Rules for the New Reality
by Ron LieberThursday, February 26, 2009
provided by
Back in September, before we were all inured to the tottering nature of so many financial giants, investors were looking for someone to blame.
More from NYT.com: • How About a Stimulus for Financial Advice? • Coaches for a Game of Money• Readers Weigh in With Tips on Jobs and Money
So when Prince & Associates, a market research firm in Redding, Conn., polled people with more than $1 million in investable assets, it wasn’t any great surprise that 81 percent intended to take money out of the hands of their financial advisers. Nearly half planned to tell peers to avoid them, while 86 percent were going to recommend steering clear of their firms.
In January, Prince took another poll of people with similar assets, and only a percentage in the teens had engaged in trash-talking. Just under half of the investors had taken money away from their advisers.
All of the bad feelings, however, raised a simple question that’s even more essential when we’ve all been so severely tested. What, exactly, does your wealth manager owe you? And what can you never reasonably expect?
Some of the answers are basic. Your financial advisers should have impeccable credentials. They should be free of black marks on their regulatory or disciplinary records. They should agree, on Day 1, to act solely in your best interest, not theirs or those of any company that might toss them a commission.
More from Yahoo! Finance: • Why Index Funds Are Still Winners• 5 New Investing Rules for Retirement• The $38 Billion Shadow Stimulus
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But other standards are less obvious, and the carnage in the markets provides an excellent opportunity to review them.
What You Should Expect
A Long Look at Risk
Most of us aren’t honest with ourselves about how much investment risk we can handle. Even worse, we tend to change our minds at market tops and bottoms, making the wrong choices at precisely the wrong moments.
An accurate assessment of risk is important. But you can view risk in many ways.
David B. Jacobs of Pathfinder Financial Services in Kailua, Hawaii, usually starts with risk capacity. Young people have a great deal of risk capacity, since they have their whole career ahead of them to make up for any mistakes. A football player might have much less risk capacity, since he could have only a few years of high earnings. And some retirees have plenty of risk capacity, if they have a solid pension.
Then Mr. Jacobs moves to risk need. Need is driven by goals. Someone with no heirs and $20 million in municipal bonds might not care so much about significantly growing the portfolio. But if that person suddenly becomes passionate about a cause, he or she may want to double that amount in a decade to create an endowment or put up a building.
Only then does risk tolerance become a factor. “You have to help people visualize what the risk means,” Mr. Jacobs said. “If a year from now, your $1 million is $700,000, how would it change your life? Does that mean you can’t go visit your grandchildren? I’m trying to dig down and make people think of exactly what their day would be like.”
A Balance Sheet Audit
Diversifying the risks in your portfolio is merely the beginning of the process. Burt Hutchinson, of Fischer & Hutchinson Wealth Advisors in Bear, Del., trained as an accountant before earning his certified financial planner designation. He believes in tax diversification too, across a range of savings vehicles with different tax rules.
He wants his firm to act as a sort of personal chief financial officer, looking at liabilities as well as assets and at spending as much as saving. “How are you tracking your cash flow?” he will ask. “Is it increasing? Decreasing? Do you have any idea where it’s going?” He says that a good financial planner should ask to see your tax return, not just your investment portfolio.
Customization
A 100-page financial plan lands with a thud and comes with fancy leather binding. What you might not know, however, is that off-the-shelf software probably produced most of it.
More from NYT.com: • How About a Stimulus for Financial Advice? • Coaches for a Game of Money• Readers Weigh in With Tips on Jobs and Money
Not that there’s anything wrong with computer projections. But most people’s financial lives, even those of the wealthy, do not contain 100 pages of complications. And enormous financial plans can be overwhelming and difficult to follow.
“Plans need not be over 10 to 15 pages,” said Timothy J. Maurer of the Financial Consulate in Hunt Valley, Md. “But every bit of it should be customized.”
To eat the same dog food
When Dr. Marc Reichel, an anesthesiologist from Beaufort, S.C., grew tired of stockbrokers pitching investments they would never use themselves, he queried a new adviser about her own portfolio. “Unlike with my previous experiences, she said, ‘Sure, this is what I have, take a look,’ ” he said. “And it wasn’t just a one-time thing. It was ongoing.”
Dr. Reichel has been with that planner, Sheila M. Chesney, of Chesney & Company in Sheldon, S.C., for nearly a decade. “The only way I could feel like I did a good job was to say that I’m doing the same thing,” she said. “If it wasn’t working for me, I wouldn’t be doing it.”
Boredom
You have the right to be bored by your financial life. There is no shame in putting things on autopilot, saving the same percentage of your income in a diverse collection of index funds for decades on end.
This philosophy drew skepticism in the 1990s for Spencer D. Sherman, when his clients wondered why he wasn’t putting them in individual technology stocks. But Mr. Sherman, a financial planner and the author of “The Cure for Money Madness,” thinks his clients would be better off seeking thrills far away from the financial markets.
More from Yahoo! Finance: • Why Index Funds Are Still Winners• 5 New Investing Rules for Retirement• The $38 Billion Shadow Stimulus
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“If you’re in a diversified passive portfolio, you have nothing to talk about at a cocktail party,” he said. “But why don’t people make investments a smaller part of their lives? It almost seems like people need to fulfill that desire for excitement somehow, and investing is an easy way to do it.”
What You Should Not Expect
Market Timing
It would’ve been nice if every wealth manager had moved clients to 100 percent cash positions around the middle of last year. The truly prescient might have put some money down on exchange traded funds that bet on the decline of various stock indexes.
But those who did probably didn’t call the top in 2000, or get back into the market in early 2003. Nor will they know when the current bear market will end. For the same reasons that most mutual fund managers consistently underperform market indexes over the long haul, especially after taxes and fees, your adviser is not clairvoyant, either.
“In the 1990s, a lot of people wanted to know how much we were going to beat the market by and our strategy for market timing,” said Laura H. Mattia, wealth management principal with Baron Financial Group in Fair Lawn, N.J. Most people know better now, after riding the roller coaster for a decade or watching the unraveling in recent months.
Low Risk, High Return
After market timing, Ms. Mattia said, this fiction is the second of two great false beliefs in money management. “It’s the same as wanting to believe in a magic pill that will cause you to lose 20 pounds,” she said. “People are looking for the easy way of achieving their goals, but things just aren’t always necessarily so easy.”
The notion seemed abstract until December. Then, after years of smooth supposed returns, prosecutors accused the wizard Bernard L. Madoff of making it all up. Recently, the Texas financier Robert Allen Stanford came under scrutiny for peddling high-yielding C.D.’s that may have been too good to be true. Anyone who utters the phrase “low risk, high return” deserves close examination.
To Be a Pest
Remember that you hire advisers in order to set some clear, long-term goals — which probably shouldn’t change every day in reaction to the ups and downs of the markets.
“One of my biggest roles is to take the emotion out and be a calming force,” said Lon Jefferies of Net Worth Advisory Group in Midvale, Utah. “If clients want to continually change their risk tolerance when the market drops another 300 points, that’s going to make it impossible for the relationship to succeed, because they’re changing the rules almost every day.”
Rather than calling every day to second-guess yourself and your adviser, set aside dates to sit down and examine your feelings.
Certainty
This one may be the toughest to swallow. Jay Hutchins, of Comprehensive Planning Associates in Lebanon, N.H., never promises an outcome. The past year, he said, should make it easier for new clients to understand why.
Even a collection of Treasury bills and top-rated, immediate fixed annuities is not enough to establish certainty in his mind. “When you decide you’re going to build a house, you build the building accordingly and with prudence, depending on whether tornadoes or earthquakes are most likely to threaten it,” he said. “Then, an airplane flies into it. Did you do anything wrong to fail to plan for an airplane crash? Of course not. You plan for what is going to be most likely.”
While Mr. Hutchins is not yet ready to predict a return to the 1930s, he doesn’t believe it makes sense to place the likelihood of it happening at zero either.
Life, in general, is unpredictable.
And for the adviser, that uncertainty should be cause for some modesty.
Milo M. Benningfield, of Benningfield Financial Advisors in San Francisco, notes that we tend to value aggressiveness. “But when I think about the meltdown, I feel like it was overconfidence,” he said. “It was a colossal lack of modesty that led people to underestimate the risk involved and believe that they understood things more than they did.”
So to him, a big part of being modest is recognizing your own limits. “You’re more inclined to say, What if I’m wrong?” he said, adding that he often reaches out for help on insurance and estate planning matters. “I think the definition of incompetence is failing to recognize that you don’t know something.”
http://finance.yahoo.com/retirement/article/106652/Rules-for-the-New-Reality;_ylt=AgyVt.WIeqvSeWfCieaON9tO7sMF
Sunday, 1 March 2009
Berkshire has worst year, Buffett still optimistic
AP
Berkshire has worst year, Buffett still optimistic
Saturday February 28, 6:07 pm ET
By Josh Funk, AP Business Writer
Berkshire has worst year, Buffett still optimistic
Saturday February 28, 6:07 pm ET
By Josh Funk, AP Business Writer
Buffett optimistic despite Berkshire's worst year, prospects for more economic turmoil
OMAHA, Neb. (AP) -- Warren Buffett remains optimistic about the prospects for his company and the nation even though Berkshire Hathaway Inc. turned in its worst performance in 2008 and the widely-followed investor says the economy will likely remain a mess beyond this year.
ADVERTISEMENT
Buffett used his annual letter Saturday to reassure shareholders that the Omaha-based insurance and investment company has the financial strength needed to withstand the current turmoil and improve after the worst showing of Buffett's 44 years as chairman and CEO.
Buffett wrote he's certain "the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall."
In between the news of Berkshire's sharply lower profit and a thorough explanation of its largely unrealized $7.5 billion investment and derivative losses, Buffett offered a hopeful view of the nation's future.
He said America has faced bigger economic challenges in the past, including two World Wars and the Great Depression.
"Though the path has not been smooth, our economic system has worked extraordinarily well over time," Buffett wrote. "It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead."
Buffett's letter appeared to mollify the concerns of many who follow the company, but it's not yet clear whether that will help Berkshire's Class A stock extend its rebound from the new five-year low it set last Monday at $73,500. On Friday, it closed up $250 at $78,600.
"If anything, I feel better than I did before I read it," Morningstar analyst Bill Bergman said. Berkshire's results could have easily been worse, he said.
But Buffett estimates Berkshire's book value -- assets minus liabilities -- declined 9.6 percent to $70,530 per share in 2008 -- the biggest drop since he took control of the company in 1965. Berkshire's book value declined only one other time under Buffett, and that was a 6.2 percent drop in 2001 when insurance losses related to the Sept. 11 terrorist attacks hurt results.
Berkshire's Class A shares remain the most expensive U.S. stock, but they fell nearly 32 percent in 2008 and have declined 48 percent since setting a high of $151,650 in December 2007. That high came after an exceptionally profitable quarter that was helped by a $2 billion investment gain.
The S&P 500 fell 37 percent in 2008.
Within Berkshire, Buffett said the company's retail businesses, including furniture and jewelry stores, and those tied to residential construction, such as Shaw carpet and Acme Brick, were hit hard last year. Net income for those businesses slipped 3 percent to $2.28 billion, and Buffett said they will likely continue to perform below their potential in 2009.
But he said Berkshire's utility and insurance businesses, which includes Geico, both delivered outstanding results in 2008 that helped balance out the other businesses.
The Des Moines, Iowa-based utility division, MidAmerican Energy Holdings, contributed $1.7 billion to Berkshire's net income in 2008 thanks to more than $1 billion in proceeds from MidAmerican's failed takeover of Constellation Energy. That's up from the $1.1 billion utility profit that Berkshire recorded in 2007.
The insurance division, which also includes reinsurance giant General Re, contributed $1.8 billion in earnings from underwriting -- a drop of 17 percent from 2007. Buffett praised Geico CEO Tony Nicely's efficiency and his ability to increase Geico's market share to 7.7 percent of the auto insurance market last year.
"As we view Geico's current opportunities, Tony and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere," Buffett wrote.
Overall, Berkshire's 2008 profit of $4.99 billion, or $3,224 per Class A share, was down 62 percent from $13.21 billion, or $8,548 per share, in 2007.
Berkshire's fourth-quarter numbers were even worse. Buffett's company reported net income of $117 million, or $76 per share, down 96 percent from $2.95 billion, or $1,904 per share, a year earlier.
Buffett devoted nearly five pages of his letter to shareholders to explaining the role derivatives played in the company's investment losses last year.
The derivatives Berkshire offers operate similar to insurance policies. Some of them cover whether certain stock market indexes -- the S&P 500, the FTSE 100 in the United Kingdom, the Euro Stoxx 50 in Europe and the Nikkei 225 in Japan -- will be lower 15 or 20 years in the future. Others cover credit losses at groups of 100 companies, and some cover credit risks of individual companies.
Buffett said he initiated all of Berkshire's 251 different derivative contracts because he believes they were mispriced in Berkshire's favor.
Analyst Justin Fuller, who works with Midway Capital Research & Management in Chicago, said he thinks the details Buffett offered about Berkshire's derivatives will help.
Fuller said two key things make Berkshire's derivatives different from the complex financial bets of the same name that other companies have used. Berkshire requires most payment upfront, so there's little risk the other party to the derivative will fail to pay. And Berkshire won't take part in derivatives that require the company to post substantial collateral when the value of the contract falls.
"I think laying those out as plainly and simply as he did with examples should calm investors' fears about derivatives," said Fuller.
Berkshire has received $8.1 billion in payments for derivatives which can be invested until the contracts expire years from now.
But Berkshire has to estimate the value of its derivatives every quarter. Buffett said he supports that mark-to-market accounting, but the Black-Scholes formula used to estimate that value tends to overstate Berkshire's liability on long-term contracts.
"Even so, we will continue to use Black-Scholes when we are estimating our financial-statement liability for long-term equity puts. The formula represents conventional wisdom and any substitute that I might offer would engender extreme skepticism," Buffett wrote.
Buffett said he made at least one major investing mistake last year by buying a large amount of ConocoPhillips stock when oil and gas prices were near their peak.
Berkshire increased its stake in ConocoPhillips from 17.5 million shares in 2007 to 84.9 million shares at the end of 2008. Buffett said he didn't anticipate last year's dramatic fall in energy prices, so his decision cost Berkshire shareholders several billion dollars.
Buffett says he also spent $244 million on stock in two Irish banks that appeared cheap. But since then, he's had to write down the value of those purchases to $27 million.
But Buffett also had several investing successes in 2008.
Berkshire committed $14.5 billion to fixed income investments in Goldman Sachs Group Inc. and General Electric Co. Those investments carry high interest rates and give Berkshire the option to acquire stock in those companies.
To fund those investments, Buffett said he had to sell some of Berkshire's holdings in Johnson & Johnson, Procter & Gamble Co. and ConocoPhillips even though he would have rather kept that stock.
"However, I have pledged -- to you, the rating agencies and myself -- to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow's obligations," Buffett said.
In that regard, Berkshire should be OK because the company finished 2008 with $24.3 billion cash on hand. That's down significantly from the $37.7 billion the company held at the end of 2007, reflecting the investments Buffett made during the year.
Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo & Co. and Coca-Cola Co.
OMAHA, Neb. (AP) -- Warren Buffett remains optimistic about the prospects for his company and the nation even though Berkshire Hathaway Inc. turned in its worst performance in 2008 and the widely-followed investor says the economy will likely remain a mess beyond this year.
ADVERTISEMENT
Buffett used his annual letter Saturday to reassure shareholders that the Omaha-based insurance and investment company has the financial strength needed to withstand the current turmoil and improve after the worst showing of Buffett's 44 years as chairman and CEO.
Buffett wrote he's certain "the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond -- but that conclusion does not tell us whether the stock market will rise or fall."
In between the news of Berkshire's sharply lower profit and a thorough explanation of its largely unrealized $7.5 billion investment and derivative losses, Buffett offered a hopeful view of the nation's future.
He said America has faced bigger economic challenges in the past, including two World Wars and the Great Depression.
"Though the path has not been smooth, our economic system has worked extraordinarily well over time," Buffett wrote. "It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead."
Buffett's letter appeared to mollify the concerns of many who follow the company, but it's not yet clear whether that will help Berkshire's Class A stock extend its rebound from the new five-year low it set last Monday at $73,500. On Friday, it closed up $250 at $78,600.
"If anything, I feel better than I did before I read it," Morningstar analyst Bill Bergman said. Berkshire's results could have easily been worse, he said.
But Buffett estimates Berkshire's book value -- assets minus liabilities -- declined 9.6 percent to $70,530 per share in 2008 -- the biggest drop since he took control of the company in 1965. Berkshire's book value declined only one other time under Buffett, and that was a 6.2 percent drop in 2001 when insurance losses related to the Sept. 11 terrorist attacks hurt results.
Berkshire's Class A shares remain the most expensive U.S. stock, but they fell nearly 32 percent in 2008 and have declined 48 percent since setting a high of $151,650 in December 2007. That high came after an exceptionally profitable quarter that was helped by a $2 billion investment gain.
The S&P 500 fell 37 percent in 2008.
Within Berkshire, Buffett said the company's retail businesses, including furniture and jewelry stores, and those tied to residential construction, such as Shaw carpet and Acme Brick, were hit hard last year. Net income for those businesses slipped 3 percent to $2.28 billion, and Buffett said they will likely continue to perform below their potential in 2009.
But he said Berkshire's utility and insurance businesses, which includes Geico, both delivered outstanding results in 2008 that helped balance out the other businesses.
The Des Moines, Iowa-based utility division, MidAmerican Energy Holdings, contributed $1.7 billion to Berkshire's net income in 2008 thanks to more than $1 billion in proceeds from MidAmerican's failed takeover of Constellation Energy. That's up from the $1.1 billion utility profit that Berkshire recorded in 2007.
The insurance division, which also includes reinsurance giant General Re, contributed $1.8 billion in earnings from underwriting -- a drop of 17 percent from 2007. Buffett praised Geico CEO Tony Nicely's efficiency and his ability to increase Geico's market share to 7.7 percent of the auto insurance market last year.
"As we view Geico's current opportunities, Tony and I feel like two hungry mosquitoes in a nudist camp. Juicy targets are everywhere," Buffett wrote.
Overall, Berkshire's 2008 profit of $4.99 billion, or $3,224 per Class A share, was down 62 percent from $13.21 billion, or $8,548 per share, in 2007.
Berkshire's fourth-quarter numbers were even worse. Buffett's company reported net income of $117 million, or $76 per share, down 96 percent from $2.95 billion, or $1,904 per share, a year earlier.
Buffett devoted nearly five pages of his letter to shareholders to explaining the role derivatives played in the company's investment losses last year.
The derivatives Berkshire offers operate similar to insurance policies. Some of them cover whether certain stock market indexes -- the S&P 500, the FTSE 100 in the United Kingdom, the Euro Stoxx 50 in Europe and the Nikkei 225 in Japan -- will be lower 15 or 20 years in the future. Others cover credit losses at groups of 100 companies, and some cover credit risks of individual companies.
Buffett said he initiated all of Berkshire's 251 different derivative contracts because he believes they were mispriced in Berkshire's favor.
Analyst Justin Fuller, who works with Midway Capital Research & Management in Chicago, said he thinks the details Buffett offered about Berkshire's derivatives will help.
Fuller said two key things make Berkshire's derivatives different from the complex financial bets of the same name that other companies have used. Berkshire requires most payment upfront, so there's little risk the other party to the derivative will fail to pay. And Berkshire won't take part in derivatives that require the company to post substantial collateral when the value of the contract falls.
"I think laying those out as plainly and simply as he did with examples should calm investors' fears about derivatives," said Fuller.
Berkshire has received $8.1 billion in payments for derivatives which can be invested until the contracts expire years from now.
But Berkshire has to estimate the value of its derivatives every quarter. Buffett said he supports that mark-to-market accounting, but the Black-Scholes formula used to estimate that value tends to overstate Berkshire's liability on long-term contracts.
"Even so, we will continue to use Black-Scholes when we are estimating our financial-statement liability for long-term equity puts. The formula represents conventional wisdom and any substitute that I might offer would engender extreme skepticism," Buffett wrote.
Buffett said he made at least one major investing mistake last year by buying a large amount of ConocoPhillips stock when oil and gas prices were near their peak.
Berkshire increased its stake in ConocoPhillips from 17.5 million shares in 2007 to 84.9 million shares at the end of 2008. Buffett said he didn't anticipate last year's dramatic fall in energy prices, so his decision cost Berkshire shareholders several billion dollars.
Buffett says he also spent $244 million on stock in two Irish banks that appeared cheap. But since then, he's had to write down the value of those purchases to $27 million.
But Buffett also had several investing successes in 2008.
Berkshire committed $14.5 billion to fixed income investments in Goldman Sachs Group Inc. and General Electric Co. Those investments carry high interest rates and give Berkshire the option to acquire stock in those companies.
To fund those investments, Buffett said he had to sell some of Berkshire's holdings in Johnson & Johnson, Procter & Gamble Co. and ConocoPhillips even though he would have rather kept that stock.
"However, I have pledged -- to you, the rating agencies and myself -- to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow's obligations," Buffett said.
In that regard, Berkshire should be OK because the company finished 2008 with $24.3 billion cash on hand. That's down significantly from the $37.7 billion the company held at the end of 2007, reflecting the investments Buffett made during the year.
Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo & Co. and Coca-Cola Co.
Berkshire Hathaway Inc.: http://www.berkshirehathaway.com/
Warren Buffett's 2008 letter: http://www.berkshirehathaway.com/letters/2008ltr.pdf
http://biz.yahoo.com/ap/090228/buffett_letter.html
Warren Buffett's 2008 letter: http://www.berkshirehathaway.com/letters/2008ltr.pdf
http://biz.yahoo.com/ap/090228/buffett_letter.html
Are You Taking Too Much (or Too Little) Risk?
Are You Taking Too Much (or Too Little) Risk?
by Christine Benz
Friday, February 27, 2009
provided by
Assessing a client's risk tolerance--an individual's own assessment of his or her ability to withstand investment losses--is standard practice in the financial-planning world. The Web is full of tools to help investors gauge how they would respond if the market dropped 10%, 20%, or even 50%, and I often hear from readers who tell me that their risk tolerance is "high" or "low."
The basic premise behind getting investors to identify their pain thresholds makes sense. After all, reams of data, including Morningstar Investor Returns, show that investors often buy high and sell low. By identifying their ability to handle losses and avoiding those investments that will cause them to sell at the wrong time, investors should be able to improve their overall return records.
Yet relying disproportionately on your risk tolerance to shape your investments carries its own big risk: namely, that you'll end up with a portfolio that doesn't help you reach your goals because you've been too aggressive or too timid. Instead, risk tolerance should take a back seat to the really important considerations, such as the size of your current nest egg, your savings rate, the years you have until retirement, and the number of years you expect to be retired. Only after you've developed a portfolio plan based on those factors should you consider making adjustments around the margins to suit your risk tolerance.
The Risk of Being Too Aggressive ...
Generally speaking, I'm happy to hear from investors who rate their risk tolerance as "high." These folks' long-term mind-sets allow them to tune out the market's inevitable day-to-day gyrations and weather big losses from time to time--characteristics that usually go hand in hand with profitable investing.
Yet being too aggressive isn't always a good thing. For one thing, it's possible that you're misreading your own risk tolerance and won't behave as you think you will if and when your investments lose money. Studies from the field of behavioral finance indicate that investors' confidence level--and in turn their perceived ability to handle risk--ebbs and flows with the market's direction. Thus, an investor might rate highly his own ability to handle risk at the very worst time--when the market is skyrocketing and stock valuations are high--only to exhibit much less confidence in the event of a market drop. (Not surprisingly, buoyant markets are also when most financial-services firms hawk the riskiest products.)
Moreover, being loss-averse has a foundation in simple math. After all, the stock that drops from $60 to $45 has lost 25% of its value, but it will have to gain 33% to get back to $60. The same cruel math holds for the whole of your portfolio, so it's no wonder that investors are inclined to rate themselves as risk-averse; losses are tough to recover from.
Big losses can be particularly painful for those who are getting close to retirement, because their portfolios have less time to recover from the hit. If you're 30 and your 401(k) balance goes down by 37%--as the S&P 500 did last year--it's a painful but not cataclysmic blow. After all, you might have 30 years or more to recoup those losses, and depressed stock valuations give you the opportunity to buy stocks on the cheap.
By contrast, if you're in your mid-60s and saw your retirement-plan balance shrink from $800,000 to little more than $500,000 over the past year, you don't have as many options. You could continue working to amass more savings or dramatically scale back your planned standard of living in retirement, neither of which is particularly appealing. The bottom line is that there are real reasons to grow more protective of your nest egg as you grow closer to needing your money, and there are real risks to letting your own assessment of your risk tolerance guide your asset-allocation decisions.
... Or Too Conservative
However, with the market dropping sharply over the past year, I'd wager that being too conservative is a bigger risk for many investors right now than is maintaining a portfolio that's too aggressive. Just as investor confidence improves as stocks march upward, so does pessimism take over when stocks are in the dumps.
Yet anyone tempted to make his portfolio more conservative should ponder a real risk of that tactic. By avoiding stocks and sticking exclusively with "safe," fixed-rate securities such as CDs or short-term Treasuries, you also put a cap on your portfolio's upside potential, which in turn heightens the risk of a shortfall come retirement. True, stocks have greater loss potential than do short-term fixed-income investments, but they also have the potential for greater gains. Moreover, the gains from short-term, high-quality investments are pretty darn skimpy right now: You're lucky to earn 3% on a one-year CD.
That might not sound terrible. After all, the S&P 500 Index has lost about 3%, on an annualized basis. Yet while inflation is currently minimal right now, it won't always be so benign. In fact, inflation has the potential to gobble up most, if not all, of the return you earn from any fixed-rate investment. The upshot? For retirees, pre-retirees, and 20-somethings alike, hunkering down in safe, fixed-rate investments is a luxury you probably can't afford, even if it helps you sleep at night. To help offset the effects of inflation, you need to have at least part of your portfolio in stocks, whose returns have the potential to outstrip inflation over time.
Just Right
So if it's a bad idea to let your gut guide your stock/bond mix, what should you do? Your key mission is to let hard numbers--rather than your own comfort level--be the chief determinant of your asset-allocation plan. Employ an online asset-allocation tool, such as Morningstar's Asset Allocator, to help you optimize your asset allocation based on your goals, your savings rate, and the number of years you have until retirement. Alternatively, you could hire a financial advisor for even more customized help or look to the asset allocations of target-maturity funds for back-of-the-envelope guidance. (David Kathman discussed how to do that in a recent The Short Answer column.)
Once you've put your basic asset-allocation framework in place, it's fine to make some adjustments around the margins based on your own comfort level. For example, if you determine that you should have the majority of assets in equities, you could focus on underpriced large-cap stocks or invest with a stock-fund manager who places a premium on limiting losses. On the bond side, you could limit your portfolio's risk level by going light on more-volatile asset classes like high-yield bonds and sticking with high-quality short- and intermediate-term bonds.
Beyond these small adjustments, it's a big mistake to let your emotions--and that's essentially what irrational risk aversion is--drive your portfolio planning. If the market's ups and downs leave you with excess nervous energy to burn, focus on factors you can actually influence, such as improving your security selection and lowering your overall investment-related and tax costs.
http://finance.yahoo.com/retirement/article/106656/Are-You-Taking-Too-Much-or-Too-Little-Risk;_ylt=AgJi2m23enNuwutOjND70J5O7sMF?
by Christine Benz
Friday, February 27, 2009
provided by
Assessing a client's risk tolerance--an individual's own assessment of his or her ability to withstand investment losses--is standard practice in the financial-planning world. The Web is full of tools to help investors gauge how they would respond if the market dropped 10%, 20%, or even 50%, and I often hear from readers who tell me that their risk tolerance is "high" or "low."
The basic premise behind getting investors to identify their pain thresholds makes sense. After all, reams of data, including Morningstar Investor Returns, show that investors often buy high and sell low. By identifying their ability to handle losses and avoiding those investments that will cause them to sell at the wrong time, investors should be able to improve their overall return records.
Yet relying disproportionately on your risk tolerance to shape your investments carries its own big risk: namely, that you'll end up with a portfolio that doesn't help you reach your goals because you've been too aggressive or too timid. Instead, risk tolerance should take a back seat to the really important considerations, such as the size of your current nest egg, your savings rate, the years you have until retirement, and the number of years you expect to be retired. Only after you've developed a portfolio plan based on those factors should you consider making adjustments around the margins to suit your risk tolerance.
The Risk of Being Too Aggressive ...
Generally speaking, I'm happy to hear from investors who rate their risk tolerance as "high." These folks' long-term mind-sets allow them to tune out the market's inevitable day-to-day gyrations and weather big losses from time to time--characteristics that usually go hand in hand with profitable investing.
Yet being too aggressive isn't always a good thing. For one thing, it's possible that you're misreading your own risk tolerance and won't behave as you think you will if and when your investments lose money. Studies from the field of behavioral finance indicate that investors' confidence level--and in turn their perceived ability to handle risk--ebbs and flows with the market's direction. Thus, an investor might rate highly his own ability to handle risk at the very worst time--when the market is skyrocketing and stock valuations are high--only to exhibit much less confidence in the event of a market drop. (Not surprisingly, buoyant markets are also when most financial-services firms hawk the riskiest products.)
Moreover, being loss-averse has a foundation in simple math. After all, the stock that drops from $60 to $45 has lost 25% of its value, but it will have to gain 33% to get back to $60. The same cruel math holds for the whole of your portfolio, so it's no wonder that investors are inclined to rate themselves as risk-averse; losses are tough to recover from.
Big losses can be particularly painful for those who are getting close to retirement, because their portfolios have less time to recover from the hit. If you're 30 and your 401(k) balance goes down by 37%--as the S&P 500 did last year--it's a painful but not cataclysmic blow. After all, you might have 30 years or more to recoup those losses, and depressed stock valuations give you the opportunity to buy stocks on the cheap.
By contrast, if you're in your mid-60s and saw your retirement-plan balance shrink from $800,000 to little more than $500,000 over the past year, you don't have as many options. You could continue working to amass more savings or dramatically scale back your planned standard of living in retirement, neither of which is particularly appealing. The bottom line is that there are real reasons to grow more protective of your nest egg as you grow closer to needing your money, and there are real risks to letting your own assessment of your risk tolerance guide your asset-allocation decisions.
... Or Too Conservative
However, with the market dropping sharply over the past year, I'd wager that being too conservative is a bigger risk for many investors right now than is maintaining a portfolio that's too aggressive. Just as investor confidence improves as stocks march upward, so does pessimism take over when stocks are in the dumps.
Yet anyone tempted to make his portfolio more conservative should ponder a real risk of that tactic. By avoiding stocks and sticking exclusively with "safe," fixed-rate securities such as CDs or short-term Treasuries, you also put a cap on your portfolio's upside potential, which in turn heightens the risk of a shortfall come retirement. True, stocks have greater loss potential than do short-term fixed-income investments, but they also have the potential for greater gains. Moreover, the gains from short-term, high-quality investments are pretty darn skimpy right now: You're lucky to earn 3% on a one-year CD.
That might not sound terrible. After all, the S&P 500 Index has lost about 3%, on an annualized basis. Yet while inflation is currently minimal right now, it won't always be so benign. In fact, inflation has the potential to gobble up most, if not all, of the return you earn from any fixed-rate investment. The upshot? For retirees, pre-retirees, and 20-somethings alike, hunkering down in safe, fixed-rate investments is a luxury you probably can't afford, even if it helps you sleep at night. To help offset the effects of inflation, you need to have at least part of your portfolio in stocks, whose returns have the potential to outstrip inflation over time.
Just Right
So if it's a bad idea to let your gut guide your stock/bond mix, what should you do? Your key mission is to let hard numbers--rather than your own comfort level--be the chief determinant of your asset-allocation plan. Employ an online asset-allocation tool, such as Morningstar's Asset Allocator, to help you optimize your asset allocation based on your goals, your savings rate, and the number of years you have until retirement. Alternatively, you could hire a financial advisor for even more customized help or look to the asset allocations of target-maturity funds for back-of-the-envelope guidance. (David Kathman discussed how to do that in a recent The Short Answer column.)
Once you've put your basic asset-allocation framework in place, it's fine to make some adjustments around the margins based on your own comfort level. For example, if you determine that you should have the majority of assets in equities, you could focus on underpriced large-cap stocks or invest with a stock-fund manager who places a premium on limiting losses. On the bond side, you could limit your portfolio's risk level by going light on more-volatile asset classes like high-yield bonds and sticking with high-quality short- and intermediate-term bonds.
Beyond these small adjustments, it's a big mistake to let your emotions--and that's essentially what irrational risk aversion is--drive your portfolio planning. If the market's ups and downs leave you with excess nervous energy to burn, focus on factors you can actually influence, such as improving your security selection and lowering your overall investment-related and tax costs.
http://finance.yahoo.com/retirement/article/106656/Are-You-Taking-Too-Much-or-Too-Little-Risk;_ylt=AgJi2m23enNuwutOjND70J5O7sMF?
Saturday, 28 February 2009
Why You Should Sell
Why You Should Sell
By Brian Richards and Tim Hanson February 20, 2009 Comments (74)
I can be just as dumb as anybody else. -- Peter Lynch, September 2008
Peter Lynch earned near-30% annual returns running Fidelity Magellan from 1977 to 1990. He's sold millions of books, raised millions for charity, and holds the rare distinction of having a Motley Fool Global HQ conference room named after him.
But in September 2008, Peter Lynch also had the ignominious honor of holding both AIG (NYSE: AIG) and Fannie Mae (NYSE: FNM) in his personal portfolio -- as they dropped 82% and 76%, respectively, during that month alone.
Ouch.
For those of us who have spent our investing careers trying to match the great Peter Lynch … well, if you lost 80% in September, then congratulations -- you did it! If you did better than negative 80%, then you beat the great Peter Lynch.
Invest like Peter Lynch We kid, of course, and we're in no way demeaning Lynch or his illustrious career. Rather, we're just pointing out how hard it's been to avoid a flameout lately. When the blue-chip S&P 500 has dropped some 40% over the course of a year, you know it's bad.
And when companies like Boeing (NYSE: BA) and Adobe Systems (Nasdaq: ADBE) drop more than 50% in the course of a year -- even though they're historically strong operators that appear to have little to do with the crisis on Wall Street -- you know it's rough out there for pretty much everyone.
In other words, even if you don't own AIG or Fannie, you probably own a stock like AIG or Fannie. We sure do. Brian, for example, has ridden Whole Foods Market (Nasdaq: WFMI) from $40 to $12, while Tim has watched pump-maker Colfax sink from $20 on down to $10. Ahem.
We are not aloneAnd while there are many stocks that will recover from this market downturn, it's likely we're all continuing to hold stocks that won't. New research, from Professors Nicholas Barberis and Wei Xiong of Yale and Princeton Universities, gives a name for this tendency. We're exhibiting "realization utility."
Realization utility encourages investors to hang on to stocks that have sunk -- even when those stocks have dim futures. Here's how they explain it:
The authors consider an additional experimental condition in which the experimenter liquidates subjects' holdings and then tells them that they are free to reinvest the proceeds in any way they like. If subjects were holding on to their losing stocks because they thought that these stocks would rebound, we would expect them to re-establish their positions in these losing stocks. In fact, subjects do not re-establish these positions.
That's right. If we force-sold all of your stocks and gave you the cash to reinvest, would you buy the stocks we had just sold? Odds are, you wouldn't.
So, why would you hold on to stocks that you don't think will recover? We'll let the good professors give it to you straight:
Subjects were refusing to sell their losers simply because it would have been painful to do so … subjects were relieved when the experimenter intervened and did it for them.
Wait a second
But aren't we the guys who pounded the table two years ago about how individual investors like us sell winners too early, missing out on life-changing multibagger gains to lock in a modest return? "Quick trigger fingers aren't rewarded," we wrote at the time.
And that's still true. But down markets like this one present an enormous long-term opportunity for investors … only so long as you're willing to do some selling.
See, when stocks are expensive, we may invest in mediocre stocks because they look cheap, while passing on superior operators because they're too expensive. Today, however, those superior operators are all down double digits at least.
Google (Nasdaq: GOOG), for example, dropped more than 50% in 2008. Dream stock Microsoft (Nasdaq: MSFT) -- given its growth, FCF-generating abilities, competitive advantages, and bulletproof balance sheet -- has a P/E in the single digits!
In other words, now is the time to upgrade your portfolio.
Why you should sell
You should always sell when you have a better place to put your money -- and today, a host of superior companies are on sale. The takeaway, then, is to recognize when realization utility may take root, take a sober view of your holdings, and take advantage of this down market to upgrade your portfolio. Ten years from now, you'll be very glad you did.
We're both looking to take advantage of current prices in foreign markets -- which have been hammered even worse than our own S&P 500.
Brian Richards owns shares of Microsoft and Whole Foods Market (still). Global Gains co-advisor Tim Hanson owns Colfax. Microsoft is a Motley Fool Inside Value recommendation. Google is a Rule Breakers selection. Whole Foods is a Stock Advisor pick. The Motley Fool has a disclosure policy.
Read/Post Comments (74)
http://www.fool.com/investing/international/2009/02/20/why-you-should-sell.aspx
Some interesting comments:
On February 20, 2009, at 11:03 AM, DargFool wrote:
I love the statement, "You should always sell when you have a better place to put your money".
I give that a capital DUH. The problem is identifying when one place is better than another. Presumably the losing positions you are holding were "better places to put your money" at the time you bought them.
The buy and hold investors basically say, hey, we have no chance of identifying which investments will do better than the other, so we will get our returns by trading infrequently.
The value investors say, We only buy quality cheap, and we think we can differentiate between cheap quality and cheap crap.
The growth investors say, We can't tell what it's worth, but if it is moving in the right direction, then by a fallible application of Newton's law, a stock price in motion tends to stay in motion.
The financial planners say, everything is a gamble so you have to a million small bets instead of a few large bets. And by the way, here is your bill.
The traders and talking heads say, Buy my computer trading system, its models have been tested in all market conditions, and it generates returns of 23% (your results may vary).
The hedgers say, I don't know which way its going to move, but if it moves a lot I win.
The average investor says, "Damn, screwed again. I paid that CEO 10 million to LEAVE the company after I got a 90% loss. Great job Board of Directors, you are really on top of things!". I am taking what's left of my money and buying a beer. At least I can enjoy that.
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Report this Comment On February 20, 2009, at 6:04 PM, Redbird95 wrote: Great but even "safe" stocks continue to drop. I can see the sell but buy now? I thought GE was a great bargin at $15 (down from $35) now it is $9 (another 40% down) with a yield of 13% but will it go to $6? Sometimes ridding a new purchase down is worse than seeing the old ones sink.
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On February 21, 2009, at 12:13 AM, TradeNakedOption wrote: The high dividends on quality companies like GE look great. But if you get 10% and the stock drops 20%, you are not doing your account any good.
My bias is to be neither short nor long the market. I talk more about this with options on my blog:
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Report this Comment On February 21, 2009, at 12:39 AM, truthisntstupid wrote: No thanks. One of my picks did get crushed but I liked it then and I'll like it again. Be stupid to sell it because its down then decide ten years from now that I like it again and buy in again higher - now wouldn't it? It's still the same company, still has a wide moat, still an iconic brand - and long-term prospects are no worse now than they were when i picked it. If more people thought for the truly long term when they buy (buy and KEEP) they would find that it forces you to think a lot differently and put a lot more time and consideration into choosing companies they would have unshakeable confidence in even when something like this happens.
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Report this Comment On February 22, 2009, at 11:14 AM, truthisntstupid wrote: Samscreek
some of these people don't seem to realize what long term is. I buy with no plans on ever selling and it forces me not to try to capitalize on short-term movements. To me it's the difference between gambling & investing.
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Report this Comment On February 22, 2009, at 11:35 AM, ReillyDiefenbach wrote: Investing in stocks is ALWAYS a gamble.
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Report this Comment On February 22, 2009, at 12:01 PM, truthisntstupid wrote: True. But is my investing for dividends in companies like P&G and PEP and various utilities gambling to the same extent as people trying to capitalize on short-term price movements? I read the "Intelligent Investor" and like the mental perspective of taking the view that I'm buying "a piece of a business" instead of a number whose volatility might give me a profit. Love Ben Graham for the mental aspect of what that book teaches yet I'm not really a "value investor."
I'm more of a dividend investor that believes in the ownership viewpoint that Ben Graham teaches
-----
On February 23, 2009, at 2:19 PM, Ecomike wrote: I stayed out of the market for 20 years, got back in in October as I started to see stocks on sale. So far I have been up, down and even, right now about even, which means I am holding about twice as much stock as I had 4 months ago. I sold NCX today at 300% profit on an Arab (Dudais, UAE?) Take over, taking it private at a 300% premium over last weeks closing pricing. They are buying and we are selling. SIRI got a private (Non-gov) bail out last week, stock tripled in one day. Trick is buy stocks that get hammered huge.
I feel pretty good as I am even with my peak value from last year as of today, with the market at a new bottom.
-----
Report this Comment On February 27, 2009, at 3:15 PM, kpmom wrote: See when I see things like this, I wonder why I ever subscribed to the Motley Fool publications, and am glad I canceled my subscriptions. Y'all rode your stocks down 40%, 50%, 60%, and MORE??? Why????
And you guys have the nerve to CHARGE for your "reccomendations"? This is the problem with the MF's "buy and hold" forever mentality. Do you realize how long it will take to make those losses up (if ever), never mind moving ahead? I follow IBD's reccomendation to cut all losses at 7-8%. And don't tell me about Buffett's buy and hold strategy. He's a zillionaire. Most of the rest of us are not. Shame on you all for not advising your follows to PRESERVE CAPITAL at all costs. For we workin' stiffs it's the name of the game
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Report this Comment On February 27, 2009, at 3:56 PM, JoeyBallz wrote: Hey whiney guys that are bitching about losing their money on stock recommendations from Fool. Just because they each recommend a stock to buy each month doesn't mean that you should go out right then and there and buy it. There are dozens of underlying factors that you need to consider before just buying whatever a newsletter says (No, I'm not going to explain them to you, go read a book). If you've been buying every recommendation they've given you for the past year, you're going to be down 50% from where you started. That's what happens in a recession. The knife is still falling and will continue to until the nation regains confidence. If you try to catch a falling knife when it's got a heavy weight behind it, you're going to get cut... well your money is at least. If you think just because they recommend a stock that means you're going to make money on it right away or in the middle of a recession you're either retarded, a Hillbilly that never finished getting their GED or you just shouldn't be investing at all. These recommendations are mostly stocks to buy and HOLD so that once a bull market makes a comeback (who knows when that will be), these stocks will rebound better than most stocks out on the market (If you haven't checked, their recommendations are doing much better than the market itself). Don't blame Fool.com because you don't understand the basic concepts of investing. If stocks give you too much of a tummy ache and you're selling them once you've already lost 50% of your money try out some nice mutual funds or ETFs.
P.S. If you still want to go on and make blind thoughtless investments, please be my guest. You're only helping me build my own wealth. Happy trading! :-)
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Report this Comment On February 27, 2009, at 4:48 PM, truthisntstupid wrote: I can't hope to say it better than joeybalz
most of you whiners had no business subscribing to a newsletter til you first invested that same money in a copy of "The Intelligent Investor", some good books on dividend investing, and maybe at least a first-year college textbook on accounting principles.
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On February 27, 2009, at 4:49 PM, garyanton wrote: My own approach is to only invest in securities which yield substantial dividends or interest - i.e preferred shares, income trusts, MLPs, CEFs, bonds, etc. I avoid common shares because of what many people above have complained about - I have no idea where "the market" is heading. While portfolio values can still get crushed if companies fail to pay a dividend or go bankrupt (I held both Lehman Bros bonds and Freddie Mac preferred shares and incorrectly thought they were utterly solid), overwhelmingly companies continue to pay. Yields right now are often extraordinary and the steady, generally predictable cash flow sure beats the guesswork of timing the market.
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Report this Comment On February 27, 2009, at 5:25 PM, biglittleone wrote: My first stock purchase was in 1952. Anyone have earlier first exposure to risks of markets?
I sold it before being drafted into the army in 53. Next purchase was after graduating from college in 1960. Still have some of the ofspring of this purchase.
Since then I have had many more gainers than losers.
I will probably buy some more in the next several weeks.
It helps to be debt free in a paid for house.
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On February 27, 2009, at 5:41 PM, rwk2008 wrote: Most of us (including me) have tended to give stock pickers far more credit for clairvoyance than they deserve. TMF doesn't know how the market will behave, doesn't know which stocks have solid base and which are mostly hot air. TMF picks a few stocks they THINK might perform better than the market in the short to medium term (think a month or two to a couple of years). If the market drops 50% and their stock drops 45%, in some limited sense they were right. When everything was booming, and bubbles were expanding, it wasn't hard to be a hotshot stock picker. In today's market, it takes a lot more digging and long-term perspective to get it reasonably right most of the time. And you don't get that with a couple of guys pumping out lots of stock picks every week.
One thing to remember - unless you think the market is going a lot lower, don't be a net seller of stocks. If you expect a recovery in the next year or two, pick some stocks YOU expect to hold up and do well, and put some money into them. They probably won't be the ones that have almost completely collapsed (like CITI, BofA, Fannie and Freddi, and GM). They also may not be the ones that have dropped less than the rest. You have to consider the source and value of the advice, and make up your own mind. Remember Warren Buffet took a loss on Level 3, Bill Gross is surprized at the dept of the recession, and Peter Lynch had big bucks in AIG last year. And most of the multi-million per year investment bankers were betting on toxic real estate 'securities' up until last summer. Nobody gets it right more than about 2/3 of the time.
I see a lot of posters who want to bring the neo-con republican wing nuts back to run Washington. Hello! What part of ran the country into depression do you not get? If a republican tells you it is night, go to the window and check. They haven't been right for a long time, probably since Teddy Roosevelt left office. They've given us two major depressions in less than 100 years, and they still haven't given up on trying to kill social security, medicare, and the American labor movement, three of the progressive ideas that made our country great and built the middle class most of us are a part of.
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On February 27, 2009, at 9:56 PM, InvestingShar wrote: It seems that there fewer and fewer real investors left in the world every day now. But there are so many gamblers!..Buy today hoping it's going to go up and sell tomorrow to get some return in case it'll go down.
These are shares of the company we are talking about here. We are owning part of the company!
A lot of speculations, a lot of misleading information, a lot useless articles, a lot of bad news out there right now.
But the true investor beleives in the concept of the stock market, the concept of trading, the concept of investing. The true investor buys value cheap. And this is the time, gentlmen! This is the time to get on the board, fasten your setbelts and enjoy the journey for the next 2-5 years. And once the world economy is telling you: It's going good. - you have to sell everything you've got and wait for the next time like NOW!
By Brian Richards and Tim Hanson February 20, 2009 Comments (74)
I can be just as dumb as anybody else. -- Peter Lynch, September 2008
Peter Lynch earned near-30% annual returns running Fidelity Magellan from 1977 to 1990. He's sold millions of books, raised millions for charity, and holds the rare distinction of having a Motley Fool Global HQ conference room named after him.
But in September 2008, Peter Lynch also had the ignominious honor of holding both AIG (NYSE: AIG) and Fannie Mae (NYSE: FNM) in his personal portfolio -- as they dropped 82% and 76%, respectively, during that month alone.
Ouch.
For those of us who have spent our investing careers trying to match the great Peter Lynch … well, if you lost 80% in September, then congratulations -- you did it! If you did better than negative 80%, then you beat the great Peter Lynch.
Invest like Peter Lynch We kid, of course, and we're in no way demeaning Lynch or his illustrious career. Rather, we're just pointing out how hard it's been to avoid a flameout lately. When the blue-chip S&P 500 has dropped some 40% over the course of a year, you know it's bad.
And when companies like Boeing (NYSE: BA) and Adobe Systems (Nasdaq: ADBE) drop more than 50% in the course of a year -- even though they're historically strong operators that appear to have little to do with the crisis on Wall Street -- you know it's rough out there for pretty much everyone.
In other words, even if you don't own AIG or Fannie, you probably own a stock like AIG or Fannie. We sure do. Brian, for example, has ridden Whole Foods Market (Nasdaq: WFMI) from $40 to $12, while Tim has watched pump-maker Colfax sink from $20 on down to $10. Ahem.
We are not aloneAnd while there are many stocks that will recover from this market downturn, it's likely we're all continuing to hold stocks that won't. New research, from Professors Nicholas Barberis and Wei Xiong of Yale and Princeton Universities, gives a name for this tendency. We're exhibiting "realization utility."
Realization utility encourages investors to hang on to stocks that have sunk -- even when those stocks have dim futures. Here's how they explain it:
The authors consider an additional experimental condition in which the experimenter liquidates subjects' holdings and then tells them that they are free to reinvest the proceeds in any way they like. If subjects were holding on to their losing stocks because they thought that these stocks would rebound, we would expect them to re-establish their positions in these losing stocks. In fact, subjects do not re-establish these positions.
That's right. If we force-sold all of your stocks and gave you the cash to reinvest, would you buy the stocks we had just sold? Odds are, you wouldn't.
So, why would you hold on to stocks that you don't think will recover? We'll let the good professors give it to you straight:
Subjects were refusing to sell their losers simply because it would have been painful to do so … subjects were relieved when the experimenter intervened and did it for them.
Wait a second
But aren't we the guys who pounded the table two years ago about how individual investors like us sell winners too early, missing out on life-changing multibagger gains to lock in a modest return? "Quick trigger fingers aren't rewarded," we wrote at the time.
And that's still true. But down markets like this one present an enormous long-term opportunity for investors … only so long as you're willing to do some selling.
See, when stocks are expensive, we may invest in mediocre stocks because they look cheap, while passing on superior operators because they're too expensive. Today, however, those superior operators are all down double digits at least.
Google (Nasdaq: GOOG), for example, dropped more than 50% in 2008. Dream stock Microsoft (Nasdaq: MSFT) -- given its growth, FCF-generating abilities, competitive advantages, and bulletproof balance sheet -- has a P/E in the single digits!
In other words, now is the time to upgrade your portfolio.
Why you should sell
You should always sell when you have a better place to put your money -- and today, a host of superior companies are on sale. The takeaway, then, is to recognize when realization utility may take root, take a sober view of your holdings, and take advantage of this down market to upgrade your portfolio. Ten years from now, you'll be very glad you did.
We're both looking to take advantage of current prices in foreign markets -- which have been hammered even worse than our own S&P 500.
Brian Richards owns shares of Microsoft and Whole Foods Market (still). Global Gains co-advisor Tim Hanson owns Colfax. Microsoft is a Motley Fool Inside Value recommendation. Google is a Rule Breakers selection. Whole Foods is a Stock Advisor pick. The Motley Fool has a disclosure policy.
Read/Post Comments (74)
http://www.fool.com/investing/international/2009/02/20/why-you-should-sell.aspx
Some interesting comments:
On February 20, 2009, at 11:03 AM, DargFool wrote:
I love the statement, "You should always sell when you have a better place to put your money".
I give that a capital DUH. The problem is identifying when one place is better than another. Presumably the losing positions you are holding were "better places to put your money" at the time you bought them.
The buy and hold investors basically say, hey, we have no chance of identifying which investments will do better than the other, so we will get our returns by trading infrequently.
The value investors say, We only buy quality cheap, and we think we can differentiate between cheap quality and cheap crap.
The growth investors say, We can't tell what it's worth, but if it is moving in the right direction, then by a fallible application of Newton's law, a stock price in motion tends to stay in motion.
The financial planners say, everything is a gamble so you have to a million small bets instead of a few large bets. And by the way, here is your bill.
The traders and talking heads say, Buy my computer trading system, its models have been tested in all market conditions, and it generates returns of 23% (your results may vary).
The hedgers say, I don't know which way its going to move, but if it moves a lot I win.
The average investor says, "Damn, screwed again. I paid that CEO 10 million to LEAVE the company after I got a 90% loss. Great job Board of Directors, you are really on top of things!". I am taking what's left of my money and buying a beer. At least I can enjoy that.
-----
Report this Comment On February 20, 2009, at 6:04 PM, Redbird95 wrote: Great but even "safe" stocks continue to drop. I can see the sell but buy now? I thought GE was a great bargin at $15 (down from $35) now it is $9 (another 40% down) with a yield of 13% but will it go to $6? Sometimes ridding a new purchase down is worse than seeing the old ones sink.
-----
On February 21, 2009, at 12:13 AM, TradeNakedOption wrote: The high dividends on quality companies like GE look great. But if you get 10% and the stock drops 20%, you are not doing your account any good.
My bias is to be neither short nor long the market. I talk more about this with options on my blog:
-----
Report this Comment On February 21, 2009, at 12:39 AM, truthisntstupid wrote: No thanks. One of my picks did get crushed but I liked it then and I'll like it again. Be stupid to sell it because its down then decide ten years from now that I like it again and buy in again higher - now wouldn't it? It's still the same company, still has a wide moat, still an iconic brand - and long-term prospects are no worse now than they were when i picked it. If more people thought for the truly long term when they buy (buy and KEEP) they would find that it forces you to think a lot differently and put a lot more time and consideration into choosing companies they would have unshakeable confidence in even when something like this happens.
-----
Report this Comment On February 22, 2009, at 11:14 AM, truthisntstupid wrote: Samscreek
some of these people don't seem to realize what long term is. I buy with no plans on ever selling and it forces me not to try to capitalize on short-term movements. To me it's the difference between gambling & investing.
-----
Report this Comment On February 22, 2009, at 11:35 AM, ReillyDiefenbach wrote: Investing in stocks is ALWAYS a gamble.
-----
Report this Comment On February 22, 2009, at 12:01 PM, truthisntstupid wrote: True. But is my investing for dividends in companies like P&G and PEP and various utilities gambling to the same extent as people trying to capitalize on short-term price movements? I read the "Intelligent Investor" and like the mental perspective of taking the view that I'm buying "a piece of a business" instead of a number whose volatility might give me a profit. Love Ben Graham for the mental aspect of what that book teaches yet I'm not really a "value investor."
I'm more of a dividend investor that believes in the ownership viewpoint that Ben Graham teaches
-----
On February 23, 2009, at 2:19 PM, Ecomike wrote: I stayed out of the market for 20 years, got back in in October as I started to see stocks on sale. So far I have been up, down and even, right now about even, which means I am holding about twice as much stock as I had 4 months ago. I sold NCX today at 300% profit on an Arab (Dudais, UAE?) Take over, taking it private at a 300% premium over last weeks closing pricing. They are buying and we are selling. SIRI got a private (Non-gov) bail out last week, stock tripled in one day. Trick is buy stocks that get hammered huge.
I feel pretty good as I am even with my peak value from last year as of today, with the market at a new bottom.
-----
Report this Comment On February 27, 2009, at 3:15 PM, kpmom wrote: See when I see things like this, I wonder why I ever subscribed to the Motley Fool publications, and am glad I canceled my subscriptions. Y'all rode your stocks down 40%, 50%, 60%, and MORE??? Why????
And you guys have the nerve to CHARGE for your "reccomendations"? This is the problem with the MF's "buy and hold" forever mentality. Do you realize how long it will take to make those losses up (if ever), never mind moving ahead? I follow IBD's reccomendation to cut all losses at 7-8%. And don't tell me about Buffett's buy and hold strategy. He's a zillionaire. Most of the rest of us are not. Shame on you all for not advising your follows to PRESERVE CAPITAL at all costs. For we workin' stiffs it's the name of the game
-----
Report this Comment On February 27, 2009, at 3:56 PM, JoeyBallz wrote: Hey whiney guys that are bitching about losing their money on stock recommendations from Fool. Just because they each recommend a stock to buy each month doesn't mean that you should go out right then and there and buy it. There are dozens of underlying factors that you need to consider before just buying whatever a newsletter says (No, I'm not going to explain them to you, go read a book). If you've been buying every recommendation they've given you for the past year, you're going to be down 50% from where you started. That's what happens in a recession. The knife is still falling and will continue to until the nation regains confidence. If you try to catch a falling knife when it's got a heavy weight behind it, you're going to get cut... well your money is at least. If you think just because they recommend a stock that means you're going to make money on it right away or in the middle of a recession you're either retarded, a Hillbilly that never finished getting their GED or you just shouldn't be investing at all. These recommendations are mostly stocks to buy and HOLD so that once a bull market makes a comeback (who knows when that will be), these stocks will rebound better than most stocks out on the market (If you haven't checked, their recommendations are doing much better than the market itself). Don't blame Fool.com because you don't understand the basic concepts of investing. If stocks give you too much of a tummy ache and you're selling them once you've already lost 50% of your money try out some nice mutual funds or ETFs.
P.S. If you still want to go on and make blind thoughtless investments, please be my guest. You're only helping me build my own wealth. Happy trading! :-)
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Report this Comment On February 27, 2009, at 4:48 PM, truthisntstupid wrote: I can't hope to say it better than joeybalz
most of you whiners had no business subscribing to a newsletter til you first invested that same money in a copy of "The Intelligent Investor", some good books on dividend investing, and maybe at least a first-year college textbook on accounting principles.
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On February 27, 2009, at 4:49 PM, garyanton wrote: My own approach is to only invest in securities which yield substantial dividends or interest - i.e preferred shares, income trusts, MLPs, CEFs, bonds, etc. I avoid common shares because of what many people above have complained about - I have no idea where "the market" is heading. While portfolio values can still get crushed if companies fail to pay a dividend or go bankrupt (I held both Lehman Bros bonds and Freddie Mac preferred shares and incorrectly thought they were utterly solid), overwhelmingly companies continue to pay. Yields right now are often extraordinary and the steady, generally predictable cash flow sure beats the guesswork of timing the market.
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Report this Comment On February 27, 2009, at 5:25 PM, biglittleone wrote: My first stock purchase was in 1952. Anyone have earlier first exposure to risks of markets?
I sold it before being drafted into the army in 53. Next purchase was after graduating from college in 1960. Still have some of the ofspring of this purchase.
Since then I have had many more gainers than losers.
I will probably buy some more in the next several weeks.
It helps to be debt free in a paid for house.
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On February 27, 2009, at 5:41 PM, rwk2008 wrote: Most of us (including me) have tended to give stock pickers far more credit for clairvoyance than they deserve. TMF doesn't know how the market will behave, doesn't know which stocks have solid base and which are mostly hot air. TMF picks a few stocks they THINK might perform better than the market in the short to medium term (think a month or two to a couple of years). If the market drops 50% and their stock drops 45%, in some limited sense they were right. When everything was booming, and bubbles were expanding, it wasn't hard to be a hotshot stock picker. In today's market, it takes a lot more digging and long-term perspective to get it reasonably right most of the time. And you don't get that with a couple of guys pumping out lots of stock picks every week.
One thing to remember - unless you think the market is going a lot lower, don't be a net seller of stocks. If you expect a recovery in the next year or two, pick some stocks YOU expect to hold up and do well, and put some money into them. They probably won't be the ones that have almost completely collapsed (like CITI, BofA, Fannie and Freddi, and GM). They also may not be the ones that have dropped less than the rest. You have to consider the source and value of the advice, and make up your own mind. Remember Warren Buffet took a loss on Level 3, Bill Gross is surprized at the dept of the recession, and Peter Lynch had big bucks in AIG last year. And most of the multi-million per year investment bankers were betting on toxic real estate 'securities' up until last summer. Nobody gets it right more than about 2/3 of the time.
I see a lot of posters who want to bring the neo-con republican wing nuts back to run Washington. Hello! What part of ran the country into depression do you not get? If a republican tells you it is night, go to the window and check. They haven't been right for a long time, probably since Teddy Roosevelt left office. They've given us two major depressions in less than 100 years, and they still haven't given up on trying to kill social security, medicare, and the American labor movement, three of the progressive ideas that made our country great and built the middle class most of us are a part of.
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On February 27, 2009, at 9:56 PM, InvestingShar wrote: It seems that there fewer and fewer real investors left in the world every day now. But there are so many gamblers!..Buy today hoping it's going to go up and sell tomorrow to get some return in case it'll go down.
These are shares of the company we are talking about here. We are owning part of the company!
A lot of speculations, a lot of misleading information, a lot useless articles, a lot of bad news out there right now.
But the true investor beleives in the concept of the stock market, the concept of trading, the concept of investing. The true investor buys value cheap. And this is the time, gentlmen! This is the time to get on the board, fasten your setbelts and enjoy the journey for the next 2-5 years. And once the world economy is telling you: It's going good. - you have to sell everything you've got and wait for the next time like NOW!
Friday, 27 February 2009
The End of the Credit Crisis
The End of the Credit Crisis
by: Alex Trias
February 27, 2009
Now sit around in a circle, kiddies, and let me tell you the story of the credit crisis. It goes like this.
Homeowner owns a $400,000 home secured by a $500,000 mortgage. Homeowner is very concerned that the value of the home could drop to $300,000 in the next few years, which is when he plans to sell the home, and he does not have the $200,000 in cash to make up the balance and pay off the full mortgage. Currently, Homeowner is thinking foreclosure is the best and only option to avoid going into further debt.
Bank has a worse problem, because Bank has a $500,000 mortgage on its balance sheet but no investor is willing to buy it for more than $100,000. The reason why is because investors know that the security on this loan is worth $400,000 and that it will probably continue to deteriorate in value. More importantly, the investors know that Homeowner has a strong incentive to let this thing go to foreclosure soon, at a time when the underlying property is rapidly losing value. Finally, investors see the value of other mortgages falling rapidly, and don’t want to catch a falling knife.
Now we’re getting to crux of Bank’s biggest problem, which is that under some clever accounting rules, Bank needs to mark this mortgage to market. Bank knows that the mortgage is not worth $500,000, but right now if they went to foreclosure, Bank would get $400,000 because that is what the collateral would sell for. However, under the mark to market rules, the value of this mortgage is not $400,000 – it’s $100,000 because that is what an investor would pay for it.
You see where this is going. Under banking regulations, Bank needs $1 in the vault for every $10 that Bank lends out. If Bank’s $500,000 mortgage is worth $100,000, that translates to $4,000,000 that Bank can no longer lend out. Bank must curtail its lending dramatically, which means less profits for Bank, and less liquidity in the system. No good. And even worse, Bank just reported a $400,000 write-down to its overjoyed shareholders, and hedge funds are now taking Bank’s market capitalization down by 90%. The public watches the 90% decline in the price of Bank stock, and forms a view that the banking system may be failing. Hedge funds act on this fear by short selling Bank stock with verve and confident greed, sending the share price down further still, and reinforcing a sense of panic among the public. Other investors are jumping on the bandwagon, too, and short interest on Bank’s stock is now close to 50%! (Pssst – remember that short interest thing for later, okay?).
Bank management has an idea. They believe that foreclosure is the best solution to this problem because by forcing Homeowner into foreclosure, the mark to market accounting rules permit Bank to report that $500,000 mortgage not as an asset worth $100,000, but rather, as $400,000 in cash. Moreover, Bank is concerned that if the secondary market for mortgages deteriorates, further write downs will become necessary, feeding the downward spiral in its share price and profitability.
This story plays out across the economy, and results in foreclosure rates that surpass those during the Great Depression, and the sharpest and worst decline in bank capital in history. The world, it feels, may be ending.
Time to short Citibank (C)? Bank of America (BAC)? What about JP Morgan (JPM)? Well hold on, kiddies, let me finish the story.
Some clever folks who work for President Obama have an idea. They say, let’s order the banks to renegotiate all those underwater mortgages! It’ll look like we’re punishing Bank, and helping the little guy. But what we’re really doing is solving the credit crisis, and tossing Bank a nice juicy bone in the process.
See, right now, Bank has a $500,000 mortgage that is about 50% likely to go into default, and nobody will buy that mortgage because it’s got lousy creditworthiness. Bank doesn’t want to mess with renegotiating any mortgages in a bankruptcy court, so Bank goes straight to Homeowner and says “Homeowner, now you only owe us $300,000, which you can afford to pay us back.” Homeowner is delighted, and now has no incentive to go into default. This fact is not lost on investors who like to buy mortgages that are a good credit risk. Anything will beat those Treasuries that only pay 2.5% a year.
Suddenly, this $300,000 mortgage is a very good credit risk, and investors are far more willing to buy it – in fact, investors will pay a whole lot more for a high quality $300,000 mortgage than a very low quality $500,000 mortgage. In fact, investors are ready to pay $300,000 for that high quality $300,000 mortgage. So what does Bank get to do?
You guessed it. Bank takes a WRITE UP. For tax purposes, Bank claims a tax deduction for the $200,000 it just wrote off the mortgage (which boosts up Bank’s balance sheet right on the spot), but for accounting purposes, Bank writes the mortgage up from $100,000 to $300,000. Bank announces these write ups as a surprise profit next quarter, completely stunning the stock market in the process – most investors had just assumed Bank was going to fail or be nationalized. But nobody expected WRITE UPS!
And this adjustment to Bank’s balance sheet frees up ten times as much capital that Bank can now lend out. The news of increased lending is equally surprising, and the stock market greets the news with enthusiasm. Yes, the clever people in President Obama’s administration are starting to look rather clever indeed.
Hey, turning to reality for a minute, do you want to know what? Some bank executives this author talks to actually GET IT, see? This is really the plan.
But back to my story. Remember what happened with Volkswagon stock last year?
The U.S. Treasury has been purchasing Bank’s common equity. There just aren’t that many shares of Bank stock available to buy. Turning back to reality for a moment here, anyone notice what Treasury said about buying Citigroup stock? WONDER WHAT THAT’S ABOUT, KIDDIES? Let me finish the story and you soon will.
When Bank reports that surprise write up of the mortgage on its balance sheet, some short sellers decide to cover. Quickly. The problem the short sellers have is, they are all trying to cover their short positions all at once! And the even bigger problem is that because Treasury has been buying up Bank stock quietly, THERE IS NOT ENOUGH BANK STOCK ON THE MARKET TO COVER THE SHORT INTEREST. This is a case where demand for Bank stock is larger than the supply, and the higher the price of Bank stock goes, the higher the demand for the stock goes. Only Treasury won’t sell Bank stock. And momentum traders have just figured out what’s going on and have decided to ride this trend to the moon. Short sellers, one by one, go bankrupt.
And then the big bad wolf eats them.
The end.
Disclosure: Author owns shares of BAC and JPM.
http://seekingalpha.com/article/123194-the-end-of-the-credit-crisis?source=yahoo
by: Alex Trias
February 27, 2009
Now sit around in a circle, kiddies, and let me tell you the story of the credit crisis. It goes like this.
Homeowner owns a $400,000 home secured by a $500,000 mortgage. Homeowner is very concerned that the value of the home could drop to $300,000 in the next few years, which is when he plans to sell the home, and he does not have the $200,000 in cash to make up the balance and pay off the full mortgage. Currently, Homeowner is thinking foreclosure is the best and only option to avoid going into further debt.
Bank has a worse problem, because Bank has a $500,000 mortgage on its balance sheet but no investor is willing to buy it for more than $100,000. The reason why is because investors know that the security on this loan is worth $400,000 and that it will probably continue to deteriorate in value. More importantly, the investors know that Homeowner has a strong incentive to let this thing go to foreclosure soon, at a time when the underlying property is rapidly losing value. Finally, investors see the value of other mortgages falling rapidly, and don’t want to catch a falling knife.
Now we’re getting to crux of Bank’s biggest problem, which is that under some clever accounting rules, Bank needs to mark this mortgage to market. Bank knows that the mortgage is not worth $500,000, but right now if they went to foreclosure, Bank would get $400,000 because that is what the collateral would sell for. However, under the mark to market rules, the value of this mortgage is not $400,000 – it’s $100,000 because that is what an investor would pay for it.
You see where this is going. Under banking regulations, Bank needs $1 in the vault for every $10 that Bank lends out. If Bank’s $500,000 mortgage is worth $100,000, that translates to $4,000,000 that Bank can no longer lend out. Bank must curtail its lending dramatically, which means less profits for Bank, and less liquidity in the system. No good. And even worse, Bank just reported a $400,000 write-down to its overjoyed shareholders, and hedge funds are now taking Bank’s market capitalization down by 90%. The public watches the 90% decline in the price of Bank stock, and forms a view that the banking system may be failing. Hedge funds act on this fear by short selling Bank stock with verve and confident greed, sending the share price down further still, and reinforcing a sense of panic among the public. Other investors are jumping on the bandwagon, too, and short interest on Bank’s stock is now close to 50%! (Pssst – remember that short interest thing for later, okay?).
Bank management has an idea. They believe that foreclosure is the best solution to this problem because by forcing Homeowner into foreclosure, the mark to market accounting rules permit Bank to report that $500,000 mortgage not as an asset worth $100,000, but rather, as $400,000 in cash. Moreover, Bank is concerned that if the secondary market for mortgages deteriorates, further write downs will become necessary, feeding the downward spiral in its share price and profitability.
This story plays out across the economy, and results in foreclosure rates that surpass those during the Great Depression, and the sharpest and worst decline in bank capital in history. The world, it feels, may be ending.
Time to short Citibank (C)? Bank of America (BAC)? What about JP Morgan (JPM)? Well hold on, kiddies, let me finish the story.
Some clever folks who work for President Obama have an idea. They say, let’s order the banks to renegotiate all those underwater mortgages! It’ll look like we’re punishing Bank, and helping the little guy. But what we’re really doing is solving the credit crisis, and tossing Bank a nice juicy bone in the process.
See, right now, Bank has a $500,000 mortgage that is about 50% likely to go into default, and nobody will buy that mortgage because it’s got lousy creditworthiness. Bank doesn’t want to mess with renegotiating any mortgages in a bankruptcy court, so Bank goes straight to Homeowner and says “Homeowner, now you only owe us $300,000, which you can afford to pay us back.” Homeowner is delighted, and now has no incentive to go into default. This fact is not lost on investors who like to buy mortgages that are a good credit risk. Anything will beat those Treasuries that only pay 2.5% a year.
Suddenly, this $300,000 mortgage is a very good credit risk, and investors are far more willing to buy it – in fact, investors will pay a whole lot more for a high quality $300,000 mortgage than a very low quality $500,000 mortgage. In fact, investors are ready to pay $300,000 for that high quality $300,000 mortgage. So what does Bank get to do?
You guessed it. Bank takes a WRITE UP. For tax purposes, Bank claims a tax deduction for the $200,000 it just wrote off the mortgage (which boosts up Bank’s balance sheet right on the spot), but for accounting purposes, Bank writes the mortgage up from $100,000 to $300,000. Bank announces these write ups as a surprise profit next quarter, completely stunning the stock market in the process – most investors had just assumed Bank was going to fail or be nationalized. But nobody expected WRITE UPS!
And this adjustment to Bank’s balance sheet frees up ten times as much capital that Bank can now lend out. The news of increased lending is equally surprising, and the stock market greets the news with enthusiasm. Yes, the clever people in President Obama’s administration are starting to look rather clever indeed.
Hey, turning to reality for a minute, do you want to know what? Some bank executives this author talks to actually GET IT, see? This is really the plan.
But back to my story. Remember what happened with Volkswagon stock last year?
The U.S. Treasury has been purchasing Bank’s common equity. There just aren’t that many shares of Bank stock available to buy. Turning back to reality for a moment here, anyone notice what Treasury said about buying Citigroup stock? WONDER WHAT THAT’S ABOUT, KIDDIES? Let me finish the story and you soon will.
When Bank reports that surprise write up of the mortgage on its balance sheet, some short sellers decide to cover. Quickly. The problem the short sellers have is, they are all trying to cover their short positions all at once! And the even bigger problem is that because Treasury has been buying up Bank stock quietly, THERE IS NOT ENOUGH BANK STOCK ON THE MARKET TO COVER THE SHORT INTEREST. This is a case where demand for Bank stock is larger than the supply, and the higher the price of Bank stock goes, the higher the demand for the stock goes. Only Treasury won’t sell Bank stock. And momentum traders have just figured out what’s going on and have decided to ride this trend to the moon. Short sellers, one by one, go bankrupt.
And then the big bad wolf eats them.
The end.
Disclosure: Author owns shares of BAC and JPM.
http://seekingalpha.com/article/123194-the-end-of-the-credit-crisis?source=yahoo
Understanding effects of economic indicators on stock market
Understanding effects of economic indicators on stock market
Published: 2009/02/25
When the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be a golden opportunity to spot some good stocks at a bargain
IF YOU have been following the news on a daily basis, you surely would have heard the repeated news on the fall of the US and European markets that are currently spreading gloom across the globe.
With the risk of global recession on the increase, global stock markets are not left unscathed by the predicament the world's economic giants are in. Stock markets worldwide are left to face strong selling pressures that are wiping out their asset values.
As a result, you might be wondering whether your portfolio (albeit confined to the local business environment) is strong enough to weather the adverse external shocks that are causing jitters in markets across the globe.
Why do you need to understand and monitor the economic situation?
A company's earnings and future prospects depend largely on the overall business and economic climate. No matter how strong a company's fundamental is, if the economy is down, the performance of a company will inevitably be affected somewhat. Cyclical stocks will probably face a larger impact compared to non-cyclical or defensive stocks.
Meanwhile, the stronger companies will be able to weather the harsh economic situation better than the weaker or less well managed ones.
Therefore, as an investor, it is important for you to understand the macro picture of the economy, not just the sector/industries or stock/company that you are interested in investing in.
What is an economic indicator
An economic indicator is in simple terms, the official statistical data of a certain economic factor that are published periodically by the government agencies, which an investor can use to gauge the economic situation. It allows investors to analyze the past and current situation and to project the future prospects of the economy.
There are three basic indicators that matter to investors in the stock market, namely inflation, gross domestic product (GDP) and the labour market.
* Inflation
Inflation is important for all investments, simply because it determines the real rate of return that you get from your investment. For instance, if the inflation rate is 5 per cent and the nominal return is 8 per cent, this means that your real rate of return is 3 per cent as the 5 per cent has been eaten by inflation.
Inflation's impact on the stock market is even more complicated. A company's profit will be affected by higher inflation. Its input cost will increase and the impact of the increase will depend on how much of the incremental cost the company is able to pass on to its consumers. The amount that the company will have to absorb will reduce its profits, assuming all else being equal.
The stock market will suffer further negative impact if it is accompanied by increased interest rates as the bond market is seen as a cheaper investment vehicle compared to stocks. When this happens, investors will sell off their stocks to invest in bonds instead.
The most commonly used indicator for the measurement of inflation is consumer price index (CPI). It consists of a basket of goods and services commonly purchased by consumers, such as food, housing, clothes, transportation, medical care and entertainment.
The total value of this basket of goods and services will be compared with the value of the previous year and the percentage increase will be the inflation rate.
On the other hand, where the value drops, it will be a deflation rate. A steady or decreasing trend will be favourable to the overall stock market performance.
* Gross Domestic Product
Another important indicator is the GDP measurement. It is the total value of goods and services produced in a country during the period being measured. When compared to the previous year's reading, the difference between these two readings indicates whether a country's economy is growing or contracting. GDP is usually published quarterly.
When the GDP is positive, the overall stock market will react positively as there will be a boost in investor confidence, encouraging them to invest more in the stock market. This will in turn boost the performances of companies.
When the GDP contracts, consumers tread cautiously and reduce their spending. This in turn will affect the performance of companies negatively, thus exerting more downward pressure on the stock market.
* Labour market
The unemployment rate as a percentage of the total labour force will basically indicate the country's economic state. During an economic meltdown, most companies will either freeze hiring or in more severe cases downsize, by cutting costs and reducing capacity. When this happens, the unemployment rate will increase, which in turn, creates a negative impact on market sentiment.
Bottom line
By understanding the economic indicators, you should be able to gauge the current state of economy and more importantly, the direction in which its headed. Pooling this knowledge together with the detailed research on the companies that you are interested in, you should be well equipped to make sound investment decisions.
Bear in mind that when the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be your golden opportunity to spot some good stocks at a bargain that are worth buying.
Malaysia's economic indicator data can be obtained from the Department of Statistics website at http://www.statistics.gov.my/
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/SIDC4/Article/
http://www.reuters.com/article/marketsNews/idINKLR30358420090227?rpc=611
TABLE-Malaysia economic indicators - Feb 27, 2009
Published: 2009/02/25
When the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be a golden opportunity to spot some good stocks at a bargain
IF YOU have been following the news on a daily basis, you surely would have heard the repeated news on the fall of the US and European markets that are currently spreading gloom across the globe.
With the risk of global recession on the increase, global stock markets are not left unscathed by the predicament the world's economic giants are in. Stock markets worldwide are left to face strong selling pressures that are wiping out their asset values.
As a result, you might be wondering whether your portfolio (albeit confined to the local business environment) is strong enough to weather the adverse external shocks that are causing jitters in markets across the globe.
Why do you need to understand and monitor the economic situation?
A company's earnings and future prospects depend largely on the overall business and economic climate. No matter how strong a company's fundamental is, if the economy is down, the performance of a company will inevitably be affected somewhat. Cyclical stocks will probably face a larger impact compared to non-cyclical or defensive stocks.
Meanwhile, the stronger companies will be able to weather the harsh economic situation better than the weaker or less well managed ones.
Therefore, as an investor, it is important for you to understand the macro picture of the economy, not just the sector/industries or stock/company that you are interested in investing in.
What is an economic indicator
An economic indicator is in simple terms, the official statistical data of a certain economic factor that are published periodically by the government agencies, which an investor can use to gauge the economic situation. It allows investors to analyze the past and current situation and to project the future prospects of the economy.
There are three basic indicators that matter to investors in the stock market, namely inflation, gross domestic product (GDP) and the labour market.
* Inflation
Inflation is important for all investments, simply because it determines the real rate of return that you get from your investment. For instance, if the inflation rate is 5 per cent and the nominal return is 8 per cent, this means that your real rate of return is 3 per cent as the 5 per cent has been eaten by inflation.
Inflation's impact on the stock market is even more complicated. A company's profit will be affected by higher inflation. Its input cost will increase and the impact of the increase will depend on how much of the incremental cost the company is able to pass on to its consumers. The amount that the company will have to absorb will reduce its profits, assuming all else being equal.
The stock market will suffer further negative impact if it is accompanied by increased interest rates as the bond market is seen as a cheaper investment vehicle compared to stocks. When this happens, investors will sell off their stocks to invest in bonds instead.
The most commonly used indicator for the measurement of inflation is consumer price index (CPI). It consists of a basket of goods and services commonly purchased by consumers, such as food, housing, clothes, transportation, medical care and entertainment.
The total value of this basket of goods and services will be compared with the value of the previous year and the percentage increase will be the inflation rate.
On the other hand, where the value drops, it will be a deflation rate. A steady or decreasing trend will be favourable to the overall stock market performance.
* Gross Domestic Product
Another important indicator is the GDP measurement. It is the total value of goods and services produced in a country during the period being measured. When compared to the previous year's reading, the difference between these two readings indicates whether a country's economy is growing or contracting. GDP is usually published quarterly.
When the GDP is positive, the overall stock market will react positively as there will be a boost in investor confidence, encouraging them to invest more in the stock market. This will in turn boost the performances of companies.
When the GDP contracts, consumers tread cautiously and reduce their spending. This in turn will affect the performance of companies negatively, thus exerting more downward pressure on the stock market.
* Labour market
The unemployment rate as a percentage of the total labour force will basically indicate the country's economic state. During an economic meltdown, most companies will either freeze hiring or in more severe cases downsize, by cutting costs and reducing capacity. When this happens, the unemployment rate will increase, which in turn, creates a negative impact on market sentiment.
Bottom line
By understanding the economic indicators, you should be able to gauge the current state of economy and more importantly, the direction in which its headed. Pooling this knowledge together with the detailed research on the companies that you are interested in, you should be well equipped to make sound investment decisions.
Bear in mind that when the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be your golden opportunity to spot some good stocks at a bargain that are worth buying.
Malaysia's economic indicator data can be obtained from the Department of Statistics website at http://www.statistics.gov.my/
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/SIDC4/Article/
http://www.reuters.com/article/marketsNews/idINKLR30358420090227?rpc=611
TABLE-Malaysia economic indicators - Feb 27, 2009
Thursday, 26 February 2009
Depression? Or just a recession?
From The TimesFebruary 9, 2009
Depression? Or just a recession? Experts also find it hard to tell
This week: After Gordon Brown talked of a new Depression, we explain the phenomenon.
How is an economic depression different from a recession?
First of all, it is important to understand that there is no precise or agreed definition of a depression. Even now, 70 years after the last experience of the 1930s economic slump that became know as the Great Depression, the world's leading economists are still wrangling over what caused it and what it meant. Defining the term is made more difficult since the last experience of anything like a depression was in this period, more than seven decades ago, which is well beyond many people's living memory.
In general, it is accepted by most commentators and experts that a depression is a very severe form of recession: one involving a deeper decline in GDP and most other measures of economic welfare, including employment, and which probably lasts for significantly longer than the typical recessions experienced in modern times.
How different is the scale of a depression from a recession?
Very different. In modern times, the typical experience of recession in big Western economies has been a period of declining GDP that has lasted perhaps three to six quarters, and the typical fall in GDP over the period of recession has been in the order of 1 to 3 per cent. Some recessions have been even briefer and less deep, but all of these have still been bad enough to cause considerable hardship and to alter the business landscape significantly.
By contrast, the Great Depression in the United States stretched from 1929 to 1933, and involved a collapse in the economy that saw national output and income shrink by 29.6per cent. GDP dropped by 8.6per cent in 1930 alone, by 6.4 per cent in 1931 and by 13 per cent in 1932. Recovery in 1934 to 1937 was followed by a relapse into recession. It was only the huge rise in industrial production in the US war economy of the early Forties that ended this profound period of economic woes in America.
What was the toll from this slump?
The impact was brutal. The proportion of the workforce without jobs surged from 2 per cent to a quarter of those of working age. Output from US factories was halved, consumer prices fell by a quarter as the economy slid into deflation, four-fifths of the value of the US stock market was wiped out, from the Wall Street crash onwards, and house prices fell by nearly a third.
What about Britain in the Depression?
Britain's experience of the Thirties was grim and painful, but far from as searing as that of the US. British GDP plunged by about 5 per cent, compared with the 2.9 per cent drop suffered in the worst modern recession in the early Eighties. During the early Thirties, British unemployment doubled from 7 to 15per cent of the workforce. However, this experience was much less severe than the slump that the UK suffered in the early Twenties. Although that is not part of what we know as “the Great Depression”, it clearly was a depression on the same scale. In the wake of the First World War, UK GDP plummeted by 23 per cent, mirroring the experience of America a decade later.
www.timesonline.co.uk/economics
www.timesonline.co.uk/targettwopointzero
www.bankofengland.co.uk/education/targettwopointzero
http://business.timesonline.co.uk/tol/business/economics/target_2_0/article5689193.ece
Depression? Or just a recession? Experts also find it hard to tell
This week: After Gordon Brown talked of a new Depression, we explain the phenomenon.
How is an economic depression different from a recession?
First of all, it is important to understand that there is no precise or agreed definition of a depression. Even now, 70 years after the last experience of the 1930s economic slump that became know as the Great Depression, the world's leading economists are still wrangling over what caused it and what it meant. Defining the term is made more difficult since the last experience of anything like a depression was in this period, more than seven decades ago, which is well beyond many people's living memory.
In general, it is accepted by most commentators and experts that a depression is a very severe form of recession: one involving a deeper decline in GDP and most other measures of economic welfare, including employment, and which probably lasts for significantly longer than the typical recessions experienced in modern times.
How different is the scale of a depression from a recession?
Very different. In modern times, the typical experience of recession in big Western economies has been a period of declining GDP that has lasted perhaps three to six quarters, and the typical fall in GDP over the period of recession has been in the order of 1 to 3 per cent. Some recessions have been even briefer and less deep, but all of these have still been bad enough to cause considerable hardship and to alter the business landscape significantly.
By contrast, the Great Depression in the United States stretched from 1929 to 1933, and involved a collapse in the economy that saw national output and income shrink by 29.6per cent. GDP dropped by 8.6per cent in 1930 alone, by 6.4 per cent in 1931 and by 13 per cent in 1932. Recovery in 1934 to 1937 was followed by a relapse into recession. It was only the huge rise in industrial production in the US war economy of the early Forties that ended this profound period of economic woes in America.
What was the toll from this slump?
The impact was brutal. The proportion of the workforce without jobs surged from 2 per cent to a quarter of those of working age. Output from US factories was halved, consumer prices fell by a quarter as the economy slid into deflation, four-fifths of the value of the US stock market was wiped out, from the Wall Street crash onwards, and house prices fell by nearly a third.
What about Britain in the Depression?
Britain's experience of the Thirties was grim and painful, but far from as searing as that of the US. British GDP plunged by about 5 per cent, compared with the 2.9 per cent drop suffered in the worst modern recession in the early Eighties. During the early Thirties, British unemployment doubled from 7 to 15per cent of the workforce. However, this experience was much less severe than the slump that the UK suffered in the early Twenties. Although that is not part of what we know as “the Great Depression”, it clearly was a depression on the same scale. In the wake of the First World War, UK GDP plummeted by 23 per cent, mirroring the experience of America a decade later.
www.timesonline.co.uk/economics
www.timesonline.co.uk/targettwopointzero
www.bankofengland.co.uk/education/targettwopointzero
http://business.timesonline.co.uk/tol/business/economics/target_2_0/article5689193.ece
World's favourite yellow metal at record highs
A golden opportunity but don't rush in without thinking
Last Updated: 12:22AM BST 18 Oct 2007
With the world's favourite yellow metal at record highs, investors must take care, says Nina Montagu-Smith
The price of gold recently reached a 28-year high, hitting $739 an ounce, its highest level since February 1980, before settling back to around $730 an ounce this week.
Stock market volatility and a renewed demand for gold from developing countries, which are increasingly cash-rich, are the main drivers of this rise, and look set to continue to support it. So should investors be getting in on the gold rush too?
Mark Dampier, investment adviser at the independent financial adviser Hargreaves Lansdown, is a gold fan. He said: "I am keen on gold at the moment. It seems the world is a bit more of an uncertain place right now and gold is something that is seen to store value."
Philippa Gee, investment specialist at the independent financial adviser Torquil Clark, said: "There are occasions in the life of a stock market cycle when investors prefer gold to most other asset classes and this is one of those times."
However, Ms Gee counselled against any dramatic switching of assets into gold, saying that most investors should not allocate more than 9 per cent of a portfolio to gold. "The attractiveness of gold as an asset can change quickly and most investors are unable to react at the same pace," she said.
Brian Dennehy, of the independent financial adviser Dennehy Weller, was even more cautious, suggesting a maximum of 5 per cent of an investor's portfolio should be given over to gold.
He said: "Gold is a fringe asset that has a record of destroying capital, which is why it has only just reached a level last achieved 28 years ago. By contrast, the FTSE All Share index is up in excess of 1,000 per cent since 1980, with dividends on top. And if history is any guide, the stock market still looks decent value."
Ms Gee said: "Some people will assume that because natural resources-related commodities have been delivering strong returns of late, this is the place to invest all their money, but that is the route to madness.
"If you want the commodity to be anything other than fool's gold, you need to keep your allocation low and diversify as much as possible."
There are several ways to invest in gold. You can buy physical gold either directly by buying bullion – not an easy option for the average private investor – or indirectly through exchange-traded funds, known as ETFs. Exchange-traded funds are investment funds which can be traded on the stock market in the same way as shares or investment trusts, but are open-ended, like unit trusts. This means there is an unlimited number of shares, which are issued on demand.
Exchange-traded funds track indices of shares, giving you exposure to the exact make-up of a particular index, or commodities, including gold. As with company shares, you buy ETF shares via a stockbroker. They can be bought and sold at any time during trading hours, giving you immediate exposure to the commodity or share index of your choice.
Exchange-traded funds specialising in gold are currently offered by ETF Securities, which runs exchange-traded funds in gold, platinum, commodities, and precious metals, and as Barclays Global Investors iShares.
Alternatively, it is possible to buy shares in gold mining companies through pooled funds such as investment trusts, unit trusts and open-ended investment companies (Oeics). The advantage of choosing a pooled fund is that you get the services of a professional fund manager who will select stocks on your behalf, and your investment benefits from greater diversification.
Mr Dampier said: "You can buy physical gold, but if the gold price goes up, then so will the gold mining stocks."
He chose the Merrill Lynch Gold & General fund which has benefited from excellent performance, adding: "Had the gold price kept up with this fund, it would now cost $8,000 per ounce." (Comment: Note the disconnection.)
Mr Dennehy, the reluctant gold investor, also selected this fund for fans of gold, saying: "If you insist on speculating in gold, put yourself in the hands of the experienced elves running Merrill Lynch Gold and General."
This Merrill Lynch fund, which has more than trebled investors' money after charges are deducted in the past five years, has an initial charge of 5 per cent and an annual management charge of 1.75 per cent .
In order to spread risk, both Mr Dennehy and Ms Gee said investors should consider a more diversified commodities or natural resources fund instead of restricting themselves just to gold.
Although past performance should not be used as an indicator for the future, these funds can produce excellent returns. Merrill Lynch World Mining Investment Trust, for instance, has turned a £1,000 investment five years ago into £6,235 now. JP Morgan Natural Resources has turned £1,000 into £5,584 over five years, including the effects of charges.
Mr Dennehy said: "Consider a diversified commodity fund such as JP Morgan Fleming Natural Resources, or, my preference, a more thoughtful fund such as M&G Global Basics. The latter can have an exposure of up to 50 per cent in commodities, but at the moment has nearer 30 per cent , because commodity companies as a whole are just not that attractive – private investors should take heed of this strong message from such a hugely successful fund."
JP Morgan Fleming Natural Resources has an initial charge of 5.5 per cent and an annual charge of 1.5 per cent . M&G Global Basics levies a 4 per cent initial fee and a 1.5 per cent annual management fee.
Contacts
For performance and prices of pooled funds and exchange-traded funds (ETFs), see http://www.trustnet.co.uk/ or http://www.morningstar.com/
For information about investing in physical gold, see the World Gold Council: http://www.gold.org/
To find a local independent financial adviser, see IFA Promotion: http://www.unbiased.co.uk/
Last Updated: 12:22AM BST 18 Oct 2007
With the world's favourite yellow metal at record highs, investors must take care, says Nina Montagu-Smith
The price of gold recently reached a 28-year high, hitting $739 an ounce, its highest level since February 1980, before settling back to around $730 an ounce this week.
Stock market volatility and a renewed demand for gold from developing countries, which are increasingly cash-rich, are the main drivers of this rise, and look set to continue to support it. So should investors be getting in on the gold rush too?
Mark Dampier, investment adviser at the independent financial adviser Hargreaves Lansdown, is a gold fan. He said: "I am keen on gold at the moment. It seems the world is a bit more of an uncertain place right now and gold is something that is seen to store value."
Philippa Gee, investment specialist at the independent financial adviser Torquil Clark, said: "There are occasions in the life of a stock market cycle when investors prefer gold to most other asset classes and this is one of those times."
However, Ms Gee counselled against any dramatic switching of assets into gold, saying that most investors should not allocate more than 9 per cent of a portfolio to gold. "The attractiveness of gold as an asset can change quickly and most investors are unable to react at the same pace," she said.
Brian Dennehy, of the independent financial adviser Dennehy Weller, was even more cautious, suggesting a maximum of 5 per cent of an investor's portfolio should be given over to gold.
He said: "Gold is a fringe asset that has a record of destroying capital, which is why it has only just reached a level last achieved 28 years ago. By contrast, the FTSE All Share index is up in excess of 1,000 per cent since 1980, with dividends on top. And if history is any guide, the stock market still looks decent value."
Ms Gee said: "Some people will assume that because natural resources-related commodities have been delivering strong returns of late, this is the place to invest all their money, but that is the route to madness.
"If you want the commodity to be anything other than fool's gold, you need to keep your allocation low and diversify as much as possible."
There are several ways to invest in gold. You can buy physical gold either directly by buying bullion – not an easy option for the average private investor – or indirectly through exchange-traded funds, known as ETFs. Exchange-traded funds are investment funds which can be traded on the stock market in the same way as shares or investment trusts, but are open-ended, like unit trusts. This means there is an unlimited number of shares, which are issued on demand.
Exchange-traded funds track indices of shares, giving you exposure to the exact make-up of a particular index, or commodities, including gold. As with company shares, you buy ETF shares via a stockbroker. They can be bought and sold at any time during trading hours, giving you immediate exposure to the commodity or share index of your choice.
Exchange-traded funds specialising in gold are currently offered by ETF Securities, which runs exchange-traded funds in gold, platinum, commodities, and precious metals, and as Barclays Global Investors iShares.
Alternatively, it is possible to buy shares in gold mining companies through pooled funds such as investment trusts, unit trusts and open-ended investment companies (Oeics). The advantage of choosing a pooled fund is that you get the services of a professional fund manager who will select stocks on your behalf, and your investment benefits from greater diversification.
Mr Dampier said: "You can buy physical gold, but if the gold price goes up, then so will the gold mining stocks."
He chose the Merrill Lynch Gold & General fund which has benefited from excellent performance, adding: "Had the gold price kept up with this fund, it would now cost $8,000 per ounce." (Comment: Note the disconnection.)
Mr Dennehy, the reluctant gold investor, also selected this fund for fans of gold, saying: "If you insist on speculating in gold, put yourself in the hands of the experienced elves running Merrill Lynch Gold and General."
This Merrill Lynch fund, which has more than trebled investors' money after charges are deducted in the past five years, has an initial charge of 5 per cent and an annual management charge of 1.75 per cent .
In order to spread risk, both Mr Dennehy and Ms Gee said investors should consider a more diversified commodities or natural resources fund instead of restricting themselves just to gold.
Although past performance should not be used as an indicator for the future, these funds can produce excellent returns. Merrill Lynch World Mining Investment Trust, for instance, has turned a £1,000 investment five years ago into £6,235 now. JP Morgan Natural Resources has turned £1,000 into £5,584 over five years, including the effects of charges.
Mr Dennehy said: "Consider a diversified commodity fund such as JP Morgan Fleming Natural Resources, or, my preference, a more thoughtful fund such as M&G Global Basics. The latter can have an exposure of up to 50 per cent in commodities, but at the moment has nearer 30 per cent , because commodity companies as a whole are just not that attractive – private investors should take heed of this strong message from such a hugely successful fund."
JP Morgan Fleming Natural Resources has an initial charge of 5.5 per cent and an annual charge of 1.5 per cent . M&G Global Basics levies a 4 per cent initial fee and a 1.5 per cent annual management fee.
Contacts
For performance and prices of pooled funds and exchange-traded funds (ETFs), see http://www.trustnet.co.uk/ or http://www.morningstar.com/
For information about investing in physical gold, see the World Gold Council: http://www.gold.org/
To find a local independent financial adviser, see IFA Promotion: http://www.unbiased.co.uk/
Gold investors make 120pc return in four months
Gold investors make 120pc return in four months
Private investors who have bought exchange traded funds that track the performance of gold miners have more than doubled their money since October last year.
By Richard EvansLast Updated: 12:18PM GMT 25 Feb 2009
A gold investment that private investors can buy on the stock market has gained in value by more than 120pc in four months.
The Russell Global Gold fund, an "exchange traded fund" or ETF that tracks the performance of gold miners, has produced a total gain of 121pc since October 27 last year.
Meanwhile, a similar investment that tracks the gold price has risen by 33pc since November 21 and by 65pc since this time last year. The gold price broke through the psychologically important $1,000 an ounce level last week.
The Russell Global Gold fund, which tracks the performance of the world's largest gold miners, is the strongest performing equity ETF among those provided by ETF Securities.
"The fund continues to benefit from investors' positive view on the gold price and the leverage to the gold price gold equities provide," said ETF Securities. "Despite recent price increases, gold equities are still trading at a substantial discount to their historical levels relative to the gold price."
Investors can buy ETFs from stockbrokers in exactly the same way as buying a normal share. The stockbroker will charge its usual fee, while the company that manages the ETF will deduct its charges, which may typically be about 0.5pc, from the income produced by the fund.
ETF Securities said its S-Net Global Agri Business and Russell Global Coal fund ETFs had also performed strongly, rising by 29pc and 33pc respectively over the past three months.
Ten ways to invest in gold
http://www.telegraph.co.uk/finance/personalfinance/investing/4804472/Gold-investors-make-120pc-return-in-four-months.html
Private investors who have bought exchange traded funds that track the performance of gold miners have more than doubled their money since October last year.
By Richard EvansLast Updated: 12:18PM GMT 25 Feb 2009
A gold investment that private investors can buy on the stock market has gained in value by more than 120pc in four months.
The Russell Global Gold fund, an "exchange traded fund" or ETF that tracks the performance of gold miners, has produced a total gain of 121pc since October 27 last year.
Meanwhile, a similar investment that tracks the gold price has risen by 33pc since November 21 and by 65pc since this time last year. The gold price broke through the psychologically important $1,000 an ounce level last week.
The Russell Global Gold fund, which tracks the performance of the world's largest gold miners, is the strongest performing equity ETF among those provided by ETF Securities.
"The fund continues to benefit from investors' positive view on the gold price and the leverage to the gold price gold equities provide," said ETF Securities. "Despite recent price increases, gold equities are still trading at a substantial discount to their historical levels relative to the gold price."
Investors can buy ETFs from stockbrokers in exactly the same way as buying a normal share. The stockbroker will charge its usual fee, while the company that manages the ETF will deduct its charges, which may typically be about 0.5pc, from the income produced by the fund.
ETF Securities said its S-Net Global Agri Business and Russell Global Coal fund ETFs had also performed strongly, rising by 29pc and 33pc respectively over the past three months.
Ten ways to invest in gold
http://www.telegraph.co.uk/finance/personalfinance/investing/4804472/Gold-investors-make-120pc-return-in-four-months.html
This financial crisis is now truly global
This financial crisis is now truly global
The financial crisis has moved from Wall Street to all streets, as the economic shock causes strains and suffering in every part of the world economy.
By Adrian Michaels
Last Updated: 9:11PM GMT 20 Feb 2009
In Florida, a state devastated by tumbling house prices and repossessions, the inhabitants are arming themselves against recession, with requests for concealed weapon permits up 42 per cent in the past 45 days. In Moscow, the murder rate has climbed by 16 per cent. At Tetsuya's – the most exclusive and expensive restaurant in Sydney – the waiting list has shrunk from three months to 24 hours.
Over the past few months, we were told that we were caught in the worst economic crisis for 20 years, then 30, then 80, then 100. It can't be long before someone points out that really, all things considered, the Black Death was comparatively pleasant. But beyond the hyperbole, one thing is clear: what began as a financial problem in certain debt-soaked nations is battering the economies of dozens of others, as well as millions of people working in almost every trade. It will change behaviour and alter the pecking order of the world's economies. There will be social unrest and changes of regime. Received wisdom, whether about the benefits of free trade, globalisation or European integration, may be cast on to a bonfire of recrimination. Estimates of how long the pain will last range from a year to a decade. Bring out your dead.
Among the most significant developments has been the realisation that the most prudent countries – such as Germany, Japan and China – will suffer as badly as the spendthrifts, or even worse. Despite the whiff of hubris that wafted from Berlin when the banks of Britain and America went into meltdown, Germany's economy contracted by two per cent in the last quarter of 2008, compared with 1.5 per cent for Britain's. The problem was that the Chinese and Germans were too thrifty: their countries' growth was reliant on sales of goods to countries that were borrowing. Now that Americans can't afford its products, China's exports have collapsed, down 17.5 per cent in January from a year earlier.
Americans can't spend because their house prices have crumpled, their shares have plummeted and their banks will not – or cannot – lend them any money. Insecurity is also forcing cutbacks: January saw the highest monthly jump in unemployment in 34 years. The equally worried Chinese seem to want to save still more: imports into China fell 43 per cent in January compared with the year before. Yet if no one at home or abroad wants to buy their goods, the result will be massive unemployment: some 20 million people are already said to have lost their jobs. As they head home from the coastal manufacturing belt, their government is trying to force-feed them consumer goods; 80 per cent of all white goods sold in December were subsidised.
As demand dries up, the arteries of global trade are hardening. Lufthansa's air freight division is putting 2,600 staff on short-time working, while cargo ships have so many empty containers that shipping rates are a tenth of what they were at last year's peak. The knock-on effects are complex, but painful. "For Rent" signs dot empty storefronts on the once sought-after stretch of New York's Madison Avenue, where the vacancy rate rose by 50 per cent in 2008. Rents have dropped by a third as the ladies who lunch think twice about coffee at Barneys, or frocks from Versace. This falling appetite for luxury goods helps explain why half of India's 400,000 diamond workers have lost their jobs. More than 40 have committed suicide.
Or take car sales, which Carlos Ghosn, the chief executive of Renault-Nissan, estimates could fall by 21 per cent across the world this year. Car companies are begging governments for handouts – but that won't shift their products from showrooms. Among other things, lower car sales mean fewer catalytic converters, which means that platinum does not need to be mined so intensively. The price of platinum has fallen by half, and the world's largest producer, Anglo Platinum, which operates mostly in South Africa, is axing 10,000 jobs.
And so the rural Chinese are not the only ones heading home. Thanks largely to a construction boom, Spain was responsible for a third of the new jobs created in the eurozone in 2006 and 2007, but is now losing 40,000 a week, and is offering subsidies for migrants to leave (some immigrants are instead digging in, selling home-cooked food at illegal markets around Madrid). Thai factories and farms used to rely on Burmese expats; aid workers report that thousands of them are now being rounded up and sent home. Malaysia has banned the hiring of foreigners in certain sectors, while the Philippines, which has 10 per cent of its population working abroad, is braced for family incomes to tumble. Remittances from overseas are a lifeline for the world's poorest: Africans working in the developed world have been sending back $40 billion a year to support their impoverished relatives, but the World Bank predicts that this could drop substantially this year.
Even when the crisis is not causing outright misery, it is transforming behaviour. In Britain, employers seem to be choosing to fire women rather than men – but in America, more than 80 per cent of those losing their jobs have been male; as a result, women are making up an increasing percentage of the workforce. Of course, not every extraordinary trend or statistic can be blamed on the economic crisis – but it is certainly true that cheap, home-based pursuits are making a comeback, and frippery is out. Australians spent 13 per cent less on eating out in the last quarter of 2008, while a Manhattan dentist is pitching his teeth-whitening services with the phrase "Make me an offer".
The challenge is to come up with a political response that does not make things worse. Western countries used to preach openness, free movement of people, the breaking down of barriers. Now the instinct is to raise the shutters and protect voters' livelihoods. Social unrest is spreading; particularly at risk are the nations of central and eastern Europe, which fervently embraced the free market after the Berlin Wall came down. As their workers headed west, their businesses loaded up on debt to fuel breakneck expansion; now, they can't meet their obligations, especially as the region's biggest banks were sold to Italians and Austrians, who might repatriate cash to focus on domestic demands. "The mess in central and eastern Europe is a clear result of globalisation," says Hans Redeker, a strategist at European bank BNP Paribas. "It should be no surprise to see [Western] banks acting increasingly locally while trying to please domestic governments."
The world's leaders promise to stop protectionism, but their actions speak differently. A joint statement this week from Gordon Brown and Silvio Berlusconi, Italy's prime minister, said: "Protectionist measures reduce worldwide growth, deny us the benefits of global trade and confine millions to poverty." Yet both countries are propping up their car industries. Congress wants to protect the American steel industry; the French government is spending more on newspaper advertising.
However restless they are, electorates need to remember that a lack of protectionism lay behind a huge increase in prosperity for millions of people. That is not easy when jobs are being lost. A cleaned-up banking system is a top priority – but the debate has only just started about how our banks are to look, who will run them and how they will be regulated. "The history of financial crises," warns Michael Pettis, professor of finance at Peking University, "shows a mismanagement of the regulatory framework that comes out of them."
Above all, consumers are somehow going to have to change their behaviour. Americans are certain to be more prudent during the immediate crisis, but they need to maintain that more hostile attitude to debt when it is over. It will be just as hard to persuade the Chinese, Japanese and Germans to start spending, in order to supplement export-led growth with domestic demand. "The world doesn't need more stuff to sell," explains Prof Pettis. "It needs more buyers."
As they mature, Asian economies will in time have better pension and health systems, which will help persuade people that there is a safety net for hard times, and tease money out from under the mattress. "Surplus countries have to spend their income and enjoy themselves," says Charles Dumas, an analyst at Lombard Street Research. "The purpose of an economy is to consume." Right now, though, the main objective is survival.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4736387/This-financial-crisis-is-now-truly-global.html
The financial crisis has moved from Wall Street to all streets, as the economic shock causes strains and suffering in every part of the world economy.
By Adrian Michaels
Last Updated: 9:11PM GMT 20 Feb 2009
In Florida, a state devastated by tumbling house prices and repossessions, the inhabitants are arming themselves against recession, with requests for concealed weapon permits up 42 per cent in the past 45 days. In Moscow, the murder rate has climbed by 16 per cent. At Tetsuya's – the most exclusive and expensive restaurant in Sydney – the waiting list has shrunk from three months to 24 hours.
Over the past few months, we were told that we were caught in the worst economic crisis for 20 years, then 30, then 80, then 100. It can't be long before someone points out that really, all things considered, the Black Death was comparatively pleasant. But beyond the hyperbole, one thing is clear: what began as a financial problem in certain debt-soaked nations is battering the economies of dozens of others, as well as millions of people working in almost every trade. It will change behaviour and alter the pecking order of the world's economies. There will be social unrest and changes of regime. Received wisdom, whether about the benefits of free trade, globalisation or European integration, may be cast on to a bonfire of recrimination. Estimates of how long the pain will last range from a year to a decade. Bring out your dead.
Among the most significant developments has been the realisation that the most prudent countries – such as Germany, Japan and China – will suffer as badly as the spendthrifts, or even worse. Despite the whiff of hubris that wafted from Berlin when the banks of Britain and America went into meltdown, Germany's economy contracted by two per cent in the last quarter of 2008, compared with 1.5 per cent for Britain's. The problem was that the Chinese and Germans were too thrifty: their countries' growth was reliant on sales of goods to countries that were borrowing. Now that Americans can't afford its products, China's exports have collapsed, down 17.5 per cent in January from a year earlier.
Americans can't spend because their house prices have crumpled, their shares have plummeted and their banks will not – or cannot – lend them any money. Insecurity is also forcing cutbacks: January saw the highest monthly jump in unemployment in 34 years. The equally worried Chinese seem to want to save still more: imports into China fell 43 per cent in January compared with the year before. Yet if no one at home or abroad wants to buy their goods, the result will be massive unemployment: some 20 million people are already said to have lost their jobs. As they head home from the coastal manufacturing belt, their government is trying to force-feed them consumer goods; 80 per cent of all white goods sold in December were subsidised.
As demand dries up, the arteries of global trade are hardening. Lufthansa's air freight division is putting 2,600 staff on short-time working, while cargo ships have so many empty containers that shipping rates are a tenth of what they were at last year's peak. The knock-on effects are complex, but painful. "For Rent" signs dot empty storefronts on the once sought-after stretch of New York's Madison Avenue, where the vacancy rate rose by 50 per cent in 2008. Rents have dropped by a third as the ladies who lunch think twice about coffee at Barneys, or frocks from Versace. This falling appetite for luxury goods helps explain why half of India's 400,000 diamond workers have lost their jobs. More than 40 have committed suicide.
Or take car sales, which Carlos Ghosn, the chief executive of Renault-Nissan, estimates could fall by 21 per cent across the world this year. Car companies are begging governments for handouts – but that won't shift their products from showrooms. Among other things, lower car sales mean fewer catalytic converters, which means that platinum does not need to be mined so intensively. The price of platinum has fallen by half, and the world's largest producer, Anglo Platinum, which operates mostly in South Africa, is axing 10,000 jobs.
And so the rural Chinese are not the only ones heading home. Thanks largely to a construction boom, Spain was responsible for a third of the new jobs created in the eurozone in 2006 and 2007, but is now losing 40,000 a week, and is offering subsidies for migrants to leave (some immigrants are instead digging in, selling home-cooked food at illegal markets around Madrid). Thai factories and farms used to rely on Burmese expats; aid workers report that thousands of them are now being rounded up and sent home. Malaysia has banned the hiring of foreigners in certain sectors, while the Philippines, which has 10 per cent of its population working abroad, is braced for family incomes to tumble. Remittances from overseas are a lifeline for the world's poorest: Africans working in the developed world have been sending back $40 billion a year to support their impoverished relatives, but the World Bank predicts that this could drop substantially this year.
Even when the crisis is not causing outright misery, it is transforming behaviour. In Britain, employers seem to be choosing to fire women rather than men – but in America, more than 80 per cent of those losing their jobs have been male; as a result, women are making up an increasing percentage of the workforce. Of course, not every extraordinary trend or statistic can be blamed on the economic crisis – but it is certainly true that cheap, home-based pursuits are making a comeback, and frippery is out. Australians spent 13 per cent less on eating out in the last quarter of 2008, while a Manhattan dentist is pitching his teeth-whitening services with the phrase "Make me an offer".
The challenge is to come up with a political response that does not make things worse. Western countries used to preach openness, free movement of people, the breaking down of barriers. Now the instinct is to raise the shutters and protect voters' livelihoods. Social unrest is spreading; particularly at risk are the nations of central and eastern Europe, which fervently embraced the free market after the Berlin Wall came down. As their workers headed west, their businesses loaded up on debt to fuel breakneck expansion; now, they can't meet their obligations, especially as the region's biggest banks were sold to Italians and Austrians, who might repatriate cash to focus on domestic demands. "The mess in central and eastern Europe is a clear result of globalisation," says Hans Redeker, a strategist at European bank BNP Paribas. "It should be no surprise to see [Western] banks acting increasingly locally while trying to please domestic governments."
The world's leaders promise to stop protectionism, but their actions speak differently. A joint statement this week from Gordon Brown and Silvio Berlusconi, Italy's prime minister, said: "Protectionist measures reduce worldwide growth, deny us the benefits of global trade and confine millions to poverty." Yet both countries are propping up their car industries. Congress wants to protect the American steel industry; the French government is spending more on newspaper advertising.
However restless they are, electorates need to remember that a lack of protectionism lay behind a huge increase in prosperity for millions of people. That is not easy when jobs are being lost. A cleaned-up banking system is a top priority – but the debate has only just started about how our banks are to look, who will run them and how they will be regulated. "The history of financial crises," warns Michael Pettis, professor of finance at Peking University, "shows a mismanagement of the regulatory framework that comes out of them."
Above all, consumers are somehow going to have to change their behaviour. Americans are certain to be more prudent during the immediate crisis, but they need to maintain that more hostile attitude to debt when it is over. It will be just as hard to persuade the Chinese, Japanese and Germans to start spending, in order to supplement export-led growth with domestic demand. "The world doesn't need more stuff to sell," explains Prof Pettis. "It needs more buyers."
As they mature, Asian economies will in time have better pension and health systems, which will help persuade people that there is a safety net for hard times, and tease money out from under the mattress. "Surplus countries have to spend their income and enjoy themselves," says Charles Dumas, an analyst at Lombard Street Research. "The purpose of an economy is to consume." Right now, though, the main objective is survival.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4736387/This-financial-crisis-is-now-truly-global.html
Wednesday, 25 February 2009
Savers withdraw record amount from banks
Savers withdraw record amount from banks
The British Bankers' Association said that customers withdrew £2.3bn in January, the biggest drop since records began.
By Paul Farrow
Last Updated: 5:19PM GMT 24 Feb 2009
The BBA said personal deposits fell by £2.3bn as spending drained cash and savers sought alternative ways of getting a return on their cash. The previous high for falling deposits was £1.5bn in 1997.
David Dooks, BBA statistics director, said: "It is the biggest monthly fall in a decade. A fall in deposits in January reflects a tendency to draw on cash to pay off credit cards after Christmas, or to move into alternative financial products paying a higher return."
With interest rates at record lows savers are having to find other ways to get a return on their money. A recent survey showed that savers are preparing to abandon their tax-free Individual Savings Accounts (ISAs) because of lack of money and falling rates.
The uSwitch survey shows that 4.3 million savers are planning on withdrawing money from their accounts, losing the advantage of the tax-free status. The research suggests that, with the average cash ISA saver having a balance of £2,200, savers are set to withdraw £9.5 billion over the next year.
On the other hand, sales of corporate bond funds, which are paying yields of 5pc or more are proving popular among investors looking for a lower risk investment that pays an income. Bonds funds accounted for two in every three unit trusts bought in December and they continue to attract the lion's share of investors' money in 2009.
Dooks played down suggestions that customers had lost faith in the banks and said that deposits had risen in November and December.
http://www.telegraph.co.uk/finance/personalfinance/savings/4799679/Savers-withdraw-record-amount-from-banks.html
The British Bankers' Association said that customers withdrew £2.3bn in January, the biggest drop since records began.
By Paul Farrow
Last Updated: 5:19PM GMT 24 Feb 2009
The BBA said personal deposits fell by £2.3bn as spending drained cash and savers sought alternative ways of getting a return on their cash. The previous high for falling deposits was £1.5bn in 1997.
David Dooks, BBA statistics director, said: "It is the biggest monthly fall in a decade. A fall in deposits in January reflects a tendency to draw on cash to pay off credit cards after Christmas, or to move into alternative financial products paying a higher return."
With interest rates at record lows savers are having to find other ways to get a return on their money. A recent survey showed that savers are preparing to abandon their tax-free Individual Savings Accounts (ISAs) because of lack of money and falling rates.
The uSwitch survey shows that 4.3 million savers are planning on withdrawing money from their accounts, losing the advantage of the tax-free status. The research suggests that, with the average cash ISA saver having a balance of £2,200, savers are set to withdraw £9.5 billion over the next year.
On the other hand, sales of corporate bond funds, which are paying yields of 5pc or more are proving popular among investors looking for a lower risk investment that pays an income. Bonds funds accounted for two in every three unit trusts bought in December and they continue to attract the lion's share of investors' money in 2009.
Dooks played down suggestions that customers had lost faith in the banks and said that deposits had risen in November and December.
http://www.telegraph.co.uk/finance/personalfinance/savings/4799679/Savers-withdraw-record-amount-from-banks.html
Dr Doom says US govt bonds next bubble to burst
Dr Doom says US govt bonds next bubble to burst
SINGAPORE, Feb 23 – As usual, Dr Marc Faber, the author of The Gloom Boom and Doom Report and contrarian views, did not disappoint the masochist in us as he gave his spiel on the causes of the current economic turmoil at a dialogue on Friday organised by The Business Times in partnership with Julius Baer, one of Switzerland's leading wealth managers.
His topic “Were You Born Before Or After 2007”, that is, before or after the global economies began their steep decline, got nearly 400 bankers and businessmen intrigued enough to spend four-and-a-half hours at the Ritz Carlton Singapore.
Luckily lunch was served before Dr Doom, as Dr Faber is often called, took the floor. The picture he painted was indeed gloomy, with no end in sight of what appears to be a very long tunnel.
The present credit crisis caused by ultra expansionary monetary policies was very serious, he said – as if the audience of bankers and business were not already aware of this.
He went on to add that non-financial credit growth has declined from an annual rate of 16 per cent in late 2006 to between 1 and 2 per cent now.
The deleveraging taking place among financial intermediaries is negative for the American economy that is addicted to credit growth, he pointed out. The United States' trade and current account deficits will shrink further and diminish international liquidity. This is bad for asset prices.
“We had an unprecedented global economic boom between 2002 and 2007. A colossal global economic bust is now following,” he said.
And worse might follow, as he noted: There was still one bubble more to be deflated – US government bonds.
Adding more fuel to his fire of gloom was his warning that regardless of the policies followed by the US government and its agencies, the American consumer was in a recession, which will only deepen.
“Expansionary monetary policies, which caused the current credit crisis in the first place, are the wrong medicine to solve the current problems. They can address the symptoms of excessive credit growth, but not the cause,” he noted.
Expansionary fiscal and monetary policies will, after a bout of deflation, lead to much higher inflation rates, which will have a negative impact on the valuation of equities in real terms, he observed.
“But what options does the Federal Reserve have with a total credit market debt to GDP (Gross Domestic Product) of more than 350 per cent?” he asked rhetorically.
And if that was bad enough, he raised the spectre of war looming on the horizon, noting that geopolitical tensions were on the rise. He predicted that commodity shortages, especially of oil, would lead to increased international tensions and to what he called resource nationalism.
The shortage of oil would be caused not only by increased demand from China and India, but also the Middle East. “Not only do they (the Middle East) produce oil, they produce too many babies,” he said in one of the few light moments of his dialogue.
The good doctor, however, had some upbeat investment advice: In Asia, avoid real estate in financial centres, but look at things such as soft commodities, which, while volatile, are on an upward trend.
There are also opportunities in pharmaceutical and hospital management companies, and in banks, insurance companies and brokers, especially in emerging economies.
Opportunities also abound in plantations and farmlands in Indonesia, Malaysia, Latin America and the Ukraine. He also advised investors to go long on gold and corporate bonds but to dump US government bonds.
However, what was lacking at the talk were solutions to the current crisis. And answers. When can we see the light at the end of the tunnel? How long is the tunnel that we are in? – Today
http://www.themalaysianinsider.com/index.php/business/18977-dr-doom-says-us-govt-bonds-next-bubble-to-burst
SINGAPORE, Feb 23 – As usual, Dr Marc Faber, the author of The Gloom Boom and Doom Report and contrarian views, did not disappoint the masochist in us as he gave his spiel on the causes of the current economic turmoil at a dialogue on Friday organised by The Business Times in partnership with Julius Baer, one of Switzerland's leading wealth managers.
His topic “Were You Born Before Or After 2007”, that is, before or after the global economies began their steep decline, got nearly 400 bankers and businessmen intrigued enough to spend four-and-a-half hours at the Ritz Carlton Singapore.
Luckily lunch was served before Dr Doom, as Dr Faber is often called, took the floor. The picture he painted was indeed gloomy, with no end in sight of what appears to be a very long tunnel.
The present credit crisis caused by ultra expansionary monetary policies was very serious, he said – as if the audience of bankers and business were not already aware of this.
He went on to add that non-financial credit growth has declined from an annual rate of 16 per cent in late 2006 to between 1 and 2 per cent now.
The deleveraging taking place among financial intermediaries is negative for the American economy that is addicted to credit growth, he pointed out. The United States' trade and current account deficits will shrink further and diminish international liquidity. This is bad for asset prices.
“We had an unprecedented global economic boom between 2002 and 2007. A colossal global economic bust is now following,” he said.
And worse might follow, as he noted: There was still one bubble more to be deflated – US government bonds.
Adding more fuel to his fire of gloom was his warning that regardless of the policies followed by the US government and its agencies, the American consumer was in a recession, which will only deepen.
“Expansionary monetary policies, which caused the current credit crisis in the first place, are the wrong medicine to solve the current problems. They can address the symptoms of excessive credit growth, but not the cause,” he noted.
Expansionary fiscal and monetary policies will, after a bout of deflation, lead to much higher inflation rates, which will have a negative impact on the valuation of equities in real terms, he observed.
“But what options does the Federal Reserve have with a total credit market debt to GDP (Gross Domestic Product) of more than 350 per cent?” he asked rhetorically.
And if that was bad enough, he raised the spectre of war looming on the horizon, noting that geopolitical tensions were on the rise. He predicted that commodity shortages, especially of oil, would lead to increased international tensions and to what he called resource nationalism.
The shortage of oil would be caused not only by increased demand from China and India, but also the Middle East. “Not only do they (the Middle East) produce oil, they produce too many babies,” he said in one of the few light moments of his dialogue.
The good doctor, however, had some upbeat investment advice: In Asia, avoid real estate in financial centres, but look at things such as soft commodities, which, while volatile, are on an upward trend.
There are also opportunities in pharmaceutical and hospital management companies, and in banks, insurance companies and brokers, especially in emerging economies.
Opportunities also abound in plantations and farmlands in Indonesia, Malaysia, Latin America and the Ukraine. He also advised investors to go long on gold and corporate bonds but to dump US government bonds.
However, what was lacking at the talk were solutions to the current crisis. And answers. When can we see the light at the end of the tunnel? How long is the tunnel that we are in? – Today
http://www.themalaysianinsider.com/index.php/business/18977-dr-doom-says-us-govt-bonds-next-bubble-to-burst
Tuesday, 24 February 2009
The Global Recession
The Global Recession, Graded on a Curve
By FLOYD NORRIS
Published: February 19, 2009
If the economies and stock markets of the world were graded on a curve, the United States would be doing quite well.
By FLOYD NORRIS
Published: February 19, 2009
If the economies and stock markets of the world were graded on a curve, the United States would be doing quite well.
Stock prices in the United States have fallen sharply since the end of 2007, but the situation is even bleaker in some other countries.
In the fourth quarter of last year, the American economy shrank at a 3.8 percent annual rate, the worst such performance in a quarter-century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 percent — three times as bad.
Industrial production in the United States is falling at the fastest rate in three decades. But the 10 percent year-over-year plunge reported this week for January looks good in comparison to the declines in countries like Germany, off almost 13 percent in its most recently reported month, and South Korea, down about 21 percent.
Even in the area of exploding mortgages, the United States has done better than some countries, particularly in Eastern Europe. There it is possible now to owe twice what a house is worth — even if the house has not lost much of its value.
Grading on the curve, as any college student knows, requires that a certain proportion of high grades be given out no matter how badly the class as a whole performs. If the best student in the class gets just over half the answers right on a difficult test, that student deserves an A.
The real world, alas, does not score success in that way.
Consider how much money you would have left if you had put $100 into the stocks in the leading market indexes of major countries at the end of 2007, less than 14 months ago.
In the United States, you would now have about $53. That fact — coupled with the reality that more Americans than ever are depending on the stock market to pay for their retirement — has severely depressed sentiment and spending.
But it merits one of the top grades in this world. Among major markets, only Japan, at $59, has done better. In Britain, France, Spain and Germany, the figure would be around $45. In Italy, it would be $37. About a quarter of the money would still be there in countries like Ireland, Greece and Poland.
Remember the BRIC countries, where growth possibilities seemed limitless not long ago? The stars there are Brazil and China, where about $46 or $47 remains. In India, the figure is $35, and in Russia it is $23. At least they have all done a lot better than Iceland, where you would have just $3 left of your hypothetical $100.
All this failure, whether in markets or economies, is feeding upon itself. Imports and exports are falling nearly everywhere. “Our exports have been hurt more by the global recession than their exports have been hurt by our recession,” said Roger Kubarych, an economist at the Unicredit Group in New York.
Nowhere does the situation appear more dire now than in Eastern Europe.
Many of those countries had been running large current-account deficits, just as the United States has been doing. But the United States still has the ability to borrow all the dollars it wants — in part because lenders know the United States can print more of them if it needs to.
Eastern European countries have no such printing presses, and those countries that can borrow show little interest in sharing the bounty.
“Emerging Europe appears to be suffering a ‘sudden stop’ in financing, which could cause the region’s economy to contract by 5 percent to 10 percent this year,” said Neil Shearing, an economist at Capital Economics in London. “Markets in Eastern Europe appear to be in meltdown.” He says the Baltic economies could shrink 20 percent this year.
The latest collapses are both a cause of and a result of worries about the health of banks in the region, many of which are owned by Western European banks. Some of those banks did a fine job of pushing “affordable” mortgages that are turning out to be just the opposite, endangering both borrower and lender.
The details differed from the subprime lending that was a major cause of the destruction of capital in the American banking system. There were no “Ninja” loans (no income, no job or assets) that would produce exploding monthly payments within a couple of years. Instead, the banks pushed mortgages denominated in foreign currencies — largely the euro and the Swiss franc — where interest rates were much lower than in the local currency markets.
The risk was obvious. What if the local currency lost value rapidly? That is just what is happening. The Hungarian forint is down by about a quarter this year against the Swiss franc, and by more than half since last summer.
That means someone who bought a house in Hungary last summer, financing it with a Swiss franc loan, now owes more than twice as many forints as he or she borrowed, and has a monthly payment that has increased by a similar amount. Even if the home’s value has not fallen and the homeowner’s job is safe, he or she may be in desperate straits. In fact, unemployment is rising and house prices are falling.
It has been noted in what Donald H. Rumsfeld called the “old Europe” that the European countries in the direst straits tend to be the ones that accepted American financial advice with the most enthusiasm. Now, however, few Americans seem to be interested.
Part of the Obama plan to revive the American financial system is an expansion of the TALF program, announced but not carried out by the Bush administration. That program — short for Term Asset Backed Securities Loan Facility — is supposed to stimulate financing for things like credit cards and student loans.
But the loans are not for just anybody. At least 95 percent of the money must go to American borrowers. “It is a ‘Lend America’ program,” said Mr. Kubarych.
When world leaders gather, there is a lot of talk about coordinated policies. When the leaders go home, it is every country for itself. Unfortunately, as the United States ought to have learned, doing better than anyone else may not be nearly enough.
Floyd Norris’s blog on finance and economics is at nytimes.com/norris.
In the fourth quarter of last year, the American economy shrank at a 3.8 percent annual rate, the worst such performance in a quarter-century. They are envious in Japan, where this week the comparable figure came in at negative 12.7 percent — three times as bad.
Industrial production in the United States is falling at the fastest rate in three decades. But the 10 percent year-over-year plunge reported this week for January looks good in comparison to the declines in countries like Germany, off almost 13 percent in its most recently reported month, and South Korea, down about 21 percent.
Even in the area of exploding mortgages, the United States has done better than some countries, particularly in Eastern Europe. There it is possible now to owe twice what a house is worth — even if the house has not lost much of its value.
Grading on the curve, as any college student knows, requires that a certain proportion of high grades be given out no matter how badly the class as a whole performs. If the best student in the class gets just over half the answers right on a difficult test, that student deserves an A.
The real world, alas, does not score success in that way.
Consider how much money you would have left if you had put $100 into the stocks in the leading market indexes of major countries at the end of 2007, less than 14 months ago.
In the United States, you would now have about $53. That fact — coupled with the reality that more Americans than ever are depending on the stock market to pay for their retirement — has severely depressed sentiment and spending.
But it merits one of the top grades in this world. Among major markets, only Japan, at $59, has done better. In Britain, France, Spain and Germany, the figure would be around $45. In Italy, it would be $37. About a quarter of the money would still be there in countries like Ireland, Greece and Poland.
Remember the BRIC countries, where growth possibilities seemed limitless not long ago? The stars there are Brazil and China, where about $46 or $47 remains. In India, the figure is $35, and in Russia it is $23. At least they have all done a lot better than Iceland, where you would have just $3 left of your hypothetical $100.
All this failure, whether in markets or economies, is feeding upon itself. Imports and exports are falling nearly everywhere. “Our exports have been hurt more by the global recession than their exports have been hurt by our recession,” said Roger Kubarych, an economist at the Unicredit Group in New York.
Nowhere does the situation appear more dire now than in Eastern Europe.
Many of those countries had been running large current-account deficits, just as the United States has been doing. But the United States still has the ability to borrow all the dollars it wants — in part because lenders know the United States can print more of them if it needs to.
Eastern European countries have no such printing presses, and those countries that can borrow show little interest in sharing the bounty.
“Emerging Europe appears to be suffering a ‘sudden stop’ in financing, which could cause the region’s economy to contract by 5 percent to 10 percent this year,” said Neil Shearing, an economist at Capital Economics in London. “Markets in Eastern Europe appear to be in meltdown.” He says the Baltic economies could shrink 20 percent this year.
The latest collapses are both a cause of and a result of worries about the health of banks in the region, many of which are owned by Western European banks. Some of those banks did a fine job of pushing “affordable” mortgages that are turning out to be just the opposite, endangering both borrower and lender.
The details differed from the subprime lending that was a major cause of the destruction of capital in the American banking system. There were no “Ninja” loans (no income, no job or assets) that would produce exploding monthly payments within a couple of years. Instead, the banks pushed mortgages denominated in foreign currencies — largely the euro and the Swiss franc — where interest rates were much lower than in the local currency markets.
The risk was obvious. What if the local currency lost value rapidly? That is just what is happening. The Hungarian forint is down by about a quarter this year against the Swiss franc, and by more than half since last summer.
That means someone who bought a house in Hungary last summer, financing it with a Swiss franc loan, now owes more than twice as many forints as he or she borrowed, and has a monthly payment that has increased by a similar amount. Even if the home’s value has not fallen and the homeowner’s job is safe, he or she may be in desperate straits. In fact, unemployment is rising and house prices are falling.
It has been noted in what Donald H. Rumsfeld called the “old Europe” that the European countries in the direst straits tend to be the ones that accepted American financial advice with the most enthusiasm. Now, however, few Americans seem to be interested.
Part of the Obama plan to revive the American financial system is an expansion of the TALF program, announced but not carried out by the Bush administration. That program — short for Term Asset Backed Securities Loan Facility — is supposed to stimulate financing for things like credit cards and student loans.
But the loans are not for just anybody. At least 95 percent of the money must go to American borrowers. “It is a ‘Lend America’ program,” said Mr. Kubarych.
When world leaders gather, there is a lot of talk about coordinated policies. When the leaders go home, it is every country for itself. Unfortunately, as the United States ought to have learned, doing better than anyone else may not be nearly enough.
Floyd Norris’s blog on finance and economics is at nytimes.com/norris.
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