Thursday, 27 March 2008
We retain our Bearish stance on Singapore’s residential sector, with the market moving swiftly from a state of denial to acknowledging the realities on the ground. We see asset prices being driven down further by the marginal speculative sellers, amid low transaction volumes and rising unsold pre-sale inventories.
Residential rents are likely to remain firm in the short term, given the low vacancy, though rising new supply is likely to cap rental gains from 2H08F — we forecast vacancy will rise from 5.7% at end-2007F to 8.2% at end-2010F.
Luxury residential prices have risen too fast relative to rental expectations. We see the marginal speculative seller in the pre-sale market as the catalyst for asset price declines in the luxury sector of 16.9% in 2008F and 10.3% in 2009F, with the mass market not immune from asset price declines amid rising new supply.
Eye on the storm
Luxury asset prices to fall by 32% over 2008-10F
Sentiment in the market has deteriorated rapidly — asset prices look to
have fallen by about 5% over the first two months of the year, with falls
of up to 15% in some non-prime locations. We see asset prices being
driven lower by the marginal speculative sellers, amid low transaction
volumes and higher unsold pre-sale inventories. Overall fundamentals
aren’t supportive, on higher expected new supply and re-assessed
rental expectations. Luxury should bear the brunt of falls in asset prices,
though mass residential looks unlikely to escape completely.
Unnerving sound of supply: 12,231 units pa over 2008-11F
We assume supply will remain modest in 2008F (8,364 units), but
completions should rise markedly thereafter, to 12,867 units in 2009F
and 15,043 units in 2010F, with the average at 12,231 units pa over
2008-11F. We note that over the course of 2007, the volume of new
supply forecast for 2008-11F rose by 10,829 units.
Demand remains firm: 9,064 units pa over 2008-11F
Our demand forecasts are broadly intact, with 2008-11F private sector
demand averaging 9,064 units pa, though with this demand slightly
skewed to 2010-11F, when the integrated resorts open. We expect
vacancy to fall to a low of 5.1% this year, but rise to 6.4% in 2009F,
before stabilising at around 8-9% over 2010-11F. We expect rents to
peak this year, and ease by 10.3% y-y in 2009F and 15.7% y-y in 2010F.
Withdrawal of pre-sale speculators?
With asset values likely to correct further over 2008-10F, we see
speculators becoming net sellers, weighing on pre-sale launch prices.
Smaller players are likely to initially trade price for volumes in 2008F,
with the larger players possibly having to follow suit — and as construction costs rise ever higher, this may well create a potential
downside surprise for margins and NAVs.
Eye on the storm
Singapore’s residential market is moving quickly from a state of denial to now acknowledging the realities of falling asset prices. The exchange of SMS messages shown below highlights the rapid recent deterioration in the residential market.
In early March, an agent noted below to a prospective vendor for a unit in District 9: “The market for sale has gone quiet for now. Please advise if you still want to ask at $2400psf. Buyer sentiments are at the $1900-2000 range. In the next few weeks, price is expected to dip another 20% as some urgent sales by weak speculators of projects are being caveated and will become apparent to the market”
Two weeks later the same agent advised:
“They (buyers) are now looking below $2000psf. Market expectation lowered as more owners lower price. At the moment sentiments are weak, especially after the pull out of a fund from the purchase of a high end project. So now most buyers on a wait and see mentality. Unless its a genuine fire or urgent sale the interest level is not so high”
In what we see as something of an under-statement, an agent recently candidly summarised the current market:
“To be honest the market is very slow”
We see asset prices being driven lower by the marginal speculative sellers, amid low transaction volumes and higher unsold pre-sale inventories. Fundamentals aren’t supportive, on higher new supply and re-assessed rental expectations.
The 10 March decision by the Kuwait Finance House (referred to above by the agent) to withdraw from its decision made in mid-December to acquire Phase One of Goodwood Residence (comprising 97 out of 210 units) for S$818.4mn (about S$3,000/psf) in Bukit Timah is indicative of a market where asset prices are falling.
Analysis of sub-sale activity (units re-sold prior to completion) and caveats lodged in key residential developments suggest that asset prices have already fallen by about 5% over the first two months of the year, with falls of up to 15% in non-prime locations such as Sentosa Cove. This analysis highlights the broadening of the correction in asset prices, and is a natural extension of recent analysis by estate agencies that the decline in asset prices has been selective.
Sentiment in the market has deteriorated rapidly. While rampant expectations for capital growth in 2007 are now being checked by global economic concerns, the longer-term reality is that the domestic residential market will remain weighed down by increased new supply and unrealistically low yields. As launches are deferred amid weak demand, we see the prospects for a build-up of unsold inventory adding further
downward pressure to pre-sale asking prices.
Asset price outlook
We see the luxury residential market bearing the brunt of the changed realities in the market, and we envisage average asset prices in this segment falling 32.3% from the 2007 peak over 2008-10F — by 16.9% in 2008F, 10.3% in 2009F and 9.3% in 2010F, as rental growth slows and yields are re-appraised. This amounts to a major correction in luxury asset prices, though not a crash, with a 2010F average of S$1,847/psf,
marginally higher than the S$1,811/psf in the 1996 peak and 22.4% above the 2001 peak of S$1,508/psf.
Note: the forecasts above are averages. We expect greater falls for pre-sale units in selected developments and markets, with Sentosa Island and fringe CBD/fringe prime locations likely to bear the brunt of lower asset prices.
Mass residential prices appear on a firmer footing, supported by rental growth and prevailing yields. However, the advent of new supply and the resultant increase in rental availability in prime locations is likely to see demand that was once displaced to “non-core mass market” locations returning to prime districts, hurting non-core rents and ultimately mass market prices. As a result, we anticipate mass residential prices
remaining flat in 2008F (+0.5%), but as the new supply is completed in the prime districts, we expect prices to fall 10.3% in 2009F and 10.1% in 2010F — with prices to fall 19.4% from the 2008 peak.
However, as asset prices are known to overshoot rationale expectations, the risk is that in the current economic climate, asset price falls may overshoot on the downside, especially if developers defer launches, potentially increasing the overhang of unsold inventory, and/or cut prices to clear stock.
Rental / yield outlook
The key to our capital value outlook, and the sustainability or otherwise of current asset prices, is our outlook for rentals, and hence yields. We maintain our forecast for demand of about 9,000 units pa over 2008-10F, and expect average rentals to peak in 2008F, rising 5.0% y-y to S$3.64/psf pm, following rises of 14.1% y-y in 2006 and 41.2% y-y in 2007. We had previously pencilled in growth of 26.5% for 2007 and
18.2% for 2008F, and anticipated rentals would peak in 2009F (at S$4.00/psf pm).
Luxury yields are currently at a historical low of 2.77%, whereas mass market yields have risen on strong rental growth as demand has been displaced from core locales. While we expect real interest rates in Singapore to fall (mainly as a result of higher inflation rather than lower interest rates), we do not envisage these monetary conditions sustaining the historically low yields in the luxury market. As a result, we expect yields to rise from 2.77% currently to 3.00-3.50% over 2008-11F.
With supply on the rise, we expect rents to ease by 10.3% y-y in 2009F and 15.7% y-y in 2010F. Despite the declines, mass residential rents will still be 25.2% higher than 2003 trough levels.
Unnerving sound of supply
6,513 units in 2007
We estimate 6,513 units were completed in 2007 (source: URA, Nomura), versus average annual completion over the past 10 years of 9,062. However, due to demolitions as a consequence of en bloc transactions, we estimate the net increase in the private residential housing stock was only 1,448 units.
12,231 units pa over 2008-11F
The URA estimates that 56,516 units are scheduled for completion over 2008-11F. While we expect some slippage in project completions, we still expect total supply of 48,924 units. We assume supply will remain modest in 2008F (8,364 units), but should rise markedly thereafter, to 12,867 units in 2009F (below the URA’s estimate of 13,493 units) and 15,043 units in 2010F (URA: 18,509 units), well above our demand assumption of about 9,000 units pa.
Changing supply forecasts: 10,834 more units for 2008-11F
While an increase in new completions is increasingly being factored into the market, the key is the significant change in the volume of expected supply, compared with forecasts that were being made six to 12 months ago. Over the course of 2007, the volume of new supply expected to be completed over 2008-11F has increased from 45,687 to 56,516 units, an increase of 10,829 units, broadly equivalent to an additional year of new supply (see the exhibit below for details).
Tight construction market contributing to slippage
The increased volume of construction activity in Singapore, both for residential and non-residential projects, as well as the increase in commodity prices, has contributed to a marked pick-up in construction costs. According to the tender price index, construction costs in Singapore were up 23.2% y-y in 4Q07 (the residential tender price index was up 28.9% y-y). We estimate total construction costs plus interest comprise about 15-20% of the total cost for luxury developments and 25-40% of total costs for mass residential projects, with the key remaining cost being for land.
While rising construction costs are unlikely to have an immediate impact on developer margins, given the high level of pre-sales and fixed price contracts, margin pressure beyond our current forecast period is likely, with the lower achieved prices and higher input costs hurting NAVs. Given the interplay between costs and margins, it is perhaps more plausible to conclude that if the tight construction market starts to impact completions, such delays are more likely to impact the mass market rather than the
luxury sector, supporting our view of greater supply risks in the luxury sector
We already assume natural project slippage in new completions. We have analysed past URA data for two-year forward forecasts (for units under construction) over the six years covering 1999-2004. The URA’s forecast of 48,182 units was above the actual level of 46,178 units, a slippage rate of 4.3%.
New supply mainly in prime locales
The volume of new supply is focused very much on the prime districts of 9, 10 and 11 (broadly defined by the URA as the Central region) — these areas have been the focus of most of the en bloc activity in the past 24 months.
Monday, 24 March 2008
Although our all-star fund managers found themselves against the ropes with the rest of the investment community at the close of 2007, you wouldn't know it from reading their shareholder letters.
Warren Buffett's advice to "be greedy when others are fearful" has become an investment clichÃ©, but the 16 fund managers on our list have taken it to heart. Mason Hawkins and Staley Cates at Longleaf Partners (NASDAQ:LLPFX - News) see "tremendous opportunity" in the markets, while Christopher and William Browne at Tweedy, Browne Value Fund (NASDAQ:TWEBX - News) believe that "more attractive valuations" are forthcoming. Mario Gabelli of Gabelli Asset (NASDAQ:GABAX - News) believes "the most profitable investment opportunities come with blood in the streets." With Bear Stearns (NYSE:BSC - News) losing more than 90% of its market value in only a few days, there is certainly blood in the streets, but we think our expanding roster of 5-star stocks is evidence that this storm is set to help more than a few investment flowers bloom. The following table lists the fund managers whose holdings we surveyed at the end of 2007.
To see related chart, click here:
Housing, Finance, and the Consumer
For almost an entire year, financial stocks have been making front-page news as the subprime housing fiasco spread to engulf global financial markets. Credit has become nearly impossible to come by, with the greed of the last several years being quickly replaced by fear. Despite--or perhaps as a result of--widespread hysteria, our all-star managers were buying financial stocks in the fourth quarter, with American International Group (NYSE:AIG - News), Ambac Financial Group (NYSE:ABK - News), MBIA (NYSE:MBI - News), Merrill Lynch (NYSE:MER - News), and Washington Mutual (NYSE:WM - News) on the list of stocks purchased by two or more managers, with AIG held by seven of the funds on our radar screen. Bill Miller of Legg Mason Value (NASDAQ:LMNVX - News) believes the markets are in for a period of "enantiodromia, the tendency of things to swing to the other side," and believes that stocks in the housing, financial, and consumer sectors are the cheapest he's seen since 1991, "an exceptionally propitious time to have bought them." Judging from the stocks other managers are buying, he does not seem to be alone in this opinion.
A Fourth-Quarter Shopping List
Marty Whitman at Third Avenue Value Fund (NASDAQ:TAVFX - News) continued to buy beleaguered insurers Ambac, MBIA, MGIC (NYSE:MTG - News), and Radian (NYSE:RDN - News) in the fourth quarter. While the sentiment toward these companies from the financial media, ratings agencies, and political establishment appears to be overwhelmingly negative, Whitman believes these companies have ample resources to pay out any likely claims. Selected American (NASDAQ:SLASX - News) managers Christopher Davis and Kenneth Feinberg also bought shares in MBIA at the end of the quarter. On the other hand, Davis and Feinberg placed Ambac in the "mistake" category in their year-end letter, admitting to misjudgments "in our assessment of the risk embedded in its portfolios, the possibility of the rating agencies removing its triple-A rating, and the likelihood of significant stock dilution." Whitman shared these fears, and a "sense of discomfort due to the dangers of Rating Agency subjective considerations and capricious regulators." Primarily due to their dependence on these factors, my colleague Jim Ryan currently maintains a "Not Rated" opinion on MBIA and Ambac.
Other stocks in the consumer and housing sectors made up the next largest portion of managers' fourth-quarter shopping list. Building materials company USG Corporation (NYSE:USG - News) suffered from the housing downturn, while Carmax's (NYSE:KMX - News) exposure to a slowing economy hurt the stock. Wally Weitz of Weitz Partners Value (NASDAQ:WPVLX - News) owns USG, explaining that "demographics suggest a positive long-term outlook" and that the time to buy cyclical companies is "when their businesses are weak and investors are fearful." Rounding out the managers' consumer stock buy list are the world's largest alcoholic beverage company, Diageo (NYSE:DEO - News), and drugstore chain Walgreen (NYSE:WAG - News). We believe both of these wide-moat companies deserve a close look when available at a fair price. The table below lists stocks bought by two or more managers in the last quarter of 2007.
To see related chart, click here:
Finding Buys Among the Sells
Surprisingly, we think events during the last two months have created opportunities in some of the stocks sold by our all-star fund managers. Although high-quality stocks such as Berkshire Hathaway (brk.b.B), Yum Brands (NYSE:YUM - News), and Markel (NYSE:MKL - News) spent much of the fourth quarter in 3-star territory, recent market action has brought these stocks back onto our "Consider Buying" list. The Fairholme Fund's (NASDAQ:FAIRX - News) Bruce Berkowitz appears to expect further opportunities to arrive in 2008, holding shares in Berkshire, Leucadia (NYSE:LUK - News), and Sears Holdings (NasdaqGS:SHLD - News) as well as a sizable cash position. Finally, though Ariel (NASDAQ:ARGFX - News) and Oakmark Select (NASDAQ:OAKLX - News) reduced holdings in wide-moat tax preparer H&R Block (NYSE:HRB - News), my colleague Todd Young believes the stock is a potential buy at current prices. Also, because redemptions forced manager Bill Nygren to sell portions of several holdings in 2007, we're not reading too much into Oakmark's share reductions of H&R Block and other top positions. The table below lists the stocks sold by two or more funds in the final quarter of 2007.
To see related chart, click here:
Although we're not sure when Mr. Market's mood will change, we share the belief that times like these create opportunities for the patient investor. With so many wide-moat, 5-star stocks available at discounts to our fair value estimates, we think the market is serving up numerous chances for individual investors to buy like the pros.
Thursday, 20 March 2008
Despite higher volatility, largely reflecting financial market stability concerns and
expectations for a US recession, there is reason for optimism in global equity
markets. Monetary and fiscal policy response has been aggressive and more is
likely on the way. Thus, a major source of ‘tail’ risk appears to have been removed.
Coupled with attractive valuations, low interest rates, and reasonable earnings
growth, we believe prospects for a more sustainable rally in equities appear good.
Broad market support
Sectors that underperform in a sell-off also tend to recover the most. Thus, we add
to positions Financials and Consumer Discretionary. Even so, we believe a decline
in risk premiums is likely to provide a boost to market valuations making a broadbased
recovery. To reflect this more outlook we trim our defensive exposure
(Healthcare and Consumer Staples), which we upgraded in January.
Regions and stocks
We retain our regional allocations, where we are overweight in the US, neutral in
GEM and Japan, and underweight Europe and UK. We are making several changes
to our Global Top 40 stock list: Adding: Prudential Financial, News Corp,
Barclays, and BNP Paribas. We are removing State Street, Sumitomo Mitsui
Financial, BAT, and Novartis.
We recognize that a move to become less defensive could still be early given that
uncertainty could persist. Details of policy response are still unknown and global
growth is still under pressure, which may keep earnings expectations muted.
Volatility in financial markets has continued to ratchet higher in recent weeks.
With expectations for a US recession still on the rise and concerns about the
stability of the financial system acute, markets have reeled amid the uncertainty.
The collapse and buy-out of Bear Stearns over the last several days was the most
recent source of uncertainty and anxiety for markets to grapple with.
Yet, despite all of the angst, perhaps there is a silver lining. While fundamental
pressures on the US economy stemming from the decline in house prices persist,
the policy reaction to financial market turmoil has become increasingly
aggressive, particularly from the Federal Reserve. To be sure, response has been
necessary. Credit markets are under strain, banks have been under associated
stress, and pressures have seemed unlikely to abate on their own. But, the
nearing of a potential ‘bailout’ suggests that more of the current crisis is behind
us than ahead. This does not imply that the days of worry and volatility are
things of the past. It does, however, suggest that the uncertainty that has
depressed overall equity market valuations is likely to dissipate, leading to a
more sustainable rally than has appeared probable in recent months. Thus, we
are getting ready for a shift in markets to a more positive assessment of nearterm
prospects based on the policy response we’ve seen so far and what may yet
In this report we outline our expectations for global equity markets in coming
weeks and months and look at historical sector and regional performance in a
recovery. We present a summary of work done by our Global Banks team that
looks back at a history of bailouts of the banking system to provide some
context about where we stand in today’s environment. We also look at prospects
for the sustainability of a rally given the underlying macro environment. Finally,
we address our current regional and sector allocations. Our conclusions follow:
Expectations for the arrival of concerted policy response should help to
alleviate pressures on the financial system and result in a broad equity
market rally. Indeed, a reduction of risk premiums is likely and will help
boost overall valuations which have room to rise materially.
Past examples of banking system bailouts should offer hope to investors.
Performance of domestic bank stocks following inception of a banking sector
bailout is usually robust, with an average gain of nearly 30% in three months.
The historical pattern of a market rebound suggests that the sectors that have
been under the most pressure also rebound the most. Therefore, we have
lifted our allocation to Financials and Consumer Discretionary. A long-term
sustainable rally in these sectors will require signs of more sustainable
growth potential. In that vein, challenges will persist. For consumers, balance
sheet repair is still needed. Meanwhile, financials face continued questions
about growth potential in coming years given shrinking balance sheets.
The rally in stocks we envisage is more about falling risk premiums (rising
multiples) than about a change in fundamental expectations. Therefore, we
are trimming our exposure to defensive sectors which we upgraded in January.
In particular, we are trimming Consumer Staples and Healthcare to
Neutral. We retain overweight positions in Technology and Telecoms.
Regionally, we are keeping our current recommendations unchanged. We
remain overweight in the US, neutral in Global Emerging Markets and Japan,
and underweight in Europe and the UK.
We are making several changes to our Global Top 40 stock list. We add
Prudential Financial, News Corp, BNP Paribas, and Barclays. We remove
State Street, Sumitomo Mitsui Financial Group, BAT UK, and Novartis.
We recognize that a move to get less defensive still could be somewhat early.
Uncertainty may linger for the financial sector and for the equity market as a
whole as details about further policy action are debated. Moreover, overall
economic conditions remain challenging and recession in the US appears
probable. To that end, sustainability of overall earnings growth may remain a
concern. This suggests that a prolonged rally requires signs that a slowing in
US growth will be relatively short-lived and mild. For financials, long-term
growth prospects for the sector will continue to be questioned.
Policy response, fundamentals and valuations
Actions already taken by the Federal Reserve over the last nine months in
response to the housing and financial market crisis have been significant. Those
actions include cuts of 300 bps in the Fed Funds rate and 375 bps in the
Discount Rate since August, creation of the Term Auction Facility (TAF), Term
Securities Lending Facility (TSLF), Primary Dealer Credit Facility (PDCF), and
involvement in term-funding of Bear Stearns. In addition to monetary policy
measures, there has also been fiscal action, with a tax rebate approved by
Further, we believe that there’s a probability of additional measures that will be
taken by Congress and, perhaps, the Fed to provide more stimulus and liquidity
to the economy and to markets. The combination of these measures should act as
a stabilizer against the instabilities caused by the weakness in the housing
market. Our Global Banks strategy team has compiled a history of banking
system bailouts that compare similarly to the current environment. They also
show how markets have performed in periods following bailouts. In short, when
policy is implemented, markets tend to respond positively. We provide a brief
summary of their findings on page 6.While not reason, alone, to become positive
on the outlook for equities, we believe policy action will be successful.
Therefore, coupled with other positive factors, equities appear oversold.
As we have highlighted often in recent months, absolute valuations on global
equities are attractive. Current market levels are consistent with ‘trough’
valuations coupled with near-trough earnings. To that end, value exists in
markets, and there’s considerable scope for multiple expansion without
threatening aggressive valuation levels. Moreover, multiples can expand against
a backdrop of slowing earnings growth.
Low levels of nominal and real interest rates also favour equity markets. Real
interest rates (the real Fed funds rate is now negative) are supportive of overall
equity market valuations. Moreover, the low level of interest rates has resulted
in continued rise in the equity risk premium (Chart 3 and Chart 4). Of course,
interest rates have been low for some time and have favoured equities. But, a
shift in sentiment and decline in uncertainty will allow for risk premiums to fall
and, hence, equity multiples for the market to rise.
Markets are likely to require reasonable earnings growth to sustain a rally
beyond short-term short covering that is driven by expectations for policy relief.
While we continue to believe that earnings growth is slowing globally and that
bottom-up estimates for this year remain somewhat optimistic (particularly in
emerging markets), though there have been downgrades to earnings estimates in
recent months. At the same time there are other sources of support. As we have
highlighted regularly, the health of corporate balance sheets globally is positive
for valuations and fundamentals. Moreover our US strategy team still expects
earnings growth to hold up this year, which would almost certainly help to
support valuations, and current earnings remain solid. For example, in the US,
we expect nearly all sectors to post positive growth in Q1.
How to position for a market rebound
Looking back over previous market sell-offs (-10% from 12-month peak) that
are followed by a sharp rebound (greater than 10% in three months) we find that
the sectors that led markets lower also tend to lead in the recovery (Chart 5).
This is an intuitive result insofar as a rebound in markets is probably driven by a
change in fundamental expectations that allows the most impaired sectors to
recover, while short-covering in bombed out sectors also reverses course.
As stated above, we believe that markets are poised for a broad recovery in
valuations driven by a decline in risk premiums. These moves are likely to
benefit the whole market. However, the historical pattern of a market rebound
suggests that the sectors that have been under the most pressure over the last
year (financials -22% and consumer discretionary -16%, compared to the market
which has been roughly flat) have potential to rebound sharply in the near-term.
Therefore, we have lifted our allocation to both of these sectors (financials to a
small overweight, consumer discretionary to a smaller underweight). Some of
the move in share prices will likely be a function of short-covering, while
additional gains will require signs of more sustainable growth potential.
In that vein, both sectors face hurdles that are unlikely to be cleared quickly. For
consumers, the US appears still at the early stages of recession, the
unemployment rate is likely to rise, and the downturn in housing will continue to
force household balance sheet repair. Meanwhile, financials will face continued
questions about growth potential in coming years given shrinking balance sheets.
These concerns are apt to cap valuations until growth and profitability
expectations become clearer. Thus, over a strategic horizon, both sectors may
struggle to outperform beyond an early-stage rally.
We are also making other changes to our recommended sector allocations. In
particular, we are cutting our position in defensive sectors – Healthcare and
consumer staples move from overweight to neutral – which we upgraded in
January. This reflects our more positive assessment of broader market
conditions and still-high relative valuations of these segments of the market. We
retain a preference for sectors that are exposed to business spending (e.g.,
Technology) relative to those with consumer exposure.
Our regional allocations remain unchanged. The US is our only overweight
region. We are neutral in Global Emerging Markets and in Japan. We are
underweight in Europe and the UK.
Banking bailouts: A history lesson
Our Global Banks Analyst Philip Finch published a report on March 17th called
“UBS Global I/O™: Banking Crisis – A banking bailout?” which takes a close
look at past banking crises and the parallels we can draw from them to help
understand the current turbulence. The team looked at four other crises with
similar features to today which were preceded by a long period of over-lending
and were all derived in one way or another from a real estate bubble. These bank
crises are 1) The Great Depression of 1929, 2) the Savings and Loans crisis in
1986, 3) the Swedish banking crisis in 1992 and 4) the Japanese banking crisis
of 1990. Stacked up against these prior episodes, the current subprime crisis
ranks second in terms of its cost as a percentage of GDP.
In these past instances, a fiscal policy response which was aimed right at the
underlying cause of these crises in hindsight marked a turning point in the
performance of the financials sector. Table 2 shows how on average the
financial sector returned 148% in the twelve months after the inception of the
government bailout. The team believe a swift response from the US government
this time could lead to a similar rally.
We recognize that a move to get less defensive still could be somewhat early
given the potential for concerns about the financial system and the economy to
linger. It will also be important to see how policy response evolves in coming
weeks to determine how much relief markets can anticipate. Overall economic
conditions may remain challenging as recession in the US appears probable. To
that end, sustainability of overall earnings growth may remain a concern as will
fears of a spreading global slowdown. These growth concerns could be most
acute in Europe and Emerging markets, where growth expectations have been
more stable. Moreover, materials and energy stocks could be vulnerable if
demand concerns finally trump expectations for limited supply, driving prices
A broad recovery. Monetary and fiscal policy response
to financial and housing market troubles has been
aggressive and more action is likely, though details of
further steps are still lacking. Combined with good
valuations and low interest rates, we believe conditions
are in place to see a decline in risk premiums that drives
valuations higher and results in a more sustainable rally.
Downgrade the defensive sectors. We cut positions in
Consumer Staples and Healthcare, as a broad market
rally makes holdings of defensive sectors, where
valuations are not cheap, less attractive.
Upgrade financials and consumer discretionary. We
upgrade these sectors based on historical experience
that the sectors which led sharp market sell-offs also
tend to perform best in the recovery. Longer term these
sectors still have structural problems to work through
before they are likely to sustain longer-term out
Overweight positive fundamentals. We take our
biggest overweight positions where we think
fundamentals are most positive longer term. Non
financial corporates have restrained capex this cycle
and have clean balance sheets. In general, therefore, we
prefer exposure to sectors with exposure to business
spending rather than consumer spending.
A preference for the US over Europe. European
equities have more headwinds to overcome including
slowing GDP growth, larger earnings downgrades,
strong Euro, and reluctance of the ECB to cut rates.
Neutral Japan. On many metrics Japan looks to offer
value. Investor sentiment remains cautious however
waiting for a catalyst for improved performance.
GEM outperformance less likely. As performance has
lagged in the developed world GEM now trades at a
premium to the world and could suffer a pullback if
economic concerns begin to shift East. Moreover, there
has been little downgrade of earnings in GEM.
Large Cap, Growth. We maintain a preference for
both large over small caps and growth over value.
Low Debt. Move up in credit quality and prefer strong
balance sheets given the pressures highly indebted
companies face in tough credit markets.
Risks to the view
Challenges remain Much of the stemming of systemic
risk in the financial markets was predicated on a fiscal
policy response from the US government. If this fails
to materialise or the Fed disappoints with future
monetary measures, substantial uncertainty could return
to the capital markets.
March 19 (Bloomberg) -- U.S. stocks, which surged the most in five years yesterday, will likely continue their rally this year because the ``out of control'' Federal Reserve is cutting interest rates to save investment banks from collapse, investor Jim Rogers said.
The Fed's support is ``why we're having a big rally, but that's not going to solve the problem,'' Rogers, chairman of Rogers Holdings and co-founder of the Quantum Hedge Fund with George Soros, said during an interview with Bloomberg Television from Singapore. ``The system is terribly corroded.''
The central bank is helping securities firms while delaying and deepening a bear market and recession, said Rogers, who is betting against financial shares. The Fed cut its benchmark for overnight lending between banks yesterday, continuing the most aggressive series of reductions since the rate became an explicit policy target in the late 1980s.
The Standard & Poor's 500 Index jumped 4.2 percent yesterday, the most since October 2002. The index this week dropped as much as 19.7 percent from its October record, nearing the 20 percent threshold of a bear market, following $195 billion in bank losses from the collapse of the subprime-mortgage market.
No `Bullets Left'
``What are they going to do when it's down 30 percent or 40 percent or 50 percent?'' Rogers said. ``They're not going to have any bullets left. They're not going to be able to solve the problems at that point.''
Rogers, who predicted the start of the commodities rally in 1999, traveled the world by motorcycle and car in the 1990s researching investment ideas for his books, which include ``Adventure Capitalist'' and ``Hot Commodities.''
Rogers said he continues to short Citigroup Inc., Fannie Mae and investment banks via an exchange-traded fund tracking financial firms and increased his bearish bet last week. Short selling is the sale of borrowed stock in the hope of profiting by repurchasing the securities later at a lower price.
The Standard & Poor's 500 Financials Index, which surged 8.5 percent yesterday for the steepest advance since March 2000, closed at a five-year low on March 17.
Taiwan stocks are attractive, Rogers said. The nation's Taiex stock index has slumped 3.8 percent this year, trailing only Brazil and Argentina as the best-performing stock market among the world's 20 largest, according to Bloomberg data.
Rogers, whose commodities index has climbed more than fivefold since its inception in 1998, said raw materials are about halfway through their rally.
He also said the dollar, which has declined 15 percent against the euro in the past year, is likely to weaken further. The Fed should stop cutting rates, which would end that decline, Rogers said.
The Fed's mandate is ``to keep a sound currency, not to prop up Wall Street,'' said Rogers. He recommended selling the dollar in a Nov. 15 interview. The currency has fallen about 6.6 percent against the euro since then.
By Brian Sullivan and Michael Patterson
March 14 (Bloomberg) -- The decline in U.S. stocks is ``way overdone'' and the Dow Jones Industrial Average may rally 1,000 points, investor Barton Biggs said.
``We're in a financial panic,'' Biggs said during a telephone interview with Bloomberg Television from New York. ``We're setting up for a really big rally. I don't mean three or four hundred points on the Dow, I mean 1,000 points on the Dow. I don't know if we're going to get it next week or the week after. But this thing has gotten crazy and is overdone.''
Biggs, a former Morgan Stanley strategist who now runs the $1.5 billion hedge fund Traxis Partners LLC, said stock markets from Germany to Hong Kong may bottom out soon after tumbling this year. Biggs's prediction in March 2007 that U.S. stocks were near a low preceded a 16 percent rally in the Dow average during the next four months. His forecast that the Dow would climb as much as 19 percent in 2007 overshot its actual gain by almost 13 percentage points.
``We're at a really crucial point,'' Biggs said. ``This is a time to be buying stocks around the world and not to be selling them.''
The Dow average has tumbled 16 percent to 11,951.09 since reaching a record in October after the subprime-mortgage market's collapse caused $195 billion in asset writedowns and credit losses at global financial firms including Citigroup Inc. and Bank of America Corp. A 1,000-point gain in the Dow from today's close would amount to an 8.4 percent rise.
U.S. stocks plunged today for the third time this week, sending the Dow average down 1.6 percent, after Bear Stearns Cos. required a bailout from the Federal Reserve and JPMorgan Chase & Co. to avoid collapse.
``Yeah, it's scary. It's always scary at bottoms. But I don't believe the economy is collapsing,'' Biggs said. ``This is not the end of the world.''
A friend sent me an email below, which I think will put things in perspective.
To tell of their good qualities is the practice of bodhisattvas (heroic beings)."
I just signed an urgent petition calling on the Chinese government to respect human rights in Tibet and engage in meaningful dialogue with the Dalai Lama. This is really important, and I thought you might want to take action:
After nearly 50 years of Chinese rule, the Tibetans are sending out a global cry for change. But violence is spreading across Tibet and neighbouring regions, and the Chinese regime is right now considering a choice between increasing brutality or dialogue, that could determine the future of Tibet and China.
We can affect this historic choice. China does care about its international reputation. Its economy is totally dependent on "Made in China" exports that we all buy, and it is keen to make the Olympics in Beijing this summer a celebration of a new China that is a respected world power.
President Hu needs to hear that 'Brand China' and the Olympics can succeed only if he makes the right choice. But it will take an avalanche of global people power to get his attention. Click below to join me and sign a petition to President Hu calling for restraint in Tibet and dialogue with the Dalai Lama -- and tell absolutely everyone you can right away. The petition is organized by Avaaz, and they are urgently aiming to reach 1 million signatures to deliver directly to Chinese officials:
Thank you so much for your help!
Tuesday, 18 March 2008
lies in the symmetries in markets, reports GENEVIEVE CUA
MAKING forecasts is a tricky business, as many analysts and fund managers will tell you,
but it does not faze technical analyst David Bensimon.
Some of his calls on the markets have been so precise that on one of his
speaking engagements, it spurred an impromptu bidding war among some in the audience for
an on-the-spot copy of his award winning tome on markets, Polar Perspectives.
Mr Bensimon: Asia is in for a prosperity-driven inflationary era
One of the bidders paid for his copy with a gold coin. Worth about US$700
then in November, it was about equal to the price of the book. But the coin
has since appreciated, as Mr Bensimon notes with amusement.
The book last year won a gold medal as the 'best book in finance/
investment/economics' at New York's annual independent publishers awards.
Mr Bensimon's fundamental view is that most of the world - Asia in
particular - is in for a 'prosperity-driven inflationary era' over the next
few years, notwithstanding the jitters over the credit crisis. His
long-term view, for instance, is that the Straits Times Index (STI) will
hit 9,000 and the Hang Seng Index 100,000 by 2012; and gold will climb to
US$2,600 an ounce by 2014.
He has set up a fund to invest according to the themes of his book. One of
his first investors is Stephen Riady of the Lippo Group.
His forecasts may sound quite incredible, until you learn of his near-term
calls on markets which have turned out uncannily right. Last October, for
instance, he told an audience in Singapore that the STI would fall 15 per
cent from its level of 3,900 then to 3,300 shortly. The index fell from
3,906 to 3,306 within six weeks of his call. In The Business Times in
August, Executive Money quoted him as saying that the STI would fall to
2,800; the index was then at 3,300. It fell to a low of 2,866 in January.
The principle behind Mr Bensimon's calls lies in the proportionalities and
symmetries in markets, which he sees as functions of 'phi', also called the
'golden mean'. This is expressed in the number 1.618 and its inverse 0.618.
As he sees it, these symmetries permeate markets, and this is evident in
the scale of market rises and even in the pattern of retracements across
time. His calls have gained a following among banks, traders, hedge funds
and private individuals.
The outcome of a forecast, he says, is not cast in stone but is based on
probabilities. 'The power comes not from saying that markets will do this
or that. It comes from recognising that different alternatives can unfold,'
he says. 'The benefit is not to say the market might go up or down, that's
not of value to anyone. The value comes from being able to say that if the
market chooses this northward path, it will go this far and no more. If it
takes the southward path, it will go this far to a target.
'My speciality is to provide clients with a magnitude of duration and time,
of price and specific levels and dates . . . March does provide a broad
turning point that crosses different markets, not just the STI or equities
but across a spectrum.'
He believes the STI, currently trading at the 3,077 level, could still face
yet another downdraft. It needs to exceed 3,300, he says, to confirm that
it is out of the woods. Until then, there is a 'distinct risk' that it
could fall another 15 per cent to 2550, which will be a buying opportunity.
'In Singapore if we break the 2,850 level, the next level down is 2,550
which seems a little far and rather cheap. But these motions are driven by
panic and over-extension on the downside. But I'd be happy to invest
anywhere from 2,800 to 2,600 because at those levels, it's really very
He said: 'One of the benefits of looking at the very big picture history is
that it provides a degree of comfort and confidence that when we are in a
corrective mode, instead of being worried and panicking, we can be
comfortable that we know what the rhythm is and can recognise the
relationships. We know we'll get to the ultimate target of 8,800 or higher
several years from now, and there are natural levels to re-enter the
His view is that Asian markets - Australia, Shanghai, Singapore and in
particular, Hong Kong - will move in synch upwards. 'Asia will benefit from
the huge fundamental growth and prosperity sweeping across
the region, that is not in any way harmed by the slowdown in the US.
Asia now has enough internal demand and intra-Asian trade
and infrastructure and consumer spending that it has a life of its own.'
He notes that historically, in past US recessions, the stock market has
anticipated a recovery and rises well before the recession ends. 'There is
no impediment to have markets bottom in March, and have them recover
sharply even if a recession technically continues in the next few months.'
His views on oil and gold are positive but not equally so. He expects oil
to reach US$125 a barrel this year and to move sideways for two years.
'We're still en route to US$125, but the big story is that once we reach
US$125, everyone will scream that we're on the way to US$200
and that's not what's going to happen. '
The catch, too, is that consumer prices will not be adjusted downwards
during the consolidation period. 'The margins for products will be fabulous
and will power the stock market to much higher levels because the reduction of the oil price
will translate directly into the bottom line for
corporates in the industrial and financial sectors, telecom and blue chips.
They'll all be lifted by prosperity.'
He is bullish on gold in the long term but expects some consolidation this
year before it moves to US$1,030 an ounce in 2009, and eventually US$1,220 in 2010.
But the most rapid rise is expected between 2011 and 2014 when he expects the price to hit US$2,600.
by Ben Stein
Let me be the first to agree: The finance news lately is bad.
The collapse of venerable firm Bear Stearns in the past few days has been dazzling. The company was supposed to be worth a bare minimum of $80 per share. It turns out to have been worth one-fortieth of that -- a catastrophe for its employees, whose fortunes lay largely in Bear's stock (a super-good lesson in diversification for everyone).
That a business with a stellar reputation for measuring risk got it so wrong is a bad augury for other Wall Street firms. It turns out that the Street has been run largely as a gigantic casino, only a casino in which the house could lose big.
Waiting for the Other Shoe
Obviously, we're all wondering when the next shoe will drop, or if there will be another one at all.
In this environment, bank lending is curtailed and the legitimate work of Wall Street -- financing business investment -- slows down drastically. This, and not the collapse of Bear, is what will hurt the economy, and affect stock prices in the long run (or the medium run).
There's also an endless torrent of bad news about the falling dollar. Seven years of wild mismanagement of the federal budget by the Bush administration are coming home to roost. Bush, for whom I voted twice, inherited a giant surplus, and turned it into a giant deficit by his greatly excessive tax cuts. The need to finance the deficit has made the United States into the world's beggar, going from door to door with a tin cup.
A Perfect Storm
The need to finance the staggering trade deficit is even more horrific. We borrow close to $1.6 billion a day to feed our cars and air conditioners. These two deficits have simply demolished the value of the dollar. This has led to a self-reinforcing cycle in which oil states demand more dollars to offset the falling dollar and we need to borrow more to pay for those higher prices; this in turn leads to a still lower dollar, higher oil, and on and on.
Then there's the housing correction. Housing prices are falling in every part of the nation except Manhattan, and you can be sure Manhattan will join the ranks as soon as bankers lose their jobs. Homeowners get a bit discouraged when their homes fall in value, and this keeps them from buying at the local department store, which slows down the economy, too.
In other words, there is what some might cal la "perfect storm" of bad news on the economy.
However, as your oldest columnist, let me give you a few words of encouragement:
First, when recessions are building and when economic activity slows, the landscape always looks uniquely bleak. Commentators always say, "This time it's different and this time it's going to be another Great Depression." It isn't going to be another Great Depression, not by a long shot.
The Great Depression was caused by a Federal Reserve deliberately trying to slow down the economy and drastically overshooting its mark over and over again. This time, the Fed is actively stimulating the economy and flooding it with liquidity. To be sure, this effect is damped by the dim mood on Wall Street, but it always eventually gets traction and money starts to spread throughout society.
Unless the Fed is actively seeking to crimp economic activity -- as it did in the late 1970s and early 1980s, when we had the worst postwar recession -- there will not be a genuine depression. There could be a recession and there probably will be, but a real depression, with long-term unemployment over 15 percent, is a most unlikely prospect with a pro-expansion Fed.
Expansion on the Horizon
True, there are those immense federal budget deficits, which undeniably create havoc with our long-term dollar valuation and also create inflation. But in the short-run they're stimulative. They basically borrow from our grandchildren to buy goods and services today, and this is good for us right now.
So to have a serious downturn with a super-stimulative Fed and stimulative fiscal policy would be extremely rare.
Wall Street will suffer, and it will drag down the innocent as well as the guilty for a time. But eventually, the Fed moves will ease the pain for everyone, and people will once again start making money by lending money. Commodities will be a problem, too, but they always move in cycles. This one will come down, too, although it may take a very long time.
Finally, the immense surpluses that the far Eastern states and the petro states generate have to be invested here. There's simply no other market large enough to absorb them, and that, too, will be expansive.
Buy Now, Reap Later
In a word, this is going to be a rocky time for a while. Good people will suffer. But we'll get through it, and there will be no Great Depression in the foreseeable future.
If you have a good, long time horizon, it's time to buy European stocks, emerging markets, even our own market. But don't let yourself get short of liquidity. If you have a few years of cash and bonds on hand, get some stock now while there's blood in the streets. The good times will come back when you least expect them.
by Paul Merriman
Ten ways to crash-proof your investments
Everybody's a genius in a bull market, the old saying goes. But a bear market creates fear, uncertainty and costly mistakes.
The conventional definition of a bear market is a decline in stock prices of 20% or more, lasting at least two months. As markets have become more diverse, experts have developed other measures, too. Whether or not Wall Street is in a bear market, every investor can have his or her personal bear too. Your personal bear market is an unbearable price fall in the value of your nest egg.
You can experience two types of bear markets, temporary and permanent. Markets tend to go up and down and then back up. In a temporary bear market, you lose 20% or more but eventually recover. In a permanent bear market, you lose 20% or more and you never get it back. All the historical evidence I've seen indicates that a properly diversified portfolio has never suffered a permanent bear market. Unfortunately, some common investor behaviors can easily turn temporary losses into permanent ones.
Here are 10 ways to avoid permanent losses and crash-proof your portfolio:
1. Diversify among many stocks
If all your money is in Washington Mutual (WM) shares, you're hurting because of the sub-prime mortgage mess. Microsoft (MSFT) shares are still worth less than half their value at the start of 2000. If you own a diversified portfolio, you're unlikely to suffer that kind of pain. Own thousands of stocks via mutual funds.
2. Diversify across many sectors
Financial services and homebuilders are doing poorly now. Yet energy, natural resources and export-intensive industries that benefit from a weak dollar are holding up better. Own the Standard & Poor's 500 Index (SPX), and you're invested in energy, industrials, information technology, consumer products, healthcare, telecommunications and much more.
3. Spread your portfolio among different asset classes
Be sure to look beyond the S&P 500 to achieve this goal. Examples include value, small-cap, large-cap and growth. Every asset class we recommend has a long-term history of success. They have made money despite plenty of temporary losses.
4. Spread your investments geographically
I'm not talking about country funds. The answer is not to put some of your money in Brazil, a little in India and some more in Germany. The answer is to diversify throughout the world. International index funds are the best way to do this.
5. Don't forget fixed income
Even with all this diversification, you still need some fixed-income investments such as bond funds. Don't expose your entire portfolio to the stock market. Fixed-income funds can be a great stabilizer. Just how much fixed income you need depends on your circumstances, and figuring this out is worth spending some time with a good financial advisor. Further reading: "Fine tuning your asset allocation."
6. Consider a mechanical defensive strategy to limit losses
Active risk management isn't for everyone, but it is possible to follow systems that let you invest in an asset when its price is rising and switch to cash when its price is falling, without your having to make any forecasts. Every day that your money is in cash is a day you're not exposed to a possible bear market. Don't do this without a firm discipline. You're asking for big trouble if you base your moves on your emotions or your own judgments about the market.
7. Avoid paying unnecessary expenses
If you neglect this, you can lose a lot of money and have no way to gain it back. In fact, you can lose more than you invest in the first place. Here's an example from our investment workshop, "Live it Up Without Outliving Your Money:" A 25-year-old who invests $5,000 a year in equities and earns 12% will wind up with $3.8 million after 40 years. But if that same investor neglects to pay attention to expenses and lets the return fall to 10%, the account will be worth only $2.2 million in 40 years. The difference, $1.6 million, is eight times the total dollars that the investor saved for 40 years.
8. Avoid paying unnecessary taxes
In an actively managed fund, the fund manager decides when to sell and incur capital gains liability that will impact your tax bill. Choose funds in which the management pays attention to limiting your tax liability. Avoid funds that churn their portfolios, buying shares for short-term gains that can hurt you at tax time.
9. Don't panic
Selling an investment after it's taken a big hit can leave you with a permanent loss. If it rebounds, which it probably will, you won't be there to benefit.
10. You can't outwit the bear by avoiding all risk
One of the worst bears in the forest is inflation, and it can be especially painful for the most risk-averse investors. If you want to hang onto cash in an environment of 3% inflation, you are almost certain to lose purchasing power over the long run. Even staying exclusively in Treasuries or other fixed-income securities can't overcome the combination of taxes and inflation.
Crashes happen and so do those nasty bear markets. But every investor can limit the damage by following these guidelines. Be patient. And if you have trouble keeping track of all these things, a good professional advisor can help you.
Mr Anoop Singh, IMF director for the Western Hemisphere Department, including the US and Latin America, cited a high likelihood of a US recession and said he sees losses from the US subprime mortgage market crisis resulting in widening losses for European banks.
'This is clearly a period of exceptional uncertainty,' Mr Singh told a conference in Brazil on Monday. A copy of his speech was made available in Washington.
'The distribution of risks for the US outlook is wide and skewed clearly toward the downside, and the probability of additional shocks leading to a US recession is quite high,' he said.
'All in all, current estimates suggest that the global financial system could be facing losses of close to US$800 billion spread across banks, insurance companies, hedge funds and pension funds, although some analysts are projecting much higher losses,' he said.
Mr Singh said the US housing crisis was starting to spread beyond the subprime mortgage market to other real estate areas.
He said the US housing crisis was the 'ground zero' for the current financial market turmoil, with an asset price bubble in the process of deflating, adding that it will likely be 'a protracted process'.
'We know from past experiences that output effects from housing price bursts last about twice as long as those from, say, a bursting equity price bubble,' he said.
Broader implicationsThere is growing concern that housing prices abroad - many of which have been grew even more than US prices - might 'deflate abruptly', with potential financial implications, Mr Singh said.
'At this point, we expect banks' subprime-related losses to mount further to around US$230 billion worldwide, with about half of that amount residing in the US banking system and the remainder mostly in Europe,' he said.
An additional US$100 billion in losses may arise from bank holdings of other financial assets, including commercial mortgages and credit card debts, he said.
'However, losses could mount much further as an economic downturn brings with it a widening deterioration of credit across a broad range of household and corporate credit,' Mr Singh said.
He spoke a day after the US Federal Reserve announced emergency measures to stem the fast-spreading credit market seizure, pouring funds into cash-starved Wall Street firms.
The Fed cut the discount rate it charges on direct loans to banks to 3.25 per cent from 3.50 per cent and set up a new programme to provide cash to a wider range of big financial firms previously unable to borrow directly from the central bank. -- REUTERS
Monday, 17 March 2008
This is going to be a bit controversial. Bear in mind that I often make mistakes and could be wrong about some of this, but it's all food for thought.
First of all, markets are made up of human beings, and human beings can be irrational. They can be irrational on the upside, they can be irrational on the downside.
We saw "irrational exuberance" in the late 1990s, and it led to a crash. I believe we're now seeing highly irrational pessimism in the markets, especially the credit markets. The gloom comes from the bad results that banks and other lenders got when they loaned money on mortgage obligations in the form of. These instruments were never meant to be as safe as AAA bonds, but they were thought to be much safer than they turned out to be.
Beware of Cold Stoves
There have indeed been major defaults in mortgages. Just as important, there's been wild speculation on indexes tied to mortgages, and this speculation by itself has led to immense losses in mortgage-linked investments. To a large extent, these losses will be recovered when the subject properties are sold and when speculation goes to the long side. But for now, national and local banks are sitting on big losses.
This has scared them about lending on anything at all. It shouldn't, but it does. It's sort of like the old saw about the cat: Forever after jumping on a hot stove, it'll be scared of hot stoves. But it'll also be scared of cold stoves.
Fear Working Overtime
So, lenders are terrified of loans even to very sound borrowers. Just to give an example, banks are scared of lending even onbonds -- even though these bonds are backed by the federal government and can't default by any likely standard.
This reluctance to lend is causing a credit crunch, and this is terrifying markets and newspapers everywhere. This fear has knocked down the Dow by over 2,000 points from its October high. It's led to strong fears of a recession and to a slowdown in hiring and investment as businesses cut back their borrowing and spending.
By this point, the banks and bankers are terrified that they'll be fired if they make bad loans, and that if by some lightning strike of improbability their loans to good borrowers fail, they'll see their banks fail altogether. Again, that's irrational human fear at work.
The problem is that even irrational fear can have real consequences, and can indeed cause a serious recession -- even if the actual losses in mortgages aren't large enough to cause one by themselves. In fact, that's what's happening right now.
Let the Healing Begin
So what to do? First, bear in mind that irrational markets eventually get a taste of reason. Also bear in mind that, assays, markets are at first a voting machine, but always eventually become a weighing machine. Reality will triumph, and the credit markets will get their act together, loans will start to be made, and credit will begin to flow.
But why not get the healing process started today instead of waiting for a bad recession? Why doesn't Mr. Bernanke call in the big bankers and tell them he'll make sure none of them fails? Why not tell them the Fed will always be there to bail them out and recapitalize them if need be? Why not stop solvency-risk fears today? Why wait until another day? Why wait until a million or 2 million more people lose their jobs or homes or both?
Further, why not tell the banks that a condition for recapitalizing them is much stricter regulation about lending policies -- not lending against bad collateral, not lending to borrowers with no credit history? Why not also impose rules about executive compensation to keep top brass from looting their own stockholders even as they kill their own companies?
Regulation to the Rescue
It's a myth that all regulation is bad. In banking, regulation saves greedy, foolish people from killing their own banks and the economy in general. Let's save the banks, save the economy, and lay the foundation for a smarter tomorrow -- starting today.
And then let's investigate what role speculation by hedge funds against the credit markets has played in our current problems. Some killers have made a bundle out of our troubles; let's find out exactly what they did. It's going to be a scary story, but that's fear for another day.
An inspiring speech by Steve Jobs relating his personal career and life challenges of the extremes.
This is the text of the Commencement address by Steve Jobs, CEO of Apple Computer and of Pixar Animation Studios, delivered on June 12, 2005.
I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories.
The first story is about connecting the dots.
I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?
It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his
wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had
never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college.
And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my
life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty cary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting.
It wasn't all romantic. I didn't have a dorm room, so I slept on the floor in friends' rooms, I returned coke bottles for the 5?deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to
be priceless later on. Let me give you one example:
Reed Collegeat that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif
typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can't capture, and I found it fascinating.
None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped
in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, its likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do. Of course it was impossible to connect the dots looking forward when I was in
college. But it was very, very clear looking backwards ten years later.
Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something - your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.
My second story is about love and loss.
I was lucky ? I found what I loved to do early in life. Woz and I started Apple in my parents garage when I was 20. We worked hard, and in 10 years Apple had grown from just the two of us in a garage into a $2 billion company with over 4000 employees. We had just released our finest creation - the Macintosh - a year earlier, and I had just turned 30. And then I got fired. How can you get fired from a company you started? Well, as Apple grew we hired someone who I thought was very talented to run the company with me, and for the first year or so things went well. But then our visions of the future began to diverge and eventually we had a falling out. When we did, our Board of Directors sided with him. So at 30 I was out. And very publicly out. What had been the focus of my entire adult life was gone, and it was devastating.
I really didn't know what to do for a few months. I felt that I had let the previous generation of entrepreneurs down - that I had dropped the baton as it was being passed to me. I met with David Packard and Bob Noyce and tried to apologize for screwing up so badly. I was a very public failure, and I even thought about running away from the valley. But something slowly began to dawn on me ? I still loved what I did. The turn of events at Apple had not changed that one bit. I had been rejected, but I was still in love. And so I decided to start over.
I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative
periods of my life.
During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I retuned to
Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together.
I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith. I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If
you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle.
My third story is about death.
When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.
Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything ? all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.
About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.
I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it
turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.
This was the closest I've been to facing death, and I hope its the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept:
No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.
Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart
and intuition. They somehow already know what you truly want to become. Everything else is secondary.
When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.
Stewart and his team put out several issues of The Whole Earth Catalog, and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you.
Stay Hungry. Stay Foolish.
Thank you all very much.
Sunday, 16 March 2008
When stocks are falling, take these steps. They'll keep you from doing things you'll be sorry for later.
1. Paste this to your computer
Had you invested in an S&P 500 index fund in August 1997 and sat tight for 10 years, you'd have racked up an 88% return. Had you missed just the 20 best days in the market over that period, you would have had a 20% loss, according to Chicago's Altair Advisers. Moral: Stock returns come in bursts. Step out of the market, even temporarily, and you may miss the whole point of owning stocks.
2. Get your emotions out of the picture
Invest via an automatic plan that moves money into mutual funds every month. Then have your portfolio rebalanced automatically - lifestyle or target-date retirement funds can do the job. Some 401(k) plans offer a rebalancing service.
3. Focus on what you can control
That would be costs. Assuming an 8% annual return, if you invest in an actively managed fund with a 1.5% expense ratio vs. an index fund that charges 0.2% you'll give up almost 20% of your profits.
4. Give yourself a taste of power
Set aside 5% or so of your portfolio as mad money in which you're free to deviate from your long-term plan. That way you can indulge hunches and gut feelings without harming yourself too much.
5. Seek professional help
If you move money around every time the Dow drops 200 points, hire a financial planner. Yes, your expenses will go up. But if that keeps you in the market, it'll be well worth it.