Friday, August 29, 2008
1. US Q2 GDP revised up to 3.3% on higher exports, spending.
But is the BEA measuring growth or inflation?
2. As the credit crisis continues, consumers will be forced to save.
3. Merrill losses wipe away longtime profits.
4. Credit crisis has produced some surprising winners and losers.
5. Derivatives law sheds light on the financial ripple effect.
6. Pressure mounts on Thailand's PM as protests spread.
7. Reports of Steve Jobs' death are greatly exaggerated.
8. Economist: Is farmland overvalued?
9. FT dopes out the long-term outlook for emerging markets.
10. China's tallest skyscraper meets surging office demand (video).
11. Skyscrapers and Business Cycles - Mark Thornton.
12. Cambodia is building up its economy and attracting investors.
13. Mark Mobius finds Vietnam's stock market attractive.
14. Brother, can you spare some gold coins?
15. "GSEs: too big to survive", says Michael Pento.
Thanks for reading Finance Trends Matter. Hope you've enjoyed this week's posts.
You can bookmark us for future reference and subscribe to our site feed to keep up with all our recent posts. Enjoy your weekend, and visit often.
Wednesday, August 27, 2008
Here's how we left off Monday's post:
"Did the recent, sharp summer correction in oil and resource prices mark the end of the 2000s commodity boom, or will the drop seen in leading commodity indexes such as the GSCI and CRB turn out to be a cyclical down move in a continuing, long-term bull market?"
Today we're going to try and answer some of these questions, while also looking at the prospects for China's post-Olympics economy, since China's growth has played such a large role in fueling the rise in commodity prices this decade.
First off, how is China's economy doing and what is the overall economic effect for a country hosting the Olympics?
Historically, economic benefits to host countries have been small, and most observers would regard the national financial impact of an Olympics hosting as rather inconsequential. Despite spending over $40 billion on the Olympics, five times what was spent on the Sydney Olympics, economists feel the effort will have little economic impact on China as a whole, although benefits may have accrued to Beijing as an outgrowth of the city's construction boom.
In fact, with the Olympics now over, China's officials are focused on how to avoid an economic slowdown. Reuters reports that the country's policy makers are trying to goose economic activity by encouraging an increase in power generation, relaxing caps on bank lending, and creating tax breaks for textile goods exporters.
Excerpt from, "After the Games, China's economy faces big hurdle":
"Post-Olympics China is slowing, not because the Olympics are over, but because of global forces," said Don Straszheim, vice-chairman of Roth Capital in Los Angeles.
"China's macro statistics are going to look terrible the rest of this year and into 2009. China wants to act, and supporting the growth rate is going to be overwhelmingly the top policy priority," Straszheim said in a note to clients.
JPMorgan Chase told clients that the government was studying a fiscal stimulus package worth 200-400 billion yuan ($29-59 billion).
A burst of public works spending would reduce China's reliance on exports -- a source of friction with its trading partners -- and address China's fundamental needs. "
So now that the Olympics are over and done with, it seems China will look to fiscal stimulus packages and activity related to infrastructure spending to keep their economy going at the desired rate of growth (hmm, sounds a bit like the US economy).
While we are currently experiencing worries over a possible global slowdown, it's entirely possible that demand for commodities and raw materials (such as oil, base metals, cement) could pick up again in the not-too-distant future as these infrastructure projects gain steam and China's urbanization continues.
Interestingly, commodities experienced a sharp summertime correction around the same time that China was reaching the end of its frenzied economic activity in the runup to the Olympic games. This post-Olympics correction scenario was the subject of much talk in the months and years before the event, but now that such an event has transpired, we have to ask: is it all down to a slowdown China and the emerging markets or are there other forces at work here?
Actually, much of the break in commodity prices could also be explained by events taking place in the financial markets. Given the recent overwhelming investment demand for commodities and commodity related investments, the long-commodities trade may have simply become too overcrowded, which set the stage for a violent shakeout.
Hedge funds began selling their long positions in commodities as the long commodities/short financials trade started to unravel a bit in July. Meanwhile, the recent dollar rally further tarnished commodities' inflation-hedge appeal, which also helped to push commodity prices down during this summer.
Monetary conditions have also played a part in the commodities correction, as Gary Dorsch has recently detailed. In, "Is the 'Commodity Super Cycle' Dead or Alive?", he notes that tightening of monetary conditions by a coalition of six central banks has coincided with the plunge in commodity prices.
"While the Fed, the British, and Canadian central bankers were stoking the mania in the commodities markets, a coalition of six influential central banks, from Brazil, China, Europe, India, Korea, and Russia, were working collectively in the opposite direction.
The Group-of-Six, led by ECB chief Jean Claude Trichet, tightened their monetary policies, in the hope of derailing the powerful “Commodity Super Cycle,” which was wrecking havoc across the global economic landscape."
Dorsch goes on to note that tightening by the central banks resulted in a drop in the Dow Jones Commodity Index in local currencies, and an accompanying drop in the national stock markets, in the case of China and Brazil.
So what's ahead for commodity prices in 2009 and beyond? Nobody knows for certain, but we can try and draw some insights from knowledgeable sources. To that end, I have compiled a short list of extra articles and interviews on this subject for you to peruse.
1. Investors debate extent of commodities rout - Bloomberg.
2. Hedge fund manager Renee Haugerud on oil, commodities - Bloomberg.
3. Commodity correction: an important bottom? - Frank Barbera/FSO.
4. Bill Powers and Jim Puplava discuss energy and commodity prices during the first hour segment (at 34 minute mark) of the August 16, 2008 Financial Sense Newshour broadcast.
See also, third hour "Big Picture" segment of the August 16, 2008 broadcast.
5. Mark Mobius discusses emerging market shares and commodity prices with Bloomberg's Charles Stein (audio).
Monday, August 25, 2008
In a recent Bloomberg article, Rogers reiterated his call for higher oil and commodity prices over the next several years.
"Investor Jim Rogers, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, said Aug. 23 that crude oil prices will climb.
``Over the course of time, it's a bull market,'' Rogers, 65, chairman of Rogers Holdings, said after an investor conference in Kuala Lumpur. While oil could fall to $75 or rise to $175, prices will appreciate during the next 10 years, he said."
Did the recent, sharp summer correction in oil and resource prices mark the end of the 2000s commodity boom, or will the drop seen in leading commodity indexes such as the GSCI and CRB turn out to be a cyclical down move in a continuing, long-term bull market?
More on this to come.
Friday, August 22, 2008
1. US stocks gain on Lehman buyout rumors (the "good" kind of rumors).
2. Investors quit Russia after Georgia war.
3. Nonidentical twins: solvency and liquidity.
4. Three hours with Warren Buffett: CNBC videos and transcripts (Thanks, BMB).
5. Lessons from Warren Buffett and Charlie Munger.
6. In defense of short-selling: Doug Kass.
7. Key to happineness is freedom, not income.
8. "Thinking outside the game" - The Financial Philosopher.
9. Charlie Rose speaks with artist, Francesco Clemente (Thanks, Luke).
Thanks for visiting Finance Trends Matter. Enjoy your weekend, and stop by often.
Thursday, August 21, 2008
In today's post, we will learn from Buffett's long-time friend and business partner, Berkshire Hathaway Vice-Chairman, Charlie Munger.
While Charlie Munger is not as well known as Warren Buffett, his thoughts on investing, education, and life are highly prized by those who have followed his investment career. Shareholder meetings for Berkshire Hathaway and Wesco Financial Corporation, of which Charlie is the chairman, have yielded many valuable insights from Mr. Munger over the years.
This video conversation with Charlie Munger (click #1 in the iTunes playlist or watch on YouTube), filmed at Caltech in March of 2008, is testament to his unique thinking. Here, Munger shares his thought process with students and viewers, and challenges us to think across disciplines.
Some important points made by Munger in this discussion:
· Humility was a problem for Munger, especially as a young man. He still recognizes this as a character flaw. Still, he and Warren are very good at recognizing what they don't know. As Charlie says, know the edge of your own competency in a given area. This was an important factor in Berkshire's success.
· Studying folly. "I was very lucky in my own life because every place I looked, at the pinnacle there was somebody better than I was". Charlie knew he could succeed by studying folly and using common sense (which is uncommon) to avoid it. This was his great advantage.
· Invert, always invert. Tackle problems by inversion.
· Charlie always liked finding big ideas which held a great deal of instructive power. He searches through disparate fields of study for these concepts, and uses them with no regard for the territorial boundaries of academic disciplines. He uses these ideas in his daily life, to solve problems and educate himself.
· Munger likes to collect inanities and learn from them. There is never a shortage of inanities, and he finds them amusing and instructive.
· Integrating ideas. Munger is interested in integrating ideas taken from seperate disciplines.
He likes to do this in his head, sorting out ideas that may conflict by learning more or trying to figure out the synthesis for himself. He works to find some explanation for conflicting ideas, rather than retreating to the safety of one's own orthodoxy or discipline, which is what most people do.
· If you understand the main ideas of all the disciplines, you are, by definition, a man in possession of many tools. You are therefore unlikely to commit the inanities made by others, especially those who are more limited in their understanding of the issues.
· With his expanded base of knowledge and bag of "mental tricks", Munger feels he is able to enter new areas and can sometimes solve problems that might have stumped people who are more experienced or eminent in those fields.
This gives him the flexibility and confidence to operate in areas outside his own. He notes, "this is a very dangerous attitude to have in ordinary social discourse, but it's a very good way to make money".
· Charlie idolizes Benjamin Franklin for his very wide range of knowledge, and the competency which he showed over the full range. He notes that Franklin was also self-educated and a wise observer of human nature. A thirst for learning and knowledge of human psychology are often attributes of successful investors.
· Focus on the big ideas and use common sense to pick up the obvious finds. Charlie uses a gold mining anology: he would rather look for the big nuggets of gold than spend his time placer mining and sifting through gravel, trying to uncover small pebbles.
There is plenty more to hear and learn in this discussion, so be sure to bookmark this post and view the whole clip when you have time. Enjoy the lessons, and apply them as you see fit!
1. Lessons from Warren Buffett.
2. Lessons from Market Wizard, Ray Dalio.
Wednesday, August 20, 2008
On Monday we featured the writings and interview thoughts of noted value investor Seth Klarman.
Today's guest of honor in our developing blog lecture series is Berkshire Hathaway chief Warren Buffett, an investor who, for most Americans, requires no further introduction.
Yet it is fair to say that Buffett was not as well known in international investment circles until a recent business trip to Europe this past spring, where he announced that Berkshire Hathaway would begin stepping up its investments and business acquisitions in certain foreign countries where business conditions were favorable.
At that time, Buffett gave a series of press conferences at each stop along the way through Europe. Today, we will outline some of the lessons learned from a press conference held for Buffett in Lausanne, Switzerland.
In this Bloomberg video clip, Buffett discusses Berkshire Hathaway's investment and acquisition philosophy, as well as his personal views on investing and some of the oft-discussed economic themes of 2008. Some highlights and notes from that discussion:
· On doing business with Eitan Wertheimer and purchasing a majority stake in Israeli manufacturing firm, Iscar: Buffett said that Berkshire's acquisition of Iscar was, "the right business, with the right people, at the right price, at the right time".
Buffett was especially impressed with the written communication he initially received from Wertheimer, a letter barely longer than one page describing a company he had never heard of before. Buffett recalls, "both the quality of the business and the quality of the person writing it just leapt off the page".
The quality of this initial correspondence helped set Iscar apart from the hundreds of letters Buffett receives from other companies looking to do a deal with Berkshire. The importance of developing communication skills is a point mentioned later on in the Q&A session, as Buffett responds to a question on business school education.
· The differences in buying whole businesses, rather than shares: When buying marketable securities, you can always change your mind tomorrow. When buying businesses, Berkshire wants to, "buy to keep".
Margin of safety is not in the price paid for the business, but in qualitative factors, such as a company's durable competitive advantage and management that is passionate about running the business.
· Timing of deals: "We don't do deals when we're ready to buy, but rather, when a company is ready to sell". Owners of successful businesses should maintain control and ownership as long as they can (since the business is an appreciating asset), but at some point many are forced to sell, for one reason or another. This is where Berkshire comes in.
· Berkshire is an attractive purchaser for owners looking to sell. The acquisition price will be lower than that achieved at auction, but business owners are buying into the Berkshire culture and way of doing business. The negotiations are usually simple, and once the business is acquired by Berkshire Hathaway, there is little to no meddling from the parent company in the subsidiary's affairs.
· Currency factors are not a main consideration in seeking European acquisitions. Buffett is "perfectly happy" to earn money in Euros, but says it's not a big factor over the long term. He does believe that the European currencies will remain strong against the US dollar over the long term, due to US policies that are likely to weaken the dollar over time.
· Buffett on business-school education: There are really two important investment concepts - how to value a business, and how to think about markets. The stock market is there to serve you, not to inform you (The "Mr. Market" philosophy).
Students could benefit from improving their verbal and written communication skills. People who have honed these skills can have an enormous impact, and will "jump out from the pack".
· On the current state of the financial system and financial institutions: The financial world has become increasingly complex with the growth of derivatives and structured investment products.
As Buffett says, "We talk about too big to fail; I think some of these places [financial firms] are too big to manage", citing the case of Berkshire's own experience with General Re's complex derivatives book.
The current period (last spring, and up to the present) has shown the consequences of people not understanding the instruments they are selling.
· Asked about sovereign wealth funds (SWFs), Buffett replies that they are a natural outgrowth of the US' current account deficit. The money we pay for foreign goods is collected by exporting nations, and that money must end up somewhere.
Many nations would, of course, prefer to invest these funds in real assets and companies, rather than just "stick the money under the mattress".
· Speculators are not, in Buffett's opinion, the real driver of higher commodity prices. The rise in corn, agricultural commodities, and oil prices were all easily explained (and driven) by supply and demand fundamentals.
He notes that US subsidies for corn ethanol had driven demand for corn higher, and produced knock-on effects for crops displaced by increased corn acreage. Inflationary monetary policies are also helping to drive commodity prices higher.
· On succession at Berkshire Hathaway: Key people have been identified by Berkshire's board of directors to replace Warren Buffett at a moment's notice. Just as Wal-Mart continued to execute their business strategy and grow after the passing of founder Sam Walton, Berkshire will march on as its culture is now well-defined and institutionalized.
Hope you enjoyed the video and the business lessons from Warren Buffett.
Tune in tomorrow, as we continue this series with a video lecture and lessons from Berkshire Hathaway Vice-Chairman, Charlie Munger.
Related articles and posts:
1. Lessons from Charlie Munger - Finance Trends
2. Buffett's successor + Woodstock for capitalists - Finance Trends
3. Calling all Buffettheads - Finance Trends.
Monday, August 18, 2008
Value Stock Plus has linked to a scanned PDF copy of the book on its Seth Klarman page (Update: link removed due to Google DMCA copyright notice. See the extensive Margin of Safety notes included in our related links below).
My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out our previous Margin of Safety post for the BusinessWeek article that describes the buzz surrounding Klarman's hard-to-find (and increasingly expensive) book.
You can also go straight to Ronald Redfield's Margin of Safety book notes.
Enjoy the Margin of Safety notes. You'll find more wisdom from Seth Klarman and other investing greats in our related posts below.
Subscribe to Finance Trends by email or get new posts via RSS. You can follow our real-time updates on Twitter and StockTwits.
Related articles and posts:
1. Seth Klarman interviews and Margin of Safety notes - Stockideas.org.
2. Seth Klarman: Lessons from 2008 - ValuePlays via Finance Trends.
3. Lessons from Hedge Fund Market Wizards: Ray Dalio - Finance Trends.
4. Lessons from Charlie Munger - Finance Trends
Friday, August 15, 2008
Please enjoy our, "Features of the week".
1. Georgia forced to accept a Russian occupation.
See also: "Russia's concept for dominating Europe", and "Georgia crisis comes in middle of new great game".
2. Gold, oil slump, leading commodities drop as dollar rallies.
3. Commodity correction: coming into an important bottom?
4. Mohammed El-Erian says the credit crisis is morphing into something much bigger (Bloomberg audio interview).
5. John Authers on signs the credit squeeze will get much more painful over the next year.
6. Rising profits in FASB wonderland...or "Wimpy's rule".
7. Hunter, Touradji hedge funds gain as commodities sink.
8. Banks and Brokers: exposure to Level 3 assets (charts).
9. Suburbia comes to China (Fortune magazine).
10. Crybaby capitalists whine for more (bailouts, that is).
11. Peak caviar and oil/resource depletion models.
12. The Intellectuals and Socialism - Friedrich A. Hayek.
13. Jeffrey Tucker on the role of gold and silver money in, "Truth in the Coin Shop".
14. Seed saving and the Heirloom vegetable garden.
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Thanks for reading Finance Trends Matter. Have a nice weekend!
Thursday, August 14, 2008
Are we nearing the end of the Oil Age?
Is the end of a cheap fossil fuel era at hand? How will we make the transition from a world dependent on hydrocarbon energy to one powered by a mix of hydrocarbons and renewable energy, and can we profit from this coming shift?
Answers to these questions, and further insights into our oil-dependent global economy, are found in a new book by Brian Hicks and Chris Nelder, entitled, Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century.
The Oil Age: An Epochal Shift
The book opens with an elegy to the end of an age: the Oil Age. As the authors tell it, that era recently came to an end when the world consumed its one-trillionth barrel of oil. By the end of 2005, we had used up half of the world's known oil reserves.
What's more, with global oil consumption growing steadily to over 85 million barrels a day, the world has, "only about 30 to 50 years' worth of oil left at present rates of consumption". The long up-cycle that brought oil abundance and steadily increasing oil production will give way to a declining curve in world oil production, bringing higher oil prices and shortages along with it.
As the authors remind us, this gradual decline in the availability of cheap oil and fossil fuel energy has implications that go beyond our need for liquid transport fuels.
Many of the manufactured products we use every day are made from petroleum products, or created with energy from fossil fuels. Our system of food production and storage has become totally dependent on fossil fuel energy. In turn, the rise of fossil fuel-dependent food production has supported the enormous growth in world population over the past one hundred years.
Approaching the Peak
With so much riding on the outcome of our energy future, and so little understanding of these issues in mainstream circles, it's no surprise that Hicks and Nelder have decided to devote the first part of Profit to a discussion of the approaching peak in global oil production and its consequences.
There is much to learn here, and the chapters and subtopics which introduce us to the problems of peak oil are very well thought out, factually detailed, and laid out in a clear, logical progression. The information is quite interesting and very up to date, and presented in a way that is likely to engage the energy novice, as well as the more seasoned peak oil observer.
Topics range from the geological formation of oil, to the problems with global oil reserve estimates and our dependence on production from aging, giant old fields. There follows a pointed discussion of why production of unconventional oil (tar sands, oil shales) and conventional crude oil from smaller fields is unlikely to mitigate production declines observed in larger, conventional oil fields.
Readers will also find a very useful breakdown and clarification of the various oil production figures bandied about in oil discussions and media reports, as well as a brief, but fascinating chapter on the true (external) costs associated with oil production and our oil dependence.
A Shift to Renewables and Electric Power
It's in the second and third parts of the book, in chapters like, "Twilight for Fossil Fuels", and, "The Renewable Revolution", that the authors shift their focus more towards the investment opportunities arising from the dwindling availability of hydrocarbon energy sources and the shift to renewable energy sources.
These later chapters mix overviews of what to expect from energy sources like tar sands, coal, geothermal, wind, and solar power with possible investment ideas, mostly through the highlighting of key stocks in each industry.
While investment themes are present throughout the book, many of the specific stock ideas are concentrated in the book's latter portion, and while these are largely limited to brief descriptions of companies operating in a given segment of the energy industry, they at least seem to provide some jumping off point for further investigation.
Hicks and Nelder summarize the push towards renewable fuel options on page 119, in a chapter subheading called, "Diminishing Returns and Receding Horizons":
"Whether we're talking about crude oil, natural gas, or coal, the trend is the same: every year we're paying more (and expending more effort) for less and less energy."
In short, we're not just facing a problem of peak oil; we're facing a bigger problem of "peak everything". We'll need all the help we can get from renewable energy sources, but will these technologies be able to ramp up in time to give us the energy we need?
Hicks and Nelder are very cautious on this point, seeing "no supply-side solutions" to our energy needs. Instead, they emphasise a need to reduce energy use in order to the smooth the transition to a post-peak world.
If there is a bright side to this vision, it's in the authors' hopes for an improved and expanded electricity infrastructure that would help us replace our current dependency on liquid fuels. This, along with their faith in humanity's ingenuity and ability to respond to problems with innovative solutions, gives the book a realistic, yet slightly optimistic outlook.
One of the real strengths of Profit is its ability to introduce the reader to a big picture view of our global energy future and the likely onset of peak oil and peak fossil fuel energy. It discusses the idea of a "peak everything" future not in an alarmist way, but with all of the seriousness that this subject demands.
The authors seem to have a sincere faith in the effectiveness of large-scale efforts (such as their proposed "Manhattan Project for Energy") and government "investment" programs in solving some of our energy problems.
However, many of the so-called "investments" called for in the book (such as government-sponsored R&D programs for alternative energy) would more accurately be labelled "hope & spend" projects. Results from such government co-ordinated spending projects are likely to be slight in relation to the time and resources expended, especially given their historical track record and the probability that benchmarks of success will be open-ended and politically defined.
As mentioned, specific investment ideas were present throughout the book. Where Profit from the Peak really excels is in its excellent overviews of all current and up-and-coming energy sources. These overviews, more than anything, will help investors and traders to better understand the sectors they are hoping to get involved in. If you're looking to speculate in shares of, say, uranium companies, it may help you to first get a realistic view of the nuclear industry's prospects before jumping in.
The information throughout the book was interesting and layman-friendly (speaking from a personal viewpoint), and while I felt there were some minor things left out early on in the book (such as the authors' incomplete response to their own mention of the abiotic oil theory) or certain ideas I personally disagreed with, I found the book to be quite useful and informative overall.
I would certainly recommend Profit from the Peak to anyone who wants to better understand our current energy reality, as well as the economic and investment implications of our energy future.
· Interview with Profit from the Peak co-author, Chris Nelder on the Financial Sense Newshour broadcast.
Wednesday, August 13, 2008
The notes are for an upcoming review of the book, which I'll post here tomorrow or early next week (depending on when I can finish it).
In the meantime, those of you interested in the subjects of peak oil, energy investing, and the transition from fossil-fuel energy to alternative energy might enjoy this recent interview with the book's co-author Chris Nelder.
Nelder recently spoke with the Financial Sense Newshour about the looming peak in crude oil production and the investment and lifestyle implications of this event.
While most of the interview seems to focus on the energy background side of the equation, rather than the investing side, I think you'll find a useful introduction to many of the book's concepts here.
Monday, August 11, 2008
Simmons appeared on the Financial Sense Newshour last week for an interview about oil production and the future of energy prices.
In, "Energy: It's Still Cheap", Simmons and FSN host Jim Puplava discuss the possibility of coming oil shortages, as well as options for mitigating future energy crises through conservation methods and lifestyle changes.
Looking at prices in Europe and much of the rest of the world, Simmons notes that oil is still relatively cheap in America, despite Americans' growing outrage over steadily escalating oil and gasoline prices.
How will we cope with $9 or $10 per gallon gasoline prices and the possibility of future supply disruptions in an oil-dependant society?
Hear the interview and see the related reading links to find out more about peak oil and the shift to energy alternatives.
Friday, August 08, 2008
1. US stocks rise, S&P posts best week since April as oil falls.
2. Emerging market shares drop to 1-year low as Russia, China fall.
3. Ford, GM survival odds deteriorate with the economy.
4. Where is the discount window for taxpayers? Protest at the Fed.
5. Marc Faber says we have entered a global recession (Bloomberg).
6. Commodities tumble as CRB index hits a four-month low.
7. America's smartest banker. How come Hudson City Bank is thriving?
8. Hermance says this credit crunch not the worst he's seen.
9. Niall Ferguson: How a local sqaull might become a global tempest.
See also: FT's in depth look at the credit crunch, "The Big Freeze".
10. A personal view of the crisis: Confessions of a risk manager.
11. War erupts in Georgia. Fighting between Russia and Georgia underway.
12. FT takes an in depth look at the Beijing Olympics 2008.
13. Hospitals and health care: EconTalk interview with Arnold Kling.
14. The future of the internet: an iPatriot Act? (Hat tip: LRC blog)
Thanks for reading Finance Trends Matter.
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Enjoy your weekend!
Wednesday, August 06, 2008
To spur your thinking on this subject, I will present two very different views on how investors might respond to the same bear market conditions. In the following passages, Bennet Sedacca of Minyanville, and Kent Thune of The Financial Philosopher, share their thoughts on planning for and investing through the bear market portion of market cycles.
As you read this, think about which of these perspectives works best for you. Do you try to identify and capture the various trend and counter trend moves, adopt long/short investment portfolio and trading strategies, time the market (through charting and historical data referencing) and attempt to avoid bear phases altogether, or continue to invest with a well-thought out plan that encompasses defensive investments and asset allocation strategies?
Remember: each person needs to find a trading or investment strategy/plan that suits their own unique temperament, skill level, outlook, and goals. We all see things differently, and variations in individual judgement, response, preferences, and psychology are some of the key things that make markets function!
In, "The Sun Will Come Out in 2010", Bennet Sedacca looks to past presidential/fiscal stimulus cycles as a guide for identifying future rally stages in the context of an ongoing secular bear market.
Though bad news is currently in abundance, and a bear market is evident, Bennet feels that some knowledgeable, active investors can plan ahead to take advantage of opportunities that will present themselves in the coming months and years.
"The economy and the credit/equity markets are anything but a walk in the park these days. But hey, this isn't a game for amateurs, and this cycle will most certainly show us who a) understands the big picture, b) knows how to measure risk and c) knows how to preserve capital.
Why? Because the sun will come out tomorrow. Tomorrow may be a bit far off, but it's out there. The goal now is to make it there with your capital intact, and even with some gains along the way.
The difference between realists and “perma-bears” is this: “Perma-bears” wake up praying for rain and don’t like to plan for tomorrow. Realists, on the other hand, look to get through the rainy days, and then pounce when the sun's about to peek out again."
According to Bennet, many investors have been lulled into a false sense of security by the previous secular bull market (1982-2000) in shares, and an overwhelming focus on long-only investing programs. This outlook has not served individual investors well since the secular bear market in US stocks began back in 2000.
"Folks are starting to figure out that traditional long-only investing means that you have to be invested for a long time. I have no problem with that philosophy, provided your time horizon is 100 years and you don’t mind 15- to 17-year periods where you don’t make any money (like the one we're in now).
Frankly, I have yet to meet an investor with a 100-year time horizon and the patience to sit through a secular bear market in stocks - and the volatility that goes with it."
What is the flip side of this "buy and hold/pray" mantra? Bennet outlines his view in part 2, by emphasizing the need to stay cautious and capture the counter trend moves.
"I believe the correct posture is one of caution, not to be confused with being bearish. I believe that every bet one makes must be measured and have considerable thought behind it.
It's truly okay to miss opportunities but the big cyclical moves, even within secular bear markets, must be had. The same is true for cyclical bear moves within secular bull markets, which I believe could be a result of a combination of both time and price...
...I do believe one thing for sure. The sun will definitely come out tomorrow. I just have to be around with my capital and my investor’s capital to take advantage of the sunshine."
Meanwhile, Kent Thune at The Financial Philosopher feels differently about trying to anticipate market direction and movements.
In his opinion, the best strategy for most investors is a patient and disciplined approach to investing. Kent expresses this view in, "The Wisdom of Asset Allocation":
"I believe time in the market, with proper asset allocation, is preferable to "timing the market," which is a fool's game. In my view, time in the market refers to investing early, investing often, and staying in for the long-term. Albert Einstein called compounding interest "the most powerful force in the universe" and it represents "time in the market" at its best.
Here's a classic example: Which would you rather have -- $1million today or one penny doubled every day for one month? If you chose the penny doubled then you are the "winner" with $5,368,709.12. Time exponentially expands the compounding effect. With less time to invest, even the most skilled traders will find themselves at an enormous disadvantage to compounding interest..."
So as Kent points out, and as The Rolling Stones sang, when it comes to saving and investing, "Time is on my side".
But what does the average investor do in the face of an oncoming (or ongoing) bear market? Shouldn't he sidestep such an event and lighten up on his share holdings until the storm has passed?
Kent addresses this point in, "Invest Like a Philosopher: Intro to Asset Allocation":
"Unless you are a professional market timer (which, if you think about it, is an oxymoron) you should be using stocks for their most logical purpose (long-term investing) and your investment portfolio should be allocated in such a way that allows you to respond similarly when someone comments on the market news of the day: "Who cares?"
Simply stated, one can not logically begin the asset allocation process by constructing a portfolio based upon unknown variables; therefore, we must begin the process of asset allocation by separating the known from the unknown.
The investor's (1) Investment Objective, (2) Investment Time Horizon, (3) Amount of Money available to Invest, and (4) Risk Tolerance/Capacity are, in my opinion, the only known variables while everything else, such as future market performance, is largely unknown.
Asset allocation is about creating and maintaining a portfolio of assets (stocks, bonds, cash) that is based upon those four known variables so the investor's concern over the unknown variables are significantly reduced or even removed. Furthermore, proper asset allocation effectively reduces volatility, which, in turn, reduces the human temptation to buy or sell into short-term market movements."
Whether you hew more closely to Kent's view of prudent investment guidelines, or Bennet's call for anticipating and trading/capturing the trend and counter trend moves, one thing is paramount for investors and traders. That is the ability to know yourself, to know your own tolerance for risk, your strengths and weaknesses, and what works well for you. The more I learn about successful traders and investors, the more this theme stands out.
Have you encountered useful advice or lessons in formulating strategies for investing or trading in bear markets?
Maybe you've come across a helpful book, or have uncovered some useful guidelines for surviving and prospering in these down markets.
Share your thoughts, experiences, and investment and trading wisdom here with us!
Monday, August 04, 2008
"All of the 23 developed nations in the MSCI World Index except for Canada have experienced bear-market plunges of 20 percent or more since September as credit losses surged and record commodity prices stoked inflation. Brazil last week became the 23rd out of 25 developing countries in the MSCI Emerging Markets Index to enter a bear market. Only Jordan and Morocco avoided such slumps."
Of course, Bloomberg, like almost everyone else these days, is using the 20 percent rule (a drop of 20 percent from the price high) as their threshold for determining bear markets. Of course, if you're using this arbitrary marker as a guideline, you're likely to find that you've already seen (and sat through) a substantial portion of the average bear market decline.
So let's get a trader's definition of a bear market. The following definition is taken from Victor Sperandeo's book, Trader Vic - Methods of a Wall Street Master.
"Bear market - A long term downtrend (a downtrend lasting months to years) in any market, especially the stock market, characterized by lower intermediate lows (those established in a time frame of weeks to months) interrupted by lower intermediate highs."
Boom, there you have it. Lower highs, lower lows, upmoves usually made on diminishing volume, downlegs accompanied by expanding volume. That's a bear market. Forget all this "20 percent" nonsense.
And by the way, go check out Vic's book if you haven't already; lots more on identifying and classifying bull and bear markets here, and that is just a very small part of an excellent book which covers the principles of speculation, trading psychology, economic principles, and more.
Back to the lecture at hand: ever since the S&P 500 dipped below the magical 20 percent mark in July, the global bear market has been confirmed in the minds of journalists and US market watchers.
Still, while most major global indices are in the midst of longer-term downtrends, Deepak Mohoni notes that "most global indices are also in intermediate uptrends", and that the "major global markets have held on to their intermediate uptrends". So far, so good, but the longer-term trend for many of these markets seems decidedly bearish.
For those who would like a further view of this year's global stock market returns, please see Bespoke Investment Group's global stock markets performance table, as well as Investment Postcards' recent stock market performance round-up. You may find some bright spots here and there!
Friday, August 01, 2008
1. CRB index suffers its worst monthly drop in 28 years.
2. The Short View: Commodities and inflation.
3. Are we trading against Hank Paulson? (Hat tip: BMB)
4. Financial sector has 7 of 10 best days in 2008.
5. Global stock market performance round-up via Investment Postcards.
"In spite of a “teaser” of a rally and stock markets holding their July 15 lows, equity markets were still in the red for the month of July. The MSCI World Index was down 2.5%, with the MSCI Emerging Market Index (-4.2%) faring even worse."
6. Frank Barbera charts the US dollar, stocks, and commodity markets.
7. Gary Dorsch explores the arcane world of commodities and currencies.
8. "The Cost of Socialism" - John Browne, Euro Pacific Capital.
"Over the past few decades, the United States has steadily evolved from a nation of ‘producers’ to one of ‘consumers’. The change has been celebrated by politicians and economists as proof of America’s arrival at the top of the global economic food chain. In reality, the development has depleted the nation of its hard-earned wealth, and has led us to the brink of ruin."
9. FASB: OK for USA to turn Japanese. Take it, Barry:
"Just when you think there is a glimmer of hope that some of these ne'er do well, lying, cheating, sniveling, cowardly bank CEOs might finally be forced to step up to the confessional and tell all, this comes along: FASB Postpones Off-Balance-Sheet Rule for a Year.
Which makes me wonder: How precarious is the financial health of the US banks and brokers that they need yet another year before they can, oh, I don't know -- disclose what they own on their balance sheets?"
10. Plans for a central clearing house for credit derivatives.
11. Soros' global macro successors shine in first half of 2008.
12. When and why the credit crisis began.
13. Keys to successful trading and investing: the company you keep.
14. The 'Experience-Stretching Hypothesis' - Financial Philosopher.
"It is my unscientific guess that most people who would say that they are truly "happy," would also say that their happiness is not a function of obtaining an end -- it is one of finding pleasure in the act of pursuing happiness, which is the means to an end, illustrated in a common metaphor, the journey -- with little or no consideration for where the journey will take them."
15. Video: A conversation with Charlie Munger.
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