The Art Of Selling Stocks

The Art Of Selling Stocks

By Jae Jun on June 9, 2009 More Posts By Jae Jun Author's Website

After my post on when to sell stocks last week, we have a guest post from fellow reader Tim du Toit, the editor of EuroShareLab, to discuss his methods of selling. Since selling is a difficult aspect of investing, I encourage you to read the following post by Tim.

Introduction I always thought of myself as a long term buy and hold investor. Buying good companies and holding through thick and thin thinking that overall my investment performance will be acceptable. But looking at my portfolio over time I realized that I developed the tendency of selling winners and hanging onto losers. Try as I may, I found it really hard to rationally break away from this tendency. After a lot of research I developed a strict selling strategy which has helped me a lot and I hope it helps you too. If nothing else I hope this article prompts you to think about your approach to selling and how it can be improved. Important Points - You should have a selling strategy - You should have it written down - You must review it regularly - You have to force yourself to follow it

Why is it important to limit losses? Limiting losses is very important as the gains required to recover the loss grows exponentially as the loss gets larger. The following table and graph show the relationship between a loss and the recovery visually.

Whatever approach you take to selling, this is the most important principle to bear in mind, irrespective of how positive you are on the recovery probability when it comes to the losing investment in your portfolio.

Behavioral aspect of selling

Fear and regret play a large role in investors failing to sell a stock that has declined. Sometimes when a stock falls, it’s a great opportunity to increase the investment at an even more attractive price. But in cases where investors have made an obvious mistake, and logically should sell immediately, behavioral research shows that they will often hang on, thus suffering even greater losses.

Why is this? By selling, they have permanently locked in the loss, and then have to confront the pain and regret of having made a bad investment, including the potential embarrassment of disclosing the loss to others.

Somehow, in our minds, we think that our ownership of something increases its value. This is incorrect. For example, just after placing bets, punters at the racetrack become much more confident about their horse’s chance of winning the race. Similarly, lottery ticket buyers tend to buy more frequently if they are allowed to choose their own numbers. Investing in shares is no different.

So what can we do to avoid costly and annoying errors?

• Approach investment decisions from as neutral a position as possible
• Ignore all sunk costs by ignoring the cost of the investment when reviewing your portfolio
• Accept it as inevitable that you will make mistakes in your buying decisions
• You will face tremendous pressure that will tempt you to rationalize your mistakes and not correct them
• You will tend to protect the status quo by inventing new reasons to hold on to a bad investment
• This will be especially true when your original buying decision is known to many other people who are important to you, as it will hurt you to acknowledge this to them, and to yourself.
• It will be difficult for you to correct the mistake because you will attach more importance to saving face by appearing to be consistent with your past commitments.

• Don’t overvalue your current positions. Pretend that you don’t own them, and ask, “If I didn’t own this stock today, would I buy it?” If the answer is no, you should think hard about selling.
• Don’t compound past mistakes for fear of embarrassment. In the end, the best advice is to learn from mistakes and move on.

Selling Stocks to Realize a Gain

1. Movement of the share in the ranking If you buy stocks based on a ranking or a mechanical strategy, such as a low price to earnings ratio, low price to book ratio, or high dividend yield, the movement of the stock from cheap to expensive through the ranking can be used to determine the selling point.

2. When your premise is fulfilled This is what it is all about - selecting a share because of a reasoned, well-thought investment premise, and things work out exactly like you expected, or better. When this happens you have every right to feel confident and take your well earned profits.

3. After a substantial rise in price Another reason for selling is when you think the stock has become more valuable than it should be. Unfortunately, for many of us, the realization that a stock price has increased too much comes long after the price has already peaked and started to fall.

4. When it doubles An old adage in the market is that you should sell half your holdings when a stock doubles. This is a purely emotional reason to sell a stock. It allows you to feel like you have received all of your money back and that the money you now have in the share is pure profit or “house money”. The concept of “house money” is purely emotional as all the money, including the gain, is always all yours.

Selling Stocks to Limit a Loss 1. Your reason for making the investment Once you have done your homework on a company, write down your concise reason for buying. Should you use this selling strategy, you may want to implement a strict rule that if you were wrong about the reason for investing, you should exit the position with no questions asked. Never invent new reasons to hold a position when the original reasons are no longer applicable.

Holding onto a position simply to recover your initial capital is usually a recipe for even greater losses.

2. Leave emotions out of it Should it happen that management really makes you angry, you may want to put the investment away for a while and not do anything. Try not to take action just because of your emotions. If you take action because of an emotional reaction, it is likely that a lot of other investors are thinking exactly the same. This means that everyone is abandoning the investment at exactly the same time. I have found it better to wait a while, even if I am still angry.

3. When your nerves can’t take it any more Have you ever bought a stock that has taken you for an emotional roller-coaster ride? Instead of increasing in value the price dips and bounces every day. If holding the stock makes you so uncomfortable that you can’t sleep and you only worry about how much money you have lost or made in a single day, you are being distracted.

4. Percentage drop in price This strategy is the simplest of all, but also much more difficult to implement than it looks. Sell after a fixed percentage decline in price. This level can be set by looking at the recovery table mentioned above, or can arbitrarily be set according your pain threshold.

My Approach (Tim’s) Below is a diagram of my approach to selling. It’s a combination of the many considerations mentioned above.

The loss and gain levels are arbitrary, but they are ones I feel comfortable with. You can use it as a basis to build your own selling strategy. Even though I have developed it and feel comfortable with the arguments and values, I still find it difficult to stick to. The toughest decision is to sell according to the model when I think the share is down due to a negative day for the stock market overall, or negative industry news. The most frustrating is when I did not sell at a 25% loss and the loss then increased to 33% or more.

How the Stock Selling Model Works Loss of more than 16% If the share price declines more than 16%, I first ask if I have already added to the position. If not, I redo the analysis. If the business has not deteriorated in one of the five factors mentioned, then I buy more after selling the position to make use of any tax losses. The position is never a hold - either I buy more as the investment has become more compelling, or if it has not, I sell.

Should I have increased my position, the loss on the new total position would have decreased as my average purchase price has declined.

Should my loss again exceed 16% after I have bought more shares, I ask a friend or fellow investor to redo the analysis. I use this objective review to determine if I have missed anything in my analysis. Should the independent evaluation come to the conclusion that it is a good investment, I may buy more or I may just hold, depending on the size of the position in my portfolio. Loss of more than 25% In order for a loss to exceed 25%, I would have had to go though my own, and an independent, review of the position when the loss got to 16%. At this point I cut my losses. I may be wrong in selling but I can always buy the shares again.

Selling at this point has enabled me to get out of a position where it has later shown that something was happening in the market or with the company, that I did not understand.

Gain of more than 50% Should my gain on the investment exceed 50%, I also review the position. If the investment was a “Cigar butt”, a description Benjamin Graham gave to cheap, bad quality businesses, I exit the position as the lowest risk gains have been made.

If the investment is a high quality business, I determine if the gain has been purely price-based with no change in the earnings of the business. Should the former be the case, I may sell right away, or may still hold if the valuation is lower than the market or peer group based on price to earnings ratio, for example.

Should the earnings of the investment have increased along with the price, I will hold the shares.

As you can see, my approach to selling is mainly sticking to the “rules”, but it allows some decision freedom. What I really try to stick to is the hard rule of selling out at a 25% loss.

An Example About a month after I bought Dell Inc., the share price fell 17%. The following day I looked at my financial analysis and made sure there were no updated financial or recent news I was not aware of. I found nothing, apart from uncertainty around worldwide computer shipments in the coming year. I added to my position.

This lowered my loss to 11%, as my average purchase price was lowered by the additional shares. About six weeks later my loss again exceeded 16%.

This time I asked a friend to work through my financial analysis to see if he found the company an attractive investment. Apart from a few points he also thought it an attractive investment. I decided to hold the position and not buy additional shares.

Three weeks later my loss on Dell exceeded 25% and I sold the position. From what I could gather the share price decline was caused by weak sales results by Lenovo Group, one of Dell’s competitors. Having sold the share I was in the position to objectively and unemotionally evaluate what I wanted to do from there going forward - repurchase the share after waiting for the situation to stabilize, or look for alternative investments.

What happen? Dell’s share price recovered slightly after I sold, but subsequently went on to lose a further 20%.

The sale thus had a good outcome, but even if the share had recovered I would have been pleased as it limited my losses and gave me complete emotional freedom to evaluate my options.

Summary and Conclusion The goal of this article is to show that it is important to think about your selling strategy in advance of making your investments, and to make it clear that selling is a lot more difficult than it looks. To summarize the most important points in this article:

1. Have your selling strategy written down.
2. Look at it often.
3. Make changes as you gain additional insight.
4. Stick to your selling strategy - no exceptions!

I wish you all the best with your investment endeavors. Tim du Toit

The purpose of EuroShareLab is to share knowledge and ideas gained in over 20 years of investing experience and continuous learning to help other self directed investors on their investment journey. Visit EuroShareLab, browse through past content and sign up for our free weekly newsletter. Do something for your financial future today.

Sell in May and Go Away?

By John Mauldin, Published Author and Market Expert Sell in May and Go Away? The End of the Recession? Is the US Consumer Back? A Dangerous End Game A Few Thoughts on Swine Flu The old adage that one should "sell in May and walk away" has been around for years. I mentioned that bromide about this time last year, urging readers to head for the sidelines if they had not already done so. I was also suggesting a strategic retreat in August of 2006 (after which the markets went up 20% before plummeting). In this week's letter we look at the actual data and offer up a fresh viewpoint. Then we turn our eyes to the recent GDP numbers, which were awful, though many took comfort in the apparent rise in consumer spending. Are Americans back to their old ways? It will make for an interesting letter. Sell in May and Go Away? My friend and South African business partner Prieur du Plessis recently updated a chart on monthly stock market returns since 1950. It clearly shows that the November through April periods have on average been superior to the May through October half of the year. (To read his very interesting blog you can go to http://www.investmentpostcards.com/) And the difference is quite significant. As Prieur notes, the "good" six-month period shows an average return of 7.9%, while the "bad" six-month period only shows a return of 2.5%. Of course, selling creates taxable events, which can hurt your returns. Plus, you never know when the markets are going to go down and when they will be up. There can be a lot of variance from year to year. For instance, in 2007 the markets were up during the summer by 4.52% and down during the "good" period by -9.62%, which is opposite the average pattern. Of course, the markets did go down by 30% after May 1 last year and down another 5% since then. That is what bears markets can do. Which caused me to wonder. The last 59 years have seen two significant secular bull markets (roughly 1950-1966 and 1982-1999) and two secular bear markets (1966-1982 and 2000-??? -- the one we are in now). I wondered if the pattern changed during the bear cycles, so I shot a late-night note off to Prieur and came in the next morning and had my answer. It made a significant difference. May through October in secular bear cycles has been ugly. Look at this graph: And just for fun, let's look at the monthly numbers since the present secular bear market began in 2000. So far, this has been a lot worse than the 1966-82 cycle, although we have not yet had the recovery phase from the current doldrums, which will likely make the overall numbers look better in 4-5 years. As noted above, these graphs simply give us past trends and not an absolute forecast. But they do provide food for thought. There are times when you should be cautious and times when you should throw caution to the wind. I think this is the former. While some pundits are talking about green shoots and the second derivative of growth, this economy may be worse than their rosy forecasts of the end of the recession, as we will see in a few paragraphs. The End of the Recession? Let's revisit 2000 and 2006. The yield curve was inverted in the late summer and early fall of both years. By that I mean that short-term yields were higher than long-term yields. When that happens for longer than 90 days, a recession has always followed within 12 months. (I wrote numerous e-letters on the topic. You can go to the website and search for "Mishkin," one of the authors of a Fed paper on the yield curve.) I wrote in this letter on both occasions that it was time to get out of the market, as the stock market drops an average of 43% during a recession. There is a YouTube of me on CNBC in August of 2006 on Larry Kudlow's show. I was forecasting a recession in 2007 based on the inverted yield curve. And if there was going to be a recession, I reasoned, then a bear market would follow. Larry and John Rutledge basically noted that "this time it's different," because the reasons for the inverted yield curve were different. And the market did rise another 20%+ for over 12 months. There was a recession, but it did not come until 15 months later, in late 2007. The yield curve was right in forecasting a recession, but the timing was different this cycle. If you had gotten out in August of 2006, you were not terribly happy 12 months later; but today you are still way ahead, plus the gains on your bonds and alternatives. On October 5 of 2007 I wrote about what I saw coming as a "Slow Motion Recession." I was more convinced than ever we were either in a recession or soon would be. As it turned out, we were. But at the time there was a lot of criticism from a lot of analysts. Christopher Amberger did a particularly scathing piece (which was at least witty) on YouTube on October 10, suggesting that the concept of a recession was nonsensical and there were still plenty of opportunities in the market. (Oh, and buy his newsletter to find out what they are). http://www.youtube.com/watch?v=UjAK0s9I8vA The market topped two days later. The point is that it is more important to get the general direction right than to be right on the specifics. In August of 2006 I was seeing a modest recession in the future. As time went on, I became increasingly bearish. But whether it was to be a mild recession or a major one, the advice would have been the same. You do not want to get caught long the market before a recession. Today, there are those who say the stock market will start rising six months before the economy does. And maybe it will. I don't know. The predisposition of this market is down. Valuations are not at a level that has spawned major bull markets in the past. At the beginning of real bull markets, volume is strong and rising. Now it is weak (modest at best) and shows no real sign of becoming strong, especially going into summer. Further, this rally has all the earmarks of a major short squeeze. Regulators have recently (and correctly) been enforcing short selling rules that require stock to be delivered and settled on short trades. This may be a one-time event. When the short squeeze is over, the buying will stop and the market will drop. Remember, it takes buying and lot of it to move a market up but only a lack of buying to create a bear market. Corporate earnings are likely to go even lower, as consumer spending is likely to get weaker in the coming months. Capacity utilization is at its lowest point since they began tracking it. The National Federation of Business says a recent survey shows none of the responders plans to raise prices, which is not a sign of business strength. Banks are not yet lending, and the past quarter's positive performance was mostly accounting gimmicks. Citigroup, for instance, said they made $1.6 billion. They did this by booking a one-time gain of $2.7 billion, because the value of Citigroup bonds have fallen (!), giving them the theoretical possibility of buying back their debt at a discount. And with consumer and credit card loans showing more weakness, Citi decided to REDUCE its loan loss reserves, allowing it to show another $1.3 billion in profit. And then there was the profit of $400 million from the new mark-to-market rules, which allowed them to produce a profit on "impaired assets." Without all these games, there would have been a loss of $2.8 billion. Maybe this time it's different. But when I survey the economic landscape, I see lots of opportunity for disappointments and missed targets. And bear market rallies are killed by disappointments and missed expectations. To be long this market going into summer you need to be brave or have very serious stops on your portfolio. I think the possibility of missed expectations at the end of the second quarter is high. It could be ugly. Is the US Consumer Back? The headlines told us that even as the economy fell an annualized 6% in the first quarter, consumer spending rose by 2%. Given that consumer savings climbed to 4.2%, unemployment rose, and income was down, how did consumer spending rise? To get the real picture, you have to dig into the numbers. (Thanks to 82-year-old, long-time reader Paul Miller for doing the slicing and dicing of the data at his excellent blog http://musingsbymiller.wordpress.com/.) First, the headline numbers are inflation-adjusted. Consumer spending in actual dollars rose $28 billion. But since prices went down (deflation), the "real" or after-inflation/deflation number shows up in the headlines as $44 billion. But where prices went down makes the real difference. Gasoline and other energy costs were down $50 billion, allowing consumers to spend on other items. Over the last two quarters energy costs are down almost $200 billion from the second and third quarters, making a huge difference. But now the "tax cut" from energy is largely gone, as prices have stabilized. Paul notes, "But ... now ... the gasoline tax cut has dissipated, and coming to the rescue are the Obama administration's tax cuts. In fact, the cuts began to be felt in the first quarter. Personal income declined modestly in the first quarter, by $60 billion, or a 2% annual rate. But personal taxes were down by $193.5 billion, some part of which was the result of the tax cuts, so that disposable income rose at a 5% annual rate. Putting taxes and lower gasoline prices together gave consumers $143.5 billion more to spend or save than they would otherwise have had, which accounted for the rather amazing performance of consumption in the face of immense job losses." And going further into the GDP numbers, there is an interesting statistic. Imports fell more than exports, mainly due to oil. The net trade deficit was only about $26 billion last month. Falling prices in imports, and especially oil, actually added about 3% annualized to the GDP number. Without that boost, the number would have been far more ugly. That being said, we are very likely to see better numbers in the future, and maybe even a positive one in the 4th quarter. But a large part of that will be statistical. For instance, housing construction is now down to 2.5% (or thereabouts) of GDP. Drops in housing construction have contributed almost a negative 1% a quarter for the last year. Even if housing construction goes down another 10-20%, it is becoming a very small piece of the puzzle and is not likely to be a big drag on future GDP. Inventories, though, have been a large drag on the economy for the last two quarters. While we could see inventories drop somewhat this quarter, as the ISM manufacturing number is still significantly negative, they will probably not drop a lot more in the third and fourth quarters. There are more stimuli and tax cuts on the way, and they will start to have an effect, as individuals will have more disposable income, whether to pay down debt, save, or spend. But that positive will be balanced by rising unemployment, likely to hit 10% or more by the end of the year. If you count those who are part-time workers wanting full-time work or who are discouraged workers, unemployment is over 15% today. A Dangerous End Game The Fed and the Obama administration are playing a dangerous game. The Fed is going to print trillions of dollars to forestall deflation and try to re-ignite the economy. But for a variety of reasons we will go into next week, a real, sustainable recovery may be a few years away. What happens when the market start balking at high and unsustainable national deficits? What happens when inflation (finally) does return? Can the Fed remain independent and take back the money it is printing in the face of what will likely be a tepid recovery? And if they don't, what happens to the dollar? Next year, we will be entering what will certainly be the most dangerous era in my lifetime for the US economy. It is not clear what will happen. There are a lot of paths that can be taken, though some are more likely than others. For those who are convinced that high inflation and a falling dollar are absolutely, unequivocally in the future I have just one word: Japan. Yes, there are differences, but there are a lot of similarities. While I think the most likely outcome is a long Muddle Through recovery, the likelihood of a lost decade of deflation a la Japan is a very real potential outcome. And the possibility of stagflation and a seriously impaired dollar is also quite real. Investors, businessmen, and entrepreneurs need to be as nimble as possible. A free market will figure out what paths to take, and I am still optimistic about the long term. But we have some very dangerous times in front of us, and we need to be realistic. And before I close, let me make a few comments about the Chrysler and GM issues. I tell my kids all the time that actions have consequences. If I hold senior secured debt of a company and the government tells me I have to take less than unsecured junior debtors, I am not going to be happy. I may have been dumb to make the loans in the first place, but I did it under a very specific contract and the rule of law. If the Obama administration arbitrarily changes those rules to favor a political class (unions), then that is going to have a chilling effect on future lending to all corporations. As an aside, they are spending $12 billion to save 54,000 Chrysler jobs (at $22,000 per job). With 600,000 jobs a month being lost, why are these 54,000 jobs more special than those of the rest of the unemployed, who get a fraction of that amount in unemployment benefits? Actions have consequences. The lenders who are forcing the Chrysler deal into bankruptcy court are not all "predatory hedge funds." They are mutual funds, pension funds, and other financial firms with small stakeholders as their investors. Cerberus, the hedge fund that originally bought Chrysler, deserves to lose their money. They made a bad investment. But those who lent money deserve to be treated in accordance with the contracts they signed. Demonizing investors and businessmen is hardly helpful. They are precisely the people we need to help get this economy moving. Governments don't create true job growth, businesspeople do, and mostly small businesses. I am not certain why small business owners, the job creation engine of the country, should see their taxes raised in order to protect bond holders of automobile companies or banks, or for union jobs to be preserved in companies that are clearly not competitive. But that is just my final thought late at night, before I hit the send button. OK, one more thought. If Chrysler couldn't figure out how to make efficient cars from their partnership with Daimler-Benz, are they now going to become viable through a partnership with Fiat, which has been on the verge of bankruptcy for the last decade? Really? GM paid $2 billion in penalties to Fiat in 2005 so as to not be forced to buy them. And Fiat gets 20% for no cash? Finally, a very quick three-paragraph commercial. In the current market environment, there are managers who have not done well and then there are money managers who have done very well. My partners would be happy to show you some of the managers they have on their platforms that we think are appropriate for the current environment. If you are an accredited investor (basically a net worth over $1.5 million) and would like to look at hedge-fund and other alternative-fund managers (such as commodity traders) I suggest you go to www.accreditedinvestor.ws and sign up; and someone from Altegris Investments in La Jolla will call you if you are a US citizen. Or you'll get a call from Absolute Return Partners in London if you are in Europe. If you are in South Africa, then someone from Plexus Asset Management will ring. And for my long-suffering readers who are patiently waiting for another accredited investor letter, there is one in the works. If you sign up today, you will get it. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.) If you are not an accredited investor, I work with CMG in Philadelphia. We have created a platform of money managers who specialize in the alternative management space. By this I mean they do not need a bull or bear market in order to have the potential for profits. (Past performance is not indicative of future results.) You can go to http://www.cmgfunds.net/public/mauldin_questionnaire.asp and quickly read about the recent past performance of a manager we recently added to the platform, and then sign up to get more information. If you are an investment advisor, all of my partners will work with you in providing your clients exposure to alternative-style investments and managers. Obviously, if your clients are high-net-worth individuals, then you will want to work with Altegris or ARP; and if your clients need lower minimums, then you should work with CMG. And if you have any feedback or comments, feel free to write me. A Few Thoughts on Swine Flu Intellectually, I know that flu is something that we live with every year. According to the Centers for Disease Control, seasonal flu infects between 15 and 60 million Americans each year (5% to 20%), hospitalizes about 200,000, and kills about 36,000. That comes out to over 800 hospitalizations and over 250 deaths each day during flu season. Worldwide deaths from "regular" flu are between 250,000 to 500,000 a year. In the last SARS virus "epidemic" in 2003, there were around 8,000 deaths worldwide but none in the US. Swine flu has been diagnosed 160 times in ten countries, plus several hundred more in Mexico. The toll is almost sure to rise a great deal, but will it reach the level of normal, everyday flu? I hope not, and I rather doubt it, at least based on the recent SARS scare. But that is all an intellectual, distanced, nuanced concept. The real world is a little different. This morning I went to wake up my son to get ready to take him to school. For a real change, he was already up. He had been throwing up, he had a sore throat, and his head was warm. We finally found the thermometer and took his temperature. It was 100, and 20 minutes later had risen a degree. We got into the car and went to the local "Doc-in-the Box." (For non-US readers, that is a local private-care clinic that will take walk-up patients without an appointment.) After a few tests, which they can now do in a few minutes, they determined it was not flu or strep throat. It was just some bug he had come down with that needed a course of antibiotics. We got the medicine and went home. On the way back I asked him if he was worried about whether he had swine flu. The day before, his school had cancelled a field trip, and a local large school district (Fort Worth) had simply closed for a week after one diagnosed case. "Yeah, Dad, I was worried a little. Glad it's not the flu." And Dad was, too. Statistics, whether financial or medical, become meaningless when it's personal. Have a great week, and stay healthy! Your planning to enjoy his May through October analyst, - John Mauldin

Recession: What Does It Mean To Investors?

by Investopedia Staff, (Investopedia.com) (Contact Author Biography)

When the economy heads into a tailspin, you may hear news reports of dropping housing starts, increased jobless claims and shrinking economic output. How does this affect us as investors? What do house building and shrinking output have to do with your portfolio? As you'll discover, these indicators are part of a larger picture, which determines the strength of the economy and whether we are in a period of recession or expansion.

The Phases of the Business Cycle

In order to determine the current state of the economy, we first need to take a good look at the business cycle as a whole. Generally, the business cycle is made up of four different periods of activity extended over several years. These phases can differ substantially in duration, but are all closely intertwined in the overall economy.

Peak - This is not the beginning of the business cycle, but this is where we'll start. At its peak, the economy is running at full steam. Employment is at or near maximum levels, gross domestic product (GDP) output is at its upper limit (implying that there is very little waste occurring) and income levels are increasing. In this period, prices tend to increase due to inflation; however, most businesses and investors are having an enjoyable and prosperous time.

Recession - The old adage "what goes up must come down" applies perfectly here. After experiencing a great deal of growth and success, income and employment begin to decline. As our wages and the prices of goods in the economy are inflexible to change, they will most likely remain near the same level as in the peak period unless the recession is prolonged. The result of these factors is negative growth in the economy.

Trough - Also sometimes referred to as a depression, depending upon the duration of the trough, this is the section of the business cycle when output and employment bottom out and remain in waiting for the next phase of the cycle to begin.

Expansion/Recovery - In a recovery, the economy is growing once again and moving away from the bottoms experienced at the trough. Employment, production and income all undergo a period of growth and the overall economic climate is good.

Notice in the above diagram that the peak and trough are merely flat points on the business cycle at which there is no movement. They represent the maximum and minimum levels of economic strength. Recession and recovery are the areas of the business cycle that are more important to investors because they tell us the direction of the economy.

To further complicate matters, not all business cycles go through these four steps sequentially. For instance, during a double dip recession, the economy goes through a recession followed by a short recovery and another recession without ever peaking.

Recession Versus Expansion

Recession is loosely defined as two consecutive quarters of decline in GDP output. This definition can lead to situations where there are frequent switches between a recession and expansion and, as such, many different variations of this principle have been used in the hope of creating a universal method for calculation.

The National Bureau of Economic Research (NBER) is an organization that is seen as having the final word in determining whether the United States is in recession. It has a more extensive definition of recession, which deems the following four main factors as the most important for determining the state of the economy:

1) Employment 2) Personal income 3) Sales volume in manufacturing and retail sectors

4) Industrial production

By looking at these four indicators, economists at the NBER hope to gauge the overall health of the market and decide whether the economy is in recession or expansion.

The tricky part about trying to determine the state of the economy is that most indicators are either lagging or coincidental rather than leading. When an indicator is "lagging" it means that the indicator changes only after the fact. That is, a lagging indicator can confirm that an economy is in recession, but it doesn't help much in predicting what will happen in the future. (Learn more about this in Economic Indicators To Know.)

What Does this Mean for Investors?

Understanding the business cycle doesn't matter much unless it improves portfolio returns. What's an investor to do during recession? Unfortunately, there is no easy answer. It really depends on your situation and what type of investor you are. (For some ideas, see Recession-Proof Your Portfolio.)

First, remember that a bear market does not mean there are no ways to make money. Some investors take advantage of falling markets by short selling stocks. Essentially, an investor who sells short profits when a stock declines in value. Problem is, this technique has many unique pitfalls and should be used only by more experienced investors. (If you want to learn more, see the tutorial Short Selling.)

Another breed of investor uses recession much like a sale at the local department store. Referred to as value investing, this technique involves looking at a fallen stock not as a failure, but as a bargain waiting to be scooped up. Knowing that better times will eventually return in the economy, value investors use bear markets as buying sprees, picking up high-quality companies that are selling for cheap.

There is yet another type of investor who barely flinches during recession. A follower of the long-term, buy-and-hold strategy knows that short-term problems will barely be a blip on the chart when taking a 20-30 year horizon. This investor merely continues dollar-cost averaging in a bad market the same way as he or she would in a good one.

Of course, many of us don't have the luxury of a 20-year horizon. At the same time, many investors don't have the stomach for riskier techniques like short selling or the time to analyze stocks like a value investor does. The key is to understand your situation and then pick a style that works for you. For example, if you are close to retirement, the long-term approach definitely is not for you. Instead of being at the mercy of the stock market, diversify into other assets such as bonds, the money market, real estate, etc.

Conclusion

The financial media often takes on a "sky is falling" mentality when it comes to recession. But the bottom line is that recession is a normal part of the business cycle. We can't say what the best course is for you - that's a personal decision. However, understanding both the business cycle and your individual investment style is key to surviving a recession.

Bond Yield Curve And The Stock Market

By Hans Wagner on May 25, 2009 More Posts By Hans Wagner Author's Website

Will the steeper yield curve and higher interest rates have a negative affect on stock prices? During the week of May 4, 2009, the U.S. Treasury conducted a record $71 billion May refunding that required higher rates than expected to complete. In fact, the 10-year yield completed its seventh straight weekly rise, a move that has not happened in five years. A steeper yield curve means companies selling longer-term corporate bonds must pay more for the privilege. It shows that interest rates affect investors in the stock market.

Background on the Yield curve One of my first papers I had to write in college was on the “Term Structure of Interest Rates”. The purpose was to discuss how interest rates change over a time and how to interrupt the rates of different maturities at a point in time. I am not sure I understood what I was writing at the time. Since then it has become much clearer and the term “yield curve” provides a much better image in the mind.

The yield curve is a plot of the yield on bonds with the same credit quality across different maturities. The basic assumption is you get more interest on your investment in a bond by holding it longer. The theory states there is more risk for holding a bond for 10 years than for 5 years, or for 5 years than for 90 days. Simply, the yield curve is a graph showing bond yields on the vertical axis and different length maturities of any type of debt instrument such as government bonds and notes on the horizontal axis.

Generally, the longer the maturity of the debt an investor is buying, the greater the yield any given bond will carry. This is because there is more risk to principal the longer the maturity of the debt. The more risk an investor carries, the higher return he should expect.

There are four ways to describe the yield curve at any given time: normal, steep, flat, and inverted. When the economy is growing normally without any fear of inflation or other economic disruptions, the yield curve slopes gently upward. Investors who risk their money for longer periods expect to get a bigger reward in the form of higher interest than those who risk their money for shorter periods. This creates a normal sloping yield curve.

A steep curve occurs when the longer-term bonds have much higher yields than the short-term notes. Investors have a greater fear that inflation is rising, which causes interest rates to be much higher at longer maturities.

The yield curve is flat when there is little difference between the long and short-term securities. This tends to take place when the economy is in transition and the yield curve is forecasting the change. A flat yield curve is normally a temporary situation.

An inverted curve takes place when the rates received on long-term bonds are less than the rates received short-term notes. When the economy is expected to go into a recession, especially a severe one, investors will settle for lower yields now if they think rates and the economy are going even lower in the future. They are betting that this is their last chance to lock in rates before the bottom falls out.

The shape of the yield curve can help tell us the trend in interest rates. Since longer-term rates are much higher, a steep yield curve tells us that the market is expecting rates to increase in the future. Investors want to be protected from loosing current principal value, so the market is generally selling the longer-term bonds. Rates move opposite bond prices. Therefore, when investors sell longer-term bond, rates rise. Rising rates at the long end of the curve hint that inflation is more of a concern.

On the other hand, a flattening or inverted curve, where long-term rates are falling relative to or below the short-term rates, means that the bond market expects interest rates to decline in the near future. This is due to traders bidding up (reducing the yield of) the longer-term bonds because the market expects the higher-yielding bonds to have a higher principal value in the near future. Falling interest rates actually raise the value of the longer-term bonds.

The yield curve only represents the bond market’s expectation of where interest rates and the economy are going, and the bond market, just like the stock market, is never truly efficient. In other words, the yield curve is not exactly perfect in predicting rates and should not be treated as gospel. Nevertheless, the yield curve is as good an indicator as any concerning where interest rates are headed.

Credit Spreads Widening As longer-term interest rates rise, it causes longer-term investment grade credit spreads to widen further. In fact, these credit spreads are currently at or near their widest levels in decades. In some sectors, they are approaching the widest since the Great Depression. This asset class has not been so attractively valued in a very long time. Yields at or around 7% to 8% on investment grade corporate debt are attracting investors who expect equity returns to be low over the next several years. In addition, Treasury yields are now near historical lows, as the Federal Reserve has stepped in to help stimulate the economy with lower rates. Given the current economic environment, corporate profits are likely to grow at roughly the same pace as nominal gross domestic product (GDP). For a variety of reasons, GDP will be below historical trends. In addition, dividends, currently around 3.5% on average, may be cut further to help companies preserve cash. If either or both of these events take place, it will render the equity market far less attractive than investment grade corporate bonds.

The expanding deficits in the U.S. require the Treasury to sell more bonds to provide the money for the government to spend. While still considered a safe investment, investors will require higher rates to meet their return expectations, as we saw in the Treasury auction the week of May 4, 2009. We should expect the treasury yield curve to steepen even further over the next few months. As the Treasury yield curve gets steeper, it will cause the rates of other debt securities to rise, as they must compete for money. Investors should consider what if the ratings on U.S. government securities received less than the best rating.

Affect of Interest Rates on Stock Prices

Bond investors are closely aligned with the economy, as interest rates are a key determinant of economic performance. Stock investors are aware of interest rates, though they focus on companies and their individual performance. As investors, we are very interested in the direction interest rates will go over the next few months and years.

In theory, rising interest rates should be good for stocks. Rates tend to rise when the economy is recovering from a down turn. However, higher rates can also be a determent to an economy that is recovering. That is why the Federal Reserve is keeping short-term rates near zero. However, controlling long-term rates is much more difficult. The hidden hand of Adam Smith steps in and forces all entities to deal with the realities of economics.

When rates go up, many investors seeking safety, who had been buying stocks, opt for bonds to receive their yields tempting. When investors perceive they can get better returns from long-term bonds than from stocks it takes money out of the stock market. This tends to put downward pressure on stocks prices. In addition, companies that sell long-term debt will pay more now that rates are higher. This reduces their earnings power.

As the yield curve gets steeper, it puts downward pressure on stock prices. Like all securities, bond yields do not rise or fall in a direct line. Rather they zig and zag along the way. As the rates for Treasury bonds climbs, they will place downward pressure on stock markets. This is one more factor stock investors need to consider as they make their investment decisions. It does not mean there will not be excellent investing opportunities for equities investors. It just adds to the analysis of the trends for the stock market.

Famous Failures

"Three Choices that Make You Who You Are" and why they matter.

Three Choices that Make You Who You Are By Adam Khoo One power that has given to us by our creator is the power to choose. The power of free will. I believe that the person you are today is the result of all the choices you have made in the past. Ten years from now, you will definitely become 10 years older. if you are 20 today, you will be 30 and if you are 30 today, you will be 40 a decade from now. The question is who would you have become? What would you have achieved? The answer lies in three major choices that you make every single day. It is what I call the three choices that make you who you are. 1) The People You Choose to Spend Time WithAs social beings, we have the tendency of picking up, matching and following the beliefs, attitudes and habits of the people who surround us. If the people you mix with have negative thoughts, complain all the time and lack self-belief, then the chances are that you will become that way as well. If the people around you constantly think positive, are self-motivated and set high standards, then you will become that way as well. Since we were young, we have been subconsciously picking up the thought and behavioral patterns of the people around us. Haven’t you notice times when you spoke just like your friends or your mother? Have you noticed times when you behaved just like your friends? It is common sense that if you surround a positively charged magnet with 10 negative ones, the positive magnet will soon follow the charges of the rest. This is why there are some people who get all motivated and positive after going for a personal development training but soon go back to their disempowered ways? When they leave the seminar, they go back to a negative environment where people tell them all day that life sucks and that things are hopeless. A seminar can immerse you in a powerful environment for 4-5 days, but the wrong friends will immerse you in a damaging environment for the rest of your life! Let me ask you this think about this… Write down the names of 5 people you spend most of your time with. Now look at these names and ask yourself: Do these people bring out the best in me? Do they inspire me? Do they challenge me? Do they uplift me? Or do these people make me feel lousy and bring me down? Think of the beliefs, attitudes, behaviors and standards that these five people have for themselves. Are these the beliefs that I want for myself? Are these the attitudes that will help me succeed? If the answer is yes, then GREAT. If the answer is no, then it is time you change who you spend time with. If you want to succeed, you have to mix with people who are successful (or who aspire to be successful). If you want to be highly motivated, you have to mix with people who are highly motivated. The main reason why many of the participants from my programs (e.g. Patterns of Excellence, wealth Academy etc…) create powerful and long lasting changes is because of the new friendships that are forged during the program. I have developed and implemented a system where program graduates form into success groups where they keep each other in check and develop a powerful new group culture where wealth and success in the norm. 2) What You Choose to Put into Your MindThe second thing that makes you who you are is what you choose to put into your mind! What are the books you choose to read? What are the magazines you choose to read? When you read the newspapers, which section to you focus on? Which websites do you spend time surfing on? What bookmarks are in your web browser? What seminars do you choose to go to? I often find it very funny when someone tells me that they want to increase their wealth. Yet, they read FHM and sports magazines (instead of SmartInvestor, The Edge and Fortune). They spend their time surfing entertainment sites (instead of moneycentral.com, sgx.com, cnn.com). They read Singapore ghost stories (instead of business & financial books). They rather spend their time and money watching a movie or going on holiday than attending financial management and investment seminar. They input negative thoughts like ‘why am I so poor?’ instead of focusing on thoughts like ‘ how can I learn the strategies to become rich?’ So the second lesson is that if you want to excel in something (e.g. health, success and wealth), you have to invest in your education and learn everything you can about it. Fill you mind with knowledge and thoughts of wealth and you become wealthy. 3) The Dreams You Choose to HavePeople who become better and better every day and move towards their goals do so because they have big and inspiring dreams that fill their minds the moment they open their eyes in the morning. If you have big dreams of becoming the best in your field, building a church/mosque/temple, sending your children to the best schools, buying a landed property, building your own business, then you will live each and every day with passion, focus and a sense of purpose. Every decision you take and every action you take will be purposeful. As a result, you will move closer and closer to you goals every day. However, if you have no dreams that inspire you out of bed. If you have no goals that fill your mind every moment, then you will tend to follow the decisions and actions of others blindly. You will tend to go in all directions with little sense of purpose. You will live your life day by day, without much meaning. And where you will end up 10 years from now will not be by YOUR plan, but by the plan that others have set for you.

BYD: Positioning Berkshire Hathaway for the “Chinese Century”

Warren Buffett is a margin of safety investor. That is, Buffet purchases equity stakes in companies only when he is more or less certain that he won’t permanently lose his capital and where the price is such that he believes he will earn an outstanding return on his investment over time. In order to practice this risk averse method of investing, Buffett has often had to pass on investment opportunities where it was not clear to him how the competitive dynamics of the relevant industry would change over time

During the tech bubble of the 90s, for example, Buffett was derided as being a stodgy old man who simply did not understand the new era of business. However, while Buffett did pass on some outstanding opportunities, he did so because it was difficult for him to predict how these “tech” companies would reinvest capital into their businesses in a way that would maintain or grow their earnings such that the prices quoted for their shares provided a margin of safety. Buffett also knew that the “moats” of many of these companies could easily be crossed by new entrants selling the latest and greatest disruptive technologies and so he declined to participate across the board. This led to a general theory among the press that Buffett simply would not invest in tech companies because he did not understand how these companies worked.

So many Buffett followers were perplexed when he saw fit to buy close to 10% of

BYD Company Limited (BYD), a Chinese manufacturer of rechargeable batteries, mobile handset components, and cars, in October of last year. The purchase was largely viewed in the media as a bet on BYD’s batteries playing a large part in the future of personal transport, either through the sale of its batteries to car manufacturers or through the sale of its own cars. The purchase was also cast as an atypical investment for Buffett, since the company was trying to bring to market a new disruptive technology – namely, a low priced, all-electric vehicle. However, when one digs deeper into the investment, one begins to realize that the investment is vintage Buffett and will, in fact, probably turn out to be one of the best investments that Buffett ever makes in his lifetime. Berkshire’s stake in BYD not only has the adequate margin of safety required by Buffett but also represents the future of Berkshire. Buffett and his partner in crime Charlie Munger are beginning to position Berkshire for what they believe will be the “Chinese Century.”

BYD deals with two businesses: IT manufacturing and auto manufacturing. It has production bases in several large Chinese manufacturing centers as well as in Japan, Korea, Taiwan and various emerging markets (such as Hungary and India). It is a public company and is listed on both the Chinese and Hong Kong stock exchanges. According to a Harvard Business School case study on BYD (required reading, in my opinion, if you really wish to understand Buffett’s interest in the company), the company opened up shop in 1995 and by 2002 became the world’s second largest manufacturer of rechargeable batteries. This was considered a remarkable feat because battery manufacturing was traditionally viewed as a capital intensive business that required large expenditures on things like robotic arms and dry rooms. Chinese companies’ comparative advantage was always thought to be their access to a large supply of cheap labor and so it was assumed that no Chinese company would be able to compete in the battery business. However, BYD was able to become a low cost producer of rechargeable batteries by changing the manufacturing process such that labor became a much larger input and capital equipment became a much smaller input.

BYD also had a one-up on most other Chinese manufacturing companies because it spent far more money on R&D focused on both product improvement and, more importantly, on manufacturing process improvement. This focus on both product and production process engineering is what enabled BYD to become the second largest rechargeable battery supplier in the world so quickly, as the company was able to manufacture batteries in a way that maintained quality control even while relying heavily on human resources for its manufacturing lines. It has also enabled the company to jump into other manufacturing businesses and become the low cost producer over time, as with its entry into mobile handset production. And while turnover on the assembly line side of the business is fairly high, turnover on the intellectual resources side of the business (R&D scientists) is quite low. BYD has been able to keep people on board by offering great benefits, including free housing, food, health insurance, access to free education for their children, and the opportunity to interact socially through athletic events, art programs, etc. In other words, BYD offers its employees Google-like benefits in order to keep them happy and working hard. This is just one of the reasons why BYD has been able to recruit from the “‘top of the top’” in China and why BYD will continue to innovate going forward.

Charlie Munger has called Wang Chuan-Fu a combination of Thomas Edison and Jack Welch, but I believe a more apt comparison for Wang Chuan-Fu is with the titan of American business Henry Ford. Like Ford, Wang started out as a skilled engineer and scientist who actually helped create and design new technological innovations (even working at the Edison Illuminating Company at one point). Like Ford, Wang eventually became a successful entrepreneur that excelled not only in creating innovative and value enhancing products, but also in coming up with new ways to optimize the manufacturing process in a way that made his company a low cost producer. Like Ford, Wang has vertically integrated his company so that it has become a one-stop shop for equipment manufacturing, thus capturing the entire value associated with the manufacturing supply chain. And like Ford, Wang has recognized that it is important for his workers – his human resources – to be taken care of both so that they will be more productive and stay at the company, but also because it is important that they themselves be able to buy the products they are manufacturing. Would you buy into a company run by the Chinese Henry Ford given the chance? I would.

By investing in BYD, Buffett has achieved several amazing feats at once. First, he has bought into a company that could potentially be the lowest cost manufacturer of a number of complex goods, not just batteries, handsets, and cars. BYD initially started out in batteries but then expanded into handsets, LCD screens, and automobiles, and it has always been able to generate profits in these growth enterprises by becoming a low cost manufacturer. BYD’s moat, it seems, comes from the company’s incredible ability to tailor the manufacturing process of complex goods in a way that takes advantage of China’s labor supply advantage. Additionally, BYD has done a good job of fending off competitors by vertically integrating the supply chain, thereby controlling the cost and quality of production and protecting its intellectual property and know-how. According to Wang Chuan-Fu, China is a ruthless place in terms of business competition, and its commercial law is relatively underdeveloped and under-enforced, so it is important that companies adapt their business models to deal with this reality. Learning how business works in China will be much easier with Wang Chuan-Fu at Buffett’s disposal.

Second, by investing in BYD Berkshire has gained access to the largest potential market for goods and services in the world. The growth of China in the coming years will be tremendous, and it is likely that the Chinese will be clamoring for products and service from home and abroad. Mobile phones, LCD TVs, and automobiles are all growth areas where the Chinese can supply themselves if they wish (through companies like BYD), but there are areas where the Chinese will want to purchase from foreigners or open up their markets to foreign investors. For example, the rapid industrialization of China will require huge amounts of electricity, and the Chinese would probably love to work with American utility companies who have expertise in supplying electricity using various types of generating technologies in a way that reduces pollutants and CO2 emissions. This presents a perfect opportunity for MidAmerican, the Berkshire utility subsidiary that made the strategic acquisition of shares in BYD. One can also imagine that the Chinese will increasingly see the social benefits of a robust and healthy private insurance market. By getting a toehold in the Chinese market, making business and political connections there, and learning more about the various risks of doing business in China, Berkshire may eventually be able to provide insurance capacity in China in the manner that it does in the U.S. This will give Chinese citizens access to insurance policies from a company that will always be able to make good on its promises due to its responsible underwriting and healthy investment practices.

Third, Buffet’s investment in BYD will better enable Berkshire to access one of the largest pools of talent in the world. China is continually churning out loads of intellectual talent, particularly in the fields of natural science, engineering, and business, and BYD is a top repository of such talent. Berkshire will be able to access China’s top talent both directly through BYD and through the networks of the individuals working for BYD, including Wang Chuan-Fu, thus allowing Berkshire to be more “linked in” to the Chinese business, scientific, and political communities. This in turn will enable Buffett and his successors to capitalize on new technologies that emerge from Chinese industry and to better understand the business climate in China as it changes. For example, if MidAmerican is deciding on investing in battery storage for its renewable energy portfolio, it can turn to BYD for advice on the appropriate technologies or even be directed by BYD to the companies BYD believes has the best technology for MidAmerican’s purposes. Or if Berkshire is interested in being involved in the development of traditional or renewable generation capacity in China, it can tap into BYD’s talent network to figure out what the regulatory outlook is like in China for allowing foreign investment in utilities.

Finally, given BYD’s growth potential, Berkshire has purchased its stake in BYD for what appears to be an outstanding price. Take a look at BYD’s annual report for 2008. Buffett infused about HK$ 1.8 billion worth of capital into BYD for a purchase price of HK$ 8 per share, resulting in a 10% stake in BYD. Last year, BYD earned RMB 0.50 per share, which is currently equivalent to about HK$ 0.57. Assuming that reported earnings are a good approximation of “owner earnings” and that BYD’s owner earnings will merely be maintained over the business’ lifetime, Buffet’s earnings yield for his stake is close to 7%. This is an excellent price for a company that in actuality has huge growth potential, especially when you consider that much of BYD’s income generating assets are intangible in nature (remember: its production process know-how is what helps it to be the low cost manufacturer).

BYD has a legitimate shot at becoming one of the largest suppliers of electric vehicle-related battery technology in the world given its low cost battery manufacturing capabilities. Furthermore, it is possible – though not necessarily probable – that BYD will become the largest automaker in the world. If BYD succeeds in this respect, it will probably be because its cars present a value proposition for emerging market customers rather than its cars being of the best quality. Regardless, BYD will almost certainly become a major auto manufacturer in China if the government subsidizes the purchase of all-electric vehicles. One must also remember that the Japanese were initially derided for manufacturing low quality electronics and vehicles, but now they are fierce competitors that are known for their manufacturing prowess across the globe. Just imagine if BYD is able to start generating valuable intellectual property related to its products in addition to its production processes. Could BYD become the new Sony or the new Toyota? It’s possible, and Buffett has essentially gotten this option value on BYD’s success for free.

Buffett and Munger believe that while the twentieth century was the American Century, the twenty-first will be the Chinese Century. Thus, the BYD investment should be viewed as Berkshire’s stepping stone into China. Those who deride Buffett for having a subpar record over the last decade should take note: if Buffett continues to make investments in companies like BYD, Berkshire will easily outperform the U.S. stock market for years to come. Disclosure: Please note that the author currently owns shares in Berkshire Hathaway (BRK.B). Sumit Shah www.sumitshah.com

Market Cycles and Self-fulfilling Prophecies

By AdamKhoo http://www.ProfitFromThePanic.com ========================================== "How To Make Your Fortune From The Greatest Investment Opportunity Since The Great Depression!" ========================================== The market is a predominantly irrational place filled with many investors who will believe anything and everything. Therefore, it is not a surprise that superstition and self-fulfilling prophecies prevail. That's actually not a bad thing if you realise how you can leverage on knowing when and what will happen. It can help you decide whether to profit take or hedge your position. Here are some interesting events that have been observed to happen. However it is important to note there are exceptions when they do not occur. Pattern 1: January Barometer Often used by analysts as an indication of the year's sentiment. If January ends down, the year to follow will be bearish (downward trend). If it closes up, the year will be bullish (upward trend). During election years when the first five days of January closed down with the month of January also down, the year had always closed negative. Pattern 2: The January Effect Here's a bit of January Effect Trivia: Traditionally in bullish years, the 10 best performing stocks on the S&P 500 will end the year up, while the 10 worst performers will go down. Pattern 3: Sell in May and Go Away A trader's superstition that has more credit than most would like to admit. The months from November to April are often bullish, while May to Halloween (end October) are bearish. September is traditionally one of the worst months of the trading year. Other interesting trivia: ------------------------- 1) The first trading day of the month is reliably a very bullish day - often the month's most bullish. 2) April is the most bullish month of any trading year. 3) Quarter 3 is the worse quarter of the trading year starting with July and ending with September - with September being the worst of those three months. 4) November, December and January make up the best three months of a trading year. 5) The end of October starts the best six months on the S&P500 and the start of the best eight months on the NASDAQ. To your investing success, Adam

Companies with the Biggest Earnings and Losses (2008)

Top 10 Company Earners in 2008 1. Exxon Mobil - $45.22 Billion 2. Chevron - $23.93 Billion 3. Microsoft - $17.68 Billion 4. General Electic - $17.41 Billion 5. Wal-mart - $13.40 Billion 6. Johnson & Johnson - $12.94 Billion 7. A T & T - $12.87 Billion 8. IBM - $12.33 Billion 9. Proctor and Gamble - $12.07 Billion 10. Hewlett Packard - $8.33 Billion- Stock Article Link Top 10 Company Losses in 2008 1. AIG - $99.3 billion 2. Fannie Mae - $58.7 billion 3. Freddie Mac - $50.1 billion 4. General Motors - $30.9 billion 5. Citigroup - $27.7 billion 6. Merril Lynch - $27.6 billion 7. Conoco Phillips - $17 billion 8. Ford Motor - $14.7 billion 9. Time Warner - $13.4 billion 10. CBS - $11.7 billion Stock Article Link

Focus still on America to lead global recovery

By David Caploe IN THE aftermath of the G-20 summit, most observers seem to have missed perhaps the most crucial statement of the entire event, made by United States President Barack Obama at his pre-conference meeting with British Prime Minister Gordon Brown: 'The world has become accustomed to the US being a voracious consumer market, the engine that drives a lot of economic growth worldwide,' he said. 'If there is going to be renewed growth, it just can't be the US as the engine.' While superficially sensible, this view is deeply problematic. To begin with, it ignores the fact that the global economy has in fact been 'America-centred' for more than 60 years. Countries - China, Japan, Canada, Brazil, Korea, Mexico and so on - either sell to the US or they sell to countries that sell to the US. To put it simply, Mr Obama doesn't seem to understand that there is no other engine for the world economy - and hasn't been for the last six decades. If the US does not drive global economic growth, growth is not going to happen. Thus, US policies to deal with the current crisis are critical not just domestically, but also to the entire world. This system has generally been advantageous for all concerned. America gained certain historically unprecedented benefits, but the system also enabled participating countries - first in Western Europe and Japan, and later, many in the Third World - to achieve undreamt-of prosperity. At the same time, this deep inter-connection between the US and the rest of the world also explains how the collapse of a relatively small sector of the US economy - 'sub-prime' housing, logarithmically exponentialised by Wall Street's ingenious chicanery - has cascaded into the worst global economic crisis since the Great Depression. To put it simply, Mr Obama doesn't seem to understand that there is no other engine for the world economy - and hasn't been for the last six decades. If the US does not drive global economic growth, growth is not going to happen. Thus, US policies to deal with the current crisis are critical not just domestically, but also to the entire world. Consequently, it is a matter of global concern that the Obama administration seems to be following Japan's 'model' from the 1990s: allowing major banks to avoid declaring massive losses openly and transparently, and so perpetuating 'zombie' banks - technically alive but in reality dead. As analysts like Nobel laureates Joseph Stiglitz and Paul Krugman have pointed out, the administration's unwillingness to confront US banks is the main reason why they are continuing their increasingly inexplicable credit freeze, thus ravaging the American and global economies. Team Obama seems reluctant to acknowledge the extent to which its policies at home are failing not just there but around the world as well. Which raises the question: If the US can't or won't or doesn't want to be the global economic engine, which country will? The obvious answer is China. But that is unrealistic for three reasons. First, China's economic health is more tied to America's than practically any other country in the world. Indeed, the reason China has so many dollars to invest everywhere - whether in US Treasury bonds or in Africa - is precisely that it has structured its own economy to complement America's. The only way China can serve as the engine of the global economy is if the US starts pulling it first. Second, the US-centred system began at a time when its domestic demand far outstripped that of the rest of the world. The fundamental source of its economic power is its ability to act as the global consumer of last resort. China, however, is a poor country, with low per capita income, even though it will soon pass Japan as the world's second largest economy. There are real possibilities for growth in China's domestic demand. But given its structure as an export-oriented economy, it is doubtful if even a successful Chinese stimulus plan can pull the rest of the world along unless and until China can start selling again to the US on a massive scale. Finally, the key 'system' issue for China - or for the European Union - in thinking about becoming the engine of the world economy - is monetary: What are the implications of having your domestic currency become the global reserve currency? This is an extremely complex issue that the US has struggled with, not always successfully, from 1959 to the present. Without going into detail, it can safely be said that though having the US dollar as the world's medium of exchange has given the US some tremendous advantages, it has also created huge problems, both for America and the global economic system. The Chinese leadership is certainly familiar with this history. It will try to avoid the yuan becoming an international medium of exchange until it feels much more confident in its ability to handle the manifold currency problems that the US has grappled with for decades. Given all this, the US will remain the engine of global economic recovery for the foreseeable future, even though other countries must certainly help. This crisis began in the US - and it is going to have to be solved there too. The writer is the CEO of the Singapore-incorporated American Centre for Applied Liberal Arts and Humanities in Asia.

Big Bank Profits Are Bogus! It’s A Massive Public Deception!

By Martin D. Weiss on April 20, 2009 More Posts By Martin D. Weiss Author's Website A big bank CEO on a mission to deceive the public doesn’t have to tell outright lies. He can con people just as easily by using “perfectly legal” tricks, shams, and accounting ruses. First, I’ll give you the big-picture facts. Then, I’ll show you how big U.S. banks are painting lipstick on some of the fattest pigs ever raised. Six of America’s Largest Banks at Risk of Failure As we have written here so often … as we documented in our recent white paper … as we showed in our presentation to the National Press Club … and as we explained again with new data in our follow-up press conference, the nation’s banking troubles are many times more severe than the authorities are admitting. First, look at the megabanks: The authorities SAY that all of the 14 largest banks have earned a “passing” grade in their just-completed “stress tests.” But just six months ago, the authorities swore that, without a massive injection of taxpayer funds, those same banks would suffer a fatal meltdown. Was the bad-debt disease magically cured? Did the economy miraculously turn around? Not quite. In fact, we have overwhelming evidence that the condition of the nation’s banks has deteriorated massively since then. How can our trusted authorities be so blatantly deceptive and still keep their jobs? Perhaps you should ask Fed Chairman Ben Bernanke. Not long ago, for example, he declared that the total losses from the debt crisis would not exceed $100 billion, while conveying the hope that most of those losses could be soon written off. Also around that time, the International Monetary Fund (IMF) estimated the losses would be $1 trillion, with only a small percentage written off. The IMF’s latest estimate: $4 trillion in losses, with only one-third of those written off so far. Bernanke’s error factor: He was 4,000 percent off the mark, in a world where 50 percent errors can be lethal. Meanwhile, based on fourth quarter Fed data, we find that, among the nation’s megabanks, six are at risk of failure in our opinion (seven if you count Wachovia and Wells Fargo (WFC: 16.36 -0.64 -3.76%) as separate institutions). JPMorgan Chase (JPM: 29.05 -0.64 -2.16%) is the nation’s largest, with $1.7 trillion in assets in its primary banking unit. It’s massively exposed to defaults by its trading partners in derivatives - to the tune of 382 percent (almost four times) its risk-based capital. Plus, since it holds HALF of ALL the derivatives in the U.S. banking industry, JPMorgan is at ground zero in the debt crisis.

Citibank (C: 2.65 -0.29 -9.86%) is the nation’s third largest, with assets of $1.2 trillion in its main banking unit. Its total credit exposure to derivatives is a bit lower than Morgan’s, at 278 percent, but still extremely high. Plus, it has other troubles, especially the surging default rates in its sprawling global portfolio of credit cards and other consumer loans. (More on these in a moment.)

Wells Fargo and Wachovia now make up the nation’s fourth largest bank with combined assets of $1.17 trillion. But in the fourth quarter, they still reported separately, which is illuminating: Even without Wachovia’s troubled assets, TheStreet.com Ratings has downgraded Wells Fargo to a D+. Wachovia, meanwhile, got a D. This tells you that Wells Fargo wasn’t exactly the best merger partner, unless you believe in some bizarre math wherein adding two negatives somehow gives you a positive result. SunTrust (STI: 13.80 -0.91 -6.19%), with $185 billion in assets, is getting hit hard by the collapse in the commercial real estate. Its Financial Strength Rating is D+. HSBC Bank USA (HBC: 32.09 -1.36 -4.07%) has massive credit exposure to derivatives that’s even greater than Morgan’s: 550 percent of risk-based capital. We’re not looking at its larger foreign operations. But the U.S. numbers are ugly enough, meriting a rating of D+. Goldman Sachs (GS: 115.01 0.00 0.00%), which reported for the first time as a commercial bank in the fourth quarter, seems to be taking the biggest risks of all in derivatives. Its total credit exposure is 1,056 percent of capital. Bottom line: It debuts as a bank with a rating of D, on par with Wachovia. Regional banks: Banking regulators have been largely mute regarding major regional banks. But several are also at risk of failure, including Compass Bank (Alabama), Fifth Third (Michigan), Huntington (Ohio), and E*Trade Bank (Virginia). Primary reason: Massive losses in commercial real estate loans. Smaller banks: On its “Problem List,” the FDIC reports only 252 institutions with assets of $159 billion. In contrast, our list of at-risk institutions includes 1,816 banks and thrifts with $4.67 trillion in assets. That’s seven times the number of institutions and 29 times more assets at risk than the FDIC admits. What Explains the Huge Gap Between Official Declarations and Our Analysis? We all use essentially the same data. And conceptually, the analytical approach is also similar. The primary difference is that the regulators have an agenda: Instead of protecting the people from bank failures, they’re trying harder than ever to protect failed banks from the people. Specifically … They have forever hidden the names of the banks on the FDIC’s “Problem List,” making it almost impossible for average consumers to get prior warnings of troubles. They have never disclosed their own official ratings of the banks - the CAMELS ratings - making it difficult for the public to find safe institutions they can trust. They have religiously underestimated - or understated - the depth and breadth of the debt crisis. And as I explained a moment ago, they have rigged their recent stress tests to give passing grades to all of the nation’s 14 largest banks, sending the false signal that even the most dangerous among them are somehow “safe.” Legal Cover-Ups, Flim-Flam and Sham In the Big Bank’s “Glowing” First-Quarter Earnings Reports Wall Street is aglow with the latest “better-than-expected” earnings reports by major banks. But take one look below the surface, and you’ll see three of the most egregious accounting gimmicks in recent history. Gimmick #1. Toxic asset cover-up. In their infinite wisdom, global banking regulators have now agreed to let banks cover up their toxic assets by booking them at fluffy-high values, bearing little resemblance to actual market prices. Like magic, the bad assets are suddenly worth more, as hundreds of billions in losses are defined away. Gimmick #2. Reserve flim-flam. Every quarter, banks are required to estimate their losses and decide how much to set aside in loss reserves. If they deliberately guess too much in one quarter and too little in the next, they can shove all their bad earnings into earlier P&Ls and make future P&Ls look rosy by comparison. Gimmick #3. The great debt sham. Consider this scenario: A financially distressed real estate developer owes the bank $4 million. His revenues have plunged. He’s lost a fortune in his properties. And he’s on the brink of bankruptcy. Therefore, in the secondary market, traders recognize that loans like his are worth, say, only half their face value, or about $2 million. So far, a very common situation, right? But now imagine this: He walks into the bank one morning and claims that he really owes only $2 million. Why? Because, in theory, he says, he could buy back his own loan for that price, thereby reducing his debt in half. In practice, of course, that’s a pipedream. If he actually had the cash to buy back his own loans on the market, then he wouldn’t be financially distressed in the first place. And if he weren’t financially distressed, his loans wouldn’t be selling on the market for half price. The reality is that he can’t buy back his own debt and never will. And even if he could someday, he will still be on the hook for the full $4 million unless and until he files for bankruptcy and the bankruptcy judge decides otherwise. That’s why the government would never let real estate developers - or hardly anyone else, for that matter - mark down the debts on their books and still stay in business. But guess what? The government lets banks do precisely that! It’s the ultimate double standard: The banks get away with inflating their toxic assets. But at the same time, they’re allowed to mark to market their own debts, which happen to be trading at huge discounts on the open market precisely because of their toxic assets.

Accountants call it a “credit value adjustment.” I call it cheating. Finding all of this hard to believe? Then consider … How Citigroup Mobilized ALL THREE of These Gimmicks to Create One of the Greatest Accounting Shams of All Time in Its First-Quarter Earnings Report I’m outraged. But I’m glad to see that someone besides us is speaking out: Meredith Whitney, one of the few no-nonsense analysts in the industry, says that the banks’ latest reports are, in essence, “a great whitewash.” Jack T. Ciesielski, publisher of an accounting advisory service, calls it “junk income.” And Saturday’s New York Times, picking up from their research, lays out precisely how Citigroup has transformed a massive loss into what appears to be a fat profit … First, Citigroup deployed the Toxic Asset Cover-Up. By inflating the value of the bad assets on its books, it was able to beef up its after-tax profits by $413 million. Second, Citigroup used the Reserve Flim-Flam gimmick: By (a) shoving most of its bad-debt losses into last year’s fourth quarter and (b) greatly understating its likely losses in the first quarter, the bank legally rigged its books to look like it had made major improvements. Even assuming no further deterioration in its loan portfolio, I estimate this gimmick alone bloated profits by at least another $1 billion. Third, Citigroup went all out with the Great Debt Sham, marking down its own debt and creating an additional $2.7 billion in purely bogus profits from this maneuver alone. So here’s Citigroup’s true math for the first quarter: So-called “profit” $1.6 billion Gimmick #1 $0.4 billion Gimmick #2 $1.0 billion Gimmick #3 $2.7 billion Total gimmicks $4.1 billion Actual result: $2.5 billion LOSS! And all this despite the fact that Citigroup’s loan portfolios actually deteriorated further in the first quarter. Based on its Q1 2009 Quarterly Financial Data Supplement, we find that: Net credit losses in Citi’s global credit card business surged from $1.67 billion at year-end 2008 to $1.94 billion by March 31. And compared to March 2008, they surged by a whopping 56 percent! (Page 9 of its data supplement.) Foretelling future credit card losses, the delinquency rate (90+ days past due) on those credit cards jumped from 2.62 percent at year-end to 3.16 percent on March 31 (page 10). Credit losses on consumer banking operations jumped from $3.442 billion on December 31 to $3.786 billion on March 31. And compared to the year-earlier period, they surged 66 percent (page 12). By almost every measure, Citigroup’s first-quarter numbers are worse than they were just three months earlier and far worse than they were 12 months before. My forecast: Citigroup’s effort last week to twist this into an “improvement” will go down in history as one of the greatest banking deceptions of all time. But Citigroup is not the only one. Nearly all other major banks are suffering similar surges in their credit losses and delinquency rates. Nearly all are using at least one of the same gimmicks to bloat their first-quarter profits. And every single one is destined to see massive new losses, driving their shares to new lows and the banking system as a whole into a far more severe crisis. Bottom line: Rather than the private-public partnership the government has called for to address the nation’s banking woes, we see little more than private-public collusion to hide the truth from the public, paper over the problems and, ultimately, sink the banks into an even deeper hole. My Recommendations In my book, The Ultimate Depression Survival Guide, I give you very detailed, step-by-step instructions on what to do immediately. Here’s a quick summary: Step 1. Get away from risky stocks. Use the recent stock market rally as a selling opportunity - your second chance to get out of danger before it’s too late. Step 2. Get out of sinking real estate. If there’s a temporary improvement in the market, grab it to sell the properties you’ve been wanting to sell all along. Step 3. Raise as much cash as you possibly can - not only by selling stocks and real estate, but also by cutting expenses and selling other things you own. Step 4. Make sure you keep your cash in one of the safe banks on the list we provide on the book’s resource page. Or better yet, follow my instructions on how to buy Treasury bills. They’re safer than any bank, with no limit on the Treasury’s direct guarantee. Step 5. For assets you cannot sell, buy protection using exchange-traded funds that are designed to go UP when stocks fall. The more the market goes down, the more you make; and those profits can offset any losses you suffer in the stocks or real estate that you cannot sell. Step 6. Later, get ready for the big bottom in nearly all markets. That’s when you should be able to lock in relatively safe interest rates of 10 percent or more for years to come … buy shares in our country’s best companies for pennies on the dollar … buy a dream home in a great location that’s practically being given away. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive.