Parkside InvestorPlus

Signs of Market Recovery

2009-04-05T18:32:00.000-07:00

Three crucial indicators will signal the worst is over for risky assets (such as equities) and these assets are ready to move higher in price. They will also signal the reverse for defensive assets.

S&P 500 Volatility Index: needs to move lower into the 15 to 25 range. This would indicate that investors expect the upper and lower trading range of the S&P 500 Index to remain relatively modest over the next 12 months.

As at end December was at 45 and now fallen to 39.

Ted-Spread: the difference between the three-month sovereign Treasury bill yield and the London Interbank Offered Rate for US Dollars, (LIBOR). A narrowing of the spread will be a good indicator that Interbank counter-party risk aversion is abating.

The spread was around 1.46 (23 Dec) and now 1.33 and just above where the rate differential was just before Lehman Bros collapsed. (click below to enlarge)

Yield on the short-dated Treasury bills: watch for an indication that the yield of these instruments is heading closer to the official cash rate, rather than at yields last seen around the time of World War II. This would be a good indicator that investor risk aversion is gradually abating.

US Treasury yields across the board were generally higher through late Dec to 2 January.
UST 90 day ranged between 0.0% and 0.04% (peaks on 23 Dec and 2 Jan).
UST 2s steady at 0.82% (0.9% pre Christmas, Dec range was 0.64% – 0.94%) and UST 10s up 20bps to 2.37% (2.17% pre Christmas, Dec range was 2.05% – 2.70%).
US 30 Yr is offering virtually nil return at 0.01% compared to the cash rate of 0.0% - 0.25%.

Given that cash rates are close to Zero, the Fed recently noted that it had “obviously limited” room to lower rates further, but that the US Fed might use unconventional policies, such as buying US Bonds, ie. keeping rates down, to revive the economy, thus this indicator may not be a trigger.

Investors have been focussed on ‘return OF capital rather than return ON capital’.

A Little Thrift

2009-03-10T18:44:00.000-07:00

When you have done all of the right things – been educated, via school or life, worked hard, in business or at home, saved and invested money, spent wisely, paid your bills on time – it may be especially disconcerting that you’ve lost so much money due to the current economic crisis. Although none of us caused this economic mess, we are all in this together. Like it or not, it is always those who have behaved responsibly who end up bailing out the irresponsible.

Just about everyone has experienced significant declines in the value of their home and their portfolio. So what do we do about it? One thing we can control is how we spend our money. I advocated being thoughtful and careful when making your spending decisions, and to spend consistent with your values.

Below are some ideas on how to cut expenses without really impacting your lifestyle. I just finished refinancing my home loan and bundled some telephone services to reduce the cost. In fact, I have done or continue to do everything on the list below. I was recently interviewed for a Consumer Reports article on how to help people reduce their expenses, so sharing of ideas is helpful. Be thoughtful about your spending and your purchases.

Ideas on how to save money:

Monitor your usage of and check with your service providers such as mobile phone, cable TV, land line to see if they have less expensive plans or packages (for example, bundled services). There are special promotions all the time, and sometimes you can receive a discount just by asking.

If you have investment property that may have previously been highly valued enough to attract tax, have it revalued to ensure that you are fairly appraised

Take a look at refinancing your home loan as interest rates are very low.

Review your gym and other memberships and cancel, freeze or downgrade if you’re not using the services. If you’re not using your membership stop paying for it.

For travel, compare fares and prices. Take advantage of websites such as lastminute.com and wotif.com

Shop online – saves time and gas – or shop over the phone by calling vendors in advance to check product availability and prices.

Reduce your carbon footprint and reduce consumption and your bills.

Use coupons and vouchers (from newspapers, coupon books, mailers, websites), clubs (grocery store, Costco, restaurant) when you shop or dine out.

A great money-saving idea is to buy the “Entertainment Book” which comes out each year. These books contain coupons for two-for-one dinners, discounted movie ticket, hotels, etc. You can now buy the 2009 Entertainment Book at a reduced price at entertainment.com.

If you have any ideas on how to beat the economic blues, feel free to share them.

Can It Get Any Worse?

2009-02-22T15:36:00.000-08:00

Can it get any worse? And what should I do with my investments?
What now for markets?

After making waves in 2007, the global financial crisis hit our shores with the force of a tidal wave last year. It translated rapidly into the slump in the real economy that we are seeing now – job losses, drying up of credit and company closures. It even picked up its own acronym – GFC.
For investors, the fallout was felt in heavy falls in share markets around the world. Share-based portfolios were particularly hard hit. Rises in government bonds were not enough to reduce the impact by much. Now cash interest rates have also fallen to 40-year lows leaving those approaching retirement, in particular, with nowhere to hide.

The questions everyone is asking are: Can it get any worse? And what should I do with my investments?

Neither is easy to answer. But while there may still be dark days ahead, there are also glimmers of light at the end of a long tunnel.

Where to from here?
The current crisis has seen an unprecedented response from governments around the world. Eager to avoid the mistakes of the past, particularly the 1930s and 1970s, economic policies have been introduced to restore confidence and spending and stabilise markets.

In Australia these measures have included huge injections of cash to buoy the retail sector and save and create jobs. It will take time for these measures to work – you don’t spend $42 billion overnight – and there is a long way to go before business and investor confidence is restored. But it’s a start.

The outlook for 2009 is for continued slowing in economic growth, and rising unemployment in most economies with major industrialised countries pushed into recession.

Beyond 2009, our long-range view is for signs of recovery in the global economy to emerge in 2010 under the influence of the massive stimulus described above. Investor confidence should begin to re-emerge and investors, who are currently showing a preference for bonds and cash over shares, will return to equity markets. Volatility will eventually subside. More resilient financial companies and banks will survive the current crisis and emerge stronger than before.

If the global recession becomes more protracted, however, recovery will take longer and it will be harder for companies to make a profit and deliver good returns to shareholders for a longer period.

Investment outlook
The chart below shows the International Monetary Fund’s projections for global growth. The IMF expects a slow recovery to begin in 2010, after a sharp slowdown this year.
Cash or shares?

Given the scale of the crisis, it’s tempting to think share markets will never come good – and thus to consider switching all investments to cash. This is where your timeframe for investment is most important.

What we do know is that over the majority of long periods in the past, a broadly diversified global share portfolio has done better than cash – in many cases significantly better. However the timing and sequence of returns from both shares and cash is unpredictable.

Eighteen months ago, for example, it seemed that half of Australia was struggling to fix their mortgage interest rate at around 8 – 9%. Now some are looking into the break fees (how much they need to pay) to move back to much lower variable rates.

There is no doubt that 2008 was an extraordinary year, and over the short-term share markets are likely to remain volatile. However, this short-term relief may come at a high price over the long term. By settling for a certain, but very low, return investors risk:

turning a paper loss into an actual loss when shares are cashed in
being out of the market when the share market recovers. It’s important to note that history shows recovery can come without warning.
missing out on dividend income. Even when share prices fall, many good quality companies still pay meaningful dividends. In Australia, falling share prices have pushed historic dividend yields on the All Ordinaries Index to more than 6%. At the same time, the cash return is now 3.25%, and likely to go lower. Shares potentially provide a better income return and potential for capital growth.
failing to achieve investment objectives over the long term. Even if it takes the Australian share market as long as 10 years to recover to its 2008 high, this still equates to an average annual return of 6.3%. Add dividend reinvestments to this, and the return is likely to be much higher, and a much healthier figure than the current cash rate.

Women take control of finances

2009-02-11T16:43:00.001-08:00

Financial Standard, Tuesday, 10 February 2009 12:20pm
Women are more likely to use a financial planner, own investment property and trust the past performance of investment strategies than men, new RaboPlus research found.The study, undertaken by Rabobank's online banking division, found women are 20 per cent more likely to use a financial planner or consultant than men. Also, women generally would rather consult an accountant, financial advisor or family friend than rely on the internet for information, whereas men a more inclined to use the internet as a primary source of information.Investment property is favoured more by women, with the study finding 54 per cent of females are more prone to own investment property compared to only 46 per cent of men.Past performance is more important among women, 57 per cent of women said they placed more trust in past returns and seek a safe expected rate of return compared to 41 per cent of men.Self managed super funds (SMSF) are also a preferred super vehicle among women, with women aged between 40 to 59 more likely to have an SMSF than men. "The study shows women are looking to take more control of their investment , particularly women aged over 40 years who are more likely than men to own a [SMSF]," said Tim Hewson, RaboPlus senior manager investments and managed funds."They also appear to be more strategic in their investment approach than men, seek associated tax benefits and want a full understanding of an investment before investing."The study asked 213 women and 289 men with more than $150,000 in personal savings their point of view late last year.
Are you a woman in need of good financial advice? Contact us for a complementary meeting and let us show you how we can develop individual and customised strategies to help secure your financial future.

Rudd commits billions to keep Australia afloat

2009-02-02T20:08:00.000-08:00

By Online parliamentary correspondent Emma Rodgers (ABC News)

The measures will contribute to a predicted budget deficit of $22.5 billion. (ABC News: Gi

More than $40 billion will be pumped into education and community infrastructure, public housing, business tax breaks and one-off cash payments in an economic stimulus plan to offset the effects of the global financial crisis.

The Government says its $42 billion Nation Building and Jobs Plan will help "support and sustain" over 90,000 jobs in the next two years and give a boost to the economy of 0.5 per cent of GDP and put growth at 1 per cent for 2008-09.

But it is also forecasting unemployment will rise to 7 per cent next year.

The measures will contribute to a predicted budget deficit of $22.5 billion.

Prime Minister Kevin Rudd says the plan provides a basis to see Australia through the crisis, but he has conceded it will not eliminate the country's economic woes.

"It does not represent the removal of the problem - it is our best effort to reduce the problem," he said.

"It is a strategy in which a nation can have confidence and as I have said before, it is a strategy to which we will add in the future as is necessary."

Mr Rudd said the Government also remains committed to taking further actions to support growth and jobs if needed.

The bulk of the spending will be allocated to education infrastructure and public and defence housing.

Almost $15 billion will be injected into primary school buildings and maintenance for both primary and secondary schools.

The money will be used to upgrade large infrastructure such as libraries, build 500 new science laboratories and language centres and provide $200,000 for each school for maintenance.

Mr Rudd said the program represents the single largest modernisation of schools in Australia's history.

"This investment in every one of the nation's 7,500 primary schools is designed to build the primary schools we need for the 21st century," he said.

Over 20,000 public and Defence houses will be built and 2,500 others upgraded at a cost of $6.6 billion.

Small businesses will also have access to $2.7 billion to bring forward maintenance on capital expenditure.

The Government will also provide free ceiling insulation to almost 3 million homes, a move which it says can cut $200 a year off energy bills and reduce greenhouse gas emissions by 49.4 million tonnes by 2020.

Tax bonuses and cash handouts

Millions of Australians are also set to benefit from $12.7 billion worth of tax bonuses and one off payments to low and middle-income households, farmers, single-income families and students.

Those earning up to $80,000 are eligible for a tax bonus of $950, while those earning between $80,000 and $90,000 will receive $600 and those earning between $90,000 and $100,000 will receive $300.

The Government estimate almost 10 million Australians will be eligible for the bonuses.

A cash payment of $950 will also be given to single-income families, farmers facing hardship, parents with children heading back to school and students and unemployed people returning to study.

The cash payments will be released next month and the bonuses from April.

The Government says the cash payments are immediate measures to support jobs and strengthen growth during the global recession.

Nation Building and Jobs Plan main points

A $42 billion package consisting of:

$14.7b for school infrastructure and maintenance;
$6.6b for community and Defence housing;
$2.7b small business tax break;
$890 million for community infrastructure and road improvements;
$8.2b tax bonus for those earning under $100,000;
$1.4 billion for single income families;
$20.4 million for farmers in hardship;
$2.6 billion for children going back to school;
$511 million for students and unemployed returning to training;
Free ceiling insulation for around 2.7 million homes;
An increase to the solar hot water rebate of $600 and a doubling of the Low Emissions Plan for Renters to $1,000.

Forecasts

However the package will help contribute to keeping the Budget in deficit over the next four years and unemployment is also expected to rise to 7 per cent, revised Treasury figures show.

The Government's spending measures, including last October's package of $10.4 billion, and the loss of $115 billion of revenue over the next four years will see a predicted $22.5 billion deficit for 2008-09.

The Budget figures are massively revised down since last November, when the Mid-Year Economic and Fiscal Outlook forecast a surplus of $5.6 billion.

"Nobody likes being in deficit and I don't like being in deficit at all," Mr Rudd said.

"This is not a matter of choice - this is what we're required to do."

It is expected that 2009-10 will see a deficit of $35.5 billion, 2010-11 a deficit of $34.3 billion and 2011-12 a deficit of $25.7 billion.

This year's deficit amounts to almost 2 per cent of Australia's GDP.

The Government says it has allowed the Budget to move into deficit because it would be "irresponsible" not to act now to stave off the effects of the global downturn.

It says it is still committed to delivering budget surpluses over the "economic cycle" but jobs and growth are the main priority.

But Mr Rudd said the Government did not know at this stage how long the economic cycle might be.

Last week the IMF forecast world growth for this year would be only 0.5 per cent.

Revised economic outlook

A $22.5 billion deficit for 2008-09, $35.5 billion for 2009-10, $34.3 billion for 2010-11 and $25.7 billion for 2011-12;
This year's deficit is 1.9 per cent of GDP, while next year's will be 2.9 per cent of GDP;
Growth after the package is released is forecast at 1 per cent for this year and 0.75 per cent for 2009-10;
Unemployment forecast to rise to 7 per cent by June 2010;

The January Effect?

2009-01-27T20:55:00.000-08:00

Where's the January effect when you need it most?
Wikipedia describes this stock market phenomenon best:

"The January effect is the tendency of the stock market to rise between December 31 and the end of the first week in January. There are many theories for why this happens, the main one being that it occurs because many investors choose to sell some of their stock right before the end of the year in order to claim a capital loss for tax purposes. Once the tax calendar rolls over to a new year on January 1st these same investors quickly reinvest their money in the market, causing stock prices to rise. The January effect has been observed numerous times throughout history, though the first week of January 2008 was a notable exception."

A corollary to this is that the stock market's performance in the first five trading days of January determines the market's returns for the entire year. If this assumption holds, equities are destined for a flat to positive performance this year. The major equity index's return over the first five days of the first month of 2009 is shown below:

S&P 500 0.4%Dow Jones -0.1%All Ordinaries 1.9%Nikkei-225 4.3%DJ Euro Stoxx 4.4%FTSE-100 1.7%

These may not be the double-digit positive returns investors have grown accustomed to before the global financial crisis, but they are significantly better than the double-digit losses of the past two years.

But before investors celebrate, be aware that this ‘rule' has also been proven to be a fallacy. What has been determined to be more accurate is the theory that the market's performance for the entire month of January predicts the direction of equities for the remaining 11 months of the year. Statistical analysis shows that this had been correct nearly 75 per cent of the time.

This means that investors have to wait until the end of the month to see what 2009 have in store in terms of equity market return. The inauguration of US President-elect Barack Obama this coming 20 January could set the stage for a market rebound that could last until the end of the month and hopefully beyond. However, economic statistics set for release in the next two weeks are not expected to be equity-friendly either. Worse, they could show that global fortunes have deteriorated even more.Guess investors would have to just wait and see what the next fortnight brings. Then again, there's also a 25 percent chance that the next 11 months do not reflect what happens in January.

Happy New Year

2009-01-22T14:26:00.000-08:00

And we sincerely hope it is a good one . . . so what's anticipated for 2009? John Robertson from All things Considered has two views:

The pessimistic view about the economic outlook rests on an assumption that this cycle is fundamentally different to all that have gone before.

Optimism about 2009 rests on a single pillar: that the current cycle is similar to others in its essential features. Each cycle has its peculiarities but, in each case, recession is a way to purge the economic system of excess and redress imbalances that have built up over the prior three or four years. The flexibility of our economies and the ingenuity of our entrepreneurial classes is then enough to force a recovery and create a new cycle (which unerringly duplicates much of what went before).

The countervailing view is that our current predicament is more than simply a cycle repeating itself. It is a breakdown of the financial order which has damaged, if not destroyed, important self repairing mechanisms.

Traditional monetary policy tools operate through a well functioning financial system. Since we no longer have such a thing, monetary policy will not work.
In any event, the ten years prior to 2008 were an aberration. Restoring those times is not an option under any feasible circumstances. Those for whom this period was the benchmark of success will forever be disappointed.

No cycle has been so outrageously supported by monetary authorities. It was apparent at the time and even more evident with hindsight that less dire adjustments were being postponed by a Federal Reserve overly concerned about propping up asset markets. The current adjustment is, at least in part, a need to compensate for the egregious policy failings of Alan Greenspan.
Over a year into the current U.S. recession, U.S. policymakers remain preoccupied with what happens on the southern tip of Manhattan and, in leaving the rest to fend for themselves, are damaging those who really count. Ditto in the UK and elsewhere.

Debt was the wind beneath the wings of consumers. This phenomenon relied on ever rising residential property prices eagerly supported by policymakers around the world with the active encouragement of those pursuing electoral success. Even if prices are restored, several decades might have to pass before they will be allowed to underpin current consumption in the same way.

Even an optimistic view of the world would have to concede that banks will take many years to rejuvenate their balance sheets and claw back their profitability. Recall, in this context, what happened in Australia in the early 1990s after the failure of several financial institutions and the near death experience of others. Remember the debate about whether banks were retarding recovery due to their overly cautious lending practices. Expect this conversation to be happening globally in 2012-2014.

Financial markets will be so heavily regulated and operationally constrained by their government ownership that they will lose their freedom to innovate. Without new financial products, new business opportunities in the real economy will be stifled.

Rapidly expanding government debt will burden financial markets for decades. Luckily, governments can borrow cheaply because business and households are less inclined to do so. Somewhere down the track, government funding of debt might start to compete with private demands. In any case, we are not solving the problem of too much debt. We are simply altering its incidence. The debt problem remains.

The pace of asset price inflation leading up to 2008 was always at odds with the emerging macroeconomic picture of slowing global growth as population growth decelerated and, in places like eastern Europe and Japan, population numbers actually declined. On that front alone, something had to give.

A Long Way From the Dust Bowl

2008-11-09T20:49:00.000-08:00

Every day it seems someone is seeking to compare the current financial crisis with the Great depression of the 1930s. There's no doubt these comparisons are an attention grabber. But how do today's events really match up?

A search of a newspaper database reveals 30,000 mentions so far this year of the term 'Great Depression'. References to dust bowls, long and winding dole queues and overflowing soup kitchens are getting a real workout.

These are striking metaphors, particularly for the generations (and that encompasses most of us by now) whose only knowledge of the misery of the 1930s comes from grainy newsreels, Hollywood movies and John Steinbeck.

Certainly there are parallels now in the breathtaking day-to-day market volatility, rising default rates, financial instability, banking strains, worsening economic indicators and the global nature of the crisis.

But there are also as many, if not more, ways in which this crisis is different from what occurred eight decades ago. These other signs suggest that while we face the prospect of an economic downturn, this is unlikely to turn into a 30s-style Depression.

By the way, there is no universally accepted definition of a recession or a depression. The standard international definition of a recession is a period in which an economy contracts for two consecutive quarters.

However, In the US, the National Bureau of Economic Research, uses a broader definition as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."1 The bureau says it typically takes 6-18 months after a recession is started to make its declaration. Often by that time, the recession is over.

As to the term depression, there is no commonly agreed definition of that either, other than as a particularly deep and prolonged recession. So what are the signs that argue against a 1930s-style downturn?

Firstly, there is a keen awareness among policymakers about not repeating the mistakes of that time, when the Federal Reserve actually tightened monetary policy at a time when the system needed additional liquidity.2

Current US Federal Reserve governor Ben Bernanke, himself a scholar of the Great Depression,3 has shown he is highly aware of the risks of such an approach and has led efforts in the current crisis to recapitalise the banking system, cut interest rates and provide liquidity in certain areas of the market, such as commercial paper.

Also worth noting is that policymakers in other countries are taking a similar, flexible approach. Extraordinary policy actions in recent weeks by central banks and governments in Canada, the UK, Europe, Asia and Australasia have made progress so far in unfreezing credit markets. In addition there has been an increase in global cooperation among central banks, primarily through coordinated interest rate cuts.

Global policy coordination was rare in the 1930s. At that time, most nations adhered to the gold standard, a system in which currency values were expressed in terms of the price of ounces of gold. In 1931, Britain left the standard after a speculative attack on the pound. When speculators turned their attention to the $US, panic ensued. Depositors withdrew their money from banks to convert them into gold. To stop the loss of gold reserves and defend the dollar, the Federal Reserve raised interest rates sharply.

As scholars of the Depression, such as Bernanke, have since identified, the Fed made a significant error in tightening monetary policy at a time when an easing of conditions was required.
In contrast with the 1930s, we now have a level of global oversight that was unheard of between the wars. Bodies such as the G7, the G20 and the International Monetary Fund provide forums for international cooperation and coordination during economic and market crises.
But aren't the banking failures of 2008 a mirror image of what happened in the Great Depression? Again, some perspective is needed.

Between 1930 and 1933, thousands of US banks failed. In 1933 alone, 4,000 institutions went to the wall.4 By contrast, by late October only 19 US banks had failed in 2007 and 2008.
On the other side of the Atlantic, a dozen or so banks have been bailed out or nationalised by the UK and European governments. While suffering strains, Australian banks remain highly profitable, with a relatively low level of problem loans.5

Bear in mind, also, that prudential regulation, while still clearly imperfect, has improved immeasurably since the Great Depression. Up until 1933 in the US, there was no Federal Deposit Insurance Corporation. When a bank failed, depositors lost everything.

People subsequently hoarded cash, stashing it in old coffee containers, burying it in the backyard and, yes, hiding it under the mattress. This withdrew hard currency from circulation, adding to liquidity pressures.

Another contrast between then and now is the broad commitment of governments internationally to free trade and capital flows. The problems of the Depression era were compounded by protectionism. In the US, the Smoot-Hawley Tariff Act raised tariffs on more than 20,000 imported goods, triggering tit-for-tat trade restrictions and making the downturn even worse.

Further fuelling the downturn in the United States were the effects of the 'Dust Bowl'—a prolonged drought which combined with poor farming practices to devastate the Plains states. More than 500,000 Americans were left homeless by the drought and more than 2.5 million migrated from those affected areas. In many countries, particularly in the US, there was virtually no social safety net, so the hit to household spending from rising unemployment (the unemployment rate in the US rose to nearly 25 per cent versus around 6 per cent today 6 ) was exacerbated by a lack of jobless benefits. These days, most western democracies operate a mixed economy where governments provide protections for workers.

This brings us to the understanding that governments now have about the role they can play in economic downturns by providing liquidity and attempting to increase confidence in the markets. Back in the Depression era, there was not the same sense that governments could play these roles.

In summary, governments have learned from past downturns that quick, decisive action can limit the economic effects of a financial crisis. They also understand that global problems require global solutions, and there are signs of coordinated efforts on that front.

While the level of banking failures has been alarming, it is nowhere near the proportions of the 1930s. In any case, prudent regulation, insurance and government guarantees are acting to protect investors.

Protectionist responses similar to the Smooth-Hawley Act are now seen as unlikely given the broad commitment of governments to free trade and capital flows. And within their borders, governments generally are committed to providing social safety nets for those dislocated by tough economic times.

While markets have fallen a long way, it is worth remembering that they are forward looking. So by the time a peak or trough in the business cycle has been identified, the market has already incorporated that information into prices.

None of the above is intended to downplay the seriousness of the situation the world economy finds itself in. But it does seek to put current events into historical context. We are still a long way from the Dust Bowl.

The author would like to thank Gerard O'Reilly of our research group for his assistance in researching this article.
1National Bureau of Economic Research, 'Business Cycle Expansions and Contractions'
2Christiano, Motto and Rostagno, 'The Great Depression and the Friedman-Schwartz Hypothesis', Federal Reserve Bank of Cleveland, Jan 2004
3Bernanke, 'Money, Gold and the Great Depression', the Federal Reserve Board, March 2004
4Source: FDIC
5'Financial Stability Review', Reserve Bank of Australia, September 2008
6Bernanke

Buffett Speaks Out

2008-10-20T14:58:00.000-07:00

Arguably the most cluey of investors Warren Buffett has published the following in the New York Times on October 17, 2008.

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why? A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down rice.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66
to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice:

“I skate to where the puck is going to be, not to where it has been.” I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a
diversified holding company.

Reasons to be Cheerful

2008-10-15T21:35:00.000-07:00

Ten Reasons to Be Cheerful
Jim Parker, Regional Director, DFA Australia Limited

Ladies and gentlemen, please raise your half-empty glasses and view them as half-full, because here are ten reasons to be cheerful about the global economy and the state of investment markets:

An awful lot of bad news is in the price. It is the nature of markets to assimilate new information quickly, which means that as we all sit around feeling gloomy, markets have usually moved on.
In bad times, demand for risky assets falls. So the compensation for taking this risk needs to adjust higher to attract investors. Lower share prices relative to fundamentals just means expected returns are higher.

Governments in the US, Europe, the UK and Australasia are pulling out all the stops to recapitalise their banking systems and get credit flowing again. The extraordinary response of risk assets to recent moves on this front shows how important confidence is in supporting markets.

Central banks have mounted a globally coordinated reduction in benchmark interest rates. Markets are priced for further moves. Insofar as banks pass on these lower borrowing costs, this will support business and consumer activity, buttressing the real economy.

Some governments are providing fiscal stimulus to bolster economic activity. Australia, for instance, recently unveiled a $A10.4 billion package. In the US, there is talk of a post-election stimulus plan.1

Oil prices, which until recently were seen as a major threat to global growth, have retraced significantly. From late July until early October, crude oil futures fell by 45 per cent from a record $US147.27 a barrel.2

According to Dimensional research, the average duration of bear markets in the US from the end of 1965 until the middle of this year was about 14 months.3 This one has now lasted just on a year. This is not to claim it is near an end, but the longer it goes on, the closer is the next bull market.

Someone is buying. It's important to remember that on the other side of the trade from all those people liquidating their portfolios and mutual funds are other investors who are happy to buy. While some are market timers, others see this as a long-term buying opportunity.

Unless you have sold your holdings, your losses so far are only on paper. Market recoveries after prolonged downturns tend to come in quick sudden bursts. All you need to do to capture those recoveries is to stay in your seat.

The sun will come up tomorrow. Anxiety over the market downturn is understandable. But there have been crises before. The world moves on and risk appetites have a tendency to reassert themselves.

1'House Democrats Weigh New Economic Stimulus', Reuters, Oct 13, 2008
2Bloomberg data
3'Bull and Bear Markets, S&P-500 Index', Dimensional
Copyright Dimensional Fund Advisers, Australia 2008

Welcome Aboard

2008-10-13T19:26:00.000-07:00

Welcome to the inaugural Parkside Weblog . .

Designed to complement our website, you now have a direct opportunity to catch up on breaking news, reproduced articles which reflect events happening right here and now, historical perspectives and some investment insight. We invite you to comment, both to us and to each other and we value your feed back!

What a mad month!
The crash of the past 2 weeks and the panic compounded by de-leveraging has been one of the most disturbing things ever witnessed by most investors. Friday down 8%, the week down 18%. Similar figures worldwide (not helped by the mid-week lifting of short-selling restrictions in the US). Fridays +10% intraday volatility in the US and the VIX (volatility Index) at a record 70 points may be a turning point?

Australia cut rates by 1% (0.8% passed on, which with the recent 0.2% cut earlier in October, a positive for borrowers and mortgages) led the northern hemisphere cutting by 0.5%. The A$ collapse to mid-60’s (down approx 30% from recent highs) is some offset to global share investments.

We now need some serious people making serious decisions re this serious situation.
World leaders met over the weekend – but with little firm action delivered. We need to see a boost to liquidity in the credit markets as well as the rebuilding of confidence (investor, counterparty and customer).

Sunday’s Government announcement that ALL bank deposits will be guaranteed for 3 year (Including Macquarie Cash Management accounts as Macquarie will now only invest in cash secure assets) is the first sign of reassurance to investors and households. This will apply to all depositors (individuals and corporate’s), as well as to all credit unions and buildings societies. They will also guarantee bank borrowings from global credit markets as well as extend funds to the secondary market for home loans.

We expect European and US governments to announce similar commitments following agreement to take ‘decisive’ and ‘urgent’ action before the markets opened last Monday, or at the latest this coming week. We await firm action, as we have only heard vague principles so far.

What we need to see?

The markets convinced of a package of guarantees, and
A narrowing of credit market spreads, and
A rebuilding of confidence among investors
The Australian share market was up around 5% on Monday in response to the
Government’s commitment. Early indications from futures markets are for positive
moves in overseas markets.
Our advice:
Avoid knee-jerk reactions to the current crisis. In terms of financial crises, this is significant and unsettling. But as we have been saying – ultimately – it will pass.
Markets will recover. In the meantime ensure that your finances and investments are positioned to gain from the recovery when it occurs. It’s important to remember the 7 Deadly Sins of investing and to stick to your plan. They are:

Instant gratification – or choosing the immediate pay-off over a larger
reward down the track.
Naïve diversification – you know it’s unwise to put
all your eggs in one basket. But it is also foolhardy to sink money into
holdings that do not suit your individual risk profile or tolerance just so that
you can hold a ‘safe’ investment. This can be just as
dangerous.
Overconfidence – after five years of bull markets it can become
tempting to attribute your market success to your skills as an investor – our
skills as advisers - rather than a naturally occurring buoyant market. The share
market is never without its risks.
Belief persistence – a refusal to
acknowledge that a situation is not as you thought, despite compelling evidence.
Let’s face it, even we expected the markets to resume rising
earlier.
Overweight recent events – we all place much greater weight and
importance on what has just happened and our actions are guided by expectations
that those conditions will continue. Remember the returns of the past four years
exceeded all expectations.
Loss aversion – the impetus to avoid losing money
is greater than that to maximise wealth. This causes us to ignore opportunities
in challenging environments and times like the current.
Fear of regret – when you become paralysed with indecision for fear of making the wrong choice.

To avoid the above and preserve your wealth, you need to re-evaluate your plan to
ensure it is still appropriate to your goals and risk tolerance for the mid-
longer- term, and not the temporary market conditions.
Remain diversified and insure that your investment portfolio is suitable. Stay committed to your investment strategy, rather than chopping and changing based on the noise of the day. If possible, start trickling money into the markets (you will be buying more units at lower prices and when markets recover it will grow more quickly).

If you are drawing a pension or regular withdrawals – perhaps you could reduce
your payments in the short term to allow maximum exposure to recovering markets.
Some of you may be Centrelink pensioners or benefit recipients – or you may now qualify for benefits. Our staff are re-assessing all our clients positions to ensure that you will receive that maximum benefits possible. If you believe that you may benefit – please contact our office to ensure that your position is evaluated and re-assessed.
Most important of all – delay ‘gratification’. Probably the mother of all ‘sins’ in this erratic market climate is to give into fear and panic and sell out – that applies more-so now that the values have fallen so far.

If you have any questions – please do not hesitate to contact your adviser or our office for assistance and assurance.

Take our poll in the sidebar and let us know what you think about whether the markets have bottomed out or not!