(BN) Greenspan Calls Treasury Yields ‘Canary in the

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Greenspan Calls Treasury Yields 'Canary in the Mine' (Update3)
2010-03-26 19:11:40.33 GMT


(Adds support for 2001 tax cuts in 12th paragraph.)

By Joshua Zumbrun and Craig Torres
March 26 (Bloomberg) -- Former Federal Reserve Chairman
Alan Greenspan said the recent rise in Treasury yields
represents a "canary in the mine" that may signal further
gains in interest rates.
Higher yields reflect investor concerns over "this huge
overhang of federal debt which we have never seen before,"
Greenspan said in an interview today on Bloomberg Television's
"Political Capital With Al Hunt."
"I'm very much concerned about the fiscal situation,"
said Greenspan, 84, who headed the central bank from 1987 to
2006. An increase in long-term interest rates "will make the
housing recovery very difficult to implement and put a dampening
on capital investment as well."
The yield on 10-year Treasury notes was 3.85 percent at
3:08 p.m. in New York, down three basis points from late
yesterday and up from 3.69 percent at the end of last week.
U.S. interest-rate swap spreads declined to the lowest
levels on record this week, reflecting investor concerns about
the ability of nations to finance rising fiscal deficits.
The rate to exchange floating- for fixed-interest payments
for 10 years fell below the comparable-maturity Treasury yield
for the first time on March 23. The swap spread reached as low
as negative 10.19 basis points yesterday before reaching
negative 7.63 basis points.

Record Deficit

The U.S. budget deficit reached a record $1.4 trillion for
the fiscal year that ended Sept. 30 amid falling tax revenue
from the recession, a bailout of the banking and auto
industries, and the $787 billion economic stimulus package.
"I don't like American politics and what's happening,"
Greenspan said.
Historically, there has been "a large buffer between the
level of our federal debt and our capacity to borrow," he said.
"That's narrowing. And I'm finding it very difficult to look
into the future and not worry about that."
Greenspan said in an interview last year that a consumption
tax was a likely response to a widening budget deficit. That may
not be sufficient when the gap is caused by a failure to cut
spending, he said today.
"I'm not convinced by any means that we can succeed in
stabilizing this long-term outlook strictly from a value-added
tax," Greenspan said.

2001 Tax Cut

Greenspan in 2001 supported the first round of tax cuts
under President George W. Bush. At the time, the federal
government operated with a surplus, and Greenspan told Congress
he didn't think the cuts would lead to a deficit.
He told the Senate Budget Committee on Jan. 25, 2001, that
"having a tax cut in place may, in fact, do noticeable good."
The next year he said it would be unwise to unwind the tax cut.
As deficits returned, he became an opponent of further tax cuts,
telling Congress in 2003 that "fiscal stimulus is premature."
In today's interview, the former Fed chairman said the U.S.
economic recovery has been driven "to a very large extent" by
a resurgence of stock prices. The Standard & Poor's 500 Index
has jumped 73 percent since its low on March 9, 2009. The index
was little changed at 1,165.29 at 3:08 p.m. in New York.
"You can see the whole blossoming of finance," Greenspan
said. "As these stock prices have gone up, debt became far more
valuable, and you can see this huge issuance, especially of junk
bonds."
A continued rally in share prices could help sustain the
expansion, Greenspan said. Still, the unemployment rate could
remain "not terribly far from where it is" at 9.7 percent as
people re-enter the labor force to take advantage of job
openings in a growing economy.
The U.S. economy expanded at a 5.6 percent annual rate in
the fourth quarter of 2009, and corporate profits climbed,
figures from the Commerce Department showed today in Washington.
Company earnings increased 8 percent, capping the biggest year-
over-year gain in a quarter century.

For Related News and Information:
Federal Reserve links: FED <GO>
Credit crunch page: WWCC <GO>
Fed balance-sheet figures: ALLX FARW <GO>
Government relief programs: GGRP <GO>
Fed monetary policy: FOMC <GO>
Fed Web links: FRBM <GO>
Central bank rates worldwide: CBRT <GO>

--Editors: Christopher Wellisz, Brendan Murray

To contact the reporters on this story:
Joshua Zumbrun in Washington at +1-202-624-1984 or
jzumbrun@bloomberg.net;
Craig Torres at +1-202-654-1220 or
ctorres3@bloomberg.net

To contact the editor responsible for this story:
Christopher Wellisz at +1-202-624-1862
or cwellisz@bloomberg.net;

Fund Spy

Buy the Unloved, 2010 Style

It pays to go against the grain.

If chasing hot performers hasn't gotten you very far, consider doing the opposite.

Categories with the greatest inflows tend to underperform and those with the greatest outflows tend to outperform. Net flows tend to be driven by past returns, so, in effect, they are telling you what areas have gotten relatively overpriced and underpriced. If the market and fund investors were perfectly efficient and logical, flows and prices would only adjust so that everything had a similar potential risk/reward profile.

About the Author

Russel Kinnel is Morningstar's director of mutual fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping investors pick great mutual funds, build winning portfolios, and monitor their funds for greater gains. Kinnel would like to hear from readers, but no financial-planning questions, please.

Contact Author | Meet other investing specialists

 

However, markets and fund investors generally overdo things in both directions, as the markets of the past two years illustrate vividly.

Since 1994, Morningstar has tracked a strategy named "buy the unloved," which suggests investing in funds from the three most heavily redeemed equity categories from the past 12 months. In addition, it suggests trimming back your positions in the three loved--meaning the most purchased--equity categories.

If you think about it, the logic is somewhat similar to rebalancing. When you rebalance, you are generally selling what's expensive and buying what's cheap because the expensive holdings in your portfolio are those that have rallied the most. Fund flows tend to follow performance, so this strategy reflects a similar approach, only with an emphasis on the extremes, where the most money moved in or out.

 

To implement the strategy, you buy funds from the three most unloved categories and do so again the next year and the year after that. In the following year after accumulating three batches of unloved categories, you roll money from the first batch into a new batch so that your holding period is three years.

From 1994 through 2009, the buy-the-unloved strategy produced an annualized 8.1% return, compared with 4.77% for the loved, 6.24% for the S&P 500, 6.96% for the Wilshire 5000, and 5.36% for the MSCI World. This assumes you invest in the unloved categories for three years running and then roll over the oldest group into the new unloved group starting in year four.

The strategy also produced strong results if you run it on a five-year rotation. In that version, the unloved produced an 8.08% annualized return, compared with 4.25% for the loved, 5.17% for the S&P 500, 5.76% for the Wilshire 5000, and 4.55% for the MSCI World.

Based on the 12-month flows through the end of January, the unloved categories to buy now are large-cap growth, large-cap value, and world stock. The loved categories are diversified emerging markets, foreign large blend, and Pacific Asia ex-Japan.

 

Favorites for Playing the Unloved

 

Among large-growth funds,

 

Primecap Odyssey Growth (POGRX) is one of the best fundamentals-driven growth funds around. As you can see from the record of closed  Vanguard Primecap (VPMCX), the managers have built an outstanding track record by focusing on what a business is worth rather than growth rates or quarterly expectations. One catch is that you have to either invest directly or pay a fee to buy it through Vanguard.

 

For large-cap value, the most contrarian plays are dividend-focused funds, which have been unpopular because of their link to banking and the economy. Thus, I'd take a look at  T. Rowe Price Equity Income (PRFDX) and  American Funds Washington Mutual (AWSHX); the latter has seen more outflows than any other fund in 2009.

 

In world stock,  Dodge & Cox Global Stock (DODWX) is a nice choice. It's a low-cost combination of the strategies of  Dodge & Cox Stock (DODGX) and  Dodge & Cox International Stock (DODFX). It does have different managers and a different portfolio than you'd get from simply gluing the other two together but the end result will likely be fairly close. The strategy is a straightforward take on value but Dodge's depth of managers and analysts enables it to shine in the long run.

A Star Trader Who Rarely Ever Traded

By JASON ZWEIG

This week, one of the great traders of the mutual fund industry, John Laporte of T. Rowe Price New Horizons, stepped down. An investor who put $10,000 in the fund when Mr. Laporte took the helm, three weeks before the crash of 1987, now has $78,000; the same investment in the Russell 2000 Growth index of small-company stocks has grown to just $52,000.

The key to Mr. Laporte's trading greatness? Barely trading at all. He has urged his successor, Henry Ellenbogen, to do the same. Jack Laporte's advice holds a lesson for all investors, large and small.

He held his typical stock for four years; the average small-company fund, according to Morningstar, flips its stocks every nine months.

New Horizons has held two-thirds of its top 20 holdings for at least five years apiece. Mr. Laporte has clung to his largest position, the medical-products distributor Henry Schein, for more than 14 years; he has owned his fourth-largest, O'Reilly Automotive, since 1999.

In seeking the great growth companies of tomorrow, Mr. Laporte looks for creative leaders, a strong corporate culture and innovative ways of doing business. He hunts in service industries and in markets not controlled by a handful of giant firms. He also insists on strong cash flows, high returns on capital and low debt.

But spotting growth companies in their infancy requires patience. "It often takes me years to get confident in the business strategy and the management team," Mr. Laporte says.

And Mr. Laporte chronically beats himself up over the extra profits his fund could have made if it hadn't sold winners too soon. T. Rowe Price owned a small venture-capital stake in Starbucks even before the coffee chain first sold stock to the public in 1992. Two years later, after an analyst convinced him that coffee prices would go up and Starbucks' earnings would go down, Mr. Laporte dumped the stock at a profit.

Since then, Starbucks has gone up more than tenfold. "We left well over $200 million on the table," he says ruefully. "It takes an iron will to hold on when the market declines or companies stumble."

New Horizons bought Wal-Mart when the retailer went public in 1970, then sold in 1983 (before Mr. Laporte ran the fund), as Wal-Mart outgrew small-company status. Mr. Laporte periodically checks the value of the fund's former Wal-Mart stake. Today, it would be worth roughly $14 billion, more than twice the value of the fund.

Finance professors Eugene Fama and Kenneth French have found that one in eight small growth stocks typically becomes large each year—and that these small stocks on the cusp of becoming big generate giant annual returns of as much as 62% on average.

Ironically, at the very moment when their returns are likely to be highest, these stocks get forcibly dumped by most small-company mutual funds. Mr. Laporte has deliberately sought to minimize that damage by hanging on to his winners longer, but neither he nor most other fund managers can eliminate it. To preserve their "style purity," small-stock funds rarely own more than a handful of big stocks.

An individual investor, on the other hand, is under no obligation to sell a winner just because it gets big.

As the value investor Benjamin Graham pointed out, "most true bargains are not available in large blocks." That puts small investors, who buy a few hundred shares at a time, at an advantage. Yet many individual investors try to beat the pros at their own game—a fruitless effort, since fast trading is a game even most of the pros can't win. As Mr. Laporte's career has shown, less is more.

Write to Jason Zweig at intelligentinvestor@wsj.com

 

The Intelligent Investor: A Star Fund Manager's Secrets - WSJ.com

* Please note, the sender's email address has not been verified. You have received the following link from dave: Click the following to access the sent link: The Intelligent Investor: A Star Fund Manager's Secrets - WSJ.com* This article will be available to non-subscribers of the Online Journal for up to seven days after it is e-mailed. Get your EMAIL THIS Browser Button and use it to email content from any Web site. Click here for more information. *This article can also be accessed if you copy and paste the entire address below into your web browser. http://online.wsj.com/article/SB10001424052748704869304575103471269923964.html?mod=WSJ_hps_sections_personalfinance

Bottom of Form

Analysis

Will Silver Always Be Second to Gold?

By Mikka Pineda

2/23/2010 | Last Updated

EXECUTIVE SUMMARY

Though silver's long-term fundamentals point to a life of underperformance versus gold, silver has a chance to outperform in the short term. Both technical and fundamental drivers have built a case for a silver rally. Silver may never reach the price level of gold but it will gain more relative its 2008 trough.

Several factors point to a resumption of silver's run-up in 2010. From a technical perspective, a deeper liquidation of long positions as a share of open interest gives silver more upside potential than other precious metals. Silver's higher price volatility opens up short-term opportunities for higher capital gains than gold. From a fundamental perspective, silver is better placed than gold to enjoy the global recovery in industrial production. While non-investment demand accounts for 94% of total demand for silver, non-investment demand accounts for only 62% of total demand for gold. Silver has several large-scale industrial uses—photography, silverware, solar panels, etc. —whereas physical use of gold lies mostly in jewelry.

Hype about a silver shortage could raise silver prices faster than gold. Inventories have fallen from 110 months of demand in 1950 to just 3 months in 2008. Silver is rarely found in pure form in nature and is most commonly produced as a by-product of mining for base metals—particularly copper, nickel, lead and zinc. Very few mines produce silver primarily. New supplies of silver are tied to the fate of base metals production, which slowed in 2009. As all base metals except lead ended 2009 with an apparent surplus, mine production of base metals—and hence silver—will remain muted in 2010 . Recycling will also dampen increases in mine production. Unfortunately, silver itself is difficult to recycle. Whereas base metals need only be melted—which costs only a fraction of their initial refining costs—most silver requires electrolysis to be recovered, potentially costing as much as its initial refining.

Preexisting supplies of above-ground silver are unknown. They are presumably locked up in government reserves and private coffers. Scrap silver from the silver standard era (which ended 1935) may still be lying around, but much of it may have already been converted into finished products. Known government stockpiles have fallen to 72 million ounces as of end-2008 as governments have been coining them or slowly off-loading their silver reserves to the market since moving off the silver standard. China and Hong Kong were the last to move off the silver standard and did so in 1935. The U.S. government ran out of silver in 2002.

Alternative uses of silver have been growing over the past few years. Extrapolating from trends in the data from the U.S. Geological Survey leads us to conclude other uses will soon overshadow photography as the main end-use of silver. The ascent of digital photography reduced the need for film, pushing photography’s share of total fabrication demand for silver from 26% in 1999 to 12% in 2008. The recent discovery of silver's anti-bacterial properties has led to its use in medical dressings. Efforts to reduce carbon dioxide emissions have led to increased production of solar panels and catalysts, both of which use silver.

The mushrooming of silver ETFs could tweak the price drivers behind silver. ETFs have just caught on to silver, leaving much room for investment demand to grow. Barclays established the first silver ETF in 2006, two years after the first gold ETF. So far, there are only 14 ETFs dedicated to silver, compared with 24 for gold. As of February 4, 2010, eight silver ETFs held a combined 467 million ounces of physical silver, equivalent to 53% of the annual world supply in 2008. In addition, COMEX speculators held contracts for 243.5 million ounces of silver as of February 16, 2010. Concerns over inflation due to loose monetary policies in the U.S. and elsewhere will keep investors looking to precious metals as an inflation hedge in 2010 and beyond.

In the long-term, gold will always be more precious than silver. Silver is 16 times more abundant in the earth's crust than gold and world mine production of silver has been increasing since 1999. The supposed silver shortage applies only to large speculative investors in the futures market. Physical users of silver do not face position limits in the futures market or physical market. Finally, gold is the first stop for investors seeking an alternative store of value not tied to national fiat currencies.

Silver is also much cheaper to produce than gold. An ounce of gold cost an average US$457 to produce as of H1 2009, up from approximately US$170 in 2003. Barrick, the world’s largest gold miner, spent an average US$466 per ounce of gold in 2009, while the lowest cost major producer, Lihir, spent an average US$397. Among the silver producers we surveyed , the average cash cost of producing an ounce of silver ranged between US$2 and US$9 in 2009. For the lowest cost producer, Hecla Mining, the cash cost was sometimes negative because silver was just a by-product—an extra source of revenue—from base metals mining. Cash costs are higher for producers that mine silver exclusively. Fresnillo, the highest cost major producer and the world’s largest primary producer of silver, spent about US$8.50 per ounce of silver on average in 2009.

Next to platinum, silver has even more humble fundamentals. There is 15-25 times more silver than platinum in the earth’s crust. Though some estimates claim gold is more rare than platinum, only about 30 tons of platinum get produced each year, compared to 2,800 tons of gold. Like silver and gold, platinum benefits from jewelry, industrial and investment demand. But platinum will gain more from climate change policies and growing automobile production because platinum is used in catalytic converters. Frequent power outages in South Africa, the largest platinum producer, often limits supply. Platinum was in a deficit for every year in the last decade except for 2006 and 2009.

An oversupply of silver won't keep silver prices from spiking on speculative demand. The recovery of industrial demand and continuing investment demand will set a floor for silver in 2010 above the historical (1968-2010) average London fixing price of US$6.19 per ounce. Low silver inventories, low interest rates and increasing investor access to commodities combined with a short squeeze could push silver prices to US$22 per ounce in the short-term or even a new nominal high—though probably not a new inflation-adjusted high. Silver's undervaluation versus gold bodes well for silver: between 1950 and 2010, gold was on average 48 times more expensive than silver. Now it is about 70 times. If gold stays around US$1,120 per ounce, then silver should be at US$23.33, in keeping with the historical average ratio.

But not even a spike will let silver set foot in gold's price territory. Silver's doubling from its 2008 trough to its January 2010 peak at US$18.84 beats gold's trough-to-peak rise of around 70%. But silver is still worth only 1/70 of gold per ounce. Silver is best bet on for its total and absolute return rather than its unit value. Gold finds a floor at around US$800 per ounce and is currently worth more than US$1,100 per ounce. Silver maxed out at US$49 in 1980 only because the Hunt Brothers had cornered the futures market, which at the time lacked position limits. To beat its own record in inflation-adjusted terms, silver would need to fetch more than US$12,760 per ounce today.

Silver will at least be more precious than base metals. Base metals are much more abundant in the earth’s crust than silver. There is 187 times more lead, 652 times more nickel and 800 times more copper than silver in the earth’s crust. Annual production of each base metal runs in the millions by tonnage, while silver production runs only in the thousands (about 21,000 tons in 2008). The supply of base metals exceeds demand more often than not, although many people expect the surpluses to disappear in the long term due to emerging market demand. Reflecting their abundance relative to precious metals, base metals fetch less than a dollar per ounce. The cheapest base metals, aluminum and zinc, sold for 5 U.S. cents per ounce; the most expensive, nickel, sold for 45 U.S. cents per ounce on average in 2009.

Endnotes:

1. 2009 supply and demand statistics for silver are not yet available but investment demand likely drove most of the growth in demand as a slowdown in global industrial production and weak consumer spending depressed physical demand. An article published June 23, 2009 in Commodity Online reported, “According to an analysis from GFMS, investment accounted for only 50 tons of silver demand in 2008. In the first quarter of 2009, buying by the biggest silver exchange-traded fund, the iShares Silver Trust, alone hit more than 1,500 tons.”

2. Lead and nickel mining have the strongest impetus for output increases and will contribute the most to silver supply. Lead experienced a 19,900 ton deficit in 2009, while nickel had the smallest surplus (3,000 tons) among the rest of the base metals.

3. In this article, ounces refer to troy ounces while tons refer to metric tons.

4. Hecla Mining, Pan American Silver, Coeur d’Alene, Silver Wheaton, Hochschild, First Majestic and Fresnillo.

 

(BN) Stocks Face ‘Ice Age’ Drop as Indicators Peak: Chart

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Stocks Face 'Ice Age' Drop as Indicators Peak: Chart of the Day
2010-02-19 13:28:01.19 GMT


By Adam Haigh and Michael Patterson
Feb. 19 (Bloomberg) -- Stocks are poised to tumble as
gauges of the economic outlook in the U.S. and China have
peaked, according to Societe Generale SA's Albert Edwards.
The CHART OF THE DAY shows the Economic Cycle Research
Institute's weekly index of leading indicators for U.S. growth
topped out on Jan. 15 and the Organization for Economic
Cooperation and Development's monthly gauge of measures for
China peaked in October, according to Edwards.
High-points in the indexes for the U.S. and China, the
world's biggest and third-largest economies, foreshadowed the
stock market selloff that began in October 2007 and sent the
MSCI AC World Index down as much as 60 percent in 16 months. The
China gauge bottomed in November 2008 and the U.S. index on
March 6, before the rally in stocks that began on March 9, 2009.
"We monitor a variety of such indicators and until
recently they have all been giving an unambiguous green light to
participate in risk assets," Edwards, Societe Generale's global
strategist in London, wrote in a research report today. "That
has now changed."
Edwards, a member of the European strategy team ranked top
in Thomson Extel's 2009 survey, predicted the Asian currency
crisis of the late 1990s. He says stocks are "overpriced" and
headed for a long-term drop he terms "the ice age."
Edwards maintained his recommendation today that money
managers hold 35 percent of their assets in stocks, 50 percent
in bonds and 15 percent in cash. A Bloomberg survey of eight
investment strategists excluding Edwards on Feb. 8 showed the
average recommended allocation to stocks was 60.3 percent.

(To save a copy of the chart, click here.)

For Related News and Information:
More chart of day stories: NI CHART <Go>
Emerging-market news: NI EM <GO>
For emerging-market stocks news: TNI EM STK <GO>
Developing economy market moves: EMMV <GO>
Emerging-market economic statistics STAT4 <GO>
World equity index rankings: WEIS <GO>

--Editors: Gavin Serkin, Stephen Kirkland

To contact the reporters on this story:
Michael Patterson in London at +44-20-7073-3102 or
mpatterson10@bloomberg.net;
Adam Haigh in London at +44-20-7073-3433 or
ahaigh1@bloomberg.net.

To contact the editors responsible for this story:
David Merritt at +44-20-7673-2639 or
dmerritt1@bloomberg.net;
Gavin Serkin at +44-20-7673-2467 or
gserkin@bloomberg.net.

China the Next Bubble?? (Forwarded by Chuck from Dave)

 

< Go to Emerging Markets Monitor Main Page

Never Short a Country with $2Trillion in Reserves?

Michael Pettis

Feb 3, 2010 5:43PM

I am traveling in DC, NY and Boston over the next few days, and between meetings and jet-lag it is hard for me to do much on my blog, but I did want to extend a short piece I wrote that was published yesterday in the South China Morning Post.  This is because it is about central bank reserves, a topic that to my dismay probably generates more confused and mistaken thinking than any other topic in economics.

As many of my readers know (although I have not made any reference to it on my blog) hedge fund manager Jim Chanos recently made some headline-inducing claims about China.  Chanos, a successful hedge fund manager who has made his reputation – and fortune – by identifying and shorting seriously overvalued assets, most famously Enron, seems to have read the PivotCapital piece that got a lot of attention last year, and partly as a consequence he claimed that China is undergoing a speculative bubble that makes it the equivalent of "Dubai times 1,000 – or worse".

His claim was met with incredulity by New York Times columnist Thomas Friedman.  Freidman is best known for his writings on globalization, and although I have no doubt that he is a very smart man when it comes to getting politics right, especially in the Middle East, which I believe is his area of specialty, I also have no doubt that he does not understand China much and understands almost nothing about central bank reserves and the functioning of the global balance of payment.  I have read many of his articles, and so far I am pretty sure that these aren't his strong points.

In response to Chanos' claim Friedman made a number of very questionable statements about China.  These are matters of dispute and although I think they are completely wrong, they are at least defensible.  For example he says its true that there may have been risks of bubbles.  "In the last few days, though, China's central bank has started edging up interest rates and raising the proportion of deposits that banks must set aside as reserves — precisely to head off inflation and take some air out of any asset bubbles." 

Really?  I think you have to be a tad credulous to believe that the RMB 7.5 trillion lending target for 2010 and the slightly higher interest rates represents taking air out of the asset bubble.  I would argue that they simply mean that the astonishing rate at which they were pumping air into the bubble has moderated slightly, to merely excessive.

He also says:

Now take all this infrastructure and mix it together with 27 million students in technical colleges and universities — the most in the world. With just the normal distribution of brains, that's going to bring a lot of brainpower to the market, or, as Bill Gates once said to me: "In China, when you're one-in-a-million, there are 1,300 other people just like you."

Aside from perhaps his overestimating the quality of the education system, this is very bad statistics, and perhaps shows how easily we can get intellectually overwhelmed by large numbers.  If China indeed has the same distribution of geniuses, or talent, as other countries, the fact that it has so many people won't make it richer (and what about India?).  After all if you cut China into four countries, each country will have only one-fourth the number of geniuses.  Does that really mean that the four countries together are stupider?  If we combine the US, Canada and Mexico into one country, its a pretty safe bet that the total number of geniuses will be more than any of the three countries currently possess, but will average intelligence rise?  Can we really make the three countries richer that way (of course there may be good economic arguments for suggesting that unifying North American into a single country will make it richer, but the larger number of geniuses is not one of these arguments).

Ok, we can argue about these things, and we can agree to disagree, but where he completely blew it was, I suspect, on the one topic are where he was absolutely certain he could not be wrong.

Too bad, because he was.  Friedman proposed, yet again, a common misconception over the meaning of China's huge accumulation of foreign reserves.  He argued that thanks in part to the size of the reserves it would be impossible to make money by shorting China. "First," he warned, "a simple rule of investing that has always served me well: Never short a country with US$2 trillion in foreign currency reserves."

Really? Friedman proposed the rule sarcastically – as both untestable and too obvious to need testing.  It is so obvious that no country has ever had such high levels of reserves, so you can't really test the hypothesis, but it's also pretty obvious that a country with $2 trillion in reserves is in great shape.  Anyone who wanted to short it must be pretty stupid, right?

But it turns out that reality is not as obvious as he imagines. Let us leave aside that the PBoC's reported reserves are a lot more than $2 trillion, and that if correctly accounted they would be pretty close to $3 trillion.  China's foreign reserves are certainly huge. They add up to an amount equal to about 5-6 % of global gross domestic product.

But they are not unprecedented. Twice before in history a country has, under similar circumstances, run up foreign reserves of the same magnitude.

The first time occurred in the late 1920s when, after a decade of record-beating trade and capital account surpluses, the United States had accumulated what John Maynard Keynes worriedly described as "all the bullion in the world". At the time, total reserves accumulated by the US were more than 5-6% of global GDP.  My back-of-the-envelope calculations suggest that this was probably the greatest hoard of central bank reserves ever accumulated as a share of global GDP, but please check before you accept this claim.

The second time occurred in the late 1980s, when it was Japan's turn to combine huge trade surpluses, along with more moderate surpluses on the capital account, to accumulate a stockpile of foreign reserves only a little less than the equivalent of 5-6% of global GDP.   By the late 1980s, Japan's accumulation of reserves drew the sort of same breathless description – much of it incorrect, of course – that China's does today.

Needless to say, and in sharp rebuttal to Friedman, both previous cases turned out badly for long investors and brilliantly for anyone dumb enough to have gone short. During the early years of the Great Depression of the 1930s, US stock markets lost more than 80 per cent of their value, real estate prices collapsed, and the US economy contracted in real terms by an astonishing 30-40 per cent before recovering in the 1940s.

Japan's subsequent experience was economically less violent in the short term, but even costlier over the long term. During the period following its astonishing accumulation of central bank reserves, its stock market also lost more than 80 per cent of its value, real estate prices collapsed, and economic growth was virtually non-existent for two decades.

The idea that massive levels of reserves are a guarantor of economic stability is, in other words, based on a profound misunderstanding both of history and of the nature of reserves.  Reserves of course are not useless as an enhancer of financial stability, but their use is for very specific forms of instability.  Having large amounts of reserves relative to external claims protects countries from external debt crises and from currency crises.

Great, but neither Chanos, nor even the most pessimistic Sino-analyst, has ever said that these are the kinds of risks China faces today, any more than they were the risks faced by the US in the late 1920s or Japan in the late 1980s.  The risks that China faces today (and the US in the late 1920s and Japan in the late 1980s) is of excessive domestic liquidity having fueled asset and capacity bubbles, the latter requiring the uninterrupted ability of foreign countries to absorb via large and growing trade deficits.  These risks include an explosion in domestic government debt directly and contingently through the banking system.

These are, very typically, the kinds of risks that threaten rapidly developing large economies, unlike the external debt and currency risks that typically threaten small economies.  And reserves are almost totally useless in protecting these economies from the risks they face (and, no, no, no, reserves cannot be used to recapitalize the banks – only domestic government borrowing or direct or hidden taxes on the household sector can be used to recapitalize the banks).

In fact, it was the very process of generating massive reserves that created the risks which subsequently devastated the US and Japan. Both countries had accumulated reserves over a decade during which they experienced sharply undervalued currencies, rapid urbanization, and rapid growth in worker productivity (sound familiar?). These three factors led to large and rising trade surpluses which, when combined with capital inflows seeking advantage of the rapid economic growth, forced a too-quick expansion of domestic money and credit.

It was this money and credit expansion that created the excess capacity that ultimately led to the lost decades for the US and Japan. High reserves in both cases were symptoms of terrible underlying imbalances, and they were consequently useless in protecting those countries from the risks those imbalances posed.

We must be careful how we read history. The fact that the US and Japan had terrible decades following periods during which they had amassed levels of reserves that China has subsequently matched, and under conditions similar to those of China, does not necessarily mean that China too must have a lost decade or two.  Chanos is not being crazy when he worries, but it is still an open question as to whether or not he will turn out to be right.

But the history does indicate that facile statements about central bank reserves should, at the very least, be measured against the obvious historical precedents. Chanos might still lose this debate, but Friedman has already proven himself to be hopelessly wrong.

---

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financing question

Guys,

 

See question below from Wrosnkinator X.  He said it would be fine to post to the group blog, so feel free to reply there or here. (  http://makingcoin.blogspot.com/  )

 

Chuck

 

 

---------- Forwarded message ----------
From: *snip*
Date: Sun, Oct 5, 2008 at 2:46 PM
Subject: Basement.
To: *snip*

 

I'm probably going to get around to start finishing our basement this fall/winter.

As part of this project, I am going to look into sub-ing out the work to install a bathroom in the basement.

We had all the pipes roughed into the basement slab when the house was built, so it's not quite as big a job as it could be.

But I imagine that it might make sense to "finance" it?

 

Have you looked into the differences (pro's/con's) between a 2nd mortgage vs. a home equity line of credit?

Or is it essentially the same thing?

 

I lost the link to the stock/$$$ blog type thing you had set up a while ago...

I figured you or some of the other guys who actually read/posted to this might have some experience with this.

 

 

paw

 

Back in black...

..on Amazon!

Amazon charging ahead 10% in short order put me back in it's good graces. You heard my original woes below when as it's value eroded with fears of recession and more. I'm in it for the longer haul any how and think that Amazon is the walmart of 10 years from now. Not that Walmart will not have a big precense but I think Amazon is perfectly position to be to online selling what Wally world is to bricks and mortar.

The reseller platform offers the flexibility and openness of ebay with better security and less risk. And I think their forays into ASP and storage are well placed and good platforms for growth.

What do you guys think? Are you long or short on AMZN?

Software tools for investing?

Hi all,

So I'm curious what you guys all use for tracking / analyzing for investing?

I have a very simple excel spreadsheet that I used from time to time. Beyond that I have a little word doc that I record notes on...but that too is only employed in fits of interest in stock picking. So generally I just use my companies 401k page to track that and fidelity's regular webpage to track any investments with them. I don't have any real good system for stocks with Ameritrade.

Any recommendations? Also quiet interested in hearing if people use wider applications like MS Money, quicken, etc. Lastly what about tools for analyzing the wider markets...like stock screens that can search for stocks meeting your specific criteria?

Investing podcasts?

Hey, if you guys do the podcast thing, I have a couple worth considering:

1)  Moneygirl's Quick tips for a richer life

Despite the funky name, this typically has some good info in the form of a short overview of different elements of personal finance and investing.  It may be a little basic for you guys but I still get something from it here and there.  The original "money girl" recently moved on so there's been guest hosts recently.

2) The Diciplined Investor

This guy has actually been guest hosting the first podcast listed and I like the more concise delivery.  In this, his own podcast, he covers present market conditions and very detailed analysis of what's going on and how to play it.  I have to confess I don't subscribe regularly because the episodes are frequent and long, and more detail than I have time to use.  However it might be worth checking out if you're more into it than I am. 

With that in mind, anyone else have any others to recommend?

interesting article on starbucks and "5 stocks that will never be great again"

While I agree with the comments in general, I would not be buying starbucks in the short term as the economy is bottoming in the US. 

http://www.marketwatch.com/news/story/story.aspx?guid=%7B9F1B60D6%2DCA23%2D4ED5%2DBC0C%2D91B26F61DACC%7D&siteid=rss

TDSC

This stock is really at a historical low.  Meanwhile rapid prototyping, rapid tooling...basically all this "rapid" are becoming the buzzwords of the manufacturing industry.  I can tell you from my perspective of traditional milling/turning/edm machining, I'm constantly getting R&D folks saying telling me that some knew RP company has come in an has some technology like this that will solve all their problems.  But while I don't believe some of the wild claims, there's no doubt that technologies like this have an increasingly larger market opportunity as traditionally mfg-ed products look for contemporary approaches (molding, etc).

I think I will take a closer look at their fundamentals and maybe buy a piece of the action.  Thoughts?

Check out HNR

I gotta share my most recent trade - it was with Harvest Natural Resources, HNR. They're an energy company that acquires, explores and develops oil and natural gas properties. They work in a variety of areas but have a heavy tie to Venezuela... in any event, I bought at $9.15 and just sold yesterday at $11.55. In hindsight, if I had waited until the end of the day I could have pulled the trigger even higher, at $12.

In any case, I'd recommend watching this stock's movement in the coming months. In the past year it's been doing a saw tooth -- bouncing up and down between $10 and $12 a few times. I may jump back in if I see a dramatic pull back...

Green Energy actually many shades of Gray

Articles like the ones below show a turning point in the recent, meteoric-rise of what I call "pop environmentalism". 
Regardless of your individual viewpoints, there is no arguing that the last 4 years or so have seen an onslaught of media pressure and pop culture around global warming and the group think that Green is Good. 

Without getting into the details, I've long believed that it's just not that simple. 
Driving an electric or hybrid car these days will win you bragging rights among many circles.  For proof you need look no further than the bumper of  the nearest Prius or other electric car for the ubiquitous stickers declare their power source with pride. 

But shouldn't we really replace "I AM ELECTRIC" with "I AM COAL"?  After all, that the largest source of energy to create electricity in these United states.  Even every BTUs worth of ethanol contains a large portion of petroleum, which is used to fertilize the corn fields and power the equipment to plant, harvest, and especially to transport that ethanol to your gas tank.

We're now going to see a convergence of these realities in a much wider sphere.  Green may be Good but it is far from a black and white issue.  In fact, there's never been more shades of gray.

We exist in a world where energy creation and use is THE primary element that separates humanity from nature.  And that balance is fickle, rapidly changing, and impacted entirely by decisions and behavior ranging from the individual person to huge, intergovernmental organizations. 

Global Warming may or may not live up to the hype of the past few years.  But the issues around growing demand for energy and food and the sustainability with which we meet will define our future.

Rising corn prices bring worldwide backlash against U.S. ethanol production.
ABC World News (8/24, story 4, 2:20, Gibson) reported that according to ABC World News' Bill Weir, "[s]ince Congress demanded that Americans vehicles burn less gas and more ethanol, the price of corn has rocketed, and farm towns has boomed." But with that boom came "tortilla protests in Mexico and bread riots in Egypt." And now the "moving [of] precious grain from stomachs to gas tanks is...bringing a backlash from American allies around a hungry world." For example, "India's finance minister calls biofuel a crime against humanity, Turkey's finance minister calls it appalling," and the U.K.'s Prime Minister Gordon Brown said that the country will "now reconsider buying American ethanol over fears of a world crisis." However, Weir pointed out that the "ethanol industry blames soaring food prices on bad weather, a weak dollar, and Chinese demand. But most of all, they blame the high price [of] oil, which has raised the cost of everything."

Op-ed: Maligning of biofuels "hogwash." In an op-ed for the New York Times <http://links.mkt171.com/ctt?kn=36&m=1093678&r=MjQ0ODc3OTcwOQS2&b=0&j=OTAyNDg1MDIS1&mt=2&rj=OTAyNDg1MDIS1> (4/24) Roger Cohen wrote that ethanol, "once hailed as an answer to everything from global warming to the geo-strategic power shift favoring repressive one-pipeline oil states," is now seen by critics as "a 'scam' and 'part of the problem.'" Cohen explained that biofuels have been associated with "soaring global commodity prices, the destruction of the Amazon rain forest, increased rather than diminished greenhouse gases, food riots in Haiti, [and] Indonesian deforestation." However, "[m]ost of this...is hogwash and bilge," Cohen argued. He cited the surging price of oil, the growing middle classes in China and India, and a world population that eats twice, and not once a day, as bigger contributing factors to problems recently attributed to biofuels. He also argued for the discontinuation of subsidies for corn-based ethanol and the scrapping of a 54 cent tariff per gallon on Brazilian sugar-based ethanol, which produces a "yield eight times higher than U.S. corn ethanol." Cohen concluded that the real "'scam' lies in developed world protectionism and skewed subsidies, not the biofuel idea."

BP plans to invest in Brazilian sugar cane ethanol.
The Financial Times <http://links.mkt171.com/ctt?kn=59&m=1093678&r=MjQ0ODc3OTcwOQS2&b=0&j=OTAyNDg1MDIS1&mt=2&rj=OTAyNDg1MDIS1> (4/25, Wheatley, Crooks) reports, "BP announced plans to invest $560 million in biofuels on Thursday and argued that its proposals to develop ethanol production from sugar cane in Brazil would not affect food supplies." Despite criticism, "BP argued that Brazilian ethanol fitted with its strategy of investing in "sustainable feedstocks that do not impact on food supplies." The company "is providing half the total $1 billion investment in two ethanol plants being prepared by Tropical BioEnergia, the joint venture it is entering with Grupo Maeda, a Brazilian agribusiness group, and Santelisa Vale, a Brazilian sugar and ethanol producer."

Findings on pollution reduction technology for BP refinery expected in June. The AP <http://links.mkt171.com/ctt?kn=48&m=1093678&r=MjQ0ODc3OTcwOQS2&b=0&j=OTAyNDg1MDIS1&mt=2&rj=OTAyNDg1MDIS1> (4/24) reported that "Purdue University Calumet researchers expect to update the public in June on their investigation into technologies that may help BP reduce its wastewater discharges into Lake Michigan after its Whiting refinery is expanded." Last year, "BP faced a public uproar after state officials approved a new wastewater permit that would allow it to significantly boost pollution discharges as part of a $3.8 billion refinery expansion to process more heavy Canadian crude oil." The AP noted that "Purdue Calumet's Water Institute and the Argonne National Laboratory were chosen in August to review technologies that could be incorporated into the refinery about 20 miles southeast of Chicago." BP "officials have said they would either find a way for the refinery to stay within the limits set in its previous discharge permit or they would not pursue the expansion." The company "has pledged $5 million to fund the research effort in an attempt to keep wastewater discharge levels constant."

BP to buy clean energy plant. The AP <http://links.mkt171.com/ctt?kn=19&m=1093678&r=MjQ0ODc3OTcwOQS2&b=0&j=OTAyNDg1MDIS1&mt=2&rj=OTAyNDg1MDIS1> (4/25) reports that "BP Alternative Energy plans to buy NiSource's clean energy plant for $210 million in a deal that could be completed in the next three months." The company "had entered into a joint operating agreement on the plant, which generates electricity and steam, in 2006. It sells electricity on the open market, while BP's Whiting refinery buys the steam." BP said that "no jobs would be lost with the acquisition," and that "the plant fits BP's 'alternative energy strategy of owning cogeneration projects on site that enhance energy efficiency and reduce group emissions.'"

Bad news for Harley...

FWIW, This is a daily briefing I get.  While it's focused on mfg and engineering, it is actually a good glimpse of industry at large so I find it helpful for news and investing.  Check it out if you're interested.

http://links.mkt171.com/servlet/MailView?ms=MTA2NzIyNgS2&r=MjQ0ODc3OTcwOQS2&j=ODcxMjkwNTQS1&mt=2&rj=ODcxMjkwNTQS1

Do you del.icio.us?

Just curious if you guys use this at all? I use it to keep my bookmarks available where-ever I am. But I've heard it's got good functionality for sharing links etc. Didn't know if you've had first-hand expereience or if it would be good for sharing here?

Chuck

HOG and SBUX - what do you think?

So I've got some cash and I'm thinking of either reinforcing current long positions in HOG and/or SBUX, or else buying something new, such as VZ if it retests new lows. Any gut feelings on Harley-Davidson or Starbucks, or read any good tidbits lately? I'm unsure about HOG/SBUX in the current market considering the impact discretionary spending habits may have, at least during 2008...

Emailing in entries

In case you guys didn't know you can email in entries and they'll show up as regular blog entries.

 

The email address is   [my email user name].makingcoin@blogger.com

 

Where [my email address] is "chuck" followed by the numbers you usually see after it.  Hint, good things happened in alabam that year...

 

 

Sorry to be so cryptic but don't want to publish it online here b/c of all the webcrawler stuff out there.

At the risk of sounding political, I'll pass this on....

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four m en were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'
 
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And t he first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls , journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.

David R. Kamerschen, Ph.D.
Professor of Economics
University of Georgia

 

Cereal, anyone?

So I'm thinking of picking up some General Mills (GIS)... They're getting toward their low for the year, but over the past few years have seen steady growth... Again, a long term buy, but the dividend of $1.56 will bring in some gains while I wait 5-10 years for some (hopefully decent gains)... I'm still unsure on this one, but I'm leaning more towards pulling the trigger as the stock recedes to the year low...

By the way, in terms of tech... Have a look at Rambus (RMBS)... I've owned this one for a while and I'm waiting on the day they pull a nice gain... They always have something going on in terms of news, recently winning a design award for '08 and pending patent infringement cases could go in their favor... I would say, however, that this is a highly risky stock, so I wouldn't put any "real" money into it... I cashed out half my shares long ago when the stock doubled (1999 or 2000), so for all intents and purposes I'm sitting on $0 per share as the price I paid. Something to look into though if you guys are interested... They are one of the companies I mentioned that deals in intellectual property and has no manufacturing of it's own... They come up with patents and lease the rights to the technology to manufacturers of RAM chips.

Apartment REITs?

So I'll throw this one out there for discussion... Anyone been getting involved with REIT investing? Particularly, I'm thinking apartment REITs, with the potential for rents to rise, that could help out this subset of the REIT market... the nice dividend payouts are attractive too...

Malware warnings?

When I load the blog, Kaspersky pops up a little warning saying this site is used to collect passwords or credit cards or something.... I've never noticed this on my other Blogger sites. Anyone else getting that warning?

Has anyone seen my shirt?

Because I'm losing it on AMZN.

Seriously, I have to fess up and admit that I did NOT do my homework before buying in at 83 less than a month ago. It was an impulse buy. But an impulse that I thought fit into the "buy what you know" catergory. But that turned out to be false as well. Here's what I did know and what I should have known:

I knew that Amazon is getting more and more entrenched as one of the internet alternative places to buy anything. My personal lists includes: Ebay, Amazon, and Craigslist. And I find myself using and recommending these alternatives successully all the time. Sure there's thousand of other alternatives but I think for the mass-market of buyers with varying degress of techsavitude, Ebay and Amazon are likely to be the first stop.

I know that I am obsessive about pre-purchase research on a lot of the things I buy, especially tools and tech stuff. Not only for a good bargain... though it's a close follower. More so to buy something with a reasonable expectation that it is the right item among the many choices for my specific needs. This used to a an analysis-paralysis scenario and require much legwork (read google searching) on my part. Then I discovered Amazon's user reviews. As it turns out, there are people out there more obsessed with than I and when they're done all the legwork, they write up the results in a nice synopsis. Sometimes they even point towards a place to get a better bargain than Amazon itself-- what a country! So I figured that others would notice the same resource and it will build brand allegiance for Amazon...something difficult to do in an online environment where switching costs are very low. But I thought even more of this when I read an articale in Money magazine that was explaining how to get a good deal on anything. One of their primary pieces of advice? Check Amazon reviews before buying. So I'm not sure that magazine holds enough sway to impact Amazon but the fact that it is reaching that status of a go-to place has to be an indication of some popular opinion.

I know that Amazon has cheap or free shipping. For the longest time, I've seen this as a huge drag of online sellers getting past the early adoptors for their services. So Amazon has used their purchasing power to buy lower but instead of reducing items costs, it appears they're diverting that towards reducing shipping costs. Seems like everything is eligible for the "Super Saver Shipping". And I suspect that shipping service is another area where they can bargain for better deals from shippers buy contracting in bulk.

I knew / know that they are the first company offering MP3 music DRM-free. And they were planning to give away millions of free songs as part of a Superbowl promotion. Maybe it's the angry geek in me but I have to say about time! I really like I-tunes but I have this little voice in my head wondering if I'll be able to recover my music after a HDD crash. I'm willing to pay a buck for a song and don't plan to go putting them all up for grabs on the net. And frankly, even if I did, the truth is they're already out there. If I wanted to steal music, I wouldn't be parting with one red cent for any music and would have access to any of it on the net. It's just more convenient to buy it given a certain price point. And Amazon has lined up all the major record labels, who appear to have chosen Amazon to make a good faith effort at DRM-free in opposition to I-tunes. Perhaps to create competition with I-tunes, in a move to create competition and drive down the retailers share of price.

Truth be told, this last item is what drove me to buy Amazon shares. I really believe(d) this is a big enough item to take share from Apple and make a splash on Amazon's top and bottom lines...... however, here's what I should have known (or thought about):

I didn't know (or think about) The R word.

R E C E S S I O N ! ! !

Seriously, how I missed this is beyond me... Amazon has huge exposure to contractions in consumer spending. I did know that the company is highly valued versus earnings, which is based primarily on rosy prospect for the future (read what I do know from above!). So if the economy retracts, retailers are going to take it on the chin.

But I have to think its even worse for online retailers. I based this on my suspicion that a larger portion of their sales are discretionary purchases than their brick-and-mortar counterparts. Certainly I'm guilty of this. If Americans have to tighten up their checkbooks a bit, my guess is they give up searching Amazon for Beanie Babies before they stop hitting Walmart for Pampers and Doritos. I suspect if spending goes down 5%, Amazon's going to be feeling 10% reduction.

So I attribute a lot of the eroding -- nay, plummeting!-- stock price to this phenomena. I would think institution investors especially are going to have a better visibility on the economy and take whatever profits they have to safer harbors.

Now I'm down a healthy 18% and can't say I see an end in sight. I'm certainly not afraid to hold onto down stocks...I'd like to think it's a "buy-and-hold" strategy but more likely just stubborness.

So what to do? Are you long or short on AMZN in the near-term (less than a year)? How about the long term prospect? ....will we be buying our Pampers and Doritos there by the time the next recession roles around?

Erik's Two Cents...

I'm somewhat aligned with Pat's philosophy; I'm mostly a buy-and-hold type, with some exceptions. I would estimate that my portfolio is about 15% cash, 20% bond funds (401k), 60% mutual funds (401k, RothIRA) and the remaining 5% is in individual stocks. The cash portion is higher than I would typically have it, but it just happens that I've been saving for the next downpayment on our next house... and in anticipation of a downturn I did move 20% of my 401k from aggressive stock funds into a bond fund about 8 months ago. (Normally, I'm all stocks and no bonds.) I suspect that at some point this year I'll assume we're nearing a good entry point and I'll move the bond fund back into stocks.

As for that 5% of individual stock; I treat that as more like play money that I treat almost like a hobby. I have to be honest and admit that I've suffered some big losses (hello, homebuilders?) and I've garnished some big wins too. I wouldn't be suprised if my net gain over the years is probably below 10%, but I do feel that I'm making wiser investment decisions lately.

The key to hand-picking stocks is to have a well-defined philosophy and stick to it. I'm guilty in the past of buying a stock on some public hype, and then watching it plummet shortly after. But lately I'm trying to focus more on defining my strategy. Am I going to be a contrarian value investor, and look for downtrodden stocks with low P/E ratios, buying them when they're out of favor and then selling once the price rebounds? Or am I going to focus on stocks that are already rallying, following the market and buying in on stocks that are already approaching their 52-week high in the hopes that the rise will continue in the near term? Or some other strategy?

I think my investment philosophy falls somewhere in the middle; I prefer to buy a stock that seems to be out of favor and therefore shows a historically low PEG ratio, or P/E divided by it's earnings growth. My idea is that I have plenty of time to hold the stock and let it rebound. It's contrary to one's psychology to actually purchase a stock when it's hated by everyone else, and to sell it when everyone loves it, but historically many people (like Bill Miller, Warren Buffet) believe this is the type of discipline that yields the best results on average.

I focus on anywhere from 10-20 stocks that I hold from 2 mo - 1 year, but sometimes I'll hold even longer than that. Especially in the current market, I think my horizon will stretch out to longer hold times. And obviously diversification, not only by sector but also by market capitalization and geography, is important to a healthy portfolio. But I don't limit myself to only buying on a value-based strategy. If I see a reliable blue-chip company (or a company that is considered a market leader in it's industry, like Google, or Goldman-Sachs) take a dip on some bad news like a class-action lawsuit, or missed earnings based on expectations, I'll often pick up some shares if I think it's an attractive entry point and the bad news is just a temporary setback, not an indication of something worse. This type of stock I may only hold for 2-3 months, until it's had time for the price of the stock to rebound and then I'll collect the gains and move on.

Lastly, in an attempt to diversify my account further, I bought some shares of a Singapore ETF so that I could play the Asia market a bit but do so in more of an index fund. That proved to be a nice move, with about a 40% gain over 18 months or so.

Anyway, I'm always looking to refine my strategy and get ideas about how other people approach individual stock investments. This blog should prove interesting!

- Erik

What am I doing during the current economy condition?

What am I doing during the current economy condition?

My plan is to ride it out, perhaps buying some stocks in blue-chip companies if we get a real good correction/plunge. Given that I'm 32, and my focus on investing is for retirement, time is on my side for recovery and growth. One point is that I rarely sell... Unless it's a forced sale, I'm just a buyer/holder... I've gotten screwed in some areas (i.e. Teradyne!), but I can always hope someone will buy them... Lucent also sucked, but they spun off a bunch of things which I received shares of for holding Lucent stock (i.e. Altria)...

While I do have some smaller company and tech company stocks in my portfolio, most of my holdings are in the bigger, dividend-producing stocks. The growth of a Google or Apple may not be there, but then again, the risk is a lot lower and when the stocks are in a down-turn, I'm still picking up dividends which I then use to purchase additional shares or diversify.

One area I have been focusing on lately is medical devices. When you look at the baby boomers now reaching retirement age, and being a very large proportion of our population, they are (unfortunately) going to need hip and other joint replacements, and other things. I'm banking on them creating a strong growth in the companies which supply these things, and as unfortunate as it is, it's inevitable that they will get sick in the next 10-20 years creating a large need. With the markets falling a bit, now is a decent time to buy into some of these stocks and sit on them for a while.

Additionally, I've purchased some energy funds that focus a large portion on R&D. Obviously, energy is becoming a bigger issue and I feel more research is going to be done. Instead of selecting a single stock (to me this would be like buying a lottery ticket), I'm hedging my bet and buying a fund which covers a broad spectrum. Again, I may not make a million, but I'm less likely to lose it all as well...

Another thing that I have done in the past, especially in regards to the smaller tech stocks, is to go with stocks in companies on the research/patent side of things. These companies don't actually manufacture anything, but rather, they create the patents which manufacturing companies lease. So they get the revenue from the companies which are manufacturing their designs, and have a lot less overhead. They also don't have to deal with the ups and downs of manufacturing in various countries as favorable spots move around the globe.
Anyway, those are some of my thoughts...

welcome

Hi guys,

So here we are! Right now I hve this open to anyone on the web to see. Are you guys cool with that? If not, we can change it so that only you (the authors) can or only people with invites...

I'm not exactly going to get into specifics on my 401k but I have not problem being public about the companies I'm long and short on in public....so I'm happy as is.

Chime in if you feel different.

Chuck