Pound Falls Against Euro as Housing Sales Slide to Record Low
By Matthew Brown
March 10 (Bloomberg) -- The pound fell to its weakest in more than five weeks against the euro after Britain’s housing sales slipped to the lowest level since at least 1978 and manufacturing shrank the most in four decades.
The U.K. currency dropped for a third day versus the 16- nation currency as the Bank of England prepared to print money to buy assets as part of a quantitative easing policy. The average number of transactions in a survey of real-estate agents and surveyors fell to 9.5 per respondent in the quarter through February, the least since the data began three decades ago, the Royal Institution of Chartered Surveyors said today.
“Investors are saying we don’t like the banking situation in the U.K., the housing data was bad, and we’re nervous about the economy,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International. “Quantitative easing is about to begin, and all these factors tell us to stand aside and wait until it gets cheaper.”
The pound weakened to 92.33 pence per euro by 5:20 p.m. in London, from 91.53 yesterday. It slipped to 92.48 pence earlier, the lowest level since Jan. 29. Against the dollar, the currency was little changed at $1.3784.
Factory production dropped 2.9 percent in January from December, the Office for National Statistics in London said. Economists in a Bloomberg survey predicted a 1.4 percent decline. Manufacturing shrank 6.4 percent in the three months through January, the most since records began in 1968.
Quantitative Easing
The Bank of England will seek to buy 2 billion pounds of gilts in an operation for its asset-purchase facility on March 11, it said last week. Policy makers said March 5 they will acquire as much as 150 billion pounds of government and corporate assets, the first central bank to adopt quantitative easing since the Bank of Japan in the 1990s.
“With the Bank of England taking far more aggressive steps than any other central bank, bar possibly the Federal Reserve, the pound remains vulnerable to the downside,” Derek Halpenny, the London-based European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a note today.
Policy makers cut the nation’s benchmark interest rate 4.5 percentage points to an all-time low of 0.5 percent since October as the economy headed for its worst recession since World War II. Gross domestic product contracted 1.5 percent in the fourth quarter, the most since 1980, a report on Feb. 25 showed.
The pound may still strengthen to 89 pence per euro in the next three months as the recession in the euro region economy deepens, Stretch said. For Merrill Lynch & Co., the euro’s gain against the pound may have gone to far.
Gilts Rise
“We will probably look to fade the move higher in the euro- pound if and when the short-term interest-rate spread-compression trend resumes,” wrote Steven Pearson, a London-based strategist at Merrill Lynch. “It is worth noting that with the Bank of England bank rate having likely reached its terminal level, pound-euro may now start to trade well during risk aversion.”
U.K. government bonds rose, with the yield on the 10-year gilt falling one basis point to 3.11 percent. The 4.5 percent security due March 2019 advanced 0.09, or 90 pence per 1,000- pound face amount, to 111.82. Two-year gilt yields slipped one basis point to 1.32 percent. Bond yields move inversely to prices.
The U.K. Treasury today sold 3 billion pounds of 4.5 percent bonds maturing in 2019. The sale received bids 2.06 times the amount offered, the Debt Management Office said, compared with an average 1.9 times at the last three auctions of the securities.
‘Carried Away’
“Investors are getting carried away with the euphoria surrounding quantitative easing,” said Ian Williams, chief executive officer of Charteris Portfolio Managers in London. “The Bank of England is a buyer of gilts, but the U.K. government is still a net seller of gilts. The compression in yields when the penny drops is going to be difficult to maintain, and the implications of quantitative easing are inflationary.”
The yield on the 10-year gilt may rise to 3.25 percent by the end of April, said Williams, whose U.K. government-bond fund beat all its competitors in January, according to data from Lipper and given to Bloomberg by Charteris.
Ten-year gilts may keep gaining, according to technical strategists at Barclays Plc.
“Bigger picture, the secular bull trend remains intact, particularly following the recent failure to overcome 3.82 percent-area support,” Barclays Capital analysts including Jordan Kotick in New York wrote in a report. The yield may move toward 2.70 percent “medium term,” they said.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net Last Updated: March 10, 2009 13:43 EDT
http://www.bloomberg.com/apps/news?pid=20601102&refer=uk&sid=adCmriDF1wc8
Wednesday, 11 March 2009
Dollar defies recipe for currency collapse
Dollar defies recipe for currency collapse
The US Federal Reserve is printing money. The US government is also spending wildly today so there won’t be a depression tomorrow. It sounds like a recipe for currency collapse. Yet the dollar keeps picking up. And the trend seems unlikely to change soon. What’s going on? Well, consider the competition.
By Ian Campbell, breakingviews.com
Last Updated: 4:08PM GMT 10 Mar 2009
Start with the dollar’s predecessor as reserve currency – the pound. At $1.38, it is close to setting what would be 20-year lows against the dollar, less than a year after it set quarter-century highs.
Let us count the woes. The banks have big foreign liabilities, the deficit-ridden UK government has taken on most of the risk in the banking sector, and the Bank of England is going to add £75bn in fresh notes to the pool of sterling assets. Who wants them? Not foreign investors.
Related Articles
Authorities lose patience with collapsing dollar
Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve
Basket case Britain must rebuild its credibility
Hawkish ECB risks central bank fight on rates
Euro bank's hawks take a pounding
The euro, Icarus-like last summer, also looks to be heading fast for the soil. Eurozone growth is bad. Its banks are in trouble. How to avoid an unfortunate roast of Greece, Ireland, Portugal and Spain is the question. But now add Belgium, Italy and Austria, whose banks are among the worst affected by eastern Europe’s implosion.
In Frankfurt, Jean-Claude Trichet, head of the European Central Bank is not in favour of easing. In Berlin, Chancellor Angela Merkel is not keen on bailing. The zone is sinking.
Just like Japanese exports – down by an annual 46pc in January. The yen’s rise last year was in part technical. Hedge funds advocated shorting Japan. Then it became time to drop those risky yen shorts and run for cover. But Japan’s fundamentals are now exposed and none too pretty. Recession is intense.
US fundamentals are dreadful, too. But policy-making could hardly be more activist. It is in essence a huge gamble on recovery. For now, the world would rather take that gamble and buy the multitude of treasuries the US government is issuing than contemplate anything else. The reserve currency will forge ahead. Unless the world starts to think the big US wager is going to be a losing one.
http://www.telegraph.co.uk/finance/breakingviewscom/4968519/Dollar-defies-recipe-for-currency-collapse.html
The US Federal Reserve is printing money. The US government is also spending wildly today so there won’t be a depression tomorrow. It sounds like a recipe for currency collapse. Yet the dollar keeps picking up. And the trend seems unlikely to change soon. What’s going on? Well, consider the competition.
By Ian Campbell, breakingviews.com
Last Updated: 4:08PM GMT 10 Mar 2009
Start with the dollar’s predecessor as reserve currency – the pound. At $1.38, it is close to setting what would be 20-year lows against the dollar, less than a year after it set quarter-century highs.
Let us count the woes. The banks have big foreign liabilities, the deficit-ridden UK government has taken on most of the risk in the banking sector, and the Bank of England is going to add £75bn in fresh notes to the pool of sterling assets. Who wants them? Not foreign investors.
Related Articles
Authorities lose patience with collapsing dollar
Morgan Stanley warns of 'catastrophic event' as ECB fights Federal Reserve
Basket case Britain must rebuild its credibility
Hawkish ECB risks central bank fight on rates
Euro bank's hawks take a pounding
The euro, Icarus-like last summer, also looks to be heading fast for the soil. Eurozone growth is bad. Its banks are in trouble. How to avoid an unfortunate roast of Greece, Ireland, Portugal and Spain is the question. But now add Belgium, Italy and Austria, whose banks are among the worst affected by eastern Europe’s implosion.
In Frankfurt, Jean-Claude Trichet, head of the European Central Bank is not in favour of easing. In Berlin, Chancellor Angela Merkel is not keen on bailing. The zone is sinking.
Just like Japanese exports – down by an annual 46pc in January. The yen’s rise last year was in part technical. Hedge funds advocated shorting Japan. Then it became time to drop those risky yen shorts and run for cover. But Japan’s fundamentals are now exposed and none too pretty. Recession is intense.
US fundamentals are dreadful, too. But policy-making could hardly be more activist. It is in essence a huge gamble on recovery. For now, the world would rather take that gamble and buy the multitude of treasuries the US government is issuing than contemplate anything else. The reserve currency will forge ahead. Unless the world starts to think the big US wager is going to be a losing one.
http://www.telegraph.co.uk/finance/breakingviewscom/4968519/Dollar-defies-recipe-for-currency-collapse.html
Tuesday, 10 March 2009
Interest rate cut: what do I do with my money now?
Interest rate cut: what do I do with my money now?
With interest rates close to zero, savers could be forgiven for giving up, and putting their cash under the mattress.
By Harry Wallop, Consumer Affairs Editor
Last Updated: 9:23PM GMT 05 Mar 2009
Corporate bonds are becoming increasingly popular. These are a form of IOU issued by large companies. The important thing is not to store it under the bed
What's the point of letting £100,000 languish in an account for it to earn all of £290 in interest in a year. And that's before tax.
But savers really should not despair at the average savings rates cited by the Bank of England. Canny investors need to shop around, hunt for better than average, and think about alternative places for their cash than a standard deposit account.
For starters, there are some cash Individual Savings Accounts, that are offering well over 3 per cent, such as Marks & Spencer's 3.1 per cent, which savers can withdraw their money from at any time. The advantage with ISAs is that they are more or less tax free, though savers can only invest up £3,600 each year.
For those with more cash, and the discipline to deposit money regularly, they can enjoy an astonishingly good rate of 5.84 per cent from Barclays – more than tenfold the new Bank Rate. The down side is that you have to put in at least £20 every month but no more than £250.
Further afield from traditional banks, there are endless possibilities.
Corporate bonds are becoming increasingly popular. These are a form of IOU issued by large companies. (Take a look at Barclays corporate bond.)
They are not risk-free and tend to pay higher returns than deposits to compensate investors for a lower degree of security; for example, British American Tobacco bonds due to be redeemed in 2019 currently yield – or pay out the equivalent of an annual return – about 6.4 per cent, while Tesco bonds pay 5.5 per cent. And Tesco is still likely to still be around in 2019 to pay investors back.
Or you can always turn to the last refuge of the desperate: gold, which is proving a volatile, but impressive, performer during the financial crisis.
You can buy the stuff via gold exchange traded funds, which trade on the stock market like shares, or pop down to a bullion dealer and buy a bar or coin of the hard stuff.
The important thing is not to store your savings under the bed.
The only winner will be the local neighbourhood thief. And as the police have warned, they are on the increase – unlike interest rates.
http://www.telegraph.co.uk/finance/personalfinance/savings/4944354/Interest-rate-cut-what-do-I-do-with-my-money-now.html
With interest rates close to zero, savers could be forgiven for giving up, and putting their cash under the mattress.
By Harry Wallop, Consumer Affairs Editor
Last Updated: 9:23PM GMT 05 Mar 2009
Corporate bonds are becoming increasingly popular. These are a form of IOU issued by large companies. The important thing is not to store it under the bed
What's the point of letting £100,000 languish in an account for it to earn all of £290 in interest in a year. And that's before tax.
But savers really should not despair at the average savings rates cited by the Bank of England. Canny investors need to shop around, hunt for better than average, and think about alternative places for their cash than a standard deposit account.
For starters, there are some cash Individual Savings Accounts, that are offering well over 3 per cent, such as Marks & Spencer's 3.1 per cent, which savers can withdraw their money from at any time. The advantage with ISAs is that they are more or less tax free, though savers can only invest up £3,600 each year.
For those with more cash, and the discipline to deposit money regularly, they can enjoy an astonishingly good rate of 5.84 per cent from Barclays – more than tenfold the new Bank Rate. The down side is that you have to put in at least £20 every month but no more than £250.
Further afield from traditional banks, there are endless possibilities.
Corporate bonds are becoming increasingly popular. These are a form of IOU issued by large companies. (Take a look at Barclays corporate bond.)
They are not risk-free and tend to pay higher returns than deposits to compensate investors for a lower degree of security; for example, British American Tobacco bonds due to be redeemed in 2019 currently yield – or pay out the equivalent of an annual return – about 6.4 per cent, while Tesco bonds pay 5.5 per cent. And Tesco is still likely to still be around in 2019 to pay investors back.
Or you can always turn to the last refuge of the desperate: gold, which is proving a volatile, but impressive, performer during the financial crisis.
You can buy the stuff via gold exchange traded funds, which trade on the stock market like shares, or pop down to a bullion dealer and buy a bar or coin of the hard stuff.
The important thing is not to store your savings under the bed.
The only winner will be the local neighbourhood thief. And as the police have warned, they are on the increase – unlike interest rates.
http://www.telegraph.co.uk/finance/personalfinance/savings/4944354/Interest-rate-cut-what-do-I-do-with-my-money-now.html
Dividends: Which are safe and which may fall?
Dividends: Which are safe and which may fall?
The income from shares offers some protection against a bear market – unless it is cut. We asked the experts which companies looked safest.
By Richard Evans
Last Updated: 10:35AM GMT 07 Mar 2009
Share prices have been falling for months now but for many investors there has been one crumb of comfort: dividends.
After all, share prices can recover if you don’t sell – and hanging on can be relatively painless if the income from your investment is maintained or even increased.
But there have been some worrying developments for dividends recently. HSBC, the bank that seemed relatively unscathed by the financial crisis, was forced to cut its payout; now there are rumours that BP may have to freeze its dividend for the first time in years because of the falling oil price.
So we asked the experts which dividends they thought should be safe despite the turmoil – and which ones could be at risk.
Ian Lance, manager of the Schroder Income fund, said: "Despite all the concerns about the sustainability of dividend payments in the face of falling profits, we believe those invested in UK equities are still being well rewarded, particularly as yield is becoming increasingly difficult to find in many other areas of investment.
"The dividend yield on the highest yielding UK equities has risen to its highest point in around 20 years – even if you exclude financials. The dividend yield on non-financial stocks now exceeds the yield on 10-year government bonds."
As for concerns about how resilient these yields will be, Mr Lance said dividend levels were likely to fall across the UK market as a whole over the next couple of years, but he remained confident that a number of companies had sufficient dividend "cover" – the degree to which the dividend is exceeded by earnings – to support their current payouts even if earnings fell.
Schroders believes that the most resilient and attractive dividend streams will be among the long-established, well-diversified "mega caps" and companies that declare dividends in US dollars, given that sterling’s weakness pushes up their value. "These include names such as GlaxoSmithKline, AstraZeneca, Royal Dutch Shell and Vodafone, which we bought some time ago when they were out of favour with other investors and consequently undervalued, and which we continue to hold today," said Mr Lance.
Jonathan Jackson, an equity analyst at Killik & Co, the stockbroker, is not convinced that BP's dividend is under threat; he expects it to be safe for at least this year and next. "My reading is that BP will let gearing [borrowing relative to equity] increase," he said. "Holding the dollar-denominated dividend means 23pc growth for British shareholders, resulting in a yield of 10pc."
He also backs Vodafone, which is yielding 6.5pc, pointing to its strong balance sheet and "fairly defensive" qualities. "Tobacco stocks such as BAT and Imperial Tobacco have stable cash flows throughout the cycle," he added.
Hugh Duff, an investment manager at Scottish Investment Trust, said that among his holdings were two companies likely to maintain, or possibly grow, their dividends: Serco and De La Rue.
"Serco is a leading international services company operating in a broad range of sectors, servicing both private and public markets. The long-term nature of Serco’s contracts and the significant order book give us confidence in the company’s defensive and highly visible earnings growth," he said.
"De La Rue is the world’s largest commercial security printer and literally has a licence to print money. The company's main operation is the production of 150 currencies on behalf of central banks. The demand for currency printing is expected to continue to show stable growth, with a key driver being the increasing use of cash machines which require notes to be in mint condition. De La Rue has a very good track record of returning the profits from this business to shareholders through special dividends and dividends."
Turning to companies seen as candidates for cutting their dividends, Mr Jackson singled out BT Group. "There are trading difficulties in the global services division and a pension fund gap," he said. A recent ruling from the pensions regulator that pensions should take priority over dividends made a cut more likely, he added.
"The consensus in the City is that the dividend could be halved but we don’t know the size of the pensions deficit. BT used to put £280m into the fund annually to reduce the gap, now it could need to put in twice that figure. The cost of the dividend is £1.2bn."
Mark Hall, a fund manager at Rensburg Sheppards, voiced concern about life insurers. He said: "The sector I am most concerned about now regarding dividend payments is the life assurers such as Legal & General and Aviva. They have big bond portfolios and are vulnerable to any further dislocation in the financial system putting even greater pressure on their solvency ratios.
"This contrasts with the general insurance companies and Lloyd's specialists such as Royal Sun Alliance and Amlin, where we think the dividend prospects are really quite good."
http://www.telegraph.co.uk/finance/personalfinance/investing/4941355/Dividends-Which-are-safe-and-which-may-fall.html
The income from shares offers some protection against a bear market – unless it is cut. We asked the experts which companies looked safest.
By Richard Evans
Last Updated: 10:35AM GMT 07 Mar 2009
Share prices have been falling for months now but for many investors there has been one crumb of comfort: dividends.
After all, share prices can recover if you don’t sell – and hanging on can be relatively painless if the income from your investment is maintained or even increased.
But there have been some worrying developments for dividends recently. HSBC, the bank that seemed relatively unscathed by the financial crisis, was forced to cut its payout; now there are rumours that BP may have to freeze its dividend for the first time in years because of the falling oil price.
So we asked the experts which dividends they thought should be safe despite the turmoil – and which ones could be at risk.
Ian Lance, manager of the Schroder Income fund, said: "Despite all the concerns about the sustainability of dividend payments in the face of falling profits, we believe those invested in UK equities are still being well rewarded, particularly as yield is becoming increasingly difficult to find in many other areas of investment.
"The dividend yield on the highest yielding UK equities has risen to its highest point in around 20 years – even if you exclude financials. The dividend yield on non-financial stocks now exceeds the yield on 10-year government bonds."
As for concerns about how resilient these yields will be, Mr Lance said dividend levels were likely to fall across the UK market as a whole over the next couple of years, but he remained confident that a number of companies had sufficient dividend "cover" – the degree to which the dividend is exceeded by earnings – to support their current payouts even if earnings fell.
Schroders believes that the most resilient and attractive dividend streams will be among the long-established, well-diversified "mega caps" and companies that declare dividends in US dollars, given that sterling’s weakness pushes up their value. "These include names such as GlaxoSmithKline, AstraZeneca, Royal Dutch Shell and Vodafone, which we bought some time ago when they were out of favour with other investors and consequently undervalued, and which we continue to hold today," said Mr Lance.
Jonathan Jackson, an equity analyst at Killik & Co, the stockbroker, is not convinced that BP's dividend is under threat; he expects it to be safe for at least this year and next. "My reading is that BP will let gearing [borrowing relative to equity] increase," he said. "Holding the dollar-denominated dividend means 23pc growth for British shareholders, resulting in a yield of 10pc."
He also backs Vodafone, which is yielding 6.5pc, pointing to its strong balance sheet and "fairly defensive" qualities. "Tobacco stocks such as BAT and Imperial Tobacco have stable cash flows throughout the cycle," he added.
Hugh Duff, an investment manager at Scottish Investment Trust, said that among his holdings were two companies likely to maintain, or possibly grow, their dividends: Serco and De La Rue.
"Serco is a leading international services company operating in a broad range of sectors, servicing both private and public markets. The long-term nature of Serco’s contracts and the significant order book give us confidence in the company’s defensive and highly visible earnings growth," he said.
"De La Rue is the world’s largest commercial security printer and literally has a licence to print money. The company's main operation is the production of 150 currencies on behalf of central banks. The demand for currency printing is expected to continue to show stable growth, with a key driver being the increasing use of cash machines which require notes to be in mint condition. De La Rue has a very good track record of returning the profits from this business to shareholders through special dividends and dividends."
Turning to companies seen as candidates for cutting their dividends, Mr Jackson singled out BT Group. "There are trading difficulties in the global services division and a pension fund gap," he said. A recent ruling from the pensions regulator that pensions should take priority over dividends made a cut more likely, he added.
"The consensus in the City is that the dividend could be halved but we don’t know the size of the pensions deficit. BT used to put £280m into the fund annually to reduce the gap, now it could need to put in twice that figure. The cost of the dividend is £1.2bn."
Mark Hall, a fund manager at Rensburg Sheppards, voiced concern about life insurers. He said: "The sector I am most concerned about now regarding dividend payments is the life assurers such as Legal & General and Aviva. They have big bond portfolios and are vulnerable to any further dislocation in the financial system putting even greater pressure on their solvency ratios.
"This contrasts with the general insurance companies and Lloyd's specialists such as Royal Sun Alliance and Amlin, where we think the dividend prospects are really quite good."
http://www.telegraph.co.uk/finance/personalfinance/investing/4941355/Dividends-Which-are-safe-and-which-may-fall.html
Monday, 9 March 2009
10 ways to get a better return on your money
10 ways to get a better return on your money
Getting a decent return on your money can seem a daunting task. A year ago building society savers were earning 7pc on their money. Today, with the Bank Rate standing at a record low of 0.5pc, most accounts pay less than 1pc.
Last Updated: 10:17AM GMT 07 Mar 2009
10 ways to get a return on your money
Investors have also seen returns plummet, thanks to turbulent stock markets. Last week alone the FTSE100 index reached a six-year low, and most experts are predicting that share prices will remain volatile for the foreseeable future. In such markets investors could be forgiven for thinking they have more chance of making money on the 3.15 at Cheltenham or with a spin of the roulette wheel.
There is no doubt that savers and investors have to face up to a new reality: either accept lower returns on money (which may mean living on less income from savings or putting those early retirement plans on ice) or accept that you will have to take more risk.
As the following points show, whatever your risk profile there are steps all savers and investors can take to boost returns and make more money from your money.
1 Get the best cash deal you can
The best rates are reserved for those who can afford to lock their money up for a year, so invest what you can in a fixed-rate account. Current best deals include a two-year bond from Abbey paying 4.01pc (the minimum deposit is £30,000). Banks also tend to pay higher rates to those with online accounts. Make the most of "bonus" rates, but ensure you switch to a more competitive deal once the introductory rate expires.
2 Make sure all savings are tax-efficient
OK, so cash Isa rates are poor, but for the first time many banks are allowing savers to transfer existing Isas. So if your Isa rate has dropped to a dismal 0.5pc, look at switching providers. The best accounts to accept transfers are from Halifax at 3.3pc and NatWest – its e-Isa pays 3.25pc. For more savings rates click here.
3 Become a lender
Another option is Zopa, which dubs itself the "eBay of the banking world". Those with cash to spare lend to strangers and earn between 9pc and 10pc on their money, depending on the credit rating of borrowers. Rather than lend to one borrower, money is given to a number to reduce the risk of losing your capital. Zopa says default rates are low, but they could rise as the recession bites.
4 Switch to an offset mortgage
Savers might be getting next to nothing on their savings, but an offset mortgage can offer the equivalent of 5pc interest, as home owners are saving on mortgage interest charges. Most mortgages allow borrowers to overpay their mortgage, up to certain limits, so it makes sense to use surplus cash this way. Offset mortgage deals, however, are far more flexible – allowing money in savings and current accounts to offset the mortgage debt, reducing interest charges.
5 Invest in a corporate bond fund
Corporate debt is looking attractive, according to Jason Walker of AWD Chase de Vere, particularly compared with the returns available on government-issued gilts. But in a recession the risk of defaults increases, so tread carefully and avoid "junk" bonds. Most advisers recommend investors to stick with "investment grade" bonds, where income is lower but there is far less chance of the company going under, taking your money with it. Gavin Haynes of Whitechurch Securities said: "Capital appreciation can occur as interest rates fall; however, the reverse is also true: if rates rise then capital losses may well be sustained."
Funds recommended by advisers include M&G Corporate Bond, Invesco Perpetual Corporate Bond and Invesco Perpetual Sterling Bond.
6 Bet on equity markets without putting your capital at risk
Guaranteed Equity Bonds (Gebs) are fixed-term investments that pay a proportion of any stock market gains over the period. Typically they are linked to one or more stock market indices (for example, the FTSE100). If the index falls over the term you get your original investment back in full. The catch? Your money is locked up for this period and in most cases Gebs pay only a proportion of any stock market gain (and do not include dividend returns). There is also a risk that if the bank backing the guarantee goes under you could lose your money.
Nationwide has a six-year bond linked to the FTSE100, DJ EuroSTOXX 50 and S&P500. It will pay up to 70pc of the growth of the indices, subject to a maximum return of 40pc of the original investment.
7 Equity funds
Advisers say investors are looking again at equity income funds to boost returns. These funds aim to deliver a growing income stream and are primarily invested in blue-chip shares that have a record of paying dividends. At the moment it is possible to achieve a net yield of about 5pc to 5.5pc and favoured funds include Invesco Perpetual High Income, Newton Higher Income and Artemis Income. Other equity-based funds that have proven track records include Blackrock UK Absolute Alpha and Cazenove UK Growth & Income.
8 Buy recession-proof shares
Not all companies suffer in a downturn, so pick up those that are likely to profit in the gloom. Rosemary Banyard, who manages Schroders' UK Smaller Companies fund, says businesses such as pawnbroker Albemarle & Bond and Park Group, the Christmas savings scheme operator, are well placed to benefit from economic contraction. Health care companies such as Advanced Medical and Health care Locums are also well placed, as is Dignity, the funeral company.
For investors wanting dividend income, Schroders believes you should consider long-established, well-diversified "mega caps" and companies that declare dividends in US dollars, given sterling's weakness. It likes GlaxoSmithKline, AstraZeneca, Royal Dutch Shell and Vodafone.
9 Boost your pension
Transfer existing investments into a Sipp and the value of these holdings will be boosted by a further 40pc for higher-rate taxpayers. Or get a return of 12pc – here's how. A 75-year-old male who pays £2,880 into an immediate vesting pension will see £720 added by the Government, making a total pension pot of £3,600. The pension is then drawn immediately, at which point he gets £900 back as tax-free cash. An annuity is bought with the remaining £2,700, paying £218.30 a year – of which the first instalment is paid straight away. Based on a net outlay of £1,761.70 he'll get annual income of £218.30 for life, a return of 12pc.
10 Take a punt on markets falling further
If you don't see the stock market recovering in the short term, make money from falling share prices via an exchange traded fund (ETF).
This route is only for those willing to take on substantially more risk. One popular EFT has been the Bank Short ETF. This aims to deliver the exact inverse of the Dow Jones Bank index, which tracks the performance of the leading banking companies in western Europe.
As bank stocks have declined, this ETF has seen positive returns. (If banks' shares rise, the reverse will happen.) According to Deutsche Bank, which launched the ETF, the fund has risen by 184pc over the past year.
http://www.telegraph.co.uk/finance/personalfinance/savings/4949583/10-ways-to-get-a-better-return-on-your-money.html
Getting a decent return on your money can seem a daunting task. A year ago building society savers were earning 7pc on their money. Today, with the Bank Rate standing at a record low of 0.5pc, most accounts pay less than 1pc.
Last Updated: 10:17AM GMT 07 Mar 2009
10 ways to get a return on your money
Investors have also seen returns plummet, thanks to turbulent stock markets. Last week alone the FTSE100 index reached a six-year low, and most experts are predicting that share prices will remain volatile for the foreseeable future. In such markets investors could be forgiven for thinking they have more chance of making money on the 3.15 at Cheltenham or with a spin of the roulette wheel.
There is no doubt that savers and investors have to face up to a new reality: either accept lower returns on money (which may mean living on less income from savings or putting those early retirement plans on ice) or accept that you will have to take more risk.
As the following points show, whatever your risk profile there are steps all savers and investors can take to boost returns and make more money from your money.
1 Get the best cash deal you can
The best rates are reserved for those who can afford to lock their money up for a year, so invest what you can in a fixed-rate account. Current best deals include a two-year bond from Abbey paying 4.01pc (the minimum deposit is £30,000). Banks also tend to pay higher rates to those with online accounts. Make the most of "bonus" rates, but ensure you switch to a more competitive deal once the introductory rate expires.
2 Make sure all savings are tax-efficient
OK, so cash Isa rates are poor, but for the first time many banks are allowing savers to transfer existing Isas. So if your Isa rate has dropped to a dismal 0.5pc, look at switching providers. The best accounts to accept transfers are from Halifax at 3.3pc and NatWest – its e-Isa pays 3.25pc. For more savings rates click here.
3 Become a lender
Another option is Zopa, which dubs itself the "eBay of the banking world". Those with cash to spare lend to strangers and earn between 9pc and 10pc on their money, depending on the credit rating of borrowers. Rather than lend to one borrower, money is given to a number to reduce the risk of losing your capital. Zopa says default rates are low, but they could rise as the recession bites.
4 Switch to an offset mortgage
Savers might be getting next to nothing on their savings, but an offset mortgage can offer the equivalent of 5pc interest, as home owners are saving on mortgage interest charges. Most mortgages allow borrowers to overpay their mortgage, up to certain limits, so it makes sense to use surplus cash this way. Offset mortgage deals, however, are far more flexible – allowing money in savings and current accounts to offset the mortgage debt, reducing interest charges.
5 Invest in a corporate bond fund
Corporate debt is looking attractive, according to Jason Walker of AWD Chase de Vere, particularly compared with the returns available on government-issued gilts. But in a recession the risk of defaults increases, so tread carefully and avoid "junk" bonds. Most advisers recommend investors to stick with "investment grade" bonds, where income is lower but there is far less chance of the company going under, taking your money with it. Gavin Haynes of Whitechurch Securities said: "Capital appreciation can occur as interest rates fall; however, the reverse is also true: if rates rise then capital losses may well be sustained."
Funds recommended by advisers include M&G Corporate Bond, Invesco Perpetual Corporate Bond and Invesco Perpetual Sterling Bond.
6 Bet on equity markets without putting your capital at risk
Guaranteed Equity Bonds (Gebs) are fixed-term investments that pay a proportion of any stock market gains over the period. Typically they are linked to one or more stock market indices (for example, the FTSE100). If the index falls over the term you get your original investment back in full. The catch? Your money is locked up for this period and in most cases Gebs pay only a proportion of any stock market gain (and do not include dividend returns). There is also a risk that if the bank backing the guarantee goes under you could lose your money.
Nationwide has a six-year bond linked to the FTSE100, DJ EuroSTOXX 50 and S&P500. It will pay up to 70pc of the growth of the indices, subject to a maximum return of 40pc of the original investment.
7 Equity funds
Advisers say investors are looking again at equity income funds to boost returns. These funds aim to deliver a growing income stream and are primarily invested in blue-chip shares that have a record of paying dividends. At the moment it is possible to achieve a net yield of about 5pc to 5.5pc and favoured funds include Invesco Perpetual High Income, Newton Higher Income and Artemis Income. Other equity-based funds that have proven track records include Blackrock UK Absolute Alpha and Cazenove UK Growth & Income.
8 Buy recession-proof shares
Not all companies suffer in a downturn, so pick up those that are likely to profit in the gloom. Rosemary Banyard, who manages Schroders' UK Smaller Companies fund, says businesses such as pawnbroker Albemarle & Bond and Park Group, the Christmas savings scheme operator, are well placed to benefit from economic contraction. Health care companies such as Advanced Medical and Health care Locums are also well placed, as is Dignity, the funeral company.
For investors wanting dividend income, Schroders believes you should consider long-established, well-diversified "mega caps" and companies that declare dividends in US dollars, given sterling's weakness. It likes GlaxoSmithKline, AstraZeneca, Royal Dutch Shell and Vodafone.
9 Boost your pension
Transfer existing investments into a Sipp and the value of these holdings will be boosted by a further 40pc for higher-rate taxpayers. Or get a return of 12pc – here's how. A 75-year-old male who pays £2,880 into an immediate vesting pension will see £720 added by the Government, making a total pension pot of £3,600. The pension is then drawn immediately, at which point he gets £900 back as tax-free cash. An annuity is bought with the remaining £2,700, paying £218.30 a year – of which the first instalment is paid straight away. Based on a net outlay of £1,761.70 he'll get annual income of £218.30 for life, a return of 12pc.
10 Take a punt on markets falling further
If you don't see the stock market recovering in the short term, make money from falling share prices via an exchange traded fund (ETF).
This route is only for those willing to take on substantially more risk. One popular EFT has been the Bank Short ETF. This aims to deliver the exact inverse of the Dow Jones Bank index, which tracks the performance of the leading banking companies in western Europe.
As bank stocks have declined, this ETF has seen positive returns. (If banks' shares rise, the reverse will happen.) According to Deutsche Bank, which launched the ETF, the fund has risen by 184pc over the past year.
http://www.telegraph.co.uk/finance/personalfinance/savings/4949583/10-ways-to-get-a-better-return-on-your-money.html
Stock market: opportunity of a lifetime or priced for a depression?
Stock market: opportunity of a lifetime or priced for a depression?
These are the two messages investors are hearing simultaneously these days: the first is: "Watch out! The recession is getting to look more like a depression. Safety first. Avoid shares and anything with the slightest risk."
By James Bartholomew
Last Updated: 1:27PM GMT 09 Mar 2009
The second is: "Shares are ridiculously cheap. This is the opportunity of a lifetime. Do you want to look back at this time and reflect that you funked it? Buy now!"
So investors are pulled one way and then the other. Let us not pretend it is easy. If possible, one wants to have one's cake and eat it – to finesse the problem by having exposure to shares but, at the same time, owning ones that might hold up even if things worsen.
The trouble is, lots of people are trying to do the same, so anything that looks pretty safe gets a much higher rating than companies that could get into trouble.
The safest ones are often in sectors where it will take a lot to destroy demand. People are always going to want to eat, and will probably want to drink, too. We are going for "the bare necessities of life".
Fortunately, the stock market is so low that, even among such safer companies, shares are clearly good value for the long term. It would be easy to make a little portfolio of relatively reliable companies with modest, but perhaps sustainable, dividend yields. It could include Associated British Foods at 622p on a prospective yield of 3.3pc, British Sky Broadcasting at 452p on a yield of 3.9pc and, say, Tesco at 310p on a yield of 3.7pc.
I prefer to go for smaller companies where I believe share prices are cheaper and potential gains bigger. I have been buying back into REA Holdings, which has a palm oil plantation. Palm oil is used, among other things, as a basic foodstuff.
I have also held onto my stake in Staffline, which provides "blue-collar" labour for a variety of industries, but especially food processing. Staffline produced its annual results this week and they were a perfect illustration of how results announcements have changed.
Press releases of results often start with "Highlights". Twelve months ago, companies shone light on their growth and expansion. "Highlights" were full of bold ambition. Now, the greatest boast a company can make is that it is safe and won't be closed. On Tuesday, Staffline announced its "gearing" – borrowing as a proportion of the shareholders' net assets – had fallen from 28pc to 24pc.
In the old days, companies were criticised if they borrowed so little. They were accused of "failing to make full use of their capital base". Now, low borrowing is absolutely the fashion (except for the Government).
Staffline went on to trill about how the cost of its interest payments had tumbled by a quarter and that these payments were covered a wonderful 10 times by profits. The message was "we have been prudent, we are safe and our bankers are happy". The shares rose 15pc.
Many people feel big companies are safer than such small ones and I don't blame anyone wanting to feel safe. But small companies, as a generality, are much cheaper than large ones at the moment. They also have greater scope for growth. And, after Royal Bank of Scotland, surely no one is confident that size guarantees safety.
I don't hold any particular torch for Staffline, but it is a good example of what I see among plenty of small companies. Its share price, as I write, is 27p, a mere 2.5 times the earnings per share last year. That is seriously cheap. Over the long term, a rating of at least four times that would be normal.
A broker forecasts that its profits will fall this year but only by a little. The historic dividend yield is terrific at just over 10pc. Yes, the dividend could be reduced next year but probably not by much.
It does seem like the opportunity of a lifetime and one might be tempted to fill one's boots with the shares of companies like this.
The only thing that holds me back is the echo of the other message: that the economy is sliding down so fast and unpredictably that one should keep at least some cash in reserve.
http://www.telegraph.co.uk/finance/personalfinance/investing/shares/4961165/Stock-market-opportunity-of-a-lifetime-or-priced-for-a-depression.html
These are the two messages investors are hearing simultaneously these days: the first is: "Watch out! The recession is getting to look more like a depression. Safety first. Avoid shares and anything with the slightest risk."
By James Bartholomew
Last Updated: 1:27PM GMT 09 Mar 2009
The second is: "Shares are ridiculously cheap. This is the opportunity of a lifetime. Do you want to look back at this time and reflect that you funked it? Buy now!"
So investors are pulled one way and then the other. Let us not pretend it is easy. If possible, one wants to have one's cake and eat it – to finesse the problem by having exposure to shares but, at the same time, owning ones that might hold up even if things worsen.
The trouble is, lots of people are trying to do the same, so anything that looks pretty safe gets a much higher rating than companies that could get into trouble.
The safest ones are often in sectors where it will take a lot to destroy demand. People are always going to want to eat, and will probably want to drink, too. We are going for "the bare necessities of life".
Fortunately, the stock market is so low that, even among such safer companies, shares are clearly good value for the long term. It would be easy to make a little portfolio of relatively reliable companies with modest, but perhaps sustainable, dividend yields. It could include Associated British Foods at 622p on a prospective yield of 3.3pc, British Sky Broadcasting at 452p on a yield of 3.9pc and, say, Tesco at 310p on a yield of 3.7pc.
I prefer to go for smaller companies where I believe share prices are cheaper and potential gains bigger. I have been buying back into REA Holdings, which has a palm oil plantation. Palm oil is used, among other things, as a basic foodstuff.
I have also held onto my stake in Staffline, which provides "blue-collar" labour for a variety of industries, but especially food processing. Staffline produced its annual results this week and they were a perfect illustration of how results announcements have changed.
Press releases of results often start with "Highlights". Twelve months ago, companies shone light on their growth and expansion. "Highlights" were full of bold ambition. Now, the greatest boast a company can make is that it is safe and won't be closed. On Tuesday, Staffline announced its "gearing" – borrowing as a proportion of the shareholders' net assets – had fallen from 28pc to 24pc.
In the old days, companies were criticised if they borrowed so little. They were accused of "failing to make full use of their capital base". Now, low borrowing is absolutely the fashion (except for the Government).
Staffline went on to trill about how the cost of its interest payments had tumbled by a quarter and that these payments were covered a wonderful 10 times by profits. The message was "we have been prudent, we are safe and our bankers are happy". The shares rose 15pc.
Many people feel big companies are safer than such small ones and I don't blame anyone wanting to feel safe. But small companies, as a generality, are much cheaper than large ones at the moment. They also have greater scope for growth. And, after Royal Bank of Scotland, surely no one is confident that size guarantees safety.
I don't hold any particular torch for Staffline, but it is a good example of what I see among plenty of small companies. Its share price, as I write, is 27p, a mere 2.5 times the earnings per share last year. That is seriously cheap. Over the long term, a rating of at least four times that would be normal.
A broker forecasts that its profits will fall this year but only by a little. The historic dividend yield is terrific at just over 10pc. Yes, the dividend could be reduced next year but probably not by much.
It does seem like the opportunity of a lifetime and one might be tempted to fill one's boots with the shares of companies like this.
The only thing that holds me back is the echo of the other message: that the economy is sliding down so fast and unpredictably that one should keep at least some cash in reserve.
http://www.telegraph.co.uk/finance/personalfinance/investing/shares/4961165/Stock-market-opportunity-of-a-lifetime-or-priced-for-a-depression.html
Saturday, 7 March 2009
Why should printing money succeed here when it failed in Japan?
Why should printing money succeed here when it failed in Japan?
Posted By: Edmund Conway at Mar 5, 2009 at 20:13:00 [General]
Posted in: Business
Tags:
Bank of England, Interest rates, Japan, quantitative easing
Why on earth will Britain succeed where Japan failed?
It is the big question which no-one in the Bank of England - or for that matter the Federal Reserve, or other central banks around the world that have pledged to embark on policies of overt money creation - is particularly comfortable answering.
There is nothing new about what the Bank has announced it will do. Japan tried very similar tactics around a decade ago after most of its other deflation-aversion tactics failed. As we all know, it failed to pull Japan out of the rut it still lies in (though the hyperinflationists among you may be reassured that neither did it spark a Weimar Germany style rise in prices).
So what have we got on our side that Japan hasn't?
Here are the big differences.
1. Time. Japanese policymakers took a good few years to get round to Quantitative Easing (let's call it QE from hereon). The old adage in monetary policy is that the sooner you act the more effect it will have, and the Bank definitely has this on its side, having reduced interest rates all the way down from 5pc to 0.5pc in barely more than a year, and now getting on with QE pretty much instantly. On the other hand, the size and immediacy of the economic slowdown we're facing is far greater.
2. Size. The Japanese (and for that matter the Americans) spent around 5pc of their GDP on QE, printing money to buy up assets. The Bank of England, on the other hand, has committed to spending just over 10pc of GDP. This is a hell of a lot of money. A terrifying amount. To put it into context, the total size of the 5 year to 25 year government bond market in the UK is around £250bn; the amount the Bank is proposing to spend on these government bonds through magicked-up money is around £100bn (the remaining £50bn will go on corporate bonds, the market for which is even smaller). Anyway, with QE, the bigger, so they say, is better.
3. Savings culture. Quantitative easing is designed to encourage people to save less and spend more. The Japanese, however, had a 15pc or more (I forget) savings ratio at the start of their recession. As a result they had a massive bed of savings to eat into (rather than borrowing) over the years. We have little or no savings ratio and a culture of high borrowing and spending. In the long run that needs to change, but it may mean the switch to frugality may be slightly less fast and aggressive than it was there.
4. Application. This is important but mildly technical. The Japanese may have pumped this newly-created money into the wrong bit of the financial system. They did a very similar thing to what the Bank is planning, printing money (electronically) and using it to buy up government debt. This will certainly mechanically increase the amount of cash floating around the system. It will also push down the yields on government debt, which should in turn reduce the cost of borrowing throughout the economy. However, this is only one half of the objective for QE. The other is to try to encourage companies and investors to get out there and spend more.
The Japanese tended to buy most of these assets off banks. Unfortunately, the banks then hoarded the cash, because their balance sheets had been so damaged by the financial crisis. The Bank, on the other hand, intends to buy most of the gilts off institutional investors - pension funds, insurers and the like. The theory - or hope - is that they will be less keen to hoard the cash and will spend it elsewhere.
This will, so the theory goes, set off a snowball effect whereby they buy extra stuff, which in turn encourages other sellers to go out and buy, and which eventually causes the economy to start growing again. So the £150bn that is poured into the economy eventually generates two or three or four times that in economic output and in money growth. We hope.
***
The problem, as you'll have guessed, is that although all of these arguments seem very rational, we have no idea whether they will work in practice. Sure, the Japanese made mistakes, but there could easily by another mistake we'll make. Likewise, even if we fulfil all the preconditions necessary, will this actually have the desired effect of bringing economic growth back up to trend? And if it does, how will we ensure we don't then generate a tidal wave of inflation which creates another dangerous bubble five years hence?
No-one knows, of course. All of which is why this new topsy-turvy world is so terrifying. However, the one counterfactual I am pretty sure about is this: for all that it is disturbing for savers now to see interest rates down at absolute zero, the economy would be in a far, far worse state if interest rates had been any higher over the past year. Then we truly would have been staring economic armageddon in the face.
In the meantime, we must try to get to grips with the remoulded economic and monetary landscape thrown up by quantitative easing. Many thanks for all your comments and questions in my last blog. Please keep them coming (either at the bottom here or by twitter) and I'll try to address them tomorrow and thereafter. I'm going home now to watch trashy television and briefly expunge words like quantitative easing from my brain.
[ 33 comments ]
Is This the Market Bottom?
Is This the Market Bottom?
By Ilan Moscovitz March 6, 2009 Comments (19)
The news isn't pretty: Earlier this week, the S&P 500 closed below 700 -- its lowest level since October 1996. Many former stalwarts are faring even worse: General Electric (NYSE: GE) hit an 18-year low yesterday. Bank of America (NYSE: BAC) hasn't traded at these levels in 25 years. Citigroup (NYSE: C) hit an all-time low of $0.97 at one point Thursday.
This hurts, there’s no doubt. And as we watch stocks fall to new lows day after day, it seems as if the market's slide will never end.
But while these sorts of apocalyptic figures make for exciting minute-by-minute updates on CNBC, they're not much use to you. They don't say anything about how stocks will behave in the future, which is what actually matters when you're deciding how to invest today. That's one reason investors always ask, "Is this the market bottom?"
Well, is it? Opinions vary. Nouriel Roubini, one of the few economists who predicted this crisis, wrote a January piece masterfully titled "The Latest Bear Market Sucker's Rally Is Losing Its Steam as an Onslaught of Awful Macro and Earnings News Takes Its Toll," in which he predicted the S&P could fall as low as 500 -- more than 25% below where it stands right now.
But last fall, in a New York Times op-ed piece, superinvestor Warren Buffett compared today's overwhelming pessimism to 1932, 1942, and the 1980s -- all fantastic times to buy stocks. Lately he's been adding shares of Burlington Northern (NYSE: BNI) and Ingersoll-Rand (NYSE: IR). Although Buffett doesn't try to time market bottoms, his urge to "be fearful when others are greedy, and be greedy when others are fearful" has helped him to make eerily prescient moves in the past.
When he says it's time to buy, it pays to listen.
One approach to answering the question My colleague Morgan Housel wrote an excellent piece examining historical market valuations. The one-sentence summary is as follows: When things get scary, investors frantically sell stocks down to incredibly low multiples.
Using historical data from Standard & Poor's, my research shows that the average of the lowest quarter-end price-to-earnings ratio (P/E) during all recessions since 1937 is 11.7. With the S&P trading at 11.9 times 2009 earnings, we've about hit that point.
However, looking at some of the lowest recession P/Es since 1937 also shows that if corporate earnings stay depressed, stocks could fall even further:
Recession
Lowest End-of-Quarter P/E
Today
11.9*
January 1980 - July 1980
6.7
November 1973 - March 1975
7.0
November 1948 - October 1949
5.9
Sources: National Bureau of Economic Research, Standard & Poor's, and Birinyi Associates. *Based on 2009 earnings estimates.
Applying these multiples to the S&P today means that the bottom could be anywhere between here and another 50% decline.
But what if the economy gets really bad?
Another Great Depression? With comparisons between the Great Depression and the Great Wipeout of 2008 growing ever louder, a simple worst-case approach is to look at how Depression investors fared.
According to the National Bureau of Economic Research, we're 14 months into this recession, and thus far, the S&P 500 index has lost 52%. Fourteen months into the Great Depression (January 1931), investors were down only 46%.
But while the stock market was hit harder in 2008, economic conditions were far uglier in 1930. Back then GDP had fallen 8.6%, unemployment reached 8.9%, and deflation was running 6%. Our 6.2% GDP decline, 8.1% unemployment rate, and likely deflation almost appear mild compared to 1930.
So relative to 1931, if stocks today have been hit harder on less-dire economic news, does that mean we've already seen the bottom?
Not necessarily.
Even though stocks had already fallen dramatically since the October 1929 market crash, investors who bought in January 1931 were down another 71% by May 1932. This goes to show how difficult it is to time market bottoms, and it demonstrates that even though stocks have fallen considerably, they could still fall even more.
That's actually not so bad … The good news is that it doesn't much matter whether you accurately time the bottom.
See, conventional wisdom holds that the Depression was a bad time to be an investor. Excitable market commentators like to cite the statistic that it took until 1954 -- 25 years! -- for the market to return to its 1929 levels.
That figure is true, but misleading. It assumes that investors put all of their money into stocks just before the market crash, stopped purchasing stocks thereafter, and never collected dividends.
Remember, we're now 14 months into this recession -- not at its starting point. So for the sake of symmetry, let's ask how long it actually took new money invested 14 months into the Depression (January 1931) to break even. According to number-crunching I've done using rare Ibbotson Associates data, the answer is less than five years. And an investor who continued to purchase stocks on a monthly basis would have broken even in little more than two years.
Take a look at how investors who bought stocks in 1931 fared after completely missing the bottom during the worst economic period of the 20th century:
Returns
T-Bill Investment
Stock Investment
1-Year
2%
(43%)
3-Year
4%
(23%)
5-Year
5%
12%
Through Depression (June 1938)
6%
10%
Through October 1954
18%
678%
Sources: Ibbotson Associates, National Bureau of Economic Research, and author's calculations.
According to NBER, the second 1930s recession ended in June 1938. Assumes reinvested dividends.
The Foolish bottom line So, then, how can we use this data? There are three applications for investing today:
1. It's very difficult to time the market bottom. Just because stocks have fallen and valuations are low, does not mean they can't fall further. So if you're going to need the money in the next five years, there are safer places for it than stocks.
2. Market timing isn't necessary to achieve great returns. The Depression was a terrible time to be a speculator. But long-term investors who continued buying stocks did just fine.
3. Stick to a proven stock-buying strategy. As I mentioned before, Warren Buffett built his more than $50 billion fortune in large part by purchasing stable businesses in strong competitive positions -- at discount prices. That's what led him to American Express (NYSE: AXP) in the 1960s, Washington Post in the early 1970s, and Coca-Cola (NYSE: KO) soon after the Black Monday 1987 crash. He didn't try to time markets; he just bought stocks when they were cheap.
And he says they're cheap again today.
If Buffett's investing approach makes sense to you, now's a great time to begin bargain-hunting.
Ilan Moscovitz is greedy with chocolate cake and fearful of heights. He doesn't own shares of any companies mentioned in this article. The Motley Fool owns shares of American Express. Coca-Cola and American Express are Inside Value recommendations. The Fool's disclosure policy is overly aphoristic.
Read/Post Comments (19)
http://www.fool.com/investing/value/2009/03/06/is-this-the-market-bottom.aspx
By Ilan Moscovitz March 6, 2009 Comments (19)
The news isn't pretty: Earlier this week, the S&P 500 closed below 700 -- its lowest level since October 1996. Many former stalwarts are faring even worse: General Electric (NYSE: GE) hit an 18-year low yesterday. Bank of America (NYSE: BAC) hasn't traded at these levels in 25 years. Citigroup (NYSE: C) hit an all-time low of $0.97 at one point Thursday.
This hurts, there’s no doubt. And as we watch stocks fall to new lows day after day, it seems as if the market's slide will never end.
But while these sorts of apocalyptic figures make for exciting minute-by-minute updates on CNBC, they're not much use to you. They don't say anything about how stocks will behave in the future, which is what actually matters when you're deciding how to invest today. That's one reason investors always ask, "Is this the market bottom?"
Well, is it? Opinions vary. Nouriel Roubini, one of the few economists who predicted this crisis, wrote a January piece masterfully titled "The Latest Bear Market Sucker's Rally Is Losing Its Steam as an Onslaught of Awful Macro and Earnings News Takes Its Toll," in which he predicted the S&P could fall as low as 500 -- more than 25% below where it stands right now.
But last fall, in a New York Times op-ed piece, superinvestor Warren Buffett compared today's overwhelming pessimism to 1932, 1942, and the 1980s -- all fantastic times to buy stocks. Lately he's been adding shares of Burlington Northern (NYSE: BNI) and Ingersoll-Rand (NYSE: IR). Although Buffett doesn't try to time market bottoms, his urge to "be fearful when others are greedy, and be greedy when others are fearful" has helped him to make eerily prescient moves in the past.
When he says it's time to buy, it pays to listen.
One approach to answering the question My colleague Morgan Housel wrote an excellent piece examining historical market valuations. The one-sentence summary is as follows: When things get scary, investors frantically sell stocks down to incredibly low multiples.
Using historical data from Standard & Poor's, my research shows that the average of the lowest quarter-end price-to-earnings ratio (P/E) during all recessions since 1937 is 11.7. With the S&P trading at 11.9 times 2009 earnings, we've about hit that point.
However, looking at some of the lowest recession P/Es since 1937 also shows that if corporate earnings stay depressed, stocks could fall even further:
Recession
Lowest End-of-Quarter P/E
Today
11.9*
January 1980 - July 1980
6.7
November 1973 - March 1975
7.0
November 1948 - October 1949
5.9
Sources: National Bureau of Economic Research, Standard & Poor's, and Birinyi Associates. *Based on 2009 earnings estimates.
Applying these multiples to the S&P today means that the bottom could be anywhere between here and another 50% decline.
But what if the economy gets really bad?
Another Great Depression? With comparisons between the Great Depression and the Great Wipeout of 2008 growing ever louder, a simple worst-case approach is to look at how Depression investors fared.
According to the National Bureau of Economic Research, we're 14 months into this recession, and thus far, the S&P 500 index has lost 52%. Fourteen months into the Great Depression (January 1931), investors were down only 46%.
But while the stock market was hit harder in 2008, economic conditions were far uglier in 1930. Back then GDP had fallen 8.6%, unemployment reached 8.9%, and deflation was running 6%. Our 6.2% GDP decline, 8.1% unemployment rate, and likely deflation almost appear mild compared to 1930.
So relative to 1931, if stocks today have been hit harder on less-dire economic news, does that mean we've already seen the bottom?
Not necessarily.
Even though stocks had already fallen dramatically since the October 1929 market crash, investors who bought in January 1931 were down another 71% by May 1932. This goes to show how difficult it is to time market bottoms, and it demonstrates that even though stocks have fallen considerably, they could still fall even more.
That's actually not so bad … The good news is that it doesn't much matter whether you accurately time the bottom.
See, conventional wisdom holds that the Depression was a bad time to be an investor. Excitable market commentators like to cite the statistic that it took until 1954 -- 25 years! -- for the market to return to its 1929 levels.
That figure is true, but misleading. It assumes that investors put all of their money into stocks just before the market crash, stopped purchasing stocks thereafter, and never collected dividends.
Remember, we're now 14 months into this recession -- not at its starting point. So for the sake of symmetry, let's ask how long it actually took new money invested 14 months into the Depression (January 1931) to break even. According to number-crunching I've done using rare Ibbotson Associates data, the answer is less than five years. And an investor who continued to purchase stocks on a monthly basis would have broken even in little more than two years.
Take a look at how investors who bought stocks in 1931 fared after completely missing the bottom during the worst economic period of the 20th century:
Returns
T-Bill Investment
Stock Investment
1-Year
2%
(43%)
3-Year
4%
(23%)
5-Year
5%
12%
Through Depression (June 1938)
6%
10%
Through October 1954
18%
678%
Sources: Ibbotson Associates, National Bureau of Economic Research, and author's calculations.
According to NBER, the second 1930s recession ended in June 1938. Assumes reinvested dividends.
The Foolish bottom line So, then, how can we use this data? There are three applications for investing today:
1. It's very difficult to time the market bottom. Just because stocks have fallen and valuations are low, does not mean they can't fall further. So if you're going to need the money in the next five years, there are safer places for it than stocks.
2. Market timing isn't necessary to achieve great returns. The Depression was a terrible time to be a speculator. But long-term investors who continued buying stocks did just fine.
3. Stick to a proven stock-buying strategy. As I mentioned before, Warren Buffett built his more than $50 billion fortune in large part by purchasing stable businesses in strong competitive positions -- at discount prices. That's what led him to American Express (NYSE: AXP) in the 1960s, Washington Post in the early 1970s, and Coca-Cola (NYSE: KO) soon after the Black Monday 1987 crash. He didn't try to time markets; he just bought stocks when they were cheap.
And he says they're cheap again today.
If Buffett's investing approach makes sense to you, now's a great time to begin bargain-hunting.
Ilan Moscovitz is greedy with chocolate cake and fearful of heights. He doesn't own shares of any companies mentioned in this article. The Motley Fool owns shares of American Express. Coca-Cola and American Express are Inside Value recommendations. The Fool's disclosure policy is overly aphoristic.
Read/Post Comments (19)
http://www.fool.com/investing/value/2009/03/06/is-this-the-market-bottom.aspx
Why It's Taking So Long To Fix the Economy
Why It's Taking So Long To Fix the Economy
February 27, 2009 02:49 PM ET Rick Newman Permanent Link Print
Nobody wants to listen to Ben Bernanke - even though the Federal Reserve Chairman has been a pretty effective soothsayer.
Last fall, he famously predicted catastrophe if the government didn’t step in to help stabilize panicky financial markets. That was on the mark: Even with more than $2 trillion worth of government intervention since then, the economy is in tatters.
Bernanke has said we’re in a “severe” recession, which has now been borne out by the biggest decline in GDP since the punishing 1982 downturn. And now, he says that a recovery depends on whether a series of unproven government moves works or not. If we're lucky, things might start to get better by 2010.
[See how to tell when the economy’s getting better.]
We don’t want to believe it. That’s too long. We don’t want to wait till next year. We want things to get better NOW.
Stock market investors are the worst offenders. They’re continually looking for signs that a quick fix is right around the corner. Then they grow despondent when it doesn’t materialize, madly selling and sending the markets into yet another nosedive.
Homeowners are guilty, too. Sellers in many neighborhoods are still clinging to unrealistically high prices, sure that a housing rebound is coming soon. Workers who still have jobs refuse to prepare for a rainy day, hoping they won’t be among the 1 or 2 million Americans still likely to lose their jobs this year. Most of us, in one way or another, want to believe it can’t really get much worse.
[See 5 pieces missing from Obama’s stimulus plan.]
Sorry to say, it can. Here’s why it’s taking so long to resolve the biggest problems our economy faces:
The housing bust. We know now that we’ve been living through a classic bubble in the housing market, where frenzied buyers sensing a rush bid prices far higher than they should have gone. So the market crashed. And now everybody wants to know when home prices will stop falling.
There have been half a dozen government programs to stem foreclosures and help stabilize the housing market. But too much help would falsely subsidize prices once again, and prolong the problem. For the most part, bubbles need to work themselves out.
After the tech bubble burst in 1999, technology stocks took a beating similar to today’s housing market. The tech-heavy Nasdaq stock index sank for about two-and-a-half years, bottoming out in 2002. But it didn’t come roaring back to where it had been. Instead, it began a steady climb out of the basement, aided by Alan Greenspan’s interest rate cuts. By 2007, many of the tech shares that survived had regained ground lost during the bust. But it took nearly a decade.
[See why the feds rescue banks but not homeowners.]
Home prices peaked in 2006, so we’re more than two years into the bust. It’s plausible that the slide in prices will end later this year or in 2010. But keep in mind that tech stocks recovered during a booming economy – which obviously we don’t have right now. In some areas it could easily take another five years for housing markets to return to normal.
Broken banks. The markets rise and fall on every whisper out of Washington about the direction of President Obama’s bank-bailout plan. But whatever the plan, it will take years before the balance sheets of teetering titans like Citigroup and Bank of America are healthy again. An effective plan might generate confidence that the feds are on the case, but there is no conceiveable plan that will repair the most troubled banks anytime soon.
[See why bank nationalization is so scary.]
Part of their problem is a mountain of losses stemming from mortgage foreclosures, which helped make the last quarter of 2008 one of the worst ever for the nation’s banks. But bigger losses are coming, as the recession deepens, more workers lose their jobs, and default rates on other kinds of consumer loans spike. Then there are those trillions of dollars worth of mortgage-baked securities and other assets that nobody has wanted to buy for almost a year. They’re worth something, but nobody knows what, and until that starts to become clearer, buyers will sit and wait.
The government has bailed out and wound down many banks before – and it’s usually a muddle-through affair that lasts a long time. That’s because failing banks are usually saddled with assets that have plunged in value and are hard to sell. After the Resolution Trust Corporation took over several thousand S&Ls in the 1980s, it took more than five years to sell much of the real estate and other assets that brought these banks down. It could take just as long to unwind the huge portfolios of troubled securities at Citigroup and other banks.
[See what Citigroup and AIG will look like in a year.]
If there’s any good news, it’s that the working parts of these banks will continue to function while the broken parts get dismantled. That’s what the federal interventions are supposed to do. In other words, they might resume something that looks like normal lending before all the problems are solved.
Other failing companies. If not for federal relief, other staggering companies like AIG, General Motors, and Chrysler, would be well into bankruptcy proceedings, and possibly headed toward liquidation. Federal aid has prevented that – but even so, the transformation of those companies is starting to look similar to a Chapter 11 reorganization.
AIG, for instance, is selling off many of its assets and lines of business, to raise cash it can use to pay back government loans. GM is killing off divisions, slashing its workforce, and making draconian deals with unions. To get some idea of how long this might go on, consider the bankruptcy of United Airlines, which lasted more than three years. And that was under court-ordered deadlines. GM has predicted that even if it gets all the money it’s asking for from the government, it won’t break even until 2011 or have significant free cash flow until 2014. AIG may have to wait nearly five years just for its vast portfolio of credit-default swaps, one key source of its problems, to expire. So this sorry show will be airing for a long time. If you want to switch it off for awhile, that might be a good idea.
[See 9 bailout surprises from GM and Chrysler.]
Layoffs. As consumers spend less and the economy contracts, companies cut jobs. And they won’t add them back until they’re damn sure the economy is improving. The Fed and many others expect unemployment to rise to nearly 9 percent this year, from 7.6 percent now. That may start to come down in 2010 – but like everything else, slowly.
[See why the media is hyperventilating over unemployment.]
Plunging confidence. Americans are worth a lot less then they were a couple years ago. The Federal Reserve said recently that since the recession started in December 2007, the aggregate net worth of Americans has fallen by 23 percent, thanks largely to declines in home values and investment portfolios. And that was only through last October. Just about everything has gotten worse since then. So Americans’ feel poorer, and they’re a lot more worried about their jobs, too. No surprise consumers have sharply cut back spending – which makes companies cut even more jobs.
Americans will start to feel a little better when the biggest problems stop getting worse, layoffs subside, and there's less worry about getting or keeping a job. And when will that be? Not soon enough for most of us. But if you take a longer view, the recovery might not seem so far off.
http://www.usnews.com/blogs/flowchart/2009/2/27/why-its-taking-so-long-to-fix-the-economy.html
February 27, 2009 02:49 PM ET Rick Newman Permanent Link Print
Nobody wants to listen to Ben Bernanke - even though the Federal Reserve Chairman has been a pretty effective soothsayer.
Last fall, he famously predicted catastrophe if the government didn’t step in to help stabilize panicky financial markets. That was on the mark: Even with more than $2 trillion worth of government intervention since then, the economy is in tatters.
Bernanke has said we’re in a “severe” recession, which has now been borne out by the biggest decline in GDP since the punishing 1982 downturn. And now, he says that a recovery depends on whether a series of unproven government moves works or not. If we're lucky, things might start to get better by 2010.
[See how to tell when the economy’s getting better.]
We don’t want to believe it. That’s too long. We don’t want to wait till next year. We want things to get better NOW.
Stock market investors are the worst offenders. They’re continually looking for signs that a quick fix is right around the corner. Then they grow despondent when it doesn’t materialize, madly selling and sending the markets into yet another nosedive.
Homeowners are guilty, too. Sellers in many neighborhoods are still clinging to unrealistically high prices, sure that a housing rebound is coming soon. Workers who still have jobs refuse to prepare for a rainy day, hoping they won’t be among the 1 or 2 million Americans still likely to lose their jobs this year. Most of us, in one way or another, want to believe it can’t really get much worse.
[See 5 pieces missing from Obama’s stimulus plan.]
Sorry to say, it can. Here’s why it’s taking so long to resolve the biggest problems our economy faces:
The housing bust. We know now that we’ve been living through a classic bubble in the housing market, where frenzied buyers sensing a rush bid prices far higher than they should have gone. So the market crashed. And now everybody wants to know when home prices will stop falling.
There have been half a dozen government programs to stem foreclosures and help stabilize the housing market. But too much help would falsely subsidize prices once again, and prolong the problem. For the most part, bubbles need to work themselves out.
After the tech bubble burst in 1999, technology stocks took a beating similar to today’s housing market. The tech-heavy Nasdaq stock index sank for about two-and-a-half years, bottoming out in 2002. But it didn’t come roaring back to where it had been. Instead, it began a steady climb out of the basement, aided by Alan Greenspan’s interest rate cuts. By 2007, many of the tech shares that survived had regained ground lost during the bust. But it took nearly a decade.
[See why the feds rescue banks but not homeowners.]
Home prices peaked in 2006, so we’re more than two years into the bust. It’s plausible that the slide in prices will end later this year or in 2010. But keep in mind that tech stocks recovered during a booming economy – which obviously we don’t have right now. In some areas it could easily take another five years for housing markets to return to normal.
Broken banks. The markets rise and fall on every whisper out of Washington about the direction of President Obama’s bank-bailout plan. But whatever the plan, it will take years before the balance sheets of teetering titans like Citigroup and Bank of America are healthy again. An effective plan might generate confidence that the feds are on the case, but there is no conceiveable plan that will repair the most troubled banks anytime soon.
[See why bank nationalization is so scary.]
Part of their problem is a mountain of losses stemming from mortgage foreclosures, which helped make the last quarter of 2008 one of the worst ever for the nation’s banks. But bigger losses are coming, as the recession deepens, more workers lose their jobs, and default rates on other kinds of consumer loans spike. Then there are those trillions of dollars worth of mortgage-baked securities and other assets that nobody has wanted to buy for almost a year. They’re worth something, but nobody knows what, and until that starts to become clearer, buyers will sit and wait.
The government has bailed out and wound down many banks before – and it’s usually a muddle-through affair that lasts a long time. That’s because failing banks are usually saddled with assets that have plunged in value and are hard to sell. After the Resolution Trust Corporation took over several thousand S&Ls in the 1980s, it took more than five years to sell much of the real estate and other assets that brought these banks down. It could take just as long to unwind the huge portfolios of troubled securities at Citigroup and other banks.
[See what Citigroup and AIG will look like in a year.]
If there’s any good news, it’s that the working parts of these banks will continue to function while the broken parts get dismantled. That’s what the federal interventions are supposed to do. In other words, they might resume something that looks like normal lending before all the problems are solved.
Other failing companies. If not for federal relief, other staggering companies like AIG, General Motors, and Chrysler, would be well into bankruptcy proceedings, and possibly headed toward liquidation. Federal aid has prevented that – but even so, the transformation of those companies is starting to look similar to a Chapter 11 reorganization.
AIG, for instance, is selling off many of its assets and lines of business, to raise cash it can use to pay back government loans. GM is killing off divisions, slashing its workforce, and making draconian deals with unions. To get some idea of how long this might go on, consider the bankruptcy of United Airlines, which lasted more than three years. And that was under court-ordered deadlines. GM has predicted that even if it gets all the money it’s asking for from the government, it won’t break even until 2011 or have significant free cash flow until 2014. AIG may have to wait nearly five years just for its vast portfolio of credit-default swaps, one key source of its problems, to expire. So this sorry show will be airing for a long time. If you want to switch it off for awhile, that might be a good idea.
[See 9 bailout surprises from GM and Chrysler.]
Layoffs. As consumers spend less and the economy contracts, companies cut jobs. And they won’t add them back until they’re damn sure the economy is improving. The Fed and many others expect unemployment to rise to nearly 9 percent this year, from 7.6 percent now. That may start to come down in 2010 – but like everything else, slowly.
[See why the media is hyperventilating over unemployment.]
Plunging confidence. Americans are worth a lot less then they were a couple years ago. The Federal Reserve said recently that since the recession started in December 2007, the aggregate net worth of Americans has fallen by 23 percent, thanks largely to declines in home values and investment portfolios. And that was only through last October. Just about everything has gotten worse since then. So Americans’ feel poorer, and they’re a lot more worried about their jobs, too. No surprise consumers have sharply cut back spending – which makes companies cut even more jobs.
Americans will start to feel a little better when the biggest problems stop getting worse, layoffs subside, and there's less worry about getting or keeping a job. And when will that be? Not soon enough for most of us. But if you take a longer view, the recovery might not seem so far off.
http://www.usnews.com/blogs/flowchart/2009/2/27/why-its-taking-so-long-to-fix-the-economy.html
Five Things That Could Revive the Markets
U.S.News & World Report
Five Things That Could Revive the Markets
Thursday March 5, 6:22 pm ET By Rick Newman
Can stock prices fall forever?
It feels that way. Each time we've hit an unthinkable low over the last few months, investors have whispered to each other that it can't possibly get any worse. Then it gets worse. Overall, stocks are down about 25 percent just this year, and about 55 percent since they peaked in October 2007. By some measures, it's the worst wipeout since (you guessed it) the Great Depression.
[See why it's taking so long to fix the economy.]
But stocks won't keep falling forever, and some analysts are now beginning to mention the "B word" - as in bottom. Hardly anybody expects a dramatic rebound. But stocks are so beaten down that any good news would be a welcome surprise that might tempt investors to buy. A few such possibilities:
A full bailout for General Motors.
GM has finally acknowledged the obvious: Without billions more in federal aid, it will have no choice but to file for bankruptcy. This terrifies the markets because a GM bankruptcy would send tremors far beyond Detroit and add many thousands more Americans to the unemployment rolls. But the federal government probably won't let that happen.
The feds have already made a $13.4 billion down payment on a GM bailout, and GM is asking for up to $25 billion more. That's a total of almost $45 billion - the same amount the feds have spent so far to keep Citigroup in business, and Bank of America too. And that sum is barely one-fourth of what the government has spent to keep insurance giant AIG afloat. Would the Obama administration really let an industrial giant fail while salvaging a bunch of wayward financial firms? Seems unlikely. We should know by March 31, when a federal automotive task force is supposed to rule on the "viability plans" - essentially, pleas for more money - from GM and Chrysler.
[See 9 bailout surprises from GM and Chrysler.]
The bank "stress tests" provide some clarity.
They may not produce a lot of good news, since many large banks are believed to be technically insolvent. But the government-administered tests, meant to assess how the nation's biggest banks will fare as economic conditions worsen, could help clarify which banks are likely to need more help and which can muddle through on their own. The markets hate bad news, but they hate uncertainty even more. If the stress tests help define how much worse bank losses could get, that will be an improvement on the murky outlook we have now. The Treasury Dept. should release some of the data within a month or so.
[See 7 other stress tests we ought to run.]
The Obama bailouts start to take root.
Critics have had a field day blowing holes in the government's efforts to fix the economy: The bank rescue plan amounts to nationalization. The stimulus plan is too small. The stimulus plan is too big. The mortgage-relief plan helps the wrong people. The consumer-lending plan is too complicated. All of it is coming too late.
The pessimism industry is probably right about some of this. Lost amidst the grumbling, however, is the fact the government is taking extraordinary steps to boost the economy, and it is almost certain to have some effect. Anybody who's looking for a silver-bullet fix will be disappointed. But by later this year, all of that federal spending may very well help stabilize the banks, keep some homeowners from defaulting, and save jobs. It would be extraordinary if it didn't.
[See why the markets hate the idea of bank nationalization.]
Some good news surfaces.
Actually, there's been a little. Amazon's stock, for instance, has been rising as skittish consumers turn to online retailing. Wal-Mart recently beat expectations and raised its dividend. And all those companies that are shedding jobs and cutting costs are getting healthier. The layoffs hurt, but as companies get more efficient they're setting the stage for growth down the road. If we could get through a week without disturbing news from market-movers like GM, Citi, AIG, Bank of America and General Electric, smaller signs of recovery might get more attention.
[See how Citi and AIG will look in a year.]
The market actually finds a bottom.
It has to be getting closer. And some money advisors are starting to say it's time to buy. "We should be getting close to the bottom, and we think we are," Jeremy Zirin, senior equity strategist for UBS, told investors in a recent conference call. He believes stocks are 20 to 25 percent undervalued, with a market rebound possible as the bad news moderates in the second half of 2009 and various federal programs start to kick in. That doesn't mean another bull market is around the corner. But the gloom might start to lift. That alone might feel like a rally.
Dow Hits New Lows: What Should Investors Do Now?
Dow Hits New Lows: What Should Investors Do Now?
Posted Mar 05, 2009 01:37pm EST
by Tech Ticker in Investing, Recession
As if the past 15 months haven't been scary enough, the Dow was plunging to new lows Thursday afternoon.
So what should already devastated investors do now?
Liz Ann Sonders, chief investment strategist for Charles Schwab, says now is not the time to hoard all your money in cash and abandon stocks altogether, as tempting as it may be. Clearly that's not a viable long-term investment strategy.
Instead, Sonders advises:
Get a plan, it's never too late to start one or get your "old" one back on track.
If you're going to panic, do so "intelligently" by making incremental portfolio changes to reflect your tolerance for risk and time horizon.
Don't try to bottom pick the market.
Don't forget about savings when the bull market reappears. Such advice may seem self-evident but it's worth repeating (and hearing) again in what remains a very scary market that has paralyzed many investors.
http://finance.yahoo.com/tech-ticker/article/201317/Dow-Hits-New-Lows-What-Should-Investors-Do-Now?tickers=%5Edji,%5Egspc%20,SPY,DIA,XLF,QQQQ
-----
Transcript of video:
There's no "one size fits all" in financial planning.
Be honest about time horizon, risk tolerance.
Investors recovering from market devastation.
Thawing of investor paralysis
Large cash positions not a long term strategy.
Panic intelligently. Panic slowly.
Thoughtfully analysizng investment adjustment.
How do you panic intelligenty:
Thoughfully analysing investment adjustment
One option: Make adjustments to new allocations,
Transition into a new investment strategy
Bottom calling isn't a smart strategy
Select investment strategies for the long haul
What should investors do now?
Long term expected returns for asset classes.
Better returns may come based on past, lower returns.
Don't abandon equities altogether.
Thawing of investor paralysis
Investors recovering from market devastation
Investors fled to cash in December.
Then drew down cash for fixed income in January
Investors slowly embracing more risk
February data showed movement into defensive stocks
Get an investment plan
It's never too late
And don't forget savings
Januray US Savings rate surged 5%, levels last seen in 93
And don't forget savings - even in a bull market.
Posted Mar 05, 2009 01:37pm EST
by Tech Ticker in Investing, Recession
As if the past 15 months haven't been scary enough, the Dow was plunging to new lows Thursday afternoon.
So what should already devastated investors do now?
Liz Ann Sonders, chief investment strategist for Charles Schwab, says now is not the time to hoard all your money in cash and abandon stocks altogether, as tempting as it may be. Clearly that's not a viable long-term investment strategy.
Instead, Sonders advises:
Get a plan, it's never too late to start one or get your "old" one back on track.
If you're going to panic, do so "intelligently" by making incremental portfolio changes to reflect your tolerance for risk and time horizon.
Don't try to bottom pick the market.
Don't forget about savings when the bull market reappears. Such advice may seem self-evident but it's worth repeating (and hearing) again in what remains a very scary market that has paralyzed many investors.
http://finance.yahoo.com/tech-ticker/article/201317/Dow-Hits-New-Lows-What-Should-Investors-Do-Now?tickers=%5Edji,%5Egspc%20,SPY,DIA,XLF,QQQQ
-----
Transcript of video:
There's no "one size fits all" in financial planning.
Be honest about time horizon, risk tolerance.
Investors recovering from market devastation.
Thawing of investor paralysis
Large cash positions not a long term strategy.
Panic intelligently. Panic slowly.
Thoughtfully analysizng investment adjustment.
How do you panic intelligenty:
Thoughfully analysing investment adjustment
One option: Make adjustments to new allocations,
Transition into a new investment strategy
Bottom calling isn't a smart strategy
Select investment strategies for the long haul
What should investors do now?
Long term expected returns for asset classes.
Better returns may come based on past, lower returns.
Don't abandon equities altogether.
Thawing of investor paralysis
Investors recovering from market devastation
Investors fled to cash in December.
Then drew down cash for fixed income in January
Investors slowly embracing more risk
February data showed movement into defensive stocks
Get an investment plan
It's never too late
And don't forget savings
Januray US Savings rate surged 5%, levels last seen in 93
And don't forget savings - even in a bull market.
Nearly 50% of all US stocks trading for less than $5 per share
$11 Trillion Wipeout: Wall Street's Year-and-a-Half of Dangerous Living
Posted Mar 06, 2009 05:03pm EST
by Aaron Task in Investing, Recession, Banking
In a fitting end to another desultory week on Wall Street, the stock market did its best to frustrate everyone Friday; first, it failed to sustain an early bounce on not-worse-than-feared jobs numbers, then avoided the cathartic "whoosh" down many were hoping for after the initial rally faded.
After trading as low as 6470, the Dow rebounded to end the day up 32.50 points to 6470. The S&P also managed to eek out a gain to 683 after trading below 667 intraday while the Nasdaq pared much of its early loss before closing down a hair at 1294.
It's hard to remember what transpired in just the past week, during which the Dow and S&P hit their lowest levels since 1997 and 1996, respectively. But it's almost impossible for most of us to remember (much less comprehend) what's occurred in the past year, or since the peak in October 2007.
So here's some (unfriendly) reminders:
The current decline is worse than the 1929-1932 rout.
Based on the Wilshire 5000 Index, the market-cap of U.S. stocks is down $11 trillion since the Oct. 2007 peak, Marketwatch says.
U.S. stocks have lost $1.6 trillion in market-cap since Barack Obama's inauguration, Bloomberg reports.
Nearly 50% of all stocks in the Wilshire 5000, the broadest index of U.S. equities, are trading for less than $5 per share, and 37% are under $3.
As devastating as those statistics are, they fail to capture the psychological damage that's been done by the fall of once hallowed institutions such as Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, Fannie Mae and Freddie Mac, as well as those still hanging by a thread like Citigroup and GM.
Still, there's a case to be made that stocks are now actually "cheap" on a long-term cyclically adjusted P/E basis. Yes, it's probably is too late to dump and run, and the market is certainly due for a short-term rally of some substance. But that doesn't mean major averages aren't ultimately going still lower before the worst bear market of many generations runs it course.
Friday, 6 March 2009
Printing money: an easy guide to quantitative easing
Printing money: an easy guide to quantitative easing
The 'unconventional tools' that the Bank of England will use to fight the financial crisis.
Last Updated: 9:29AM GMT 06 Mar 2009
Interest rates are now as close as they can get to zero without causing malfunctions in the financial system.
In this new world, with the Bank of England shorn of its main tool for influencing the economy, the policymakers in Threadneedle Street have to turn to unconventional tools.
Some have been tried before with differing degrees of success. But whatever the tool, the objective is clear: to keep Britain from dipping any deeper into recession and becoming trapped in a debt-driven deflation and depression, as the US was in the 1930s.
With no room to cut rates, the Bank must instead turn to direct means of influencing the money supply. This is important. The nominal growth rate of an economy can be no greater than the speed at which money is growing, and flowing around the economy. This famous economic equation – the quantity theory of money – lies behind the Bank's decision to create £150bn of money.
Whether it will succeed is another question, but Thursday's announcement means it has thrown its weight behind this new policy of quantitative easing with more weight and vigour than any other central bank in history.
THE BANK OF ENGLAND'S EMERGENCY WEAPONS
Liquidity support
How does it work? The Bank lends out money in return for collateral – usually government or company debt – to instill confidence in the market and provide cash with which to trade. It has been doing this for over a year through its Special Liquidity Scheme and its successor.
Pros The system does not meddle directly with monetary policy – so does not interfere with interest rate decisions – and it directly ensures that banks' balance sheets are kept above water.
Cons Although it addresses liquidity problems –
ie. when financial institutions don't have enough cash to hand – it does not solve the credit crunch, in which banks are unwilling to lend cash at all.
Does it work? To an extent. It has ensured strains on the financial markets have eased in comparison with the early days of the crisis, but the amount banks are willing to lend remains extremely low.
Buying company debt
How does it work? The Bank buys, rather than lends against, the assets of private investors, be they pension funds, insurance groups or banks. The assets are most likely commercial paper (short-term company debt) and corporate bonds. It pays for the money from a pot of cash raised by the Government through issuing gilts – in other words without increasing the amount of cash in the system. This is what the Bank has attempted to do through the Asset Purchase Facility, and is what the Federal Reserve is doing in the US.
Pros If successful, it gets to the heart of the matter, reducing the cost of credit for companies and lubricating the capital markets for companies. Because the purchases are funded by the Government it is not particularly inflationary.
Cons It has proved very difficult for the Bank to get hold of the right type of commercial debt (in other words at a good price, and a type that won't default). Pay too little and you will leave the taxpayer facing a big bill in the coming years.
Does it work? To an extent. The Fed has bought billions of dollars worth of corporate debt, but with little impact on commercial bond spreads.
Buying gilts (Government debt)
How does it work? The Bank buys government debt off investors and banks rather than corporate debt. This is something the Bank had authorised by the Treasury yesterday. The aim is to bring longer-term interest rates down, ensuring that companies and lenders cut their own rates.
Pros: Gilts are gilt-edged, and so have very little chance of defaulting (and if the UK Government has defaulted that is a whole other kettle of fish to worry about) and there are plenty of them around, so are easy to buy.
Cons: It does not make any direct difference to companies' cost of borrowing, instead pushing down government interest rates: nice, but not the heart of the matter.
Does it work? Yes, if by that you mean getting long-term interest rates down. The Japanese did it in the past, but it has not yet been tried by the Fed.
Creating money to buy assets
How does it work? The Bank buys assets off private investors but funds those purchases by creating money (literally, with the push of a button; metaphorically, with printing presses). This is what the Government has now approved. The aim is to increase the amount of money in the economy, which will in turn increase either economic growth, inflation, or a combination of the two.
Pros: The UK faces a possible spate of debt deflation, and there are few more powerful weapons for a central bank to use than its printing presses. It can also aim to kill two birds with one stone and cut the cost of borrowing for companies by making cash more plentiful. With interest rates at zero, there are few other more powerful tools the Bank can employ.
Cons: In normal times, such a policy is potentially highly inflationary. There is every chance the Bank is unconsciously laying the ground for an uncontrollable wave of inflation in the future. Deflation is the big enemy at present but the threat may be overblown, and printing money – quantitative easing – will create a mess of unparalleled proportions to clear up afterwards.
Does it work? Yes and no. The only other time it has been used is by the Bank of Japan. As Japan is still trapped in stagnation, many say it failed. However, there is evidence the Japanese experience would have been worse had it not taken these measures. Some also argue that the BoJ was too slow to start quantitative easing.
The helicopter drop
How does it work? The bank prints money, piles it inside a helicopter, takes to the skies and scatters the cash across the nation. Suddenly, every family is richer – provided they get to the cash in time and have sharp enough elbows. This technically amounts to a tax rebate for everyone funded by money creation, and was christened a "helicopter drop" of money by economist Milton Friedman. In his eyes it was the most dramatic way for the central bank to get money out into the streets.
Pros: This instantly gets money into people's hands and, with any luck, gets them spending it in the high street. Those who don't spend can use it to pay off debt, which isn't such a bad thing either.
Cons It is so radical a policy it might scare away international investors from the UK. It displays a disregard for controlling inflation that could also send sterling plunging. It will summon up even more vivid comparisons with Zimbabwe and Weimar Germany.
Does it work? It has never been properly tried before. The Japanese and Koreans have experimented with issuing vouchers to their citizens in the hope of encouraging them to spend but these were – importantly – not funded with created money. Fed Chairman Ben Bernanke is convinced, however, that in desperandum it would pump up a deflated economy.
http://www.telegraph.co.uk/finance/financetopics/recession/4944762/Printing-money-an-easy-guide-to-quantitative-easing.html
The 'unconventional tools' that the Bank of England will use to fight the financial crisis.
Last Updated: 9:29AM GMT 06 Mar 2009
Interest rates are now as close as they can get to zero without causing malfunctions in the financial system.
In this new world, with the Bank of England shorn of its main tool for influencing the economy, the policymakers in Threadneedle Street have to turn to unconventional tools.
Some have been tried before with differing degrees of success. But whatever the tool, the objective is clear: to keep Britain from dipping any deeper into recession and becoming trapped in a debt-driven deflation and depression, as the US was in the 1930s.
With no room to cut rates, the Bank must instead turn to direct means of influencing the money supply. This is important. The nominal growth rate of an economy can be no greater than the speed at which money is growing, and flowing around the economy. This famous economic equation – the quantity theory of money – lies behind the Bank's decision to create £150bn of money.
Whether it will succeed is another question, but Thursday's announcement means it has thrown its weight behind this new policy of quantitative easing with more weight and vigour than any other central bank in history.
THE BANK OF ENGLAND'S EMERGENCY WEAPONS
Liquidity support
How does it work? The Bank lends out money in return for collateral – usually government or company debt – to instill confidence in the market and provide cash with which to trade. It has been doing this for over a year through its Special Liquidity Scheme and its successor.
Pros The system does not meddle directly with monetary policy – so does not interfere with interest rate decisions – and it directly ensures that banks' balance sheets are kept above water.
Cons Although it addresses liquidity problems –
ie. when financial institutions don't have enough cash to hand – it does not solve the credit crunch, in which banks are unwilling to lend cash at all.
Does it work? To an extent. It has ensured strains on the financial markets have eased in comparison with the early days of the crisis, but the amount banks are willing to lend remains extremely low.
Buying company debt
How does it work? The Bank buys, rather than lends against, the assets of private investors, be they pension funds, insurance groups or banks. The assets are most likely commercial paper (short-term company debt) and corporate bonds. It pays for the money from a pot of cash raised by the Government through issuing gilts – in other words without increasing the amount of cash in the system. This is what the Bank has attempted to do through the Asset Purchase Facility, and is what the Federal Reserve is doing in the US.
Pros If successful, it gets to the heart of the matter, reducing the cost of credit for companies and lubricating the capital markets for companies. Because the purchases are funded by the Government it is not particularly inflationary.
Cons It has proved very difficult for the Bank to get hold of the right type of commercial debt (in other words at a good price, and a type that won't default). Pay too little and you will leave the taxpayer facing a big bill in the coming years.
Does it work? To an extent. The Fed has bought billions of dollars worth of corporate debt, but with little impact on commercial bond spreads.
Buying gilts (Government debt)
How does it work? The Bank buys government debt off investors and banks rather than corporate debt. This is something the Bank had authorised by the Treasury yesterday. The aim is to bring longer-term interest rates down, ensuring that companies and lenders cut their own rates.
Pros: Gilts are gilt-edged, and so have very little chance of defaulting (and if the UK Government has defaulted that is a whole other kettle of fish to worry about) and there are plenty of them around, so are easy to buy.
Cons: It does not make any direct difference to companies' cost of borrowing, instead pushing down government interest rates: nice, but not the heart of the matter.
Does it work? Yes, if by that you mean getting long-term interest rates down. The Japanese did it in the past, but it has not yet been tried by the Fed.
Creating money to buy assets
How does it work? The Bank buys assets off private investors but funds those purchases by creating money (literally, with the push of a button; metaphorically, with printing presses). This is what the Government has now approved. The aim is to increase the amount of money in the economy, which will in turn increase either economic growth, inflation, or a combination of the two.
Pros: The UK faces a possible spate of debt deflation, and there are few more powerful weapons for a central bank to use than its printing presses. It can also aim to kill two birds with one stone and cut the cost of borrowing for companies by making cash more plentiful. With interest rates at zero, there are few other more powerful tools the Bank can employ.
Cons: In normal times, such a policy is potentially highly inflationary. There is every chance the Bank is unconsciously laying the ground for an uncontrollable wave of inflation in the future. Deflation is the big enemy at present but the threat may be overblown, and printing money – quantitative easing – will create a mess of unparalleled proportions to clear up afterwards.
Does it work? Yes and no. The only other time it has been used is by the Bank of Japan. As Japan is still trapped in stagnation, many say it failed. However, there is evidence the Japanese experience would have been worse had it not taken these measures. Some also argue that the BoJ was too slow to start quantitative easing.
The helicopter drop
How does it work? The bank prints money, piles it inside a helicopter, takes to the skies and scatters the cash across the nation. Suddenly, every family is richer – provided they get to the cash in time and have sharp enough elbows. This technically amounts to a tax rebate for everyone funded by money creation, and was christened a "helicopter drop" of money by economist Milton Friedman. In his eyes it was the most dramatic way for the central bank to get money out into the streets.
Pros: This instantly gets money into people's hands and, with any luck, gets them spending it in the high street. Those who don't spend can use it to pay off debt, which isn't such a bad thing either.
Cons It is so radical a policy it might scare away international investors from the UK. It displays a disregard for controlling inflation that could also send sterling plunging. It will summon up even more vivid comparisons with Zimbabwe and Weimar Germany.
Does it work? It has never been properly tried before. The Japanese and Koreans have experimented with issuing vouchers to their citizens in the hope of encouraging them to spend but these were – importantly – not funded with created money. Fed Chairman Ben Bernanke is convinced, however, that in desperandum it would pump up a deflated economy.
http://www.telegraph.co.uk/finance/financetopics/recession/4944762/Printing-money-an-easy-guide-to-quantitative-easing.html
Report: 1 in 5 Mortgages Are Underwater
Report: 1 in 5 Mortgages Are Underwater
By Mara Der Hovanesian
Thu Mar 5, 8:08 am
It's bad enough when the value of your house is sinking like a lead balloon. But for a growing number of Americans, their woes are compounded by owing more on the mortgage than what that house is now worth. It's called having negative equity -- the opposite of what happens when a home appreciates and a homeowner builds positive equity above and beyond his initial investment.
In a new report released Mar. 4, more than 8.3 million U.S. mortgages, or 20% of all mortgaged properties, were saddled with negative equity at the end of 2008, according to LoanPerformance, a company that tracks mortgage data. That's up two percentage points, from 7.6 million borrowers, from the end of September 2008. California led the nation with a monthly average of 43,000 new negative-equity borrowers over the three-month period, followed by Texas (16,000), Nevada (15,000), Florida (14,000), and Virginia (14,000).
"Given that we've never seen house price declines of this magnitude, this is probably one of the highest negative-equity levels we've ever seen," said Mark Fleming, chief economist for First American CoreLogic, LoanPerformance's parent. "House price declines have taken hold everywhere."
Temptation to Walk Away
The study is based on the data of some 45 million properties that carry a mortgage, which accounts for more than 85% of all U.S. mortgages. The data was filtered to include only properties valued between $70,000 and $1.25 million.
The most severe "underwater mortgages" -- mortgage loans that are 125% or higher than the value of the property -- are in five states: California (723,000), Florida (432,000), Nevada (170,000), Michigan (128,000), and Arizona (122,000). Underwater homes are of serious concern because for some homeowners there is little incentive not to walk away and allow the home to fall into foreclosure. Foreclosed homes drag down the prices of neighboring properties, possibly dragging more homes underwater.
A veteran real estate broker in Las Vegas who declined to be named said that in 2004 there were only 2,000 homes on the market; now there are some 20,000 and growing. "Everybody became crazy," she said. "In certain areas (home prices are) off 60% from the peak. It's really sad because there's no equity and people can't refinance."
Nevada Leads Negative Equity
The negative-equity conundrum appears poised to get worse. LoanPerformance calculates that there are another 2 million houses that are approaching the danger zone, that is, within 5% of being in a negative-equity position. Negative-equity and near-negative-equity mortgages combined account for a quarter of all homes with mortgages nationwide.
The distribution of negative equity is heavily skewed to a small number of states, according to Fleming. Nevada has the highest percentage of negative equity: More than half of all mortgage borrowers in that state are now upside down. The average loan-to-value ratio for properties with a mortgage in Nevada was 97%, or less than $8,000 in equity. That leaves the typical mortgaged homeowner with virtually no cushion for the rapidly declining home values.
In states where unemployment is high and rising, such as Michigan, the problem of upside-down mortgages is acute. "It's the combination of underwater and losing a job that is of most concern at this point," says Fleming. "If you're underwater but can still pay your mortgage, you're O.K. And if there's equity in the home and you lose a job, you can always refinance" to tap into that to make ends meet, providing a bank will approve a new loan.
Worst Is Yet to Come
Ranking the states by total number of borrowers underwater, California came in first with more than 1.9 million borrowers in negative equity, followed by Florida (1.3 million), Texas (497,000), Michigan (459,000), and Ohio (435,000). These five states account for more than half of these problem mortgages.
For states that haven't seen a widespread problem in declining prices and therefore upside-down mortgages, the worst may be in store. Fleming forecasts that the largest increases in the share of negative-equity mortgages will likely occur in states that have not yet experienced deep declines. "The worrisome issue is not just the severity of negative equity in the 'sand' states," Fleming said, "but the geographic broadening of negative equity that is expected to occur throughout the year."
http://news.yahoo.com/s/bw/20090305/bs_bw/mar2009db2009033306801;_ylt=AkxNe7n.EtjHM3M3rhZhkROyBhIF
By Mara Der Hovanesian
Thu Mar 5, 8:08 am
It's bad enough when the value of your house is sinking like a lead balloon. But for a growing number of Americans, their woes are compounded by owing more on the mortgage than what that house is now worth. It's called having negative equity -- the opposite of what happens when a home appreciates and a homeowner builds positive equity above and beyond his initial investment.
In a new report released Mar. 4, more than 8.3 million U.S. mortgages, or 20% of all mortgaged properties, were saddled with negative equity at the end of 2008, according to LoanPerformance, a company that tracks mortgage data. That's up two percentage points, from 7.6 million borrowers, from the end of September 2008. California led the nation with a monthly average of 43,000 new negative-equity borrowers over the three-month period, followed by Texas (16,000), Nevada (15,000), Florida (14,000), and Virginia (14,000).
"Given that we've never seen house price declines of this magnitude, this is probably one of the highest negative-equity levels we've ever seen," said Mark Fleming, chief economist for First American CoreLogic, LoanPerformance's parent. "House price declines have taken hold everywhere."
Temptation to Walk Away
The study is based on the data of some 45 million properties that carry a mortgage, which accounts for more than 85% of all U.S. mortgages. The data was filtered to include only properties valued between $70,000 and $1.25 million.
The most severe "underwater mortgages" -- mortgage loans that are 125% or higher than the value of the property -- are in five states: California (723,000), Florida (432,000), Nevada (170,000), Michigan (128,000), and Arizona (122,000). Underwater homes are of serious concern because for some homeowners there is little incentive not to walk away and allow the home to fall into foreclosure. Foreclosed homes drag down the prices of neighboring properties, possibly dragging more homes underwater.
A veteran real estate broker in Las Vegas who declined to be named said that in 2004 there were only 2,000 homes on the market; now there are some 20,000 and growing. "Everybody became crazy," she said. "In certain areas (home prices are) off 60% from the peak. It's really sad because there's no equity and people can't refinance."
Nevada Leads Negative Equity
The negative-equity conundrum appears poised to get worse. LoanPerformance calculates that there are another 2 million houses that are approaching the danger zone, that is, within 5% of being in a negative-equity position. Negative-equity and near-negative-equity mortgages combined account for a quarter of all homes with mortgages nationwide.
The distribution of negative equity is heavily skewed to a small number of states, according to Fleming. Nevada has the highest percentage of negative equity: More than half of all mortgage borrowers in that state are now upside down. The average loan-to-value ratio for properties with a mortgage in Nevada was 97%, or less than $8,000 in equity. That leaves the typical mortgaged homeowner with virtually no cushion for the rapidly declining home values.
In states where unemployment is high and rising, such as Michigan, the problem of upside-down mortgages is acute. "It's the combination of underwater and losing a job that is of most concern at this point," says Fleming. "If you're underwater but can still pay your mortgage, you're O.K. And if there's equity in the home and you lose a job, you can always refinance" to tap into that to make ends meet, providing a bank will approve a new loan.
Worst Is Yet to Come
Ranking the states by total number of borrowers underwater, California came in first with more than 1.9 million borrowers in negative equity, followed by Florida (1.3 million), Texas (497,000), Michigan (459,000), and Ohio (435,000). These five states account for more than half of these problem mortgages.
For states that haven't seen a widespread problem in declining prices and therefore upside-down mortgages, the worst may be in store. Fleming forecasts that the largest increases in the share of negative-equity mortgages will likely occur in states that have not yet experienced deep declines. "The worrisome issue is not just the severity of negative equity in the 'sand' states," Fleming said, "but the geographic broadening of negative equity that is expected to occur throughout the year."
http://news.yahoo.com/s/bw/20090305/bs_bw/mar2009db2009033306801;_ylt=AkxNe7n.EtjHM3M3rhZhkROyBhIF
It's Time to Sell and Walk Away
It's Time to Sell and Walk Away
By John Rosevear (TMF Marlowe)
March 5, 2009 Comments (14)
There's no escaping this truth: The market has lost more than half of its value since it peaked in October 2007.
It could go even lower -- and it probably will.
Things are getting worse. If you have any home equity left, it's still shrinking. General Motors inches closer to Chapter 11 every day -- and General Electric (NYSE: GE) is confronting some mighty problems of its own.
Our entire banking system seems on the ragged edge of collapse, as nervous investors wonder who AIG's counterparties are and fret about the true financial condition of institutions such as Bank of America (NYSE: BAC) and Goldman Sachs (NYSE: GS). Layoffs continue at a torrid pace, as companies such as General Dynamics (NYSE: GD) and Tyco Electronics (NYSE: TEL) join the very long list of companies adjusting to new economic expectations.
It's going to get worse before it gets better -- if it gets better. Some folks are saying there's no way out -- a huge collapse might be in the cards. At best, they say, we're looking at a decade or more of high unemployment and stock market misery.
This is the time when you look at your decimated portfolio and wonder how much more you can take. This is the time when many pundits remind you that the "buy and hold myth" has been "debunked," and that the "smart money" is already in cash, waiting for the bottom. This is the time when the temptation to join them is overwhelming.
This is the time when you sell it all and walk away,
There's just one catch But if you act while you still have something left to get rid of, answer this: What do you do after that?
I mean, great, you sold. Congratulations. Now what?
Of course, when people talk about selling, they're not thinking about an alternative long-term strategy. They're thinking they'll wait for the bottom and then buy back in.
Is that what you're thinking?
You sure that's a good idea? Waiting for the bottom and jumping back in would be market timing. That's the practice of using something -- technical analysis, macroeconomic factors, seasonal indicators, astrology -- to buy when markets are about to rise and sell when they're about to fall.
Market timing, the academics say, doesn't work. But there were academic theories that said our current mess couldn't happen. Are they wrong about this, too?
As Foolish retirement guru Robert Brokamp notes in the new issue of the Fool's Rule Your Retirement newsletter, available online at 4 p.m. Eastern time today, some timing indicators seem to work more often than not. For example, when dividend yields go up and price-to-earnings ratios go down, prospects for stocks in general have usually been good. No-brainer, eh? But some notions are more nuanced -- for instance, statistically speaking, the stock market does best between November and April.
Ouch. Given how the market's done since last November, let's hope that last one doesn't hold this year. But that makes for a good point -- tendencies and trends and "more often than not" isn't reliable enough to bet your retirement fund on. Consider: Will the next sharp upward spike in the markets be yet another bear-market rally -- or the birth of a new bull? One thing history tells us about bull markets: They start sooner than most folks think they will. We'll only know for sure in retrospect.
Likewise, we'll all know what the bottom was -- a year or two later. But how will you know it when it's here? Can you say for sure that we haven't already seen it? The bottom happens, we all know, at "the point of maximum pessimism." I don’t see very many optimists around today.
Wall Street chest-thumping aside, there's only one good answer to that: I don't know.
So what should you do? The short answer is to "invest well and hang on." Successfully timing the markets involves an extraordinary combination of luck, skill, knowledge, and more luck -- and even the best market timers regularly miss the mark.
A better answer? Well, we can't predict the future -- but as Robert notes in his article, there are reasons to believe that the remainder of this bear market will unfold along certain lines. And there are strategies you can use to mitigate downside risk in the meantime -- strategies that don't involve selling everything and sitting in cash.
These aren't esoteric strategies, either -- they're approaches you can use in any portfolio, even a 401(k).
Fool contributor John Rosevear has no position in the companies mentioned. Johnson & Johnson is a Motley Fool Income Investor selection. Tyco Electronics is a Motley Fool Inside Value pick. The Fool owns shares of Procter & Gamble.
Read/Post Comments (14)
http://www.fool.com/retirement/general/2009/03/05/its-time-to-sell-and-walk-away.aspx
By John Rosevear (TMF Marlowe)
March 5, 2009 Comments (14)
There's no escaping this truth: The market has lost more than half of its value since it peaked in October 2007.
It could go even lower -- and it probably will.
Things are getting worse. If you have any home equity left, it's still shrinking. General Motors inches closer to Chapter 11 every day -- and General Electric (NYSE: GE) is confronting some mighty problems of its own.
Our entire banking system seems on the ragged edge of collapse, as nervous investors wonder who AIG's counterparties are and fret about the true financial condition of institutions such as Bank of America (NYSE: BAC) and Goldman Sachs (NYSE: GS). Layoffs continue at a torrid pace, as companies such as General Dynamics (NYSE: GD) and Tyco Electronics (NYSE: TEL) join the very long list of companies adjusting to new economic expectations.
It's going to get worse before it gets better -- if it gets better. Some folks are saying there's no way out -- a huge collapse might be in the cards. At best, they say, we're looking at a decade or more of high unemployment and stock market misery.
This is the time when you look at your decimated portfolio and wonder how much more you can take. This is the time when many pundits remind you that the "buy and hold myth" has been "debunked," and that the "smart money" is already in cash, waiting for the bottom. This is the time when the temptation to join them is overwhelming.
This is the time when you sell it all and walk away,
There's just one catch But if you act while you still have something left to get rid of, answer this: What do you do after that?
I mean, great, you sold. Congratulations. Now what?
- You can leave what's left in a money market fund that earns a whopping 1%.
- You can buy gold, though that seems more and more to me like buying tech stocks in 1999.
- You could buy bonds issued by a blue-chip company such as Johnson & Johnson (NYSE: JNJ) or Procter & Gamble (NYSE: PG) -- yet that still leaves you exposed to an economic cataclysm.
- You could … geez, I don't know what else. There isn't much available that looks like a great long-term investment strategy once you're out of the market. Picassos? Vintage Ferraris? Rental condos in Scottsdale? The Ferrari would be fun, but it's not really a retirement plan.
Of course, when people talk about selling, they're not thinking about an alternative long-term strategy. They're thinking they'll wait for the bottom and then buy back in.
Is that what you're thinking?
You sure that's a good idea? Waiting for the bottom and jumping back in would be market timing. That's the practice of using something -- technical analysis, macroeconomic factors, seasonal indicators, astrology -- to buy when markets are about to rise and sell when they're about to fall.
Market timing, the academics say, doesn't work. But there were academic theories that said our current mess couldn't happen. Are they wrong about this, too?
As Foolish retirement guru Robert Brokamp notes in the new issue of the Fool's Rule Your Retirement newsletter, available online at 4 p.m. Eastern time today, some timing indicators seem to work more often than not. For example, when dividend yields go up and price-to-earnings ratios go down, prospects for stocks in general have usually been good. No-brainer, eh? But some notions are more nuanced -- for instance, statistically speaking, the stock market does best between November and April.
Ouch. Given how the market's done since last November, let's hope that last one doesn't hold this year. But that makes for a good point -- tendencies and trends and "more often than not" isn't reliable enough to bet your retirement fund on. Consider: Will the next sharp upward spike in the markets be yet another bear-market rally -- or the birth of a new bull? One thing history tells us about bull markets: They start sooner than most folks think they will. We'll only know for sure in retrospect.
Likewise, we'll all know what the bottom was -- a year or two later. But how will you know it when it's here? Can you say for sure that we haven't already seen it? The bottom happens, we all know, at "the point of maximum pessimism." I don’t see very many optimists around today.
Wall Street chest-thumping aside, there's only one good answer to that: I don't know.
So what should you do? The short answer is to "invest well and hang on." Successfully timing the markets involves an extraordinary combination of luck, skill, knowledge, and more luck -- and even the best market timers regularly miss the mark.
A better answer? Well, we can't predict the future -- but as Robert notes in his article, there are reasons to believe that the remainder of this bear market will unfold along certain lines. And there are strategies you can use to mitigate downside risk in the meantime -- strategies that don't involve selling everything and sitting in cash.
These aren't esoteric strategies, either -- they're approaches you can use in any portfolio, even a 401(k).
Fool contributor John Rosevear has no position in the companies mentioned. Johnson & Johnson is a Motley Fool Income Investor selection. Tyco Electronics is a Motley Fool Inside Value pick. The Fool owns shares of Procter & Gamble.
Read/Post Comments (14)
http://www.fool.com/retirement/general/2009/03/05/its-time-to-sell-and-walk-away.aspx
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