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Wednesday, 30 September 2009

4 low-risk inflation strategies

Margarette Burnette

Inflation should be a top concern for investors, especially among people facing retirement, says Michael Kresh, a Certified Financial Planner and author of "You Can Afford to Retire."

"When you are trying to accumulate money long-term, you have to try to beat the rate of inflation," Kresh says. "That means real (inflation-adjusted) growth in your portfolio, not just nominal growth."

The following are expert tips to help savers balance the desire for financial safety with the need to outpace inflation.

1. Strike balance between safety and return

Investors can easily protect themselves against the risk of loss of principal by choosing safe, low-yielding investments. However, that "safety" may be a mirage.

Parking money in such accounts makes it vulnerable to the risk of loss of purchasing power that comes with inflation, Kresh says.

4 inflation-fighting tactics

1. Strike balance between safety and return.
2. Add TIPS to list of possibilities.
3. Keep a sliver -- or more -- of stocks.
4. Stay the course?

"There's no way to get a real rate of return without taking some sort of financial risk," says Kresh.

Investors need to ask themselves how much risk they can take, says Neal Ringquist, president and chief operating officer of Advisor Software, a Lafayette, Calif.-based company that provides investment management software to advisers.

"I advise people to sit down and analyze their age, assets, liability and cash flow," Ringquist says. "Then they can define their goals and come up with a strategy to meet them."

The analysis helps people understand their capacity to bear risk. Investors who need 95 percent of their money just to meet minimum living expenses won't be able to take on as much risk as someone with a bigger cash cushion, says Ringquist.

2. Add TIPS to list of possibilities

Treasury Inflation-Protected Securities are low-risk Treasury bonds that guarantee a return that rises along with the inflation rate, as defined by the Consumer Price Index.

If inflation increases, so does the value of the TIPS investment.

TIPS are issued in five-, 10- and 20-year terms. They can be purchased through a broker or directly from the government through the TreasuryDirect Web site. An investor can buy up to $5 million in TIPS with a noncompetitive bid. More typically, these bonds can be purchased for as little as $100. They're also sold in $100 increments.

TIPS pay interest twice a year and the income is taxable.

Because TIPS increase in value every time inflation rises, there is some possibility an investor will incur taxable income from the security, Kresh says. In fact, bond holders are responsible for paying federal income taxes on the bond's appreciation in price even though they don't receive any actual income from the appreciation until the bond matures. This is commonly known as a "phantom income" problem.

Investors also can invest in TIPS through mutual funds or exhange-traded funds. One big advantage of purchasing TIPS through a fund is that funds pay out income in the form of a dividend, Kresh says. The fund owner still owes taxes, but does not have to wait to receive the income.

"If you're buying TIPS, it might be better to buy them in a fund simply because that income is distributed rather than having the growth in the bond," he says.

I bonds are another government-backed investment security that correlate with inflation. They can be purchased in increments as small as $25, but have a maximum purchase amount of $5,000.

"Since you can't accumulate a large savings with them, I bonds are really for smaller investors," says Kresh.

Current interest rates for TIPS and I bonds are very low -- zero percent in the case of I bonds -- just as they are with short-term Treasuries and short-term CDs, Kresh says.

"The difference is these bonds will pay the rate of inflation plus the interest that's promised in the bonds, so at least you know you'll have a real rate of return over time," he says.

Inflation-indexed bonds are investments that help people who are simply concerned about their savings, and are not necessarily worried about the market or trying to grow their net worth, he adds.

The values for TIPS and I bonds reset twice a year. Of course, the federal government fully backs TIPS and I bonds.

"It makes them a pretty safe investment," says Kresh.

3. Keep a sliver -- or more -- of stocks

Some investors may want to lower the amount of risk in their portfolio. But that doesn't mean they should shun equity investments entirely, says Richard Staszak, a financial adviser and estate planner in Pittsburgh.

Staszak advises retirees to put at least some of their money -- typically, cash they won't need for at least five years -- into stocks instead of traditionally low-yielding investments.

"If you have money that you don't plan to use for the next five to 10 years, why should you penalize yourself in an investment vehicle that pays only a half a point percent?" Staszak says.
“There's no way to get a real rate of return without taking some sort of financial risk.”

Bill Losey -- a Certified Financial Planner in Wilton, N.Y., and author of "Retire in a Weekend!" -- agrees.

"People are going to be living in retirement for 20 (to) 40 years," he says. "Even at an inflation rate of only 3 percent per year, you'd need to have about double your current income in 20 years just to maintain the same standard of living you have today."

Losey says that while there is no guarantee the market will perform as well as it has in the past, "the stock market has been the only place that has consistently delivered returns above inflation over a consistently long period of time."

Losey acknowledges that investors may need to keep some money in low-yield investments. But he adds that many people don't consider their long-term needs.

"Unfortunately, I'm seeing people who are panicking and taking all of their money out of the stock market," he says. "They're changing their entire investment philosophy to a 'preservation of capital' strategy.

"That's a real dumb move, and you can quote me on that."

Losey notes that he often meets people in their mid-to-late 70s who made similar mistakes in the past.

"They tell me, 'I retired 15 years ago and was defensive with my investments because I didn't want to take risks."

The result?

"They're blowing through their savings accounts and can't maintain their standard of living because their costs have increased," Losey says.

4. Stay the course?

Balancing concerns about inflation with worries over investment risk means different things to different people. While retired investors might take a cautious approach, it could be a different story for investors with a longer time horizon.

Younger investors should manage instability by building a stash of emergency cash and committing to invest a set amount of money consistently, says Larry Rosenthal, a Certified Financial Planner and president of Financial Planning Services in Manassas, Va.

"My advice is to get back to basics," he says. "Maintain adequate cash reserves and use dollar cost averaging for investing.

"When we have economic expansion, it can create volatility in stocks, especially if inflation increases. Younger investors can start dollar cost averaging now to limit volatility concerns."

Ringquist says investors should resist the urge to follow the investment crowd unless the move helps them reach financial targets. This is true regardless of whether the economic climate is unstable or calm.

"You have to ask yourself what is more important -- beating some index or achieving your retirement income objective," he says. "Returns on a portfolio are meaningless outside of the context of what your investments are doing to meet your goals."

The period of insane market volatility is over

By Paul R. La Monica, editor at large

Wall Street will celebrate a not-so-happy anniversary on Tuesday.

A year ago on Sept. 29, the Dow Jones industrial average suffered its worst point drop in history, plummeting nearly 778 points, after the House of Representatives rejected the first draft of the $700 billion financial rescue plan. The S&P 500 and Nasdaq each plunged about 9% that day.

Of course, the controversial Troubled Asset Relief Program, or TARP, ultimately wound up passing the House a few days later after the Senate approved a modified bill. Some politicians who initially voted against the bailout even attributed fears of another big sell-off as a reason for changing their minds.

The market chaos didn't end with the passage of TARP though. Over the next few months, the Dow suffered its second-largest, fourth-largest and fifth-largest point drops ever -- but also its biggest, second-biggest and third-biggest point gains in history.

Looking back, it truly is amazing how jittery and uncertain investors were about where the economy was heading. Between the time that Lehman Brothers collapsed on Sept. 15 and the end of 2008, the S&P 500 moved up or down at least 3% in one day a stunning 29 times.

Fortunately, the days of insane market volatility appear to be over. Even Monday's triple-digit point rally in the Dow was relatively tame. The Dow gained only 1.3% while the S&P 500 was up 1.8%.

The S&P 500 has experienced a 3% swing only 20 times so far this year. And that could be a sign that the recent rally, despite some concerns about running too far too fast, could be for real.

"The lack of volatility is a sign of good behavior. This is what you should see at the start of a bull market. We've moved from a period of crisis to a period of early recovery," said Todd Campbell, president of E.B. Capital Markets, a Durham, N.H.-based research firm catering to institutional money managers.

In fact, when you look even more closely at the times the market had a big up or down day, almost all of them took place during the first quarter -- a time when investors were fearing the worst for the economy.

None of the 3% gains or losses in the S&P 500 have occurred during the third quarter, and only four of them took place in the second quarter. That means the rally has been an orderly move higher, largely absent of the bipolar market shifts that characterized the fourth quarter of 2008.

Alan Skrainka, chief market strategist with Edward Jones in St. Louis, said it makes sense that stocks are no longer being whipsawed like passengers on a Tilt-A-Whirl.

Skrainka said TARP and other bailout programs, despite their many critics, has helped restore confidence in the banking sector, stock market and economy at large.

"We don't have the extreme volatility anymore because we've reached greater stability in the financial markets. Credit markets have mostly returned to normal," he said. "Many of the problems that were keys to the panic have been addressed and it looks like the economy is coming out of recession."

This doesn't mean that investors can cavalierly dismiss some of the economic concerns that still exist.

Commercial real estate may be a lingering headache for banks. The national unemployment rate is inching closer to 10% and is not expected to fall anytime soon.

And even though large companies are expected to post decent profits for the third quarter, much of that will be due to cost-cutting and the weak dollar as opposed to real revenue growth.

Bill Stone, chief investment strategist with PNC Wealth Management in Philadelphia, said one worry is that investors are starting to expect a robust and rapid rebound in both corporate profits and the economy. That may not come to pass.

In fact, weaker-than-anticipated reports regarding housing sales and durable goods orders helped push stocks lower last week. That just goes to show that the recovery may take longer to unfold and may not necessarily be a smooth one.

"We're in a recovery. But there was mixed economic data last week and the market didn't like it. So investors could get the shakes," Stone said. "When you set the bar higher, there's a better chance you knock the bar off and fall down. The risks have increased."

Skrainka conceded as much. He said that sooner or later, stocks will have to cool off. After all, the S&P 500 is now up nearly 60% since its March low.

"It's been a remarkable rally -- any way you measure it," he said. "So there will be some kind of correction and investors need to factor that in to their planning."

All that said, Skrainka thinks that a correction -- technically defined as a 10% drip from a recent high -- could be just a temporary pause in what may be a new bull market.

Stone agrees. If stocks do pull back, he doesn't think it will be for long. And he is hopeful that such a decline will be as gradual as the recent run-up has been rather than a sudden, sharp sell-off.

"Short term, you have to make the case that stocks are overbought. But the market is now viewed much more stably," he said. "So much of the concerns last year were that we were sinking into the abyss and that the financial system had cracked. We've come a long way since then."

How much is a burger worth?

IF SINGAPOREANS feel they cannot afford to buy as many things as they could a few years ago, they are not imagining it, according to a survey by Swiss bank UBS.

The proof, so to speak, is in a burger.

The survey shows Singapore workers have to slog longer to earn enough money to bite into a Big Mac. Its price is equivalent to about 36 minutes' worth of work, 14 more than three years ago.

It is, however, just one ingredient in the survey which covered the prices of 122 goods and services.

While a burger index is hardly a scientific study of purchasing power, it does provide some meat to the argument that workers here are getting a tougher deal than those in some other countries.

Singapore's worsened placing on the burger index - a proxy for the cost of goods and services - highlights two possibilities: either that consumption has become more costly, or pay packets have become lighter.

Both are worrying trends which could have crept into the country, serving a double whammy to residents who are feeling the pinch from the downturn.

What accounts for the trend? Is it just a blip or here to stay? More importantly, what are the social and political costs if they persist?

Money not enough

THE UBS survey tracks prices and earnings of 73 cities this year, including Singapore. It started in 1971 with 31 cities, and has since been conducted every three years, with a growing list of cities.

Now, it includes Asian capitals such as Beijing, Kuala Lumpur and New Delhi along with key Western financial centres like London, New York and Zurich.

Price and wage levels are compared across the different cities with a standard basket of 122 goods and services and a set list of 14 professions.

In its latest survey done in March this year, the picture painted of Singapore is not a cheerful sight. It shows that the country is among First World economies in prices but not necessarily in wages.

Singapore is ranked the 24th most expensive city, moving up eight spots from the last survey in 2006. It is more costly than Chicago, Hong Kong and Sydney.

If rent is included, Singapore is even higher, at No. 15.

But there was no similar progress in wage levels. On the contrary, the average hourly gross wage dipped from US$7.30 (S$10.30) in 2006 to US$7.10 this year.

This led to Singapore slipping two notches to 40th position.

Interestingly, Singapore's wage level is just one rung above Moscow's. But in the price chart, Moscow is way down the list, at No. 56 - or 32 places below Singapore.

With pay increases not keeping pace with price hikes, purchasing power is squeezed. Singapore has declined 10 spots to the 50th position, behind cities like Bratislava in Slovakia, Johannesburg in South Africa and Kuala Lumpur in Malaysia.

Are the findings an accurate reflection of Singapore?

Not quite, says MP Seah Kian Peng, who also chairs the Government Parliamentary Committee for Community Development, Youth and Sports.

'The figures may be right, but the conclusion could be wrong,' he notes.

Rather than look at prices and wages in isolation, he says the key considerations should be: Do Singaporeans lead a better life than they did in the past, and are the poor taken care of?

'If the answer to both is yes, then moving up or down two notches becomes mere semantics,' he says.

He cites a recent government report which found that the salaries of the bottom 20 per cent of wage earners have risen. Their monthly wages increased from $1,200 in 2006 to $1,310 last year.

Like him, MP and labour leader Halimah Yacob questions the survey's validity.

While she is concerned by the findings of declining purchasing power, she wonders whether the indicators include government aid.

This covers a wide range, from the Workfare Income Supplement for low-wage earners, to rebates and subsidies in healthcare, education and housing. These 'are significant and help people to cope better', she says.

The scepticism of both politicians is shared by some analysts and political watchers, who believe that price comparisons across cities tend to be tenuous.

One key problem, they say, is the survey methodology which may not fully capture different consumption habits.

Varying prices

TO UBS, the strength of its survey is consistency.

'We measure the same goods across the cities and aggregate these prices in a goods basket that is the same for all the observed cities,' explains Mr Thomas Kaegi, UBS Wealth Management Research's head of macro-economic research for Asia-Pacific.

This enabled its researchers to compare cities on the same indicators.

Using one standard basket of 122 goods and services - from food to Internet connection costs - UBS determined the price levels in various cities.

With that same basket, it analysed the purchasing power of the cities' residents by how much their average incomes - based on 14 professions - can buy from that basket.

Mr Kaegi recognises its weakness - it does not take into account consumer patterns and taste buds that differ across countries.

For instance, veal steak, cheese and frozen pizza are among the 39 food items included in the basket of goods - but these imports from the West are not exactly standard fare for a typical Singaporean.

Diets aside, differences in culture and behaviour are also not captured.

Mr Kaegi observes that many Singaporeans would rather eat out at a hawker centre instead of buying food items and cooking at home, which is what people in Europe generally prefer.

Another example he cites is domestic foreign helpers, who are not included in the reference basket but whose services are widely used here.

'If Europeans were to employ domestic helpers, which they don't, it would make Singapore's price level lower,' he says.

High cost, low wages

DESPITE the survey limitations, there is no denying its broad conclusion that prices in Singapore have risen faster than wages here in the last three years.

The chief culprit appears to be the global recession which robbed workers of wage gains but did little to suppress high prices left by last year's record inflation.

Inflation peaked at a 26-year high of 6.5 per cent last year, owing to soaring food and fuel prices.

Unlike wages, prices have yet to deflate significantly despite the onslaught of the economic crisis late last year, notes DBS economist Irvin Seah.

'Look at general food prices... We saw some slight adjustment, but not as much as the downward adjustment in wages,' he says.

According to Singapore's consumer price index in March - when the UBS survey was conducted - food prices rose 4.6 per cent over the same period last year due to dearer items, from cooked food to fruit and vegetables.

On the other hand, pay packets shrank in the first three months of this year compared with the same period last year, according to Manpower Ministry figures.

Its quarterly labour report showed that real wages - wages minus inflation - had declined by 5.8 per cent.

The timing of the UBS data collection could be another reason for Singapore's poorer showing in the survey ranking. March was when Singapore was bearing the brunt of the global recession.

'Singapore was one of the worst-hit economies during this recession in terms of growth,' notes Mr Seah.

'If you take the reading then, you'll naturally see lower wages and purchasing power relative to other countries which fared better during this recession.'

The low pay of low-skilled workers here also dragged down Singapore's average wage level.

The salary gap is wide when comparing the net incomes of low-skilled workers here and elsewhere, notes economics professor Basant Kapur from the National University of Singapore (NUS).

Drawing a comparison between workers in Singapore and Sydney, the UBS survey figures are telling.

Women sales assistants in Singapore earn an average of US$7,500 a year, less than half the annual income of US$17,700 for those in Sydney.

It is the same fate for bus drivers. In Singapore, they earn US$11,400 a year, while those in Sydney get US$25,000.

In contrast, there is less of a salary gap between higher-skilled workers here and in Sydney.

Department heads in the metal industries earn US$43,100 a year in Singapore, slightly less than the US$52,600 in Sydney. Product managers get US$45,100 a year in Singapore, while those in Sydney receive US$49,800.

The low wages of the lower-skilled in Singapore are due to many factors, says Prof Kapur, including competition from low-wage countries and technological changes which do not favour them.

The influx of foreign workers in recent years, especially in the services sector, has not helped.

'Their availability reduces the incentive for employers to adopt more technologically advanced and productive methods of production that would enable them to offer higher wages,' he notes.

Associate Professor Shandre Thangavelu from the NUS, however, cautions against attributing the wage decline to foreign workers.

Referring to the UBS 2006 and 2009 surveys, he compared the wage levels for different Asian cities.

The wage level index dipped by 13.9 points for Seoul, six points for Taipei, four points for Tokyo, 1.4 points for Kuala Lumpur, and 5.4 points for Singapore.

However, the wage index rose by 6.3 points for Hong Kong and 2.9 points for Bangkok.

'Since other cities in Asia have also experienced similar decline in the wage level... it is difficult to conclude that Singapore's growth model or influx of foreign workers is the cause of the decline,' he notes.

Regardless of the cause, analysts say policymakers ought to even out the imbalance between price and wage costs.

As Assistant Professor Randolph Tan from the Nanyang Technological University puts it: 'Except for labour costs, most things have become more expensive between 2006 and 2009.

'That could imply that in terms of ensuring Singapore's cost competitiveness, we must look beyond wage restraint.'

Middle-class squeeze

IF THESE troubling trends are not reversed, this could lead to growing discontent, especially among the sizeable group of middle-income earners in Singapore.

This same group tends to receive less government aid and rebates, compared to low-income earners who receive more aid to ease their plight.

With lower purchasing power, it would be harder to maintain a middle-class standard of living, notes sociologist Tan Ern Ser from the NUS.

'If we pride ourselves in being a middle-class society with a large middle class, then we would have a high proportion of people experiencing an expectation gap,' he adds.

While the 'expectation gap' could cause some unhappiness, he does not believe it will result in a backlash against the Government.

His reason: The gap is not primarily attributed to government policy but to globalisation.

'Also, the middle class in Singapore constitutes only a category, not a united, highly charged political force.'

But for a government whose mandate rests on delivering a better life for citizens, it will need to ameliorate the pain, note analysts.

'If the Government can convince the middle class they are doing better than the middle classes elsewhere, and that the problem lies with global competition, then the political consequences could be moderated somewhat, or even become non-existent,' says Dr Tan.

Placating the people

FOR now, it could still be possible to lay the bulk of the blame on external forces like globalisation, because fiscal measures are fuelling the slowly recovering economy.

But not forever.

'If the situation of falling wage levels and declining purchasing power deteriorates rapidly, then it would undermine the performance legitimacy of the Government,' says political observer Eugene Tan.

Economic growth which prospers people is a fundamental basis of the Government's legitimacy, he notes.

'A continual decline in purchasing power will deflate the Government's bragging rights that it fosters shared economic growth.

'In turn, public opinion that the Government's economic policy is not working will be stoked, accompanied by the greater likelihood that voters may be bolder in wanting to try alternatives,' he adds.

If this happens, 'the possibility of a significant swing against the ruling party cannot be ruled out', says the law lecturer from Singapore Management University.

To keep any such eventuality at bay, Singapore needs to fine-tune strategies to ensure that it not only remains competitive but also mitigates the constant downward pressure on wages, notes Dr Gillian Koh, a senior research fellow at the Institute of Policy Studies.

During the depth of crisis, the Government went swiftly to the aid of Singaporeans and companies, unveiling a $20.5 billion Resilience Package in its January Budget.

Families received twice the amount of goods and services tax (GST) credits. Those living in HDB flats also received increased rebates for service and conservancy charges, with one- to three-roomers getting an extra month of rebate and owners of bigger flats receiving half a month more.

In addition, low-wage earners received 50 per cent more Workfare grants to supplement their income as well as more transport vouchers.

Dr Koh says the challenge for the Government lies in convincing people it is doing all it can to improve the economy which, in turn, will increase the number of well-off citizens.

However, Singaporeans too must take the initiative to improve their lives, she adds.

CIMB-GK regional economist Song Seng Wun believes Singaporeans should be better off by 2012, especially if inflation stabilises to around 1.5 per cent.

'With asset inflation, more stable food prices, we'll see affordability moving up if economic growth returns to normal. Wages will be pulled up as well,' he says.

Tuesday, 29 September 2009

Singapore: Keeping cool in the heat

Pauline Goh
Managing Director
CB Richard Ellis Singapore

THE measures are aimed at cooling the market by lowering demand and increasing supply. On the demand side, the removal of the special payment schemes will effectively encourage homebuyers to reassess their cashflow position carefully before they make purchase commitments. Those who have sufficient funds only for the upfront 20 per cent downpayment and are relying on the future sale of their existing homes to help finance their new purchases may now be encouraged to hold back on newly launched projects and possibly look instead to the secondary market including projects that are close to TOP.

On the supply side, the re-introduction of the confirmed list back into the government land sales programme will provide better visibility to the market on the pipeline of future supply.

These measures should help to moderate, to more sustainable levels, the current sales momentum which has escalated since March and looks set to easily exceed the record volume of 14,811 units in 2007.

Laura Deal
Executive Director
The American Chamber of Commerce in Singapore

THE American Chamber of Commerce in Singapore just conducted its eighth annual Business Outlook Survey of US businesses across Asean. As part of this survey, companies rate their satisfaction level with aspects of the business environment of the country in which they operate.

Overall, Singapore is viewed extremely positively by US companies based here as a place to do business. However, for several years, the greatest dissatisfaction has been with the cost of overheads – mainly housing and office leases. In 2008, 74 per cent of the surveyed US companies based in Singapore reported being dissatisfied with housing and office lease costs. In 2009, that number declined to 55 per cent for housing and 47 per cent for office leases. Anecdotally, our members also cite housing and office lease costs as the greatest challenge to planning business expansion in Singapore rather than other countries in the region.

It is crucial for the Singapore government to keep housing and office lease prices low as the country rebounds from the world economic downturn. Through these measures, the government is ensuring that Singapore remains competitive in attracting and keeping foreign companies.

David Leong
Managing Director
PeopleWorldwide Consulting Pte Ltd

HAVING witnessed the burst US property bubble, it is not hard to imagine how those conditions – if not tempered with cooling-off measures by Ministry of National Development – will put Singapore in similar dire straits. Property prices should be aligned with economic fundamentals. With the current spiralling of prices, these are signs of heightened speculative activity with no major shift in economic fundamentals.

The intervention with the immediate withdrawal of the interest absorption scheme (IAS) and interest only loans (IOL) being offered for purchases of uncompleted property developments will halt any frivolous speculations for the moment. However, with the interest rate pedal nailed to the floorboard and remaining so low for such a long time, new money will find properties as good investment options.

Whatever the case, it looks like demand outstrips supply and therefore there is a chasing up of the property prices. Private home sales witnessed strong upswing since February this year when 11 times more homes were sold compared to January’s 108 units. Since then, developers have sold more than 10,000 units, more than double the 4,300 sold in the entire 2008.

All eyes are on the economic performance since should growth turn out weaker than expected, all buyers of property will be chasing the tails of escalating prices with possible capital losses should the market suddenly correct and rebalance. This will create a negative wealth effect traceable to a flattening out or worst, a drop in property prices.

On the other hand, should the recovery maintain its course, interest rates will shoot north and drive up financing cost and this can have serious implications for those who are over-extended with no real money to back their purchase.

The removal of the IAS and IOLs will technically remove the speculative element from the burgeoning sales volume. This is good for mid to long-term genuine homebuyers and investors as it will take out the speculative element in the pricing of the property.

The cooling-off measures by the government will discourage property ‘flippers’ but I suspect that property prices and sales volumes will continue to improve, with a more sustainable pace of increase and with less volatility as hopefully, cool and level heads will prevail.

Reto Isenring
Managing Director
VP Bank (Singapore) Ltd

DEVELOPERS’ launches and sale volume in June 2009 exceeded even the pre-crisis 2007 levels, and while the government initiatives are well-intended at preventing another property bubble, I feel that there was an oversight on the type of property buyers participating in this round of growth.

In the bull market of 2007, property purchases required only 10 per cent cash outlay, and everything else was easily loaned from banks on interest-serving loans. That set the stage for speculation and consequently, the property bubble.

However, the 2009 scenario is dramatically different, as tighter credit policies capped bank loans at 80 per cent loan-to-value. Coupled with a lower valuation to sale price, cash-tight investors and pure speculators were eliminated from the market as the cash capital is drastically higher than before.

Therefore the government measures of removing the interest absorption scheme and interest-only housing loans are only marginally effective.

Instead, I feel that the deciding factor on the behaviour of property buyers will emerge from the leasing market front. Looming pipeline supply amid weak growth foreseen for expatriate population and demand will remain a concern, and if the rental yields decline sharply, there will be a shift in funds from property investments into other potentially more lucrative investments.

Teng Yeow Heng Michael
Managing Director
Corporate Turnaround Centre Pte Ltd

THE measures to cool the property market are not appropriate. The real estate prices have actually not hit the roof yet. Singapore property prices are merely rising in line with what is happening in Asia and also catching up on lost ground.

The funds are currently coming fast and furious into Asia because of the major central banks’ fiscal stimuli a few months ago. We are seeing real estate prices and stock markets rising in many countries in Asia, not just Singapore.

I believe that this escalation of real estate prices is short term as the economic fundamentals are still weak globally. Our government should just let the property market run its course without any interference as it will not be effective in changing market sentiments.

Wee Piew
HG Metal Manufacturing Ltd

A RECENT report by Savills Singapore shows that quite a number of property sub-sales resulted in substantial losses for owners who sold in Q1 this year. A large number of these owners who suffered losses were short-term speculators. I believe that such losses are the best way to weed out property speculators. Once bitten, they are less likely to try their luck in buying a property and hoping for a quick ‘flip’.

However, in any form of investment, some form of speculation is healthy to create a thriving market where there are ready buyers and sellers. The key is to prevent runaway or excessive speculation.

As such, I believe that the recent government measures to remove interest absorption schemes will help ensure buyers are more ‘genuine’ or have enough resources to buy and hold the property for a longer time horizon.

However, the government must be mindful that it treads a thin line in having to avoid excessive interference in the market, thereby dampening a market which just six months ago was still in the doldrums.

After all, the current property boom, being liquidity driven, is not unique to Singapore as you will see similar trends in Hong Kong and China.

Loi Pok Yen
Group CEO

RECENT events over the last year has shown that capitalism in its purest form may be flawed. The assumption that markets are efficient and allowing market participants to get ahead of themselves is potentially dangerous.

Singapore’s government has always taken an approach that prevents financial disruptions which may cause damage to the social fabric and destroy the lives of its citizens. I like to consider this capitalism with a conscience.

The recent measures present buyers and sellers with a different perspective – the government’s. Being able to talk down the market without resorting to monetary policy is always the preferred route. Whether it can be effective in the long run, however, remains to be seen.

Kelvin Lum
Executive Director
LC Development Ltd

THE effectiveness of the recently announced government measures to cool the property market will probably be more evident in the upcoming expected launches till year-end which supposedly will yield about 3,700 units.

The run-up in prices for the mass to mid-market sectors might also start to face resistance from the recent price surge as well as talk about a slowing equity market. From a global perspective, the Federal Reserve’s decision to maintain measures to support the fragile US economy suggests that fundamentals still remain weak, and ultimately would have an impact on other major Asian economies.

These factors, coupled with the recent measures, might possibly dampen the sentiment among speculators but genuine home buyers could still support buying interest in homes as they are likely to be undeterred by the removal of the IAS and IOL.

Lim Soon Hock
Managing Director
Plan-B ICAG Pte Ltd

PEOPLE believe that the economy is finally turning around. They base this on the positive economic growth data across the globe and the rally in the stock market. Anticipating that property prices will likewise increase, they are buying now, including speculators.

I believe that the government’s actions are not targeted at the genuine buyers, for example the HDB upgraders and en bloc sellers, but rather the unscrupulous speculators. However, in the current somewhat buoyant environment, where there is demand, the government’s hand in curbing speculation is weak relative to market forces, as was seen in recent property launches after the government’s intervention.

That said, as a result of the measures, I expect price increases will be gradual, rather than spiralling to dizzying heights, that were seen pre-financial crisis.

Alastair Hughes
Chief Executive Officer – Asia-Pacific
Jones Lang LaSalle

THE announcement of the measures was intended to send a strong signal to the market that the government will step in to balance supply and demand to avoid an overheating of the property market and curb speculation.

In the weeks following the announcement, it has not created any significant knee-jerk reactions in the market and there has been no evidence of any significant reduction in demand. It has, however, made the market sit up and assess the current pricing.

The real test of the effectiveness of these measures will be in the medium to long term. A number of factors come into consideration, including the recovery prospects of the global economy, which will have an impact on Singapore; as well as the financial strength and affordability of developers and homebuyers respectively. How these factors play out will determine whether the government needs to re-evaluate its stance.

Maintaining a stable property market with regulatory transparency and consistency is important for Singapore to keep its position as a regional business hub and therefore, a combination of market forces plus prudent central influence on demand and supply is a recipe for success.

Liu Chunlin
K&C Protective Technologies Pte Ltd

I THINK that the measures are good. But the issues are more complex than just cooling the market. There are other concerns to be addressed and the baby should not be thrown out with the bath water.

For example, there are genuine buyers, especially HDB upgraders who have held back over the last one year or so. Some of them may be hit by financial difficulties after committing to a purchase and they would need help.

There will inevitably be speculation or flipping, and certainly we want to avoid the debilitating effect of an asset bubble, especially as Singapore is a small market. And nobody wants the property market to be manipulated to the detriment of the genuine buyers.

In essence, the government has intervened by being one of the players, and a significant player at that, in its role as regulator and major supplier of land.

Krishna Ramachandra
Managing Director
Arfat Selvam Alliance LLC

THE recent measures adopted by the government are just about perfectly weighted. I say this because these measures have the clear intent of signalling to the market that a firm interventionist approach is still on hand, and yet the measures adopted are not really going to shock the market and send it into free fall.

These measures have not and will not seriously hurt the players in the property market. But what they have done is diffuse the uneasiness that surrounds the phenomenal rise in property prices. Clearly, the government has learnt from past experiences that any intervention has to be appropriate in what it intends to achieve but more importantly, the timing of such intervention is critical.

The economy is still very fragile – and still yearning for positivism – and as such, if the intervention was any harsher than what has already been instituted, it would have been an over-kill. So ‘well done’ to the policymakers in getting this one just right.

Jimmie Lee
Dynaforce International Pte Ltd

AS a property owner, I would love to see prices continue to escalate (albeit in a more realistic manner). But I am also a potential buyer because property is now one of the safer investments. So as a potential buyer, I am glad to see that the government making this move. In a ‘guided’ economy like Singapore, it is definitely the right message at the right time. But we have also seen that it has not tamed the raging bull.

Not unexpectedly, we see the media roped in to accentuate the message. The press has listed the average loss that buyers of luxury apartments suffered. The teacher has taken out the cane and whacked it on the table. He’s got our attention and we know his intentions. But like my old classmates in ACS, many will still be itching to test the limit.

R Dhinakaran
Managing Director
Jay Gee Enterprises Pte Ltd

THE high volatility and frequent swings in Singapore’s property market is perhaps a combined function of its small land mass, present high liquidity in the market and rampant speculative behaviour.

While demand and supply in its own course can correct much of these anomalies in a fairly large market, the scarce land resource buoyed by speculative interests often leads to a panic situation among genuine buyers.

The recent announcement is aimed to make buyers think on their longer-term financial liabilities than to look at property as short-term investment.

While it is definitely a step in the right direction, it addresses the speculative behaviour only partially. Similar to the stock market, a more elaborate framework to desist ‘insider trading’ and conflict of interest would help in further limiting speculation.

Additional taxes on gains made from frequent speculative trading activities will help in curbing this behaviour to some extent.

Deb Dutta
Vice-President – Asia-Pacific

IN the near term, these measures will cool off rising property prices. However, when the property market takes a beating, these same measures will be relaxed again to encourage existing home owners to upgrade and new owners to buy. Within a year since the financial market meltdown, this is the second time that the government has proposed mitigating measures to regulate the property market.

Increasing land supply means more property developments in the pipeline and therefore more jobs. All these are good. However, Singapore is just one small island with a finite supply of land. Land reclamation is one way to increase land area while urban renewal is another to clear out the old buildings for taller and swankier-looking high-rise residences, at the expense of heritage and nature conservation.

The government may like to take a step back and revisit the property market from both genuine home owners and investors’ view points, so that a longer-term and more sustainable measure that works for both groups of buyers can be put in place.

David Low
Futuristic Store Fixtures Pte Ltd

THE recession may now be recent history but fundamentally, the world at large is still experiencing slow growth. Yet property transactions are rife and mirror that of peak times in 2007 despite a polar economic setting. This is an interesting phenomenon that seems to defy financial sense, and calls for more in-depth study.

For a start, there is an urgent need to marry market fundamentals with sentiments to moderate rife speculation which could otherwise lead to another burst property bubble or worse, will create a depression.

What the government is doing to tame investment and speculative property purchases is certainly timely. Measures such as the removal of the interest absorption scheme and interest only housing loans are certainly effective as a wake up call to mass market buyers who are hoping to make a pile from speculation that may well be beyond their financial call. This will help to moderate advanced cash spending and prevent an alarmingly high-debt society from forming.

Dora Hoan
Group CEO
Best World International Ltd

THE Singapore property sector is in the midst of a boom quite like that of 2007, when we made headlines as the world’s hottest real estate market. There is a confluence of factors that has triggered the returning frenzy and I believe that many of them are positive. Singapore is recognised as the top destination in which to do business. Such a bright prospect is made even more vibrant by signs of global economic recovery, the stock market rally, the imminent completion of massive casino resorts, low interest rates and a search for more stable, alternative investments – all these contributed to encourage property buying.

While speculation is inevitable for any market, the government has done well in acting quickly to temper the heightened exuberance which may result in a speculative bubble that will be hazardous for both Singapore and the region. We do not need much memory refreshing to realise that a red hot property market can go out of bounds and mimic what happened in the United States before the sub-prime crisis. I believe however that if we remain upbeat but cautious, we can seize opportunities here in positive light.

Source : Business Times – 28 Sep 2009

cnbc M&A Is Back and May Bring Big Opportunities for Investors

After missing in action for much of this year's stock rally, mergers and acquisitions are making a big comeback.

On Monday alone, Xerox (NYSE:XRX - News) announced plans to buy Affiliated Computer Services (NYSE:ACS - News) in a deal valued at $6.4 billion. And Abbott Laboratories (NYSE:ABT - News) agreed to buy the drugs unit of Belgian conglomerate Solvay for $6.6 billion in cash.

Kraft (NYSE:KFT - News) also is reportedly poised to launch a hostile bid for Cadbury (NYSE:CBY - News) valuing the British confectionery business at around 11 billion pounds ($17.6 billion).

On top of that, Disney (NYSE:DIS - News) agreed earlier this month to buy Marvel (NYSE:MVL - News) and eBay (NasdaqGS:EBAY - News) is moving ahead with plans to sell a majority stake in its Skype unit.

Stocks opened sharply higher Monday as investors cheered the growing wave of M&A activity.

"It reflects an improvement in investor psychology," says Curt Lyman, managing director at HighTower Advisors in Palm Beach, Fla. "For investors, it gives them hope that the world is not coming to an end, businesses are still in business to make money."

As strong sentiment persists that the market is due for a substantial correction following its six-month rally, the resurgence in M&A activity could counter that trend and help the rally continue.

As for specific M&A deals, analysts see energy as a sector most likely to benefit, while materials, consumer staples and health care also could be active.

The key will be value, with acquirers trying to find companies whose shares remain beaten down from the bear market that destroyed 50 percent of Wall Street's worth from October 2007 until March 2009.

"This is an extraordinary opportunity for combinations of businesses at prices that make sense," says Peter J. Tanous, president and director at Lynx Investment Advisory in Washington, D.C. "There was a period of time when acquisitions were based on exuberance, but the numbers didn't quite work. The numbers work a lot better now. I think we're going to see a lot more M&A activity and this time it's going to be a lot better thought-out and more sensible."

Another factor that could spur M&A is the market's performance since reaching the March lows.

Stocks have regained half those losses, and buyers looking to snap up smaller companies will be compelled to do so in case the market continues to rise, Tanous says.

"I have never seen such unanimity of opinion among professional investment people that we are going to have a major correction," he says. "The rationale for that is very compelling, but I am concerned that everybody expects it and that usually is a contrarian bullish sign."

As economists continue to see the US recession coming to an end that would further stimulate buyouts, particularly of companies not sensitive to the buying power of US consumers, who are likely to continue to face difficult times until unemployment subsides.

"Companies are looking forward and beginning to pull in some of their missing links," says Peter Cardillo, chief economist at Avalon Partners in New York. "The more consolidation and more mergers we see suggests that corporate America is certainly much more enthused about the global economic rebound as opposed to consumers."

To be sure, investors looking to time M&A activity and buy companies that appear to be in line for such moves are playing a dangerous game. But market experts say there are flags for companies that seem ripe on both sides of the equation.

The simplest view is to find companies with strong assets and low debt against companies laden with leverage and not much access to credit markets.

"It's fair to say that the strong probably stay status quo," Lyman says. "But those companies with weak balance sheets heavily reliant on leverage and credit and difficulty obtaining that are now weakened. It's a perfect opportunity for companies to exercise financial Darwinism. It's survival of the fittest."

"I would never recommend to a retail investor as a matter of strategy to try and play it, because you'll lose," Tanous adds. "But the way to improve your odds is to buy beaten-down stocks that have value primarily in terms of undervalued assets. That's the typical value-investor thesis."

For those who are fortunate enough to get in on a deal, the rule of thumb is that short-term investors benefit from owning the acquiree, while long-term investors will want to own acquirers.

"Investors in companies that are taken over will do well," Tanous says. "But I do not expect lush premiums. I think those days are probably behind us, and the effects of the M&A activity will be much more focused on the synergy of the combined company rather than on a huge premium to the acquired company."

Besides, if the trend holds up then those holding a broad market focus could be biggest beneficiaries of all.

"For this (rally) to have legs you're going to have to have some M&A," says Uri Landesman, head of global growth strategist at ING Investment Management in New York. "I don't think this level would be substantiated without it. If we're going to see a much higher market, M&A is going to have to be a part."

Sunday, 27 September 2009

$1 million going further in many housing markets

By ADRIAN SAINZ,AP Real Estate Writer

A million dollars doesn't buy you what it once did. In most U.S. neighborhoods, it now gets you a lot more.

During the housing boom, prices rose so high and so fast that even cookie-cutter homes in the paved suburbs of South Florida and California could cost a cool million. In Santa Clara, Calif., a high-tech hot spot, the median price hit $836,780 in 2007.

That was a long way from the days when a million-dollar home evoked images of marble columns and swimming pools with vanishing edges. Subprime loans allowed more people than ever to buy houses that were once above their means. Higher demand fueled ever-higher prices until the spigot of cheap money was turned off and the housing bubble burst. The recession forced many well-heeled buyers into unemployment lines. And sales of homes over $1 million cratered by more than 50 percent from the peak four years ago.

"Everyone has less money than they once had," said Amy Wright, an agent with The Real Estate Office in Rancho Santa Fe, Calif. "That has certainly affected the nouveau riche, and that's definitely in that $1 million price point."

For people who do have the money, however, it's the best time in years to buy luxury real estate.

Rancho Santa Fe is a luxury enclave in San Diego County that has over the years lured the likes of Howard Hughes and Bill Gates. Equestrian trails border golf courses, and the most expensive home on the market is listed for $29.9 million.

A couple of years ago, the idea of getting a house in Rancho Santa Fe for a paltry $1 million was laughable. Now, foreclosures and financially distressed homeowners account for about 15 percent of sales, and home prices are down 30 percent.

In one golf-course community in the town, a 2,200-square-foot home is listed for $800,000. Residents live in a gated community where Spanish style homes surround a 250-acre Rees Jones-designed golf course and an accompanying 35,000-square foot clubhouse.

In the 20 largest U.S. metro areas, about 2,800 homes sold for more than $1 million in July _ down by more than half from July 2005, according to MDA DataQuick. Nationwide, overall home sales were down about 27 percent, according to the National Association of Realtors.

In the month of August, sellers with homes priced above $2 million were cutting prices by an average of 14 percent, compared with the national average of 10 percent, according to

The good news for luxury homebuyers is that they're getting about 20 percent "more house" than they did two years ago, and the prestige of owning a $1 million home is returning, said John Brian Losh, CEO of

That is, if they can afford the payments.

On Friday, the average interest rate for a 30-year "jumbo loan" (defined as a mortgage over $729,750) was 6.18 percent _ about a point higher than a conventional fixed-rate mortgage, according to That means the mortgage payment for a $1 million home (with a down payment of 20 percent) would run about $4,900 a month, not including property taxes.

A buyer would have to earn at least $200,000 a year to make the payment plus taxes _ and only about 4 percent of Americans fall into that tax bracket, 2007 Census data shows.

In Fort Myers, Fla., Pat and Dennis Tyeryar are trying to sell their four-bedroom, 3,795-square-foot house on three acres for $999,700. The property is a rare slice of lush Old Florida, with moss cascading off shade trees and views of a river and lagoon.

The property, valued at $1.4 million four years ago, is unique for the area because it sits on a peninsula: Every room in the house has a water view.

So far, no offers.

In a recession-battered place like Saginaw, Mich., however, a person can scoop up almost 18 houses for $1 million. Or, a buyer can get a 6,360-square-foot, two-story brick palace that sits on a five-acre estate.

The house is priced at $995,000. It has an indoor swimming pool and six bedrooms, but the property has been a hard sell in a market where a 2,300-square-foot home can go for $160,000, real estate agent Bruce Shaw said.

Shaw said the home would have been listed for about $1.3 million during the boom.

"It's not like I get a lot of calls on it, not unless someone is moving from Southern California," he said.

In Toledo, Ohio, agent Nancy Kabat has two listings that add up to $1 million _ a six-bedroom, $635,000 house in suburban Ottawa Hills, and a three-story, two-bedroom condo on the Maumee River for $360,000.

The house has detailed crown molding and a renovated kitchen with granite countertops. It's also near good schools. The condo has a view of Toledo's landmark Anthony Wayne Bridge and is a short ride to an area with upscale restaurants and a vibrant nightlife.

"You could have a house in the suburbs for the winter and have a condo on the river in the summer and use your boat," Kabat said.

If that approach doesn't work, a buyer can pursue a three-bedroom, Mediterranean-style home in Toledo for $969,177, according to The 4,800-square-foot property was built in 2007 and has a three-car garage and upscale kitchen appliances like a stainless steel refrigerator and a dual-temperature wine cooler.

"We don't have that many million dollar houses here, so it seems that they're holding their value," said Betty Lazzaro, an agent with Sulfur Springs Realty Inc.

Stocks a poor indicator: Stiglitz

NEW YORK - NOBEL economist Joseph Stiglitz said on Friday a rising stock market is not a good indicator of how the economy will fare, saying falling wages may help corporate profits without spurring increased demand for goods and services.

Mr Stiglitz, a Columbia University professor, told a corporate governance and securities regulation conference events of the last year have created distorted markets that are 'tilted' in favour of companies deemed 'too big to fail'.

The conference marked the anniversary of Lehman Brothers Holdings Inc's and the first bailout of the insurer American International Group Inc. These have become signature events that helped drive the United States, and much of the world economy, into what is widely considered the worst financial crisis since the Great Depression of the 1930s.

US stocks have recovered well over half their losses following Lehman's Sept 15, 2008 failure.

Unlike increasingly voluble analysts who believe the gains have come too fast, Mr Stiglitz, 66, said stocks 'may be doing well in the next period,' while adding he did not 'have a lot of confidence' in that view.

He said, though, that there is a disconnect because the labour market is 'very weak, much weaker' than the 9.7 per cent US unemployment rate suggests. Lower wages can mean lower expenses for companies, which can translate to higher earnings that would be reflected in rising stock prices.

'Stock market performance is not going to be a good indicator of how well the economy is going to be doing,' Mr Stiglitz said. 'Wages are going down, profits are going up, but for an economic recovery, if wages are going down, it's not going to be strong aggregate demand, and it's very hard to have a strong recovery for our economy.'

Echoing comments by Paul Volcker, a former Federal Reserve chairman and an adviser to US President Barack Obama, Mr Stiglitz also said federal efforts to prop up companies deemed too big to fail had led to greater concentration in banking. 'Things are much worse than they were a year ago' in that respect, Mr Stiglitz said.

The economist said companies deemed too big to fail should face 'very tight restrictions on all of their risk taking, including their incentive structures.' He said this could help insure that the next AIG or Lehman problem does not surface.

'The whole market is tilted toward the too-big-to-fail institutions, and so we're putting in place a system that will in time lead to more and more distortions,' he said. 'Would you rather buy a credit default swap from an institution that has a government guarantee, or one that does not?'

Mr Stiglitz, who received the Nobel Prize for economics in 2001, was a member of the White House's Council of Economic Advisers under the Clinton administration and chief economist at the World Bank in the late 1990s. -- REUTERS

3% global growth, 2010: IMF

PITTSBURGH - THE International Monetary Fund foresees a stronger than anticipated recovery from the economic crisis, with global growth approaching three per cent in 2010, world leaders said on Friday.

The IMF had estimated in July a global contraction of 1.4 per cent in 2009, followed by sluggish growth of 2.5 per cent in 2010, but was more upbeat as Group of 20 leaders met in the US city of Pittsburgh.

'The IMF estimates that world growth will resume this year and rise by nearly 3.0 per cent by the end of 2010,' the Group of 20 developed and emerging economies said in a final statement to conclude a two-day summit.

Leaders of 19 rich and emerging nations plus the European Union pledged they would work together to help the world economy reach robust growth.

Asia-led growth has lifted the world out of the doldrums and France, Germany and Japan have all now officially climbed out of recession with the United States, the world's biggest economy, expected to follow later this year.

But G-20 leaders were still cautious and agreed not to roll back massive stimulus measures that helped them contain a severe global recession following last year's financial meltdown.

'We will avoid any premature withdrawal of stimulus,' the leaders' statement said after a summit that endorsed a shift in voting rights at the IMF to give emerging nations, such as India and China, a greater voice.

'At the same time, we will prepare our exit strategies and, when the time is right, withdraw our extraordinary policy support in a cooperative and coordinated way, maintaining our commitment to fiscal responsibility,' it said.

China, which fears US deficits will destabilise the dollar, has been cheering on those calling for cuts in Washington's massive stimulus measures that have been propping up key sectors of the global economy.

G-20 leaders announced on Friday a grand overhaul of economic governance centred on giving the IMF a greater monitoring role and addressing imbalances in global trade and budgets that are blamed for fuelling the crisis.

'We agreed to launch a framework that lays out the policies and the way we act together to generate strong, sustainable and balanced global growth,' the joint Pittsburgh G-20 statement said. -- AFP

Employment may keep falling

LONDON - BRITAIN'S economy appears to be stabilising after the downturn but it could be a while before employment levels start picking up again, Bank of England chief economist Spencer Dale was quoted as saying on Saturday.

In comments that reiterated remarks in a speech earlier this week, Dale said employment had not fallen as much during the current recession as might have been expected and could therefore take longer to recover.

The number of people out of work has been climbing and is expected to hit 3 million by next year, even though the economy may already have started growing again.

'Going forward we may well see employment levels continue to remain low, or fall further, before we start to see a pick up, so I do think the pick up in employment may well be relatively slow and gradual,' Mr Dale told the Exeter Express & Echo newspaper while on a visit to south-west England.

'This is in part because the falls off in employment haven't been so great, so there's more slack within firms to use up before they need to go and employ additional workers.'

But he said there were signs the economy was getting back on a more level footing after suffering its deepest downturn in decades, although it would take some time for conditions to return to pre-crisis levels.

'Things look like they've stabilised and we have turned a corner, but it looks like we are in for a long haul,' he said. 'There's still a long way to go before things are bouncing back to where they were, and it's going to take us a while to get there, but things feel quite a bit better than they did six or nine months ago.'

He also noted firms were still having trouble getting credit and said it would take time for the effects of the central bank's 175 billion pound (S$396 billion) asset purchase programme to filter through.

'We are seeing some signs of improvement, but there still seems to be further to go,' he said.

'We still hear stories that people are finding it hard to access funds in the way that they used to and to undertake new investment projects and expansion. I think that remains a significant issue affecting local businesses,' he said. -- THOMSON REUTERS

Saturday, 26 September 2009

Normal Recovery or Not? Having Your Cake and Eating It Too

The comments which follow from Larry Kantor - head of research at perma-bullish Barcap (Barclays Capital) - are cited in this short piece at the FT Alphaville site.

In our view, the main risk to the current bull market in stocks and corporate bonds is not that the global economic recovery will falter. Rather, we believe that it is the strength of the recovery itself — or at least the recognition of it — that provides the greatest source of risk to the continuation of the market rally.

Once investors embrace that a “normal” recovery has arrived, they will quickly conclude that the current “crisis” settings for policy — such as near zero interest rates — are no longer appropriate. That — along with the impending withdrawal from direct purchases of duration by central banks — will drive interest rates higher and make it much more difficult for stock and corporate bond prices to keep rising.

In other words, the good news that the patient has recovered will shift toward the more sobering news that the bill has come due. That recognition — which is likely to be fostered by still more positive surprises on the economic data front, especially in the US — will be the signal to reduce exposure, and it could well come before the end of the year.

What is most unsettling about this "analysis" is the somewhat contrived manner in which one is left not knowing which outcome the author really favors.

Either the economic and financial recovery will be a "normal" one or it won't be - but hedging bets by inserting the conditionality about how monetary policy will derail the recovery in markets with knock on effects for the broader financial economy - seems like a classic case of wanting to have your cake and eat it too.

Five Reasons Why The Market Will Moderate

By Matt Phillips

A worse-than-expected report on durable goods sent S&P futures lower early, putting markets on course for a third-straight down day.

But according to the tape-readers over at Ned Davis Research, there’s little reason to worry about a sustained turndown in stocks. “Considering that the economy is now recovering with inflation and interest rates still contained, and with our sentiment and valuation indicators far from threatening, the risk of another bear market is limited right now,” they wrote in a note that fluttered into our MarketBeat inbox last night.

Still, the market is not going to crank like it has been over the last six months. After all, the Dow Jones Industrial Average is up 48.3% from its 12-year close low of 6547.05 hit on March 9. The S&P is up 55.3% since March 9, and the Nasdaq is up 66.1%, according to Dow Jones number crunchers.

Any trader’s gut would likely tell them that sizzling gains like that can’t last. But Ned Davis’ researchers offer five succinct data-driven reasons why we should see stocks level off:

1) There’s a good chance that the bull market has moved out of its first third, when the biggest gains typically accrue. Most likely, the bull is now in its second third.

2) Seasonal headwinds typically impede the market in September and October.

3) The market tends to move higher at a more gradual rate after the ends of recessions. The trend of 1975 has been especially comparable.

4) While stocks are not yet overvalued, they’re no longer cheap.

5) While optimism is not yet excessive, high pessimism is no longer a market positive.

The Fed has to worry about inflation eventually

By Paul R. La Monica, editor at large

he Federal Reserve is going to keep interest rates near zero for the foreseeable future. That much is certain.

What isn't so clear is whether this will create an inflation headache down the road for the Fed -- and consumers.

So far, inflation is not a problem. According to the most recent figures from the Labor Department, overall consumer prices have decreased during the past 12 months. Core consumer prices, which exclude the costs of food and energy items, are up just 1.4% over the past year.

What's more, there's no evidence of inflation in the labor market. Many economists argue that inflation is only an issue when the economy is humming along. That's because unemployment tends to be low, workers are getting steady pay increases and companies can afford to raise prices as a result.

But the unemployment rate is at a quarter-century high. Average weekly wages are up only slightly from a year ago, according to the Labor Department. Many companies have cut back the number of hours their employees work in response to weak demand and a need to keep costs down.

With all that in mind, it's no surprise that the Fed reiterated Wednesday that it "expects that inflation will remain subdued for some time."

"Anybody in the market right now that says they are worried about inflation fears are just looking for something to be scared about. You really have to dig for that. It wasn't that long ago that the scare was lower prices," said Terry Clower, director of Center for Economic Research and Development at the University of North Texas.

But there are some troubling signs.

Gold has rallied above $1,000 an ounce and many experts think that this is partly due to fears that the Fed's money-printing campaign over the past year will cause the dollar to weaken even further than it already has.

That's putting upward pressure on other commodities. Oil is trading around $71.50 a barrel, an increase of about 20% over the past six months. The prices of sugar and copper have shot up recently as well.

Even though this bull run in commodities can be partly written off to speculation, it would be unwise to completely dismiss inflation as a longer-term economic concern.

Sooner or later, the trillions of dollars that the Fed has injected into the economy through various lending initiatives and its quantitative easing -- i.e. buying mortgage-backed securities and Treasurys in order to keep long-term rates low -- could lead to rising prices.

"The Fed has printed a lot of money and unless Milton Friedman was wrong, when you print money inflation is going to be a problem," said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala., in reference to the late Nobel Prize-winning economist and free market champion.

When's the right time to raise rates?

Norris conceded that inflation should not be the Fed's biggest concern right now, but he said that the Fed must have a game plan to start raising interest rates and unwind its numerous liquidity programs by the middle of next year.

"With inflation numbers as low as they are now, the Fed has some breathing room," he said. "But you can't keep the overnight lending rate at zero and the yield curve this steep and not have some asset bubble up. We saw it with the tech bubble and housing bubble. If you're not worried about inflation, then I think you are a fool."

Clower, while not concerned about inflation now, also thinks the central bank shouldn't wait too long to raise rates. He said the massive government spending could eventually lead to "insidious inflation." As such, he pointed out that, as counterintuitive as this may sound, a rate hike could actually inspire more confidence in the Fed.

Federal Reserve Chairman Ben Bernanke said last week that he thought the recession is "very likely over." So if he really believes that, then what better way to prove it than by backing up words with action?

"You don't want to raise rates too early," Clower said. "But you almost have to wonder if the Fed could show more confidence in the economy with a small increase in rates. That would be a definitive statement that they think a recovery is under way."

Still, some think that it is extremely premature to consider a rate hike..

"Inflation concerns are nowhere in the picture. The economy is still in terrible shape. The Fed should be in no hurry to raise interest rates," said Zach Pandl, an economist with Nomura Securities in New York. He said the Fed probably isn't going to raise rates until the first quarter of 2011.

Douglas Burtnick, an investment manager with the U.S. equity team at Aberdeen Asset Management in Philadelphia, added that the economy is still in the bottoming process. With the recovery so tenuous, the bigger risk is an economic backslide, not runaway inflation.

"The Fed doesn't want to have a stutter-start recovery to the economy. I know people are extremely concerned about inflation down the road and see risks, but we're not seeing wild upticks in demand that would precede dramatic inflation," Burtnick said.

Protecting Your Portfolio from the Next Market Downturn

By Nadia Papagiannis, CFA

Prior to the 2007 crash, many of us thought that as long as our portfolios were diversified among several standard equity and fixed-income asset classes, a dip in one would be balanced out by another, and it wouldn't be too long before we'd be back on track in working toward our investment goals. Still, most of us lost big chunks of our nest eggs in the recent financial crisis. As the S&P 500 Index and core-type large-blend funds, on average, lost 55% between October 2007 and March 2009, every other major asset class, with the exception of government bonds, also swam in red ink. Thus, even "diversified" portfolios experienced major losses.

Even though many funds have recovered the same percentage they lost since March 2009, they still have a long way to go before their investors are made whole. Simple arithmetic says that when you lose half of your money, you must double it (that is, earn a 100% return) to break even. That recovery can take a long time. The stock market's last crash, between March 2000 and October 2002, was milder, with the S&P 500 Index losing 47%. But it took more than four years, until October 2006, to recover, only to experience another, more severe crash a year later. Some of us can't afford to wait that long to recover, especially those who are already retired.

The Alternatives Alternative
Clearly, protecting your portfolio is important. Although a simple portfolio can be effective over the long haul, there are other diversification options, such as mutual funds that practice "alternative" strategies, many of which fall in Morningstar's long-short category. These funds use different trading strategies, such as hedging or arbitrage, or different asset classes, such as commodity futures, options, and currencies--all with one goal in mind: to have low correlations (usually) with the stock market. That is, the market's ups and downs should not highly correspond with the funds' vacillations. In good times for the stock market, these funds may post small losses, stay flat, or gain less than equities. In bad times, these funds should either gain ground or lose substantially less than the market. An allocation to these types of funds could thus reduce or negate the overall losses to a standard stock and bond portfolio, making it easier to start rebuilding your wealth.

Of course, not all alternative funds are created equal, and alternative funds vary even more widely in strategy and performance than other mutual fund groups. Therefore, we looked at all 49 funds in Morningstar's long-short category with inception dates prior to the October 2007 crash to answer a couple of questions. First, did these funds help investors diversify overall? Second, which funds did the best job?

The average long-short mutual fund lost 19.1% between early October 2007 and early March 2009. That's less than half the S&P 500's losses. The average long-short fund has recovered 16.5% through Sept. 15, 2009, but still has 20.8% left to break even. Even more interesting, however, is the range of returns that alternative funds posted during the market crash. JPMorgan Intrepid Plus (NASDAQ:JPSAX - News) lost the most, 56%, while Rydex Managed Futures Strategy (NASDAQ:RYMTX - News) gained the most, 18%. At the risk of stating the obvious, these two funds are very different from each other, as are many of the funds in the long-short category. The JPMorgan fund takes long and short bets on equities, while the Rydex fund takes directional long and short positions in commodity and financial futures. Because of their strategies, JPMorgan Intrepid Plus will act more like the stock market, whereas Rydex Managed Futures Strategy will generally not, making it a better diversifier.

The funds that could help diversify investors' portfolios the most are those that lost the least and preserved wealth. There are 14 such long-short funds--funds that never lost money in the first place, or funds that lost some but have recovered nicely in just six months time. These 14 funds averaged only a 2% drop, much less than the rest of the category.

Click here to view the table.

While recent history on these funds provides some comfort, we also looked at their behavior in the last bear market. Six of these 14 alternative funds existed then: Robeco Long/Short Equity (NASDAQ:BPLSX - News), JPMorgan Market Neutral (NASDAQ:JPMNX - News), Caldwell & Orkin Market Opportunity (NASDAQ:COAGX - News), Virtus Market Neutral (NASDAQ:EMNAX - News), GMO Alpha Only III (NASDAQ:GGHEX - News), and Merger Fund (NASDAQ:MERFX - News). All posted positive returns during the tech bubble's bursting, and all but one fund (Virtus Market Neutral) sport 4-and 5-star Morningstar Ratings.

So much for the past. Here's our short list of alternative funds for the future.

Highbridge Statistical Market Neutral (NASDAQ:HSKAX - News)If protecting your downside risk, rather than participating in the market's recovery, is of utmost importance, you should consider a fund with a market neutral equity or arbitrage strategy. Highbridge Statistical Market Neutral quantitatively trades equities long and short, but does so in a manner that the equity market risk of the long stocks in the portfolio is completely offset by the short stocks. What you're left with is the return from stock-picking skills, which the fund has demonstrated. This fund has returned 3.44% since its late-2005 inception (through Sept. 15) with a zero-correlation to the S&P 500.

JP Morgan Market Neutral This fund is also market neutral, but unlike Highbridge, it relies less on computer-driven statistical models and more on management's fundamentally based decisions. This fund exhibits a low correlation to the S&P 500, less than 0.2 since inception more than 10 years ago, and has returned 3.45% annualized over that time period. Its net expense ratio, though, is substantively less than that of Highbridge, which makes it more attractive to some investors.

Merger Merger Fund also hedges out equity market risk by taking long and short positions in stocks, but it specializes in stocks involved in mergers and acquisitions. Simply, it buys the acquiree and shorts the acquisitor, in an effort to capture the premium an acquisitor pays for its target. The strategy is not loss-proof, however. These "arbitrage" trades fall apart when announced deals do. But the losses tend to be small, as in the market neutral equity funds. Unlike many "alternative" funds, this fund has a 20-year track record, returning 7.5% annualized over its life, with a 0.4 correlation to the S&P 500.

Arbitrage (NASDAQ:ARBFX - News)Arbritrage Fund uses the same approach that Merger does, with similar results. Since its inception in 2000, this fund has returned 6% annualized, with a 0.4 correlation, but it has outperformed the Merger Fund in recent years. Because it's much smaller, it's able to better take advantage of smaller-cap deals, which may be advantageous in environments where merger deals are smaller and less frequent. This fund's expense ratio, however, is dearer than the Merger Fund's.

Rydex/SGI Managed Futures Strategy This fund offers one of the newest and most unique ways to diversify a portfolio. This fund tracks the S&P Diversified Trend Indicator and profits from both positive and negative trends (a form of momentum) in a diverse basket of futures markets--both financial futures such as equity index futures and commodity futures such as metals or agriculture. When the various futures markets lack up and down trends, this fund can lose money, but the beauty of this strategy is that it truly diversifies a standard stock and bond portfolio by trading a different type of risk (momentum) in various assets. Although the fund is relatively new, the indicator has been around since 2003 and sports a 7% annualized return since inception with a slightly negative correlation to the S&P 500.

If there's one thing that the recent bear market has taught us, it's that even broad, diversified portfolios can be vulnerable. Using alternatives funds is one way to limit losses. When looking at an alternative fund for diversification, though, be sure to look at a fund's returns during periods of market turmoil. It can be the fund's most-telling statistic.

Nadia Papagiannis, CFA does not own shares in any of the securities mentioned above.

etfguide $1,000/oz Gold - New Reality or New Bubble?

By Simon Maierhofer

'Gold represents tangible value, that's why a gold bubble is simply impossible.' If you think along those lines, you may want to consider the following:

1) After reaching a record high of $850/oz in January 1980, gold prices fell over 40% in two months. It took gold 28 years to reclaim the $850 level.

2) Many thought there could never be an oil bubble. Oil, similar to gold, is a limited resource. Oil production, just like gold production, has peaked. Therefore, oil prices were supposed to consistently move higher. Contrary to conventional wisdom, however, oil prices fell more than 77.5% from their July 2008 top to their February 2009 bottom. A similar drop would equate to a $229/oz gold bottom.

What is causing the gold rally?

Just as a car mechanic would want to find out what is causing a certain problem before making an estimate, investors should find out what caused the recent gold spike before making a buy/sell decision.

Deciphering the cause/effect equation will also shed more light on gold's future. Isolating the cause of gold's spike will also bring us a step closer to finding out whether $1,000/oz is sustainable.

Since gold, as other commodities, is traded in U.S. dollar denominated units, the fluctuations of the greenback may have a direct bearing on gold prices. If demand for gold truly outweighs supply, gold prices measured in various currencies will go up. If a weak dollar is causing higher gold prices, gold denominated in U.S. dollars will be the main or sole beneficiary.

As the chart below shows, dollar denominated gold has risen while euro denominated gold has been stagnant. Therefore, Gold's future seems tied to the fortune of the U.S. dollar.

Will the dollar continue to weaken?

Contrary to popular belief, our analysis shows that the greenback is about to start (or has already started) a sustainable rally. The government's efforts to re-inflate the U.S. monetary system should be outpaced by the amount of dollars destroyed by the continuation of the bear market. Here's why:

The US dollar is by far the most inflated currency. It is also the most commonly used currency in the world. As such, most of the debt - and toxic assets - in the world is US dollar denominated. As those toxic assets continue to deflate, US denominated wealth will continue to shrink.

The law of supply and demand teaches us that scarcity of any product results in higher prices. In other words, the fewer dollars in circulation the more valuable the remaining dollars will become. Not only are the amount of dollars in circulation already declining, the velocity of the remaining dollars is slowing as well. This means consumers tend to 'park' their dollars in savings account rather than spending.

In summary, a strengthening dollar will push gold once again beneath $1,000/oz.

$1,000/oz gold - a foregone conclusion

At no other time in history have investors been as bullish about gold as they've been over the past 18 months. The SPDR Gold Shares (NYSEArca: GLD - News) had net inflows of 347.21 metric tons in just the first quarter of 2009. Globally, gold ETF holdings have surged 42%, or 16 million ounces, since the beginning of 2009. Gold ETFs now hold a total of 54.23 million ounces of gold. This is almost as much as last year's total world production.

Bullion purchases for 2008 reached 862 metric tons, twice as much as in 2007. The US Mint, the federal agency in charge of making America's coins, has had to step up its production as well. This year's sales have already exceeded the 794,000 American Eagles peddled in all of 2008 by a large margin. Earlier this year, it had to freeze sales of some of its gold items due to an order backlog.

Not only are investors feeling jolly about gold, major corporations are too. Barrick Gold, the world's biggest gold producer, just announced that it plans to eliminate all of its gold hedges. Gold hedges are futures contracts that commit a company to selling the metal at a set price. Such hedges protect producers against falling prices and limit profits in an environment of rising prices. Barrick Gold intends to spend $3 billion to eliminate and pay off all current hedges. In essence, Barrick is going 'naked' long on gold. Declining gold prices would result in losses much greater than the $3 billion spent to neutralize their hedges.

$1,000/oz gold - too good to be true?

The fact that nearly all investors have morphed into goldbugs over the last 1-2 years should raise a major flag for gold bulls. As explained in the article - The Herding Effect, Why Investors Are Usually Wrong - extreme levels of optimism usually foreshadow lower prices, often significantly lower. Here's why:

The 18-months run on gold has increased the base of gold owners. People wanting to own gold have already converted from wanna-be buyers to owners. Therefore, the pipeline of new buyers is drying up to a point where there's not enough buying volume to drive up prices any further. This is compounded by the fact that owners are reduced to either holding or selling, neither of which can propel prices.

As the base of gold owners has become un-proportionately high, the cycle reverses. Inevitably, some owners give in and start selling. As prices start to decline, more gold is being sold and selling becomes the new trend. The unusual high level of gold ownership provides a consistent flow of gold supply being put up for sale, resulting in rapidly declining prices.

According to some estimates, up to 90% of all traders are currently bullish on gold. With such a large base of investors and goldbugs owning gold, there are simply not enough buyers left to propel gold prices much further from here.

By the way, just as gold traders are extremely bullish, dollar traders are extremely bearish. This means that most traders have already sold the dollars they want to sell, leaving the door open for buyers to push the greenback higher.

Practical examples

The ETF Profit Strategy Newsletter issued the following market calls based on an analysis of investor sentiment and other indicators: 1) A 2008 Dow Jones (DJI: ^DJI) bottom below 7,500 2) A sell signal early January 2009 with the Dow (NYSEArca: DIA - News) sitting at above 9,000 3) A buy signal at Dow 6,800 and S&P (SNP: ^GSPC) 680 on March 2nd, 2009.

Further examples of extreme optimism are the market's all-time highs reached in October 2007, followed by a 54% drop in the S&P 500. Lest we forget about the top of the bubble which reached its crescendo early 2000, when the Nasdaq (Nasdaq: ^IXIC) peaked above 5,000 for two brief days.

Gold's impact on U.S. stocks

Gold is more than just a precious metal. Unlike paper currency, gold is not someone else's liability. Its worth is specified by investor's willingness to own the yellow metal. As such, gold is the only true currency.

On a daily basis, we read or hear about 'the Dow.' The Dow is up, the Dow is down, etc. The Dow as it's quoted to us is quoted in U.S. dollars, inflated U.S. dollars. This has skewed the Dow's real worth over time, since it's not measured by a real currency.

Back in 1999, one share of the Dow was worth 42 ounces of gold. Today, one share of the Dow is worth a mere 9 - 10 ounces of gold. In real currency, the Dow has already declined 78% since 1999. Will the Dow denominated in fiat dollars follow the path of the gold Dow?

While the destination for stocks is pretty much mapped out already, gold is likely to undergo two stages over the coming years. One stage will be influenced by the extreme optimism present today, while the other stage should be closely linked to a continuation of financial (NYSEArca: XLF - News) turmoil.

Most ominous indicators:Insider selling still accelerating

While legions of U.S. market-pumpers insist that all that lies ahead for U.S. markets is an “economic recovery,” and a continuation of this absurd rally, they deliberately ignore one of the most ominous indicators of the future direction of markets: insider selling.

For the entire duration of this hype-fueled rally, insider selling has been steadily increasing. As we enter what has historically been the two worst months for U.S. markets, a CNN article had this to say:

Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.

Let me repeat this. U.S. insiders are dumping stock with the same intensity last seen just before the worst market crash since the Great Depression. For those who can recall that period, this was when “Helicopter” Ben Bernanke had finally stopped insisting the U.S. had a “Goldilocks economy” where markets would never turn lower. He had just begun to push his new propaganda slogan: the “soft landing.” This was where the U.S. housing sector would experience a mild correction – which was supposed to have zero spill-over in the broader economy.

The same (reappointed) Ben Bernanke is now insisting that a U.S. “economic recovery” has already begun. That, in itself, should be seen as conclusive evidence that the U.S. economy is about to start its next leg lower.

As I have pointed out in several previous commentaries, with just 20% of the U.S. population holding 85% of all wealth, and a mere 1% holding more than 55% of all stocks (and the majority of this wealth being managed by Wall Street), the same Wall Street banksters who just finished scamming the world for trillions (and then scamming U.S. taxpayers for trillions more) literally control U.S. markets. And as they buy, buy, buy for their clients, they are sell, sell, selling themselves.

Unless someone believes that insiders are selling their shares solely to give retail investors a chance to buy cheap stocks, there is only one possible interpretation of this data: for nearly six months, U.S. insiders have been saying (with their wallets) that U.S. markets are heading lower.

The same “experts” who were all “surprised” by the first crash in U.S. markets are the ones who are claiming that the U.S. has already started a recovery. As I pointed out in “The Myth of the Job-less Recovery,” there cannot and has never been a genuine “economic recovery” which is not accompanied with positive job growth.

I followed that up with a commentary pointing out the sickening collapse in the amount of credit available to consumers – from the same Wall Street banksters who told Americans that if they could just give them $10 trillion in hand-outs, loans, and guarantees, that they would lend, lend, lend. In fact, a recent report from BNN stated that a survey of U.S. banks found that none of them planned on loosening credit.

With Americans losing their jobs, losing their homes, those who have jobs seeing their wages shrink, and cut-off from further credit, as one of my readers quipped, we're supposed to believe that the U.S. consumer economy is about to start a “job less and consumer less recovery.”

If we needed any further cues about what comes next for the U.S. economy (and U.S. markets) we need look no further than “Cash-for-clunkers.” This quick fix accomplished two things. It provided a very short-term jolt of “stimulus” for the U.S. economy.

However, by forcing Americans with limited available credit to take on significant amounts of debt, it literally “borrowed” a large amount of future consumption from the U.S. economy. It would be hard to invent more perfect circumstances for a final “blow-off” rally, followed by the inevitable, painful correction.

As you continue to listen to all the market-pumpers attempting to assure you that all is well, remember that all these market-pumpers were saying the same thing before the last crash. Remember that insider-selling is also mirroring what happened just before the last crash. What do people think these insiders are going to do once they have finished selling? Are they going to buy back in at higher prices? I think not.

Remember that there are 20 million empty homes in the U.S., ten million Americans with “underwater” mortgages, record rates of foreclosures (which are certain to increase going forward), and millions of already-foreclosed homes being deliberately held off the market – and hidden from the myopic vision of the market-pumpers.

Remember that there are still 2.5 million lay-offs occurring every month, roughly double what occurs when the economy is actually growing, and that even the phony, government monthly labor reports acknowledge the “worst job losses since the Great Depression.”

Remember that U.S. consumers (the “backbone” of the U.S. economy) have record levels of debt, falling wages, no access to credit, and (for the first time in decades) are actually trying to begin saving money.

If you can remember all that, you should be O.K. - as long as you don't forget to sell your U.S. equities before it’s too late!

Why Small Businesses See a Gloomy Future

By Rick Newman

If small businesses are the backbone of the U.S. economy--as politicians routinely claim--then we're in worse shape than a lot of people realize.

Most economists, including Federal Reserve Chairman Ben Bernanke, believe the recession is technically over and the economy is growing again. But the news apparently hasn't trickled down to the people who run delicatessens, plumbing outfits, and Web start-ups. A recent survey by the nonprofit Kauffman Foundation found that 68 percent of entrepreneurs do not believe the economy is beginning to recover, and 61 percent think the economy's on the wrong track. Only 13 percent believe a recovery is underway.

Entrepreneurs are usually optimists inclined to believe things will work out, which is why they're willing to try something as laborious as starting their own business. But the recession has put them in a foul mood. A startling 94 percent said the recession will last at least another year. Only 3 percent believe the pain will end within six months. And 66 percent believe the United States is facing a long period of high unemployment.

Entrepreneurs aren't economists, but it's possible that their street-level view of the economy actually meshes with the predictions of analysts crunching numbers and running computer models. Bernanke, for instance, has tempered his own optimism by saying that "it is still going to feel like a very weak economy for some time." The Congressional Budget Office predicts that the unemployment rate will be 10.2 percent in 2010--which would be worse than this year--and an unpleasant 9.1 percent in 2011. So maybe the entrepreneurs in the survey spend their spare time reading Federal Reserve and CBO reports.

Still, the entrepreneur blues are a big worry because small businesses often pick up the slack when big businesses slash their payrolls, as they've done over the past 18 months. Recessions tend to create "accidental entrepreneurs" who start a business because they get laid off and have no choice. Others may take a buyout from their firm to avoid the ax later on and use part of the cash to fund a start-up. Ray Nowak was a design manager for auto-supplier Johnson Controls who accepted a buyout offer in October 2008, figuring he'd rather pocket the cash voluntarily than be forced to accept a much worse deal later on. Four months later, he opened a Fast-teks franchise in Holland, Mich., offering onsite computer support to businesses and individuals. He has three employees, expects his business to become profitable soon, and is already thinking of expanding. "It's not too often you get a buyout and a new chance to discover what you can do," he says.

A Kauffman Foundation study published in June found that a disproportionately large number of successful businesses tend to get started during tough economic times. More than half of the Fortune 500 companies were founded during a recession or bear market, for instance, even though such economic contractions occurred only about one third of the time. The formation of new firms dipped during the recessions that began in 1991 and 2001 but returned to prior levels or exceeded them within a year or two.

Layoffs in the 2008-2009 recession have been steeper than during most other downturns of the past century, and there are plenty of anecdotal reports of bankers, software engineers, lawyers, and retail employees who got laid off and started their own businesses. But there are no reliable data yet on whether there's been an overall surge of start-ups, and it's too early to tell how many of those that did get started became profitable.

Meanwhile, there's at least one powerful discouraging factor: scarce credit. Some entrepreneurs use their savings or borrow from friends and family to set up shop, but sooner or later most businesses require loans to grow and expand. And with the financial sector still in rough shape, loans are hard to come by.

Aggressive government intervention in the economy probably prevented an even worse financial meltdown, but entrepreneurs, typically free-marketeers, are turned off by the bank bailouts and the $787 billion stimulus package. Still, 58 percent of the respondents in the Kauffman survey said the government should do more to encourage entrepreneurship, and many would like the government to cut their taxes and fix the healthcare system while they're at it. Wouldn't we all.

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