July 2, 2010
Bypassing Equity Funds, Wealthy Families Try Direct Investing
By PAUL SULLIVAN
The 2008 financial crisis had several unexpected outcomes, but one of the surprising ones was an increased willingness by wealthy families to invest directly in private companies and forgo private equity funds.
Direct investments are not going to replace private equity funds any time soon, if for no other reason than such investments are only for the very rich. Advisers suggest a net worth above $100 million to even contemplate individual, private equity investments.
Still, the world of private equity was shaken in the financial crisis, when many individual investors found their private equity investments to be a burden rather than a boon. Many either had to sell other assets to meet the demands for additional capital from private equity firms or they had to sell their stakes in the funds at steep discounts to get out early.
Though this was all laid out in the rules of the funds, a bigger issue had been raised: the investors’ lack of a voice in how private equity funds operated.
Specifically, the problem was that people with hundreds of millions of dollars were investing alongside endowments and pension funds with billions of dollars. And for probably the first time in their adult lives, these very wealthy people were being drowned out by significantly larger institutional investors.
That’s where Ward McNally, managing partner at McNally Capital, a private equity adviser, comes in. In 1997, his family sold its interests in Rand McNally, the map maker, and he began managing his family’s fortune. Shortly before the market crash, he started a company to advise his family and others on investing directly in private equity, a move he attributed to his own bad experience.
While his family had had success investing in private equity deals on their own and not within a fund, members watched in shock as three of the six units of Rand McNally that had been sold to private equity firms went bankrupt after the firms saddled the units with debt. The three that thrived had all been sold to competitors who integrated the units and ran them profitably.
This was an ah-ha moment for him. He saw where wealthy families could reprise their age-old role of investing directly in private companies and bypassing funds.
“We encourage our families to make direct investments in the area in which they made their wealth,” Mr. McNally said. “That knowledge is an incredible advantage. They can create a network of value for the company.”
At the root of the shift toward individual private equity investments is the families’ desire for control and to know exactly what was happening with their investments. But the bigger issue may be frustrated expectations. “If private equity funds kept producing outsized returns, this shift might not have taken place,” said John Rompon, managing partner at McNally Capital. “The attitude changed when distributions dried up and investors had to meet capital calls.”
A survey last month of 62 families advised by McNally Capital — with an average net worth of $250 million — showed an increased interest in single-company private equity investing. Nearly two-thirds said they now preferred to make direct investments in companies rather than using private equity funds.
Yet that same group acknowledged the risk associated with doing this: 78 percent had two or fewer people dedicated to evaluating private equity deals, and 63 percent heard about deals from friends and family members — eerily similar to how Bernard L. Madoff attracted investors.
“One thing we have found is families are insular by nature,” Mr. McNally said. “Families have a reach that exceeds their grasp. They want to accomplish more than the resources they have.”
This is the downside for direct private equity investing. Yet by directly investing, families can hold an investment for as long as they want and are not bound by fund documents that say when they have to sell an investment.
Investing directly is also a way for families to capitalize on the reputations they have from building their companies. “They want their dollar to be worth $1.06 to reflect the added value they bring to the deal,” Mr. Rompon said. “It is not reflected when you invest in a private equity fund. We try to help them be anything other than an A.T.M., which is how they feel every day.”
How popular is this approach? A recent study by Coller Capital, a private equity investment firm, said 41 percent of all private equity investors planned to increase their direct investment in the next three years.
And Dale Miller, head of wealth management solutions at Credit Suisse Private Bank, called the move to single investments an “emerging trend” that is part of clients’ overall desire for control.
“Clients are interested in being active,” he said. “On a net worth basis, clients with greater than $100 million are interested in direct investments because they can achieve diversification on their own.”
The big risk is too much enthusiasm, even when the investor knows an industry well. Theodore Beringer, a managing director at the Beringer Group, an adviser to family offices, said people making single investments needed to show restraint and properly value the company.
“You have to have discipline,” he said. “Say your limit is $15 million and you have two deals that are $12 million, you can only take one.”
But you would have complete control over which one.
Saturday, 3 July 2010
Acquiring "seed money" for investing
There are those who are born rich. Excluding this group, what other ways are there for one to acquire the "seed money" to launch oneself into an exponential growth path in one's investing?
A good education is an asset. However, this too does not ensure wealth. One need to be able to use the knowledge productively to acquire wealth. The young will need to choose the right profession carefully. Certain jobs or professions earn more than others. For example, doctors, lawyers and accountants are big earners. Contrast this with teachers, psychologists and others. Those with reasonable incomes will take time to acquire this "seed money". The rich professionals with very high income jobs may earn in the region of $500,000 to $1,000,000 per year and can start on the exponential growth path of investing almost immediately.
Another group is the rag to riches entrepreneur. These people lack the higher education of the professionals. However, those who make it in business can be very very rich. In fact, they are among the richest in societies.
I should also add that there is a fourth group, abeit a small one. They marry into riches.
Having the "seed money" and with financial knowledge, time and compounding, all the above groups can launch themselves into the exponential path of growth in their investing, ensuring that their money works harder for them. However, without the right financial knowledge and discipline, the "seed money" can also be easily squandered away.
A good education is an asset. However, this too does not ensure wealth. One need to be able to use the knowledge productively to acquire wealth. The young will need to choose the right profession carefully. Certain jobs or professions earn more than others. For example, doctors, lawyers and accountants are big earners. Contrast this with teachers, psychologists and others. Those with reasonable incomes will take time to acquire this "seed money". The rich professionals with very high income jobs may earn in the region of $500,000 to $1,000,000 per year and can start on the exponential growth path of investing almost immediately.
Another group is the rag to riches entrepreneur. These people lack the higher education of the professionals. However, those who make it in business can be very very rich. In fact, they are among the richest in societies.
I should also add that there is a fourth group, abeit a small one. They marry into riches.
Having the "seed money" and with financial knowledge, time and compounding, all the above groups can launch themselves into the exponential path of growth in their investing, ensuring that their money works harder for them. However, without the right financial knowledge and discipline, the "seed money" can also be easily squandered away.
Friday, 2 July 2010
Changing Investment World: Decoupling is set to become a reality soon
Decoupling is set to become a reality soon
29 Jun 2010, 0920 hrs IST,Aditya Puri,
The world has changed structurally. On the ground, change will require time but the decoupling of the East & West has begun. The financial markets, however, are slow learners, creatures of habit, and therefore, create confusion in the short-term or transition (defined as volatility) period.
Basically, flight to safety still means gold and US dollar. However, we must understand that unless they invest these dollars in the US equity market or actively trade treasuries, there is very little return and the money would have to be returned or invested in growing GDP markets.
Also, the rating agencies (as usual) are behind time, resulting in rating bearing little co-relation to reality which distorts cost of credit. We only need to examine accepted facts to understand where the world is going.
Growth Rate
The forecast GDP growth rate during the next 3-5 years for the following countries are (%):
This reflects the level of structural adjustments required in the Western countries in terms of asset bubbles, financial contagion, stimulus, exchange rate, etc.
A high GDP growth rate on the other hand indicates that these countries were not structurally affected by the crisis. It also provides the countries with flexibility and time in addressing their problems.
Composition of Trade Between Countries
An examination of the growth/change between regional blocks is illuminating. Basically, the US and Europe, while important, are rapidly reducing as % of total trade while Middle East, Asian and African trade is increasing and also being focused upon strategically India-China trade has grown and will continue to grow exponentially. Political equations will be subject to economic reality.
Asia’s contribution to global merchandise trade has been increasing steadily over the years. In fact, Asia is the second-highest contributor to total global trade flows behind Europe. On the exports front, the Asian region has become the primary exporter to the advanced economies, especially the US region in the pre-crisis period.
However, imports have also started to pick up over the last few years as the Asian region (particularly China) is trying to change its economic structure from being export dependent to consumption driven. Overall, the contribution of Asian trade to total global trade has risen from 18.8% in 1983 to 24.8% in 1993 to 27% in 2008.
Africa’s trade with the rest of the world is also increasing though more moderately than in Asia. Africa’s share increased from 2.6% in 1993 to 3.2% mark in 2008.
There are important changes taking place within China as well. Growth is becoming less dependent on exports and more on internal demand.
Europe’s Govt sector a drag for years to come
The consolidated budget deficit or net borrowings for the eurozone in 2010 is likely to be close to 7% of its GDP. Even in the best case scenario, the net borrowing for the region is likely to remain over 4.5% in 2015. To put this in perspective, the ratio was just 1.2% in 2006. Also, government spending averaged 50% GDP and will not be anywhere close going forward, with resultant impact on the GDP.
Currency and Commodities
Currency and commodity markets will drive Asia’s growth momentum. Strong GDP growth both in China and India will power the demand for commodities. Structural bottlenecks in supply for a whole range of commodities from agricultural to mineral oil mean that prices in the long term are headed northward.
Besides, investors seeking higher returns on their investment will flock to Asia; this will result in a flood of capital and Asian currencies will see a phase of secular rise against their G-7 counterparts. This could erode export competitiveness, and economies within Asia such as India and Indonesia that are more internally focused, will outperform the others.
Unemployment
Employment is known to lag economic recovery and even if the growth cycle were to turn in the US and parts of Europe, it might take 2-3 years for the unemployment rate to go significantly below the current levels of close to 9%. Economies on the periphery of Europe such as Spain, with unemployment of around 25%, have seen permanent damage to their growth model and that will be difficult to repair.
Currency
In the short term, the uncertainty surrounding Europe, the possibility of deflation in China’s housing bubble will see a sustained search for safety. Old habits die hard and despite the US economy’s myriad problems, US treasury bonds remain the preferred safe haven for investors.
Thus, unless sentiment improves significantly and risk-appetite returns, the bid for the dollar will continue. In the longer term, however, America’s structural imbalances (particularly its fiscal overstretch) will catch with the dollar.
Since Europe and the UK find themselves in worse straits, much of the depreciation in the dollar will be vis-à-vis the Asian currencies and not the euro or the pound. The euro will survive but remain sickly in the foreseeable future.
India is destined for big things!!!. The real world is moving and the financial world will recognise events with a Lag.
29 Jun 2010, 0920 hrs IST,Aditya Puri,
The world has changed structurally. On the ground, change will require time but the decoupling of the East & West has begun. The financial markets, however, are slow learners, creatures of habit, and therefore, create confusion in the short-term or transition (defined as volatility) period.
Basically, flight to safety still means gold and US dollar. However, we must understand that unless they invest these dollars in the US equity market or actively trade treasuries, there is very little return and the money would have to be returned or invested in growing GDP markets.
Also, the rating agencies (as usual) are behind time, resulting in rating bearing little co-relation to reality which distorts cost of credit. We only need to examine accepted facts to understand where the world is going.
Growth Rate
The forecast GDP growth rate during the next 3-5 years for the following countries are (%):
- US: 1.8;
- Europe: 0.8;
- East Asia: 8;
- China: 8.5;
- India: 8.
This reflects the level of structural adjustments required in the Western countries in terms of asset bubbles, financial contagion, stimulus, exchange rate, etc.
A high GDP growth rate on the other hand indicates that these countries were not structurally affected by the crisis. It also provides the countries with flexibility and time in addressing their problems.
Composition of Trade Between Countries
An examination of the growth/change between regional blocks is illuminating. Basically, the US and Europe, while important, are rapidly reducing as % of total trade while Middle East, Asian and African trade is increasing and also being focused upon strategically India-China trade has grown and will continue to grow exponentially. Political equations will be subject to economic reality.
Asia’s contribution to global merchandise trade has been increasing steadily over the years. In fact, Asia is the second-highest contributor to total global trade flows behind Europe. On the exports front, the Asian region has become the primary exporter to the advanced economies, especially the US region in the pre-crisis period.
However, imports have also started to pick up over the last few years as the Asian region (particularly China) is trying to change its economic structure from being export dependent to consumption driven. Overall, the contribution of Asian trade to total global trade has risen from 18.8% in 1983 to 24.8% in 1993 to 27% in 2008.
Africa’s trade with the rest of the world is also increasing though more moderately than in Asia. Africa’s share increased from 2.6% in 1993 to 3.2% mark in 2008.
There are important changes taking place within China as well. Growth is becoming less dependent on exports and more on internal demand.
Europe’s Govt sector a drag for years to come
The consolidated budget deficit or net borrowings for the eurozone in 2010 is likely to be close to 7% of its GDP. Even in the best case scenario, the net borrowing for the region is likely to remain over 4.5% in 2015. To put this in perspective, the ratio was just 1.2% in 2006. Also, government spending averaged 50% GDP and will not be anywhere close going forward, with resultant impact on the GDP.
Currency and Commodities
Currency and commodity markets will drive Asia’s growth momentum. Strong GDP growth both in China and India will power the demand for commodities. Structural bottlenecks in supply for a whole range of commodities from agricultural to mineral oil mean that prices in the long term are headed northward.
Besides, investors seeking higher returns on their investment will flock to Asia; this will result in a flood of capital and Asian currencies will see a phase of secular rise against their G-7 counterparts. This could erode export competitiveness, and economies within Asia such as India and Indonesia that are more internally focused, will outperform the others.
Unemployment
Employment is known to lag economic recovery and even if the growth cycle were to turn in the US and parts of Europe, it might take 2-3 years for the unemployment rate to go significantly below the current levels of close to 9%. Economies on the periphery of Europe such as Spain, with unemployment of around 25%, have seen permanent damage to their growth model and that will be difficult to repair.
Currency
In the short term, the uncertainty surrounding Europe, the possibility of deflation in China’s housing bubble will see a sustained search for safety. Old habits die hard and despite the US economy’s myriad problems, US treasury bonds remain the preferred safe haven for investors.
Thus, unless sentiment improves significantly and risk-appetite returns, the bid for the dollar will continue. In the longer term, however, America’s structural imbalances (particularly its fiscal overstretch) will catch with the dollar.
Since Europe and the UK find themselves in worse straits, much of the depreciation in the dollar will be vis-à-vis the Asian currencies and not the euro or the pound. The euro will survive but remain sickly in the foreseeable future.
India is destined for big things!!!. The real world is moving and the financial world will recognise events with a Lag.
US to welcome best and brightest: Obama
US to welcome best and brightest: Obama
2 Jul 2010, 1620 hrs IST,AGENCIES
WASHINGTON: President Barack Obama has pledged to fix America's "broken" immigration system to ensure that the US will remain a magnet for the best and the brightest from countries like India.
In his first major policy speech on the thorny issue of immigration, Obama revealed the broad contours of his vision of reform, which if implemented would be helpful to hundreds and thousands of people from countries like India, who are professionals and law abiding and add value to the American society.
"We should make it easier for the best and the brightest to come to start businesses and develop products and create jobs. Our laws should respect families following the rules, instead of splitting them apart," he said on his third major domestic agenda after health care and financial reforms.
He said the presence of about 11 million illegal immigrants makes a mockery of all those who are going through the process of immigrating legally.
"Indeed, after years of patchwork fixes and ill-conceived revisions, the legal immigration system is as broken as the borders. Backlogs and bureaucracy means the process can take years," he observed.
He said the steady stream of talented people has made America the engine of the global economy and a beacon of hope around the world.
"It has allowed us to adapt and thrive in the face of technological and societal change. To this day, America reaps incredible economic rewards because we remain a magnet for the best and brightest from across the globe," Obama said.
He said the system should stop penalising innocent young people for the actions of their parents, by denying them the chance to stay and contribute to build the country.
He noted that immigration reform has been held hostage to political posturing and special interest wrangling and to the pervasive sentiment in Washington that tackling such a thorny and emotional issue is inherently bad politics.
Obama said besides addressing the issue of illegal immigrants, a reformed system also needs to address the need for talented people to stay and contribute to the country.
"While we provide students from around the world visas to get engineering and computer science degrees at our top universities, our laws discourage them from using those skills to start a business or power a new industry right here in the United States," Obama said.
"It is this constant flow of immigrants that helped to make America what it is: the scientific breakthroughs of Albert Einstein, the inventions of Nikola Tesla, the great ventures of Andrew Carnegie's US Steel and Sergey Brin's Google Link. All this was possible because of immigrants," he argued.
My Comment: Given the huge brain drain of our young professionals, the Malaysian government can learn from Obama's speech. As a young professional, the world is your oyster. Go forth and prosper; do not be chained to silly pasts.
2 Jul 2010, 1620 hrs IST,AGENCIES
WASHINGTON: President Barack Obama has pledged to fix America's "broken" immigration system to ensure that the US will remain a magnet for the best and the brightest from countries like India.
In his first major policy speech on the thorny issue of immigration, Obama revealed the broad contours of his vision of reform, which if implemented would be helpful to hundreds and thousands of people from countries like India, who are professionals and law abiding and add value to the American society.
"We should make it easier for the best and the brightest to come to start businesses and develop products and create jobs. Our laws should respect families following the rules, instead of splitting them apart," he said on his third major domestic agenda after health care and financial reforms.
He said the presence of about 11 million illegal immigrants makes a mockery of all those who are going through the process of immigrating legally.
"Indeed, after years of patchwork fixes and ill-conceived revisions, the legal immigration system is as broken as the borders. Backlogs and bureaucracy means the process can take years," he observed.
He said the steady stream of talented people has made America the engine of the global economy and a beacon of hope around the world.
"It has allowed us to adapt and thrive in the face of technological and societal change. To this day, America reaps incredible economic rewards because we remain a magnet for the best and brightest from across the globe," Obama said.
He said the system should stop penalising innocent young people for the actions of their parents, by denying them the chance to stay and contribute to build the country.
He noted that immigration reform has been held hostage to political posturing and special interest wrangling and to the pervasive sentiment in Washington that tackling such a thorny and emotional issue is inherently bad politics.
Obama said besides addressing the issue of illegal immigrants, a reformed system also needs to address the need for talented people to stay and contribute to the country.
"While we provide students from around the world visas to get engineering and computer science degrees at our top universities, our laws discourage them from using those skills to start a business or power a new industry right here in the United States," Obama said.
"It is this constant flow of immigrants that helped to make America what it is: the scientific breakthroughs of Albert Einstein, the inventions of Nikola Tesla, the great ventures of Andrew Carnegie's US Steel and Sergey Brin's Google Link. All this was possible because of immigrants," he argued.
My Comment: Given the huge brain drain of our young professionals, the Malaysian government can learn from Obama's speech. As a young professional, the world is your oyster. Go forth and prosper; do not be chained to silly pasts.
Do not scoff at an Overall Rate of Return of 8% p.a. of your TOTAL portfolio
Asset allocation is the next most important factor, after asset selection, in determining the overall rate of return of your total portfolio.
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 20%)
http://spreadsheets.google.com/ccc?key=0AuRRzs61sKqRdE9yeVRvSzRrMzM5djc0MHA0cERLbXc&hl=en
It is common enough to hear of 'investors' and 'speculators' achieving high rate of return on their equity/equities. An equity portion may give a return of >15% or >50% p.a., but this may only translate into a small overall return to the total portfolio if the percentage of equity is a small portion of the total portfolio.
Here are some illustrations to bring home this important fact.
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 8%)
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 10%)
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 15%)
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of 20%)
http://spreadsheets.google.com/ccc?key=0AuRRzs61sKqRdE9yeVRvSzRrMzM5djc0MHA0cERLbXc&hl=en
Asset Allocation and Overall Rate of Portfolio Return (Equity Growth Rate of -10%)
It is common enough to hear of 'investors' and 'speculators' achieving high rate of return on their equity/equities. An equity portion may give a return of >15% or >50% p.a., but this may only translate into a small overall return to the total portfolio if the percentage of equity is a small portion of the total portfolio.
Therefore, do not scoff at the investor who is able to grow his/her total portfolio at an overall rate of return of 8% or more p.a. It is no mean feat indeed. Just study the spreadsheets to gauge what is required to achieve this.
On occasions, there are those who are 100% in cash. This doesn't make sense, as the risk of being in 100% cash compared to being 80% cash: 20% equity is almost the same and moreover, the later has a greater probability of a higher return compared to the former.
The Rich Get Richer!
Asians value education. However, education alone does not create wealth. It is what one does with all the knowledge that is key to getting rich.
Have you ever wondered why the rich get richer?
By virtue of their wealth, they are able to take advantage of two components:
They are able to set aside money at an early age and watch their savings grow through compounding over time. The other component is risk. If you have time on your side, you can afford to take on more risk and invest in instruments that can give you better returns. The end result is achieving exponential returns on your savings.
The 3 ways to riches are:
With time on their side, the rich can afford to take more risk and invest for higher returns. This means that they would have the "holding power" to ride through any short-term losses.
In the world of finance and investment, time is really money because money has a time value. As an economic resource, money is capable of earning a rate of return which we call interest. With the compounding effect, your money can really grow exponentially over time.
The Next Level
With sufficient seed money, you get to invest in property, which is one of the favourite investment vehicles for the rich. Through leveraged investing in property, returns can double or triple in the short term. In fact, nearly everyone who has invested in property leverages. For example, an investment of $100,000 can be leveraged 10 X , via a loan, to buy a $1 million property. A 20% appreciation on the property would be equivalent to $200,000, representing a 200% gain on the initial capital invested.
Other than property, you may be wondering if the rates of return of 10%, 15% or 20% are realistic and possible. The answer is a resounding 'yes' but you will need to take the risk with a multi-asset portfolio that can invest in equities, bonds, futures, etc. It must be able to adopt alternative strategies, like investing short and using leverage, to capitalize on market conditions that are constantly changing. In brief, you will need to include non-traditional investments to your portfolio.
The point is that investment is a continuous process. You need to keep searching for instruments that can yield returns of 10% or more. It takes time and effort but it is not impossible.
For those who are risk-adverse and growing their money at fixed deposit rates - the likely trade-off is that they will have to settle for lower returns and thus end up with a smaller retirement nest-egg. The value of their money will shrink over time as a result of the ravaging effect of inflation and they might just end up poor. The rich, on the other hand, will most likely attract better opportunities to them. They will also be able to stomach risk and diversify their assets into different businesses to multiply their wealth.
Get richer. Understand risk, manage it well and you will be rewarded over the long term.
Ref: How to be a successful investor by William Cai
Have you ever wondered why the rich get richer?
By virtue of their wealth, they are able to take advantage of two components:
- time and
- risk.
They are able to set aside money at an early age and watch their savings grow through compounding over time. The other component is risk. If you have time on your side, you can afford to take on more risk and invest in instruments that can give you better returns. The end result is achieving exponential returns on your savings.
The 3 ways to riches are:
- Born Rich
- Rich Professionals
- From Rags to Riches - Entrepreneurs
With time on their side, the rich can afford to take more risk and invest for higher returns. This means that they would have the "holding power" to ride through any short-term losses.
In the world of finance and investment, time is really money because money has a time value. As an economic resource, money is capable of earning a rate of return which we call interest. With the compounding effect, your money can really grow exponentially over time.
The Next Level
With sufficient seed money, you get to invest in property, which is one of the favourite investment vehicles for the rich. Through leveraged investing in property, returns can double or triple in the short term. In fact, nearly everyone who has invested in property leverages. For example, an investment of $100,000 can be leveraged 10 X , via a loan, to buy a $1 million property. A 20% appreciation on the property would be equivalent to $200,000, representing a 200% gain on the initial capital invested.
Other than property, you may be wondering if the rates of return of 10%, 15% or 20% are realistic and possible. The answer is a resounding 'yes' but you will need to take the risk with a multi-asset portfolio that can invest in equities, bonds, futures, etc. It must be able to adopt alternative strategies, like investing short and using leverage, to capitalize on market conditions that are constantly changing. In brief, you will need to include non-traditional investments to your portfolio.
The point is that investment is a continuous process. You need to keep searching for instruments that can yield returns of 10% or more. It takes time and effort but it is not impossible.
For those who are risk-adverse and growing their money at fixed deposit rates - the likely trade-off is that they will have to settle for lower returns and thus end up with a smaller retirement nest-egg. The value of their money will shrink over time as a result of the ravaging effect of inflation and they might just end up poor. The rich, on the other hand, will most likely attract better opportunities to them. They will also be able to stomach risk and diversify their assets into different businesses to multiply their wealth.
Get richer. Understand risk, manage it well and you will be rewarded over the long term.
Ref: How to be a successful investor by William Cai
Thursday, 1 July 2010
Black Swan events
These aren't predictions — any fool can make a prediction.
A Black Swan event is, by definition, unpredictable.
In the last few years, we've been hit on a number of these events that came out of the blue and destroyed with a vengeance; the biggest of these was the credit crisis in fall 2007.
A Black Swan event is, by definition, unpredictable.
In the last few years, we've been hit on a number of these events that came out of the blue and destroyed with a vengeance; the biggest of these was the credit crisis in fall 2007.
IS THIS the beginning of a new market plunge? Probably not - but ask me again in 48 hours.
Slow global growth will test markets
July 1, 2010
IS THIS the beginning of a new market plunge? Probably not - but ask me again in 48 hours: there's a couple of hurdles to clear in Europe first. They are, in batting order, tonight's ejection of Greek bonds from bond indices that are the template for sovereign bond funds, and tomorrow night's withdrawal of €442 billion ($A630 billion) of central bank lending from the European banking system.
Both these events were predictable. The central bank money was supplied to more than 1100 European banks a year ago as a buffer against the financial crisis. It was always temporary, and now it's being withdrawn, with back-up measures in place in case it all goes pear-shaped. And people invest in government bonds because they want their money to be safe, and an investment in Greek bonds no longer fits the bill.
Both situations have the potential to cause disruption, and a clear read on the forces behind the global market selloff will only emerge when they are resolved.
The trigger for the ejection of Greek bonds from the indices was the mid-June decision of credit-rating agency Moody's to join Standard & Poor's in ranking Greek government debt as junk. With two of the three main ratings agencies classifying the bonds as garbage, the bonds moved outside the investment mandates of the bond indices and associated funds.
Greece can count itself unlucky: the odds on a Greek bond default actually lengthened soon after S&P moved, when Greece secured a €110 billion lifeline from the European Union and the International Monetary Fund.
Moody's believes, however, that a junk rating is justified given the risks the Greek government faces as it attempts to cut spending, raise taxes and rein in its debt to justify the funding lifeline, and the implications of the downgrade are playing out this week as bond investors quit their holdings.
Greek bond spreads are spiking upwards as this occurs - but it should be a momentary flutter: the European Central Bank is the only buyer, and when it has finished mopping up, the market for Greek debt will be moribund for years as Greece get its balance sheet in order.
The scheduled repayment of more than half a trillion dollars of one-year funding to the ECB by more than 1000 banks raises two concerns.
The first is that repayments will expose liquidity and solvency issues in weaker banks, including Spanish banks, which have high exposure to commercial and residential property. The ECB will extend short-term funding to banks that struggle to cough up the dough they owe, but the repayment deadline is, in a sense, a stress test of the European banking system.
Those who believe the full extent of the collateral damage Europe's banks took in the crisis has not been revealed are watching closely, and hedging their positions by selling before the deadline.
The second concern is that banks will look to shareholders for new equity to help fill the hole the repayment of the ECB money creates. This is manageable, if the the first test reveals that Europe's banking sector is healthy.
If the two hurdles are cleared, attention will return to the longer-term issue investors are confronting: whether the global economic recovery is faltering.
Economic data for the rest of this year needs to be treated with care because it is increasingly being compared with a recovering economy a year ago, rather than the abnormally low levels of activity that accompanied the final phase of the global crisis.
In Australia, jobs growth, house price rises and retail spending have slowed in the face of the Reserve Bank's decision to boost the cash rate from 3 per cent to 4.5 per cent between October and May.
In the US, the housing market continues to struggle, profit downgrades are flowing, consumer confidence is falling again and bank lending has been declining.
Concerns in the market this week following a downgrade in the US Conference Board's growth forecast for China are less serious: a slowdown from an unsustainable pace is being engineered, and Beijing still looks likely to stay in control of the process.
In Europe's markets, however, there is concern that stimulus is being withdrawn too aggressively. The dangers were aired by the Obama administration in the lead-up to last weekend's G20 meeting, but Europe is holding its course, and the developed-nation members of the G20 effectively endorsed Europe's tack by committing to halve their budget deficits by 2013.
Evans & Partners strategist Michael Hawkins notes that the global growth questions will not be completely answered for several months.
The good news is that slow global growth is now factored into sharemarket prices. The Australian component of the MSCI global index, for example, has a solid base now at 11.3 times expected earnings in the next 12 months, down from 16.8 times in September last year, and well below a long-term average of 14 to 15 times earnings. Wall Street's S&P 500 index looks just as inexpensive, at 11.7 times estimated earnings a year out.
But there's bad news, too: the relatively lengthy time frame for a resolution of the risks to global growth means that a sustained and rapid sharemarket rebound is also unlikely.
mmaiden@theage.com.au
Source: The Age
July 1, 2010
IS THIS the beginning of a new market plunge? Probably not - but ask me again in 48 hours: there's a couple of hurdles to clear in Europe first. They are, in batting order, tonight's ejection of Greek bonds from bond indices that are the template for sovereign bond funds, and tomorrow night's withdrawal of €442 billion ($A630 billion) of central bank lending from the European banking system.
Both these events were predictable. The central bank money was supplied to more than 1100 European banks a year ago as a buffer against the financial crisis. It was always temporary, and now it's being withdrawn, with back-up measures in place in case it all goes pear-shaped. And people invest in government bonds because they want their money to be safe, and an investment in Greek bonds no longer fits the bill.
Both situations have the potential to cause disruption, and a clear read on the forces behind the global market selloff will only emerge when they are resolved.
The trigger for the ejection of Greek bonds from the indices was the mid-June decision of credit-rating agency Moody's to join Standard & Poor's in ranking Greek government debt as junk. With two of the three main ratings agencies classifying the bonds as garbage, the bonds moved outside the investment mandates of the bond indices and associated funds.
Greece can count itself unlucky: the odds on a Greek bond default actually lengthened soon after S&P moved, when Greece secured a €110 billion lifeline from the European Union and the International Monetary Fund.
Moody's believes, however, that a junk rating is justified given the risks the Greek government faces as it attempts to cut spending, raise taxes and rein in its debt to justify the funding lifeline, and the implications of the downgrade are playing out this week as bond investors quit their holdings.
Greek bond spreads are spiking upwards as this occurs - but it should be a momentary flutter: the European Central Bank is the only buyer, and when it has finished mopping up, the market for Greek debt will be moribund for years as Greece get its balance sheet in order.
The scheduled repayment of more than half a trillion dollars of one-year funding to the ECB by more than 1000 banks raises two concerns.
The first is that repayments will expose liquidity and solvency issues in weaker banks, including Spanish banks, which have high exposure to commercial and residential property. The ECB will extend short-term funding to banks that struggle to cough up the dough they owe, but the repayment deadline is, in a sense, a stress test of the European banking system.
Those who believe the full extent of the collateral damage Europe's banks took in the crisis has not been revealed are watching closely, and hedging their positions by selling before the deadline.
The second concern is that banks will look to shareholders for new equity to help fill the hole the repayment of the ECB money creates. This is manageable, if the the first test reveals that Europe's banking sector is healthy.
If the two hurdles are cleared, attention will return to the longer-term issue investors are confronting: whether the global economic recovery is faltering.
Economic data for the rest of this year needs to be treated with care because it is increasingly being compared with a recovering economy a year ago, rather than the abnormally low levels of activity that accompanied the final phase of the global crisis.
In Australia, jobs growth, house price rises and retail spending have slowed in the face of the Reserve Bank's decision to boost the cash rate from 3 per cent to 4.5 per cent between October and May.
In the US, the housing market continues to struggle, profit downgrades are flowing, consumer confidence is falling again and bank lending has been declining.
Concerns in the market this week following a downgrade in the US Conference Board's growth forecast for China are less serious: a slowdown from an unsustainable pace is being engineered, and Beijing still looks likely to stay in control of the process.
In Europe's markets, however, there is concern that stimulus is being withdrawn too aggressively. The dangers were aired by the Obama administration in the lead-up to last weekend's G20 meeting, but Europe is holding its course, and the developed-nation members of the G20 effectively endorsed Europe's tack by committing to halve their budget deficits by 2013.
Evans & Partners strategist Michael Hawkins notes that the global growth questions will not be completely answered for several months.
The good news is that slow global growth is now factored into sharemarket prices. The Australian component of the MSCI global index, for example, has a solid base now at 11.3 times expected earnings in the next 12 months, down from 16.8 times in September last year, and well below a long-term average of 14 to 15 times earnings. Wall Street's S&P 500 index looks just as inexpensive, at 11.7 times estimated earnings a year out.
But there's bad news, too: the relatively lengthy time frame for a resolution of the risks to global growth means that a sustained and rapid sharemarket rebound is also unlikely.
mmaiden@theage.com.au
Source: The Age
Asset Allocation and Rebalancing
Asset allocation and re-balancing is the second most important thing determining your portfolio returns after asset selection.
http://www.iwillteachyoutoberich.com/blog/asset-allocation-investor-psychology/#
Who Is Participating In Forex Market Trades?
Who Is Participating In Forex Market Trades?
Jun 30, 2010
The forex market is all about trading between countries, the currencies of these nations and the timing of investing in sure currencies. The FX market is trading between counties, usually completed with a dealer or a monetary company. Many people are concerned in forex trading, which is similar to stock market trading, but FX buying and selling is accomplished on a much larger total scale. Much of the buying and selling does take place between banks, governments, brokers and a small quantity of trades will take place in retail settings where the typical particular person concerned in trading is called a spectator. Monetary market and monetary conditions are making the forex market buying and selling go up and down daily. Hundreds of thousands are traded on a daily basis between most of the largest countries and this is going to incorporate some amount of trading in smaller international locations as well.
From the studies through the years, most trades in the foreign exchange market are accomplished between banks and this is referred to as interbank. Banks make up about 50 percent of the buying and selling in the forex market. So, if banks are broadly utilizing this method to generate income for stockholders and for their own bettering of enterprise, you already know the money have to be there for the smaller investor, the fund managers to use to increase the quantity of interest paid to accounts. Banks commerce money each day to extend the amount of money they hold. Overnight a bank will invest millions in forex markets, after which the next day make that money available to the general public in their savings, checking accounts and etc.
Business firms are also trading more typically in the foreign exchange markets. The commercial companies resembling Deutsche bank, UBS, Citigroup, and others reminiscent of HSBC, Braclays, Merrill Lynch, JP Morgan Chase, and nonetheless others corresponding to Goldman Sachs, ABN Amro, Morgan Stanley, and so forth are actively buying and selling within the foreign exchange markets to extend wealth of stock holders. Many smaller companies will not be concerned within the foreign exchange markets as extensively as some massive corporations are however the choices are stil there.
Central banks are the banks that maintain worldwide roles in the international markets. The supply of money, the availability of cash, and the interest rates are managed by central banks. Central banks play a big position within the forex trading, and are situated in Tokyo, New York and in London. These usually are not the one central locations for foreign currency trading but these are among the many very largest concerned on this market strategy. Typically banks, industrial investors and the central banks may have massive losses, and this in flip is handed on to investors. Other instances, the buyers and banks will have big gains.
http://www.themarketfinancial.com/who-is-participating-in-forex-market-trades/5560
Jun 30, 2010
The forex market is all about trading between countries, the currencies of these nations and the timing of investing in sure currencies. The FX market is trading between counties, usually completed with a dealer or a monetary company. Many people are concerned in forex trading, which is similar to stock market trading, but FX buying and selling is accomplished on a much larger total scale. Much of the buying and selling does take place between banks, governments, brokers and a small quantity of trades will take place in retail settings where the typical particular person concerned in trading is called a spectator. Monetary market and monetary conditions are making the forex market buying and selling go up and down daily. Hundreds of thousands are traded on a daily basis between most of the largest countries and this is going to incorporate some amount of trading in smaller international locations as well.
From the studies through the years, most trades in the foreign exchange market are accomplished between banks and this is referred to as interbank. Banks make up about 50 percent of the buying and selling in the forex market. So, if banks are broadly utilizing this method to generate income for stockholders and for their own bettering of enterprise, you already know the money have to be there for the smaller investor, the fund managers to use to increase the quantity of interest paid to accounts. Banks commerce money each day to extend the amount of money they hold. Overnight a bank will invest millions in forex markets, after which the next day make that money available to the general public in their savings, checking accounts and etc.
Business firms are also trading more typically in the foreign exchange markets. The commercial companies resembling Deutsche bank, UBS, Citigroup, and others reminiscent of HSBC, Braclays, Merrill Lynch, JP Morgan Chase, and nonetheless others corresponding to Goldman Sachs, ABN Amro, Morgan Stanley, and so forth are actively buying and selling within the foreign exchange markets to extend wealth of stock holders. Many smaller companies will not be concerned within the foreign exchange markets as extensively as some massive corporations are however the choices are stil there.
Central banks are the banks that maintain worldwide roles in the international markets. The supply of money, the availability of cash, and the interest rates are managed by central banks. Central banks play a big position within the forex trading, and are situated in Tokyo, New York and in London. These usually are not the one central locations for foreign currency trading but these are among the many very largest concerned on this market strategy. Typically banks, industrial investors and the central banks may have massive losses, and this in flip is handed on to investors. Other instances, the buyers and banks will have big gains.
http://www.themarketfinancial.com/who-is-participating-in-forex-market-trades/5560
The Investment Secrets of Warren Buffett
BRINGING IT ALL TOGETHER
The remarks of Warren Buffet and analysis by Buffett authors suggest that, at the very least, Warren Buffett looks at the following aspects of a corporation and its operations. They can be put in the form of questions that any sensible investor should ask before considering a stock investment.
BASIC QUESTIONS TO ASK
1. Does the company sell brand name products that are likely to endure?
2. Is the business of the company easily understood?
3. Does the company invest in and operate businesses within its area of expertise?
4. Does the company have the ability to maintain or increase profitability by raising prices?
5. Is the company, looking at both long-term debt, and the current position, conservatively financed?
6. Does the company show consistently high returns on equity and capital?
7. Have the earnings per share and sales per share of the company shown consistent growth above market averages over a period of at least five years?
8. Hs the company been buying back its shares, and if so, has it bought them responsibly?
9. Has management wisely used retained earnings to increase the rate of return to shareholders?
10. Is the company likely to require large capital sums to ensure continuing profitability?
2. Is the business of the company easily understood?
3. Does the company invest in and operate businesses within its area of expertise?
4. Does the company have the ability to maintain or increase profitability by raising prices?
5. Is the company, looking at both long-term debt, and the current position, conservatively financed?
6. Does the company show consistently high returns on equity and capital?
7. Have the earnings per share and sales per share of the company shown consistent growth above market averages over a period of at least five years?
8. Hs the company been buying back its shares, and if so, has it bought them responsibly?
9. Has management wisely used retained earnings to increase the rate of return to shareholders?
10. Is the company likely to require large capital sums to ensure continuing profitability?
This would only be the first stage of the process. The next, and most important question, is determining the price that an investor such as Warren Buffet would pay for the stock, allowing for the margin of safety.
http://www.buffettsecrets.com/bringing-it-all-together.htm
In 1992, Warren Buffett said that:
‘Leaving question of price aside, the best business to own is one that over an extended period can employ large amounts of capital at very high rates of return. The worst company to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return.’
Agricultural Bank of China launches world's biggest share offer
Chinese bank launches world's biggest share offer
AFP - Thursday, July 1
HONG KONG (AFP) - – Agricultural Bank of China on Wednesday kicked off a share offer worth a world-record 23.2 billion dollars as China strives to develop depressed regions in the rural lender's heartland.
AgBank, the last of China's "big four" state banks to list, plans to float its shares in Hong Kong and Shanghai next month with the monster IPO on track to overtake the previous record of 22 billion dollars set by Industrial and Commercial Bank of China (ICBC) in 2006.
The initial public offering has already won bedrock support from heavyweight investors -- including Qatar's sovereign wealth fund, US food giant Archer Daniels Midland and British bank Standard Chartered.
"Agricultural Bank of China is a great bank with a great future," Standard Chartered Group chief executive Peter Sands said in a statement Wednesday, confirming a 500-million-dollar investment in the share flotation.
As small-time retail investors got their first chance to grab a piece of the action, queues built outside bank branches in Hong Kong where the AgBank prospectus was being handed out.
But the orderly affair was far cry from the chaotic scene four years ago when huge crowds queued up for several blocks in the city's bustling Kowloon district to get their hands on ICBC's offering kit.
"I think it will be a pretty good investment -- there is good demand for this stock," Warren Ng, 24, told AFP on Wednesday. "I've already made up my mind. I'm going to put some money in it."
But retiree S.S. Fung said he was not so sure about the massive share sale, especially after his investment in AgBank's rival mainland lenders fell flat.
"I think I'll take a little of this one, but this is not a good time in the market," he said.
Hong Kong's South China Morning Post reported that investors in the football-mad former British colony may be distracted by the World Cup.
"The IPO has come at a wrong time as market sentiment is not good while the World Cup is going on," Christopher Cheung, chairman of Hong Kong's Christfund Securities, was quoted as saying.
"(Some investors) think they could earn more money from soccer betting than the IPO."
The Shanghai Composite Index closed down Wednesday over concerns about liquidity and market strength after AgBank said earlier this week that pricing for the Shanghai portion of the IPO would be lower than expected.
That fostered doubts about mainland demand for the IPO after recent spasms of market volatility.
Hong Kong's Hang Seng Index also finished lower, with bank stocks pushing the benchmark down.
The lender plans to raise 13.1 billion US dollars from the Hong Kong IPO and 10.1 billion dollars in Shanghai.
AgBank chairman Xiang Junbo said Tuesday that his company had worked hard to cut its bad-debt load, a major concern for all of China's big banks after a state-sanctioned lending binge during the global financial crunch.
And the rural lender says it is poised to capitalise on Chinese government efforts to boost economic growth in the country's centre and west, which have missed out on the export-driven boom enjoyed by coastal regions. Related article: Humble rural roots of China's AgBank
"The county area business will be one of our key profit drivers," Xiang told a news conference in Hong Kong. "(AgBank) is well positioned to capitalise on China's next wave of growth."
AgBank has come a long way since it was set up in 1951, two years after Mao Zedong's communist revolution in China. Last year it booked a profit of 65 billion yuan (9.56 billion US dollars), up from 51.45 billion yuan in 2008.
Some analysts consider AgBank to be the weakest of the country's big banks, owing mainly to its burden of bad loans and the nature of its business lending to poorer customers in rural China.
But Agbank's prospectus said its bad debt ratio dropped from 4.32 percent in 2008 to 2.91 percent in 2009. In 2010, it forecasts a profit of 82.9 billion yuan.
AFP - Thursday, July 1
HONG KONG (AFP) - – Agricultural Bank of China on Wednesday kicked off a share offer worth a world-record 23.2 billion dollars as China strives to develop depressed regions in the rural lender's heartland.
AgBank, the last of China's "big four" state banks to list, plans to float its shares in Hong Kong and Shanghai next month with the monster IPO on track to overtake the previous record of 22 billion dollars set by Industrial and Commercial Bank of China (ICBC) in 2006.
The initial public offering has already won bedrock support from heavyweight investors -- including Qatar's sovereign wealth fund, US food giant Archer Daniels Midland and British bank Standard Chartered.
"Agricultural Bank of China is a great bank with a great future," Standard Chartered Group chief executive Peter Sands said in a statement Wednesday, confirming a 500-million-dollar investment in the share flotation.
As small-time retail investors got their first chance to grab a piece of the action, queues built outside bank branches in Hong Kong where the AgBank prospectus was being handed out.
But the orderly affair was far cry from the chaotic scene four years ago when huge crowds queued up for several blocks in the city's bustling Kowloon district to get their hands on ICBC's offering kit.
"I think it will be a pretty good investment -- there is good demand for this stock," Warren Ng, 24, told AFP on Wednesday. "I've already made up my mind. I'm going to put some money in it."
But retiree S.S. Fung said he was not so sure about the massive share sale, especially after his investment in AgBank's rival mainland lenders fell flat.
"I think I'll take a little of this one, but this is not a good time in the market," he said.
Hong Kong's South China Morning Post reported that investors in the football-mad former British colony may be distracted by the World Cup.
"The IPO has come at a wrong time as market sentiment is not good while the World Cup is going on," Christopher Cheung, chairman of Hong Kong's Christfund Securities, was quoted as saying.
"(Some investors) think they could earn more money from soccer betting than the IPO."
The Shanghai Composite Index closed down Wednesday over concerns about liquidity and market strength after AgBank said earlier this week that pricing for the Shanghai portion of the IPO would be lower than expected.
That fostered doubts about mainland demand for the IPO after recent spasms of market volatility.
Hong Kong's Hang Seng Index also finished lower, with bank stocks pushing the benchmark down.
The lender plans to raise 13.1 billion US dollars from the Hong Kong IPO and 10.1 billion dollars in Shanghai.
AgBank chairman Xiang Junbo said Tuesday that his company had worked hard to cut its bad-debt load, a major concern for all of China's big banks after a state-sanctioned lending binge during the global financial crunch.
And the rural lender says it is poised to capitalise on Chinese government efforts to boost economic growth in the country's centre and west, which have missed out on the export-driven boom enjoyed by coastal regions. Related article: Humble rural roots of China's AgBank
"The county area business will be one of our key profit drivers," Xiang told a news conference in Hong Kong. "(AgBank) is well positioned to capitalise on China's next wave of growth."
AgBank has come a long way since it was set up in 1951, two years after Mao Zedong's communist revolution in China. Last year it booked a profit of 65 billion yuan (9.56 billion US dollars), up from 51.45 billion yuan in 2008.
Some analysts consider AgBank to be the weakest of the country's big banks, owing mainly to its burden of bad loans and the nature of its business lending to poorer customers in rural China.
But Agbank's prospectus said its bad debt ratio dropped from 4.32 percent in 2008 to 2.91 percent in 2009. In 2010, it forecasts a profit of 82.9 billion yuan.
KLCI over the last 3 months to 17 Years (30.6.2010)
3 months (1.4.2010 - 30.6.2010)
6 months (1.1.2010 - 30.6.2010)
12 months (1.7.2009 - 30.6.2010)
2 Years (1.7.2008 - 30.6.2010)
5 Years (1.7.05 - 30.6.2010)
17 Years (Dec 1993 - 30.6.2010)
6 months (1.1.2010 - 30.6.2010)
12 months (1.7.2009 - 30.6.2010)
2 Years (1.7.2008 - 30.6.2010)
5 Years (1.7.05 - 30.6.2010)
17 Years (Dec 1993 - 30.6.2010)
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