JP Morgan (JPM): There are Cracks but the Foundation is Strong

InvestorGuide Stock of the Day Stock Analysis Let's evaluate the two competing arguments. The pro-JPM case rests on CEO Jamie Dimon and how he has been very effective in managing risk at the bank. JPM made the same mistakes as the rest of Wall Street when it came to the quality of mortgage assets on their book but the magnitude of exposure to residential real estate was much lower and better hedged. This meant the firm was able to take advantage of cheap acquisition opportunities in the form of Bear Stearns and Washington Mutual. Dimon has also gotten much better at lobbying Washington where government officials mostly like him and see him as a very competent leader. Additionally, there is much reduced competition on the street and that along with the upward sloping yield curve makes this a profitable trading environment for the firms that survived 2008. JP Morgan's two chief commercial banking competitors -- Bank of America (BAC: Charts, News, Offers) and Citigroup (C: Charts, News, Offers) -- have lost a lot of leverage with customers and regulators -- as they are both seen as wards of the state. This backdrop led JP Morgan to record a 36% jump in net income (to $2.7 billion) on a 39% year-over-year increase in revenue which rose to a record level of $27.7 billion. With short-term interest rates being close to zero, JPM was able to make $4.9 billion in revenue by exploiting wide credit spreads. JPM also took in a lot of equity underwriting business as the ranks of investment banks, with deep balance sheets to offer to clients, have dwindled. The investment banking division accounted for $1.5 billion of the $2.7 billion profit number. The case against JP Morgan uses these very same numbers. Yes, the second quarter was very profitable but let's remember JP Morgan is a commercial bank after all. It's not a hedge fund so don't count on that kind of fixed income trading performance again (plus spreads will narrow too) and it has never brought home the bacon consistently by operating as a white-shoe bulge bracket investment bank, so don't plan again on a quarter in which JPM outshines everybody (including Goldman) on the investment banking deal-making league tables. Therefore, for JPM to consistently perform well in the future, it will have to continue to rely on its bread-butter business of consumer and business banking. And that's where there are serious problems now and in the future. For example, JPM made only $15 million from retail banking this quarter as compared to $474 million last quarter and losses at the consumer lending division rose to $955 million from $389 million. And despite all the talk of an improving economy, housing loans continue to deteriorate with a $1.31 billion charge-off in this segment, up 4.61%. So the argument here is simple, JP Morgan's core business of lending continues to hemorrhage blood and with the unemployment rate slated to cross 10%, things will only get worse. Additionally, JPM will have to suffer more pain thanks to its commercial real estate portfolio which has yet to take major hits. So which of these two arguments carry more merit? Time (and the future course of the economy) will tell but we lean towards the first position because a) JP Morgan has set aside about $29 billion in loss reserves (or 5% of loans outstanding) providing it with a much bigger cushion than its competitors to deal with future losses and b) it may be time to start thinking of JP Morgan as more than just a commercial bank. The departure of Lehman and Merrill has probably created a void that needs to be filled by a blue-chip investment bank. JP Morgan could play that role well especially with Bear Stearns in its fold. Also, Bear was a powerhouse in the area of bond trading, something that JPM is finding very profitable.

Do We Cheer Banks’ Earnings?

By Zacks Investment Research on July 20, 2009 More Posts By Zacks Investment Research Author's Website Last week, after a round of “positive surprises” delivered by some of the major banks, we had “not so surprising” news of closure of five more banks, bringing to 57 the number of federally insured banks closed this year। It appears that the divide in the banking landscape between the “haves” and “have-nots” is increasing। Even among the big banks, there is now a clear two-tier system. On one hand, we have Goldman Sachs (GS: 158।31 -1.72 -1.07%) and JP Morgan (JPM: 36.80 -0.18 -0.49%), which delivered record profits from their trading and investment banking revenues. There is no doubt that these two managed their affairs well, have increased their market share after the collapse of Lehman and Bear Stearns and also have benefitted tremendously from the various programs by the Treasury and the regulators. And, we should not forget the generous AIG (AIG: 13.42 -0.04 -0.30%) payout to Goldman. On the other hand, the second-quarter profits of Bank of America (BAC: 12।01 -0.23 -1.88%) and Citigroup (C: 2.6703 -0.1197 -4.29%) were reliant on several one-time gains, resulting from asset sales etc, while weaknesses in some businesses and continued credit deterioration showed that there is more pain to come. Bank of America’s credit-card unit lost $1।6 billion amid rising delinquencies, compared with a year-ago profit of $582 million. Its home-loan and insurance unit lost $725 million. The bank reported $8.7 billion in credit losses, up from $3.6 billion in the year-ago quarter. Its nonperforming loans jumped to 3.3%, up from 1.1% a year ago. Like Goldman and JP Morgan, Bank of America’s results were aided by strong investment-banking and trading income following the merger with Merrill Lynch। But Citigroup saw decline in investment banking profits and it appears to be losing market share to stronger rivals. Citigroup reported $8।4 billion in net credit losses, nearly double the loss from a year ago. Incidentally, the CEO of Citigroup — after the bank had posted a sixth quarter of loss ($2.4 billion net loss on operational basis) in the last seven quarters — sounded most optimistic during the conference call, saying “the rate of growth in these consumer losses may be moderating.” Obviously he was trying to put on a brave face as the bank still faces an uncertain future. With spiking unemployment, these banks will face increasing credit card losses। Housing and Commercial Real Estate prices are still on a downward spiral and will cause more losses in the coming quarters. On the other hand, mortgage refinancing, which was one of the main reasons for supporting the revenues in the last two quarters, is expected to taper off as the rates are creeping up now. The smaller banks that do not enjoy the privilege of being “too big to fail” continue to struggle. The regulators shut two banks in California and two smaller banks in Georgia and South Dakota on Friday (something that has become the rule rather than the exception for Fridays). The 57 bank failures this year compare with 25 last year and just three in 2007. The latest round of failures is expected to cause a loss of $1.1 billion to the FDIC and bring the total cost of failures this year to $13.4 billion. And unfortunately, this trend is expected to continue for some time.

Hitachi Expanding Hybrid Cap

By Zacks Investment Research on July 4, 2009 More Posts By Zacks Investment Research Author's Website
Hitachi Ltd. (HIT: 31.44 +0.45 +1.45%), a Tokyo-based global conglomerate, is expected to supply advanced lithium-ion batteries to General Motors (GMGMQ.PK: 0.82 -0.0875 -9.64%) in 2010 for use in its gasoline hybrid-electric vehicles (HEV). The deal with GM will increase Hitachi’s production capacity for lithium-ion and expand its business in the automotive-related field. It will also meet rising demand for gas-electric cars.

Hitachi expects the global market for HEVs to expand from 690,000 units in 2007 to 1.5 million units in 2010. As a result, Hitachi estimates the demand for HEV lithium-ion batteries to overtake that of the current mainstream nickel metal hydride batteries by 2015. Toyota Motor (TM: 74.09 -1.21 -1.61%), which currently uses nickel-metal hydride batteries, will start using lithium-ion batteries for its plug-in hybrid cars for the first time.

The company has boosted capacity to handle demand. Currently, Hitachi produces 40,000 lithium-ion batteries per month and expects to increase production to 3,000,000 units. According to The Nikkei business daily, Hitachi will invest approximately ¥30 billion ($311 million) to raise production capacity.

Hitachi has declined to comment on the report. Hitachi’s lithium-ion battery systems will be installed annually in more than 100,000 hybrid-electric vehicles (HEV), which are scheduled for launch in the North American market in 2010.

The company was also recently awarded an order from U.S.-based Eaton Corporation (ETN: 42.99 -2.29 -5.06%) to supply motors, inverters, lithium-ion batteries and other components for Eaton’s hybrid power systems to be delivered through 2011. Plans call for commercial vehicles using Eaton’s hybrid system to be rolled out in markets in North America, Europe and Asia.
Hitachi plans to form a cross-business unit for lithium-ion industrial and automotive batteries and an R&D unit for next-generation batteries. In 2009, Hitachi converted Hitachi Koki, a manufacturer and seller of power tools into a consolidated subsidiary to foster increased research and development into lithium-ion battery-operated products.

Additionally, to develop and manufacture rechargeable lithium-ion batteries for hybrid electric vehicles and other applications, Hitachi merged Hitachi Unisia Automotive, Ltd. with TOKICO LTD., thereby forming Hitachi Vehicle Energy, Ltd. Through these structural reforms, we expect Hitachi to emerge as a leading supplier in the global automotive market.

Hitachi will be able to create more energy by producing lithium-ion batteries and help hybrid cars give greater mileage, but the company may face some technological barriers. Furthermore, globalization of some of its markets, commoditization of products and stagnation of industries may pose difficulty for the company to grow shareholder value.

Hitachi posted large revenue declines across all its segments in fiscal 2008, particularly in automotive-related products, due to a fall in demand. With a large amount of debt and low amount of cash on its balance sheet, Hitachi’s performance has been deteriorating over the past few years. We therefore maintain our Hold rating on Hitachi shares.

A Clear Picture On The US Debt Situation

More Posts By Michael Panzner Author's Website With all of the rhetoric, obfuscation, and spin coming out of Washington these days, some might find it hard to see just where our current policies are leading us. One look at the following chart of federal receipts, outlays, and borrowing, however, and the facts seem pretty clear.

Put that together with the following report from the Associated Press, “Mountain of Debt: Rising Debt May Be Next Crisis,” and it makes you wonder whether this year’s July 4th holiday should really be a time for celebration.

The Founding Fathers left one legacy not celebrated on Independence Day but which affects us all. It’s the national debt.

The country first got into debt to help pay for the Revolutionary War. Growing ever since, the debt stands today at a staggering $11.5 trillion - equivalent to over $37,000 for each and every American. And it’s expanding by over $1 trillion a year.

The mountain of debt easily could become the next full-fledged economic crisis without firm action from Washington, economists of all stripes warn.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Federal Reserve Chairman Ben Bernanke recently told Congress.

Higher taxes, or reduced federal benefits and services - or a combination of both - may be the inevitable consequences.

The debt is complicating efforts by President Barack Obama and Congress to cope with the worst recession in decades as stimulus and bailout spending combine with lower tax revenues to widen the gap.

Interest payments on the debt alone cost $452 billion last year - the largest federal spending category after Medicare-Medicaid, Social Security and defense. It’s quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders. The United States went into the red the first time in 1790 when it assumed $75 million in the war debts of the Continental Congress.

Alexander Hamilton, the first treasury secretary, said, “A national debt, if not excessive, will be to us a national blessing.” Some blessing.

Since then, the nation has only been free of debt once, in 1834-1835. The national debt has expanded during times of war and usually contracted in times of peace, while staying on a generally upward trajectory. Over the past several decades, it has climbed sharply - except for a respite from 1998 to 2000, when there were annual budget surpluses, reflecting in large part what turned out to be an overheated economy. The debt soared with the wars in Iraq and Afghanistan and economic stimulus spending under President George W. Bush and now Obama.

The odometer-style “debt clock” near Times Square - put in place in 1989 when the debt was a mere $2.7 trillion - ran out of numbers and had to be shut down when the debt surged past $10 trillion in 2008.

The clock has since been refurbished so higher numbers fit. There are several debt clocks on Web sites maintained by public interest groups that let you watch hundreds, thousands, millions zip by in a matter of seconds.

The debt gap is “something that keeps me awake at night,” Obama says. He pledged to cut the budget “deficit” roughly in half by the end of his first term. But “deficit” just means the difference between government receipts and spending in a single budget year. This year’s deficit is now estimated at about $1.85 trillion.

Deficits don’t reflect holdover indebtedness from previous years. Some spending items - such as emergency appropriations bills and receipts in the Social Security program - aren’t included, either, although they are part of the national debt.

The national debt is a broader, and more telling, way to look at the government’s balance sheets than glancing at deficits.

According to the Treasury Department, which updates the number “to the penny” every few days, the national debt was $11,518,472,742,288 on Wednesday.

The overall debt is now slightly over 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product.

By historical standards, it’s not proportionately as high as during World War II, when it briefly rose to 120 percent of GDP. But it’s still a huge liability.

Also, the United States is not the only nation struggling under a huge national debt. Among major countries, Japan, Italy, India, France, Germany and Canada have comparable debts as percentages of their GDPs.

Where does the government borrow all this money from? The debt is largely financed by the sale of Treasury bonds and bills. Even today, amid global economic turmoil, those still are seen as one of the world’s safest investments. That’s one of the rare upsides of U.S. government borrowing.

Treasury securities are suitable for individual investors and popular with other countries, especially China, Japan and the Persian Gulf oil exporters, the three top foreign holders of U.S. debt.

But as the U.S. spends trillions to stabilize the recession-wracked economy, helping to force down the value of the dollar, the securities become less attractive as investments. Some major foreign lenders are already paring back on their purchases of U.S. bonds and other securities. And if major holders of U.S. debt were to flee, it would send shock waves through the global economy - and sharply force up U.S. interest rates.

As time goes by, demographics suggest things will get worse before they get better, even after the recession ends, as more baby boomers retire and begin collecting Social Security and Medicare benefits.

While the president remains personally popular, polls show there is rising public concern over his handling of the economy and the government’s mushrooming debt - and what it might mean for future generations.

If things can’t be turned around, including establishing a more efficient health care system, “We are on an utterly unsustainable fiscal course,” said the White House budget director, Peter Orszag.

Some budget-restraint activists claim even the debt understates the nation’s true liabilities. The Peter G. Peterson Foundation, established by a former commerce secretary and investment banker, argues that the $11.4 trillion debt figures does not take into account roughly $45 trillion in unlisted liabilities and unfunded retirement and health care commitments. That would put the nation’s full obligations at $56 trillion, or roughly $184,000 per American, according to this calculation. ___ On the Net: Peter G. Peterson Foundation independent assessment of the national debt: http://www.pgpf.org/

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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.