SMART Market

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Deep and Long Recession

sp_insight_106x76Here is S&P’s baseline economic forecast, plus the better and worse scenarios

By David Wyss and Beth Ann Bovino
From Standard & Poor’s Equity Research

For economists, projections are a stock in trade. At Standard & Poor’s Ratings Services, which operates independently of S&P Equity Research, we publish monthly our economists’ best estimates of where the U.S. economy could be heading.

Beyond the projection of GDP and inflation, we include outlooks for other major economic categories, such as home and auto sales, employment, and oil prices. We call this forecast our baseline scenario, and we use it to inform all areas of our credit analyses.

However, we realize that financial market participants also want to know how we think things could go worse — or better — than what our baseline scenario calls for. We also offer two additional scenarios, one worse than the baseline and one better, both of which have an estimated 20% chance of occurring (in the sense that reality will look more like them than like the baseline).

Baseline Case: A Deep and Long Recession
The January baseline forecast is for the recession to be deep and long, with a recovery beginning in mid-2009. Although lower oil prices are relieving the squeeze on consumers, financial markets have tightened much more than many anticipated. The inability to borrow money has hurt investment more than expected, while consumers suffer from both loss of wealth and increased difficulty borrowing.

Although the underlying problems that led to the recession are in some ways similar to those of the 1991-1992 recession (during which the gross domestic product (GDP) fell 1.2% from peak to trough), we think that the financial problems could make this recession deeper.

The cyclical peak of the latest expansion was December 2007, and the trough will likely come in June 2009. This 18-month recession would be longer than both the 50-year average of 10.7 months and the longest recessions, which were in 1975 and 1982 and lasted for 16 months each.

We’re forecasting negative GDP growth for the second half of 2008 and the first half of 2009, with a total decline of 3%. The business tax credits should boost fourth-quarter results somewhat, though business borrowing restrictions have made the credits less effective than we originally thought.

The Downside Case: Into the Depths

In our deep recession scenario, financial markets remain frozen, cutting capital spending and consumer purchases. Consumer and investor confidence weakens further, resulting in a recession that lasts through 2009. The deeper foreign downturn keeps exports weak. The result is the deepest recession in postwar history, with a peak-to-trough decline in real GDP of 4.5% and an unemployment rate of 10.4% in mid-2010, near the postwar record of 10.8% set in the 1982 recession.

In this scenario, consumer spending drops more sharply as households try to rebuild the wealth lost to weaker home and stock prices. As a result, the downturn would be longer (24 months) than the 18 months in the baseline projection.

Housing remains the weakest sector of the economy. Housing starts tumble to a record low of 540,000 in 2009, down from their 2005 peak of 2.07 million.

In addition, average home prices (S&P/Case-Shiller house price index) drop 43% by early 2010 from their recent peak compared with a 32% drop in the baseline forecast. The weak home prices hit consumer wealth and spending; wealth drops 22% from its peak compared with 18% in the baseline. The saving rate holds at 3.8% in 2011 compared with 2.6% in our baseline projection. Weaker employment and tougher credit standards hit light-vehicle sales hard, cutting them to 8.5 million in 2009 compared with 10 million in our baseline.

In the downside case, capital spending suffers from the weak economy and borrowing difficulties. Spending on capital equipment falls 17.9% in 2009. Companies also cut back on employment. Nonfarm employment drops 4.3 million during 2009.

The Upside Case: Maybe as Good as it Gets

As already confirmed by the National Bureau of Economic Research, the U.S. economy is in a recession, but an improving housing market, growing confidence, and a more rapid calming of financial markets could still keep the recession relatively mild. At the same time, a revival of productivity increases could keep inflation under control despite stronger economic growth.

In our optimistic projection, the housing sector contracts by less than in the baseline scenario because of lower mortgage rates and a stronger economy. Starts fall to 800,000 in 2009 (compared with a drop to 650,000 in the baseline) from 910,000 in 2008. Starts reach 1.60 million, near their pre-boom average level, in 2011. The result is a mild recession, equivalent to the one in 2001, with a peak-to-trough decline in real GDP of 1.9%. Unemployment still rises to a 7.9% peak in the third quarter of 2009 from its current 7.2% rate as real GDP growth recovers after reaching bottom in the first quarter.

In the upside case, capital spending benefits from a recovering economy and improving credit conditions. Although business borrowing restrictions continue to weigh on spending in the optimistic scenario, the credit market problems improve faster than in the baseline forecast, with a larger boost to spending. The business tax credits provide an additional boost to the fourth quarter, though business borrowing restrictions cap the upside potential.

Spending on capital equipment falls 6.4% in 2009 (compared with a 13.1% drop in the baseline). While companies also cut back on employment, nonfarm employment loses 1.9 million jobs in 2009, which is much less severe than the 3.1 million jobs lost in the baseline forecast. More hires support nonresidential construction spending, which falls 8.3% in 2009 under this scenario (compared with a 12.2% drop in the baseline).

January 31, 2009 Posted by | Economic Trends | 1 Comment

4 ETF Strategies For A Down Market

by Hans Wagner

Exchange-traded funds (ETFs) are rapidly becoming a popular investment tool for many investors. As with any investment, it is important to understand the downside risks. ETFs are traded like stocks, so they inherit many of the same risks as stocks. However, there are several strategies that ETF investors can use to protect their capital during a down market. These strategies include knowing when to sell, knowing how to allocate your assets, following the rotation of sectors and using hedging techniques. (For the basics, review our Exchange-Traded Funds tutorial.)

Sell Your ETF
Knowing when to sell your ETF is just as important as knowing when to buy it. Many investors do not know when to sell and they tend to hold on to their shares hoping things will improve. Unfortunately, it may be a long time before they fully recover. During a down market, there are several reasons investors should consider selling their ETFs:

* Risk Tolerance: Every investor should know how much risk he or she can tolerate. If you are having trouble sleeping at night due to concerns over the market, then you have reached your limit and it is probably a good time to sell. You’ve already made the losses, so now it’s time to save what’s left. (To learn more, read Personalizing Risk Tolerance.)

* Stop Orders: Stock investors have long used stop orders to protect their portfolios. Fortunately, investors in ETFs can use the same stop techniques available for stocks, such as trailing percent stops, limit stops, volatility stops or some other variation that helps close out a position at a predetermined amount. (For more on arranging stop orders, read A Logical Method Of Stop Placement.)

* Ready Money: If you will need the cash for some purpose in the next couple of years, it is a good idea to reduce your risk and move your money to a low-risk investment now. Investors can move to less volatile ETFs or sell for cash to preserve gains should the market turn down.

* Balancing Act: Rebalancing your portfolio is always a good idea. Should your ETF run up in value, providing a nice gain, it might overweight your portfolio toward one sector or industry. A good strategy is to sell part of the ETF to capture the profits and then diversify your reinvestments. This approach protects your profits should the market take a dive. (Learn more about fine-tuning in Rebalance Your Portfolio To Stay On Track.)

* Expectations: Investors who beat the market may find that their initial reasons for purchasing an ETF have changed. Maybe it failed to meet your expectations, or the fundamentals underlying the investment changed for the worse. When this happens, it is a good time to sell and move on to another opportunity.

One of the best ways to protect your ETF portfolio is to know when to sell before a market tumbles, or to have your wits about you to sell before further losses occur. If investors follow sound selling principles during up markets, these same principles will serve them well during down markets.

Allocate Your Assets
Sophisticated investors use asset allocation strategies to protect their portfolios against negative moves. ETFs now offer the everyday investor the tools to allocate assets to gain exposure to a wide range of asset classes, equity market capitalizations and sectors. These ETFs permit investors to construct portfolios that are consistent with their tolerance for risk and their investment horizons.

Sample strategies to help reduce exposure in a down market include:

* Reducing your portfolio’s exposure to sectors, asset classes or equity capitalizations that are likely to perform badly in a down market

* Filling voids in a portfolio with ETFs that fill out your allocation strategy. You can do this by buying or selling short sectors that are likely to over- or underperform relative to the overall market. If you are concerned that the market may get weaker, then buy an ETF that shorts a sector and/or the market.

* Over- or underweighting a portfolio to gain exposure that will reduce the downside risk. Let’s say an investor’s portfolio is composed of stocks from many sectors in the S&P 500, but he or she is concerned that a market downturn will hurt the portfolio. This investor could purchase a consumer staples sector ETF to increase exposure to a sector that typically does better in a down market.

ETFs provide investors with the tools to allocate their assets to reflect their portfolio strategies, especially in a down market. For these strategies to succeed, the bear market ETF must have high negative correlation to your long portfolio. (Read more in Five Things To Know About Asset Allocation.)

Follow Sector Rotation
Another strategy for providing downside protection is to follow the rotation of industry sectors. Based on the theory that industry sectors follow economic cycles, investors can use ETFs to reposition their portfolios and adapt to a down market.

The business cycle is a long-term pattern of changes in gross domestic product (GDP), which follows the four basic stages: expansion, prosperity, contraction and recession. After a recessionary phase, the expansionary phase starts again. According to investor Sam Stovall’s 1996 book “Sector Investing”, each sector is stronger at different points along the business cycle. Investors can identify the sectors that align with the business cycles and invest accordingly. ETFs are excellent choices when employing this strategy, especially during a down market.

Investors who follow this strategy adjust their portfolio’s sector weight to align with the sectors that are most likely to perform best. Sector-oriented ETFs give these investors an efficient way to redirect their portfolios. When faced with a market that is trending down, these investors can use ETFs that invest in sectors that normally outperform a down market, such as consumer staples, utilities and healthcare. Investors who are more aggressive could use ETFs that short the market or a sector that is likely to perform worse than the market. (Get details on how ETFs enable these techniques at ETFs Smooth Road For Sector Rotation Strategies.)

Employ Hedges
A hedge is a position designed to mitigate risk that bets for or against an expected future trend or event. Hedges are particularly useful if an investor is facing a down market. To be effective, hedges need not make money, they must only limit risk.

ETFs that short an index or a sector give investors new ways to employ hedging strategies. For example, if your portfolio is long the market and you are concerned that the slowdown in the economy will cause the market to fall, you could either move part of your portfolio to cash or acquire an ETF that shorts the market. In this way, you could realign your portfolio to be 75% long and 25% short, using an ETF that shorts the market. This would be similar to a portfolio that is 50% long and 50% cash.

Options on ETFs offer investors another proven way to hedge their positions. Two conservative approaches involve covered calls and protective puts. Covered calls allow investors to lock in profits and/or provide some downside protection in the event the market turns. The seller of a covered call receives downside insurance equal to the amount of the option premium. If the ETF falls by more than the premium, the position will lose money but still outperform holding the ETF alone.

Investors seeking insurance against sharp ETF declines who want to hold the shares to avoid negative tax consequences can purchase “protective” put options. A put on an ETF allows an investor to sell if the share price falls below the strike price. The put typically increases in value as the ETF declines. If the ETF stays flat or increases in value by the end of the option period, the put expires worthless. (You can learn the basics of these contracts in our Options Basics Tutorial.)

The Bottom Line
Investors often find down markets to be a major challenge. ETFs provide additional ways to reduce the negative impact on your portfolio during a market decline, but you still need to do your homework. The options available to individual investors are similar to what professionals have enjoyed, so you are the only limit to your own plan. Design your strategy around what helps you sleep well at night.

January 27, 2009 Posted by | Economic Trends | Leave a comment

India predicts growth will fall to six-year low

feature_recession3Published: January 27 2009 02:00 | Last updated: January 27 2009 02:00

India’s central bank warned yesterday that the country’s economy would grow this fiscal year at its slowest rate since 2003, as the global economic malaise spreads to large emerging markets that had hoped to escape the worst of the crisis.

The Reserve Bank of India cited the median estimates of institutions such as the World Bank and Citigroup that showed growth in the world’s second-fastestexpanding emerging economy would slow to 6.8 per cent, down from earlier forecasts of 7.7 per cent. This would therefore be the slowest rate of growth since 2003 – when India’s gross domestic product expanded 3.8 per cent – and would end a three-year period in which the economy grew at least 9 per cent annually.

“The balance of risks on the growth outlook is tilted towards the downside,” the RBI said in its review of the economy for India’s fiscal third quarter ending in December.

The rapid decline in expectations for growth in India will place added pressure on the RBI to lower its key interest rate from the present level of 5.5 per cent when it presents its quarterly monetary policy announcement today.

While the news is nowhere near as dark as in developed nations, many of which are already in recession, the RBI said there had been a rapid slowdown in industrial activity and exports in the third quarter, which would be matched by a decline in the service sector.

“For the first time in seven years, exports have declined in absolute terms in October and November 2008,” the RBI said. But the RBI also said the economy would receive some support from government tax breaks and civil service pay rises, along with a loan waiver for farmers that would increase the disposable income of the country’s rural majority. A fall in commodity prices – particularly oil, of which India imports more than 70 per cent of its requirements – would also ease inflationary pressures.

Inflation has fallen from 12.9 per cent in the middle of the year to 5.6 per cent, giving the RBI ample room to ease monetary policy.

Dharmakirti Joshi, principal economist with Crisil, the Indian rating agency affiliated with Standard & Poor’s, said another positive was that the country’s financial sector remained in reasonable health.

“Even if you grow 6.5 per cent to 6 per cent this year and 5 per cent to 5.5 per cent next year, that is reasonably good,” Mr Joshi said.

But other economists warned that India’s demographic make-up, with a large young population in need of employment, meant it could not tolerate lower rates of growth for too long.

“While growth estimates may appear high relative to those of developed economies, given India’s demographic changes, the pressure on employment, confidence and price levels would be more burdensome than the past,” said Rohini Malkani, Citigroup India economist.

But she added that monetary policy measures and lower commodity prices should set the stage for an Indian economic recovery in the fiscal year ending on March 31, 2011.

By Joe Leahy in Mumbai

January 27, 2009 Posted by | Economic Trends | 1 Comment

Investment Philosophy

Investment philosophy consists of a mixture of financial gurus who have one goal in mind when purchasing securities:finding undervalued securities.

David Dreman

1. Invest in undervalued companies that exhibit strong fundamentals, above-market dividend yields and historic earnings growth, which analysis indicates will persist.
2. Own strong,fundamentally sound companies and to avoid speculative stocks or potential bankruptcies.
3. Markets are not perfectly efficient and that, in particular, behavioral finance plays a considerable role in investor actions and over-reactions and subsequently in stock price movements

Joel Greenblatt-

As for the “complicated” formula, here is the big picture. For “cheap stocks”, the formula uses earnings yield (the inverse of P/E, it is simply earnings divided by market capitalization).

For “good stocks”, the formula uses return on capital. Many analysts use a simple return on equity calculation (earnings/equity) or return on assets (earnings/assets) ratio to determine return on capital. As with earnings yield calculations, we make a couple of adjustments that account for differing debt levels and tax rates between companies. We also compare earnings to the total “net working capital” plus “net fixed assets” required to generate operating profits. Intangible assets are excluded as described in detail in the book.


Benjamin Graham

* “An investment operation is one which,upon thorough analysis promises safety of principle and an adequate return.Operation not meeting these requirements are speculative.”-Security Analysis


The approach mentioned above is almsot 100% mechanical with very little security analysis.Thus, every stock mentioned should not be considered a buy decision.<

January 22, 2009 Posted by | Investment Guide | Leave a comment

The Nature of Stocks and Their Markets

feature_stocksby Peter Leeds is the American financial author and investment coach with expertise in choosing and profiting from penny stocks. Peter Leeds manages several informational site focusing on penny stocks and publishes an investment newsletter.

Stock Brokers
Besides money, the only thing you need to start investing is a stock broker. Your broker will be the individual or organization that have execute your buy and sell orders. They will have an account for you which is just like a normal bank account, except that it can contain not only cash, but stocks and bonds as well. Money from the sale of shares will go into this account, and cash to buy shares will be taken from this account.

There are two types of stock brokers which you can choose between, full service and discount. Each has advantages and disadvantages, as discussed below.

Full Service Stock Brokers
Full service brokers will give you advice and investment recommendations. However, they do have very high commission fees and are usually only suitable for investors who have a great deal of money to invest and who do few trades. For penny stock investment, the frequency of trading and the small amounts of capital per trade make full service brokers inappropriate, because their commission fees will be too high. You may be required to pay as much as $100 or more to have your full service broker buy you some shares, and just as much again when you sell.

Discount Stock Brokers
Discount brokers can answer any investment questions you may have, but they offer fewer personalized services for their clients, such as making stock recommendations or giving you portfolio advice. These are the brokers you see on television, advertising $10 or $20 a trade commission fees. When you buy or sell stock, you will be required to pay this lower commission rate, and can therefore keep more of your own money in your pocket.

As well, with discount brokers you can often monitor your account and execute trade orders from your computer or through an automated telephone system. With the computer system you are able to see all of your open buy orders, check market indexes and get stock price quotes. On-line discount brokers are best for anyone investing in penny stocks, as you are able to check prices anywhere there is a modem, and as many times as you like throughout the day.

When you’ve chosen which broker you want to establish an account with, simply contact them and they will help you fill out any forms and set up your account. You generally will need an initial deposit of cash. Getting your account running and ready for trading is simple and should not take more than three days.

Buy Orders
When you want to acquire shares of a stock, you give your broker a buy order. Make sure you have enough money in your account to cover the cost of the shares, as well as the commission fee. You will need to know the following;

1. The ticker symbol of the stock (i.e.- COMX is the ticker symbol for Comtrex Systems)

2. The market the stock is trading on (i.e.- NASDAQ)

3. How many shares you want to acquire. This is also referred to as the volume. With penny stocks you should always buy in multiples of 1000 shares, as you may be otherwise subject to extra commission charges from your broker.

4. The price you are willing to pay for the shares. A ‘market’ order means you are willing to pay the best available price at the time. A ‘limit’ order means you will specify a price which you are willing to pay, and your trade will only take place if shares reach that price. We strongly suggest the use of limit orders, to increase you control over the transaction and to avoid price volatility.

5. The duration of your order. For example, you may keep your order good for just that trading day, or have it good every trading day until it expires on the date you specified, which may be weeks later.

Thus, an example order you might enter would be; “I wish to buy 6000 shares of Lore Diamonds, ticker symbol LOR, at 19 cents or less. The stock is on the Vancouver exchange, and I want this order to stay active until Friday of this week.”

If the price of LOR hits 19 cents or less, your broker should acquire the shares for you. You will find that 6000 shares of LOR have been added to your account, and the money for them has been taken out (6000 shares * $0.19 = $1140 + commission fee).

Sell Orders
A sell order is simply the reverse process of buying. Make sure you know how many shares you have in your account when selling a stock. Tell your broker; “I wish to sell the 6000 shares of Lore Diamonds from my account. The ticker symbol is LOR, and the stock is on the Vancouver Stock Exchange. I want to sell at 24 cents or higher, and keep the order good for the day.”

If the price of LOR hits 24 cents or higher, your shares should be sold and the money from the transaction (6000 shares * $0.24 = $1440 – commission fee) deposited into your account within three days, ready to be used in another purchase.

Special Trading Notes
When trading on an exchange, investors either enter a bid price (if they are buying) or an ask price (if they are selling). When a bid and ask price meet at an agreed price, a trade takes place. In other words, if you are willing to pay 24 cents per share for a stock, and someone is willing to sell shares of the same stock for 24 cents, you will exchange the shares for the cash.

At any one time there are usually several buy orders and sell orders all at different prices for a given stock. However, when you check a stock quote you will only see the highest bid price and the lowest ask price, representing the most that investors are willing to pay for the shares, and the lowest price at which shareholders are willing to sell, respectively.

Due to the ‘best price’ priority, your order to buy stock will not get filled until all buy orders of a higher price are filled first. Similarly, your sell orders will not get filled until sell orders of a lower price are filled.

For orders to buy (or sell) stock that are entered at the same price as other similar orders, preference will be given by the exchange in the order in which they were received.

Unfilled Orders
Due to the above mentioned ranking order, and the often light volume of shares trading, you may not always get your order filled. You may put in an order to buy at a certain price, and find that the shares did not trade at that price during the duration of your order, and therefore you did not make the transaction. There will be no broker fee when no trade takes place.

Partial Fills
You may also find that you got your order partially filled. You may want 8000 shares of a stock, but only get 2000. This is because only 2000 shares were available at the price you had stipulated. This applies to both buying and selling. If you notice that this may be the case mid-day, you can respond by adjusting the price of your order to ensure you trade all the shares you want. You will not get an extra commission for that. However, if your order spans several days and is partly filled on more than one day, you will get a commission charge from your broker each day you trade shares.

Canceling and Changing Open Orders
Buy and sell orders can be canceled or changed during their duration. Consult your broker for more information about changing open orders.

January 22, 2009 Posted by | Investment Guide | Leave a comment

Review: The New Buffettology

warrenbuffett1by Mary Buffett and David Clark

This book is essential reading for anyone who wants to know more about Warren Buffett and how he does what he does.

The authors look at the companies Buffett has invested in over the years and what he has said about investment principles, and use this to draw up a series of tests and principles that they claim he puts in place when selecting investments.

We cannot say with any certainty that these tests and principles totally and accurately reflect the way that Warren Buffett does business. We can however say that they make good and logical sense to us.

For example, the authors assert that Buffett only looks at companies with consistently high rates of return on equity, preferably rising, and give mathematical tests and equations for assessing this. This seems to accord with everything that Warren Buffett has ever publicly said and makes sense.

In the early part of the book, Mary Buffett and David Clark analyze some of Warren’s historical investments and come up with a series of guiding principles on what to buy and when to buy it. They include important factors such as brand name companies, information sources, and company management.

Later in the book, the authors set out a series of financial and other equations for assessing likely investments, and the price that an investor can pay and still have Graham’s famous ‘margin of error’.

Generally, these equations and calculations can easily be done by the average reader, with the assistance of a financial calculator, such as the Texas Instruments Solar Financial Calculator. One equation, that using book value to predict earnings growth, did give us some difficulty at first but proved do-able after a couple more readings.

The authors also produce a Buffetology Workbook that contains all the steps the reader needs to make the calculations suggested in the principal book.

This is a must-have book for any reader wanting to tap into the Buffet investment secrets.

January 22, 2009 Posted by | Investment Guide | Leave a comment

Review of Investing – the Last Liberal Art

sb10067756i-001by Robert Hagstrom

Charlie Munger is like a kind of Mycroft Holmes to Warren Buffett’s Sherlock – he is the deep thinker of the two, and a man who believes strongly that the general acquisition of wisdom can lead to a better approach to investing.

Munger believes in having a grasp on the central ideas of as many disciplines as you can, and furthermore believes in finding the links between those various disciplines – the “lattice-work of models”, in Munger’s words, that enables a person to approach any new idea or concept with a framework of understanding that goes well beyond the subject at hand. Beyond being useful for investing, Munger believes, as do we, this to be a healthy approach to life in general.

Influenced, as he acknowledges, by Charlie Munger’s investment philosophy, Robert Hagstrom’s book takes up on Munger’s approach. Investing: the Last Liberal Art, by the author of The Warren Buffett Way, is an extraordinary achievement, a book that goes far beyond being a simple primer of investment approaches. In its two hundred pages, it manages to elegantly offer the following:

1. An explanation of the stock market, and a common-sense guide to investing

2. A necessarily brief, but nonetheless clearly written overview of much of Western thought in regard to physics, biology, psychology, and genetics, as well as fascinating, more detailed looks at certain basic principles in all these areas.

3. A series of frame-works of understanding, drawn from these disciplines, for understanding the stock market and investing

4. A powerful and convincing plea for a traditional liberal arts approach to knowledge, and an indictment of business schools and their emphasis on a narrow focus that obliterates a larger view of life, and in turn leads to a narrow, capitalistic, money driven and shallow human being.

Hagstrom proceeds sequentially through various areas of Western thought, highlighting general principles and showing how they can be applied to economics, the stock market, and investing. From physics, he focuses particularly on equilibrium theory. In the following chapter, biology, he draws parallels between Darwin’s principles of evolution and the stock market, in which “survival of the fittest investment approach” can be said to operate, resulting in a continuous need for new approaches.

The following chapter, exploring the social sciences, is the book’s strongest. Hagstrom draws convincing connections between the foraging patterns of ants, the growth of the internet, and current experiments in the ability of social systems to find optimal solutions, to explain the way the stock market continuously corrects itself. As if that wasn’t enough, he follows it up with a lucid explanation of how the nature of catastrophe works in social systems, how minor problems can multiply exponentially out of control until a new stability is reached, and the implication this holds for stock market crashes.

In psychology, Hagstrom examines some of the inbuilt pattern-seeking mechanisms of the human brain, and explores why these mechanisms result in stock market instability. The human brain, Hagstrom explains, is not designed for optimal processing of stock market information, and this results in inherent instabilities in the system that cause oscillation. By compensating for these inbuilt flaws, however, Hagstrom explains how investors distinguish themselves from speculators on the stock market, and are able to judge not trends, but the intrinsic value of shares, irrespective of current market value, and thus take advantage of psychologically-based oscillations to purchase shares at a price lower than they should be.

The final disciplines Hagstrom looks at are philosophy and literature.. From philosophy Hagstrom focuses, perhaps too narrowly, on the sub-branch of Pragmatism.The chapter on literature takes a somewhat different approach: rather than explore how specific literary techniques or approaches can provide insight into economics, the stock market, or general thought, Hagstrom makes a general plea for reading as a productive exercise, particularly for investors and those in the finance industry.

In this section, Hagstrom interviews graduates of St John’s College, a liberal arts college that focuses exclusively on a set four year program of intense study of the great books of Western thought. He speaks to graduates of this college who currently work in the finance industry, and it is clear this liberal approach to education has helped them both as investors, and in their personal lives.

One cannot disagree with Hagstrom’s point. But we also believe that while you might lead investors to water, you can’t make them think. A small minority will seek to understand the general principles that lie beneath human existence, and the majority will continue to look for a shopping-list formula that will enable them to get rich quick. Some will live wealthy and productive lives; others might get rich, but will remain shallow and ignorant.

There is no doubt which approach Buffett and Munger adopt. We would have liked a chapter on history, but this is a small complaint, and does not detract from the quality of this book, which has recieved wonderful reviews throughout the world. More than just a book on investment philosophy, it’s a book for those who seek to understand the world about them. Those who approach investing as an exercise of the mind, as well as a way to make money, wil be enthralled by Hagstrom’s thoughts – those who seek only a formula for quick profits will miss the point.

January 22, 2009 Posted by | Investment Guide | Leave a comment

Review: The Snowball: Warren Buffett and the Business of Life

cover-image-wb1by Alice Schroeder

There have been many books written about Buffett and I have read most of them. They generally gloss over his life but try to extract his investment principles by deduction from some of the trades that he has made.

This book is different. It examines Warren’s life in some detail and interposes the tale with comments directly from Buffett himself and from others in his life. What is important however is that it looks in exquisite detail at many of the deals he has made, giving the reader the opportunity of working out his investment principles for themselves. This way you get to make up your mind how he does it.

Unlike many of the other Buffett books, Schroeder also shows us the occasional error of judgment and, like Buffett, you can also learn from these.

This book tells us all about the big and well-publicised deals – Coca Cola, Washington Post, Salomons. But it also details the many smaller and lesser-known ones – the shirt factories, the share-an-airplane company and others. I particularly liked the chapter on Rose Blumkin and the Nebraska Furniture Mart. I think that the amazing Rose may be one of the few people that had Buffett’s measure. And the story of Warren’s early career as a race handicapper is a blast.

This is one of the best biographies that I have read in years.

These are perilous times but I believe that a close reading of this book, together with a re-reading of Buffettology by Mary Buffett will give you a good insight into the way Buffett does it. Plus, I would also re-read The Intelligent Investor by Benjamin Graham, the man Buffett says taught him the basic principles of investment.

January 22, 2009 Posted by | Investment Guide | Leave a comment

Gobal Market Review dan Outlook 2009: Lower Outlook, Best Investment Opportunity


feature_recession2Krisis finansial di AS yang dipicu oleh kegagalan subprime mortgage terus meluas dan belum menunjukkan indikator pemulihan yang berarti. Krisis ekonomi menjalar ke sektor vital seperti industri otomotif AS yang dimotori oleh tiga raksasa otomotif: General Motor Company, Ford Motor Company dan Chrysler Corp yang menyatakan diri memerlukan dana bailout dari pemerintah AS. Bursa Wall Street jatuh karena kasus potensi bangkrut perusahaan ini memicu kekhawatiran ekonomi AS yang semakin melemah. Goldman Sachs dan Merrill Lynch juga melaporkan kerugian besar pada 3Q08 setelah kebangkrutannya beberapa bulan lalu.

Melemahnya ekonomi AS juga telah menular ke Eropa dan Asia, terutama Jepang. Pertumbuhan GDP negara-negara G7 juga semakin menurun. Untuk 3Q08; Kanada hanya tumbuh +0,29%, Jerman turun -0,52%, Perancis naik +0,14, UK -0,49%, Italia mengalami penurunan terburuk -0,52%, Jepang jatuh -0,46%, sementara AS sendiri juga turun -0,13%. Buruknya pertumbuhan GDP ini akan terus berlanjut sampai akhir semster 1, 2009 dan World Bank memperkirakan pertumbuhan ekonomi global hanya sekitar 0,9% saja.

Wall Street sendiri mengalami fluktuasi terus menerus dan masih sulit keluar dari situasi bearish. Indeks Dow Jones masih berkutat pada trading range 7.900-8.850 sepanjang 4Q08. Dow Jones masih mengalami kesulitan keluar dari wilayah bawah karena terus menerus harus merespon berita negatif yang masuk ke pasar. Buruknya indikator ekonomi maupun dampak pasca kerugian perusahaan dunia membuat indeks Dow Jones terus berada di bottom level-nya. Pelaku pasar tampaknya masih terus menganalisis berbagai data ekonomi 4Q08 dan terus mencermati pasar yang belum menunjukkan pemulihan berarti.

Memburuknya krisis ekonomi di AS memberikan dampak yang semakin serius di Asia, terutama ekonomi Jepang dan sebagian besar perekonomian di regional Asia. Profil risiko di negara Asia juga semakin meningkat dan kondisi likuiditas semakin ketat akibat berkurangnya kepercayaan di berbagai pasar di Asia. Indeks Nikkei di TSE mengalami penurunan yang tajam, bahkan terburuk dalam 5 tahun terakhir dimana pada pertengahan Desember, berada pada posisi 8.235 setelah sebelumnya sempat berada di bawah level 8.000 disertai turunnya nilai transaksi di bursa. Indeks Hang Seng juga mengalami penurunan terburuk sepanjang 2008 yaitu sekitar 62,92%, bahkan diprediksi dapat terus turun tergantung harga komoditas terutama crude oil.

Asian Development Bank (ADB) merilis prediksinya mengenai inflasi di negara-negara Asia untuk 2008 dan 2009, masing-masing dari sebelumnya 5,1% dan 4,6% menjadi 7,8% dan 6%. Outlook ekonomi negara-negara Asia untuk 2008 dan 2009 juga dipangkas ADB menjadi 7,7% dan 7,2%. GDP Indonesia sendiri diprediksi tumbuh pada kisaran 4,5% saja untuk periode 2009. Namap un Asia masih dapat berharap kepada kekuatan ekonomi China dan India yang terlihat tangguh dalam terpaan krisis global ini dengan estimasi pertumbuhan GDP sekitar 6-7% pada 2009 ini.

Penurunan harga minyak mentah (crude oil) dunia semakin dalam. Pada medio Desember 2009, harga minyak bahkan sudah menembus level psikologisnya USD40/barrel dan mencatatkan rekor terendah baru USD37,19/barrel. Beberapa skenario terburuk menyatakan bahwa trend harga minyak mungkin akan turun sampai USD25/barrel. Apabila skenario ini terjadi, maka bursa saham global akan mengalami penurunan berikutnya; indeks Dow Jones dapat berada pada level 7.000, dan bursa global akan mengikuti Wall Street. Para investor perlu dengan cermat mengamati pergerakan harga minyak ini.

Per 18 Desember 2008, OPEC memutuskan untuk memotong produksi 2,2 juta barrel per hari (bph), dan tindakan ini akan terus disesuaikan dengan pergerakan harga minyak dunia. Idealnya harga crude oil berkisar antara USD60-70/barrel sehingga diharapkan memicu pemulihan ekonomi yang cepat dan seimbang untuk menggairahkan pasar global.

Indonesia Market Outlook 1Q09-2Q09

Memasuki 2009, terdapat beberapa faktor yang perlu diwaspadai selain faktor-faktor fundamental perekonomian global di atas. Pertama, kondisi perekonomian AS, Eropa dan Jepang yang masih belum menentu. Kedua, belum stabilnya harga crude oil yang semakin volatile yang diikutii harga komoditas lainnya di bottom level nya. Menurut analisis supply-demand yang dilakukan CAPITAL PRICE tehadap komoditas minyak mentah ini kisaran harga minyak akan berada pada USD 40–USD 55/barrel pada kuartal I 2009 dan USD 60-70 pada kuartal II 2009.

Ketiga, potensi PHK masal yang mencapai 2-3 juta orang pada kuartal 1 dan 2, 2009 dan membutuhkan stimulus ekonomi bagi sektor riil. Keempat, kekhawatiran krisis sosial-politik pada Pemilu 2009 menjelang akhir 1Q09 dan 2Q09 akan menguat jika ada pihak-pihak mempolitisasi krisis ekonomi menjadi krisis sosial-politik. Kelima, menurunnya kinerja laporan kuartalan 1Q09 dan 2Q09 para emiten BEI terutama sektor perkebunan, pertambangan, properti, otomotif, perbankan dan lainnya. Nilai EPS saham-saham akan menjadi sangat rendah dan PER BEI akan berada di bawah 10x.

Permasalahan likuiditas makro yang ketat juga akan membuat ekonomi cenderung lesu, dan BEI akan kekurangan likuiditas sampai indikator makroekonomi menunjukan sinyal positif yang mampu memancing kepercayaan asing untuk masuk. Memang terdapat beberapa lonjakan IHSG akhir-akhir ini, namun belum disertai kenaikan volume yang memadai. Masalah likuiditas ini akan terus merongrong BEI sepanjang 1Q09 dan 2Q09 sehingga kenaikkan IHSG banyak menemui kendala.

Kabar baiknya adalah; dengan turunnya harga BBM, inflasi akibat dorongan biaya akan mereda. Dengan demikian, suku bunga di tahun 2009 berpotensi menurun menuju 8%. Sektor perbankan akan sedikit menggeliat mulai 2Q09 karena penurunan suku bunga patokan. Kendati begitu, turunnya BI rate bukan jaminan turunnya bunga kredit ke level terendah seperti terjadi pada awal tahun 2008. Pertumbuhan kredit perbankan sebagai akibat stimulus perekonomian di tahun 2009 menurut kami hanya mampu mencapai angka 10-15% sepanjang 2009 nanti. Pasalnya, krisis keuangan akan meningkatkan potensi kredit macet, penurunan daya beli, dan pemangkasan kapasitas produksi para debitornya.

Debt market termasuk SUN akan sedikit menggeliat dengan naiknya harga obligasi akibat turunnya BI rate. Yield-to-maturity SUN jangka menengah dan panjang berpotensi turun ke level 9%-11% di tahun 2009. Penurunan BI rate akan terus berlanggsung sepanjang angka inflasi terus turun atau bahkan deflasi karena rendahnya daya beli masyarakat. Ini membuat Debt market akan terus mempunyai harapan yang baik.

Sektor yang perlu dicermati terkait potensi turunnya harga minyak dunia adalah sektor berbasis komoditas dan pertambangan. Komoditas mining sangat tergantung harga minyak dunia dan mempunyai korealsi yang tinggi terutama metal dan CPO. Sektor konstruksi kemungkinan akan turun 30% sekalipun rencana pemerintah mengalokasikan dana besar untuk proyek infrastruktur skala nasional diiringi harapan BI rate yang terus turun.

Imbas dari proyek infrastruktur membuat emiten sektor semen masih dapat bertahan karena konsumsi semen yang relatif tetap dibarengi penurunan harga BBM dan batubara yang cukup besar sehingga efisiensi biaya produksi meningkat disertai ekspansi produksi mendekati economies of scale-nya. Sektor consumer goods sebagai defensive sector diperkirakan masih tetap bertahan terhadap terpaan krisis dan kinerja keuangannya tidak akan turun signifikan.

Namun demikian, kesuramam pasar modal ini diharapkan hanya berlangsung sementara, khususnya di 1Q09. Kuartal kedua (2Q09) akan mulai memperlihatkan konsolidasi untuk siap-siap mengalami tren naik dengan tetap memperhaitkan kinerja laporan keuangan, sehingga baru pada 3Q09, prospek pemulihan diprediksi akan mulai menemukan indikator positif fundamentalnya.

Kondisi krisis keuangan global ini justru menciptakan peluang besar bagi investasi jangka panjang (long-term investment) karena harga saham di peralihan tahun 2008-2009 relatif murah, dan pospek bisnis beberapa tahun ke depan yang sangat baik. Pergerakan jangka panjang IHSG akan kembali memberikan return normal sekitar 15%-20% per tahun, bahkan lebih untuk beberapa sektor tertentu seperti perkebunan dan pertambangan seiring dengan pertumbuhan harga komoditas dan meningkatnya nominal GDP Indonesia.

Skenario outlook ini tergantung kepada seberapa cepat ekonomi global khusunya AS, Eropa dan Jepang dapat pulih kembali dan kenaikan harga crude oil dan komoditas andalan lainnya.

Artikel ini pernah dimuat harian Bisnis Indonesia dan menjadi materi Talk Show di PAS FM pada 5 Januari 2009

Perdana Wahyu Santosa – Chief Knowledge Officer CAPITAL PRICE
Research Center for Capital Market, Portfolio Investment, Corporate Finance and Economics

January 21, 2009 Posted by | Market Analysis | Leave a comment

Prince Al Waleed Bin Talal of Saudi Arabia

He each invested up to $200 million the development of infrastructure and economic activity in Africa Prince Alwaleed’s investment operation, Kingdom Holding Co., has stakes in companies across a range of sectors, including hotels, media and real estate

Who is the largest individual shareholder of Citigroup? CEO Sanford Weill will tell you “I’ve never had an individual shareholder who is as big as he is.” The man Weill is referring to is Prince al-Waleed Bin Talal of Saudi Arabia, the Warren Buffet of Saudi Arabia

He consequently got the contract and invested the entire proceeds in Citigroup at $9 a share His giant stake in Citigroup alone totals a cool $10 billion. (+/- 33%). Like most Saudi Arabians, I myself am a practicing, traditional Muslim, and yet I have liberal views.

I believe that women should of course be allowed to drive cars, and that they should generally have all rights that men have. If you visit the hotel I own in Paris, you’ll find two verses of the Koran displayed in the lobby, right next to the bar, where we serve alcohol. I am the biggest shareholder in Citigroup, the world’s largest bank. Who do you think is the president of Citigroup? He’s a Jew. Many of my friends and business associates are Christians and Jews. Traditionalism and liberalism are not mutually exclusive. But we must be cautious and show respect for all religions.

The purchase of large share of what was considered a conservative station by a Saudi Prince:

Prince Al Waleed Bin Talal, CEO of Saudi Arabia’s Kingdom Holding Company, has purchased 5% of Kuwait Invest Holding Company

Kuwait Invest Holding is part of the Jassim Al-Bahar Group of Companies. Prince Al Waleed invested 5% in IFA’s capital in September 2003. IFA is now worth over US $1 billion

We welcome and are proud of Prince Al Waleed’s investment in Kuwait Invest Holding. This is the second investment in the Kuwait Stock Market by His Highness within a year and it will further strengthen the Kuwait Stock Market.

His interests range from his own construction, hotel and oil firms to the stocks of troubled brand-name firms, including Compaq, Disney and Kodak

He is an entrepreneur and international investor with a net worth estimated in 2006 at $20 billion, and he is ranked as the eighth richest person in the world by Forbes
his holdings in Citigroup now comprises half of his wealth worth US$10 billion.[1] He has also made large investments in AOL, Apple Inc., Worldcom, Motorola, News Corporation Ltd and other technology and media companies

His first big win in 1991: $790 million of depressed Citicorp stock that has grown to an $8 billion stake in what is now Citigroup. And he’s looking for similar opportunities in today’s market.

January 21, 2009 Posted by | General Articles | Leave a comment