Investing to Beat Inflation

by John Dobosz

In October, the nation's first baby boomer, Kathleen Casey-Kirschling, applied for her Social Security benefits. The 61-year-old woman was born one second after midnight on January 1, 1946.

Following Ms. Casey-Kirschling into retirement over the next two decades will be about 80 million people born between 1946 and 1964, a generational swath that encompasses everyone from Bill Clinton and George W. Bush to Sandra Bullock and Rob Lowe.

Welcome to your retirement, boomers. It's going to be a long one.

Making sure that your savings last as long as you do could be a challenge for some people. And even if your nest egg grows, will it grow fast enough to keep you ahead of inflation?

Going back 40 years to 1967, do you know which had a higher annualized gain: the S&P 500 Index or the Consumer Price Index (CPI)? Although you may be tempted to say inflation, you'd be wrong.

From September 1967 to September 2007, the S&P 500 produced an annualized return of 7.14%, compared to the annualized gain of 4.67% in the CPI over the same period.

If the message you take away from this is that stocks keep you ahead of inflation, then you're only half right. During the 1970s, stocks--despite a couple of bear and bull markets--were essentially flat, while the CPI more than doubled. The good times for stock investors came after 1982, when harsh monetary policy from the Federal Reserve helped to wring inflation and its expectations out of the financial system.

Lots of investors look at what's happening now with the dollar, gold, oil and other commodities and argue that substantially higher consumer price inflation is just around the corner. Even Federal Reserve Chairman Ben Bernanke has acknowledged its possibility and that it would be "costly" to fix.

"During the past 25 years, we've had two huge disinflationary forces at work," says James Stack, editor of InvesTech Research. Namely, the spread of the personal computer and the opening up of labor markets around the globe have helped to keep a lid on inflation, he says.

Technology and the personal computer have helped make workers more productive, while labor markets in China, India and Eastern Europe have helped to offset the traditional inflationary pressures that build during an economic expansion, since American firms have been able to outsource production to countries with a lower wage base than the U.S.

However, now that personal computers are nearly ubiquitous and China and India have matured rapidly, those release valves may no longer open, and inflation could once again percolate higher.

In September, consumer prices were 2.8% higher than they were a year before. That's still mild and just about in line with the 25-year average inflation rate.

But what if higher fuel and energy prices do what seems logical--drive up prices in general? Is your portfolio prepared?

Inflation can be a double whammy, since it not only lowers the worth of your dollars in the future but it also tends to depress overall equity returns, says Sam Stovall, chief investment strategist at S&P Equity Research.

To find out the impact of rising inflation on individual sectors of the market, Stovall looked at eight periods since 1969 when inflation has accelerated and moved above 4% before turning lower. He tabulated things like average absolute returns and frequency of outperforming the overall market. As a whole, the S&P 500 lost an average of 1% during these periods of rising inflation, but there were some clear winners and losers among sectors.

Predictably, energy was the best sector during higher inflation, gaining an average of 24%, followed by materials and telecommunications services, which posted average advances of 12% and 10%, respectively.

The biggest loser has been the financial sector, underperforming the market 75% of the time during high inflation and posting an 8% average decline. Consumer discretionary stocks underperformed 62% of the time with an average loss of 6%.

"Classic defensive stocks seem to work well during inflationary times," says Stovall.

Smaller stocks can also keep you ahead of inflation, points out Stack. "From 1974 to 1982, when the overall market was flat, the smallest 20% of companies on the NYSE were up about 600%," he says. Good growth stocks, too, can stay ahead of inflation.

Whether or not we will see another six-fold increase in prices over the next 40 years, we do not know. But you should invest like we will--just to be safe.

Deflation to the Rescue

by Clif Droke

Time is the least common denominator of all things, including in the stock market. We'd all be lost if we couldn't look at the clock throughout the day since time is our frame of reference for the day's activities. So are the days of the calendar and so are the dominant equity market cycles.

With that in mind, let's step back for a minute and consider where we are in the grand scheme of the 60-year cycle. The 60-year cycle is one of the most profound market cycles of our lifetime since it usually bottoms at least once during the average lifespan. The 60-year cycle also closely correlates with the 50-70 year Kondratieff economic long wave (which as the name implies is a wave, not a cycle). The K-wave averages 60 years and is expected to bottom at about the same time as the current 60-year cycle, in or around 2014.

The 60-year cycle is the dominant half-cycle component of the Kress 120-year Master Cycle series, which governs the major bias of the financial markets over a 120-year period. The last 120-year cycle bottomed in 1894, accompanying the end of a major depression at that time and kicking off the acceleration of the Industrial Revolution as well as a secular bull market in stocks.

Since the last 120-year cycle bottomed in 1894, from a time cycle perspective the period that most closely resembles our own in terms of the configuration of yearly cycles is the period of 1884-1894. This naturally corresponds to the period of 2002-2014. It's easiest to start with the fourth year of both decades since this is when the 10-year cycle bottomed in both instances. The year 1884 was also the bottom of a major stock market decline as measured by the Axe-Houghton Industrial Stock Price Average. It also coincided with the Depression of 1884. From the major market low of 1884 the U.S. stock market went on to record all-time highs by 1887. Then in '87 there was a decline beginning around mid-year followed by a lateral consolidation before stocks took off again in 1888.

Stock prices then peaked, forming a double top between the years 1889 and 1890. From there stocks declined mildly into 1891 then bounced back to a token new all-time high in 1892. Then came the major crash of 1893 which coincided with the final bottoming of the 120-year cycle.

Fast forward to 2004 and we see remarkable similarities. Following the 10-year cycle low of 2004 the Dow Jones Industrial Average, much like the Axe-Houghton Industrial Average, has since rallied up to all-time highs in the seventh year of the present decade. We've also seen a summer decline and are in the consolidation period following the latest decline. If history repeats we should see a further recovery from here and then a stellar year for stocks in 2008 before a peak occurring sometime in 2009-2010 as the latest 10-year cycle peaks. It's hard to predict what will follow from there but the law of probability states 2011 is likely to be a bad year for the markets and maybe also 2012. As mentioned previously, the 120-year cycle is due to formally bottom in 2014 along with the latest K-wave.

Now why have I taken the time to enlighten you with this rather dry history lesson? Because I believe it provides a useful road map to lead us through the current market environment and into the next two years ahead. Everywhere we hear talk of how the coming 60-year/120-year/K-wave bottom will mean significant downward pressure against the financial markets from here onward but that clearly isn't self-evident. The heavy downside pressure against the stock market back during the "hard down" phase of the last 120-year cycle didn't really hit stocks hard until around 1892, some two years before the cycle bottomed.

Were the comparable years 1887-1889 bad for stocks on balance? Absolutely not! They were mostly bullish years. So why can't the 2007-2009 years be bullish for stocks as well since we're the same amount of time away from the 120-year cycle bottom? Answer: there's no reason why the coming two years won't be bullish for stocks on balance.

More than anything else the 120-year cycle is a guideline for the forces of long-term inflation and deflation. These inflationary and deflationary forces are more often visible in the economy than they are in the financial markets in the grand scheme of things and we're currently experiencing K-wave deflation. While you wouldn't know it from looking at your grocery or gasoline bill, you can see the forces of cycle-related deflation by looking at prices for electronic goods among other consumer goods prices. This is partly a function of demographics and emerging market logistics as the former Third World countries are able to produce and export goods much cheaper than the mature, developed countries such as the U.S. This is one way of looking at the effects of cyclical deflation.

Another way of looking at deflation is to see the effects that 120-year/K-wave deflation have recently had on the housing and property market. While there has been much speculation on the effects the sub-prime mortgage lending problem and the housing price decline will have on the financial markets and economy, the overall effect is likely to be much less detrimental than commonly supposed. An argument could even be advanced that the housing price deflation is a good thing in the overall scheme. In the face of the current 6-7% consumer price inflation, lower housing prices will mean greater affordability to those who were previously priced out of the housing market. There is already preliminary evidence that younger buyers are buying condos and houses in the Washington, D.C. metro market in response to the reduced prices. This shows us that while the volume of activity isn't nearly as vibrant as it was 2-3 years ago, the demand is still there and in the end lower prices always creates its own demand.

This is just one example of how, in a financial system loaded with liquidity as ours is, deflation can sometimes be a good thing inasmuch as it tends to benefit consumers and retail investors who recognize the opportunities it brings. The deflationary tendencies of the falling 120-year cycle also keep economic inflation from getting out of hand in spite of the government's relentless tendency to increase the volume of money. Indeed, history shows that until the final 3-4 years of the 120-year cycle come upon us there is likely to be an upward bias in the stock market based on the complex set of factors that make holding stocks profitable during all but the final stages of a deflationary cycle.

The effects of deflation were extremely visible back in 1998 as commodity prices sagged while the U.S. dollar index rallied. Oil prices were $10/barrel and the price of a gallon of gasoline was in some cities just under $1. Retail and consumer prices were also low at that time. Much of the impetus behind the considerably higher commodity prices of today in the face of K-wave deflation can be attributed to the effects of the war in the Middle East. War is the great cure for deflation as history shows time and again. The last time the 120-year cycle bottomed it was the Spanish-American War that lifted the economy out of the doldrums and lifted the general level of stock and commodity prices.

Already the comparisons are coming in for the LTCM crisis of 1998 after the Fed pumped money into the system last week. The latest infusion of money has been commanding newspaper headlines around the world with the media engaging in a feeding frenzy of scaremongering. The front page of the August 10 business section of the Washington Post asked, "Where did all the money go?" The article pointed out that the European Central Bank injected $130 billion into the system as the interest rate fell to 4%. This in turn led to "financial institutions scrambling for crash, lifting the federal funds rate as high as 5.5%, well above the Federal Reserve's target rate of 5.25%," said the Post. "As a result, the Fed put $24 billion into the system to bring the federal funds rate back down to 5.25%." This headline was accompanied by two related stories, both on the same page, with these headlines: "New order ushers in a world of instability" and "Low-risk borrowers now feel the crunch."

Can you smell the fear in the air? I certainly can and it's showing up big time in the market's leading psychology indicators. Several of these indicators have given super-bullish signals and these signals are telling us that we should ignore the headlines and remain bullish on the stock market, including the natural resource sector.

Sunshine Empire under CAD probe

By Asha Popatlal, Channel NewsAsia | Posted: 13 November 2007 1813 hrs

SINGAPORE: The Commercial Affairs Department (CAD) has launched investigations into multi-level marketing (MLM) firm, Sunshine Empire.

The probe by the white collar crime buster comes just over a month after the Monetary Authority of Singapore (MAS) placed the firm on an investor-alert list which zooms in on those who may be conducting activities regulated by the MAS without authority.

Sunshine was also put on a similar list by Malaysian authorities a few months ago.

MLM firms, which are legal in Singapore, typically invite people to pay cash for the right to market goods to other people. They also get cash for recruiting other MLM marketeers.

Sunshine has been in the news on concerns over its business practices.

It is supposed to be doing networking marketing but its mode of operation appears more like a financial investment scheme for which it is not licensed.

Sunshine is believed to have a few thousand members.

When Channel NewsAsia news team visited Sunshine's headquarters at Toa Payoh Hub, members were seen entering the premises but they refused to comment.

Channel NewsAsia news team were not allowed into the premises. But looking through the glass door, it seemed it was still very much business as usual.

Large crowds of people were seen gathered around small desks discussing about marketing possibilities.

Eventually, two members emerged from the building, and they agreed to speak to Channel NewsAsia.

"We have been following the company for almost one year and all the updates are there. So we understand the company fully so we are not worried about anything," said one of the members.

"So far, we haven't complained, because every month we get money back. So, we've been all right," said another.

"You've been a member for five months, how much have you put in?" asked Channel NewsAsia.

"About $12,000," the member said.

"How much have you gotten back?"

"Including this month, it's about $7,000," answered the member.

The Commercial Affairs Department advises those who have placed money with Sunshine Empire to wait for further updates by the CAD as more information will be released in due course.

In the meantime, Sunshine members may be requested to come forward to help with investigations, says CAD.

The man behind Sunshine is Mr James Phang, 48, the founder, director and international president of Empire Group Alliance, a group spanning several Asian countries.

Sunshine is part of the group, but Mr Phang does not own it.

Sunshine also operates in Indonesia, Thailand, Hong Kong, Korea and Taiwan, and has 50,000 merchants. - CNA/ir

Profit in 2008: Your spending

Energy bills. A flat-panel TV. There are plenty of ways to save money in the coming year.

By Donna Rosato, Money Magazine senior writer

(Money Magazine) -- Higher energy prices and a weak dollar are boosting the cost of everything from milk to heating your home to your annual family vacation. But you don't have to feel beaten down.

Vacation closer to home

The dollar is expected to remain a wimp against the euro, pound and Canadian loonie. But if you have your heart set on an overseas vacation in 2008, there are still plenty of destinations where the dollar is a good value.

Latin America in general is inexpensive because many local currencies are tied to the U.S. dollar formally and informally, says Tim Leffel, author of "The World's Cheapest Destinations: 21 Countries Where Your Money Is Worth a Fortune."

Leffel says Argentina and Peru are the best values for tourists, as are many parts of Asia.

Have your heart set on Europe? Spain and Portugal are relatively cheap compared with other Western European countries.

Cut those energy bills

You know you should replace your 20-year-old water heater and insulate your attic. But there are plenty of other cheap ways to save some bucks on your energy bills next year.

Install a programmable thermostat so your home is warm only when you're actually in it (up to $100 a year).

Use a fan in conjunction with your air conditioner to more effectively cool your home ($40 to $60).

Seal major air leaks around doors and windows ($45 or so) and put in a couple of low-flow showerheads (around $65).

For more tips, go to the Energy Department's consumer guide at eere.energy.gov.

Buy a tax-friendly hybrid

The number of manufacturers rolling out hybrids is increasing rapidly. To offset the cost of buying a hybrid vehicle, take advantage of tax credits of up to $3,000 offered on some vehicles.

Typically, the newest entries in the hybrid game - the Ford Escape and Mercury Mariner, for instance - provide the biggest credits.

Go to irs.gov and search for "qualified hybrid vehicles" to get an up-to-date list of the credits available on various cars.

Get that flat-screen

Prices continue to tumble on virtually anything electronic. You'll see the biggest drops - more than 30% - in the price of flat-screen TVs.

According to iSuppli, a 42-inch flat-screen TV that cost $1,478 in 2007 will drop to $978 in 2008.

You can expect to pay about 8% less for a digital camera, with even bigger discounts on higher-resolution models. The Consumer Electronics Association says you'll pay $491 next year for a camera with 10 megapixels, down from $629 this year. MP3 players and GPS devices will also come down noticeably in price.

Profit in 2008: Your job

Three ways to stand out in a crowded field.

By Donna Rosato, Money Magazine senior writer

(Money Magazine) -- Expect to work harder for your money, but your job should be safe (unless you work in a vulnerable industry, like housing or autos).

Raise your profile

High-performing workers will snag raises of 5.7% or higher in 2008 vs. 3.8% for the average employee, according to Mercer Human Resource Consulting.

Whatever extra money is available will be largely tied to bonuses and other types of incentive pay, according to WorldatWork, an HR association.

How do you make sure you're one of those getting top dollar? You not only need to do your job very well, you have to make sure your boss knows it. Talk regularly with your manager to make sure you're meeting expectations and to keep him up to date on your progress on key goals.

If you're shy about tooting your horn, send e-mails instead, giving him the latest info about an important project or the lowdown about a meeting with a new client.

Get involved in a cross-departmental initiative or an industry association committee where you'll have opportunities to mingle with higher-level folks outside your area.

Training co-workers, getting published in an industry newsletter or helping recruit talent for important positions will all raise your standing.

Join a social network

Haven't joined Facebook yet? Even if you're not actively job hunting, networking is essential to staying up to date with what's going on in your industry.

Professionals are flocking to sites like Facebook and LinkedIn, which make it easier to stay in touch with industry contacts, friends and former colleagues. If you're not on it, you're out of it.

But be sure your virtual networking doesn't do more harm than good. If you're using Facebook as a professional networking tool, don't display anything on your profile that you wouldn't want your boss or a client to know about you.

Be wary of "friending" (extending or accepting an invitation to join your network) someone you don't know well.

If your boss is comfortable going for a drink with you, it's probably fine to invite her to join your network. But unless you've had lunch or worked on a project with a higher-up at your company or in your industry, an invitation may be inappropriate.

The same rule goes for subordinates. Social networking is about the quality of your connections, not a popularity contest. Besides, if you've got hundreds of virtual friends, people may wonder just how much time you spend doing your job.

Cross-train

If you're in an industry that's vulnerable to cutbacks, don't wait for a pink slip to find you. Look for opportunities to increase your marketability by enhancing your skills and experience.

Knowing your way around a PowerPoint presentation and an Excel spreadsheet is a must for almost any professional. But there are probably software programs or certifications specific to your job that can make you more marketable.

Take advantage of training opportunities at work and keep up with the latest developments in your area of expertise. If your employer is involved in a reorganization or downsizing, volunteer to pick up more responsibility, which could help you hang on to your job.

"It'll show you are committed to your organization, and you'll get exposure to people in your company that you normally wouldn't," says Kim Bishop, practice leader at recruiter Korn Ferry.

Profit in 2008: Your investments

Three ways to make the market's volatility work for you.

By Janice Revell, Money Magazine senior writer

(Money Magazine) -- Let's face it: As investors, we've been spoiled. A study by Wilshire Consulting shows that from 2004 to 2006, volatility in the U.S. stock market was almost freakishly low - in fact, over the past 30 years, there was only one other stretch (1993 to 1996) when the market was as calm.

That's history now, and the turbulence that erupted last summer looks to continue next year. But you can make that volatility work to your advantage.

The best strategy in a rocky market is to stay in the game. As long as you're investing over a long enough period for the market to recover from a severe drop - about seven to 10 years - you will almost always be better off staying invested and continuing to pick up additional shares on market dips.

Consider the outcome if you had contributed, say, $400 every two weeks to your 401(k) plan and invested it in a low-cost stock fund like Vanguard's S&P 500 index fund during a volatile period like the third quarter of 2007.

By the end of September, the S&P 500 had just barely recovered from the 10% plunge it took in July and August, when the credit crisis was in full swing. For the full three months, the index fund eked out a gain of just 0.4%.

But because you'd have scooped up more shares for each $400 contribution when the market was falling, you would have racked up a 2.7% gain on your 401(k) contributions for the third quarter - a return that most professional money managers would have killed for.

By the way, you would have gotten the same type of great returns if you had been buying stocks right after the crash of 1987 - or after any other big drop - as long as you had stuck with your picks a few years.

"It's during times of volatility, the scary times, that your discipline pays off," notes Stephen Wood, senior portfolio strategist at Russell Investment Group.

Think big

The combination of a slowing U.S. economy and the weaker dollar weighs heavily in favor of large-cap growth stocks like General Electric and Cisco that can rely on their foreign operations to prop up their earnings when the U.S. slows down.

And unlike smaller companies, which have registered strong price gains over the past few years, large companies still look inexpensive heading into 2008.

"You're getting some of the bluest of the blue-chip companies at bargain-basement prices," says Bob Turner, chief investment officer of Turner Investment Partners.

Within the Money 70, our list of recommended mutual and exchange-traded funds, solid large-cap growth choices include American Funds Amcap (AMCPX (Charts), T. Rowe Price Blue Chip Growth (TRBCX (Charts) and Jensen (JENSX (Charts).

In fixed income, go for high quality

Compared with stocks, bonds may not look like an overly appealing investment for 2008. After all, the Federal Reserve's recent rate cuts have depressed bond yields, enhancing the relative appeal of stocks.

Ten-year Treasury bonds, for instance, were recently yielding just 4.4%. But unless you've got an ironclad stomach, owning some bonds will be particularly important next year.

Those yields will provide a much needed buffer against the sharp ups and downs of the stock market.

Given the general concerns about credit quality, favor highly rated bonds. Sticking with shorter maturities also makes sense. The weakening dollar could fuel inflation, which would seriously erode the returns on longer-term bonds.

Some top-quality selections from the Money 70 whose bond portfolios match that description: Dodge & Cox Income (DODIX (Charts), FPA New Income (FPNIX (Charts) and Vanguard Short-Term Bond Index (VBISX (Charts).

All the right moves: Profit in 2008

The 22 best ways to keep safe, spend smart and make your money grow in the year ahead

By Amanda Gengler, Money Magazine writer-reporter

Money Magazine) -- Tumbling home values. Soaring energy prices. A topsy-turvy stock market and a gazillion other financial worries, not the least of which is whether we'll spend the coming year mired in recession.

Considering all the black clouds hanging over the economy, you probably think there's no way you can really expect to prosper in 2008. It will be all you can do just to hang in there.

If that is what you're thinking, we're happy to tell you that you're wrong. There will be plenty of opportunities to make money next year - yes, even in real estate - as well as ways to insulate your finances from the most serious economic challenges ahead.

Your home

The real estate slump isn't going away soon, so whether you're buying, selling or staying put, deal with it.

Make your house look like a bargain

For sellers: Forget what the ugly house next door sold for last year or even what comparable homes are listed for today. Instead, use the going price of houses that have recently sold as a guide - then price your home even lower so it looks like a great deal. (Ask your real estate agent for help with this assessment or go to homegain.com or zillow.com for guidance.)

Best case: Your aggressive pricing attracts more than one bid, pitting buyers against one another and ultimately lifting the final sale price.

Pay a little to look good

For sellers: You'll pay around $150 a month for a 10-foot-by-15-foot storage unit, a piddling amount compared with the $5,000 more your house might fetch or the three months faster it might sell.

The quickest, most effective way to increase curb appeal: Apply a fresh coat of paint, says Dave Liniger, co-founder of Re/Max International, the real estate franchise.

Offer the right incentive

For sellers: Covering closing costs is a biggie because it may help a buyer who's short on cash pay for a home he otherwise couldn't afford.

Or you might offer to kick in homeowners association dues or provide a home warranty covering repairs for the first year.

Lowball your offer

For buyers: If ever there was a time to drive a hard bargain, this is it. Don't be distracted by small stuff like whether the current owners will leave behind their appliances and window treatments.

Focus instead on what's really important: getting the lowest price. Do a little homework and find out what comparable houses have sold for lately. Then start the bidding at 10% to 15% below that recent sale price.

Note: This strategy works best if there are several homes on the market in your area around the same price.

Look like a good risk

For buyers: You'll have an easier time getting approval from a lender if you have enough money set aside to put down at least 10% to 15% of a home's purchase price (no- or low-money-down deals have largely disappeared).

You'll also need plenty of documentation to prove you can afford a home in the range you're looking at.

What lenders will want to see: Your total debt payments shouldn't eat up more than 36% of your income, says Keith Gumbinger of HSH Associates.

Don't jump at a jumbo

For buyers: These days $417,000 is a magic number: If your mortgage exceeds that amount, it's considered a jumbo, and your interest rate will be about six-tenths of a percentage point higher than you'd pay on a standard 30-year fixed-rate loan vs. just two-tenths of a point normally.

The gap expanded last summer when the credit crunch hit, and it's likely to remain unusually wide next year.

To avoid paying the extra interest, try to come up with a big enough down payment to bring your mortgage below $417,000. Or simply hold out for a less expensive house.

Getting a $400,000, 30-year fixed-rate loan instead of a $425,000 jumbo will save you about $325 a month and more than $92,000 in interest over the life of the loan.

Put down your ARM

For owners: If you have an adjustable-rate mortgage that's due to reset next year, consider refinancing into a fixed-rate mortgage now to avoid future payment shock.

Similarly, if you have borrowed heavily against the equity in your home and are feeling squeezed, refinance your home-equity loan and mortgage into one new fixed-rate loan.

A $200,000 mortgage at 6.5%, plus a $100,000 home-equity loan at 8.2%, works out to monthly costs of about $2,500. Roll that entire $300,000 into a 30-year fixed-rate loan at today's rates and your payment will be $1,900 or so, a savings of about $600 a month.

Turbulent time for Asian markets next year: S&P

ASIAN stock markets face a difficult 2008 and could slide sharply, ratings agency Standard & Poor's (S&P) said yesterday, as regional share prices fell heavily.
'Next year will be a more difficult one for stock-market returns and we would not rule out the risk of a sharp correction,' Asia-Pacific equity research head Lorraine Tan said in a statement.

Asian equity markets have reached increasingly risky levels and there will be less scope for them to rise after this year's strong performance, the report added.

'Markets would be jittery over potential negative news, such as on inflation and further deterioration in the US and European economies,' said Ms Tan.

The United States is struggling with a credit crunch and housing market slowdown, after record defaults on sub-prime mortgages extended to homebuyers with riskier credit profiles.

The report said markets in Hong Kong, South Korea and Thailand were likely to deliver better relative performances next year, but Japan is set to do less well.

S&P also expects more ratings downgrades for the corporate sector next year due to rising costs and less readily available credit.

Mr Ian Thompson, the firm's chief credit officer for regional ratings services, said casualties were expected, especially outside the financial sector.

'There may be more ratings downgrades than upgrades among Asia-Pacific companies next year'.

That contrasted sharply with the general improvement in credit quality this year, he said in the statement.

S&P expects South-east Asian economies to grow on average by 6.4 per cent next year, with Indonesia and the Philippines seen as bright spots.

- Straits Times Interactive, Friday Nov 9.

Collapse or Rally? The market ahead.

Collapse or Rally?
The market ahead
By Starry Administrator
Sgfunds.com

Over the last 2 months or so, we received many emails asking for market direction, opinions on conflicting analyst reports and more recently, what should they do seeing the market rebounded strongly. Understandably, this must be a very confusing time for most investors out there. Just when the credit crunch and sub-prime issues were hogging headlines, FED suddenly pull a trick out of their bag with a cut of 50 basis points. What now? Is this good or bad? There were so many conflicting reports (I received quite a few everyday), with expert economist or analyst conflicting each other with their views and opinions. So why another article from us on this issue? Because we feel that addressing the current market situation from both fundamental and technical point of view would give a clearer perspective. We have not seen many reports attempted that. Also, having given some earlier comments in the forum about our thoughts on this correction (and invited a lot of emails), we feel obligated to do a follow up on our earlier comments. Before we end this report, we also decided to show why the Oct 87 collapse is unlikely in the current market environment. This is to address one of the reports from a "famous bank" where they claimed that there is a high chance for that event to happen again. We will show you why that collapse is unlikely. One of most popular question I received is what make me think that the recent "correction" is a correction and not the begining of a bear market (due to the sub-prime and credit crunch issue). Many seems to had sold off their shares due to all the fears lingering around the correction period.

FUNDAMENTALS Valuations

Currently the US market is trading at a PE of around 15-16 and that's almost at its historical average. Because it is almost at its historical level and with all the sub-prime issues coming in, the bears screamed that the market is ripe for declining. In our opinion, that's far from the truth. Looking at just the PE level may not give the correct interpretation of the current market situation.

In the world of investment where bonds and stocks are chasing for the same investors' money, perhaps it is better to look at the earning yield of the current stock market and compare that with the long term bond yield. If you invert the PE of 15, you get about 6.6% of earning yield against a 4.6% of a 10-year US bonds yield. In other words, stocks are relatively cheap compared to bond now.

If FED continues to lower the interest rate (which is expected to do so), stocks will continue to look attractive even if its PE continues to go a tad higher. Because of this, we are very much convince that the stock market still has much legs to run. FED decision One of the main reason we strongly believe that this market will continue to rally (even up to crazy levels) is because of FED recent decision of cutting 50 basis points.

That decision is a big indication of their current motive. FED's main duty is not to bail out hedge funds or mortgage lenders or helping Wall Street. Their main duty and the reason why they were formed is to fight inflation. Curently with the extra liquidity pumped into the banking system and with oil price at sub $80 level, they should be more concern about controlling inflation by tightening rates.

Why is it then that they choose to take a risk in that and went bailing out Wall Street with a drastic cut of 50 basis points? It's like telling the world "forget about inflation..controlling recession is more important now". But controlling recession is never their job and recession is not a always a bad thing. In any case, their motive is clear.

With the cut of 50 basis points, they are trying to get as much liquidity into the system so that the banking system does not collapse. In short, they are just putting a handiplast to the wound and hope the bleed would stop for awhile. But this action is going to create an even bigger problem. With liquidity flowing into the system, this liquidity will find its way into the stock market pushing up stocks prices to dizzying levels.

Look at it this way. If you are holding US dollar now...there is only a few things you can invest into. Either stocks, bonds, gold, properties or just hold onto that US dollar. Bonds yield and US dollar is declining, so forget about that. Properties look very vulnerable now with all the housing issues. Gold would be a good alternative, but it will get more expensive when the USD slides further. Only stocks look really good now and with interest rates dropping, stocks look like a great alternative for investment returns.

The main concern is not so much within US itself, but with China and Japan holding loads of USD surplus, where will they invest into? Their long time favourite, US debts are now dropping in yield. So probably it will start flowing back into the stock market as well as some to gold. The Tech bubble was created partially also due to this reason. And we have no doubt that such scenario is going to repeat itself again because FED seems resolve in bailing out Wall Street as much as they can.

Historical facts

Probably some would think it is a myth that we even mention this, but we do believe there is some basis to the US Presidential cycle. Since 1925, there were only three negative years when the President is in his third year. Amazing to some, even 1987 (with a deep market crash) ended up +5.9% for the year. That was when Reagan was in his third year. With only three negative years since 1925, we really wouldn't want to bet against that! However, if we look into the current US politics now, it may be clear that probably FED cut of 50 basis points has something to do with next year Presidential election.

With more democrats in the senate now, our sole Republican President better be sure that the mood is right going into the next election. Wall street and the US economy better be secure and well. This is of course speculative, but with historical data backing up, this could be a possibility. CONCLUSION Adding the technical, fundamental and historical data together, we are convince that we are likely to see the stock market rally from the current levels. We might even face a bubble going into 2008 and 2009. Dow may touch 15,000 or more by end of 2008. We would be very cautious from mid 2009 onwards.

There is a real problem behind the US economy and it may lead to a very severe recession once this bubble collapse. However, even if the market is to rally, it never goes up in a straight line. There will be correction from time to time.

This will be an opportunity to load up. Also some gold in your portfolio would be good. I have advocated gold since the start of this forum when gold prices was at USD$400++. Even now at USD$700++ , gold is still very cheap compared to historical inflation-adjusted previous high (around USD$2230). Gold will not give u dizzying returns, but with bond yield dropping and USD declining, gold will be a great stabiliser to your portfolio. Also another point to note. Do not just focus on small/mid caps growth stocks.

I know some people love to do that. But with interest rate dropping, big cap value stocks will get their chance. You may also want to cut down your US equities since the decline of USD will erode your returns. Asia is still relatively attractive and this is where you should focus in the next couple of years or so. ANOTHER OCT 87 CRASH? Recently, there was an article from a "famous bank" quoting the similarity between the current price patterns in the DJI with the one in 1987.

They use the peak in August 87 and compared against the peak in July 07. Hence they conclude that we might be facing the same thing in October this year. In our opinion, there are two things we need to consider. Looking at price patterns may not be enough. One is that the fear for Oct 07 has been old news. We have seen people talking about this since the beginning of the year. Some even since last year. In most cases, when there is great fear of certain stories/news surrounding investors, that story would have already been priced into the market. I am pretty sure there is no sense of mania in the markets now and infact, probably a lot of investors are at the sidelines waiting for October to pass.

I can't say however, that the same happened in 1987. Which brings me to the second point : the current market psychology is very different compared to Oct 87. And as we all know, market is driven by human psychology, definitely not by price patterns alone. To validate my point, below are the charts of Oct 87 and now : Oct 87 Current 2007 One way to "measure" the market psychology then and now is to look at the returns since the begining of that year. In 1987, the gains in the Aug 87 peak was a whopping 42% since Jan 87.

If you are an investor then, obviously your psychology build-up towards the market is going to be very different compared to now where there is only about 11% gain since Jan 07 (from the last peak in July 07) Market psychology aside, even the valuations are different. One quick and fast (may not be very accurate though) way to see if the market is "expensive" then is to compare with its 200-Days moving average. In Aug 87, DJI was 22% higher than its 200-DMA. For 07, the peak in July was just 10% above the 200-DMA. High, but nothing to be concern about. If I use technical indicators, I could have shown much more differences in the market psychology now and then but by looking at the gains itself, I am sure most readers would sense that the market psychology itself is already different.

Ok..let's go a bit more. Forget about market psychology now and 87. Let's look at earning yields and Bond yields then. We talk about fundamentals now. Before the crash, the US market was at PE 19, which gives an earning yield of 5.2%. Guess what was the 10-year bond yield then? It was a whopping 10%! When you have a market that has gain 42% since the beginning of the year where the bond yield is almost twice the earning yield of the market, that's almost a recipe for a collapse. Are they the same now?

Obviously not. Well, Oct is not here yet and who knows? It might still crash and burn. But we have just showed that there is a fair number of differences between now and then, and hence, very unlikely that crash is going to happen this year. No one knows Mr.Market for sure, and we could only invest based on probabilities. In this case here, the probability for an Oct collapse looks low. That's the end to this article.

I hope you guys enjoyed reading it!

Disclaimer : As of all investment articles, what was said in this article can go wrong as no one can tell exactly where the market is heading. Please do due diligence in your own financial and portfolio matters or get a financial advisor to advise you on that. Sgfunds.com nor the writer is liable to any of your investment loss due to the contents of this article.

The Key to Your Happiness

By Mary Dalrymple

Think for a moment about all the things in life you can't control -- the weather, the price of gasoline, that crazy guy hammering the horn while you're stuck in gridlocked traffic. These things make us unhappy.

What can turn that frown upside down? Saying goodbye to deadlines, meetings, and micromanaging bosses forever. Yep, retirement can put a smile on your face. It doesn't matter whether you quit cold turkey or you take your time. What matters -- to your happiness, anyway -- is whether you have control.

Do it your way
That's what researchers at the Center for Retirement Research at Boston College discovered when they looked at survey data to see what effect retirement had on happiness. They found the cheeriest bunch of retirees had control over their decision to retire.

From the comfort of your plush cubicle, you may think that if it were that easy, golf courses would be packed with retirees grinning from ear to ear. But, consider for a moment that you may not have complete control over your decision to retire.

Among the millions of things you can't control, there are quite a few that might unexpectedly toss you into permanent unemployment. A major health problem or disability could hit you or your spouse. Your company might decide to replace you with some young whippersnapper. Your industry could start heading for a steep decline.

Be ready
If the winds of fate can toss you into retirement at any time, then it's your job to be ready. The survey data doesn't say why retirees with control over the decision reported more happiness. But part of the reason must be that they entered this new phase of their lives mentally, emotionally, and financially prepared.

To take care of the financial part, get serious about retirement now. You'll be more prepared when those winds blow your way. Consider these examples. Assume for a moment that we've collected a barbershop quartet of retirees who started saving for retirement at 20, 30, 40, and 50 years old. Assume each put away $10,000 that grew at the market's average annual 10% rate of return until retirement.

Our hypothetical retirees all expected to retire at age 65. But, what happens if the market for barbershop quartets dries up and they're all suddenly forced to retire three years early?

Retire at Age 65Retire at Age 62

20-year-old lead	$880,000	$665,000
30-year-old tenor	$326,000	$242,000
40-year-old bass	$121,000	$89,000
50-year-old baritone	$45,000	$33,000

A couple of things should be obvious. The longer you sit on your savings, the more money you will have when you finally need the cash. But also, being forced to tap that $10,000 investment early can make a pretty big dent in an anticipated nest egg. Wouldn't you rather be sitting on a bigger nest if you're pushed into retirement too early?

What you can control
You may not be able to reverse your health declines, save your industry from extinction, or prevent a vicious round of downsizing. You certainly can't control the public's taste in choirs. You can, however, control the money in your pocket.

You can choose to spend it now, or you can choose to set some aside for the future. Start piling it up now, and you'll be happier when things go out of control later. You have plenty of options for saving the money, once you've made the decision to get started.

Fool contributor Mary Dalrymple does not sing, but she welcomes your feedback. The Motley Fool has a fine-tuned disclosure policy.

Money Magazine 2008 outlook: Investing

By Janice Revell, Money Magazine senior writer

The sluggish economy will be behind the expected surge in market turbulence. "When the economy slows down, there is more uncertainty," says Stuart Freeman, chief equity strategist at A.G. Edwards. "So people react much more strongly to news that otherwise would not have a big impact."

But even though stock prices will jump around more, they're still expected to rise in the coming year. The combination of decent if unspectacular earnings growth - about 7.7 percent - and a slight decline in the average price-to-earnings ratio next year should translate to an overall gain of about 5 percent in Standard & Poor's 500 index for 2008.

But to cash in, you'll need to be picky about the kind of stocks you buy. Most pros believe that large-cap growth stocks - shares of companies with earnings growing faster than the market average - are primed to outperform in 2008.

One reason: A weaker U.S. dollar boosts profits on big companies' foreign sales, allowing them to grow even if the U.S. economy flags.

This year such stocks outperformed their value counterparts - stocks that look inexpensive based on their earnings - for the first time in several years. And analysts say big growth stocks will keep their edge throughout 2008.

"Once that shift happens, it doesn't switch back overnight," says Stephen Wood, senior portfolio strategist at Russell Investment Group.

As for bonds, favor such high-quality issues as Treasuries and highly rated corporate bonds over riskier "junk" bonds. Lower-rated issues have a higher risk of default in a slow-go economy and thus a greater chance that their prices will slide.

The wild card: Strong overseas sales are fueling much of the profit growth in the large company growth stocks that are expected to excel this year. But if a foreign version of the U.S. credit crunch and housing crises were to cause economic growth outside the U.S. to sag, it could erode the earnings of U.S. large-caps and push down their stock prices.

Protecting your nest egg in a recession

Laura Bruce

Anyone nearing retirement is old enough to remember the recession of 2001.

While the experts were debating whether the country really was in a recession -- and if so, when it would bottom out and when the recovery would start -- your portfolio was probably losing value.

It's rotten enough to see your nest egg decimated when you have 10, 20 or more years for it to recover.

But millions of Americans on the cusp of retirement experienced the devastating effect of a recession on their portfolios just prior to, or shortly into, their retirements.

9 tips from the experts:

Understand risk

Why a recession is coming

How to create a defensive strategy

Insure your portfolio

What to invest in now: Barber

What to invest in now: Lancz

Be proactive

Know when to sell

Be aware of costs

Now, six years later, the news is peppered with stories of a slowing economy and talk of a possible recession. If retirement is in your near future, or even if it's years off, consider taking steps to protect your assets against a potential downdraft in the stock market.

We spoke with two money managers, Dean Barber, of Lenexa, Kan., and Alan Lancz, of Toledo, Ohio, who talk about what they're doing for their clients.

Where to invest now:

Dean Barber, Lenexa, Kan.: "Late 2008 is when the real pain will start." Read more ...

Alan B. Lancz, Toledo, Ohio: "Buy and hold is becoming outdated." Read more ...

In his own words: Dean Barber

Dean Barber is CEO of Barber Financial Group in Lenexa, Kan. Barber says his main job is to prepare people for an independent retirement. He's preparing for a market downturn that he says may be hard-felt by late 2008.

The main thing people have to understand is that there is a lot of risk in our market. People get a false sense of security when the market has been up for quite some time that, this time, it's going to be different. There really is risk in the market and unless people have a well-thought-out plan, there's no way they can protect themselves.

So the first thing that has to happen is they have to have a written plan; they have to know how market fluctuations will affect them. They have to know what percentage of their money they can afford to lose before they have to get out. Most people don't know where their breaking point is. They don't know how it affects their ability to retire or how it affects their overall plan because they don't have a written plan.

Most people invest for what we call an absolute rate of return, which is looking at how much money can they make without regard to how much risk they are actually taking in order to gain that return. In their plan they should know what kind of risk-adjusted return they need. How much risk do they need to take in order to get to the return that they need to accomplish their written objectives?

Get ready for a downturn
There's no question that there's some sort of downturn on the horizon. You can't see a market that goes up for five years in a row like we've seen without some sort of substantial downturn. We think by late 2008 is when the real pain will start.

I believe that any time you're in the position like we are today, that you must have defensive strategies in place to help protect you from a potential market downturn. Those defensive strategies can be things like the put protection that Clark Capital uses, or inverse funds, such as the ones at Rydex, Profunds or Prudent Bear, for a portion of the portfolio.Put protection takes a lot of time (to understand). Puts are an option so they're a zero-sum game. What that means is for every winner there has to be a loser. What individuals don't want to do is compete with Wall Street. Those people do it for a living and they're trying to win.

You've heard the same commercials I've heard on the radio -- "We're going to show you how to make money in any market, we've got these trade-by-colors type thing." Well, if you're 25 years old maybe that's OK. But if you're 50-plus and you're gearing up for retirement, the last thing you want to do is play with your future.

People need to understand how those strategies work.

Don't use defensive strategies as a gambling technique to try to get rich while the market's falling, but rather as a hedge to try to prevent event-driven declines, or a decline you're not expecting, from destroying your portfolio.

Insurance for the portfolio
It's all about greed. It's all about how much can I make on the upside. Our contention is, it's not how much money you make, it's how much you get to keep that's most important. Bad markets can take a heck of a lot of money away. When you're 40 years old, you've got lots of time to recover. The bulk of our boomers are past 50 and there are no mulligans after that age. The only mulligan you get is to work for 20 more years.

People who have protection strategies on their portfolios need to understand that when the markets are racing ahead, they won't keep up. They'll lag behind a little bit because a portion of their money is in a strategy that's designed to protect. It's like paying an insurance premium to protect your portfolio. If you were just looking for pure return on real estate, for example, you'd never buy insurance on your house because it's just an expense that takes away from your total return. Well, that's just silly. No one would own real estate without insuring it. Yet people all day long want to talk about their investments yet they don't want to pay a little bit extra to ensure that something bad is not going to take it away. Somehow they're magically smart enough to predict what's going to happen.

How to choose an adviser
If a client is getting ready to retire in five years and we know out of the $1.2 million that person has that $750,000 of it is absolutely critical to their ability to retire and the other half-million is going to allow them to do the extras, we probably don't need to insure the half-million but we need to insure the $750,000.

What to invest in now
I think we have some room to go before the recession hits and that technology is going to be one of the leaders over the next several months. In any industry, when a new product comes to market there's zero market penetration for that product. It takes quite some time to get from a zero percent market penetration to 10 percent. And then you have a very rapid movement from 10 percent to 90 percent. It takes as long to get from zero percent to 10 percent as it did to get from 10 percent to 90 percent. And then it takes as long to get from 90 percent to 100 percent as it did to get from zero percent to 10 percent. Most of our major technologies that have been driving our economy for the last 16 to 17 years are at about 80 percent market penetration. Once we hit 90 percent market penetration, that technology will cap out and the profits in those companies will begin to fall. But companies are going to fight to get that last 10 percent. I think it will create some euphoria in that arena that will allow technology to make a splash.
I think the area you want to avoid right now is financials. By and large I think the subprime issues and how deeply involved were the banks in loaning to hedge funds -- those are things that are kind of unknowns at this point in time.

I think you also want to avoid the small-cap stocks now.

They tend to perform best in the early part of a bull market and they perform the worst in the latter part of the bull market, and what we have seen lately is that small caps have begun to lag pretty significantly behind large.

And large caps will typically perform best at the latter part of the bull market.

In his own words: Alan B. Lancz

Alan Lancz is president of Alan B. Lancz and Associates, a money management firm in Toledo, Ohio. Lancz says one of the key factors in a successful portfolio in any type of economy is managing risk. He has also has taken the unusual step of fully disclosing to his clients, on a real-time basis, the holdings in his personal and retirement portfolios, and his company's corporate holdings.

It's important be strategically in the right areas or sectors of the market. In May, we recommended selling the real estate investment trusts (REITs), utilities and financials. The financials comprise more than 20 percent of the S&P 500. If you look back at 2000, technology was over 20 percent, and whenever you get a sector that comprises so much of the market it's usually a concern, a red flag should go up to investors.

They've gone down quite a bit, so it's not as worrisome, but in our estimation there's too much uncertainty. We don't know if another shoe will drop as far as subprime. Usually when there's fallout that will take longer -- just like with technology, it took more than a year for the sell-off to correct all the excesses in technology -- and we kind of see that with the financials, so it's an area that we would still avoid.

Being in the right areas and, if we're looking at potentially a recession or at least an economic slowdown, being in more defensive areas is important.
We're right now underweight on consumer discretionary mainly because a lot of the economic growth has been the consumer, and with the problems with housing and credit concerns, we think it will be much more difficult for the consumer to be the main catalyst for the U.S. economy. We're overweight on more defensive issues such as health care, telecom and technology. And we're equal weighting consumer staples.

Be proactive, not reactive
It's more a matter of being in the right companies. Even in technology we're overweight, but our overweight is from a year ago. We plan on selling, and that's my second point: being proactive rather than reactive. What I mean in that regard is we recommended selling the financials and REITs and the utilities in May -- we're going to be selling into the technologies because all of a sudden technology has become a safe haven because it doesn't have the subprime and credit concerns.

If there is a recession, we'll definitely see an economic slowdown that's going to affect technology, too, but investors, with their myopic view, aren't looking at that. They're just looking at, well, you know, there are some hot products that don't have any credit concerns with subprime and this is the sector to be in.

Look overseas
International is another example. If you talk with other advisers, that's probably going to be their No. 1 answer -- go internationally if you see an economic slowdown or recession in the U.S. That concerns us a little bit. We've been overexposed internationally for most of the last seven years. It initiated with us buying a lot of the infrastructure plays after seeing the growth in some of these BRIC (Brazil, Russia, India and China) countries. We've been taking profits in some of those the last year or two and buying more defensive plays in (global consumer staples and pharmaceuticals).

International is a good way to participate as far as outperforming a slowing U.S. economy, but it's to the point that most advisers are saying 20 percent of your portfolio should be international. That concerns us. You have to look at the market globally, but it's not a panacea that you just have international and it will cure all the problems. Just like being in the right areas of the U.S., you have to be in the right areas globally. But that's one way to help the investor who might be close to retirement or retiring and worried about a recession.

Two common mistakes
When we get new clients, they often have a great portfolio in terms of great companies. But the two mistakes we see is whenever the bank trust or whoever managed it before we got their money, they just bought a selection of high-quality companies and they didn't really look into the price or valuation, they just bought across-the-board, good-quality issues. So, 20 percent or so of those companies will be overvalued because they were bought at or near their highs and are now historically high-valued.
But the biggest mistake we see, and why a lot of new clients come to us, is that they never sell. Buy and hold is becoming outdated. It's easy for the adviser or the trust company or the mutual fund manager to do it from the standpoint of just buying across the board and just hanging on.

It reminds me of the index funds. You're buying 500 companies in the S&P 500 and whether there's an Enron in there or whatever, you're holding it until you're forced to sell or S&P has finally decided to eliminate it from the index.

Remember to take profits and redeploy them into lesser-risk, low-expectation areas. The best example of what we're doing now is in the energy sector. It's been very hot so we're overweight, but we're decreasing our overweighting. If you still want energy exposure and income, sell some of the high-flying energy companies that have done so well and buy some of the leaders in natural gas.

For the long-term investor, it's a nice way to reduce risk in one area that's done so well for years and still participate in the energy sector, but with less risk.

Cash and CDs
Cash is important and it's part of profit-taking. For example, when we take profits in tech, as it becomes more and more favorable, if we don't find other places to redeploy those assets we'll put it in cash. And if you're close to retirement, having that cash or fixed-income component is going to be critical.

I think (high-yield) CDs are a good route. I wouldn't do Treasuries because the flight to quality this summer has depressed those yields. High tax-bracket individuals should select high-quality municipals. They're at historically high yields now compared to what you can do with a CD.

If we're not finding the bargains to redeploy as we're taking profits in these areas that are moving up, our cash just automatically builds up. If a client is closer to retirement and more conservative, there will be fewer bargains to buy because we're not going to buy aggressive-growth-type companies, so their cash would build up more quickly than an average investor or younger investor.

The other big mistake I see the average investor making is not being aware of cost or risk. If you're in a quasi-index fund, make sure you don't have extra fees and costs. What I've seen throughout the country is people selling these good, low-cost funds and then charging 1 percent or 2 percent to asset allocate them. That means you're getting an index-type performance, but now you've guaranteed yourself the cost of the fund plus the 1 percent or 2 percent you're paying an adviser. So, you're guaranteed to underperform the market by 1 percent or 2 percent. If you can get active management for that, why are you paying for an asset allocation? If you can put together your own group of mutual funds and avoid the added cost, many times you're going to be better off.

Patience Is Part of the Cycle

As a trader there are times where less is more and the art of patience becomes the ultimate strategy. It is counterintuitive for a trader to sit idle as it goes against the very nature of what a trader is and does, always on the prowl, always in motion, but during times of uncertainty it is that very patience which keeps a trader in the game awaiting the next favorable opportunity. I have struggled with this over the years and have spent considerable time analyzing why I am not alone facing this challenge. It seems that most traders have a drive to be in control, always attempting to influence the outcome of each and every situation. While it is this same desire to remain in control that allows many traders to achieve ultimate success as they don’t cling onto false hope, allowing trades to get away from them, it is this same trait which keeps a trader trading when in reality they should be doing nothing. It doesn’t look or feel right, raising substantial cash and taking your hands off the wheel, sitting back during a time such as we have now, but this is exactly the strategy which will allow you to weather the storm and be prepared to participate when the environment improves.

If position sizing is appropriate, while there will be nicks, the stops taken and the losses realized should not completely demolish a trader’s portfolio rather a normal draw will take place. Once the cash is raised, the trader should not recommit this capital until they are certain the environment has improved and the risk reward is much more favorable. Unfortunately, sitting idle can be a strategy that is necessary for weeks or even months. While there may be intermittent periods of opportunity, it may be a very long time before it is prudent to commit anything meaningful back into the marketplace. The question then becomes how does one know when the time is right? Well, first and foremost, the underlying charts will start to show signs of improvement and start offering a trader the patterns he or she favors. Once this takes place, a trader may wade into the opportunity with a very small amount "testing" the water and analyzing closely the movement and trading pattern of the stock. If the market has truly improved not only will these patterns start to act as a trader desires, but more patterns will develop within the underlying charts offering more and more opportunities. Themes will become apparent and specific groups of stocks will start trading better than others. It is at this point when one knows that the environment is improving and stocks can be added. As the environment continues to improve, more and more opportunities present themselves and very soon a trader finds himself with an abundance of opportunities and past challenges a distant memory. This is typically the time when a trader has to start become a bit more conservative and start becoming a bit more selective as the entire process will be repeated. As a trader it is inevitable that we will go through challenging times. Regardless of what anyone says it is also these times which will lead to the next great opportunities, but we must successfully navigate the rough spots in order to enjoy and participate when the environment improves. There are times when less is more and this is one of those times.Respect your stops, raise cash when stops are hit and sit idle waiting until the underlying chart action shapes up and we can start to nibble again. Patience is not easy but it will ultimately be what keeps you in the game for the long term.

Wall Street firms see recession nearing

By John Poirier

NEW YORK (Reuters) - The economy might be edging toward a recession in the wake of mortgage-related credit woes plaguing the financial markets, bankers and analysts said on Monday.

"I think that the risk of a recession is greater than people realize," James Dunne, chief executive of Sandler O'Neil & Partners, said at the Reuters Finance Summit in New York.

With home prices dropping, more people about to lose their homes due to unaffordable mortgages and sharply higher oil prices, the economy could be on the brink of slowing down, they said.

"I think there is a serious risk to the economy," Howard Lutnick, CEO of Cantor Fitzgerald, told the summit.

Charles Peabody, partner at New York-based research firm Portales Partners LLC, said the Fed may have to take more aggressive action and drop the benchmark fed funds rate in an effort to prevent a Japanese-style economic stagnation, which eventually evolved into a deflationary recession.

"We're moving into a recession, and over time -- the length of which is difficult to predict -- there is going to be a lot more credit problems," he said.

Preliminary data released by the U.S. government last week showed that the gross domestic product grew by 3.9 percent in the third quarter, compared with 3.8 percent in the previous quarter and 0.6 percent in the first three months of this year.

Last week the Fed announced at the end of a two-day meeting of its policy-setting Federal Open Market Committee that it was reducing its federal funds rate a quarter percentage point to 4.5 percent, citing its expectation that "economic expansion will likely slow in the near term" because of the housing sector's problems.

The Fed noted that growth was "solid" in the third quarter and said it thought financial-market strains were easing, but still opted for some insurance to add stimulus.

When asked where the U.S. economy is headed over the next year or so, John Duffy, chairman and CEO of Keefe, Bruyette & Woods, said at the summit: "In the toilet."

With the recent data and Fed moves, Wall Street firms believe the Fed will be forced to reduce interest rates on loans to banks to 3 percent, or even as low as 1 percent, at least over the next year.

Duffy said Fed action alone will not cure what ails the U.S. economy and financial institutions, which are experiencing a liquidity squeeze in the markets for credit and other financial products.

"I don't think they (the Fed) have a silver bullet,' he told Reuters.

(Reporting by John Poirier)

Make money in 2008: The outlook

The economy, housing, employment and the markets: What will matter most to your money next year?

By Walter Updegrave, Money Magazine senior editor

(NEW YORK) Money Magazine -- Given the pervasive gloom in the face of the housing slump and sudden sharp drops in stock prices earlier this year, you might have figured it was just a matter of time before the economy would collapse faster than the Colorado Rockies in the World Series. In fact, a survey last summer found that two-thirds of Americans believed the economy either was already in a recession or would be in the next year.

The litany of depressing news has only seemed to get worse since then: surging oil prices, mortgage defaults, investment banks writing off subprime loans, the dollar skidding to new lows - pass the Prozac.

Well, we've got two words for you: Cheer up. If you delve behind the headlines, you'll find that despite all of these challenges, the economy has actually held up pretty well this year. And key indicators suggest that next year should be even better (okay, maybe not a lot better).

What specifically lies ahead for the stock market, housing, jobs and the rest of your finances? Here's a closer look at the big stories that are likely to have the greatest impact on how you manage your money next year.

The economy: slow growth but no recession

Hard to believe but true: Recession is not around the corner. The consensus of the 52 economists polled each month by Blue Chip Economic Indicators is that the economy will kick off 2008 with annualized growth at the sluggish pace of 2 percent or so in the first quarter. Then it will gradually pick up steam and close out the year chugging along at just under 3 percent (see the chart at right), roughly in line with the U.S. economy's long-term annual growth rate.

True, next year's 2.4 percent annual pace is a far cry from the get-out-the-party-hats growth the country enjoyed in the late '90s. But that's not necessarily a bad thing. Slow to moderate growth should help keep inflation and interest rates under control - economists expect consumer prices to rise less than 2.5 percent next year and interest rates to stay within a quarter- to a half-point of current levels.

That kind of scenario should allow stock prices to keep moving up (albeit not straight up). And, perhaps most important, it should keep a real economic downturn at bay.

That's not to say that there won't be challenges. The biggest problem area by far is the slumping housing market, where the number of homes for sale keeps rising, prices keep falling and foreclosures, defaults and related woes represent a real drag on economic growth.

Already-anemic new-job creation will also continue to slow next year, so you'll have a tougher time landing a new position or getting a raise. Then too, the U.S. dollar, which sank to an all-time low of $1.45 against the euro in October, isn't expected to make a comeback anytime soon.

Housing woes can't derail economy

The one bright side: The sliding buck has made U.S. goods cheaper abroad, which in turn has boosted exports - and that increase in trade has been instrumental in keeping the country out of recession.

It's always possible that some unforeseen wild card could turn the consensus slow-to-moderate growth picture into a full-fledged downturn. One potential trouble spot is the U.S. credit system, which remains fragile because of all those mortgage defaults, particularly among subprime loans.

If we were to see a major blowup - say, several financial institutions simultaneously taking large and unexpected losses in subprime or other risky debt - already-anxious lenders could drastically cut back on new loans. That could prompt both consumers and corporations to dramatically lower their spending, which could be the catalyst that sends the economy spiraling downward.

"Credit is mother's milk for an economy," says Mark Zandi, chief economist at Moody's Economy.com. "And if credit's not there, the economy would quickly falter."

And since 2008 is a presidential election year, there's always the possibility that politics could upset the works. One area that concerns economists is an incipient trend toward protectionism, driven in part by tainted exports from China (pet food, toothpaste, lead-paint toys) as well as a sense that Americans may not be benefiting from globalization.

Recent polls suggest that many voters believe free trade has been bad for the U.S. and that they'd agree with a candidate who favored tougher regulations to limit foreign imports. The worry is that presidential candidates might cater to this sentiment with talk of import quotas or currency restrictions that could lead to retaliation from U.S. trade partners. This could undermine the export growth that's now a key driver of the U.S. economy.

"If we were to see a pullback in globalization, that could pull the U.S. economy and the financial markets down," says Dennis Jacobe, chief economist at the Gallup Organization.

Barring such an economic or political surprise, however, the big story for 2008 should be moderate growth, not recession. And that in turn should enable you to keep your own money growing too.

Mutual Funds Are for Losers

by Jay MacDonald
If Wall Street were a Hans Christian Anderson fairy tale, Phil Town would be the little boy pointing and laughing at the emperor's new clothes, or lack thereof.

By turns a Vietnam Green Beret, Grand Canyon river guide and spiritual seeker of enlightenment, Town's life on the fringes of society changed when he saved a raft from treacherous rapids on the Colorado River. One of the thankful survivors was a successful San Diego investor who, in turn, volunteered to save Town's financial future by teaching him the ropes of investing.

Blending Zen with Wall Street, Town's anyone-can-do-this advice, in his best-seller "Rule #1," amounts to: Don't lose money, find great companies, know their worth and acquire them at 50 percent off. Beyond that, he says the traditional advice -- invest in mutual funds, diversify, buy and hold -- is strictly for losers.

Let's cut to the chase: What's wrong with mutual funds?

First, if you intend to stay ignorant about investing, if you don't intend to get the education to tell a good business from a not-very-good business, you're going to have to give your money to somebody and let them invest it. In that case, the bad choice of the choices is mutual funds.

They're going to take nearly a percentage point a year and they're not going to deliver anything that an index fund doesn't deliver. So just go and get an index stock fund. Buy SPDRs or Diamonds (Dow Jones ETFs) or the Nasdaq and be done with it. Then you won't have all these management fees and you're going to (earn) the index for sure, which is the best you can do in a mutual fund over any 20-year period of time anyway. So you might as well do an index.
You're also a doubting Thomas when it comes to a balanced portfolio, right?

We're going to separate the world into two groups of people: those who are ignorant and are going to remain so about investing -- and they have to do mutual funds, what other choice do they have? -- and those who are going to learn what the best investors in the world have known for 100 years, which is just the basic fundamentals of what a great company looks like and what it's worth. When you know that it's a great company and you know what it's worth, then you'll know if it's on sale. You buy it on sale and you're off and running.

When you can buy Johnson & Johnson on sale, buy it. You're done. You don't need a mutual fund when you can buy Johnson & Johnson on sale; it's been around 120 years, it's going to be around another 120 years. That's not hard. That's all I want to tell people -- it's not hard. You don't need to buy lots of things, you can buy just one good stock and you'll be in good shape.

Surely you're not advocating that people put all their money in one stock? It may have worked for you, but are you saying this is a smart investment strategy?

For getting started, the key thing is to find one good one. Then, as you get better and better at it, you can pull more and more money out of mutual funds and maybe end up with four or five really good companies you like in four or five different areas of the market.

What about the argument for diversification? Shouldn't investors protect themselves from market volatility by diversifying among a few dozen companies?

One of my favorite Warren Buffett quotes is, "Diversification is a protection against ignorance." It's not meant to be mean, but if you don't know the difference between a wonderful business that is on sale and a bad business that isn't, you must diversify. That's your only logical choice. If you can't tell the difference between things, then you have to spread your money out across a lot of things. But when you can tell the difference, then diversification hurts your portfolio performance.

If I were to coach a novice investor, I would say first, let's diversify by getting rid of all your mutual funds and get SPY (or SPDR -- an exchange-traded fund that mimics the S&P 500). Wonderful stock, no fees. Yay, we just saved ourselves about 1 percent to 2 percent a year. The second step, buy one really good solid business; buy a Johnson & Johnson on sale, a Merck on sale, Coca-Cola on sale. Something that has been around for 100 years and is going to be around another 100 years. Then you've basically locked in, for that portion of your portfolio, a 12 percent to 15 percent return. Then add a really cool business that might be the next Apple; go for one of those because they're fun. Put $1,000 in and hope for seven doubles in the next five years.

Explain how you can tell when a stock is a screaming buy.

Here's what a screaming buy is, bottom line: a great business that is for sale at a substantial reduction to its value. You can't just have a company that is at a substantial discount to its value because if it's not a great company, it's real hard to say what that value actually is. The things that make a really great business investment boil down to the fact that you can say with a great deal of certainty that this is a durable business and that it will grow at at least a certain minimum amount per year. Otherwise, you don't know how to give it a value short of saying its liquidation value is this. Of course, no really valid business is going to sell for its liquidation value. Another of my favorite Warren Buffett quotes is, "It is much better to buy a wonderful company at a fair price than a fair company at a wonderful price." If you have the choice between a screaming deal or a screaming great company, you tend to lean toward the screaming great company, particularly as novice investors.

Give an example of some companies that you bought that you thought were good buys.

OK. I loved Cognizant Technology Solutions, Whole Foods, Garmin, recently Apple. Cognizant Technologies has been a screaming deal for a long, long time and it's constantly on sale. It's a fabulous company. Garmin is a fabulous company that goes from being at retail price down to being on sale on a fairly regular basis. These are examples of companies that had the qualities we look for.

When did you start investing seriously?

In about 1980, I started up and was very fortunate to get in on some early stage investments that were good. I did a lot of different kinds of investing, everything from private to public businesses, and I caught one that just took off, just exploded. That, plus some other things that I did right, turned into about $1 million in about five years, and that allowed me to just quit.
Then I quit. That was it; I had all the money I needed. I went off to Iowa and raised my kids in a little private school. I did some basic investing out there, bought some land and subdivided it and sold it off, just to get places to live that I wanted to live in. The investing stopped. I loved pursuing enlightenment or consciousness. I was still chasing the rainbow. I wrote a couple of screenplays with a friend of mine that were horrible. I studied acting for a couple years. I was just sort of wandering and meditating and hanging out with my kids. Then I got divorced and suddenly a million dollars started to look like not so much money anymore, so that's when I started cranking it back up in about 1989 or 1990.

Your meditation seems to have led to a Zen-like approach to looking at stocks by removing the barrier of what stock is, and instead establishing a relationship with the companies in which you're investing.

That's a great way to say it, man. For me, it's very much about making friends. I would not make a very good hedge fund manager, probably. I would probably not be any good at managing other people's money. So the money becomes a very personal thing to me. It's my vote for how the world should be, and I do want a personal relationship with these businesses. I get really involved. I've been on the boards of companies. I want to know that the people I'm working with are really honest and really passionate people who are going to run my company really well. I buy one share of stock and that's my company.

You're not a big fan of stock analysts. Why not?

You listen in on these conference calls and the questions that are getting asked by the analysts are down in the forest so deep, they're asking questions about the color of that tree's leaf. And I kind of want to know what the forest is up to. Are you really going to tell me if the forest is on fire? I love people like John Mackey at Whole Foods who just come right out and tell you the whole forest is on fire.

Can you buy stock in a company that you philosophically oppose?

No. I think you've really got to put your money where your mouth is. The people out there pontificating about the values of the environmental movement, who have mutual funds that own all of these companies that they're calling the bad guys, are hypocrites. Every Friday, they put their 401(k) money into the company that they're trying to stop! It's like, what are you doing? I can't do that. That doesn't work for me.

Morgan Stanley sees Asia linked to US recession

Mumbai: The crisis in subprime mortgages in the US is unlikely to affect stock markets in Asia, says Stephen Roach, chairman of Morgan Stanley Asia. However, should the credit crunch affect consumer demand in the US, Asian markets will not remain immune, he warned.

Note of caution: Stephen Roach, chairman of Morgan Stanley Asia.Roach noted that if the US does go into a recession, Asia cannot remain as a lucrative investment option.

“Asia will not be an oasis of prosperity in a softer global demand climate,” he said. “I think there could be a significant correction in emerging market equities that will impact the Indian market.”

Weighing in on the debate about the Asian markets decoupling from the US, Roach pointed out that while Chinese consumption is worth $1 trillion (Rs39.4 trillion) and India has a $700 billion market, they pale in comparison to the US, which is a $9.5 trillion consumer market.
Much of India and China’s exports are dependent on the US. If US consumption falls a couple of percentage points, it’s mathematically impossible for China and India to absorb the shock fully, said Roach. “Watch for the US consumer very very closely,” he warned. “The slowing right now in the US is in the homebuilding activity. It’s a global sector, which does not affect Asian exporters much. The slowing that will be coming over the next year will be in the consumer demand sector, which is America’s most global sector.”

However, Roach acknowledged that the impact will be different in different parts of Asia. “I think the impact will be relatively limited in India (compared with other countries).”

“I do believe the equity market in Asia is poised for an optimistic scenario that is well beyond my optimism,” he said. “I am optimistic on developing Asia, but equity markets in your region don’t believe that any problem outside the region will have an impact. I think that’s wrong. When it becomes evident that Asia slows because of the slowdown in America … your Asia market will correct.”

Roach said he did not favour capital control measures. “I understand the need to use them as a stopgap measure when things get out of hand, but I don’t think that’s the way to really manage international financial policy,” he said.

The former chief economist of Morgan Stanley also pointed out that at present, emerging markets are a magnet for global fund flows. Once global market demand slows, capital flows too will slow, he argued.
Roach is also bearish on crude oil prices.

“There is lot of upward momentum right now, but as soon as it becomes evident that the global economy is turning down, I look for a significant reversal of crude oil prices,” he said. “When the global economy turns down, the demand side of the world oil energy market will be hit with a surprising shortfall and I could see a cyclical reduction in oil prices.”

Retire Rich: Why the Fed's rate cut should scare you

By Janice Revell, Money Magazine senior writer

If you're saving for a retirement decades away, Thursday's big drop in the stock market shouldn't worry you too much.

But something did happen this week that you can't afford to ignore: the Federal Reserve's rate cut.

The Fed's actions could very well be ushering in a new era of inflation - and that is horrible news for your retirement portfolio.

When you save for retirement, you're saving for a lifetime supply of food, shelter and golf fees. Over time, the prices for these things only go one way: up.

The risk is that the value of the investments you're now stockpiling to pay for them may not increase at the same pace - leaving you with only enough money to pay for nine holes' worth of green fees.

With its rate cut this week, the Fed has made it clear that staving off recession is more important than reining in inflation.

But while the typical recession has lasted 18 months on average (not including the Great Depression), inflation can dog your finances for a long, long time.

Our last inflationary cycle stretched out for almost 20 years, from the mid-1960s to the early 1980s.

I'm not saying that the Fed's quarter-point rate cut is going to turn America into Argentina overnight. But you'd be wise to start taking steps to guard against the possible uptick in inflation.

Don't be too conservative

When the stock market gets especially volatile (as it is right now) there's a natural temptation to flee into conservative investments like government bonds. That's understandable - you have to be able to sleep at night.

But the risk of loss is only one of the two big risks you face. The other is the risk of inflation - and it can be just as damaging.

To see why, consider that the average rate of return on the 10-year Treasury bond has historically outpaced inflation by only about one-and-a half percentage points.

Right now, for instance, the 10-year Treasury is yielding about 4.4%, while the inflation rate is running at 2.8%.

Sure, a Treasury bond is a safe investment if you hold it to maturity. But unless you've already racked up more money than you can possibly spend, that yield will not even get you close to the stash you'll need to live on in retirement.

So to protect your portfolio simultaneously against both the risk of loss and inflation, you must be diversified.

Bonds, for instance, frequently move up when stock prices are heading south, dampening your risk of loss. But at the same time, bonds, more than any other type of investment, can get hammered by rising inflation.

Think back to the early 1980s, when inflation was running at around 10%. At the time, even ultra-safe US Treasuries were sporting double-digit yields, which certainly looked tempting. But to entice new bond investors, the government had to keep ratcheting up the interest rates they offered on new bond issues. That made the prices on existing bonds plummet (since the interest they paid was less attractive) and bond investors took big losses.

Over the longer run, common stocks have done a much better job of protecting investors from high inflation, since their returns are generally about four to five percentage points higher than high-quality bonds. But of course, stocks can crash in the short-term.

Real estate investments, such as REITS or real estate funds, typically perform the best of all types of investments during times of high inflation. But like stocks, they also carry a significant risk of short-term loss.

Add all of this up and it means that you've got to have a smattering of all asset classes. Ideally, your portfolio will hold a mix of small- and large-cap U.S. stocks, a smattering of international stocks, some REITs and some bonds.

The exact investment mix that is right for you will depend on several factors including how much time you have until retirement, the degree of risk you're comfortable taking, and other sources of retirement income you might have.

Roughly speaking, though, the targets for your retirement asset allocation might look like the following:

At 30, you might aim for 75% stocks, 10% REITs and the rest in bonds.

At 45, you'd shift to 70% in stocks/REITs, and at 60, you'd reduce your stock/REIT allocation to 60% of the portfolio (Corrected).

Even if you're already retired, you'll want to keep some exposure to regular stocks and real estate to give your portfolio a chance to generate enough income to keep pace with inflation.

I certainly can't predict the future, and neither can anyone else. One thing I do know, however, is that inflation now presents more of a threat to your retirement portfolio than it has in a long, long time.

Follow the strategies above and you'll be well on your way to handling anything the economy dishes out.

Asia thriving but not insulated from external factors

Yang Huiwen
458 words
1 November 2007
Straits Times
English
(c) 2007 Singapore Press Holdings Limited

US recession, inflation and surging oil prices will affect regional economies: Analysts

ASIA is booming but an explosive mix of rising energy prices, inflation and the sliding greenback could wreak much damage, warned Singapore-based experts.

And despite talk that Asia's economy is decoupling from the United States, the region will not be insulated from a US recession, which could hit next year.

The warning came from analysts speaking at yesterday's relaunch of Pulses, a monthly investment magazine from the Singapore Exchange, which will now be produced by The Business Times starting from its January issue.

Citigroup economist Chua Hak Bin said: 'If the US sinks into a recession, Asia will feel it. There are signs that some exports are slowing, but the good thing is that there are some domestic demands.'

Mr Hugh Young, managing director of Aberdeen Asset Management, agreed: 'While Asia has decoupled economically, it has integrated in a financial sentiment sense. So, if things do wobble sentiment-wise in the US, that could have a knock-on effect in Asia.

'Energy prices are going to be a destabilising force, especially in poor economies,' he added, citing the unrest in Myanmar. 'It could be a very volatile world in the next 12 months.'

The Singdollar is expected to hit a record 1.37 against the US dollar by the end of next year, said Dr Chua, adding that oil prices crossing the US$100 mark is not too far away. The Singdollar is now at 1.45. 'On the other hand, Asian currencies have a huge way to go, as far as appreciation is concerned,' said Mr Young.

Inflation was cited as another concern. Dr Chua said: 'The difference between now and three years ago is that inflation numbers are now within a discomforting range for central banks.'
Mr Young is also worried about the level of inflation. 'At the same time you've got rates being cut because of the US sub-prime issue, yet some central banks are raising rates due to inflation and that causes distortions.'

The risk of slower US growth in the first half of next year and rising inflation in economies like China mean investors will not get the same stock market bull run as this year. 'Our equity strategist has shifted to a more defensive mode given where valuations are,' said Dr Chua.
Bank stocks are going to pick up strongly, and the marine and offshore engineering sector is also likely to do well, while telecommunication stocks, which give generous dividends, are also favoured, said Dr Chua. But exporters will be hit as the US dollar continues to sink further.

Chances of US recession less than 50%: Top economist

Bryan Lee
315 words
1 November 2007
Straits Times
English

(c) 2007 Singapore Press Holdings Limited

THE United States economy might have slowed dramatically under the weight of its mortgage crisis, but the chance of a recession there is well under 50 per cent, a top economist says.
Former International Monetary Fund (IMF) chief economist Kenneth Rogoff said yesterday that credit market woes caused by mortgages given to risky US borrowers are being resolved.

But he feels the problem will linger longer in Europe, which ironically has taken the brunt of the US sub-prime mortgage fallout.

'Mr Greenspan's going around saying that the chance for a US recession is almost 50:50 now,' said Dr Rogoff, referring to former US central banker Alan Greenspan.

'I think the odds are considerably less than that,' Dr Rogoff noted.

While there are uncertainties about the extent of the sub-prime problem, 'on the whole, it's getting worked out', he said.

He was answering questions from the floor after giving a public lecture on global financial crises at the Lee Kuan Yew School of Public Policy.

He noted the resignation of US investment bank Merrill Lynch's chief executive, Mr Stan O'Neal, and the possible departure of Citigroup chief Chuck Prince.

'I would not be shocked if Citi or Merrill is forced into a merger to ensure sufficient capital to maintain operations,' said Dr Rogoff.

Both Citigroup and Merrill Lynch have reported billion-dollar losses from investments in sub-prime mortgages.

Recovery will be slower in Europe as banks there appear to have invested in the worst parts of the sub-prime debt, said Dr Rogoff, who is now a professor at Harvard University's economics department.

For the most part, Asian investors have somehow avoided the debacle, he said, adding that the early adoption of new global banking rules by Japanese banks has helped make them more resilient.

Now That Housing Has Soured, Renters Are Glad They Didn't Buy

by Jane Hodges

With the housing-market slowdown, tightening mortgage-lending standards and rising home foreclosures, renters are more easily answering the question: "Why rent when you can own?" Such a question was common during the housing boom, when homeowners, happy with the gains their homes were making -- at least on paper -- would urge non-property-owner friends to join the party.

The conventional real estate wisdom holds that owning a home is a better investment than renting. Real-estate values tend to appreciate over time (despite temporary negative blips in home prices) and homeowners who hold mortgages -- at least those who financed with fixed-rate loans -- know exactly what their monthly housing payments will be for the length of their loan. Renters don't have the same certainty.

But some renters say that the price hikes they may face when they renew a lease are manageable, especially in light of today's housing-market troubles. Several areas across the U.S. that saw substantial home-price appreciation during the housing boom also experienced steep property-tax increases, and mortgage costs for adjustable-rate or subprime loan borrowers can be tough as rates push higher. What's more, home buyers who bought at the top of the market can find themselves with high mortgage payments for an asset that has lost much of its value. With the housing market in flux, it makes sense to hold off on buying, renters say. Now, these renters are asking, "Why own when you can rent?"

Take Jim Kollross, vice president of finance at Telephia, a consumer research firm in San Francisco. In 2003, he and his wife bought a 2,000-square-foot house in the city's Inner Sunset neighborhood for $825,000, but sold the three-bedroom, two-bathroom home two years later with plans of renting a home indefinitely. Their property went up in value approximately 60% during the two years they owned it, and they wanted to sell while its value was still high. Such steep appreciation signals an unstable market, Mr. Kollross says, and he'd rather rent than risk watching his home's value balloon, only to stagnate, or even worse -- fall.

Mr. Kollross, 37, told his mother that he planned to sell and rent an apartment instead. He recalls that her first question was, "Did you lose your job?"

He and his wife sold their place for just over $1.3 million in 2005 and currently lease a 1,700-square-foot flat in San Francisco's prestigious Laurel Heights section. Their new neighborhood is nicer and affords him a faster commute, Mr. Kollross says. Plus, their two-bedroom, two-bathroom apartment has city and San Francisco Bay views and includes a garage parking spot and off-street parking. While the rent is a steep $3,000 a month, he says the price of owning a comparable home in his area -- where home prices start at $2 million -- is three times higher.
To put his cash to good use, he's invested his profits from the home's sale in the stock market, where assets are easier to transfer or sell during market fluctuations than in real-estate, he says.

Mr. Kollross isn't alone in his bearish sentiments on homeownership. Housing-bubble blogs like Housing Panic and Housing Doom are full of anti-ownership sentiment from renters. Some renters are resentful they can't afford to own in pricey cities, while others are bitter that speculators drove up housing values in their markets. Some are irked that naïve buyers who bit off too much mortgage are calling on lenders and government for bailouts when, all along, they could have held off on buying a place.

John Sternal, 33, learned the hard way about taking out more loan than he could handle. As a vice president at LeaseTrader.com, Mr. Sternal has a steady income and solid credit, yet in 2005 he purchased a Fort Lauderdale, Fla., condo with an interest-only loan (instead of a more conventional fixed-rate mortgage). He had rented for most of his life and was living in a $900 per month one-bedroom apartment at the time of his purchase. Now, as he watches his home loan's interest rates balloon upward, he regrets his decision. His mortgage's low teaser rates have begun a series of resets -- first to 8.6%, pushing his $1,300 payment to $1,700. His rates will eventually rise to a maximum of 12% in October 2008, increasing his payments to $2,500, making his $900 rent look awfully nice in retrospect, he says.

If he were to try to sell now, he'd take a substantial loss on the property, Mr. Sternal says. Within his condo complex, a unit similar to his is now listed at $150,000 -- about $47,000 below what he paid for his property. With 60,000 new condos expected to hit the market in South Florida over the next five years, selling his property could be difficult, he says.

Marc Savitt, president-elect of the National Association of Mortgage Brokers, says that many first-time buyers, at least those he encounters at The Mortgage Center in Martinsburg, W. Va, are choosing to remain renters over taking out unfavorable home loans. About 75% of prospective buyers decide to postpone buying when informed that waiting to do so could garner them lower rates, he says.

Not everyone who can afford to own needs to, some renters say. Ben Cheng, a 30-year old manager at an oil services firm in Houston, could have purchased his own place in 2000 -- when he returned to Texas after college. But rather than buy, he's using money saved by renting to pursue a masters of business administration program at The University of Chicago. He has a good deal on rent, he admits, paying $400 per month to a friend for an apartment worth $650 in rent monthly.

"If I was paying $800 to $1,000 in rent per month, I'd have definitely looked into buying by now," he says.

Sheara Reich, 34, is another renter who's glad she resisted the buying bug -- until now, anyway. The Washington, D.C., freelance publicist has rented for more than a decade, and as housing heated up during the past four years, she says that her relatively low rent, coupled with the volatility of the housing market, made it a smart move. For eight years she paid $750 to $800 for a studio in a city building that's close to public transit and has a rooftop pool. But since the sale of that building, she's moved into a $1,300 a month unit in another building.

She's watched from the sidelines as friends made hasty purchases without inspections or in fear of "losing out" on a home. "Everyone kept telling me, 'You're so stupid,'" she says. "'You've got to get into the market.'"

Now, she says, some of her friends regret making those buys and are funding expensive home repairs a home inspection might have revealed.

Ms. Reich finally started looking for a place of her own in April -- after 12 years of renting -- when she noticed that prices in her market were cooling. She bought a condo in September in Washington D.C.'s Adams Morgan neighborhood. The 800-square foot unit, which has a bedroom and an office, was listed at $415,000 in April, but dropped to $375,000 by August. She bought the condo for its $375,000 asking price using a 10% down payment and a conventional, 30-year loan; the sellers paid her closing costs. She closed on October 5 and is in the process of moving in.

"I feel really great," she says of her decision to stick to renting during what she says was a "feeding frenzy" in Washington D.C. "I got one over on the market."

Ms. Hodges is a a free-lance writer in Seattle.

The Biases Investors Suffer From

I personally feel a host of people lose money in their investment not because of the capricious nature of the stock market but because of biases in the important investment decisions they make. Many investors unwittingly suffer from one form of bias or the other. In this discussion, I will draw the reader’s attention to the various forms of biases that investors suffer from. The biases investors primarily suffer from are: overconfidence, representativeness, conservatism, narrow framing and ambiguity aversion.

Self-attribution bias contributes to overconfidence bias. In self-attribution bias the investor is very quick to attribute the good results of investment decisions to himself and blame others or come up with excuses when things don’t work according to plan. This leads to overconfidence in one’s ability to select the right shares for a portfolio. It also leads to an irrational behaviour of not sufficiently diversifying one’s portfolio to reduce risk. Overconfidence bias supports the over-reaction hypothesis which states that markets rise too high when they rise and falls too low when they fall. When an overconfident person thinks the market will rise he invests enthusiastically, hence causing the market to rise more than necessary. On the other hand, a feeling that the market will fall leads to a progressively decreasing investment which causes the market to fall more than necessary. Overconfidence also explains why some investors trade more often, although they have to pay high charges every time they buy or sell shares.

Representativeness is to do with one projecting past successes or failures as also happening in the future. Thus some investors will invest a lot in a particular share just because it performed well in the past, or invest less in a security because it underperformed in the past. This sort of action or decision takes place in spite of concrete evidence that future performances cannot be guaranteed by past performances on the stock market. It is a form of bias.

Conservatism refers to a slow response to information or events. Research shows that a lot of investors only buy shares when it is about to peak in price and sells when it is just about to trough.

Narrow framing has to do with considering things from a smaller perspective than it should be. Looking at a long-term investment from a short-term perspective, is a good example. Some investors anxiously monitor daily changes in the prices of securities in a portfolio targeted at achieving an objective in 40 years’ time. Others as a result of this bias consider the volatility of the constituent securities of their portfolios, instead of looking at the risk of the portfolio as a whole. This can result in a rather meager investment, since individual securities in a portfolio tend to be more volatile than the portfolio itself.

Bias of ambiguity concerns investors’ preparedness to invest only in companies they know more about. A lot of investors prefer investing in companies in their own countries, even if investment in other countries can provide higher returns and also help to reduce risk.

One bias that is very closely related to narrow framing is that of retreivability, in which investors pay more attention to information that they can readily recall. Some investors will only support statements that coincide with their views, rejecting those that oppose the notion they hold. Others suffer from illusion of control. Some investors feel they are really in control of the investment situation, when in actual fact they are not. This type of bias explains why many investors pursue actively managed funds, irrespective of research findings that tracker funds outperform actively managed ones in the long-term.

Great dividends can be expected if the investor will use the above-mentioned biases as a checklist when making important investment decisions. Biases can warp the decision making mind of an investor, and foster irrationality and lack of objectivity. Taking appropriate measures to eschew biases is the first step towards investment success.

10 Financial Mistakes to Avoid

1. Negative Spending

Have you created a budget and do you stick to it? If not, you may be spending more money than you make. People who have created a budget have a good idea of their monthly income and expenses and can accurately diagnose their financial condition. Other signs of negative spending include the inability to pay off credit cards each month and spending money on fun things before you have paid for necessities.

2. No Rainy Day Fund

Do you have little or no money in savings accounts, retirement plans, and investment portfolios? When something breaks, or difficult circumstances such as unexpected medical expenses or a job loss happens you must draw down what little savings you have and go deeper into debt.

3. Too Much Debt

Do you have so much debt that you are having difficulty meeting your expenses each month? Are you �borrowing from Peter to pay Paul'? You may have re-financed your home or consolidated debt to get cash to pay for other debts (maybe more than once). Re-financing or consolidation can be a very good tool to help you, but the ultimate goal must be to reduce debt.

4. No Plan

Do you have a written financial plan, to help you plan for unexpected things and future goals? A comprehensive financial plan used to be difficult to come by unless you had substantial assets, but with a financial plan you can take control of planning your future.

5. Optical Rectitus

The condition in which your optical (eye) nerve gets crossed with your rectal (anal) nerve and you see the world through a crappy disposition. You can choose to be negative or positive. Whichever one you choose will set the course for your life. You can either make the best of what you have, or be a victim of circumstances and spend your life blaming others for your situation. Having a positive attitude creates the state of mind for success and overall health.

6. Self-Centeredness

You live mainly for yourself without thinking of the world around you. You buy things that please you alone, and then you don't share. For instance, what good is it to buy a new gas grill then never have a cookout? You are enjoying your holiday meal without even a thought about donating to a soup kitchen or food pantry. Your children are enjoying opening their holiday gifts, but you didn't think about donating a gift for a needy child. You don't give money and time away. You spend your time and money on yourself, or on those in your very small circle. You will find liberation if you think of others and �higher things' before thinking about yourself. Giving money away can be the best "investment" in how you feel about yourself and the world around you

7. You and Your Spouse Don't See Eye-to-Eye on Money

Perhaps one of you is a procrastinator and spender and the other is a saver and has a �get-er-done' attitude about finances. This problem can be overcome, but it requires a lot of work from both of you. Financial counseling may be in order in extreme situations. Sometimes separate checking accounts, but joint savings and investments can help. Creating and sticking to a budget is essential so that the �spender' isn't always blamed for financial difficulties. Also, remember that a lot of marriages break up over fighting about financial matters. The small amount of time planning and working through financial responsibilities is well worth marital harmony.

8. Either Trust Too Much or Don't Use Advisors at all

You assume that anyone can make financial decisions and that everything will work out in the end. You don't keep up with the news so you were unaware of things such as predatory lending practices on your �interest only' mortgage or the 400% interest you paid to the �Get Cash Now' store. You are certain that the odds are truly in your favor to win this time so you are buried in magazines that you bought to increase your chances to win. Your basement is filled with products that you will sell someday; you just had to get the minimum amount so that you could be an official distributor and save more money. Remember, if it seems too good to be true it probably is.

Have you put off seeking help from financial, insurance, legal and tax advisors. Many people procrastinate to the detriment of their financial condition. We all have to pay taxes and we all need insurance and a will. Perhaps you don't want to make the hard decisions that they may tell you to make (like saving more money and buying insurance, or delaying the purchase of things you want now). Tax and legal advisors may save you money and legal entanglements.

9. Living Large

Do you spend money on homes, cars, vacations, or hobbies at or a level above your income bracket versus a notch or two below? Bigger homes, and cars, more sophisticated appliances or whatever you buy, will cost more to purchase, fuel, maintain and insure. The nicer vacation spot will cost you more for your lodging, meals, and for everything else while you are there. Have you ever allowed warm fuzzy feelings to dictate the purchase of a pet without properly budgeting for all of the expenses it would entail? Don't buy anything if you can't afford all of the expenses that will come with it.

10. Laziness

For some, the desire to pay bills, budget, and plan finances falls somewhere below getting a root canal without anesthesia. Sometimes procrastination or a desire to avoid difficult topics (like thinking about your death for Life Insurance or creating a Will) can keep you from achieving your dreams.

Being successful with the money you have is not easy or quick and there are no short cuts. Continue to educate yourself about financial matters and obtain and follow a financial plan. If you work hard to achieve the goals laid out in your plan and avoid these mistakes you will be well on your way to funding your dreams.

How To Stop Playing Games And Start Investing

by Tony Clifton

There is one major excuse for people to keep playing these HYIP games with $10 to $100 "investments". And the excuse is simple...

Not Enough Money To Invest

I don't want to be blunt, but basically you can't really make any investment with $10 or even $100. At the very minimum, you need at least $500 - $1,000 to start doing some real stuff.

Playing the HYIP game is one method to turn your $100 into $1,000. But it is not the best method and certainly the chance that you'll lose that $100 are better.

If you don't have at least $500 to invest, I can suggest you some or combination of the following:

• Save money from everyday expenses. It may sound frustrating, but you need to save only $1.37 per day in order to save $500 for one year. That's just a bottle of beer, so next time when you are buying, think about this: do you want a bottle of beer and an excuse to play games, or you prefer no bottle of beer and no excuse?


• Work more. This usually isn't the thing to recommend, but just for getting your initial capital, it's the best and most secure thing. Raize your salary/income with just $50 monthly and you'll have $500 in just 10 months.


• Sell your car/bike and buy a cheaper one. Sounds horrible? Do you want financial freedom or not? Lower your lifestyle for a while and you can change your life for good forever


• Borrow money. In some countries the banks won't give loan for investing, but there are pretty many non-bank institutions who would. And finally, you have friends and probably parents. Ask someone, $500 or $1,000 is really not that much
  

There are hundreds or other ways to acquire such amount, I gave you only few bery secure ones. There is NO excuse for "investing" $10 saying that you can't afford more.

So How To Do High Yield Investing with $500 - $1,000?

"The good deals are only for people with millions, no?"

Actually no. The big guys certainly do have access to deals that me and you don't. But one billion of dollars is much less liquid than $1,000. Have you heard Bill Gates making 100% per year on his 50 billions?

Well, you can make 100% per year on your $500 - $1,000 bucks. How?

• Put into aggressive mutual funds. This is usually the best advice for the beginner investor. The main problem is the return is rarely hot enough to produce big gains on small investment. If a good aggressive mutual funds averages ROI of 30% per year, this means $1,000 will turn into 13k for 10 years. Not bad, but not earth shattering either. So if you choose this way, you have to keep investing over time.


• Invest in a good managed forex account. This is great, if you can find one which accepts such low minimum investment. Currently GalleonFX and FXCM both accept $1,000 minimum. For GalleonFX this is valid only for October, so hurry up. A good managed account can achieve 50% - 100% yearly ROI which means your $1,000 can turn into $57,000 to 1 million in ten years.


• Trade forex or stocks yourself. This is a good option, but only if you are already educated how to trade. Otherwise you'll have to spend time and money on education.


• Trade by signals. If you have to pay for forex, stocks or options signals, you'll need more than 1k. But if you use free ones (there are such options available), you can start even with $500 and turn them into tens of thousands withouts big knowledge.


• Start a web based business. $500 is not enough to start offline business, but for web it could be a good start. $500 or $1000 can be enough to boost your site with some targeted advertising or to pay for professional design or to hire copywriter who to write good articles (or all of these if you can manage with low cost providers).


• Buy a website. A good deal in the web is considered a website which is sold for a price which equals about 12 monthly incomes. This means 100% yearly ROI with less risk than in forex. And you can find even better deals.


• Invest in education. This is usually not my recommendation. Why? Because education prepares you for work, which is not your target. There are two cases in which this remains the best options however. First, if you want a better job so you can earn and save more for future investing, it may worth it. If an education costing $1,000 can raise your monthly income with $300, this means in one year you'll have $3,600 ready for investing instead of the $1,000 that you started with. The second good case is when you invest in good trading or business course which can drastically imrpove your investing results in the future.
  

And just like usual, there are many more options available. There is no excuse which can keep you from investing if you really want to invest. So don't play 10 dollar games except for fun and don't delay investing in real stuff. It's out there waiting for you.