Madoff Topples Zsa Zsa School of Investing
By Selena Maranjian
February 5, 2009 Comments (1)
A few years ago, I spotlighted Zsa Zsa Gabor as a surprising source of investing insights. Now I'm having second thoughts.
Gabor, who's now almost 92, is in the news again. Why? Well, there's a summary of the situation on a website in her native Hungary, and although it reads like Greek to me, one word in particular stands out ... Madoff. Yes, Zsa Zsa's one of the many customers apparently duped by Bernie Madoff.
Avoiding scams
The glamorous Ms. Gabor has my sympathy, as do all of Madoff's victims. They were swindled, plain and simple. Still, some of them might have suffered less if they'd followed some basic investing rules. For example:
Diversify!
I'm not suggesting you should own hundreds of stocks. Heck, even eight might be enough, as long as they're distributed among different industries and maybe even a few different countries. It appears that many Madoff victims left the lion's share of their wealth in his hands. That's always risky, no matter how much you trust someone.
Tend to your asset allocation
If you have decades to retirement, you might want to be 100% in stocks, as they tend to grow fastest over the long haul. If you have only a few years, you might want to keep some money in bonds. Considering that Gabor is in her 90s, she might do well to keep a chunk of her money in conservative income-producing dividend payers. Here are some contenders -- companies with dividend yields above 3%:
Company
Recent dividend yield
Bristol-Myers Squibb (NYSE: BMY)
5.5%
ArcelorMittal (NYSE: MT)
5.1%
Consolidated Edison (NYSE: ED)
5.7%
Kraft Foods (NYSE: KFT)
4.4%
Titanium Metals (NYSE: TIE)
3.9%
Sysco (NYSE: SYY)
4.0%
Spectra Energy (NYSE: SE)
6.8%
Source: Motley Fool CAPS.
A free, no-obligation trial of our Motley Fool Income Investor service will give you dozens of researched recommendations, many yielding 8% or more.
Be skeptical
Finally, Gabor and others should have been wary of Madoff's relatively consistent returns. Know that the stock market has always gone up over the long haul -- but as we were reminded sharply in 2008, it can swing wildly from year to year.
Don't wait until you're 92 to brush up on your investing basics. They're your best defense against swindles, scams, and other Wall Street dangers.
http://www.fool.com/investing/dividends-income/2009/02/05/how-madoff-swindled-one-of-my-favorite-investors.aspx
Saturday, 7 February 2009
Panic of 2008
The Wall Street Panic of 2008
By Todd Wenning
October 8, 2008 Comments (14)
Panic: In economics, acute financial disturbance, such as widespread bank failures, feverish stock speculation followed by a market crash, or a climate of fear caused by economic crisis or the anticipation of such crisis.
-- Britannica Online
Make no mistake -- by this definition, what we've witnessed so far in 2008 is nothing less than a global market panic.
Acute financial disturbance? Freddie Mac and Fannie Mae imploded. Bear Stearns got "rescued" along with AIG (NYSE: AIG), but somehow Lehman Brothers wasn't saved. Money markets "broke the buck," and there was a formal bank run on IndyMac.
Feverish speculation followed by a crash? Our housing bubble fueled excessive borrowing and risky lending practices, resulting in the credit crisis we're now dealing with. The S&P 500 is down 31% year to date, erasing the past five years of market gains.
Climate of fear? U.S. investor sentiment is at record lows, and the CBOE Volatility Index (the "fear index") has posted all-time highs in recent days. No one seems to know where the next shoe will drop.
The list, sadly, could go on.
Don't panic
Of course, no one wants to call this a market "panic." Instead, in most places it's been labeled a "crisis." In fact, the term "panic" hasn't been widely used to describe a market since the Panic of 1907 -- which is unfortunate, because understanding this as a panic has something to teach us.
In the 19th century (the high time for market panics), Yale professor William Graham Sumner defined a panic as:
... a wave of emotion, apprehension, alarm. It is more or less irrational. It is superinduced upon a crisis, which is real and inevitable, but it exaggerates, conjures up possibilities, takes away courage and energy.
In other words, the subprime and credit mess is the "crisis," and the "panic" is the exaggerations and doom-and-gloom language that come with it. We've seen plenty of that in recent months. Three of the world's major financial publications have likened our current economy to the Great Depression more than 250 times so far this year. So please, let's call this market by its proper name: the Panic of 2008.
Fortunately, "a panic," Sumner continued, "can be partly overcome by judicious reflection, by realization of the truth, and by measurement of facts."
Let us be judiciously reflective
So what do the panics of the early 20th century tell us about how we might overcome this one?
The last official panic -- the Panic of 1907 -- shook the U.S. economy to its core. Wall Street brokerages failed, depositors ran on banks, well-known companies went under, and the market's liquidity was in question. (Sound familiar?) In this instance, J.P. Morgan and friends famously put together $25 million to keep the market afloat -- a role now occupied by the Federal Reserve. By 1909, the Dow Jones index had more than recovered from pre-panic highs.
In 1914, the year the Great War began in Europe, the U.S. stock markets actually closed for nearly four months after foreign investors began pulling their money out of U.S. equities en masse to support the war effort. When it reopened, the market was devalued about 30%, but sustained rallies doubled that opening by the end of 1916.
Then, of course, came the Great Depression -- the single most important economic event in U.S. history -- which began with the Crash of 1929 and lasted arguably until the U.S. entered World War II in 1941. In 1932, unemployment hit 24.9%, and more than 9,000 banks failed during the 1930s. And there were no federally insured deposits until the Banking Act of 1933 created the FDIC, so when the bank failed, your money went with it. In fact, Wall Street's very future -- not to mention the economic model of capitalism -- was in question.
For those investors who had both the money and the courage to invest in the 1930s, it paid off. One man famously borrowed money to buy 104 U.S. stocks trading for less than $1 a share in 1939. Talk about investing at the point of maximum pessimism! Four years later, though, his money had quadrupled. His name, of course, was John Templeton.
OK, what's your point?
Judicious reflection, realization of the truth, and measurement of facts all say the same thing: We've seen markets like today's before -- and some far worse. And in every case, the point at which the market has turned irrational or overly pessimistic is precisely the time we long-term investors should have bought equities.
Despite the headlines proclaiming the next Great Depression, this is no Great Depression -- only a panic helped along by the short-term mind-set of the financial industry. Financial media's job is to attract readership by sensationalizing news events, and financial institutions, which are built on commissions and fees, want to keep money moving in and out in order to bulk up their own revenues. So both fan the flames of panic.
Individual investors like us do not have the advantage versus Wall Street when it comes to short-term trading, but we do have longer time horizons. Wall Street focuses on minutes, hours, and days, while we focus on years and decades. And that's what makes their panics a good time for us to buy.
Let's take the most modern example of market irrationality -- the dot-com bubble and subsequent burst -- and see what's happened to some quality names since the S&P 500 was near its low in September 2002.
Company
Returns (9/30/2002-Present)
Cisco Systems (Nasdaq: CSCO)
80%
Oracle (Nasdaq: ORCL)
113%
Schlumberger (NYSE: SLB)
264%
CVS Caremark (NYSE: CVS)
139%
Baxter (NYSE: BAX)
127%
Adobe Systems (Nasdaq: ADBE)
201%
Data provided by Capital IQ. Returns adjusted for dividends.
You didn't need to be a market genius to invest in these names in 2002. They were all well-known to both consumers and investors. All six had been beaten down considerably by the bear market, though, and that downturn presented investors with excellent opportunities to buy great companies at great prices.
Ironically enough, however, the third quarter of 2002 had the fewest equity-based mutual fund assets of the entire post-dot-com bust. Put simply, investors bailed on the market at exactly the wrong time.
It's still scary
Don't get me wrong -- some of the financial headlines we've seen over the past few months are downright frightening. But it's important to not join the panic and to keep a long-term perspective on market panics, booms, crises, and everything in between. In this market, that means you should keep investing, and make sure you're diversified.
At our Motley Fool Stock Advisor investing service, Fool co-founders Tom and David Gardner had a lot of success picking up great companies during the post-dot-com bust. Their long-term focus helped them add names like Amazon.com at a time when the market wanted nothing to do with them -- and their picks are subsequently beating the market by 30 percentage points on average.
They're taking a similar approach now, and count top brand names such as Starbucks among their "best buys" right now. To see what else they're recommending, take a free, 30-day trial. Click here to get started -- there's no obligation to subscribe.
This article was originally published on Sept. 4, 2008. It has been updated.
Todd Wenning panics at the sight of clowns, but at little else. He does not own shares of any company mentioned. The Fool, on the other hand, owns shares of Starbucks, which is a Stock Advisor and an Inside Value pick. Amazon is a Stock Advisor recommendation. The Fool's disclosure policy keeps a steady hand.
Read/Post Comments (14)
http://www.fool.com/investing/general/the-wall-street-panic-of-2008.aspx
By Todd Wenning
October 8, 2008 Comments (14)
Panic: In economics, acute financial disturbance, such as widespread bank failures, feverish stock speculation followed by a market crash, or a climate of fear caused by economic crisis or the anticipation of such crisis.
-- Britannica Online
Make no mistake -- by this definition, what we've witnessed so far in 2008 is nothing less than a global market panic.
Acute financial disturbance? Freddie Mac and Fannie Mae imploded. Bear Stearns got "rescued" along with AIG (NYSE: AIG), but somehow Lehman Brothers wasn't saved. Money markets "broke the buck," and there was a formal bank run on IndyMac.
Feverish speculation followed by a crash? Our housing bubble fueled excessive borrowing and risky lending practices, resulting in the credit crisis we're now dealing with. The S&P 500 is down 31% year to date, erasing the past five years of market gains.
Climate of fear? U.S. investor sentiment is at record lows, and the CBOE Volatility Index (the "fear index") has posted all-time highs in recent days. No one seems to know where the next shoe will drop.
The list, sadly, could go on.
Don't panic
Of course, no one wants to call this a market "panic." Instead, in most places it's been labeled a "crisis." In fact, the term "panic" hasn't been widely used to describe a market since the Panic of 1907 -- which is unfortunate, because understanding this as a panic has something to teach us.
In the 19th century (the high time for market panics), Yale professor William Graham Sumner defined a panic as:
... a wave of emotion, apprehension, alarm. It is more or less irrational. It is superinduced upon a crisis, which is real and inevitable, but it exaggerates, conjures up possibilities, takes away courage and energy.
In other words, the subprime and credit mess is the "crisis," and the "panic" is the exaggerations and doom-and-gloom language that come with it. We've seen plenty of that in recent months. Three of the world's major financial publications have likened our current economy to the Great Depression more than 250 times so far this year. So please, let's call this market by its proper name: the Panic of 2008.
Fortunately, "a panic," Sumner continued, "can be partly overcome by judicious reflection, by realization of the truth, and by measurement of facts."
Let us be judiciously reflective
So what do the panics of the early 20th century tell us about how we might overcome this one?
The last official panic -- the Panic of 1907 -- shook the U.S. economy to its core. Wall Street brokerages failed, depositors ran on banks, well-known companies went under, and the market's liquidity was in question. (Sound familiar?) In this instance, J.P. Morgan and friends famously put together $25 million to keep the market afloat -- a role now occupied by the Federal Reserve. By 1909, the Dow Jones index had more than recovered from pre-panic highs.
In 1914, the year the Great War began in Europe, the U.S. stock markets actually closed for nearly four months after foreign investors began pulling their money out of U.S. equities en masse to support the war effort. When it reopened, the market was devalued about 30%, but sustained rallies doubled that opening by the end of 1916.
Then, of course, came the Great Depression -- the single most important economic event in U.S. history -- which began with the Crash of 1929 and lasted arguably until the U.S. entered World War II in 1941. In 1932, unemployment hit 24.9%, and more than 9,000 banks failed during the 1930s. And there were no federally insured deposits until the Banking Act of 1933 created the FDIC, so when the bank failed, your money went with it. In fact, Wall Street's very future -- not to mention the economic model of capitalism -- was in question.
For those investors who had both the money and the courage to invest in the 1930s, it paid off. One man famously borrowed money to buy 104 U.S. stocks trading for less than $1 a share in 1939. Talk about investing at the point of maximum pessimism! Four years later, though, his money had quadrupled. His name, of course, was John Templeton.
OK, what's your point?
Judicious reflection, realization of the truth, and measurement of facts all say the same thing: We've seen markets like today's before -- and some far worse. And in every case, the point at which the market has turned irrational or overly pessimistic is precisely the time we long-term investors should have bought equities.
Despite the headlines proclaiming the next Great Depression, this is no Great Depression -- only a panic helped along by the short-term mind-set of the financial industry. Financial media's job is to attract readership by sensationalizing news events, and financial institutions, which are built on commissions and fees, want to keep money moving in and out in order to bulk up their own revenues. So both fan the flames of panic.
Individual investors like us do not have the advantage versus Wall Street when it comes to short-term trading, but we do have longer time horizons. Wall Street focuses on minutes, hours, and days, while we focus on years and decades. And that's what makes their panics a good time for us to buy.
Let's take the most modern example of market irrationality -- the dot-com bubble and subsequent burst -- and see what's happened to some quality names since the S&P 500 was near its low in September 2002.
Company
Returns (9/30/2002-Present)
Cisco Systems (Nasdaq: CSCO)
80%
Oracle (Nasdaq: ORCL)
113%
Schlumberger (NYSE: SLB)
264%
CVS Caremark (NYSE: CVS)
139%
Baxter (NYSE: BAX)
127%
Adobe Systems (Nasdaq: ADBE)
201%
Data provided by Capital IQ. Returns adjusted for dividends.
You didn't need to be a market genius to invest in these names in 2002. They were all well-known to both consumers and investors. All six had been beaten down considerably by the bear market, though, and that downturn presented investors with excellent opportunities to buy great companies at great prices.
Ironically enough, however, the third quarter of 2002 had the fewest equity-based mutual fund assets of the entire post-dot-com bust. Put simply, investors bailed on the market at exactly the wrong time.
It's still scary
Don't get me wrong -- some of the financial headlines we've seen over the past few months are downright frightening. But it's important to not join the panic and to keep a long-term perspective on market panics, booms, crises, and everything in between. In this market, that means you should keep investing, and make sure you're diversified.
At our Motley Fool Stock Advisor investing service, Fool co-founders Tom and David Gardner had a lot of success picking up great companies during the post-dot-com bust. Their long-term focus helped them add names like Amazon.com at a time when the market wanted nothing to do with them -- and their picks are subsequently beating the market by 30 percentage points on average.
They're taking a similar approach now, and count top brand names such as Starbucks among their "best buys" right now. To see what else they're recommending, take a free, 30-day trial. Click here to get started -- there's no obligation to subscribe.
This article was originally published on Sept. 4, 2008. It has been updated.
Todd Wenning panics at the sight of clowns, but at little else. He does not own shares of any company mentioned. The Fool, on the other hand, owns shares of Starbucks, which is a Stock Advisor and an Inside Value pick. Amazon is a Stock Advisor recommendation. The Fool's disclosure policy keeps a steady hand.
Read/Post Comments (14)
http://www.fool.com/investing/general/the-wall-street-panic-of-2008.aspx
Friday, 6 February 2009
Investing for income: Dividend yield and Dividend cover ratio
Investing for income: Where savers can escape zero interest rates
As deposit accounts pay next to nothing, dividends on shares seem attractive. But you'll need to choose carefully.
By Richard Evans Last Updated: 3:06PM GMT 06 Feb 2009
The Bank of England's decision to cut interest rates to 1pc means that many savers will now receive virtually no return from their money. As a result, many will be looking for alternative homes for their nest eggs. Among the options are dividend-paying shares.
"Cash-rich individuals will be scouring the stock market in search of a decent income from their savings," according to DigitalLook.com, the private investors' website.
Many large companies pay decent dividends once, twice or even four times a year. The yield – the dividend expressed as a percentage of the share price – is often attractive by comparison with interest rates on savings. There are now a wide range of blue chip companies yielding 4pc or more, DigitalLook said.
When comparing a dividend yield with the interest rate on a savings account, however, certain warnings should be borne in mind.
As deposit accounts pay next to nothing, dividends on shares seem attractive. But you'll need to choose carefully.
By Richard Evans Last Updated: 3:06PM GMT 06 Feb 2009
The Bank of England's decision to cut interest rates to 1pc means that many savers will now receive virtually no return from their money. As a result, many will be looking for alternative homes for their nest eggs. Among the options are dividend-paying shares.
"Cash-rich individuals will be scouring the stock market in search of a decent income from their savings," according to DigitalLook.com, the private investors' website.
Many large companies pay decent dividends once, twice or even four times a year. The yield – the dividend expressed as a percentage of the share price – is often attractive by comparison with interest rates on savings. There are now a wide range of blue chip companies yielding 4pc or more, DigitalLook said.
When comparing a dividend yield with the interest rate on a savings account, however, certain warnings should be borne in mind.
- The first point is that your capital is not guaranteed; share prices can and do fall.
- Secondly, dividends can be cut drastically or axed altogether with little or no notice – and this can lead to a fall in the share price as well.
So just buying the shares with the highest dividend, without researching how safe that dividend is, can be a mistake.
"There are now a huge range of high yielding blue chips but it is best to look for a dividend that is less likely to be cut even if that company's profits fall," said Andy Yates of DigitalLook.
The long-established measure of a dividend's reliability is dividend cover: the ratio of net profits to the size of the dividend payout.
Generally, a cover ratio of at least two – meaning that the company has twice as much net earnings as the amount earmarked for dividend payments – is considered a strong indicator.
A high yield alone is not synonymous with a decent dividend.
Shares in Land Securities yield 9.5pc, for instance, but this reflects investors' concerns about the property market.
There are companies that analysts expect to have a good chance of sustaining their dividends. These include AstraZeneca, the drug maker, International Power and Sage Group, the software firm, according to DigitalLook.
Mr Yates pointed out that an increasing number of companies, including Xstrata, the miner, and JD Wetherspoon, the pubs group, have announced over the past few weeks that they are going to skip their dividends.
But careful research should enable investors to sidestep enough potential problems to build up a well diversified high-income investment portfolio, he added.
"If you carry out thorough research and pick the right shares, you will get better value for your cash than by leaving it in a savings account."
The table below is a selection of FTSE100 companies with a forecast dividend yield of at least 4pc and a dividend cover of two or more.
Source: DigitalLook.com. Based on averaged forecasts from analysts at over 20 investment banks and stockbroking firms as of Feb 5 – forecasts on dividends excludes all UK listed banks
Data as on 05/02/09 at 12.30
Forecast
Forecast
Name
Forecast Dividend Yield...Forecast Dividend Cover
Prudential
5.80% ...4.1
WPP Group
4.20% ...3.4
Next
4.70%...2.8
FirstGroup
7.40% ... 2.6
InterContinental Hotels Group
5.00% ... 2.6
International Power
4.80% ... 2.6
Thomas Cook Group
6.30% ... 2.4
AstraZeneca
5.60% ... 2.4
Rolls-Royce Group
4.60% ... 2.4
Whitbread
4.70% ... 2.3
Smiths Group
4.00% ... 2.2
Aviva
10.60% ...2.1
Reed Elsevier
4.20% ... 2.1
Sage Group
4.10% ... 2.1
TUI Travel
5.30% ... 2
Imperial Tobacco Group
4.20% ... 2
http://www.telegraph.co.uk/finance/personalfinance/investing/shares/4537565/Investing-for-income-Where-savers-can-escape-zero-interest-rates.html
Savings: Where should I put my money?
Savings: Where should I put my money?
Savers have had a rough time of late, but they really shouldn't despair.
By Harry Wallop, Consumer Affairs Editor Last Updated: 7:50PM GMT 05 Feb 2009
Yes, savings rates are the lowest since the 17th Century. But that doesn't mean you should not lock your hard-earned money into iron chests and place into your cellar, as Samuel Pepys did during the Great Fire of London.
For starters there is the stock market. Yes, really. Unless you genuinely believe capitalism is dead, the stock market should be considered. It has consistently outperformed every other asset class, including property during the last century.
Only last week, I topped up the Wallop children's child trust funds – confident that when they are allowed to touch the money, it will be worth a great deal more than if I put the money into Premium Bonds.
Shares are likely to tread water for the next year or two, but in the intervening period most companies should pay out a dividend to their shareholders.
BP, for instance, intends to pay a dividend of £7.70 for every £100 invested. Okay, it is conceivable in these unprecedented times that this oil giant will cut payments to shareholders, but it seems a risk worth taking.
If you don't have the luxury of time – a prerequisite for investing in shares – there are other options.
Most savings accounts pay out less than 1.5 per cent, but there are banks desperate for your money and prepared to offer unprofitable (for them) rates if you scout around.
Standard Life Bank's Easy Access ISA has a rate of 3.5 per cent – a remarkable rate of return, considering Bank rates have hit just 1 per cent.
Or you can always turn to the last refuge of the desperate: gold, which is proving an impressive, if volatile, performer during the financial crisis.
Either buy the stuff via gold exchange traded funds, which trade on the stock market, or pop down to a bullion dealer and buy a bar of the hard stuff.
You can then store it in your cellar.
http://www.telegraph.co.uk/finance/economics/interestrates/4528415/Savings-Where-should-I-put-my-money.html
Savers have had a rough time of late, but they really shouldn't despair.
By Harry Wallop, Consumer Affairs Editor Last Updated: 7:50PM GMT 05 Feb 2009
Yes, savings rates are the lowest since the 17th Century. But that doesn't mean you should not lock your hard-earned money into iron chests and place into your cellar, as Samuel Pepys did during the Great Fire of London.
For starters there is the stock market. Yes, really. Unless you genuinely believe capitalism is dead, the stock market should be considered. It has consistently outperformed every other asset class, including property during the last century.
Only last week, I topped up the Wallop children's child trust funds – confident that when they are allowed to touch the money, it will be worth a great deal more than if I put the money into Premium Bonds.
Shares are likely to tread water for the next year or two, but in the intervening period most companies should pay out a dividend to their shareholders.
BP, for instance, intends to pay a dividend of £7.70 for every £100 invested. Okay, it is conceivable in these unprecedented times that this oil giant will cut payments to shareholders, but it seems a risk worth taking.
If you don't have the luxury of time – a prerequisite for investing in shares – there are other options.
Most savings accounts pay out less than 1.5 per cent, but there are banks desperate for your money and prepared to offer unprofitable (for them) rates if you scout around.
Standard Life Bank's Easy Access ISA has a rate of 3.5 per cent – a remarkable rate of return, considering Bank rates have hit just 1 per cent.
Or you can always turn to the last refuge of the desperate: gold, which is proving an impressive, if volatile, performer during the financial crisis.
Either buy the stuff via gold exchange traded funds, which trade on the stock market, or pop down to a bullion dealer and buy a bar of the hard stuff.
You can then store it in your cellar.
http://www.telegraph.co.uk/finance/economics/interestrates/4528415/Savings-Where-should-I-put-my-money.html
IMF confident in ability to aid crisis victims
IMF confident in ability to aid crisis victims
By Chris Giles in Davos
Published: January 30 2009 13:37 Last updated: January 30 2009 13:37
The International Monetary Fund expressed confidence on Friday that its members would ensure the fund remains adequately funded and able to support any country that might be hit by the global financial crisis.
Speaking to the Financial Times at the World Economic Forum in Davos, John Lipsky, the deputy managing director of the IMF, said the institution was seeking to double its financial firepower to come to aid any country that needs its support in the downturn.
EDITOR’S CHOICE
Economics upstages diplomatic drama - Jan-30
In depth: Davos 2009 - Jan-28
Mandelson warns on public finance - Jan-30
Video: Bill and Melinda Gates on aid outlook - Jan-30
Erdogan returns to mixed reaction - Jan-30
HSBC pushes for G20-style business grouping - Jan-30
It has already received a pledge of $100bn of contingent reserves from Japan last November and is seeking another $150bn to enable it to lend to countries facing sudden capital flight.
“I am very confident our membership will not allow the situation to emerge where the fund has insufficient resources to fulfil its mandate and responsibilities,” Mr Lipsky said.
Predictions from the Institute of International Finance this week showed the net capital flows to emerging are likely to fall to only $165bn this year, less than a fifth of the level two years ago with banks making a net withdrawal of capital.
Such potential repatriation of cash will place many emerging economies in a vulnerable position, especially those countries with large current account deficits who rely on large capital inflows, Mr Lipsky said.
The IMF wants to make its finances bullet proof so that it can lend to any emerging economies that experience a sudden withdrawal of funds.
In recent weeks, attention has been drawn to the possibility of Southern European countries, Ireland and the UK being vulnerable to a sudden flight of international capital.
Although the IMF does not see signs of imminent need to get involved in any of these countries, officials are making contingency action plans should the need arise. It thinks that the better its finances, the more confidence it can bring to markets, making any intervention a much more remote possibility.
Mr Lipsky downplayed the possibility of the financial crisis morphing into an external financing crisis for large industrial countries. He continued to urge countries to act quickly with necessary reforms to remove uncertainty from financial institutions and to provide stimulus for their economies. “In current circumstances it is preferable to commit errors of commission rather than omission,” he said.
Mr Lipsky reiterated the fund’s pessimistic view of economic prospects in the world for 2009, which is likely to record the slowest rate for world output growth since the second world war.
But he stressed there were forces for recovery – lower energy prices, China’s expected growth, the continued spending of oil exporting countries even as energy prices fall, the lack of leverage of non-financial companies – which would help the world emerge from recession in 2010.
Refusing to discuss the aggressive comments of Tim Geithner, the US Treasury secretary, regarding the Chinese currency, he nevertheless pointed to the failure of all the world’s leading economies to address trade imbalances before they contributed to the current economic crisis. He said the policies agreed by the US, eurozone, China, Saudi Arabia and Japan, in 2006 and 2007 to deal with global imbalances “were applied with insufficient vigour”.
In this respect he praised the Chinese stimulus package as something the IMF was counting on to restore global growth. “The [Chinese] policies put in place are consistent with its long-term interests,” he said because they would encourage domestic expansion rather than the previous focus on exports.
http://www.ft.com/cms/s/0/f1c9c6d8-eed1-11dd-bbb5-0000779fd2ac,dwp_uuid=261fcad4-db24-11dd-be53-000077b07658.html
By Chris Giles in Davos
Published: January 30 2009 13:37 Last updated: January 30 2009 13:37
The International Monetary Fund expressed confidence on Friday that its members would ensure the fund remains adequately funded and able to support any country that might be hit by the global financial crisis.
Speaking to the Financial Times at the World Economic Forum in Davos, John Lipsky, the deputy managing director of the IMF, said the institution was seeking to double its financial firepower to come to aid any country that needs its support in the downturn.
EDITOR’S CHOICE
Economics upstages diplomatic drama - Jan-30
In depth: Davos 2009 - Jan-28
Mandelson warns on public finance - Jan-30
Video: Bill and Melinda Gates on aid outlook - Jan-30
Erdogan returns to mixed reaction - Jan-30
HSBC pushes for G20-style business grouping - Jan-30
It has already received a pledge of $100bn of contingent reserves from Japan last November and is seeking another $150bn to enable it to lend to countries facing sudden capital flight.
“I am very confident our membership will not allow the situation to emerge where the fund has insufficient resources to fulfil its mandate and responsibilities,” Mr Lipsky said.
Predictions from the Institute of International Finance this week showed the net capital flows to emerging are likely to fall to only $165bn this year, less than a fifth of the level two years ago with banks making a net withdrawal of capital.
Such potential repatriation of cash will place many emerging economies in a vulnerable position, especially those countries with large current account deficits who rely on large capital inflows, Mr Lipsky said.
The IMF wants to make its finances bullet proof so that it can lend to any emerging economies that experience a sudden withdrawal of funds.
In recent weeks, attention has been drawn to the possibility of Southern European countries, Ireland and the UK being vulnerable to a sudden flight of international capital.
Although the IMF does not see signs of imminent need to get involved in any of these countries, officials are making contingency action plans should the need arise. It thinks that the better its finances, the more confidence it can bring to markets, making any intervention a much more remote possibility.
Mr Lipsky downplayed the possibility of the financial crisis morphing into an external financing crisis for large industrial countries. He continued to urge countries to act quickly with necessary reforms to remove uncertainty from financial institutions and to provide stimulus for their economies. “In current circumstances it is preferable to commit errors of commission rather than omission,” he said.
Mr Lipsky reiterated the fund’s pessimistic view of economic prospects in the world for 2009, which is likely to record the slowest rate for world output growth since the second world war.
But he stressed there were forces for recovery – lower energy prices, China’s expected growth, the continued spending of oil exporting countries even as energy prices fall, the lack of leverage of non-financial companies – which would help the world emerge from recession in 2010.
Refusing to discuss the aggressive comments of Tim Geithner, the US Treasury secretary, regarding the Chinese currency, he nevertheless pointed to the failure of all the world’s leading economies to address trade imbalances before they contributed to the current economic crisis. He said the policies agreed by the US, eurozone, China, Saudi Arabia and Japan, in 2006 and 2007 to deal with global imbalances “were applied with insufficient vigour”.
In this respect he praised the Chinese stimulus package as something the IMF was counting on to restore global growth. “The [Chinese] policies put in place are consistent with its long-term interests,” he said because they would encourage domestic expansion rather than the previous focus on exports.
http://www.ft.com/cms/s/0/f1c9c6d8-eed1-11dd-bbb5-0000779fd2ac,dwp_uuid=261fcad4-db24-11dd-be53-000077b07658.html
When globalisation goes into reverse
When globalisation goes into reverse
By Gideon Rachman
Published: February 2 2009 19:10
Last updated: February 2 2009 19:10
The World Economic Forum in Davos.
For the past decade, the Davos meeting has brought together big business, high finance and top politics to promote and celebrate the integration of the global economy. Whatever their business rivalries or political differences, the Davos delegates all agreed that the road to peace and prosperity lay through more international trade and investment – globalisation, in short.
But this year the forum has had to confront a new phenomenon – deglobalisation. The world that Davos Man created is slipping into reverse. International trade and investment is falling and protectionist barriers are on the rise. Economies are shrinking and unemployment is growing.
The symptoms of deglobalisation are all around us. Last week, it was reported that global air cargo traffic in December 2008 was down 22.6 per cent compared with December 2007. Abhisit Vejjajiva, prime minister of Thailand, told the forum that tourist receipts in his country had fallen by about 20 per cent year-on-year, in line with the general decline in international travel (and stripping out the effects of the temporary closure of Bangkok airport). In the US and Europe, governments are scrambling to bail out not just banks but also car companies. But, as the European Union has long acknowledged, “state aid” to national industrial champions is a form of protectionism.
Then there is “financial mercantilism”, the talk of this year’s Davos. This is the growing pressure on banks and financial institutions to retreat from international business and concentrate on domestic markets. Trevor Manuel, South Africa’s finance minister, captured the fears of many when he warned that his country and other emerging markets were in danger of being crowded out of international capital markets and of “decoupling, derailment and abandonment”.
Financial protectionism is driven by the logic of the market and political pressure. Banks that have lost confidence and capital in the credit crunch are retreating to the home markets they know best. And because so many banks have been bailed out by national taxpayers, they are also coming under political pressure to lend at home rather than abroad.
The symptoms of deglobalisation are all around us. Last week, it was reported that global air cargo traffic in December 2008 was down 22.6 per cent compared with December 2007. Abhisit Vejjajiva, prime minister of Thailand, told the forum that tourist receipts in his country had fallen by about 20 per cent year-on-year, in line with the general decline in international travel (and stripping out the effects of the temporary closure of Bangkok airport). In the US and Europe, governments are scrambling to bail out not just banks but also car companies. But, as the European Union has long acknowledged, “state aid” to national industrial champions is a form of protectionism.
Then there is “financial mercantilism”, the talk of this year’s Davos. This is the growing pressure on banks and financial institutions to retreat from international business and concentrate on domestic markets. Trevor Manuel, South Africa’s finance minister, captured the fears of many when he warned that his country and other emerging markets were in danger of being crowded out of international capital markets and of “decoupling, derailment and abandonment”.
Financial protectionism is driven by the logic of the market and political pressure. Banks that have lost confidence and capital in the credit crunch are retreating to the home markets they know best. And because so many banks have been bailed out by national taxpayers, they are also coming under political pressure to lend at home rather than abroad.
Three breeds of rogue trader
Three breeds of rogue trader
The most effective traders, says Hugo Pound, managing director of management consultants RDI, tend to be disciplined, innovative and brave. They enjoy challenges and pushing boundaries. Unfortunately, that profile also fits a different breed of trader – the rogue, writes Tom Drew.
Pound is a psychologist, and part of his job is to weed out potential troublemakers from top banks’ new recruits: “The problem is that after some success, they realise that there is more personal reward available through fraud than they can ever achieve through the system.”
He says fraudulent traders can be divided into three psychological profiles:
The cover-up artist has been playing double or quits and keeps on losing, “so they carry on digging a deeper and deeper hole … in the hope that they will sort themselves out”.
And the benevolent rebel breaches boundaries set by an employer or government authority because he believes that, eventually, it will all come good.
Using Pound’s definitions, Nick Leeson was not a rogue trader at all, but a cover-up artist. As such, Pound thinks he was treated harshly, absorbing most of the blame for a bank whose systems and controls had failed. Jérôme Kerviel, apparently driven by a desire for corporate profit, not personal gain, falls into the benevolent rebel category. “I personally don’t have any experience of traders who have knowingly stepped over the boundary for their own benefit,” says Pound.
He believes it is difficult to measure the incidence of benevolent rebels because much of the time they are successful and stay unnoticed – or are even rewarded. “Banks don’t want to reward the safe traders because they’re not the ones who make the money. So it’s very difficult to get a line between rewarding real, brave [workers] and the people who go too far.”
http://www.ft.com/cms/s/2/2d78785c-e755-11dd-aef2-0000779fd2ac.html
The most effective traders, says Hugo Pound, managing director of management consultants RDI, tend to be disciplined, innovative and brave. They enjoy challenges and pushing boundaries. Unfortunately, that profile also fits a different breed of trader – the rogue, writes Tom Drew.
Pound is a psychologist, and part of his job is to weed out potential troublemakers from top banks’ new recruits: “The problem is that after some success, they realise that there is more personal reward available through fraud than they can ever achieve through the system.”
He says fraudulent traders can be divided into three psychological profiles:
- the rogue trader,
- the cover-up artist, and
- the benevolent rebel.
The cover-up artist has been playing double or quits and keeps on losing, “so they carry on digging a deeper and deeper hole … in the hope that they will sort themselves out”.
And the benevolent rebel breaches boundaries set by an employer or government authority because he believes that, eventually, it will all come good.
Using Pound’s definitions, Nick Leeson was not a rogue trader at all, but a cover-up artist. As such, Pound thinks he was treated harshly, absorbing most of the blame for a bank whose systems and controls had failed. Jérôme Kerviel, apparently driven by a desire for corporate profit, not personal gain, falls into the benevolent rebel category. “I personally don’t have any experience of traders who have knowingly stepped over the boundary for their own benefit,” says Pound.
He believes it is difficult to measure the incidence of benevolent rebels because much of the time they are successful and stay unnoticed – or are even rewarded. “Banks don’t want to reward the safe traders because they’re not the ones who make the money. So it’s very difficult to get a line between rewarding real, brave [workers] and the people who go too far.”
http://www.ft.com/cms/s/2/2d78785c-e755-11dd-aef2-0000779fd2ac.html
Josef Ackermann's bravado doesn't match reality at Deutsche Bank
Josef Ackermann's bravado doesn't match reality at Deutsche Bank
Josef Ackermann’s bravado surely can’t be shaken, not if it wasn’t undone by last quarter’s horror show.
By Jeffrey Goldfarb, breakingviews.comLast Updated: 1:52PM GMT 05 Feb 2009
The Deutsche Bank boss remains confident about his investment-banking-heavy business model. He thinks the group can power through a financial crisis and potentially deep recession, despite reporting its first annual loss since just after the Second World War.
Such steely resolve is usually a comfort to investors. But not all of them share Ackermann’s iron-clad view that Deutsche Bank can survive – and “emerge successfully” from this mess – without additional capital, or any siphoning of its gargantuan balance sheet into a government-sponsored “bad bank”.
Deutsche Bank struggled to offer sufficient evidence on Thursday to support its stubborn resistance to such rescue measures. None of its divisions churned out any meaningful profit in the fourth quarter – which led to a €3.9bn net loss for the year. Big gains in foreign exchange and money markets were more than offset by disappointment from the core trading areas of credit and equity derivatives.
What’s more, Deutsche Bank seems to be exhausting its bag of available tricks to deleverage and sustain its capital ratios. A dividend cut released funds that had been accumulated for a higher payout, while a change in pension plan accounting freed up still more.
Some of the bank’s sizeable balance sheet reduction also was down to a bit of smoke and mirrors. Its hefty leveraged loan exposure all but disappeared when two US buyouts collapsed, and another €11bn of assets vanished under new accounting rules.
The woeful performance of the investment bank, the lower profits generated by the retail bank and the loss of funds from private banking and asset management make it hard to see where Ackermann gets his mettle. He is making adjustments, to be sure, but remains “firmly committed to the business model”.
Ackermann touted significant revenue gains in January as one reason to cheer. But it will take considerably more walking the walk to justify the swagger.
http://www.telegraph.co.uk/finance/breakingviewscom/4525321/Josef-Ackermanns-bravado-doesnt-match-reality-at-Deutsche-Bank.html
Josef Ackermann’s bravado surely can’t be shaken, not if it wasn’t undone by last quarter’s horror show.
By Jeffrey Goldfarb, breakingviews.comLast Updated: 1:52PM GMT 05 Feb 2009
The Deutsche Bank boss remains confident about his investment-banking-heavy business model. He thinks the group can power through a financial crisis and potentially deep recession, despite reporting its first annual loss since just after the Second World War.
Such steely resolve is usually a comfort to investors. But not all of them share Ackermann’s iron-clad view that Deutsche Bank can survive – and “emerge successfully” from this mess – without additional capital, or any siphoning of its gargantuan balance sheet into a government-sponsored “bad bank”.
Deutsche Bank struggled to offer sufficient evidence on Thursday to support its stubborn resistance to such rescue measures. None of its divisions churned out any meaningful profit in the fourth quarter – which led to a €3.9bn net loss for the year. Big gains in foreign exchange and money markets were more than offset by disappointment from the core trading areas of credit and equity derivatives.
What’s more, Deutsche Bank seems to be exhausting its bag of available tricks to deleverage and sustain its capital ratios. A dividend cut released funds that had been accumulated for a higher payout, while a change in pension plan accounting freed up still more.
Some of the bank’s sizeable balance sheet reduction also was down to a bit of smoke and mirrors. Its hefty leveraged loan exposure all but disappeared when two US buyouts collapsed, and another €11bn of assets vanished under new accounting rules.
The woeful performance of the investment bank, the lower profits generated by the retail bank and the loss of funds from private banking and asset management make it hard to see where Ackermann gets his mettle. He is making adjustments, to be sure, but remains “firmly committed to the business model”.
Ackermann touted significant revenue gains in January as one reason to cheer. But it will take considerably more walking the walk to justify the swagger.
http://www.telegraph.co.uk/finance/breakingviewscom/4525321/Josef-Ackermanns-bravado-doesnt-match-reality-at-Deutsche-Bank.html
Writedowns push Deutsche Bank to first full-year loss
Writedowns push Deutsche Bank to first full-year loss
Deutsche Bank has posted its first full-year loss in more than 50 years after a catastrophic three months for its core investment banking business.
By Philip AldrickLast Updated: 7:07PM GMT 05 Feb 2009
Josef Ackermann, CEO of Deutsche Bank addresses the media during the bank's annual news conference in Frankfurt. Photo: REUTERS
Germany's largest lender was hit by heavy writedowns and a plunge in revenues from trading debt and other products. A €5.8bn (£4bn) loss in the investment bank pushed the group to a record fourth quarter net loss of €4.8bn and a full year loss of €3.9bn.
Chief executive Josef Ackermann put on a brave face, insisting that the bank would not need government support and that the worst of the crisis was over. Revenues had recovered "significantly" in January to €2.8bn and Deutsche will pay a 50 cent dividend, "confidence in the bank's future performance", he said. The company paid a dividend of €4.50 in 2007.
Although refusing to rule out more "earthquakes", he said: "[The conditions] exposed some weaknesses in our business model. We are therefore repositioning our platform in some core businesses ... We are certain Deutsche Bank will emerge from this crisis stronger."
Further job losses are likely this year, he said, but not at the levels of last year, when 1,200 positions were axed and the proprietary trading desk closed. Mr Ackermann said last month that the bank expects no more "material negative impact" from leveraged loans, commercial real estate and other credit investments.
Germany's financial flagship has recently reinvented itself as a retail bank, striking a deal to buy 22.9pc of German post-office lender Deutsche Postbank for €1.1bn. Mr Ackermann reaffirmed plans to step down in May 2010 and added that the bank currently had no need for fresh capital.
----
Deutsche Bank in first quarterly loss in five years
By Philip AldrickLast Updated: 12:50AM BST 01 May 2008
Deutsche Bank said it had managed to limit its losses through the sale of stakes in Daimler, Allianz and Linde
German financial giant Deutsche Bank has suffered its first quarterly loss in five years as conditions worsened to what chief executive Josef Ackermann described as "the most difficult in recent memory".
Worsening trading due to the credit crunch has forced the bank to write down €2.7bn (£2.13bn) of assets and scale back forecasts for its successful investment banking activities.
Finance director Anthony di Iorio added to the gloom by stating that the crisis had made it impossible to provide an accurate forecast for the full year. "These are very uncertain times - the markets are unpredictable," he said.
Deutsche reported a pre-tax loss of €254m for the first three months of the year, against a €3.16bn profit a year earlier, and saw revenues in its investment bank dwindle from €6.1bn to €880m as markets in key business areas such as leveraged finance and structured credit dried up. Analysts were phlegmatic about the writedowns but questioned whether the bank's core divisions could continue to operate successfully in the current environment.
Mr Ackermann, who has been among the most outspoken members of the industry on the need for new regulation, said:
"In the first quarter of this year, the financial market conditions were the most difficult in recent memory. In March, pressure on the banking sector was more intense than at any time since the current credit downturn began."
Deutsche said it had managed to limit its losses through the sale of stakes in Daimler, Allianz and Linde. Without these gains, the net loss would have climbed from €141m to €1.1bn.
Unlike British rivals, Mr Ackermann has not resorted to capital raisings. He stressed the bank was "well positioned to emerge stronger than ever from the crisis".
Thursday, 5 February 2009
Recession: glimmers of hope?
Recession: glimmers of hope?
The first glimmers of hope are starting to emerge across the world, reports Ambrose Evans-Pritchard.
Last Updated: 3:28PM GMT 05 Feb 2009
Glimmer of hope: the Baltic Dry Index measuring freight rates for iron ore and other bulk goods has been creeping up for two months after crashing 94pc in the worst fall in shipping history.
The pace of economic decline is slowing. Housing sales are picking up, even if prices are falling. Credit markets have begun to thaw.
This is the time-honoured pattern you expect to see when the downward spiral burns itself out and the cycle slowly starts to turn, helped this time by an unprecedented global monetary and fiscal blitz. But it may equally be a false dawn.
The Baltic Dry Index measuring freight rates for iron ore and other bulk goods has been creeping up for two months after crashing 94pc in the worst fall in shipping history. Copper prices are also edging up after plunging by two-thirds from their June peak. So are lumber prices.
The debt markets have opened like a flower in spring, at least in one sense. Companies issued $246bn (£171bn) in bonds in January, the most since the credit crisis began. France's EdF has raised €9bn (£8bn). Shell and RWE each raised €3bn this week. Blue-chip groups can borrow again.
"The mood is upbeat. There are swathes of cash pouring back into credit," said Suki Mann, a credit strategist at Société Générale. "The market closed down after the Lehmans collapse so there was a lot of pent-up demand, but they are having to pay materially higher spreads than pre-Lehmans."
So far this has not helped the rest of the corporate universe. Average yields on BBB-rated debt are a prohibitive 19.6pc. "The market is absolutely closed. There is no trickle-down yet," he said.
The interbank freeze has started to thaw, again in one sense. David Buik, from BGC Partners, said interest spreads on three-month dollar Libor have come down to 1pc from the extremes above 2pc at the height of the panic. "The cost of money is coming down, but the banks are still not lending to each other. It's virtually moribund," he said.
The US Federal Reserve's loan survey this week showed that lending is again picking up, albeit tentatively. The number of banks expecting to tighten credit has fallen from 80pc in the autumn to nearer 60pc, the lowest in a year.
Mortgage demand has stabilised, though that is small comfort in a country where 19m homes are standing empty and foreclosures are running at 6,000 a day. The number of evictions reached 2.2m last year. But at least the Fed is taking drastic action by purchasing mortgage securities (with printed money) in order to drive down the costs of home loans. The rate for 30-year mortgages has fallen to 5.28pc from 6.5pc two months ago.
The first fruit of these actions is ripening. Pending home sales rose by 6.3pc in December, led by the South and Midwest, a sign that the great glut of unsold houses may start to clear – albeit at very low prices, and very slowly. Some 45pc of the all homes sold in December were foreclosures or distressed sales.
US house prices have fallen 27pc from their peak, according to the respected Case-Shiller index, dropping every month since July 2006. They will fall further. The downward momentum is overwhelming, and the $200bn "option-arm" time-bomb is only just starting to detonate as these rates ratchet up. But it is telling that the shares of builders D.R. Horton, Toll Brothers, and Lennar have begun to rally. The ITB builders share index has risen 45pc from its nadir in December.
The bloodbath in manufacturing industry across the world since September has been frightening – Korea's GDP fell by an annualised 21pc rate in the fourth quarter – but the leading indicators in a clutch of countries look slightly less awful. China's PMI purchasing index rebounded for a second month in January, even if actual output has been declining for four months.
"There are tentative signs of stabilisation. China's manufacturing is no longer in free-fall," said BNP Paribas.
The indexes also bounced in the US, the eurozone, and Britain, despite cataclysmic car sales. The inventory cycle of the OECD club of rich states may be turning. Companies ran down their stocks during the credit crunch when capital costs soared. At some point this process must exhaust itself, forcing companies to start producing again. Michael Vaknin from Goldman Sachs said we are getting "closer to the point" in the re-stocking cycle where industrial output stabilises.
Veterans of Japan's Lost Decade know that these moments of optimism can be intoxicating – and costly. Japan had four bear market rallies before investors finally had the stuffing knocked out of them. Global debt deflation this time may prove just as powerful.
"Nothing moves down in straight lines," said SocGen's perma-bear Albert Edwards. "There will be little bounces. But our view is that investors can afford to be lazy and wait. There is not a cat's chance in hell that this really is the bottom of the cycle."
http://www.telegraph.co.uk/finance/4514330/Recession-glimmers-of-hope.html
The first glimmers of hope are starting to emerge across the world, reports Ambrose Evans-Pritchard.
Last Updated: 3:28PM GMT 05 Feb 2009
Glimmer of hope: the Baltic Dry Index measuring freight rates for iron ore and other bulk goods has been creeping up for two months after crashing 94pc in the worst fall in shipping history.
The pace of economic decline is slowing. Housing sales are picking up, even if prices are falling. Credit markets have begun to thaw.
This is the time-honoured pattern you expect to see when the downward spiral burns itself out and the cycle slowly starts to turn, helped this time by an unprecedented global monetary and fiscal blitz. But it may equally be a false dawn.
The Baltic Dry Index measuring freight rates for iron ore and other bulk goods has been creeping up for two months after crashing 94pc in the worst fall in shipping history. Copper prices are also edging up after plunging by two-thirds from their June peak. So are lumber prices.
The debt markets have opened like a flower in spring, at least in one sense. Companies issued $246bn (£171bn) in bonds in January, the most since the credit crisis began. France's EdF has raised €9bn (£8bn). Shell and RWE each raised €3bn this week. Blue-chip groups can borrow again.
"The mood is upbeat. There are swathes of cash pouring back into credit," said Suki Mann, a credit strategist at Société Générale. "The market closed down after the Lehmans collapse so there was a lot of pent-up demand, but they are having to pay materially higher spreads than pre-Lehmans."
So far this has not helped the rest of the corporate universe. Average yields on BBB-rated debt are a prohibitive 19.6pc. "The market is absolutely closed. There is no trickle-down yet," he said.
The interbank freeze has started to thaw, again in one sense. David Buik, from BGC Partners, said interest spreads on three-month dollar Libor have come down to 1pc from the extremes above 2pc at the height of the panic. "The cost of money is coming down, but the banks are still not lending to each other. It's virtually moribund," he said.
The US Federal Reserve's loan survey this week showed that lending is again picking up, albeit tentatively. The number of banks expecting to tighten credit has fallen from 80pc in the autumn to nearer 60pc, the lowest in a year.
Mortgage demand has stabilised, though that is small comfort in a country where 19m homes are standing empty and foreclosures are running at 6,000 a day. The number of evictions reached 2.2m last year. But at least the Fed is taking drastic action by purchasing mortgage securities (with printed money) in order to drive down the costs of home loans. The rate for 30-year mortgages has fallen to 5.28pc from 6.5pc two months ago.
The first fruit of these actions is ripening. Pending home sales rose by 6.3pc in December, led by the South and Midwest, a sign that the great glut of unsold houses may start to clear – albeit at very low prices, and very slowly. Some 45pc of the all homes sold in December were foreclosures or distressed sales.
US house prices have fallen 27pc from their peak, according to the respected Case-Shiller index, dropping every month since July 2006. They will fall further. The downward momentum is overwhelming, and the $200bn "option-arm" time-bomb is only just starting to detonate as these rates ratchet up. But it is telling that the shares of builders D.R. Horton, Toll Brothers, and Lennar have begun to rally. The ITB builders share index has risen 45pc from its nadir in December.
The bloodbath in manufacturing industry across the world since September has been frightening – Korea's GDP fell by an annualised 21pc rate in the fourth quarter – but the leading indicators in a clutch of countries look slightly less awful. China's PMI purchasing index rebounded for a second month in January, even if actual output has been declining for four months.
"There are tentative signs of stabilisation. China's manufacturing is no longer in free-fall," said BNP Paribas.
The indexes also bounced in the US, the eurozone, and Britain, despite cataclysmic car sales. The inventory cycle of the OECD club of rich states may be turning. Companies ran down their stocks during the credit crunch when capital costs soared. At some point this process must exhaust itself, forcing companies to start producing again. Michael Vaknin from Goldman Sachs said we are getting "closer to the point" in the re-stocking cycle where industrial output stabilises.
Veterans of Japan's Lost Decade know that these moments of optimism can be intoxicating – and costly. Japan had four bear market rallies before investors finally had the stuffing knocked out of them. Global debt deflation this time may prove just as powerful.
"Nothing moves down in straight lines," said SocGen's perma-bear Albert Edwards. "There will be little bounces. But our view is that investors can afford to be lazy and wait. There is not a cat's chance in hell that this really is the bottom of the cycle."
http://www.telegraph.co.uk/finance/4514330/Recession-glimmers-of-hope.html
How to play the coming gold price jump
Questor: how to play the coming gold price jump
Questor explains why it thinks gold is a good investment and the options available to those looking to invest.
Garry WhiteLast Updated: 3:01PM GMT 04 Feb 2009
Questor's view
Gold has always been about wealth preservation - it does well in a time of crisis.
In good times there are better ways to make money than buying gold. However, equities are now volatile, house prices are falling and current interest rates make saving unattractive. Significantly, people no longer trust the banking system.
In the last few months gold has hit a series of all-time highs in sterling terms because of weakness in the pound - and it is likely to rise further.
Questor feels that now is a good time to look at all the different ways investors can buy into gold, be it coins, bullion or via funds. Questor is not recommending any specific dealers in the metal, but points you in the direction of the World Gold Council (WGC) investor website (www.invest.gold.org)
Click on "where to invest" and you will find a list of dealers in each of the different asset classes. There is a substantial amount of information on the site regarding gold and enough information to decide which asset is best for your own circumstances.
Questor remains a bull of gold through 2009 and urges investors without exposure to buy.
Here are some options available to investors.
Gold coins
The premium on gold coins such as sovereigns and Krugerrands has widened recently as demand for the coins has accelerated.
This means you have to pay more than their weight in gold to make a purchase.
This premium, which could be as much as 20pc, is partly due to their current popularity, but also because of what they are. You are, in effect, buying a piece of history. This will always demand a premium.
To find out more about premium, discuss this with a coin dealer listed on the World Gold Council's website. They should only be too happy to help.
Gold coins are an easy way of storing your wealth and they are easily transported. However, this means that you must pay attention to storage – and there will be insurance costs to consider as well.
Gold bars
You can also buy gold bars through bullion dealers. However, storage and insurance is a problem here too.
There are a number of organisations and mints which run certificate schemes for gold in their vaults.
This means you can invest in the precious metal without having to store the bars yourself. You receive a certificate of deposit showing how much gold is allocated to you.
Perhaps the most famous is the Perth Mint Certificate from Australia. This programme is the only government guaranteed certificate program in the world.
The same service is provided by a number of European organisations too – see the WGC website.
However, there are storage costs associated with this way to play gold. Make sure you check out all the details of the certificate programme before you invest.
Gold funds
Gold exchange traded funds (ETFs) have been around since 2003. It is a way of buying into movements in the gold price without physically storing the metal yourself.
Investors may be aware that in September a number of ETFs were suspended as they were backed by AIG products.
However, one gold ETF that was not suspended because it is backed by real gold was the ETF Securities Physical Gold fund, which trades on the London Stock Exchange under the symbol PHAU.
Some investors may have a US trading account. In this situation they may like to buy the world's largest gold ETF fund streetTRACKS Gold, which is listed in the US under the symbol GLD.
Gold shares
One of Questor's tips of the year is gold miner Centamin Egypt.
The company is set to become a gold producer in the second quarter of this year at the Sukari mine in Egypt.
A detailed analysis of the company was published in this column on Tuesday this week. The shares have risen 13pc since their recommendation and remain a buy.
Silver
Silver is also a precious metal that should not be ignored.
The price of silver tends to move with the gold price – and should the gold price spike, Questor expects that the silver price will rise too.
Questor's recommended investors buy into the world's largest silver producer Fresnillo on January 18.
The shares are up 34pc, after the silver price jumped 17pc since the recommendation was made. Shares in Fresnillo remain a buy.
The technical view
Although Questor does not believe technical analysis alone is a solid basis for making an investment decision, it is a useful tool. So, it is worth taking a look at the situation right now.
Citigroup analyst Yutaka Yoshino believes that the gold price could reach $1,190 or $1,300 in March or May. He thinks that gold has upward resistance at $933 an ounce (the current price is $901).
He argues that a push through $933 would increase the likelihood of gold renewing last spring's all-time high at an early stage.
However, if it fails to breach this level, it would be vulnerable to a pull back and any upward spike will be delayed until March or May.
http://www.telegraph.co.uk/finance/markets/questor/4512793/Questor-how-to-play-the-coming-gold-price-jump.html
Questor explains why it thinks gold is a good investment and the options available to those looking to invest.
Garry WhiteLast Updated: 3:01PM GMT 04 Feb 2009
Questor's view
Gold has always been about wealth preservation - it does well in a time of crisis.
In good times there are better ways to make money than buying gold. However, equities are now volatile, house prices are falling and current interest rates make saving unattractive. Significantly, people no longer trust the banking system.
In the last few months gold has hit a series of all-time highs in sterling terms because of weakness in the pound - and it is likely to rise further.
Questor feels that now is a good time to look at all the different ways investors can buy into gold, be it coins, bullion or via funds. Questor is not recommending any specific dealers in the metal, but points you in the direction of the World Gold Council (WGC) investor website (www.invest.gold.org)
Click on "where to invest" and you will find a list of dealers in each of the different asset classes. There is a substantial amount of information on the site regarding gold and enough information to decide which asset is best for your own circumstances.
Questor remains a bull of gold through 2009 and urges investors without exposure to buy.
Here are some options available to investors.
Gold coins
The premium on gold coins such as sovereigns and Krugerrands has widened recently as demand for the coins has accelerated.
This means you have to pay more than their weight in gold to make a purchase.
This premium, which could be as much as 20pc, is partly due to their current popularity, but also because of what they are. You are, in effect, buying a piece of history. This will always demand a premium.
To find out more about premium, discuss this with a coin dealer listed on the World Gold Council's website. They should only be too happy to help.
Gold coins are an easy way of storing your wealth and they are easily transported. However, this means that you must pay attention to storage – and there will be insurance costs to consider as well.
Gold bars
You can also buy gold bars through bullion dealers. However, storage and insurance is a problem here too.
There are a number of organisations and mints which run certificate schemes for gold in their vaults.
This means you can invest in the precious metal without having to store the bars yourself. You receive a certificate of deposit showing how much gold is allocated to you.
Perhaps the most famous is the Perth Mint Certificate from Australia. This programme is the only government guaranteed certificate program in the world.
The same service is provided by a number of European organisations too – see the WGC website.
However, there are storage costs associated with this way to play gold. Make sure you check out all the details of the certificate programme before you invest.
Gold funds
Gold exchange traded funds (ETFs) have been around since 2003. It is a way of buying into movements in the gold price without physically storing the metal yourself.
Investors may be aware that in September a number of ETFs were suspended as they were backed by AIG products.
However, one gold ETF that was not suspended because it is backed by real gold was the ETF Securities Physical Gold fund, which trades on the London Stock Exchange under the symbol PHAU.
Some investors may have a US trading account. In this situation they may like to buy the world's largest gold ETF fund streetTRACKS Gold, which is listed in the US under the symbol GLD.
Gold shares
One of Questor's tips of the year is gold miner Centamin Egypt.
The company is set to become a gold producer in the second quarter of this year at the Sukari mine in Egypt.
A detailed analysis of the company was published in this column on Tuesday this week. The shares have risen 13pc since their recommendation and remain a buy.
Silver
Silver is also a precious metal that should not be ignored.
The price of silver tends to move with the gold price – and should the gold price spike, Questor expects that the silver price will rise too.
Questor's recommended investors buy into the world's largest silver producer Fresnillo on January 18.
The shares are up 34pc, after the silver price jumped 17pc since the recommendation was made. Shares in Fresnillo remain a buy.
The technical view
Although Questor does not believe technical analysis alone is a solid basis for making an investment decision, it is a useful tool. So, it is worth taking a look at the situation right now.
Citigroup analyst Yutaka Yoshino believes that the gold price could reach $1,190 or $1,300 in March or May. He thinks that gold has upward resistance at $933 an ounce (the current price is $901).
He argues that a push through $933 would increase the likelihood of gold renewing last spring's all-time high at an early stage.
However, if it fails to breach this level, it would be vulnerable to a pull back and any upward spike will be delayed until March or May.
http://www.telegraph.co.uk/finance/markets/questor/4512793/Questor-how-to-play-the-coming-gold-price-jump.html
Wednesday, 4 February 2009
Benjamin Graham's timeless key investing principles
Benjamin Graham's timeless key investing principles
Published: 2009/01/28
This is the first in a weekly series of articles by the Securities Industry Development Corp to help educate investors.
"TO ACHIEVE satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks." - these were the wise words of Benjamin Graham, the father of two fundamental investment disciplines - security analysis and value investing.
Not a name unheard of in the investing world, Benjamin Graham was an icon for many, including William J. Ruane and Irving Kahn. One of his most loyal and notable disciples, however, was Warren Buffet.
There is no better way to learn how to make it big in the investing world than learning it from the best and it doesn't get any better than Benjamin Graham.
Benjamin Graham was born in the UK in 1894 and moved to US when he was eight and a half years old. Although he came from a poor family, he was exceptionally bright at a young age. He graduated from Columbia University in 1914 and started his investment career by joining Wall Street as a financial analyst.
He established his first private investment organisation, the Benjamin Graham Joint Account, at the age of thirty two. During the Great Depression, between 1929 and 1932, he lost 70 per cent of his US$2.5 million (RM9.05 million) fund. Although some of his clients gave up, his fund managed to survive the worst, and by 1935, he recovered all the losses.
What did Graham consider as critical elements to successful investing? Here, we will briefly note the investing principles propoun-ded by Benjamin Graham.
Published: 2009/01/28
This is the first in a weekly series of articles by the Securities Industry Development Corp to help educate investors.
"TO ACHIEVE satisfactory investment results is easier than most people realise; to achieve superior results is harder than it looks." - these were the wise words of Benjamin Graham, the father of two fundamental investment disciplines - security analysis and value investing.
Not a name unheard of in the investing world, Benjamin Graham was an icon for many, including William J. Ruane and Irving Kahn. One of his most loyal and notable disciples, however, was Warren Buffet.
There is no better way to learn how to make it big in the investing world than learning it from the best and it doesn't get any better than Benjamin Graham.
Benjamin Graham was born in the UK in 1894 and moved to US when he was eight and a half years old. Although he came from a poor family, he was exceptionally bright at a young age. He graduated from Columbia University in 1914 and started his investment career by joining Wall Street as a financial analyst.
He established his first private investment organisation, the Benjamin Graham Joint Account, at the age of thirty two. During the Great Depression, between 1929 and 1932, he lost 70 per cent of his US$2.5 million (RM9.05 million) fund. Although some of his clients gave up, his fund managed to survive the worst, and by 1935, he recovered all the losses.
What did Graham consider as critical elements to successful investing? Here, we will briefly note the investing principles propoun-ded by Benjamin Graham.
* Understand the difference between investment and speculation.
Graham established a clear distinction between an investment and a speculation. To qualify as an investment, it must go through analysis, must have a good margin of safety and a satisfactory return. Speculation, on the reverse, merely involves timing and profiting from market fluctuation.
* Do a detailed analysis as stocks represent a share of business.
In the process of doing a detailed analysis, investors need to have the mindset of treating stock purchasing as if they own a piece of the business to evaluate stock prices from the perspective of the underlying asset value, financial strength and future earning prospect, instead of focusing on the short-term fluctuation of the market. This is regarded as the intrinsic value of the company.
Graham's most famous and influential motto is 'margin of safety'. The experiences that he cumulated during the frenzy of the Great Depression made a deep impression on him. He became a very cautious investor whose number one investment concern is the safety of investment principal.
If the intrinsic value of a stock is RM1 and you buy the stock at the price of 67 sen, then your margin of safety is 33 per cent. This serves as a cushion to your investment in the case of a market downturn or to provide you with a margin of error in calculating the intrinsic value, so that the chances of you losing your principal are at the lowest.
* Have a realistic return objective.
The objective of making an investment is to make money. However, Graham warns against aiming for unrealistic return objective. If you expect an abnormally high return from your investment, chances are you will be exposing yourself to unnecessary risk in order to achieve your return objective, which will become speculation instead of investment.
There is no short cut or quick ways to making money. Graham's way of investing is to set a realistic return objective and making investments based on sound investment principles and having the discipline to follow through.
* Treat the market as servant, not master.
Graham believes that risks and returns do not increase proportionately. He sees the opportunities in market volatilities. To him, the stock market is manic-depressive and investors should go for a bargain hunt during a market down turn.
The risk of investment can be significantly reduced if investors understand the business and apply good judgment based on the above first three elements in searching for good fundamental stocks, which are temporarily depressed due to market reasons.
However, he discourages making decisions based on any form of forecast and timing of the market. Instead, the decision making should be made based on price attractiveness.
Graham's stock selection criteria include a price-to-book ratio of 1.5 times, price-to-earnings ratio of below 20 times and debt-to-equity ratio of 0.5 times.
From the above, you can observe that Graham advocates defensive investing approaches. This later became the foundation of the investing principles of the famous investing guru, Warren Buffet, who learned about the quantitative screening process from Graham while working in Graham's company.
However, for a lay person to successfully apply Graham's approaches, you need to be prepared to overcome some hurdles. You need to do a lot of hard work and have good accounting knowledge in order to dissect the financial information provided in the annual report or other financial publications.
In addition to that, you will have to be highly sensitive to any news that will affect the performance of the company or the relevant industries. Having the ability to derive your own conclusion from your research, you will also then need to have the determination and faith in your work so as to prevent yourself from being blown away by the market.
This is the first in a weekly series of articles by the Securities Industry Development Corp to help educate investors. Incorporated in March 2007, SIDC is a leading capital markets education, training and information resource provider. For more tips on wise investing, log on to www.min.com. my
Jim Rogers and his theories of relativity
Jim Rogers and his theories of relativity
Jim Rogers. Investing legend or so the Alabama-born financial maven would like us to believe.
By Jame Quinn, Wall Street Correspondent Last Updated: 6:57PM GMT 03 Feb 2009
Jim Rogers is one of the best-known and most vocal investors in the world
Ever since the bow-tie wearing, world-travelling Mr Rogers appeared on the scene as one of the co-founders of the Quantum fund – along with George Soros – a vehicle that delivered a 4,200pc increase in value in a decade, he has not been shy about sharing his views with the world.
From commodities to oil to the dollar, when he speaks, the investment community tends to listen. That appeared to be true two weeks ago when he took on Gordon Brown and slammed sterling, saying the City of London was finished, and that the UK would be too once the North Sea's oil reserves ran dry.
The pound responded quickly, hitting a 24-year low later that day, as followers appeared to agree.
But as the Royal Bank of Scotland's Ross Walker and David Simmonds promptly pointed out, the UK has been running an oil deficit for four years, and manufacturing contributes more to the UK economy than the Square Mile ever has done.
Not that that stopped Mr Rogers predicting just last week that sterling would again reach parity with the dollar.
The problem with Mr Rogers' rants, however – as the past fortnight has perhaps shown – is that he is not always as right as he seems to think he is.
Take one of his more recent punts, on the rise of China and the growth of the Asian region as an economic superpower – a viewpoint in which he believes so strongly he has relocated to Singapore and is teaching his young children Mandarin.
But China's growth is slowing, and fast. From an annualised growth rate of 9pc in the third quarter of 2008, the International Monetary Fund predicts the Chinese economy will grow by 6.7pc in this year, its slowest pace of growth for more than seven years.
The Chinese economy is stagnating – as seen in news that more than 20m rural migrant farm workers had lost their jobs by the start of the recent lunar new year festivities. Mr Rogers may yet prove to be right in the long term, but not right now.
When it comes to oil, Mr Rogers has long been a bull, predicting a price of $200 a barrel long before last summer's $140-plus price squeeze, and again as recently as this month.
But his thesis is predicated on a lack of supply, which perhaps seems valid, until you look at his other theories.
After all, one of Mr Roger's favourite current mantras is that the US economy is ruined, thanks in part to the mishandling of the recent crisis by the Bush administration.
So, given that the US remains far and away the largest consumer of oil, if its economy is in freefall, surely its need for oil will wane sharply, freeing up supply?
The investment "guru" also contradicts himself by being bullish on the future of shares in airlines, a sector that tends to be crippled by high oil prices.
One of his most resounding ideologies is his unnerving belief in the value of commodities, which led to him being coined the "commodities king".
So fervent is his belief that in 1998 he even set up a tradable commodities index in his name - the Rogers International Commodities Index (RICI).
But, unfortunately for him and for those who have invested in it, the RICI delivered a negative return of 41.35pc in 2008 in large part due to the slump in commodity prices at the tail-end of last year. As a result, the index's return since inception, as at the end of December, was 159.36pc, a five-year low.
The RICI – which is based on a "basket" of 36 commodities – is led by the man himself, along with a committee of eight others from banks including Merrill Lynch and UBS.
Interestingly, crude oil and Brent account for 35pc of the indices' weighting, perhaps in part explaining the recent fall in its value.
To be fair, Mr Rogers has in the past admitted he is not the best when it comes to timing, and that when it comes to short-term trading, he is "horrible".
Behind the sound-bites for which he has become known, he recently admitted that if it hadn't been for shorting US banks and investing in the Japanese yen, his own personal portfolio wouldn't have made a profit last year.
Mr Rogers has proven to be bang on the money in the past, and his current overriding mantra, that Asian economies will replace those of the West, will be no doubt proven correct in the long-term.
But, to paraphrase an old adage, you shouldn't believe everything you hear, no matter who it is that's saying it.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4446729/Jim-Rogers-and-his-theories-of-relativity.html
Jim Rogers. Investing legend or so the Alabama-born financial maven would like us to believe.
By Jame Quinn, Wall Street Correspondent Last Updated: 6:57PM GMT 03 Feb 2009
Jim Rogers is one of the best-known and most vocal investors in the world
Ever since the bow-tie wearing, world-travelling Mr Rogers appeared on the scene as one of the co-founders of the Quantum fund – along with George Soros – a vehicle that delivered a 4,200pc increase in value in a decade, he has not been shy about sharing his views with the world.
From commodities to oil to the dollar, when he speaks, the investment community tends to listen. That appeared to be true two weeks ago when he took on Gordon Brown and slammed sterling, saying the City of London was finished, and that the UK would be too once the North Sea's oil reserves ran dry.
The pound responded quickly, hitting a 24-year low later that day, as followers appeared to agree.
But as the Royal Bank of Scotland's Ross Walker and David Simmonds promptly pointed out, the UK has been running an oil deficit for four years, and manufacturing contributes more to the UK economy than the Square Mile ever has done.
Not that that stopped Mr Rogers predicting just last week that sterling would again reach parity with the dollar.
The problem with Mr Rogers' rants, however – as the past fortnight has perhaps shown – is that he is not always as right as he seems to think he is.
Take one of his more recent punts, on the rise of China and the growth of the Asian region as an economic superpower – a viewpoint in which he believes so strongly he has relocated to Singapore and is teaching his young children Mandarin.
But China's growth is slowing, and fast. From an annualised growth rate of 9pc in the third quarter of 2008, the International Monetary Fund predicts the Chinese economy will grow by 6.7pc in this year, its slowest pace of growth for more than seven years.
The Chinese economy is stagnating – as seen in news that more than 20m rural migrant farm workers had lost their jobs by the start of the recent lunar new year festivities. Mr Rogers may yet prove to be right in the long term, but not right now.
When it comes to oil, Mr Rogers has long been a bull, predicting a price of $200 a barrel long before last summer's $140-plus price squeeze, and again as recently as this month.
But his thesis is predicated on a lack of supply, which perhaps seems valid, until you look at his other theories.
After all, one of Mr Roger's favourite current mantras is that the US economy is ruined, thanks in part to the mishandling of the recent crisis by the Bush administration.
So, given that the US remains far and away the largest consumer of oil, if its economy is in freefall, surely its need for oil will wane sharply, freeing up supply?
The investment "guru" also contradicts himself by being bullish on the future of shares in airlines, a sector that tends to be crippled by high oil prices.
One of his most resounding ideologies is his unnerving belief in the value of commodities, which led to him being coined the "commodities king".
So fervent is his belief that in 1998 he even set up a tradable commodities index in his name - the Rogers International Commodities Index (RICI).
But, unfortunately for him and for those who have invested in it, the RICI delivered a negative return of 41.35pc in 2008 in large part due to the slump in commodity prices at the tail-end of last year. As a result, the index's return since inception, as at the end of December, was 159.36pc, a five-year low.
The RICI – which is based on a "basket" of 36 commodities – is led by the man himself, along with a committee of eight others from banks including Merrill Lynch and UBS.
Interestingly, crude oil and Brent account for 35pc of the indices' weighting, perhaps in part explaining the recent fall in its value.
To be fair, Mr Rogers has in the past admitted he is not the best when it comes to timing, and that when it comes to short-term trading, he is "horrible".
Behind the sound-bites for which he has become known, he recently admitted that if it hadn't been for shorting US banks and investing in the Japanese yen, his own personal portfolio wouldn't have made a profit last year.
Mr Rogers has proven to be bang on the money in the past, and his current overriding mantra, that Asian economies will replace those of the West, will be no doubt proven correct in the long-term.
But, to paraphrase an old adage, you shouldn't believe everything you hear, no matter who it is that's saying it.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4446729/Jim-Rogers-and-his-theories-of-relativity.html
Why selling is a common problem
Why selling is a common problem
Published: 2009/02/04
Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.
* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.
So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html
Published: 2009/02/04
Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.
* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.
So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.
Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.
http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html
The importance of having a good business plan
Wednesday February 4, 2009
The importance of having a good business plan
RSM EYE - By Girish Ramachandran
THE business plan remains the cornerstone in determining whether you can attract potential funders and investors.
However, statistics show that only 5% of business plans are read beyond the executive summary. And only 10% of proposals that pass the initial screening qualify for due diligence and receive funding.
That means on average, only six in 1,000 business plans get the funding they ask for.
Different types of funders look at business plans from different perspectives.
These individuals seek out businesses with good potential and sound strategies that will provide high financial returns, coupled with an option to exit the venture.
The 3Fs (founder, friends and family), angel investors and venture capitalists observe the highest risk levels as they gain entry into the business at its seeding points.
In contrast, to manage their risks, equity investors and commercial banks are more likely to look for entry points between the growth and maturity stages of the business.
The implication for entrepreneurs is that they must customise their business plan according to whether they are seeking funding from a bank or a venture capital fund.
A good business plan provides a clear roadmap to your corporate destination.
It may be your most important communication tool to investors. It will include a marketing plan, a management plan and financial projections for five years.
The financial projections are an integral part of the plan, since nothing speaks louder to bankers than numbers.
The marketing plan provides an overview of the business, its location and your marketing strategies. The management plan basically details the credentials and experience of those in the decision-making capacity.
To sum it up, you have to be prepared. Many people are unsure of what the bank can or cannot do for you, and why. Bankers expect you to know the basics before you walk in their door. Do your homework and set realistic assumptions.
A bank that wants to start a relationship with you will read your plan to know who you are and what you plan to do. Some things they are likely to look for:
The business background
You will have more credibility if you’ve had experience in the business and field you’re entering.
Attempt to show an overview of the market and highlight your advantages of your business over its competitors.
The business plan should detail strategies for breaking into the industry and show good potential for demand and further expansion.
People are an all important factor in a business, so describe the management team with short biographies of main managers.
Your financial projections
Bankers expect to see the three main financial statements – income statement, balance sheet and cash flow – projected monthly for the first year, and annually for four years after that. The cash flow is imperative.
These financial projections give bankers a sense of your profit and cash flow if they provide you with a loan.
You need to prove that you will have more than enough cash to cover the monthly loan repayments and any overheads.
The financial projections should mirror that of reality as much as possible. This implies that if you are able to obtain actual numbers (rents, insurance, equipments quotes and prices), use the actual numbers.
Some bankers like to say if they see too many zeros, they know the numbers aren’t reliable.
Take note, if you underestimate capital or operational expenses, you may end up overspending in the future and eating into your working capital.
Realism in your financials
Granted, you can’t really forecast your income or expenses. The temptation is to use over-optimistic assumptions to show strong projections.
That may work to your disadvantage in the long run. Over-optimism on your part will definitely come face to face with plenty of doubt on the banker’s.
The trick is to use conservative assumptions but still show strong projections. This is because bankers will compare your projections to industry reports on average performance of different kinds of businesses.
If you project margins way better than those, you’d better be able to explain why or how you’re going to accomplish that.
·Local alignment in the financials
Amounts have to logically match so that the amount you ask to borrow matches the financial gaps in your plan.
For example, don’t try to show you don’t need any money, because if you didn’t, you wouldn’t be borrowing. Don’t show that you need much more money than you can afford to borrow. Your cash flow should be realistic and show how much money you need and why.
A complete plan
A good banker will also expect to see a readable plan from executive summary through to the end. It should cover what you sell, your market, your company background, and specific dates and activities.
So the business plan is a two-way test.
Although most banks will require a plan, not all of them will really process the plan. Be grateful if they do. That means they are interested in your business and want to build a long-term relationship.
Girish Ramachandran is executive director of RSM Strategic Business Advisors. He is of the opinion that failure to plan is most certainly planning to fail. Feedback to this article is welcome. Please email starbiz@thestar.com.my
http://biz.thestar.com.my/news/story.asp?file=/2009/2/4/business/3188027&sec=business
The importance of having a good business plan
RSM EYE - By Girish Ramachandran
THE business plan remains the cornerstone in determining whether you can attract potential funders and investors.
However, statistics show that only 5% of business plans are read beyond the executive summary. And only 10% of proposals that pass the initial screening qualify for due diligence and receive funding.
That means on average, only six in 1,000 business plans get the funding they ask for.
Different types of funders look at business plans from different perspectives.
These individuals seek out businesses with good potential and sound strategies that will provide high financial returns, coupled with an option to exit the venture.
The 3Fs (founder, friends and family), angel investors and venture capitalists observe the highest risk levels as they gain entry into the business at its seeding points.
In contrast, to manage their risks, equity investors and commercial banks are more likely to look for entry points between the growth and maturity stages of the business.
The implication for entrepreneurs is that they must customise their business plan according to whether they are seeking funding from a bank or a venture capital fund.
A good business plan provides a clear roadmap to your corporate destination.
It may be your most important communication tool to investors. It will include a marketing plan, a management plan and financial projections for five years.
The financial projections are an integral part of the plan, since nothing speaks louder to bankers than numbers.
The marketing plan provides an overview of the business, its location and your marketing strategies. The management plan basically details the credentials and experience of those in the decision-making capacity.
To sum it up, you have to be prepared. Many people are unsure of what the bank can or cannot do for you, and why. Bankers expect you to know the basics before you walk in their door. Do your homework and set realistic assumptions.
A bank that wants to start a relationship with you will read your plan to know who you are and what you plan to do. Some things they are likely to look for:
The business background
You will have more credibility if you’ve had experience in the business and field you’re entering.
Attempt to show an overview of the market and highlight your advantages of your business over its competitors.
The business plan should detail strategies for breaking into the industry and show good potential for demand and further expansion.
People are an all important factor in a business, so describe the management team with short biographies of main managers.
Your financial projections
Bankers expect to see the three main financial statements – income statement, balance sheet and cash flow – projected monthly for the first year, and annually for four years after that. The cash flow is imperative.
These financial projections give bankers a sense of your profit and cash flow if they provide you with a loan.
You need to prove that you will have more than enough cash to cover the monthly loan repayments and any overheads.
The financial projections should mirror that of reality as much as possible. This implies that if you are able to obtain actual numbers (rents, insurance, equipments quotes and prices), use the actual numbers.
Some bankers like to say if they see too many zeros, they know the numbers aren’t reliable.
Take note, if you underestimate capital or operational expenses, you may end up overspending in the future and eating into your working capital.
Realism in your financials
Granted, you can’t really forecast your income or expenses. The temptation is to use over-optimistic assumptions to show strong projections.
That may work to your disadvantage in the long run. Over-optimism on your part will definitely come face to face with plenty of doubt on the banker’s.
The trick is to use conservative assumptions but still show strong projections. This is because bankers will compare your projections to industry reports on average performance of different kinds of businesses.
If you project margins way better than those, you’d better be able to explain why or how you’re going to accomplish that.
·Local alignment in the financials
Amounts have to logically match so that the amount you ask to borrow matches the financial gaps in your plan.
For example, don’t try to show you don’t need any money, because if you didn’t, you wouldn’t be borrowing. Don’t show that you need much more money than you can afford to borrow. Your cash flow should be realistic and show how much money you need and why.
A complete plan
A good banker will also expect to see a readable plan from executive summary through to the end. It should cover what you sell, your market, your company background, and specific dates and activities.
So the business plan is a two-way test.
Although most banks will require a plan, not all of them will really process the plan. Be grateful if they do. That means they are interested in your business and want to build a long-term relationship.
Girish Ramachandran is executive director of RSM Strategic Business Advisors. He is of the opinion that failure to plan is most certainly planning to fail. Feedback to this article is welcome. Please email starbiz@thestar.com.my
http://biz.thestar.com.my/news/story.asp?file=/2009/2/4/business/3188027&sec=business
High returns not sustainable in global crisis: Singapore GIC
Agence France-Presse - 2/2/2009 8:47 AM GMT
High returns not sustainable in global crisis: GIC
High returns obtained for 20 years by one of Singapore's sovereign wealth funds will not be seen during the global credit crisis, the firm's deputy chairman said in remarks published Monday.
The Government of Singapore Investment Corp (GIC), one of the world's largest sovereign wealth funds, announced in September that its nominal annual rate of return over the past 20 years was 7.8 percent in US dollar terms.
However, deputy chairman Tony Tan Keng Yam said the firm, which has bailed out international financial institutions hit by the economic turmoil, said the economic environment had made such profits very unlikely.
"I do not expect GIC or any other large investor to be able to reproduce the type of high returns which GIC was able to deliver in the last 20 years," Tan was quoted as saying in an interview with the Straits Times.
"It's now a completely different economic and financial environment which all investors, all companies have to deal with -- and this will last for quite some time," Tan said.
In late 2007 and early last year GIC injected billions of dollars into Swiss bank UBS as well as US banking giant Citigroup, which suffered massive losses from US subprime, or higher-risk, mortgage investments.
Subprime troubles later evolved into the worldwide financial slowdown.
Governments and central banks have stepped in with stimulus packages and other measures to confront the crisis. If these measures work, the world's economy could start to recover later this year, Tan said in the interview.
A recession that lasts into 2010, however, could be a sign of "systemic change in the world economy," he said.
In a weekend speech to the World Economic Forum of global leaders in Davos, Switzerland, Tan said sovereign wealth funds and other institutional investors will play an important role in the stabilisation and eventual recovery of asset markets.
"Such institutions, with their long-term investment horizons could be important sources of demand for undervalued assets.
"This would contribute to stabilising financial and household sector losses, thereby helping to restore both credit creation and demand in the real economy," said Tan, whose speech was released by GIC.
http://news.my.msn.com/regional/article.aspx?cp-documentid=2315533
High returns not sustainable in global crisis: GIC
High returns obtained for 20 years by one of Singapore's sovereign wealth funds will not be seen during the global credit crisis, the firm's deputy chairman said in remarks published Monday.
The Government of Singapore Investment Corp (GIC), one of the world's largest sovereign wealth funds, announced in September that its nominal annual rate of return over the past 20 years was 7.8 percent in US dollar terms.
However, deputy chairman Tony Tan Keng Yam said the firm, which has bailed out international financial institutions hit by the economic turmoil, said the economic environment had made such profits very unlikely.
"I do not expect GIC or any other large investor to be able to reproduce the type of high returns which GIC was able to deliver in the last 20 years," Tan was quoted as saying in an interview with the Straits Times.
"It's now a completely different economic and financial environment which all investors, all companies have to deal with -- and this will last for quite some time," Tan said.
In late 2007 and early last year GIC injected billions of dollars into Swiss bank UBS as well as US banking giant Citigroup, which suffered massive losses from US subprime, or higher-risk, mortgage investments.
Subprime troubles later evolved into the worldwide financial slowdown.
Governments and central banks have stepped in with stimulus packages and other measures to confront the crisis. If these measures work, the world's economy could start to recover later this year, Tan said in the interview.
A recession that lasts into 2010, however, could be a sign of "systemic change in the world economy," he said.
In a weekend speech to the World Economic Forum of global leaders in Davos, Switzerland, Tan said sovereign wealth funds and other institutional investors will play an important role in the stabilisation and eventual recovery of asset markets.
"Such institutions, with their long-term investment horizons could be important sources of demand for undervalued assets.
"This would contribute to stabilising financial and household sector losses, thereby helping to restore both credit creation and demand in the real economy," said Tan, whose speech was released by GIC.
http://news.my.msn.com/regional/article.aspx?cp-documentid=2315533
Tuesday, 3 February 2009
2009 MARKET OUTLOOKS
Ignis: 'Double-digit returns by the end of next year are entirely achievable'
Increasingly attractive valuations in the stock market contrast with poor returns available from bank deposits, says asset manager.
Last Updated: 4:40PM GMT 19 Dec 2008
IGNIS ASSET MANAGEMENT – 2009 MARKET OUTLOOKS
UK: Ralph Brook-Fox, manager, Ignis UK Focus Fund
“The UK stock market over the next three months should trough as the poor economic data continues to flood in. Earnings estimates will continue to fall, which they must do before we can be confident that expectations have fully adjusted.
“Markets are forward-looking, however, and once the recovery gets under way, I expect the UK market to perform respectably. Indeed, given increasingly attractive valuations, I believe double-digit returns by the end of next year are entirely achievable, especially given the increasingly poor returns available from bank deposits.
“Investors will need to be brave to avoid missing the boat and we are looking to start rotating into more cyclical names early next year, as defensive stock valuations appear increasingly stretched. Rate cuts and falling inflation favour a move into the consumer sector, but with no guarantee that consumers will spend and not save their money, stock selection will be key. Selectively, we believe clothing retailers will do well but are steering clear of stocks related to the housing market where the overhang of negative equity and limited credit availability will drag for some years.
“Rotating into more cyclical stocks is not an immediate priority, however, as we expect the news flow in the first quarter to be poor. There is no point getting beaten-up by the market when you know the punches are coming. The middle of that gloomy period, however, could be an opportune time to start looking at companies that will do well for the rest of the year.”
Emerging Markets: Bryan Collings, managing partner, HEXAM Capital
“We believe emerging markets will come out of the global crisis stronger than developed markets. From a global perspective emerging markets still exhibit the best fundamentals from almost every angle. Corporate health is good and balance sheets are generally robust, significantly more so than in developed markets.
“2009 will be the year in which deflation plagues the developed markets. Most of these would, in their current state, fail to meet the original Maastricht criteria for entry into the euro. Many emerging markets, in contrast, would pass the tests with relative ease. Deflation is, however, unlikely to occur in emerging markets, where we see inflation coming in around 4pc per annum over the next three years.
“Emerging markets are particularly compelling in terms of valuations. At just seven times earnings, stocks are insanely cheap and have been brutally oversold, down almost 60pc year-to-date as a whole. Given this, it is well worth remembering that the bounce in the first five days after the market hits the bottom is usually vicious and can reclaim over 40pc of previous losses. This is a distinct possibility in 2009.
“Fundamentally, the next two quarters are likely to see bearish macro and micro news, with slowing economic and earnings growth. This clearly poses a threat to any sustained equity market rallies, if only because of the bearish mood of the market. The bad news, however, has been more than priced into emerging markets and we remain positive for 2009 given current levels.”
Corporate Bonds: Chris Bowie, head of credit, Ignis Asset Management
“Investment grade credit has never been better value – ever. Forced sellers of corporate bonds have created a situation where investors can achieve comfortable double-digit yields on household names. Sainsbury’s, for instance, has a 14pc yield while investors can secure 16pc with Barclays, HBOS or RBS. Aviva is yielding 15pc and Standard Life 12pc. Even away from financials and retailers, there are yields of 10pc with the likes of Firstgroup, BT and Imperial Tobacco.
“For perspective, a typical bank account would take seven years to achieve a return equal to the annual yield you can buy on a Sainsbury’s secured bond. Equities look more attractive, with dividend yields rising sharply, but this is because capital values are plunging over earnings fears and we believe companies will be cutting dividends in 2009. The outlook for property next year is equally bad.
“Bonds are not risk-free of course and the default risk is undoubtedly higher than in recent years. Some companies will fail in 2009 but these are unlikely to include high street supermarket chains or banks with a government guarantee for the next three years. This risk is more than priced into yields already.
“Inflation is, of course, the enemy of bonds, but in the near term the risk is deflation as a result of the drop in economic activity. Deflation may be destructive to the real economy, but it is a major positive for bonds.
“Admittedly, the lack of liquidity in corporates means that it is difficult to get out of the asset class cheaply, so a corporate bond investment has to be for the long-term, at least for a year. Corporate bonds have, however, been battered to such an extent in the last 18 months that this is the best buying opportunity in several generations.”
Europe: Adrian Darley, head of European equities, Ignis Asset Management
“After an incredibly volatile 2008, it is already apparent what many of the investment issues will be for 2009. At a stock level it is clear that consensus earnings expectations are still too high for many companies. The key question for investors is not where earnings will bottom but what is already priced into company valuations.
“There is a danger that a myopic focus on how bad 2009 may be, could lead to similar mistakes made in 2003. This resulted in a focus on difficult short-term news flow and investors missing out when European equity markets subsequently rose more than 37pc in just eight months – based partly on falling interest rates. This is not to underestimate the global challenges many companies presently face. It does, however, highlight that, as in previous cycles, policy-makers are reacting fast. This time they are spending money and cutting interest rates more aggressively than ever before. The credit crunch will slow the speed at which this feeds through into economic growth, but the policy-makers’ actions will undoubtedly make a difference. There have also been recent examples of shares rising significantly on so-called bad profit warnings, which is a clear sign that investors are starting to see through the fog.
“Predicting investor behaviour will be important heading into 2009 and it appears most investors will enter the year positioned defensively, with high cash levels and overweight positions in telecoms and pharmaceuticals. Any shift in this stance could trigger aggressive sector rotation, as we saw in 2003. At this stage it makes sense to enter 2009 with a more balanced and less defensive portfolio than was appropriate in 2008. This means slowly increasing cyclical exposure through financial and industrial stocks, with individual stock selection vitally important. After such large stock market falls there are always excellent investment opportunities.”
Asia Pacific: Andrea McNee, CIO international equities, Ignis Asset Management
“The economic news coming out of Asia is deteriorating quickly and this is likely to continue into 2009. The impact of global deleveraging has only just hit Asia’s real economies and it will take time to work its way though. Many Asian governments are cutting interest rates and bringing in fiscal stimulus packages, while commodity prices are lower than they were. These are all positives for the region. There is a question mark, however, over whether consumers, in a time of rising unemployment and global uncertainty, are in the mood to spend the extra money in their pockets.
“The main risk is the corporate earnings outlook. Earnings estimates for 2009 are still too high and have further to fall, with downgrades likely to continue. This will abate at some point and there are positive signs emerging, with analysts’ forecasts becoming more consensual and volatility coming down from an extremely high level. It is also worth noting that certain firms will profit from the downturn. Much of their competition could be wiped out and there is money to be made from identifying strongly-managed businesses able to ride out the current slump. Also, for Asia, unlike the West, this is cyclical rather than structural and Asia has the fiscal muscle and healthy foreign exchange reserves to cushion the impact of a deteriorating environment.
“The key for markets in 2009 will be visibility. Once markets see clear evidence that there is an economic recovery on the way and that company earnings could rise, there is the potential for a significant rally. Calling the start of this is difficult although visibility should improve in the second half of the year. It is unlikely we have seen the bottom just yet, with the upswing in mid-December looking like a classic bear market rally. Equally, now is not the time to sell out of Asia.”
Multi-Manager View: Simon Mungall, partner, Maia Capital
“UK retail investors seeking an income in 2009 are not spoilt for choice. The Bank of England’s base rate is at 2pc and is likely to be cut further. UK equity income funds, the traditionally popular alternative for fund investors, flatter to deceive.
“UK equity income funds perform well in an environment in which equity issuers can continue to pay dividends. Last year, many investors claimed bank stocks looked good value on the basis of their dividend yields. This, however, assumed that banks would continue to be able to pay their dividends and, at some point, the price of equity in banks would rise to reflect this. In fact, the price of bank stocks was a better guide to the future than their dividends, which are, of course, at the discretion of management.
“Coupon income on conventional bonds is contractually guaranteed and failure to pay it puts the issuer in default. In the event of a default, the claims of a corporate bond investor are senior to the equity holder, meaning the bond investor gets paid first.
“Corporate bonds can provide an attractive yield in a safer part of the capital structure than equities. There is also a medium-term prospect of capital gains if and when corporate bond valuations return to par. Not only is the corporate bond market offering an attractive income, it is currently offering rates of return more commonly associated with the equity market, and importantly at a lower level of risk.
“Economic fundamentals will be undoubtedly difficult in 2009 and financing will remain scarce and expensive. Consequently corporate defaults will rise significantly and will probably continue at high levels until well into 2010. Proper issuer analysis is therefore essential to successful corporate bond investing, and even funds run by the best corporate bond managers will suffer defaults in a market of this nature. In our experience, however, the default rates of these higher quality funds have been less than a quarter of the number of defaults in the market as a whole. The message for 2009 is, therefore, to choose carefully or entrust your money to specialist managers who will do it for you and that corporate bond funds could be an attractive option for 2009.”
US: Terry Ewing and Alison Porter, co-managers, Ignis American Growth Fund
“The downturn in the US stock market has been consistent with previous bear markets, but the speed of the fall has been very different. Even during the much milder recession of 2001, the market took two years to reach a bottom. The current downturn is less than a year old.
“US equity markets traditionally fare better under a democratic administration. The economy is, however, the more important factor and President-elect Obama will come to power following one of the worst quarters of economic performance in US history. US economic growth is likely to fall to between -2pc and -4pc in the first three months of the year and, as such, earnings expectations for US companies will have to come down significantly from current levels.
“Obama has, however, already impressed Wall Street with his economic appointments and a more strategic approach to dealing with the financial crisis will engender greater confidence. His approach to foreign affairs could also restore the standing of the US abroad in the longer term, which ultimately will help the valuation of the market by reducing risk premium.
“Additionally, US policy-makers have been quick to act in the face of the downturn. They announced more stimulus packages in the last six months than the Japanese government did in the first eight years of the Japanese slowdown. Base rates are likely to be cut to 0pc – part of the US Federal Reserve’s quantitative easing that appears to know no bounds.
“Following his forthcoming stimulus package, Obama is likely to bring in direct and immediate tax cuts in addition to Roosevelt-like infrastructure building plans aimed at getting Middle America back to work. This will aid the economy in the second quarter of the year and will be an investment theme for the Ignis American Growth Fund throughout 2009, as certain companies will benefit from infrastructure development.
“Deflation will also be a theme in 2009 with certain companies well-positioned to benefit from falling prices, either because of their balance sheet strength and ability to pay significant dividends, or because lower commodity prices will shrink their cost base. Increasing consolidation in the airline, insurance and retail sectors should also benefit those companies well-positioned to take market share from competitors, and therefore profit from a stronger pricing environment due to restricted capital flows.”
http://www.telegraph.co.uk/finance/personalfinance/investing/shares/3851888/Ignis-Double-digit-returns-by-the-end-of-next-year-are-entirely-achievable.html
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