Follow the leader? Insight into insider stock buys

Follow the leader? Insight into insider stock buys
Insider purchases and sales noteworthy milestones but no road map to investing success
Dave Carpenter, AP Personal Finance Writer
Wednesday February 11, 2009, 5:21 pm EST


Yahoo! Buzz Print CHICAGO (AP) -- When a top executive buys or sells shares of his company in great number, it could be a telltale signal of what lies ahead for all investors.

But be careful before you follow in a CEO's footsteps. Knowing how much stock to put into an insider's actions, literally and figuratively, is a tricky business.

"The most important aspect that the lay investor should keep in mind is that it is a first screen," said Jonathan Moreland, director of research at InsiderInsights.com. Despite that caveat, though, "it's the best one that I know of," he added.

Assessing insider transactions is a lot more useful as an investing tool than it used to be.

That's because a publicly traded company's officers, directors and anyone who owns more than 10 percent of the shares is required to report any purchases or sales of their company's stock to the U.S. Securities and Exchange Commission within two business days. This means they can be quickly digested by investors checking the SEC Web site and any number of financial sites such as Yahoo Finance and MSN Money.

Until corporate scandals including Enron and WorldCom prompted reforms in 2002, companies had up to 41 days after transactions were made to report. Fortunes have been made or lost in less time.

The latest high-profile insider purchase to draw attention in a down market is that of Bank of America Corp. chief executive Ken Lewis, who spent more than $2 million buying 400,000 shares of his struggling bank in late January and early February.

So far, so good. Bank of America shares climbed back above $6 on Wednesday, well above Lewis' purchase price of about $5.40 per share.

These stories frequently have unhappy endings, though, for investors who try to emulate an insider's buys.

Take the case of Krispy Kreme Doughnuts Inc. Two days after the company reported its first-ever loss in May 2004, CEO Scott Livengood bought 24,000 shares at $20.77 in an apparent show of confidence. His total cost: More than $498,000, almost equivalent to a year of his salary.

Some investors believed that was a promising sign of better things to come, at a time when overexpansion and changing dietary habits had both hurt results and the stock price had been cut in half in a matter of months.

But if you bet dollars to doughnuts on it being a strong buy signal, you'd have been very wrong. Eight months of continuously bad news followed -- including plunging profits, a federal securities investigation and allegations of corporate deceit -- Livengood was out as CEO and the stock price was under $9. Today each share is worth just over $1.

Similarly, Dell Inc. CEO Michael Dell bought $100 million of the computer maker's stock last September.

Talk about bad timing. The shares lost more than half their value in 10 weeks during the market meltdown. As of this week Michael Dell had lost $55 million on the investment.

A wildly unpredictable economy like this one, in other words, makes it even harder to interpret the significance of insider transactions.

"When you see an executive put large sums of money on the line, clearly that's a signal that he feels very confident," said Jason O'Donnell, a senior research analyst with Boenning & Scattergood Inc. in West Conshohocken, Pa. "But that doesn't necessarily mean that the stock's going to go up."

While it's hard to imagine that a $100 million stock purchase like Dell's was simply window dressing or a statement to investors, it's possible that smaller purchases could be aimed largely at drumming up more buying.

Vita Nelson, editor and publisher of The MoneyPaper, a Rye, N.Y.-based financial newsletter, says executives could be playing off the widespread notion that insiders have an early read on where the company is going.

"They may hope that the publicity of their having bought will have a positive effect on the direction of the market price," she said.

Other reasons to be wary of insider purchases: They could be happening because of company requirements that require C-level executives to own a certain amount of shares. They could have been made with company loans -- check the company's SEC filings. Or the executives could just be putting company-awarded stock options to work, which would signify less of a personal commitment.

Savvy investors will view a CEO's big buy in context.

Lewis, for example, made more than $20 million in 2007, so a $2 million purchase was the equivalent of roughly a month's pay -- substantial but not exactly betting the ranch. On the other hand, he was joined by more than a dozen Bank of America officers and directors who made large purchases at the same time -- a collective vote of confidence rather than an individual one.

Insider sales should be viewed with similar caution. An investor's instinct when a top executive sells thousands of shares would be that the stock price is heading lower and it's time to follow suit. But the executive could also be selling because she needs the cash for personal reasons.

One good overall indicator is how much of a stake insiders have in their companies. In general, the more shares they own, the better for investors. So if they are selling large percentages of their overall holdings, that could be a stronger signal to jump ship.

But don't drive yourself crazy trying to assess the meaning of a big transaction if the evidence seems mixed. It's best not to view insider moves in isolation, advises Wayne Thorp, a financial analyst for the American Association of Individual Investors in Chicago.

"You're building a mosaic to decide whether you want to be invested in a company," said Thorp. "This is just one piece of the puzzle."

Securities and Exchange Commission http://www.sec.gov

http://finance.yahoo.com/news/Follow-the-leader-Insight-apf-14325813.html;_ylt=AuU4A5xCJXZ4MquWq6DJEaC7YWsA

Investing for income: 'By any measure, these yields look enticing'

Investing for income: 'By any measure, these yields look enticing'
As interest rates fall towards zero, equity income funds and bonds could be better bet than cash.

By Kara Gammell
Last Updated: 3:32PM GMT 11 Feb 2009

The rate cut last week left many savers receiving virtually nothing from their capital. But for savers willing to take a bit of risk, there are ways to generate a decent income.

Darius McDermott, managing director of Chelsea Financial Servies, said: "By any historic measure, equity and bond fund yields are looking enticing – not to mention discounts on investment trusts.

"There are serious dangers, namely the worsening economic picture and the state of the banking system which will affect capital growth – but attractive income payments should soften the blow to investors somewhat while we await a pickup in markets."

James Davies, investment research manager at Chartwell, said: "As long as investors are prepared to hold investments for the medium to long term and are comfortable with a degree of capital volatility, now is the right time to be turning to market-linked investments to meet your income."

Drawing income from cash accounts is looking less and less attractive – particularly when you factor in tax and inflation, said Mr McDermott.

Mark Dampier, head of research at independent financial advisers Hargreaves Lansdown, offered a warning for return-hungry investors: "Take great care and always understand exactly what you are buying. While a 1 per cent interest rate may be poor, other asset classes have capital risk. Don't forget that the general rule is the higher the yield the bigger the risk."

For investors who want to look at equity income, Mr Dampier advised funds such as Invesco Perpetual Income, Artemis Income, Threadneedle Alpha Income and Psigma Income. "Also, consider overseas income funds like Argonaut European Income, which has a good yield of 6 per cent," he added.

Equity income funds invest in the shares of companies which pay good dividends. Mr McDermott suggested Schroder Income Maximiser, which has a yield of 7 per cent.

Corporate debt, although far more risky than lending money to the Government by buying gilts, is another area where income can be high. These bonds are IOUs issued by companies and are graded according to the likelihood of the issuer defaulting on debts.

Mr Dampier recommended buying a selection of bonds, which is easiest in a fund. "Try Jupiter Corporate Bond, M&G Optimal Income, Investec Sterling Bond and Invesco Perpetual Corporate Bond," he said.

Mr McDermott suggested Henderson Strategic corporate bond, with a yield of 8.4 per cent. Jupiter yields 5.1 per cent, M&G yields 6.9 per cent, Investec Sterling yields 5.9 per cent and Invesco Perpetual yields 6.4 per cent.

Nick Raynor, investment adviser at The Share Centre, said: "More people are looking at shares because of poor returns from savings accounts." Mr Raynor tipped Vodafone. "With a yield of over 5 per cent, Vodafone has just published very good figures."

For a quarterly dividend, Mr Raynor suggested BP, which pays 6.5 per cent, and National Grid and GlaxoSmithKline, which pay 5.2 per cent and 4.4 per cent respectively. "These companies sell things that the population can't do without, which means there is always room for growth."

http://www.telegraph.co.uk/finance/personalfinance/investing/4582273/Investing-for-income-By-any-measure-these-yields-look-enticing.html

Savers are going to bear the brunt of the Bank of England's attempts to revive the economy

Mervyn King suggests savers will be sacrificed as rates fall
Savers are going to bear the brunt of the Bank of England's attempts to revive the economy, the Bank of England Governor Mervyn King has warned.

By Myra Butterworth and Edmund Conway
Last Updated: 4:35PM GMT 11 Feb 2009

Comments 27 Comment on this article

Mr King expressed sympathy for savers, but indicated that they will be sacrificed as interest rates are cut further in a bid to revive the economy.

He said: "I have every sympathy with savers – they are certainly not responsible for the current difficulties – but suppose we were to put up interest rates?

"That might benefit savers in the short run, but is anyone seriously suggesting that would help the British economy get through the recession? No. We have to take action to increase the supply of money in the economy, to increase spending in the short run, in order to dampen the strength of the recession."

The Bank of England is widely expected to reduce rates to zero per cent at its next meetings in March or April.

Mr King explained: "Given that we are in such a deep recession in the short run, I think that if we were not to take measures to stimulate the economy, then savers would find they are actually much worse off – there would be even higher unemployment and even more of a downturn in the economy. That is the paradox of policy."

The Bank of England has cut the Bank Rate from 5 per cent to just 1 per cent in the past five months – and high street banks have responded by reducing the rates they offer savers.

Savings rates are now at their lowest ever level, according to the Bank of England's own records, with notice accounts offering an average of just 0.29 per cent and cash individual savings accounts (Isas) paying an average rate of 1.38 per cent.

Financial experts and charities warned lower rates will bring further misery to savers this year.

Sean Gardner, of the personal finance website MoneyExpert.com, said: "The Bank of England has tried to jump start the economy by slashing interest rates to previously unheard of lows. But these efforts come at a price and it's savers who have been sacrificed.

"Savers outnumber borrowers seven to one and it's the returns on their hard earned cash that will be crushed every day that the base rate stays so low."

Rebecca Ward, of the poverty charity Elizabeth Finn Care, said: "The latest interest rate reduction is a further kick in the teeth for people on low incomes who are struggling to eke out from their savings a life beyond mere subsistence survival."

Mr King's comments come as The Daily Telegraph calls for pensioners to be given a tax cut on the income earned from their savings and investments through its Justice for Pensioners campaign.

The Chancellor, Alistair Darling, has said he will look at measures to help these savers in the Budget, due in March or April.

Phil Jones, personal finance campaigner at consumer group Which?, said: "We've seen some very worrying data and savers will be very concerned. Banks cannot have their cake and eat it: if banks are not passing on cuts to borrowers they should not be passing on cuts to savers."

http://www.telegraph.co.uk/finance/personalfinance/savings/4592271/Mervyn-King-suggests-savers-will-be-sacrificed-as-rates-fall.html

European bank bail-out could push EU into crisis

European bank bail-out could push EU into crisis
A bail-out of the toxic assets held by European banks' could plunge the European Union into crisis, according to a confidential Brussels document.

By Bruno Waterfield in Brussels
Last Updated: 3:50PM GMT 11 Feb 2009

“Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states,” the EC document, seen by The Daily Telegraph, cautioned.

"It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”

The secret 17-page paper was discussed by finance ministers, including the Chancellor Alistair Darling on Tuesday.

National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.

The Commission figure is significant because of the role EU officials will play in devising rules to evaluate “toxic” bank assets later this month. New moves to bail out banks will be discussed at an emergency EU summit at the end of February. The EU is deeply worried at widening spreads on bonds sold by different European countries.

In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart.

“Such considerations are particularly important in the current context of widening budget deficits, rising public debt levels and challenges in sovereign bond issuance,” the EC paper warned.


http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4590512/European-banks-may-need-16.3-trillion-bail-out-EC-dcoument-warns.html

Why Do Companies Care About Their Stock Prices?

Why Do Companies Care About Their Stock Prices?
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)

Here's the irony of the situation: companies live and die by their stock price, yet for the most part they don't actively participate in trading their stocks within the market. Companies receive money from the securities market only when they first sell a security to the public in the primary market, which is commonly referred to as an initial public offering (IPO). In the subsequent trading of these shares on the secondary market (what most refer to as "the stock market"), it is the regular investors buying and selling the stock who benefit from any appreciation in stock price. Fluctuating prices are translated into gains or losses for these investors as they shift ownership of stock. Individual traders receive the full capital gain or loss after transaction costs.

The original company that issues the stock does not participate in any profits or losses resulting from these transactions because this company has no vested monetary interest. This is what confuses many people.

Why then does a company, or more specifically its management, care about a stock's performance in the secondary market when this company has already received its money in the IPO? Read on to find out.

Those in Management are Often Shareholders Too
The first and most obvious reason why those in management care about the stock market is that they typically have a monetary interest in the company. It's not unusual for the founder of a public company to own a significant number the outstanding shares, and it's also not unusual for the management of a company to have salary incentives or stock options tied to the company's stock prices. For these two reasons, management acts as stockholders and thus pay attention to their stock price.

Wrath of the Shareholders
Too often investors forget that stock means ownership. The job of management is to produce gains for the shareholders. Although a manager has little or no control of share price in the short run, poor stock performance could, over the long run, be attributed to mismanagement of the company. If the stock price consistently underperforms the shareholders' expectations, the shareholders are going to be unhappy with the management and look for changes. In extreme cases shareholders can band together and try to oust current management in a proxy fight. To what extent shareholders can control management is debatable. Nevertheless, executives must always factor in the desires of shareholders since these shareholders are part owners of the company.

Financing
Another main role of the stock market is to act as a barometer for financial health. Analysts are constantly scrutinizing companies and reflecting this information onto its traded securities. Because of this, creditors tend to look favorably upon companies whose shares are performing strongly. This preferential treatment is in part due to the tie between a company's earnings and its share price. Over the long term, strong earnings are a good indication that the company will be able to meet debt requirements. As a result, the company will receive cheaper financing through a lower interest rate, which in turn increases the amount of value returned from a capital project.

Alternatively, favorable market performance is useful for a company seeking additional equity financing. If there is demand, a company can always sell more shares to the public to raise money. Essentially this is like printing money, and it isn't bad for the company as long as it doesn't dilute its existing share base too much, in which case issuing more shares can have horrible consequences for existing shareholders.

The Hunters and the Hunted
Unlike private companies, publicly traded companies stand vulnerable to takeover by another company if they allow their share price to decline substantially. This exposure is a result of the nature of ownership in the company. Private companies are usually managed by the owners themselves, and the shares are closely held. If private owners don't want to sell, the company cannot be taken over. Publicly-traded companies, on the other hand, have shares distributed over a large base of owners who can easily sell at any time. To accumulate shares for the purpose of takeover, potential bidders are better able to make offers to shareholders when they are trading at lower prices.

For this reason, companies would want their stock price to remain relatively stable, so that they remain strong and deter interested corporations from taking them.On the other side of the takeover equation, a company with a hot stock has a great advantage when looking to buy other companies. Instead of having to buy with cash, a company will simply issue more shares to fund the takeover. In strong markets this is extremely common - so much that a strong stock price is a matter of survival in competitive industries.

Ego
Finally, a company may aim to increase share simply to increase their prestige and exposure to the public. Managers are human too, and like anybody they are always thinking ahead to their next job. The larger the market capitalization of a company, the more analyst coverage the company will receive. Essentially, analyst coverage is a form of free publicity advertising and allows both senior managers and the company itself to introduce themselves to a wider audience.

For these reasons, a company's stock price is a matter of concern. If performance of their stock is ignored, the life of the company and its management may be threatened with adverse consequences, such as the unhappiness of individual investors and future difficulties in raising capital.

by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.

http://www.investopedia.com/articles/basics/03/020703.asp?partner=NTU2

The 10 Best Dividend Stocks of the Past Decade

The 10 Best Dividend Stocks of the Past Decade
By Todd Wenning January 30, 2009 Comments (1)

There's a common misconception among investors that dividend-paying stocks cannot, by definition, also be great growth stocks.

But in fact, stock price appreciation and dividend growth can go hand in hand quite well, as we'll see shortly.

Spread the wealth
Too many investors assume that since dividend-paying companies pay a percentage of profits to shareholders in the form of cash, there's less left over for them to reinvest in their own businesses, resulting in slower earnings growth.

But there's such a thing as a company having too much cash -- and that's not only true of value stocks. Some large-cap growth companies -- such as Dell (Nasdaq: DELL) and eBay (Nasdaq: EBAY), for example -- are sitting on billions in cash, but don't give any of it back to shareholders in the form of dividends.

Investors in these stocks are putting all of their faith in management's ability to do more with that cash than they themselves could. Will Dell and eBay management consistently invest that cash into projects returning more than you could earn elsewhere? Possibly -- but with both stocks down more than 50% over the past few years, you really have to wonder if just a little of that cash wouldn't have been better off in your pocket.

In fact, as a 2003 study by Robert Arnott and Clifford Asness showed, there's a link between higher dividend payouts and higher earnings growth. See, companies paying a dividend naturally have less cash available -- and that forces management to be more selective with the projects they take on.

On the other hand, as Arnott and Asness note in their study, managers who are flush with cash too often try to "empire build" -- and make ill-advised acquisitions or take on pie-in-the-sky internal projects that never quite materialize.

For my money, I'd much rather have the companies I own run by managers who are forced to spend only on the very best of their available projects.

The best dividend-paying stocks
The best dividend-paying stocks, in other words, provide not only income, but significant capital appreciation. By way of example, consider the tremendous performance of Wal-Mart (NYSE: WMT) -- which in addition to nearly unmatched returns for early investors has raised its dividend every year since 1974, when it was still a small-cap company.

But is Wal-Mart the exception to the rule?
I looked for the best dividend-paying stocks of the last decade using the following criteria:
Capitalized above $100 million on Dec. 31, 1998.
Listed on a major US exchange.
Paid a dividend each year.
Never cut its dividend during the decade.
Increased its dividend at least once.

Company
Dividend-Adjusted Return,1998-2008
10-Year AnnualizedDividend Growth
XTO Energy (NYSE: XTO)
2,981%
32%
Agnico-Eagle Mines (NYSE: AEM)
931%
25%
Occidental Petroleum (NYSE: OXY)
851%
9%
CH Robinson Worldwide
846%
31%
Teva Pharmaceutical
781%
29%
EOG Resources
707%
23%
Corporate Office Properties Trust
671%
9%
Tanger Factory Outlet Centers
625%
8%
Potash Corp. of Saskatchewan (NYSE: POT)
623%
10%
Apco Argentina
573%
14%
Data provided by Capital IQ, a division of Standard & Poor’s, and Yahoo! Finance.

Wal-Mart may be the best example of the growth power of dividends, but it's clearly not the only one.

The next dividend winner
So what do the best dividend payers of the next decade look like? Here are some noted trends from the companies above.
Unsurprisingly, all of the companies were small- to mid-caps in December 1998, which allowed plenty of room for price appreciation.

With the obvious exception of the real estate investment trusts (REITs) on the list, the payout ratios (dividends per share / earnings per share) were generally below 50%, which allowed plenty of room for dividend growth.

The rate of dividend growth generally remained below earnings growth, a sign that the company is not only conservative with its dividend growth (too much too soon can backfire), but that it also sees opportunities to reinvest in the business.

While many industries were represented, energy-related companies were the most common. In late 1998, many energy companies were beaten down as investors preferred "new tech" dot-coms (boy, was that a mistake), but energy nevertheless enjoyed economic tailwinds and a wide-market opportunity for growth. Selecting an undervalued but promising dividend star in a similarly positioned industry will significantly improve your odds of finding a winner.

One stock that fits this profile is waste management company Republic Services, a stock our Motley Fool Income Investor team recently named a "featured buy." It's a mid-cap at $4.5 billion in a growing and necessary industry, and its low payout ratio, near-monopoly status, and ability to rake in cash mean there's also the potential for serious dividend growth.

Get the best of both worlds
As the best dividend stocks of the past decade show us, you should never feel as though you need to trade dividend growth for earnings growth. That's why James Early and the Income Investor team not only look for companies with well-protected and growing dividends, but the potential for long-term earnings growth as well.


Todd Wenning does not own shares of any company mentioned. eBay is a Motley Fool Stock Advisor pick. Dell, eBay, and Wal-Mart are Inside Value choices. The Fool's disclosure policy rules Fooldom.
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The Best Stock to Own

The Best Stock to Own
By James Early January 31, 2009 Comments (2)


Do you have a very best stock?
A stock that brings you closer to retirement year in and year out? One like Kraft, formerly American Dairy Products, which -- as tracked back by Dr. Jeremy Siegel -- turned $1,000 into more than $2 million over 53 years with dividend reinvestment? In terms of returns, Kraft has quite literally been the very best stock of the past half-century.
I pay special attention to this stuff: My job is to find companies with the same magic that's made Kraft such a dynamite stock.

A repeatable fortune
What's the secret of Kraft's phenomenal digits? Well-branded products that a lot of people use, for starters. While that may be the bulk of it, those products aren't its only source of juju. The rest comes from two magic words: dividend reinvestment.

Don't think these words are powerful?
Take a ho-hum stock -- or at least one that appears that way -- paying 5% in dividends yearly and racking up a modest 5% in capital appreciation. Start with $1,000 and reinvest those dividends. After 30 years, you'll have amassed a whopping $18,700!

The other side of the coin is that you could get those returns -- or better -- from a strong growth stock, but the dividend stock above gives you the flexibility to switch from reinvestment to an income strategy. In that example, you'd get almost $900 a year. Besides, which one do you think is the safer bet?

A few ideas for you
Paying dividends to shareholders also forces companies to exercise fiscal discipline. That's great, because being flush with cash tempts managers -- let's face it, they tend to have big egos -- to bungle their loads. And even if they don't slip up, they tend to hoard that cash away from shareholders without putting it to any use. That's why Microsoft's long-anticipated one-time $3-per-share dividend payout meant so much to shareholders, and why cash hoarders like Oracle (Nasdaq: ORCL) are underserving their owners.

In a way, dividends encourage responsibility -- something that strikes a personal nerve with me. As co-advisor of The Motley Fool's dividend stock newsletter, Income Investor, I'm always on the lookout for corporations paying solid dividends, like the stocks I'll share with you now.

Like Kraft, Procter & Gamble (NYSE: PG) has an enormous portfolio of well-branded products that a lot of people use. Its brands include Pringles, Crest, Duracell, and Bounty. At 2.8%, its yield isn't enormous, but its ability to generate free cash flow is quite impressive.

Speaking of companies with strong brands, I'm taking a hard look at Mattel, which manufactures a portfolio of iconic toys, including Barbie, Hot Wheels, Fisher-Price, and Matchbox. The stock has been beaten down hard in the last year, unlike its competitor Hasbro (NYSE: HAS). But I believe brighter days lie ahead as the company continues to work with A-list partners like DreamWorks (NYSE: DWA). The 4.9% dividend yield should make the wait that much easier.

But you needn't limit yourself to the world of consumer staples if you're thirsty for some action. Examine StatoilHydro (NYSE: STO), a big-name in North Sea energy exploration and distribution. The company has been battered by declining energy prices across the world, but remains well-positioned to serve energy consumers in Norway, the U.S. and the rest of Europe. Like ExxonMobil (NYSE: XOM), StatoilHydro should benefit from a long-term increase in fossil-fuel demand. Plus, you’ll be collecting a healthy dividend yield along the way.

The Foolish bottom line These stocks aren't companies that are perfect for everyone; they're ideas to jump-start your research. The best stock for you might not be the best for another reader. The bottom line is that in seeking great stocks for your portfolio, I invite you to give a close look to dividend stocks. They're appropriate for just about everybody. They're closet performers, and they tend to do their jobs more safely than others.

Looking for more stock ideas? Income Investor is beating the market by more than seven percentage points -- and I'm offering a free guest pass. Simply click here to learn more.
This article was originally published Nov. 14, 2006. It has been updated.
James Early does not own shares of any company mentioned in this article. StatoilHydro is an Income Investor recommendation. Microsoft is an Inside Value pick. Kraft is an Income Investor recommendation. Hasbro and Dreamworks are Stock Advisor selections. The Motley Fool has a disclosure policy.
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An Opportunity We Haven't Seen in 50 Years

An Opportunity We Haven't Seen in 50 Years
By Chuck Saletta February 1, 2009 Comments (5)


Conventional investing wisdom says that if you're looking for income from your portfolio, you should buy bonds. Thanks to the market meltdown of 2008, however, stocks may well have become a better way to earn income from your investments.

That's right: For the first time in 50 years, the S&P 500 index offers investors a higher yield than the 10-Year U.S. Treasury note.

That's in addition to the long-term growth potential that stocks still have going for them -- and in spite of how far they may have fallen in 2008.

Dividends can rise, too
For an investor with a long-term time horizon, it really is a beautiful sight to behold.

See, stocks now have not just two but three things going for them: superior current income, long-term price appreciation, and increasing income.

After all, despite the rash of companies cutting their dividends in 2008, companies can -- and quite often do -- raise their dividends. And a company that consistently raises its dividends over time -- demonstrating that company's solidity and sustainability -- often outperforms the broader market.

Income today, more tomorrow
So if you truly want income in your portfolio, you shouldn't be looking at bonds. You should be looking at stocks that not only pay dividends, but have a history -- and a future -- of raising those dividends.

To see what might fit that bill right now, I ran a screen with the following criteria:
A yield higher than the 2.8% recently seen on the 10-Year U.S. Treasury note,
Dividend growth of at least 10% in 2008 -- in spite of the economic meltdown
A payout ratio less than 50%, which means the company pays out less than half of its earnings in the form of dividends -- giving the company room to raise its dividend in the future

Here are a few of the companies it returned:
Company
Recent Yield
2008 Dividend Increase
Payout Ratio

Waste Management (NYSE: WMI)
3.3%
11.7%
44%
Chevron (NYSE: CVX)
3.5%
11.8%
21%
PepsiCo (NYSE: PEP)
3.3%
18.5%
44%
United Technologies (NYSE: UTX)
3%
15%
26%
Automatic Data Processing (NYSE: ADP)
3.5%
26.1%
47%
Sysco (NYSE: SYY)
4%
15.8%
46%
Texas Instruments (NYSE: TXN)
2.8%
36.7%
28%

These aren't buy recommendations, just suggestions for further research.

But think about it: More cash in your pocket today.
The willingness to raise that payout even during troubled times. A legitimate shot at continued increases in the future. With an investing profile like that, what's not to love?

Start getting paid more
It's been half a century since the last time stocks paid investors more than 10-year Treasuries. At Motley Fool Income Investor, we're actively taking advantage of that situation by uncovering the strongest dividend-paying companies available at cheap-to-reasonable prices. With the powerful 1-2-3 punch of current income, income growth, and long-term capital appreciation on our side, we're well prepared to emerge victorious from this tumultuous market.

If you're ready to move past the panic of 2008 and arm your own portfolio with companies that reward their owners even during a global financial meltdown, now's the time to start.

At the time of publication, Fool contributor Chuck Saletta owned shares of Sysco. PepsiCo and Sysco are Motley Fool Income Investor recommendations. Waste Management is an Inside Value choice. The Fool has a disclosure policy.
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http://www.fool.com/investing/dividends-income/2009/02/01/an-opportunity-we-havent-seen-in-50-years.aspx

Put Warren Buffett in Your Corner

Put Warren Buffett in Your Corner

http://www.fool.com/investing/dividends-income/2009/02/11/put-warren-buffett-in-your-corner.aspx
Motley Fool StaffFebruary 11, 2009

Dividend stocks may be the best way to follow Warren Buffett's famous rules:

Rule No. 1: Never lose money.

Rule No. 2: Never forget rule No. 1.

But that shouldn't be surprising.

Playing the part of the investor whose aim is to never lose money is to study businesses that rule boring industries, make real products, and earn heaps of cash flow. More often than not, these types of stocks also offer generous dividend yields.

Consider Buffett's portfolio. Plenty of the stocks held by Berkshire Hathaway yield more than the S&P 500 average of about 3.2%. Here's a sampling:

Company
CurrentDividend Yield
American Express (NYSE: AXP)
4.5%
Coca-Cola (NYSE: KO)
3.7%
UPS (NYSE: UPS)
4.0%
Kraft Foods (NYSE: KFT)
4.6%
ConocoPhillips (NYSE: COP)
4.1%
Constellation Energy (NYSE: CEG)
7.5%
Wells Fargo (NYSE: WFC)
8.3%
Sources: SEC filings, Yahoo! Finance.

Get 97% of the market's returns automatically

Surely, some of this is coincidence. Berkshire has billions to invest. Buffett and curmudgeonly partner Charlie Munger are unlikely to buy stock in anything but the largest large caps, and large caps are always more likely to pay dividends.

Nevertheless, research conducted by Dr. Jeremy Siegel shows that 97% of the stock market's return from 1871 to 2003 can be traced to dividends. I think we can fairly give superinvestors like Buffett and Munger credit for following a smart strategy, even if they don't follow it to the letter. Buffett and Munger, you see, don't reinvest dividends as Siegel's research suggests you should. They've done better by investing cash from dividends into their best ideas.

But what's good for them isn't necessarily good for you.

That's why many of America's millionaires are buying, holding, and reinvesting in the stocks of sturdy businesses that have a history of increasing their dividend payouts. It's a no-brainer way to get rich. Really rich.

From Buffett's portfolio to yours

I'll not pretend that owning dividend-paying stocks makes you like Buffett or Munger. It doesn't. But isn't it nice to know that if you do choose to invest in cheap dividend payers, you're in good company?

For more on dividends:
An Opportunity We Haven't Seen in 50 Years
The Best Stock to Own
The 10 Best Dividend Stocks of the Past Decade
Legal Information.

© 1995-2008 The Motley Fool. All rights reserved.

The Death of Fundamental Analysis

The Death of Fundamental Analysis
By Shannon Zimmerman
February 11, 2009 Comments (0)


If Ben Graham or some other proud, dearly departed purveyor of brick-by-brick, fundamental analysis were to emerge from the great beyond and dial up, say, this chart of the market's action over the last year, you could hardly blame the venerable value hound for scratching his head and saying, "Hey there, youngster! What's with this Facebook thing I keep hearing so much about?"

Irrationality is painful -- and painfully boring. And when you have a passion for investing (as opposed to speculation), your capacity for patience is sometimes trumped by an impulse to throw up your hands and make other time-occupying arrangements while the market finds its proverbial bottom, comes to its senses, and revives an apparently moribund interest in corporate fundamentals as opposed to, say, big macroeconomic attacks.

Just don't do it
Still, as great investors like Graham have always known and taught, the time to go stock shopping is when you can buy quality on the cheap. Which is precisely where we seem to be, if the chart I linked to above is any indication.

The chart's big-picture story is of a market gripped by fear and panic. A closer look, however, reveals that that particular dynamic was accompanied by a proverbial flight not to quality (as represented by the large-cap-dominated S&P 500's anemic red line) but rather to the seemingly riskier little fish that comprise the Russell 2000 (represented in royal blue).

Virtually everything has tanked over the last year, of course. But in relative terms, small caps have trumped the big boys. That's surprising enough in the aggregate, but it's positively shocking when you dig into particular names.

Consider, for example, the following grade-A lineup -- rock-solid companies with financial strength, ample free cash flow, and long-haul track records of overachievement -- and how they've fared relative to both the S&P 500 and the Russell 2000 for the past 12 months.

Company
+/- S&P 500
+/- Russell 2000

Applied Materials (Nasdaq: AMAT)
-9.6
-11.1

Schlumberger (NYSE: SLB)
-10.4
-11.9

Berkshire Hathaway (NYSE: BRK-B)
-1.1
-2.5

UnitedHealth (NYSE: UNH)
-3.8
-5.3

Texas Instruments (NYSE: TXN)
-9.1
-10.6

eBay (Nasdaq: EBAY)
-14.9
-16.4

Honeywell (NYSE: HON)
-6.7
-8.6


That's a hit list of companies that, in my view, strike the right profile for folks in search of a clutch of companies to use as the centerpiece of their portfolios. That's particularly true for Fools who may be closing in on retirement and wondering how they're going to glue their nest eggs back together before their permanent tee time comes around. The upside potential of these titans relative to their downside risk -- at least in terms of these companies' currently attractive valuation profiles -- seems Goldilocks perfect.

My, what big market caps you have
Still, it certainly pays to mix it up when designing your portfolio, diversifying across the market's valuation spectrum and its cap ranges as well. Indeed, if the recent history charted by my Fool colleague Ilan Moscovitz holds true, small caps may have more room to run when the economy finally turns the corner.

The good news, of course, is that investing is not an either/or proposition -- and that fundamental analysis isn't dead. Once you've settled on the asset-allocation breakdown that works for you -- i.e., the right ratios of stocks to bonds, large caps to small, international to domestic -- your best bet is to fill in that personalized pie chart with vehicles that sport attributes similar to those I called out above in connection with our magnificent seven: companies that are firing on all fundamental cylinders as evidenced by robust financial health -- and wealthy long-term shareholders.

We're working hard
At the Fool's Ready-Made Millionaire, we've designed a five-star portfolio that matches the profile sketched above -- a lineup comprising a power trio of world-class mutual funds, an undervalued ETF, and four individual stocks that we think will whip up on the market over the next three to five years and beyond. The Fool itself has invested a million bucks of its own capital in our Ready-Made selections, and starting next Tuesday, you'll be able to as well.

That's the day we'll reopen Ready-Made Millionaire to new members, who'll be able to emulate our set-and-forget lineup at prices that, thanks to the market's irrational despair, are even more attractive that when we invested last July. Click here to be notified when our doors swing wide again -- and to snag our special 11-Minute Millionaire special report as an immediate download now.

Hope to see you Tuesday!

Shannon Zimmerman runs point on the Fool's Ready-Made Millionaire and doesn't own any of the companies mentioned. The Motley Fool owns shares of Berkshire Hathaway and UnitedHealth. Berkshire, UnitedHealth, and eBay are Motley Fool Stock Advisor and Motley Fool Inside Value recommendations. You can check out the Fool's strict disclosure policy.

http://www.fool.com/investing/general/2009/02/11/the-death-of-fundamental-analysis.aspx

Cashing in on jobs gloom

Feb 11, 2009
Cashing in on jobs gloom

SYDNEY - THE financial crisis is proving good business for Australian firms involved in corporate recovery, restructuring and insolvency, looking to hire from an expanding pool of financial professionals.

Unemployment in Australia may be on the rise, but website eFinancialCareers.com.au lists 104 job in those areas, a significant increase on last year or even six months ago, the website said without giving comparative numbers.

The ads were typically placed by investment banks, Australian commercial banks and the big accountancy firms, all looking to take advantage of a growing number of skilled professionals in the market.

'Since the beginning of my financial year I have increased my direct workforce by 30 per cent and my indirect workforce by another third,' said Chris Campbell, national leader of the corporate reorganisation group at accountancy firm Deloitte.

Rescue firms are on a hiring binge, a godsend for many unemployed bankers.

Australian financial institutions have generally kept layoff numbers close to their chest, but analysts estimate job cuts to amount to several thousands and more are on the horizon.

The economy may not have suffered anything like the fallout seen in many developed countries thanks to a sound financial sector, but its economy is rapidly shrinking.

Job ads in newspapers and on the Internet fell for the ninth straight month in January, a survey by the Australia and New Zealand Banking Corp showed on Monday.

The government expects unemployment to rise to 7 per cent by mid-2010, from just 4.5 per cent currently.

Insolvency specialists and corporate advisory units are hiring, said to Angus Price, a partner from search firm Derwent Executive in Sydney. He cited investment banks Goldman Sachs and Rothschild which have set up restructuring units in Australia.

Restructuring
Domestic banks are also expanding their restructuring areas, hiring specialists to manage their own portfolios exposed to troubled companies, said Patrick Everest, partner at Jon Michel, a specialist financial services search form Jon Michel Executive Search.

'A lot of companies are in a lot of trouble... finance institutions in particular need help in working out how to do these recoveries,' said Deloitte's Campbell.

Australia's high profile casualties include finance companies Allco Finance Group and Babcock & Brown, mall-owner Centro Properties, child-care group ABC Learning Centres All of them heavily borrowed from top banks.

And more corporate distress is on the horizon with ratings agency Standard & Poor's predicting a spike in corporate defaults in 2009 after seven years of relative calm with just three Australian corporate defaults.

Other sectors in vogue are project finance and family offices endowments where recruiters see demand on the rise.

Project finance is set to grow after the government said it would spend A$42 billion (S$42 billion) with a priority on urgently needed infrastructure.

Derwent's Price anticipates banks in particular to beef up their project finance units to fund the infrastructure mandates.

Another active recruiting area is family office endowment, an investment structure that is typically used by very rich individuals.

'There has been a huge turnaround in family offices looking to buy distressed assets as principal investment,' said Derwent's Price. -- REUTERS

http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336939.html

Credit markets easing

Feb 11, 2009
Credit markets easing

WASHINGTON - US Federal Reserve chairman Ben Bernanke said on Tuesday the vast array of special central bank programs appear to have helped ease a credit crunch that has been choking economic activity.

Appearing before the House of Representatives Committee on Financial Services, Bernanke said that measuring the impact of the Fed's programs 'is complicated by the fact that multiple factors affect market conditions'.

'Nevertheless, we have been encouraged by the responses to these programs, including the reports and evaluations offered by market participants and analysts,' he stated.

'Notably, our lending to financial institutions, together with actions taken by other agencies, has helped to relax the severe liquidity strains experienced by many firms and has been associated with considerable improvements in interbank lending markets.'

Mr Bernanke said that in the past year since the Fed and other central banks began efforts to pump liquidity into the financial system, there have been signs of improvement.

He said this is notable in the lowering of the Libor, or London interbank rate, used among banks for short-term loans. He also said corporate short-term borrowing terms have improved since the Fed entered the commercial paper market.

Additionally, he said a drop in US mortgage rates may help steady the critical housing market.

'All of these improvements have occurred over a period in which the economic news has generally been worse than expected and conditions in many financial markets, including the equity markets, have worsened,' he added. -- AFP

http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336882.html

US ECONOMIC STIMULUS PLAN - Commercial property included

Feb 11, 2009
US ECONOMIC STIMULUS PLAN
Commercial property included

NEW YORK - THE commercial real estate industry applauded the government's move to include commercial mortgages in a key lending program on Tuesday, but experts said the plan's lack of details is disconcerting.

Treasury Secretary Timothy Geithner said the government's Term Asset-Backed Securities Loan Facility will include securities backed by commercial property loans.

The programme, being developed by the Federal Reserve, allows investors to swap AAA-rated securities for US Treasurys, which could then be used as collateral for new financing. The goal is to create new lending in a now frozen market.

The news comes not a moment too soon for the troubled commercial real estate industry, which is facing a deluge of debt coming due this year at the same time that property prices, rents and occupancies are falling.

If commercial landlords can't refinance, loan defaults will spike and lenders could end up owning shopping malls and office buildings along with their piles of foreclosed homes. That would likely prolong the credit crisis.

'There was a sense of urgency to do this quickly,' said Brendan Reilly, the lobbyist for the Commercial Mortgage Securities Association, about the bailout. 'It's critical to kick-starting the market.' The market for commercial mortgage-backed securities, or CMBS, virtually shut down last year as the financial system unraveled.

CMBS are commercial mortgages that are pooled together, sliced into pieces and resold as bonds. The money that lenders receive from the bonds is used to fund more loans.

The CMBS market funded nearly half of all commercial mortgages in 2007 at the height of the industry's boom. Last year, that shrank to 5 per cent, Reilly said.

The result? Sales plunged and, along with it, property prices.

Construction and acquisition loans dried up. And refinancing for short-term debt stalled. Commercial foreclosures have become a real possibility for even the soundest properties and owners.

'No one is calling for a bailout for high-flying guys who overpaid at the top of market, but there are many healthy owners with performing assets who can't access the debt markets right now,' said Dan Fasulo, managing director of research firm Real Capital Analytics.

About US$171 billion (S$257.7 billion) of non-bank commercial mortgages are scheduled to mature this year, according to the Mortgage Bankers Association.

And while defaults on commercial property loans now are relatively low barely above 1 per cent, they could shoot up to between 5 per cent and 6 per cent if credit conditions don't improve, said Victor Calanog, research director at Reis Inc.

'It's a great first step' Calanog said about the plan, 'but there's much to be done in fleshing out the details.' The plan leaves out a key piece of the puzzle: How will the government price CMBS assets, or any securities backed by debt? So far, the free market can't value them because no one is buying them, said Hessam Nadji, managing director at Marcus & Millichap Real Estate Investment Services.

'It sounds good in concept, but I'm still having a hard time deciphering the real solution,' Nadji said. 'The devil is in the details.' -- AP


http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336827.html

Too few details in Bailout 2.0

Feb 11, 2009
Too few details in Bailout 2.0

WASHINGTON - THE new bank rescue plan landed with a thud on Wall Street.
Worried that the revamped financial bailout was far too short on details, especially on how to clean up the books of the banks, investors drove the Dow Jones industrials tumbling more than 380 points.

Treasury Secretary Timothy Geithner announced a plan that could send as much as US$2 trillion (S$3 trillion) coursing through the banking system and the broader economy and stressed the government would act to stop 'catastrophic failure' of financial institutions.

But investors fretted that the government was nowhere near untangling the crisis that has paralysed the financial system and hammered the economy. Wall Street suffered its worst day since Dec 1.

'The good news is they are going to spend a trillion dollars,' said James Cox, managing partner at Harris Financial Group. 'The bad news is they don't know how.' The administration called it the Financial Stability Plan, abandoning the old TARP, or Troubled Asset Relief Program. And while it may have a new name, investors were also quick to point out a whole new set of problems.

Besides worrying the plan is too light on details, Wall Street seemed concerned it does not solve the problem of how to get the soured mortgage-backed assets off banks' books - the heart of the crisis.

Asked about the negative investor response, President Barack Obama told ABC News that Wall Street 'is hoping for an easy out on this thing, and there is no easy out.' For now, the Obama administration says it does not need more than the second US$350 billion chunk of the bailout fund, but it concedes that may change.

'We are going to have to adapt our program as conditions change. We will have to try things we never tried before,' Mr Geithner said.

'We will make mistakes. We will go throughout periods in which things get worse and progress is uneven or interrupted.' The new approach aims to use both public and private cash to buy soured assets off the books of the banks. But the plan provides almost no detail on how the assets would be priced - only that it would be left to the private sector. Pricing the bad assets is key, in part because pricing them too low would force banks to take devastating writedowns.

It's far from clear that the government approach, using federal loans to entice private buyers to take the soured assets, will work.

'Most fund managers see these assets and don't want to touch them,' said Christopher Whalen, managing director of Institutional Risk Analytics. 'They can't sell them.' The government will also use some of the bailout cash to try to kick-start as much as US$1 trillion in lending - hoping that getting the private market for bundled loans humming again will unlock credit in the rest of the economy.

Mr Geithner also wants to put all banks with more than US$100 billion in assets through a 'stress test' to determine whether they can handle the losses that could come from an extended economic downturn.

But details on that part of the plan were sketchy, too, and some observers worried that the process would be messy. It also raises legal questions about what would happen to banks that refuse to participate.

'Let's say they do a stress test and conclude that a bank is insolvent. The bank could say, 'No, that's not the case and we're going to challenge you,'' banking analyst Bert Ely said. 'There's a potential for a lot of litigation.' Banking industry officials reacted with caution.

'There are a lot of details that have not been provided yet, and the devil is in the details,' said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable.

Critics of how the Bush administration handled the first half of the bailout say it doled out money to banks with few strings attached and failed to get banks to resume more normal lending.

It will be at least a week before the Obama administration provides details of how it plans to help homeowners. Mr Geithner did say the government will use $50 billion of bailout money for that, and suggested it would help reduce mortgage principal and lower mortgage rates.

Even so, 'There's not a hell of a lot here to get a sense of,' Democratic Sen. Robert Menendez told Mr Geithner in an appearance later on Tuesday before the Senate Banking Committee.

Republican Senator Richard Shelby of Alabama faulted Geithner for 'a conceptual plan with many details yet to be filled in.' Mr Geithner said the administration was laying out the 'broad architecture' for the program with more details to come as the new plans are designed. He stressed the urgency of moving boldly, given the troubles facing the economy and the financial system.

Details of the new bailout plan came as the Senate passed Obama's $838 billion economic stimulus plan, clearing the way for talks with the House on a compromise measure.

In his speech outlining the plan, Geithner stressed the huge US$1 trillion figures represented loans that would ultimately be repaid.

And he said the cost of doing nothing would be far higher.

'The complete collapse of our financial system would be incalculable for families, for businesses and for our nation,' Geithner said.

Consumer advocates, who had unsuccessfully pressed the Bush administration to help individual borrowers, saw some of the changes as welcome.

'Certainly the flavor has changed and that's encouraging, but we need the meat on the bone here,' said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group in Washington. -- AP


http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_336900.html

World oil demand forecast cut

Feb 11, 2009
World oil demand forecast cut

PARIS - THE International Energy Agency cut its forecast again for global oil demand this year on Wednesday, but warned about a future supply crunch because of current low investment levels.

The energy watchdog for industrialised nations forecast that global oil demand would measure 84.7 million barrels per day (bpd) on average in 2009 - 570,000 bpd less than its last forecast made in January.

At this level, demand would be 1.1 percent or 1.0 million bpd less than in 2008, when demand also fell compared with the year earlier.

'Not only will the two-year contraction in oil demand be the first since the early 1980s, but 2009's decline will also be the largest since 1982,' the IEA said in its monthly oil report.

The watchdog, which has been revising down its once-buoyant forecasts for oil demand steadily since the end of last year, said its revisions were based on new economic growth forecasts from the International Monetary Fund.

The IMF slashed its global growth forecast for 2009 at the end of January, saying the financial crisis and spreading economic problems would result in expansion of just 0.5 per cent, its lowest rate since World War II.

The bleak economic environment has pushed oil prices down to below US$40 (S$60) a barrel in recent weeks, far from their peaks of nearly $150 last year, despite production cuts by OPEC oil producers.

The Organisation of Petroleum Exporting Countries (OPEC) has slashed its output in successive decisions to try to support the plunging market.

The IEA, echoing warnings from industry insiders and OPEC members, warned that one of the effects of low prices would be a delay in investment in future capacity which will be needed once global growth picks up again.

'Ultimately, low prices sow the seeds of their own destruction, and only clear signs of a recovering global economy will spur investment in new oil supply,' the report said.

'The danger is that if too much investment slips now, the scale of the price response to resurgent demand could again destabilise the global economy,' it added.

The secretary general of OPE, Abdalla Salem El-Badri, said on Monday that members of the cartel had already postponed 35 oil drilling projects because of low crude prices.

He has said that OPEC members need a price above $50 per barrel for their exports to encourage investment and balance their government budgets.

Many expensive oil projects have been called off in the last 12 months, particularly in Canada's high-cost tar sands, but news that OPEC countries are also reducing investment has sounded an alarm for analysts. -- AFP

http://www.straitstimes.com/Breaking%2BNews/Money/Story/STIStory_337003.html

Insight into bonds

Insight into bonds
Published: 2009/02/11

Find out what is a bond; why invest in it; and what to watch out for when investing in bonds.

MALAYSIAN retail investors have never participated actively in bond investing.

Some of you may have bought bond funds offered by the unit trusts, however, most of you may not know what a bond investment is really about and the effect it has on your investment portfolio.

So then… what is a bond?

A bond represents the debt owed by either government units or corporations.

By investing in bonds, you basically become the lender to the issuers and you will be paid a specified percentage of interest.

This percentage of interest is called coupon payment and it is given to you by the issuer because of the use of your money.

At the end of the maturity date, you will get back your principal.

An example to quote is the Bond Simpanan Merdeka 2008 issued by Bank Negara for the senior citizens, which has a three-year tenure and pays 5 per cent interest per year.

In Malaysia, the main issuers of public debt are the government of Malaysia,Bank Negara Malaysia), and quasi government institutions (Khazanah, Danamodal and Danaharta).

Private debt securities and asset-backed securities are issued by the National Mortgage Corporation (Cagamas Bhd), financial institutions and non-financial corporations.

The major investors in the Malaysian bond market are the Employees Provident Fund (EPF), pension funds, insurance companies and other financial institutions.

The price of a bond is determined by many factors, with the main drivers being interest rates, inflation, maturity and credit quality.

Interest rates

Bonds are highly sensitive to interest rate fluctuations.

When the prevailing interest rate goes up higher than the coupon rate, the prices of the outstanding bonds will fall below the principal value.

If you are buying a bond fund, higher interest rates will cause lower fund prices.

Inflation

During periods of rapid economic growth, we will see increasing inflation.

This will eventually lead to higher interest rates and cause a drop in the value of bonds.

Deflation, the opposite of inflation, may occur when there is a recession or prolonged periods or little or no growth and excess capacity, will eventually lead to zero or negative real interest rates, causing the value of bonds to rise.

Maturity

Due to the sensitivities to inflation and interest rate fluctuations, longer term bonds will face more uncertainties compared to shorter term bonds.

As such, longer term bonds should offer better interest payments as the additional risk premium for the investors.

Nevertheless, they will suffer larger price fluctuations as a result of the longer period they take to mature.

Credit quality

When we lend out our money, we want to make sure that we will be able to get it back.

Therefore, the credibility or credit quality of the bond issuers plays an important role in the bond price.

A corporate bond will have a higher yield than a government guaranteed bond due to the additional risk that the investor has to bear for facing the possibility of the corporate bond defaulting.

The recent global financial crisis was partly attributed to the decline in credit quality for certain corporate bonds.

Why invest in bonds

Investing in bonds offers an alternative to investors to diversify their investment portfolios because it is relatively lower risk compared to stock investing.

As bonds provide periodic interest payments and repayment of principal at the end of the maturity, it will be suitable for you if your investment objective is to preserve capital and receive a predictable stream of income.

Depending on your investment time horizon, you can choose to invest in short-, medium- or long-term bonds.

However, you must understand the factors that drive the price of the bond that you invest in.

As retailers, most of the time we will be investing in bond funds offered by unit trusts or commercial banks.

Bond funds are combinations of various bonds, therefore, the risk of investing in bond funds is relatively lower compared to individual bonds.

However, you must take note of the factors listed above while selecting an appropriate bond fund.

In addition, you will also need to know about the fund management companies and make sure that the approaches they take are suitable for your risk profile and investment objectives.

The timing of investing in bond funds is also very important.

What to watch out for when investing in bonds

Watch out for the interest rate especially if it is too low or unstable.

Avoid speculative bonds. Even when you are investing in bond funds, make sure that the bonds in the portfolio are investment grade, which carries a credit rating of “BBB” and above.

Bonds with rating of “BB” and below are considered “high yield” and below investment grade.

Don’t invest a large portion of your portfolio in bonds. It will limit your portfolio growth, as over time, inflation will erode the fixed income stream and principal.

Bonds are suitable to complement stock investing.

This article was written by SIDC and Ooi Kok Hwa, a holder of a Capital Markets Services Representative’s Licence to carry on the business of investment advice under the Capital Markets and Services Act 2007.

The information provided in this article is for educational purposes only and should not be used as a substitute for legal or other professional advice.

Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission.

It was established in 1994 and incorporated in 2007.


http://www.btimes.com.my/Current_News/BTIMES/articles/20090211005643/Article/index_html

Bank of England to warn recession will last far longer than Government's forecast

Bank of England to warn recession will last far longer than Government's forecast
The Bank of England will this week come into direct conflict with the Treasury as it warns on recession.

By Edmund Conway and Angela Monaghan
Last Updated: 12:40PM GMT 09 Feb 2009

In its quarterly Inflation Report, the Bank's Monetary Policy Committee will slash its economic growth forecast to the lowest level since it was granted independence in 1997, and will indicate that it is now poised to start buying up securities directly in a bid to pump extra money into the economy.

It comes after the MPC voted to cut borrowing costs to an all-time low of 1pc, despite warnings from savings groups that such a move would undermine incentives to save money.

The Bank is expected to cut its growth forecast from the already-bearish projection that the economy would shrink by 1.3pc in 2009 made in November, to one which factors in a far steeper decline. It undermines the Treasury's assessment in the pre-Budget report that the economy would start growing again in the second half of the year.

The Inflation Report is the Bank's three-monthly opportunity to indicate its outlook for the economy, and economists will be watching the event closely on Wednesday to determine how much further it will cut borrowing costs.

They expect further rate cuts towards zero, as well as quantitative easing, whereby the Bank would increase the money supply by buying assets like corporate and government bonds, complementing the £50bn Asset Purchase Facility scheme already announced by the Treasury. The Governor, Mervyn King, will also indicate how soon the Bank will embark on this.

Despite better-than-expected data from the services sector last week, more gloom is in store next week in the form of labour market statistics, which could show that unemployment surpassed the two million mark in December.

Figures from the Office for National Statistics are also likely to show the number of people claiming unemployment benefits jumped in January, after a series of high profile failures including Woolworths.

"We are looking for a nasty surge of 110,000, the largest increase since March 1991," said Philip Shaw, economist at Investec. That would take the number of claimants to about 1.27m.

http://www.telegraph.co.uk/finance/financetopics/recession/4561002/Bank-of-England-to-warn-recession-will-last-far-longer-than-Governments-forecast.html

Concern is mounting over the dramatic deterioration of public finances across the EU.

Europe ambushes Germany on debt bail-out
The European Union has called an emergency summit of national leaders this month to halt the drift towards protectionism and stem the risks of a debt crisis as the slump deepens.

By Ambrose Evans-Pritchard
Last Updated: 6:24PM GMT 09 Feb 2009

EU finance ministers are to discuss proposals over breakfast in Brussels today for some form of "debt-agency" or mechanism for the EU to raise bonds, a move seen by diplomats as a ploy to ambush Germany into accepting shared responsibility for EU debts – anathema to Berlin.

Concern is mounting over the dramatic deterioration of public finances across the EU. Ireland's deficit is heading for 12pc of GDP, and there are doubts over whether Italy and Greece can roll over some €250bn (£218bn) in state debt between them this year.

EU company debt is a worry too, now 95pc of GDP compared to 50pc in the US. "The amount of debt to roll over in the eurozone is huge, at a time when banks are tightening credit standards," said Gilles Moec, from Bank of America. "Spanish businesses are in a dire situation."

Mirek Topolanek, Czech premier and holder of the EU presidency, said the crisis summit was aimed at thrashing out a joint "recovery plan" and curbing the nationalist reflexes that are tearing the EU apart.

The Czechs are livid over comments by French president Nicolas Sarkozy, who threatened to withold aide for French car companies unless they spend it at home. " If we give money to the auto industry to restructure, we don't want to hear about plant moving to the Czech Republic," he said.

Mr Topolanek said the comments were "unbelievable" and could cause the Czech Republic to reject the Lisbon Treaty. "If somebody wanted to seriously threaten ratification, they couldn't have picked a better means," he said.

The French plan fleshed out yesterday offers €6.5bn in soft loans to Renault and PSA Peugeot Citroen on condition that they promise not to close any sites in France. The Brussels competition police said they will examine the details to determine whether the terms breach EU law.

http://www.telegraph.co.uk/finance/globalbusiness/4571850/Europe-ambushes-Germany-on-debt-bail-out.html

The Ferocious Bears

Bond market calls Fed's bluff as global economy falls apart

Bond market calls Fed's bluff as global economy falls apart
Global bond markets are calling the bluff of the US Federal Reserve.

By Ambrose Evans-Pritchard
Last Updated: 7:22PM GMT 08 Feb 2009

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The yield on 10-year US Treasury bonds – the world's benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down.

This level will asphyxiate the US economy if allowed to persist, as Fed chair Ben Bernanke must know. The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay.

The "real" cost of capital is rising as the slump deepens. This is textbook debt deflation. It was not supposed to happen. The Bernanke doctrine assumes that the Fed can bring down the whole structure of interest costs, first by slashing the Fed Funds rate to zero, and then by making a "credible threat" to buy Treasuries outright with printed money.

Mr Bernanke has been repeating this threat since early December. But talk is cheap. As the Fed hesitates, real yields climb ever higher. Plainly, the markets do not regard Fed rhetoric as "credible" at all.

Who can blame bond vigilantes for going on strike? Nobody wants to be left holding the bag if and when the global monetary blitz succeeds in stoking inflation. Governments are borrowing frantically to fund their bail-outs and cover a collapse in tax revenue. The US Treasury alone needs to raise $2 trillion in 2009.

Where is the money to come from? China, the Pacific tigers and the commodity powers are no longer amassing foreign reserves ($7.6 trillion). Their exports have collapsed. Instead of buying a trillion dollars of extra bonds each year, they have become net sellers. In aggregate, they dumped $190bn over the last fifteen weeks.

The Fed has stepped into the breach, up to a point. It has bought $350bn of commercial paper, and begun to buy $600bn of mortgage bonds. That helps. But still it recoils from buying Treasuries, perhaps fearing that any move to "monetise" Washington's deficit starts a slippery slope towards an Argentine fate. Or perhaps Bernanke doesn't believe his own assurances that the Fed can extract itself easily from emergency policies when the cycle turns.

As they dither, the world is falling apart. Events in Japan have turned deeply alarming. Exports fell 35pc in December. Industrial output fell 9.6pc. The economy is contracting at an annual rate of 12pc. "Falling exports are triggering a downward spiral of production, incomes and spending. It is important to prepare for swift policy steps, including those usually regarded as unusual," said the Bank of Japan's Atsushi Mizuno.

The bank is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.

This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.

The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.

Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.

Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.

The ECB's obduracy has nothing to do with economics. It fears zero rates as a vampire fears daylight, because that brings the purchase of eurozone bonds ever closer into play. Any such action would usher in an EMU "debt union" by the back door, leaving Germany's taxpayers on the hook for Club Med liabilties. This is Europe's taboo.

Meanwhile, Eastern Europe is imploding. Industrial output fell 27pc in Ukraine and 10pc in Russia in December. Latvia's GDP contracted at a 29pc annual rate in the fourth quarter. Polish homeowners have had the shock from Hell. Some 60pc of mortgages are in Swiss francs. The zloty has halved against the franc since July.

Readers have berated me for a piece last week – "Glimmers of Hope" – that hinted at recovery. Let me stress, I was wearing my reporter's hat, not expressing an opinion. My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4560901/Bond-market-calls-Feds-bluff-as-world-falls-apart.html