Top Investors: How They Beat a Scary Market
Ben Steverman
Monday, April 27, 2009
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BusinessWeek asked successful portfolio managers how they navigated a nasty recession and financial crisis
Hardly anyone predicted the size and scope of the recent market meltdown. At the depths of the crisis, which started in 2007 and continues today, there was almost no place for investors to hide.
Still, some investors protected their portfolios far better than others at a time when the concept of investment risk seemed to take on a new dimension. BusinessWeek talked to these investing pros in search of their secrets to success.
The bottom line: There was no simple solution. Successful investing strategies in the past couple of years represented a wide range of philosophies and investment choices. Yet nearly all these top investors, relying on years of experience, sought out only high-quality investments, and many of them were aware of financial and housing difficulties early.
Who Dodged a Bullet?
Which pros managed to sidestep the worst of the market mayhem? What were their strategies? Here's a look:
Ann Benjamin and Thomas O'Reilly, Neuberger Berman High Income Bond Fund (LBHBX)
For Benjamin and O'Reilly, investing is about keeping an eye on the big picture. In 2005, their Neuberger Berman High Income Bond Fund pulled out of bonds exposed to the overheated housing market.
They didn't predict a big housing crash, Benjamin says, but "we thought there was significant oversupply being built in the market."
In 2007 they lightened exposure to more cyclical industries—the sort that would be hurt by the coming recession. "You have to be ahead of the curve," O'Reilly says. "You can't sell on the news." Rather, you need to anticipate the news.
Last year was tough on high-income bond funds, but the Neuberger Berman High Income Bond Fund fell 19% in 2008, beating its Morningstar (MORN) category by 22.5 percentage points. The fund is rated five stars by Morningstar.
Benjamin and O'Reilly are looking ahead, trying to predict the market and the economy's next moves. Fearing the economy could keep dragging longer than predicted, they carefully examine companies to make sure their investments "make it through the cycle," Benjamin says.
Rich Gates, TFS Market Neutral (TFSMX)
By contrast, Rich Gates doesn't shift approaches depending on his predictions of the future. His TFS Market Neutral fund has used the same quantitative strategy since it was started five years ago. It's an approach similar to the hedge fund strategies TFS has run since 2001.
This U.S. equity fund fell just 7.3% in 2008, beating the broad Standard & Poor's 500, which dropped 37.2%, and doing 7 percentage points better than its Morningstar category.
The fund protects assets not just by buying stocks, or going "long," so the fund benefits when prices rise. It also shorts other stocks, by borrowing shares and selling them so the fund benefits when prices fall. The fund stays three-fifths in long positions and two-fifths short.
The fund's computers automatically rank equities according to consistent (and proprietary) criteria, seeking out stocks to buy and short for a few days or up to a month. The shorting strategy limited losses in a tough year, but TFS has also chosen the right stocks to outperform the market in good years like 2006. "It's definitely harder in an up market than a down market," Gates says.
Eric Cinnamond, Intrepid Small Cap Fund (ICMAX)
For Cinnamond, investing starts with close examination of individual companies. "We're just focusing business by business," Cinnamond says. The Intrepid Small Cap Fund buys a stock if it is a "good business"—with a strong balance sheet and consistent cash flow—and if it's priced 20% less than Cinnamond thinks it's worth.
In 2007, when stocks peaked, Cinnamond says nothing was meeting his criteria. "I couldn't find anything," he says. He also avoided financial stocks, believing the rapid increase in mortgage debt was a bubble that would burst.
With much of the market overvalued, Cinnamond had much of his portfolio in cash—perhaps the safest place to be—as the market slid during 2008. At the start of 2008, cash was almost 40% of his portfolio.
In the past 12 months, the fund, rated five stars by Morningstar, has lost just 2.5%, 36 percentage points better than the S&P 500. In early March, when stocks hit their bear market lows, the fund had almost no cash at all, because it was fully invested in equities.
"Now we're able to buy some great companies at deep discounts," he says. "It's the perfect scenario."
Roger Vogel, Silvercrest Asset Management
Vogel also focuses on individual companies, and especially their management teams.
"We get our feel for what's happening in the economy from our companies," Vogel says. Like most "value" investors, he looks for companies trading at a discount. But his fund is "quality-oriented." Sticking with financially secure firms has helped during the credit crisis.
As the crisis unfolds and recession continues, "the strong will emerge stronger and the weak will go away," Vogel says.
He judges firms not just by their numbers but also by their executives. More than two decades of experience help in evaluating management presentations, he says. "If you're an experienced investor, you tend to come out of those with a different mindset," he says.
Silvercrest's small-cap value portfolio—managed for the firm's private clients—is down 6.7% in the past three years, compared to a 17.5% decline for the Russell 2000 Value index.
Jim Moffett, UMB Scout International Fund (UMBWX)
Moffett also focuses on quality, though he does so in international stocks.
Quality "means starting with a balance sheet with not too much debt," Moffett says. His UMB Scout International Fund has traditionally avoided financial stocks because of their reliance on debt and their lack of transparency, he says.
He also avoids too much risk by, for example, staying out of China and Russia, which saw huge market declines. "That's where the reward is, but that's also where the risk is," he says. "We thought the risk was higher than people appreciated."
His fund picks stocks for the long term only after careful vetting, he says. There's "not a lot of razzle-dazzle," he says. "Just stick to the basics."
Moffett's fund, rated five stars by Morningstar, fell 38% in 2008, a disastrous year for overseas stocks, but it beat its benchmark and Morningstar category by more than 5 percentage points.
Emmanuel Ferreira, Oppenheimer Quest Opportunity Value Fund (QVOPX)
For Ferreira, the key to investing is flexibility. The Oppenheimer Quest Opportunity Value Fund can buy or short almost any asset, from bonds to stocks to commodities.
"It's really a mutual fund format where we are allowed to have hedge fund flexibility," he says, adding, "When you have a fund that's flexible, you can take advantage of a lot more opportunities."
Ferreira spotted problems in housing and mortgage debt early. In 2005 and 2006, the fund started shorting—or betting against—subprime mortgage securities. By the time the fund had unwound those bets, it had earned about $200 million—"30 times the money we put at risk."
By the end of 2006, the worry was "too much excess in the financial system and the global economy," Ferreira says. The fund's response was to shift assets into cash.
The fund, rated five stars by Morningstar, is down 17% in the past 12 months.
Michael Cuggino, Permanent Portfolio (PRPFX)
Expect no bold predictions from Cuggino, who says his fund is "based on the premise that the future is unpredictable and investors should prepare themselves for a variety of a different outcomes."
People—even and especially portfolio managers—are bad at predicting the future, he says. So, the Permanent Portfolio is diversified in a wide array of asset classes, a classic risk-management strategy. Gold is 20% of the portfolio, silver 5%, and Swiss-denominated assets are 10%. Equities based on natural resources are 15%, while U.S. growth stocks are 15%, and 35% of the fund sits in U.S. and corporate bonds.
The fund might underperform in a fast-rising bull market for stocks, but there's stability and protection in its broad strategy.
There's little room for managers to make a big bet on one lucrative strategy, but on the flip side, the chance for big losses is reduced. The approach has worked: The five-star Morningstar fund lost just 8.4% in 2008.
Steverman is a reporter for BusinessWeek's Investing channel.
http://finance.yahoo.com/special-edition/active-investor/7_market_pros;_ylt=A0S00ta4tfpJcngBG3dsLKJ4
Friday 1 May 2009
Don't Be Long and Wrong
Active Investing: Managing Risk
Don't Be Long and Wrong
David Serchuk
Thursday, April 30, 2009EmailIMBookmarkdel.icio.usDigg
Think like an institutional investor in order to avoid being either all long securities or all in cash.
Recently we laid out strategies for better ways to buy and hold securities, the idea being that even though the markets have taken a pounding over the past year, you don't have to lose your shirt should you stay long.
Now, however, we are showing the other side of the argument, which is how to avoid being long and wrong. The idea being that while buying and holding--or conversely moving to cash--may be good strategies for some, markets investors should realize that there are other ways to manage portfolios. Just as it can be a mistake to trade in and out of positions as the wind changes, it can also be a mistake to feel that during tough times, you either have to stay long, or move all your assets into savings.
But how to do it? Here is where the Forbes Investor Team steps in. Stephen Roseman, the head of hedge fund Thesis Capital, says that investors should look to have some kind of diversity among their assets. During a downturn, or at least during this most recent downturn, the correlation between all asset classes becomes especially strong, so you want to get out of this trap. The key for individual investors is to try and take a page from institutional investors, who have a large arsenal of tools at their disposal.
Individual investors can follow this model by employing asset managers with a more institutional focus, who look for opportunities in more sophisticated areas including merger arbitrage, statistical arbitrage and venture capital. These would be hard areas for the average investor to tap into, so it's best to seek professional help in order to invest here. Roseman says he expects to see more asset managers offer this type of guidance in the coming quarters.
In total, Roseman recommends investors have between 10% and 30% of their portfolio in something other than long stocks or bonds. Often homeowners already have this base covered in the form of real estate.
Ken Shubin Stein, of hedge fund Spencer Capital Management, adds that a basic but under-appreciated way to lessen the impact of being long and wrong is simply to pay off outstanding debt. Combine that with living beneath one's means, and it can give individuals the emotional fortitude to stick to an investment plan through volatile times. This is key because investors are prone to abandoning their rationally hatched investment plans during turbulent times--not because the plan is failing, but because the investor panics. They pay for this fear when markets rebound, and they miss the upswing.
John Osbon, the head of Osbon Capital Management, makes his living by investing primarily in indexes and exchange-traded funds. He says a diverse portfolio of ETFs can help protect investors through times good and bad. He also says that even though U.S. equity markets have been not done well in the past 10 years, other markets like Latin America have.
One way to play this diversity is through the iShares S&P Latin America 40 Index Fund ETF (ILF). This ETF tracks firms in Mexico, Brazil, Argentina and Brazil. Over the past decade it's up 240.1%, although its down 50.0% over the past 12 months.
One intriguing play noted by Osbon is the new IQ Hedge Multi-Strategy Tracker ETF (QAI), an ETF that seeks to mirror the performance of hedge funds. This is an exciting investment because hedge funds represent a potentially lucrative yet dangerous place to invest. On the one hand, hedge funds have shown strong recent performance as the markets have stumbled, and through mid-March they were down 1.1% versus 18.2% for the S&P Total Return Index.
On the other hand, hedge funds have onerous expenses, are lightly regulated, require large investments and can go out of business. So owning a hedge fund index allows you to tap into an exotic world with few of the obvious downsides. Having said that, the ETF has only been in existence for less than a month, so you might want to wait a little while to see how it actually does before taking a step in.
Diversify Like A Pro
Forbes: What are some ways that traditionally long-only individual investors can use the strategies employed by places like, ahem, hedge funds to diversify their risk, and lower their correlations between stocks and bonds? Stephen laid out a few, what do you think? What can individual investors be expected to reasonably crib from more sophisticated players to diversify?
Stephen Roseman: The biggest impediment that the individual investor has faced is an inability to be anything other than "long and wrong." What I mean by that is that the individual investor has historically had two choices: 1) to be long stocks and bonds, or 2) to make a market call and move their assets into cash. Of course, many individual investors are also diversified in the form of some real estate holding, typically a primary residence.
Institutional investors often have a much more "complete" view of the world. They position their assets across disparate and typically less correlated asset classes and strategies. So while they may have exposure to stocks and bonds through traditional asset managers who are long-only, they also have exposure to less correlated strategies like activism, merger arbitrage, statistical arbitrage, convertible arbitrage, short-biased, private equity, venture capital, real estate, etc. They also tend to give some thought to geographic exposure and investment duration.
In the coming quarters, you will see more asset management companies offer institutional-type products, with the aforementioned strategies, to the retail investor. Retail investors, and their advisers, will come to realize the benefit of diversifying away from long-only strategies. While this won't necessarily be a panacea for a world in which correlations all converge toward "one" as they did over the course of the last 18 months, these products will help investors mute portfolio volatility and contribute to more consistent returns.
Ken Shubin Stein: I agree with Stephen, but to date, the market does not yet offer good alternatives for individual investors.
Another risk for individuals is their view on volatility, risk and investment time horizons. The psychology that makes people chase returns is deeply rooted and probably impossible to change on a population basis. This leads to abandonment of sound strategies during inevitable periods of disappointing returns and is why the average investor earns returns well below the average mutual fund returns.
One alternative is for people to seek out expert help from financial planners and wealth managers, and follow a disciplined plan. This should include managing their liabilities as well as their assets.
Roseman: While, in theory, individual investors can, on their own, emulate some of the strategies that hedge funds use, in practice, it would be very difficult if not impossible. This is because of a smaller asset base, access to the tools needed to execute some of these strategies and ability to focus on strategies that are not well understood.
Even most institutional investors (pensions, endowments and the like) allocate out to specialists in their respective areas of expertise and don't try to emulate the myriad approaches on their own.
The average investor will be better served by seeking out fund managers that employ some of these strategies in an open-end fund format (i.e., a mutual fund). The typical investor can achieve the benefit of meaningful diversification by having some percentage of their assets, probably between 10% and 30%, in something other than long stocks and long bonds.
Of course, it also bears mentioning that most institutional allocators use little to no leverage, or borrowed money, in their own portfolios (although those they allocate to may). The individual investor can emulate that portion of the institutional approach by paying down any outstanding debt. This is especially true of high-cost debt like credit cards, which really undermines good financial planning on the portfolio side.
Shubin Stein: Exactly. I think it is under-appreciated that paying down debt and generally living below one's means allows investors to have the emotional strength to stick to a plan, even during periods of extreme volatility.
John Osbon: It is a nicely flung gauntlet, so let's examine it ... Let me begin by asking Stephen two questions, and then I will weigh in:
1. Which institutional investor do you admire, or think has done a good job, who you would like to see manage money for individuals?
2. What's your after-tax return on such a strategy?
Obviously, I have loaded the questions in my favor because I respectfully and resolutely believe the institutional route is the wrong way for individuals. "Completeness" does not seemed to have redeemed even the shrewdest professional investors, such as Harvard, Yale, et al., nor has it prevented the purveyors of knowledge, like Wall Street banks, from arranging their own funerals from the piles of research they produce.
Nor has non-correlation been a refuge because suddenly ... everything is correlated and heads straight down at the same time. When you most need it, correlation vanishes as quickly as your capital. In fact, Rich Bernstein, formerly of Merrill Lynch/Bank of America, showed how equity correlation is now over 80%, from 60% in the '80s, and that correlation in down markets approaches 95% for all asset classes. There is literally no place to hide. That's no wonder in an investment world dominated by shadow banking.
Lastly, taxes matter, and are likely to matter more the way our government is spending money. There is a big difference between agents of money (institutions) and owners of money (individuals), and that difference is the owners of money pay taxes on their investments, while institutions defer taxation forever. A pre-tax strategy may look quite attractive--and could belong in your IRA or 401(k)--but after-tax the return story is quite different when you have to give up 20% to 40% of the gain.
Stephen is mining a deep and rich lode with diversification, however, which is the one proven way investors can manage risk and return. As an indexer, we pick index materials via ETFs. But it is the architecture of the portfolio--the diversification of "glass, steel, wood and plastic" ETFs that dominates the risk and return. I would look at the whole building of one's portfolio, not just the components. Not all markets have done poorly in the last 10 years. High-quality fixed income has done extremely well, as has most of Latin America. China has positive returns, too, as you might expect.
You can index virtually anything these days via ETFs, even hedge funds with the new QAI, the IQ Hedge Multi-Strategy Tracker ETF. I am not necessarily recommending it, but it's there, and sub-strategies such as the ones Stephen mentions are also coming in ETF form.
I have to say that ETFs are superior to mutual funds for individuals in our view, because with an ETF you own your own basis, whereas with a mutual fund you own everyone else's tax bill.
Ken, what is your recommended debt-to-capital ratio for an individual? I suspect most people would be very interested to hear your notion applied to them personally.
Shubin Stein: I think it is difficult to have one ratio for all individuals. What may be conservative for someone with a very stable income source, say a dentist or doctor, may be aggressive for an artist or advertising executive or finance professional. A principle-based approach is easier to discuss--live life realizing that sudden, and sometimes severe, reversals can happen to any of us, and try to be as immunized to this risk as possible. For some, it means no debt, for others it may mean moderate levels.
The common mistake is to extrapolate near-term experience into the future. When times are good, lots of people assume the good times will last forever and behave accordingly, and when times are tough, like now, it is a challenge to realize that things will get better.
John, given how poorly diversification worked this year, have you changed your opinion on the importance of diversification, or do you think it is important but nothing works all the time?
Osbon: Your principles are widely applicable, and hopefully will be applied!
I do believe some numbers add insight, however. If you run your financial life like Me, Inc., and subject it to discipline and guidelines just like you would any company, your results, and your happiness, might improve. Think, for example, if you limited your total debt to no more than 50% of your capital--ever, including real estate, how much trouble could have been avoided. Likewise, limiting debt service to no more than 20% of cash flow would be a conservative, prudent limit to observe. In fact, these two limits would make Me, Inc. look quite attractive in today's environment. One would also be free to lower those limits with the passage to time so that by age 65, there would be zero debt and zero debt service.
Ken, just so I understand, why do you say diversification worked poorly? Treasuries of all types and stripes did fabulously last year. Are you referring to equities only?
Shubin Stein: Not just equities. Credit, real estate, hard assets of all types did poorly. The bubble in Treasuries did offset the pain in all other areas unless someone had a very large percentage of their assets in them.
Also, I agree some numbers are helpful. This why people need wealth managers! I would probably advise even lower ratios than the below, but that is just because I am very conservative.
Osbon: More clients should come to you!
I believe, and it can be shown, that the added value of non-correlated equities is approaching zero. Common sense explains why: globalization and the Internet. It is no exaggeration to say that almost any company, no matter how small, competes globally. Why? Because you can get it cheaper on the 'net, and your customers will buy it there unless you give them a reason not to, like service, reliability, quality, status or others.
The real non-correlation and its value as expressed in diversification, I believe, comes from truly equity-unalike assets--bonds, commodities, and real estate.
Roseman: In an attempt to speak to all of John's points I will touch on them in order.
I think any conversation needs to begin with the definition of investing "success." While Harvard, Yale et al. suffered declines in the value of their endowments, I would point out that they outperformed the respective underlying asset classes handily in an environment where, to your point, correlations were converging to one. I think it's also important to remember that one year does not a track record make, and these endowments have extraordinary long-term returns. That's a fact, not opinion. Most people are investing for some horizon that exceeds one year so, again, I think the conversation about success first needs to be framed by the definition of "success."
It probably also bears mentioning that we have just suffered the fastest and most catastrophic destruction of wealth since the Crash. This has been the 100 year flood.
As for ETFs, they are appropriate when and if they are used by individuals with the tools to divine how and where they should be positioned. Moreover, many of them suffer tracking errors. I am not suggesting they don't have a place in someone's portfolio, but the point of investing (in any asset class) is to do one's homework and carefully and judiciously allocate capital to the highest return opportunities. As it relates to investing successfully over the long term, an ETF is a shotgun approach to what I believe requires a scalpel.
As for which investors I admire, since many of my competitors are also friends of mine, I am going to refrain from naming names for fear of insulting anyone by omission.
http://finance.yahoo.com/special-edition/active-investor/buy_hold_rip;_ylt=A0WTUTofufpJVPMAHB9sLKJ4
Don't Be Long and Wrong
David Serchuk
Thursday, April 30, 2009EmailIMBookmarkdel.icio.usDigg
Think like an institutional investor in order to avoid being either all long securities or all in cash.
Recently we laid out strategies for better ways to buy and hold securities, the idea being that even though the markets have taken a pounding over the past year, you don't have to lose your shirt should you stay long.
Now, however, we are showing the other side of the argument, which is how to avoid being long and wrong. The idea being that while buying and holding--or conversely moving to cash--may be good strategies for some, markets investors should realize that there are other ways to manage portfolios. Just as it can be a mistake to trade in and out of positions as the wind changes, it can also be a mistake to feel that during tough times, you either have to stay long, or move all your assets into savings.
But how to do it? Here is where the Forbes Investor Team steps in. Stephen Roseman, the head of hedge fund Thesis Capital, says that investors should look to have some kind of diversity among their assets. During a downturn, or at least during this most recent downturn, the correlation between all asset classes becomes especially strong, so you want to get out of this trap. The key for individual investors is to try and take a page from institutional investors, who have a large arsenal of tools at their disposal.
Individual investors can follow this model by employing asset managers with a more institutional focus, who look for opportunities in more sophisticated areas including merger arbitrage, statistical arbitrage and venture capital. These would be hard areas for the average investor to tap into, so it's best to seek professional help in order to invest here. Roseman says he expects to see more asset managers offer this type of guidance in the coming quarters.
In total, Roseman recommends investors have between 10% and 30% of their portfolio in something other than long stocks or bonds. Often homeowners already have this base covered in the form of real estate.
Ken Shubin Stein, of hedge fund Spencer Capital Management, adds that a basic but under-appreciated way to lessen the impact of being long and wrong is simply to pay off outstanding debt. Combine that with living beneath one's means, and it can give individuals the emotional fortitude to stick to an investment plan through volatile times. This is key because investors are prone to abandoning their rationally hatched investment plans during turbulent times--not because the plan is failing, but because the investor panics. They pay for this fear when markets rebound, and they miss the upswing.
John Osbon, the head of Osbon Capital Management, makes his living by investing primarily in indexes and exchange-traded funds. He says a diverse portfolio of ETFs can help protect investors through times good and bad. He also says that even though U.S. equity markets have been not done well in the past 10 years, other markets like Latin America have.
One way to play this diversity is through the iShares S&P Latin America 40 Index Fund ETF (ILF). This ETF tracks firms in Mexico, Brazil, Argentina and Brazil. Over the past decade it's up 240.1%, although its down 50.0% over the past 12 months.
One intriguing play noted by Osbon is the new IQ Hedge Multi-Strategy Tracker ETF (QAI), an ETF that seeks to mirror the performance of hedge funds. This is an exciting investment because hedge funds represent a potentially lucrative yet dangerous place to invest. On the one hand, hedge funds have shown strong recent performance as the markets have stumbled, and through mid-March they were down 1.1% versus 18.2% for the S&P Total Return Index.
On the other hand, hedge funds have onerous expenses, are lightly regulated, require large investments and can go out of business. So owning a hedge fund index allows you to tap into an exotic world with few of the obvious downsides. Having said that, the ETF has only been in existence for less than a month, so you might want to wait a little while to see how it actually does before taking a step in.
Diversify Like A Pro
Forbes: What are some ways that traditionally long-only individual investors can use the strategies employed by places like, ahem, hedge funds to diversify their risk, and lower their correlations between stocks and bonds? Stephen laid out a few, what do you think? What can individual investors be expected to reasonably crib from more sophisticated players to diversify?
Stephen Roseman: The biggest impediment that the individual investor has faced is an inability to be anything other than "long and wrong." What I mean by that is that the individual investor has historically had two choices: 1) to be long stocks and bonds, or 2) to make a market call and move their assets into cash. Of course, many individual investors are also diversified in the form of some real estate holding, typically a primary residence.
Institutional investors often have a much more "complete" view of the world. They position their assets across disparate and typically less correlated asset classes and strategies. So while they may have exposure to stocks and bonds through traditional asset managers who are long-only, they also have exposure to less correlated strategies like activism, merger arbitrage, statistical arbitrage, convertible arbitrage, short-biased, private equity, venture capital, real estate, etc. They also tend to give some thought to geographic exposure and investment duration.
In the coming quarters, you will see more asset management companies offer institutional-type products, with the aforementioned strategies, to the retail investor. Retail investors, and their advisers, will come to realize the benefit of diversifying away from long-only strategies. While this won't necessarily be a panacea for a world in which correlations all converge toward "one" as they did over the course of the last 18 months, these products will help investors mute portfolio volatility and contribute to more consistent returns.
Ken Shubin Stein: I agree with Stephen, but to date, the market does not yet offer good alternatives for individual investors.
Another risk for individuals is their view on volatility, risk and investment time horizons. The psychology that makes people chase returns is deeply rooted and probably impossible to change on a population basis. This leads to abandonment of sound strategies during inevitable periods of disappointing returns and is why the average investor earns returns well below the average mutual fund returns.
One alternative is for people to seek out expert help from financial planners and wealth managers, and follow a disciplined plan. This should include managing their liabilities as well as their assets.
Roseman: While, in theory, individual investors can, on their own, emulate some of the strategies that hedge funds use, in practice, it would be very difficult if not impossible. This is because of a smaller asset base, access to the tools needed to execute some of these strategies and ability to focus on strategies that are not well understood.
Even most institutional investors (pensions, endowments and the like) allocate out to specialists in their respective areas of expertise and don't try to emulate the myriad approaches on their own.
The average investor will be better served by seeking out fund managers that employ some of these strategies in an open-end fund format (i.e., a mutual fund). The typical investor can achieve the benefit of meaningful diversification by having some percentage of their assets, probably between 10% and 30%, in something other than long stocks and long bonds.
Of course, it also bears mentioning that most institutional allocators use little to no leverage, or borrowed money, in their own portfolios (although those they allocate to may). The individual investor can emulate that portion of the institutional approach by paying down any outstanding debt. This is especially true of high-cost debt like credit cards, which really undermines good financial planning on the portfolio side.
Shubin Stein: Exactly. I think it is under-appreciated that paying down debt and generally living below one's means allows investors to have the emotional strength to stick to a plan, even during periods of extreme volatility.
John Osbon: It is a nicely flung gauntlet, so let's examine it ... Let me begin by asking Stephen two questions, and then I will weigh in:
1. Which institutional investor do you admire, or think has done a good job, who you would like to see manage money for individuals?
2. What's your after-tax return on such a strategy?
Obviously, I have loaded the questions in my favor because I respectfully and resolutely believe the institutional route is the wrong way for individuals. "Completeness" does not seemed to have redeemed even the shrewdest professional investors, such as Harvard, Yale, et al., nor has it prevented the purveyors of knowledge, like Wall Street banks, from arranging their own funerals from the piles of research they produce.
Nor has non-correlation been a refuge because suddenly ... everything is correlated and heads straight down at the same time. When you most need it, correlation vanishes as quickly as your capital. In fact, Rich Bernstein, formerly of Merrill Lynch/Bank of America, showed how equity correlation is now over 80%, from 60% in the '80s, and that correlation in down markets approaches 95% for all asset classes. There is literally no place to hide. That's no wonder in an investment world dominated by shadow banking.
Lastly, taxes matter, and are likely to matter more the way our government is spending money. There is a big difference between agents of money (institutions) and owners of money (individuals), and that difference is the owners of money pay taxes on their investments, while institutions defer taxation forever. A pre-tax strategy may look quite attractive--and could belong in your IRA or 401(k)--but after-tax the return story is quite different when you have to give up 20% to 40% of the gain.
Stephen is mining a deep and rich lode with diversification, however, which is the one proven way investors can manage risk and return. As an indexer, we pick index materials via ETFs. But it is the architecture of the portfolio--the diversification of "glass, steel, wood and plastic" ETFs that dominates the risk and return. I would look at the whole building of one's portfolio, not just the components. Not all markets have done poorly in the last 10 years. High-quality fixed income has done extremely well, as has most of Latin America. China has positive returns, too, as you might expect.
You can index virtually anything these days via ETFs, even hedge funds with the new QAI, the IQ Hedge Multi-Strategy Tracker ETF. I am not necessarily recommending it, but it's there, and sub-strategies such as the ones Stephen mentions are also coming in ETF form.
I have to say that ETFs are superior to mutual funds for individuals in our view, because with an ETF you own your own basis, whereas with a mutual fund you own everyone else's tax bill.
Ken, what is your recommended debt-to-capital ratio for an individual? I suspect most people would be very interested to hear your notion applied to them personally.
Shubin Stein: I think it is difficult to have one ratio for all individuals. What may be conservative for someone with a very stable income source, say a dentist or doctor, may be aggressive for an artist or advertising executive or finance professional. A principle-based approach is easier to discuss--live life realizing that sudden, and sometimes severe, reversals can happen to any of us, and try to be as immunized to this risk as possible. For some, it means no debt, for others it may mean moderate levels.
The common mistake is to extrapolate near-term experience into the future. When times are good, lots of people assume the good times will last forever and behave accordingly, and when times are tough, like now, it is a challenge to realize that things will get better.
John, given how poorly diversification worked this year, have you changed your opinion on the importance of diversification, or do you think it is important but nothing works all the time?
Osbon: Your principles are widely applicable, and hopefully will be applied!
I do believe some numbers add insight, however. If you run your financial life like Me, Inc., and subject it to discipline and guidelines just like you would any company, your results, and your happiness, might improve. Think, for example, if you limited your total debt to no more than 50% of your capital--ever, including real estate, how much trouble could have been avoided. Likewise, limiting debt service to no more than 20% of cash flow would be a conservative, prudent limit to observe. In fact, these two limits would make Me, Inc. look quite attractive in today's environment. One would also be free to lower those limits with the passage to time so that by age 65, there would be zero debt and zero debt service.
Ken, just so I understand, why do you say diversification worked poorly? Treasuries of all types and stripes did fabulously last year. Are you referring to equities only?
Shubin Stein: Not just equities. Credit, real estate, hard assets of all types did poorly. The bubble in Treasuries did offset the pain in all other areas unless someone had a very large percentage of their assets in them.
Also, I agree some numbers are helpful. This why people need wealth managers! I would probably advise even lower ratios than the below, but that is just because I am very conservative.
Osbon: More clients should come to you!
I believe, and it can be shown, that the added value of non-correlated equities is approaching zero. Common sense explains why: globalization and the Internet. It is no exaggeration to say that almost any company, no matter how small, competes globally. Why? Because you can get it cheaper on the 'net, and your customers will buy it there unless you give them a reason not to, like service, reliability, quality, status or others.
The real non-correlation and its value as expressed in diversification, I believe, comes from truly equity-unalike assets--bonds, commodities, and real estate.
Roseman: In an attempt to speak to all of John's points I will touch on them in order.
I think any conversation needs to begin with the definition of investing "success." While Harvard, Yale et al. suffered declines in the value of their endowments, I would point out that they outperformed the respective underlying asset classes handily in an environment where, to your point, correlations were converging to one. I think it's also important to remember that one year does not a track record make, and these endowments have extraordinary long-term returns. That's a fact, not opinion. Most people are investing for some horizon that exceeds one year so, again, I think the conversation about success first needs to be framed by the definition of "success."
It probably also bears mentioning that we have just suffered the fastest and most catastrophic destruction of wealth since the Crash. This has been the 100 year flood.
As for ETFs, they are appropriate when and if they are used by individuals with the tools to divine how and where they should be positioned. Moreover, many of them suffer tracking errors. I am not suggesting they don't have a place in someone's portfolio, but the point of investing (in any asset class) is to do one's homework and carefully and judiciously allocate capital to the highest return opportunities. As it relates to investing successfully over the long term, an ETF is a shotgun approach to what I believe requires a scalpel.
As for which investors I admire, since many of my competitors are also friends of mine, I am going to refrain from naming names for fear of insulting anyone by omission.
http://finance.yahoo.com/special-edition/active-investor/buy_hold_rip;_ylt=A0WTUTofufpJVPMAHB9sLKJ4
Advisers Ditch 'Buy and Hold' for New Tactics
Advisers Ditch 'Buy and Hold' for New Tactics
by Anne Tergesen and Jane J. Kim
Thursday, April 30, 2009
provided by
Facing Angry Clients, Pros Turn to 'Alternative' Products; Risk of Missing a Turnaround
The broad decline across financial markets in the past year has persuaded a small but growing number of financial advisers to abandon the traditional buy-and-hold strategy -- which emphasizes long-term investing in a mix of assets -- for a new approach geared to sidestep future market plunges and ease volatility.
Jeff Seymour, an adviser based in Cary, N.C., used to counsel clients to buy a diverse menu of stocks, bonds and commodities, and hold on for the long run. But early last year, he says, he recognized that "the macro-economic climate has changed."
Today, Mr. Seymour keeps about 90% of his clients' money in such low-risk investments as short-term bonds, cash and gold. With some of the small amount that's left over, he uses leveraged exchange-traded funds to place magnified bets both on and against the Standard & Poor's 500-stock index.
"It's a complete rethink of how to do asset management," Mr. Seymour says. Most of his clients are within a few percentage points of breaking even since the shift, he says, while his firm, Triangle Wealth Management LLC, has more than doubled in size.
Buffeted by steep declines in stocks, many bonds, commodities and real estate, many advisers are questioning their faith in long-standing investment principles, such as controlling risk by building diverse portfolios. Some are adding increasingly exotic investments, including products that offer downside protection, to client portfolios. Others are trading more actively -- and say they plan to continue to do so until they see evidence of a new bull market.
To be sure, most advisers are staying the course. They point out that frequent trading leads to higher trading costs and tax bills, and that so-called alternative investments come with some serious downsides. Because the markets for many of these products are relatively undeveloped, for example, investors may face high fees, poor liquidity and a high degree of complexity.
Critics also contend that advisers who scale back on stocks are essentially trying to time the market, and are exposing their clients to another type of risk -- that of missing out on future rallies that could recoup recent losses.
"By abandoning time-proven prudent techniques, they run a serious risk of destroying their own credibility and their clients' portfolios," says Frank Armstrong, president and founder of Investor Solutions Inc., an independent financial advisory firm in Miami that still practices buy-and-hold investing.
The changes come at a time when financial advisers are coming under pressure from clients who are tired of paying fees only to watch their savings evaporate. Advisers have "a lot of cranky clients," says Mr. Armstrong. "They want to see something happen," he says.
Certain advisers have long placed small tactical bets on sectors, countries or regions they expect to outperform the broad market. Many have also placed a small portion of clients' portfolios into alternative investments, such as commodities and real-estate investment trusts.
Offsetting Risks
Now, some are adopting even less-conventional approaches in an attempt to more effectively offset the risks of investing in stocks -- and generate returns in a market they expect to remain depressed for some time. Some have ramped up their use of opportunistic trading to try to profit from short-term rallies and selloffs. Others are turning to "structured products," which are complex investments that often employ options to provide downside protection. Still others are using investments such as currencies or managed futures that they believe will rise when stocks fall.
"Asset allocations built on stocks and bonds are best suited to secular bull markets," says Louis Stanasolovich, founder of Legend Financial Advisors Inc. in Pittsburgh. "But the past nine years have proved that nontraditional thinking makes more sense in secular bear markets."
Last October, Mr. Stanasolovich revamped one of his portfolios that is aimed at delivering relatively consistent returns with low volatility. It currently consists mainly of government and agency bonds, hedge-fund-like mutual funds and a long-short commodities fund. It also holds "managed futures" funds, which seek to profit from gains and losses in commodities and financial futures, including a range of currencies, government securities and equity indexes. From Oct. 10, when Mr. Stanasolovich completed this makeover, through April 27, he says Legend's low-volatility portfolios are "essentially break even." The S&P's 500 is off about 3% over that period.
Brave New Investing World
Some financial advisers are reconsidering their approach. Here's what to keep in mind:
• Frequent trading can lead to higher trading costs and tax bills.
• "Alternative products" often come with high fees and complex strategies.
• Market timing may help dodge declines, but investors may miss the next big turnaround.
Such unconventional approaches appear to be gaining sway. About 15% of the 500 advisers polled between December and March by consulting firms GDC Research LLC of Sherborn, Mass., and Practical Perspectives LLC of Boxford, Mass., say they have made significant changes in the way they manage retirement money over the past year. Among those who have made a change, 21% report increasing their use of opportunistic trading strategies. Eighteen percent say they have become more reliant on structured products and related investments, and 11% say they're incorporating other types of alternative investments.
Two prominent networks of financial advisers -- the National Association of Personal Financial Advisors and the Financial Planning Association -- are sponsoring panels at conferences this year on the subject of rethinking conventional approaches to investing and building client portfolios.
'A Seismic Change'
"There's a seismic change in the market," says Will Hepburn, president of the National Association of Active Investment Managers. "The people who were buy-and-hold-oriented lost a lot of money, and they don't want to do it again."
Meanwhile, financial-services companies are rolling out products designed to lure gun-shy advisers. Last July, Portfolio Management Consultants, the investment consulting arm of Envestnet Asset Management Inc., introduced seven portfolios that invest in ETFs based primarily on signals from quantitative models. Advisers -- who have invested over $200 million since the launch -- can select how much of their clients' portfolios to allocate to this tactical asset-allocation approach. Although many will put between 20% and 40% of client assets in them, some have shifted 100%, says Richard Hughes, group co-president.
Helios LLC of Orlando, Fla., expects to start offering customized portfolios this summer that will enable independent advisers to use options strategies to get exposure to riskier asset classes, such as stocks, with limited downside. In exchange, they give up some potential appreciation.
DWS Investments, the U.S. retail unit of Deutsche Bank AG's Asset Management division, says more financial advisers are using its so-called buffered notes, which offer limited principal protection. "A lot of investing over the last 40 years has been done around traditional asset classes," says Chris Warren, head of structured products at DWS. "But over the last 18 months, the correlation among those asset classes has gone up a lot, so much of the benefits of portfolio diversification really aren't there."
All these structured products add a layer of fees. Helios, for example, plans to charge a maximum fee of 0.95%.
In October, Matthew Tuttle of Tuttle Wealth Management LLC in Stamford, Conn., gave up on buy-and-hold investing. He hired Murray Ruggiero Jr. -- who developed trading systems for managed-futures traders and funds -- to develop similar computer models for the ETFs and index funds he favors. Now, Mr. Tuttle decides what to buy and sell for his clients based on market trends.
"We trust the computer," he says. He has been able to sidestep recent market slides while reducing the volatility of clients' portfolios, he says.
Paying More in Taxes
To be sure, his clients will pay more in taxes. But Mr. Tuttle says no one is complaining. "Would you rather be tax-efficient and have losses?" he says.
Other advisers are looking even further afield for alternative investments. Today, the average client of West Financial Consulting Inc. of Huntsville, Ala., holds about 20% in domestic and international stocks, down from 40% last year. Founder Larry West is currently using bond funds that make tactical bets. He is also recommending greater exposure to alternative investments, including managed-futures funds, bonds that back construction and expansion projects at churches, hedge-fund-like mutual funds, gas-drilling projects, and private partnerships that invest in real estate. He also holds positions in two private partnerships that invest in railroad cars.
There is some evidence that advisers who practice the traditional buy-and-hold philosophy are losing clients to managers trying new approaches. Jeff Porter of North Canton, Ohio, left his buy-and-hold-oriented planner last year and moved his account to Brenda Wenning of Newton, Mass. Ms. Wenning had been a financial adviser for years at a firm that practiced a buy-and-hold approach, but started actively managing clients' money -- in part by using leveraged ETFs -- when she opened her own practice in May 2008.
"I realized when I saw the market starting to change that the old buy-and-hold strategy just doesn't work," says Mr. Porter, whose account was already down 20% last year by the time he went to Ms. Wenning. She immediately shifted his investments to cash -- a move he calculates saved him about $80,000. Since then, he says, Ms. Wenning has been slowly moving back into the markets. His old adviser hadn't bought or sold a single investment in his account last year.
"You're paying these people a fee to manage your money," Mr. Porter says. "They're really not earning their keep."
Write to Anne Tergesen at anne.tergesen@wsj.com and Jane J. Kim at jane.kim@wsj.com
Pick Your Poison: Inflation, Deflation, Stagflation
Active Investing: Managing Risk
Pick Your Poison: Inflation, Deflation, Stagflation
Lauren Young
Monday, April 27, 2009
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Analysts see possible scenarios for each of these to strike the U.S. economy. Stay alert and invest accordingly.
Will the real 'flation please stand up?
Experts are arguing about where the U.S. economy is heading as the global financial system tries to right itself. Is it on the path to inflation, deflation, or, worse, stagflation? Rising unemployment and excess production capacity are making it hard for the U.S. economy to climb out of recession. And that, in turn, is putting a strain on pricing power and wage growth—raising fears of deflation, which develops when a broad decline in prices amid falling demand feeds further price-cutting.
But what happens if the Federal Reserve's efforts to jump-start the economy take effect? Stimulus to the tune of $787 billion is supposed to rev up economic engines. Prices could climb too high as too much money chases after available goods and services—the classic formula for inflation.
"I describe [the potential dangers in] this economy in the form of a snowy Minnesota road," says Peter Rekstad, a financial adviser at TruNorth in Oakdale, Minn. "A car slid off the road into the deflation ditch. The way out of the ditch is to get a bunch of friends pushing while you rock the car back and forth. The big danger is that you get out of the deflation ditch and race across the road into the inflation ditch."
Or to take Rekstad's analogy further, say a car is straddling the road, with its wheels mired in both ditches at once—the worst of both worlds. That situation, where growth slows while inflation soars, is known as stagflation.
Here's an investor's guide to protecting your portfolio from these three forces.
Deflation
Deflation is the threat dominating headlines. "You've got a strong supply of goods and weak demand. That's a recipe for prolonged deflation," says A. Gary Shilling, economist and author of Deflation: How to Survive & Thrive in the Coming Wave of Deflation (McGraw-Hill). The problem is deflation's ripple effect: When banks stop lending, businesses stop expanding and wages fall. Consumers stop spending, which pushes prices lower. Why won't massive stimulus pull the economy out of the deflationary lane? Shilling fears that the U.S. government's economic tampering will have a "Big Brother effect," hurting innovation and permanently curbing growth.
The Signs. The surest sign of deflation is a decline in the consumer price index, which tracks the prices of consumer goods and services. But it's hard to ignore lower real estate values, which aren't in the CPI. Home prices fell more than 18% in 2008, according to the S&P/Case-Schiller U.S. National Home Price Index. Another deflation indicator: the higher savings rate, which we're seeing for the first time in 25 years. Shilling expects the savings rate to rise from 4.2% to 10% in the next decade.
Investment Strategy. "Quality is paramount in deflationary markets," Shilling says. He thinks most investors should be in short-term certificates of deposit or money-market funds. Those with a 10-year time horizon should also buy tech stocks, such as semiconductors, he says. Companies facing deflation can't cut prices and must boost productivity through technology.
Inflation
The Argument. Many of the economists and financial advisers polled by BusinessWeek for this story believe the huge amount of money being pumped into banks by the Federal Reserve (chart, right) makes inflation a real threat. Hans Olsen, chief investment officer for JPMorgan Chase (JPM)'s private wealth management business, says the stimulus plan ultimately will lead to higher inflation. However, total inflation is basically nonexistent at -0.4%. The trick is figuring out when it will be a problem. "The nasty thing about inflation is that it's insidious," Olsen says. Banishing inflation from the economy once it is "infected" is hard.
The Signs. The leading indicator used to measure inflation is the CPI.
Commodity prices, particularly those of oil and copper, are another bellwether. One indicator Olsen tracks is government debt as a percentage of gross domestic product, which he sees surging from 40% to 80% over the next few years.
Investment Strategy. Mild price inflation is considered healthy for stock investors because it is a sign that the economy is growing. But when inflation spikes, as it did when it hit 13% in the 1970s, interest rates rise and borrowing stops. For bondholders, soaring inflation eats away at asset values over extended periods.
The most direct way to fight this is to buy Treasury Inflation-Protected Securities (TIPS)—government-backed bonds pegged to inflation via the CPI. (TIPS belong in tax-deferred accounts because they are not tax-efficient.) A study by economic consultancy Peter L. Bernstein Inc. found that, for an aggressive investor who is worried about inflation, a 47%/53% proportion of TIPs to stocks (the study tracked broad stock market indexes) provided the best risk-adjusted real returns over a wide range of inflationary environments.
Among mutual funds, advisers favor the Vanguard Inflation-Protected Securities Fund (VIPSX), which had an annualized return of 5% for the past three years. Other plays include the iShares Barclays TIPS Bond exchange-traded fund (TIP) and Pimco Real Return Fund (PRTNX).
Commodities are another classic hedge. A well-diversified commodity play is the Pimco Commodity Real Return Fund (CRIX), which combines commodities with TIPS. Many advisers also like the SPDR Gold Trust ETF (GLD) and the First Eagle Gold Fund.
Stagflation
Stagflation is caused by the combination of slow growth and surging inflation. Slower growth will come from extreme caution by lenders, households, and businesses, while a shortage of production capacity will create inflationary bottlenecks, argues Mohamed El-Erian, chief executive officer at Pimco. "Stagflation will be part of the new normal," he says.
The Signs. The misery index, which combines the unemployment and inflation rates, is the best gauge of stagflation. In March it was at 8.1%. El-Erian predicts that unemployment will hit 10% by yearend, and 2% inflation could bring the misery index up to 12% by the end of 2010.
Investment Strategy. Insulating your portfolio from stagflation is tough. Equity investors need to take a very conservative stance, focusing on high-quality growth stocks such as Johnson & Johnson (JNJ) and PepsiCo (PEP), says John Boland, financial adviser at Maple Capital Management. Gold, as well as TIPS, will help mitigate some of the inflation risk. El-Erian considers TIPS a bargain because 10-year TIPS are pricing in inflation of less than 1.5% for the next decade, and he sees inflation jumping as high as 6% by 2011.
Young is a Personal Business editor for BusinessWeek
With Tara Kalwarski in New York
http://finance.yahoo.com/special-edition/active-investor/inflate-deflate-stagflate;_ylt=Apx_JUcYDM.BiqB1peaegXC7YWsA
Active Investing: Managing Risk
http://finance.yahoo.com/special-edition/active-investor;_ylt=Av0dbBsyTSeandibSloqvq67YWsA
Pick Your Poison: Inflation, Deflation, Stagflation
Lauren Young
Monday, April 27, 2009
EmailIMBookmarkdel.icio.usDigg
Analysts see possible scenarios for each of these to strike the U.S. economy. Stay alert and invest accordingly.
Will the real 'flation please stand up?
Experts are arguing about where the U.S. economy is heading as the global financial system tries to right itself. Is it on the path to inflation, deflation, or, worse, stagflation? Rising unemployment and excess production capacity are making it hard for the U.S. economy to climb out of recession. And that, in turn, is putting a strain on pricing power and wage growth—raising fears of deflation, which develops when a broad decline in prices amid falling demand feeds further price-cutting.
But what happens if the Federal Reserve's efforts to jump-start the economy take effect? Stimulus to the tune of $787 billion is supposed to rev up economic engines. Prices could climb too high as too much money chases after available goods and services—the classic formula for inflation.
"I describe [the potential dangers in] this economy in the form of a snowy Minnesota road," says Peter Rekstad, a financial adviser at TruNorth in Oakdale, Minn. "A car slid off the road into the deflation ditch. The way out of the ditch is to get a bunch of friends pushing while you rock the car back and forth. The big danger is that you get out of the deflation ditch and race across the road into the inflation ditch."
Or to take Rekstad's analogy further, say a car is straddling the road, with its wheels mired in both ditches at once—the worst of both worlds. That situation, where growth slows while inflation soars, is known as stagflation.
Here's an investor's guide to protecting your portfolio from these three forces.
Deflation
Deflation is the threat dominating headlines. "You've got a strong supply of goods and weak demand. That's a recipe for prolonged deflation," says A. Gary Shilling, economist and author of Deflation: How to Survive & Thrive in the Coming Wave of Deflation (McGraw-Hill). The problem is deflation's ripple effect: When banks stop lending, businesses stop expanding and wages fall. Consumers stop spending, which pushes prices lower. Why won't massive stimulus pull the economy out of the deflationary lane? Shilling fears that the U.S. government's economic tampering will have a "Big Brother effect," hurting innovation and permanently curbing growth.
The Signs. The surest sign of deflation is a decline in the consumer price index, which tracks the prices of consumer goods and services. But it's hard to ignore lower real estate values, which aren't in the CPI. Home prices fell more than 18% in 2008, according to the S&P/Case-Schiller U.S. National Home Price Index. Another deflation indicator: the higher savings rate, which we're seeing for the first time in 25 years. Shilling expects the savings rate to rise from 4.2% to 10% in the next decade.
Investment Strategy. "Quality is paramount in deflationary markets," Shilling says. He thinks most investors should be in short-term certificates of deposit or money-market funds. Those with a 10-year time horizon should also buy tech stocks, such as semiconductors, he says. Companies facing deflation can't cut prices and must boost productivity through technology.
Inflation
The Argument. Many of the economists and financial advisers polled by BusinessWeek for this story believe the huge amount of money being pumped into banks by the Federal Reserve (chart, right) makes inflation a real threat. Hans Olsen, chief investment officer for JPMorgan Chase (JPM)'s private wealth management business, says the stimulus plan ultimately will lead to higher inflation. However, total inflation is basically nonexistent at -0.4%. The trick is figuring out when it will be a problem. "The nasty thing about inflation is that it's insidious," Olsen says. Banishing inflation from the economy once it is "infected" is hard.
The Signs. The leading indicator used to measure inflation is the CPI.
Commodity prices, particularly those of oil and copper, are another bellwether. One indicator Olsen tracks is government debt as a percentage of gross domestic product, which he sees surging from 40% to 80% over the next few years.
Investment Strategy. Mild price inflation is considered healthy for stock investors because it is a sign that the economy is growing. But when inflation spikes, as it did when it hit 13% in the 1970s, interest rates rise and borrowing stops. For bondholders, soaring inflation eats away at asset values over extended periods.
The most direct way to fight this is to buy Treasury Inflation-Protected Securities (TIPS)—government-backed bonds pegged to inflation via the CPI. (TIPS belong in tax-deferred accounts because they are not tax-efficient.) A study by economic consultancy Peter L. Bernstein Inc. found that, for an aggressive investor who is worried about inflation, a 47%/53% proportion of TIPs to stocks (the study tracked broad stock market indexes) provided the best risk-adjusted real returns over a wide range of inflationary environments.
Among mutual funds, advisers favor the Vanguard Inflation-Protected Securities Fund (VIPSX), which had an annualized return of 5% for the past three years. Other plays include the iShares Barclays TIPS Bond exchange-traded fund (TIP) and Pimco Real Return Fund (PRTNX).
Commodities are another classic hedge. A well-diversified commodity play is the Pimco Commodity Real Return Fund (CRIX), which combines commodities with TIPS. Many advisers also like the SPDR Gold Trust ETF (GLD) and the First Eagle Gold Fund.
Stagflation
Stagflation is caused by the combination of slow growth and surging inflation. Slower growth will come from extreme caution by lenders, households, and businesses, while a shortage of production capacity will create inflationary bottlenecks, argues Mohamed El-Erian, chief executive officer at Pimco. "Stagflation will be part of the new normal," he says.
The Signs. The misery index, which combines the unemployment and inflation rates, is the best gauge of stagflation. In March it was at 8.1%. El-Erian predicts that unemployment will hit 10% by yearend, and 2% inflation could bring the misery index up to 12% by the end of 2010.
Investment Strategy. Insulating your portfolio from stagflation is tough. Equity investors need to take a very conservative stance, focusing on high-quality growth stocks such as Johnson & Johnson (JNJ) and PepsiCo (PEP), says John Boland, financial adviser at Maple Capital Management. Gold, as well as TIPS, will help mitigate some of the inflation risk. El-Erian considers TIPS a bargain because 10-year TIPS are pricing in inflation of less than 1.5% for the next decade, and he sees inflation jumping as high as 6% by 2011.
Young is a Personal Business editor for BusinessWeek
With Tara Kalwarski in New York
http://finance.yahoo.com/special-edition/active-investor/inflate-deflate-stagflate;_ylt=Apx_JUcYDM.BiqB1peaegXC7YWsA
Active Investing: Managing Risk
http://finance.yahoo.com/special-edition/active-investor;_ylt=Av0dbBsyTSeandibSloqvq67YWsA
Financial Planning for the Future
Financial Planning for the Future
http://www.usnews.com/features/business/financial-planning-for-the-future.html
http://www.usnews.com/features/business/financial-planning-for-the-future.html
Why Chrysler Still Might Not Survive
U.S.News & World Report
Why Chrysler Still Might Not Survive
Thursday April 30, 3:31 pm ET
By Rick Newman
Give President Obama credit for his boldest bailout plan yet. Unlike some of the open-ended bank bailouts, his Chrysler plan makes hard choices, sets public standards and deadlines, and puts some burden on stakeholders besides the U.S. government. By forcing Chrysler into bankruptcy, Obama has committed to a process that will determine winners and losers and force concessions on those unwilling to make them voluntarily.
But Obama's claim that bankruptcy gives Chrysler a "new lease on life" may be wishful thinking. Bankruptcy reorganization and a Fiat merger might be Chrysler's best chance for survival, but the "New Chrysler," as the administration calls it, could end up being no more successful than New Coke, one of the biggest business flops ever. Here's why:
No cars.
Obama praised Chrysler's accomplishments in cutting tough deals with its unions and most of its creditors. But it takes compelling cars to succeed in the car industry, and Chrysler still has few. The Fiat merger is supposed to give Chrysler new versions of some popular Fiat vehicles, like the 500 compact car. Okay, great. But unless Obama takes the unusual step of waiving U.S. safety and environmental laws, it will take well over a year for such cars to be retrofitted for the U.S. market - and even longer before they're actually built here, which is one of the conditions the new company must meet to get up to $8 billion in additional aid. For the next 12 months at least, Chrysler will still be offering the same lineup of inefficient, underperforming vehicles, and losing market share the whole time.
Small margins.
The last two years have proven that every successful automaker needs a stable of competitive small cars - one of Fiat's strengths - but those are just part of the formula. Small cars tend to have small profit margins, no matter how many you sell, which is why it's vital to have compelling larger vehicles, too. Chrysler's 300 sedan was a big hit, but it's near the end of its lifecycle, and few of Chrysler's other big vehicles are tops in their segment. When the car market was going gangbusters, a few hits in the lineup could make up for a few duds. But with industry sales down 40 percent from their peak, every vehicle needs to pull its own weight, and even a combined Chrysler-Fiat fleet doesn't seem to have enough standouts.
Lots of competition.
The revitalized Chrysler is hardly the only company planning to introduce hot new small cars that will take the market by storm. Chevrolet has the Cruze. Ford has the Fiesta. Toyota, Honda and Nissan already build some of the best small cars, and they're certainly not planning to give up their huge edge in the segment. So even if the 500 and a couple other Fiats are big hits when they arrive in America, the competition is only going to intensify. And other makes already in the market have a key first-mover advantage.
Convoluted ownership.
If the Obama plan goes as expected, Chrsyler will emerge from bankruptcy being jointly owned by the United Auto Workers, Fiat, and the U.S. and Canadian governments. Those vastly different entities share a common cause for the moment - saving a big North American employer and using its infrastructure as a springboard for Fiat. But it's hard to imagine a more awkward ownership structure for something as complex as a car company. The U.S. government and the UAW? The U.S. government and the Italians? Will they really maintain a unified focus for as long as it takes for Chrysler to repay up to $12 billion in federal loans and get out of the government's clutches? Chrysler's failed 9-year marriage to Germany's Daimler AG is a poignant reminder of how difficult it can be to hold together a sprawling operation when the biggest stakeholders have diverging interests.
Ford.
There's one domestic automaker positioned to benefit from the woes at Chrysler and General Motors. Ford is still nursing its own string of deep losses -- but doing so without government aid or the stigma associated with bankruptcy. And as it turns around its own operation, Ford has started to slowly gain market share, largely at the expense of its crosstown rivals. Ford could make further gains as Chrysler works through bankruptcy, and GM approaches it. Obama has pledged government backing for the warranties on all Chrysler and GM products, but buying from a solvent automaker still beats taking your chances on a fuzzy government guarantee. That's old-fashioned capitalism, which may yet play a role in the historic realignment of the automakers.
http://biz.yahoo.com/usnews/090430/30_why_chrysler_still_might_not_survive.html;_ylt=Ak4I9f5eS163H2qBgdj9syy7YWsA?.&.pf=loans
Why Chrysler Still Might Not Survive
Thursday April 30, 3:31 pm ET
By Rick Newman
Give President Obama credit for his boldest bailout plan yet. Unlike some of the open-ended bank bailouts, his Chrysler plan makes hard choices, sets public standards and deadlines, and puts some burden on stakeholders besides the U.S. government. By forcing Chrysler into bankruptcy, Obama has committed to a process that will determine winners and losers and force concessions on those unwilling to make them voluntarily.
But Obama's claim that bankruptcy gives Chrysler a "new lease on life" may be wishful thinking. Bankruptcy reorganization and a Fiat merger might be Chrysler's best chance for survival, but the "New Chrysler," as the administration calls it, could end up being no more successful than New Coke, one of the biggest business flops ever. Here's why:
No cars.
Obama praised Chrysler's accomplishments in cutting tough deals with its unions and most of its creditors. But it takes compelling cars to succeed in the car industry, and Chrysler still has few. The Fiat merger is supposed to give Chrysler new versions of some popular Fiat vehicles, like the 500 compact car. Okay, great. But unless Obama takes the unusual step of waiving U.S. safety and environmental laws, it will take well over a year for such cars to be retrofitted for the U.S. market - and even longer before they're actually built here, which is one of the conditions the new company must meet to get up to $8 billion in additional aid. For the next 12 months at least, Chrysler will still be offering the same lineup of inefficient, underperforming vehicles, and losing market share the whole time.
Small margins.
The last two years have proven that every successful automaker needs a stable of competitive small cars - one of Fiat's strengths - but those are just part of the formula. Small cars tend to have small profit margins, no matter how many you sell, which is why it's vital to have compelling larger vehicles, too. Chrysler's 300 sedan was a big hit, but it's near the end of its lifecycle, and few of Chrysler's other big vehicles are tops in their segment. When the car market was going gangbusters, a few hits in the lineup could make up for a few duds. But with industry sales down 40 percent from their peak, every vehicle needs to pull its own weight, and even a combined Chrysler-Fiat fleet doesn't seem to have enough standouts.
Lots of competition.
The revitalized Chrysler is hardly the only company planning to introduce hot new small cars that will take the market by storm. Chevrolet has the Cruze. Ford has the Fiesta. Toyota, Honda and Nissan already build some of the best small cars, and they're certainly not planning to give up their huge edge in the segment. So even if the 500 and a couple other Fiats are big hits when they arrive in America, the competition is only going to intensify. And other makes already in the market have a key first-mover advantage.
Convoluted ownership.
If the Obama plan goes as expected, Chrsyler will emerge from bankruptcy being jointly owned by the United Auto Workers, Fiat, and the U.S. and Canadian governments. Those vastly different entities share a common cause for the moment - saving a big North American employer and using its infrastructure as a springboard for Fiat. But it's hard to imagine a more awkward ownership structure for something as complex as a car company. The U.S. government and the UAW? The U.S. government and the Italians? Will they really maintain a unified focus for as long as it takes for Chrysler to repay up to $12 billion in federal loans and get out of the government's clutches? Chrysler's failed 9-year marriage to Germany's Daimler AG is a poignant reminder of how difficult it can be to hold together a sprawling operation when the biggest stakeholders have diverging interests.
Ford.
There's one domestic automaker positioned to benefit from the woes at Chrysler and General Motors. Ford is still nursing its own string of deep losses -- but doing so without government aid or the stigma associated with bankruptcy. And as it turns around its own operation, Ford has started to slowly gain market share, largely at the expense of its crosstown rivals. Ford could make further gains as Chrysler works through bankruptcy, and GM approaches it. Obama has pledged government backing for the warranties on all Chrysler and GM products, but buying from a solvent automaker still beats taking your chances on a fuzzy government guarantee. That's old-fashioned capitalism, which may yet play a role in the historic realignment of the automakers.
http://biz.yahoo.com/usnews/090430/30_why_chrysler_still_might_not_survive.html;_ylt=Ak4I9f5eS163H2qBgdj9syy7YWsA?.&.pf=loans
Making A Winning Long-Term Stock Pick
Investopedia
Making A Winning Long-Term Stock Pick
Wednesday April 29, 11:33 am ET
Chris Seabury
Many investors are confused when it comes to the stock market; they have trouble figuring out which stocks are good long-term buys and which ones aren't. To invest for the long term, not only do you have to look at certain indicators, but you also have to remain focused on your long-term goals, be disciplined and understand your overall investment objectives. In this article, we tell you how to identify good long-term buys and what's needed to find them.
Focusing on the Fundamentals
There are many fundamental factors that analysts inspect to decide which stocks are good long-term buys and which are not. These factors tell you whether the company is financially healthy and whether the stock has been brought down to levels below its actual value, thus making it a good buy. The following are several strategies that you can use to determine a stock's value.
Consider Dividend Consistency
The consistency of a company's ability to pay and raise its dividend shows that it has predictability in its earnings and that it's financially stable enough to pay that dividend - the dividend comes from current or retained earnings. You'll find many different opinions on how many years you should go back to look for this consistency - some say five years, others say as many as 20 - but anywhere in this range will give you an overall idea of the dividend consistency.
Examine P/E Ratio
The price-earnings ratio (P/E) ratio is used to determine whether a stock is over- or undervalued. It's calculated by dividing the current price of the stock by the company's earnings per share (EPS). The higher the P/E ratio, the more willing some investors are to pay for those earnings. However, a higher P/E ratio is also seen as a sign that the stock is overpriced and could be due for a pullback - at the very least. A lower P/E ratio could indicate that the stock is an attractive value and that the markets have pushed shares below their actual value.
A practical way to determine whether a company is cheap relative to its industry or the markets is to compare its P/E ratio with the overall industry or market. For example, if the company has a P/E ratio of nine while the industry has a P/E ratio of 14, this would indicate that the stock is a great valuation compared with the overall industry.
Watch Fluctuating Earnings
The economy moves in cycles. Sometimes the economy is strong and earnings rise; other times, the economy is slowing and earnings fall. One way to determine whether a stock is a good long-term buy is to evaluate its past earnings and future earnings projections. If the company has a consistent history of rising earnings over a period of many years, it could be a good long-term buy.
Also, look at what the company's earnings projections are going forward. If they're projected to remain strong, this could be a sign that the company may be a good long-term buy. Alternatively, if the company is cutting future earnings guidance, this could be a sign of earnings weakness and you might want to stay away.
Avoid Valuation Traps
How do you know if a stock is a good long-term buy and not a valuation trap (the stock looks cheap but can head a lot lower)? To answer this question, you need to apply some common-sense principles, such as looking at the company's debt ratio and current ratio. Debt can work in two ways:
During times of economic uncertainty or rising interest rates, companies with high levels of debt can experience financial problems.
In good economic times, debt can increase a company's profitability by financing growth at a lower cost.
The debt ratio measures the amount of assets that have been financed with debt. It's calculated by dividing the company's total liabilities by its total assets. Generally,the higher the debt, the greater the possibility that the company could be a valuation trap.
But there is another tool you can use to determine the company's ability to meet these debt obligations: the current ratio. To calculate this number, you divide the company's current assets by its current liabilities. The higher the number, the more liquid is the company. For example, let's say a company has a current ratio of four. This means that the company is liquid enough to pay four times its liabilities.
By using these two ratios - the debt ratio and the current ratio - you can get a good idea as to whether the stock is a good value at its current price.
Economic Indicators
There are two ways that you can use economic indicators to understand what's happening with the markets.
Understanding Economic Conditions
The major stock market averages are considered to be forward-looking economic indicators. For example, consistent weakness in the Dow Jones Industrial Average could signify that the economy has started to top out and that earnings are starting to fall. The same thing applies if the major market averages start to rise consistently but the economic numbers are showing that the economy is still weak. As a general rule, stock prices tend to lead the actual economy in the range of six to 12 months. A good example of this is the U.S. stock market crash in 1929, which eventually led to the Great Depression.
Understand the Economic Big Picture
A good way to gauge how long-term buys relate to the economy is to use the news headlines as an economic indicator. Basically, you're using contrarian indicators from the news media to understand whether the markets are becoming overbought or oversold. A good example of this occurred in 1974, when Newsweek had a bear on the cover showing the pillars of Wall Street being knocked down. Looking back, this was clearly a sign that the markets had bottomed and stocks were relatively cheap.
In contrast, a Time magazine cover from September 27, 1999, included the phrase, "Get rich dot com" - a clear sign of troubles down the road for the markets and dotcom stocks. What this kind of thinking shows is that many people feel secure when they're in the mainstream. They reinforce these beliefs by what they hear and read in the mainstream press. This can be a sign of excessive optimism or pessimism. However, these kinds of indicators can take a year or more to become reality.
Conclusion
Investing for the long term requires patience and discipline. You may spot good long-term investments when the company or the markets haven't been performing so well. By using fundamental tools and economic indicators, you can find those hidden diamonds in the rough and avoid the potential valuation traps.
Making A Winning Long-Term Stock Pick
Wednesday April 29, 11:33 am ET
Chris Seabury
Many investors are confused when it comes to the stock market; they have trouble figuring out which stocks are good long-term buys and which ones aren't. To invest for the long term, not only do you have to look at certain indicators, but you also have to remain focused on your long-term goals, be disciplined and understand your overall investment objectives. In this article, we tell you how to identify good long-term buys and what's needed to find them.
Focusing on the Fundamentals
There are many fundamental factors that analysts inspect to decide which stocks are good long-term buys and which are not. These factors tell you whether the company is financially healthy and whether the stock has been brought down to levels below its actual value, thus making it a good buy. The following are several strategies that you can use to determine a stock's value.
Consider Dividend Consistency
The consistency of a company's ability to pay and raise its dividend shows that it has predictability in its earnings and that it's financially stable enough to pay that dividend - the dividend comes from current or retained earnings. You'll find many different opinions on how many years you should go back to look for this consistency - some say five years, others say as many as 20 - but anywhere in this range will give you an overall idea of the dividend consistency.
Examine P/E Ratio
The price-earnings ratio (P/E) ratio is used to determine whether a stock is over- or undervalued. It's calculated by dividing the current price of the stock by the company's earnings per share (EPS). The higher the P/E ratio, the more willing some investors are to pay for those earnings. However, a higher P/E ratio is also seen as a sign that the stock is overpriced and could be due for a pullback - at the very least. A lower P/E ratio could indicate that the stock is an attractive value and that the markets have pushed shares below their actual value.
A practical way to determine whether a company is cheap relative to its industry or the markets is to compare its P/E ratio with the overall industry or market. For example, if the company has a P/E ratio of nine while the industry has a P/E ratio of 14, this would indicate that the stock is a great valuation compared with the overall industry.
Watch Fluctuating Earnings
The economy moves in cycles. Sometimes the economy is strong and earnings rise; other times, the economy is slowing and earnings fall. One way to determine whether a stock is a good long-term buy is to evaluate its past earnings and future earnings projections. If the company has a consistent history of rising earnings over a period of many years, it could be a good long-term buy.
Also, look at what the company's earnings projections are going forward. If they're projected to remain strong, this could be a sign that the company may be a good long-term buy. Alternatively, if the company is cutting future earnings guidance, this could be a sign of earnings weakness and you might want to stay away.
Avoid Valuation Traps
How do you know if a stock is a good long-term buy and not a valuation trap (the stock looks cheap but can head a lot lower)? To answer this question, you need to apply some common-sense principles, such as looking at the company's debt ratio and current ratio. Debt can work in two ways:
During times of economic uncertainty or rising interest rates, companies with high levels of debt can experience financial problems.
In good economic times, debt can increase a company's profitability by financing growth at a lower cost.
The debt ratio measures the amount of assets that have been financed with debt. It's calculated by dividing the company's total liabilities by its total assets. Generally,the higher the debt, the greater the possibility that the company could be a valuation trap.
But there is another tool you can use to determine the company's ability to meet these debt obligations: the current ratio. To calculate this number, you divide the company's current assets by its current liabilities. The higher the number, the more liquid is the company. For example, let's say a company has a current ratio of four. This means that the company is liquid enough to pay four times its liabilities.
By using these two ratios - the debt ratio and the current ratio - you can get a good idea as to whether the stock is a good value at its current price.
Economic Indicators
There are two ways that you can use economic indicators to understand what's happening with the markets.
Understanding Economic Conditions
The major stock market averages are considered to be forward-looking economic indicators. For example, consistent weakness in the Dow Jones Industrial Average could signify that the economy has started to top out and that earnings are starting to fall. The same thing applies if the major market averages start to rise consistently but the economic numbers are showing that the economy is still weak. As a general rule, stock prices tend to lead the actual economy in the range of six to 12 months. A good example of this is the U.S. stock market crash in 1929, which eventually led to the Great Depression.
Understand the Economic Big Picture
A good way to gauge how long-term buys relate to the economy is to use the news headlines as an economic indicator. Basically, you're using contrarian indicators from the news media to understand whether the markets are becoming overbought or oversold. A good example of this occurred in 1974, when Newsweek had a bear on the cover showing the pillars of Wall Street being knocked down. Looking back, this was clearly a sign that the markets had bottomed and stocks were relatively cheap.
In contrast, a Time magazine cover from September 27, 1999, included the phrase, "Get rich dot com" - a clear sign of troubles down the road for the markets and dotcom stocks. What this kind of thinking shows is that many people feel secure when they're in the mainstream. They reinforce these beliefs by what they hear and read in the mainstream press. This can be a sign of excessive optimism or pessimism. However, these kinds of indicators can take a year or more to become reality.
Conclusion
Investing for the long term requires patience and discipline. You may spot good long-term investments when the company or the markets haven't been performing so well. By using fundamental tools and economic indicators, you can find those hidden diamonds in the rough and avoid the potential valuation traps.
Chrysler driven into bankruptcy
Chrysler driven into bankruptcy
Chrysler became the first major car manufacturer to file for bankruptcy in the current recession after last-minute negotiations between the US government and a batch of dissident hedge fund creditors broke down.
By James Quinn, Wall Street Correspondent
Last Updated: 9:20PM BST 30 Apr 2009
But, at the same time, Chrysler entered into a strategic partnership with Italian rival Fiat designed to safeguard its long-term future and give it access to fuel-efficient technologies and smaller car designs.
Related Articles
Chrysler holdouts should keep fighting Obama’s cramdown
Chrysler: facts and figures
Chrysler to file for bankruptcy
Chrysler forms alliance with Fiat as it files for Chapter 11
Chrysler deal may see $4.9bn debt write-off
US car makers: the rocky road to bankruptcy
The developments – which followed months of negotiations by Barack Obama’s automotive task force – herald a new chapter in the 84-year-old company’s history. A chapter which will ultimately see it controlled by Fiat and the United Auto Workers (UAW) union.
The collapse followed an 11th-hour stand-off between the US automotive task force and 20 hedge and distressed debt funds which control $1bn (£676m) of Chrysler’s $6.9bn debt. The funds refused to accept a deal which would have seen them paid only 44pc of what they are owed.
The dissident funds, including Oppenheimer Funds and Perella Weinberg’s Xerion Capital Fund, stood firm after alleging they were being unfairly treated in favour of government funded banks such as JP Morgan Chase and Goldman Sachs, who are among Chrysler’s biggest creditors.
President Obama reprimanded the hedge funds, saying he could not support “a group who held out for the prospect of an unjustified taxpayer bailout”. He added that some “demanded returns twice what others were getting”. The attack was a negative moment in an otherwise highly positive statement, in which he called Chrysler one of the companies that “helped make the 20th century the American century”.
The car maker has been given a “new lease on life” as a result of the deal with Fiat, the President said. He added that the company’s move into Chapter 11 will be “quick ... efficient ... and controlled” and “will not disrupt the lives of those who work at Chrysler.”
The alliance with Fiat will safeguard 30,000 jobs at Chrysler, tens of thousands at suppliers and dealers, and guarantee the healthcare rights of 170,000 retired Chrysler workers and their families.
Chrysler was last night due to file for Chapter 11 bankruptcy protection in New York, a process which will allow a bankruptcy judge to approve its restructuring plan, which has the support of employees, unions, and 70pc of creditors by value.
Obama administration officials described the bankruptcy process as “purely surgical”, saying it would take 30-60 days for the new Chrysler to re-emerge.
Filing for bankruptcy will allow Chrysler to access $3.3bn in new debtor-in-possession financing from the US government, intended to ensure it can operate as normal through the process, as well as $4.7bn in US loans on exiting Chapter 11, on top of $4bn already loaned back in December. The Canadian and Ontario governments will provide a further $2.42bn.
In return, on formation of the new Chrysler, the US government will own an 8pc stake — and its Canadian counterparts a 2pc stake — and will be able to nominate five directors between them.
Fiat will get a 20pc stake in the new company to begin with, but President Obama stressed the Italian company will not be allowed to take a majority stake until “every taxpayer dime” has been repaid. UAW, will have a 55pc stake.
http://www.telegraph.co.uk/finance/newsbysector/transport/5252690/Chrysler-driven-into-bankruptcy.html
Chrysler became the first major car manufacturer to file for bankruptcy in the current recession after last-minute negotiations between the US government and a batch of dissident hedge fund creditors broke down.
By James Quinn, Wall Street Correspondent
Last Updated: 9:20PM BST 30 Apr 2009
But, at the same time, Chrysler entered into a strategic partnership with Italian rival Fiat designed to safeguard its long-term future and give it access to fuel-efficient technologies and smaller car designs.
Related Articles
Chrysler holdouts should keep fighting Obama’s cramdown
Chrysler: facts and figures
Chrysler to file for bankruptcy
Chrysler forms alliance with Fiat as it files for Chapter 11
Chrysler deal may see $4.9bn debt write-off
US car makers: the rocky road to bankruptcy
The developments – which followed months of negotiations by Barack Obama’s automotive task force – herald a new chapter in the 84-year-old company’s history. A chapter which will ultimately see it controlled by Fiat and the United Auto Workers (UAW) union.
The collapse followed an 11th-hour stand-off between the US automotive task force and 20 hedge and distressed debt funds which control $1bn (£676m) of Chrysler’s $6.9bn debt. The funds refused to accept a deal which would have seen them paid only 44pc of what they are owed.
The dissident funds, including Oppenheimer Funds and Perella Weinberg’s Xerion Capital Fund, stood firm after alleging they were being unfairly treated in favour of government funded banks such as JP Morgan Chase and Goldman Sachs, who are among Chrysler’s biggest creditors.
President Obama reprimanded the hedge funds, saying he could not support “a group who held out for the prospect of an unjustified taxpayer bailout”. He added that some “demanded returns twice what others were getting”. The attack was a negative moment in an otherwise highly positive statement, in which he called Chrysler one of the companies that “helped make the 20th century the American century”.
The car maker has been given a “new lease on life” as a result of the deal with Fiat, the President said. He added that the company’s move into Chapter 11 will be “quick ... efficient ... and controlled” and “will not disrupt the lives of those who work at Chrysler.”
The alliance with Fiat will safeguard 30,000 jobs at Chrysler, tens of thousands at suppliers and dealers, and guarantee the healthcare rights of 170,000 retired Chrysler workers and their families.
Chrysler was last night due to file for Chapter 11 bankruptcy protection in New York, a process which will allow a bankruptcy judge to approve its restructuring plan, which has the support of employees, unions, and 70pc of creditors by value.
Obama administration officials described the bankruptcy process as “purely surgical”, saying it would take 30-60 days for the new Chrysler to re-emerge.
Filing for bankruptcy will allow Chrysler to access $3.3bn in new debtor-in-possession financing from the US government, intended to ensure it can operate as normal through the process, as well as $4.7bn in US loans on exiting Chapter 11, on top of $4bn already loaned back in December. The Canadian and Ontario governments will provide a further $2.42bn.
In return, on formation of the new Chrysler, the US government will own an 8pc stake — and its Canadian counterparts a 2pc stake — and will be able to nominate five directors between them.
Fiat will get a 20pc stake in the new company to begin with, but President Obama stressed the Italian company will not be allowed to take a majority stake until “every taxpayer dime” has been repaid. UAW, will have a 55pc stake.
http://www.telegraph.co.uk/finance/newsbysector/transport/5252690/Chrysler-driven-into-bankruptcy.html
FTSE recovery or a sucker's rally?
FTSE recovery or a sucker's rally?
The Daily Telegraph asks some of the City's leading experts if the FTSE bounce signals a market turn.
By Jonathan Sibun
Last Updated: 12:38PM GMT 16 Mar 2009
The FTSE-100 rose an impressive 6.3pc last week and market participants are openly questioning whether markets have reached their lows for the first time since the financial crisis began.
After weeks of gloom the scale of the surge – with the FTSE up 223 points at 3753.7, the biggest full-week rise this year – took many by surprise.
The Daily Telegraph talks to some of the City's leading experts to ask whether it is time to turn back to equities.
Anthony Bolton
Fidelity International
All of the things I look for to be in place for a market bottom were in place last week, so I think there is a reasonable chance that we have reached a bottom. A new bull market could have started.
There are three things I have looked for.
The first is the pattern of bull and bear markets. In the US, the S&P index is down 57pc from peak to trough. That is the deepest bear market but one since the early 1900s. The exception was in the 1930s but that came after huge overvaluations in the 1920s.
The second is sentiment. You would have to go back to the 1970s to see when sentiment was last this bad.
And the third is that some valuations are now compelling. There are a lot of stocks out there that are undervalued.
I don't tend to focus on the economic outlook. If you focus solely on the economy you won't see it [the bottom]. You won't see a flashing green light. By the time you see the economic indicators the equity markets will already have moved.
Edward Bonham Carter
Jupiter Asset Management
If you are asking whether this is a reasonable time to be increasing equity exposure on a three-to-five year view then the answer is yes.
However, while investors are starting to be paid to take equity risk that doesn't mean we've reached the bottom. The lesson in history is that very few people can call the bottom.
This year is likely to remain schizophrenic. You will have periods of people thinking they can see the bottom and the effects of the actions taken by governments and then periods where people believe that the economy will remain in difficulty for some time.
It is possible we could fall through the 3,000 mark but a lot of people are trying to predict the unpredictable. In bear markets, rallies are the order of the day.
Between 1966 and 1982 markets traded in a broadly sideways pattern in a range of 300 to 400 points. It is highly possible we could see that again.
Paul Kavanagh
Killick & Co
The market was due a rally. I wouldn't call it a sucker's rally but neither would I call it the bottom. I can see us getting above 4,000 but I still believe there is a long way to go before we've bottomed out. We're looking at another year of working through this.
There is sentiment around job losses which has yet to feed through. Unemployment is a lagging indicator but it will hurt sentiment if 100,000 jobs are cut a month to Christmas. Consumer spending has yet to drop off a cliff but if unemployment reaches three million there will be an impact.
Tim Steer
New Star Asset Management
We may be reaching the bottom. One justification for saying that would be that much of the refinancing that companies are going to have to do is priced into the market. The market discounts what is going to happen and it is very easy to see which companies are in need of financing and which are not.
We have already seen some companies do well from that. In a few cases companies' share prices are going up in anticipation of a rights issue. The view is that while earnings will be diluted, there will be less of a debt problem.
Garry White
Questor Editor
A market bottoms when we reach what is known as the "point of maximum pessimism". This means that investors have lost so much money they completely throw in the towel - and shares correct to an undervalued level. I don't believe we are at this level yet.
The FTSE 100 is now trading on a price-earnings multiple approaching 16 – with many more earnings downgrades likely to follow the reporting season. Some analysts believe earnings at non-financial companies may slump 24pc in 2009, this means the "real" prospective multiple of the index is much, much higher. This rally has all the marks of a bear market rally and investors should beware.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5252775/FTSEs-11-week-high-sparks-hope-that-bull-market-may-be-arriving.html
Related Articles
FTSE 100 enjoys biggest monthly gain in six years
FTSE 100 heads for biggest monthly gain in 17 years
FTSE's 11-week high sparks hope that bull market may be arriving
FTSE 100 closes the week up 6pc
Global markets search for a cure
The Daily Telegraph asks some of the City's leading experts if the FTSE bounce signals a market turn.
By Jonathan Sibun
Last Updated: 12:38PM GMT 16 Mar 2009
The FTSE-100 rose an impressive 6.3pc last week and market participants are openly questioning whether markets have reached their lows for the first time since the financial crisis began.
After weeks of gloom the scale of the surge – with the FTSE up 223 points at 3753.7, the biggest full-week rise this year – took many by surprise.
The Daily Telegraph talks to some of the City's leading experts to ask whether it is time to turn back to equities.
Anthony Bolton
Fidelity International
All of the things I look for to be in place for a market bottom were in place last week, so I think there is a reasonable chance that we have reached a bottom. A new bull market could have started.
There are three things I have looked for.
The first is the pattern of bull and bear markets. In the US, the S&P index is down 57pc from peak to trough. That is the deepest bear market but one since the early 1900s. The exception was in the 1930s but that came after huge overvaluations in the 1920s.
The second is sentiment. You would have to go back to the 1970s to see when sentiment was last this bad.
And the third is that some valuations are now compelling. There are a lot of stocks out there that are undervalued.
I don't tend to focus on the economic outlook. If you focus solely on the economy you won't see it [the bottom]. You won't see a flashing green light. By the time you see the economic indicators the equity markets will already have moved.
Edward Bonham Carter
Jupiter Asset Management
If you are asking whether this is a reasonable time to be increasing equity exposure on a three-to-five year view then the answer is yes.
However, while investors are starting to be paid to take equity risk that doesn't mean we've reached the bottom. The lesson in history is that very few people can call the bottom.
This year is likely to remain schizophrenic. You will have periods of people thinking they can see the bottom and the effects of the actions taken by governments and then periods where people believe that the economy will remain in difficulty for some time.
It is possible we could fall through the 3,000 mark but a lot of people are trying to predict the unpredictable. In bear markets, rallies are the order of the day.
Between 1966 and 1982 markets traded in a broadly sideways pattern in a range of 300 to 400 points. It is highly possible we could see that again.
Paul Kavanagh
Killick & Co
The market was due a rally. I wouldn't call it a sucker's rally but neither would I call it the bottom. I can see us getting above 4,000 but I still believe there is a long way to go before we've bottomed out. We're looking at another year of working through this.
There is sentiment around job losses which has yet to feed through. Unemployment is a lagging indicator but it will hurt sentiment if 100,000 jobs are cut a month to Christmas. Consumer spending has yet to drop off a cliff but if unemployment reaches three million there will be an impact.
Tim Steer
New Star Asset Management
We may be reaching the bottom. One justification for saying that would be that much of the refinancing that companies are going to have to do is priced into the market. The market discounts what is going to happen and it is very easy to see which companies are in need of financing and which are not.
We have already seen some companies do well from that. In a few cases companies' share prices are going up in anticipation of a rights issue. The view is that while earnings will be diluted, there will be less of a debt problem.
Garry White
Questor Editor
A market bottoms when we reach what is known as the "point of maximum pessimism". This means that investors have lost so much money they completely throw in the towel - and shares correct to an undervalued level. I don't believe we are at this level yet.
The FTSE 100 is now trading on a price-earnings multiple approaching 16 – with many more earnings downgrades likely to follow the reporting season. Some analysts believe earnings at non-financial companies may slump 24pc in 2009, this means the "real" prospective multiple of the index is much, much higher. This rally has all the marks of a bear market rally and investors should beware.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5252775/FTSEs-11-week-high-sparks-hope-that-bull-market-may-be-arriving.html
Related Articles
FTSE 100 enjoys biggest monthly gain in six years
FTSE 100 heads for biggest monthly gain in 17 years
FTSE's 11-week high sparks hope that bull market may be arriving
FTSE 100 closes the week up 6pc
Global markets search for a cure
FTSE's 11-week high sparks hope that bull market may be arriving
FTSE's 11-week high sparks hope that bull market may be arriving
Hopes that the bear market in equities is over were buoyed as shares rose and more analysts speculated we could be in the early stages of a bull market.
By Edmund Conway
Last Updated: 9:27PM BST 30 Apr 2009
The benchmark FTSE 100 index rose by 1.3pc, capping its biggest monthly increase since 2003. The market's buoyancy comes with many experts claiming that the worst of the financial crisis and market slides are now over. The FTSE dropped by more than 31pc in 2008, but has now risen back to an 11-week high of 4,243.71, despite the spread of swine flu and warnings from the International Monetary Fund that the crisis is not even half-way over.
Analysts hailed the fact that the index increased by 8.1pc this month, with a strong performance from the banking sector yesterday.
Disappointing news is just being ignored, good news is being jumped on as an excuse to get involved," said David Morrison, market strategist at GFT Global Market.
Meanwhile, Anthony Bolton, the renowned fund manager and president of investments at Fidelity International, said a bull market may have begun in March.
"All the things are in place for the bear market to have ended," he said. "When there's a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I'd like to bet against that."
A report by Barclays Wealth said the likelihood is that the world economy has avoided depression and would escape with a milder recession. Aaron Girwitz, head of global investment strategy, said: "We suggest beginning to add more risk to portfolios, and look to Asia to lead the economic revival. Credit markets will outperform as risk appetite increases.
"But we remain somewhat cautious. Market volatility will ease back only gradually. We are not urging investors to increase equity allocations to levels above their strategic norms".
However, others have warned that with many banks still needing extra capital, the crisis and the associated bear market may have longer to run.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5252775/FTSEs-11-week-high-sparks-hope-that-bull-market-may-be-arriving.html
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FTSE 100 heads for biggest monthly gain in 17 years
Global markets slide on banking fears
FTSE recovery or a sucker's rally?
Hopes that the bear market in equities is over were buoyed as shares rose and more analysts speculated we could be in the early stages of a bull market.
By Edmund Conway
Last Updated: 9:27PM BST 30 Apr 2009
The benchmark FTSE 100 index rose by 1.3pc, capping its biggest monthly increase since 2003. The market's buoyancy comes with many experts claiming that the worst of the financial crisis and market slides are now over. The FTSE dropped by more than 31pc in 2008, but has now risen back to an 11-week high of 4,243.71, despite the spread of swine flu and warnings from the International Monetary Fund that the crisis is not even half-way over.
Analysts hailed the fact that the index increased by 8.1pc this month, with a strong performance from the banking sector yesterday.
Disappointing news is just being ignored, good news is being jumped on as an excuse to get involved," said David Morrison, market strategist at GFT Global Market.
Meanwhile, Anthony Bolton, the renowned fund manager and president of investments at Fidelity International, said a bull market may have begun in March.
"All the things are in place for the bear market to have ended," he said. "When there's a strong consensus, a very negative one, and cash positions are very high, as they are at the moment, I'd like to bet against that."
A report by Barclays Wealth said the likelihood is that the world economy has avoided depression and would escape with a milder recession. Aaron Girwitz, head of global investment strategy, said: "We suggest beginning to add more risk to portfolios, and look to Asia to lead the economic revival. Credit markets will outperform as risk appetite increases.
"But we remain somewhat cautious. Market volatility will ease back only gradually. We are not urging investors to increase equity allocations to levels above their strategic norms".
However, others have warned that with many banks still needing extra capital, the crisis and the associated bear market may have longer to run.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5252775/FTSEs-11-week-high-sparks-hope-that-bull-market-may-be-arriving.html
Related Articles
UK consumer confidence rises for third month in April
Markets infected by confidence pandemic
FTSE 100 enjoys biggest monthly gain in six years
FTSE 100 heads for biggest monthly gain in 17 years
Global markets slide on banking fears
FTSE recovery or a sucker's rally?
Markets infected by confidence pandemic
Markets infected by confidence pandemic
Imagine if swine flu had broken out on March 9. A health emergency would probably have thrown stock markets - then touching 10-year lows - into an absolute rout. But less than two months later, investors don't seem to care.
By Edward Hadas, breakingviews.com
Last Updated: 4:14PM BST 30 Apr 2009
The Dow Jones Stoxx 600 European index hit a 2009 high on Thursday. That followed Wednesday's rise in the yield on 10-year US Treasury bonds above 3pc. Investors won't cough up for risk-free assets, but will take commodities and emerging markets exposure in big doses. It's a kind of flight from safety.
Clouds become mere appendages to big silver linings. Investors overlooked worse-than-expected US GDP figures, focusing instead on the need to rebuild inventories. They rejoiced in a slowdown in the contraction of eurozone bank lending, without recoiling at the contraction itself. Even the likely bankruptcy of Chrysler has found a positive spin: uncertainty is lifted.
As for unequivocally bad news - a huge increase in eurozone unemployment, confirmation that UK house prices are still falling - it is simply ignored.
Investors seem to be on a mood-enhancing drug. And in a sense they are.
Governments and central banks have been issuing vast quantities of a stimulant that gets investors and markets high - cheap money. Some of the liquidity created by near-zero official interest rates, effectively unlimited financing for banks and gargantuan fiscal deficits is almost certainly leaking into financial markets.
Investors, like policymakers, are betting that the optimism will prove self-fulfilling. Confidence makes consumers and companies more likely to spend and invest. Also, the liquidity should ease the financial squeeze, increasing the supply of credit for trade and inventories.
The cure is working so well that it's tempting to believe the monetary floodgates should remain open forever. But there's a reason why these policies are exceptional. They are likely to have adverse side effects - too high inflation if money stays too cheap for too long, or another squeeze if interest and tax rates rise too quickly.
The money drug is still in trials. What's more, it may do little to combat the underlying disease of globally unbalanced production and consumption. A long and painful recession would do that. And markets may yet follow the economy rather than the money.
http://www.telegraph.co.uk/finance/breakingviewscom/5251575/Markets-infected-by-confidence-pandemic.html
Imagine if swine flu had broken out on March 9. A health emergency would probably have thrown stock markets - then touching 10-year lows - into an absolute rout. But less than two months later, investors don't seem to care.
By Edward Hadas, breakingviews.com
Last Updated: 4:14PM BST 30 Apr 2009
The Dow Jones Stoxx 600 European index hit a 2009 high on Thursday. That followed Wednesday's rise in the yield on 10-year US Treasury bonds above 3pc. Investors won't cough up for risk-free assets, but will take commodities and emerging markets exposure in big doses. It's a kind of flight from safety.
Clouds become mere appendages to big silver linings. Investors overlooked worse-than-expected US GDP figures, focusing instead on the need to rebuild inventories. They rejoiced in a slowdown in the contraction of eurozone bank lending, without recoiling at the contraction itself. Even the likely bankruptcy of Chrysler has found a positive spin: uncertainty is lifted.
As for unequivocally bad news - a huge increase in eurozone unemployment, confirmation that UK house prices are still falling - it is simply ignored.
Investors seem to be on a mood-enhancing drug. And in a sense they are.
Governments and central banks have been issuing vast quantities of a stimulant that gets investors and markets high - cheap money. Some of the liquidity created by near-zero official interest rates, effectively unlimited financing for banks and gargantuan fiscal deficits is almost certainly leaking into financial markets.
Investors, like policymakers, are betting that the optimism will prove self-fulfilling. Confidence makes consumers and companies more likely to spend and invest. Also, the liquidity should ease the financial squeeze, increasing the supply of credit for trade and inventories.
The cure is working so well that it's tempting to believe the monetary floodgates should remain open forever. But there's a reason why these policies are exceptional. They are likely to have adverse side effects - too high inflation if money stays too cheap for too long, or another squeeze if interest and tax rates rise too quickly.
The money drug is still in trials. What's more, it may do little to combat the underlying disease of globally unbalanced production and consumption. A long and painful recession would do that. And markets may yet follow the economy rather than the money.
http://www.telegraph.co.uk/finance/breakingviewscom/5251575/Markets-infected-by-confidence-pandemic.html
Swine flu: 'There are two weeks where it could go either way'
Swine flu: 'There are two weeks where it could go either way'
As the scientific community admits the world is overdue for a pandemic, will the outbreak of swine flu find Britain prepared, asks Neil Tweedie.
by Neil Tweedie
Last Updated: 1:30PM BST 28 Apr 2009
Comments 21 Comment on this article
Swine flu is a variant of the H1N1 strain which causes seasonal outbreaks among humans Photo: Getty
Buy shares in pharmaceuticals, sell airlines and travel operators – well, at least for the next one or two weeks. It will take about a fortnight for the threat presented by swine flu to become clear – the scaremongers can scare away to their hearts' content for the next few days but neither they nor anyone else knows if the outbreak in Mexico City represents the beginning of a global influenza pandemic.
"Flu is like fire," says Angela McLean, director of the Institute for Emerging Infections at Oxford University. "You have an outbreak and it spits out sparks. You then have to wait to see whether the sparks die out or start new fires."
Nearly 150 people in Mexico are thought to have died after contracting a new version of the flu virus, and yesterday two cases were confirmed in Scotland, as another 22 remained under observation in the UK. There are other confirmed cases in the United States, Canada and Spain; and suspected cases in New Zealand, Israel and Colombia. Meanwhile, the Russians banned imports of US and Latin American pork (for no good reason).
The version in question is a variant of the H1N1 strain responsible for seasonal outbreaks in humans but containing genetic ingredients from strains that normally affect birds and pigs. It is virtually certain that the new variant can be transmitted between humans – otherwise all those infected would have to have been in contact with pigs. Currently, that makes it more of a threat than the avian flu strain H5N1, which has killed scores of people in South-East Asia. Although H5N1 may one day mutate into a human-to-human strain, it has not yet done so – all those who died worked closely with birds.
Influenza is the most adaptable of viruses, constantly evolving to outwit human attempts to combat it. There were three flu pandemics in the 20th century: the "Spanish influenza" outbreak of 1918, which some scientists think may have evolved from swine flu and killed between 40 and 50 million people worldwide; the Asian influenza pandemic of 1957; and the Hong Kong outbreak of 1968. Between them, these may have been responsible for four million deaths. Received opinion has it that the world is overdue another one. So what could the Mexican outbreak mean for Britain?
The doctors, scientists and civil servants responsible for managing an outbreak have a problem: they can raise the alarm now and be accused of over-reacting if Mexican flu remains just that; or they can wait and be accused of under-reacting when the British economy, already in intensive care, goes into cardiac arrest as hundreds of thousands of workers take to their beds.
According to a Cabinet Office briefing paper, a flu pandemic could reach the UK within two to four weeks of an outbreak. Once here, the virus would spread to all major population centres within one or two weeks. Peak infection would occur seven weeks after its arrival.
The department states: "Depending upon the virulence of the influenza virus, the susceptibility of the population and the effectiveness of counter-measures, up to half the population could have developed the illness and between 50,000 and 750,000 additional deaths could have occurred by the end of the pandemic in the UK."
The latter is presumably based on the apocalyptic assumption that half the UK population of 61 million contracts flu and then suffers the 2.5 per cent mortality rate seen in 1918. This compares to mortality rates of 0.5 per cent in 1957 and 1968. Nevertheless, a flu pandemic could induce economic dislocation in the United Kingdom on a crippling scale, and the jitters have already begun.
The travel industry copped it first, with shares in airlines plunging and stocks in cruise lines sinking. Shares in British Airways, Carnival Cruise Lines, Intercontinental Hotels and Thomas Cook all headed south as the European Union commissioner for health advised against all but essential travel to affected areas of Mexico and the United States. That announcement was bound to drown out President Obama's expression yesterday of "concern rather than alarm" over the outbreak. The share movements could not be justified by available evidence, but then, when did that stop the speculators?
In an assessment of 2005, the World Bank warned that a pandemic could cause a loss of 2 per cent in global GDP over the course of a year, due to reduced productivity through absenteeism. Tourism and the restaurant and hotel sectors would be hit severely as people sought to stay away from each other, while health services would be overwhelmed by those seeking help. The Department of Health believes a flu pandemic would cost Britain up to £7 billion in lost GDP if a quarter of employees were affected, and double that if half went on sick leave at some point – a more likely figure. Hospitals and surgeries would be swamped: pneumonia cases could easily outstrip the 110,000 acute and 1,800 intensive beds available in England and Wales.
A specialist in acute medicine based in London told The Telegraph that he had made preliminary plans to quarantine himself from his wife and three children if the flu outbreak proves to be serious and he is treating patients.
Some 12,000 people die from influenza in England and Wales each year but because the overwhelming majority are elderly that fact tends to escape the general population. The outbreak of 1918 differed from the norm in that young adults and those in early middle age, the 25-40 age group, died in the greatest numbers. The theory is that their strong immune systems over-reacted to the flu strain with fatal results. Post-mortem examinations uncovered severe haemorrhages in lungs unlike anything seen before. Some 230,000 people in Britain are believed to have succumbed to the flu pandemic, a painful toll given the three quarters of a million claimed by the First World War.
"Even in an outbreak involving low mortality, there could be real problems in maintaining services," says Prof McLean. "Schools could close for extended periods, for example. Then there is the "milk in Tesco" question. The just-in-time ordering system of supermarkets may have made us more vulnerable to stoppages through illness. I heard one figure suggesting there are eight hours worth of milk in London at any one time."
The good news is that Britain is one of the best-prepared nations with regard to stocks of the anti-influenza drugs Tamiflu and Relenza, which would supply some protection against a new strain. And, of course, the Mexican outbreak could go the way of Sars and bird flu, viral outbreaks which claimed lives at an alarming rate initially but then failed to spread.
When swine flu broke out at a US army base in 1976, predictions of a cataclysm accompanied it. F David Mathews, the US health secretary, warned: "The indication is that we will see a return of the 1918 flu virus – that is the most virulent form of the flu. The predictions are that this virus will kill one million Americans in 1976.''
Thankfully, he was wrong. Only one person died and the outbreak spontaneously ceased.
"There is a difference between being able to transfer between one human being and another, and being able to do it efficiently," cautions Professor McLean. "This strain may not be very infectious. What matters is how much virus these people are shedding and for how long – for how long are they coughing and sneezing."
"We can't know for weeks what proportion of people catch it and what proportion die from it. This might turn out to be nothing – outside Mexico."
Even if the Mexican strain spreads to the UK, people are fitter and better fed than they were in 1918. And antibiotics mean the secondary infections that often kill flu sufferers can be seen off. Still, Prof McLean believes caution is the best policy.
"You could say that it is better to over-react and then retreat. Eating humble pie at a later date is preferable to reacting too slowly and too late because outbreaks are easier to control early on."
Even in 1918, when transport was slower and scarcer, Spanish flu managed to spread around the world, reaching – and devastating – the remotest Inuit villages in five months. The jumbo jet and the era of mass travel has made influenza's task much easier.
"If this is a pandemic, we should begin to see these newly seeded epidemics growing in different countries in one or two weeks," says Prof McLean.
"Are we overdue for one? I think I would agree that we are. It's been an awfully long time.
"These are the two weeks where it really could go either way. It's a question of watch this space."
http://www.telegraph.co.uk/comment/5232571/There-are-two-weeks-where-it-could-go-either-way.html
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Swine flu: Germany confirms first case
As the scientific community admits the world is overdue for a pandemic, will the outbreak of swine flu find Britain prepared, asks Neil Tweedie.
by Neil Tweedie
Last Updated: 1:30PM BST 28 Apr 2009
Comments 21 Comment on this article
Swine flu is a variant of the H1N1 strain which causes seasonal outbreaks among humans Photo: Getty
Buy shares in pharmaceuticals, sell airlines and travel operators – well, at least for the next one or two weeks. It will take about a fortnight for the threat presented by swine flu to become clear – the scaremongers can scare away to their hearts' content for the next few days but neither they nor anyone else knows if the outbreak in Mexico City represents the beginning of a global influenza pandemic.
"Flu is like fire," says Angela McLean, director of the Institute for Emerging Infections at Oxford University. "You have an outbreak and it spits out sparks. You then have to wait to see whether the sparks die out or start new fires."
Nearly 150 people in Mexico are thought to have died after contracting a new version of the flu virus, and yesterday two cases were confirmed in Scotland, as another 22 remained under observation in the UK. There are other confirmed cases in the United States, Canada and Spain; and suspected cases in New Zealand, Israel and Colombia. Meanwhile, the Russians banned imports of US and Latin American pork (for no good reason).
The version in question is a variant of the H1N1 strain responsible for seasonal outbreaks in humans but containing genetic ingredients from strains that normally affect birds and pigs. It is virtually certain that the new variant can be transmitted between humans – otherwise all those infected would have to have been in contact with pigs. Currently, that makes it more of a threat than the avian flu strain H5N1, which has killed scores of people in South-East Asia. Although H5N1 may one day mutate into a human-to-human strain, it has not yet done so – all those who died worked closely with birds.
Influenza is the most adaptable of viruses, constantly evolving to outwit human attempts to combat it. There were three flu pandemics in the 20th century: the "Spanish influenza" outbreak of 1918, which some scientists think may have evolved from swine flu and killed between 40 and 50 million people worldwide; the Asian influenza pandemic of 1957; and the Hong Kong outbreak of 1968. Between them, these may have been responsible for four million deaths. Received opinion has it that the world is overdue another one. So what could the Mexican outbreak mean for Britain?
The doctors, scientists and civil servants responsible for managing an outbreak have a problem: they can raise the alarm now and be accused of over-reacting if Mexican flu remains just that; or they can wait and be accused of under-reacting when the British economy, already in intensive care, goes into cardiac arrest as hundreds of thousands of workers take to their beds.
According to a Cabinet Office briefing paper, a flu pandemic could reach the UK within two to four weeks of an outbreak. Once here, the virus would spread to all major population centres within one or two weeks. Peak infection would occur seven weeks after its arrival.
The department states: "Depending upon the virulence of the influenza virus, the susceptibility of the population and the effectiveness of counter-measures, up to half the population could have developed the illness and between 50,000 and 750,000 additional deaths could have occurred by the end of the pandemic in the UK."
The latter is presumably based on the apocalyptic assumption that half the UK population of 61 million contracts flu and then suffers the 2.5 per cent mortality rate seen in 1918. This compares to mortality rates of 0.5 per cent in 1957 and 1968. Nevertheless, a flu pandemic could induce economic dislocation in the United Kingdom on a crippling scale, and the jitters have already begun.
The travel industry copped it first, with shares in airlines plunging and stocks in cruise lines sinking. Shares in British Airways, Carnival Cruise Lines, Intercontinental Hotels and Thomas Cook all headed south as the European Union commissioner for health advised against all but essential travel to affected areas of Mexico and the United States. That announcement was bound to drown out President Obama's expression yesterday of "concern rather than alarm" over the outbreak. The share movements could not be justified by available evidence, but then, when did that stop the speculators?
In an assessment of 2005, the World Bank warned that a pandemic could cause a loss of 2 per cent in global GDP over the course of a year, due to reduced productivity through absenteeism. Tourism and the restaurant and hotel sectors would be hit severely as people sought to stay away from each other, while health services would be overwhelmed by those seeking help. The Department of Health believes a flu pandemic would cost Britain up to £7 billion in lost GDP if a quarter of employees were affected, and double that if half went on sick leave at some point – a more likely figure. Hospitals and surgeries would be swamped: pneumonia cases could easily outstrip the 110,000 acute and 1,800 intensive beds available in England and Wales.
A specialist in acute medicine based in London told The Telegraph that he had made preliminary plans to quarantine himself from his wife and three children if the flu outbreak proves to be serious and he is treating patients.
Some 12,000 people die from influenza in England and Wales each year but because the overwhelming majority are elderly that fact tends to escape the general population. The outbreak of 1918 differed from the norm in that young adults and those in early middle age, the 25-40 age group, died in the greatest numbers. The theory is that their strong immune systems over-reacted to the flu strain with fatal results. Post-mortem examinations uncovered severe haemorrhages in lungs unlike anything seen before. Some 230,000 people in Britain are believed to have succumbed to the flu pandemic, a painful toll given the three quarters of a million claimed by the First World War.
"Even in an outbreak involving low mortality, there could be real problems in maintaining services," says Prof McLean. "Schools could close for extended periods, for example. Then there is the "milk in Tesco" question. The just-in-time ordering system of supermarkets may have made us more vulnerable to stoppages through illness. I heard one figure suggesting there are eight hours worth of milk in London at any one time."
The good news is that Britain is one of the best-prepared nations with regard to stocks of the anti-influenza drugs Tamiflu and Relenza, which would supply some protection against a new strain. And, of course, the Mexican outbreak could go the way of Sars and bird flu, viral outbreaks which claimed lives at an alarming rate initially but then failed to spread.
When swine flu broke out at a US army base in 1976, predictions of a cataclysm accompanied it. F David Mathews, the US health secretary, warned: "The indication is that we will see a return of the 1918 flu virus – that is the most virulent form of the flu. The predictions are that this virus will kill one million Americans in 1976.''
Thankfully, he was wrong. Only one person died and the outbreak spontaneously ceased.
"There is a difference between being able to transfer between one human being and another, and being able to do it efficiently," cautions Professor McLean. "This strain may not be very infectious. What matters is how much virus these people are shedding and for how long – for how long are they coughing and sneezing."
"We can't know for weeks what proportion of people catch it and what proportion die from it. This might turn out to be nothing – outside Mexico."
Even if the Mexican strain spreads to the UK, people are fitter and better fed than they were in 1918. And antibiotics mean the secondary infections that often kill flu sufferers can be seen off. Still, Prof McLean believes caution is the best policy.
"You could say that it is better to over-react and then retreat. Eating humble pie at a later date is preferable to reacting too slowly and too late because outbreaks are easier to control early on."
Even in 1918, when transport was slower and scarcer, Spanish flu managed to spread around the world, reaching – and devastating – the remotest Inuit villages in five months. The jumbo jet and the era of mass travel has made influenza's task much easier.
"If this is a pandemic, we should begin to see these newly seeded epidemics growing in different countries in one or two weeks," says Prof McLean.
"Are we overdue for one? I think I would agree that we are. It's been an awfully long time.
"These are the two weeks where it really could go either way. It's a question of watch this space."
http://www.telegraph.co.uk/comment/5232571/There-are-two-weeks-where-it-could-go-either-way.html
Related Articles
Swine flu: Fingers crossed for a forgettable epidemic
Swine flu: Five confirmed cases in Britain as child dies in US
Swine flu: Companies impose travel ban on staff
Swine flu: Pandemic 'would infect four in ten Britons'
Swine flu: Germany confirms first case
Swine flu: how will shares react?
Swine flu: how will shares react?
As fears grew over the economic impact of a flu pandemic, shares initially tumbled, with travel and airline companies bearing the brunt of the losses.
By Emma Simon
Last Updated: 4:13PM BST 30 Apr 2009
Fears that the swine flu outbreak could cause further stock market shocks around the globe have proved largely unfounded, although certain shares and funds have fallen in value on the back of this latest health concern.
As fears grew over the economic impact of a flu pandemic, shares initially tumbled on Monday, with travel and airline companies bearing the brunt of the losses.
But later in the week stock markets stabilised, although there was little positive news for those companies operating in the travel and tourism sectors. By Wednesday, British Airways, which was the hardest hit in a general sell-off of airline stocks in London, fell 7.7pc.
Others shares badly affected included Carnival, the Caribbean cruise operator, which saw its share price fall by almost 7pc at one point and Thomas Cook and InterContinental, both of whom saw share prices dive by more than 4pc midweek.
But while investors were nervous about the effect that swine flu could have on these travel firms, many were buying up pharmaceutical companies on the expectation that Government's would be forced to stockpile expensive viral treatments and flu vaccinations.
Two of the biggest beneficiaries were GlaxoSmithKline, which makes flu vaccine Relenz, and Roche which manufactures the drug Tamiflu – which has been proven to be an effective treatment against both avian and the new swine flu.
Market experts said that despite the economic turmoil, stock market were not overreacting to this latest scare. (Why?)
Anthony Grech, market strategist at IG Index, said: "After weathering the likes of SARS and bird flu in recent years, there seems to be an element of wait-and-see among traders."
During the Asian bird flu outbreaks in 2005 and 2006, airline, hotel groups, insurers and oil companies stocks fell heavily, while shares in drug, health care and cleaning product businesses soared.
"I think there will be a little bit of a lift for pharmaceuticals, but this may not follow through unless the situation gets out of hand," said Paul Kavanagh of stockbroker Killik & Co. "Governments will be looking at vaccines, but it's come at a bad time for the world economy and could be very expensive."
For investors that hold Isas, unit trusts and other investment funds, this latest market turbulence may be fraying already taut nerves. But financial advisers have pointed out that the volatility this week should be put into perspective.
Adrian Lowcock, the senior investment adviser at Bestinvest said: "Stock market has a nervous day on Tuesday following the spread of swine flue, but have bounced back as concerns ease. Unless this develops into something much more prevalent we don't expect to see any further impact. The volatile is insignificant when compared to recent events."
He points out that the road to recovery will be bumpy - but this latest jolt does not seem to have derailed the slight market improvements seen over the past month.
The focus on swine flu, may be focusing people's attention on pharmaceutical companies and biotech and healthcare funds. The former invest solely in companies involved in developing new drug treatments and therapies.
The latter have a broader remit, also investing in other health care related companies, such as the large pharmaceutical giants, and companies such as Smith & Nephew that manufacture medical equipment - be it surgical instruments or face masks.
Over the past 12 months, these funds have delivered reasonable returns for investors: Framlington's biotech fund is up 20pc, while Franklin Templeton's biotech fund is up 21pc.
The health care funds have produced more modest returns (Schroders Medical Discovery is up 3.5pc, while Framlington's Health care is up just 0.6pc) but given the wider market falls, anyone invested in one of these funds is no doubt delighted with positive returns.
However, Mark Dampier, of Hargreaves Lansdown says: "Up until a year ago the performance of these funds has been awful." He adds that investors should remember that these are high risk funds, where returns can be volatile. Many are largely invested in US-listed companies, so currency movements can affect returns.
http://www.telegraph.co.uk/finance/personalfinance/investing/5246672/Swine-flu-how-will-shares-react.html
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As fears grew over the economic impact of a flu pandemic, shares initially tumbled, with travel and airline companies bearing the brunt of the losses.
By Emma Simon
Last Updated: 4:13PM BST 30 Apr 2009
Fears that the swine flu outbreak could cause further stock market shocks around the globe have proved largely unfounded, although certain shares and funds have fallen in value on the back of this latest health concern.
As fears grew over the economic impact of a flu pandemic, shares initially tumbled on Monday, with travel and airline companies bearing the brunt of the losses.
But later in the week stock markets stabilised, although there was little positive news for those companies operating in the travel and tourism sectors. By Wednesday, British Airways, which was the hardest hit in a general sell-off of airline stocks in London, fell 7.7pc.
Others shares badly affected included Carnival, the Caribbean cruise operator, which saw its share price fall by almost 7pc at one point and Thomas Cook and InterContinental, both of whom saw share prices dive by more than 4pc midweek.
But while investors were nervous about the effect that swine flu could have on these travel firms, many were buying up pharmaceutical companies on the expectation that Government's would be forced to stockpile expensive viral treatments and flu vaccinations.
Two of the biggest beneficiaries were GlaxoSmithKline, which makes flu vaccine Relenz, and Roche which manufactures the drug Tamiflu – which has been proven to be an effective treatment against both avian and the new swine flu.
Market experts said that despite the economic turmoil, stock market were not overreacting to this latest scare. (Why?)
Anthony Grech, market strategist at IG Index, said: "After weathering the likes of SARS and bird flu in recent years, there seems to be an element of wait-and-see among traders."
During the Asian bird flu outbreaks in 2005 and 2006, airline, hotel groups, insurers and oil companies stocks fell heavily, while shares in drug, health care and cleaning product businesses soared.
"I think there will be a little bit of a lift for pharmaceuticals, but this may not follow through unless the situation gets out of hand," said Paul Kavanagh of stockbroker Killik & Co. "Governments will be looking at vaccines, but it's come at a bad time for the world economy and could be very expensive."
For investors that hold Isas, unit trusts and other investment funds, this latest market turbulence may be fraying already taut nerves. But financial advisers have pointed out that the volatility this week should be put into perspective.
Adrian Lowcock, the senior investment adviser at Bestinvest said: "Stock market has a nervous day on Tuesday following the spread of swine flue, but have bounced back as concerns ease. Unless this develops into something much more prevalent we don't expect to see any further impact. The volatile is insignificant when compared to recent events."
He points out that the road to recovery will be bumpy - but this latest jolt does not seem to have derailed the slight market improvements seen over the past month.
The focus on swine flu, may be focusing people's attention on pharmaceutical companies and biotech and healthcare funds. The former invest solely in companies involved in developing new drug treatments and therapies.
The latter have a broader remit, also investing in other health care related companies, such as the large pharmaceutical giants, and companies such as Smith & Nephew that manufacture medical equipment - be it surgical instruments or face masks.
Over the past 12 months, these funds have delivered reasonable returns for investors: Framlington's biotech fund is up 20pc, while Franklin Templeton's biotech fund is up 21pc.
The health care funds have produced more modest returns (Schroders Medical Discovery is up 3.5pc, while Framlington's Health care is up just 0.6pc) but given the wider market falls, anyone invested in one of these funds is no doubt delighted with positive returns.
However, Mark Dampier, of Hargreaves Lansdown says: "Up until a year ago the performance of these funds has been awful." He adds that investors should remember that these are high risk funds, where returns can be volatile. Many are largely invested in US-listed companies, so currency movements can affect returns.
http://www.telegraph.co.uk/finance/personalfinance/investing/5246672/Swine-flu-how-will-shares-react.html
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Swine flu: Will travel insurance cover you?
The fund that's up 68pc in a month
Swine flu: 'There are two weeks where it could go either way'
FTSE 100 edges higher as swine flu fears ease
GlaxoSmithKline leads pharmaceutical shares higher on swine flu outbreak
Swine flu hits British Airways and Iberia merger talks
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