Where's the U.S. economy headed?
Nov 2, 2009 10:37 AM,
By Forrest Laws, Farm Press Editorial Staff
"We don't know how much of that is cash for clunkers or the tax credit for first-time home buyers. We're also likely to see continued high unemployment numbers until companies begin to do more hiring."
U.S. farmers and consumers who are trying to figure out what the future holds aren’t getting much help from Washington these days. As a result, they may need to pick out some economic indicators that could help them chart their course.
Ernie Goss, professor of economics at Creighton University in Lincoln, Neb., identified some of those indicators while giving members of the American Society of Farm Managers and Rural Appraisers his take on the current economic outlook at the ASFMRA’s 80th annual meeting in Denver.
“We’re all sitting on the sidelines, trying to figure out what’s happening,” said Goss, a graduate of the University of Tennessee who has held a number of public and private economic positions over the years. “I’ve never seen this much uncertainty over government policy and the national economy.”
While that might be a good scenario for economists and lawyers, it gives little comfort to farmers and other small business owners and consumers, said Goss. The uncertainty over the so-called cap and trade legislation, health care reform and tax increases are causing nightmares for much of America.
“I also have a small consulting business, and I’m sitting here thinking ‘Should I hire now, should I hire later; should I buy a car now, should I buy a car later; should I buy a house now, should I buy a house later?” he said.
“We have millions of people sitting on the sidelines, and the chief, No. 1 economic problem we’re facing now is the lack of clarity. We don’t know the answers to those kinds of questions.”
Goss said the Commerce Department report issued when he spoke Thursday (Oct. 29) was “a very good sign.” The government reported that the nation’s gross domestic product grew by 3.5 percent in the third quarter of 2009.
“We don’t know how much of that is cash for clunkers or the tax credit for first-time home buyers,” he said. “We’re also likely to see continued high unemployment numbers until companies begin to do more hiring.”
Goss, one of 200 economists who took out a full page ad saying “We are not all Keynesians,” that appeared in the New York Times and the Wall Street Journal earlier this year, said he believes the government’s fiscal policies have not helped the economy all that much.
“Yes, the economy needed some stimulus; there’s no doubt about that,” he said. (Followers of the British economist John Maynard Keynes believe government spending or economic stimulus packages are the key to pulling the economy out of a recession/depression.) “Whether it was the right stimulus package is the question?
“It may be that if the government had allowed some of these big companies like AIG and General Motors to fail, it would have hurt, but we might also have a lot of this behind us now. We also wouldn’t have $11.2 trillion in federal debt.”
So what indicators should you be looking for in the coming months?
• The employment report for October will be released Nov. 6. “I expect the report to show job losses (above 200,000 persons) for a 24th straight month and an increase in the unemployment rate by 0.2 percent,” he said. “If the report goes above10 percent unemployment, that would be very bad. A good report would be only 100,000 jobs.”
• First time and continuing claims for unemployment insurance. This report is released every Thursday. “First time claims above 550,000 will be bearish,” he said. “I expect this number to drop below 500,000 by December (http://www.doe.gov/.)
• The first and most important indicator for November will be the Mid-America and U.S. October Purchasing Manager Institute’s survey released Nov. 2 (http://www.outlook-economic.com/ and http://www.ism.ws/.) “A drop in the national will be bearish (under 50 will be very, very bearish.”
• Goss suggests you keep an eye on the yield for 10-year U.S. Treasuries. If this yield approaches 4 percent within the next month, the Federal Reserve Board will be “between a rock and a hard place.” The rapidly rising yields reflect: 1) Concerns regarding the large increases in the U.S. budget deficit; 2) Rising inflation expectations; and 3) Investors have reduced their risk perceptions and are pulling money out of treasuries and putting it into equity markets (“a good thing”). (http://finance.yahoo.com/)
• Investors will be closely watching retail sales to detect a weak consumer reading. A weak consumer market will be a bad signal for the holiday buying season.
e-mail: flaws@farmpress.com
http://southeastfarmpress.com/news/american-economy-1102/index.html?imw=Y
Wednesday 4 November 2009
Futures market uncertainties increase risks for wheat growers
Futures market uncertainties increase risks
Sep 3, 2008 2:06 PM, By Roy Roberson
Farm Press Editorial Staff
Many wheat growers in the Southeast who expected to reap big profits from high prices for the 2007-2008 crop ended up disappointed with the price they received and disillusioned with the Chicago Board of Trade.
Speaking at the recent 71st annual meeting of the North Carolina Feed Industry Association, Randy Gordon says the CME (Chicago Mercantile Exchange) which now owns the Chicago Board of Trade admits the wheat futures contract is broken.
Gordon, who is vice-president of communications and government affairs for the National Grain and Feed Association, says the same trends are beginning to be seen in corn and many wonder whether soybeans will be next. Gordon says elevator managers and feed mills have lost confidence in futures markets as a risk management tool.
“Down to the farmer level there is little confidence futures prices are a true barometer of what supply and demand conditions are for crop and commodity values,” Gordon says. “Losing the ability to forward contract crops significantly increases what is already a huge risk in farming.”
Gordon explains that investors who manage long-only index funds have invested billions of dollars in both agriculture and energy commodities. All these investors do is continually roll contracts from one delivery date to the next, never planning to take delivery of the commodity.
“At the close of trading in late July, in the soft wheat market in Chicago, there was more than a $2.50 difference in cash prices and futures prices — unprecedented levels. And, the prediction is that this difference or basis price, may go as high as $3 in the wheat market, which is an untenable situation for grain buyers,” Gordon says.
The futures market has created tremendous pressure on the industry to continue to fund margin calls that occur as buyers try to maintain hedge positions. This situation has severely limited forward contracting. Many, if not most lenders, are reluctant to extend contracts longer than 30-60 days, according to Gordon.
Elevator managers have begun asking, and in some cases insisting, that farmers share some of the margin cost, if they want to contract for longer periods of time. Elevators just can’t afford to continue to do business as usual.
“Lenders are trying to stick with grain buyers, but it’s a tough call on them as well. The risks involved in financing margin requirements, even inventory purchases, have caused some long-term lenders to pull back,” Gordon says.
“At the last meeting of the CME, they publicly admitted for the first time their wheat futures contract is broken. It’s been a long time coming, but they now admit the problem that grain buyers have warned was happening over the past couple of years. The CME is now reaching out to the grain industry to try and fix the problem,” Gordon adds.
Red winter wheat is the poster boy for futures market trading with differences in cash and futures prices consistently topping $2. In corn the price differential as of late July was 45 cents and less for soybeans. “The great fear is that corn and beans will go the way of wheat, which would be catastrophic for grain buyers, grain growers and ultimately consumers,” according to Gordon.
Possible solutions the National Grain and Feed Association and other grain industry associations are looking at include:
• Increasing storage rates at delivery warehouses to try and force price convergence to occur.
• Establish a side by side ag index fund.
• Encourage, or force takers of deliveries to load out the commodity as specified in the contract.
• Add more delivery locations, making delivery a more reasonable option.
• Establish a cash settlement contract.
There are a number of possible solutions, but no magic bullet right now, Gordon admits. One of the major stumbling blocks that needs to be fixed, he contends, is that long-term index funds, large retirement funds and other large financial investors in agricultural commodities have very limited reporting responsibilities to the Commodity Futures Trading Commission, which oversees the futures market.
“There are numerous ways for these large investment managers to report the value of their index funds — all perfectly legal. What this says is that we have a broken reporting system, too,” Gordon says.
One option is to get the USDA Commodity Credit Association to provide loan guarantees to lenders who extend credit to elevators and feed mills for hedging commodities. It’s a different wrinkle, but indicative of how critical the problem is for grain buyers.
“Farmers would love to contract out into the 2009 crop season to capture some of these high commodity prices. The risk to elevator managers and feed mills is just too great to allow that to happen, unless some dramatic changes are made,” Gordon says.
The biggest fear lenders have in financing grain buying and marketing is that farmers will walk away from contracts and simply not deliver. It’s hard from a grower’s perspective to contract corn, for example, at $3 a bushel and see prices at over $7 a bushel.
“The best insurance policy against failure to deliver is always to include the National Grain and Feed Association’s arbitration rules in contracts with growers. It’s not an ironclad guarantee, but a good insurance policy against going to court. Even if cases go to court, most courts have ruled that arbitration agreements are valid and both the grower and buyer tend to come out better,” Gordon says.
The commodity market woes have attracted the attention of the U.S. Congress. An unprecedented bill recently was approved by the House Agriculture Committee. This legislation would require the Commodity Futures Trading Commission issue within 60 days rules on how to prevent excessive speculation on ag and energy futures markets.
With virtually every input cost to farmers tied directly to the price of their product, fixing the futures market is critical. Without a viable futures market for grain, the risks may be too high from some farmers to stay in business.
e-mail: rroberson@farmpress.com
http://southeastfarmpress.com/grains/commodity-markets-0904/
Sep 3, 2008 2:06 PM, By Roy Roberson
Farm Press Editorial Staff
Many wheat growers in the Southeast who expected to reap big profits from high prices for the 2007-2008 crop ended up disappointed with the price they received and disillusioned with the Chicago Board of Trade.
Speaking at the recent 71st annual meeting of the North Carolina Feed Industry Association, Randy Gordon says the CME (Chicago Mercantile Exchange) which now owns the Chicago Board of Trade admits the wheat futures contract is broken.
Gordon, who is vice-president of communications and government affairs for the National Grain and Feed Association, says the same trends are beginning to be seen in corn and many wonder whether soybeans will be next. Gordon says elevator managers and feed mills have lost confidence in futures markets as a risk management tool.
“Down to the farmer level there is little confidence futures prices are a true barometer of what supply and demand conditions are for crop and commodity values,” Gordon says. “Losing the ability to forward contract crops significantly increases what is already a huge risk in farming.”
Gordon explains that investors who manage long-only index funds have invested billions of dollars in both agriculture and energy commodities. All these investors do is continually roll contracts from one delivery date to the next, never planning to take delivery of the commodity.
“At the close of trading in late July, in the soft wheat market in Chicago, there was more than a $2.50 difference in cash prices and futures prices — unprecedented levels. And, the prediction is that this difference or basis price, may go as high as $3 in the wheat market, which is an untenable situation for grain buyers,” Gordon says.
The futures market has created tremendous pressure on the industry to continue to fund margin calls that occur as buyers try to maintain hedge positions. This situation has severely limited forward contracting. Many, if not most lenders, are reluctant to extend contracts longer than 30-60 days, according to Gordon.
Elevator managers have begun asking, and in some cases insisting, that farmers share some of the margin cost, if they want to contract for longer periods of time. Elevators just can’t afford to continue to do business as usual.
“Lenders are trying to stick with grain buyers, but it’s a tough call on them as well. The risks involved in financing margin requirements, even inventory purchases, have caused some long-term lenders to pull back,” Gordon says.
“At the last meeting of the CME, they publicly admitted for the first time their wheat futures contract is broken. It’s been a long time coming, but they now admit the problem that grain buyers have warned was happening over the past couple of years. The CME is now reaching out to the grain industry to try and fix the problem,” Gordon adds.
Red winter wheat is the poster boy for futures market trading with differences in cash and futures prices consistently topping $2. In corn the price differential as of late July was 45 cents and less for soybeans. “The great fear is that corn and beans will go the way of wheat, which would be catastrophic for grain buyers, grain growers and ultimately consumers,” according to Gordon.
Possible solutions the National Grain and Feed Association and other grain industry associations are looking at include:
• Increasing storage rates at delivery warehouses to try and force price convergence to occur.
• Establish a side by side ag index fund.
• Encourage, or force takers of deliveries to load out the commodity as specified in the contract.
• Add more delivery locations, making delivery a more reasonable option.
• Establish a cash settlement contract.
There are a number of possible solutions, but no magic bullet right now, Gordon admits. One of the major stumbling blocks that needs to be fixed, he contends, is that long-term index funds, large retirement funds and other large financial investors in agricultural commodities have very limited reporting responsibilities to the Commodity Futures Trading Commission, which oversees the futures market.
“There are numerous ways for these large investment managers to report the value of their index funds — all perfectly legal. What this says is that we have a broken reporting system, too,” Gordon says.
One option is to get the USDA Commodity Credit Association to provide loan guarantees to lenders who extend credit to elevators and feed mills for hedging commodities. It’s a different wrinkle, but indicative of how critical the problem is for grain buyers.
“Farmers would love to contract out into the 2009 crop season to capture some of these high commodity prices. The risk to elevator managers and feed mills is just too great to allow that to happen, unless some dramatic changes are made,” Gordon says.
The biggest fear lenders have in financing grain buying and marketing is that farmers will walk away from contracts and simply not deliver. It’s hard from a grower’s perspective to contract corn, for example, at $3 a bushel and see prices at over $7 a bushel.
“The best insurance policy against failure to deliver is always to include the National Grain and Feed Association’s arbitration rules in contracts with growers. It’s not an ironclad guarantee, but a good insurance policy against going to court. Even if cases go to court, most courts have ruled that arbitration agreements are valid and both the grower and buyer tend to come out better,” Gordon says.
The commodity market woes have attracted the attention of the U.S. Congress. An unprecedented bill recently was approved by the House Agriculture Committee. This legislation would require the Commodity Futures Trading Commission issue within 60 days rules on how to prevent excessive speculation on ag and energy futures markets.
With virtually every input cost to farmers tied directly to the price of their product, fixing the futures market is critical. Without a viable futures market for grain, the risks may be too high from some farmers to stay in business.
e-mail: rroberson@farmpress.com
http://southeastfarmpress.com/grains/commodity-markets-0904/
How to handle market uncertainty
Wednesday November 4, 2009
How to handle market uncertainty
Personal Investing - By Ooi Kok Hwa
AFTER the strong rally over the past seven months, the market is finally undertaking some corrections. Some investors may not fully comprehend why the stock market moved up when the companies reported bad financial results, but tumbled when the companies started to show better financial performance. (Comment: There were many periods in the past when market movements were down when the economy was doing well, and vice versa.)
We need to understand that the market had discounted the good news. Some of those good financial results were already reflected in the stock prices. The stock market cycle always moves ahead of the economic cycle.
During the Great Depression in 1929, the stock market recovered eight months ahead of the real economic recovery. Even though some investment experts say the worst is far from over, we notice that a lot of economic indicators are pointing to an economic recovery.
However, the economic growth may not move as fast as the stock market. As a result, while the economy continues to recover, stock prices need to come down to reflect the fundamentals of the companies. (Comment: Overcome this short term uncertainties by taking a long term horizon in your investments.)
This explains why once investors started to realise that the stock prices could not be supported by the fundamentals of some companies, especially blue-chip stocks, the stock prices had to come down to reflect the true value of companies.
Nevertheless, based on our analysis, most listed companies in Malaysia showed great recovery in their second quarter of 2009 financial results against the results in the first quarter as well as the fourth quarter of 2008.
We need to understand that there are many disturbing factors that affect the stock prices, but not reflect the fundamentals of companies. From the perspective of behavioural finance, investors’ expectations and emotions have great influence on stock prices. Two factors influence investors’ expectations – past experience and new information.
In the absence of new information, investors will use past trends to extrapolate into the future. As a result, the stock prices may persist in trend for a while before the next market reversal. This may cause the market to overreact to good financial results as shown by some companies.
According to Fischer Black, some investors tend to be affected by noise that makes it difficult for them to act rationally. (Comment: This is to the benefit of those who are able to value the stocks and not act in folly with the market.) He defines noise as what makes our observations imperfect as well as keeps us from knowing the expected return on a stock.
Some investors, due to lack of self control and proper financial training, may misinterpret economic information and sometimes be carried away by the stock market emotion. Investors may feel uneasy over the recent strong market performance. However, they will still choose to follow the market trend even though they feel their judgment may be wrong. In behavioural finance, we label this as conformity in which we are inclined to follow the example of others even though we do not believe in the action.
The above phenomenon of stock prices being valued beyond the fundamentals of the companies is applicable to some selected blue-chip stocks. Nevertheless, Bursa Malaysia does have plenty of second- and third-liner stocks which are still selling at cheap valuations. Investors may want to take the current market corrections to accumulate them for the long-term.
We need to relate the current stock prices to the intrinsic value of the companies. Some investment tools like price-to-earnings ratio, dividend yield and price-to-book ratio will assist us in filtering out some good companies for investment.
Even though there are a lot of uncertainties along the way to full financial recovery, we feel that investors may view the recent corrections as good opportunities to build their long-term investment portfolios. For those who have been looking for investment returns higher than fixed deposit rates, there are still a lot of stocks that are paying handsome dividend yield of more than 4% and yet selling at cheap prices.
One of the most important investing principles is to have the discipline to hold long term. We should not pay too much attention to the fluctuation of stock prices; instead, we need to focus on the earning power of the companies as it is one of the most important drivers in deriving the intrinsic value of a company.
As a result of the financial crisis, even though a lot of companies are showing great recovery, their performance and prices are still lower than their peak level during the year in 2007. If the overall economy and the companies’ performance recover to 2007 level, their current stock prices may be a good entry level.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/11/4/business/5035143&sec=business
How to handle market uncertainty
Personal Investing - By Ooi Kok Hwa
AFTER the strong rally over the past seven months, the market is finally undertaking some corrections. Some investors may not fully comprehend why the stock market moved up when the companies reported bad financial results, but tumbled when the companies started to show better financial performance. (Comment: There were many periods in the past when market movements were down when the economy was doing well, and vice versa.)
We need to understand that the market had discounted the good news. Some of those good financial results were already reflected in the stock prices. The stock market cycle always moves ahead of the economic cycle.
During the Great Depression in 1929, the stock market recovered eight months ahead of the real economic recovery. Even though some investment experts say the worst is far from over, we notice that a lot of economic indicators are pointing to an economic recovery.
However, the economic growth may not move as fast as the stock market. As a result, while the economy continues to recover, stock prices need to come down to reflect the fundamentals of the companies. (Comment: Overcome this short term uncertainties by taking a long term horizon in your investments.)
This explains why once investors started to realise that the stock prices could not be supported by the fundamentals of some companies, especially blue-chip stocks, the stock prices had to come down to reflect the true value of companies.
Nevertheless, based on our analysis, most listed companies in Malaysia showed great recovery in their second quarter of 2009 financial results against the results in the first quarter as well as the fourth quarter of 2008.
We need to understand that there are many disturbing factors that affect the stock prices, but not reflect the fundamentals of companies. From the perspective of behavioural finance, investors’ expectations and emotions have great influence on stock prices. Two factors influence investors’ expectations – past experience and new information.
In the absence of new information, investors will use past trends to extrapolate into the future. As a result, the stock prices may persist in trend for a while before the next market reversal. This may cause the market to overreact to good financial results as shown by some companies.
According to Fischer Black, some investors tend to be affected by noise that makes it difficult for them to act rationally. (Comment: This is to the benefit of those who are able to value the stocks and not act in folly with the market.) He defines noise as what makes our observations imperfect as well as keeps us from knowing the expected return on a stock.
Some investors, due to lack of self control and proper financial training, may misinterpret economic information and sometimes be carried away by the stock market emotion. Investors may feel uneasy over the recent strong market performance. However, they will still choose to follow the market trend even though they feel their judgment may be wrong. In behavioural finance, we label this as conformity in which we are inclined to follow the example of others even though we do not believe in the action.
The above phenomenon of stock prices being valued beyond the fundamentals of the companies is applicable to some selected blue-chip stocks. Nevertheless, Bursa Malaysia does have plenty of second- and third-liner stocks which are still selling at cheap valuations. Investors may want to take the current market corrections to accumulate them for the long-term.
We need to relate the current stock prices to the intrinsic value of the companies. Some investment tools like price-to-earnings ratio, dividend yield and price-to-book ratio will assist us in filtering out some good companies for investment.
Even though there are a lot of uncertainties along the way to full financial recovery, we feel that investors may view the recent corrections as good opportunities to build their long-term investment portfolios. For those who have been looking for investment returns higher than fixed deposit rates, there are still a lot of stocks that are paying handsome dividend yield of more than 4% and yet selling at cheap prices.
One of the most important investing principles is to have the discipline to hold long term. We should not pay too much attention to the fluctuation of stock prices; instead, we need to focus on the earning power of the companies as it is one of the most important drivers in deriving the intrinsic value of a company.
As a result of the financial crisis, even though a lot of companies are showing great recovery, their performance and prices are still lower than their peak level during the year in 2007. If the overall economy and the companies’ performance recover to 2007 level, their current stock prices may be a good entry level.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/11/4/business/5035143&sec=business
Monetising land bank assets a good move
Tuesday November 3, 2009
Monetising land bank assets a good move
Commodities Talk- By Hanim Adnan
ARE prime land bank assets in the Klang Valley still “hard” commodities to come by these days?
Perhaps not, given the Government’s green light for its agencies to monetise their fixed assets as a new source of revenue and to maximise earnings.
Fixed assets include land, infrastructure and buildings, intellectual property, live assets and moveable assets, such as goods and inventory.
Among the candidates are plantation-related government agencies like the Malaysian Rubber Board (MRB), Risda, Felcra and Felda, which are large owners of land given the diversified nature of their respective crops they own or help manage for local smallholders under various schemes.
Even the headquarters of these agencies are nestled in Kuala Lumpur’s prime Golden Triangle area. According to sources, the land-bank assets of the plantation-based government agencies in Malaysia could easily top RM20bil.
Top officials from these agencies have openly admitted that offers are pouring in, in the form of acquisitions/joint ventures to develop their prime land bank as well as leasing of public buildings from various government-linked companies and major private corporations.
MRB, which is estimated to own over RM1bil worth of land bank nationwide, had indicated to StarBiz that it was aiming to monetise part of its assets in Rubber Research Institute (RRI) in Sungei Buloh as well as in Jalan Ampang.
Another rubber agency, Risda, is also evaluating offers for its prized small pockets of land in Jalan U Thant and Jalan Ampang given their high commercial value in the Golden Triangle. Risda, however, is believed to be in no hurry to let go of its Jalan Ampang land and still biding for the right time.
Previously, Risda had also successfully monetised its 40,000ha in Sungai Petani and transformed it into a lucrative residential property project.
So far, the three most talked-about parcels of land likely to be developed are those in Jalan Ampang Hilir, Jalan Cochrane and RRI’s Sungei Buloh.
A recent report, quoting sources, said that Malaysian Resources Corp Bhd and its single-largest shareholder, the Employees Provident Fund, had been given the green light to acquire and develop a land of “an unspecified size” in Jalan Cochrane and Jalan Ampang Hilir.
The rationale for the Government’s move to allow its agencies to monetise their assets, especially those non-core ones, should be applauded as it would enable the agencies to sustain or increase their revenue and become less dependent on government allocation and subsidies.
That said, the public, however, wants government auctions – especially of its land or other assets – to be conducted via an open-tender system rather than through direct negotiation for the sake of transparency.
There have been claims that many closed-door negotiations to sell government-related assets are often subject to abuse, inefficiency and misallocation of funds.
● Hanim Adnan is assistant news editor at The Star. She often wonders whether transparency is always the best policy.
Monetising land bank assets a good move
Commodities Talk- By Hanim Adnan
ARE prime land bank assets in the Klang Valley still “hard” commodities to come by these days?
Perhaps not, given the Government’s green light for its agencies to monetise their fixed assets as a new source of revenue and to maximise earnings.
Fixed assets include land, infrastructure and buildings, intellectual property, live assets and moveable assets, such as goods and inventory.
Among the candidates are plantation-related government agencies like the Malaysian Rubber Board (MRB), Risda, Felcra and Felda, which are large owners of land given the diversified nature of their respective crops they own or help manage for local smallholders under various schemes.
Even the headquarters of these agencies are nestled in Kuala Lumpur’s prime Golden Triangle area. According to sources, the land-bank assets of the plantation-based government agencies in Malaysia could easily top RM20bil.
Top officials from these agencies have openly admitted that offers are pouring in, in the form of acquisitions/joint ventures to develop their prime land bank as well as leasing of public buildings from various government-linked companies and major private corporations.
MRB, which is estimated to own over RM1bil worth of land bank nationwide, had indicated to StarBiz that it was aiming to monetise part of its assets in Rubber Research Institute (RRI) in Sungei Buloh as well as in Jalan Ampang.
Another rubber agency, Risda, is also evaluating offers for its prized small pockets of land in Jalan U Thant and Jalan Ampang given their high commercial value in the Golden Triangle. Risda, however, is believed to be in no hurry to let go of its Jalan Ampang land and still biding for the right time.
Previously, Risda had also successfully monetised its 40,000ha in Sungai Petani and transformed it into a lucrative residential property project.
So far, the three most talked-about parcels of land likely to be developed are those in Jalan Ampang Hilir, Jalan Cochrane and RRI’s Sungei Buloh.
A recent report, quoting sources, said that Malaysian Resources Corp Bhd and its single-largest shareholder, the Employees Provident Fund, had been given the green light to acquire and develop a land of “an unspecified size” in Jalan Cochrane and Jalan Ampang Hilir.
The rationale for the Government’s move to allow its agencies to monetise their assets, especially those non-core ones, should be applauded as it would enable the agencies to sustain or increase their revenue and become less dependent on government allocation and subsidies.
That said, the public, however, wants government auctions – especially of its land or other assets – to be conducted via an open-tender system rather than through direct negotiation for the sake of transparency.
There have been claims that many closed-door negotiations to sell government-related assets are often subject to abuse, inefficiency and misallocation of funds.
● Hanim Adnan is assistant news editor at The Star. She often wonders whether transparency is always the best policy.
Tuesday 3 November 2009
PPB may use sugar proceeds to invest in Wilmar China
PPB may use sugar proceeds to invest in Wilmar China
Tags: HKEX | OSK Research | PPB Group Bhd | Wilmar China | Wilmar International
Written by Melody Song
Tuesday, 03 November 2009 11:17
KUALA LUMPUR: PPB GROUP BHD [] may utilise the RM1.29 billion proceeds from the sale of its sugar refining and trading business in Malaysia, to subscribe for shares in Wilmar China, according to OSK Research.
The research firm believes that by investing in Wilmar China, which is planning an initial public offering (IPO) on the Hong Kong Exchange (HKEX), PPB will get “a bigger bang for the buck”, compared to buying additional shares in Wilmar International Ltd.
PPB had in an announcement last Friday said it would channel the proceeds to make strategic investments rather than distribute them as special dividends to shareholders.
The announcement was pertaining to PPB’s proposed divestment to Felda Global Ventures Holdings Sdn Bhd of all its sugar refining and trading business in Malaysia, comprising a 100% stake in Malayan Sugar Manufacturing Sdn Bhd, 50% stake in Kilang Gula Felda Perlis Sdn Bhd and 5,797ha of land in Perlis, for a total consideration of RM1.29 billion.
According to OSK, PPB currently owns 18.22% stake in Wilmar International, which is planning to float its China operation under Wilmar China on the HKEX.
“If PPB were to raise its investment in Wilmar International, it would only be able to buy an additional 1.3% based on the current price,” said OSK in a note yesterday, citing that PPB’s chairman had mentioned the group would only raise stakes in Wilmar International if the price were right.
“We doubt that the proceeds would be used to buy into Wilmar International given that the additional stake (of 1.3%) will only raise PPB’s pre-tax profit by RM59.5 million (based on our estimates) compared to about RM165 million (in pre-tax profits) forgone from its sugar refining and trading business. Moreover, PPB is already equity-accounting Wilmar International’s contribution,” noted OSK.
Hence, the research firm believed that the company would rather invest the proceeds to subscribe for the IPO shares of Wilmar China.
OSK said PPB’s 18.22% stake in Wilmar International is worth RM17.86 billion compared to its own market capitalisation of RM17.95 billion.
“Assuming zero value for its other businesses, PPB’s revised net asset value (RNAV) is estimated at RM19.29 billion, taking into consideration its net cash of RM140.96 million and the sale proceeds of RM1.29 billion. Hence PPB is trading at a narrow 7% discount to its RNAV,” said OSK.
PPB closed 20 sen or 1.32% higher at RM15.34 yesterday.
This article appeared in The Edge Financial Daily, November 3, 2009.
Tags: HKEX | OSK Research | PPB Group Bhd | Wilmar China | Wilmar International
Written by Melody Song
Tuesday, 03 November 2009 11:17
KUALA LUMPUR: PPB GROUP BHD [] may utilise the RM1.29 billion proceeds from the sale of its sugar refining and trading business in Malaysia, to subscribe for shares in Wilmar China, according to OSK Research.
The research firm believes that by investing in Wilmar China, which is planning an initial public offering (IPO) on the Hong Kong Exchange (HKEX), PPB will get “a bigger bang for the buck”, compared to buying additional shares in Wilmar International Ltd.
PPB had in an announcement last Friday said it would channel the proceeds to make strategic investments rather than distribute them as special dividends to shareholders.
The announcement was pertaining to PPB’s proposed divestment to Felda Global Ventures Holdings Sdn Bhd of all its sugar refining and trading business in Malaysia, comprising a 100% stake in Malayan Sugar Manufacturing Sdn Bhd, 50% stake in Kilang Gula Felda Perlis Sdn Bhd and 5,797ha of land in Perlis, for a total consideration of RM1.29 billion.
According to OSK, PPB currently owns 18.22% stake in Wilmar International, which is planning to float its China operation under Wilmar China on the HKEX.
“If PPB were to raise its investment in Wilmar International, it would only be able to buy an additional 1.3% based on the current price,” said OSK in a note yesterday, citing that PPB’s chairman had mentioned the group would only raise stakes in Wilmar International if the price were right.
“We doubt that the proceeds would be used to buy into Wilmar International given that the additional stake (of 1.3%) will only raise PPB’s pre-tax profit by RM59.5 million (based on our estimates) compared to about RM165 million (in pre-tax profits) forgone from its sugar refining and trading business. Moreover, PPB is already equity-accounting Wilmar International’s contribution,” noted OSK.
Hence, the research firm believed that the company would rather invest the proceeds to subscribe for the IPO shares of Wilmar China.
OSK said PPB’s 18.22% stake in Wilmar International is worth RM17.86 billion compared to its own market capitalisation of RM17.95 billion.
“Assuming zero value for its other businesses, PPB’s revised net asset value (RNAV) is estimated at RM19.29 billion, taking into consideration its net cash of RM140.96 million and the sale proceeds of RM1.29 billion. Hence PPB is trading at a narrow 7% discount to its RNAV,” said OSK.
PPB closed 20 sen or 1.32% higher at RM15.34 yesterday.
This article appeared in The Edge Financial Daily, November 3, 2009.
Latexx 3Q net jumps 130% to RM14m
Latexx 3Q net jumps 130% to RM14m
Tags: Latexx Partners Bhd | third quarter
Written by Financial Daily
Tuesday, 03 November 2009 11:16
KUALA LUMPUR: LATEXX PARTNERS BHD [] posted a net profit of RM14.27 million for the third quarter ended Sept 30, 2009, a 130% jump from RM6.2 million a year earlier, boosted by increased sales and improved overall efficiency through lower overheads, operational and supervision costs.
Revenue came in at RM80.84 million, up 29% from RM62.65 million previously, driven by recent capacity expansion and aggressive marketing strategy, as well as overall cost savings. The group declared a second interim tax-exempt dividend of one sen per share for FY09.
For the nine-month period, net profit jumped 311% to RM34.83 million from RM8.47 million last year, while turnover improved 47% to RM225.59 million compared with RM153.4 million previously.
In a statement to the stock exchange yesterday, the glove maker said it was confident that the growth achieved in the past 18 months would be sustained in tandem with the growth of world demand for medical gloves. Latexx also said its capacity expansion was on track, with the installation of an additional eight double-formers production lines expected to be completed and fully operational by year-end.
This will bring the company’s total capacity to six billion pieces per annum.
“In addition, CONSTRUCTION [] of an additional production plant adjacent to existing production facilities has commenced. It is expected to increase our total capacity by another three billion pieces per annum within the next two years,” said Latexx.
This article appeared in The Edge Financial Daily, November 3, 2009.
Tags: Latexx Partners Bhd | third quarter
Written by Financial Daily
Tuesday, 03 November 2009 11:16
KUALA LUMPUR: LATEXX PARTNERS BHD [] posted a net profit of RM14.27 million for the third quarter ended Sept 30, 2009, a 130% jump from RM6.2 million a year earlier, boosted by increased sales and improved overall efficiency through lower overheads, operational and supervision costs.
Revenue came in at RM80.84 million, up 29% from RM62.65 million previously, driven by recent capacity expansion and aggressive marketing strategy, as well as overall cost savings. The group declared a second interim tax-exempt dividend of one sen per share for FY09.
For the nine-month period, net profit jumped 311% to RM34.83 million from RM8.47 million last year, while turnover improved 47% to RM225.59 million compared with RM153.4 million previously.
In a statement to the stock exchange yesterday, the glove maker said it was confident that the growth achieved in the past 18 months would be sustained in tandem with the growth of world demand for medical gloves. Latexx also said its capacity expansion was on track, with the installation of an additional eight double-formers production lines expected to be completed and fully operational by year-end.
This will bring the company’s total capacity to six billion pieces per annum.
“In addition, CONSTRUCTION [] of an additional production plant adjacent to existing production facilities has commenced. It is expected to increase our total capacity by another three billion pieces per annum within the next two years,” said Latexx.
This article appeared in The Edge Financial Daily, November 3, 2009.
Risks and Rewards on China's New Stock Board
Risks and Rewards on China's New Stock Board
Reuters/China DailyCompany delegates of GEM, also known as ChiNext, at the listing ceremony Friday. Values of the newly listed companies surged.
By DAVID BARBOZA
Published: November 2, 2009
SHANGHAI — The opening of a Nasdaq-style stock board in China is already being seen as a watershed moment for the country’s capital markets, providing new but volatile opportunities for mainland Chinese investors and an alternative source of financing for start-up companies.
On Monday, the second day of trading on the ChiNext board, 25 of the 28 listed shares fell, many by the daily limit of 10 percent, while the benchmark MSCI index of Asia-Pacific shares outside Japan fell about 1 percent
Over all, shares fell about 8.5 percent on ChiNext, but the drop came after a day of gains that were astronomical and amid expectations that shares on the new board would be subject to big ups and downs. On Friday, the first day of trading on ChiNext, a secondary board of the Shenzhen stock exchange, the shares of some companies soared as much as 210 percent.
The first batch of the 28 companies listed — including film producers, software makers and pharmaceutical companies — raised about $2 billion in their initial public offerings, far more than the companies had hoped.
By the end of trading Monday, the combined market value of the companies was almost $19 billion, creating fortunes for the founders and initial investors in those companies.
China is already the world’s biggest market for initial public offerings this year, and its resurgent economy is flush with capital and investors with a big appetite for risk.
But trading experts have long complained that the mainland’s stock market system is seriously flawed, partly because of a misallocation of capital.
State-run banks lend primarily to state-owned companies, which tend to be inefficient. Listings on the Shanghai stock exchange and the main board of the Shenzhen exchange are dominated by government enterprises. Because there are few opportunities for stock listings on the mainland, young private mainland companies generally list their shares in Hong Kong, which operates under rules separate from the mainland’s, or overseas on the Nasdaq or New York Stock Exchange.
The government hopes to change that with the creation of ChiNext. The government is seeking to create a more efficient capital market system, one that would steer investment capital to small and midsize private enterprises — companies that can help reshape the economy through technology and innovation, rather than low-price exports.
“This is potentially a major game changer in China’s high-tech industry,” said Yu Zhou, a professor at Vassar College in Poughkeepsie, New York. “For about 10 years, the biggest problem for China’s innovative companies was finance. You know, it is veA Chinese investor monitors screens showing share prices at a security firm in Wuhan, central China's Hubei province on November 2, 2009. More than two-thirds of the shares listed on China's newly launched Nasdaq-style board ended limit-down on profit-taking on November 2, in only the second session after a wild debut last week, as twenty of the 28 stocks listed on the Shenzhen-based ChiNext fell by the daily trading limit of 10 percent, and analysts said there was room for further correction. CHINA OUT AFP PHOTOry hard for them to get loans from state-owned banks.”
Although ChiNext is tiny when compared with the Shanghai and Hong Kong stock exchanges, regulators hope it will eventually compete with Nasdaq and entice more Chinese companies to list with it.
ChiNext is also expected to give a boost to venture capital and private equity markets in mainland China, which have been hampered by a system that until now has not provided investors with what industry insiders call an exit strategy — a way of eventually cashing out of their investments in small companies through a domestic stock market.
There are big challenges to creating a stock board similar to Nasdaq, which includes companies like Microsoft, Intel and Google. For instance, volatile stock prices and high valuations could hurt the new board’s credibility with entrepreneurs and investors.
Chinese investors are known to speculate, favoring momentum buying and selling rather than the underlying fundamentals of a company, analysts say. Indeed, the casinolike nature of the Shanghai stock exchange and the main Shenzhen board, combined with government intervention, have added to the volatility of the mainland markets.
Analysts warn that ChiNext could also be prone to similar speculative frenzies.
Andy Xie, an economist who formerly worked at Morgan Stanley, is already calling ChiNext a “V.I.P. table on top of a big casino.”
Chang Chun, an expert on financial markets at the China Europe International Business School in Shanghai, said that China needed a market to serve start-ups, but “the issue is the maturity of Chinese investors.”
Before trading opened Friday, he said, regulators created rules to guard against excessive volatility and even warned investors that they would crack down on aggressive speculation. Still, the opening Friday — with 28 companies beginning to trade at once — was marked by wild price swings.
The buying was so feverish that regulators, trying to calm the market, temporarily suspended trading of the 28 companies at different points, and analysts warned of the risks posed by excessive speculation and inflated stock prices.
One cause of concern was the huge valuations of the first batch of stocks.
The average company on ChiNext has a price-earnings ratio of about 100 meaning investors are paying $100 for every $1 of 2008 earnings. By comparison, the Nasdaq 100 index has a price-earnings ratio of 23.6, according to Bloomberg.
ChiNext stocks are also priced far above Shanghai-listed stocks, which have long been considered inflated by the standards of more mature markets.
Hundreds of Chinese companies are eagerly awaiting their turn to list on the ChiNext, and many analysts say the exchange will fill an important need: directing financing toward smaller start-ups that help rebalance economic growth. Ms. Zhou at Vassar said she had heard that there were more than 1,000 companies in Beijing’s high-technology district alone that met the requirements for listing shares on the ChiNext board.
http://www.nytimes.com/2009/11/03/business/global/03yuan.html?pagewanted=2&ref=business
Reuters/China DailyCompany delegates of GEM, also known as ChiNext, at the listing ceremony Friday. Values of the newly listed companies surged.
By DAVID BARBOZA
Published: November 2, 2009
SHANGHAI — The opening of a Nasdaq-style stock board in China is already being seen as a watershed moment for the country’s capital markets, providing new but volatile opportunities for mainland Chinese investors and an alternative source of financing for start-up companies.
On Monday, the second day of trading on the ChiNext board, 25 of the 28 listed shares fell, many by the daily limit of 10 percent, while the benchmark MSCI index of Asia-Pacific shares outside Japan fell about 1 percent
Over all, shares fell about 8.5 percent on ChiNext, but the drop came after a day of gains that were astronomical and amid expectations that shares on the new board would be subject to big ups and downs. On Friday, the first day of trading on ChiNext, a secondary board of the Shenzhen stock exchange, the shares of some companies soared as much as 210 percent.
The first batch of the 28 companies listed — including film producers, software makers and pharmaceutical companies — raised about $2 billion in their initial public offerings, far more than the companies had hoped.
By the end of trading Monday, the combined market value of the companies was almost $19 billion, creating fortunes for the founders and initial investors in those companies.
China is already the world’s biggest market for initial public offerings this year, and its resurgent economy is flush with capital and investors with a big appetite for risk.
But trading experts have long complained that the mainland’s stock market system is seriously flawed, partly because of a misallocation of capital.
State-run banks lend primarily to state-owned companies, which tend to be inefficient. Listings on the Shanghai stock exchange and the main board of the Shenzhen exchange are dominated by government enterprises. Because there are few opportunities for stock listings on the mainland, young private mainland companies generally list their shares in Hong Kong, which operates under rules separate from the mainland’s, or overseas on the Nasdaq or New York Stock Exchange.
The government hopes to change that with the creation of ChiNext. The government is seeking to create a more efficient capital market system, one that would steer investment capital to small and midsize private enterprises — companies that can help reshape the economy through technology and innovation, rather than low-price exports.
“This is potentially a major game changer in China’s high-tech industry,” said Yu Zhou, a professor at Vassar College in Poughkeepsie, New York. “For about 10 years, the biggest problem for China’s innovative companies was finance. You know, it is veA Chinese investor monitors screens showing share prices at a security firm in Wuhan, central China's Hubei province on November 2, 2009. More than two-thirds of the shares listed on China's newly launched Nasdaq-style board ended limit-down on profit-taking on November 2, in only the second session after a wild debut last week, as twenty of the 28 stocks listed on the Shenzhen-based ChiNext fell by the daily trading limit of 10 percent, and analysts said there was room for further correction. CHINA OUT AFP PHOTOry hard for them to get loans from state-owned banks.”
Although ChiNext is tiny when compared with the Shanghai and Hong Kong stock exchanges, regulators hope it will eventually compete with Nasdaq and entice more Chinese companies to list with it.
ChiNext is also expected to give a boost to venture capital and private equity markets in mainland China, which have been hampered by a system that until now has not provided investors with what industry insiders call an exit strategy — a way of eventually cashing out of their investments in small companies through a domestic stock market.
There are big challenges to creating a stock board similar to Nasdaq, which includes companies like Microsoft, Intel and Google. For instance, volatile stock prices and high valuations could hurt the new board’s credibility with entrepreneurs and investors.
Chinese investors are known to speculate, favoring momentum buying and selling rather than the underlying fundamentals of a company, analysts say. Indeed, the casinolike nature of the Shanghai stock exchange and the main Shenzhen board, combined with government intervention, have added to the volatility of the mainland markets.
Analysts warn that ChiNext could also be prone to similar speculative frenzies.
Andy Xie, an economist who formerly worked at Morgan Stanley, is already calling ChiNext a “V.I.P. table on top of a big casino.”
Chang Chun, an expert on financial markets at the China Europe International Business School in Shanghai, said that China needed a market to serve start-ups, but “the issue is the maturity of Chinese investors.”
Before trading opened Friday, he said, regulators created rules to guard against excessive volatility and even warned investors that they would crack down on aggressive speculation. Still, the opening Friday — with 28 companies beginning to trade at once — was marked by wild price swings.
The buying was so feverish that regulators, trying to calm the market, temporarily suspended trading of the 28 companies at different points, and analysts warned of the risks posed by excessive speculation and inflated stock prices.
One cause of concern was the huge valuations of the first batch of stocks.
The average company on ChiNext has a price-earnings ratio of about 100 meaning investors are paying $100 for every $1 of 2008 earnings. By comparison, the Nasdaq 100 index has a price-earnings ratio of 23.6, according to Bloomberg.
ChiNext stocks are also priced far above Shanghai-listed stocks, which have long been considered inflated by the standards of more mature markets.
Hundreds of Chinese companies are eagerly awaiting their turn to list on the ChiNext, and many analysts say the exchange will fill an important need: directing financing toward smaller start-ups that help rebalance economic growth. Ms. Zhou at Vassar said she had heard that there were more than 1,000 companies in Beijing’s high-technology district alone that met the requirements for listing shares on the ChiNext board.
http://www.nytimes.com/2009/11/03/business/global/03yuan.html?pagewanted=2&ref=business
A sideways pyramid to increase your Retirement Income.
Increase Your Retirement Income
by Mary Beth Franklin
Monday, November 2, 2009
This new money-for-life strategy creates both guaranteed income and growth potential.
In the midst of the stock-market meltdown in October 2008, Arthur Szu-tu, a relatively new retiree at 60, was gripped with fear and anxiety. He had no pension, he was too young to collect Social Security benefits, and he was relying completely on his savings. "Intellectually, I knew I couldn't cash out my stocks because I might live another 35 years and I would need the higher investment returns that come from stocks," says Szu-tu, a former technology manager from Syracuse, N.Y. "But emotionally, it was really scary."
As retirees watched their account balances plummet, many were advised to reduce their withdrawals or go back to work to preserve their nest eggs. "The thought of becoming a Wal-Mart greeter or McDonald's counter boy did not allow me to sleep at night," quips Szu-tu. He decided that he would rest easier if he mentally separated his investments into two groups: cash and bonds that could sustain him through his initial years of retirement, and stock funds that he would leave untouched until they could recover and grow.
Without realizing it, Szu-tu had stumbled on an alternative income model that has been kicking around in some retirement-planning sectors for more than 20 years but attracted little attention until recently. As long as the stock market was booming -- and bonds performed well when stocks tanked -- the so-called 4% rule for systematically withdrawing retirement income from an investment portfolio worked well.
That rule of thumb became the gold standard for creating sustainable retirement income. According to the 4% rule, if you invest in a moderately risky portfolio of 60% stocks and 40% bonds, you can initially withdraw 4% of your assets, increase that amount in subsequent years to keep pace with inflation, and still have a 90% probability of not running out of money over a 30-year retirement.
Probabilities are fine -- until you become a statistic. The recent bear market was so severe and so unusual (because virtually every asset class, except Treasury bonds, suffered severe losses) that it has called into question even that conservative strategy. The biggest threat to retirement wealth is withdrawing too much money from a shrinking nest egg, because there may not be enough left to benefit from the inevitable market rebound. Retirees were urged to skip their annual inflation adjustments -- or, in cases of severe investment losses, to reset their 4% distribution schedule based on their new, lower balance.
"If it weren't for inflation, cash and bonds would be all you need," says Lubinski. But even with modest inflation of 3% a year, your buying power would be cut in half in about 25 years, so you need to invest for future growth, too. When you add stocks to your portfolio, however, you also add risk.
In retirement, "clients are more concerned about reliability of income than about return on investment," says Lubinski. "You can't chase both at the same time." But you can achieve both goals if you compartmentalize your money based on short-term, medium-term and long-term needs.
A sideways pyramid.
Jim Coleman, head of Coleman Financial Advisory Group(http://www.colemanadvisorygroup.com/), in Waterbury, Conn., has added his own twist to the income-for-life model. When describing the strategy to clients, he tells them to think of a classic risk pyramid, which puts the safest investments (such as bank accounts and money-market funds) at the bottom and layers progressively riskier investments (such as bonds and stock funds) building to a peak.
In the classic model, even if your investments are diversified, all your assets are at risk at the same time. Coleman flipped the pyramid on its side so that you tap the most conservative, risk-free investments at the beginning of your retirement timeline and let the riskier investments grow until the later years. Your most aggressive assets will have years -- and possibly even decades -- to grow, creating a source of stable retirement income in the future. "With this divide-and-conquer strategy, you can have the best of both worlds," says Coleman.
KipTip: A New Angle on the Risk Pyramid
This alternative model for retirement withdrawals delivers current income and future returns.
With a traditional risk-pyramid model, you use your safest investments -- such as bank accounts and certificates of deposit -- to build the foundation of your portfolio. Then you layer riskier investments on top, adding bonds, followed by various types of stock funds and alternative investments that might include commodities and real estate. Diversification spreads your risk, but it doesn't guarantee that you won't lose money.
By flipping the risk pyramid on its side, you can align your retirement timeline with your investment strategy. Fund your immediate income needs with risk-free investments, such as CDs or an immediate annuity, and gradually increase the risk (and potential return) of other investments. Every five years, use investment returns to replenish your guaranteed income.
http://finance.yahoo.com/focus-retirement/article/108055/increase-your-retirement-income;_ylt=ArlNO.c7ri6qIIasaoxRuVu7YWsA;_ylu=X3oDMTE1azc1c250BHBvcwMyBHNlYwNmaWRlbGl0eUZQBHNsawNpbmNvbWVmb3JsaWY-?mod=fidelity-readytoretire
by Mary Beth Franklin
Monday, November 2, 2009
This new money-for-life strategy creates both guaranteed income and growth potential.
In the midst of the stock-market meltdown in October 2008, Arthur Szu-tu, a relatively new retiree at 60, was gripped with fear and anxiety. He had no pension, he was too young to collect Social Security benefits, and he was relying completely on his savings. "Intellectually, I knew I couldn't cash out my stocks because I might live another 35 years and I would need the higher investment returns that come from stocks," says Szu-tu, a former technology manager from Syracuse, N.Y. "But emotionally, it was really scary."
As retirees watched their account balances plummet, many were advised to reduce their withdrawals or go back to work to preserve their nest eggs. "The thought of becoming a Wal-Mart greeter or McDonald's counter boy did not allow me to sleep at night," quips Szu-tu. He decided that he would rest easier if he mentally separated his investments into two groups: cash and bonds that could sustain him through his initial years of retirement, and stock funds that he would leave untouched until they could recover and grow.
Without realizing it, Szu-tu had stumbled on an alternative income model that has been kicking around in some retirement-planning sectors for more than 20 years but attracted little attention until recently. As long as the stock market was booming -- and bonds performed well when stocks tanked -- the so-called 4% rule for systematically withdrawing retirement income from an investment portfolio worked well.
That rule of thumb became the gold standard for creating sustainable retirement income. According to the 4% rule, if you invest in a moderately risky portfolio of 60% stocks and 40% bonds, you can initially withdraw 4% of your assets, increase that amount in subsequent years to keep pace with inflation, and still have a 90% probability of not running out of money over a 30-year retirement.
Probabilities are fine -- until you become a statistic. The recent bear market was so severe and so unusual (because virtually every asset class, except Treasury bonds, suffered severe losses) that it has called into question even that conservative strategy. The biggest threat to retirement wealth is withdrawing too much money from a shrinking nest egg, because there may not be enough left to benefit from the inevitable market rebound. Retirees were urged to skip their annual inflation adjustments -- or, in cases of severe investment losses, to reset their 4% distribution schedule based on their new, lower balance.
"If it weren't for inflation, cash and bonds would be all you need," says Lubinski. But even with modest inflation of 3% a year, your buying power would be cut in half in about 25 years, so you need to invest for future growth, too. When you add stocks to your portfolio, however, you also add risk.
In retirement, "clients are more concerned about reliability of income than about return on investment," says Lubinski. "You can't chase both at the same time." But you can achieve both goals if you compartmentalize your money based on short-term, medium-term and long-term needs.
A sideways pyramid.
Jim Coleman, head of Coleman Financial Advisory Group(http://www.colemanadvisorygroup.com/), in Waterbury, Conn., has added his own twist to the income-for-life model. When describing the strategy to clients, he tells them to think of a classic risk pyramid, which puts the safest investments (such as bank accounts and money-market funds) at the bottom and layers progressively riskier investments (such as bonds and stock funds) building to a peak.
In the classic model, even if your investments are diversified, all your assets are at risk at the same time. Coleman flipped the pyramid on its side so that you tap the most conservative, risk-free investments at the beginning of your retirement timeline and let the riskier investments grow until the later years. Your most aggressive assets will have years -- and possibly even decades -- to grow, creating a source of stable retirement income in the future. "With this divide-and-conquer strategy, you can have the best of both worlds," says Coleman.
KipTip: A New Angle on the Risk Pyramid
This alternative model for retirement withdrawals delivers current income and future returns.
With a traditional risk-pyramid model, you use your safest investments -- such as bank accounts and certificates of deposit -- to build the foundation of your portfolio. Then you layer riskier investments on top, adding bonds, followed by various types of stock funds and alternative investments that might include commodities and real estate. Diversification spreads your risk, but it doesn't guarantee that you won't lose money.
http://finance.yahoo.com/focus-retirement/article/108055/increase-your-retirement-income;_ylt=ArlNO.c7ri6qIIasaoxRuVu7YWsA;_ylu=X3oDMTE1azc1c250BHBvcwMyBHNlYwNmaWRlbGl0eUZQBHNsawNpbmNvbWVmb3JsaWY-?mod=fidelity-readytoretire
6 Common Traits of Successful Traders and Investors
6 Common Traits of Successful Traders and Investors
By Jack Ablin
On 8:23 am EST, Monday November 2, 2009
Jack Ablin, Chief Investment Officer of Harris Private Bank, is responsible for managing over $50 billion in private client assets, and for developing strategies for some of America's wealthiest individuals and families. He is a trusted source to some of America's most respected journalists; a frequent commentator on CNBC and Bloomberg; and a frequent contributor to Barron's.
For the last 27 years, I've been an institutional investor. I have spent more than a decade on trading desks and have overseen the management of billions on behalf of individuals and institutions alike. One trend that has been very clear during my 27 years, and that is the balance of information has clearly changed.
Early in my career, the balance of information was clearly skewed in favor of the big boys. All of that has now changed with the democratization of investment data. The Internet has brought real-time quotes to avid investors' desktops and CNBC leveled the playing field when it comes to news. In fact within a year of its launch, CNBC forced virtually every investment professional to get a TV set in their office just to spare the embarrassment of having one of their clients clue them in on an investment scoop.
Like many other segments of business, just because individuals have equal access to many of the same tools, doesn't mean that they will employ them as effectively as the professionals. WebMD is a great tool for understanding our health and bodies, but I would still leave medical diagnoses to trained physicians. Desktop publishing is another area where we now all have the tools to layout a newsletter, but that doesn't make us graphic designers. When it comes to investing, the little guy is clearly empowered, but there are a few points, however, that individual investors must keep in mind before charting their own course in the rough seas of investing.
Pay Less Attention
Individual investors tend to get caught in the minutia of the moment and often lose sight of broader trends. Focus instead on what's important. There's so much information available nowadays, it's easy to drown in the deep end of the data pool.
From 1982 to 1990, I was a mortgage-backed securities trader. My job was to scour the markets for the best deals in Freddie Mac, Fannie Mae and Ginnie Mae securities looking for the best opportunities. Day in and day out I would concentrate on my trading screens and watch the prices of as many as 60 securities ebb and flow with the movement of the marketplace. I was set to pounce on any instrument that got as little as one-sixteenth of a point out of whack. Talk about granularity. Had I simply appreciated that the yield of a 10-year Treasury was nearly 14 percent and it was the single-minded aim of Treasury Secretary Volker to drive the yield lower, I could have simply put one big trade in place at the beginning of my career and kept in place throughout my entire tenure, and made significantly more money for my clients and would have had a much easier time of it. Certainly, "buy in 1982 and go away," is unrealistic, but appreciating the enormous tailwind behind the bond market would have made my life a heck of a lot easier at the time.
Leverage Your Strengths
Each of us bring a unique set of skill and expertise. Make sure you're employing your best skills in investing. At the same time, insulate yourself against your weaknesses. Understand that individuals, for example, have far fewer resources when it comes to stock selection than large institutions. Last time I checked, Fidelity spent about $150 million annually on stock research, so going toe-to-toe with the big boys when it comes to selecting stocks puts individuals at a big disadvantage. Notwithstanding their advantage is selecting securities, big institutions are handicapped when it comes to market selection.
Most big institutions are "mandate managers," meaning that they are constrained by a set of specific investment styles and markets. A small-cap value manager, for example, must maintain small-cap value exposure through thick and thin, regardless of their opinion of the market for small cap value stocks. The fund manager would be chastised for leaving their "style box" if they decided that international large cap equities were a better deal. Since the big guys are often constrained to their pre-determined style boxes, individuals have an opportunity to play between the giants; by evaluating and trading markets, not securities.
You're Your Own Worst Enemy
Human nature often gets in the way of sound investment decision making; even among institutional investors. Do you consider yourself to be "better than average" drivers? Most people do. The Lake Wobegon Effect, as it's affectionately called, was inspired by the radio series, A Prairie Home Companion by Garrison Keillor, where "all the children are above average." Seriously though, overconfidence has the potential to make bad investments worse, by pushing obstreperous investors to hang onto losing positions; even when evidence to the contrary is overwhelming. New car buyers love reading favorable reviews about the bright and shiny automobile they just purchased, at the same time they would be highly critical reviews that criticize their decision. As investors, we sift through a myriad of information as we assemble a mosaic. How valuable would our conclusions be if we latched onto data that only supported our views and ignored information that refuted it?
Be Willing to Be Wrong
Those investors who recognize mistakes sooner are better investors than those who don't. One way to maintain objectivity is to articulate your strategy and expectations before establishing a position. This means write out your investment premise and establish "rules" for exiting the position, whether it's time horizon, return or price targets, or simply a technical factor like breaking below a moving average. Not all investment decisions work out as planned. Recognizing when to get out and move on is paramount. Darwinian survivors aren't necessarily the smartest, but they are the most flexible.
Be a Hawk, Not a Worm
Always be aware of the big picture. Investment market movements are a function of the global economic and political environment as well as the collection of moods and attitudes of investors. While investors are mercurial, the political and economic landscape tends to move in a more deliberate fashion. Peter Stamos, Chairman and CEO of Sterling Stamos Capital Management, relayed the story about the headmaster on campus who walked his dog every evening. Every evening after dinner the headmaster would stroll along the quad, walking his dog who hurriedly scampered from lawn to lawn, bush to bush, occasionally stopping to greet a passer by. Each evening the headmaster walked an identical path in a slow and predictable fashion, yet predicting the path of his dog was impossible. That depended upon an incalculable number of decisions taking place in his trusted pet's brain. Ultimately, the dog followed the headmaster. After all, he was on a leash. Peter's point was that the economy is the headmaster and the market is the dog. Over shorter periods, predicting the markets' pathways is like reading the collective minds of investors, yet over longer periods, the market must follow the economy. Focus on the landscape and understand the economic headwinds and tailwinds as your guide to managing your asset allocation.
Lessons Learned
Study after study have found that asset allocation, the decision whether or not to be in a particular market or asset class, is by far the most influential on your investment outcome than virtually any other investment decision you will make. Yet, sadly, very few individual investors spend nearly enough time thinking about the overall market. The explosion of exchange-traded funds, or ETFs, enables individuals to effectively maintain a broadly-diversified global portfolio. Think of it as a CliffsNotes Guide to effective investing. The basics are there for the taking, but some extra effort will always pay off. The tools available today are so much better than they were when I started in this business 27 years ago. That means that everyone has the opportunity to be successful, even during a very challenging market.
For more trading strategies, go to TradingMarkets.com/reports.
By Jack Ablin
On 8:23 am EST, Monday November 2, 2009
Jack Ablin, Chief Investment Officer of Harris Private Bank, is responsible for managing over $50 billion in private client assets, and for developing strategies for some of America's wealthiest individuals and families. He is a trusted source to some of America's most respected journalists; a frequent commentator on CNBC and Bloomberg; and a frequent contributor to Barron's.
For the last 27 years, I've been an institutional investor. I have spent more than a decade on trading desks and have overseen the management of billions on behalf of individuals and institutions alike. One trend that has been very clear during my 27 years, and that is the balance of information has clearly changed.
Early in my career, the balance of information was clearly skewed in favor of the big boys. All of that has now changed with the democratization of investment data. The Internet has brought real-time quotes to avid investors' desktops and CNBC leveled the playing field when it comes to news. In fact within a year of its launch, CNBC forced virtually every investment professional to get a TV set in their office just to spare the embarrassment of having one of their clients clue them in on an investment scoop.
Like many other segments of business, just because individuals have equal access to many of the same tools, doesn't mean that they will employ them as effectively as the professionals. WebMD is a great tool for understanding our health and bodies, but I would still leave medical diagnoses to trained physicians. Desktop publishing is another area where we now all have the tools to layout a newsletter, but that doesn't make us graphic designers. When it comes to investing, the little guy is clearly empowered, but there are a few points, however, that individual investors must keep in mind before charting their own course in the rough seas of investing.
Pay Less Attention
Individual investors tend to get caught in the minutia of the moment and often lose sight of broader trends. Focus instead on what's important. There's so much information available nowadays, it's easy to drown in the deep end of the data pool.
From 1982 to 1990, I was a mortgage-backed securities trader. My job was to scour the markets for the best deals in Freddie Mac, Fannie Mae and Ginnie Mae securities looking for the best opportunities. Day in and day out I would concentrate on my trading screens and watch the prices of as many as 60 securities ebb and flow with the movement of the marketplace. I was set to pounce on any instrument that got as little as one-sixteenth of a point out of whack. Talk about granularity. Had I simply appreciated that the yield of a 10-year Treasury was nearly 14 percent and it was the single-minded aim of Treasury Secretary Volker to drive the yield lower, I could have simply put one big trade in place at the beginning of my career and kept in place throughout my entire tenure, and made significantly more money for my clients and would have had a much easier time of it. Certainly, "buy in 1982 and go away," is unrealistic, but appreciating the enormous tailwind behind the bond market would have made my life a heck of a lot easier at the time.
Leverage Your Strengths
Each of us bring a unique set of skill and expertise. Make sure you're employing your best skills in investing. At the same time, insulate yourself against your weaknesses. Understand that individuals, for example, have far fewer resources when it comes to stock selection than large institutions. Last time I checked, Fidelity spent about $150 million annually on stock research, so going toe-to-toe with the big boys when it comes to selecting stocks puts individuals at a big disadvantage. Notwithstanding their advantage is selecting securities, big institutions are handicapped when it comes to market selection.
Most big institutions are "mandate managers," meaning that they are constrained by a set of specific investment styles and markets. A small-cap value manager, for example, must maintain small-cap value exposure through thick and thin, regardless of their opinion of the market for small cap value stocks. The fund manager would be chastised for leaving their "style box" if they decided that international large cap equities were a better deal. Since the big guys are often constrained to their pre-determined style boxes, individuals have an opportunity to play between the giants; by evaluating and trading markets, not securities.
You're Your Own Worst Enemy
Human nature often gets in the way of sound investment decision making; even among institutional investors. Do you consider yourself to be "better than average" drivers? Most people do. The Lake Wobegon Effect, as it's affectionately called, was inspired by the radio series, A Prairie Home Companion by Garrison Keillor, where "all the children are above average." Seriously though, overconfidence has the potential to make bad investments worse, by pushing obstreperous investors to hang onto losing positions; even when evidence to the contrary is overwhelming. New car buyers love reading favorable reviews about the bright and shiny automobile they just purchased, at the same time they would be highly critical reviews that criticize their decision. As investors, we sift through a myriad of information as we assemble a mosaic. How valuable would our conclusions be if we latched onto data that only supported our views and ignored information that refuted it?
Be Willing to Be Wrong
Those investors who recognize mistakes sooner are better investors than those who don't. One way to maintain objectivity is to articulate your strategy and expectations before establishing a position. This means write out your investment premise and establish "rules" for exiting the position, whether it's time horizon, return or price targets, or simply a technical factor like breaking below a moving average. Not all investment decisions work out as planned. Recognizing when to get out and move on is paramount. Darwinian survivors aren't necessarily the smartest, but they are the most flexible.
Be a Hawk, Not a Worm
Always be aware of the big picture. Investment market movements are a function of the global economic and political environment as well as the collection of moods and attitudes of investors. While investors are mercurial, the political and economic landscape tends to move in a more deliberate fashion. Peter Stamos, Chairman and CEO of Sterling Stamos Capital Management, relayed the story about the headmaster on campus who walked his dog every evening. Every evening after dinner the headmaster would stroll along the quad, walking his dog who hurriedly scampered from lawn to lawn, bush to bush, occasionally stopping to greet a passer by. Each evening the headmaster walked an identical path in a slow and predictable fashion, yet predicting the path of his dog was impossible. That depended upon an incalculable number of decisions taking place in his trusted pet's brain. Ultimately, the dog followed the headmaster. After all, he was on a leash. Peter's point was that the economy is the headmaster and the market is the dog. Over shorter periods, predicting the markets' pathways is like reading the collective minds of investors, yet over longer periods, the market must follow the economy. Focus on the landscape and understand the economic headwinds and tailwinds as your guide to managing your asset allocation.
Lessons Learned
Study after study have found that asset allocation, the decision whether or not to be in a particular market or asset class, is by far the most influential on your investment outcome than virtually any other investment decision you will make. Yet, sadly, very few individual investors spend nearly enough time thinking about the overall market. The explosion of exchange-traded funds, or ETFs, enables individuals to effectively maintain a broadly-diversified global portfolio. Think of it as a CliffsNotes Guide to effective investing. The basics are there for the taking, but some extra effort will always pay off. The tools available today are so much better than they were when I started in this business 27 years ago. That means that everyone has the opportunity to be successful, even during a very challenging market.
For more trading strategies, go to TradingMarkets.com/reports.
Investors suffer from recency bias
Investors suffer from recency bias
Written by Ang Kok Heng
Monday, 02 November 2009 10:36
Human beings suffer from various forms of psychological biases (see Table 1). One of them is recency bias. Recency bias is a kind of mental myopia where investors focus on the more recent events, that is giving more weight to the recent happenings. Like many other diseases where there is no known cure, there is also no known financial doctor who can heal this mental myopia as it is hereditary.
Everyone, irrespective of race or level of education achieved, suffers from this problem, the only difference is the degree. In the absence of a cure, the only advice is for one to understand the cause of the disease, and learn how to control it so that we can reduce incidents of bad decision, while at the same time make more sensible investment decisions.
Short memory
As humans tend to have short memories, events that happened months or years ago tend to be neglected. Instead, recent incidents that are of lesser importance are still fresh in the memory. These incidents have a strong impact on our day-to-day judgement as they interfere in the decision-making process and influence our decision on a particular assessment.
Unlike the memory of a computer where every file is kept according to the names, the human mind arranges the “files” according to time and relative importance. Recent affairs are fresh in the memory. Some of the more important events are also kept at the top of our mind, but trivial events are suppressed to the bottom so as to release more room for the brain to remember relatively more important happenings (see Chart 1).
Some of the very important occurrences that happened recently will always be at the top of our mind. As a result, our brain will always remind us of other recent events, especially those which are more important. From time to time, our brain will also recall some of the more important happenings that occurred many years ago. There is also a tendency for old information to be out-weighed by new information, even though both are of equal importance.
All these “reminders” that pop up during our decision-making process influence our judgement sub-consciously.
Narrow framing
Another problem of recency bias is short-term bias. Many people are focused on the immediate future and are not too interested in the broader perspective. This phenomenon is sometimes called “narrow framing”, as it distorts our perception to the point that we do not think rationally. It changes the way we think, the way we analyse an issue. This framing bias gives a selective simplistic picture of reality.
Narrow framing is seen in emphasis by analysts to focus on quarterly results. A company which performs poorly in the latest quarter tends to be downgraded by analysts as if the poor showing is sure to be continued over the next few quarters. A more detailed analysis is needed to determine whether a particular below-average result is due to a luck factor, events beyond the control of the management, cyclical nature, change in circumstances, etc.
Unfortunately, most analysts and fund managers place undue emphasis on the belief that what has just happened to a company will continue to happen. As analysing quarterly results is the job of analysts, they tend to be over-excited by short-term changes of earnings, and they have the tendency to exaggerate transient changes.
There is no denying that the poor results of some companies signal the beginning of their downturn. Unless there is clear evidence to show that a drastic fundamental change has occurred, it would be too simplistic to assume that every company having a weaker quarterly profit will continue to go down.
Emphasis on recent trends
A study by Kahneman and Tversky in 1973 found that people usually assume there is a strong correlation between the recent past and future outcomes.
Investors believe recent trends can predict future market directions. Assume the market goes up five times and down five times. The different orders of the up-market (U) and down-market (D) will influence investors’ perception differently. If the market is directionless (as in Chart 2a), investors will not be able to decide where the market is heading. But if the market forms an obvious downtrend recently (Chart 2b), fear of a further downturn will make investors bearish for the immediate outlook. However, if the market has been trending upwards recently (Chart 2c), there is a tendency that investors will believe the market will continue to go up.
In all three examples, the market comes back to the original level. Investor (a) is at a loss. Investor (b) feels like selling to preserve the capital after the initial market run-up. Investor (c) is hopeful that the market is recovering again after the initial losses.
This type of psychology is also seen in punters who play roulette in a casino on the belief that recent results will form a pattern. In fact, each outcome is independent of previous outcomes. Similarly, a series of heads from tossing a coin will not show nor give you the ability to predict the exact outcome of the next toss, whether it is a head or a tail.
In predicting the outcome of market direction the next day, the past few days’ performance will not be sufficient to predict the market direction correctly. If there is any correlation, the degree of accuracy using the past few days’ performance to predict the next few days’ direction is only marginally relevant.
More weight on recent events
Given a list of items, most people tend to recall the items at the end of a list rather than items in the middle. This type of human weakness in recency bias is exploited in many instances.
For example, lawyers schedule the more “influential” witness at the end of the witness appearance in court to influence the judge or jury; event managers schedule a list of speakers to achieve the desired results at the beginning or end of an event; personnel managers emphasise the recent conduct of an employee to judge the performance of the employee, etc.
There is a tendency for an investor to focus on “what happened lately” while making a decision. This recency bias puts more weight on recent events rather than looking at the longer period of evaluation. An investment for a longer period of three to five years should not be evaluated based solely on the past six months’ events and ignore the happenings of the past few years.
Reinforced by frequency
Recent happenings can also be reinforced by the frequency of news heard or read. Investors are biased by the frequency of news received. A piece of news repeated many times is lodged more deeply in the mind than one that is broadcast only once. The more times an investor hears or reads about a particular piece of news, the more likely he or she will react to the outcome of the news. This is because repetition distorts our belief that a particular event is more important.
Unfortunately, the media likes to repeat and sensationalise a particular type of news, especially negative ones. This type of biased reporting will only mislead investors into making prejudiced decisions. In the recent crisis, the negative comments and fear of recurrence of a 1930s-style depression were repeatedly broadcast by both the electronic and print media, and it swayed many into believing that another depression was imminent.
Other than distortion by frequency of news, breaking news that highlights a particular incident — usually negative — will also increase the bearish opinion of investors as if such a mishap would happen again soon. Getting influenced by such reporting does not help investors in rational thinking.
Recency leads to overconfidence
A series of recent successes may also lead to overconfidence in investors, as if nothing could possibly go wrong. The years upon years of success of LTCM (Long Term Capital Management) in managing a client’s money misled fund managers into believing that their strategies were perfect. In order to make more money, they increased their leverage and bet heavily on Russian bonds. The unexpected collapse of the Russian economy resulted in huge losses that led to the subsequent downfall of the invincible LTCM in 1998.
The Internet stock rally of the early 2000s is also a good example of how the daily gains in the “new economy” dot.com stocks misled investors into believing that the momentum would continue, and that these hot stocks will just keep rallying.
We all fall prey to recency bias, whether you are a professional fund manager or an individual retail investor. There is a strong tendency to believe in our hearts that whatever happens recently is going to continue. As such, a bull market enhances market confidence, and a bear market depresses the mood of investors. Unknown to many, the changes in our emotions are dictating our actions, which rationally should be determined by the real fundamentals.
Distancing from recent losers
The recent global financial crisis resulted in losses in almost every asset class, and many investors cut their losses and regretted having invested in those assets. Losses were seen in every bourse. Institutions and high net-worth individuals redeemed their investments from hedge funds.
Unit trust investors avoided high-risk equity funds and opted for guaranteed structured products. Bond investors also saw losses due to a perceived increase in credit risk. Bond investors avoided lower grade bonds in favour of AAA and government bonds. Even low-risk money market funds were faced with massive redemptions early this year, as investors were fearful of possible bank failures. All these have passed ,and investors now are more rational as the economy is obviously recovering gradually.
Following recent performers
The exit from market losers benefited the strong performing asset classes — one of which is gold, which has performed well after the financial crisis. It is common for investors to avoid recent, poorer-performing investments and chase after stronger performers. Investors believe that those investments which have performed well recently will continue to do well.
This recency bias influenced many unit trust investors to put in more investment during the bull market when funds were showing strong gains. Similarly, during the bear market, unit trust investors were avoiding this investment for fear of further losses. Instead of buying low and selling high, unfortunately, unit trust investors always fall prey to recency bias and perform the opposite. Similar mistakes were also made in other forms of investment where investors chase after strong performers.
Unknowingly, the psychological weakness of investors cause many investors to adopt the wrong investment approach. What investors need to do is diagnose the degree of recency bias they suffered, and how to control such deficiency.
Ang has 20 years’ experience in research and investment. He is currently the chief investment officer of Phillip Capital Management Sdn Bhd.
This article appeared in The Edge Financial Daily, November 2, 2009.
http://www.theedgemalaysia.com/business-news/152639-investors-suffer-from-recency-bias.html
Written by Ang Kok Heng
Monday, 02 November 2009 10:36
Human beings suffer from various forms of psychological biases (see Table 1). One of them is recency bias. Recency bias is a kind of mental myopia where investors focus on the more recent events, that is giving more weight to the recent happenings. Like many other diseases where there is no known cure, there is also no known financial doctor who can heal this mental myopia as it is hereditary.
Everyone, irrespective of race or level of education achieved, suffers from this problem, the only difference is the degree. In the absence of a cure, the only advice is for one to understand the cause of the disease, and learn how to control it so that we can reduce incidents of bad decision, while at the same time make more sensible investment decisions.
Short memory
As humans tend to have short memories, events that happened months or years ago tend to be neglected. Instead, recent incidents that are of lesser importance are still fresh in the memory. These incidents have a strong impact on our day-to-day judgement as they interfere in the decision-making process and influence our decision on a particular assessment.
Unlike the memory of a computer where every file is kept according to the names, the human mind arranges the “files” according to time and relative importance. Recent affairs are fresh in the memory. Some of the more important events are also kept at the top of our mind, but trivial events are suppressed to the bottom so as to release more room for the brain to remember relatively more important happenings (see Chart 1).
Some of the very important occurrences that happened recently will always be at the top of our mind. As a result, our brain will always remind us of other recent events, especially those which are more important. From time to time, our brain will also recall some of the more important happenings that occurred many years ago. There is also a tendency for old information to be out-weighed by new information, even though both are of equal importance.
All these “reminders” that pop up during our decision-making process influence our judgement sub-consciously.
Narrow framing
Another problem of recency bias is short-term bias. Many people are focused on the immediate future and are not too interested in the broader perspective. This phenomenon is sometimes called “narrow framing”, as it distorts our perception to the point that we do not think rationally. It changes the way we think, the way we analyse an issue. This framing bias gives a selective simplistic picture of reality.
Narrow framing is seen in emphasis by analysts to focus on quarterly results. A company which performs poorly in the latest quarter tends to be downgraded by analysts as if the poor showing is sure to be continued over the next few quarters. A more detailed analysis is needed to determine whether a particular below-average result is due to a luck factor, events beyond the control of the management, cyclical nature, change in circumstances, etc.
Unfortunately, most analysts and fund managers place undue emphasis on the belief that what has just happened to a company will continue to happen. As analysing quarterly results is the job of analysts, they tend to be over-excited by short-term changes of earnings, and they have the tendency to exaggerate transient changes.
There is no denying that the poor results of some companies signal the beginning of their downturn. Unless there is clear evidence to show that a drastic fundamental change has occurred, it would be too simplistic to assume that every company having a weaker quarterly profit will continue to go down.
Emphasis on recent trends
A study by Kahneman and Tversky in 1973 found that people usually assume there is a strong correlation between the recent past and future outcomes.
Investors believe recent trends can predict future market directions. Assume the market goes up five times and down five times. The different orders of the up-market (U) and down-market (D) will influence investors’ perception differently. If the market is directionless (as in Chart 2a), investors will not be able to decide where the market is heading. But if the market forms an obvious downtrend recently (Chart 2b), fear of a further downturn will make investors bearish for the immediate outlook. However, if the market has been trending upwards recently (Chart 2c), there is a tendency that investors will believe the market will continue to go up.
In all three examples, the market comes back to the original level. Investor (a) is at a loss. Investor (b) feels like selling to preserve the capital after the initial market run-up. Investor (c) is hopeful that the market is recovering again after the initial losses.
This type of psychology is also seen in punters who play roulette in a casino on the belief that recent results will form a pattern. In fact, each outcome is independent of previous outcomes. Similarly, a series of heads from tossing a coin will not show nor give you the ability to predict the exact outcome of the next toss, whether it is a head or a tail.
In predicting the outcome of market direction the next day, the past few days’ performance will not be sufficient to predict the market direction correctly. If there is any correlation, the degree of accuracy using the past few days’ performance to predict the next few days’ direction is only marginally relevant.
More weight on recent events
Given a list of items, most people tend to recall the items at the end of a list rather than items in the middle. This type of human weakness in recency bias is exploited in many instances.
For example, lawyers schedule the more “influential” witness at the end of the witness appearance in court to influence the judge or jury; event managers schedule a list of speakers to achieve the desired results at the beginning or end of an event; personnel managers emphasise the recent conduct of an employee to judge the performance of the employee, etc.
There is a tendency for an investor to focus on “what happened lately” while making a decision. This recency bias puts more weight on recent events rather than looking at the longer period of evaluation. An investment for a longer period of three to five years should not be evaluated based solely on the past six months’ events and ignore the happenings of the past few years.
Reinforced by frequency
Recent happenings can also be reinforced by the frequency of news heard or read. Investors are biased by the frequency of news received. A piece of news repeated many times is lodged more deeply in the mind than one that is broadcast only once. The more times an investor hears or reads about a particular piece of news, the more likely he or she will react to the outcome of the news. This is because repetition distorts our belief that a particular event is more important.
Unfortunately, the media likes to repeat and sensationalise a particular type of news, especially negative ones. This type of biased reporting will only mislead investors into making prejudiced decisions. In the recent crisis, the negative comments and fear of recurrence of a 1930s-style depression were repeatedly broadcast by both the electronic and print media, and it swayed many into believing that another depression was imminent.
Other than distortion by frequency of news, breaking news that highlights a particular incident — usually negative — will also increase the bearish opinion of investors as if such a mishap would happen again soon. Getting influenced by such reporting does not help investors in rational thinking.
Recency leads to overconfidence
A series of recent successes may also lead to overconfidence in investors, as if nothing could possibly go wrong. The years upon years of success of LTCM (Long Term Capital Management) in managing a client’s money misled fund managers into believing that their strategies were perfect. In order to make more money, they increased their leverage and bet heavily on Russian bonds. The unexpected collapse of the Russian economy resulted in huge losses that led to the subsequent downfall of the invincible LTCM in 1998.
The Internet stock rally of the early 2000s is also a good example of how the daily gains in the “new economy” dot.com stocks misled investors into believing that the momentum would continue, and that these hot stocks will just keep rallying.
We all fall prey to recency bias, whether you are a professional fund manager or an individual retail investor. There is a strong tendency to believe in our hearts that whatever happens recently is going to continue. As such, a bull market enhances market confidence, and a bear market depresses the mood of investors. Unknown to many, the changes in our emotions are dictating our actions, which rationally should be determined by the real fundamentals.
Distancing from recent losers
The recent global financial crisis resulted in losses in almost every asset class, and many investors cut their losses and regretted having invested in those assets. Losses were seen in every bourse. Institutions and high net-worth individuals redeemed their investments from hedge funds.
Unit trust investors avoided high-risk equity funds and opted for guaranteed structured products. Bond investors also saw losses due to a perceived increase in credit risk. Bond investors avoided lower grade bonds in favour of AAA and government bonds. Even low-risk money market funds were faced with massive redemptions early this year, as investors were fearful of possible bank failures. All these have passed ,and investors now are more rational as the economy is obviously recovering gradually.
Following recent performers
The exit from market losers benefited the strong performing asset classes — one of which is gold, which has performed well after the financial crisis. It is common for investors to avoid recent, poorer-performing investments and chase after stronger performers. Investors believe that those investments which have performed well recently will continue to do well.
This recency bias influenced many unit trust investors to put in more investment during the bull market when funds were showing strong gains. Similarly, during the bear market, unit trust investors were avoiding this investment for fear of further losses. Instead of buying low and selling high, unfortunately, unit trust investors always fall prey to recency bias and perform the opposite. Similar mistakes were also made in other forms of investment where investors chase after strong performers.
Unknowingly, the psychological weakness of investors cause many investors to adopt the wrong investment approach. What investors need to do is diagnose the degree of recency bias they suffered, and how to control such deficiency.
Ang has 20 years’ experience in research and investment. He is currently the chief investment officer of Phillip Capital Management Sdn Bhd.
This article appeared in The Edge Financial Daily, November 2, 2009.
http://www.theedgemalaysia.com/business-news/152639-investors-suffer-from-recency-bias.html
Stock market ‘bubble’ to end, Morgan Stanley says
Stock market ‘bubble’ to end, Morgan Stanley says
Tags: Credit bubble | Global stock market rally | James Paulsen | JPMorgan Chase & Co | Latin American markets | Mark Mobius | Morgan Stanley | MSCI Emerging Market Index | MSCI World Index | Ruchir Sharma | Templeton Asset Management Ltd | Wells Capital Management
Written by Bloomberg
Friday, 30 October 2009 11:14
MUMBAI: The global stock market rally, which resembles the bull run between 2003 and 2007, will end as government spending slows after so-called easy money boosted asset prices, according to Morgan Stanley.
“Such echo rallies are never as big as the original one and we will see it fading away,” Ruchir Sharma, 35, who oversees US$25 billion (RM85.75 billion) in emerging-market stocks at Morgan Stanley, said in an interview. “The rally will end as the effects of the stimulus begin to fade and the credit bubble caused by easy money disappears.”
The MSCI Emerging Market Index, which tracks shares in developing markets, has surged 60% this year, set for its biggest annual advance since 1993, as governments poured in US$2 trillion and central banks cut interest rates to near zero to kick-start their economies.
Last year, the measure dropped 54%, its worst run in the gauge’s 20-year history.
A new rally globally needs to be driven by new industry groups, he added, while the current advance is led by the same sectors, such as commodities, as the ones in the bull market that ended in 2007. That’s not a good sign, he said.
The emerging-market index lost 1.7% to 901.41 as of 12.26pm in Mumbai, a six-week low, after the Standard & Poor’s 500 Index lost 2% to 1,042.63 on Wednesday, the steepest drop since Oct 1.
Sharma, the New York-based head of emerging markets, said he expects the S&P 500 to trade in a “long-term” range of 800 to 1,200 in the next couple of years.
Markets globally dropped last year following the biggest financial crisis since the 1930s as the bankruptcy of Lehman Brothers Holdings Inc and writedowns from subprime debt caused a seizure in lending.
Only 31% of respondents to a poll of investors and analysts who are Bloomberg subscribers in the US, Europe and Asia see investment opportunities, down from 35% in the previous survey in July. Almost 40% in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down.
US investors are even more cautious, with more than 50% saying they are in a defensive crouch.
“The doubt and the pessimism just won’t go away,” said James Paulsen, who helps oversee US$375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “They’re still so shell-shocked by what they went through despite the improvement in the market and the economy.”
Sharma predicted in May 2006 that emerging markets will post further gains. The index for developing nations has risen 20% since then, compared with a 16% drop in the MSCI World Index.
The commodity-producing nations will be the hardest hit when the current rally ends, Sharma said. The Latin American markets of Brazil and Chile are the most expensive, he said, and Morgan Stanley is also underweight on Taiwan, Malaysia, Israel and Russia.
Commodity prices are rising even as economic fundamentals are deteriorating, he added, a sign that the rally may be fizzling.
“Commodities are at the centre of this echo bubble,” he said, adding that they are “in substantially overvalued territory, way above fundamentals”.
Inventories of oil, copper, aluminum have risen over the past few months even though demand hasn’t picked up, Sharma said, adding that the price of oil is inversely correlated to the US dollar. Increasing buying of commodities as a hedge against the decline in the US dollar has resulted in the commodity rally, he said.
“The greatest degree of irrationality is in commodities,” Sharma said. Morgan Stanley owns a lower percentage of commodity stocks, including metals, materials, energy and industrials, compared with the benchmark index. It holds a higher percentage of financial and consumer stocks including automobiles, retailers and beer companies.
Some brokerages are predicting further gains in equities. The emerging markets benchmark stock index may retest its “life high” by next year, helped by economic growth and gains in credit markets, according to JPMorgan Chase & Co.
The optimism is shared by Mark Mobius, who oversees about US$25 billion as executive chairman of Templeton Asset Management Ltd. The investor said this month he expects developing nations’ shares to surpass previous records, predicting a continued rally with “corrections along the way”.
Emerging markets make up all 10 of the world’s best-performing markets, according to data compiled by Bloomberg. Russia’s dollar-denominated RTS Index has been the world’s best-performer this year after climbing 117%.
Morgan Stanley is overweight on India, Indonesia, Poland, Czech Republic, Turkey and Thailand, as it’s betting on economies that are driven by domestic demand. — Bloomberg
This article appeared in The Edge Financial Daily, October 30, 2009.
Tags: Credit bubble | Global stock market rally | James Paulsen | JPMorgan Chase & Co | Latin American markets | Mark Mobius | Morgan Stanley | MSCI Emerging Market Index | MSCI World Index | Ruchir Sharma | Templeton Asset Management Ltd | Wells Capital Management
Written by Bloomberg
Friday, 30 October 2009 11:14
MUMBAI: The global stock market rally, which resembles the bull run between 2003 and 2007, will end as government spending slows after so-called easy money boosted asset prices, according to Morgan Stanley.
“Such echo rallies are never as big as the original one and we will see it fading away,” Ruchir Sharma, 35, who oversees US$25 billion (RM85.75 billion) in emerging-market stocks at Morgan Stanley, said in an interview. “The rally will end as the effects of the stimulus begin to fade and the credit bubble caused by easy money disappears.”
The MSCI Emerging Market Index, which tracks shares in developing markets, has surged 60% this year, set for its biggest annual advance since 1993, as governments poured in US$2 trillion and central banks cut interest rates to near zero to kick-start their economies.
Last year, the measure dropped 54%, its worst run in the gauge’s 20-year history.
A new rally globally needs to be driven by new industry groups, he added, while the current advance is led by the same sectors, such as commodities, as the ones in the bull market that ended in 2007. That’s not a good sign, he said.
The emerging-market index lost 1.7% to 901.41 as of 12.26pm in Mumbai, a six-week low, after the Standard & Poor’s 500 Index lost 2% to 1,042.63 on Wednesday, the steepest drop since Oct 1.
Sharma, the New York-based head of emerging markets, said he expects the S&P 500 to trade in a “long-term” range of 800 to 1,200 in the next couple of years.
Markets globally dropped last year following the biggest financial crisis since the 1930s as the bankruptcy of Lehman Brothers Holdings Inc and writedowns from subprime debt caused a seizure in lending.
Only 31% of respondents to a poll of investors and analysts who are Bloomberg subscribers in the US, Europe and Asia see investment opportunities, down from 35% in the previous survey in July. Almost 40% in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down.
US investors are even more cautious, with more than 50% saying they are in a defensive crouch.
“The doubt and the pessimism just won’t go away,” said James Paulsen, who helps oversee US$375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “They’re still so shell-shocked by what they went through despite the improvement in the market and the economy.”
Sharma predicted in May 2006 that emerging markets will post further gains. The index for developing nations has risen 20% since then, compared with a 16% drop in the MSCI World Index.
The commodity-producing nations will be the hardest hit when the current rally ends, Sharma said. The Latin American markets of Brazil and Chile are the most expensive, he said, and Morgan Stanley is also underweight on Taiwan, Malaysia, Israel and Russia.
Commodity prices are rising even as economic fundamentals are deteriorating, he added, a sign that the rally may be fizzling.
“Commodities are at the centre of this echo bubble,” he said, adding that they are “in substantially overvalued territory, way above fundamentals”.
Inventories of oil, copper, aluminum have risen over the past few months even though demand hasn’t picked up, Sharma said, adding that the price of oil is inversely correlated to the US dollar. Increasing buying of commodities as a hedge against the decline in the US dollar has resulted in the commodity rally, he said.
“The greatest degree of irrationality is in commodities,” Sharma said. Morgan Stanley owns a lower percentage of commodity stocks, including metals, materials, energy and industrials, compared with the benchmark index. It holds a higher percentage of financial and consumer stocks including automobiles, retailers and beer companies.
Some brokerages are predicting further gains in equities. The emerging markets benchmark stock index may retest its “life high” by next year, helped by economic growth and gains in credit markets, according to JPMorgan Chase & Co.
The optimism is shared by Mark Mobius, who oversees about US$25 billion as executive chairman of Templeton Asset Management Ltd. The investor said this month he expects developing nations’ shares to surpass previous records, predicting a continued rally with “corrections along the way”.
Emerging markets make up all 10 of the world’s best-performing markets, according to data compiled by Bloomberg. Russia’s dollar-denominated RTS Index has been the world’s best-performer this year after climbing 117%.
Morgan Stanley is overweight on India, Indonesia, Poland, Czech Republic, Turkey and Thailand, as it’s betting on economies that are driven by domestic demand. — Bloomberg
This article appeared in The Edge Financial Daily, October 30, 2009.
Nestle 3Q net profit dips 8.9% to RM79.7m
Nestle 3Q net profit dips 8.9% to RM79.7m
Tags: consumer spending | earnings | MILO | Nestle
Written by Joseph Chin
Thursday, 29 October 2009 17:58
KUALA LUMPUR: NESTLE (M) BHD []'s net profit declined 8.9% to RM79.76 million in its third quarter ended Sept 30 from RM87.54 million a year ago on weaker consumer spending in Malaysia.
It said on Thursday, Oct 29 that revenue slipped 7.8% to RM886.81 million from RM961.82 million. Earnings per share were 34.01 sen compared with 37.33 sen.
"The world economic downturn and uncertain recovery is having a dampening effect on consumer spending in Malaysia. From an export perspective, the quarter saw a reduction in selling prices due to lower commodity costs as well as a shift in demand with higher export sales of Non Dairy Creamer partially offsetting lower sales of milk powders to the Middle East," it said.
Nestle said the domestic market recovery was below its expectations, as the weaker economic conditions saw consumers becoming very cautious in their spending. This translated into lower product consumption affecting the group's domestic sales.
"The price reductions for Milo and milk products ranging between 7% and 12% in February have also contributed to the lower turnover," it added, but this was cushioned by efficiency gains and cost savings, and lower commodity prices.
For the nine-months ended Sept 30, net profit was marginally higher at RM265.57 million versus RM263.61 million. Revenue was RM2.79 billion, down 3.8% from RM2.9 billion.
Tags: consumer spending | earnings | MILO | Nestle
Written by Joseph Chin
Thursday, 29 October 2009 17:58
KUALA LUMPUR: NESTLE (M) BHD []'s net profit declined 8.9% to RM79.76 million in its third quarter ended Sept 30 from RM87.54 million a year ago on weaker consumer spending in Malaysia.
It said on Thursday, Oct 29 that revenue slipped 7.8% to RM886.81 million from RM961.82 million. Earnings per share were 34.01 sen compared with 37.33 sen.
"The world economic downturn and uncertain recovery is having a dampening effect on consumer spending in Malaysia. From an export perspective, the quarter saw a reduction in selling prices due to lower commodity costs as well as a shift in demand with higher export sales of Non Dairy Creamer partially offsetting lower sales of milk powders to the Middle East," it said.
Nestle said the domestic market recovery was below its expectations, as the weaker economic conditions saw consumers becoming very cautious in their spending. This translated into lower product consumption affecting the group's domestic sales.
"The price reductions for Milo and milk products ranging between 7% and 12% in February have also contributed to the lower turnover," it added, but this was cushioned by efficiency gains and cost savings, and lower commodity prices.
For the nine-months ended Sept 30, net profit was marginally higher at RM265.57 million versus RM263.61 million. Revenue was RM2.79 billion, down 3.8% from RM2.9 billion.
KAF records RM6.6m in net profit
KAF records RM6.6m in net profit
Tags: KAF-Seagroatt & Campbell Bhd
Written by Lam Jian Wyn
Thursday, 29 October 2009 00:19
KUALA LUMPUR: KAF-SEAGROATT & CAMPBELL BHD [] returned to profitability with a net profit of RM6.55 million in its first quarter (1Q) ended Aug 31, 2009, from a loss of RM4.71 million a year earlier.
The brokerage and investment holding company posted a revenue of RM10.1 million, up 87.7% from RM5.38 million a year earlier, while earnings per unit stood at 5.46 sen per share from a loss of 3.93 sen a year earlier.
Profit before tax for the current quarter stood at RM8.23 million, 39.3% lower compared to the profit-before tax of RM13.57 million in the preceding quarter. This is mainly due to the higher writeback in allowance for the diminution in the value of equity investment made in the preceding quarter coupled with lower interest income for the current interim period, according to notes accompanying the result announced yesterday.
Tags: KAF-Seagroatt & Campbell Bhd
Written by Lam Jian Wyn
Thursday, 29 October 2009 00:19
KUALA LUMPUR: KAF-SEAGROATT & CAMPBELL BHD [] returned to profitability with a net profit of RM6.55 million in its first quarter (1Q) ended Aug 31, 2009, from a loss of RM4.71 million a year earlier.
The brokerage and investment holding company posted a revenue of RM10.1 million, up 87.7% from RM5.38 million a year earlier, while earnings per unit stood at 5.46 sen per share from a loss of 3.93 sen a year earlier.
Profit before tax for the current quarter stood at RM8.23 million, 39.3% lower compared to the profit-before tax of RM13.57 million in the preceding quarter. This is mainly due to the higher writeback in allowance for the diminution in the value of equity investment made in the preceding quarter coupled with lower interest income for the current interim period, according to notes accompanying the result announced yesterday.
RHB ups Hai-O earnings forecasts, target price
RHB ups Hai-O earnings forecasts, target price
Tags: Brokers Call | Hai-O Enterprise Bhd | MLM | RHB Research
Written by Financial Daily
Wednesday, 28 October 2009 10:45
RHB Research yesterday raised its fair value for HAI-O ENTERPRISE BHD [] to RM8.80 from RM6.80 after revising upwards its earnings forecasts to take into account the recent stronger-than-expected membership growth at the latter’s multi-level marketing (MLM) division.
“Since June 2009, Hai-O’s MLM division recruitment of new members has increased to an average of 4,000 to 5,000 a month (versus 3,000 to 4,000 in 1HCY09), representing an average increase of 29%,” RHB said in a note.
RHB, which has an outperform call on Hai-O, revised its FY2010-2012 forecasts for the company by between 4% and 26% after increasing projections for new members per month.
The increase in new members was mainly attributed to the success of Hai-O’s advertising activities such as celebrity endorsement and TV commercials for its water filter product (BioAura).
The research house also applied a higher price-earnings ratio (PER) multiple of nine times CY10 earnings (from eight times CY10 earnings previously), “to reflect increased investor participation in mid-cap stocks, lower risk premium and improved market sentiment”.
The PER multiple is still at a 38% discount to its target market capitalisation of 14.5 times PER for the consumer sector, to account for Hai-O’s smaller market capitalisation as well as lower liquidity, RHB added.
It also noted that sales from Hai-O’s recently launched health supplements and anti-aging skincare range have picked up despite initial mediocre sales performance.
“Nevertheless, Hai-O’s star product remains its water filter, which is still gaining popularity especially amongst the bumiputera community. While no figures were provided, management guided that average revenue/distributor continues to grow year-on-year. We forecast average revenue/distributor to increase by an unchanged 5%, 3% and 1% for FY2010-2012,” RHB said.
RHB has yet to input any contributions from Indonesia, where Hai-O had begun initial recruitment activities, having obtained a licence from the Association of MLM in Indonesia in August 2009.
“Recall that Hai-O only invested a total of US$480,000 (RM1.7 million) for its Indonesia venture, which is a minimal amount for the vast potential growth in the Indonesian market.
Management targets a conservative 5,000 to 10,000 new members in FY2010, and projects a minimum one year to break even,” RHB added.
Risks to RHB’s recommendation include the termination of supply agreements from its suppliers in China, stronger-than-expected strengthening of the greenback as well as weaker-than-expected increase in consumer spending.
Hai-O rose 12 sen to close at its intra-day high of RM7.20 yesterday on a volume of 121,400 shares.
This article appeared in The Edge Financial Daily, October 28, 2009.
http://www.theedgemalaysia.com/business-news/152305-rhb-ups-hai-o-earnings-forecasts-target-price.html
Tags: Brokers Call | Hai-O Enterprise Bhd | MLM | RHB Research
Written by Financial Daily
Wednesday, 28 October 2009 10:45
RHB Research yesterday raised its fair value for HAI-O ENTERPRISE BHD [] to RM8.80 from RM6.80 after revising upwards its earnings forecasts to take into account the recent stronger-than-expected membership growth at the latter’s multi-level marketing (MLM) division.
“Since June 2009, Hai-O’s MLM division recruitment of new members has increased to an average of 4,000 to 5,000 a month (versus 3,000 to 4,000 in 1HCY09), representing an average increase of 29%,” RHB said in a note.
RHB, which has an outperform call on Hai-O, revised its FY2010-2012 forecasts for the company by between 4% and 26% after increasing projections for new members per month.
The increase in new members was mainly attributed to the success of Hai-O’s advertising activities such as celebrity endorsement and TV commercials for its water filter product (BioAura).
The research house also applied a higher price-earnings ratio (PER) multiple of nine times CY10 earnings (from eight times CY10 earnings previously), “to reflect increased investor participation in mid-cap stocks, lower risk premium and improved market sentiment”.
The PER multiple is still at a 38% discount to its target market capitalisation of 14.5 times PER for the consumer sector, to account for Hai-O’s smaller market capitalisation as well as lower liquidity, RHB added.
It also noted that sales from Hai-O’s recently launched health supplements and anti-aging skincare range have picked up despite initial mediocre sales performance.
“Nevertheless, Hai-O’s star product remains its water filter, which is still gaining popularity especially amongst the bumiputera community. While no figures were provided, management guided that average revenue/distributor continues to grow year-on-year. We forecast average revenue/distributor to increase by an unchanged 5%, 3% and 1% for FY2010-2012,” RHB said.
RHB has yet to input any contributions from Indonesia, where Hai-O had begun initial recruitment activities, having obtained a licence from the Association of MLM in Indonesia in August 2009.
“Recall that Hai-O only invested a total of US$480,000 (RM1.7 million) for its Indonesia venture, which is a minimal amount for the vast potential growth in the Indonesian market.
Management targets a conservative 5,000 to 10,000 new members in FY2010, and projects a minimum one year to break even,” RHB added.
Risks to RHB’s recommendation include the termination of supply agreements from its suppliers in China, stronger-than-expected strengthening of the greenback as well as weaker-than-expected increase in consumer spending.
Hai-O rose 12 sen to close at its intra-day high of RM7.20 yesterday on a volume of 121,400 shares.
This article appeared in The Edge Financial Daily, October 28, 2009.
http://www.theedgemalaysia.com/business-news/152305-rhb-ups-hai-o-earnings-forecasts-target-price.html
Caveat Emptor — Be a wary investor
Caveat Emptor — Be a wary investor
Written by Mushida Muhammad
Monday, 02 November 2009 10:53
In the high stake game of making money in the stock market, getting emotional is not an option. It is true that investors should focus on fundamentals, be patient and exercise good judgment; but alas, they are only human.
In the exuberance of a bull run or the trepidation of a bear, oftentimes there exist tendencies to inflate or deflate stocks above or below their intrinsic values disproportionately before investors realise that their optimism or pessimism was not entirely justified.
The danger lies when emotions overcome rational judgment, giving way to greed and fear. Excessive greed leads to a superfluous rise in share prices, creating a bubble which eventually sows the seeds for future panic.
Time and again, history has shown that panic often leads to a crash. In the past 10 years, greed and fear had culminated in three major financial crises; the Asian Financial Crisis, the Tech Bubble and — most recently — the Subprime Crisis.
In all cases, markets were experiencing unprecedented outperformance prior to the crash. Driven by greed, many believed that they could ride the high waves without repercussions. What lesson can be learned from this?
For one, investors tend to have a short term memory, often falling prey to the “herd mentality”. The temptation of making a killing often prompts them to take extremely high risks and disregard fundamentals for fear of missing the boat if they did.
Going back to basics. Regardless whether the objective is for the long- or short-term, investment practices should be based on fundamentals and good business judgment. Warren Buffett’s foundation has always been centralised on the principle of fundamental business analysis — a good investor should identify good businesses, purchase them at fair prices and hold them for the long term.
Success lies not in price behaviour but rather on an investor’s ability to apply sound judgment and make the distinction between market price and intrinsic value.
At a time when markets are insecure and unstable, information is key. Investors must understand the company’s business.
Thus, the onus lies with the investor to be discerning. Information is best found in financial statements, as they provide an up-to-date snapshot view of the company’s financial health and growth potential.
Some industries are inherently better for investment than others due to their intrinsic qualities. Health-care, consumer, PLANTATION [] are a few sectors that generally provide better investment opportunities due to the inelasticity in demand.
Striking a balance between risk and reward is crucial, for the amount of risk taken ought to be proportionate with the anticipated reward. Assuming too much risk for too little reward gives way to bad investment.
More importantly, investors must have a stop-loss strategy to prevent escalating losses. Many a time investors make the mistake of holding on to losing stocks in the hope that it will turn around — but in reality, these stocks seldom do.
For those with a long term investment horizon, high and stable dividend income may be an important factor, as are return on equity, business sustainability, cash flow management. Corporate governance and management best practice are critical factors.
If a company reports annual growth and profits that seems “too good to be true”, it most probably is too good to be true.
Finding good stocks to invest in is difficult enough; therefore, investors should hold on to them for the long haul. Companies with a competitive edge have the tendency to increase in value over time. Eventually, the market would acknowledge the underlying value and push the price upwards.
So, when is the best time to sell? The answer is often as difficult as deciding when to buy. Depending on investor’s risk tolerance, if the stock proves to be too volatile for the nerves, it is best to sell and replace with another that lets you sleep at night.
Furthermore, social, environmental and ethical practices of many companies are now becoming a concern and investors may dispose of those that are in conflict with their social, religious or moral beliefs.
At times, the decision to sell is due to the company itself. A change in the company’s fundamentals or business plan may warrant a re-assessment on whether it is able to continue to meet the investor’s investment requirements.
There is no doubt that the stock market offers the best opportunity for higher returns in the long run. The risk is that it could dramatically erode investor’s net worth in the short-term should the down market last longer than expected. Nonetheless, it offers great opportunities.
Investors ought to rely on their judgment and not be influenced by the market. Knowing the company, finding its winning qualities and knowing when the right time to sell should aid the investor in obtaining success.
Attaching emotional value, however, is not. So be a wise investor; do not get sentimental. Have an investment objective and take the time to study before putting in your hard-earned money. Caveat emptor; be a wary investor.
Mushida Muhammad is the senior portfolio manager of the equity department, Kumpulan Wang Persaraan (Diperbadankan) (KWAP).
This article appeared in The Edge Financial Daily, November 2, 2009.
Written by Mushida Muhammad
Monday, 02 November 2009 10:53
In the high stake game of making money in the stock market, getting emotional is not an option. It is true that investors should focus on fundamentals, be patient and exercise good judgment; but alas, they are only human.
In the exuberance of a bull run or the trepidation of a bear, oftentimes there exist tendencies to inflate or deflate stocks above or below their intrinsic values disproportionately before investors realise that their optimism or pessimism was not entirely justified.
The danger lies when emotions overcome rational judgment, giving way to greed and fear. Excessive greed leads to a superfluous rise in share prices, creating a bubble which eventually sows the seeds for future panic.
Time and again, history has shown that panic often leads to a crash. In the past 10 years, greed and fear had culminated in three major financial crises; the Asian Financial Crisis, the Tech Bubble and — most recently — the Subprime Crisis.
In all cases, markets were experiencing unprecedented outperformance prior to the crash. Driven by greed, many believed that they could ride the high waves without repercussions. What lesson can be learned from this?
For one, investors tend to have a short term memory, often falling prey to the “herd mentality”. The temptation of making a killing often prompts them to take extremely high risks and disregard fundamentals for fear of missing the boat if they did.
Going back to basics. Regardless whether the objective is for the long- or short-term, investment practices should be based on fundamentals and good business judgment. Warren Buffett’s foundation has always been centralised on the principle of fundamental business analysis — a good investor should identify good businesses, purchase them at fair prices and hold them for the long term.
Success lies not in price behaviour but rather on an investor’s ability to apply sound judgment and make the distinction between market price and intrinsic value.
At a time when markets are insecure and unstable, information is key. Investors must understand the company’s business.
Thus, the onus lies with the investor to be discerning. Information is best found in financial statements, as they provide an up-to-date snapshot view of the company’s financial health and growth potential.
Some industries are inherently better for investment than others due to their intrinsic qualities. Health-care, consumer, PLANTATION [] are a few sectors that generally provide better investment opportunities due to the inelasticity in demand.
Striking a balance between risk and reward is crucial, for the amount of risk taken ought to be proportionate with the anticipated reward. Assuming too much risk for too little reward gives way to bad investment.
More importantly, investors must have a stop-loss strategy to prevent escalating losses. Many a time investors make the mistake of holding on to losing stocks in the hope that it will turn around — but in reality, these stocks seldom do.
For those with a long term investment horizon, high and stable dividend income may be an important factor, as are return on equity, business sustainability, cash flow management. Corporate governance and management best practice are critical factors.
If a company reports annual growth and profits that seems “too good to be true”, it most probably is too good to be true.
Finding good stocks to invest in is difficult enough; therefore, investors should hold on to them for the long haul. Companies with a competitive edge have the tendency to increase in value over time. Eventually, the market would acknowledge the underlying value and push the price upwards.
So, when is the best time to sell? The answer is often as difficult as deciding when to buy. Depending on investor’s risk tolerance, if the stock proves to be too volatile for the nerves, it is best to sell and replace with another that lets you sleep at night.
Furthermore, social, environmental and ethical practices of many companies are now becoming a concern and investors may dispose of those that are in conflict with their social, religious or moral beliefs.
At times, the decision to sell is due to the company itself. A change in the company’s fundamentals or business plan may warrant a re-assessment on whether it is able to continue to meet the investor’s investment requirements.
There is no doubt that the stock market offers the best opportunity for higher returns in the long run. The risk is that it could dramatically erode investor’s net worth in the short-term should the down market last longer than expected. Nonetheless, it offers great opportunities.
Investors ought to rely on their judgment and not be influenced by the market. Knowing the company, finding its winning qualities and knowing when the right time to sell should aid the investor in obtaining success.
Attaching emotional value, however, is not. So be a wise investor; do not get sentimental. Have an investment objective and take the time to study before putting in your hard-earned money. Caveat emptor; be a wary investor.
Mushida Muhammad is the senior portfolio manager of the equity department, Kumpulan Wang Persaraan (Diperbadankan) (KWAP).
This article appeared in The Edge Financial Daily, November 2, 2009.
Don’t be greedy, Eldon advises retail investors
Don’t be greedy, Eldon advises retail investors
Tags: Bank Negara Malaysia | Bubble | David Eldon | DJIA | FBM KLCI | FIDE | Free economy | Global stock market rally | Greedy | Hang Seng Index | HSBC | Noble Group Ltd | regulators | Straits Times Index | Taiex | Take profit | Western economies
Written by Ellina Badri
Monday, 02 November 2009 11:40
KUALA LUMPUR: With the global stock market rally appearing to lose steam given a lack of fresh leads and a rally “fatigue”, investors are again forced to decide on their next course of action.
For one, a well-known former banker who has been in the corporate world for the past four decades, David Eldon, tells investors, particularly individuals, that it may be time to stop being greedy and to take profit when reasonable gains have been made.
“Don’t try to squeeze the last dollar of profit. Take profit when you’ve made a decent percentage,” he told The Edge Financial Daily in an interview.
Several markets, including the local bourse, reached their year’s highs in October, driven by optimism of a global recovery but have since retreated as key data signals to investors that they could be getting ahead of themselves.
The FBM KLCI reached its 52-week high of 1,270.44 points on Oct 21, while Taiwan’s Taiex rose to 7,811.92 points a day earlier. Singapore’s Straits Times Index rose to 2,739.55 points on Oct 15, while Hong Kong’s Hang Seng Index reached its year’s high of 22,620 points on Oct 23.
Eldon, a Scot who had been chairman, chief executive officer and executive director of the Hongkong and Shanghai Banking Corp (HSBC), and Malaysia CEO of the Saudi British Bank, believes the global recovery is currently unsustainable.
Indeed, markets faltered in the last week of October, after the US reported weak company earnings and an unexpected fall in September housing data.
The Dow Jones Industrial Average (DJIA), which rose to its 52-week high of 10,119.4 on Oct 21, after breaching the 10,000-point level for the first time in a year, failed to maintain its momentum amid the release of weak data.
Indeed, US markets suffered a pre-Halloween scare last Friday with the DJIA tumbling 249.85 points or 2.51% to 9,712.73.
“There is still some correction to come. It may be more selective, but there is a downturn to come, and let’s just hope people in Asia are wise to it.
“The problem in Asia, and perhaps other parts of the world, is that people are reluctant to take a profit if the stock market is still going up. Because they want to reach the top of the market — that doesn’t happen in reality,” Eldon said.
Eldon tells retail investors not to wait to squeeze out the last ringgit from their stock purchases. They should sell when they’ve chalked up a decent percentage. Photo by Chu Juck Seng
He was in Kuala Lumpur last week to give a talk to directors of financial institutions, as part of the financial institutions directors’ education (FIDE) programme, which is jointly offered by Bank Negara Malaysia and Malaysia Deposit Insurance Corp. (See page 8 for Eldon’s luncheon talk entitled Over-regulation and Other BS.)
Among other positions, Eldon is a senior adviser at PricewaterhouseCoopers Hong Kong, chairman of the Dubai International Financial Centre Authority and Singapore-listed Noble Group Ltd, a commodities trading company.
Eldon said stock markets were something he felt strongly about, as institutional investors often led the market’s rise or fall, leaving retail investors to pick up the pieces.
“When institutional investors enter the market, this becomes a bit of a self-fulfilling prophecy because once you start buying into equities, they start to rise. Then retail investors come in, because they see the market rising, and continue to go in as it keeps rising.
“Once things start to turn, for example if company results don’t come out as good as anticipated, or interest rates start to rise, and people can now put money in banks instead of stocks, institutional investors are the first to leave the market.
“Their money comes out in big chunks, so the market starts to fall. Who’s left holding the baby? Retail investors,” Eldon said.
Meanwhile, he said with more problems in the Western economies yet to surface, “there may very well be another downturn coming”, though it would not be as severe as the one just past.
Challenges for regulators
On the role of regulators in helping to stem crises, Eldon said it would be difficult for them to restrict businesses in a free economy.
“For example, do you tell Goldman Sachs there is a limit to the business they can do, and the authorities will regulate and that’s the end of the story? Do the good people of Goldman go off and start off their own company and do exactly what they were doing there, or should they be regulated in the same way?
“Where do you draw the line? This is one of the problems of doing business in a free economy. The moment you start putting restrictions, the economy has much less freedom in it,” he said.
Eldon also said while this might not be desirable, it was a fact that had to be accepted as such was the nature of the world economy.
But ultimately, he said, public opinion could have a big influence in how markets would be regulated.
On whether increased competition could help markets avoid the excesses seen in recent times, such as via the demerger of big banks, he said while this could happen, its implementation would depend on the willingness of the market to carry it out.
Asked what action could be taken once a bubble is perceived, he said this was not possible as people often thought situations differ from one crisis to another.
“History will tell you that we don’t seem to remember anything. If there was something that we could have done, we surely would have done it.
“But people say, it’s different this time. That was how the bubble was created the last time. And it very rarely is that different,” he said.
He also said if there were a way to “prick the bubble”, the question then arose of who would do it, adding it would be a major challenge for the world’s regulators to make a concerted effort to manage global economic and financial problems.
“It requires a lot of resolve from world leaders to actually say to themselves, we are going to effectively say to the world, this is what you’re going to have to put up with. For example, with the euro, because it is managed from a centre, monetary policy may suit Germany but not Spain, or benefit Ireland, but not other members.
“If you try to translate all of that into doing something for the globe, I think it will be extremely difficult to do,” he said.
Where Asia stands
During his talk at the FIDE programme, Eldon said one main reason why the Asian financial services industry had been shielded from the West’s financial crisis was the lack of sophisticated financial products here.
Despite this, however, he said the industry here had succeeded in growing and would continue to do so, albeit in a more controlled manner.
“That gives it a good future. You have two choices, either really let the brakes off, or you do it in a gradual way. You can take it step-by-step, and China is particularly good at this. If we continue that sort of policy, it’s fairly basic, and it may not be terribly exciting, but it’ll save you from getting into huge problems,” he said.
This article appeared in The Edge Financial Daily, November 2, 2009.
Tags: Bank Negara Malaysia | Bubble | David Eldon | DJIA | FBM KLCI | FIDE | Free economy | Global stock market rally | Greedy | Hang Seng Index | HSBC | Noble Group Ltd | regulators | Straits Times Index | Taiex | Take profit | Western economies
Written by Ellina Badri
Monday, 02 November 2009 11:40
KUALA LUMPUR: With the global stock market rally appearing to lose steam given a lack of fresh leads and a rally “fatigue”, investors are again forced to decide on their next course of action.
For one, a well-known former banker who has been in the corporate world for the past four decades, David Eldon, tells investors, particularly individuals, that it may be time to stop being greedy and to take profit when reasonable gains have been made.
“Don’t try to squeeze the last dollar of profit. Take profit when you’ve made a decent percentage,” he told The Edge Financial Daily in an interview.
Several markets, including the local bourse, reached their year’s highs in October, driven by optimism of a global recovery but have since retreated as key data signals to investors that they could be getting ahead of themselves.
The FBM KLCI reached its 52-week high of 1,270.44 points on Oct 21, while Taiwan’s Taiex rose to 7,811.92 points a day earlier. Singapore’s Straits Times Index rose to 2,739.55 points on Oct 15, while Hong Kong’s Hang Seng Index reached its year’s high of 22,620 points on Oct 23.
Eldon, a Scot who had been chairman, chief executive officer and executive director of the Hongkong and Shanghai Banking Corp (HSBC), and Malaysia CEO of the Saudi British Bank, believes the global recovery is currently unsustainable.
Indeed, markets faltered in the last week of October, after the US reported weak company earnings and an unexpected fall in September housing data.
The Dow Jones Industrial Average (DJIA), which rose to its 52-week high of 10,119.4 on Oct 21, after breaching the 10,000-point level for the first time in a year, failed to maintain its momentum amid the release of weak data.
Indeed, US markets suffered a pre-Halloween scare last Friday with the DJIA tumbling 249.85 points or 2.51% to 9,712.73.
“There is still some correction to come. It may be more selective, but there is a downturn to come, and let’s just hope people in Asia are wise to it.
“The problem in Asia, and perhaps other parts of the world, is that people are reluctant to take a profit if the stock market is still going up. Because they want to reach the top of the market — that doesn’t happen in reality,” Eldon said.
Eldon tells retail investors not to wait to squeeze out the last ringgit from their stock purchases. They should sell when they’ve chalked up a decent percentage. Photo by Chu Juck Seng
He was in Kuala Lumpur last week to give a talk to directors of financial institutions, as part of the financial institutions directors’ education (FIDE) programme, which is jointly offered by Bank Negara Malaysia and Malaysia Deposit Insurance Corp. (See page 8 for Eldon’s luncheon talk entitled Over-regulation and Other BS.)
Among other positions, Eldon is a senior adviser at PricewaterhouseCoopers Hong Kong, chairman of the Dubai International Financial Centre Authority and Singapore-listed Noble Group Ltd, a commodities trading company.
Eldon said stock markets were something he felt strongly about, as institutional investors often led the market’s rise or fall, leaving retail investors to pick up the pieces.
“When institutional investors enter the market, this becomes a bit of a self-fulfilling prophecy because once you start buying into equities, they start to rise. Then retail investors come in, because they see the market rising, and continue to go in as it keeps rising.
“Once things start to turn, for example if company results don’t come out as good as anticipated, or interest rates start to rise, and people can now put money in banks instead of stocks, institutional investors are the first to leave the market.
“Their money comes out in big chunks, so the market starts to fall. Who’s left holding the baby? Retail investors,” Eldon said.
Meanwhile, he said with more problems in the Western economies yet to surface, “there may very well be another downturn coming”, though it would not be as severe as the one just past.
Challenges for regulators
On the role of regulators in helping to stem crises, Eldon said it would be difficult for them to restrict businesses in a free economy.
“For example, do you tell Goldman Sachs there is a limit to the business they can do, and the authorities will regulate and that’s the end of the story? Do the good people of Goldman go off and start off their own company and do exactly what they were doing there, or should they be regulated in the same way?
“Where do you draw the line? This is one of the problems of doing business in a free economy. The moment you start putting restrictions, the economy has much less freedom in it,” he said.
Eldon also said while this might not be desirable, it was a fact that had to be accepted as such was the nature of the world economy.
But ultimately, he said, public opinion could have a big influence in how markets would be regulated.
On whether increased competition could help markets avoid the excesses seen in recent times, such as via the demerger of big banks, he said while this could happen, its implementation would depend on the willingness of the market to carry it out.
Asked what action could be taken once a bubble is perceived, he said this was not possible as people often thought situations differ from one crisis to another.
“History will tell you that we don’t seem to remember anything. If there was something that we could have done, we surely would have done it.
“But people say, it’s different this time. That was how the bubble was created the last time. And it very rarely is that different,” he said.
He also said if there were a way to “prick the bubble”, the question then arose of who would do it, adding it would be a major challenge for the world’s regulators to make a concerted effort to manage global economic and financial problems.
“It requires a lot of resolve from world leaders to actually say to themselves, we are going to effectively say to the world, this is what you’re going to have to put up with. For example, with the euro, because it is managed from a centre, monetary policy may suit Germany but not Spain, or benefit Ireland, but not other members.
“If you try to translate all of that into doing something for the globe, I think it will be extremely difficult to do,” he said.
Where Asia stands
During his talk at the FIDE programme, Eldon said one main reason why the Asian financial services industry had been shielded from the West’s financial crisis was the lack of sophisticated financial products here.
Despite this, however, he said the industry here had succeeded in growing and would continue to do so, albeit in a more controlled manner.
“That gives it a good future. You have two choices, either really let the brakes off, or you do it in a gradual way. You can take it step-by-step, and China is particularly good at this. If we continue that sort of policy, it’s fairly basic, and it may not be terribly exciting, but it’ll save you from getting into huge problems,” he said.
This article appeared in The Edge Financial Daily, November 2, 2009.
Malaysia has lost its way, says Ku Li
Malaysia has lost its way, says Ku Li
Tengku Razaleigh says many Malaysians are losing faith in their future despite the evidence of material progress. — File pic
KUALA LUMPUR, Nov 2 — Tengku Razaleigh Hamzah has urged the country to shed “crude nationalism” and come to terms with the reality that many Malaysians are losing faith in their future despite the evidence of material progress.
The veteran Umno man told the British Graduates Association at a dinner here last night that it was a fact that those Malaysians who “can stay away and settle overseas do so with the encouragement of their parents”.
“Their parents tell them to remain where they are, there is nothing for them here. The illusion of nostalgia does not explain why parents fight to send their children to private and international schools rather than the national schools they themselves went to.
“The very same politicians who recite nationalist slogans about our national schools and turn the curriculum into an ideological hammer send their own children to international schools here or in Australia and Britain.
“They know better than anyone else the shape our schools are in. It is no illusion that people do not have the faith in our judiciary and police that they once had,” said Tengku Razaleigh.
The former Finance Minister pointed out that the country inherited at independence a functional country with independent institutions.
These included “the Westminster model of parliamentary democracy, civil law grounded in a Constitution, a capable and independent civil service, including an excellent teaching service, armed forces and police, good schools, sophisticated trade practices and markets, financial markets”.
While he pointed out that the challenges of nation building were serious, but the country “faced them with an independent judiciary, a professional civil service and a well-defined set of relationships between a federal government and our individually sovereign states.”
Indeed we were able to face these challenges because these institutions functioned well.
“Institutionally, we had a good start as a nation. Why is it important to recall this?
“For one it makes sense of the feeling among many Malaysians and international friends who have observed Malaysia over a longer period that Malaysia has seen better days. There is a feeling of wasted promise, of having lost our way, or declined beyond the point of no return.”
He said that such a feeling was too pervasive to be put down to the nostalgia of always finding the good old days best.
Malaysians, Tengku Razaleigh contends, are losing faith in their future despite the evidence of material progress.
“We have lots of infrastructure. Lots of malls and highways. Especially toll highways. It is not for want of physical infrastructure, dubious as some of it is, that we feel we languish. It is a sense that we are losing the institutional infrastructure of civilised society.”
He said that if Malaysians felt a sense of loss, or tell their children not to come home from overseas, or are making plans to emigrate, it was not because they did not love the country, or were ungrateful for tarred roads and bridges.
“It is because they feel the erosion of the institutional infrastructure of our society. Institutional intangibles such as the rule of law, accountability and transparency are the basis of a people’s confidence in their society.”
He said it was time to shed the “crude nationalism” which refuses to acknowledge things “not invented here”.
He pointed out that Malaysia had a good start because it had inherited from the British a system of laws, rights and conventions that had been refined over several hundred years.
Malaysia, he said, also inherited the English language, and with that a strong set of links to the English-speaking world.
“There should be a rethinking of our attitude to the English language. By now it is also a Malaysian language. It would be sheer hypocrisy to deny its value and centrality to us as Malaysians.
“Do we continue to deny in political rhetoric what we practice in reality, or do we grasp the situation and come up with better policies for the teaching and adoption of the language?”
He urged Malaysians to reconnect with Britain as it is today instead of recycling stale colonial era stereotypes.
New Chinese stock exchange opens with a surge
New Chinese stock exchange opens with a surge
China’s GEM has been likened to a “VIP table on top of a big casino”. — Reuters pic
SHANGHAI, Nov 2 — The highly anticipated opening of China’s new Nasdaq-style stock exchange last Friday is already being seen as a watershed moment for the country’s capital markets, providing new opportunities for Chinese investors and an alternative source of financing for upstart companies.
Investors went on a wild buying spree during the first day of trading Friday on the Growth Enterprise Market, or GEM, sending the shares of some companies soaring as much as 210 per cent.
“This is potentially a major game changer in China’s high-tech industry,” said Yu Zhou, a professor at Vassar College in Poughkeepsie, NY “For about 10 years, the biggest problem for China’s innovative companies was finance. You know it is very hard for them to get loans from state-owned banks.”
The buying was so feverish that regulators, trying to calm the market, temporarily suspended trading in the shares of all 28 newly listed companies at different points on Friday, and analysts warned about the risks posed by excessive speculation and inflated stock prices.
Stocks on the GEM opened sharply lower today, with many shares down 10 per cent.
Still, the first batch of companies listed on the GEM — including film producers, software makers and pharmaceutical companies — raised about US$2 billion (RM6.8 billion) in their initial public offerings, far more than the companies had hoped.
By the end of trading Friday, the combined market value of the newly listed companies was more than US$20 billion, creating fortunes for the founders and investors in those companies.
China is already the world’s biggest market for initial public offerings, and its resurgent economy is flush with capital and investors with a big appetite for risk.
But trading experts have long complained that this country’s market system is seriously flawed, partly because of a misallocation of capital.
State-run banks lend primarily to state-owned companies, which tend to be inefficient. Listings on the Shanghai and Shenzhen stock exchanges are dominated by government enterprises. Young private Chinese companies generally list their shares overseas, in Hong Kong or on the Nasdaq or New York Stock Exchange, because there are few opportunities for stock listings inside the country.
But the government hopes to change that with the creation of the GEM, which is based in the southern boomtown of Shenzhen. The government is seeking to create a more efficient capital market system, one that would steer investment capital to small and midsize private enterprises — companies that can help reshape the economy through technology and innovation, rather than low-price exports.
Although the GEM, which is also known here as ChiNext, is tiny when compared with the Shanghai and Hong Kong stock exchanges, regulators hope it will eventually compete with Nasdaq and entice more Chinese companies to list with GEM.
The GEM is also expected to give a boost to China’s venture capital and private equity markets, which have been hampered by a system that until now has not provided wealthy investors with what industry insiders call an exit strategy, or a way to eventually cash out of their investments in small companies through a domestic stock market.
There are big hurdles to creating a stock exchange similar to Nasdaq, which includes companies like Microsoft, Intel and Google. For instance, volatile stock prices and high valuations could hurt the new bourse’s credibility with entrepreneurs and investors.
Chinese investors are known to speculate, favouring momentum buying and selling rather than the underlying fundamentals of a company, analysts say. Indeed, the casino-like nature of the Shanghai and existing Shenzhen exchanges, combined with government intervention, have added to the volatility of the Chinese markets.
Analysts warn that the GEM could also be prone to similar speculative frenzies.
Andy Xie, an economist who formerly worked at Morgan Stanley, is already calling the GEM a “VIP table on top of a big casino.”
Chang Chun, an expert on financial markets at the China Europe International Business School in Shanghai, said that China needed a market to serve start-ups, but “the issue is the maturity of Chinese investors.”
Before trading opened Friday, he said, regulators created rules to guard against excessive volatility and even warned investors that they would crack down on aggressive speculation. Still, Friday’s opening — with 28 companies beginning to trade at once — was marked by wild price swings.
One cause of concern was the huge valuations of the first batch of stocks listed Friday.
The average GEM-listed company has a price-to-earnings ratio of about 100 — meaning investors are paying about US$100 for every US$1 of 2008 earnings. By comparison, the Standard & Poor’s 500-stock index of big American companies trades at closer to 20 times earnings.
GEM stocks are also priced far above Shanghai stocks, which have long been considered inflated by United States standards.
Still, hundreds of Chinese companies are eagerly awaiting their turn to list on the GEM, and many analysts say the exchange will fill an important need: directing financing toward smaller start-ups that help rebalance economic growth. Zhou at Vassar said she had heard that there were over 1,000 companies in Beijing’s high-tech district alone that met the requirements to list shares on the GEM exchange.
Analysts say many more start-ups will be eager to list after seeing the riches made by the first group of companies to go public on the GEM.
For instance, Wang Zhongjun and his brother Wang Zhonglei are the founders of Beijing-based Huayi Brothers Media, one of the country’s leading film producers. Shares in their company jumped 148 per cent Friday, for a valuation of about US$1.7 billion. — NYT
China’s GEM has been likened to a “VIP table on top of a big casino”. — Reuters pic
SHANGHAI, Nov 2 — The highly anticipated opening of China’s new Nasdaq-style stock exchange last Friday is already being seen as a watershed moment for the country’s capital markets, providing new opportunities for Chinese investors and an alternative source of financing for upstart companies.
Investors went on a wild buying spree during the first day of trading Friday on the Growth Enterprise Market, or GEM, sending the shares of some companies soaring as much as 210 per cent.
“This is potentially a major game changer in China’s high-tech industry,” said Yu Zhou, a professor at Vassar College in Poughkeepsie, NY “For about 10 years, the biggest problem for China’s innovative companies was finance. You know it is very hard for them to get loans from state-owned banks.”
The buying was so feverish that regulators, trying to calm the market, temporarily suspended trading in the shares of all 28 newly listed companies at different points on Friday, and analysts warned about the risks posed by excessive speculation and inflated stock prices.
Stocks on the GEM opened sharply lower today, with many shares down 10 per cent.
Still, the first batch of companies listed on the GEM — including film producers, software makers and pharmaceutical companies — raised about US$2 billion (RM6.8 billion) in their initial public offerings, far more than the companies had hoped.
By the end of trading Friday, the combined market value of the newly listed companies was more than US$20 billion, creating fortunes for the founders and investors in those companies.
China is already the world’s biggest market for initial public offerings, and its resurgent economy is flush with capital and investors with a big appetite for risk.
But trading experts have long complained that this country’s market system is seriously flawed, partly because of a misallocation of capital.
State-run banks lend primarily to state-owned companies, which tend to be inefficient. Listings on the Shanghai and Shenzhen stock exchanges are dominated by government enterprises. Young private Chinese companies generally list their shares overseas, in Hong Kong or on the Nasdaq or New York Stock Exchange, because there are few opportunities for stock listings inside the country.
But the government hopes to change that with the creation of the GEM, which is based in the southern boomtown of Shenzhen. The government is seeking to create a more efficient capital market system, one that would steer investment capital to small and midsize private enterprises — companies that can help reshape the economy through technology and innovation, rather than low-price exports.
Although the GEM, which is also known here as ChiNext, is tiny when compared with the Shanghai and Hong Kong stock exchanges, regulators hope it will eventually compete with Nasdaq and entice more Chinese companies to list with GEM.
The GEM is also expected to give a boost to China’s venture capital and private equity markets, which have been hampered by a system that until now has not provided wealthy investors with what industry insiders call an exit strategy, or a way to eventually cash out of their investments in small companies through a domestic stock market.
There are big hurdles to creating a stock exchange similar to Nasdaq, which includes companies like Microsoft, Intel and Google. For instance, volatile stock prices and high valuations could hurt the new bourse’s credibility with entrepreneurs and investors.
Chinese investors are known to speculate, favouring momentum buying and selling rather than the underlying fundamentals of a company, analysts say. Indeed, the casino-like nature of the Shanghai and existing Shenzhen exchanges, combined with government intervention, have added to the volatility of the Chinese markets.
Analysts warn that the GEM could also be prone to similar speculative frenzies.
Andy Xie, an economist who formerly worked at Morgan Stanley, is already calling the GEM a “VIP table on top of a big casino.”
Chang Chun, an expert on financial markets at the China Europe International Business School in Shanghai, said that China needed a market to serve start-ups, but “the issue is the maturity of Chinese investors.”
Before trading opened Friday, he said, regulators created rules to guard against excessive volatility and even warned investors that they would crack down on aggressive speculation. Still, Friday’s opening — with 28 companies beginning to trade at once — was marked by wild price swings.
One cause of concern was the huge valuations of the first batch of stocks listed Friday.
The average GEM-listed company has a price-to-earnings ratio of about 100 — meaning investors are paying about US$100 for every US$1 of 2008 earnings. By comparison, the Standard & Poor’s 500-stock index of big American companies trades at closer to 20 times earnings.
GEM stocks are also priced far above Shanghai stocks, which have long been considered inflated by United States standards.
Still, hundreds of Chinese companies are eagerly awaiting their turn to list on the GEM, and many analysts say the exchange will fill an important need: directing financing toward smaller start-ups that help rebalance economic growth. Zhou at Vassar said she had heard that there were over 1,000 companies in Beijing’s high-tech district alone that met the requirements to list shares on the GEM exchange.
Analysts say many more start-ups will be eager to list after seeing the riches made by the first group of companies to go public on the GEM.
For instance, Wang Zhongjun and his brother Wang Zhonglei are the founders of Beijing-based Huayi Brothers Media, one of the country’s leading film producers. Shares in their company jumped 148 per cent Friday, for a valuation of about US$1.7 billion. — NYT
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