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Friday, 26 February 2010

Stocks Still Cheap

by Peter Brimelow and Edwin S. Rubenstein

Commentary: Stocks have more potential upside than downside risk

Stocks rebounded strongly in 2009. But they're still fairly low by historic standards.

We base this conclusion on the work of Prof. Jeremy Siegel of the University of Pennsylvania's Wharton School, author of the classic book, "Stocks For the Long-Run." (Note: Siegel should not be blamed for the conclusions we draw from his data.)

Siegel's most famous finding: Counting capital gains and dividends together, and adjusting for inflation, stocks have accumulated on average in real terms at a remarkably consistent 7% or so over the past 200 years. Shown on a log scale, this consistent trend appears as an impressive upward-slanting straight line.

For several years, we've been writing columns that look at stocks relative to that upward-slanting trend line.

Since the Crash of 2008, we've twice pointed out that stocks had reached levels below trend that in the past marked historic lows.

Our conclusion: A stock market bottom was in sight.

This was a very unpopular conclusion at the time. But the world did not come to an end, and stocks are now considerably higher.

Stocks have not, however, gotten very far out of the range that marks historic lows.

As of the market's close on Wednesday, Feb. 24, stocks were 27.9% below trend.

In contrast, October 2008, they were 38% below trend. Last January, they were 43.1% below trend.

That was very comparable to the levels seen at historic bear market bottoms in 1981 (40% below trend), 1974 (41% below trend) and 1932 (42% below trend).

Of course, the stock market did rebound strongly in 2009. But not enough to move stocks out of historic low ranges, because the trendline itself is slanting up so sharply.

Our (cautious) conclusion now: Stocks have more upside potential than downside risk.

Note carefully: we are not saying that stocks can't go down, maybe by a lot, or move sideways for a long time. These relationships are very approximate.

Over the longer term, however, they prevail.

Thus, when we first started following Siegel's work, in the 1990s, stocks were far above trend, approaching levels associated with market tops.

We concluded, therefore, that the market was overvalued. And apparently it was, but it took years to break. (Stocks reached 86.39% above trend in 1999).

In our early MarketWatch columns, we pointed out that, despite the 2000-2002 Crash, stocks had never gotten anywhere close to the levels associated with historic lows.

We concluded that stocks had more downside risk than upside potential. But they stooged along sideways for years and even managed a blow-off before finally tanking.

But, eventually, they did tank. Remember?

Our conclusion now is the mirror-image of our conclusion in 2007: Stocks are not high by historic standards. They can go down, but they can't go down all that far before getting to unsustainable levels. And, someday, they have to go up.

Edwin S. Rubenstein is president of ESR Research in Indianapolis.
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Friday, 19 February 2010

An Experiment Shows the Risks of Shorting

by James B. Stewart

Back in late October, with stocks rallying, I decided to hedge some of my exposure by buying a "short" exchange-traded fund -- an ETF designed to rise when the market falls. At the time, based on historical norms, the market was overdue for a correction.

After all, stocks had gone up nearly 57% without any correction of 10% or more since March, despite a sluggish recovery and rising unemployment. So I bought shares in the ProShares UltraShort S&P 500 fund, which aims to double the inverse return of the Standard & Poor's 500-stock index. In other words, for any given day, if the S&P 500 fell 10%, this ETF would be expected to gain 20%. I wrote then, "I'm deliberately calling this an experiment, not a recommendation. I suggest that conservative investors let me be the guinea pig."

The guinea pig is back with his report.

It's long been my policy to avoid bets on short-term moves in the stock market. There are good reasons for this. No one else has been able to predict the market's short-term direction with any consistency, so why should I? I only expected to hold the short ETF until a correction materialized, then sell.

And indeed, despite my expectations for a correction, none came. On Oct. 27 the S&P 500 was at 1063; by Christmas it was 1126, a gain of 63, or 6%. My ETF, as expected, went the other way and lost more than twice that much, or 13%. So, as I reported on Dec. 23, I figured the market was even more ripe for a correction. I bought the ProShares UltraShort QQQ fund, which aims to achieve twice the inverse return of the Nasdaq 100 for a single day. At that point, the Nasdaq Composite was at 2253. Still, the market kept rising; the Nasdaq hit 2320 on Jan. 19.

Then I was vindicated -- somewhat. By Feb. 5, the Nasdaq Composite had dropped as low as 2100 intraday, or just under 7% below its level when I bought the short ETF. The Nasdaq 100 had fallen similarly. I was looking at a gain of over 8% in my UltraShort QQQ shares. Coincidentally, the S&P 500 fell to 1063 the previous day, right where it had been when I bought the UltraShort S&P 500.

But then what? I hadn't developed a clear-cut exit strategy. I had the idea I'd sell the short funds when the Nasdaq Composite had dropped 10%, a standard correction. But it never quite hit that threshold. Still, I no longer had the sense that stocks were so overvalued. Much had changed since October. Corporate earnings were rolling in, and they were strong. Multiple indicators suggested the economy was indeed improving. Despite the decline, the market seemed remarkably resilient considering all the bad news, such as worries about Greece defaulting. And then, the markets resumed their climb. Last week the S&P 500 was back to 1076 and the Nasdaq to 2184.

I bailed out, a modest gain in my UltraShort QQQ shares offsetting a small loss in the UltraShort S&P 500. With transaction costs, I pretty much came out where I would have been had I held cash.

The short ETFs performed as advertised, but I doubt I'll be buying them again anytime soon. It may turn out I sold them prematurely, and that the long-awaited correction of more than 10% is just around the corner. But who knows?

The problem with selling short -- which is really just the problem of selling, magnified -- is you have to be right twice. You have to know when the market is overvalued, and then you have to know when a correction has run its course. I know there are many successful short sellers, but I don't like those odds.

10 Management Practices to Axe

by Liz Ryan

Every few years, a management book or philosophy emerges to change our thinking about the best ways to lead employees.

From The One Minute Manager to Who Moved My Cheese?, new and revived leadership concepts have shaped the way we organize, evaluate, inspire, and reward team members. With so many competing management theories in the mix, some ill-conceived practices were bound to take hold—and indeed, many have. Here's our list of the 10 most brainless and injurious:

1. Forced Ranking

The idea behind forced ranking is that when you evaluate your employees against one another, you'll see who's most critical on the team and who's most expendable. This theory rests on the notion that we can exhort our reports to work together for the sake of the team 364 days a year and then, when it really counts, pit them against one another in a zero-sum competitive exercise. That's a decent strategy for TV shows such as Survivor but disastrous for organizations that intend to stay in business for the long term. What to do instead: Evaluate employees against written goals and move quickly to remove poor performers all the time (not just once a year).

2. Front-Loaded Recruiting Systems

All the rage in the corporate hiring arena, so-called front-loaded hiring processes require candidates to surmount the Seven Trials of Hercules before earning so much as a phone call from your HR staff. Those trials can include credit checks, reference checks, online honesty tests, questionnaires, sample work assignments, and other mandatory drills that signal "We'll just need you to crawl over a few more bits of broken glass, and you may get that interview." Don't be fooled by job-market reports—talented, creative employees are as hard to snag as ever. Insulting and demeaning hiring practices are a big reason. What to do instead: Dismantle your Kafka-esque recruiting system and give hiring power back to your hiring managers. They'll thank you for it, and the quality and speed of your recruitment will skyrocket.

3. Overdone Policy Manuals

You know who's making money for your employer right now? Workers who are selling, building, or inventing stuff. You know who's spending the business's money right now? Other employees (most easily found in HR, IT, and Finance) who've been commanded to write, administer, and enforce the 10,000 policies that make up your company's employee handbook. Overblown policy efforts squelch creativity, bake fear into your culture, and make busywork for countless office admins, on top of wasting paper, time, and brain cells. What to do instead? Nuke one unnecessary or outdated policy every week and require the CEO's signature to add any new ones.

4. Social Media Thought Police

It's reasonable to block Youtube in the office because of the bandwidth it consumes. The recent e-mail message I received from a worker who'd just been informed of her employer's "no LinkedIn profiles permitted" policy sets a new low for organizational paranoia. Memo to your general counsel: Human beings work in your business, not robots or replicants. People have lives, brands, and connections beyond your walls, and those human entanglements are more likely to help your business than to hurt it. What to do instead: Treat people like babies only if you want them to act like babies. Let the rest of them update their LinkedIn, Facebook, and Twitter accounts appropriately, and if they're not getting their work done, deal with that problem on its own.

5. Rules That Force Employees to Lie

You won't be shocked to hear that a majority of working people believe their employers don't trust them. We throw gas on the fire when we install rules that encourage our employees to lie. A great example is the time-honored policy that says "Congratulations on the upcoming birth or adoption of your baby. We'll pay your insurance premiums while you're on maternity leave if you're planning to return to work afterward. If not, you'll be terminated when your leave starts, and pay your own premiums." Which Einstein dreamed up that brain-dead policy? What to do instead: Pay the same percentage of insurance premiums for all employees in a category (e.g. new moms) without requiring pointless declarations of their intentions. Don't allow any new rules (sick-time policies are a prime offender) that reward employees for withholding information.

6. Theft of Miles

Saving money is in, but taking it out of employees' hides in the form of stolen frequent-flier miles is the hallmark of a Mickey Mouse outfit. If your employees are trotting the globe to advance your cause, let them keep their hard-earned air and hotel miles. (Have you flown economy class recently?) What to do instead: Tell your travel agent to book one-stop flights in place of non-stop ones, saving a few bucks.

7. Jack-Booted Layoffs

It's no shame to have to reduce your workforce, but why treat departing employees like convicted felons? Anyone who tells you that an RIF requires perp-walk guided exits is someone to add to the next layoff list himself. One-on-one pink-slip discussions and dignified, non-immediate departures are the new norm for ethical organizations. If you have to march your loyal, redundant co-workers out the door, it says lots about the kind of workplace you've built. What to do instead: Deal with performance problems independently of staff reductions. Treat those employees you're forced to let go like the mature professionals they are.

8. 360-Degree Feedback Programs

I have a second-grader, and if my second-grader has something to say to his little friend Dylan, I encourage him to say it directly. I don't tell him, "Fill out this form, and we'll have the other kids fill out forms, too, and then we'll tell Dylan what all the kids think of him, anonymously." Apart from the fact that my kid doesn't know what "anonymously" means, this is very bad coaching for a budding communicator. The 360-degree feedback system is a crutch for poor managers. We need more forthright discussion among our teams, not sneaky group feedback mechanisms masquerading as career development tools. What to do instead: Ditch the 360 system and teach your employees how to give one another constructive criticism. (Teach your managers how to do it, too.)

9. Mandatory Performance-Review Bell Curves

The evil twin to forced ranking systems is the annual review protocol that commands managers to assign their employees in equal numbers into groups of Poor, Fair, Good, Above Average, and Excellent employees. If a CEO has so little faith in his or her managers that she'd plan for, much less settle for, a workforce where 50% of the people range from so-so to dismal, that CEO requires too little from the management team. Forcing performance-review (and salary-increase) distributions into a bell curve exalts and institutionalizes mediocrity. What to do instead: Set high standards for employee reviews and raise them every year. Counsel or remove managers who can't move past Easy Grader status, and trust the rest of your managers to review their employees fairly. If you can't trust your leadership team members to assess their employees, how can you trust them to manage at all?

10. Timekeeping Courtesy of Henry Ford

If you employ white-collar "knowledge workers" in your organization, you're better off giving them challenging assignments and standing back than managing them like assembly-line workers. An obsession with arrival and departure times is not the way to signal to your employees, "We're expecting great things from you," and neither are picky payroll practices that require salaried employees to use fractions of sick and personal days to attend to pressing life situations. Nothing spells "you're a cog in the machine" like a policy that happily allows you to work until midnight on a client project, then docks your pay when you're half an hour late arriving to work the next day. What to do instead: Set goals with your salaried employees, see that they meet them, and leave the how-and-where issues to your brilliant team members to manage for themselves.

Liz Ryan is an expert on the new-millennium workplace and a former Fortune 500 HR executive.

Friday, 12 February 2010

Loving Your Day Job and Your Life

by Laura Rowley

Back in 2007, bored and frustrated with her day job as an office administrator, New York musician, artist and writer Summer Pierre wrote and illustrated a 'zine about her double life.

"I wanted to make something that honors the fact that most of us have two lives and that takes A LOT of energy," the California native wrote on her blog. "I also wanted to make something that could be an easy reminder that you are living your ONE life right now (not later) -- why not enjoy it as much as you can -- with a day job or not."Pierre's whimsical handbook was a hit with struggling artists as far away as Japan, New Zealand and Egypt. "The Artist in the Office: How to Creatively Survive and Thrive Seven Days a Week," was published in paperback this month by Perigree. The book offers inspiration and practical tips not only to frustrated artists, but alienated workers clinging to jobs they hate, reluctant to move on because of the tough economy.

"I think a lot of people just make their living and do everything else after work and on weekends," says Pierre, 37. "They feel a little bit dead, a little bit tired, and they think that's how you have to do it. The book is not only for artists but anyone who feels they are cramming their real life into after-work and weekends."

What Might Not Be the Answer

Pierre offers tips on setting priorities, making the office an object for creativity, getting a fresh perspective on work and shaking up your routine. But I was most intrigued by her thoughts on money and happiness.

While many people think money is the answer to their problems, "thinking about money can also be the source of our problems," Pierre writes. "We equate money as a means for pleasure, and yet we put making money in front of creating or experiencing pleasure. We think in amounts of money, but not in sanity or joy. For some of us, having lots of money might mean 'the good life' but we never ask ourselves, 'what does that good life look like specifically?'"

Pierre gives an example of a decision she made when she was unhappy in her full-time day job. "I was thinking about going to graduate school, which would have meant spending more money, when I realized what I really wanted from graduate school was more time to do art, and school somehow legitimized it," she says.

Instead of investing thousands of dollars in a graduate program, she went part-time in her day job.

"As a result I actually didn't miss the money at all, because I didn't need to buy things to make me feel better about my life," Pierre recalls. "Having four days off a week was such a luxury to me, I stopped needing things. If you start making larger choices based on your values and priorities, you stop needing other stuff to give you that inspiration -- so I needed less money."

I clearly recall that austere sense of joy, when happiness meant working as a writer, living in a charming Manhattan apartment and owning a good pair of running shoes. Then I married and had three kids. I realized that the paycheck that facilitates a pint-sized rental and $100 Nikes would not fund three college educations.

And since I value educating my kids without the indentured servitude of massive student loan debt, I began to take on projects that lacked a certain inherent joy. However, they did wonders for my 529 college savings plans contributions. It was a light bulb moment when I recognized that earning money doing less engaging work that supports your values is a different kind of joy, but a joy nonetheless.

Changing Perspective

Pierre makes this very point in her book for the parents, artists and others leading quiet work lives of desperation: Savor what the job offers, rather than ruminating on the negatives.

"Look to what is working for you: What are the things you are being provided with through this job?" she says. "Maybe it's being able to pay bills on time or have weekends to yourself. There are always little elements that are working for us." In one of her unhappy office gigs, Pierre focused on being able to walk to the ocean at lunchtime and having a boss who became an important friend and mentor.

(Incidentally, I asked Pierre if she had children, and found out she gave birth in January in a traffic jam on the Brooklyn-Queens Expressway; her son Gus arrived in the back of a livery cab. She recounts the harrowing tale, "A Funny Thing Happened on the Way to the Birthing Center" on her blog. Warning: This post may not be suitable for expectant mothers.)

Among Pierre's other tips to boost happiness on the job:

-- Avoid office gossip like the plague. "I love good dirt, it's really fun, it's a way to get intimacy with other people -- but it's like a drug. You get a good high but nothing changes," Pierre says. "It's draining, and often continues to breed negativity. What's underlying gossip is frustration and boredom, and it doesn't actually get you to do anything about that. It sounds Pollyanna, but (avoiding gossip) is a way of training your brain to look toward the light."

-- Think small steps. "Don't think in terms of all or nothing -- think in terms of a little bit here and there, actually getting creative work done," she says, whether it means waking up 30 minutes earlier or disconnecting the cable. "Know that you are living your priorities, and if you like watching TV every night and don't have time to do other things, there's nothing wrong with that. Just acknowledge that those are your priorities."

-- Find life conspirators. "The friends who make you feel most alive are life conspirators," she explains. "I think collaborators are really key because so often we feel isolated and the world doesn't mirror back to us who we are." The Latin etymology of conspire is "to breathe together," she points out, and conspirators help breathe life into our plans, "to usher us into the life we really want."

-- Finally, figure out what abundance looks like. "Often what we want from monetary wealth is really just a sense of abundance," Pierre writes. "But abundance is not about how much money you have, it's about how much you are enjoying your life."

For Pierre, that can be as simple as a favorite pair of jeans and a good cup of coffee. Pierre says she's rolling in dough, but feels abundant, "because I know what gives me joy and meaning and that is where my energy goes."

Wednesday, 10 February 2010

Outlook: Where Will the Markets Go Next?

by GREGORY ZUCKERMAN

A year ago, investors were dealing with heavy losses from the most brutal stock-market selloffs in years. The last thing they expected was a ferocious bull market. And yet, shares soon began to soar -- climbing more than 50%.

Last year's unexpected stock rebound -- and the sudden selloff last week -- should remind investors to be on the lookout for the next surprise. That's because big profits come in being early to the next trend, and in preparing for the next downturn.

"If you don't leave yourself open to surprises, when they occur you probably won't respond correctly," says Mike O'Rourke, chief market strategist at institutional trader BTIG LLC.

It's a simple rule of thumb: Buy before the good news; sell before the bad. The tricky part comes, of course, from guessing where the news might break to begin with.

Here are some places to watch:

Energy Boost: Many analysts expect energy prices to keep climbing, as demand from China pushes oil prices higher.

But Mr. O'Rourke says crude prices could actually drop below $50 a barrel this year, helping to fuel an economic recovery. He argues that as China applies the brakes on its growth, and is no longer focused on filling its strategic petroleum reserve, prices could fall.

"Despite this record Chinese demand in 2009, crude has been unable to sustainably move above the levels achieved in the spring" of 2009, Mr. O'Rourke says. "If this demand wanes, it could have a real problem" for energy prices.

Meanwhile, more energy supply is on the way, which also could pressure prices. There have been major oil discoveries in recent years, including in the Gulf of Mexico and off the coast of Brazil. And the U.S. Geological Service said last month that Venezuela's Orinoco Belt held far greater oil reserves than had been believed.

Heady Growth: Most economists predict subpar growth in the U.S. and around the globe in 2010. Consumers are dealing with too much debt, help from government spending will peter out, and businesses aren't spending much.

But if the recovery conforms to historic patterns after major downturns, it could be surprisingly strong.

Some recent data have been encouraging, with manufacturing activity at its highest point since the summer of 2004. An index compiled by the Institute for Supply Management rose to 58.4 in January from less than 55 in December. A reading above 50 indicates expansion. A recent survey showed banks have stopped making it tougher for consumers and businesses to borrow, another hopeful sign.

"The more I look at the data, the more this looks like a typical recovery," says Norbert J. Ore, chairman of the ISM survey committee.

Robust growth may have to await a rebound in employment. But the improving data are a reminder that the economy just might surprise with its strength.

Japanese Jitters: Investors are concerned about the debt piled up by countries including Spain and Portugal. Some worry that the European Union or others might have to step in to help Greece deal with its debt.

Not as many investors are focused on Japan, though perhaps they should be. Japanese government debt as a percentage of gross domestic product is around 220%, up from 120% in 1998, according to the International Monetary Fund. (In contrast, federal debt is around 85% of the U.S.'s GDP.) Demand has long been strong for Japanese debt, and 10-year bonds yield well below 2%, partly because most of it is held by loyal Japanese citizens. Some observers have been warning about Japan for a decade. The country's debt markets have been steady, but there are indications that domestic buying is slowing.

Any troubles for that market would be more worrisome than woes in some other countries, given the size of Japan's bond market -- about $7.5 trillion -- and the role Japan plays globally.

Another potential worry: the U.K., which has its own debt issues, as well as an economy dominated by the still-troubled financial sector.

Municipal Mess: Municipal bonds have long attracted conservative investors. That might change as the poor health of various states and municipalities comes under scrutiny.

Short-term bonds issued by the state of California yield less than 2%, for example, due to strong demand. But the state is facing a budget deficit of almost $21 billion. As interest expenses rise, they represent a larger chunk of the state's revenue, a worrisome shift. If investors begin to worry about the health of various municipalities, they could push prices lower for various bonds.

Growing Greenback: There are reasons to expect a dollar rebound. Worries about the debt of European nations took hold last week, pulling down the euro and sending skittish investors back to the U.S. dollar. Gold and commodities fell, too.

If U.S. growth proves stronger than expected, the Federal Reserve could signal an interest-rate increase, which also would help the dollar and weigh on shares of gold miners and other commodity producers.

Health-Care Recovers: Health-care stocks were haunted by the specter of President Obama's overhaul plans, though the shares have generally held up. In recent days, they've been hit by downbeat earnings -- such as last week's quarterly results from Pfizer, which helped send the drug maker's share price down 5% over two days.

But some of these shares could see healthy gains. Merck, for example, trades at price/earnings multiples that are below the overall market, yet sports a hefty dividend yield of nearly 4%. If the stock market turns rocky (and it certainly did last week), those dividends will look more attractive.

Health-care companies may have an easier time raising prices if the government can't settle on an overhaul plan, some analysts say.

Branson warns that oil crunch is coming within five years

• Virgin chief and fellow business leaders call for action
• Energy crisis threatens to be more serious than credit crunch

* Terry Macalister
* guardian.co.uk, Sunday 7 February 2010 20.18 GMT

Sir Richard Branson and fellow leading businessmen will warn ministers this week that the world is running out of oil and faces an oil crunch within five years.

The founder of the Virgin group, whose rail, airline and travel companies are sensitive to energy prices, will say that the ­coming crisis could be even more serious than the credit crunch.

"The next five years will see us face another crunch – the oil crunch. This time, we do have the chance to prepare. The challenge is to use that time well," Branson will say.

"Our message to government and businesses is clear: act," he says in a foreword to a new report on the crisis. "Don't let the oil crunch catch us out in the way that the credit crunch did."

Other British executives who will support the warning include Ian Marchant, chief executive of Scottish and Southern Energy group, and Brian Souter, chief executive of transport operator Stagecoach.

Their call for urgent government action comes amid a wider debate on the issue and follows allegations by insiders at the International Energy Agency that the organisation had deliberately underplayed the threat of so-called "peak oil" to avoid panic on the stock markets.

Ministers have until now refused to take predictions of oil droughts seriously, preferring to side with oil companies such as BP and ExxonMobil and crude producers such as the Saudis, who insist there is nothing to worry about.

But there are signs this is about to change, according to Jeremy Leggett, founder of the Solarcentury renewable power company and a member of a peak oil taskforce within the business community. "[We are] in regular contact with government; we have reason to believe their risk thinking on peak oil may be evolving away from BP et al's and we await the results of further consultations with keen interest."

The issue came up at the recent World Economic Forum in Davos where Thierry Desmarest, chief executive of the Total oil company in France, also broke ranks. The world could struggle to produce more than 95m barrels of oil a day in future, he said – 10% above present levels. "The problem of peak oil remains."

Chris Skrebowski, an independent oil consultant who prepared parts of the peak oil report for Branson and others, said that only recession is holding back a crisis: "The next major supply constraint, along with spiking oil prices, will not occur until recession-hit demand grows to the point that it removes the current excess oil stocks and the large spare capacity held by Opec. However, once these are removed, possibly as early as 2012-13 and no later than 2014-15, oil prices are likely to spike, imperilling economic growth and causing economic dislocation."

Skrebowski believes that Britain is particularly vulnerable because it has gone from being a net exporter of oil, gas and coal to being an importer, and is becoming increasingly exposed to competition for supplies.

"This is likely to put pressure on the UK balance of payments and in a world of floating exchange rates is also likely to put downward pressure on the valuation of sterling. In other words, the positive benefits to the valuation of the pound as a petrocurrency are now eroding," he said.

The question of peak oil came to centre stage last November when a whistleblower told the Guardian the figures provided by the IEA – and used by the UK and US governments for much of their planning scenarios – were inaccurate.

"The IEA in 2005 was predicting that oil supplies could rise as high as 120m barrels a day by 2030, although it was forced to reduce this gradually to 116m and then 105m last year," said the IEA source. "The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this."

But Saudi Arabia launched a counter-strike at Davos, insisting the issue was overblown. "The concern about peak oil is behind us," said Khalid al-Falih, chief executive of Saudi Aramco.

Tony Hayward, the BP chief executive, downplayed fears about dwindling supplies in an interview with the Guardian last week.

Friday, 5 February 2010

The Best Way to Quit Your Job

By Karen Burns

A majority of Americans are unhappy with their jobs, according to a recent Conference Board survey. What does this mean? For one thing, it's a clue that as soon as this economy improves, an awful lot of people are going to be setting off for greener pastures.

Now is a good time to talk about how to quit a job with class. (A lot of this also applies to how to leave a job classily under any circumstances, voluntary or not.)

It helps to break down the process into three phases: before you give notice, when you give notice, and after you give notice.

Before You Give Notice:

1. First and foremost, if you're leaving for another job, have the offer for your new job in writing. Make sure everything is absolutely a "go."

2. Get your work up to date, and organize it in a way others will be able to understand. Don't leave messy, half-finished projects for your soon-to-be-former-coworkers to clean up. You wouldn't want people to do it to you.

3. Erase your digital footprints. If you have any personal stuff on the company computer, now is the time to remove it. Clear your browser cache, remove passwords, and delete all personal email.

4. Check company guidelines. You'll want to know your company's policy for giving notice so you can do it right. Also check to see if you have any unused vacation or comp time coming to you, or if there are any other policies regarding resignation.

When You Give Notice:

1. Tell your boss before you tell anyone else, and do so in private and in person. Make an appointment. Know in advance what you're going to say and how you're going to say it.

2. Display some regret. If you hated the job or the boss you may be tempted to vent your feelings at this point. Please resist. The moment you leave a job your boss ceases to be your boss and begins to be part of your network. And you should always treat your network like gold.

3. Volunteer to train your replacement or otherwise help to make the transition easier. More often than not, your employer will not take you up on this, but it's just good manners to offer.

4. You'll be giving notice as per your company policy (if your employer has no policy, two weeks is still standard), but be prepared to be escorted out that very day. This is actually required practice at some companies. Try not to take it personally.

After You Give Notice:

1. Follow up your in-person meeting with a written letter of resignation, stating you're resigning as of such and such a date. Try to say something positive about how much you enjoyed the job. If you didn't enjoy the job, you can at least say you learned a lot working there. (You learned you never want to work there again!)

2. Do not brag to coworkers about how happy you are to be leaving, how great your next job is going to be, how much more money you'll be making, etc. Do not make off with the company stapler (it's tacky, and could easily get caught on a security camera).

3. Ask for a letter of recommendation. Do this even if you already have a new job lined up. You can add it to your portfolio.

4. Continue to do a good job, right up to the last day, even the last hour. This is the mark of true professionalism. It's a small world. Someday you might find yourself back at this same company, or working for one of your former coworkers.

For a good example of a job sign-off, take a look at Conan O'Brien's last words upon leaving The Tonight Show. Now that's class.

Karen Burns is the author of the illustrated career advice book The Amazing Adventures of Working Girl: Real-Life Career Advice You Can Actually Use, recently released by Running Press. She blogs at www.karenburnsworkinggirl.com.

Wednesday, 3 February 2010

How to Tell a True Market Bottom

ByKen Shreve, Portfolio Manager

Throughout history, market bottoms and the ensuing uptrends have shown price and volume trends that recur with an eerie regularity. For investors, the question is, how do you spot a follow-through day? I've been watching follow-through days for the past 14 years, and they have a good track record of flagging bottoms.

The current market pullback is still young, but when one occurs, it's important to be ready.

Basically, market bottoms are put in when new institutional money starts to go to work again. Obviously, this isn't happening now, but new market uptrends tend to start when they're least expected, so it's important to watch for a follow-through day in coming days and weeks. Uptrends can start amid a lot of negative headlines.
What to Watch For

I learned a system for identifying bottoms from my former boss, Bill O'Neil, the founder of Investor's Business Daily. He's a savvy, highly profitable stock-picker who has an uncanny sense of when to be in the market and when to be out. His system of identifying bottoms has a good record of success. It's not perfect, but it's pretty darn good. Here's how it works:

As the market is heading lower, like it is now, look for Day 1 of a rally attempt; basically, any up day for an index. The percentage gain doesn't matter, nor does the volume. After that, wait for the fourth day of the rally attempt and then look for a big percentage gain in at least one index with volume coming in higher than the day before. Volume doesn't need to be above average, just higher than the prior session. So follow-through days must occur on Day 4 of the rally attempt, or later.

In the past, follow-through days like these have sparked several bull markets. They have also launched shorter-term, tradable rallies. These can be profitable as well. Also keep in mind that rallies can fail. During a rally attempt, if a prior intraday low in the index gets undercut, the rally attempt is killed, meaning it's time to look for Day 1 of a rally attempt again.

An Example From 2009

The market bottom that was put in last year in March was picture-perfect.

March 6 was Day 1 of the rally attempt. On March 12, Day 5 of the rally attempt, the S&P 500 surged 4.1%, and volume rose from the prior session -- a classic follow-through day that launched a big market rally.

Green Mountain Coffee RoastersNasdaq" PRIMARY="NO"/> was one of the first stocks out of the gate when the S&P 500 followed through on March 12. It cleared a five-week consolidation during the week of March 20. It broke out to new high ground and never looked back. It was also the time when several fast-growing China names started big moves.
The Current Setup

The recent market pullback seems to be gaining traction. As I wrote last week, what's different this time around, compared with other pullbacks in recent months, is that market leaders are under more duress - in other words, they are technically damaged. It'll probably take a while for the selling to run its course, but at some point the market will flash a follow-through day.

In the context of the current market, Monday, Jan. 25 was the first day of a rally attempt for the S&P 500, but the rally was killed the very next day because the index's intraday low set on Jan. 22 was undercut. Wednesday was Day 1 of a rally attempt, but the intraday low on Wednesday was undercut on Thursday. Rally attempt dead again. Fresh lows were hit on Friday, so I'm still looking for Day 1 of rally attempt. If we get one on Monday, the earliest we could see a follow-through day would be on Thursday. If we close higher Monday but Monday's intraday low gets taken out on Tuesday, the rally is dead and it's time to start looking for Day 1 of a new rally attempt. However, if Monday's intraday low doesn't get taken out, the earliest we could see a follow-through day would be on Thursday -- Day 4 of the rally attempt.

When you see a follow-through day, it's important to have a watch list of stocks that have strong fundamentals and technicals. These types of stocks can be the big winners. Earlier this week, PegasystemsNasdaq" PRIMARY="NO"/> cleared a type of base you want to see on or around a follow-through day. Technical breakouts like this can yield powerful gains after a follow-through day. Of course, the issue with Pegasystems is that it broke out in a market that is generally under distribution -- not the best of environments for breakouts to succeed.

Keep in mind that the market has to be consolidating for only three weeks. Follow-through days can work after short pullbacks, but they have a better track record of success after a meaningful market decline. A market pullback that lasts at least five to seven weeks, or longer, will normally give stocks time to set up in proper bases.

Bull Looks Long in the Tooth

by E.S. Browning

After 64% Runup, Biggest Gains Are Likely Past; What History Has to Say

Wall Street has a cliche for times like these: The easy money has been made.

After a 64% gain for the Dow Jones Industrial Average between mid-March and Jan. 19, thanks to an unprecedented wave of government stimulus, no one expects the market to maintain its breakneck pace.

Although stocks are down 6% from that high, few analysts believe the bull market has ended. But a number of analysts and investors are concerned the market could be in for a period of ragged, possibly disappointing, stock behavior.

Instead of pushing stocks higher on good news and betting on the future, investors lately have been using temporary stock gains as an opportunity to cash in profits, a change from their behavior of the past 10 months. On Friday, the Dow finished at 10067.33, startlingly close to the 10000 level it hadn't seen since early November.

"The 'sweet spot' for financial-market performance seems now at an end," warned Neal Soss, chief U.S. economist at Credit Suisse, in a recent commentary.

He was one of the rare analysts who saw the big gains coming last year. Stocks won't necessarily fall with a thud now, but the "directional 'buy-it-'cause-it's-going-up' phase of the last nine months looks to be over," Dr. Soss said.

He said investors are turning away from joy that the economy has rebounded and toward the reality that the level of economic activity seems likely to remain sub-par for a long time to come.

If the market indeed is in for a period of ups and downs, that would be a disappointment but hardly surprising. Researchers who have looked at past bull markets find that the strongest gains typically come in the initial months, usually followed by choppier performance once the bull market matures.

Birinyi Associates in Westport, Conn., studied nine bull markets since 1962 by breaking them into fourths and calculating the average performance for each fourth. It found an average gain of 37% in the first fourth, followed by 10% in the next fourth, 12% in the third and 22% in the fourth. The stock-market research firm concluded that the rampaging gains of the past 10 months are unlikely to repeat themselves.

That doesn't mean the bull market is over, Birinyi said. The firm looked at what normally follows a market drop of more than 5%, finding that the total decline was 9% on average. In less than 10% of cases did a 5% decline lead to a drop of 20% or more, signaling the end of the bull market. Only one-fourth of the time did it lead to a drop of more than 10%.

Birinyi also looked at the bull market that began in 1982, which started with a huge gain similar to the one stocks have just turned in. The big initial 1982 gain was followed by a 9% decline over the next 12 months, after which the bull market picked up steam again.

Birinyi used data on the Standard & Poor's 500-stock index, and its research suggests that the average bull market lasts four years.

Although there have been wide variations in bull market durations and the recent rebound has been particularly unusual, Birinyi's opinion is this bull market has longer to run.

Ned Davis Research has done its own work, using the Dow and going back to the beginning of the 20th century. The Venice, Fla., firm came to a less-bullish conclusion, though it also argues that the bull market likely isn't over yet.

The research firm, like Birinyi, found that the biggest gains come at a bull market's beginning. But Ned Davis's work suggests that bull markets average only two years in duration, partly because their research includes pre-1960s data. The current bull market could be shorter than average, the firm believes.

Many analysts think stocks since 2000 have been in what they call a secular bear market, a long-running period of stock weakness similar to the 1970s and 1930s. During such periods of weakness, bull markets average only 16 months long.

So while this bull market has longer to run, since it began in March, the ride might not last much longer. "We could be getting into the last third of the bull market," said Ed Clissold, senior global analyst at Ned Davis Research.

The firm doesn't see January's decline as a sign of an imminent end to the bull market, partly because it hasn't seen excesses of investor optimism or narrowing of broad market gains that usually precede a bull market's end. But the firm is warning of a more-serious setback -- and possibly the end of the bull market -- some time in the spring or summer. It recently published a study showing that market declines of more than 10% are common in the six to 18 months following a recession's end.

One sign to watch for is what analysts call a rotation away from lower-quality stocks. Those are small stocks and battered companies, such as banks that have led the recent gains. As a bull market matures, investors look for bigger, safer-seeming stocks with steadier earnings.

In January, the Nasdaq Composite Index, packed with volatile technology stocks that have been among the market's leaders, fell 5.4%; the Dow dropped 3.5%.

Small stocks, which historically do better than large stocks in the first month of the year, have done about the same as big stocks this January, a sign that they may be about to fade.

If investors see signs that small stocks and more-volatile stocks are beginning to lag, they might begin to shift away from such shares, another sign that the bull market is aging.

A big part of the problem in January was that global economic news wasn't strong enough to keep investors buying stocks.

U.S. unemployment has been worse than expected, while housing demand was disappointingly weak. Even news that the U.S. economy grew at a 5.7% annual rate in the fourth quarter wasn't enough to push stocks higher, as economists warned the rate isn't sustainable.

With stocks still up well over 50% from their lows, investor expectations have risen and the market has entered a "show-me" phase. To justify continued gains, analysts said, investors need to be favorably surprised by economic and corporate news. In January, expectations were too high for the news to satisfy them.

The stock market's endurance could depend heavily on whether economic and corporate news remains uncertain, or begins indicating that the economy truly is out of the woods.

At least for now in this show-me market, investors are turning skeptical.

Five Hidden Gems That Are Obscured by Past Failures

Russel Kinnel

Sometimes even five years isn't enough to make people forget about a fund's poor history.

A couple of weeks ago I mentioned that Loomis Sayles Small Cap Growth (NASDAQ:LCGRX - News) was a good fund that no one had noticed because its strong five-year record was obscured by a still crummy 10-year number. Thus, the fund had just $132 million in assets. Management had only been on board for six years, so that didn't make sense.

That made me curious whether there were other funds like that. I found five that fit the bill. It's a handy list because you're finding funds that have a lot of promise yet still have a modest asset base.

Harbor International Growth (NASDAQ:HAIGX - News) is a strong choice for an aggressive foreign fund, but it's easy to miss it given its weak 10-year numbers. However, since James Gendelman took over in 2004, the fund is comfortably ahead of its benchmark. Gendelman is also ahead of his benchmark at Marsico International Opportunities (NASDAQ:MIOFX - News), which he's run since 2000. Gendelman looks for fast-growing companies in industries with strong prospects. I'm impressed that he could make that strategy work in the past decade when value was much stronger. One disappointment is that he doesn't have money in the Harbor fund, though he does have between $100,000 and $500,000 in the Marsico fund.

Broker-sold MFS Growth (NASDAQ:MFEGX - News) has five-year returns of an annualized 4.1%, which is top-quintile, but its 10-year loss of 3.9% annualized is still pretty lousy. However, like MFS as a whole, this fund has enjoyed a nice turnaround. Since Eric Fischman became a manager in 2002, it has posted above-average returns in every ensuing calendar year. Like Gendelman, Fischman is willing to pay up for growth but he also looks for high-quality sustainable growth. (Fischman has between $100,000 and $500,000 in the fund.)

TCW Small Cap Growth (NASDAQ:TGSCX - News) has flown under the radar because it had a terrible start to the decade. From the beginning of 2000 through February 2005, the fund lost 55% of its value while the average small-growth fund gained 17% cumulatively. However, since Husam Nazer took over in 2005, the fund has gained 52% while the average small-growth fund has been flat. Nazer installed a strict sell discipline around cash-flow driven estimates of a stock's value. That's helped keep risk in check and has enabled the fund to outperform in the past four calendar years. (Nazer has between $100,000 and $500,000 in the fund.)

In 2005, Rob Gensler moved from T. Rowe Price Media & Telecommunications (NASDAQ:PRMTX - News) to T. Rowe Price Global Stock (NASDAQ:PRGSX - News). Although he fared well at his prior fund, Global Stock has remained rather obscure. It's still less than $1 billion in assets. Part of that is because his growth style hasn't looked all that great in a world-stock category that includes value and blend styles. Even so, the fund is still ahead of its peer group since Gensler took over. What's exciting, though, is seeing what he can do with this small fund in a growth market. (Gensler has more than $1 million in his fund.)

Dennis Lynch came on board broker-sold Morgan Stanley Mid Cap Growth (NASDAQ:DGRAX - News) just as the bear market was ending in 2002. He's put up strong numbers since then, but the $260 million fund's 10-year numbers are still unimpressive. Lynch looks for companies with high returns on capital and strong cash flows, and that's worked far better than the momentum strategies you see in mid-growth. Still, the upside and downside are readily apparent given the 48% loss in 2008 and the 59% gain last year.

Russel Kinnel does not own shares in any of the securities mentioned above.

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