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Sunday, 30 August 2009

Property 101: prices can go down

Judging from the brisk sales at launches, it appears many Singaporeans have jumped on the runaway property bandwagon.

But before you get caught up in the sales pitches and showroom euphoria of property agents cheering as each unit is sold, industry players warn that you should step back, take a breath and think twice.

This, they say applies to both HDB upgraders as well as those looking for a second property to spruce up their financial portfolio. Here are a few pointers that ought to be at the back of your mind.

1. Do your sums

It may sound obvious but it is often forgotten. Consider upgrading only if there have been significant changes in your credit profile, say, a pay rise and if your appreciating assets are holding up, said PropNex chief Mohamed Ismail.

If you’re upgrading from HDB, think about your net proceeds and what you can put into a new property to reduce your loan. Work out how much you need to pay each month. Be prudent and do not over-leverage. Consider the repayment period. Banks typically limit loan repayments to about 40 per cent of your gross monthly income.

Make sure you factor in other debts, expenses and what you need to save.

“Buy a property that will not overstretch your finances while maintaining a lifestyle of your desire,” Mr Ismail said.

Choose your home loan carefully. Interest absorption schemes may seem attractive but you may typically end up paying 2-3 per cent more for the entire property.

If you plan to rent out the property, your monthly rental should ideally cover your mortgage instalments.

2. Location, location, location

As an owner-occupier, you should think about transport options. If you’re an average HDB dweller, you would do well to choose a property near an MRT station, said Mr Chris Koh, director at Dennis Wee Group.

If you’re looking for capital gains or renting out the property, proximity to a MRT station is even more important as tenants (the foreign ones in particular) are looking for convenient public transport options to take them round the island.

Also check out which direction the unit is facing and the project’s surroundings.

3. Maintenance and other BILLS

Consider how much you will need to furnish or renovate the new apartment, advised Dennis Wee Group’s Mr Koh. Also factor in maintenance charges each month – how much more you will be paying for service and conservancy, parking and other charges.

4. Plan your interim options

Your HDB property may fetch a tidy sum now, but what about in two years when your private property obtains its Temporary Occupation Permit. Unless you intend to keep your HDB flat for rental, you should consider whether you to sell now or later.

If you choose to sell now, you need to think about where you will live in the meantime and the costs you will incur.

5. Be mentally prepared

Be aware that property prices fluctuate and prices may not return to the level at which you bought the property.

“If you can sleep through that, have really no regrets, you like the property and lifestyle, then well and good,” said Ngee Ann Polytechnic real estate lecturer, Nicholas Mak. “But don’t put everything into a private property thinking that prices will only go in one direction – up.”

Saturday, 29 August 2009

Bursting the bubble rumours

OVERNIGHT queues, balloting, midnight crowds – these dramatic scenes at the Optima condominium at Tanah Merah recently were precursors to the 270 apartments selling out in three days, and fuelling concerns that a property bubble may be brewing in Singapore.

Industry players have largely shrugged off such concerns – attributing the recent property effervescence to pent-up demand, peak public housing prices, excess liquidity and a growing population.

However, Today’s checks on the ground reveal a less simplistic picture – one with buyers signing on the dotted line without even viewing the showflats, buyers asking agents to sell a property right after purchase; and irrational decisions.

While these instances are, by and large, uncommon, their very existence is proof of unhealthy streaks in the market.

The buyers (speculators included), said agents, are split between those who already own HDB flats and those who are holding onto private property.

“They typically have fully paid up the mortgages on their HDB flats and … intend to move into the condominium and rent out their HDB flats,” said an ERA agent.

While the above seem to be the scenario for mass-market projects like the Optima and also the upcoming Trevista at Toa Payoh, smaller projects like the 127-unit Mezzo have seen “flippers” – those who buy a property, only to sell it quickly for a quick profit – walking right through its doors.

“Some buyers would tell me to release the apartments in the subsale market right after buying,” said an HSR agent.

Mr Patrick Liew, chief executive of HSR property group, told Today that unlike the property booms of the past, the speculators have a different profile this time round. He estimated that just about 5 per cent of buyers in projects his company is marketing are “flipping”.

“In the past, we saw major players coming in, market makers for example who have money and can buy many units,” said Mr Liew.

“Now we are not seeing that. People are coming in to buy one unit, they are your PMEB (professionals, managers, engineers, businessemen) type of characters, not the taxi driver who stopped work just to buy property like in 1996.”

A quick tour by Today of several show flats reveal that typical prospective buyers are your everyday mums and dads who are apartment-shopping with family members in tow.

Typically, they are not looking to buy and sell immediately, and are buying one more property with the aim of enhancing their investment portfolio.

“These people have holding power so we are not seeing a bubble at this point,” said Mr Donald Han, managing director of Cushman and Wakefield Singapore.

But these regular buyers will not hesitate to sell if the price is right – at anytime.

Take a businessmen in his 30s whom Today met at one of show flats. The man, who declined to be named, lives in an HDB flat in Queenstown but is a seasoned property player, albeit a small-time one.

He is currently shopping for his third private apartment – after making a “tidy profit” in his 2005 property purchase which he sold during the subsequent property boom.

Still, amid upbeat sentiments currently, mortgage consultant Dennis Ng warned of buyers who are biting off more than they can chew.

In fact, he has advised a few clients not to take up home loans and to sell off the property instead if it is clear that they would be stretching themselves too thin to pay off the loan.

Mr Ng added that many first-time investors who are HDB flat owners need to do their sums better and think of the downside risks before joining the current property exuberance.

“Some of the new condominiums do not offer good value for money and experienced investors will not touch them.

“If you’re looking for rental yields, comparable resale prices in the same area can be 10 to 20 per cent less and you can start leasing immediately,” Mr Ng said.

Source : Today – 26 Aug 2009

Sentiment, not liquidity, driving asset prices: C Suisse

THE recent sharp rebound in asset prices in Asia is not due to loose monetary conditions or a deluge of foreign capital, a senior economist at Credit Suisse says in a report.

Rather, improving sentiment among investors is likely the main driving force behind the recent run-up in equity and property prices, according to Credit Suisse economist Cem Karacadag.

In a separate report, Citigroup’s Singapore equity strategist Chua Hak Bin says he now believes the Straits Times Index could reach 3,000 points by the end of March next year, buoyed by better economic data in the next few months.

‘This economic recovery will continue to look V-shaped in coming months, as third-quarter gross domestic product and job growth continue to show a definite improvement,’ he says.

In his report, Credit Suisse’s Mr Karacadag refutes the ‘prevailing wisdom’ that the recent rally in equity and property prices is due to too much liquidity caused by central banks trying to keep interest rates low and local currencies cheap to support economic growth.

‘It has become fashionable to argue that Asia’s monetary conditions are too loose and that too much domestic liquidity is creating asset price bubbles,’ he says.

In fact, the monetary policy of central banks throughout Asia is accommodative ‘for good reason – domestic and external demand is still fragile and money and credit growth are still sluggish, with the notable exception of China’.

Also, ‘if central banks were printing money and increasing domestic liquidity, we would see it in reserve money, the part of money supply that central banks directly control’. Instead, reserve money balances in Asia have been stable or slowing in recent months, Mr Karacadag says.

Liquidity – which he defines as the amount of funds available for lending by domestic banks – has been abundant across the region for years, so it is unlikely to be behind the recent surge in asset prices, he says.

Low credit demand and growth may explain the build-up of liquidity in the banking systems of many Asian countries in recent years, Mr Karacadag says. ‘In effect, domestic liquidity was there for the taking, but it was not wanted.’

Sentiment probably had a lot more to do with lifting property prices so quickly in Hong Kong and Singapore than liquidity. ‘Credit – which has been cheap for a while – was a necessary condition, but it wasn’t until sentiment recovered that things moved.’

Source : Business Times – 28 Aug 2009

Examining the Link Between Gender and Finance

Laura Rowley

Crystal and Harry Gettings have spent months hunting for an investment property in their native Orlando, where foreclosures abound. Harry, 26, works in his family's production company and recording studio. Crystal, 24, is a public relations executive. They shun debt, stash their savings and discuss their goals and progress every other Saturday over breakfast.

"He's interested in investing and stocks and learning more about the strategies that go along with that, whereas I'm interested in saving money on a day-to-day basis and taking care of the bills," says Crystal. "Harry's more of a risk-taker, and I'm a little more reluctant. I want to make sure it's the right thing."

Research suggests women tend to be like Crystal -- more risk-averse in their financial decisions. But a new study argues that gender is not the issue. Researchers at Northwestern and the University of Chicago found women who have higher-than-average levels of testosterone are just as willing as men to take risks, at least when it comes to their jobs.

"Higher-testosterone women are more prone to take risk, and this attitude is correlated with riskier career choices," says Paola Sapienza, associate professor at Northwestern's Kellogg School of Management and co-author of the study with Luigi Zingales of the University of Chicago. The paper will appear in a forthcoming issue of Economic Sciences.

Testosterone is a male sex hormone found in both men and women, but in higher levels among men. It's been linked to aggression, fearlessness, competitiveness and rule-breaking (some prison inmates have higher levels of testosterone and end up behind bars because they're more disposed to breaking the law).

Willingness to Gamble

Sapienza and Zingales were initially intrigued by the pay gap between the genders. Data shows just 36 percent of female students who receive a master's in business administration (MBA) at Northwestern and University of Chicago choose a riskier career path like investment banking or trading -- versus 57 percent of their male classmates. Ten years after leaving school, MBA grads working in finance earn an average of 2.8 times their fellow alums. But they're also much more likely to be unemployed.

"There is a large literature in finance and economics that highlights gender differences in attitude toward risk, and for economists this is quite important because it may in principle lead to higher rewards," says Sapienza. "So the gender gap in salaries at some level could be linked to preferences for riskier careers. That was our starting point -- would an (appetite for risk) extend to preference for certain jobs?"

In the study, more than 400 MBA students at the University of Chicago played a series of computer games, in which they were asked 15 different times to choose between a guaranteed dollar amount (ranging from $50 in the first choice to $120 in the 15th choice) and a lottery that paid either $200 or zero with equal probability. They were rewarded according to their decision (and the lottery drawn) in that choice.

Extremely risk-averse people always choose the sure thing, while extreme risk-takers readily take the gamble. As the guaranteed amount rises, the participant should cross over from the lottery to the certain payoff. The bigger the risk-taker, the longer they'll wait to switch over, more willing to risk it all for a bigger prize. The researchers took saliva samples at the beginning and end of the test to measure hormone levels.

Two years after the study, the researchers collected data on accepted job offers at graduation. Individuals with equally high testosterone levels demonstrated the same level of risk-taking. "It was not an issue of their gender," says Sapienza, adding that high-testosterone women were nearly seven times more likely to take risks than females with lower hormone levels. (The 90 percent of women and 31 percent of men with low testosterone levels were equal in their risk-aversion.)

Meanwhile, higher salaries tend to translate into higher confidence levels, regardless of gender. Consider two recent surveys of affluent and middle-income women. Financial Finesse, a firm hired by employers to provide workers with personal finance education, found just 40 percent of women respondents felt comfortable with their investing knowledge. They earned between $40,000 and $70,000. A separate survey by Citi's Women & Co. found 75 percent of women consider themselves knowledgeable about finance and investing; these respondents had $100,000 in investable assets.

Perception and Reality

Could testosterone play a role in how confidently (and perhaps, overconfidently) people report financial events? Consider Ohio State's Consumer Finance Monthly, which interviews 1,000 people, asking them to predict their future behavior and recall past actions.

For instance, people who used credit cards were asked if they "expect, plan, or do pay off the entire balance each month?" Sixty-one percent of men said yes, compared to 54 percent of women. They were also asked whether they had "either missed or were late with paying off at least the minimum balance." Some 13 percent of men reported said they had, compared with 16 percent of women.

But when asked if they had ever filed for bankruptcy -- a dramatic event that no one forgets -- the responses were much closer: 10 percent of men and 11 percent of women. "As we go down the list from future expectations to what really happened to you, there is a gap all the way through, and men either report better outcomes or expectations than women," says Jay Zagorsky, an Ohio State researcher. "But as you get more and more concrete, the gaps get smaller and smaller."

Financial Finesse has spied a similar trend. "We see anecdotally in our financial counseling that men think they know more than they do, and women know more than they think they do -- that's some of the gap," says Liz Davidson, CEO of Financial Finesse. "Also, men have usually picked up more financial education along the way."

Clearly nurture plays an important role in both earning power and investing prowess.

Lindsey Brown, a marketing director at a city tourism bureau in Texas, says her marriage is a case in point. "From a very young age my husband's grandma gave him Exxon stock for Christmas, where my dad taught me how to balance my checkbook but never taught me investing," she says. "My friend always tries to tell me things. She's very appalled by the facts I don't know."

And what does Brown's friend do for a living? Investment banker.

Tuesday, 25 August 2009

French: The Most Productive People In The World

Vincent Fernando and John Carney

A new survey from UBS has shown that the French continue to work the least amount of hours per year in the world. Once again, the French have blown away the competition.

People work an average of 1,902 hours per year in the surveyed cities but they work much longer in Asian and Middle Eastern cities... People in Lyon and Paris, by contrast, spend the least amount of time at work according to the global comparison: 1,582 and 1,594 hours per year respectively.

Upon seeing this data, some might criticize the French for being lazy, but that misses the point completely. The real message here is that the French are likely some of the most productive people in the entire world.

Think about it. Nationmaster ranks France as #18 in terms of GDP per capita, at $36,500 per person, yet France works much less than most developed nations. They achieve their high standard of living while working 16% less hours than the average world citizen, and almost 25% than their Asian peers as per UBS. Plus, if you visit France you'll also realize that their actual standard of living is probably much higher than GDP numbers would indicate.

Thus, if one were to divide France's GDP per capita by actual hours worked, you'd probably find that the French are achieving some of the highest returns on work-hours invested. Labor Alpha, if you will.

We can actually calculate this Labor Alpha using statistics from Nation Master.

France has $36,500 GDP/Capita and works 1,453 hours per year. This equates to a GDP/Capita/Hour of $25.10. Americans, on the other hand, have $44,150 GDP/Capita but work 1,792 hours per year. Thus Americans only achieve $24.60 of GDP/Capita/Hour.

This puts the French Labor Alpha at about $0.50 GDP/Capita/Hour over the US. It may sound small at first, but add that up across millions of people, and a few decades. Now you've built a lesson for the rest of the world to learn.

Winning is not about working hard. It's about working smart... and less. As the French know well.

Additional reporting by Kamelia Angelova.

Preparing for the Worst

by Robert Kiyosaki

"Is the crisis over?" is a question I am often asked. "Is the economy coming back?"
My reply is, "I don't think so. I would prepare for the worst."

Like most people, I wish for a better future for all of us. Life is better when people are working, happy, and spending money.

The stock market has been going up since March 9, 2009. Talk of "green shoots" fill the air. Yet, in spite of the more positive news, I continue to recommend that people prepare for the worst. The following are some of my reasons:

1. I believe the stock market is being manipulated. I suspect the government, banks, and Wall Street are doing everything they can to keep the market from crashing. Our leaders know that nothing makes the world feel better than a raging bull market.

Do I have any proof that the market is being manipulated? No. I just smell a rat, or a pack of rats. I believe greed, self-interest, arrogance, and fear control the financial markets. I suspect those in charge will do anything to keep us all from panicking... and I don't blame them. A global panic would be ugly and dangerous.

2. In my view, this global crisis has been caused by the Federal Reserve Bank, the U.S. Treasury, Wall Street, and the central banks of the world. They caused the problem, profited excessively in doing so, and now profit by being asked to fix the problem.

Every time I hear a politician mention the word stimulus, my mind flashes back to high school biology class, when I touched battery wires to a dead frog to make it twitch. Today, you and I are the dead frogs. Pretty soon the dead frog will be fried frog.

In the 1980s, our government's hot money stimulus was measured only in the millions of dollars. By the 1990s, the government had to ramp the stimulus voltage into the billions in order to get the frog to twitch. Today the frog has jumper cables with trillions in high-voltage hot money pouring through the lines.

While most us feel better when we have more high-voltage money in our hands, none of us feel good about higher taxes, increasing national debt, and rising inflation for the long term. Another old saying goes, "Sometimes the cure is worse than the disease." I say the government stimulus cure is killing us frogs.

3. Old frogs don't hop. Another reason I am cautious about the future is that the Western world has a growing number of old frogs. Between 1970 and 2000, the economy responded to bailouts and stimulus packages because the baby boomers of the world were entering their greatest earning years -- their purchasing power increased, and demand for homes, cars, refrigerators, computers, and TVs boosted the economy.

The stimulus plans seemed to work. But when a person turns 60, their spending habits change dramatically. They stop consuming and start conserving like a bear preparing for winter. The economy of the Western world is heading into winter. Hot wires and hot money will not get old frogs to hop. Old frogs will simply join the bears and stick that money in the bank as they prepare for the long, hard winter known as old age. The businesses that will do well in a winter economy are drug companies, hospitals, wheelchair manufacturers, and mortuaries.

4. The dying frog economy will lead us to the biggest Ponzi schemes of all: Social Security and Medicare. If we think this subprime financial crisis is big, it's my opinion that this crisis will be dwarfed by the crisis brewing in Social Security and Medicare...Medicare being the biggest crisis of all. As old frogs head for the big lily pad in the sky, they will demand young frogs spend even more in tax dollars just to keep old frogs from croaking.

5. The 401(k)Ponzi scheme. A Ponzi scheme, like the scheme Madoff ran, depends upon young money to pay off old money. In other words, a Ponzi scheme needs tadpoles to finance old frogs. The same is true for the 401(k) and other retirement plans to work. If young money does not come into the stock market, the old money cannot retire. One reason so many people my age are worried, not only about Social Security and Medicare, is because they're concerned about getting their money out of the stock market before the other old frogs decide to drain the swamp.

The facts are that the 401(k) plan has a trigger that requires old frogs to begin withdrawing their money at a certain age. In other words, as baby boomers grow older, more and more will be required, by law, to begin withdrawing their money from the market. You do not have to be a rocket scientist to know that it is hard for a market to keep going up when more and more people are getting out.

The reason the 401(k) has this law related to mandatory withdrawals is because the Federal government wants to collect the taxes that they deferred when the worker's money went into the plan. In other words, the taxman wants their pound of flesh. Since they allowed the worker to invest without paying taxes, the government wants their tax dollars when the employee retires. That is why the laws require older workers to sell their shares ¬-- and pay their pound of flesh.

Demographics show that we are entering a battle between young and old. I call it the "Age War." The young want to hang onto their money to grow their families, businesses, and wealth. The old want the tax and investment dollars of the young to sustain their old age.

This war is not is upon us now. This is one of many reasons why I remain cautious and say, "The worst is yet to come."

Monday, 24 August 2009

20 Lazy Ways to Save Money

Katie Adams

While the media can't decide if the recession is nearing its end or not, we do know that there hasn't been a tremendous surge in wages, job creation or the stock market. Consequently, most of us are staying pretty conservative on our spending. Here are a few relatively simple ways to keep an eye on your pennies while you're waiting for that brighter economic future to arrive.

1. Schedule automatic payments. Have (at least) your fixed monthly bills paid automatically to avoid missing a payment and having to fork over extra money for late fees and/or interest. You can set up auto pay features through your bank's online bill paying service or by arranging it directly with the company or service provider.

2. Eat your groceries. Did you know that Americans regularly throw away nearly 15% of the food they buy at the grocery store each year? That can add up to hundreds or, depending on your supermarket budget, thousands of dollars each year. Save money by actually eating what you buy. Not sure how? Bypass the bookstore and borrow a cookbook from the library!

3. Bundle services. If you're paying different vendors for similar services you may be overpaying. Call your communications providers to see what price you'll be quoted if you switch and bundle your internet, phone and cable TV services.

4. Pay off credit card. If you're not paying off your credit card balance each month you're paying interest and, for most Americans, it's a pretty steep rate. Pay it off and you could save a tidy sum by eliminating your interest charges.

5. Mark your calendar. Whenever you rent something - library books, videos, etc. – mark it on your calendar and save money by avoiding those quickly mounting late fees. Many stores and libraries also now offer email reminders to help the constantly harried so sign up for the extra help!

6. File your taxes on time. Or if you need to file an extension at least pay what you owe on the due date. You'll avoid annoying notices from the IRS and, more importantly, save on penalties, fees and interest.

7. Roll it over. If you're switching jobs and you can't leave your 401(k) invested with your current company, roll your 401(k) into either your new employer's 401(k) or an IRA within the 60-day window instead of withdrawing the money. By doing so you'll keep the money invested - and earning interest - and avoid those nasty taxes as well as the additional 10% penalty.

8. Switch credit cards. If you're carrying a balance on a high interest rate credit card check out other card issuers to see if you could transfer your balance to one with a lower interest rate and fewer fees. Use sites like or to compare card rates, and pay careful attention to how long those terms last so you don't wind up paying a higher rate and erasing any potential savings.

9. Use your privileges. Are you an AAA member? Do you belong to the AARP? What about your local credit union? Check organizations you have memberships with to see if they offer buying privileges or discounts.

10. Rent instead of buy. You might be excited to expand your driveway but don't let your enthusiasm overtake good sense. Hold off on buying that jackhammer and think before you spend on big-ticket items or items that you'll use once or infrequently (like movies and books).

11. Buy instead of rent. Don't pay the exorbitantly high prices charged by rent-a-center type stores for items you'll use regularly and keep long-term like computers, furniture and appliances.

12. Ask. That's right, just ask. You can't be paying any more than you currently are, so why not ask if you can get the interest rate lowered on your credit cards or loans? Also, ask for a discount on services like your wireless phone, trash removal or pet care instead of switching to another vendor, and of course ask "is that the best you can do" on any big ticket purchases like cars, appliances and furniture.

In a tight economy it might be worth the seller's while to cut the price instead of losing the sale, and you'll both benefit in the end!

13. Just say no. To the extended warranty that is. They hardly ever make financial sense. Weigh the repair or replacement cost (and if you would even need or want to repair or replace it down the road) against the cost of the warranty and graciously pass when offered.

14. Have the awkward conversation. Americans average more than $750 yearly on holiday gifts and that's probably much more than most would like to spend. If your gift-giving is costing you more than you can realistically afford there's a good chance it’s more than your relatives can afford (or would like to spend) as well. Take the plunge and broach the subject. Offer a more reasonable alternative (say, limit giving to children or put a dollar amount on gifts per person). More than likely your relatives will be grateful SOMEONE finally raised the subject and you’ll save money in the process.

15. Eat at home. If the idea of cooking for yourself seems like too much work at least opt for take-out instead of dining out - you'll save on the tip, the alcohol and most likely the cost for appetizers or dessert.

16. Balance your checkbook. It might take a few minutes but it's something you should be doing anyway and it can pay off huge dividends by helping you avoid bouncing a check and incurring steep overdraft fees (not to mention a little embarrassment)!

17. Stick with your bank. When withdrawing cash drive or walk the extra minute it takes to use your bank's ATM and avoid the fee that could come with another bank's machine. Better yet - switch to a bank that doesn't charge fees!

18. Use your TV. If you're paying for cable why not use all of it - and save some money in the process? Cancel the video membership and watch movies through cable movie packages you're already paying for or check out your free "on demand" shows. Drop the gym membership and work out at home to channels like FitTV, and bag the magazine subscriptions and watch the same shows (like Martha Stewart) on TV instead.

19. Quit those bad habits. Smoking, overeating and drinking are costly habits to maintain. Okay - this is the "lazy" way to save, not necessarily the easy way. But you can save boatloads of money in two ways by saying sayonara to your favorite vices: (1) You'll save money by cutting out on the regular spending it's costing you, and (2) you'll probably save on insurance premiums and long-term health costs. It's the ultimate win-win.

20. Forget the pet. Sure it sounds heartless but did you realize that welcoming home a little Fido can cost you an average of more than $1,500 a year - or $15,000 over 10 years? Feline fluffies are pricey too - just under $1,000 a year or approximately $9,000 for 10 years of care. Looking at the long-term picture, that's a new car or the down payment on a home! Keep walking right past that pet store and keep the money in your pocket instead.

The recession won't last forever, but in the meantime take advantage of these lazy ways to stay on track financially, and develop some pretty good money management habits for the future!

Sunday, 23 August 2009

World emerging from deep slump but can it last?

Recovery in Asia, Europe gain steam, but fueled by stimulus spending and may not hold

By Tom Raum, Associated Press Writer

WASHINGTON (AP) -- Turnabouts in European and Asian economies, along with recent gains in the U.S., are raising hopes that that the worldwide recession is drawing to a close. That's not to say the coast is clear.

The brightening outlook in Europe and Asia and the improvement in U.S. credit markets and indicators reflect heavy government stimulus spending. Many analysts question whether the top economies can sustain recoveries after stimulus measures and easy-credit policies have run their course -- and in the absence of significant new consumer spending, especially among Americans.

"It's not clear that these economies can continue to move forward without stimulus," said Mark Zandi, chief economist for Moody's "And that's in part why stock markets across the globe are nervous."

It will be difficult for other countries to pull out of recession until the U.S., still one quarter of the world economy, starts growing, he said.

After a frightening free-fall across Europe in late 2008, France and Germany, the continent's two largest economies, reported recently that they had grown slightly in the second quarter of 2009. Other major European countries reported they were still struggling, but with generally improved figures over late 2008 and earlier this year.

China, Japan, Hong Kong, Singapore and South Korea have also reported rebounds as government stimulus efforts across the globe have begun to show results.

Russia, among the hardest hit of major economies as oil prices slumped and many foreign investors fled the country, appeared to be stabilizing.

Meanwhile, in the United States, the Federal Reserve said the world's largest economy appeared to be "leveling out" and many economists see a second-half rebound.

It all adds up to an improving picture ahead of an economic summit next month in Pittsburgh of the world's top 20 industrial and developing economies.

It is the third such meeting of all the major economic players, after one convened by former President George W. Bush in November in Washington, and one held earlier this year in London. It is the first to be held recently as economies appear to be improving.

But until American consumers begin spending again, and so long as jobs are still being lost, the durability of any recovery is questionable. Major retailers reported this week that U.S. consumers are continuing to rein in spending on all but basics.

Despite slight recent improvements in many U.S. economic statistics, many consumers haven't seen a change in their lives.

So many jobs have been lost -- nearly seven million since the recession began in December 2007 -- that the unemployment rate will remain high long after the economy begins to rebound.

Many out-of-work Americans have lost unemployment and severance benefits and are depleting their savings. Others are saving more and spending less, still shaken from the worst economic downturn since the Great Depression.

"This is going to be the mother of all jobless recoveries," said Allen Sinai, chief global economist for Decision Economics, a consulting firm.

Japan, the world's second-largest economy, grew 0.9 percent in the second quarter, or April to June, compared with the prior quarter as export sales picked up after the country's deepest slump since World War II, the Japanese government reported earlier this week. It was the latest major economy to report upbeat second-quarter results.

Japan's return to growth -- thanks to a 6.3 percent uptick in exports along with government stimulus measures -- marked the end of a yearlong recession.

But the development, along with recent news that other major economies had resumed economic growth or were stabilizing, did not impress investors as global stock markets sank and then zigzagged amid fears by jittery international investors that the recoveries were not sustainable.

In the United States, the gross domestic product contracted at a 1 percent pace in the April-June quarter, after plunging 6.4 percent in the January-March quarter, the worst in 27 years, and fell by 5.4 percent in the fourth quarter of 2008.

The latest statistics suggested the recession is in its final stages, and some economists believe it may have already ended.

Still, economists are mixed on the pace of recovery. Many barriers clearly stand in the way of a quick rebound.

Noting China's fast bounce -- it posted more than 6 percent growth in the first half of 2009 -- Peter Morici, a business economist at the University of Maryland and a critic of Obama's economic-recovery plans, said: "China has a $400 billion stimulus package, and its economy is firing on all cylinders. President Obama has an $800 billion stimulus but prospects for the U.S. economic recovery are fragile."

Other economists are guardedly optimistic. And Lawrence Summers, the top White House economic adviser, predicts "a substantial return to normalcy" in the coming months.

While acknowledging "we have a long way to go," he notes that most forecasts for GDP growth in the second half of the year are now positive.

"It is reasonable to say that we are in a very different place than we were six months ago; that the sense of free-fall, of vertical decline, has been contained," he told a recent economic forum.

Most economists and analysts seem to agree.

7 signs of the property craze


Far East Organization launched its Centro Residences in the heart of suburban HDB town Ang Mo Kio at prices starting from $1,100 per sq ft (psf). Deals done last month were at $1,117 psf to $1,228 psf.

According to property experts, such prices are more typical of city-fringe or prime projects and set a record for suburban leasehold homes.

In the mid-1990s boom, Far East set a leasehold record with its Bishan 8 project selling for up to $1,100 psf.

At a number of recent launches, above-market prices were also seen. For example, Ascentia Sky in the Alexandra Road area sold for $1,064 psf to as much as $1,459 psf.

Next door, The Metropolitan – launched at $780 psf on average in late 2006 – recently traded at around $900 psf to $1,200 psf.

In Tanah Merah, the 99-year leasehold Optima went for $810 psf on average. Right behind it is Casa Merah, which was first released in April 2007 at an average price of $588 psf.


A look at the number of pairs of shoes outside a showflat tells you immediately how packed the place is. Showflats are usually ‘no shoes’ zones.

Some of the recent new launches have attracted scores of visitors, who leave countless pairs of shoes outside the showflats.

They include yuppies, couples looking to settle down, extended families with grandparents in tow as well as speculators or investors.


Queues at newly launched condominiums were common during the booms of 1996 and 2007, with people waiting for hours to secure a unit. They disappeared last year after the world went into a recessionary tailspin.

But now they are back. A queue of more than 40 people was reported outside the Optima showflat days before it opened late last month.


At recent launches such as Optima, Meadows@Peirce, The Gale and 8@Woodleigh, buyers have been willing to hand over blank cheques in a bid to secure a favourable unit.

The cheques – for the booking fee of typically 5 per cent – are given to agents even before the final pricing is released. One property agent said that offering blank cheques was a way for buyers to show their sincerity – never mind that the price list is not out and the showflat has yet to open.


Close to midnight on a Friday, buyers and onlookers at the 297-unit Optima showflat in Tanah Merah cheered each successful buyer when the balloting results were announced. For every person who managed to commit to a big-ticket unit at a premium to the market, four others went away disappointed.

Developer TID chose to sell via balloting when buyers again started queueing a day before the public preview.

A spokesman for TID said that balloting was more transparent and the crowd could be dispersed faster. It also stopped people from trying tactics like selling their places in the queue, he said.

At the 152-unit One Devonshire in Devonshire Road, demand from buyers was so strong that a last-minute ballot was held.


A look at the classified advertisements on property pages will tell you that the flippers are back.

They have been placing advertisements for just- launched or sold-out projects, hoping to make a quick buck. Ads for Optima units surfaced only days after the housing project was sold out.

Sellers and agents are still placing ads for projects popular with investors, including The Metropolitan.

At new launches, property agents are appealing to potential buyers’ kiasu mentality, or the fear of missing the boat, and urging them to act now before prices rise.


Never mind that pay cuts are still in place at some firms or that retrenchment continues at others. You never miss a good opportunity to buy when you are presented with one.

Certainly, Singaporeans have been out in droves whenever projects deemed affordable come on the market.

Back in February when sentiment was poor, the 293-unit Alexis in Alexandra Road was launched at $850 psf to $1,100 psf and, within days, it was sold out.

Other new launches that quickly sold out in recent months include 8@Woodleigh in Potong Pasir, Illuminaire on Devonshire Road and Optima in Tanah Merah.

Source : Straits Times – 22 Aug 2009

Thursday, 20 August 2009

The Economic Recovery: Fast, Slow or Neither?

by Sudeep Reddy

Some Analysts Predict a Sharp Rebound While Others Foresee Sluggish Growth; a Few Say Another Slump Is Possible

The U.S. economy is pulling out of its deepest and longest recession since the Great Depression. Some economists expect a powerful recovery, others a sustained but muted one. Some even say it will be neither: a fleeting rebound quickly followed by a second slump.

For Americans beleaguered by almost two years of economic pain, the contours of the recovery will determine how many people linger without jobs, whether cutbacks to public services are restored and how quickly savings and investments gain value.

Economists trying to predict the shape of the recovery look for parallels in previous recessions. But the current downturn, which started in December 2007, has echoes from a multitude of economic slowdowns.

It featured the same kind of deep dive in economic output of the 1970s and 1980s recessions, which were followed by sharp rebounds. The credit shock from the latest downturn also recalls the milder credit headwinds of the early 1990s, which turned a relatively short recession into a slow multiyear recovery.

But what distinguishes this recession from most others before it is a severe credit contraction whose effects, some economists believe, are likely to linger for years.

Whatever the structure of the recovery, many consumers won't detect a change in their own circumstances. So many jobs have been lost that the unemployment rate will remain high when the economy begins to rebound. Large swaths of still-jobless Americans will have exhausted their severance payments and unemployment benefits, putting them under further strain even as the overall economy picks up again. And once consumers find new work, their depleted savings will leave them more vulnerable if they were to face another job loss in the next few years.

Some sectors of the economy — and regions of the country — are likely to recover earlier than others. The manufacturing and housing sectors, for instance, have contracted so deeply that they are likely to start recovering soon. But the troubled financial sector still is in the process of contracting as banks reshape their balance sheets, putting its recovery further down the road.

Facing a range of potential recovery scenarios, Americans are displaying everything from strong optimism to anxious caution. In recent months, investors have seemed hopeful about the prospects for a robust recovery, pushing stocks up more than 40% from their recession lows in March. Private-sector forecasters in the latest Wall Street Journal survey say the economy is starting to expand, but to expect slow to modest growth of between 2% and 3% next year. Most businesses remain hesitant, bracing for a painful year ahead.

After Steep Drop, a Sharp Rebound

The most common path for the economy after a severe contraction has been a huge rebound in economic activity. Employers usually slashed their payrolls and output so sharply to protect themselves, and consumers postponed so many major purchases during the worst of the downturn, that a return to growth came with a fierce expansion.

After the deep recessions of the 1970s and 1980s, business activity rebounded and within several months employers were rapidly rebuilding their payrolls. "You can't find a single deep recession that has been followed by a moderate recovery," said Dean Maki, chief U.S. economist at Barclays Capital. And most forecasters proved to be too pessimistic as prior deep recessions ended. "Very few people were looking for the kind of growth numbers that were actually printed," he said.

Forecasters who support the strong-rebound view expect the economy to grow at a 3% to 5% annual rate through the end of this year and provide the power needed to spark a longer-term recovery.

Businesses would ramp up output and hiring, restoring capital budgets for new computers and equipment. Rising stock values would help restore consumer confidence and spur additional spending for major goods such as cars and appliances. Some consumers put off key purchases for so long that eventually they must come around when they see good deals on store shelves. Housing construction also is coming off rock-bottom levels, giving the construction sector a bit more hope than it has had for the past three years.

After the natural rebound for three to six months, the bulk of the government's fiscal stimulus program would kick in. That would help sustain activity at the turn of the year and in early 2010, fully propelling the economy out of the downturn.

At Vila & Son Landscaping Corp. in Miami, incoming orders for new projects are about half the level they were at a year ago. The company, which has about 900 employees working on landscaping projects statewide, suffered as the construction and real estate markets tanked. The region has been left with huge inventory, from office rentals to condo buildings.

But the firm's president, Ricardo Leal, is adding workers for maintenance projects — while cutting back its construction operations — as it prepares for the economy to grow. He already sees signs of hope with more projects getting started in local governments, assisted-living facilities and parts of the health-care sector. "We've seen more activity from designers and landscape architects that are at the beginning of these projects," he said. "They feel like they're beginning to turn the corner. My gut tells me we're bottoming out right now and we'll start to see more activity going into 2010."

Economic Anxiety Keeps Growth Slow

The economy may bounce back, but plenty of barriers block the path to a sharp rebound. Trouble with spending and lending could potentially make the recovery a slog.

Consumer confidence is falling as job losses mount — albeit at a slower pace than before — and homeowners reshape their finances after severe declines in home values. Households are saving more than they have for most of this decade. That's suppressing consumer spending, the engine for 70% of economic output.

The credit shock is likely to impair the business and consumer sectors for years. Businesses are less likely to get easy loans as banks shrink their balance sheets. That's also true for homebuyers who are finding it harder to get new loans and would need to offer up larger downpayments. And, as real estate prices have tumbled, existing homeowners can't borrow against the value of their homes as they once did.

The credit headwinds "will continue to hang over the economy for a long time," said Nigel Gault, chief U.S. economist at Global Insight.

"It is one reason not to expect a strong recovery coming from the consumer side. It doesn't mean consumer spending won't grow, but it won't be a big leader the way it has been in previous expansions."

So after a quick bounce, proponents of the slow-growth view say the economy is more likely to expand at a 1% to 2% rate over the next year — well below the 4% to 5% that's necessary to heal the labor market after a deep downturn. Recessions caused by bursting bubbles like the recent housing collapse — as opposed to sharp rate increases by the Federal Reserve to thwart inflation — seem to be followed by jobless recoveries.

Businesses are finding ways to stretch their existing resources rather than expect a rebound.

"People are very frightened," said Janie Curtis, chief executive of Curtis Machine Co. in Dodge City, Kan., which makes gears and gear boxes. She says the end of the pain isn't in sight for her manufacturing customers whose sales are down 50% or more from a year ago. "When I ask people what they're seeing, they don't know either."

The payroll is down to about 70 employees from 200 several years ago, and Ms. Curtis isn't in a rush to hire more workers back. Instead, the firm is automating more of its operations, putting computers on every desk and squeezing more out of existing employees.

"Our productivity is way up, because the people who are left are having to work harder," Ms. Curtis says.

With a strong focus on productivity — remaining employees picking up the slack — some companies are likely to avoid rehiring workers as long as possible, keeping the rest on the jobless rolls even longer.

A Brief Rebound, Then a New Slump

The economy is likely to see a natural boost in the coming months from a rebound in production. After that, it will get some help from the bulk of the fiscal stimulus program late this year and early next year.

But then what?

The slack in the economy is so large that consumers won't see meaningful raises for years, and they will have less borrowing power to drive their spending. So consumers could make some of the big purchases they have been postponing and then close their wallets to save more.

Businesses, after a frightening period, could remain cautious about ramping up after a severe downturn. State and local governments could continue to cut back as tax revenue plummets. And the troubles aren't over for the banking sector. Foreclosures are still shooting up as loans go bad.

Once the boost from the federal government diminishes, the economy could still be without a major driving force such as consumer spending or business investment to push it forward — risking a return to its contractionary phase. After a brief six-month recession in 1980, the economy recovered but then relapsed within a year. Soaring inflation forced the Federal Reserve to raise interest rates to double-digit levels, pushing borrowing costs higher and spurring a painful and lengthy recession. The late 1940s and 1950s each saw recessions return just three years after the prior downturns ended. That is because businesses can bounce back from crises — such as wars — but then find that the recoveries aren't durable.

Today's fear is compounded by the heavy federal spending. Some economists worry high deficits will push interest rates — and borrowing costs — higher for consumers and businesses.

"I hope we don't have a double-dip recession, but that's a possibility," Ron Heaton, chief executive of the State Bank of Southern Utah. "The thing that no one knows is, will all this government spending, all this money being put into the system, bring inflation?"

Mr. Heaton's bank, which has about $600 million in assets, wasn't saddled with bad home loans. But it is dealing with added risks in commercial real estate, which many economists fear could drive another leg of the downturn as loans go bad, damage the banking sector and rein in lending even more.

"We don't have the demand that we had before," Mr. Heaton said, "which is probably good because we're working through some of those commercial real estate loans" that now look riskier.

Monday, 17 August 2009

Japan out of recession

TOKYO - JAPAN'S economy returned to positive growth in the second quarter, following Germany and France out of recession as massive government spending resuscitates the ailing global economy, data showed on Monday.

The rebound is welcome news for Prime Minister Taro Aso, whose long-ruling party risks being swept from power in an election at the end of this month amid discontent about the country's worst recession in decades.

Japan's economy, the second largest in the world, grew by 0.9 per cent in April-June, after contracting for four straight quarters, the government said. Japan's gross domestic product grew at an annualised pace of 3.7 per cent in the second quarter, having shrunk a revised 3.1 per cent in the first quarter and by 3.5 per cent in the fourth quarter of 2008, the Cabinet Office said.

Japan plunged into recession in the second quarter of 2008 as a severe global downturn crushed demand for its cars, electronics and other goods. The worst of the slump in foreign demand appears to be over. Japan's exports climbed 6.3 per cent in April-June - the first increase in five quarters.

The economy is expected to keep growing through the rest of 2009, said Barclays Capital economist Kyohei Morita. 'However, this is still a recovery underpinned by government policy measures and far from a self-sustaining turnaround,' he warned.

Japan, which was hit particularly hard by the global economic downturn, has exited recession before the United States, which shrank 1.0 per cent in the second quarter of 2009, according to an official estimate.

Japan's economy is riding the coat-tails of a recovery in its biggest trading partner, China, which enjoyed a stunning turnaround in the second quarter of 2009, helped by massive government spending.

Tokyo has also launched a series of pump-priming packages to cushion the blow of rising unemployment, which hit 5.4 per cent in June - close to its post-World War II high of 5.5 per cent. But the Japanese economy remains hostage to the fate of its major trading partners given its heavy reliance on foreign markets, experts warned.

'Japan remains as dependent as ever on exports,' said David Cohen, an analyst at the research firm Action Economics in Singapore. A shrinking population and rising unemployment mean that domestic consumption is unlikely to be a major engine of economic growth, he added.

Japan's economy saw plenty of false starts during its 1990s 'lost decade' and the fear is that the current green shoots of recovery might soon wilt. Economic growth is likely to lose momentum in the third quarter as exports have started to slow and rising unemployment is weighing on consumer spending, said RBS Securities economist Junko Nishioka.

'In addition, the effect of the economic stimulus packages is likely to gradually diminish,' Mr Nishioka said. There are concerns that rising unemployment and renewed deflation may hinder a recovery. 'Our hope is that we will enter a self-sustaining recovery after our pump-priming efforts,' said Economic and Fiscal Policy Minister Yoshimasa Hayashi.

But he added: 'We must keep our eyes on risks such as the worsening employment situation, the effect of the global financial crisis and worries over the global recession.' Investors gave a cautious response to the growth figures, which were slightly worse than the average market forecast for 1.0 per cent quarter-on-quarter growth and a 3.9 per cent annualised expansion. -- AFP

Australia warns of 2nd wave

CANBERRA - AUSTRALIA'S top Treasury official on Monday said there were grounds for optimism about the economy but warned a 'second shockwave' may yet derail recovery from the global downturn.

Treasury Secretary Ken Henry said that while Australia had proved resilient and avoided sliding into recession, it was too early to say the crisis had passed.

'It does appear as if the economy is behaving better than people were thinking late last year or early this year,' Henry told a business function.

'We're not rushing to judgement on this just yet. We need to be somewhat careful in prematurely declaring the war is over.' Henry said the economy remained vulnerable to a second slump which, while not as big as the one that plunged the globe into crisis, could still curb growth.

'I have no reason to believe it'll be anything like the first shockwave in size and intensity - it won't,' he said.

'But there could be a second shockwave to hit us and that too could have implications for future growth. So I think we should be a little cautious.' Mr Henry refused to speculate on whether the economy's better-than-expected performance would prompt the Treasury to revise its growth and unemployment forecasts, saying he was not taking a recovery for granted.

'I think it's fair to say that nobody fully understands the reasons for that somewhat better economic performance, and we're not rushing to judgment on this matter just yet,' he said. The Treasury predicted in the May budget that the economy would contract 0.5 per cent in the current financial year, then bounce back to grow 2.25 per cent in 2010-11.

Unemployment, currently 5.8 per cent, was forecast to peak at 8.5 per cent in 2010-11. The Treasury is due to release updated forecasts in November. -- AFP

Saturday, 15 August 2009

How to be rich (part 2)

Exactly 5 months ago, I suggested that a mentor is the way to riches and that luck may play a part.

Now we have hard data that luck really plays a part (at least according to a report by trusted names like Capgemini and Merrill Lynch).

A high net worth individual is defined as having more than US$1 million of investable assets on top of his/her residence property. So if you have US$1 million in your savings account, you’re a HNWI. Or if you have a 2nd property worth US$1 million, you’re one of the 67,000 HNWIs in Singapore.

22% of the high net worth individuals in Singapore became rich because they inherited the wealth.

That is about 15,000 of them. They are lucky to have wealthy parents. Their lucky kids are probably future HNWIs.

To be fair, the rest are self-made millionaires. In fact, 36% or about 24,000 got rich from their businesses, but a week ago, we just touched on the issue of fewer entrepreneurs.

22% + 36% = 58%

So what about the remaining 42%? I infer from the report that “earned income” and “stock options” are 2 other major sources of wealth. (Now, doesn’t “stock options” relate to owning a business, or at least part of it?)

The question now is: Is it possible to become wealthy working for others?

Consider the case of a financial futures dealer/broker. The 75th-percentile dealer earns a monthly gross income of $23,517 (see top 100 jobs). In 10 years he’ll earn $2.8 million. This is more than enough to own a property to stay in and have more than US$1 million in investable assets. He’ll be a HNWI before hitting 40 years old.

So, to answer the question, yes it’s possible to be wealthy through earned income. But it depends on what job you do.

Otherwise, you can always be lucky.

How to be rich?

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How to be rich?
May 24th, 2007


My Paper interviews the co-creator of the “Chicken Soup for the Soul” self-help books.

Mark Victor Hansen made his first million at age 35. He’s now an accomplished wealth guru coaching people and giving seminars around the world (obviously making more money).

Like other self-help gurus, Mark has advice for people who aspire to be wealthy. Let me gloss over the standard stuff and highlight what I think is important.

Standard stuff (mostly vague):

* Have a vision
* Be a team player, work with people
* Have a system of generating wealth quickly (but how?)
* Have “tools”
* Save 10% of what you earn, donate 10%, and invest 10%

Here’s what I think is useful: find a mentor. Yes, get someone who’s been there and done that to coach you. (But I don’t think this is the same as attending get-rich seminars, so please save your money.)

If you’re lucky to find such a mentor - maybe a close relative or a good friend - ask him these questions politely:

1. How did you make your first million?
2. How long did you take?
3. If you were to do it again in today’s context, how much time do you need? Would you do it differently and how?
4. If I want to be rich, what’s your advice for me?
5. What is the most important lesson you picked up in the process of getting rich?
6. What do you think is the most important habit that helped you?
7. Any missed opportunities? Can I make use of these opportunities?

I want to add one more question: Do you think luck plays a part?

The reason for asking this question is that luck is a very much underrated “quality” for getting rich. Too many people are saying it’s just hard work, having a “system”, perseverance, networking, etc. But you actually need to be lucky to have a good brain, to meet the right people, to be at the right place, to invest at the right time, and so on.

So, it helps if your mentor can give you an understanding of how luck plays a part in getting rich.

Millionaire Forummer Shares Experience and Gives Valuable Advice

- How did you make your first million?

“Made my first million i think around 30 or 31 years old. Graduated from uni in 1999, started own business in 2000 and have been running it for 9 years now. Am 34 this year. My family saves a lot. We save about 80% of total annual income.”

- How long did you take?

“About 6 years to make the 1st. 2 years for 2 second and 1 year for third. Make about 1M per year now. Probably can increase it to 2M per year over the next 5 years. It is very true that the 1st is hardest to make and the subsequent easier.”

- If you were to do it again in today’s context, how much time do you need? Would you do it differently and how?

“Well, i make my money mostly from company profits and pay. My 1st company took 5 years to hit 1 M turnover, my 2nd company took 1 year. Experience, a good team and knowhow really helps. I will still spend time, money and effort in business with stock trading as a fun sideline.”

“Investments I enjoy trading stocks but i never trade with more than 200-300K cash.No margin also. Money is hard to earn. This downturn made about 120K buying at low from last Sep to this year Mar. Over the past 9 years probably made about $250K in stocks. My idea is to use stock gains to pay for lux items. Stuff like gifts for wife/kids and travel.”

- If I want to be rich, what’s your advice for me?

“Make sure you have the right drive and temprament for it. And you need to be in the right area. Traders, Lawyers, Med Specialists, Sales, Consultants, Investment Bankers are the right group that can make $1M by 35 to 40. If you want by 30 I think have to be businessman or sales/middleman work”

- What is the most important lesson you picked up in the process of getting rich?

“I do not see myself as rich yet. It is very interesting that as you accumulate wealth you get exposed to even wealthier people and know more. Eg. I used to think I can retire with 3M net worth. Now with that, I feel might as well aim higher and go for 10M and I can picture a lifestyle requiring that. I suspect when I hit 10M, it will become 20M. So there is this slippery slope of greed which I personally want to be aware of. Money is for spending and making people around me happy, it is a means to an end and I need to keep reminding myself of it.”

- What do you think is the most important habit that helped you?

“Persistence and a drive to make things work no matter what. It helps in business a lot.”

- Any missed opportunities? Can I make use of these opportunities?

“Erm…. there are always opportunities. If viewed that way, then i have missed many many.”

- Do you think luck plays a part?

“Yes, we can try all we want but we need a little right place right time. But u need to work hard and be prepared to take some risk and take the challenge when it presents itself.”

“Hope this helps our readers. I write because I benchmark myself a lot personally and it makes me very competitive as a person. So for those of u who like to benchmark, this story is for you!”

Making sense of the recent market rally

One important reason for the bullishness is that the market has already discounted much of the bad news

RECENTLY, one of my clients told me he was confused about the significance of the recent market rally. Many of the blue chips such as Singapore Airlines, NOL, SGX and CapitaLand are still making quarterly losses. On top of that, some 47 companies listed on the Singapore Exchange have announced quarterly results with combined earnings lower than the previous quarter.

On the job front, unemployment is still rising. According to the manpower ministry, the worst is not over yet. This is the first time employment has contracted for two consecutive quarters since the 2003 economic downturn.

GDP for 2009 is expected to contract by 4 per cent to 6 per cent. ‘Aren’t all these bad news for the stock market?’ he asked. Over the last four months, equities have done extremely well with the Dow Jones Industrial Average up 20 per cent; the Standard and Poor’s 500, 23 per cent; and the Straits Times Index (STI), 56 per cent.

Our property market has also picked up with queues forming outside some new show flats. HDB resale flat prices have surged to a record high which prompted the minister of national development to caution that speculation is creeping back into the market.

What is going on? Why is the stock market going up when the economy is still struggling? Who are buying these homes in a recession? Is it the start of an economic recovery and is the worst behind us?

Singapore’s latest export data support indications that we are recovering from its deepest recession to date. Non-oil domestic exports (NODX) fell 11 per cent in June from a year ago, compared with a 12.3 per cent decline in May.

At times like this, even a slight rebound makes things look better than they are, not forgetting that the Singapore economy is expected to grow only 3.5 per cent in 2010. So why is the stock market looking bullish despite weak economic data?

The answer comes from legendary fund manager Mark Mobius and billionaire investor Warren Buffett. Both of them believe that the stock market is a leading indicator of the state of the economy. In other words, it predicts what the economy will look like in six to nine months.

I’m no economist, but I’ll share a few of my observations. The unemployment rate may be high, but it is a lagging indicator of economic activity. From past recessions, unemployment keeps rising even after an economic turnaround begins.

Singapore’s gross domestic product (GDP) fell hard in the first quarter of 2009 and was followed by large numbers of layoffs. Neither of these statistics is good news. These numbers suggest that deflation could be on the horizon. Deflation or falling prices during a recession is a troubling sign and could lengthen the recession but this does not seem to be happening.

On the property front, Singaporeans’ keen interest in property doesn’t fade even in a recession. Currently, there is plenty of liquidity and mortgage rates are relatively low. So, many are looking to buy property to take advantage of the low interest rate environment. There were reports that the private property market is well supported by HDB upgraders who only need to pay a little more to upgrade as HDB resale prices are also rising.

One important reason for the bullishness is that the market has already discounted much of the bad news. Major indexes fell more than 40 per cent last year. But this doesn’t mean the market will ignore all bad news. Unexpected news can still take the market lower. Currently, the market is responding to what the economic landscape is expected to look like in six months. As such, I believe there’s a good chance that the market is beginning a bottom-building process.

Keeping in mind that the stock market looks ahead by six to nine months, the revelations of the past year have long been digested by the market. This was also true during the Asian financial crisis when the STI fell to a low of 800 points in mid-1998. It was all doom and gloom and a few months later Singapore was in a technical recession, coupled with massive job losses and poor corporate earnings.

Stockmarket behaviour can be a sign of things to come, particularly the economy. The question here is whether we believe that the fundamentals have improved enough to merit a 9,000 in the Dow Jones, or a 900 in the S&P 500 or even a 2,600 on the STI. In other words, are stocks fully valued at this time?

For a sustained rally, there has to be real earnings growth or positive earning surprises, improving home sales, higher employment, proof that inflation will not be a major problem down the road. Until positive data becomes consistent, we can expect the markets to start and stop, go up and down with an upward bias. If the data worsens, then stocks will once again retrace their downward spiral, maybe even hitting previous lows.

In my 20 years of practice, most successful investors I know tend to focus not so much on today. What is expected to happen tomorrow is more important. In the short term, the market is unpredictable and subject to great volatility. But in the very long term, the stock market has had a strong upward bias. I don’t know of any reason to think that that would change. This is a key point that’s easily overlooked in investors’ frantic search for the direction and the ‘right’ answers that they hope will yield instant gratification.

Personally, I believe that brighter days are ahead and that, someday, most of us will look back on the past two years as a very painful period that we managed to get through. Getting to that future won’t be easy, but it will be a lot easier for people who can keep their heads when others seem to be losing theirs.

Ben Fok
CEO, Grandtag Financial Consultancy (S)

Source : Business Times – 15 Aug 2009

4 Ways To Weather An Economic Storm

Andrew Beattie

Economic conditions can be as temperamental as the weather. In this article we'll look at some simple steps that can help keep the financial boat afloat during an economic tempest.

Batten Down the Hatches
Warren Buffet derides management that embarks on cost cutting, as good management shouldn't need to be prompted to control costs – that should be second nature. People are less strict with their personal finances than Buffet is on management, but a downturn quickly provides the motivation needed for cost consciousness. There is always room for cutting frivolous expenses, or at least substituting them with cheaper alternatives. This applies to everything from the morning coffee to landscaping the backyard.

Set in Stores
Even if you have creditors banging on your door and ringing you at work, your first priority should be building or augmenting your emergency fund. When money is consistently flowing out of your bank account leaving a near-zero balance, there is no cushion for unexpected and unavoidable expenses - like a root canal or a new radiator. This forces people to take on yet more debt to make ends meet, and the outflow of cash worsens until it seems like they are working just to satisfy their creditors. The better alternative is to make minimum payments on your debt while building a cushion of at least one month's wages, but preferably 3-6 months.

The larger the emergency fund, the more secure you'll be mentally and financially. With three or more months in reserve, it takes a pretty big emergency to shake things up. Building the fund should take precedence over investment as well as debt payments. Any automatic investment plan should be put temporarily on hold and that money funneled towards the emergency fund to help speed up the building. It may feel like you're dodging creditors and robbing from your golden years, but with a proper emergency fund, you'll be in a better situation to consistently make payments on your debts and regularly invest no matter what happens in the future.

Patch the Hull
When the general market is choppy, there is almost daily coverage of where the hot money is going. Investors rush out of cash and into bonds; out of bonds and into stocks; out of stocks and back into cash and bonds, and on and on. Rather than getting caught up in the stutter-step of fast money, most people would benefit far more from paying down existing debt than finding safe havens to park idle funds.

If you are holding debt during a downturn, paying it back is one of the few places where you can put your money that will guarantee a return no matter what the market is doing. The return on paying off a 5% loan is, of course, the 5% you are no longer being charged. With some credit companies charging in the high teens and twenties, you'll likely outstrip the S&P 500 and your own portfolio simply by getting that future interest off your books.

Check the Charts
When the economy is disrupted, the value of stocks in your portfolio will also be whipsawing. Although you don't want to make rash decisions during economic downturns, recessions and slumps are very informative on the whole. In good times, mediocre and even weak companies can prosper, so hard times act as a baptism of fire for all stocks. Therefore, there's a lot to be learned from how a company reacts to a downturn. Companies that continue to profit - or at least lose money at a slower rate - in a downturn can often take advantage of depressed prices to expand their businesses and snap up assets on the cheap.

Cash on hand, much like your personal emergency fund, is one measure of how vulnerable a company is when profits slump. Companies that perpetually overextend themselves in good times are easy to spot, as they languish and burn up their cash reserves in hard times. If you already have a regular schedule for checking into your holdings, don't change it because of an economic dip. Do, however, note how they are handling things and whether or not cash reserves are being used up. If you still like how a company is acting, it's a good time to get more on the cheap. If the downturn has uncovered some dogs, then why hold on when you could do better things with the cash that's tied up?

One of the biggest temptations is to reverse all your preparation when the economy recovers. Economists sometimes call this spending binge "pent up demand." As things improve, there seems to be less need to have large amounts of cash in reserve, or to keep to a strict budget. There is also a tendency to mindlessly push money back into the market to make up for lost time and value, sometimes leading to an echo bubble. If, however, you can continue to run a tight financial ship, you'll find that your superior reserves, cost consciousness and contrarian thinking will keep you sailing smoothly in all manner of economic seas.

Friday, 14 August 2009

Hong Kong exits recession

HONG KONG - HONG Kong pulled out of its deepest recession since the Asian financial crisis in the second quarter as GDP grew more than 2 per cent from the previous three months, a source familiar with the situation told Reuters on Friday.

The source would not clarify whether gross domestic product growth had hit or exceeded 3 per cent, but growth was well above analysts' forecasts for a 1.1 per cent expansion.

The government is due to announce second-quarter GDP data at 0830 GMT (4.30pm Singapore time) on Friday.

Hong Kong follows Singapore, which surged out of recession in the second quarter, and Germany and France, which both announced on Thursday that they had emerged from recession, raising hopes the global economy may be on the mend.

Still, some analysts say the road to recovery could be volatile. Recession is generally defined as two consecutive quarters of seasonally adjusted contraction in GDP.

Improving trade flows helped Hong Kong's economy in the second quarter, as China's economy picked up again, but the city economy remains weak compared with last year and analysts forecast that second-quarter GDP fell 5 per cent when compared with the year-ago period.

As a trading and financial hub, the territory has been hard hit by the global economic downturn and a year ago it slipped into its deepest recession since the Asian financial crisis in 1997/98.

In the first quarter of this year, GDP fell 4.3 per cent from the previous quarter, its worst performance since such records began in 1990 as exports nosedived and consumer spending was hurt by rising unemployment, which has now reached a near four-year high at 5.4 per cent. -- THOMSON REUTERS

Economists Call for Bernanke to Stay, Say Recession Is Over

by Phil Izzo

Economists are nearly unanimous that Ben Bernanke should be reappointed to another term as Federal Reserve chairman, and they said there is a 71% chance that President Barack Obama will ask him to stay on, according to a survey.

Meanwhile, the majority of the economists The Wall Street Journal surveyed during the past few days said the recession that began in December 2007 is now over. Battling the downturn defined most of Mr. Bernanke's term, which began in early 2006 and expires in January, and economists say his handling of the crisis has earned him four more years as Fed chief.

"He deserves a lot of credit for stabilizing the financial markets," said Joseph Carson of AllianceBernstein. "Confidence in recovery would be damaged if he was not reappointed."

The Journal surveyed 52 economists; 47 responded.

After months of uncertainty, economists are finally seeing a break in the clouds. Forecasts were revised upward for every period, with 27 economists saying the recession had ended and 11 seeing a trough this month or next. Gross domestic product in the third quarter is now expected to show 2.4% growth at a seasonally adjusted annual rate amid signs of life in the manufacturing sector, partly spurred by inventory adjustments and strong demand for the "cash for clunkers" car-rebate program.

A better-than-expected employment report for July, where employers cut 247,000 jobs and the jobless rate fell for the first time in 15 months, suggests the worst is over. The unemployment rate is still expected to rise to 9.9% by December, but economists forecast that the economy will shed far fewer jobs over the next 12 months than they had forecast last month.

Many of the economists said there is little to be gained by changing the Fed chairman, especially considering the massive task at hand for the central bank as the economy emerges from the recession.

"Continuity is critical as we emerge from this crisis. Otherwise we could slip back in again," said Diane Swonk of Mesirow Financial. "Bernanke is the best suited to undo what has been done when the time comes."

The Fed has taken unprecedented steps in an effort to avoid another Great Depression, and its exit strategy remains a key question. Some hints may emerge as the central bank's August policy meeting comes to an end Wednesday. The Fed's key policy-making tool, the federal-funds rate, isn't likely to change at this meeting or any time soon.

Only six economists expect the Fed to raise the federal-funds rate, now between 0% and 0.25%, this year. Most expect an increase at some point in 2010, but more than a quarter of respondents don't see the rate moving until 2011 or later.

"The exit strategy will be very, very slow and cautious," said John Silvia of Wells Fargo. "The Fed will unwind the balance sheet before they raise the fed funds rates."

The Fed's balance sheet — the total value of all its loans and securities holdings — had more than doubled during the course of the crisis to more than $2 trillion, as lending facilities expanded in an effort to unfreeze credit markets. But as markets get back to normal, demand already has begun to wane, and the balance sheet has started to shrink. Now the composition of the balance sheet has begun to shift to Treasurys, mortgage-backed securities and agency debt as the Fed moves through a $1.75 trillion program announced in March to bring down long-term interest rates.

The Fed is deciding at this week's meeting whether to let that program run its course and how best to communicate its intentions to markets.

Whatever the Fed decides, the economists expressed some confidence that the central bank will be dealing with how to manage a recovery, not another recession. They expect GDP growth to remain above 2% at an annualized rate through the first half of next year, and they put the chances at just 20% of a "double-dip" second downturn before 2010.

But some said a recovery could make Mr. Bernanke's road to reappointment more rocky. "Once it is perceived that the economy is on its way to recovery, it gives Obama the opportunity to put in his own person," Mr. Silvia said. "It could be like Great Britain at the end of World War II. 'Thank you for all the hard work, Mr. Churchill, but we're going to bring someone else in to handle the next phase.'" Former president George W. Bush appointed Mr. Bernanke to succeed the departing Alan Greenspan. Presidents appoint Fed chiefs to four-year terms, and there are no term limits. Mr. Bernanke's term expires Jan. 31.

Though the economists were overwhelmingly supportive of Mr. Bernanke, they don't think his tenure was without mistakes. A slow initial response to the credit squeeze and the decision to let Lehman Brothers fail were cited as the biggest errors.

Thursday, 13 August 2009

New Bull, New Bubble, New Meltdown by 2012

by Paul B. Farrell

Something's in the air. You can feel it. A new bull. Hype? Maybe, but also a roaring new bull -- and eventually another meltdown.

Television is a metaphor for our cycles, so see how America's becoming a huge ratings competition:

-- "America's Got Talent." Complete with kooky judges like "The Hoff" (ex-Baywatch lifeguard David Hasselhoff), Ozzy's wife, and Piers Morgan (no relation to JP). And you've got to love those wacky contestants going mano-a-mano for Nielsen ratings against those noisy "disrupters" being sent to health-care town hall meetings by the GOP crew. A sure sign America's employment picture is improving and the economy is in recovery.

-- "Who Wants to Be a Millionaire?" Regis Philbin, the original moderator, is back for 11 fabulous nights in August. Why? A cover-up? Maybe it's tied to all the TARP money paybacks and hot earnings that let the "too-greedy-to-fail" banks make more Wall Street insiders millionaires. Wall Street loves Regis upstaging Goldman's giveaway of bonus billions from taxpayers.

-- "Cash for Clunkers." The Chicago school of behavioral purists might say this program is a perfect example of economist Joseph Schumpeter's "creative destruction" in action. It's also great television, rivaling Nascar, Chopper Mania, Monster Trucks and the local demolition derby.

Yes, folks, America loves talent, wants to be a millionaire, loves to destroy stuff, and then rebuild. Cars, jobs, careers, retirement portfolios, the economy, the stock market. You can see this metaphor in other great television programs: "Big Brother," "Hell's Kitchen," "Lie to Me," "Criminal Minds," "Are You Smarter Than a Fifth-Grader?" The point is, TV's a great barometer for the American soul, and it's screaming "bull!"

Yes, Americans want another bull, another bubble, even another meltdown. Guess what? It's already here, folks. The next big market-economic-business cycle has arrived ahead of schedule. This is what makes us America. We love challenges, risk-takers and winners. The nobody who suddenly becomes a big somebody is the biggest of all TV metaphors for who we are.

America's got talent. Where else can you see The Hoff screaming "You got talent!" to Grandma Lee, a craggy 75-year old comedian? Or Piers rooting for a bunch of half-time acrobats back-flipping off trampolines? Or Sharon Osbourne cheering for Kevin Skinner, an unemployed chicken farm-hand who looked like a hobo but wowed us with a voice like Randy Travis.

New, Bigger Bubble -- And a Meltdown Ahead

Yes, folks, a new bubble cycle is already in motion. You can feel the energy building, the kind that fueled the meltdowns of 1998, 2000 and 2007. We never resolved the problems fueling the dot-com insanity. We made matters worse feeding the subprime credit-derivatives disaster with cheap money, Reaganomics ideology and two costly wars. Lessons were never learned, nothing was resolved. Today matters continue deteriorating.

Behind the hoopla, the Wall Street conspiracy has dumped $23.7 trillion new bailout debt on taxpayers. The bill will come due. But for now, we're getting their wish: A new bubble is accelerating, thanks to America's "too-greedy-to-fail" Wall Street banks.

Folks, you can bet on it, sure as Regis is hosting "Who Wants to be a Millionaire?" The bull, a bubble, and another meltdown are virtually certain and accelerating faster than earlier cycles, coming by 2012. How to profit? Ride it up for a couple years, then pray you'll have enough brain left to bail out in time before the crash (most don't) because at that point the euphoria is blinding, like a cocaine addiction.

Want more proof of inevitability? Here are some visionaries who aren't working for Wall Street's hype machine: Michael Lewis, former Wall Street trader and author of "Panic: The Story of Modern Financial Insanity," recently told Newsweek: "There's a false sense that it's over, that the crisis is passed." The bailouts have merely postponed the inevitable. "We are in for another day of reckoning down the road."

The next one will be bigger, "badder," a real demolition derby. Several months ago, in a Vanity Fair article, "Wall Street Lays Another Egg," Harvard financial historian Niall Ferguson sounded more like a shrink: "Markets are mirrors of the human psyche." Like individuals "they can become depressed ... even suffer complete breakdowns."

The Five Stages of a Bubble Popping

In the 400-year history of stock markets "there has been a long succession of financial bubbles," Ferguson says. "Time and again, asset prices have soared to unsustainable heights only to crash downward again." It's an all-too-familiar cycle, in fact, so familiar is this pattern -- as described by the economic historian Charles Kindleberger -- that it is possible to distill it into five stages:

1. Displacement: "Some change in economic circumstances creates new and profitable opportunities." Last year's historic bailout, election, new ideology.

2. Euphoria or overtrading: "A feedback process sets in whereby expectation of rising profits leads to rapid growth in asset prices." Goldman is proof.

3. Mania and bubble: Prospects of "easy capital gains attract first-time investors and swindlers eager to mulct them of their money." More bubbles: 2010-2011.

4. Distress: "Insiders discern that profits cannot possibly justify the now exorbitant price of the assets and begin to take profits." Wall Street replays 2007-2008.

5. Revulsion or discredit: "Asset prices fall, the outsiders stampede for the exits, causing the bubble to burst." Yes, 2008's brutal meltdown repeats in 2012.

The culprit? The Fed, Ferguson says: "Without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission and commission of central banks." So the next bubble (and meltdown) is virtually certain, thanks to Washington's $23.7 trillion explosion in debt.

Revolution Coming With Next Meltdown

Americans are not going to put up with the "Wall Street Conspiracy" ripping off investors and taxpayers much longer. Wall Street got rich sticking us with mountains of debt for generations to come.

Expect a major house-cleaning, a second American Revolution. We predicted the "Great Depression 2" around 2012. Well, we doubt taxpayers will passively sit one more time, like in the 1930s, in 2000, and the past few years. Next time voters will take a page from the history books about past revolutions in the American Colonies, France and Russia. A perfect storm will erupt in a massive global credit meltdown, bringing down Wall Street and the clandestine $670 trillion shadow central banking system. And the collateral damage will be massive and widespread, in areas such as these:

-- Lobbyists' power is lethal to our values. Special interests are running and destroying American democracy, will self-destruct.

-- Derivatives: Cap 'n trade will crash worse than subprime. The Goldman Conspiracy's spending millions lobbying for trillion-dollar derivatives.

-- "Too-greedy-to-fail" big banks will trigger harsh backlash. Banks pay huge bonuses yet modify only 9% of 4 million stressed home loans.

-- America's wealth gap will trigger grass-roots rebellion. Wall Street's greed is so pervasive, gluttonous and obvious the rest will rebel.

-- The "Goldman Conspiracy" will be a target for retribution. Goldman's hubris is most egregious and flagrant. Their arrogance will backfire.

-- Wave of creative destruction will revive commercial banking. Investment bankers are killing commercial banking, Glass-Steagall will return.

-- Secrecy protecting Wall Street's unethical behavior to end. Wall Street's control over Washington's lawmaking will come to an end.

-- The Fed's shadow banking will collapse under excess debt. Central bank balance sheets overdrawn, feeding new bubble with cheap money.

-- A "Black Swan" of huge unintended consequences. Next bubble, highly unpredictable, huge collateral damage on Wall Street.

Make the most of this new bull. Then get out -- before you're the collateral damage.

Recovery in Asia Begins to Gather Steam

by Bettina Wassener

Has Asia’s economic recovery reached a turning point?

Recent economic data, some unexpectedly good results from companies around the region, early signs of some new hiring, and a stock market rally that has defied most analysts’ expectations would seem to indicate that perhaps it has.

On Tuesday, economic reports from Singapore, the Philippines, Australia and China provided the latest fuel for hopes that Asia was on track for a recovery that would outpace that of Europe and the United States and give the region more economic and political clout.

Even in Japan, which is mired in its deepest recession in decades, the central bank’s governor, Masaaki Shirakawa, struck an upbeat note after a rate-setting meeting on Tuesday.

“Asian economies seem to be growing at a faster pace,” he said, according to Reuters. “Since the spring, the financial system has also been improving. The overall direction is heading toward improvement.”

Still, Asia has depended heavily on government stimulus projects. Exports remain weak, and a renewed downturn in the West — the primary market for Asian goods — or a turnaround in the rise in Asian stocks, could pose major risks.

But these days, economists see an improved economy. “Things certainly look better than they did three months ago,” said Simon Wong, regional economist at Standard Chartered in Hong Kong.

All through the crisis that engulfed the world financial system and tipped much of the world into recession last year, Asia has had a major advantage: Its banks steered clear of the complex financial instruments that caused some Western banks to collapse. Asian governments and companies were in relatively sound financial health, having repaired their finances only recently after the Asian financial crisis of 1997-98.

Asia’s export-dependent economies suffered badly when consumers and companies in the United States and Europe curtailed purchases, leading to a collapse in Asian exports late last year. But over all, Asia has recovered more rapidly than most analysts had dared to hope, as governments spent heavily to lift their economies.

In recent weeks, companies like Sony, Panasonic and Samsung have reported better — or at least less bad — results for the quarter from April through June. Hyundai Motor even reported a record quarterly profit.

Although many companies are continuing to cut jobs, job recruiters in Asia say they see evidence that some companies are adding staff again. “It’s been a very tough 10 months, but over the past six or seven weeks, we’ve seen a modest upturn in jobs activity in banking — albeit from a very, very low position,” said Nigel Heap, managing director for the recruitment firm Hays in Sydney. “We’re cautiously optimistic that the worst is over in Hong Kong and Singapore.”

China in particular has stood out in Asia. After years of double-digit growth, the Chinese economy stumbled this year. A giant spending package, deep interest-rate cuts and much greater lending by state-controlled banks have pulled the economy back to a healthy level of growth in recent months.

Data for July, released by the statistics office on Tuesday, illustrated the point: Industrial output, an indicator of broader growth, rose 10.8 percent from a year earlier, while retail sales gained 15.2 percent.

Although the rise in output was less than expected, and exports took a further hit, economists at Goldman Sachs say they believe that China could return to growth of more than 10 percent as soon as next year. This week, Goldman raised its forecast for full-year growth for China to 9.4 percent. That was up from the 8.3 percent previously projected and higher than the government’s 8 percent target. For 2010, the economists say they expect China to expand by 11.9 percent.

Not all economists agree that the picture is quite as rosy. For one thing, China’s policy makers now face a delicate balancing act. A spike in property and equities markets —the Shanghai stock index is up about 80 percent this year— has led many to worry that another bubble is in the making. Analysts say the authorities now have to scale back bank lending to deflate price spikes without choking growth.

Data on Tuesday showed that bank lending dropped off sharply in July, but so far most economists remained relaxed.

“We believe that investment in the coming months will continue to be well supported by lending that has already taken place,” Tao Wang, a economist at UBS in Shanghai, said in a note.

Exports, which account for about a third of China’s economy, remain depressed, sinking 23 percent in July from a year earlier. The decline was smaller than economists had expected, and indicated that external demand was steadily recovering, Qing Wang, China economist at Morgan Stanley, said in a note. But it nevertheless showed that overseas demand for Asian-made goods remained well below the level of a year ago.

At the same time, the pace of recovery is uneven across Asia.

In Australia, business confidence is at the highest level in almost two years, and the central bank has indicated that it could raise interest rates.

By contrast, Japan remains in a deep recession. “The global economy has suffered a great shock,” said Mr. Shirakawa, the central bank governor. “We can’t expect to see an impressive recovery.”

The key question now is what happens “beyond the near-term,” said Mr. Wong, the Standard Chartered economist.

“We’ve seen a short-term rebound,” he said. “The question is what happens longer term — how will countries like China and Indonesia switch from export-dependent to something else? There are still lots of uncertainties about that.”

US economy has bottomed: George Soros

By Edward Krudy

NEW YORK (Reuters) - The U.S. economy has hit bottom and the current quarter will see positive growth due to the government's stimulus spending, billionaire financier George Soros said on Tuesday.

"I think it (the stimulus) has made a difference, the economy has actually bottomed and I think we are facing a positive quarter, and I think that is largely due to the stimulus," he said in an interview with Reuters Television in New York.

The Obama administration is pumping $787 billion into the economy in a bid to turn around the deepest recession since the 1930s. The U.S. economy shrank by 1 percent in the second quarter after tumbling 6.4 percent in the quarter before that, the biggest decline since 1982.

Soros said he did not believe the economy needed more stimulus money, despite calls for a second round of spending. Notably, in July, House of Representatives Majority Leader Steny Hoyer said the U.S. should be open to more government spending if needed.

Also on Tuesday, U.S. President Barack Obama sounded a cautious note, saying the economy is "not out of the woods" despite signs lagging business investment was reviving. Last week the White House said there are no plans for a second stimulus package.

Back in June Soros said the United States faces a "stop-go" economy because rising borrowing costs could generate major headwinds for the still-fragile economy. Soros is Chairman of Soros Fund Management.

(Reporting by Edward Krudy; Editing by Andrew Hay)

© Thomson Reuters 2009 All rights reserved.

Wednesday, 12 August 2009

The 7 New Rules of Financial Security

by Carolyn Bigda and Paul J. Lim

In a world turned upside down, you must re-examine some basic assumptions. A good place to start: understanding the true nature of risk.

Rule No. 1: Risk

Old thinking: If you can stomach the ups and downs that come with risk, you'll be rewarded.

New rule: Risk isn't about your stomach. It's about making or missing an important goal.

You know you have to consider risk. But what is risk? Many of us have learned to think of risk as synonymous with volatility. For years, what came down reliably bounced back even higher. You could easily conclude that risk tolerance was just a matter of taste. As long as you had the fortitude to see the occasional loss on your 401(k) statement and not panic, you would capture superior returns over time.

What to do: You shouldn't run from risky investments just because they lost money - that train has left the station. But the old buy-on-the-dips advice isn't quite right either. This bear market's lesson is that how much risk you can take is a matter of how much you can lose and still meet your basic goals. That may mean scaling back on stocks, even if you miss some of the next market rebound.

Rule No. 2: Cash

Old thinking: Keep enough money in ultrasafe accounts to cover life's emergencies, but no more.

New rule: Relying more on cash can rescue you in an "asset emergency."

For most of your career you'll want to set aside about six months' worth of living expenses in the bank. That money covers the mortgage and puts food on the table should you lose your job. The fact that you'll earn only about 2% is beside the point. You can't take the risk.

The simultaneous crash in stocks and houses has taught us that we need to redefine "emergency."Rande Spiegelman, vice president of financial planning for the Schwab Center for Financial Research, recommends looking at the next one to three years and adding up any big-ticket stuff you see coming: tuition, a wedding, a down payment on a house. Once you have your total, aim to hold that much in a cash account or a low-risk investment such as a high-quality short-term bond fund.

What to do: It's not easy to build cash savings and a retirement fund at the same time. If you have to make choices, build up that emergency fund first because you can't expect to lean on your home equity or stocks if you lose your job. And see if you have some flexibility on the big-ticket obligations. Maybe you plan for a state school rather than a private college, or downsize the wedding. If all your assets are in a 401(k), move some of that balance to low-risk investment options as you build your cash funds. That will preserve more to tap via a 401(k) loan in a pinch. Not a terrific option, but it can beat the alternatives.
In the years just before and after retirement, cash becomes even more important. You don't want to sell stocks during a bear market to buy groceries. Aim for two to four years' worth of living expenses in low-risk assets as you near retirement.

Rule No. 3: Human capital

Old thinking: The longer your time horizon, the more stocks you should own.

New rule: Time isn't everything. You must also consider your earnings potential.

It's one of the basic rules of thumb: The more years you have to recoup losses, the more aggressive you can be. Unfortunately, the math isn't so clear-cut.

Here's a better way to think about how aggressive your portfolio should be: Imagine that it includes not only stocks and bonds but also your human capital, meaning your ability to earn income by working. The safer it is, the more chances you can afford to take with your other assets - that is, your portfolio.

This doesn't mean that time no longer matters. As you age, the value of your human capital declines, and you'll need to secure more of your savings. So the conventional advice to hold a lot in stocks when you are young and gradually trim back can still make sense.

But not for everyone. The nature of your career may make your human capital more bond-like or more stock-like, says finance professor Moshe Milevsky of York University in Toronto. Tenured professors like Milevsky have human capital that resembles a triple-A-rated bond, especially when they have a solid pension plan. Those lucky souls can dive aggressively into stocks and even stay there as they approach retirement, he says. The human capital of a commission-based mortgage broker, on the other hand, is pretty clearly a stock - and it's not a blue chip. That person should own a fair amount of bonds, even when young.

What to do: Assess your human capital. A typical worker's income is about 70% like a bond and 30% like a stock, says Thomas Idzorek, chief investment officer for Ibbotson Associates. Use that as your baseline and then think about how long you'll be working, the stability of your current job, and your ability to change careers if you have to. You've probably realized in the past few months that your human capital is not as secure as you once thought. If you've been an aggressive investor, that alone may be a reason to shift more of your assets to safer ground.

Rule No. 4: Borrowing

Old thinking: Borrowing sensibly is a good way to build wealth.

New rule: Borrow cautiously. You have to worry about the other guy's debt too.

The quarter-century leading up to 2007 wasn't simply a golden age for stocks. It was also a bull market for leverage. (That's Wall Streetspeak for debt.) Since 1982, mortgage rates have fallen from 16% to below 6%. The levy on college loans dropped to around 3%. Americans responded to easy credit in a predictable way. The personal savings rate fell from over 12% to zilch, and household debt payments as a percentage of disposable income rose by a third as families "put it on the card" and paid for lavish kitchen upgrades with home-equity loans.

Looking back, America's borrowing binge was nuts. Families were leaning on housing wealth, and that wealth was shaky.

The obvious moral here is to be conservative. There are always good reasons to borrow, even today. You need a mortgage to buy a house, and a college education provides enough of a lifetime payoff to justify a loan. But you ought to stretch less.

There's a subtler lesson too. David Ellison, president of the FBR Funds, says that you have more exposure to leverage than you think, especially now that everyone is trying to unload debt. Perhaps your employer borrowed a lot over the past decade and now needs to conserve cash, so it's laying off staff. Suddenly that HELOC you could easily handle on your salary doesn't look like such a super idea. You can't lean on your investments for help, because many of the companies you owned used leverage to pump up profits, and now they can't borrow, so their earnings and stock prices are falling. And it's harder to shore up your own balance sheet by selling your house when banks are reining in lending and potential buyers are scared to borrow for an asset that may decline further.

What to do: Be conservative about debt? Make that very conservative. Especially when your neighbors aren't. Get a mortgage you can afford for the life of the loan, and put at least 20% down.

Rule No. 5: Housing

Old thinking: You can expect your house to appreciate handsomely over the long run.

New rule: Your home won't make you rich. But it is an important savings tool.

If you live on one of the coasts, you probably guessed sometime around 2005 that home prices couldn't keep rising the way they were. But the severity of the crash was still a shock: You heard a lot about how the market would have to "cool off" or "get back to normal" - the implication being that slow but steady appreciation was the future.

But the long-run data always told a different story. Yale University economist Robert Shiller looked closely in 2005 at the history of home prices since 1890, using a database he constructed. What he found was surprising. Except for two spectacular booms - the first after World War II and the second starting in 1998 - real estate appreciation has been unimpressive after figuring in inflation. As Shiller wrote in "Irrational Exuberance," technology has allowed builders to nail up more houses faster, ensuring that supply never gets too far behind demand (and often gets ahead of it).

Even when prices are rising, gains on real estate aren't as dazzling as they look, once you account for expenses. Maintenance costs typically run at about 1% of a home's value annually, in addition to insurance and taxes. If you remodel, the most you can expect to recoup is about 80%. You have to pay steep fees when you buy (up to 3% in closing costs) and sell (up to 6% for realtor fees).

What to do: This doesn't mean you have to rent, just that you should have modest expectations for your house as a wealth builder. There are still financial pluses. First, owning a house gives you a hedge against rising values in your own community so that you don't risk being priced out as rents go up. (Ask a New Yorker about that.) Second, a traditional 30-year mortgage acts as what economists call a "commitment device," or a tool that forces you to save. Instead of writing a check to a landlord, you gradually pay off principal. At the end, you own a house. Aside from your 401(k), no other asset enforces such discipline.

Rule No. 6: Diversification

Old thinking: A diversified portfolio lowers your risk.

New rule: Diversification won't always save you - and you need more of it than you think.

Diversification hasn't stopped you from getting hurt in this downturn. Both U.S. and foreign stocks are deep in the red. Holding bonds did cushion your losses, but most kinds of bonds still declined. What happened?

Jeremy Grantham, chief investment strategist at GMO, observed back in 2007 that we had a bubble not just in one or two kinds of assets, but in risk. Investors around the world were so confident, and so hungry for even a little extra return, that they were throwing money at anything that might deliver. Now that the risk bubble has burst, all those investors want now is the safety of U.S. Treasuries. So everything has moved roughly in sync, both up and down, for a few years.

Bear in mind, though, that these times are, to say the least, unusual. Over a longer period - as little as a decade - diversification still looks effective. While large U.S. stocks are down the past 10 years, U.S. corporate bonds earned 4.6% a year for the same period.

But in a global economy where money moves quickly, you have to work harder at diversification than before.

What to do: To ensure you are diversified, you don't have to go out and buy 16 new mutual funds. First, look under the hood of the funds you have to see if you already own some of those assets. An easy way to do so is to plug your holdings into's Instant X-Ray tool. And buy funds that kill two birds with one stone. The T. Rowe Price International Bond fund, for example, invests up to 20% of its assets in emerging markets and the rest in developed countries. Put that together with a high-yield fund and a broad U.S. bond fund, and you'll own most of the bond universe.

Rule No. 7: Retirement

Old thinking: Retiring early is a prize.

New rule: Retiring early is a problem.

Ever since Uncle Sam set 65 as the age you could retire and collect full Social Security benefits (it's 66 or 67 for boomers today), workers have been trying to beat that bogey by quitting early. And that seemed well within reach earlier in this decade after a bull market that gave workers confidence that their money could work for them rather than the other way around.

But the reality of early retirement, even before the stock market's sickening plunge, was never quite that rosy. More than half of early retirees leave work before they intended, and of those, nine in 10 depart because they get sick or are downsized.

And now the financial prospects for those who had a shot at a secure early retirement have dimmed: Long-tenured workers nearing retirement have seen their 401(k) accounts shrink an average of 30% over the past 14 months, according to EBRI. There's no way around it: The numbers require you to rethink your plans.

What to do: "By delaying retirement just one year you could increase your annual retirement income by 9%," says Richard Johnson, senior fellow at the Urban Institute. If you can hang on to your current high-paying post, great. The reality, of course, is that in an era of harsh cost cutting, well-paid older workers are more vulnerable. And you might not want to stick it out any longer anyway if the severance is decent. But there's much to be gained from finding another job, even if it's a lower-paid or part-time position. If you can earn enough to avoid collecting Social Security benefits early or dipping into your retirement accounts, research by T. Rowe Price shows, you'll barely feel a hit to your income when you do retire. If your new job comes with health benefits, so much the better. The average health-care tab for an early retiree before he is eligible for Medicare runs to $8,500 a year, says an AARP study.

Despite all those benefits, if you are still many years away from the retire-or-work decision, you should think of working longer as Plan B. As we noted, you won't have complete control over your ability to work - your health or the job market could make it difficult. That means you can't afford to assume that you'll just work a few more years if things go wrong. You will still have to stick to rules 1 through 6.

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