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Sunday, 29 November 2009

Investing in Better Research

A few days ago, a reporter asked me if I was losing money in real estate. My reply was, "No, I'm making money."

Confused, he asked, "How can you be making money during the subprime disaster?" I explained that since the real estate market took a downturn, there were more people renting rather than buying, which is great for my apartment business. I also informed him that I'm raising rents since demand for affordable apartments is so high. When someone moves out, I increase the rent and new tenants line up, which means my cash flow is increasing.

He then asked, "Are you looking for new investments?"

A shocked look came over his face when I said, "I've been investing heavily in the stock market since August 2007. I've moved several million dollars into the market."

"The stock market?" he stammered. "Stocks are crashing. Why are you in the stock market? Besides, I thought you were a real estate investor?"

Ignorance Isn't Bliss

As Warren Buffett has said, it's important for society to have accurate and informed sources of information. While I agree, I sometimes wonder about the intelligence of many financial journalists, both in print and the electronic media.

For example, lately on financial TV stations, the reporters have been talking about the run-up in gold and asking, "Is it time to invest in gold and gold stocks?" What a ridiculous question. Now isn't the time to be investing in gold or gold stocks -- that time was 10 years ago, when gold was below $300 an ounce. Investors should've taken substantial positions when gold was cheap. For reporters to be talking about gold today is no different than them reporting on the hot real estate market in 2005, just before the top blew off.

I had dinner with a friend of a friend the other night and he was telling me about the Rothschild formula for investing. According to him, this involves not participating in the first 20 percent or the last 20 percent of an investment run-up. Instead, it's investing in the middle 60 percent, when risks are low and the direction of the price is determined. As the asset value approaches what appears to be the last 20 percent, you sell and move on to another asset class.

As we all know, most amateurs (and, possibly, many reporters) only participate in the last 20 percent.

Take Notes

I wondered if the reporter who asked why I was investing millions in stocks was an investor himself. I did my best to explain to him that there are two things professionals invest for: 1) Capital gains, and 2) Cash flow.

I said, "The amateurs who come in at the top 20 percent of a market are generally investing only for capital gains. In the last real estate boom, the 'flippers' who got no-document, zero-down loans paid very high prices, and hoped for a greater fool than them to take the property off their hands.

"These are some of the people being faced with forecloses today. They're the investors who make the news -- not the investors who are making money."

The reporter then asked me, "So what do you invest for?"

My reply? "Both. If I can, I want both capital gains and cash flow."

I went on to explain that I was investing millions in stocks that were paying a high dividend -- cash flow -- and also had their prices battered down by the market crash, a loss of capital gains.

Spelling It Out

He wasn't the brightest reporter, since he had trouble with the idea of investing for both cash flow and capital gains. After about an hour of explanation, he finally began to understand that I'm not just a real estate investor -- I'm someone who invests for capital gains at a great price, or cash flow at a great price, regardless of the asset class. If the deal is right, it doesn't matter if it's in real estate, commodities, a business, or paper assets.

Here's an example of capital gains for a great price: Back in the 1990s, every time I had some extra cash I would buy some gold or silver. Although I didn't receive any cash flow from gold or silver I knew I was purchasing the metals at a great price, and that someday those prices would rise again.

An example of buying for cash flow at a great price is when I buy a stock that pays a dividend. I wait until the stock market dips and then buy, which is what I'm currently doing. One of the better companies I've been buying is a bulk cargo shipping company that's hauling U.S. grains to India. The more the dollar drops in value, the more grains we export. Every time the market drops, I buy more of this stock at a great price, because I love the cash flow from dividends.

Finally, an example of buying both capital gains and cash flow at a great price is when I find an apartment building at a bargain, and then increase the rents. By doing so, I increase the cash flow and the property value, which translates into capital gains.

Leave It to the Pros

When I watch professional football, I love listening to John Madden because I know he knows what he's talking about. He's been both down in the trenches and in front of the bench as a coach. He knows the game. By that token, one financial reporter I respect is Bloomberg's Kathleen Hayes. She's a savvy reporter who knows what she's talking about. I wonder about some of the other financial reporters.

The problem with much of the financial news in print and on the web, radio, and television is that it comes from journalists who may not be investors. When I listen to most journalists whine and cry about the subprime mess, the slowdown in the economy, and the volatile stock market, I can all but tell that they're not really investors. None of these events really has much impact on professional investors, who follow market trends and are familiar with the underlying fundamentals of the assets they investing in.

So the next time you hear a reporter ask, "Is this the time to be getting into stocks, bonds, real estate, gold, silver, or oil?" remember that it's probably the time to be looking elsewhere. And keep in mind the Rothschild formula of investing. You never want to be too early -- and you also never want to be too late.

Saturday, 28 November 2009

Avoid These Three Investment Mistakes

By Christopher Davis

Whether it's the Dutch tulip craze of the 17th century, the dot-com mania of the late 1990s, or the most recent rush into real estate, there's no shortage of examples of investors behaving irrationally.

In the world of traditional economists and finance professors, though, that's not supposed to happen. If investors are rational decision-makers, then emotion-driven bubbles shouldn't be possible. Yet human weaknesses can limit our ability to think clearly. Many studies of investor behavior have shown that investors are too willing to extrapolate recent trends far into the future, too confident in their abilities, and too quick (or not quick enough) to react to new information. These tendencies often lead investors to make decisions that run counter to their own best interests.

The idea that investor psychology can result in poor investment decisions is a key insight of an increasingly influential field of study called behavioral finance. Behavioral-finance theorists blend finance and psychology to identify deep-seated human traits that get in the way of investment success. Behavioral finance isn't just an interesting academic diversion, however. Its findings can help you identify--and correct--behaviors that cost you money.

What commonplace mistakes should investors avoid? Here are a few key behavioral-finance lessons worth heeding.

Don't Read Too Much into the Recent Past
When faced with lots of information, most people come up with easy rules of thumb to help them cope. While useful in some situations, these shortcuts can lead to biases that cause investors to make bad decisions. One example is "extrapolation bias," the overreliance on the past to assess the future. Instead of doing all the necessary and possibly tedious homework in researching a potential investment, investors instead "anchor" their expectations for the future in the recent past.

The problem, of course, is that yesterday doesn't always tell you what tomorrow will bring. If you don't believe us, just ask investors who swarmed red-hot technology- and Internet-focused stocks in 1999 and 2000 expecting the good times to continue. They didn't, and most folks ended up suffering huge losses.

That's worth keeping in mind if you're drawn to the strong performers of recent years, whether it's Latin American stocks or precious metals. The recent volatility in those areas is a reminder that the past is no guarantee of future performance.

Realize That You Don't Know As Much As You Think
In a 1981 study asking Swedish drivers to assess their own driving abilities, 90% rated themselves as above average. Statistically speaking, that's just not possible. But most of us are just like the Swedes: We think we're more capable and smarter than we really are. As an investor, you should check your excessive optimism at the door. You might believe you're more likely than the next guy to spot the next Microsoft (NasdaqGS:MSFT - News), but the odds are you're not.

According to several studies, overconfident investors trade more rapidly because they think they know more than the person on the other side of the trade. And all that trading can be hazardous to your wealth, as University of California, Berkeley professors Brad Barber and Terrance Odean put it in their 2000 study of investor trading behavior. The study looked at approximately 66,000 households using a discount broker between 1991 and 1996 and found that individuals who trade frequently (with monthly turnover above 8.8%) earned a net annualized return of 11.4% over that time, while inactive accounts netted 18.5%. Investors who traded most often paid the most in brokerage commissions, taking a huge bite out of returns.

All that trading might've been worthwhile if investors replaced the stocks they sold with something better. But interestingly, the study found that, excluding trading costs, newly acquired stocks actually slightly underperformed the stocks that were sold. That means that rapid traders' returns suffered whether or not fees were taken into account. Some researchers have come to a similar conclusion studying fund manager trading--standing pat is often the best strategy.

Keep Your Winners Longer and Dump Your Losers Sooner
Investors in Odean and Barber's study were much more likely to sell winners than losers. That's exactly what behavioral-finance theorists would predict. They've noticed that investors would rather accept smaller but certain gains than take their chances to make more money. On the flip side, investors are reluctant to admit defeat and sell stocks that are underwater in hopes of a rebound. As a result, investors tend to sell their winners too early and hang on to their losers for too long.

One way investors can avoid leaving too much money on the table is to rebalance their portfolios less often. Rebalancing involves regularly trimming winners in favor of laggards. That's a prudent investing strategy because it keeps a portfolio diversified and reduces risk. But rebalancing too frequently could limit your upside. Instead, rebalance only when your portfolio is out of whack with your target allocations. Minor divergences from your targets aren't a big deal, but when your current allocations grow to more than 5 percentage points beyond your original plan, it's time to cut back. This article discusses rebalancing in depth.

You also shouldn't be afraid to sell a loser because it will turn a paper loss into a real one. Hanging on to a dog in hopes of breaking even is a bad idea because you may be forgoing a better opportunity. The trick is knowing when it's time to cut bait. That's why it pays to have clear reasons in mind for your purchase of any investment right from the get-go. If your expectations don't pan out, then it's time to sell.

It's All about Discipline
Fortunately, you don't have to be a genius to be a successful investor. As Berkshire Hathaway chief and investor extraordinaire Warren Buffett said in a 1999 interview with Business Week, "Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." It's true that not everyone is gifted with Buffett's calm, cool demeanor. But challenging yourself to avoid your own worst instincts will help you reach your financial goals.

5 ways to make extra money and boost your income

By Alexis Jeffries and Donna Rosato, Money Magazine

Wish you had a little more money in your wallet these days? Who doesn't?

While the Great Recession is over by most accounts, the Great Income Squeeze lingers on. You're more likely to have had a pay freeze than a pay raise over the past year; and the average bump up for 2010 is expected to be pretty paltry. Meanwhile, your portfolio may still be off its pre-crisis highs, even after the market's rally, and the bank won't pay you spit to hold your cash.

But you don't have to accept the status quo when it comes to bringing in the dough. Whether you're still on the job or retired from the grind, the action plans that follow can help boost your income.

The strategies require human or financial capital (and sometimes both). But those that involve work don't demand extra training, and should leave you leisure time to spare. Bonus: These moneymakers may satisfy your entrepreneurial spirit, get your creative juices flowing, even diversify your career along the way. Talk about a payoff.

1. Consult in your field

The idea: Deploy current (or recent, if you're retired) job skills into other work. A graphic designer might create brochures; a marketing manager might develop a company's social-media strategy. Hemmed in by layoffs and hiring freezes, more employers are using contract workers. Bully for you.

Income potential: With the right few projects, you could easily add five figures to your annual take. Matt Hutter, an IT engineer in Cleveland, started offering computer consulting services on the side in 2006. Now, "I can count on $2,000 extra a month," he says. After income taxes -- and the 15.3% self-employment tax -- Hutter pockets about half of that.

Hassle factor: Medium to high. At first you'll have to hustle just to get the gigs. Also, you'll probably need to complete them outside normal business hours. Be sure you and your family are willing to make that tradeoff of your time.

How to get started: First, get your boss's okay. "You don't want to jeopardize your job just to make extra money," says Tori Johnson, a New York City employment counselor. Then begin putting the word out that you're interested in projects (the best-paying ones usually aren't advertised, says Pamela Slim, author of "Escape from Cubicle Nation"). Start with former employers and colleagues; networking site can help you find them. If you know others who moonlight, offer to take their overflow work; or see if they'll connect you with their contacts. You can also use sites like and to search for gigs and benchmark rates.

2. Seek out yield


The idea: Invest in a global dividend fund, since European stocks tend to pay richer dividends. The average yield now for the MSCI EAFE index of overseas stocks is 3.03% compared to 2.12% for the S&P 500. One peculiarity worth noting: Rather than pay out quarterly, some foreign stocks only do so once or twice annually.

How to do it: Stash some of your extra cash in the SPDR S&P International Dividend ETF.

Income potential: Put $25,000 in the ETF above, at its current yield of 3.56%, and you'd earn $890 in dividend income a year compared to $525 in an S&P 500 index fund.


The idea: Buy a REIT fund. Real estate investment trusts, which invest in income-producing property like offices and malls, aren't taxed if they pass 90% of taxable income on to investors. So yields are typically higher than those of dividend funds. The catch: With rents and occupancy rates reduced by the recession, it's more challenging for REITs to maintain those dividends.

How to do it: Given ongoing concerns about commercial real estate, REITs should make up no more than 5% of your portfolio, says Morningstar analyst Andy Gogerty. He suggests the T. Rowe Price Real Estate fund, which he says has strong management and avoids riskier bets.

Income potential: A $25,000 investment in the T. Rowe Price fund, now yielding 4.76%, would earn $1,190 in a year. (Be aware that most REIT payouts are taxed at ordinary income tax rates, not the more favorable 15% for qualified dividends.)


The idea: Lend cash that's sitting at the bank on a peer-to-peer lending site like or, where yields can top 13%. Of course, that means taking a bet on borrowers who may have been nixed by traditional lenders.

How to do it: To reduce default risks, seek borrowers with 800-plus credit scores (yes, they exist on the sites) and spread your money around. Jack Reidy, 42, of Chicago invested $10,000 over 100 loans (60% of them with borrowers who had scores over 700) at Prosper in 2008. Nine of the loans are in default, but he's still averaging an 8% return. "I'm pretty happy," he says. Or a simpler way:'s Balanced Portfolio Plan, which averages 7% and puts you in a package of the highest-rated loans.

Income potential: With Prosper's balanced plan, lending $10,000 over three years could earn you $1,115 in interest -- vs. $500 in a high-yield savings account.

3. Head a class

The idea: Leverage your expertise into a part-time college teaching gig. You can lead courses for undergraduates at two- and four-year schools, or classes for adults via continuing-education and extension programs. Afraid of public speaking? You can even teach online.

Income potential: Higher-ed courses tend to pay from $1,000 to $6,000, according to, with private four-year schools at the highest end of that range. (Note: At least a master's degree may be required.) Extension pay varies widely. Julie Moss, who manages TV scheduling at HBO, earns $600 for leading a six-week class in her field at NYU's School of Continuing and Professional Studies. With prep time, that comes out to just $18 an hour. But teaching offers rewards beyond money, as Moss notes: "I get to have an impact on students."

Hassle factor: High. "It can easily take 10 hours a week outside of class to prepare for a three-hour course," says Karim Cherif, associate dean at UCLA's Extension program. Online courses can be even more work, since web classrooms are open 24/7, adds Bill Pepicello, president of Internet-based University of Phoenix.

How to get started: Look for gigs at sites like and; and also visit the websites of local schools. Not all jobs are posted, so send a résumé and cover letter to the relevant department head as well as the school's director of human resources.

4. Be a landlord

The idea: Turn unused space in that empty nest of yours into rental income. The most lease-worthy areas are those with private entrances and bathrooms, such as carriage houses and mother-in-law apartments, says Dani Babb, author of The Accidental Landlord. Don't have that? Depending upon the demand, it may be worth creating such a space. Babb estimates it costing around $1,500 to add walls and as much as 10 times that to add a bath.

Income potential: The average studio apartment in the U.S. rents for $947, according to rental data aggregator Spaces without full apartment amenities can go for up to 30% less, says Babb. Since rents vary widely by city, even by neighborhood, visit your local newspaper site,, and for prices on comparable spaces in your area.

Marc Aarons, 38, who is single and self-employed, rents out three of the four bedrooms in his Laguna Hills, Calif., home. "The mortgage was steep, and my income fluctuates," he says. After expenses and taxes -- levied at one's ordinary rate -- he nets $675 a month, which helps a lot with his mortgage.

Hassle factor: With a good tenant and a space that affords privacy, it should be fairly low. You'll have to keep the property maintained, but you're likely already doing most of what's necessary. The one big downside: "You're always on call," says Babb.

How to get started: Contact your homeowners association and county assessor or inspector to see if you're allowed to have renters. If so, set a price based on going rates. Then post an ad -- including a description of your ideal tenant -- on the aforementioned sites.

Also call the housing offices of any local colleges. In vetting candidates, get proof of income; run background and credit checks too (find info at Have the tenant sign a lease (download one for $15 at And be sure to get a security deposit plus a month's rent upfront.

5. Monetize a hobby

The idea: Generate profit from your leisure-time activity. Love sports? Referee high school games. Make jewelry? Sell it at craft shows.

Income potential: Hobbyists can earn $2,000 to $5,000 a year if diligent about selling and marketing, estimates Gene Fairbrother of the National Association for the Self-Employed. Services (like party planning or music lessons) have greater profit potential than products because there's less overhead, he adds.

Hassle factor: Medium. You may have to put in more time than you realize. And that may suck some of the passion out of your passion. "Be realistic about whether this is a hobby or something you're serious about making money at," says Rita Gunther McGrath, professor at Columbia Business School.

How to get started: Determine if there's a market for your product or service. That means checking out the competition. For example, a jewelry artist should go to craft fairs, online craft emporium, and trade shows. (Check for area shows at This research should also give you a sense of prices. When she began considering reselling the rare dolls she'd collected over the years, Kathi McWhorter, 50, of Los Angeles started trolling eBay. "I looked up sales for Barbies like mine to see who received the best prices and why," she says.

Next, get a sense of expenses by interviewing people who operate similar businesses, suggests Kimberly Seals Allers, author of The Mocha Manual: Turn Your Passion Into Profit. Then, figure out if you could make a profit. This is the go/no-go point. If you decide to proceed, make a list of the attributes of your target customer, and use that to determine your marketing strategy. Once you've done all that, you're in business.

You Might Be Richer Than You Think

by Laura Rowley

As this column appears on Thanksgiving Day in the U.S., I thought it would be a good opportunity to look at wealth in a holistic way -- and from a global perspective.

The media typically frames wealth in terms of the list of richest moguls, or features on the world's most expensive homes -- a kind of status fixation that's guaranteed to inspire envy and skew one's perspective.

Researchers have long suggested that the green stuff alone doesn't buy happiness, and most Americans enjoy prosperity in ways we take for granted. Here's a quiz for the holiday to remind yourself of the abundance you enjoy. If you answer "yes" to more than half of these questions, you're among the global well-to-do, and you have plenty to be grateful for this Thanksgiving.

1. Are you planning a sumptuous dinner today? More than 1 billion people -- nearly a sixth of the world's population -- are faced with chronic hunger.

2. Did you spend more than $2.50 on the ingredients for your Thanksgiving menu? More than three billion people -- almost half the world's population -- live on less than $2.50 a day, according to the World Bank.

3. Can you turn on the faucet to fill the water glasses for dinner, and be confident that clean water comes out of the tap? According to the World Bank, 1.2 billion people lack access to a reliable water source that is reasonably protected from contamination.

4. Are the kids relishing a little time off from school? More than 70 million children of primary school age in the developing world were not enrolled in school in 2005, according to a United Nations Report.

5. Will someone in the family read a holiday poem or blessing before you dive into the feast? Nearly a billion people entered the 21st century unable to read a book or sign their names, according to a UNICEF report.

6. Do you fully expect to be celebrating this holiday until you're 65 years old, or are you older than that right now? Life expectancy is about 65 years on average worldwide -- but just 46 years in sub-Saharan Africa, according to the World Bank.

7. If your kids get injured playing in the annual family football game this holiday, would they have access to basic medical care? More than 10 million children die each year in the developing world, the vast majority from causes that could be prevented by good care, nutrition, and medical treatment, according to the World Health Organization.

8. Are you able to enjoy the holiday in your home country, free from persecution? In 2009, roughly 400,000 people will apply for asylum in 44 developed countries to escape war or persecution related to race, religion, nationality, political opinion or membership in a particular social group, according to the United Nations. There are more than 10.5 million refugees who have been displaced or sought haven in another country, according to the U.N. High Commissioner for Refugees.

9. If you're feeling a little full after your Thanksgiving meal, can you safely take a casual stroll around your neighborhood? The most recent government survey found 29 percent of Americans say there is an area near their home where they would be afraid to walk at night.

10. If you own the home where you'll honor the holiday, are you able to pay the mortgage next month? One in eight households with a mortgage was either in foreclosure or default during the second quarter of 2009, according to the Mortgage Bankers Association.

11. Can you pay off your credit cards in full at the end of the month (or you don't use them at all)? According to a Federal Reserve survey, 58 percent of Americans carry a balance from month to month, leading to financial anxiety.

12. Is your household income at least $50,000? This was the median income in the United States in 2008, according to the Census Bureau. A 2004 survey by researchers at the Centers for Disease Control and Prevention found Americans with incomes of more than $50,000 reported fewer days of feeling "sad, blue or depressed" than those who earned less. Nearly 40 million people -- about 13.2 percent of the U.S. population -- lived in poverty in 2008, which is defined as annual income of $22,025 for a family of four, $17,163 for a family of three, $14,051 for a family of two and $10,991 for individuals.

13. Do you have a bachelor's degree? Just one in four Americans ages 25 and older has attained a bachelor's degree, according to the Census Bureau. Average annual earnings for someone with a four-year degree were $46,805. Over an adult's working life, people with bachelor's degrees earn an average of $2.1 million, compared with $1.2 million for high school graduates.

14. Will you do some exercise this weekend as part of your regular routine? Just 40 percent of Americans do the regular physical activity recommended by the U.S. Surgeon General (30 minutes of brisk walking a day). One-quarter of all U.S. adults are not active at all.

15. Were you able to donate money to a charity last year? Charitable contributions fell by the largest percentage in five decades in 2008, according to The Giving USA Foundation. But look at the big picture: Pledges of more than $307 billion were made -- and 75 percent came from ordinary individuals, people like you, doing their part to make the world a better place. Now that's something to be grateful for -- and a sure-fire way to boost happiness.

Saturday, 21 November 2009

Famous Scams: The South Sea Bubble

The South Sea Bubble was one of the earliest British stock market bubbles. But it was more than just a bubble, like the dot com bubble of recent years -- it was an example of a scam of massive proportions, with the snouts of businessmen, management, and government firmly in the trough.
The South Sea Company

With the rise of British Imperial power in the early eighteenth century, the huge wealth generated by its vast overseas businesses was creating a growing wealthy middle class. But it was well nigh impossible for anyone new to invest directly in the companies controlling the trade. For example, the East India Company, which enjoyed a monopoly on trade with India, had fewer than 500 shareholders to whom its handsome (and tax-free) dividends were distributed.

Enter the South Sea Company. Following the War of Spanish Succession, Britain was left with a national debt of around £10m (which was a considerable sum at the time). The South Sea Company was established in 1711 and raised capital from the investment-hungry wealthy to buy that government debt in return for 6% a year in interest. In addition, the company was granted a monopoly on trade with South America, upon which the government hoped to levy taxes that would, in turn, fund the 6% interest owed to the company. It was an incestuous web right from the start.
Naïve investors

The company's first issue of stock was snapped up by eager investors, who believed South American gold would be handed over in shiploads in return for English wool and other such finery. Sadly for investors, the managers weren't really much good at trade (though they were good at looking slick and talking smoothly), and with growing hostility between England and Spain, the company barely made any money from trade at all. Instead, further financial finagling followed, with new South Sea company shares being offered to the gullible public to finance new deals over national debt. Many insiders, in both the company and government, took advantage to gain huge wealth, with the share price rising nearly tenfold in little more than six months in 1720.

That year, in full knowledge that the company’s actual business was worth a meager fraction of the current market value of their shares, the management sold out, and panic selling ensued when people heard the news. In the carnage, such notables as Sir Isaac Newton (who was said to have commented "I can calculate the motions of the heavenly bodies, but not the madness of people."), Alexander Pope, and even the king himself, lost large amounts. It wasn’t just the uneducated masses who were fleeced.
Other scams

Seeing how easy it was to separate gullible punters from their money, during the bubble in South Sea stock a whole raft of even less reputable con artists got in on the act, offering stock in companies allegedly engaging in all manner of ludicrous ventures. One venture promised to reclaim sunshine from vegetables, while another was floated in order to buy the Irish bogs. It is even said that a company was formed with the stated aim of manufacturing a cannon to fire square balls. But perhaps the most ridiculous was the flotation of a company "for carrying on an undertaking of great advantage, but no-one to know what it is". Amazingly, even that one succeeded in conning the gullible out of £2,000.
The lessons?

The whole sorry episode saw all manner of scams that are, sadly, still around today -- insider dealing, pumping and dumping, cold selling, fraudulent reporting, and plain simple lies. And it was compounded by all manner of investment pits that people are still falling into today, from simple gullibility amongst people who really didn't know any better to the large scale switching off of the brains of people who really should have. People lost everything they owned and more, with many having borrowed the money to buy their stock.

But at least today nobody would fall for the "undertaking of great advantage" one, would they? Well, I can still remember people snapping up shares of companies simply because they had the word "Internet" in their name, without the merest inkling of what the companies did.

Transcript: How To Spot An Investment Scam

This is a transcript of David Kuo's recent podcast with Jonathan Phelan of the FSA. Here they talk about common investment scams and how to avoid them.


This is Money Talk, the weekly podcast from the Motley Fool. I'm David Kuo, and today I'm joined by Jonathan Phelan, Head of Retail Enforcement at the Financial Services Authority, and today we'll be having a look at scams. Welcome to the Money Talk podcast, Jonathan.


Hi David.


Right, as obvious as it may seem to a lot of people, what exactly is a 'scam', and is money always involved in a scam?


Ultimately money is involved, but really a scam starts with the con, and con doesn't stand for con, con stands for confidence, and they gain your confidence by sweet talking you, taking an interest in you, your family, your wife, your kids, your car, your job, that sort of thing, and you could have many many conversations or a few emails before they even ask you to part with money, but ultimately they're after you, your personal details, and ultimately your money or a way of getting to money.


So when somebody is contacted by a scamster, what are the things that they should be looking out for? -- what are the things they should be aware of?


I think the first thing to be aware of is, why has this guy contacted me? People don't do that out of an abundance of benevolence, they contact you because they're trying to sell something, and sometimes you've got a legitimate salesman; in the investment world that we're concerned with at the Financial Services Authority, people shouldn't cold call, so you should have invited that call, so the first red flag for you is, where you get a call out of the blue from someone you didn't expect to call you, a legitimate broker or a legitimate advisor shouldn't be calling you out of the blue -- that's a red flag to start off with.


But he's offering you something, his job is to sell, and what is so wrong with that? I mean, sometimes, you know, I quite welcome people coming up to my door and knocking on it, and saying, "I've got some dusters, I've got something to sell you" -- what is so wrong with that?


There's absolutely nothing wrong with it, if he is a legitimate, honest broker, if he's authorised by the FSA, but as I say, an authorised legitimate honest broker won't be calling you out of the blue, they won't be knocking your door selling shares instead of dusters.


Sometimes those shares do turn into dusters, don't they?


Yes indeed, and that’s the problem we're trying to address, yes.


OK, so in your experience, what are the kind of people that normally get targeted?


Well, one of my biggest remits is share fraud, often known as "boiler room fraud". With share fraud, the most likely victim there is someone who's got a long history of investment, they're not the naïve investor, they're actually the experienced investor. The profile of your average victim for a share fraudster is over 50, male, ten plus years' worth of share buying experience.


So, what you're talking about is a particular group of people that these scamsters will be targeting. Now, how do they get hold of that information in the first place? How do they know you are a 50 year old and above, that you have got investments and that you are male?


There's two principal ways of fraudsters getting hold of your details, with share fraud anyway. First of all, as a shareholder your name will be the company's shareholder list, so if you invest in xyz plc, a perfect legitimate company, you'll be on its shareholder list, and that shareholder list is, by laws of the land, freely available, and if it gets into unscrupulous hands, they can phone down the list of shareholders, it must be a mainly sort of losing game, as you phone thousands and thousands of people, but occasionally somebody will fall for it, that's one way.

The other way is they might send you an email and invite you to receive a bit of research on some shares. It might not look like a sales pitch first of all, it might look like a perfect piece of benevolence -- "I want to help you out, I’ll give you some research notes on a share", and you might, by replying to the email, give them your email address of course, and they're away, they can contact you by further email, or if you give them your phone number, they contact you again, and sell.


So right at the very beginning, it doesn't feel much like a scam, does it? I mean, if somebody is offering you a research report on a company, that doesn't really feel much like a scam to the victim?


No, that's the important thing, because you don't feel you're being scammed. A lot of people say, "Well, why would these people give their money to someone they've never met before?", but the reality is, for the first three or four phone calls, they're not being sold to, it feels like there's a guy who really cares for your financial health, as it were, and they're looking after you, so you're drawn into a con, confidence trick.


So, let's have a look at some of the typical scams, I mean one that will be, I think, at the forefront of a lot of people's minds is pyramid selling, particularly in the case of Bernard Madoff. Now, how do these pyramid schemes work? A lot of people have heard about them, but they say, "What exactly is a pyramid or a Ponzi scheme?"


Well, they can work in different ways, I'll illustrate it with one fairly typical example, which might be that I know someone who says, "You're only getting one and a half percent saving interest in your bank, that's a bit rubbish, isn't it? Why don't you give it to me and give me £1,000, and at the end of the year I'll give you £1,500" It sounds fantastic, so you give him the money, and then he goes to someone else, or I tell my friends, and they give him £1,000.


So far, I'm actually sort of into this deal.


Yeah, absolutely.


Sounds good to me, yeah?


Yeah, I might go away with a bit more money in my pocket if I do this well. What actually happens, though, is when the first guy asks for their interest, their £500, or everything back, their £1,500, the con man, the fraudster, just takes it, not from any investment return he's made (he's not that good), he just takes it from a new investor, so the new guy who gives him £1,000, he takes that £1,000, gives it to the first guy who gave him £1,000 a year ago, so he's robbing Peter to pay Paul.

That con can go on for quite some considerable time, everyone gets very excited by the 50%, 100%, 200% interest they're going to make that he's promised, everyone gets very excited; the more people that give the money to the scheme, the more he can pay off the first people in the scheme, and if he's really good, he will convince the first people in the scheme to leave their money in the scheme to earn more interest, so he doesn't even have to pay them back, so the pyramid builds and builds and builds, but it will, it definitely will fall over at some point.


So is the lesson there to be the first guy to actually sign up for it then?


The lesson there is to not put your money in at all!


It strikes me that the guys who actually get in early are the ones who are going to make the most amount out of it.


No, because what actually happens is, normally the con man is good enough to convince the first guys to leave their money in, and that normally happens, they might take out a bit of interest, but essentially they leave their money in as well, and what everybody sees is a paper profit; we see the conmen, they'll give a fancy spreadsheet, they'll open up a laptop, show a graph, and say, "That's what your money was at the beginning" (pointing to the low point of the graph) "and that’s what your money is now" (pointing to the high point of the graph), it looks fantastic.


That's called the stock market index, isn't it?


It's called a con, in this case -- so something quite different.


Right, so if you know that these things go in, what is the FSA doing about it? Why aren't you clamping down? Why wasn't Bernard Madoff found out for what he was doing? Surely people must have known?


Well, I can't talk about that particular case, because that's in a different jurisdiction, and there are different law enforcement agencies involved in that. The FSA does come across these sort of scams, we do go in, we freeze the assets, we restrain the activity, which is a lovely technical legal term, but it's essentially involving a judge telling the individual, "Don't do this again, otherwise you're in contempt of court, and you can go to prison."

The most important thing that we can do is freeze the assets, we make the individuals bankrupt or we put firms into liquidation, and we try and get as much money back for the investors as we can, but I'll jump straight in on myself there, and say, you often lose most, if not all, of your money. We do our best to get that money back, but we often find it's been spent by the conman.


So typically, how long does that take? -- from the investigation to somebody getting something back out of their investment?


That's one of those piece of string answers, I'm afraid, or questions. It can take some considerable time, because there is a court process, because there is an investigation process, it's a piece of string answer, because if the money's in his local bank account, local bank bank account, that's grand, we can go and grab it; if it's gone into ten different foreign bank accounts and it's gone into buying Ferraris, Porsches, mansions and helicopters, then we have to appoint somebody to call all of those assets in, sell all those assets, draw as much money in as possible, and get it back out to investors. So it can take quite a while.


Well, apart from pyramid selling, at this time when lots of people are facing redundancy, you quite often see posted on, well lampposts and most other places, "working from home" schemes, where people can sign up and they can stuff envelopes and things -- that is another scam, isn't it?


It's outside of the FSA's remit, it's not an investment scam, the FSA's involved in investment scams. I do meet very regularly with law enforcement officers from different agencies, I met last year with the assistance of the National Fraud Strategic Authority, the NFSA, who acts really to draw all law enforcement agencies together that deal with fraud; met last year, we talked about scams like this, yes that can be a scam, it's not always a scam, I have to be careful there, obviously because there could be some perfectly legitimate working from home opportunities, just like there are perfectly legitimate authorised stockbrokers, so by all means working from home, not always a scam.

If people want a bit of advice on where the red flag might be, the warning signs to look out for, it's where you're asked to part with money up front, and when I talk to my colleagues from the Office of Fair Trading, I look at this sort of thing, the NFSA, the City of London Police, the Serious Fraud Office, a lot of the hallmarks of all of these scams that we talk about is parting with money up front -- you get a letter or an email saying, "You've won the lottery in Canada -- send us £20 and we'll send you your winnings” -- thousands of people might send £20, that's a lot of money for the conman, nobody's won the lottery – well rarely!


One person does, don't they?


Well, of the people contacted by the conman, I'm not so sure, well the conman isn't necessarily going to send any money to a winner, that winner's probably been contacted directly by the Canadian lottery or whatever, and that can be the con. Working from home, again talking to colleagues at the OFT, City of London Police, SFO and so on, yes the con with working from home can be, "We'll send you a starter pack if you send us £50", you know -- you send the £50, you never see your money or the starter pack, or you get five brown envelopes or something.


So, in your experience, I was recently contacted by somebody who said he would make me a male model, and I had to put some money up front – does that sound like a con to you?


It may be that the story's a con there, but I don't want to cast aspersions on your abilities as a male model! If you send money up front, that is a classic hallmark of a potential con, I can't say that every phone you make where someone says, "Send us some money" is going to be a con, that would be wrong.


But frame your answer in the context of the way that I look at the moment, I do show some potential, I can see myself as a model for Abercrombie and Fitch, for instance, yeah?


There's a limit to what I can comment on, I probably shouldn't go that far.


Is this out of the remit of the FSA as well?


It's definitely outside my remit, yeah!


Now, can we have a look at boiler room scams, because this is something that interests I think a lot of the people at the Motley Fool, because we even have a discussion board dedicated for boiler room scams. Can you explain to us how that actually works, a boiler room scam?


It's got all the hallmarks that I've mentioned so far, you get a phone call out of the blue from someone who sounds like the real deal, sounds like a proper stockbroker; if you're going to be a victim, it's like likely that you've got shareholding experience, and you as a shareholder feel that this guy sounds just like the real deal, sounds just like a stockbroker, they never sell on the first call, the second call, even the third call -- they befriend you, they ask about wife, kids, family and so on, and they will often mention a couple of shares that they think might be worth a punt, they don't even try and sell you at that stage.

When they phone you the next time, they'll mention one of the shares that has done well, they'll forget to mention the one that didn't do so well, they'll mention that you can then go and look that up and think, "Ooh, this guy not only sounds like the real deal, but he gave me a piece of advice, if I'd have taken it, it would have gone up."

He's gained your confidence, he's a conman though -- he's called you out the blue, a proper stockbroker shouldn't do that, you've not invited him to call, and ultimately, fourth phone call, fifth phone call, he will try and sell you. The average investor that we hear from has lost a few thousand pounds from dealing with that conman; the average investor's dealt with him four or five times, so ultimately they've lost about £20,000. We hear from about 3–4,000 people a year who've fallen for that con. That's essentially how it works, the red flag is you've got that call out of the blue.


So are these companies registered with the Financial Services Authority?


No, these share fraudsters, they're often based abroad, because they know if they're based in this country, we'll go out and get them, we'll close them down, make them bankrupt, put them into liquidation, get the money off them, so they base themselves abroad, outside of our jurisdiction where we haven't got the power to go after them, so we have to focus our attention not on taking the criminal away from the victim, but on taking the victim away from the criminal, and that's why we're speaking to you.


Have you practised at home before?




It’s very good!


There are two ways of approaching law enforcement, and quite often the clamour, the call is for law enforcement officers to take out the criminal, and that's great, you can put the criminal in prison. I often say, if you want another line I've practised before, I often say that, when it comes to share fraud, shareholders, they're on a register, people know that they own shares, people therefore know that they've got money, to me that's like they've got a pot of gold in their window, OK?

Now we can take out the criminals as law enforcement agencies, imagine taking out the burglar who wants to get that pot of gold in the window, they take out the burglar, but another burglar will see that pot of gold, and another burglar will, and another burglar will, so you can take out the criminal but another criminal, burglar will take their place; you can take out a share fraudster, but another one will take their place.

From my point of view, it might not sound as great, not putting someone behind bars or whatever, but when they're outside the jurisdiction, you can't anyway, I can't arrest anyone in Spain, so the most important thing for me is to tell the victim how to take that pot of gold out of their window, to remove the temptation. If all potential victims can look after their money, it doesn't matter how many criminals try and get it, the money is safe, and that’s the most important thing for me, from a law enforcement point of view.


So are you saying that anybody that deals with a company that is FSA registered is therefore going to be 100% safe?


If you deal with an FSA registered company, you've got a few layers of protection -- you've got an ombudsman scheme, you've got the FSA itself supervising the firm, and you've got a compensation scheme, if the firm that you're dealing with gets into trouble, so there are some layers of protection. We all know that not everything is 100% safe, so I'm not going to give any guarantees to say things are 100% safe; people have to be aware of the advice that they're being given, they have to be aware that sometimes the advice might not be absolutely fantastic, but there are compensation schemes and ombudsman schemes to deal with that, with an authorised firm.

I think the important thing from a share fraud point of view is that these share fraudsters, they're not authorised by the FSA, they go outside our jurisdiction to stay as far away from the FSA as possible, because they know what we'll do to them if we can get them, so they go as far away -- now, if you deal with one of those, you've got no protection at all, if you send that guy £4,000, you lose £4,000, there’s no ombudsman, no compensation scheme, no victim support.


That's terrible, isn't it?


It is, it is, and that’s why we do as much as we possibly can to keep the victims away from the criminals and the criminals away from the victims.


You're using that line again?


I am indeed.


It's very well rehearsed, that line! Right, can we talk a little bit about "pump and dump" -- what do you understand by pump and dump, in the context of investing?


You might need to tell me what you mean by pump and dump, but people have different meanings for it.


I mean, people who contact you trying to sell you shares in their company that they have already bought, and what they then do is to try and get as many people afterwards to buy the shares, consequently they are pumping up the share price, after which it's gone up, they will dump the shares, and of course the last person holding the shares will be the person that's carrying the very expensive shares, and because the share price is never worth anything in the first place, the share price falls and of course the last person standing is the last person that makes the biggest lost. Now, that is what I understand by pump and dump, so what can the FSA do to try and prevent things like this from happening?


It's a very similar piece of advice to the one I've already given, again dealing with an unauthorised firm, that's a common feature of the share fraud that we've already talked about, they might be selling an existing share, sometimes share fraudsters are selling a non-existent share, sometimes they're selling Regulation S stock from the USA, sometimes it's a pump and dump arrangement. It's all the same thing, I think, going back to the classic line, take the victim away from the criminal …


Third time now!


… yeah, third time now, I'll keep doing it -- the important thing is, I think you can overcomplicate it by describing all these schemes? – pump and dump is one, pyramid scheme is another, classic hallmarks, what's the red flag -- the red flag is the call out of the blue, the red flag is you're not expecting this, what do you do? -- that's easy as well, hang up the phone, slam the door, don't respond to the email. Pump and dump, you've described perfectly well, I don't need to redescribe it; what do you do about it? -- hang up the phone, slam the door, don't answer the email.


What about people who have been scammed? -- I mean, what kind of recourse do they have, apart from going to the FSA and just whingeing, and saying, "I've just lost some money"? I mean, what are the various things that people can do? You've already mentioned things like the financial ombudsman scheme, you've also mentioned Financial Services Authority, but if people have lost money, is there any chance that they can get the money back by contacting these people, and somehow trying to recoup that loss?


By "these people", you mean the conmen?


By the conmen themselves, yeah.


Conmen are often out of reach, out of jurisdiction, so I've not, I don't think, come across anyone who's successfully managed to get their money back from say an overseas boiler room share fraudster. Yes, contact the FSA -- people don't do that, I would like them to, the more intelligence we get, the more we can do, and your discussion boards are a fruitful source of information for us, we go to those discussion boards to see what activity's going on in the share fraud market.

Often we're a little disappointed that people have gone to the trouble of discussing them on the discussion board, and not also telling us, it'd be great if they told us, because there is a fruitful source of information. If people told us when they'd been approached by one of these conmen, particularly if they tell us where they've been asked to send the money, if they've been asked to send the money to a bank account with a sort code and account number, then we can trace the money, and that’s really really useful intelligence for us.


Can I just ask you one other question before we end, and that is, why are so many of these boiler rooms situated in Spain?


Well, they're not all, or so many in Spain, Spain is a fairly common jurisdiction.


Is it because the weather is quite nice over there?


Well, there is a lifestyle to it, our top three are USA, Switzerland and Spain, not necessarily in that order, the orders switch from time to time in popularity. What they're looking for are places with the right kind of timezone to call into the UK, with an English-speaking population, of course in Spain, they don't speak English, but they have quite a large ex-pat, they can convince people to go and get on a plane and go over and live in Spain for six months, so that's fairly straightforward.

They can do that around Europe, and of course it's straightforward in the USA, they've got English-speaking, and essentially that's it, they've got to have the right timezone, English-speaking salesforce, as it were, or conmen, as I prefer to call them, and they call into the UK and try and rip you off.


So why don't you work more closely with the people in Spain, with the authorities in Spain, to try and close these fraudsters down?


The effort is as wide as that, last November I met with, in fact the FSA chaired a boiler room conference, which called together …


Did you invite all the boiler room fraudsters along as well?


That would have been nice, because we might have arrested a few, but I don't think they'd have taken up the invitation, but we had law enforcement agencies from Spain, from 80, well there were 80 or so people in the audience from many jurisdictions from around the world, I think probably all continents were represented at that conference, and it was a very useful conference, a rare conference in law enforcement terms in that there's a global fight and a co-ordinated global fight against share fraud, it is a big problem.


So that is good news for investors in the future, isn't it? -- I mean, if all of you guys just get together and sort of clamp down on this kind of fraud sting going on?


I'd love to say, "Yes, that's fantastic news for investors", but let’s go back to victims and criminals, the law enforcement people traditionally were about arresting the criminals, the criminals know that, and they go outside jurisdictions, they make themselves as scarce as possible, often all we’ve got is a telephone line, they give false addresses on their literature or websites, so you’ve just got a telephone line and they move very frequently, so even with the best co-operation in the world from foreign law enforcement agencies, taking out the criminals is one of those tasks that is not going to give investors that much comfort, so I’m not going to give investors that much comfort from the point of view of taking out the criminals; we do what we can, and we do a good job, I think. The most important thing, though, is taking the victims away from the criminals, and helping people understand that, if you get a cold call out the blue, what’s the answer? – slam the phone down.


Yeah, well I think that's a good point in which to end, so as the sands of time slip through the egg timer of enrichment, we have to bring this podcast to an end. That was really cheesy, wasn't it? But I end each podcast with a quote, and today's quote I actually found, I think sums up fraudsters and con merchants quite nicely, it says: "Tell a man that there are 300 billion stars in the universe, and he'll believe you; tell him a bench is wet, and he'll have to touch it just to be sure" and I think quite often people are contacted and they just think, "Well, maybe I might not be the person that's going to be conned", and they just fall for it. Thank you Jonathan, for joining us today, I hope you have had as much fun as I have.


Indeed, tremendous, thank you.


And if you have a comment about today's show, you can post it at If you have a suggestion about future shows, and if you have any scams that you want to alert us to, email

Crisis fallout still in 'first half': forum

DUBAI (AFP) - – The impact of the global financial crisis is still in its "first half," but there is only a brief opportunity to bring tough reforms, the World Economic Forum warned on Friday.

"It is still too early for people to pat themselves on the back and say that we've managed to get through the crisis," WEF managing director Richard Samans, told AFP.

"I think we're still in the first half of the aftermath of this crisis," Samans said on the sidelines of the forum's second summit on the global agenda in Dubai.

Other forum participants agreed, saying the recovery was threatened by a wide range of problems thrown up by the US-rooted global financial crisis.

"The truth is that we did our best, but (the world is) still going through the storm," Mohammed Alabbar, head of a committee tasked with helping Dubai counter the impact of the crisis, told the conference.

"The world... is in trouble, because government debts are out of control, banking is at risk, consumer debt is very high, and unemployment of course is high.

"Deficits (around) the world are staggering," Alabbar said. "And what's the consequence of that? Most probably education might suffer as a result of that. Health care will be at risk as a result of that."

Mark Malloch-Brown, senior adviser for the WEF's Global Redesign Initiative, told conference participants that, "What spurred us all to come here is this sense the crisis isn't behind us."

But he said later: "The crisis created malleability, a moment of opportunity to introduce new ideas, to bring changes (to) the global system which in normal times would either not even be contemplated or would take years to get done."

John Gieve, a senior fellow at Harvard University, warned of the risk posed by complacency now that the most dire moments of the economic crisis have passed.

"There is some risk that with less acute worries about the short-term, the momentum for reform may be ebbing," Gieve said.

Sharan Burrow, president of the International Trade Union Confederation, voiced a similar sentiment.

"We've got a window of opportunity. The crisis has focused the minds of the governments," said Burrow.

Dubai Crown Prince Sheikh Hamdan bin Rashid al-Maktoum also alluded to the possibilities for reform offered by the crisis in a speech that officially opened the conference.

"The crisis itself created an opportunity to review our actions and assess the efforts needed to tackle" the crisis, he said.

The sheikh also said that because of the crisis, "there was an increase in international cooperation."

"We have seen the G-7 states broaden into the G-20, and the G-20 met three times within a year," he said.

How to Escape the Rat Race

by Brett Arends

provided by The Wall Street Journal

How much money do you actually need to take this job and shove it?

Go on, admit it: You've thought about it. Maybe you've imagined quitting your job and easing into early or semi-retirement -- or starting your own business.

It's a perennial topic, but it's especially timely now. Millions are either unemployed or working part-time. Millions more fear their job could be next.

Obviously there are a legion of complicating factors involved in anyone's decision. Sherrill St. Germain, a financial planner in Hollis, N.H. with a lot experience in the field, says the big issue for many clients is losing group health insurance. "That's the thing that keeps them stuck," she says. "That's the deal-breaker." Say what you will about healthcare reform: The present system is a huge drag on economic mobility and entrepreneurship.

But even if you can surmount all the other complications involved in escaping your current situation, how much money would you need to have saved up to make it a viable idea?

Most financial planners have advice on the subject, but Troy Thompson's is as good a place to start as any, because it comes from experience. He left his job as a lawyer at a large firm in San Francisco to start out on his own as an independent financial planner in Portland, Ore.

"What's the cash in your pocket that you need to check out of the rat race?" Mr. Thompson asks. "I decided I had to have two years' worth of (living) very liquid, easily accessible assets." He figured he had to cover a lot of transition costs. That included moving expenses, legacy costs (like the remainder of his lease in his old home), and enough money to support his expenses while he changed careers and ramped up his new business. Saving up to two years' worth of costs may sound daunting. But here's the good news: If you are making this kind of move, you are probably moving from a high-cost part of the country, like San Francisco or New York, to one of the cheaper ones. And your money will go a lot further there.

A dollar may go twice as far in Austin, Texas or Portland as in Manhattan. Those wondering where they can live for nearly nothing should take a look at's cost of living calculator (It's based on the widely-followed Accra Cost of Living Index data). Obviously everyone's numbers are different. Here are some other questions to consider:

What kind of escape are you planning (or dreaming about)? Are you just going to change jobs or are you planning to change careers? Or are you really wondering if you can check out– take early retirement, or maybe semi-retirement? The money you'll need is going to be completely different for each one. Ms. St. Germain gives clients some scenarios: A mid-level military man happy to live on his pension while searching for a new job may not need anything. A highly-paid executive who wants to downshift to a lower-paid job may need a lot to help supplement her transition and future income. Net result: Your "escape fund," as Ms. St. Germain calls it, can be anywhere from zero to a large pile of cash to supplement your income indefinitely.

How far will your savings get you over the long term? Someone investing their savings conservatively should certainly be able to earn about 3% a year over inflation. If you want to withdraw $10,000 a year and make it last for, say, thirty years, you will probably need to have about $200,000, or twenty times as much, saved up now. Anyone giving serious thought to the idea of escaping is going to need to take a hard look at their expenses. "It's all a game of cash flow, in or out," says Mitchell Reiner, a financial planner in Atlanta. One of his clients, a senior executive in Atlanta, recently managed his escape: He and his wife threw in their expensive lifestyle and took early retirement to the mountains. But they axed their monthly expenses in half, from $7,000 to $3,500.

The biggest saving was simply on real estate: Mortgage, property taxes, insurance and other expenses. They sold their expensive home and moved somewhere cheap.

What can you live without? It's a truism but worth repeating: Most middle-class household budgets can be cut. The most common advice is to look at your current expenditures and see where you can pare back. But if you really want to escape, the more radical idea is zero-based accounting: Start with a blank piece of paper, and see what you would need to spend to be comfortable.

"The problem with people nowadays is that a 'necessity' is any luxury your neighbor happens to have," jokes Ernie Zelinski, a frugal living guru and author of "The Joy of Not Working and How To Retire Happy Wild and Free." He adds, "We can all live on less than you think."

You might not want to go as far as Mr. Zelinski–"I don't own a cellphone, I drive a '95 Camry, and for two years I lived without a sofa," he says–but the principles he espouses aren't crazy. "You're financially independent if you have $15,000 coming in and $14,900 going out," he says.

How much do you need to be free? Maybe you should ask instead: How much do you really want to be free?

usnews How to Navigate a Slow-Growth Economy

By Rob Silverblatt

After the dust clears from the furious rally in stock prices, what will happen next? It's the question in the back of every investor's mind, and the answer could be far from encouraging. The way many economists see it, the market is headed for a sustained period of slow growth as the tepid borrowing environment and sluggish employment prospects balance out the recent rash of enthusiasm.

For investors, this turning point in the market provides ample reasons for tempered expectations. But even amid a slowdown, there are a number of opportunities for solid returns. Here are some tips for navigating a slow-growth economy.

Pay attention to dividends. Under normal market conditions, investors can expect a healthy balance of dividend payments and companies' earnings growth to anchor their returns. But if corporate earnings falter in a slow-growth climate, dividends will take on mounting importance.

On its surface, this is a troubling proposition, mostly because the recession caused struggling companies to slash their dividends and the situation hasn't improved much during the recovery. But even though the overall dividend yield for S&P 500 companies lingers at a paltry 2 percent, there are pockets of the market where dividends remain strong.

Josh Peters, editor of Morningstar's monthly DividendInvestor newsletter, uses the example of Altria, the parent company of Philip Morris USA. "Within that S&P 500 figure of 2 percent, you've got a lot of companies like your Googles and your Apples that pay nothing. But you've also got companies like Altria that have a 7 percent dividend yield," he says. This high yield, he notes, provides a cushion in slow-growth periods, since dividends compensate for stalled earnings increases. "Altria just does not have to grow very fast--it doesn't have to raise its dividend [or] its earnings very much--in order for you to have an overall return that is decent," he says.

This insulation often stems from the business models that companies with strong dividends tend to adopt. "For them, the dividend is a high priority," says Peters. "They run the business so they can pay that dividend and raise it over the long run. And that means that they leave room for perhaps a slower economic environment or a recession." Apart from Altria, Peters singles out McDonald's, utilities provider Southern Co., and Chlorox.

Meanwhile, he argues that companies that don't pay out steady dividends could potentially suffer in the next couple of years. "If a slow-growth economy is going to hand out its punishment to companies that need the earnings growth the most . . . it's going to make it a lot harder to own a stock like that," he says. "If you don't have a decent dividend yield that provides a basis for getting a regular, predictable return, then it's 100 percent just a bet on earnings growth and valuation expansion, and I think a slow economic growth environment makes both of those much harder to achieve."

Look for innovation. Stocks across the board got a boost from renewed investor confidence as the market moved off of its March lows, but that honeymoon effect looks destined to fade. "We're moving on from the early economic improvement and all the stocks being helped by just being undervalued and by better prospects across the board," says Kim Scott, manager of the Ivy Mid Cap Growth fund. "Now you really need to separate the wheat from the chaff, and there are still plenty of good growth companies out there. I wouldn't say it's a candy store, but there are a lot of good companies."

For Scott, looking for innovation is the key to finding companies that can bring in solid earnings, even in a slow-growth economy. By sector, she likes information technology, industrial technology, and portions of healthcare and consumer discretionary. As for companies, she says that a number of common household names, such as J. Crew, Urban Outfitters, and Chipotle, have the types of innovative business models that can provide investors with some immunity to slow growth.

"These are the kinds of companies where you still see opportunity," she says. "They have great concepts that appeal to consumers. They still have the opportunity to grow their square footage, and then as the economy recovers, they're going to get same-store sales growth."

Overall, though, prospects for earnings boosts look likely to decrease in the near future. But Scott believes investors are already braced for that outcome. "I think generally expectations are tempered," she says. "I think that's been done."

Understand the labels. Investors love to kick around terms like slow growth, but it's important that they also know where the economic forecasts are coming from. After all, understanding how the market entered a phase is the first step to approximating when the phenomenon will pass. In this case, slow growth is the result of high unemployment rates and a rough credit environment.

"We had a society that was using credit egregiously, and that's come to a screeching halt," says Scott. "And so the forced or voluntary reduction in the use of credit by consumers is a reason why we'll have a slower-growth economy."

Peters compares the current recovery to the economy's growth in the years following the recession that kicked in around the turn of the century. The last time around, the credit markets were not nearly as tight. "If you look at the next economic expansion, you don't really have much prospect that wage growth is going to accelerate because you're still going to have globalization acting as a damper on wages, to say nothing of 10 percent unemployment or higher coming out of this recession," he says. "[And] you're not going to have that secondary driver of borrowing to enable consumers to spend beyond means or spend all the way up to their means."

Weighing The Facts: Will The Next Leg Be Up or Down?

By Simon Maierhofer

When was the last time you put together a real pros and cons list? Was it back in your dating days, when you purchased your last car, or when you thought about gifts for your mother in law? Regardless of how long it may have been, it's time for another pros and cons list.

Here's why: The stock market has been moving up relentlessly for eight months. Over the same period of time, 3 million jobs have been lost and about one bank a day had to close its doors since the beginning of the year.

Aficionados of technical analysis will find it interesting that the recent 15-day rise came on volume (NYSE total market volume) that was 27% lower than the average volume since March 1st. If you're thinking, stocks are up, all is well; now's the time to snap out of it and face the music.

The implications of this pros and cons analysis will be disturbing, so let's start out with the good news and ease into the subject.

Leading indicators - leading what?

On Thursday (11-19-09), Bloomberg reports that, 'leading indicators point to sustained expansion.' 58 economists polled by Bloomberg forecasted that the Conference Board's index of leading indicators would rise 0.4% in October. The index did rise 0.3%, preserving a string of gains that goes back a few months.

Factors that contributed to a rise in the leading indicators index were interest rate spreads, initial unemployment claims, and stock prices. The pros of the above, offset declines in consumer expectations, building permits, and supplier deliveries.

This index touches a number of areas that are important to an economic recovery, not all of which are leading (meaning the opposite of lagging) indicators. Before we discuss a couple, let's ask one of the tough questions:

Where were the leading indicators in March?

If the leading indicator index is really leading, how did it do in predicting a March market bottom? Chronologically speaking, talks of green shoots didn't pop up until April or later, and the end of the recession wasn't even discussed until July. By that time the S&P 500 (SNP: ^GSPC), Dow Jones (DJI: ^DJI) and Nasdaq (Nasdaq: ^IXIC) had already rallied some 40%.

Unlike the 'leading' indicators and Wall Street which were still in 'recession mode' at the time of the market bottom, the ETF Profit Strategy Newsletter predicted the onset of a major rally via the March 2nd Trend Change Alert. Since the rally was to be the biggest in years, the newsletter recommended loading up on long and leveraged long ETFs.

Such ETFs included plain vanilla ETFs and dividend ETFs with a tilt towards financials, sector ETFs such as the Financial Select Sector SPDRs (NYSEArca: XLF - News) and leveraged ETFs such as the Ultra S&P 500 ProShares (NYSEArca: SSO - News).

The Trend Change Alert was issued weeks before major stimulus packages like the Public Private Investment Plan (PPIP) and governments $1.5 trillion bond-buying initiative were announced. The much discussed bank stress test results weren't published until May 8.

The monster rally explained

According to the ETF Profit Strategy Newsletter, this expected multi-month rally was to be fueled by investor's pent-up urge to buy stocks. This would explain why stocks continue moving up despite an avalanche of bad news.

This pattern of strong declines followed by strong rallies is not unprecedented. After an 18-month decline (October 2007 - March 2009), this urge needed to be satisfied. Furthermore, the initial 48% Dow Jones decline in 1929 was followed up by a 50% rally - as we know today, this 50% rally was the biggest sucker rally of all times, or at least until today.

However, what comes up must come down, especially if the reason for higher prices is merely based on wishful thinking, not actual economic improvements.

Running out of steam

Aside from Thursday's (11-19-09) decline, all looks fine to the casual observer. The big news is that the Dow Jones (NYSEArca: DIA - News), S&P 500 (NYSEArca: SPY - News) and Nasdaq (Nasdaq: QQQQ - News) all pushed to new highs just a few days ago (11-17-09).

Investors tend to over-focus on the three major indexes such as they over-focus on the lead-unemployment numbers (currently 10.2%). Those willing to dig deeper will see that the more comprehensive unemployment rate is 17.5% (U-6 unemployment rate, published by the Bureau of Labor Statistics). They will also find that virtually no other index, or industry sector, has reached new highs.

Small caps (NYSEArca: IWM - News) and mid caps (NYSEArca: MDY - News) are lagging, as are banks, financials, and real estate, the very sectors that have led the prior economic cycles.

Only the best will do

The appetite for risk, visible throughout nearly the entire rally from the March lows, has morphed into a distain for risk. Investors are picking up only the safest of stocks. Aside from blue chips and gold, nearly all sectors and indexes have failed to reach new highs. This is a very bearish short-term development.

Sellers outnumber buyers

Every week, Investors Intelligence (II) tallies up the number of buying and selling climaxes. Buying climaxes take place when a stock makes a 12-month high, but closes the week with a loss. They are a sign of distribution and indicate that stocks are moving from strong hands to weak ones.

Over the past six weeks, 1,410 buying climaxes occurred, more than at any other time in recent history, even more than in October 2007 (see chart above). According to II's research, sellers into buying climaxes are right about 80% of the time after four months.

Too simple to be credible?

Long before high-tech stock analysis and performance simulation programs arrived on the scene, simple, common sense and easy to understand indicators graced Wall Street with their presence.

Perhaps as signs of the time, those indicators are now considered too simple to be taken seriously. Being led in the wrong direction by sophisticated computer programs -none of which saw the post 2007 collapse or March market bottom coming - seems to be popular, but less effective.

The market communicates its intrinsic value to those willing to listen via straight-forward gauges, such as dividend yields and P/E ratios. Dividend yields measure excess cash flow and P/E ratios measure earnings. How much more plain and simplistic can it get?

Point of references that work

Combine those rustic yet accurate valuation measures with history and you have a formula for success. Why? Because every major market bottom (1930s, 1940s, 1950s, 1970s and 1980s) has seen P/E ratios drop to predefined lows and dividend yields rise to predefined highs.

Unless the market reaches those levels indicative of a market bottom, valuations have not been reset and stocks won't be able to stage a lasting rally. In 2002 for example, neither P/E ratios nor dividend yields reached those predefined levels, therefore resulting in new lows earlier this year.

Just as ice doesn't melt unless the temperature rises above 32 degrees, the market doesn't rally unless the trigger levels are reached.

The current P/E ratio, reported by Standard and Poor's (based on reported earnings) sits at 85.55, way above the historical average of about 20. Dividend yields have dropped close to their 1999 all-time lows (remember what happened shortly thereafter - the Nasdaq tumbled 80%).

Looking at the pros and cons of the market's prospects, it becomes clear that a freezing cold environment lies ahead.

The November issue of the ETF Profit Strategy newsletter plots the historic performance of the stock market against P/E ratios, dividend yields and two other trusted indicators, along with target levels for the ultimate market bottom. A picture paints a thousand words and those charts speak volumes about the market's future.

Tuesday, 17 November 2009

Make Money in 2010: Your Job

Donna Rosato

Raises should make a comeback, but keep an updated resume handy.

Despite all the talk about economic recovery, you're probably still anxious about next year's job market -- worried not necessarily about your position but maybe your spouse's or your adult kids' or your best pal's.

Your concern is understandable. According to the consensus estimate from the Blue Chip Economic Indicators, the jobless rate will steady in the first half of 2010, before dipping to 9.6% by year-end.

Continued high unemployment after a slump has become more common in recent years; after the last two recessions, it took two to three years for the jobless rate to return to pre-recession levels.

What's different now: Economists say the severity of this downturn means that it could take even longer for unemployment to drop below 5% as it was in 2007, if it ever does. Structural changes in industries from manufacturing to media, coupled with strong gains in productivity, are enabling companies to do more with fewer people -- perhaps permanently, says economist Sophia Koropeckyj of Moody's

Still, there are bright spots. You'll probably nab a raise next year, although it will be a relatively skimpy one. Nearly half of large companies froze salaries in 2009, but just 13% intend to do so in 2010, says Hewitt Associates.

Hiring plans are picking up in some hard-hit sectors: 31% of service businesses say they'll add jobs in the next six months (up from 16% in April), as do 29% of finance, insurance, and real estate firms, the National Association for Business Economics reports. And industries that held up well during the recession, such as health care, education, and technology should continue to expand in the new year.

Wild Card

A sharp rise in energy prices could hurt already fragile consumer and business spending, which in turn could prolong hiring and pay freezes at many firms.

Signs to Watch

Three months of steady growth in the average workweek should signal stronger job growth ahead. Companies have cut employee work hours so much that they will boost the number of hours worked before hiring in earnest.

The Action Plan

Don't Fly Below the Radar

Working hard and keeping your head down won't prevent you from becoming a layoff target. To secure your position and have a shot at a decent raise, you not only need to excel at what you do, you have to make sure your boss and other higher-ups notice, says executive recruiter Stephen Viscusi, author of "Bulletproof Your Job."

Seek out high-profile or cross-department assignments, actively contribute at meetings with senior colleagues, and volunteer to take on additional responsibilities -- an especially valuable tactic now, with so many fewer employees around to handle the work load.

Get Paid For Results

Raises will average just 2.7% next year -- the first time in more than 30 years that average pay hikes will fall below 3% for two years in a row, Hewitt reports. Earn a reputation as a top performer and you may nab more: The highest-rated workers will get an average boost of 4.8% in 2010, according to the latest compensation survey from Mercer, a benefits consulting firm.

If your company is among those still freezing base pay, try instead to negotiate a bonus tied to key, quantifiable company objectives: 86% of organizations have some kind of short-term incentive pay program linked to financial goals, operational performance, or customer satisfaction, Mercer notes.

Restore That Salary Reduction

Sure, a pay cut is preferable to a job cut. But if your hours were reduced or your salary slashed outright in the recession, start strategizing about when and how to get that money back.

First read the tea leaves: Have profits improved at your firm? Have layoffs stopped and hiring started? If so, the timing may be right. Prepare examples to prove you're deserving -- showing, say, you've taken on extra duties, worked longer hours, or slashed costs. Then ask your boss for a salary review.

Jump-Start Your Job Search

If you've been out of work for a while -- the average job search now takes 27 weeks vs. 19 last year -- change your tactics. Expand the options by looking at employers in different but related industries or different positions in the same field. Lower your salary expectations -- akin to dropping the price of a house if it's been on the market too long. Update your skills, says executive recruiter Kimberly Bishop, who suggests pulling job descriptions from corporate Web sites and comparing your experience with what companies are looking for. Then take a class -- you've got time, right? -- to fill in any gaps.

Be Prepared -- Just in Case

Even if your job seems secure, the prospect of double-digit unemployment should spur your Scout instincts. Take care of basics: Beef up your emergency fund, identify expenses you could cut if needed, and consider what you'd do about health insurance if you get the ax.

Update your resume and start reconnecting with folks in your professional network. Join industry forums, and seek endorsements on LinkedIn. And if a friend or colleague is laid off and turns to you for advice, assistance, or just to vent, be there for him or her. One day your pal may be in a position to recommend or hire you.

Monday, 16 November 2009

How to live well

By James Oh

In my previous article, I have given you the true meaning and the methods of creating wealth.

In this article, I am going to lay down some of the useful steps you can adopt to create your wealth so that you can live well.


This is the most crucial step to take so as to create wealth. However, this is more often than not being overlooked. People tend to have a misconception of saving and tend to believe that it is a matter of reducing their standard of living. The truth is that it can make a huge difference in their wealth creation. Just imagine every dollar you saved will be invested so as to create more wealth. If you choose to spend the money, both the money and its future benefits will be wasted.


To avoid buying craps, you should always make sure that the items you buy are necessities and not luxuries. You should do away those want lists that are not essential. They are not only to give you a better feeling, but worse still may be short live in nature. Later on, you may need to find a place to store them. Worse, you may have to waste your precious time to tidy up your stores, thus leaving you little or no time to create your wealth. Do not forget that time is money. Here, you must be well aware that most of the purchases are made based on emotion rather rationale.


You should not be bothered how other people view the way you spent your money. In reality, most of us buy things just to impress our peers or egos. Do not get me wrong, you may spend on those luxury items that can generate more residual income than the depreciated value of your assets.

Life is the sum of choices. Therefore, it is crucial for you to set the priority right in accordance to your objectives. As such, to create wealth, you must set saving as your top priority. It should not be construed as cutting back. It is wise for you to spend more on higher quality products, which will cost less in the long run.

Alternatively, you may use it for creating a long term wealth.


To hedge your wealth against inflation, you need to invest the excess of your saving money in wealth-building assets that give you a return higher than the inflation rate. No doubts, the economy today is more inclined to the investors or entrepreneurs than savers. So, to take these advantages to its fullest, you need to align your strategies toward this inclination.

However, you need to aware of its risks as well. As such, you need to equip yourself appropriately and adequately with skills and know-how so as to ensure that you create the highest possible yields for your wealth-building assets.


Never under estimate the power of simplicity. This can be the most sophisticated thing we do with our money. This is because we need to aware that complication is the friend of con artists/ crooks. You should not let your greed and desire for high returns make you confuse and blur. Be aware and do not get involve in those complicated loans or investment deals that could rob you blindly. You need to take precautions to safeguard this measure.

Be careful that you are not enticed by those who claim that your investments are fully guaranteed or they are secured collateral or insurance? They make everything sound sophisticated, so as to fool otherwise reasonable people. Be cautious not to be trapped by these scams. Be wary of your greed.


As warned by Ben Franklin “Beware of little expenses; a small leak will sink a great ship.”

To hasten your dream of creating more wealth, you have to sweat the small stuff. For those of you who are familiar with the compound interest calculation, you will know what I am talking about. Just check the annuity table and you be amazed how fast you can become a millionaire when you save a dollar daily at a fixed interest rate.

I hope both of the articles will not only give you a clear framework but also practical tips to create your wealth.

Wishing you every success. Stay tuned and look forward to seeing you again.

James Oh

Saturday, 14 November 2009

As China’s Economy Grows, So Do the Skeptics

Josh Lipton

A growing pack of bears is now clawing away at China.

Much of the world might have bought into the miracle of China, but there's a significant platoon of heavyweight investment strategists and market pros who think this story of red hot growth in China is a fairy tale that ends in a nightmare.

Yes, our brothers in Beijing are enjoying an economy that continues to smoke, no doubt.

The latest numbers -- as rounded up for us this morning by Dr. Ed Yardeni of Yardeni Research -- speak to the fast-paced growth.

Total retail sales rose 16.2% year-over-year in October, up from 15.5% during September; sales of motor vehicles rose 43.6%; sales of household appliances, music, and video equipment increased 35.4%; clothing sales rose 22.7%; grain and oil sales rose 20.7%.

Still not convinced?

Here's some more data to choke on: Chinese industrial production increased 16.1% year-over-year in October, rising from a 13.9% gain in September; coal production rose 21.1%, while electricity generation capacity increased 17.1%; cement production increased 23.9%.

Investors have liked what they heard: The iShares FTSE/Xinhua China 25 Index Fund (FXI), an exchange-traded fund that tracks Chinese companies traded in Hong Kong, is up 81% in the last 12 months.

The response from the famous short-seller Jim Chanos?


The legendary hedge fund investor, and founder of Kynikos Associates, is a dedicated China bear, Politico reports today. The money-making short seller is moving to short the entire nation’s economy.

The problem, so say a lot of China skeptics, is that the growth isn’t natural or organic but due to easy bank lending and massive government stimulus. (See also Why China’s Growth May Be a Mirage)

These scrooges note that the $4.3 trillion Chinese economy is underperforming despite a $900 billion stimulus program; Chinese officials are cooking their books (surging numbers in car sales but flat statistics for gasoline consumption?); and the country has excess capacity, producing huge quantities of goods and products that they'll be unable to sell.

Chanos’s skepticism is shared by a few other noted gurus, including longtime China bear James Grant, editor of Grant’s Interest Rate Observer.

In his most recent missive, Grant wrote to his readers that Beijing seems to surpass even Washington in substituting political muscle for the verdict of the marketplace.

So erring, Grant says, China produces clusters of avoidable errors: office buildings without workers, apartments without tenants, ports without ships, and expressways without cars.

“Early or late, we say, the economy of the People’s Republic will hit something bigger than a speed bump,” Grant writes. “It will suffer inflation or deflation or a hybrid disorder suitable to an economy that manages to combine the worst features of capitalism and socialism.”

Needless to say, Grant adds, as China goes, so go the fortunes of global resources producers such as BHP Billiton Limited (BHP), Rio Tinto (RTP), Vale (VALE), and others.

Even bulls on China are sounding more cautious, at least in the near term.

Portfolio managers at T. Rowe Price, in their latest letter to clients, said they remained relatively optimistic on Chinese equities. Though they remain overweight, the managers have pulled back a bit on their exposure as of late.

“The risks mainly involve China’s continuing reliance on exports and therefore its dependence on stressed US and Western European consumers,” said Scott Berg, manager of the Global Large-Cap Stock Fund.

The Global Oil Scam: 50 Times Bigger than Madoff

$2.5 Trillion - That’s the size of the global oil scam.

It’s a number so large that, to put it in perspective, we will now begin measuring the damage done to the global economy in "Madoff Units" ($50Bn rip-offs). That’s right - $2.5Tn is 50 TIMES the amount of money that Bernie Madoff scammed from investors in his lifetime, yet it is also LESS than the MONTHLY EXCESS price the global population is being manipulated into paying for a barrel of oil.
Where is the outrage? Where are the investigations?

Goldman Sachs (GS), Morgan Stanley (MS), BP (BP), Total (TOT), Shell (RDS.A), Deutsche Bank (DB) and Societe Generale (SCGLY.PK) founded the Intercontinental Exchange (ICE) in 2000. ICE is an online commodities and futures marketplace. It is outside the US and operates free from the constraints of US laws. The exchange was set up to facilitate "dark pool" trading in the commodities markets. Billions of dollars are being placed on oil futures contracts at the ICE and the beauty of this scam is that they NEVER take delivery, per se. They just ratchet up the price with leveraged speculation using your TARP money. This year alone they ratcheted up the global cost of oil from $40 to $80 per barrel.

A Congressional investigation into energy trading in 2003 discovered that ICE was being used to facilitate "round-trip" trades. " Round-trip” trades occur when one firm sells energy to another and then the second firm simultaneously sells the same amount of energy back to the first company at exactly the same price. No commodity ever changes hands. But when done on an exchange, these transactions send a price signal to the market and they artificially boost revenue for the company. This is nothing more than a massive fraud, pure and simple.

"Traders of the the ICE core membership (GS, MS, BP, DB, RDS.A, GLE & TOT) wouldn’t really have to put much money at risk by their standards in order to move or support the global market price via the BFOE market. Indeed the evolution of the Brent market has been a response to declining production and the fact that traders could not resist manipulating the market by buying up contracts and “squeezing” those who had sold oil they did not have. The fewer cargoes produced, the easier the underlying market is to manipulate." - Chris Cook, Former Director of the International Petroleum Exchange, which was bought by ICE.

How widespread are “round-trip’‘ trades? The Congressional Research Service looked at trading patterns in the energy sector and this is what they reported: This pattern of trading suggests a market environment in which a significant volume of fictitious trading could have taken place. Yet since most of the trading is unregulated by the Government, we have only a slim idea of the illusion being perpetrated in the energy sector.

DMS Energy, when investigated by Congress, admitted that 80 percent of its trades in 2001 were “round-trip” trades. That means 80 percent of all of their trades that year were bogus trades where no commodity changed hands, and yet the balance sheets reflect added revenue. Remember, these trades are sham deals where nothing was exchanged. Duke Energy (DUK) disclosed that $1.1 billion worth of trades were “round-trip” since 1999. Roughly two-thirds of these were done on the InterContinental Exchange; that is, the online, nonregulated, nonaudited, nonoversight for manipulation and fraud entity run by banks in this country. That means thousands of subscribers would see false pricing. Under investigation, a lawyer for JPMorgan Chase (JPM) admitted the bank engineered a series of “round-trip” trades with Enron.

Before ICE, commodities followed a more or less normal growth path that matched global GDP and was always limited in price appreciation by the fact that, ultimately, someone had to take delivery of a physical commodity at a set price.

ICE threw that concept out the window and turned commodity trading into a speculative casino game where pricing was notional and contracts could be sold by people who never produced a thing, to people who didn’t need the things that were not produced. And in just 5 years after commencing operations, Goldman Sachs and their partners managed to TRIPLE the price of commodities.

Goldman Sachs Commodity Index funds accounted for $60Bn out of $100Bn of all formula-managed funds in 2007 and investors in the GSCI lost 15% in 2006 while Goldman had a record year. John Dizard, of the Financial Times, calls this process "date rape" by Goldman Sachs as the funds index rolls cost investors 150 basis points of return annually ($9Bn on the Goldman funds) but GS, under the prospectus, is able to "manage our corresponding position," which means that it has to deliver a price at the end of the roll period. If Goldman can cover that obligation at a better price, they will, and GS pockets the difference. This is why we see such wild moves in the days before rollover, there are Billions riding on GS hitting their target every month…

t is not surprising that a commodity scam would be the cornerstone of Goldman Sachs’s strategy. CEO Lloyd Blankfein rose to the top through Goldman’s commodity trading arm J Aron, starting his career at J Aron before Goldman Sachs bought them over 25 years ago. With his colleague Gary Cohn, Blankfein oversaw the key energy trading portfolio. According to Chris Cook: "It appears clear that BP and Goldman Sachs have been working collaboratively – at least at a strategic level - for maybe 15 years now. Their trading strategy has evolved over time as the global market has developed and become ever more financialised. Moreover, they have been well placed to steer the development of the key global energy market trading platform, and the legal and regulatory framework within which it operates." According to Cook:

It appears to me that what has been occurring in the oil market may have been that – through the intermediation of the likes of J Aron in the Brent complex – long term funds have been lending money to producers – effectively interest-free - and in return the producers have been lending oil to the funds. This works well for as long as funds flow into the market, or do not withdraw in quantity, but once funds withdraw money from the market, there is a sudden collapse in price.

A combination of market hype, the opacity of the Brent Complex and the relatively small scale of trading of the benchmark BFOE crude oil contract enabled the long run up in prices, and several observers believe that the dramatic spike to $147.00 per barrel was the specific outcome of the collapse of SemGroup, which that company’s management subsequently blamed mainly on Goldman Sachs.

Mike Riess issued a study of "Modern Market Manipulation" in which he describes how GS, MS, DB et al have systematically created an environment that rewards those who manipulate the system, robbing the poor to send the money up they company ladder in exchange for record bonus payouts, which (by design) are the majority of their traders’ salaries:

Before the ‘80’s, there were just us traders. "Rogue" traders arrived on the scene with the large institutional participants, both private and public. Today’s companies and government marketing boards are large enough for senior management to distance itself from controversy, including market manipulation.

In a competitive, amoral environment, middle managers in these mega-organizations have the authority to hijack an institution’s reputation and the financial clout to manipulate the market—and they do. As long as they succeed, they enjoy promotions and perks and, sometimes, the fruits of embezzlement. If the manipulation unravels, the company denies any knowledge and hangs the rogue out to dry. We’ve seen this over and over again, most recently with D’Avila and Codelco, Hamanaka and Sumitomo, Leeson and Barings and Tsuda and Daiwa Bank.

The CFTC’s definition of manipulation is:

* A planned operation that causes or maintains an artificial price
* Unusually large purchases or sales in a short period of time in order to distort prices
* Putting out false information in order to distort prices.

In mid-2008 it was estimated that some $260 billion was invested in the Brent energy markets on the ICE while the value of the oil actually coming out of the North Sea each month, at maybe $4 to $5 billion at most. NYMEX trading follows a similar path with 258,000, 1,000-barrel contracts open for December delivery (258M barrels), which were traded 327,000 times yesterday alone yet, at the end of the period, less than 40M barrels of oil will actually be delivered as that is the total capacity at Cushing, Okla. - where NYMEX contract deliveries are settled. Every single one of those traders know it is not even possible for 80% of the contracts they are trading to be fulfilled - it's a joke, but the joke is on YOU!

Over the course of an average month at the NYMEX, 5 BILLION barrels of oil will be traded, with a fee being collected on every single transaction which is ultimately passed down to US consumers, yet less than 40M barrels will actually be delivered. That is just 8 tenths of 1 percent of actual demand for the product that is being traded - 99.2% of the oil transaction fees being paid by the American people do nothing more than create fees for the traders and record profits and bonuses for the trading firms!

Index Speculators have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years. Today, in many commodities futures markets, they are the single largest force. The huge growth in their demand has gone virtually undetected by classically trained economists who almost never analyze demand in futures markets. As money pours into the markets, two things happen concurrently: The markets expand and prices rise. One particularly troubling aspect of Index Speculator demand is that it actually increases the more prices increase. This explains the accelerating rate at which commodity futures prices (and actual commodity prices) are increasing.

Before ICE, the average American family spent 7% of their income on food and fuel. Last year, that number topped 20%. That’s 13% of the incomes of every man, woman and child in the United States of America, over $1Tn EVERY SINGLE YEAR, stolen through market manipulation. On a global scale, that number is over $4Tn per year - 80 Madoffs! Why is there no outrage, why are there no investigations? Well, the answer is the same - $4Tn per year buys you a lot of political clout, it pays to have politicians all over the world look the other way while GS and their merry men rob from the poor and give to the rich on such a vast scale that it’s hard to grasp the damage they have done and continue to do to the global economy.

CIBC Chief Economist Jeff Rubin issued a report last year that blames the current recession on high oil prices, saying defaulting mortgages are only a symptom. According to Rubin, these higher oil prices caused Japan and the Eurozone to enter into a recession even before the most recent financial problems hit. Higher oil prices started four of the last five world recessions; we shouldn’t be too surprised if they started this one also:

Oil shocks create global recessions by transferring billions of dollars of income from economies where consumers spend every cent they have, and then some, to economies that sport the highest savings rates in the world. While those petro-dollars may get recycled back to Wall Street by sovereign wealth fund investments, they don’t all get recycled back into world demand. The leakage, as income is transferred to countries with savings rates as high as 50%, is what makes this income transfer far from demand neutral.

There is NO shortage of oil. OPEC alone has 6-7 Million barrels a day of spare capacity, more than the total disruption of any single country and any two countries other than Saudi Arabia could offset. Additionaly, ICE partners Total and JPM are part of the cartel that is totally skewing the global demand picture by storing 125M barrels of oil in offshore tankers. That’s 15 days of US imports that have been "ordered" but never delivered so they show up as an extra 1Mbd of global demand, even though nobody actually wants them. Land-based storage is also bursting at the seams, with global supplies up to 61 days of total consumption (84Mbd) up from 52 days last year.

That’s 5 BILLION barrels of oil already out of the ground, in barrels and ready to go AND THEY KEEP MAKING 86M MORE EVERY DAY!!! Where is the shortage? Mainly, it is media hype pushed by "analysts" at the very firms that profit the most from high oil prices. Goldman Sachs issues bullish opinions on oil and builds large positions in oil, while it is the cartel’s job to hide oil in offshore tankers, and then sell forward all the oil, with futures contracts, locking in the high price. Of course they have their media hounds as well, most notably the Drudge Report. As noted by Goldmansachsrules:

Type in the word "OIL" inside the "Drudge Report" search engine. It returns 1,965 headlines with the word "OIL." Over the last couple years, The Drudge Report has ran 1,965 headlines with the word "OIL." Most of these articles were hosted by the worthless organizations of Yahoo, Breibart, APNews, and Reuters. The Drudge Report just creates the headline, and links it the article hosted by who ever is doing the "hyping."

Search on the word "credit crisis" and you only get 12 archived headlines. The word "bailout" yields only 268. The word "bank" returns only 568. So you have the Drudge Report hyping the oil market, because they bring it up almost 2,000 times. Unlike the "credit crisis" or "Wall Street Bailout" that actual did happen, the oil market and what did/didn’t happen between Israel/Iran is plugged 10 times more!

Of all the 1,965 articles that the Drudge Report ran with the word "OIL" in the title, most were hyping the oil market. The most notorious cases, a few times a week, were hosted by Yahoo, Breibart, and AP News. Most of these articles were plugged with the same paragraph that stated if "Israel were to attack Iran, Iran would retaliate by taking over the straits of Hormuz, the largest pathway for oil and we all know what that would do to the price of oil.

It truly takes a global village of manipulators and their lackeys to pull off a con on the scale of oil but it’s also the most profitable scam ever perpetrated on the people of this planet, as they take control of a vital resource and then create artificial shortages and drive speculative demand in order to charge you an extra dollar per gallon of gas. You don’t complain because it’s "only" $15-$20 every time you fill up your tank, but that’s what they count on and that’s where you’re wrong - it’s $20 from you and $20 from EVERY SINGLE ONE of your customers once or twice a week and $20 more your employees need just to get to work. It’s money that could be going into your business instead of a new gold bathtub for a Saudi Prince or a Goldman trader.

Global drivers consume 1.7Bn gallons of gas every single day, that $1 is $50Bn a month, a Madoff per month that is being taken away from YOU and YOUR business and the non-energy/financial businesses you invest in. Of course we can give up and invest in those sectors (we do) but that doesn’t do much for the global economy and, even as you sit here now, not doing anything, those oil profits have been plowed into the copper and gold markets and now the same Goldman energy cartel is bidding to take over you clean air (through Carbon Credit trading) and your clean water.

Maybe when they are charging you $80 a gallon for water and ten cents a breath you’ll want to do something about it. I think I’ll start right now and you can too! Here are the Email addresses and Fax numbers for all of your Senators, Congresspeople and Governors. Send this article to them and let them know you’d like to see an investigation. Take a few minutes of your time to save a few bucks on your next gallon of water!

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