Investor's Digest of Articles

Investment Bubbles - Past and Present

2007-11-20T07:14:00.001-08:00

There have been many famous speculative bubbles in the past. There appears to be a few forming currently. While it can be profitable to ride the investment while a bubble is forming, it is important to recognize when an investment is in a bubble, and to get out before the bubble bursts. Doing that is, of course, easier said than done.

One of the earliest bubbles was the famous tulip bulb mania in Holland that ended in 1637. It seems very silly looking back that seemingly rational people would pay more than ten times an average annual salary for a single tulip bulb. That bubble burst, as it obviously had to, and prices came back down to earth. Many people were financially devastated in the process.

Another famous bubble was the South Sea bubble that burst in 1720. Shares of stock in the South Sea Company went from a little over 100 pounds to nearly 1000 pounds, and then right back to where it all started. This bubble, from nearly 300 years ago, sounds not unlike the gold bubble of less than 30 years ago. In the middle to late 1970's the price of gold was trading much of the time around the $100 level. Then a huge rally gained steam at the end of that decade. The final blow-off occurred with gold reaching approximately $850 per ounce. Silver made an even greater advance. When the bubble finally burst in the first couple of months of 1980, there was a quick drop in both metals, with silver falling all the way back to the starting price. The gold market fared somewhat better, with prices holding about two and a half time the starting prices at the culmination of a 22-year bear market. Gold prices only now, after 27 years, are approaching the old record price, and that is not adjusted for inflation. Silver is still trading less than a third of the price it reached in 1980. Not a good long term hold.

Another great bubble was the tech and dot com mania of the late 1990's. The price of any stock with a "dot com" in its name went on a parabolic price move upward. Many of these stocks had no earning, no prospect of earnings, no business plan, and only a vague idea for a product. Investors would bid up these shares to market caps far greater than many well-established companies with real products and earnings. Most of these stocks are now trading on the pink sheets for pennies. This bubble, in extent of the price rise and extent of the inevitable fall, far eclipses some of the more famous, older bubbles.

So what about today?

Perhaps the most obvious and visible bubble today is in the Chinese stocks. Some will argue that these are real companies with real earnings, with growth rates that justify the high prices. However, there is a mania in China as its citizen's line up to open brokerage accounts by the tens of thousands every day, buying everything in sight. This is a group of people with little experience investing. They just buy because prices are going up, much like many beginning and even experienced investors did during the dot com mania. They will most likely get burned when the inevitable pin finds the bubble. Those analysts that should know better keep telling investors that "this time it's different." It is never different. The same story repeats again and again.

Another bubble in the process of bursting is the real estate market. Recently there have been headlines daily about investors making thousands of dollars overnight by house flipping. Condos were being pre-sold to flippers. People were borrowing on their increasing equity lines of credit to leverage more real estate holding, or just to live beyond their means. Ordinary housing was being priced far higher than any person working for a salary could afford. If you didn't have a house to trade up from, a trust fund to tap, or an inheritance, you couldn't possible come up with a down payment. People in high paying professional jobs couldn't qualify for the most basis starter home in many markets. Schemes were worked out to get around the down payment requirement, and to get around the income reporting and verification requirements. This kept the bubble going. All the real estate agents in the world saying "this time it's different" couldn't stop that bubble from bursting.

One interesting exception currently is in the Manhattan real estate market. Prices of condos and co-ops in Manhattan are still rising fast as the rest of the county is seeing prices drop. What is happening? There are a few logical reasons. The city is more desirable now that it has been cleaned up and made safer. Congestion and travel times are a factor for people wanting to live close in rather than spending three or four hours a day commuting. But prices for decent apartments are well beyond the reach of anyone working for a salary and having to deal with financing. This is a problem in much of the nation, as pointed out earlier, but in New York it is magnified beyond reason. If a doctor or other highly trained and highly paid professional moved to Manhattan and wanted to purchase a home suitable for a family, he/she would not make anywhere near enough money to qualify for a home, let alone be able to save enough for 20% down. If a doctor cannot purchase a home near where his practice is, then I would suggest that area is in a bubble.

If the real estate boom continues in Manhattan, the only people left who will be able to afford an apartment will be hedge fund managers, star baseball players, rock stars, actors, or those receiving huge inheritances. The city will lose its soul and character. I hear so many stories of people who paid $200 thousand for an apartment 20 years ago, and are now able to sell it for six million. One new building on Central Park West with over 200 units, sold out with an average sales price of $10 million per unit. Apartments with a park view were getting over $6000 per square foot. As desirable and great as Manhattan is, the price of apartments is in a bubble. It will burst. Those who pay these prices will get burned when the bubble bursts. So what can pop this bubble? The falling dollar, another bubble in reverse, has encouraged foreign purchases of desirable real estate. The consensus on the dollar is that it will keep falling for the rest of eternity. It may well have hit bottom, or be close to it. Any reversal of the dollar could end the demand from foreign buyers. Also, since the hedge fund bonuses are a primary driver of the high-end real estate market, an end to those high fees would also cause a lowering of demand. Hedge fund manager fees are also in a bubble, in my opinion, as is CEO pay. How can a hedge fund manager justify taking such large fees with such generally poor performance? How can a CEO justify taking a $200 million fee for leaving a company when the price of its stock is in the tank?

Another bubble about to burst, in my opinion, is the art market. As with housing, part of the driver for the art market is the weak dollar, both from the aspect of art in the US being relatively cheaper for foreign investors, and as a place to get out of a fiat currency into something perceived to be more tangible. There was a story in the Wall Street Journal today about an actor who bought a horrible Warhol painting about five years ago for 3.5 million dollars, and it just sold at auction for 23.5 million dollars. That's a pretty good return over five years for a piece of art that has questionable long-term appeal. Even more horrifying is the Rothko piece that sold for $73 million. If you are not familiar with Rothko, I'll fill you in. He painted large canvases - about $100 dollars worth including the stretcher bars, and put about another $20 worth of paint, usually in three blobs that resemble a hamburger in a bun. And somehow that becomes worth $73 million to someone. I think when he first painted those abstract buns he could have put them out on the street with the trash and nobody would have picked them up. If you own a Warhol or Rothko, sell before reality sets in.

The classic car market has a bubble going on as well, at least in my opinion. There was a huge bubble in the late 1980's in exotic 1960's sports cars, especially Ferraris. There was a buying mania that brought up the prices paid at auctions well into the seven figures for cars that could have been purchased for a small fraction of that just a few years before. Many of the more desirable Ferraris increased by more than a hundred-fold in a very short time, eclipsing many of the famous bubbles throughout history. What was the reason for this bubble? Many would argue that it was driven by an insatiable appetite by many of the newly rich Japanese. Many of these Ferraris were bid up at auction on behalf of Japanese investors, and the cars were transported to vaults in Japan, much like people might store gold coins in their safe deposit boxes, with some difference in the size of the box of course. Many experts suspect the collector car auction houses rigged many of these auctions to inflate the prices. The Japanese investors didn't seem to care what they paid as long as they got a car to put in the vault. And what caused this new found wealth for the Japanese investors? You might recall that the Japanese stock market was at the height of its bubble at about the same time. They were buying up US landmark buildings. The bubble in their stock market collapses, even though experts said it couldn't, and it brought down the market for sports cars with it. The Japanese stock market has yet to get anywhere near its all time high as this is being written. The price of a few selected Ferraris is now only approaching the price, in dollar terms not adjusted for inflation, of the peak about 18 years ago.

So what does this have to do with a bubble in the classic car market now? The emphasis has shifted from exotic European sports cars to much more mundane and ordinary American muscle cars from the mid-60's to early 1970's. Very ordinary Plymouths and Chevys with a muscle car engine, and perhaps some factory paint option like a racing stripe or some other gimmick that would make the car slightly more rare than one off the showroom floor, are fetching prices at auction well into the six figures. I was astounded watching one auction where an orange 'cuda (a Plymouth Barracuda) of early 1970's vintage went for over $300,000. This was a car that probably cost under $4000 new. I would suspect five years ago if someone put the keys in the ignition and a sign saying "please take me" that there would be no takers. So why is this bubble happening? The classic car experts say it is because the baby boomer men that grew up in the 1960's that weren't for one reason or another able to buy these cars, are now in a position to recapture their youthful dreams. There may be something to this. I go to many car shows every year and see pot bellied men in their early 60's standing next to their exhibited Chevelle, Corvette, or 'Cuda. Also, unlike Ferraris, these cars were so undesirable for so long that most have probably been junked or poorly cared for, so clean specimens probably are somewhat rare. Similar cars from the 30's, 40's, or 50's are not fetching anywhere near the prices of the American muscle cars.

It is very difficult to see the bubble from within. It is always obvious that a bubble existed once it has popped. Investors in stocks and futures have some advantage, as it is easier to put in a stop loss to protect against a drop when a parabolic price advance occurs. Other investments move at a much slower pace, which makes the rise and topping action much more difficult to spot. But when everyone says "this time it's different" and then goes on to explain why the price advance will never stop, it is usually a good time to exit. If you are in a theater and smell smoke, it is probably wise to get up out of the seat and get near an exit. It might be a false alarm. Someone might have lit a match to set the time on their watch and the smell drifted past you. You can always return to your seat. But if you wait for proof, and smoke begins to fill the room, someone yells "fire," and everyone rushes for the too few exits, you will wind up getting trampled trying to get out. It is better to sell when the demand is in a mania than after the top when everyone wants out.

Doug Tucker has a blog with daily commentary on stock indexes, precious metals, and other markets. There are many articles on technical analysis and indicator design and interpretation. To visit go to: http://tuckerreport.com/

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Baltic Dry Index - An Important Index To Help Measure World Economic Activity

2007-11-06T16:21:00.000-08:00

By Doug Tucker

The Baltic Dry Index, or BDI, is an index of twenty-two key dry bulk shipping rates and is compiled daily in London. This index provides an assessment of the price of moving raw materials such as iron ore, grains, coal, and cement by sea. This index does not include wet goods such as crude oil.

Since this index is not a tradable contract, it does not have a direct speculative component. Although contracts that do contain a speculative component can influence the cost of shipping. One component that has a speculative component, by as much as 30% as this is being written (October 2007), is crude oil. Another is the U.S. Dollar. Since the index is being quoted in dollars, the sharp fall in the dollar is partly responsible for the recent near vertical rise in the index.

So why would an investor or trader care about how much it costs to ship dry goods by sea?

Transportation by sea can be a good barometer of the volume of world trade. This index can be a good economic indicator for future growth and production, since the raw goods being shipped are precursors to production. Also, since the number of ships available is relatively fixed, the price of shipping can go up or down based on supply and demand. If world growth slows, the cost of shipping raw goods will decrease. If world growth accelerates, the cost of shipping raw goods will likely increase.

Today a large portion of the demand for raw goods comes from China. The growth cycle in China influences the profits of many companies around the world. Having an index that can give a clue to when the trend of the demand for raw goods is increasing or decreasing can give important clues to possible changes in broader economic activity.

A century ago the Dow Theory was gaining in popularity, and it is still in use. However, it is much less effective in the new global environment. Part of the Dow Theory requires that a new high in the Dow Jones Industrial Average is to also be confirmed by a new high in the Dow Jones Transportation Average. A failure of both averages to confirm a new high, at least within a reasonable time, would usually imply a potential reversal of trend, to be confirmed by the price action itself. On the other hand, if both averages confirm the new high, the trend is assumed to be intact, and prices can be expected to move higher. The same theory in reverse can be applied to confirmation or non-confirmations of lows, therefore buy signals could be derived from one index making a new low while not confirmed by the other. The basis of this theory is that if goods are manufactured, or raw materials are mined, it is important for the companies that move these goods around the county to also be increasing in value. Using an average of stock prices doesn't directly measure the cost of transporting these goods, as it does by actually measuring the cost of shipping, but if the transportation companies are making more money, one might infer that there is more transporting activity, and therefore more economic activity in general.

Now that the economy has become more global, with China and other emerging markets becoming a more important factor in the world economy, a different type of transportation index is required. The Dow Jones Transportation Average is composed of stocks of companies beyond just the components that transport raw and finished goods. For example, airlines moving people and small packages are also included. While that may indicate current economic activity, it does little to forecast future economic growth in the way raw goods can. Also, much of the activity is domestic, so it does not represent the global picture. While there are some companies represented that deal with global delivery of goods in general, it is quite diluted, and not an accurate measure of the shipment of raw goods. Measuring the actual cost of transporting the raw goods, rather than the value of the stocks of transportation companies, can be a more direct indication of the trend of economic activity. If a transportation average fails to confirm an industrial average at a new high or low, it might be a good idea to also check to see if the BDI is making a more meaningful confirmation.

The BDI isn't always a leading indicator. At times it is coincident, and at times it can lag. It has flaws, as does any index. It can have short term swings that can be more influenced by dollar and oil gyrations. But using the BDI in a longer-term context to view the trend of the cost of shipping can give important clues to the trend in world economic growth or contraction. It can be an important piece of the puzzle to determine longer-term trends in the world economies.

Click on the link in the resource box to view many charts of the BDI as it correlates with other indexes.

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Good News About the Sub-Prime Mortgage Crisis

2007-10-13T18:05:00.001-07:00

By Lloyd Segal

Hey, wait a minute! In recent months, the national media has dwelled on the collapse of the subprime mortgage market and the surge of foreclosures. But there is another side to this story that should also be considered.

The Mortgage Bankers Association recently released its National Delinquency Survey and the numbers are not what you may think. True, the rate of loans falling into foreclosure last quarter was the highest in the survey's 54-year history. 8.4% of subprime loans were more than 90 days late or already in the foreclosure process. That statistic is sobering, but it misses the point. If 8.4% are seriously delinquent or in foreclosure, 91.6% of the sub-prime borrowers are current with their loans and making their mortgage payments on time. They are enjoying the benefits of home ownership. Those borrowers were given the opportunity to own (rather than rent) because of the availability of sub-prime loans and have successfully taken advantage of that opportunity. For them, the "American Dream" has become a reality.

Of course, 8.4% default rate is high, but unanticipated financial problems happen. After all, people don't buy homes, take out loans, and then intentionally default. Usually something serious happens to disrupt the natural process. Commonly, it is loss of job, divorce, medical catastrophe, or some other unanticipated financial emergency that causes people to default. Keep in mind, though, you don't have to a sub-prime borrower to have financial problems. Prime borrowers also default on their loans and lose their homes in foreclosure (no one is immune in this market). Sure, the percentages are higher for sub-prime borrowers, but they are typically in a more vulnerable financial situation. Of course, they have a higher interest rate and pay a larger mortgage payments every month, so cut them some slack. Regardless, the solution is not to cut-off subprime lending, but rather to embrace these borrowers' unique needs. Particularly now, lenders need to offer delinquent homeowners programs to restructure their loans and avoid foreclosure. Let' look at why.

Delving deeper into the MBA survey, we discover several surprising facts. For example, the surge in sub-prime foreclosures last quarter was driven by four large states, California, Arizona, Nevada, and Florida. If it were not for the avalanche of foreclosures in those four states, there would have been an overall drop in the rate of foreclosure filings nationwide. Thirty-four states actually reported a decrease in the rate of new foreclosure foreclosures in the last quarter, and the remaining states (other than those four) reported only a modest increase.

There is also a wide divergence between fixed-rate and adjustable-rate loans. The delinquency rate for prime fixed-rate loans was essentially unchanged from the previous quarter and the rate for sub-prime fixed rate loans actually fell! In contrast, the rate of delinquency for prime adjustable-rate mortgages increased 36% and sub-prime adjustable-rate mortgages increased 227%.

Clearly, adjustable-rate mortgages ("ARMs") are the culprit and present a unique problem. But there is nothing wrong with ARMS, provided they are utilized responsibly. They have benefits you can't find with fixed-rate loans. They have lower interest rates and correspondingly lower monthly payments. They allow borrowers to qualify for loans they would not otherwise receive (of which the vast majority successfully pay each month). Plus, it just doesn't make sense to obtain a 30-year fixed rate loan, when in reality most people sell or refinance their homes every 5-7 years.

Nationwide, California leads the way with over 17% of all sub-prime adjustable rate mortgages. Similarly, California has over 19% of the foreclosures for sub-prime ARM loans. In fact, the same four culprits; California, Nevada, Arizona and Florida, have more than one-third of the nation's sub-prime ARMs, more than one-third of the foreclosures started on sub-prime ARMs, and most of the nationwide increase in foreclosures.

Another factor to consider is the distinction between owner-occupied and investor (non-owner occupied) borrowers. A majority of the delinquencies and foreclosure starts can be attributed directly to non-owner occupied loans. This is because investors are notorious for defaulting on mortgages when the market dips and they see the value of their properties evaporating. Further exacerbating the problem, investors' share of defaulted loans was 32% in Nevada, 25% in Florida, 26% in Arizona, and 21% in California. Yep, those same four states. Those rates are high compared with a rate of only 13% for the remainder of the country. And those percentages will certainly increase as property values continue to decline.

One more thing. The media has been quick to blame mortgage brokers for "forcing" borrowers into sub-prime adjustable-rate loans. I laugh every time I hear that. Anyone who has ever been a mortgage broker knows that you can't force a loan on borrowers, prime or sub-prime. It doesn't work like that anymore. Homeowners are more sophisticated than ever before. They have access to the internet, television and the mass media, and analyze available loan programs. They understand the difference between fixed-rate and adjustable-rate loans, between amortized and interest-only payments, and between "stated" and full documentation. They shop and explore alternatives. Ultimately, they select the loan they want, not their mortgage broker. Regardless of what the media says, that process works successfully for the vast majority of American homeowners.

All tolled, the sub-prime mortgage crisis is bad, but not nearly as bad as the media would have you believe. If you dig deeper into the survey, and segregate the four problem states, subprime ARMs, and investor loans, you will discover that with the vast majority of American homeowners, default and foreclosure are not issues. At least not yet.

This article was written by Lloyd Segal, mortgage banker, attorney, author, public speaker, and amateur economist. As an eternal optimist, Lloyd can find “good news” in almost anything. Lloyd is also the author of “Stop Foreclosure Now” and puts on monthly foreclosure workshops for investors and realtors. http://www.ForeclosureWorkshop.net

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Baby Boomers - The Future Of The Stock Market

2007-09-29T14:02:00.001-07:00

By Daniel Kertcher

You have no doubt heard of the “Baby Boomers”, those individuals born between 1943 and 1963. Following World War II, Australia’s population grew at record levels. Australia was not alone in this phenomenon. The United States, New Zealand and Canada all experienced Baby Booms at a similar time.

The Baby Boomers are an important phenomenon to understand. They have had dramatic effects on society and will substantially impact the way the stock market performs over the next 20 years. For this reason, it is important to understand some of the background on this interesting group of people.

As mentioned, the Baby Boom was experienced in various countries around the world. Part of the reason for the “Boom” was that these countries were immigrant receivers and immigrants tend to be in their 20’s, the prime childbearing years. At its peak in 1957, the US boom hit 3.7 children per family. Canada hit its peak in 1959 with Canadian women averaging 4 offspring each; that was over 479,000 new births that year alone! Australia’s boom was not quite as big as the Canadian or US booms; however, we still have a disproportionate number of people who are today in their 40’s and 50’s. Following the Baby Boom, we had a Baby Bust. Far fewer children were born during the late sixties, leaving Australia with an asymmetrical population graph.

The Baby Bust group, born between 1964 and 1976 are a much smaller group than their predecessors and are commonly referred to as Generation X.

Baby Boomers are a very significant and important group. It is not that, individually, they are any different than any other group who preceded them, it’s just that there are so many of them. Due to their large numbers, Baby Boomers have had a significant impact on our society, making substantial changes as they grew. They have changed the economy, driven housing and other markets and transformed social attitudes and lifestyles.

In Australia and North America today, the fastest growing industries, apart from technology, are financial management, leisure activities and health care. It is very easy to see why. Boomers have been working all their adult lives, usually for someone else. They have raised their children and are now focusing on their retirement. They have had a magnificent time. They have not endured wars, or a depression like their parents and grandparents. They have enjoyed fantastic luxuries such as cars, world holidays and computers. They have been at the forefront of the age of discovery.

Unfortunately, the majority have not prepared themselves financially for their retirements, believing instead that like their parents, they would enjoy a comfortable pension from their employers and/or government. The stark realities are now coming to light. Everybody, especially the Boomers, must take responsibility for their financial futures. Our government will simply not be in a position to provide adequate pension incomes for a growing number of retirees. Today, for every person who is retired, there are four people working, providing income to the government. By 2025, there will be only 2 people working for every retiree. What’s more, the Boomers, as they start to retire, will live longer than any group before them, well into their 70’s and 80’s on average. As a result, it is up to each of us as individuals to take responsibility of our own personal financial planning.

The Australian government has made substantial improvements and preparations for the growing populations. They have introduced a compulsory superannuation scheme which all employers and employees must participate in and which is gradually rising in required contributions, but it will be too little, too late. The key to investment growth is time, a luxury many Boomers no longer possess.

Consider this fact, that at a return of 8% per annum, net of tax, an investment of $30,000 would require over 15 years to triple in value, not even considering the effects of inflation. Most investment strategies commonly promoted to the public boast returns of 4% to 10% per annum. We often see managed funds, superannuation schemes, bank term deposits and property investments offering such results. Many people consider these returns appropriate and even good! Unfortunately, many members of the public require a much greater return on their investments to adequately improve their financial positions before they retire (if they can ever afford to!).

In future issues we will explore ways of generating high returns and how to self manage your own super.

Daniel Kertcher is a licensed stock market educator. Daniel has trained many people from North America, Australia and Europe in various trading systems. Join his trading mail list http://www.platinumpursuits.com and read more about him at his personal website http://www.danielkertcher.com

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Credit Crisis - Fasten Your Golden Seatbelts

2007-09-16T17:51:00.001-07:00

By Kevin A. Demeritt

Fasten Your Golden Seat Belts

The credit crisis just cost us $2 trillion.

It went poof. Just like that.

For years, now, financial talking-heads have been telling us how the Fed’s credit expansion of six years ago would come back and bite us in the butts. Last week, it did just that.

The question is, will it keep biting? The unhappy answer is, probably and for longer than we’d like to think. There’s a Ludwig von Mises quote floating around the Web that says, "There is no means of avoiding the final collapse of a boom brought about by credit expansion. The question is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Von Mises should know. He had grandstand seats to the economic collapse of pre and post-war Nazi Germany. Of course, what we are wrestling with today couldn’t come close to those darkly historic days.

We hope.

MILES OF BAD ROAD?

The road isn’t just getting bumpy, it’s fast approaching an “Ice Road Trucker” kind of treacherous.

We don’t have to look any further than the above-mentioned credit/mortgage woes. How bad will it get? It depends on where the dominos stop falling. Last week they stopped, for the time being, for three Bear Stearns mortgage funds, investments which instantly became their investors’ worst nightmares. They shut down without so much as a courtesy call. So what happens to these investors’ hard-earned money? Sadly, it’s out of their hands.

Bear Stearns wasn’t alone. The French bank Paribas also shut the door on three of its funds when the mortgage derivatives they held went into freefall. The bank reported a “complete evaporation of liquidity” as the value of its three funds plummeted by nearly a quarter in little more than a week.

Then there’s the story of American Home Mortgage Investment Corp., the 10th-largest mortgage lender in the US. Shocking the industry, it announced its bankruptcy on August 6th. The scariest thing wasn’t that the lender had a spooky portfolio brimming with sub-prime customers, but that it actually dealt with an impressive number of “Alt-A” clients—borrowers with good, if not painstakingly confirmed, credit.

The mortgage crisis may be deeper than we imagined, and it could lead us to a liquidity crisis. Last week, the European Central Bank lent a whopping $130 billion to head that off. This was so “unusual” that a Financial Times column wondered whether “there is something truly nasty lurking out there in relation to credit losses that only the ECB knows about.”

Japan and the Fed quickly followed suit, bringing last week’s total capital infusion to over $200 billion (at least, that’s the reported amount). According to Financial Times, “published reports put the total number of unsold loans sitting in financial institutions' warehouses waiting to be resold at around $260 billion in the U.S. and another $200 billion in Europe.” So the Fed’s capital infusion relieved some of that pressure, but that’s little more than a stop-gap measure. "There are now some indications that the sub-prime mess is leading to an indiscriminate rationing of credit," warned Strategas Research's Jason Trennert.

TOUGH TO JAM INTO REVERSE

The danger of a liquidity crisis is that it’s a tough road to do a “180” on. According to New York Times columnist Paul Krugman, “…when liquidity dries up, the normal tools of policy lose much of their effectiveness. Reducing the cost of money doesn’t do much for borrowers if nobody is willing to make loans. Ensuring that banks have plenty of cash doesn’t do much if the cash stays in the banks’ vaults.”

So that pretty much leaves things up to human nature. Yikes.

ALL ROADS LEAD TO ROME?

America’s outspoken comptroller, David Walker, is worried where this mortgage emergency—and all of today’s other economic emergencies—is ultimately taking us.

According to FT.com, Walker said our recent “...fiscal imbalance meant the US was ‘on a path toward an explosion of debt.’”

“With the looming retirement of baby boomers,” Walker said, “spiraling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risks.”

He even warned that there were “striking similarities” between America’s current situation and the factors that brought down Rome.

This is America’s comptroller speaking. Yikes.

THE SMOOTH, GOLDEN ROAD

With all these scary developments, you can end up feeling a trifle bit overwhelmed. But there’s no need to get anywhere near that point.

I keep talking about how gold can act as a sort of reassuring insurance against the economic mischief of the day. Well, I stand by that statement. Since gold tends to move contrary to the ocean of paper investments most of us possess, it will always serve a wonderful purpose for the wise, diversification-minded investor.

And since we obviously face a scary fiscal road ahead—mortgage generated and otherwise—it only makes perfect sense to fasten our golden seatbelts.

Far as the credit crisis goes, the sooner the better.

You’ve seen him on Fox News Television and heard him on the Rush Limbaugh Show. He’s a published author, writer and an expert guest on more than 1000 radio programs discussing today’s economy and gold.

Kevin DeMeritt, President of Lear Financial, is a nationally renowned analyst whose insight into the future of domestic and global economies is unmatched.

His book, The Bulls The Bears and the Bust, reviewed by the Associated Press, predicted the market crash of 2001 and the ensuing rise of gold to the status of best investment.

At the helm of Lear Financial, Kevin DeMeritt has made Lear one of the most highly endorsed gold companies in the country. Relying on his insightful recommendations, uncanny market and trading skills and 20 years of experience in investment quality gold, Kevin has navigated thousands of portfolios to profitability through boom and bust times.

And, now more than ever, his insights are welcome by nervous investors.

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Rare Gold Coins Versus Stocks - Five Clues Why Gold Coins Are the Better Bet in Late 2007

2007-09-16T17:48:00.000-07:00

By Kevin A. Demeritt

If looks and feel have anything to do with it, rare gold coins would beat stocks every time. They’re charming, beautiful, have a nice heft to them and, because they’ve been around for a while, represent an intriguing chunk of history.

But there are other reasons, timely reasons, to add more gold coins than stocks to your portfolio today…although making an assertion like that can come perilously close to blasphemy to traditional stock investors. Ignore the available clues at your own peril, though. For instance...

Clue #1:Call Options Point to Higher Gold. This analysis is from Prieur du Plessis and Adrian Douglas. In short, these two men observed that the December 2007 gold call option contracts were sizeable indeed, currently numbering some 122,000. What’s more, they outnumbered the puts 2 to 1.

Based on this “positive gold surge,” both du Plessis and Douglas believe gold is on the threshold of a big price jump. It’s not the first time Douglas believed this way. In November 2005, he predicted a surge in the gold price from its $460 level, based on a similar build-up of gold call options. Two months later, gold was $100 higher. Next…

Clue #2:Gold Demand is Still Heading Higher; Gold Supply is Still Heading Lower. The situation here has only worsened. According to a recent World Gold Council report, world gold demand is running 30% above a year ago while supply continues to head south. The world’s largest gold producer, South Africa, hit an 84-year low despite gold’s soaring prices. And the world’s top gold producers witnessed nearly a 20% reduction in output since 2001.

Needless to say, higher demand and lower supply leads to higher prices.

Clue #3:“Triple Threat” from the Housing Dilemma. Harvard economist Martin Feldstein warned that we face a triple threat from the housing downturn. According to Bloomberg’s September 2nd reporting of his Jackson Hole speech, “Feldstein outlined a ``triple threat'' from housing: a “sharp decline” in home prices and construction; higher borrowing costs and a “freeze” in credit markets stemming from sub-prime mortgage losses; and fewer home-equity loans and refinanced mortgages, leading to less consumer spending.

The overall effect will, needless to say, have scary consequences. “The economy could suffer a very serious downturn,” he added. More reason to diversify into the shiny stuff.

Clue #4:America’s Going the Way of the Roman Empire–Comptroller General, David Walker. Yikes. You know you’re in trouble when the guy in charge of government accountability, finds “striking similarities” between the US and the Roman Empire. The end of the Roman Empire. Among his comments, the US is suffering from “declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government.” He’s so serious that he even refused to sign off on the government’s “books.” Yikes again.

How does this relate to gold and stocks? When high profile members of our own government come right out and warn us of the coming “economic tsunami,” it’s time to find refuge in gold.

Clue #5:Inflation, Inflation and More Inflation. Despite all the government statistics in the world, we all know that inflation is off and running. We know that every time we fill our tanks. And somewhere in the back of our minds, we know that rising energy prices have to be bad for the economy, that it affects everyone and anyone who sells anything. That intuition is, not surprisingly, rooted in fact. According to the Federal Reserve Bank of Dallas, “nine of the ten post-World-War-II recessions were preceded by sharply rising oil prices.”

With the Fed rushing to defer a recession by cutting rates, we also know, somewhere in our psyches, that the dollar will only be further weakened, maybe dangerously so, from it’s current historical weakness with each of these cuts. And the bottom-line of all of this change is inflation. We’ll be needing more dollars to buy what yesterday’s dollars used to buy.

You’ve undoubtedly heard the adage, “In 1911, an ounce of gold could buy a very nice suit. Today, it still can.” That’s by way of saying that gold keeps abreast of inflation. It did so in 1911. It still does now, almost a hundred years later. Which is what makes gold the weapon of choice for fighting inflation.

But Why Just Stay on the Defensive with Gold?

In 1995, a Penn State economist, Dr. Raymond Lombra, did a study he presented to Congress. This 40-page report “proved” that rare coins, including rare gold coins, were among the top performing assets over the last 25 years (and that included stocks). He also reported that "rare coins dominate gold bullion as a diversifying asset.” These “numismatic coins” do that by reducing volatility while providing improved returns.

Lombra’s most recent 2003 study found much the same situation, From 1979 to 2003, rare coins, like rare gold, earned the highest average annual rate of return and beat gold bullion as an investment and inflation hedge.

But whether you prefer taking a more aggressive position with rare gold coins over stocks or simply want a proven financial haven, the timing may be right for gold. And that may be an understatement.

Kevin DeMeritt, President of Lear Financial, is a nationally renowned financial analyst whose insight into the future of domestic and global economies is unmatched.

His book, The Bulls The Bears and the Bust, reviewed by the Associated Press, predicted the market crash of 2001 and the ensuing rise of gold to the status of best investment.

Mr. DeMeritt has made Lear Financial into one of the most highly endorsed gold companies in the country. Relying on his insightful recommendations, uncanny market, trading skills and 20 years of experience in investment quality gold, he has navigated thousands of portfolios to profitability through boom and bust times.

Now more than ever, his insights are welcome by skittish investors.

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How To Prosper In An Unstable Market

2007-09-14T14:12:00.001-07:00

By Stephen Bigalow

Over the past five years of unstable markets, investors have learned some valuable lessons; some of these lessons were pleasant, some of them painful. After such a long period of stock volatility, media frenzy and other hysterics, investors should understand some things about unstable markets better.

Panic trading – Very little is ever accomplished when spurred on by greed and fear; both can be deadly to a portfolio, but this is especially true of fear. If you have followed a trading plan up to this point, don’t abandon it now. If you are following your plan, you will have diversified your investments, created stop loss strategies and done sufficient research to stay confident with your investment, even in an unstable market.

Establishing an investment level – Remember in an unstable market (or even in a stable one) that the money you invest is called “risk premium”. It is called that because it is the cost of doing business (or the premium) in the stock market; you are risking this money in hopes of making much more. Before making a single trade, you should decide how much to invest based on the idea of how much you can afford to lose.

Understand the market’s rise and fall – You won’t always be able to figure out why an unstable market moves like it does. Even those investors who make money investing in stock realize that the market can do crazy things. The recent fall in the China stock market happened with good reason; the market was up over 100 percent from the year before and speculation was at a fever pitch. In spite of this, there was no reason for the very best stocks on the Dow and S&P 500 to fall as well. This was simply a case of panic selling. If you are doing your fundamental analysis and stock charting, you will know if an unstable market is looking at a significant downturn and you can make wise decisions.

Know when to sell – Or maybe when NOT to sell. See an unstable market heading into a rough period? If you are confident with your fundamental and technical analysis you don’t need the cash in your hands, don’t sell. In fact, if you find some undervalued stocks in the process, maybe you should consider buying. While the economy of scale if vastly different, ask yourself if Warren Buffet is selling. If you’re not overextended, you might have the opportunity to pick up good stocks at value prices.

Suppose the downturn in this unstable market leads to a recession. In spite of Alan Greenspan’s recent comments, this is not a likely event anytime soon but for the sake of argument, let’s suppose there is one. In the past two decades, recessions have tended to be very short term in nature. As the economy moves toward a recession, the stock prices fall and this unstable market creates the opportunity to make some of your best stock picks. The simple cliché “buy low, sell high” actually has some truth to it; it is difficult to make much money when a bull market is pushing up prices.

Know where to get your information
It’s always reaffirming when the analyst on TV agrees with your theory about an unstable market but what does it buy you? If that $75,000 per year talking head were such an amazing expert on stock market advice, he would be making $250,000 per year as the lead investor from some brokerage house. It doesn’t take a crystal ball, just sticking with good, solid technical analysis and steady stock charting will give you far more solid information and a better sense of direction in an unstable market than someone on TV.

Diversify your portfolio
A healthy indicator of your stock holdings in an unstable market is if you have a diversified stock portfolio. If you hold equal investments in twenty different stocks and one goes under, what do you have? You would have a portfolio that is worth 95 percent of the original. Portfolio diversification prevents widespread destruction in your portfolio, even when the market is unstable.

Conclusion
An unstable market can still be a source of great wealth, if the investor is wise and sticks to his or her plan. Unstable markets move in a way that creates opportunities for smart investors. The key is to stay within your stock trading plan. Unstable markets can be a great source of income if you take the time to find the winners.

http://www.candlestickforum.com/PPF/Parameters/1_21_/candlestick.asp

A site dedicated to investing using Japanese Candlesticks.

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Starting a Hedge Fund - 10 Important Lessons I'd Wish I'd Known

2007-09-14T13:51:00.001-07:00

By Timothy Sykes

I brought an outline of my strategy and performance to a friend of a family friend, who supposedly had access to many hedge fund and rich clients - he was impressed, but wanted to know the details of my strategy but wouldn’t give me any assurances he simply wouldn't use it for himself. In addition, he wanted my returns audited and only then would he consider helping me raise capital in exchange for a "slight" fee. I couldn’t trust this guy and I didn't want to tell him my secrets so I passed. This encounter made me realize that audited returns would be necessary because my success was rather unbelievable. I figured this expense would be crucial to my fund raising, so I found a local accountant familiar with stock trading and spent a college semester’s tuition to have my tens of thousands of trades audited.

After a few weeks of patiently reviewing all my trades with this accountant, the audit was finally finished and the numbers looked good. In fact, the numbers looked too good. Yes, my ridiculous returns might be a problem.

Lesson #1:
If you consistently beat the market, you will face endless questions about whether or not you are a fraud.

No matter, I decided to form my own fund and take my chances raising capital. Since I was still in college and had focused solely on trading for the past few years, I had very few business connections and most of my friends and family were not wealthy enough to invest considering the all knowing industry regulations stated my investors would need a net worth of $1 million or more to be worthy of such a “risky investment”. Only my continued performance could attract new money, but, being my cocky self, that was the one part of the equation I wasn’t worried about.

Mutual funds could accept less wealthy investors, but had severe investment limitations. No, I did not want to start a mutual fund because most of them had to be invested at all times and they couldn’t even short sell! Hedge funds were considered the hot new investment vehicle, so I researched the industry nonstop for a few weeks and liked what I saw. I discovered the startup costs to be surprisingly modest and I loved the legal flexibility that would basically allow me to invest in any manner I saw fit.

Before the emergence of discount hedge fund startup shops over the past few years, I found the template for offering documents and lawyer fees could exceed $75,000. Since then, hedge fund boutiques had appeared, offering their administrative and startup services so startup costs did not exceed $10,000. That was some reduction!

I chose the second least expensive boutique I could find (probably something ingrained in me ever since my dad advised to always purchase the second cheapest bottle of wine from a restaurant’s wine list). Still, I was surprised there were so many forms to fill out and small fees to be paid, but I went along with whatever my fund administrator said because he had set up dozens of firms over the past few years. This was the real world so it would take patience, something never required of me in the trading world.

Lesson #2:
Everything takes much more time in the real business world compared to the trading world.

The ink on my letters of incorporation was barely dry when it hit me. I had been distracted by my quest for finding outside investors and creating all my companies that my trading had suffered as a result. Successful trading is all about focus, discipline and concentration and these lessons had been consumed by my ambition and greed. I had taken some rather stupid losses and now, with my fund inception just days away, I would no longer have that magic whole number in front of the millions of dollar under management. No, I would have to put a dreaded decimal point and some other numbers before the word million, hurting my credibility from the start.

Lesson #3:
Focus on trading first; never schedule investor meetings during market hours.

Meanwhile my fund administrator convinced me to switch brokers because my trusty online discount brokerages were simply not used in the hedge fund world. I quickly agreed, but I was in for a rather big surprise. This newly recommended brokerage did not have any electronic trading platform (I was told it would be ready within weeks) and the traders executing my orders gave me some of the worst executions I had ever seen. I called to complain, but they brushed me off. They placated me by saying their new online software was only days away from completion. Almost twenty months later, the software is still almost ready. I switched to yet another recommended brokerage that had online trading software and I became friends with one trader who expertly executed my larger orders.

Still, the commissions I paid were much higher than my previous setup so I asked for and received several price reductions, based on how much trading I did. It quickly became clear which broker I wanted to stay with when the broker without electronic access incredibly upped their commission on a trade without telling me. When I called to complain, the broker told me he knew I was paying more at the other broker and therefore he was entitled to the same rate. He was mistaken on top of the fact that he just had taken matters into his own hands without consulting me. The difference in price on that one trade was only a few dollars, but I lost my temper based on the principle of the situation.

Luckily, I had started chatting regularly with a popular industry commentator and he referred to me another broker that was perfect for short selling. This new broker’s online software, cost, and short-selling list blew away the competition so, I dropped my other brokers and focused on this new guy.

Lesson #4:
Do not feel bad about changing brokers if they are ripping you and your clients off. They are not girlfriends; there is always somebody cheaper and better out there.

The CEO of the brokerage I dropped called me to see what they had done wrong and ask why I had closed my account. I could not understand why it was so important my small fund stayed with their firm that supposedly had billions of dollars in accounts. My commissions with them barely touched into the thousands. As ridiculous as this conversation was, I respected this man for his dedication to providing customer service. Too bad their brokerage services weren’t up to par.

Every fund manager should price as many brokers as possible that fit the fund’s strategy. There are many brokers who may trade for themselves, but mainly exist and make money by taking their share out of our online trading commissions. They make their money from trading commissions—that’s the bottom line. There should be no reason to have to pay an individual representative of a major brokerage when we simply use their online software, but that’s the way it is. I am very skeptical when dealing with these people, and I do not feel bad about getting into arguments with them. In fact, I’ve grown to enjoy these fights.

Within a few months with my quality broker, my performance moved back to the range of my previous years, crushing the overall market and my investors were very happy. Yes, my parents and a few of their friends were elated. After months of solid performance that consistently beat the market, I still had yet to raise much outside capital. I realize now that it will take a lot longer than I originally anticipated, but I have made so much money in the past and I am confident in my skill as a trader and that is what gives me the faith to go forward. It doesn’t hurt that I make up a large portion of my fund so I can probably go on forever, however unhappily, even without many outside investors.

Lesson #5:
The larger the ‘nest egg’ stake the manager has, with the initial startup--the better.

When I first started my fund, I moved to New York City because I figured it was the epicenter of the hedge fund industry so I should be able to make thousands of investor contacts. I had met many potential investors and many in this industry, but no matter how many times people said they were interested, no checks were written nor wires sent.

One interesting meeting was with a senior manager of a major mutual fund company who had heard about my performance. I met him at his luxurious house in Florida and we proceeded to discuss my situation. After a few hours of listening to my story, he told me I was very smart and that I should focus on raising capital by changing my strategy around to suit potential investors. He told me in his years of experience, investors would be skeptical of such high returns and would want very low volatility. I told him in my years of outperforming the market I could care less if people accepted my strategy as I believed people will respond to performance. He’s probably right, but I take a certain pride in being a true rebel, a modern-day financial speculator.

Lesson #6:
Focus on what works for you and do not change to accommodate others.

Next, I attended a few alternative investment conferences and handed out plenty of business cards. I was even part of a panel discussion thanks to my fund administrator’s connections, but my speech sounded naïve and unpolished compared to the more experienced managers and veteran marketers in attendance. In fact, I was mesmerized by one particular fund marketer who had grown his fund exponentially over six months. I do not think he said one useful fact during his presentation, but he delivered an eloquent speech and several people, including me, approached him afterwards. Ah, the power of marketing skill. We discussed marketing my fund, but he charged some ridiculous fees without guaranteeing results whatsoever. I was just a startup fund; no matter how great he sounded, I wasn’t going to blow upwards of $10,000 all based on his incredibly polished speech. So, I decided to send out my marketing materials to all potential investors. I contacted just about everyone I knew, but the rate of follow-through was ridiculously minimal.

Lesson #7:
Raising money does not come easily for a startup manager.

There are very few reasons for individuals to take a chance on a new operation unless they have known you for years or if your performance warrants the added risk of being invested in a startup. People in large firms will not want to take a chance on your fund because of the minimal track record, lack of transparency of positions, and the volatility of returns. Their job is on the line with any investments they make, and if they mess up—they are fired. For the most part, they would rather underperform than risk losing big. This is what Warren Buffett once called the “institutional imperative.” It is a herd mentality, where these “institutional lemmings” move together, not necessarily doing what is best or smartest for their clients, but what is best and smartest for themselves. The decision to go with a high performing emerging manager is a risky bet, due to the outside chance of looking like a fool. No fund-of-fund manager will make that decision, because they will be fired or scolded if these risky investments don’t go exactly according to plan. Similarly, these emerging managers’ careers are to be ended if they do not make positive yearly performance each year.

My wonderful broker, who I was almost completely satisfied with after months of moving down commissions, recently baited me by saying one of his fund-of-fund clients might be interested in my fund since he was comfortable with my strategy and my performance had been above average. I had heard this many times before, from brokers trying to lure me to changing to their brokerage services to potential investors whose checks always seemed to get lost in the mail. Simple common sense dictates that when a fund-of-fund hears about me--if they are serious, they will contact me, not through my broker.

Full of doubt, I still met my broker and the fund-of-fund manager for lunch so we could discuss a possible investment. Initially, I grew rather excited because the conversation was surprisingly detailed as this manager actually did know about my fund! In fact, his talk of a possible investment sounded rather concrete and the proposed addition would increase my fund assets by 25-50%. We decided to meet again a few weeks later, so I spent hours creating a new presentation tailored to this fund-of-fund’s style. I never got to meet the fund-of-fund manager again, but my broker said he showed him my presentation and he supposedly loved it. The other day, my broker told me the great news. The manager had agreed to invest in my company without even needing to meet me again. Wow! Awesome! Of course, there was a catch. My broker felt horrible telling me (as he claimed), but he could only transfer the funds to me if the commissions on trades for this new investment were quintuple my normal rate! I felt my heart sink. I anticipated compensating my broker for this capital introduction, but quintuple fees with no hope for a reduction over time over the lifetime of the investment seemed somewhat ridiculous. I said no.

Lesson #8:

With cap intro, there’s always a catch.

My fund is listed on many hedge fund databases, but Hedgeco.net and Hedgefund.net have led to the most information requests by far. After a year of listing my fund, I have had over a thousand hits on my fund’s web pages. In fact, many third party marketers have contacted me through these websites. I have a premium listing on Hedgefund.net that costs the equivalent of a semester of college.

Some third party marketing firms have also contacted me. One marketer said he was showing my PowerPoint presentation to potential investors the day after I emailed him and he would get back to me. Three months later, he has yet to get back to me. Another marketer said he would work for my fund, but wanted 50% of the incentive fee I’d receive on any profits on the investment. Another wanted 30% of the incentive fee. With those kinds of figures, it would take me too long to make it worth my effort even if my returns continued to trample the market. I wanted to pay an upfront finders’ fee to them, but they knew that was not where the big money was. I understood their dilemma; why should they risk their entire reputation on a startup fund with only the chance for a small payoff?

But there was an individual that said he had the connections and was willing to take a job full time with me without taking more than 10% of the incentive fee. I just wanted him to introduce my fund to his connections because I have just a handful of family and friend connections that were wealthy enough to be potential investors. He demanded an exorbitant yearly pay for his services, and would not guarantee he could raise the millions he promised, but he was optimistic after reading my presentation and looking at my returns. I was happy yet skeptical that he did not want to know more about my strategies. It took weeks for him to “write out some contracts” and he insisted I only use his lawyer. Nevertheless, I was optimistic after having talked to him several times. But when I looked at the contracts, I was dismayed.

He wanted to focus on completely overhauling my marketing by creating new expensive presentations. He also tried to sell me on using his buddy as a graphics designer, supposedly the guy who designed the Oakley logo, to design an incredible logo for me that would surely attract investors! I am no marketing genius, but somehow I felt a new logo was not the problem and the Oakley guy was more than a little out of my price range. He also wanted to do a traveling road show to his contacts to present my fund so I could stay put and focus on my trading. Somehow paying for him to jet around the country without me was not my idea of a good investment. I told him no and I designed a simple logo on Microsoft Paint. I still receive many compliments on my simple yet modern logo each week.

Lesson #9:

This industry is full of frauds and con artists.

Are you seeing the pattern here yet? This industry is tough for the little guy because there are many promises and very little follow through. Not being able to advertise is very difficult and you must rely on contacts and networking for capital introductions. You have to be willing to give up your strategy and any chance at tiny yet consistent profits for a shot at the big time. I chose the other path; focus on what I do best and be content to make some decent money while waiting for more opportunities. I figure there will always be people who want to raise money for me and they will only multiply with time, especially if I keep outperforming the market. I do not want to compromise my trading and investing style and I accept the fact that it might take years for investors to come. Only performance and patience will create the path of success—a journey I am willing to take.

Lesson #10:

Results are much slower in the real world compared to the trading world.

Timothy Sykes is a hedge fund manager, star of the reality show Wall Street Warriors, and author of the upcoming book, "An American Hedge Fund" He can be reached at timothysykes.com

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More Investment Myths Exposed

2007-09-14T13:49:00.000-07:00

By Graham Dyer

Investment Myth: Stocks always rise in the long term. Don't try and time the market; what you need is time IN the market ! Just buy and hold."

You have no doubt had the experience of being urged like this by your stockbroker or someone else with a vested interest in you owning shares. Or it might have simply been a well-meaning friend. "You can't pick the bottom, just like you can't pick the top. So just buy stocks, and even if they fall in value in the short term they will always rise to a new high later on."

This sort of advice often goes along with the "Cash is Trash" mantra. Of course, if it were a realtor urging you, the "advice" would be quite different.

So, is it true? Do shares always rise in the long term?

That depends on what you mean by long term.

Ignoring dividends, if you had bought the Dow Jones index in 1965/66, do you know how long you would have had to wait to get your money back? Nearly seventeen years! That's right. The Dow first touched 1,000 points in January 1966 and then fell back. It never got back to 1,000 points until October 1982.

If you had bought near the top in 1929, do you know how long you would have had to wait for stock prices to get back to pre-crash levels? Twenty-five years! Yep, it was 1954 before the Dow put in a new high.

Apparently in the previous century there was a 43-year period during which Wall Street failed to reach a new peak.

More recently, in Australia, if you bought shares before the October 1987 correction, you would have had to hold them for a whole decade before they reached their pre-crash level again (apart from one fleeting touch in February 1994).

If you bought the Japanese Nikkei index before its peak in December 1989, you would still be down 50%, seventeen years later!

Wall Street's NASDAQ index is still about half what it was more than 7 years ago.

Does that answer the question?

Yes, shares will always rise in the long term. But you need to understand what is meant by "long term." Most who parrot the mantra never give it a thought.

Far better to know where the stock market is according to the Wave Principle, and to have the socionomic insight.

If you have not read my book or my newsletters, then here's a tip: Investing is simple. Just remember one rule - buy when prices are low; sell when prices are high.

Where is the stock market right now? High or low? So what should you be doing? Then why aren't you? It's human nature to do the opposite, isn't it? Why is that? Why does that leave you in danger? How can you avoid the mistakes that most investors eventually make?

Don't you think you need to understand the socioeconomic insight and the Wave Principle?

The Graham Dyer Newsletter has not missed a month’s publication since July 1983. His track record for forecasting is the envy of many, including the 1987 stock market crash, the demise of the Japanese economy and stock and real estate markets in the 1990s, the bull market for bonds from 1989, and the real estate boom this decade. His book is entitled: “How to Profit from the Coming Great Depression.” If you want to know the pitfalls of investing as well as the opportunities, Graham Dyer’s world class work is a must read. For more of Graham's work you can visit www.grahamdyer.com

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http://EzineArticles.com/?More-Investment-Myths-Exposed&id=578994

How The DOW Is Often Misused As An Indicator Of Likely Returns On An Individual Stock Investment

2007-09-14T13:39:00.000-07:00

By Aidan McNamara

Every asset class at some time or other has its day in terms of being the investment that offers returns superior to all other types of assets. Real estate, gold, fine art, fixed income instruments such as bonds, even in recent times the so-called alternative assets of private equity and hedge fund investments can be kings of the hill. However, over any very long period of time measured in decades, all the evidence suggests that investing in stocks - equity stakes in publicly traded companies - is the best way to achieve real inflation-beating returns.

It is typical of writers in the investing genre to use the statistical history of the Dow Jones Industrial Average (the Dow) to indicate the wisdom of investing in stocks. At first blush, the choice of this index may appear to be strange, given that it contains just thirty stocks (out of many thousands of publicly traded companies) whereas broader indices such as the Standard & Poor’s (S&P) 500 and the Wilshire 5000 Total Market Index cover much more broadly-based groupings of stocks. However, the general usage of the Dow in this way reflects both its longevity, (it has been around for one hundred and eleven years now and has been a thirty-stock index since 1928), as well as its general acceptance by investors, the media and the general public.

When someone remarks that “the market” is up 35 points today, they do not mean that the S&P 500 is up by that amount, nor the NASDAQ 100, nor certainly the Wilshire 5000. If “the market” is up 35 points then you can be sure this refers to an increase that day in the Dow Jones Industrial Average. It is precisely for this reason that the use of the Dow, whatever weaknesses it may have in other ways, makes perfect sense as a day-to-day gauge of what the market is doing. In effect, precisely owing to this level of acceptance, the Dow is the most logical index to use to act as an indicator on movements within “the market” overall because, to all intents and purposes, the Dow is the market.

This general acceptance and longevity have the additional effect that the Dow is consistently used as a market proxy by investment writers wishing to demonstrate how over very long periods of decades and more investing in stocks has been the smartest investing practice. This is especially well illustrated by showing the upward advance of the Dow in graph form. The message is clear – there is an obvious ever onward and upward progression of the index. This can be used to bolster the argument, very typically used by writers on investing, that if you had bought stocks say in November, 1972, when the Dow closed above 1,000 for the first time, then your investment would have been worth over thirteen times that initial investment in 2007 with the Dow today at well above the 13,000 level.

Leaving aside the fact that during the 35 years from 1972 to 2007 inflation would have eaten up a large portion of the nominal gain, (but also on the flip side the fact that over the same period dividend payouts would have made up a good part of any losses from inflation), our argument that the use of the Dow by investment writers in this way is misleading hinges on the fact that the Dow is itself in no way an immutable index. It is subjected to a kind of regular housecleaning by the editors of the Wall Street Journal who every few years bring into the Dow Jones Industrial Average companies that are dominant in the economy of the day, and throw out those that are not considered dominant enough, either generally or in their own industry sector. Therefore, they ease out the old-economy, smokestack, buggy-whip making has-beens of yesteryear, and replace them with the zippy bright new-economy stars in growth mode. This process over time can clearly be demonstrated by comparing the make-up of the Dow at the time that it first closed above 1,000 in 1972 and the make-up of the index today.

Then: Allied Chemical; Aluminum Company of America; American Can; American Telephone & Telegraphic; American Tobacco; Anaconda; Bethlehem Steel; Chrysler; DuPont; Eastman Kodak; Exxon; General Electric; General Foods; General Motors; Goodyear; International Harvester; International Nickel; International Paper; Johns-Manville; Owens-Illinois Glass; Procter & Gamble; Sears, Roebuck & Co.; Standard Oil of California; Swift & Co.; Texas Corporation; Union Carbide; United Aircraft; U.S. Steel; Westinghouse Electric; Woolworth.

Now: 3M Company; ALCOA; Altria Group; American International Group; American Express; AT&T; Boeing; Caterpillar; Citigroup; Coca-Cola; DuPont; Exxon Mobil; General Electric; General Motors; Hewlett-Packard; Home Depot; Honeywell International; Intel; IBM; Johnson & Johnson; JP Morgan Chase; McDonalds; Merck; Microsoft; Pfizer; Procter & Gamble; United Technologies; Verizon; Wal-Mart Stores; Walt Disney Co.

These different renderings of the Dow Jones Industrial Average demonstrate that the use of the index as if it is unchanging and somehow carved in stone can be misleading. The use of the index as a statistical proof of the history of “the market” is in truth compromised by the regular changes in its component parts. Yet it is convenient for those writing on long-term investing strategies to use the progress of the Dow over many years to demonstrate not just the general upward trend in the market over time, which is a fact, but much more tenuously that of individual stocks comprising “the market.”

Should a writer voice the opinion that an investment in “the market” in 1972 would be worth thirteen times that investment today, he or she would be ignoring the fact that any return would depend on which stocks had been selected for investment back in 1972. Buying into the market at that time could involve purchase of Dow component stocks that later did well, Dow component stocks that later did badly and are no longer part of the Dow – and of course for the most part it would probably realistically mean investment in stocks that were not part of the Dow index then or now. Indeed, exactly the same issue would arise for a broader index such as the S&P 500 which is also constantly refreshed by additions of fast-growing companies and demotions of slower-growing ones. Moreover, companies that are acquired by larger, more successful companies are deleted and always replaced in the index by promising up-and-comers.

A straight comparison of an index at one point in time with the same index decades later masks the significant rotations of sectors within the overall market that are always taking place. Developments in technology, lifestyle choices and general business and consumer trends are subject to changes that can be cyclical in nature, as certain industries or companies and their products come in or out of prominence. Management miscues, competitive developments or even legal liabilities, (did we hear someone say Asbestos?) can also lay low a stock that looked promising at the time of investment and can make its performance over time very different from that of what is being referred to as “the market.”

The only way that comparisons of indices over many years as a measure of investment performance can truly be considered accurate is for the investor who puts his/her money into a market index fund which is managed to replicate the movements of the index on which it is based. Otherwise you really cannot directly extrapolate from the historical trend lines of any index, including the key Dow Jones Industrial Average, the likely success of any individual stock in which you may choose to invest over the very long-term. Put bluntly, individual stocks potentially have a shelf life and are perishable, even though the overall market over time may go marching on.

This article was written jointly by Aidan J. McNamara and Martha A. Brozyna

Aidan McNamara is associate publisher at The Deal LLC in New York, publisher of the weekly financial magazine The Deal as well as The Daily Deal and TheDeal.com. He holds an MA (with distinction) in Area Studies (Eastern Europe and Russia) from the University of London, 1981 and a BA in German from the University of Manchester.

Martha A. Brozyna received a Ph.D. in history from the University of Southern California in 2005 and a BA in history and political science from Rutgers University where she graduated Phi Beta Kappa in 1995.

McNamara and Brozyna are the authors of Contrarian Ripple Trading: A Low-Risk Strategy to Profiting from Short-Term Stock Trades, scheduled for publication by John Wiley & Sons in October 2007. Martha Brozyna published Gender and Sexuality in the Middle Ages: A Medieval Source Documents Reader in 2005 (McFarland & Co.)

The authors have additional information on themselves and their forthcoming book at their website http://www.ridetheripples.com

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Why Do Value Stocks Tend To Come Out Ahead?

2007-09-14T12:56:00.001-07:00

By David Van Knapp

Since about 1990, it has been accepted practice in the investing world to divide stocks into "growth" and "value" categories. Furthermore, over long periods, value stocks tend to have greater total returns than growth stocks. Warren Buffett's empire is built on this fact.

Why is this true? First, let’s define what the terms mean. Value stocks are the ones that have low Price-to-X ratios, where X may be book value (P/B), earnings (P/E), or sales (P/S). Growth stocks generally have high growth rates in things like earnings and sales.

Because of the way the market tends to value stocks, those with high growth rates also tend to have high Price-to-X ratios. So a simple and common way to categorize a group of stocks is to rank them from high to low on a Price-to-X ratio basis, and then draw a line straight through the middle of the list. Everything above the line (higher ratios) is considered a growth stock, everything below the line is considered value.

This is a pretty crude, some might say simplistic, distinction. After all, if you divide the S&P 500 into two groups as just described, is there that much difference between the 250th and 251st stocks? Of course not. Yet the first will be called a growth stock, the second a value stock.

Nevertheless, studies show consistently that value stocks (as a group) outperform growth stocks when stocks are held for long periods. For example, between 1983 and 2006, value stocks outperformed growth stocks in 16 out of the 24 five-year holding periods that ended in those years. From 1979 through 2006, the Russell 1000 Value Index returned 2.4% more than the Russell 1000 Growth Index. (Each index is reconstituted annually.)

Why do value stocks produce higher long-run returns?

There are several reasons:

The first reason derives from the way the two categories are constructed. By definition, if growth stocks include all stocks above the median Price-to-X ratio for a given universe of stocks, the growth category will include practically all the stocks in that universe that are overvalued—priced too high compared to what they are really worth. Investors as a group have a tendency--when analyzing fast-growing stocks--to overestimate both the rate of growth and the timeframe during which fast growth can be sustained. They therefore tend to overvalue such stocks. Over time, the inexorable market forces of rationality and reversion to the mean will bring these stocks, on average, closer to their true worth. Overvalued stocks will see their prices reduced (or grow more slowly) in comparison to their value-stock cousins.

The same principle works in favor of the value stocks. That group, by definition, contains almost all the stocks that are undervalued. Market participants as a group tend to underestimate the growth potential of slower-growing stocks, some of which may just be living through a tough patch in their business and so are undervalued. The same market forces as previously mentioned will tend to bring the prices of those stocks up relative to the growth group.

The second reason is a camouflaged outcome of the long-holding-period ground rule. None of the studies consider what happens if an investor utilizes sell-stops or some other selling discipline to lock in gains or curtail losses on his or her holdings. Many sensible investors buy growth stocks because they are on a tear, growing not only their revenues and earnings but also their stock prices. If there were a law that any stock, once purchased, must be held for five years (the holding period reflected in the study mentioned earlier), not many rational investors would participate. It is unreasonable to expect a fast-growth stock to outperform for five years running. So the rules of the studies are stacked against growth stocks and in favor of value stocks.

A third reason is that the value group tends to harbor more dividend payers. Several studies have shown that dividends—especially reinvested dividends—account for up to half the total return of stocks over long periods of time. So again, the growth stocks are at a long-term disadvantage compared to the value stocks--but not necessarily at a short-term disadvantage.

What are the lessons for the individual investor? To me, there are three:

• It is reasonable to have a “value tilt” to one’s stock holdings. That said, remember that the value advantage tends to reveal itself over long holding periods. If long holding periods do not suit your personality, be careful. You will find it psychologically difficult (or impossible) to hold onto a declining or “dead money” stock for a long time while you are waiting for the market to figure out its true value—which may take years. Not only that, you may be wrong about the stock’s potential. Just because a stock is a value stock does not mean that its price is going to rise. It may have a justifiably low valuation because it is a lousy stock. Which leads to lesson number 2:

• Analyze your purchases before making them. Take a holistic approach. Don’t buy any stock just because it is a value stock, pays a dividend, or for any other single reason. Know why you are buying a stock before you buy it. Look at it from multiple perspectives. The crude value-versus-growth categorization is just a single factor, and perhaps not a very helpful one at that.

• Have an exit strategy. Whether you use sell stops or some other discipline, you should know under what circumstances you will sell every stock you own. If a growth stock does great for you for a year or two but then goes into reverse, sell it, unless there are good reasons which you can articulate for holding onto it. Don't feel that you have to be in the buy-and-hold school to be a good investor.

Dave Van Knapp is the author of Sensible Stock Investing: How to Pick, Value, and Manage Stocks. If you would like to learn about a stock investment approach that uses the same strategies reflected in this article, please click on this link to go directly to the book's page on Amazon.com: http://www.amazon.com . Or click on this link to learn more about the book and its sytematic approach to investing: http://www.SensibleStocks.com . Thank you.

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Best No Load Mutual Funds - Mutual Fund Research Matters!

2007-09-14T12:50:00.000-07:00

By Michael Weiss

Finding the best no load mutual funds is no easy task because today’s top funds often become tomorrow’s worst performing funds and vice versa. As the saying goes, “the faster they go up, the faster they come down.” The temptation for the average person to invest in this year’s best performing funds is almost overwhelming. Unfortunately, investors all too often focus solely on historical performance without considering how the fund achieved the superior results or whether the results are sustainable.

Mutual Fund Research

The better way to perform mutual fund research is to focus on factors that will stand the test of time such as fund expenses as well as the experience of the fund manager and the depth of his or her research team. Expense ratios, which are generally comprised of an investment management fee, a 12b-1 fee and other operating costs, do not typically deteriorate over time. Further, expenses vary considerably and can sometimes help explain the performance differential between the best no load mutual funds and the worst no load mutual funds over time. This is especially true for fixed-income funds, where sometimes only one or two percent separates the best from the worst funds.

Portfolio Manager and Analyst Qualifications

Even more important to selecting funds that will be the best performers for years to come is the background and experience of the manager and his or her investment team. As the publisher of a mutual fund report, one of the most time consuming aspects of my research is evaluating a fund’s manager and investment team. Portfolio managers should have experience in a variety of different market environments. The more experience, the better, provided that the portfolio manager is not close to retirement. In addition, the manager and his or her team should have high quality educational backgrounds and/or well-regarded designations. It has been my experience that managers with better credentials are more successful than managers with lesser credentials. Further, managers with high quality backgrounds seem to have better mutual fund research staffs than lesser-qualified managers.

Investment Approach

You should also probably consider a fund’s investment style and whether it changes over time. The better funds employ very consistent investment approaches that rarely deviate from their stated policies. At the very least, if you are invested with a fund with a consistent approach, you will know what to expect in both good and bad markets.

Avoid the Media Darlings and Do Your Research

Investors should try to avoid the high-flying, top performing funds that often get quite a bit of media attention, but inevitably can never live up to expectations. Instead, investors should go the extra mile and delve into the world of mutual fund research. Mutual fund investing can prove to be a very lucrative endeavor, but usually only when you do the necessary legwork.

You can click on the following link to learn more about The Mutual fund Investor’s approach for selecting no load mutual funds

Michael A. Weiss, CFA is the editor of The Mutual Fund Investor, a quarterly publication that provides recommendations for some of the best no load mutual funds in various investment categories. To learn more about The Mutual Fund Investor, please visit http://www.mutualfundinvestor.net/ Or, for information on how to obtain a sample copy, you can click on http://www.mutualfundinvestor.net/Try_it_Free.html

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Weighted Average Cost of Capital WACC, Commodity Historic Prices, Index Prices, and Country Risk

2007-09-14T12:47:00.001-07:00

By Mike Ashley

The Weighted Average Cost of Capital (WACC) is a calculation of a company's proportionately weighted capital according to specific categories. All sources of capital - common stock, preferred stock, bonds, and any other debt are included. It's computed by multiplying the cost of each capital source by its proportional weight (% of total capital) and then working through this equation.

WACC = (E/V) * Re + (D/V) * Rd * (1-Tc)

Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm’s equity
D = market value of the firm’s debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

The WACC is useful in determining how a company gains its capital. Is it financing itself through debt or equity? The WACC helps answer that question. Computing WACC offers insight into a company’s ability to make returns upon its investments and, hence, money for investors. The WACC is often used by internal management to steer the company toward beneficial, moneymaking projects and away from losing ones.

A historical commodity price index will illustrate prices of a commodity at specific historical times. Over a given period of time the average of these indexed prices gives the commodity’s historical price. Speculation on future commodity prices can be made on fluctuation’s of the commodity’s historical price. The spot commodity price is the price of a commodity “on the spot” where it is being sold on the cash market.

Index closing prices are the numbers we hear given on nightly news broadcasts. The NYSE index and NASDAQ index are both examples of whole market stock indices. The Dow Jones Industrial Average and the S&P 500 are examples of broad-base stock indices. The prices of these broad indices are determined by using the closing prices issued by the primary exchange for each member stock in the index. If the price changed during the trading day, the new price is used to calculate the index closing price. Thus, with the S&P 500 calculations of price fluctuations for all 500 member stocks each day are made to determine the daily index price.

Country risk rates reflect the risk of investment in that country. Government stability, both political and financial, factor into this heavily. Banks may use this term to determine whether or not it wants to provide financing to a company that does a lot of business overseas. The magazine Euromoney puts out a survey of country risk and ranks them.

Learn easy stock market trading essentials and terms such as WACC formula and country risk assessment when you visit http://www.tradingsphere.com - the online stock market tips and resources.

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Offshore Investment Is Beneficial To Investors For Reduced Taxes

2007-09-14T12:44:00.001-07:00

By Dean Forster

In the world of investments there are numerous types, styles and varieties of investments that range from the simple to the complex. You can decide upon using local investments, investments that are in the same country and even those investments that are across the ocean in a different country. Some countries have various rules and requirements governing the types of offshore investments that citizens can participate in, but these rules and guidelines are usually entirely possible to still actively make offshore investments without being restricted.

One benefit to an offshore investment is you are able to find new types of investments that are not normally available in the country where you reside. The exact definition of an offshore investment is investing in a country that is not the same country where you live. There are several benefits to using offshore investments and the exact reasons vary widely depending upon the exact needs and wishes of the investor.

Typically an offshore investment is good for investors because of the reduced taxes that can be charged on the profits from the investment. While of course the number of benefits you can find vary depending upon your exact tax status as well as the amount of money you are investing there are some ways you can reduce your overall tax burden by moving the investment to an offshore investment rather than keeping it at home.

It is important to ensure that you are careful in making sure all information is fully filled out before your tax process comes around. Many people use offshore investments to hide illegal money or to interact in less than ethical practices with money so the tax departments of many governments tend to look carefully into these transactions to ensure that they are perfectly legal and there is no illegal transactions taking place. You should use an accounting if you are working with offshore investments to ensure that you are adequately protected.

When using an accountant for your offshore investment it is a good idea to seek out an accountant who will offer audit protection in the event that they make a mistake so that you are not losing all of your potential profits to fines and penalties because your accountant has made a mistake. This is very important and most reputable accountants offer this service to help provide clients with reassurance. You can find out more about investment and hedge funds at vega-asset-management.com

There are several good reasons why offshore investments are good, with several of the reasons revolving around fewer regulations, tax savings and even greater privacy for the investor. These reasons along with asset protection help encourage more people to seek offshore investments each year. One of the most popular places to see offshore investments tend s to be the Cayman Islands because of the openness and flexibility of the investment and tax laws in the area.

Regardless of your reason for looking to offshore investments it is always a wise idea to ensure that you are looking for investments with a good financial professional who can help you ensure that you are making good decisions regarding investments before you spend your money. Careful planning will help you reap the best rewards for your offshore investments.

Article by Dean Forster at http://www.vega-asset-management.com . More great free information on investing and hedge funds at => Vega Asset Management

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Top Mutual Funds - Building No Load Mutual Fund Portfolios

2007-09-14T12:36:00.001-07:00

By Michael Weiss

Building a mutual fund portfolio requires a well thought out investment strategy that can prove rewarding over a long period of time. If you act as your own investment advisor, you will most likely implement a strategy that focuses on no load mutual funds. No load mutual fund investors normally either invest in the best mutual funds from one fund family, sometimes with the help of a mutual fund newsletter, or invest in the top mutual funds from several fund families. The rationale for implementing either of these strategies depends at least partly on your view on how to best add value to a portfolio.

Selecting the Best Mutual Funds From One Fund Family

Investors who believe that asset allocation is more important than manager selection are the likely implementers of a single-family approach. As long as you can find a fund company that offers high quality no load mutual funds that cover a wide variety of sectors and styles, you should be able to implement this approach. This strategy is top down and active in terms of asset allocation but passive regarding manager selection. While fund managers are important here, they do not drive the investment process. Several mutual fund newsletters offer model portfolios comprised of mutual funds from one fund family.

Selecting the Top Mutual Funds From Several Fund Families

The multi-family strategy normally incorporates a top down as well as a bottom up approach to investing no load mutual funds. For the purpose of this article, top down refers to asset allocation while bottom up deals with manager selection. Investors using this approach create a desired allocation and then select the best funds available to implement the strategy.

Which is the Better Approach?

Single-family and multi-family investing are both viable investment strategies. However, spreading the risk among several companies can reduce what I would call mutual fund company risk. Fidelity and Vanguard are very highly regarded and successful mutual fund companies today, but no one knows what the future will bring. No company is infallible, as we have seen in recent years with the demise of top companies once considered to be leaders in their fields. Further, there is no reason why a person cannot invest in no load mutual funds from several companies. Sure, you are likely to get a plethora of statements in the mail, but you could opt for electronic delivery. Unfortunately, far too many people consider the volume of mailings to be a factor when choosing an investment program.

The Expense Factor

Whether you decide to invest in the no load mutual funds from one family or several, please make sure that you are selecting funds with relatively low expense ratios. The evidence is clear and convincing that mutual funds with low expense ratios outperform funds with high expense ratios. This is especially true for funds that invest in the large-cap sector, where it can be difficult for a manager to outperform the S&P 500 Index, a widely used benchmark for large-cap mutual funds. In the large cap-world, information is widely known and some managers find it challenging to add value through fundamental research.

Parting Advice

The decision to invest with one family or several can be very personal. Some people fall in love with their fund companies just like a portfolio manager falls in love with a sector and refuses to expand into other parts of the market. Emotions tend to cloud your judgment, leading to less than optimal investment decisions. Although as humans we are innately emotional, when navigating the investment world, you are better off making rational investment decisions.

Michael A. Weiss, CFA is the editor of The Mutual Fund Investor, a quarterly publication that provides recommendations for some of the best no load mutual funds in various investment categories. To learn more about The Mutual Fund Investor, please visit http://www.mutualfundinvestor.net/. Or, for information on how to obtain a sample copy, you can click on http://www.mutualfundinvestor.net/Try_it_Free.html.

Michael Weiss is also the Chief Investment Officer of Timeless Capital Management, an investment advisory firm registered in New Jersey and Pennsylvania.

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Variable Annuities - The Uncensored Version

2007-09-14T12:34:00.001-07:00

By Don Conrad

With all the investments out there such as mutual funds, exchange traded funds, hedge funds, stocks, bonds, etc., why then the huge attraction to variable annuities? You can’t pick up a newspaper, turn on the television, listen to the radio, or have a conversation about investments without the subject of variable annuities (VA’s) coming up. So, what’s all the buzz about? Well, ironically, all of the hype that’s pushed to the forefront is almost always negative. Nevertheless, the latest estimates are that close to one trillion dollars are invested in VA’s. What does a statistic like that signal to investors? It tells you that something good must be happening, right? Why would so much money be invested in variable annuities if people weren’t benefiting in one way or another?

Well, here’s the inside scoop: Although several variable annuities are great additions to many investment portfolios, certain ones at times can be detrimental to the overall health of any portfolio. This can be due to potential lengthy lock-up periods, high expense ratios, and possible conflicts of interest that can arise because of the often high commissions paid by the investor. As you know, anytime large commissions are involved in sales, misrepresentation, lack of disclosure, and other types of foul play can be involved as well. Some of the people that are selling VA’s see it as an opportunity to make a fast buck.

Unfortunately, in the process, trusting investors not well versed in this area of expertise can find themselves on the short end of the stick. When this happens, the real tragedy is the major group affected by it; that’s typically seniors 50-80 years old who are gearing up for, or are already in, retirement. Both groups are almost always in a position where money saved up can rarely be recovered by the remaining years of work or through returning to the work force and starting over again. And remember, in a lot of cases, it’s their lifelong savings we’re talking about! This is another classic example of the ‘One bad apple theory:’ A few brokers/agents illegally putting their own selfish interests first, ahead of the well being of their clients. And unfortunately, this has rung true, and has been a rapidly growing phenomenon.

Here’s the good news: A lot of these potentially abusive policies have been sold outside of New York State, where the insurance laws are more lenient. The way this works is each state usually has its own rules and regulations governing the insurance industry. New York State is one of the most highly regulated and toughest states in the country to do business in for the insurance companies. For an insurance company to do business here, they must agree to participate in the New York state insurance pool. This pool helps insulate investors from the risk of losing their money in the event their insurance company should go bankrupt. Well, that protects you if the insurance company screws up, but that doesn’t seem to be where the problem lies today. What we see as the major problem is this: How can investors today protect themselves from getting ripped off or ill advised from one of these “bad apple annuity salespeople?”

First, it probably makes sense for us to give you a little background on what a variable annuity is. A variable annuity contract allows you to allocate your premium among a number of investment portfolios, consisting of any mixture of stocks, fixed income instruments or money market accounts. Your contract value will reflect the performance of the underlying investments held in those portfolios, minus the contract expenses, and is subject to market risk, including the potential loss of the principal invested. A variable annuity is a personal retirement account that brings together the best features of managed investments and insurance. Your money accumulates tax-deferred in professionally managed funds until withdrawn. And, you can feel safer knowing your beneficiaries will receive benefits upon death. In addition, guaranteed income and principal protection can be purchased within the contract. After everything our country has been through over the last few years, many investors are willing to pay for these guarantees. Because of the potential to have tax-deferred growth with guarantees in place, more and more people are looking to variable annuities as a panacea to stock market uncertainty. Here’s a case that just recently crossed our path.

When Mr. and Mrs. Jones came into our office inquiring about variable annuities a few weeks ago, with all the buzz previously discussed, we expected them to be more thoroughly versed on the topic. During our consultation, we found out very quickly that they were not. They had violated one of the cardinal rules of investing. Mr. and Mrs. Jones had not educated themselves on the topic of variable annuities. They actually said the reason they’re interested in variable annuities is because their friends have them and continuously rant and rave about how good they are. We see it in our business often; investment decisions, regardless if correct or incorrect, being made for the wrong reasons. It ends up that the Jones’ are a great example of a situation where we feel that a variable annuity would be a fitting investment that would assist them in meeting their needs and financial goals.

Here’s why: Mr. and Mrs. Jones are both 68 years old and have been married for 39 years. They’ve both just recently retired, and are currently receiving monthly social security and pension payments. Between the two of them, their monthly intake is $4,500. Their regular expenses average at $5,000, with an additional $500-$1,000 spent for miscellaneous reasons. Because of the $1,000-$1,500 monthly shortfall that usually exists, their main need is to supplement the payments they receive with an additional income. This supplement would be essential in helping them to meet their necessary expenses and have some money left over for travel, entertainment and life’s unpredictable expenses that seem to have a habit of always coming up. They were interested in choosing an investment path that would give their money a chance to grow rather aggressively, tax-deferred, while minimizing downside risk and maintaining principal protection, while concurrently serving as a reliable income source (a case not unfamiliar to us). Because of the needs, risk tolerances, and financial and personal situation of Mr. and Mrs. Jones, the variable annuity not only was a good fit, but the best we could figure.

When shopping for annuities, or any type of investment for that matter, the first thing we recommend doing is to make a list of your needs, goals, time frame, and desired investment amount. That is the first thing we did with Mr. and Mrs. Jones when they walked into our office. Even before discussing annuity types and insurance company ratings, you need to have a plan with goals clearly laid out. We usually create a grid for comparative purposes where each category can get a checkmark and weighting so that priorities can be determined. Some important categories to analyze when dealing with variable annuities are expense ratios, lock-up period lengths, annual withdrawal limits, penalties, surrender charges, and age constraints for certain benefits within the annuity. Benefits often discussed are guaranteed income options, up front bonus options, stepped-up death benefits, etc. That is why it is important to take the approach that allows one to visually understand and weigh what you are getting for the amount you’re paying.

There are many reasons why investors, like Mr. and Mrs. Jones, may choose to go with a variable annuity rather than more typical types of ‘safe’ investments, such as bonds. Although bonds can serve as a stable source of fixed income under many circumstances, the returns are often not enough for many. With the 10-year Treasury bond currently yielding a return of 3.9%, versus the 6.5% the S & P 500 is yielding, it’s no wonder more people are turning to more aggressive options that strive to take advantage of upswings in the market, while providing some type of ‘protection’ on the downside. That is when the variable annuity becomes an option you may want to explore. But with more VA’s to choose from than there are pain relievers on a drugstore shelf, how can you choose the annuity that is most appropriate for you, if it is appropriate at all in the first place?

Well, the answer lies in education. We’ve found out over time that there is no single best way for one to educate himself/herself. Whether it’s reading a book about VA’s at a local bookstore on a Saturday afternoon, attending a two-day seminar, listening to a set of audio tapes in the car during your drive in to work, or enlisting the help of a trusted advisor; any of the above methods, in addition to many others, can be extremely helpful in getting familiarized with the wide array of investment vehicles available to you. In this case, the cliché ‘knowledge is power’ proves to be very true. It’s the difference between developing a general understanding of what are fitting investments that will help you reach your financial goals, or just getting lost in the mix. This idea has been proven to us over and over again.

When the client is informed and has all of his or her questions answered, not only does their satisfaction increase, but also their comfort level with the decisions that are made. Some investors might feel a little intimidated by this process, but that’s ok and perfectly natural. There are literally thousands of different routes one can take when investing, and it’s not always easy to know which one is in your best interest, but that is why a trusted advisor is there. After you’ve gained a feel for what is available out there and what you’re looking for, then it’s often wise to consult with a trusted advisor in order to have a professional opinion that is keeping your best interests in mind.

In the end, a good indicator of how qualified the annuity specialist you’re dealing with is would be your gut feeling. This should be the final deciding factor, and arguably the most important. If Mr. and Mrs. Jones can look this person in the eye and feel as though he or she is keeping their best interests in mind, they’ll most likely feel good about the idea of working with this person. If everything else mentioned above checks out ok, chances are the Jones’ will be comfortable with the decision they come to make. This in turn usually leads to a feeling of strong gratification when the expected outcome of your investment decision becomes a reality.

Don Conrad is president of Conrad Capital Management, an independent registered investment advisor, in Melville, New York. Can be reached by phone: (631) 439-7878 or email: don@conradcapital.com

Don started his career in the late 1970s at a nationally recognized mutual fund company and was recruited after three years by E.F. Hutton Company to work in the consumer retail division. During his thirteen-year tenure there, he spent two years specializing in and trading the 30-year treasury bond. For the last five years, he served as a senior vice president focusing his efforts in the Consulting Services division, maintaining offices in both Long Island and Manhattan.

In 1993, he was recruited by PaineWebber as a Senior Vice President in the consumer retail division. In addition to managing his client’s assets, he was asked by senior management to conduct a nationwide tour to train financial consultants in the Consulting Services division. Don also made a video on the use of advanced technology in the financial services industry. This video was distributed to PaineWebber offices internationally.

After almost five years at PaineWebber, Don decided to pursue his dream by starting Conrad Capital Management in order to offer his clients more choices and flexibility.

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Private Equity Firms Are Vital Components in Today's Global Economy

2007-09-14T12:22:00.001-07:00

By Louis Victor

Gone are the days of true corporate raider, where companies were torn apart and sold off to the highest bidder. The misconception in today’s market place by investors, not institutional investors mind you but individual investors, is that when a Private Equity Firm takes over a public company that the corporate raider mentality comes into play. This is far from the truth actually.

Private Equity firms, as it relates to public companies, add true value through restructuring. Keep in mind that when a public company does anything dramatic that could temporarily reduce a company’s earnings or asset base, the street is unforgiving. Its this fear that actually puts a blockade in place and prevents most public companies from doing what a private equity firm is already geared up to do, and that is reduce the fat, build a strong sound foundation and add true growth to the company.

From putting in key management, lining up strategic acquisitions and building on the company’s core business, Private Equity is sometimes a public company’s best friend.

Take for example Sears Holdings (NASDAQ: SHLD), the company was trading on the NYSE and floundering, today the company trades on the Nasdaq, hit a 52-week high of $195.18, acquired K-Mart in the process and solidified their position in the retail industry once again. This was all made possible by a move from Mr. Eddie Lampert, yes Private Equity was the key in the current success of Sears.

My point is in today’s marketplace there are many private equity firms or funds, both large and small, that are active, some are publicly traded such as The Blackstone Group (NYSE: BX) and KKR Financial (NYSE: KFN), some are extensions of brokerage firms such as Goldman Sachs (NYSE: GS), Bear Stearns (NYSE: BSC), Credit Suisse and even banks such as Citigroup (NYSE:C), while others such as Venrock (www.venrock.com), founded by Laurance Rockefeller, General Atlantic (www.generalatlantic.com), United Max International (www.unitedmaxintl.com), and Matrix Partners (www.matrixpartners.com), are privately held, but they all have one thing in common. They all bring experience, value and positive change to the companies that they either acquire or make an investment in.

Make no mistake they are not passive investors, they are all looking to turn a profit for their investors and that only comes through their contacts, experience, chosen management team, portfolio companies and eventual exit strategy.

Basically Private Equity is good in today’s marketplace and they are in their element as they pick up the pieces of fractured companies that investors have begun to abandon.

Now the next logical question that an investor may have while reading this article is how do we as an individual investor participate in this trend. Well the first point is that any investor in a hedge fund or private equity fund has to meet certain criteria before they are allowed to participate, they are known as accredited investors.

An accredited investor can actually seek out some of the major funds that I’ve mentioned already or they may be approached through their current stockbroker, but for those that may not be looking to invest $250,000 to 1,000,000 into a private equity situation, then their next step is to look at smaller specialty funds that may offer units in the price range of $25,000 - $50,000 per unit, which may be more reasonable to an individual investor.

Of course the fund manager and his team are very important things to take into consideration when making a selection. The ones that were mentioned today are not a bad place to start as some private equity firms may be in the midst of creating another fund within the family.

So Private Equity, although most times misunderstood, is a vital part of today’s marketplace because without private equity firms making investments in failing public and private companies, investing in new technology and bringing investors along for the ride, global markets would not be as strong as they have been. Without a doubt companies such as Sears, K-Mart, Burger King and countless others would be chapters in a business history book as opposed to being thriving entities, employing thousands and feeding the U.S. economy.

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About the Author - Louis Victor is the host of the syndicated radio show and financial newsletter "Wall Street to Main Street" which is featured on the NAMC Newswire Radio. He has been involved in the financial industry for over two decades, on the retail and investment banking ends. He is also well versed in the advertising and marketing industries, which has given him insight into market trends and unqiue companies that may be under the radar. Currently he assist organizations in their private commodity transaction and capital raising endeavors through his global connections. He is a managing partner of the firm NAMC Worldwide and has been recognized for his many accomplishments globally.

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Mutual Fund Investing - ETFs and Index Funds Versus Actively Managed Mutual Funds

2007-09-14T12:08:00.001-07:00

By Michael Weiss

There are two distinct schools of thought when it comes to mutual fund investing. One group, which I will call, “Asset Allocators”, utilizes what is commonly referred to as a top-down mutual fund investment approach. The top-down approach to mutual fund investing emphasizes the big picture by first examining the economy and condition of the broad financial markets and then evaluating individual mutual funds based on standard financial measures of comparison.

At the extreme, asset allocators may not even invest in mutual funds, believing that exchange traded funds (ETFs) are reasonable substitutes for actively managed mutual funds. Investors use ETFs for a variety of reasons but the most important and logical basis for using these financial instruments is their normally low costs, tax-efficiency, style purity as well as their specialized focus. There are many ETFs that emphasize individual parts of the market such as financials, technology and healthcare. The asset allocator who believes that technology will perform well over the next year and does not want to pay an active mutual fund manager to get this exposure would buy a technology ETF.

Asset allocators may also use index funds as a substitute for actively managed mutual funds. Index funds normally offer investors low costs, style purity and tax efficiency. Index funds strive to replicate the performance and characteristics of common benchmarks such as the S&P 500 Index and the Russell 2000 Index. Not all index funds are clones of their respective benchmarks. Some mutual fund companies design index funds to replicate the performance and characteristics of a benchmark without actually holding all of the securities in that benchmark.

The pure asset allocators prefer ETFs and index funds over actively mutual funds on the theory that mutual fund managers cannot outperform benchmarks on a consistent basis. To an asset allocator, it makes no sense to pay a mutual fund manager to under perform its benchmark. There are many financial planners and other investment professionals that utilize this approach. The use of ETFs and index funds is actually a reasonable approach if one of your goals is to create a low cost structure for your clients. On the other hand, it is not very client friendly for investment professionals to use these low cost financial instruments while still charging high fees.

Mutual Fundamentalists and Actively Managed Mutual Funds

The second group, which I will call, “Mutual Fundamentalists”, care very little about the broad market and invest almost entirely based on the fundamentals of each particular mutual fund. These somewhat rigid investors might not entirely ignore the economy and market conditions, but these issues do not drive their investment processes. Mutual fundamentalists focus on factors such as the historical performance and risk attributes of different asset classes, expenses, volatility, and especially portfolio manager and analyst backgrounds. For many mutual fundamentalists, quality of management is the most important factor when evaluating a mutual fund.

Mutual fundamentalists fully acknowledge that some passive investment strategies make sense for specific investment categories, but vigorously disagree with a blanket statement asserting that active portfolio management has no value because portfolio managers cannot outperform benchmarks. Mutual fundamentalists believe that there will always be a large group of portfolio managers who have the ability to outperform benchmarks, but that investors need to do their homework in order to find them.

Combining Asset Allocation and Mutual Fundamentalism

A better approach to mutual fund investing might be to combine the best attributes of asset allocation and mutual fundamentalism. With this approach to mutual fund investing, you could get the best of both worlds. You would have the opportunity to take advantage of changing market conditions and also have the option to select the best low cost mutual fund managers within your favored asset classes.

Whichever approach you choose, do not let mutual fund expenses weigh your returns down. Most asset allocators and mutual fundamentalists agree that high cost investments should be avoided whenever possible.

Michael A. Weiss, CFA is the editor of The Mutual Fund Investor, a quarterly publication that provides recommendations for some of the best no load mutual funds in various investment categories. To learn more about The Mutual Fund Investor, please visit http://www.mutualfundinvestor.net/. Or, for information on how to obtain a sample copy, you can click on http://www.mutualfundinvestor.net/Try_it_Free.html.

Michael Weiss is also the Chief Investment Officer of Timeless Capital Management, an investment advisory firm registered in New Jersey and Pennsylvania.

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Is Stock Market Investing a Zero-Sum Game?

2007-09-14T11:54:00.000-07:00

By Aidan McNamara

A zero-sum game is one where the amount won by those who win exactly equals in aggregate the amount lost by those who lose. All forms of gambling are good examples of zero-sum games. The pot of money that is at stake in all games of chance will be divided up between the winners, the losers and the house. The house theoretically can be counted among the losers in any given instance but gaming is generally a good business to be in because the house typically wins many more times than it loses. The corollary to this is that gamblers typically as a group lose more than they win.

But what is happening is effectively a redistribution of the money used to make the bets. The total amount wagered remains unchanged before the wagers are struck and after the game has been concluded.

There has been something of an ongoing debate as to whether investing in the stock market is a zero-sum game. Those who say it is point to the fact that there is a winner and a loser to every trade. If an investor buys a stock and it goes up, he/she has won and the person who sold the stock has lost in an equal amount. (We are leaving transaction costs out for the sake of simplicity). The winner and loser roles are reversed if the stock goes down.

Those who say that investing in the market is not a zero-sum game point to the fact that as the overall market tends to rise in value over time, therefore most investors are statistically predestined to be winners should they hold their positions over the long haul.

Our own thinking is that both both arguments have correct elements to them but do not tell the whole story. The second argument ignores the fact that when any seller cashes out a stock position and registers a big profit, the investor who buys the position actually takes a notional loss because theoretically he/she could also have bought in earlier at the lower price. The first argument misses the fact that dividend payments add to the return on investment with a stream of income in such a way that the "pot" is constantly sweetened, thereby increasing the overall return all investors beyond the simple capital gain of a purchase and later sale.

Hmmm...complicated stuff. What do you think? Is stock-trading a zero-sum game just like gambling? Or is there a qualitative difference in this form of risk-taking that allows more market participants to emerge as winners than those who find themselves taking losses?

This article was written jointly by Aidan J. McNamara and Martha A. Brozyna

The authors have additional information on themselves and their forthcoming book at their website http://www.ridetheripples.com

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Financial Planning - Eight Easy Stock Picking Tips For Baby Boomers

2007-09-14T11:52:00.000-07:00

By David Skill

One of the biggest roadblocks to success in individual stock investing is the time to do the research. Below I have outlined eight stock picking tips that allow you to easily evaluate meaningful data in a reasonable period of time. With the internet there are numerous places to find data but my favorite is ‘Value Line’ which you can subscribe to or find in the reference section of your local library. All of the research information I discuss below can be easily found in Value Line for over 1700 stocks.

Understand the Price to Earnings ratio (PE) –

This is one of the basic measurements of whether a stock is a good value. You calculate it by taking the stock price and dividing it by the company’s earnings per share (EPS) for the year. The PE ratio is the value the market has set for every $1.00 per share the company earns in a year. A PE of 16 means the market has declared it is willing to pay $16 for every dollar the company earns.

To better understand if the PE ratio is low or high, compare it to the company’s average PE ratio over the last several years. Also, compare it to the average of the industry the company belongs to.

Buy what you know –

Buying stocks in an industry you are familiar with can be a big advantage. You can often have a better sense of how a company will do than some analysts that follow the stock.

Diversify, Diversify, and Diversify –

Don’t get caught with too many eggs in one basket. Think long a hard before you put more than 5% of your net worth in a single stock.

Are operating margins increasing? –

One measurement of a company executing well is they are growing their operating margins from year to year. This is often a sign that new products are successful.

Is the company free of debt problems? –

Every industry has a formula for how much debt is good (allowing a company to grow) and how much is too much. As a general rule of thumb, divide the company’s long-term debt by net profit. If the ratio is five or less and compares favorably to the industry then it is a positive sign.

Look for industry domination –

If the company you are researching has a #1 market share position they usually have a better chance of generating higher margins and growing sales and earnings per share than their competitors.

Stay ahead of institutions –

Try to buy stocks that do not have a large percentage of their shares owned by institutions. Once institutions get behind a stock their large purchases can make a stock rise in a hurry.

Track EPS growth versus the PE ratio –

Look for stocks whose annual EPS growth rate is 1.5 times the PE ratio. For example if a company is growing its EPS by 15% and the PE ratio is 10 then the ratio is 1.5 (15% EPS growth divided by a PE of 10 = 1.5). If earnings are growing faster than the PE ratio, the stock has to rise as long as the PE ratio stays the same

Picking stocks by using the above data can greatly improve your investment returns… Good Luck.

David Skill, a ‘Chartered Retirement Planning Counselor’ has created an easy retirement system that enables conscientious baby boomers to determine how much money they need to retire. David asks all the vital questions, uses common language and plenty of examples so the participant builds confidence they will outlast their money and not burden their children.
Check out http://babyboomerseasyretirement.com/

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Is There Any Safe Haven In The Event of a Global Economic Collapse?

2007-09-14T11:50:00.001-07:00

By Arthur Wyss

If there is a global economic collapse (GEC), it will certainly hit the USA hard. Is there a safe haven? The short answer is no, but you can reduce the impact if you take action in advance of the collapse.

Unfortunately there is no completely safe place on earth to avoid the effects of a GEC but all things are relative. The key is to reduce risk. The USA is likely to suffer more extreme effects of a GEC than most of the rest of the world. There are several reasons for this, but first of all is that we have such a long way to fall. Americans enjoy a standard of living that is the envy of the world. Another reason is the amount of debt already accumulated and the need of the USA to continue to finance the massive American deficit by selling more debt internationally. In a GEC it will not be as easy for America to find buyers for their debt as it is now. The current flood of foreign money flowing into the USA buying American debt (Treasury bonds and notes) will dry up. Businesses will be hit hard as orders for their goods and services dwindle. Every sector of the economy will feel the sting. It is likely to hit home and hit hard.

America has a pretty good social services safety net for those who are down on their luck, but when almost everybody is down on their luck all at the same time the system will experience stress like never before. Even if the social services can keep up, continued government spending with nothing to back the money up will contribute to run-away inflation. It will be hard to find a silver lining in the clouds of a GEC.

The rest of the world will also suffer, but where will the suffering be least felt? Nations that depend heavily on exports will suffer greatly. Nations that are self-sufficient and not dependent on exports will fare much better.

The basic necessities of life are often considered food, clothing, and shelter. When people are hard up for money they will cut back on discretionary spending. People do not have to have new clothes to survive. The expense of shelter can also be reduced out of necessity. Perhaps two or three families can live in one house or apartment. Of the basics of life, food is the most constant necessity. There are those who say it might serve Americans well to cut back on a few meals, but in any case food is always at the top of the list of necessities.

It is a safe bet to presume that food production, processing, and distribution will be the most stable sectors of the economy in the event of a GEC. Some of the middlemen between the producers and the consumers may have to worry a bit about keeping their place at the trough as times get hard, but people have to eat no matter what. If you plan to stay in the eye of the tiger and ride it out, your best bet would be to shift your assets into some component of the food production-processing-distribution chain.

If you are considering relocating to avoid being at ground-zero in the event of a GEC, then there are a few places that will probably fare well enough. People living in food exporting nations such as New Zealand will not have to worry about food shortages in the event of a GEC. Unfortunately for the "Kiwis" New Zealand is not self-sufficient in energy. There are many poorer nations that also produce a surplus of food. The poorer nations and their people have a much shorter distance to fall, but poor nations tend to have correspondingly poor quality of life. The safe haven list starts to get very short when you look for a country that is energy self-sufficient, has a good quality of life, has an economy not heavily dependent on exports and produces a surplus of agricultural products.

The list is short, but there are such places.

The author, Arthur Wyss is a resident of Beijing, China. He specializes in immigration assistance for those who wish to live in Brazil. He also operates Brazil Land Sales which primarily sells land in the State of Tocantins, Brazil. He is the former President of Adventure Spa Cruise. His website is: http://www.brazil-land-sales.com/index.htm

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How Does A Rising Cost Of Capital Effect The REIT Market?

2007-09-14T11:44:00.000-07:00

By Mike Roach

Sometimes in life, things get out of whack because of a mass reaction to new information. You are calmly enjoying your meal and your company when the fire alarm goes off. There is a rush out the door, some people get hurt, some who were planning on eating at that restaurant return to their cars and go elsewhere. But you…you were right in the middle of a meal. You don’t want to leave too quickly, because it may have been a test, or a false alarm.

So, thinking it was a false alarm, you decide you want to be one of the first to return - after all, you were enjoying your meal. What if you find, upon returning, that your meal is gone, the management will be happy to replace it, but you will have to pay for the replacement? Or, what if you return and someone else is sitting in your seat enjoying your meal, and if you want to finish you must eat what someone else orders?

The point to this strained analogy is that even if it is a false alarm or an over reaction, you may not be able to expect to just pick up where you left off. Even if it is a false alarm, things may not be the way they were before.

Case in point: Cost of capital. Many REITs that have nothing to do with sub-prime lending went down recently in sympathy with the mortgage REITs. You had a higher than anticipated default rate, then a credit squeeze, then downgrades, then equity downgrades, then another rush for the exits, then a repricing of risk, then another credit crunch, a couple of hedge funds busted, a couple more got rescued…exciting headlines, lots of fun for the talking heads, but nothing to do with my Shopping Center REIT or Industrial Property REIT, right?

Wrong.

Remember, stock and bond markets are CAPITAL MARKETS. You and I use them toward their secondary purpose…we buy and sell securities from other buyers and sellers in a secondary market. Primarily, though, capital markets are how firms raise capital. Especially important for REITs.

REITs, you will recall, pay out 90% of their net income (Funds from operations) as dividends to shareholders, leaving less than 10% for reinvestment. With so little retained earnings to invest in the business for growth, REITs are particularly dependent on the capital markets, because they must sell bonds or stocks to raise money for improvements, acquisitions, repairs, all those things they need to do to maintain and raise revenue.

In my analogy above, you may return to your meal of Shopping Center REIT, because it is not in the sub-prime residential sector, only to find that your Shopping Center REIT can’t raise money as cheaply as it could before… borrowing costs are higher, acquisition money may even be on hold. So in this instance, the stock should not be priced as it was before, when it had access to cheap capital. It should be priced lower, because it will be more expensive to grow revenue, which obviously reduces Net Income (FFO) and dividends paid to its investors.

Capital markets are dynamic and fluid markets, comprised of the individual decisions of millions of investors. In time, the market may discount the effects of increased cost of capital, or may absorb new sources of capital, or may weigh in some other factor to be of greater importance than the increased cost of capital, like immigration patterns or international trade agreements. Prices will once again rise to levels they were before the “sub-prime incident”. Just know that if you return to that market right away, you may not be able to pick up where you left off. Someone else may have eaten your lunch.

Mike Roach is and independent financial analyst and publisher of http://www.ReitTrends.com He has 7+ years on-the-ground experience in the real estate and mortgage industries.

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Globalization - Why The Stock Market Will Go Higher

2007-09-14T11:41:00.001-07:00

By Al Thomas

The pretty cheerleaders on CNBC-TV are worried.

Much of the talk on Wall Street, especially among the the TV guests, is about the coming recession and even the possibility of the “d” word (depression).

Martin Weiss, the perennial bear, will give you a thousand (well almost) reasons why the U.S. and the world is in big trouble and every investor should be thinking about methods to protect his portfolio from the coming bear market. His Daddy was right and his Grandpa was right, but Martin is going to have to wait a while to be right.

Every broker, analyst, economist and investor knows about the calamity In the housing market. They also know interest rates are rising for mortgages. It will be tougher to qualify even for those with good credit. Employment statistics though good are not healthy. Consumer sentiment took a recent nosedive showing lack of confidence in the economy. Investor sentiment is bearish with that Indicator, the VIX, running in the 20’s. and on and on.

Is there any ray of sunshine that can bull the market?

First, the psychology of the market should be appraised. If all this bad news has not been able to break the market 10% there must be something holding it up. Remember, it is not the news that is important, but the reaction to the news. If all the recent known bad news could not take the market down then it will continue on up. But why?

The U.S. population of 300 million has been the world’s largest consumer. BUT if our economy slows this could and would hurt every country that sells us goods of any kind. Seventy percent (70%) of our GDP (Gross Domestic Product – that’s all the stuff we buy and consume) could drop by one or or three percentage points it will affect everyone.

Currently there is excess production capacity world wide. Manufacturers have sprung up in all of Asia, South America and Eastern Europe that can produce quality merchandise at competitive retail prices. Service businesses are undercutting us with access through the Internet.

What the world needs is another group of consumers to keep commerce rolling at high speed.

And they are coming on line.

The world needs another group like our 300,000,000 consumers. China has 1,300,000,000 total population. Forget the one billion; They don’t count. Those 300,000,000 don’t pull rickshaws and wear bamboo sandals. They now crave Mercedes Benz autos and Gucci patent leather shoes. There are now thousands of millionaires in China and other Asian countries.

They may not like U.S. policies, but they love the US life style.

This is what the stock market sees. The market knows more than all the analysts and economist put together. Those who listen to the voice of the market will become very rich. It is now telling in a very clear voice, “I am going higher”.

Global consumption is going to continue to grow which will bull the stock markets.

Al Thomas' best selling book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter and receive his market letter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know. Copyright 2007 All rights reserved

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A Study on Capital Stock Market Movement in India - Present Scenario

2007-09-14T11:35:00.000-07:00

By Dr. P. Chella Samy

Highest ever single day loss for sensex trading stopped at NSE & BSE as lower circuit is hit. Rs.7,00,000 cores of market capitalization wiped off in a single day at the bourses black Monday. The above are some headline taken at from leading business declines. The month of may 2006 has turned at to be cruel for investors and traders not surprising, considering the following single day declines.

• 826 points May 18,2006
• 483 points May 19,2006
• 1,111 points (May 22,2006) partial recovery later

All that scud above should not make the reader think very negative above Indian Economy. Indian economy has been performing exceedingly well in the last 3 years coming out of a very devasting drought in 2002 in many parts of India rains, consequently agriculture and other allied sectors have been on a reband since then. A record Rs.1,00,000 crores of rural savings wealth was waiting to be tapped by various savings and investment channels.

The foreign institutional investors or FII and took note of a resilient economy and made huge investments in Indian bourses. Their investments were to the tune of 8 billion Rs in 2005-2006, Rs.7 billion the year before and Rs.6 billion in 2003-04. Such huge indict allocations were inheard of till now since they knocked on Indian doors after our economy liberalized in 1991 under Mr.P.V.Narasimha Rao. Not to be left behind agricultural sector industrial economy surged a head posting 7% GDP growth. Certain sectors like capital goods, IT sector have recorded double digit growth rates. The commercial vehicle and two-wheeler companies have recorded over 30% growth.

As a very logical corollary, stocks boomed all through. From a low of 2950 for sensex, 950 for Nifty in the year 2006 to a high of 12670 for sensex in May 11,2006 (and 3650 for Nifty), it has been a very dizzying height.

The number of FIIs recorded an at the time high of 950 as per SEBI date. This comprised of not only well known as timers like morgan stantley, UBS, Deutsche bank, Warburg pincus etc but also first time investors from Japan, Korea and Arab nations. But among the investors were the much dreaded hedge funds. These funds more into every country where they see good valuations invest in them and cash out as soon as they make their profits.

These funds are supposed to have sold very heavily in May,2006. Some of them are supposed to have made a small debt in their capital too markets know very well that they do not take kindly to it.

To conceptualise shortly, Indian markets are going through a structural Bull phase since 2002. This is supposed to last a decade in the least FIIs have rated India rating, a single data enough to convince skeptics crude oil has also barrel to 74$ high in 2005 fall. i.e. markets have surged a head after digesting this major international irritant crude hurts growth, but India is a major growth engine. So, India was a darling baby of global investors.

Then, what sense to make of May, 2006 mayhem? Is Indian bull run over?

An emphatic no is the answer.

The FIIs and hedge funds have pull out money mainly becomes of higher interest rates in U.S. please note federal reserve has recently increased interest rates to 4.5% under their new governor. The above increases the reverse flow into U.S. from India of FII investments Indian stocks were no longer cheap; at least in the short run. It’s broad market in FE multiples (Forward Earnings) were 22. In comparison to its neighbours, it was costly.

As a consequence, Indian bourses have briefly lost their qlitter. While it is too early to ascertain how much money is like to have been pulled out by FIIs, it is quit obvious it must be considerable. It is not likely to be a one way bull for all times. It is the stock markets as all. What goes up, has to come down. i.e. to reasonable levels. But what is that level is the million, dollar question bunting Indian minds. A broad market FE of 15 is very reasonable. To quote a sensex target is hazardous, but a level around 8500 is very much in tune with technical indicators.

FUND BUYING in the year 2006

Date FIIs Sensex
31-Jan 3677.8 9919.89
28-Feb 11265.5 10370.24
31-Mar 17654.1 11279.96
30-Apr 18476.2 12042.56
31-May 11122.1 10398.64
30-Jun 11601.8 10609.25
31-Jul 12746.7 10743.88
21-Aug 16524.1 11511.68
Source: SEBI bulletin

FIIs and mutual funds continue to maintain a positive outlook on the markets, even though the amount of redemption continues to be higher than the amount invested in the markets post-crash.

As per SEBI data, till May 11, 2006 FIIs had invested Rs.22,243.3 crore in the Indian markets. When the markets crashed, they redeemed to the tune of Rs.10,641.50 crore by the end of June.

The markets took a positive turn in July, with FIIs turning net buyers. The investment form July till August 18 has been Rs.4,403.7 crore. “The recovery has happened, albeit not fully. There is still an amount of around Rs.6,000 crore which has been lost during the crash,” said an analyst.

P/E Ratio

2006 Nifty Sensex
1-Jan  17.16 18.37
31-Jan 17.9 18.6
28-Feb 18.27 18364
31-Mar 20.26 20.05
30-Apr 20.31 21.35
31-May 17.46 20.41
30-Jun 18.44 17.9
31-Jul 17.64 19.02
31-Aug 19.15 19.6
30-Sep 20.92 20.73
30-Oct - 21.48
Source: BSE/NSE bulletin

Even as the benchmark BSE Sensex breached the 13,000 points today, market players, in particular FIIs, cautioned beside unsteadiness. Going by SEBI data, net FII investment in equity in the period January-October 30, 2006 is $6.533 billion. It crossed the $7 billion mark if debt market numbers are added. Fresh inflow of funds from new global markets like Australia coupled with strong earnings growth reported by domestic companies lifted the Sensex above 13,000 to close at an yet another all-time high of 13,024.26.

Conclusion

Investors can pick up stocks at these levels for a growth story for long term i.e. for equities a 5 years holding period is reasonable to give a very above average return. Caution may be exercised to buy only good, well established market movers and never, to buy on margins or play intraday or dabble in derivatives market, which is high risk.

* Lecturer, Department of Commerce, Bharathiar University, Coimbatore – 46. ** Ph.D Research Scholar, Department of Commerce, Bharathiar University, Coimbatore

Reference

BSE/NSE Bulletin

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72 Stock Market Investing Tips

2007-09-14T09:13:00.000-07:00

By Micheal James

Why do so many investments fall through cracks? Experts blame everything from lack of information to wrong strategy and over-confidence about the swings in the market. Here, thereby, are 72 tips that may get you find the tracks of investments.

1. Determine your objectives in terms of short and long term.

2. Once the objectives are finalized, seek towards the type on investments to buy.

3. Calculate the level of risk to withstand it.

4. Determine where you stand in terms of needs and goals.

5. Make sure you have time to follow through your commitments.

6. Be consistent and organized. Make thorough efforts in whatever you do.

7. Be open to all the new thoughts and get out the myths of your bag.

8. Develop your own plans and play your own games.

9. Access quality investment information available at internet.

10. Diversify your knowledge and investments plans to various channels.

11. Making decision to buy or sell, stock, futures or options under pressure may turn out to be disasters. Never feel pressurized at any time.

12. Try to reduce risks, as far as possible.

13. Follow the 2% rule, i.e. never risk more that 2% of your trading capital on a single trade.

14. Always use stop loss orders to protect capital whenever you make trade.

15. Never overtrade with under-capitalized accounts.

16. Move your stop loss to lock the profit in as soon as the deal gets profitable.

17. Be a tail to the trade trend. Trading against trend without reasonable stops may harm a lot.

18. When you are unsure of the fluctuations of the market, it is useless to trade. Rather quitting is a smart move at that time.

19. Avoid stagnant and volatile markets.

20. It is beneficial to trade in a market that is trending with a volume of more than 100,000 daily.

21. Do not put all your profits in re-investments. Rather it is highly recommended to save profits and have a surplus account.

22. Develop strategies and financial plans and work on other alternatives of investments.

23. Always be well informed through the sources available.

24. Watch financial market news to help you to get through the moods of market.

25. Never run after tips. Refer them and use your own brains.

26. Invest in long-term investments, as there are greater chances of getting better returns in long term.

27. Short-term market being too fluctuating may cause severe problems to the one.

28. Evaluate your investments well.

29. State those in objective terms hat are easy to use for future reference.

30. A well-researched and well-done valuation is timeless.

31. Ask for help of your broker or a fundamental analyst.

32. Always go for a thorough research work before getting into the investment world.

33. Evaluate and analyze your decisions well in future to avoid repetition of same mistakes.

34. Select an intelligent broker and use his experience to fetch better returns.

35. Always seek for cheap brokerage firm but do not compromise on the quality of services provided by them.

36. Grab the opportunities of discount brokers.

37. When investing online, remember that online bets are not always instant.

38. It may get delayed due to heavy traffic on net or so.

39. Other technological faults like modem, computer and service provider may also act as a hindrance to your investment.

40. While investing in share market always set your price limits on fast moving stocks.

41. Market order vs. limit orders rule must be followed.

42. In case you are not able to access your online account get alternative for placing trade in advance.

43. Take time and do not assume that your order has not been placed. It may cause repetition of your order and hence, may fetch you losses.

44. Make sure the cancellation of order has worked before ordering another trade.

45. If you purchase a security in cash account, you must pay for it before you can sell it.

46. Reread your margin agreement, as if you trade on margin, your broker can sell your securities without giving a margin call.

47. Get to know about the legal terms.

48. Talk to your broker and online firm in case of some misunderstanding in investing.

49. Know what you are buying and risking in the market.

50. Bernard Baruch once said that “If you want to make money, big money, buy that which is being thrown away.”

51. Do your research before making investment.

52. Be alert for any alarms of losses.

53. Do not expect your broker to recommend the stock that may double your money in few months itself.

54. Don’t be greedy and sell the stock that goes up considerably i.e. 50% or more.

55. Don’t be impulsive and take calculated risks.

56. Don't buy a stock on a hot rumor; you'll get burned 90% of the time.

57. Consider tax-planning and income-splitting techniques.

58. Go for values of stocks.

59. Maintain a well-evaluated portfolio.

60. Keep an eye everywhere. Look for bonds of the companies that are out of favor too.

61. Be an above average trader.

62. Prepare a checklist for investment.

63. Make sure that the money you are investing is vital to your financial survival.

64. Beware of the internet stock fraud.

65. Verify your investment i.e. do not just rely on your broker, ask other advices too.

66. Every time you invest, assess the risk/return profile of your investment before actually committing to it.

67. Also, pay attention to how easily the investment can be turned back into cash, just in case.

68. Compare and contrast stock trading options available with other options.

69. It is also important to ascertain one’s risk appetite.

70. Make sure you follow some precautions before investing, like make sure that your broker is registered and not a fraud.

71. Make sure stock trading documentation is in order.

72. Remember the stock investment can be risky like any other investment; thus, evaluate the risks associated to a particular move.

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