Asia and the art of war chests
By Rupert Walker
2 December 2008
Asian policymakers have built up protective foreign exchange reserves to ensure history doesn’t repeat itself.
Policymakers throughout Asia have had an overriding objective over the past decade. They have been determined to avoid a repeat of the crisis unleashed in 1997-1998, that exploded the myth of the “Asian miracle”, sending their economies into deep and protracted recessions. They would also rather avoid having to borrow from the International Monetary Fund again and be forced to impose a raft of measures demanded by the agency’s functionaries – measures which 10 years ago induced poverty and social unrest.
To reach this objective they stored up cash. Many governments built up “large protective buffers” against the balance of payment shocks that had put them under so much pressure in the late-90s, says Subir Gokarn, chief economist for Asia-Pacific at Standard and Poor’s, in a report published in early November. Basically, they created war chests of accumulated foreign exchange reserves, by absorbing their current and capital account surpluses. As a result, “healthy foreign exchange reserves are likely to buffer most Asia-Pacific economies during the (current) global slowdown”.
And despite foreign investors leaving regional equity markets in droves, as they either unwind yen carry trades and deleverage, or simply switch into the “safe-haven” of US Treasury securities, the drain on reserves hasn't been that severe.
Among the emerging economies in Asia, Vietnam has suffered the biggest fall in foreign exchange reserves – they now amount to almost 15% less than the 2008 peak – and among the developed economies New Zealand has experienced a 25% decline. The falls in China, Hong Kong, the Philippines and Taiwan have been non-existent or negligible.
Gokarn argues that one reason why the reserves have not declined more is that the region's emerging economies typically used the capital outflow to allow their currencies to depreciate, which meant they could offset the sharp appreciation that most of these currencies experienced in 2007.
He points out that Asia’s growth during the past 10 years has made it an “attractive destination for global investment flows that have been, in turn, facilitated by capital market reforms in many of these countries”. Large current account surpluses and net positive capital inflows would normally have put tremendous appreciation pressure on the region’s currencies – and made them exposed to a rapid depreciation if and when conditions changed.
Restraining currency appreciation
Twin surpluses should have put upward pressure on their currencies, but the authorities sold them and then sterilised the excess domestic currency in their financial systems to avoid monetary instability by issuing shorter-dated central bank bonds.
The depreciation has been particularly sharp since August 2008, when outward capital flows rose significantly. Six months ago, economists worried that any depreciation of domestic currencies might reinforce inflationary pressures due to rising commodity, oil and food prices. But, of course, the subsequent dramatic decline in these prices means that is not an issue now.
Comparisons have been made with the 1997-1998 crisis, although the problems then were largely home-grown whereas today the region is suffering from a deleveraging, liquidity drought and credit contraction that originated in the US and Europe. This contagion, which largely rebuts the de-coupling argument posited by some economists at the beginning of the year, has been exacerbated by a much closer integration between the financial systems worldwide.
The recurrent debt and currency crises associated with sudden withdrawals of Western money led to a rethinking by governments in Asian countries, inspired largely by China. In the past they’d followed orthodox thinking by borrowing from wealthy nations to finance domestic investment and drag their populations out of poverty. But China insisted that foreign capital should be injected as direct investment. Rather than simply providing debt to fund industrial development, the Chinese persuaded foreigners to build factories that couldn’t suddenly be up-rooted when confidence slipped.
Financial imbalances
Paradoxically, it has largely been re-routed Chinese savings which have financed much of China’s investment. Cash from household savings or corporate retained profits have been lent to the United States, fuelling that country’s consumer spending boom, and have then been channelled back to China as export earnings.
To ensure that its exports stayed cheap, China has kept the renminbi from appreciating beyond a prescribed rate by buying billions of dollars in world markets. Today China has foreign exchange reserves of more than $1.9 trillion and has surpassed Japan as the biggest holder of US treasury securities. Other Asian countries have adopted a similar strategy. For example, India entered the current crisis with around $300 billion of foreign reserves, which provide a comfortable level of “self-insurance” against capital flight.
This has led some commentators, such as the economic historian Niall Ferguson, to argue that these “financial imbalances” are the main cause of the excesses that produced the current crisis. Asia kept lending and the US (and Europeans) kept borrowing. The Asian savings glut supported a surge of consumer and corporate leverage, funding hedge funds and private equity firms, and of course, the US mortgage market which fuelled the rapid growth of derivative instruments.
Nevertheless, as Gokarn says, “it is now evident that for almost all the region's economies those handy reserves have allowed countries to avoid a potential balance-of-payments meltdown, especially as the flow of capital has reversed so sharply in the past few months”.
Whether this will hold true for the future is another matter. There is a standard Greenspan-Guidotti rule that says that reserves should cover external debt falling due within one year – but that is insufficient when foreign borrowings by private companies and overseas holdings in equity markets are taken into account. Also, debt coverage can soon disappear.
Korea, for instance, had about $240 billion of reserves – the sixth biggest in the world – at the beginning of November, which easily covers the $80 billion of short-term debt owed and even exceeds the $235 billion total external loans owed by Korean banks. But the central bank has been spending up to $280 million a week to inject liquidity into the country’s banking system, and in the first six months of the year, net foreign direct investment turned negative for the first time since 1980 as investors pulled out a net $886 million, according to the Bank of Korea.
Spending the reserves
“For Asia, the problem is not inadequate foreign exchange reserves,” says TJ Bond, Asia economist at Merrill Lynch. “It is uncertainty about how existing reserves will be used to meet maturing debt obligations and foreign sales of domestic assets.” Already, however, some of that uncertainty is being resolved.
Transparent foreign exchange intervention and currency swap agreements between the US Federal Reserve and Korea and Singapore worth $30 billion each have helped. Plus, regional currency swap agreements between 13 Asian countries (led by China, Japan and Korea) have created a pool of foreign exchange reserves to be tapped to protect their own currencies – an extension of the 2005 "Chiang Mai Initiative". The deal allows them to lend each other money at favourable terms if help is needed to stabilise exchange rates.
Capital controls restricting resident capital flight might also be an option. This was the approach taken by Malaysia a decade ago which protected the country from the worst of the crisis which afflicted other Asian economies.
But another problem is that by building up foreign exchange reserves by promoting export earnings through a competitive exchange rate, Asian economies make themselves vulnerable to growth slowdowns in the countries they export to.
On the other hand, although currency depreciation won’t help exporters as economies throughout the world fall into recession, they should be able to take advantage of any eventual recovery in consumer spending in major export markets.
Certainly, intraregional trade has lessened the export dependence on the US over the past decade, as richer Asian countries have proved increasingly significant markets for Asian exports. But, this affluence has had a cost which would make the region especially vulnerable, had it not been for policies introduced to prevent a repeat of the devastation that afflicted the region at the end of the last century.
© Haymarket Media Limited. All rights reserved.
http://www.financeasia.com/article.aspx?CIaNID=90196
Wednesday, 3 December 2008
Tuesday, 2 December 2008
A Young Analyst on Wall Street, Benjamin Graham
An Enterprising Young Analyst on Wall Street by the name of Benjamin Graham
In the early 1930s an enterprising young analyst on Wall Street by the name of Benjamin Graham noticed that the vast majority of hotshot stock pickers on Wall Street didn’t care at all about the long-term economics of the businesses that they are busy buying a selling. All they cared about was whether the stock prices, over the short run, were going up or down.
Graham also noticed that these hot stock pickers, while caught up in their speculative frenzy, would sometimes drive up the stock prices to ridiculous levels in relation to the long-term economic realities of the underlying businesses. He also realized that these same hotshots would sometimes send stock prices spiraling to insane lows that similarly ignored the businesses’ long term prospects. It was in these insane lows that Graham saw a fantastic opportunity to make money.
Graham reasoned that if he bought these “oversold businesses” at prices below their long-term intrinsic value, eventually the market would acknowledge its mistake and revalue them upward. Once they were revalued upward, he could sell them at a profit. This is the basis for what we know today as value investing. Graham was the father of it.
What we have to realize, however, is that Graham really didn’t care about what kind of business he was buying. In his world every business had a price at which it was a bargain. When he started practicing value investing back in the 1930s, he was focused on finding companies trading at less than half of what they held in cash. He called it “buying a dollar for 50 cents.” He had other standards as well, such as never paying more than 10 times a company’s earnings and selling the stock if it was up 50%. If it didn’t go up within 2 years, he would sell it anyway.
Yes, his perspective was a bit longer than that of the Wall Street speculators, but in truth he had zero interest in where the company would be in ten years.
Also read:
Warren seeks Companies with Durable Competitive Advantage
Young Warren Buffett learned under Graham
A Young Analyst on Wall Street, Benjamin Graham
Knowing the Stock Market and its Major Players
The Time To Sell
The Right Time To Buy A Fantastic Business
Warren Buffett’s Concept of Equity Bond in action....
Warren Buffett's concept of Equity Bond
In the early 1930s an enterprising young analyst on Wall Street by the name of Benjamin Graham noticed that the vast majority of hotshot stock pickers on Wall Street didn’t care at all about the long-term economics of the businesses that they are busy buying a selling. All they cared about was whether the stock prices, over the short run, were going up or down.
Graham also noticed that these hot stock pickers, while caught up in their speculative frenzy, would sometimes drive up the stock prices to ridiculous levels in relation to the long-term economic realities of the underlying businesses. He also realized that these same hotshots would sometimes send stock prices spiraling to insane lows that similarly ignored the businesses’ long term prospects. It was in these insane lows that Graham saw a fantastic opportunity to make money.
Graham reasoned that if he bought these “oversold businesses” at prices below their long-term intrinsic value, eventually the market would acknowledge its mistake and revalue them upward. Once they were revalued upward, he could sell them at a profit. This is the basis for what we know today as value investing. Graham was the father of it.
What we have to realize, however, is that Graham really didn’t care about what kind of business he was buying. In his world every business had a price at which it was a bargain. When he started practicing value investing back in the 1930s, he was focused on finding companies trading at less than half of what they held in cash. He called it “buying a dollar for 50 cents.” He had other standards as well, such as never paying more than 10 times a company’s earnings and selling the stock if it was up 50%. If it didn’t go up within 2 years, he would sell it anyway.
Yes, his perspective was a bit longer than that of the Wall Street speculators, but in truth he had zero interest in where the company would be in ten years.
Also read:
Warren seeks Companies with Durable Competitive Advantage
Young Warren Buffett learned under Graham
A Young Analyst on Wall Street, Benjamin Graham
Knowing the Stock Market and its Major Players
The Time To Sell
The Right Time To Buy A Fantastic Business
Warren Buffett’s Concept of Equity Bond in action....
Warren Buffett's concept of Equity Bond
Recession Dating: When in Doubt, Wait for a Crisis
REAL TIME ECONOMICS Real Time Economics
Economic insight and analysis from The Wall Street Journal.
December 1, 2008, 7:04 pm
Recession Dating: When in Doubt, Wait for a Crisis
Travel back to the first half of the year, after an asset bubble burst, and you’ll find a group of economists struggling with the question of whether the nation is in a recession. Payrolls hit a clear peak and started declining, the unemployment rate was rising and Americans were talking increasingly about a troubled economy. The common recession definition — two straight quarters of falling economic output — was far from being met, since official economic data hadn’t even shown a single quarter of contracting GDP yet.
Then a major international crisis hits, economic data start looking uglier and the recession question is effectively settled.Those were the circumstances of the U.S. recession call in 2008 — and in 2001. The worsening of the financial crisis in September proved to be the clarifying event that the 9/11 terrorist attacks became seven years earlier for the National Bureau of Economic Research’s Business Cycle Dating Committee. In both cases, GDP releases (or revisions of earlier figures) that weren’t available in the first half of the year later showed that a contraction clearly was in the works. But making the recession call in real time proved difficult based only on output. So the committee used nonfarm payrolls to identify the recession’s starting point in both cases.
The NBER committee, the nation’s generally accepted recession arbiter, restarted its activity this year after the labor market started contracting. But a few months of mild payroll declines weren’t enough to call a recession without a single quarter of declining GDP, given the chance that the economy could turn around quickly. (The fourth quarter 2007 contraction didn’t show up until the government’s GDP revisions came out in late July.) Then September 2008 hit, promising to worsen the housing and credit crises.
“Employment declined less than is normal in a recession until about September,” said Stanford University economist Robert Hall, chair of the NBER’s recession-dating committee. Until that point the committee didn’t expect to take action until next year, Mr. Hall said in an interview today. “Then so many negative numbers came through that made it completely clear this was a recession.”
Once that was established, the key task became identifying the precise starting point for the NBER’s monthly chronology. “The sudden worsening of the financial crisis since the end of the summer obviously sent the economy into a nosedive,” said Harvard University economist Jeffrey Frankel, a committee member. “There’s no doubt for a few months we’ve been in recession. The only question is whether you want to count the shallower period.”
The committee’s explanation of its decision today ran through the various measures it generally considers (including real personal income, wholesale-retail sales and industrial production), noting flaws in just about every one of them except employment. GDP fell in this year’s third quarter and the fourth quarter of 2007, but not in the two quarters in between. Gross domestic income peaked in the third quarter of 2007, fell in the two quarters that followed, then rose for a quarter and fell again in this year’s third quarter. The different figures — whose discrepancies (debated all year) eventually may be revised away next July — still suggest a rough plateau in economic activity from the third quarter of 2007 to the second quarter of 2008, Mr. Frankel said. “Any way of doing this is imperfect given how the two main output measures give such different answers,” he said.
With ambiguous GDP data, the payroll figures proved critical to calling the start of the recession just as they did in 2001. But if the committee follows the 2001 recession playbook again, employment won’t be key to marking the end of the recession. After a lengthy debate, the NBER committee dated the end of the recession to November 2001 even though payrolls continued declining into 2003. It explained its call in 2003: “From October to November, industrial production and sales fell sharply, employment fell moderately, personal income rose very slightly, and monthly real GDP rose moderately. Based on this information, the committee concluded that the economy reached a trough in November.” (The highly subjective nature of the call may be one reason the government never got involved in recession dating or even selected a group — the NBER or otherwise — for the task. But government economic statistics use NBER recession dates, making the committee the semi-official keeper of the nation’s business cycle chronology.)
GDP contractions continuing through June 2009 — as many economists forecast — would put the current recession at a year and a half, or two months longer than the worst two downturns since the Great Depression. With the economic outlook still so uncertain, we’ll probably have to wait until late 2009 or even 2010 before getting that call from the committee.
— Sudeep Reddy
Earlier on RTE:
Waiting For The Recession Call
A Recession Announcement Coming? Probably, But Not Soon
The GDP Debate: Did a Recession Start in 2007?
If It Is a Recession, the Longest in a Quarter Century?
Economists Weigh Possibility of a Recession Amid Economic Growth
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Avoid These Investment 'Bargains'
Avoid These Investment 'Bargains'
When is "such a deal" not such a great buy?
Christine Benz is Morningstar's director of personal finance, editor of Morningstar PracticalFinance, and author of the Morningstar Guide to Mutual Funds. Meet Morningstar's other investing specialists.
Like an extended warranty on a new appliance or the time-share pitch that's disguised as a "free" vacation, savvy consumers know that some deals that look good on the surface aren't all they're cracked up to be once you read the fine print. The same holds true in the investing marketplace.
A few months back, I shared some tips for unearthing a few true investment bargains. But what about those investments that seem like good deals but really aren't? I'll discuss some of them in this week's article.
Looking for Securities with a Cheap Share Price
Ford Motor and General Motors are currently trading at less than $2 and $3 per share, respectively. When storied companies like these two hit the skids, it may look tempting to gobble up their stocks in a bet that they won't go belly-up. After all, you can buy 100 shares of each for less than $500, and if they do manage to resuscitate themselves, you could stand to gain big. That's not the stupidest idea in the world--as long as you go in knowing that it's similar to a bet you might place in Vegas. If your bet works out, you're buying the drinks. If not, you could lose everything, as equity shareholders would likely lose almost everything if the two companies ended up in bankruptcy court. (For proof that gambling on near-busted companies is a risky proposition, just talk to shareholders of Fannie Mae, Freddie Mac , and American International Group
Hoarding Company Stock--Even When You've Bought It at a Discount
Many publicly traded companies give their employees the opportunity to purchase their stock at a discount to the current share price. That might seem like a good deal. But loading up on your company's stock can be dangerous, particularly if you're hoarding shares of your company at the expense of building a well-diversified portfolio. Remember: You already have a lot tied up in your company's financial health and your industry via your job, so it's a mistake to compound that effect by socking a disproportionate share of your portfolio into your employer's stock. To be on the safe side, limit employer stock to no more than 5% of your overall portfolio.
Buying a Cheap Fund, Then Paying Commissions on Small Purchases
Exchange-traded funds have recently taken off in the marketplace, in part because their expenses can be lower than mutual funds that invest in the same basket of securities. Before you venture whole-hog into ETFs, however, take a step back and think about your investment style. If you plan to make a lump-sum investment and let it ride, the ETF may well be the best bet for you. However, that's not so if you trade frequently or make small purchases at regular intervals (and dollar-cost-averaging is a great way to invest, by the way). That's because you'll pay a commission to buy and sell ETFs, and those charges could quickly erode any cost savings versus plain-vanilla mutual funds. Ditto for paying a transaction fee to buy a fund in a mutual fund supermarket or buying a front-load fund, even if its expenses are low.
http://news.morningstar.com/articlenet/article.aspx?id=265385
When is "such a deal" not such a great buy?
Christine Benz is Morningstar's director of personal finance, editor of Morningstar PracticalFinance, and author of the Morningstar Guide to Mutual Funds. Meet Morningstar's other investing specialists.
Like an extended warranty on a new appliance or the time-share pitch that's disguised as a "free" vacation, savvy consumers know that some deals that look good on the surface aren't all they're cracked up to be once you read the fine print. The same holds true in the investing marketplace.
A few months back, I shared some tips for unearthing a few true investment bargains. But what about those investments that seem like good deals but really aren't? I'll discuss some of them in this week's article.
Looking for Securities with a Cheap Share Price
Ford Motor and General Motors are currently trading at less than $2 and $3 per share, respectively. When storied companies like these two hit the skids, it may look tempting to gobble up their stocks in a bet that they won't go belly-up. After all, you can buy 100 shares of each for less than $500, and if they do manage to resuscitate themselves, you could stand to gain big. That's not the stupidest idea in the world--as long as you go in knowing that it's similar to a bet you might place in Vegas. If your bet works out, you're buying the drinks. If not, you could lose everything, as equity shareholders would likely lose almost everything if the two companies ended up in bankruptcy court. (For proof that gambling on near-busted companies is a risky proposition, just talk to shareholders of Fannie Mae, Freddie Mac , and American International Group
Hoarding Company Stock--Even When You've Bought It at a Discount
Many publicly traded companies give their employees the opportunity to purchase their stock at a discount to the current share price. That might seem like a good deal. But loading up on your company's stock can be dangerous, particularly if you're hoarding shares of your company at the expense of building a well-diversified portfolio. Remember: You already have a lot tied up in your company's financial health and your industry via your job, so it's a mistake to compound that effect by socking a disproportionate share of your portfolio into your employer's stock. To be on the safe side, limit employer stock to no more than 5% of your overall portfolio.
Buying a Cheap Fund, Then Paying Commissions on Small Purchases
Exchange-traded funds have recently taken off in the marketplace, in part because their expenses can be lower than mutual funds that invest in the same basket of securities. Before you venture whole-hog into ETFs, however, take a step back and think about your investment style. If you plan to make a lump-sum investment and let it ride, the ETF may well be the best bet for you. However, that's not so if you trade frequently or make small purchases at regular intervals (and dollar-cost-averaging is a great way to invest, by the way). That's because you'll pay a commission to buy and sell ETFs, and those charges could quickly erode any cost savings versus plain-vanilla mutual funds. Ditto for paying a transaction fee to buy a fund in a mutual fund supermarket or buying a front-load fund, even if its expenses are low.
http://news.morningstar.com/articlenet/article.aspx?id=265385
Where the Herd's Headed
NOVEMBER 20, 2008, 6:34 P.M. ET
Where the Herd's Headed
Merrill's monthly survey of fund managers shows some movement into stocks and bonds. Should you follow?
By BRETT ARENDS
My favorite monthly publication has just come in. No, not The Atlantic, Forbes, or GQ.
The Merrill Lynch Global Fund Manager survey.
OK, I admit it. I'm a stock market nerd. I love this stuff. The survey offers probably the best insights into what the big institutional money managers think about the market. Where they are placing their bets. And, sometimes, what they might do next.
It's a contrarian's bible. These are the people who move markets. So the assets they already own too much of are going to have a hard time outperforming, because who is left to buy more? Meanwhile, the reverse can be true for those investment classes they are currently neglecting.
The latest issue is a fascinating read. The big money crowd, the world's best financial minds, have looked at the wreckage of the worst financial crisis in 80 years. They considered the parade of humiliating fiascoes on Wall Street. And the bumbling and eye-watering extravagance in Washington. And yet the two asset classes they still seem to like are IOUs issued by the federal government, and stocks on Wall Street.
Go figure.
If you are thinking about investing in equities, you should know that institutional investors are already overexposed to U.S. stocks at the expense of the rest of the world. A thumping 55% of the fund managers surveyed now have more money in U.S. equities than their benchmark would require: Just 19% say they are under-invested in Wall Street.
Meanwhile, the picture for British and European equities is almost exactly reversed. Nearly half the fund managers say they are underinvested there.
Of course there is a lot of economic misery to come in Europe – especially in Britain, whose real estate bubble has only just begun to deflate.
Yet it's unclear whether this bad news is already factored into share prices there. British and European share indices have more than halved since last year's peaks and are now trading on multiples last seen in the mid 1980s. Several shrewd value managers are arguing that Europe – and Japan – now offer the best long-term buys.
As for bonds: I've been trying for weeks to understand fully why anyone would lend money to the federal government for thirty years, let alone at today's anemic interest rates.
The bailout parade slowly making its way through Washington, each package dazzling the crowd with its size and extravagance, is surely going to lead to slow-motion default in years to come through devaluation and inflation. That's a disaster scenario for bonds.
Nor could I understand why the only Treasurys that were unloved were TIPS – the ones that actually have inflation protection.
Now I know. These fund managers, the people who move the market, have suddenly written off inflation as a near impossibility. A startling 87% think core inflation will be lower a year from now than it is today. Just 5% think inflation might be higher.
Complacency?
You make the call. Note that just a few months ago more than four-fifths of these guys thought inflation was going to be higher than normal. So it's fair to say they're capable of changing their minds, dramatically, in a short period.
Heaven help anyone in the way when the herd suddenly changes direction.
At the moment, 84% of the fund managers think the global economy is already in recession.
One startling fact: Hardly any professional fund managers believe Wall Street analysts anymore. A whopping 90% told the Merrill Lynch survey they thought the consensus earnings estimates on the Street for the next year were too high. Amazingly, 59% called the estimates "far" too high.
That's a pretty damning indictment.
Doomsayers claim that stock markets must fall further because earnings forecasts have to come down.
Sure, Wall Street analysts remain laughably bullish. But it turns out no one with any money believes them anyway.
Write to Brett Arends at brett.arends@wsj.com
Where the Herd's Headed
Merrill's monthly survey of fund managers shows some movement into stocks and bonds. Should you follow?
By BRETT ARENDS
My favorite monthly publication has just come in. No, not The Atlantic, Forbes, or GQ.
The Merrill Lynch Global Fund Manager survey.
OK, I admit it. I'm a stock market nerd. I love this stuff. The survey offers probably the best insights into what the big institutional money managers think about the market. Where they are placing their bets. And, sometimes, what they might do next.
It's a contrarian's bible. These are the people who move markets. So the assets they already own too much of are going to have a hard time outperforming, because who is left to buy more? Meanwhile, the reverse can be true for those investment classes they are currently neglecting.
The latest issue is a fascinating read. The big money crowd, the world's best financial minds, have looked at the wreckage of the worst financial crisis in 80 years. They considered the parade of humiliating fiascoes on Wall Street. And the bumbling and eye-watering extravagance in Washington. And yet the two asset classes they still seem to like are IOUs issued by the federal government, and stocks on Wall Street.
Go figure.
If you are thinking about investing in equities, you should know that institutional investors are already overexposed to U.S. stocks at the expense of the rest of the world. A thumping 55% of the fund managers surveyed now have more money in U.S. equities than their benchmark would require: Just 19% say they are under-invested in Wall Street.
Meanwhile, the picture for British and European equities is almost exactly reversed. Nearly half the fund managers say they are underinvested there.
Of course there is a lot of economic misery to come in Europe – especially in Britain, whose real estate bubble has only just begun to deflate.
Yet it's unclear whether this bad news is already factored into share prices there. British and European share indices have more than halved since last year's peaks and are now trading on multiples last seen in the mid 1980s. Several shrewd value managers are arguing that Europe – and Japan – now offer the best long-term buys.
As for bonds: I've been trying for weeks to understand fully why anyone would lend money to the federal government for thirty years, let alone at today's anemic interest rates.
The bailout parade slowly making its way through Washington, each package dazzling the crowd with its size and extravagance, is surely going to lead to slow-motion default in years to come through devaluation and inflation. That's a disaster scenario for bonds.
Nor could I understand why the only Treasurys that were unloved were TIPS – the ones that actually have inflation protection.
Now I know. These fund managers, the people who move the market, have suddenly written off inflation as a near impossibility. A startling 87% think core inflation will be lower a year from now than it is today. Just 5% think inflation might be higher.
Complacency?
You make the call. Note that just a few months ago more than four-fifths of these guys thought inflation was going to be higher than normal. So it's fair to say they're capable of changing their minds, dramatically, in a short period.
Heaven help anyone in the way when the herd suddenly changes direction.
At the moment, 84% of the fund managers think the global economy is already in recession.
One startling fact: Hardly any professional fund managers believe Wall Street analysts anymore. A whopping 90% told the Merrill Lynch survey they thought the consensus earnings estimates on the Street for the next year were too high. Amazingly, 59% called the estimates "far" too high.
That's a pretty damning indictment.
Doomsayers claim that stock markets must fall further because earnings forecasts have to come down.
Sure, Wall Street analysts remain laughably bullish. But it turns out no one with any money believes them anyway.
Write to Brett Arends at brett.arends@wsj.com
Monday, 1 December 2008
Personal Finance Calculators
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COLLEGE
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http://online.wsj.com/article/SB122468950688858589.html
FINANCIAL/RETIREMENT PLANNING
Asset-allocation worksheet
Net worth calculator
Retirement worksheet
401(k) planner
401(k) contribution calculator
Get the latest rates on IRA CDs, money-market and savings accounts at our Rate Center from Bankrate.com.
SCREEN INVESTMENTS
ETF Screener
Mutual Fund Screener
TAXES
Alleviate tax headaches before April 15. Use these tools to determine:
Will you owe estate taxes?
What's your average tax rate?
What's your marginal tax rate?
Capital gains worksheet
HOMES
How much house can you afford?
To rent or to buy?
Mortgage calculator
Points or no points?
Fixed rate or adjustable?
Should you refinance?
Get the latest mortgage, refinancing and home-equity rates in our Rate Center from Bankrate.com.
INSURANCE
How much life insurance do you need? Use SmartMoney's tool to determine if you are covered.
COLLEGE
See our tools to figure out what you need to do financially to prepare for college:
How much can you save?
How much aid can you expect?
http://online.wsj.com/article/SB122468950688858589.html
A Bout of Irrational Pessimism?
NOVEMBER 17, 2008, 1:54 P.M. ET
A Bout of Irrational Pessimism?
Fund manager Marty Whitman says investor panic – and not declining businesses – have sunk current market valuations. Is he right?
By BRETT ARENDS
Legendary fund manager Marty Whitman is pinning the blame squarely on an "irrational" stock market meltdown for this year's hefty losses at his Third Avenue Value fund.
"As far as we are concerned," Mr. Whitman declares in his latest shareholder letter to investors, "the fund's poor 2008 performance is attributable to an irrational stock market, not any fundamental deterioration in the businesses in which [Third Avenue Funds] has invested."
It's a pretty bold claim, in the face of a 50% loss over the past year. But is it wrong?
What triumphant bears are apt to forget is that a stock market which is capable of "irrational exuberance" - and the jury on this is surely now in - is just as capable of irrational panic, worry and gloom.
If stock market valuations were wrong when they were soaring last year, who is to say that they are correct now?
Mr. Whitman's colleague Curtis Jensen, co-chief investment manager at Third Avenue, reinforced the view in an interview last week.
Some current valuations, Mr. Jensen said, are "ridiculous" and anticipate virtual "armageddon."
Mr. Whitman and Mr. Jensen see some of the best opportunities in high-yield bonds. "There are unprecedented opportunities in the distressed debt market," Mr. Jensen said. "You are able to buy very senior securities today (offering) equity-like returns." That means bonds backed by collateral or strong covenants, with priority claims in the event of insolvency, that in some cases still offer likely yields to maturity "in the high teens" or higher, in Mr. Jensen's view.
Examples include certain bonds issued by General Motors Acceptance Corp and by the trucking company Swift Transportation. Mr. Jensen's Third Avenue Small Cap Value bought the Swift bonds at about 60% of par value, and he expects either a yield to maturity of 19% -- or a valuable slice of equity in the firm if Swift is forced into a financial restructuring.
The last time Third Avenue saw such opportunities was in the early 1990s, he adds.
Mr. Whitman, writing to shareholders, said some of the distressed loans bought recently might offer yields to maturity as high as 54%
Third Avenue disclosures show that in the past few months the firm's funds have been aggressively buying certain bonds issued by General Motors Acceptance Corp., among others. Mr. Jensen, in his Third Avenue Small Cap Value, has bought IOUs issued by the trucking company Swift Transportation at about 60% of par value. He expects a yield to maturity of 19% -- or a valuable slice of equity in the firm if it is forced into a financial restructuring.
By contrast to this "off-piste" skiing in the debt markets, Third Avenue is sticking to the gentlest runs in the matter of equities. Managers are looking for cash generators with solid balance sheets that won't need to tap the markets for extra cash any time soon. No one knows how or when this market will turn. The indices may languish for years. But bottom-up value managers, like those at Third Avenue, claim they're now seeing the best opportunities in generations.
Marty Whitman, for his part, has been through market panics for over 50 years. In his letter, he argues "today the opportunity of a lifetime seems to be present for passive investors who follow a few simple caveats." Among Mr. Whitman's caveats: Be a buy and hold investor; avoid investing with borrowed funds; and avoid shares of any companies which need, in his words, "relatively continual access to capital markets if they are to remain going concerns." Acconding to Mr. Whitman, those companies include financials such as Goldman Sachs and even companies like General Electric. "Deep value and high quality alone are not sufficient conditions for investing in common stocks," writes Mr. Whitman. "Deep value pricing and high quality assets must be accompanied by creditworthiness."
Write to Brett Arends at brett.arends@wsj.com
http://online.wsj.com/article/SB122692731966133143.html
A Bout of Irrational Pessimism?
Fund manager Marty Whitman says investor panic – and not declining businesses – have sunk current market valuations. Is he right?
By BRETT ARENDS
Legendary fund manager Marty Whitman is pinning the blame squarely on an "irrational" stock market meltdown for this year's hefty losses at his Third Avenue Value fund.
"As far as we are concerned," Mr. Whitman declares in his latest shareholder letter to investors, "the fund's poor 2008 performance is attributable to an irrational stock market, not any fundamental deterioration in the businesses in which [Third Avenue Funds] has invested."
It's a pretty bold claim, in the face of a 50% loss over the past year. But is it wrong?
What triumphant bears are apt to forget is that a stock market which is capable of "irrational exuberance" - and the jury on this is surely now in - is just as capable of irrational panic, worry and gloom.
If stock market valuations were wrong when they were soaring last year, who is to say that they are correct now?
Mr. Whitman's colleague Curtis Jensen, co-chief investment manager at Third Avenue, reinforced the view in an interview last week.
Some current valuations, Mr. Jensen said, are "ridiculous" and anticipate virtual "armageddon."
Mr. Whitman and Mr. Jensen see some of the best opportunities in high-yield bonds. "There are unprecedented opportunities in the distressed debt market," Mr. Jensen said. "You are able to buy very senior securities today (offering) equity-like returns." That means bonds backed by collateral or strong covenants, with priority claims in the event of insolvency, that in some cases still offer likely yields to maturity "in the high teens" or higher, in Mr. Jensen's view.
Examples include certain bonds issued by General Motors Acceptance Corp and by the trucking company Swift Transportation. Mr. Jensen's Third Avenue Small Cap Value bought the Swift bonds at about 60% of par value, and he expects either a yield to maturity of 19% -- or a valuable slice of equity in the firm if Swift is forced into a financial restructuring.
The last time Third Avenue saw such opportunities was in the early 1990s, he adds.
Mr. Whitman, writing to shareholders, said some of the distressed loans bought recently might offer yields to maturity as high as 54%
Third Avenue disclosures show that in the past few months the firm's funds have been aggressively buying certain bonds issued by General Motors Acceptance Corp., among others. Mr. Jensen, in his Third Avenue Small Cap Value, has bought IOUs issued by the trucking company Swift Transportation at about 60% of par value. He expects a yield to maturity of 19% -- or a valuable slice of equity in the firm if it is forced into a financial restructuring.
By contrast to this "off-piste" skiing in the debt markets, Third Avenue is sticking to the gentlest runs in the matter of equities. Managers are looking for cash generators with solid balance sheets that won't need to tap the markets for extra cash any time soon. No one knows how or when this market will turn. The indices may languish for years. But bottom-up value managers, like those at Third Avenue, claim they're now seeing the best opportunities in generations.
Marty Whitman, for his part, has been through market panics for over 50 years. In his letter, he argues "today the opportunity of a lifetime seems to be present for passive investors who follow a few simple caveats." Among Mr. Whitman's caveats: Be a buy and hold investor; avoid investing with borrowed funds; and avoid shares of any companies which need, in his words, "relatively continual access to capital markets if they are to remain going concerns." Acconding to Mr. Whitman, those companies include financials such as Goldman Sachs and even companies like General Electric. "Deep value and high quality alone are not sufficient conditions for investing in common stocks," writes Mr. Whitman. "Deep value pricing and high quality assets must be accompanied by creditworthiness."
Write to Brett Arends at brett.arends@wsj.com
http://online.wsj.com/article/SB122692731966133143.html
Joe Investor, the Markets Are All Yours Now
THE INTELLIGENT INVESTOR
NOVEMBER 15, 2008
Joe Investor, the Markets Are All Yours Now
By JASON ZWEIG
The tables have turned.
For the past couple of decades, the markets have been dominated by institutional investors who devoured bargains so fast and in such bulk that individual investors were usually left, at best, with a few scraps.
But pension funds, hedge funds, mutual funds and other institutions are under siege as their portfolios implode and investors redeem their shares, forcing the fund managers to raise cash.
Advantage Goes to the Individual Investor
Personal Finance columnist Jason Zweig explains why individuals have a big advantage over institutional investors in the market right now. (Nov. 14)
Virtually every investment that carries any risk is on sale. Stocks and bonds, at home and abroad, have had their prices slashed by up to 45% this year. Yet at the very moment when bargains abound, many of the giants who normally would buy can do nothing but sell.
Welcome to a buyer's market without buyers.
This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: "The question that hardly anyone ever thinks about is: Who's on the other side of my trade, and why are they willing to be losers if I'm going to be a winner?" Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, "You can -- and probably do -- have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price."
You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing. Sooner rather than later, institutions will no longer need to beg for cash, they will regain the upper hand over individuals, and the tables will turn again.
While blue-chip stocks are still cheap, as I've said many times lately, there are some areas where the liquidity drought borders on desperation.
Corporate bonds.
A year ago, corporate bonds outyielded Treasurys by 1.6 percentage points; now, the spread is more than five. Top-quality corporate debt is yielding 7% and up. Consider cheap, well-run funds like Harbor Bond, Loomis Sayles Bond or . Convertible bonds are yielding 12% and more; here, the easiest choice is Vanguard Convertible Securities.
Municipal bonds.
The tax-free securities issued by state and local governments have gotten so cheap that in many cases you would have to earn 7% or 8% before tax to match their yield. Vanguard, T. Rowe Price and Fidelity offer a wide range of muni funds at low cost.
Emerging markets.
Stocks and bonds in the developing world have been decimated. Emerging-market stocks have fallen nearly 60% in 2008. The bonds have dropped about 20%, producing the highest yields in about a decade. For stocks, Vanguard Emerging Markets ETF is a good choice; T. Rowe Price Emerging Markets Bond fund is a solid way to play the debt.
TIPS.
Larry Swedroe of Buckingham Asset Management in St. Louis recently bought 8-year Treasury Inflation-Protected Securities with a yield of 3.7%. "That is crazy," he marvels, since the same day the 5-year TIPS yielded 2.6% and the 10-year yielded 2.7%. Such fat yields in excess of inflation on a risk-free investment are a rare opportunity. Put TIPS in a tax-free retirement account; learn more at www.treasurydirect.gov.
Subscribe to an RSS feed for the Intelligent Investor and get notified when new columns appear, at online.wsj.com/xml/rss/3_7438.xml.
Closed-end funds.
These neglected fund/stock hybrids are at their cheapest in years. Closed-ends often trade at a discount to the market value of their holdings. In many cases, you now can get $1 in assets for 85 cents. That augments the yield on funds that hold corporate or municipal bonds. A handy starting point for research is www.closed-endfunds.com. Be sure the fund is "unleveraged," meaning that it does not borrow money, and avoid any fund with annual expenses over 1%.
Real estate.
REITs, or real-estate investment trusts, have been gutted in the housing crisis, losing more than 40% so far this year after an 18% drop in 2007. Many REITs are now priced as if people and businesses will never again want roofs over their heads. The safest choice: a basket holding dozens of real-estate bundles, like Vanguard REIT Index fund.
Finally, if you have cash and courage, consider a vacation property or second home. Nearly two-thirds of the condominiums built in and around Myrtle Beach, S.C. during the boom remain unsold as of June, says the National Association of Home Builders. A similar supply glut has clogged markets in other getaways like Tampa, Fla., and San Diego. With due diligence, you could get both a high financial and a high psychic return.
Email: intelligentinvestor@wsj.com.
http://online.wsj.com/article/SB122671161003230223.html
NOVEMBER 15, 2008
Joe Investor, the Markets Are All Yours Now
By JASON ZWEIG
The tables have turned.
For the past couple of decades, the markets have been dominated by institutional investors who devoured bargains so fast and in such bulk that individual investors were usually left, at best, with a few scraps.
But pension funds, hedge funds, mutual funds and other institutions are under siege as their portfolios implode and investors redeem their shares, forcing the fund managers to raise cash.
Advantage Goes to the Individual Investor
Personal Finance columnist Jason Zweig explains why individuals have a big advantage over institutional investors in the market right now. (Nov. 14)
Virtually every investment that carries any risk is on sale. Stocks and bonds, at home and abroad, have had their prices slashed by up to 45% this year. Yet at the very moment when bargains abound, many of the giants who normally would buy can do nothing but sell.
Welcome to a buyer's market without buyers.
This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: "The question that hardly anyone ever thinks about is: Who's on the other side of my trade, and why are they willing to be losers if I'm going to be a winner?" Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, "You can -- and probably do -- have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price."
You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing. Sooner rather than later, institutions will no longer need to beg for cash, they will regain the upper hand over individuals, and the tables will turn again.
While blue-chip stocks are still cheap, as I've said many times lately, there are some areas where the liquidity drought borders on desperation.
Corporate bonds.
A year ago, corporate bonds outyielded Treasurys by 1.6 percentage points; now, the spread is more than five. Top-quality corporate debt is yielding 7% and up. Consider cheap, well-run funds like Harbor Bond, Loomis Sayles Bond or . Convertible bonds are yielding 12% and more; here, the easiest choice is Vanguard Convertible Securities.
Municipal bonds.
The tax-free securities issued by state and local governments have gotten so cheap that in many cases you would have to earn 7% or 8% before tax to match their yield. Vanguard, T. Rowe Price and Fidelity offer a wide range of muni funds at low cost.
Emerging markets.
Stocks and bonds in the developing world have been decimated. Emerging-market stocks have fallen nearly 60% in 2008. The bonds have dropped about 20%, producing the highest yields in about a decade. For stocks, Vanguard Emerging Markets ETF is a good choice; T. Rowe Price Emerging Markets Bond fund is a solid way to play the debt.
TIPS.
Larry Swedroe of Buckingham Asset Management in St. Louis recently bought 8-year Treasury Inflation-Protected Securities with a yield of 3.7%. "That is crazy," he marvels, since the same day the 5-year TIPS yielded 2.6% and the 10-year yielded 2.7%. Such fat yields in excess of inflation on a risk-free investment are a rare opportunity. Put TIPS in a tax-free retirement account; learn more at www.treasurydirect.gov.
Subscribe to an RSS feed for the Intelligent Investor and get notified when new columns appear, at online.wsj.com/xml/rss/3_7438.xml.
Closed-end funds.
These neglected fund/stock hybrids are at their cheapest in years. Closed-ends often trade at a discount to the market value of their holdings. In many cases, you now can get $1 in assets for 85 cents. That augments the yield on funds that hold corporate or municipal bonds. A handy starting point for research is www.closed-endfunds.com. Be sure the fund is "unleveraged," meaning that it does not borrow money, and avoid any fund with annual expenses over 1%.
Real estate.
REITs, or real-estate investment trusts, have been gutted in the housing crisis, losing more than 40% so far this year after an 18% drop in 2007. Many REITs are now priced as if people and businesses will never again want roofs over their heads. The safest choice: a basket holding dozens of real-estate bundles, like Vanguard REIT Index fund.
Finally, if you have cash and courage, consider a vacation property or second home. Nearly two-thirds of the condominiums built in and around Myrtle Beach, S.C. during the boom remain unsold as of June, says the National Association of Home Builders. A similar supply glut has clogged markets in other getaways like Tampa, Fla., and San Diego. With due diligence, you could get both a high financial and a high psychic return.
Email: intelligentinvestor@wsj.com.
http://online.wsj.com/article/SB122671161003230223.html
In This Market, Dividends Look Great
OCTOBER 19, 2008
In This Market, Dividends Look Great
By GREGORY ZUCKERMAN
The brutal drops in stock prices in recent weeks have devastated investors' portfolios. That's the bad news.
The good news: The stock-market plunge has also made a number of quality companies paying hefty dividends much cheaper -- boosting their "dividend yield," or the annualized dividend as a percentage of the stock price. That has some analysts recommending these shares to investors eager for some ballast in a rough market.
Indeed, stocks such as Coca-Cola, Altria Group and Merck sport dividend yields ranging from 3.4% to 6.6% and are considered relatively safe picks even in a painful global recession.
But some high-dividend stocks can be dangerous, especially as corporate profits fall, cash flows shrink and companies find it more difficult to make these payments to shareholders. Dividends generally are the second expenditure that companies trim to conserve cash in a downturn, after stock buybacks. Some investors piled into Bank of America in the past few months, attracted by a dividend yield that topped 7%. But earlier this month, the bank slashed its dividend in half, sending its shares lower.
Look Beyond Yields
In selecting stocks, "a pure dividend view misses the risk of earnings adjustments that could force future dividend cuts," says Tobias Levkovich, Citigroup's chief U.S. equity strategist. "There is lots of risk for industrial, energy and materials firms that likely will suffer margin deterioration as the global economy slows and internal cash needs grow.
"Conversely," he adds, "financial and health-care companies may be in a far better position, as many diversified financial stocks already have gone through dividend reductions, while health-care entities are generally less cyclical."
Last week, stocks went on a roller-coaster, soaring on Monday, tumbling later in the week, and finishing the week with the Dow Jones Industrial Average up 4.8%.
The turbulence makes companies that pay a reliable, hefty dividend much more attractive. Coca-Cola, for example, has a 3.4% yield and has been on a roll, despite the weakening global economy. Coke posted better-than-expected third-quarter profit growth of 14%, as strong growth from international markets helped offset weakening U.S. beverage sales. About 81% of Coke's profit came from foreign markets last year, and the company has expanded in emerging markets. Coke's revenues from Latin America, a relative bright spot in the globe, jumped 24% in the third quarter.
Drug companies like Merck have had more challenges, amid a paucity of blockbuster new drugs and a weakening dollar. But Merck now trades for less than nine times its 2009 expected earnings, and its dividend -- producing a yield of 5.3% -- is viewed as relatively safe.
Consider Utilities
Although utilities' shares have fallen sharply, some investors and analysts see their dividends as stable, and argue that the shares could be strong because they will outperform in a downturn. Goldman Sachs recommends American Electric Power, Consolidated Edison and Entergy. These stocks have dividend yields between 3.7% and 6%.
Whitney Tilson, who helps run hedge fund T2Partners, is a fan of tobacco maker Altria, which has a 6.6% dividend yield and may not see much of a sales slump in a downturn.
He also likes Crosstex Energy LP, a master limited partnership that operates natural-gas pipelines and processing and treatment plants. The stock has tumbled 57% in the past year, but the dividend has risen to an annualized $2.52, for a yield of 17.3%. Mr. Tilson says he expects the payout won't be cut.
Freeport-McMoRan Copper & Gold has a 6.1% dividend yield and trades for less than five times its expected 2009 earnings. The catch? It has suffered as commodity prices have plunged. Shares have been dumped by hedge funds -- former fans of the stock that have found themselves under heavy pressure lately and eager to raise cash. Any stabilization of commodity prices likely would leave the company in a strong position, analysts say.
But investors should be careful about high-dividend payers. Some analysts say investors should be wary before buying shares of CIT Group, a lender that sports an 8.5% dividend yield, because the company could see rougher times in the months ahead. The company cut its annualized dividend from $1 to 40 cents earlier this year.
A CIT spokesman says "the dividend is paid at the Board's discretion and serves as an indication of their confidence in CIT's long-term earnings potential."
'Unsustainable' Dividend
Another stock to be wary of: McClatchy, a newspaper company with a dividend yield of 10.2%, even after recently halving its payout. "Their dividend is unsustainable and will likely be cut" again, says Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "It's a tough business, in this environment especially."
Richard Tullo, an independent analyst, also is concerned about whether New York Times and Eastman Kodak can continue to pay dividends producing yields of 7.4% and 4.1%, respectively. The Times's "rich dividend may be sacrificed, as earnings will remain weak and as the company will have to move to strengthen its balance sheet," Mr. Tullo says, adding that Kodak's dividend could be cut as the company diversifies into new businesses.
Representatives of McClatchy, New York Times and Kodak declined to comment.
Mr. Tilson urges continued caution regarding many financial shares. "We would stay away from almost all high-yielding financials," he says. A high dividend yield for a bank or other firm under pressure "indicates the skepticism investors have that the company will stay alive…. Also, the government could force them to eliminate the dividend" to conserve needed cash.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
http://online.wsj.com/article/SB122438121647847893.html
In This Market, Dividends Look Great
By GREGORY ZUCKERMAN
The brutal drops in stock prices in recent weeks have devastated investors' portfolios. That's the bad news.
The good news: The stock-market plunge has also made a number of quality companies paying hefty dividends much cheaper -- boosting their "dividend yield," or the annualized dividend as a percentage of the stock price. That has some analysts recommending these shares to investors eager for some ballast in a rough market.
Indeed, stocks such as Coca-Cola, Altria Group and Merck sport dividend yields ranging from 3.4% to 6.6% and are considered relatively safe picks even in a painful global recession.
But some high-dividend stocks can be dangerous, especially as corporate profits fall, cash flows shrink and companies find it more difficult to make these payments to shareholders. Dividends generally are the second expenditure that companies trim to conserve cash in a downturn, after stock buybacks. Some investors piled into Bank of America in the past few months, attracted by a dividend yield that topped 7%. But earlier this month, the bank slashed its dividend in half, sending its shares lower.
Look Beyond Yields
In selecting stocks, "a pure dividend view misses the risk of earnings adjustments that could force future dividend cuts," says Tobias Levkovich, Citigroup's chief U.S. equity strategist. "There is lots of risk for industrial, energy and materials firms that likely will suffer margin deterioration as the global economy slows and internal cash needs grow.
"Conversely," he adds, "financial and health-care companies may be in a far better position, as many diversified financial stocks already have gone through dividend reductions, while health-care entities are generally less cyclical."
Last week, stocks went on a roller-coaster, soaring on Monday, tumbling later in the week, and finishing the week with the Dow Jones Industrial Average up 4.8%.
The turbulence makes companies that pay a reliable, hefty dividend much more attractive. Coca-Cola, for example, has a 3.4% yield and has been on a roll, despite the weakening global economy. Coke posted better-than-expected third-quarter profit growth of 14%, as strong growth from international markets helped offset weakening U.S. beverage sales. About 81% of Coke's profit came from foreign markets last year, and the company has expanded in emerging markets. Coke's revenues from Latin America, a relative bright spot in the globe, jumped 24% in the third quarter.
Drug companies like Merck have had more challenges, amid a paucity of blockbuster new drugs and a weakening dollar. But Merck now trades for less than nine times its 2009 expected earnings, and its dividend -- producing a yield of 5.3% -- is viewed as relatively safe.
Consider Utilities
Although utilities' shares have fallen sharply, some investors and analysts see their dividends as stable, and argue that the shares could be strong because they will outperform in a downturn. Goldman Sachs recommends American Electric Power, Consolidated Edison and Entergy. These stocks have dividend yields between 3.7% and 6%.
Whitney Tilson, who helps run hedge fund T2Partners, is a fan of tobacco maker Altria, which has a 6.6% dividend yield and may not see much of a sales slump in a downturn.
He also likes Crosstex Energy LP, a master limited partnership that operates natural-gas pipelines and processing and treatment plants. The stock has tumbled 57% in the past year, but the dividend has risen to an annualized $2.52, for a yield of 17.3%. Mr. Tilson says he expects the payout won't be cut.
Freeport-McMoRan Copper & Gold has a 6.1% dividend yield and trades for less than five times its expected 2009 earnings. The catch? It has suffered as commodity prices have plunged. Shares have been dumped by hedge funds -- former fans of the stock that have found themselves under heavy pressure lately and eager to raise cash. Any stabilization of commodity prices likely would leave the company in a strong position, analysts say.
But investors should be careful about high-dividend payers. Some analysts say investors should be wary before buying shares of CIT Group, a lender that sports an 8.5% dividend yield, because the company could see rougher times in the months ahead. The company cut its annualized dividend from $1 to 40 cents earlier this year.
A CIT spokesman says "the dividend is paid at the Board's discretion and serves as an indication of their confidence in CIT's long-term earnings potential."
'Unsustainable' Dividend
Another stock to be wary of: McClatchy, a newspaper company with a dividend yield of 10.2%, even after recently halving its payout. "Their dividend is unsustainable and will likely be cut" again, says Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "It's a tough business, in this environment especially."
Richard Tullo, an independent analyst, also is concerned about whether New York Times and Eastman Kodak can continue to pay dividends producing yields of 7.4% and 4.1%, respectively. The Times's "rich dividend may be sacrificed, as earnings will remain weak and as the company will have to move to strengthen its balance sheet," Mr. Tullo says, adding that Kodak's dividend could be cut as the company diversifies into new businesses.
Representatives of McClatchy, New York Times and Kodak declined to comment.
Mr. Tilson urges continued caution regarding many financial shares. "We would stay away from almost all high-yielding financials," he says. A high dividend yield for a bank or other firm under pressure "indicates the skepticism investors have that the company will stay alive…. Also, the government could force them to eliminate the dividend" to conserve needed cash.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
http://online.wsj.com/article/SB122438121647847893.html
**Market Strategies for the Very Brave
Market Strategies for the Very Brave
By GREGORY ZUCKERMAN
The stock market's tumble this year has left investors grappling for answers. Prices are down so far that many don't feel they should sell. But those who recently turned bullish -- including Warren Buffett, the most noted investor in recent memory -- were proved wrong, as the market kept plunging and the economy's outlook turned much bleaker.
The market is still way, way down for the year, despite the strong Thanksgiving-week rally. The Dow Jones Industrial Average rose 9.7% last week, but it's down 33% for the year. The Nasdaq was up 11% last week as well, but is off 42% for the year.
Downturns don't last forever, however, and profits usually result for those with enough dry ammunition to be able to participate in the next upturn.
That's why we've polled well-regarded strategists to develop a list of bear-market strategies to guide investors through this difficult period.
1 Dump the Dogs. If you've got stocks with weakening fundamentals, especially in industries dependent on the weakening consumer, wait for an upward bounce and sell before year's end. Vicious bear markets are noted for their sudden spikes, so there will be opportunity to take advantage of a move higher by culling your portfolio.
This kind of selling enables an investor to take advantage of a tax loss for this year. And if you're afraid of taking money out of the market at these beaten-down levels, it can be placed in shares of companies that are safer, and better candidates for a recovery.
One example: Coca-Cola, which has seen its operations hold up well, sports a dividend yield of about 3.5% and has a reasonable price/earnings multiple of less than 13, based on the next 12 months' earnings.
2 Be Price Conscious. Just as consumers are learning to look for bargains in their everyday spending, investors also need to pay more attention to costs. Many mutual funds charge annual expense ratios that add up to more than 1%. That's usually an exorbitant cost to pay in a bear market when exchange-traded funds and index-mutual funds can cost 0.70% or even less.
3 Be Wary of Technology. Investors are aware that consumer-focused companies are weakening. But Tobias Levkovich, Citigroup's chief U.S. equity strategist, says "we suspect that capital spending will drop 15%" over the next year. As a result, "even technology and resource companies get hit" from that drop, as will equipment manufacturers. "It's not just the consumer where fundamentals are weakening," he says.
4 Consider 'Sticky' Firms. Mr. Levkovich says to look for industries that have "sticky" customers and that still have some pricing power, such as managed-care and property-and-casualty insurers. Generic-drug giant Teva Pharmaceutical Industries, for example, could benefit if the Obama administration looks to curb drug costs, and the stock trades for about 13 times next year's expected earnings, a reasonable multiple.
5 Look for Attractive Bonds. The debt markets have had an even rougher time than the stock markets this year, crippling all kinds of bonds. That's for good reason -- the crisis is really about the nation's recent debt binge, and the massive deleveraging that is putting pressure on almost any kind of company with sizable debts.
But bonds of a number of high-quality companies have been unfairly punished as investors have dumped bond holdings, making these investments much more attractive. Analysts say investors should stick with highly rated bonds with juicy yields, but make sure to focus on stable companies in businesses that aren't dependent on consumer spending.
The top pick of Morgan Stanley's analysts: long-term debt of Verizon, which has a strong balance sheet and is among the strong wireless-phone operations through Verizon Wireless, its joint venture with Vodafone Group. The bonds yield almost 10% over the next 25 years -- much higher yields than in recent years and enough to compensate investors for their risk, Morgan Stanley argues.
6 Don't Jump In Feet First. The market is acting irrationally, right? When the dividend yield on the Standard & Poor's 500-stock index is about the same as the yield on 10-year Treasury notes, around 3.5% -- the first time that has happened in about 50 years -- it must mean stocks are a buy, right?
Not so fast. Many companies may have to trim dividends to conserve cash, making the juicy dividend yields of many shares unsustainable. So only focus on the dividends of companies that will be able to weather the downturn. At the same time, super-slim yields of 1% or less on some Treasury securities could signal a long-term economic downturn. The upshot: It's not a time to jump into the market with two feet, because the economy could be entering an extended period of weakness.
7 Tiptoe in. Despite a cloudy outlook, if you won't need to pull money out of the market for the next five or so years, there has never been a better time to stick to a "dollar-cost averaging" program, slowly putting a set amount into the market at regular intervals. The next five years could feature a stagnant U.S. stock market, or perhaps even worse performance. But over the long haul, stocks remain the better bet compared with 2% yields on five-year Treasurys. James Paulsen, chief investment officer at Wells Capital Management, recommends an emerging-markets ETF, such as iShares MSCI Emerging Markets Index Fund, for those with a long-term perspective.
Email: forum.sunday03@wsj.com
http://online.wsj.com/article/SB122800695619466775.html
By GREGORY ZUCKERMAN
The stock market's tumble this year has left investors grappling for answers. Prices are down so far that many don't feel they should sell. But those who recently turned bullish -- including Warren Buffett, the most noted investor in recent memory -- were proved wrong, as the market kept plunging and the economy's outlook turned much bleaker.
The market is still way, way down for the year, despite the strong Thanksgiving-week rally. The Dow Jones Industrial Average rose 9.7% last week, but it's down 33% for the year. The Nasdaq was up 11% last week as well, but is off 42% for the year.
Downturns don't last forever, however, and profits usually result for those with enough dry ammunition to be able to participate in the next upturn.
That's why we've polled well-regarded strategists to develop a list of bear-market strategies to guide investors through this difficult period.
1 Dump the Dogs. If you've got stocks with weakening fundamentals, especially in industries dependent on the weakening consumer, wait for an upward bounce and sell before year's end. Vicious bear markets are noted for their sudden spikes, so there will be opportunity to take advantage of a move higher by culling your portfolio.
This kind of selling enables an investor to take advantage of a tax loss for this year. And if you're afraid of taking money out of the market at these beaten-down levels, it can be placed in shares of companies that are safer, and better candidates for a recovery.
One example: Coca-Cola, which has seen its operations hold up well, sports a dividend yield of about 3.5% and has a reasonable price/earnings multiple of less than 13, based on the next 12 months' earnings.
2 Be Price Conscious. Just as consumers are learning to look for bargains in their everyday spending, investors also need to pay more attention to costs. Many mutual funds charge annual expense ratios that add up to more than 1%. That's usually an exorbitant cost to pay in a bear market when exchange-traded funds and index-mutual funds can cost 0.70% or even less.
3 Be Wary of Technology. Investors are aware that consumer-focused companies are weakening. But Tobias Levkovich, Citigroup's chief U.S. equity strategist, says "we suspect that capital spending will drop 15%" over the next year. As a result, "even technology and resource companies get hit" from that drop, as will equipment manufacturers. "It's not just the consumer where fundamentals are weakening," he says.
4 Consider 'Sticky' Firms. Mr. Levkovich says to look for industries that have "sticky" customers and that still have some pricing power, such as managed-care and property-and-casualty insurers. Generic-drug giant Teva Pharmaceutical Industries, for example, could benefit if the Obama administration looks to curb drug costs, and the stock trades for about 13 times next year's expected earnings, a reasonable multiple.
5 Look for Attractive Bonds. The debt markets have had an even rougher time than the stock markets this year, crippling all kinds of bonds. That's for good reason -- the crisis is really about the nation's recent debt binge, and the massive deleveraging that is putting pressure on almost any kind of company with sizable debts.
But bonds of a number of high-quality companies have been unfairly punished as investors have dumped bond holdings, making these investments much more attractive. Analysts say investors should stick with highly rated bonds with juicy yields, but make sure to focus on stable companies in businesses that aren't dependent on consumer spending.
The top pick of Morgan Stanley's analysts: long-term debt of Verizon, which has a strong balance sheet and is among the strong wireless-phone operations through Verizon Wireless, its joint venture with Vodafone Group. The bonds yield almost 10% over the next 25 years -- much higher yields than in recent years and enough to compensate investors for their risk, Morgan Stanley argues.
6 Don't Jump In Feet First. The market is acting irrationally, right? When the dividend yield on the Standard & Poor's 500-stock index is about the same as the yield on 10-year Treasury notes, around 3.5% -- the first time that has happened in about 50 years -- it must mean stocks are a buy, right?
Not so fast. Many companies may have to trim dividends to conserve cash, making the juicy dividend yields of many shares unsustainable. So only focus on the dividends of companies that will be able to weather the downturn. At the same time, super-slim yields of 1% or less on some Treasury securities could signal a long-term economic downturn. The upshot: It's not a time to jump into the market with two feet, because the economy could be entering an extended period of weakness.
7 Tiptoe in. Despite a cloudy outlook, if you won't need to pull money out of the market for the next five or so years, there has never been a better time to stick to a "dollar-cost averaging" program, slowly putting a set amount into the market at regular intervals. The next five years could feature a stagnant U.S. stock market, or perhaps even worse performance. But over the long haul, stocks remain the better bet compared with 2% yields on five-year Treasurys. James Paulsen, chief investment officer at Wells Capital Management, recommends an emerging-markets ETF, such as iShares MSCI Emerging Markets Index Fund, for those with a long-term perspective.
Email: forum.sunday03@wsj.com
http://online.wsj.com/article/SB122800695619466775.html
Investment : Types & Overview
Investment : Types & Overview
Though the term investment simply means using the present income for generating wealth in the future or net addition to the stock of capital, still it has its infinite meanings through its versatile application in the real practices.
The term investment has gained its strength in the recent years through changing economic climate over the world. The world business climate is changing very fast and it is the term investment, which is in the perfect direction to provide smell to more than 6 billions over the world.
From the latest United Nations Conference on Trade and Development( UNCTAD report, it is found that the developing nations over the world have actively participated in the field of investment. As to UNCTAD statistics, investment to the developing countries over the world has nearly doubled in two years.
Increasing liberalization among the countries over the world can justify the best result from investment. Present economic success brought by the countries such as India and China have gained a lot from the investment boom.
Present economic growth is largely dependent upon investment factor. This section covers meaning of investment, trend in investment and investment companies over the world.
Investment refers to an asset which is purchased with the expectation that it will generate income in the future or its’ value will appreciate in future so that it will be sold at a higher price. In other sense, we can say that Investment is the purchase of the goods which are not consumed at the present but is used to create wealth in the future. Investment cannot be done without Savings. Savings provides the funds necessary for investment. Investment is influenced by Rate of Interest. Falling interest rates result in increasing rate of Investment. Investment plays a vital role in economic growth of the country as Investment increases the production capacity of the economy.
The meaning of the term Investment is different in different genres. In Economics, Investment is the production per unit time of goods which are not consumed at present and are used for future production. According to economic theory Investment depends on income and rate of interest. An increase in income positively affects the Investment but an increasing rate of interest has a negative effect on it. The interest rate in this case is nothing but the opportunity cost of investing the funds rather than using them at the present. In Finance, Investment means purchasing of securities or any other assets in money market or capital market or purchase of any liquid assets like gold or residential real estate property or commercial real estate property.
Find below various Investment types , investment companies, and real estate investment:
Investment Companies & Types
Edward Jones Investment
Fidelity Investment
Franklin Templeton Investments
Vanguard Investment
Fremont Investment
Land Investment
Property Investment
Bank of America Investment
Financial Advisors
Financial Planning
Private Equity
Retirement Planning
Investment Overview
Finance Investment
Investment Brokerage
Investment Guide
Online Investment
Investment Securities
Return on Investment
Business Investment Opportunity
Investment Strategy
Types of Financial Advisors
Unit Trust
Venture Capital
Wealth Management
Real Estate Investment
Real Estate Investment
Real Estate Investment Property
Real Estate Investment Trust
Investment Firm
Fremont Investment and Loan
Investment Property Loan
Investment Banks
http://www.economywatch.com/investment/
Though the term investment simply means using the present income for generating wealth in the future or net addition to the stock of capital, still it has its infinite meanings through its versatile application in the real practices.
The term investment has gained its strength in the recent years through changing economic climate over the world. The world business climate is changing very fast and it is the term investment, which is in the perfect direction to provide smell to more than 6 billions over the world.
From the latest United Nations Conference on Trade and Development( UNCTAD report, it is found that the developing nations over the world have actively participated in the field of investment. As to UNCTAD statistics, investment to the developing countries over the world has nearly doubled in two years.
Increasing liberalization among the countries over the world can justify the best result from investment. Present economic success brought by the countries such as India and China have gained a lot from the investment boom.
Present economic growth is largely dependent upon investment factor. This section covers meaning of investment, trend in investment and investment companies over the world.
Investment refers to an asset which is purchased with the expectation that it will generate income in the future or its’ value will appreciate in future so that it will be sold at a higher price. In other sense, we can say that Investment is the purchase of the goods which are not consumed at the present but is used to create wealth in the future. Investment cannot be done without Savings. Savings provides the funds necessary for investment. Investment is influenced by Rate of Interest. Falling interest rates result in increasing rate of Investment. Investment plays a vital role in economic growth of the country as Investment increases the production capacity of the economy.
The meaning of the term Investment is different in different genres. In Economics, Investment is the production per unit time of goods which are not consumed at present and are used for future production. According to economic theory Investment depends on income and rate of interest. An increase in income positively affects the Investment but an increasing rate of interest has a negative effect on it. The interest rate in this case is nothing but the opportunity cost of investing the funds rather than using them at the present. In Finance, Investment means purchasing of securities or any other assets in money market or capital market or purchase of any liquid assets like gold or residential real estate property or commercial real estate property.
Find below various Investment types , investment companies, and real estate investment:
Investment Companies & Types
Edward Jones Investment
Fidelity Investment
Franklin Templeton Investments
Vanguard Investment
Fremont Investment
Land Investment
Property Investment
Bank of America Investment
Financial Advisors
Financial Planning
Private Equity
Retirement Planning
Investment Overview
Finance Investment
Investment Brokerage
Investment Guide
Online Investment
Investment Securities
Return on Investment
Business Investment Opportunity
Investment Strategy
Types of Financial Advisors
Unit Trust
Venture Capital
Wealth Management
Real Estate Investment
Real Estate Investment
Real Estate Investment Property
Real Estate Investment Trust
Investment Firm
Fremont Investment and Loan
Investment Property Loan
Investment Banks
http://www.economywatch.com/investment/
Insight into Stock Market Economy
Stock Market Economy
The Stock Exchange, “share market” or a “bourse” is a mutual organization for traders or “stock brokers” who trade in different company securities and stocks. Companies or businesses have to be “listed” in the bourses in order for any trading or exchange in their “shares” or equities to be carried out. Stock markets are also the place for trading in unit trusts and bonds issued by the government.
Like most other markets, the Stock market economy also depends on a number of factors with investor confidence being one of the keys. The amount of money that an investor will put on a share of a particular company depends on his perception of the company doing well in future or has been doing so for the past period. By putting in his money in the share of a company, the person becomes entitled to a share of the profit or loss the company makes. The initial offering of stocks and bonds is carried on at the primary market whereas trading of securities happens at the secondary market. Exchange of stocks, however, is the most important function of the Stock Market.
In the long run, as the shares are owned by the companies themselves, improved profits of the company are reflected in high stock prices also resulting in high stock indices. But the stock market is known as being one of the most volatile markets with ups and downs much difficult to comprehend than highs and lows in corporate profits. Swings in stock markets are known to be driven more by the speculative psychology of investors than actual economic analysis. Stock markets are sometimes said to be characterized by irrational exuberance rather than corporate performance being the real cause. Some analysts also point out that increased earnings on the part of investors will engage them more in speculative activities in the stock market.
Some of the most important stock indices reflecting the swings in the stock prices are:
Dow Jones Industrial Average
Standard and Poor 500 Index
NASDAQ
NYSE (New York Stock Exchange)
The major Indian Stock indices such as the Sensex and the Nifty have also shown huge increases from the early 1990’s and although Dalal Street experienced huge crashes in-between.
While stock market capitalization in India has increased by four times in the decade of 91’-92’ to 2001-02, capital formation in the country had barely increased over that decade. As a result, investment has also not risen commensurately which again suggests that the financial markets dance to a tune of their own. Upward swings in the stock market in early 90’s were mainly caused by a rise in Foreign Institutional Investment which only led to increase in the country’s foreign exchange reserves.
Although Stocks can mobilize savings into investment and can cause the growth of the company and increase its market share, it is not always a barometer of the economy in its true sense. Redistribution of wealth is not always indicated as fallout of a surge in the Stock indices. However, socio-political stability devoid of any recessionary effects can have a positive influence on the Stock Market Economy.
http://www.economywatch.com/market-economy/stock-market-economy.html
The Stock Exchange, “share market” or a “bourse” is a mutual organization for traders or “stock brokers” who trade in different company securities and stocks. Companies or businesses have to be “listed” in the bourses in order for any trading or exchange in their “shares” or equities to be carried out. Stock markets are also the place for trading in unit trusts and bonds issued by the government.
Like most other markets, the Stock market economy also depends on a number of factors with investor confidence being one of the keys. The amount of money that an investor will put on a share of a particular company depends on his perception of the company doing well in future or has been doing so for the past period. By putting in his money in the share of a company, the person becomes entitled to a share of the profit or loss the company makes. The initial offering of stocks and bonds is carried on at the primary market whereas trading of securities happens at the secondary market. Exchange of stocks, however, is the most important function of the Stock Market.
In the long run, as the shares are owned by the companies themselves, improved profits of the company are reflected in high stock prices also resulting in high stock indices. But the stock market is known as being one of the most volatile markets with ups and downs much difficult to comprehend than highs and lows in corporate profits. Swings in stock markets are known to be driven more by the speculative psychology of investors than actual economic analysis. Stock markets are sometimes said to be characterized by irrational exuberance rather than corporate performance being the real cause. Some analysts also point out that increased earnings on the part of investors will engage them more in speculative activities in the stock market.
Some of the most important stock indices reflecting the swings in the stock prices are:
Dow Jones Industrial Average
Standard and Poor 500 Index
NASDAQ
NYSE (New York Stock Exchange)
The major Indian Stock indices such as the Sensex and the Nifty have also shown huge increases from the early 1990’s and although Dalal Street experienced huge crashes in-between.
While stock market capitalization in India has increased by four times in the decade of 91’-92’ to 2001-02, capital formation in the country had barely increased over that decade. As a result, investment has also not risen commensurately which again suggests that the financial markets dance to a tune of their own. Upward swings in the stock market in early 90’s were mainly caused by a rise in Foreign Institutional Investment which only led to increase in the country’s foreign exchange reserves.
Although Stocks can mobilize savings into investment and can cause the growth of the company and increase its market share, it is not always a barometer of the economy in its true sense. Redistribution of wealth is not always indicated as fallout of a surge in the Stock indices. However, socio-political stability devoid of any recessionary effects can have a positive influence on the Stock Market Economy.
http://www.economywatch.com/market-economy/stock-market-economy.html
Is cash really king?
Buffett makes another prediction, but one that the world’s media did not pick up on. He said that “the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts”.
Buffett’s point is that the only way that the US – and other Anglo Saxon governments for that matter – is going to get itself out of its debt hole, is by inflating its way out.
In a best case scenario, this only entails sharply rising interest rates and substantial dollar depreciation.
In the worst case, a loss of confidence in banking systems and gold, assuming it is not outlawed, perhaps at $10,000 per ounce.
In both cases, holding cash would be a very bad idea.
In an inflationary environment, as Buffett says, it is best to hold stocks. Just make sure they are ones that will survive.
-----
Is cash really king?
By Hugh Young
19 November 2008
Holding cash in an inflationary environment is a very bad idea.
On October 17 Warren Buffett wrote in The New York Times that “equities will almost certainly outperform cash over the next decade, probably to a substantial degree”. Amid all the confusion, such a clear and bold prediction is jolting. Cash is king, right? How can Buffett be so sure that equities will mount a royal coup?
Buffett makes another prediction, but one that the world’s media did not pick up on. He said that “the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts”.
What! Inflation? Wasn’t that yesterday’s story? Oil prices have halved, as have the prices of many other commodities. And anyway, commodity prices never stayed high enough to trigger wage spirals. All they did was cause demand to fall.
Buffett’s point is that the printing presses have been turned on, following years of reckless monetary expansion, and that all the hundreds of billions of extra dollars recently created to prop up the banking system will ultimately feed through to rising prices (remember that inflation is really about money supply. Rising prices are the effect of inflation, not inflation itself).
Taking into account unfunded social security and Medicare obligations, the total US federal debt in 2006 was $49.4 trillion, equivalent to $160,000 for every American. Fast forward two years, during which there was an acceleration of government debt accumulation, and you get close to $300,000 for every working American. If Americans were to set aside, say, 3% of their average annual household income of around $48,000, it would take more than 200 years to pay off the debt.
The conjuring trick here required to create this debt mountain has been to convince people, Americans and foreigners alike, that the dollar, dollar deposits and federal debt are worth something. Spin is provided by implicit government guarantees, and continual reference to the dollar as the world’s de facto reserve currency. As long as there was confidence in the currency, debt (relative to economic activity) could rise forever.
We take for granted that bits of paper (bank notes) and electronic records in computer chips (bank deposits) have “value” to such an extent that it is impossible to imagine it any other way or, worse, the entire system collapsing. Article one, section 10, of the United States Constitution states that “no state shall…coin money; emit bills of credit; make any Thing but gold and silver Coin a Tender in Payment of Debts”.
Why were the founding fathers so against paper money (fiat currency)? Because they were aware that, throughout history, every single state-controlled fiat currency system had ultimately failed. The temptations to create money out of nothing could never be resisted, leading to the corruption of politicians and the elite and unsustainable wealth disparity between rich and poor.
George Washington had noted in 1787 that “paper money has had the effect to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice”. Later, in 1798, Thomas Jefferson wrote that the federal government has no power “of making paper money or anything else a legal tender”, and he advocated a constitutional amendment to enforce this principle by denying the federal government the power to borrow.
In days gone by money or, as it is also known, “IOUs”, developed naturally in the market. The best medium for these IOUs was gold coins as they were difficult to fake (gold is heavy, sufficiently scarce, expensive to extract and impossible to synthesise below its market value). But governments soon took control, often by guaranteeing the quality and purity of the coins. As governments outspent their revenues, they found ways to counterfeit the currency by reducing the amount of gold in the coins, hoping their subjects would not discover the fraud. But the people always did, and they tended to react badly.
What is happening today is no different. For money to be considered legal tender it must have a maker (person that will make the payment), a payee (person that will receive the payment), an amount to be paid, and a due date. Dollar bills used to state that the bearer would be paid on demand. In 1963 these words were removed.
By the same token the creation of bank deposits involves even less work than notes and coins, which at least require machines with moving parts. To create bank deposits, a bank simply needs to find someone to lend to, then punches a number into a computer. Boosh! A bank deposit! Even if the borrower spends the money such that it ends up in another bank, it’s still in the system.
When President Nixon closed the gold window in 1971, refusing, as promised under the Bretton Woods Agreement, to exchange dollars for one thirty fifth of an ounce of gold (there was not enough gold in the coffers), the stage was set for massive and unconstrained monetary expansion. Under Bretton Woods, credit as a percentage of GDP had been maintained at around 150%. From 1980 to 2007, it rose from 162% to 334%. The last 30 years have been one huge, credit-fuelled party. But the booze has now run out and the hangovers are just beginning.
Buffett’s point is that the only way that the US – and other Anglo Saxon governments for that matter – is going to get itself out of its debt hole, is by inflating its way out. In a best case scenario, this only entails sharply rising interest rates and substantial dollar depreciation. In the worst case, a loss of confidence in banking systems and gold, assuming it is not outlawed, perhaps at $10,000 per ounce. In both cases, holding cash would be a very bad idea. In an inflationary environment, as Buffett says, it is best to hold stocks. Just make sure they are ones that will survive.
Hugh Young is the Singapore-based managing director of Aberdeen Asset Management Asia.
© Haymarket Media Limited. All rights reserved.
http://www.asianinvestor.net/article.aspx?CIaNID=89287
Buffett’s point is that the only way that the US – and other Anglo Saxon governments for that matter – is going to get itself out of its debt hole, is by inflating its way out.
In a best case scenario, this only entails sharply rising interest rates and substantial dollar depreciation.
In the worst case, a loss of confidence in banking systems and gold, assuming it is not outlawed, perhaps at $10,000 per ounce.
In both cases, holding cash would be a very bad idea.
In an inflationary environment, as Buffett says, it is best to hold stocks. Just make sure they are ones that will survive.
-----
Is cash really king?
By Hugh Young
19 November 2008
Holding cash in an inflationary environment is a very bad idea.
On October 17 Warren Buffett wrote in The New York Times that “equities will almost certainly outperform cash over the next decade, probably to a substantial degree”. Amid all the confusion, such a clear and bold prediction is jolting. Cash is king, right? How can Buffett be so sure that equities will mount a royal coup?
Buffett makes another prediction, but one that the world’s media did not pick up on. He said that “the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts”.
What! Inflation? Wasn’t that yesterday’s story? Oil prices have halved, as have the prices of many other commodities. And anyway, commodity prices never stayed high enough to trigger wage spirals. All they did was cause demand to fall.
Buffett’s point is that the printing presses have been turned on, following years of reckless monetary expansion, and that all the hundreds of billions of extra dollars recently created to prop up the banking system will ultimately feed through to rising prices (remember that inflation is really about money supply. Rising prices are the effect of inflation, not inflation itself).
Taking into account unfunded social security and Medicare obligations, the total US federal debt in 2006 was $49.4 trillion, equivalent to $160,000 for every American. Fast forward two years, during which there was an acceleration of government debt accumulation, and you get close to $300,000 for every working American. If Americans were to set aside, say, 3% of their average annual household income of around $48,000, it would take more than 200 years to pay off the debt.
The conjuring trick here required to create this debt mountain has been to convince people, Americans and foreigners alike, that the dollar, dollar deposits and federal debt are worth something. Spin is provided by implicit government guarantees, and continual reference to the dollar as the world’s de facto reserve currency. As long as there was confidence in the currency, debt (relative to economic activity) could rise forever.
We take for granted that bits of paper (bank notes) and electronic records in computer chips (bank deposits) have “value” to such an extent that it is impossible to imagine it any other way or, worse, the entire system collapsing. Article one, section 10, of the United States Constitution states that “no state shall…coin money; emit bills of credit; make any Thing but gold and silver Coin a Tender in Payment of Debts”.
Why were the founding fathers so against paper money (fiat currency)? Because they were aware that, throughout history, every single state-controlled fiat currency system had ultimately failed. The temptations to create money out of nothing could never be resisted, leading to the corruption of politicians and the elite and unsustainable wealth disparity between rich and poor.
George Washington had noted in 1787 that “paper money has had the effect to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice”. Later, in 1798, Thomas Jefferson wrote that the federal government has no power “of making paper money or anything else a legal tender”, and he advocated a constitutional amendment to enforce this principle by denying the federal government the power to borrow.
In days gone by money or, as it is also known, “IOUs”, developed naturally in the market. The best medium for these IOUs was gold coins as they were difficult to fake (gold is heavy, sufficiently scarce, expensive to extract and impossible to synthesise below its market value). But governments soon took control, often by guaranteeing the quality and purity of the coins. As governments outspent their revenues, they found ways to counterfeit the currency by reducing the amount of gold in the coins, hoping their subjects would not discover the fraud. But the people always did, and they tended to react badly.
What is happening today is no different. For money to be considered legal tender it must have a maker (person that will make the payment), a payee (person that will receive the payment), an amount to be paid, and a due date. Dollar bills used to state that the bearer would be paid on demand. In 1963 these words were removed.
By the same token the creation of bank deposits involves even less work than notes and coins, which at least require machines with moving parts. To create bank deposits, a bank simply needs to find someone to lend to, then punches a number into a computer. Boosh! A bank deposit! Even if the borrower spends the money such that it ends up in another bank, it’s still in the system.
When President Nixon closed the gold window in 1971, refusing, as promised under the Bretton Woods Agreement, to exchange dollars for one thirty fifth of an ounce of gold (there was not enough gold in the coffers), the stage was set for massive and unconstrained monetary expansion. Under Bretton Woods, credit as a percentage of GDP had been maintained at around 150%. From 1980 to 2007, it rose from 162% to 334%. The last 30 years have been one huge, credit-fuelled party. But the booze has now run out and the hangovers are just beginning.
Buffett’s point is that the only way that the US – and other Anglo Saxon governments for that matter – is going to get itself out of its debt hole, is by inflating its way out. In a best case scenario, this only entails sharply rising interest rates and substantial dollar depreciation. In the worst case, a loss of confidence in banking systems and gold, assuming it is not outlawed, perhaps at $10,000 per ounce. In both cases, holding cash would be a very bad idea. In an inflationary environment, as Buffett says, it is best to hold stocks. Just make sure they are ones that will survive.
Hugh Young is the Singapore-based managing director of Aberdeen Asset Management Asia.
© Haymarket Media Limited. All rights reserved.
http://www.asianinvestor.net/article.aspx?CIaNID=89287
Sunday, 30 November 2008
US Subprime: History of the Credit Crunch and Credit Crisis
US Subprime: History of the Credit Crunch and Credit Crisis
Geneva, 3 nov 2008.
In this multi-part series, we uncover the events that led to the subprime credit crunch, and analyze future financial prospects.
Part 1: INFLATING THE BUBBLE
Part 2: BURSTING THE BUBBLE
Part 3: CONFIDENCE
Part 4: UNWINDING
http://www.economywatch.com/us-subprime/History_of_subprime_credit_crunch_part_4.html
What now?
Well, this is difficult to predict as we are in uncharted territory. It has taken time for the severity of the situation to sink in with most governments. If they have been to slow to react, the IMF has given them a shake up this weekend by saying that we could see a major melt down in the world financial system if governments do not take strong action. As I write, more and more governments are coming out to support their banks.
We can be sure we are not at the end yet. There is more bad debt on the books of the banks that has not been fully written off yet. A change in accounting rules may stave off some of this, but there is still a problem. The equity markets are badly shaken and will undoubtedly be very volatile for some time to come.
The shock of it all has triggered a lack of confidence which takes time to be restored and will affect us all. The removal of the credit mountain will cause an economic slowdown, but the worry that ensues will filter down to the consumer, who will stop spending - even if he has the money to spend - and this will push the slowdown into recession. There is much pessimism around and many comparisons to the great depression of the 1930s. You have to remember when assimilating the news that bad news sells papers and keeps people glued to the news channels, far more than good news. Gloomy predictions sell better than optimistic ones. The news channels know this.
America is likely to bear the worst brunt of this, with UK close behind and then Europe. It is harder to predict the effect on the emerging markets. They will undoubtedly slow down as their export markets dry up, but the larger emerging countries have started to develop a domestic market and a new middle class and they do not carry the bad debt of the western banks. China is sitting on over $500 billion of US Treasury Bills. However, China has already started to feel the impact of a slow down with some 20 million jobs being lost already this year, according to the Sunday Times. This sounds a lot, but you have to remember they have population of over 1.3 billion, - more than 4.3 times that of USA.
Geneva, 3 nov 2008.
In this multi-part series, we uncover the events that led to the subprime credit crunch, and analyze future financial prospects.
Part 1: INFLATING THE BUBBLE
Part 2: BURSTING THE BUBBLE
Part 3: CONFIDENCE
Part 4: UNWINDING
http://www.economywatch.com/us-subprime/History_of_subprime_credit_crunch_part_4.html
What now?
Well, this is difficult to predict as we are in uncharted territory. It has taken time for the severity of the situation to sink in with most governments. If they have been to slow to react, the IMF has given them a shake up this weekend by saying that we could see a major melt down in the world financial system if governments do not take strong action. As I write, more and more governments are coming out to support their banks.
We can be sure we are not at the end yet. There is more bad debt on the books of the banks that has not been fully written off yet. A change in accounting rules may stave off some of this, but there is still a problem. The equity markets are badly shaken and will undoubtedly be very volatile for some time to come.
The shock of it all has triggered a lack of confidence which takes time to be restored and will affect us all. The removal of the credit mountain will cause an economic slowdown, but the worry that ensues will filter down to the consumer, who will stop spending - even if he has the money to spend - and this will push the slowdown into recession. There is much pessimism around and many comparisons to the great depression of the 1930s. You have to remember when assimilating the news that bad news sells papers and keeps people glued to the news channels, far more than good news. Gloomy predictions sell better than optimistic ones. The news channels know this.
America is likely to bear the worst brunt of this, with UK close behind and then Europe. It is harder to predict the effect on the emerging markets. They will undoubtedly slow down as their export markets dry up, but the larger emerging countries have started to develop a domestic market and a new middle class and they do not carry the bad debt of the western banks. China is sitting on over $500 billion of US Treasury Bills. However, China has already started to feel the impact of a slow down with some 20 million jobs being lost already this year, according to the Sunday Times. This sounds a lot, but you have to remember they have population of over 1.3 billion, - more than 4.3 times that of USA.
Recession, but we are nowhere near a depression
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The Master: Warren Buffett 9 (9/9)
For more on Buffett
Entire books have been written on Buffett, his personality, humor, lifestyle, experiences and teachings. One can enjoy the rich material available in other books devoted to him as a topic.
Another interesting place to get information from and about Buffett and Berkshire Hathaway is the corporate website, easily accessed at www.berkshirehathaway.com. Buffett's letteres to shareholders are particularly worthwhile and exemplify his deep understanding and sense of humour.
To find out what stocks your favourite guru is holding, buying, or selling, you can visit Web sites that track this sort of thing - but they come and go.
The best bet is to Google "Berkshire Hathaway Stock Holdings" or something similar (for example, George Soros Stock Holdings"). Better yet, keep up with the changes by reviewing the SEC 13F filings - do that search on "Berkshire Hathaway's 13F filings" or "George Soros 13F filings" instead.
Also visit:
The Master: Warren Buffett 9 (9/9)
The Master: Warren Buffett 8
The Master: Warren Buffett 7
The Master: Warren Buffett 6
The Master: Warren Buffett 5
The Master: Warren Buffett 4
The Master: Warren Buffett 3
The Master: Warren Buffett 2
The Master: Warren Buffett 1
Entire books have been written on Buffett, his personality, humor, lifestyle, experiences and teachings. One can enjoy the rich material available in other books devoted to him as a topic.
Another interesting place to get information from and about Buffett and Berkshire Hathaway is the corporate website, easily accessed at www.berkshirehathaway.com. Buffett's letteres to shareholders are particularly worthwhile and exemplify his deep understanding and sense of humour.
To find out what stocks your favourite guru is holding, buying, or selling, you can visit Web sites that track this sort of thing - but they come and go.
The best bet is to Google "Berkshire Hathaway Stock Holdings" or something similar (for example, George Soros Stock Holdings"). Better yet, keep up with the changes by reviewing the SEC 13F filings - do that search on "Berkshire Hathaway's 13F filings" or "George Soros 13F filings" instead.
Also visit:
The Master: Warren Buffett 9 (9/9)
The Master: Warren Buffett 8
The Master: Warren Buffett 7
The Master: Warren Buffett 6
The Master: Warren Buffett 5
The Master: Warren Buffett 4
The Master: Warren Buffett 3
The Master: Warren Buffett 2
The Master: Warren Buffett 1
The Master: Warren Buffett 8
Smaller Slices
Buffett doesn't always buy the whole company,
Buffett doesn't always buy the whole company,
- for either it is too big, or
- he simply wants to take a position without a complete commitment.
Needless to say, the list of 42 holdings in publicly traded companies as of March 2007 is instructive.
Buffett Public Company Holdings
Company--Business/Sector--Estimated 2007 P/E
Ameriprise Financial--Financial services--14.1
American Standard--Building products--10.6
USG Corporation--Building products--24.7
Norfolk Southern--Railroad--12.8
Comcast Corporation--Cable, communications--32.7
PetroChina ADRs--International energy-- ..
Gannett Corp--Newspapers--10.0
Burlington Northern--Railroad--15.0
Tyco International--Diversified--21.7
Ingersoll-Rand--Industrial--13.9
ConocoPhillips--Energy--8.2
SunTrustBanks--Financial services--13.0
H&R Block--Financial services--14.8
Home Depot--Retail--14.7
UnitedHealthGroup--Healthcare--13.4
American Express--Financial services--16.9
Nike Inc.--Consumer apparel--16.2
Torchmark Corp--Financial services--11.1
Moody's Corp--Financial services--20.8
M&T Bank--Financial services--13.6
Pier 1 Imports--Retail--..
Union Pacific--Railroad--16.8
USBancorp--Financial services--11.2
Lowe's Corp--Retail--13.9
WellPoint Inc--Healthcare--13.7
General Electric--Diversified--17.3
First Data Corp--Info services--24.4
Sanofi-Aventis ADR--Pharmaceuticals--11.3
Comdisco Holdings--Industrial--..
Wal-Mart Stores--Retail--14.5
Western Unin--Technology services--18.1
Anheuser-Busch--Consumer beverages--17.2
Wells-Fargo--Financial services--12.6
Wesco Financial--Financial services--78.8
Johnson & Johnson--Healthcare--15.1
United Parcel Service--Logistics--18.5
Costco Wholesale--Retail--24.8
Washington Post--Newspapers--26.7
Coca-Cola Co.--Consumer beverages--21.1
Procter & Gamble--Diversified consumer--18.9
Iron Mountain--Technology security--40.1
Check this out:
SEC 13F filings contain the disclosures as statements of change of ownership. You can find these 13 Fs yourself simply by doing a search on Berkshire Hathaway 13F and the year you're interested in.
http://www.hoovers.com/free/co/secdoc.xhtml?ID=10206&ipage=6253178
Also visit:
The Master: Warren Buffett 9 (9/9)
The Master: Warren Buffett 8
The Master: Warren Buffett 7
The Master: Warren Buffett 6
The Master: Warren Buffett 5
The Master: Warren Buffett 4
The Master: Warren Buffett 3
The Master: Warren Buffett 2
The Master: Warren Buffett 1
The Master: Warren Buffett 7
Berkshire Hathaway Manufacturing, Retail and Services Subsidiaries
Beyond insurance, the manufacturing, retail and service group now consists of some 70 companies large and small, all successful in their own arena.
Subsidiary Name----Subsidiary Business
Acme Brick----Face brick and other building materials
Applied Underwriters ----Worker's compensation solutions
Ben Bridge Jeweler----Retail fine jewelry
Benjamin Moore----Architectural and industrial coatings - paint
Berkshire Hathaway Homestates Companies----Specialty property/casualty insurance
Borsheim Fine Jewelry----Retail fine jewelry
Buffalo News----Newspaper
Business Wire----Business news and information services
Central States Indemnity Company----Consumer credit insurance
Clayton Homes----Modular and manufactured homes
CORT Business Services----Rental furniture
CTB, Inc.----Agricultural equipment
Fechheimber Brothers----Safety equipment
Flight Safety International----Training for aircraft and ship operators
Forest River----Towable RVs and trailers
Fruit of the Loom----Textiles
Garan Incorporated----Children's clothing
Gateway Underwriters----Property and casualty insurance
GEICO----Property and casualty insurance
General Re----Reinsurance
H.H.Browne Shoe Co.----Work shoes, boots, casual footwear
Helzberg's Diamond Shops----Retail fine jewelry
Home Services of America----Residential real estate
International Dairy Queen----Licensing and servicing D.Q. stores
Iscar Metalworking Companies----Machine tools
Johns Manville----Insulation, roofing
Jordan's Furniture----Retail home furnishings
Justin Brands----Western boots, hats
Larson-Juhl----Custom picture frames
McClane Company----Food distribution, logistics
Medical Protective----Healthcare provider insurance
MidAmerica Energy----Production, supply, distribution of energy
MiTek Inc.----Engineered building products and services
National Indemnity Co.----Property/casualty insurance
Nebraska Furniture Mart----Retail home furnishings
NetJets----Fractinal jet ownership
The Pampered Chef----Direct marketer, kitchen products
Precision Steel Products----Steel service center
RC Willey Home Furnishings----Retail home furnishings
Scott Fetzer Companies----Subsidiary group includes Kirby Vacuums, Campbell Hausfeld, World Book
See's Candies----Boxed candies, confectionary
Shaw Industries----Flooring, carpet
Star Furniture Company----Retail home furnishings
TTI, Inc----Transportation equipment components
United States Liability Insurance Group----Specialty insurance products
Wesco Financial----Holding company
XTRA Corporation----Transport equipment leasing
What do all Berkshire Hathaway companies have in common?
Also read:
What do all Berkshire Hathaway companies have in common?
Berkshire Hathaway's Acquisition Criteria: Telling it like it is
Take a look at the following set of "acquisition criteria," straight from the 2006 Berkshire Hathaway Annual report. Straight, clear, to the point - and never before have we seen anything like this - including the commentary - in a shareholder report.
Also visit:
The Master: Warren Buffett 9 (9/9)
The Master: Warren Buffett 8
The Master: Warren Buffett 7
The Master: Warren Buffett 6
The Master: Warren Buffett 5
The Master: Warren Buffett 4
The Master: Warren Buffett 3
The Master: Warren Buffett 2
The Master: Warren Buffett 1
Beyond insurance, the manufacturing, retail and service group now consists of some 70 companies large and small, all successful in their own arena.
Subsidiary Name----Subsidiary Business
Acme Brick----Face brick and other building materials
Applied Underwriters ----Worker's compensation solutions
Ben Bridge Jeweler----Retail fine jewelry
Benjamin Moore----Architectural and industrial coatings - paint
Berkshire Hathaway Homestates Companies----Specialty property/casualty insurance
Borsheim Fine Jewelry----Retail fine jewelry
Buffalo News----Newspaper
Business Wire----Business news and information services
Central States Indemnity Company----Consumer credit insurance
Clayton Homes----Modular and manufactured homes
CORT Business Services----Rental furniture
CTB, Inc.----Agricultural equipment
Fechheimber Brothers----Safety equipment
Flight Safety International----Training for aircraft and ship operators
Forest River----Towable RVs and trailers
Fruit of the Loom----Textiles
Garan Incorporated----Children's clothing
Gateway Underwriters----Property and casualty insurance
GEICO----Property and casualty insurance
General Re----Reinsurance
H.H.Browne Shoe Co.----Work shoes, boots, casual footwear
Helzberg's Diamond Shops----Retail fine jewelry
Home Services of America----Residential real estate
International Dairy Queen----Licensing and servicing D.Q. stores
Iscar Metalworking Companies----Machine tools
Johns Manville----Insulation, roofing
Jordan's Furniture----Retail home furnishings
Justin Brands----Western boots, hats
Larson-Juhl----Custom picture frames
McClane Company----Food distribution, logistics
Medical Protective----Healthcare provider insurance
MidAmerica Energy----Production, supply, distribution of energy
MiTek Inc.----Engineered building products and services
National Indemnity Co.----Property/casualty insurance
Nebraska Furniture Mart----Retail home furnishings
NetJets----Fractinal jet ownership
The Pampered Chef----Direct marketer, kitchen products
Precision Steel Products----Steel service center
RC Willey Home Furnishings----Retail home furnishings
Scott Fetzer Companies----Subsidiary group includes Kirby Vacuums, Campbell Hausfeld, World Book
See's Candies----Boxed candies, confectionary
Shaw Industries----Flooring, carpet
Star Furniture Company----Retail home furnishings
TTI, Inc----Transportation equipment components
United States Liability Insurance Group----Specialty insurance products
Wesco Financial----Holding company
XTRA Corporation----Transport equipment leasing
What do all Berkshire Hathaway companies have in common?
- They are profitable, safe and solid.
- They are easy to understand with simple business models.
- They produce plenty of cash flow to reinvest.
- They are unique businesses with strong market positions and franchises.
- They have solid, trustworthy management.
- They were bought at reasonable prices.
Also read:
What do all Berkshire Hathaway companies have in common?
Berkshire Hathaway's Acquisition Criteria: Telling it like it is
Take a look at the following set of "acquisition criteria," straight from the 2006 Berkshire Hathaway Annual report. Straight, clear, to the point - and never before have we seen anything like this - including the commentary - in a shareholder report.
Also visit:
The Master: Warren Buffett 9 (9/9)
The Master: Warren Buffett 8
The Master: Warren Buffett 7
The Master: Warren Buffett 6
The Master: Warren Buffett 5
The Master: Warren Buffett 4
The Master: Warren Buffett 3
The Master: Warren Buffett 2
The Master: Warren Buffett 1
The Master: Warren Buffett 6
Shares? Why not the whole company?
Acquiring shares certainly works over time and is what we ordinary value investors should be focused on. But Berkshire went beyond this strategy - way beyond - to buy whole companies for its portfolio.
Why? Two reasons, mainly.
The insurance group has grown substantially and is anchored by consumer favourite GEICO, (originally bought by Ben Graham in the 1950s), and by General Re, in the lucrative reinsurance (wholesale insurance) market. The companies play in different insurance segments, and combine to produce $81 billion in revenue in 2006, with almost $13 billion in pretax income and an amazing $50 billion in "float" - cash taken in but not paid out on claims and used for investments.
Beyond insurance, the manufacturing, retail, and service group now consists of some 70 companies, large and small, all successful in their own arena.
An obvious favourite is Borsheim's, a chain of high-end jewelry stores. Dairy Queen, RC Willey Pampered Chef, and See's Candies are strong consumer names.
Applied Underwriters (worker's comp), NetJets (company jet leasing), FlightSafety International and MiTek, are for the business-to-business world.
Some companies are large and others are small, including the Nebraska Furniture Mart, which Buffett bought one morning as a $60 million birthday present to himself.
Also visit:
The Master: Warren Buffett 9 (9/9)
The Master: Warren Buffett 8
The Master: Warren Buffett 7
The Master: Warren Buffett 6
The Master: Warren Buffett 5
The Master: Warren Buffett 4
The Master: Warren Buffett 3
The Master: Warren Buffett 2
The Master: Warren Buffett 1
Acquiring shares certainly works over time and is what we ordinary value investors should be focused on. But Berkshire went beyond this strategy - way beyond - to buy whole companies for its portfolio.
Why? Two reasons, mainly.
- If you own the whole company, you're entitled to its cash and cash flow and can reinvest it as you wish.
- You don't have to compete with other shareholders, and management and reporting relationships are simpler.
The insurance group has grown substantially and is anchored by consumer favourite GEICO, (originally bought by Ben Graham in the 1950s), and by General Re, in the lucrative reinsurance (wholesale insurance) market. The companies play in different insurance segments, and combine to produce $81 billion in revenue in 2006, with almost $13 billion in pretax income and an amazing $50 billion in "float" - cash taken in but not paid out on claims and used for investments.
Beyond insurance, the manufacturing, retail, and service group now consists of some 70 companies, large and small, all successful in their own arena.
An obvious favourite is Borsheim's, a chain of high-end jewelry stores. Dairy Queen, RC Willey Pampered Chef, and See's Candies are strong consumer names.
Applied Underwriters (worker's comp), NetJets (company jet leasing), FlightSafety International and MiTek, are for the business-to-business world.
Some companies are large and others are small, including the Nebraska Furniture Mart, which Buffett bought one morning as a $60 million birthday present to himself.
Also visit:
The Master: Warren Buffett 9 (9/9)
The Master: Warren Buffett 8
The Master: Warren Buffett 7
The Master: Warren Buffett 6
The Master: Warren Buffett 5
The Master: Warren Buffett 4
The Master: Warren Buffett 3
The Master: Warren Buffett 2
The Master: Warren Buffett 1
The Master: Warren Buffett 5
Things go better with Coke
Berkshire put together a world-class portfolio of high visibility, blue chip growth stocks, including such household names as Coca-Cola, Gillette, American Express, and Wells Fargo.
Buffett could not resist the low price of Coca-Cola in the mid-1980s as the company seemed to struggle for reinvention with new Coke and other twists and turns in corporate strategy (most of which turned out to be unnecessary). Coca-Cola had the balance sheet and certainly the stability of earnings that one would expect of the world's leading purveyor of sugar water. Buffett saw not only the intrinsic value but also the franchise or marketplace value. Coke is arguably the world's most recognized brand, and that brand was and still is the closest thing to a guarantee against dips and significant competitive inroads. It's what Buffett calls a moat around the business.
Intrinsic value on the balance sheet, solid earnings with at least some growth and growth potential, and solid value in the franchise are what Buffett looked for in all his investments. And always -repeat, always - at a good price. Berkshire Hathaway acquired 200 million shares of Coke in the mid-1980s at around $6 to $6.50 per share (split adjusted). Coke generally sells at over $50 today. The Berkshire before-tax profit is in the $10 billion range.
Wanna know what Berkshire buys?
It isn't easy to find out. Berkshire keeps its puchases a secret (to avoid market overreaction, among other reasons). But as much as it tries to avoid disclosure, investmens of certain size and that constitue a certain proportion of ownership must be disclosed. SEC 13F filings contain the disclosures as statements of change of ownership. You can watch these directly or just watch the news. Any time a 13F surfaces, the financial news media is quick to pounce.
The most recent 13F filing, released in mid-May 2007 for the close of business on March 31, uncovered four new purchases, three of them in railroad companies (Union Pacific, Norfolk Southern, Burlington Northern Santa Fe) and a new position in health provider, Wellpoint. Buffett increased positions in Comcast, Iron Mountain, Wells Fargo, Johnson & Johnson, and Sanofi-Adventis, while reducing holdings in financials Ameriprise and H&R Block, brewer Anheuser-Busch and Western Union.
We know now, but hardly soon enough to have made a market killing from the knowledge. That said, knowing where Buffett has been and where he is going never hurts. By the way, you can find these 13Fs yourself simply by doing a search on Berkshire Hathaway 13F and the year you're interested in.
Also visit:
The Master: Warren Buffett 9 (9/9)
The Master: Warren Buffett 8
The Master: Warren Buffett 7
The Master: Warren Buffett 6
The Master: Warren Buffett 5
The Master: Warren Buffett 4
The Master: Warren Buffett 3
The Master: Warren Buffett 2
The Master: Warren Buffett 1
Berkshire put together a world-class portfolio of high visibility, blue chip growth stocks, including such household names as Coca-Cola, Gillette, American Express, and Wells Fargo.
Buffett could not resist the low price of Coca-Cola in the mid-1980s as the company seemed to struggle for reinvention with new Coke and other twists and turns in corporate strategy (most of which turned out to be unnecessary). Coca-Cola had the balance sheet and certainly the stability of earnings that one would expect of the world's leading purveyor of sugar water. Buffett saw not only the intrinsic value but also the franchise or marketplace value. Coke is arguably the world's most recognized brand, and that brand was and still is the closest thing to a guarantee against dips and significant competitive inroads. It's what Buffett calls a moat around the business.
Intrinsic value on the balance sheet, solid earnings with at least some growth and growth potential, and solid value in the franchise are what Buffett looked for in all his investments. And always -repeat, always - at a good price. Berkshire Hathaway acquired 200 million shares of Coke in the mid-1980s at around $6 to $6.50 per share (split adjusted). Coke generally sells at over $50 today. The Berkshire before-tax profit is in the $10 billion range.
Wanna know what Berkshire buys?
It isn't easy to find out. Berkshire keeps its puchases a secret (to avoid market overreaction, among other reasons). But as much as it tries to avoid disclosure, investmens of certain size and that constitue a certain proportion of ownership must be disclosed. SEC 13F filings contain the disclosures as statements of change of ownership. You can watch these directly or just watch the news. Any time a 13F surfaces, the financial news media is quick to pounce.
The most recent 13F filing, released in mid-May 2007 for the close of business on March 31, uncovered four new purchases, three of them in railroad companies (Union Pacific, Norfolk Southern, Burlington Northern Santa Fe) and a new position in health provider, Wellpoint. Buffett increased positions in Comcast, Iron Mountain, Wells Fargo, Johnson & Johnson, and Sanofi-Adventis, while reducing holdings in financials Ameriprise and H&R Block, brewer Anheuser-Busch and Western Union.
We know now, but hardly soon enough to have made a market killing from the knowledge. That said, knowing where Buffett has been and where he is going never hurts. By the way, you can find these 13Fs yourself simply by doing a search on Berkshire Hathaway 13F and the year you're interested in.
Also visit:
The Master: Warren Buffett 9 (9/9)
The Master: Warren Buffett 8
The Master: Warren Buffett 7
The Master: Warren Buffett 6
The Master: Warren Buffett 5
The Master: Warren Buffett 4
The Master: Warren Buffett 3
The Master: Warren Buffett 2
The Master: Warren Buffett 1
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