boston. He started as an analyst in 1969, was promoted to director of research in 1974, and took over the Fidelity Magellan fund in 1977. At the time, it had $22m in assets. By 1990, when he decided to take early retirement in order to spend more time with his family, its value had swollen to $14bn. No manager in history has ever run so large a fund, so successfully, for so long.

His secret was a punishing work schedule, lasting six and sometimes seven days a week, in which he talked to dozens of company managers, brokers and analysts every day. With a total staff of just two research assistants, he ran a portfolio of up to 1,400 stocks at any one time. Some he bought at an early stage of growth or recovery and held for years. The majority he became dissatisfied with and sold within months, admitting that over half his choices were mistakes.

Although you cannot copy his portfolio management style, Lynch is adamant that any small investor can research stocks better than most professionals, and make smarter decisions about what to buy. This is because he or she is often better placed to spot potentially profitable investments early, and is always free to act independently, rather than constrained by committees, trustees and superiors.

Long-term returns
During his tenure at Magellan, Lynch averaged 29% compound over 13 years. This remains a record for funds of this size.

Biggest success
The biggest successes Lynch lists in his book Beating the Street were all small growth companies when he bought them: Rogers Communications Inc, a 16-bagger, Telephone Data Systems, an 11-bagger, and plastic cutlery manufacturer Envirodyne and King World Productions, both tenbaggers. The last of these is Oprah Winfrey's production company, and also owns the TV rights to Wheel of Fortune and Double Jeopardy.

Method and guidelines

Firstly, keep your eyes and ears open for ideas.
Lynch's key concept is that you can spot investment opportunities all around you, if only you concentrate on what you already know and are familiar with. Maybe you notice a crowded shop or restaurant, or your neighbours all start buying a new make of car, or a nearby factory suddenly seems to be expanding - all these may be pointers to companies on the stock market that are worth further investigation.

Among your best sources of information are:

• Your job, which familiarizes you with your company, its customers and its suppliers
• Your hobbies and leisure pursuits, from sport to shopping
• Your family and friends, thanks to all their jobs and hobbies
• Your observation and experience of companies in your home town.

Secondly, categorize your ideas

Companies can be categorized into 6 main types:

1. Slow growers - raising earnings at about the same rate as the economy, about 2-4% a year.
2. Stalwarts - good companies with solid EPS growth of 10-12%
3. Fast growers - small, aggressive new companies growing 20-25% or more.
4. Cyclicals - whose earnings rise and fall as the economy booms and busts
5. Turnarounds - companies with temporarily depressed earnings, but good prospects for recovery.
6. Asset plays - companies whose shares are worth less than their assets, provided these assets could be sold off for at least book value.

Source: One Up on Wall Street, P Lynch, 1989

Consider concentrating your efforts on finding fast growers. If bought at the right price, some of these can become 'tenbaggers' - shares that multiply your investment ten times over. Otherwise, look for turnarounds and perhaps the occasional asset play.

Consider trying to avoid holding cash. It is better to stay fully invested by putting any spare money into stalwarts. That way, you will not miss out on rising markets.

Avoid slow growers (too unprofitable) and cyclicals (too hard to time).

Thirdly, summarize the story behind your stock.
Prepare a 2-minute monologue about the stock you have in mind, describing

1. The reasons you are interested in it
2. What has to happen for the company to succeed
3. The obstacles that might prevent its success.

This is the stock's 'story'. Make sure it is simple, accurate, convincing, and appropriate for the category of stock in question. For example, 'if it's a fast grower, then where and how can it continue to grow fast?'
Fourthly, check the key numbers.

1. If you are excited by a particular product or service, check it accounts for a sufficient percentage of total sales to make a significant difference to profits.
2. Favour companies with a forecast P/E ratio well below their forecast EPS growth rate (i.e. a low PEG ).
3. Favour companies with a strong cash position.
4. Avoid companies with a high debt-to-equity ratio ('gearing'), especially if the debt takes the form of bank overdrafts, which are repayable on demand, rather than bonds, which are not.
5. In the case of stalwarts and fast growers, look for a high pretax profit margin. In the case of turnarounds, look for a low one with the potential to rise.

Fifthly, base your buy and sell decisions on specifics.
Your profits and losses do not depend on the economy as a whole. They depend on the factors specific to the stocks you hold. So ignore the ups and downs of the market.

Buy whenever you come across an attractive idea, with a compelling story behind it, at an attractive price.

Consider selling stalwarts when their PEGs reach around 1.2-1.4, or when the long-term growth rate starts to slow.

Consider selling fast growers when there appears to be no further scope for expansion, or expansion starts to produce only disappointing sales and profits growth, or when their PEGs reach around 1.5-2.0.

Consider selling asset plays when they are taken over, or when assets that are sold off fetch lower than expected prices.

Key sayings
"If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighbourhood shopping mall, and long before Wall Street discovers them."

"The very best way to make money in a market is in a small growth company that has been profitable for a couple of years and simply goes on growing."

"The way you lose money in the market is to start off with an economic picture."

"You don't get hurt by what you do own that goes up. It's what you do own that kills you."

Further information
Lynch has written two extremely accessible books: One Up on Wall Street (1989) and Beating the Street (1993). The first ranks as one of the best investment primers ever for small investors. The second looks more closely at his time at Fidelity Magellan. A simplified account of his methods is given by John Train in The New Money Masters (1989).

http://www.incademy.com/courses/Ten-great-investors/Peter-Lynch/6/1040/10002

Jim Slater

Ten great investors

5. Jim Slater

Job description
No official position. Slater manages his own money through a private company.

Investment style
Flexible, but he is best known as for his interest in stocks that offer growth-at-a-reasonable-price (GARP).

Profile
Slater trained as an accountant. He first became interested in investment in the Sixties, while a director at a British Leyland subsidiary. After publicising his methods via a column in the Sunday Times, he launched the investment conglomerate Slater Walker, which he chaired until 1973. The company was known for its aggressive acquisitions in every area from banking to property. It collapsed in the 1973-4 recession, leaving Slater bankrupt to the tune of about £4m in today's currency.

He fought his way back to prosperity through private property deals and writing for small investors. In 1990, he published his main work, The Zulu Principle. This popularised the use of a financial ratio devised in America, known as the PEG, or Price:Earnings Growth Ratio. He has since devised a monthly publication called Company REFS (Really Essential Financial Statistics), which helps investors to apply his system by listing PEGs and other key ratios and information on all UK companies.

Now living in Surrey, but far from retired, Slater is still very active in educating investors through his books and lectures. He is also a major shareholder in a variety of small companies, and puts a good deal of money into charitable causes and sports sponsorships.

Long-term returns
Not known.

Biggest success
Slater's own sharedealings are mostly private. But in 1996-7, he is known to have built up a substantial holding in Blacks Leisure. After selling a lossmaking division, this sports retailer staged a spectacular recovery from around 50p to a high of 549p just 17 months later in May 1997, delivering gains of 1,000%.

Method and guidelines
The stock market is a constantly unfolding drama which shifts repeatedly from scene to scene as conditions fluctuate. It is thus unwise to stick rigidly to any one method or type of asset. However, advises Slater:

"I suggest that for most private investors their first (and possibly final) area of specialisation should be growth shares. They are by far the most rewarding investments. The upside is unlimited and, if the right companies are picked, the shares can be held for many years, during which they should multiply the original stake many times."
Source: The Zulu Principle

The best shares to buy are those with high forecast earnings growth and a relatively low prospective P/E, i.e. a low Price:Earnings Growth ratio (PEG). A share is reckoned to be fair value when this ratio is 1.0.

Search for shares with PEGs

• no higher than 0.75.
• ideally, 0.66 or lower.

Forward P/E 15

Forward EPS growth (%) ÷ 20

Forward PEG = 0.75

The appeal of a low PEG is that it offers scope for the shares to earn a higher P/E (known as a 're-rating') once the market recognises the earnings potential. Thus the price should rise by the same percentage as the earnings, plus a higher multiple of those earnings - a 'double whammy' effect.

When selecting shares, rely on figures and financial ratios rather than qualitative judgment. Click here for a list of quantitative criteria.

(Ask your broker for all the relevant figures, or consult Company REFS. You can find forecast EPS and P/E ratios on the Companies page of the Hemmington Scott website by clicking on 'Brokers' Consensus'.)

Consider selling when one of the following occurs:

• The prospective PEG reaches 1.2 or higher.
• The story changes for the worse, such that the figures and factors that first attracted you to the company no longer apply
• An even more attractive investment opportunity presents itself.

Key sayings
"Become as expert as possible in your chosen niche market. You will achieve your objective, like Montgomery and Napoleon before him, by concentrating your attack."

"Investment is the art of the specific and selection is far more important than timing."

"The price of growth shares can only increase due to earnings growth and a status change in the multiple [the P/E ratio]. The latter is often much more important than the former."

"Elephants don't gallop - but fleas can jump to over two hundred times their own height"

(i.e. smaller companies tend to grow much more rapidly than larger ones).

Further information
Start by reading Slater's primer, Investment Made Easy and visiting his webpages. These will prepare you for the more advanced material in The Zulu Principle and Beyond the Zulu Principle. After that, you may wish to sample Slater's monthly newsletter Investing for Growth.

http://www.incademy.com/courses/Ten-great-investors/Jim-Slater/5/1040/10002

Warren Buffett

Ten great investors

1. Warren Buffett

Job description
Chief executive officer, Berkshire Hathaway Holdings, an investment firm headquartered in Omaha, Nebraska, USA.

Investment style

Originally a value investor interested chiefly in assets, Buffett has since become a long-term growth investor.

Profile
Buffett is a phenomenon. In 1986, he was briefly the richest man in the world, with a net worth of $16bn, thanks entirely to his stockpicking skills and fee income from investment management. He is now worth over $20bn. Yet he started out in 1954 with just $100 to invest. After training as a broker with Benjamin Graham, he founded an investment partnership, with himself as manager. This he ran until 1969, when he disbanded it in the face of dangerously high stock market valuations.

In 1965, he bought ailing textile firm Berkshire Hathaway. It was to become a holding company for a range of investments in media, insurance and consumer companies. He bought many of them at very low prices in the 1973-4 recession. This helped to keep his rates of return well ahead of the market during the Seventies and early Eighties.

Buffett was already a legend in the investment community by the time he bought a huge stake in Coca-Cola in 1988. But it was not until the success of that purchase that he became a folk hero too. He has since become a symbol of all that is best about the old-fashioned, down-to-earth values of mid-Western America. A gift for witty anecdote and example, displayed in college lectures and annual reports, has helped to spread his reputation far beyond the confines of Wall Street and the happy band of investors he has turned into millionaires.

Long-term returns
Buffett is widely regarded as the most successful investor of all time, with a compound return of around 22.3% over 36 years.

Biggest success
Buffett's purchase of Coca-Cola has made his investors a profit of around 800% over 12 years. Less well-known is his investment in advertising group Interpublic in 1973, which brought gains of over 900% in a little over 11 years.

Method and guidelines
Shares are not mere pieces of paper. They represent part-ownership of a business. So when contemplating an investment, think like a prospective owner. Focus on the underlying business, not the stock. What does it do? How well does it do it?

Stick to businesses you understand. Otherwise, you will never be able to grasp the true value of what you own.

There are only a few businesses worth buying. The world is divided into a handful of great businesses and a mass of poor or mediocre ones. Narrow your search down to the former.

"An investor should act as though he had a lifetime decision card with just twenty punches on it. With every investment decision his card is punched, and he has one fewer available for the rest of his life."

The best businesses are like toll bridges, which their customers have to pay to cross if they want to reach their destination. This enables them to piggyback on the growth of other, less fortunately placed businesses.

• Most companies have to advertise to make their customers aware of their products and services, which means advertising companies cream off a steady percentage of their sales growth in the form of fees.
• Most men have to shave their faces daily, and most women shave their legs. As the world's leading producer of razors, Gillette has a lock on a market that will never disappear, and is expanding in line with the world's population.

Great businesses enjoy the following characteristics:

1. Simplicity - they are easily understood, and straightforward to manage
2. Strong business franchises - they benefit from 'economic goodwill', i.e. the ability to keep raising prices above the level of inflation
3. Predictability - their earnings can confidently be projected into the future
4. High returns on capital - achieved without resorting to creative accounting or excessive debt. This is even more important than headline earnings.
5. Strong cash generation - they throw off cash and do not require heavy reinvestment in assets simply to stay in business, enabling them instead to invest the cash in pursuit of even greater profits.
6. Devotion to shareholder value - the management has a significant amount of its own capital tied up in the business, and thinks of shareholders as fellow owners whose interests are identical to their own.

Estimate the intrinsic value of the business. Price is what you pay, value is what you get. Allow a sufficient 'margin of safety' between the two, so that, in effect, you are paying 50p or 60p for £1 of value. That way, you will still be able to make a good return if your estimates err on the high side.

Buffett uses a calculation known as 'discounted cash flow', or DCF for short. This involves estimating the future cash flows of the business, and discounting these back to a present-day value by applying the rate of return you could otherwise get, with no risk, by putting your money into a benchmark bond, say 10-year UK gilts. This shows whether there is a gap between the current and projected values of the business which is wide enough to give you your margin of safety.

Click here for an example of a DCF analysis of Guinness adapted from The Warren Buffett Way by Robert Hagstrom.

Ignore the gyrations of the stock market. Buffett has said that, after buying a stock, he would not care if the market shut down altogether for ten years, since he is sufficiently confident of the intrinsic value of his holdings that he does not need the market to confirm it for him.

Sell only on one or more of the following conditions:

• If the company's intrinsic value is not increasing at a satisfactory rate
• If the market value of the company vastly exceeds its estimated intrinsic value
• When you need the cash to invest in a company that is even more attractive on the basis of the gap between its intrinsic and market values.

Key sayings"Rule Number One: Never lose money.

Rule Number Two: Never forget Rule Number One."

"Ben Graham said: 'Investment is most intelligent when it is most businesslike.' These are the nine most important words ever written about investing."

"A good business is not always a good purchase, although it is a good place to look for one."

"I would sooner buy a great business at a fair price than a fair business at a great price."

"When a management with a reputation for brilliance tackles a business with a reputation for poor economics, it is the reputation of the business that stays intact."

Further informationBuffett has, alas, not yet written a full-length book of his own. But his annual reports and speeches have been published as The Essays of Warren Buffett (1998). You can also visit his website www.berkshirehathaway.com. The most readable how-to-copy-Warren guide is Robert Hagstrom's The Warren Buffett Way (1994), which he followed up with The Warren Buffett Portfolio (1999). Here in the UK, the monthly magazine Analyst uses stock selection methods modelled closely on Buffett's.

http://www.incademy.com/courses/Ten-great-investors/T-Rowe-Price/1/1040/10002

T Rowe Price

Ten great investors

2. T Rowe Price

Job description
Until his retirement in the late Sixties, Price was the head of the investment firm he founded, T Rowe Price Associates. The firm still exists today and operates out of Baltimore, Maryland, USA.

Investment style
Cyclical investor in long-term growth companies, buying at the bottom of the business cycle and selling at the top. In later life, Price switched to a more value-driven style, investing in steady-growth, oil and gold stocks.

Profile
Price was a strong-willed and egotistical man. He never deviated from the daily agenda he set himself, nor from his decisions about when to buy and sell stocks. He demanded the same zeal and discipline from his employees. This unforgiving work ethic turned his firm into one of the largest asset managers of his day.
Price was very much an entrepreneur rather than a manager. He liked to start a fund, establish it and then move on to launch another one. Some of his most famous funds are still running today: T Rowe Price Growth Stock, New Horizons and New Era. His favourite companies, such as Avon Products and Black and Decker, actually became known as 'T Rowe Price stocks'.

But he sold the business to his associates when he saw that the prices of this group of companies were reaching absurd levels in the late Sixties. He himself changed to a more cautious and diversified approach, buying bonds and stocks from the energy and commodity sectors. The 1973-4 bear market proved the wisdom of this decision. His family portfolios soared, while those of his old firm collapsed.

Long-term returns
Price published a sample family portfolio to show how he had turned $1,000 invested in 1934 into $271,201 by the end of 1972 - a compound return of about 15.4% over 39 years.

Biggest success
Price's sample portfolio contained many striking successes. Among the most remarkable was pharmaceuticals firm Merck, bought for the equivalent of 37.5 cents in 1940 and still held 32 years later at $89.13 - a compound growth rate of about 18.6%, even without any reinvestment of dividends.

Method and guidelines
Like people, companies pass through three phases in their life cycle:

1. Growth
2. Maturity
3. Decadence

Look for companies in the earliest identifiable phase of growth. This growth is of two kinds:

1. Cyclical - growth in unit volumes of sales and in net earnings, which peaks at progressively higher levels at the top of each succeeding business cycle. These stocks are ideal for investors looking for capital gains during the recovery stage of the business cycle
2. Stable - growth in unit volumes and in net earnings, which persists through the downturn in the business cycle. These stocks are suitable for investors who need relatively stable income.

Concentrate on industry leaders. These can usually be identified by their competitive advantages, including:

• Outstanding management
• Leading-edge research and development
• Patents, licences and other legally enforceable product rights
• Relative protection from government regulation
• Low labour costs, but good labour relations

These advantages usually go hand-in-hand with

• A strong balance sheet
• A high return on capital (at least 10%)
• High profit margins
• Consistently above-average earnings growth.

If these financial ratios are improving, that is often a good indicator that the company is still in its growth phase.

The best time to consider buying is when growth stocks are out of fashion. As a group, their P/E ratio will have fallen to roughly the same level as the market. Consider buying when the P/E is about 33% higher than the lowest point it has reached at the bottom of the last few cycles. Continue buying ('scaling in') until the price starts to rise strongly above this initial level.

The time to start selling is when the stock is 30% above your upper buying price limit. Sell off your stock gradually ('scale out') as the price continues to advance. (Price himself sold 10% every time the price rose 10%. Smaller investors may need to think in terms of selling 25-33% on each 20% advance.)

Also consider selling if

• You can be reasonably certain the bull market has peaked
• The company appears to be entering its mature phase
• The company reports bad news
• The stock price collapses on widespread selling.

Key sayings
"Even the amateur investor who lacks training and time to devote to managing his investments can be reasonably successful by selecting the best-managed companies in fertile fields for growth, buying their shares and retaining them until it becomes obvious that they no longer meet the definition of a growth stock."

"'Growth stocks' can be defined as shares in business enterprises that have demonstrated favourable underlying long-term growth in earnings and that, after careful research study, give indications of continued secular growth in future...Secular growth extends through several business cycles, with earnings reaching new high levels at the peak of each subsequent major business cycle..."

Further information
Start with John Train's profile in The Money Masters (1980). For Price's own views, see the extract 'Picking 'Growth' Stocks' in The Investor's Anthology, edited by Charles Ellis.

http://www.incademy.com/courses/Ten-great-investors/T-Rowe-Price/2/1040/10002

Malaysia Refrains From Raising Interest Rate as Rebound Cools

September 02, 2010, 12:01 PM EDT

By Shamim Adam

Sept. 3 (Bloomberg) -- Malaysia’s central bank left interest rates unchanged after three consecutive increases, choosing to support growth as the global recovery slows.

Malaysia started raising interest rates before any other Asian central bank this year to reduce what officials say is the risk of financial imbalances caused by keeping borrowing costs too low for too long. The region’s efforts to withdraw monetary stimulus introduced to counter last year’s global recession may slow as policy makers from the U.S. to Japan take steps to shore up growth amid signs their economies are cooling.

“The second-half outlook is gloomier globally and the strength in the Malaysian economy will be unlike what we saw in the first half,” said Wellian Wiranto, a Singapore-based economist at HSBC Holdings Plc. “It looks like they are done for the year and the question now is whether they are going to keep it unchanged for much of 2011. With Malaysia being one of the first ones to move, 2.75 percent may be what they deem as normal.”

Exports by Malaysian companies such as Sime Darby Bhd. and Unisem (M) Bhd. rose at the slowest pace in eight months in July, a report from the trade ministry showed yesterday.

Exports Cool

Malaysia’s export growth has slowed in recent months along with shipments from other countries in the region, the central bank said. “These conditions are expected to continue with the slowing of global growth,” it said.

Still, Malaysia’s growth will be supported by “robust domestic economic activity” even as the external developments may moderate the pace of expansion, Bank Negara said.

The ringgit is the best performer in Asia excluding Japan in 2010 as the economy strengthened and the central bank raised rates. The currency, which has gained 9.5 percent this year, traded at 3.1275 per dollar at 6:31 p.m. yesterday.

Malaysia’s economy, the largest in Southeast Asia after Indonesia and Thailand, grew near the fastest pace in a decade last quarter, with gross domestic product climbing 8.9 percent from a year earlier. Governor Zeti Akhtar Aziz said last month growth may exceed 6 percent in 2010 even as the expansion in advanced economies may ease in the second half.

Ahead of Curve

“Bank Negara is slightly ahead of the curve compared to its regional peers in normalizing rates,” Lee Heng Guie, chief economist at CIMB Investment Bank in Kuala Lumpur, said before the decision. “More signs of global weakness, in particular growing concerns over a double-dip recession in the U.S., a moderate pace of domestic growth and the fading effects of fiscal stimulus” may prompt Malaysia to pause the rest of the year, he said.

The U.S. economy grew at a 1.6 percent annual pace in the second quarter, less than previously estimated. Japan expanded at the slowest pace in three quarters in the period ended June 30 as global demand cooled and stimulus effects wore off.

Thailand’s Move

Other Asian central banks are still raising rates to curb inflationary pressures as their economies expand. The Bank of Thailand raised its benchmark on Aug. 25 and signaled further increases after the economy overcame political unrest to grow faster than estimated last quarter.

The Reserve Bank of India has boosted its key rate more times than any other Asian counterpart this year to cool consumer prices that are rising at more than 11 percent. The Bank of Korea is alert to inflation and may need to raise interest rates again even with a slower-than-expected global recovery, central bank Governor Kim Choong Soo said last week.

“The Monetary Policy Committee considers the current monetary policy as appropriate and consistent with the latest assessment of the economic growth and inflation prospects,” Malaysia’s central bank said. At the current level of the benchmark rate, “the stance of monetary policy continues to remain accommodative and supportive of economic growth.”

Malaysia’s rate increase in March was the first in almost four years. The overnight policy rate was kept at 3.5 percent from late April 2006 until late November 2008, when the central bank started to cut the benchmark, bringing it to a record-low 2 percent in February 2009.

The central bank’s final policy review of 2010 will be in November.

--With assistance from Michael Munoz in Hong Kong. Editors: Stephanie Phang, Lily Nonomiya

%MYR

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

http://www.businessweek.com/news/2010-09-02/malaysia-refrains-from-raising-interest-rate-as-rebound-cools.html

Malaysia Rally May Pause After Evening Star: Technical Analysis

Bloomberg

 

September 02, 2010, 12:17 AM EDT

By Chan Tien Hin

 

Sept. 2 (Bloomberg) -- Malaysia’s stock market rally to the highest level in more than 30 months may pause after a chart of the benchmark index formed a so-called Evening Star, signaling a “bearish trend,” according to RHB Research Institute Sdn.

The candle-chart image comprising a line with a long “real body” followed by a line with a short body suggests the prior trend may end. The FTSE Bursa Malaysia KLCI Index, which closed at 1,432.95 yesterday, could retreat to “retest” the 10-day moving average of 1,405 and the “psychological” level of 1,400, RHB said in a report today.

“So long as it can sustain at above these levels with robust daily turnover at between 800 million shares to 1 billion shares, buying momentum can return swiftly to lead another rally,” RHB said. Trading volume averaged 810 million shares in the past six months, according to data compiled by Bloomberg.

The index, Asia’s second-best performer last month, has surged 15 percent since the May 26 low, approaching the 20 percent jump that defines as a bull market for some investors. Stocks will extend gains in September with government reforms and a stronger ringgit drawing investors, OSK Research Sdn. analyst Chris Eng said yesterday.

The stock index may rise to 1,500 by the end of the year, HwangDBS Vickers Research Sdn. said in a report today, raising its earlier forecast of 1,448 amid stronger earnings growth prospects.

The index today climbed for a fifth day, adding 0.1 percent to 1,432.97 as of 11:43 a.m. local time, set for its highest close since Feb. 14, 2008.

Candlestick charts show an index or security’s high, low, open and close each day, and may signal a reversal of a trend or a continuation. In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

--Editor: Reinie Booysen, Linus Chua
To contact the reporter on this story: Chan Tien Hin in Kuala Lumpur at thchan@bloomberg.net
To contact the editors responsible for this story: Linus Chua at lchua@bloomberg.net

http://www.businessweek.com/news/2010-09-02/malaysia-rally-may-pause-after-evening-star-technical-analysis.html

Nine Malaysian firms on Forbes’ ‘best under a billion’ list

Nine Malaysian firms on Forbes’ ‘best under a billion’ list

By Lee Wei Lian

September 02, 2010

 

KUALA LUMPUR, Sept 2 — Nine Malaysian companies have made it to Forbes magazine’s ranking of best performing listed Asian companies with revenues under US$1 billion (RM3.1 billion).

Malaysia tied with Thailand for the sixth most number of entries on the list after China/Hong Kong with 71, India (39), South Korea (20), Taiwan (19) and Australia (13).

Singapore had eight entries on the list while Japan had two, down from 24 due to domestic economic woes.
“In aggregate the market-cap-weighted shares of our 2010 class were up 43 per cent over 12 months versus 21 per cent for the FTSE Asia Pacific Small Cap stock index,” said Forbes.

The nine Malaysian entries this year represented an increase of one over the eight entries it had on the list last year.

One Malaysian newcomer to the list, glove maker Hartalega Holdings, was profiled by the magazine.
The other companies were RFID solutions provider CBS Technology, marine services provider Coastal Contracts, herbal care multi-level marketing company Hai-O Enterprise, steel pipe maker KKB Engineering, glove maker Latexx Partners, construction company Mudajaya Group, e-government service provider My EG Services and IT firm Willowglen MSC.

The Singaporean entries were real estate fund manager ARA Asset Management, marine equipment manufacturer Baker Technology, furniture maker Design Studio Furniture, engineering outfit Hiap Seng Engineering, property developer Ho Bee Investment, infrastructure builder OKP Holdings, clean room supplier Riverstone Holdings and mining company Straits Asia Resources.

This year also marked the first time a Vietnamese company made it to the list — dairy outfit Vinamilk.

“Its history reflects the different nature of enterprises in nations with long-standing state dominance,” said Forbes.

The annual “Best Under A Billion” list picks the top-performing 200 firms from close to 13,000 listed Asia-Pacific companies with actively traded shares and sales of between US$5 million and US$1 billion.
Selection of the final 200 was based on earnings growth, sales growth, and shareholders’ return on equity in the past 12 months and over three years.

Prime Minister Datuk Seri Najib Razak said recently that small-medium enterprises (SMEs) are the backbone of the Malaysian economy.

SMEs contribute about one-third of Malaysia’s GDP and account for 20 per cent of its exports.

http://www.themalaysianinsider.com/business/article/nine-malaysian-firms-on-forbes-best-under-a-billion-list/