Best Wishes

I would like to take this opportunity to wish you all Happy Holidays!

I wish you the best this holiday season and hope that we can look forward to a better year ahead!

Have a Merry Christmas and a Happy New Year!

Beware Of The High Yield Trap

Many analysts and advisers have been recommending high dividend yield stocks as one of the most effective and defensive instrument against the current beaten down and volatile markets. The principal to follow here is that as long as you are buying or holding on to stocks that continues to distribute decent percentage of dividend on an annual basis, you are assured of receiving at least a decent amount of dividend income, as a cushion against the possible slide in share prices.

The dividend yield is calculated as the amount of dividend per share against the share price. The projected yield is therefore taking into account the future projected earnings and the average dividend distribution ratio. Instances where companies are committed to a certain percentage of their net earnings as dividend distribution augurs well for such defensive strategy.

However, beware of the earning trap, before you jump out of the bandwagon and start collecting high yield stocks!

Technically, as every country is experiencing recession or severe economic slowdown, so will the corporate earnings! This is inevitable as business and consumer confidence will surely take a hit, whether one likes it or not. In some cases, business could be driven down by slower and lesser demand, thus driving them out of business. In most cases, people could well be taking a more cautious or "wait-and-see" approach, thus limit spending. Bnnks on the other hand, are more likely to take a cautious approach to lending, although liquidity may still be abundant. This literally reduces credit availability in the market and ultimately increases cost of borrowing. All-in-all, business and consumer spending sentiment will be affected.

As the above takes place over a period of time, it remains to be seen the degree of severity of the business downturn. As you can see now, more of more companies are reporting lower than expected corporate earnings recently.

As such, one has to review carefully the forecasted earnings of companies before taking the defensive high yielding approach. When the chips are down, do not be surprised that companies may actually declare lower dividends or even cancel them altogether in order to preserve cash (for rainy days)!

Look out for companies that are least affected by the economic slowdown and consistently payout dividends through rain or shine. Companies in the utility sector (such as power generator) may be one of them.

Short Term Pain, Long Term Gain?

This is a video of an interview with Alan Valdes, trader and Vice President of Hilliard Lyons on the current loss of confidence in the market and what he claims to be a short term pain, long term gain for America (and possibly the rest of the world?). His favourite quote:"Don't Short America"! Find out why he thinks America is not heading into a depression and why Americans are going to change the way they do business but definitely not out of business!

Is It Much Easier To Make Your Second Million Than First?

According to surveys in the US, most millionaires are not made by winning the lottery, a brilliant business idea or through inheritance. Most do it the steady way via disciplied savings and investing. But how hard is it to achieve a million this way?

Let's say you start with nothing in the bank and put away $1,000 a month. With income increases and bonuses, let's assume you add to the savings at the rate of 5% a year. After one year, you would be putting away an average of $1,050 a month. With an average return of 8% per annum, you would hit the $1 million within 22 years!

But then, here's the bad news. In 22 years, your million would be worth only about $340,000, assuming annual inflation rate of 5%.

The good news is, given that the assumptions are right, your second million will be much easier to achieve. It the rate of savings remains, the second million would be made in another seven years. The third million, you would make in another four years. Even if you stop contributing after you reach the first million, the second million would be made in nine years, less than half the time it took to accumulate the first million.

If you put away $1,000 a month without increasing your savings, you would go from zero to $1million in 26 years and $2million in 35 years.

In a nutshell, most of the effort is spent in accumulating that first million. Once you get to that level, the magic of compounding and the opportunities that will open up to you, will help you get that second and third million.

They say the rich gets richer, and that is really true.

No Pay Cut, Says Auto Union!

Here's the bad news....negotiations to approve U.S. automakers $14billion bailout plan had stalled, due to rejection from U.S. Senate. Strange decision for me, considering the amount was only a "fraction" of what the U.S. banking industry had sought earlier ($700billion)! Further digging revealed that the only reason the plan was rejected was due to the fact that the U.S. Auto Workers Union rejected the Republican demands to accepting a pay cut, in order to realign the wages with Japanese automakers, namely Toyota, Honda and Nissan.

Doesn't sound like an unreasonable demand, does it? Let's face it, in order for someone to gain (from continued employment), it's fair to expect that someone ought to give up something in return. So given the unrealistic nature of the union workers, the decision probably serve them right!

It is reported that both General Motors and Chrysler are experiencing severe cash flow problems and they may not even survive beyond the month of December without filing for bankruptcy.

I would imagine is probably wiser now to bite the bullet, and then demand for better package when business improves later down the road!

Nevertheless, the White House later said it was willing to consider using money initially set aside to shore up the banking sector to give these beleaguered auto makers urgent aid. However, whether such plan will materialize or not remains to be seen.

One other thing, the investment community may not have the patience to wait for the saga to unfold. It may just lead to another global market white wash!

Let's hope not!

$15billion U.S. Auto lifeline

There were fresh news on U.S. Congressional Democrats and White House negotiators agreed on the outlines of a $15 billion plan to give General Motors and Chrysler federal loans to stay in business while requiring them to restructure their operations. An agreement in concept with lawmakers and that negotiations on details were still continuing. However, the plan still needs voting of approval from the Senate.

The legislation would however, include protections for taxpayer money, including the appointment of a so-called car czar who could force the companies into Chapter 11 bankruptcy if the companies don’t come up with a viable business restructuring plan by the deadline of March 31, 2009. Nevertheless, a 30-day extension beyond the deadline is possible if the plan is determined to be positive on a preliminary basis.

Both GM and Chrysler have said they need at least $14 billion in combined aid to keep them from running out of cash by early 2009.

More than a million Americans are believed to be employed in the U.S. automotive sector. Another reason why U.S. Government cannot afford to let them vanish, perhaps?

Will The Great Wall Withstand The Economic Storm?

China warned its economic downturn was deepening with the spread of the global financial crisis, raising the possibility of job losses and social unrest in the world’s most populous nation.

The warnings from the country’s top planner came shortly after China’s central bank slashed interest rates by the biggest margin in 11 years to protect its economy from the worst global downturn in decades.

China’s economy has been hit by a sharp drop in demand for its exports, due to a severe economic slowdown ignited by the U.S. financial crisis. This quarter is expected to be its worst in three years.

The State Information Centre, a government think-tank, forecast annual growth would slow to 8% this quarter from 9% in the third quarter, still a respectable figure but a far cry from blistering double-digit growth rates recorded in the past five years.

With factories closing by the thousands, slowing growth may undermine the stability that the ruling Chinese Government craves for its 1.3 billion people. Excessive bankruptcies and production cuts may lead to massive unemployment and social unrest.

A severe slowdown in China's economy will further dampen the hopes of Asian economies' battle against the severity of recession. 

Has Calm Been Finally Restored?

Stocks rallied worldwide this week after China cut borrowing costs by the most in 11 years and the Federal Reserve’s pledge to buy $600 billion of debt sent mortgage rates down by the most in at least seven years.

On the other hand, Citigroup has jumped 87% since the U.S. government injected $20 billion of capital into the bank at the start of the week and guaranteed $306 billion of its mortgages and other troubled loans.

More than $30 trillion has been wiped off the value of global equities this year as credit losses and writedowns approached $1 trillion in the worst financial crisis since the Great Depression.

The question remains, have we reached the bottom?

Past year's trend tells us that we should not get overly optimistic yet, as any signs of recovery could well be merely a bear trap!

Here is one of the key observation I made, that is, Down Jones Industrial Index is still trading within a bearish descending triangle. It is now at a critical cross road, that is, the next few days or weeks could potentially derail again all the positive development that has been established over the last one week! Technically speaking, the signs are pointing to a likely major bottom again!

I am holding on the same view until it proves me otherwise...

Happy Thanksgiving!

It's ironic that the general mood could be down, unemployment rate at a high, consumer confidence at the lowest and Americans are preparing to face the challenges of a recession (I supposed already in one for many but technically not by official measurement)....Anyway, it's a day for thanksgiving! What a great moment for the families and friends to get together and share a joyous moment! How about sharing some thoughts?

To all Americans, I wish you all a Happy Thanksgiving!

No Such Thing As "Too BIg To Fall"

In the eyes of the world, Citibank was "once upon a time", solid like a rock. That was true, until the current financial crisis! Exactly 11 years ago, when Asia was at the peak of its financial crisis, many people were either contemplating or switching their life savings from local banks to international foreign bankers. Among the beneficiary was Citibank. In their minds then, western foreign banks were supposedly the "safe heaven", highly regulated and possessed a solid financial framework.

How times have changed! The once giant Citigroup who owns Citibank is now in financial trouble, no thanks to the billions of dollars of exposure to sub-prime and it's related toxic securities! Many people were initially holding on to the believes that they were too big to fall, just as we initially thought so on the likes of giant Lehman Brothers, AIG, Morgan Stanley, etc.

From the height of more than $50 a share in 2007, the stock price of Citigroup has plummeted to less than $4 last Friday! Alarm bells were ringing aloud as they were desperately seeking either a financial bailout from the U.S. Government or faced the possibility of being taken over or the worst possible outcome of bankcruptcy!

As expected, the U.S. Government could not afford to let them down, as this would have severe repercussions on U.S. businesses and consumers. A financial lifeline of $20 billion (in addition to the $25 billion extended earlier), coupled with U.S. Government's guarantee of up to $306billion. The plan announced calls for Citigroup to obtain US$27bil of capital by issuing preferred shares, which carry a special 8% dividend. Citigroup agreed to absorb the first US$29bil of losses on the US$306bil portfolio, plus 10% of additional losses, for a maximum total exposure of US$56.7bil. On the other hand, dividend distribution for equity shares will be reduced to only 1% for three years, unless the company obtains consent from three federal agencies, being the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp.

Without the aid, Citigroup, along with many other corporate giants, would have fallen, irregardless of size!

On the flip side, i trust my local bankers more than anyone else!

Protect Growth To Avoid Recession

In line with global interest rate trend, Malaysia's central bank cut its key overnight policy rate (OPR) by 25 basis points to 3.25% at its final rate-setting for the year on Monday as a preemptive measure to avoid a severe economic downturn due to the global economic slowdown and credit crunch. This is also to ensure that domestic demand does not decelerate too quickly.

The central bank said the ceiling and floor rates for the OPR are correspondingly reduced to 3.50% and 3.00% respectively, and reduced Statutory Reserve Requirement to 3.5% from 4.0%, with effect from December 1st, 2008. Lowering statutory reserve requirement will lower cost of funds for banks, thus increases liquidity for lending. The rate change is the first since April 2006.

The Central Bank also hinted that there may be more rates reduction going forward, depending upon the state of the economy, particularly in 2009.

Although inflation for the month October was reported to be 7.6%, inflation is expected to come off sharply moving forward. As such, greater focus will be spent on protecting economic growth instead of fighting inflation.

Good news for both consumers and businesses as loan rates are expected to fall!

Be Prepared For More Thunder Storm...

Just when many people were expecting the worst of the U.S. financial crisis was probably over, another thunder started brewing when U.S. automotive sector requested for a US$25billion bailout package. Finally, the storm arrived yesterday when U.S Congress reacted negatively to the bailout package, followed by Citigroup reported to be in deep financial trouble, whereby Citigroup lost a quarter of its value in one day and Wall Street tumbled more than 5% overnight! Worst still, Dow Jones Industrial Index had overtaken the previous low of 7,882 recorded on 10th Oct 2008 to a low of 7,552, thus pointing to another potential major bear run! Some analysts are expecting the Dow to possibly fall as much as to the level of 6,500!

This could well be another bad news for the rest of global financial markets!

So far we have not quite seen the impact of the crisis trickling down to the other industries but the signs are surely there, starting with the auto sector!

Be prepared for more thunder storms ahead, as more corporate earnings downgrade and fallouts are expected to happen down the road!

On the other hand, Asian markets generally rose today against all odds after the initial knee-jerk reaction to Dow's drop overnight. There were news reported that China may come up with another stimulus package to support its growth. Positive news it may be (if true) but i am afraid the real problem lies else where in the west!

Light At The End of Tunnel?

U.S. Federal Reserve policy makers now predict the U.S. economy will contract until the middle of 2009, according to the minutes of their October's FOMC meeting released yesterday. Government figures showed that consumer prices excluding food and fuel costs fell for the first time since 1982 last month.

This effectively increased the odds that the Fed will cut its benchmark interest rate again next month.

Deflation, is now a significant concern. Deflation refers to a prolonged decline in prices, which hurt the economy by making debts harder to pay off and lenders more reluctant to extend credit. Japan is the only major economy to have suffered the phenomenon in modern times. Looking at Japan as an example, the country has suffered from deflation and economic stagnation for more than a decade. Question is, will U.S. suffer the same fate too? On the other hand, there isn't a lot more room to maneuver given that benchmark interest rate is already at 1%.

What about the USD700billion bailout plan?

Does anyone see light at the end of tunnel yet? Personally, i have not!

It's Time To Think About The Future

A piece of advice for investors who have little time to monitor market's daily movement, don't know much about technical analysis, but appreciate long term value and can look beyond the present crisis....

Buy low, sell high...Sure, it sounded simple but in reality, no one can truly predict when is the low or lowest! So, instead of trying to time the market at perfection and fear for losing the plot, let's look at an alternative approach where you can better manage risks and emotions.

For many, it is often hard to think about the world in the next five years from now. It is even harder to think about things that have yet to happen. Still, decisions with your investments should depend on future potential instead of what is happening now and in the past.

A long-term perspective means looking at the potential for your asset in the next five-years. If so, then don’t panic if you have not exited the market earlier and your portfolio is down.

Time to do some reshuffling (asset reallocation) and do not hesitate to chop down the dead woods. If you have wrongly invested in certain assets, cut the losses and shift the funds to the ones with the highest potential for recovery and value growth over the next five years.

Bear in mind, markets react in anticipation of the actual event. As such, you just can't wait to enter the market only until the economy has recovered. On average, markets will react six months in advance of actual. Therefore, it is a calculated risk. For example, if you believe that the global economy will turn better in the second half of 2009, 1st quarter of 2008 may well be the major turning point.

Dollar-cost Averaging is one technique where you can look at to consistently accumulate promising assets going forward. Set aside a certain percentage of your income and keep to the discipline by investing the money on a regular basis (common is monthly). However, make sure the money you set aside are not meant for emergency purposes and is relatively free from emotion, in case you have to bear some short term losses in the event the asset value goes lower.

Remember this, abundance of wealth can be best created during crisis! Now is not the time to feel sorry but to look ahead for opportunities!

U.S. Federal Reserve, the modern Santa Claus

The U.S. Treasury Department initially promoted the US$700 billion financial rescue package approved by Congress last month as a vehicle to buy toxic mortgage assets from banks and other institutions to spur fresh lending. However, in a sudden twist of event, it has decided to change its target to focusing on making direct investments in financial institutions and shoring up consumer credit markets instead. This has certainly rocked the equation and many were questioning the rationale of this sudden change of target, thereby causing immense uncertainties.

Apparently, the original plan never got off the ground and U.S. Treasury Secretary Henry Paulson declared that asset purchases were not the most effective use of the funds!

Hey, isn't he the same guy who advocated the original idea at the first place? A sign of "loss of direction"?

With the other significant root cause of the problem being the sky-diving U.S. consumer confidence, this change of target is therefore aimed to help restore credit flows to U.S. households by using financial rescue funds to lure investors back to markets for securitized debt such as car loans, student loans and credit cards.

It appears that many more troubled banks, companies or industries have started asking more bailout funds from the Fed, as if they are some kind of Santa Claus freely distributing free handouts! The latest being AIG, whose original US$85 billion bailout has now ballooned to US$150 billion, and the U.S. automotive companies also similarly demanding some large sum of rescue funds!

Last but not least, U.S. leading charge card company AMEX has now been granted a Bank holding status, i.e., they are now much more ready to tap into the seemingly "un-exhaustable" Federal Reserve funds!

To the U.S. Government, they will have a busy task to make sure that their money printing machine is not going to let them down by going overtime!

Start Buying Now, Seriously?

This is a recent interesting article that i would like to share with my readers. The author claims that it is now the right timing to re-enter equity markets.

Warren Buffett proclaimed that it is now time to buy American stocks, and he certainly led by example. Bear in mind given that Warren is the top 2 richest man on earth, his words are definitely not to be taken lightly.

However, there are also many doomsayers who claim that the worst is yet to come. At the same time, many so-called investment gurus were criticising Warren. They said he was irrelevant to the new economy in 1999, when he refused to buy technology shares. They say he didn’t understand the situation when he said that financial derivatives were “financial weapons of mass destruction” back in 2002. And now they say that he is simply trying to talk up his own investments, when he said recently to “Buy America”. These things they say of the world’s most successful investor. Nobody remembers these “they”, but Warren Buffet continues to make loads of money from his investments.

The reasons in favour of things will get worse include:
1) This time is different, because this is an unprecedented global economic slowdown!
For this reason, the author argued that of course it's always different. After all, if it wasn’t different, no one would panic, and no one would sell their shares, and stock markets wouldn’t fall. However, he also argued that human race has always been able to find solutions to these problems and emerge stronger. This is one of the reasons world stock markets grow over the long term!

Point taken!

2) There's no clear sign that the recovery is in sight!
For this reason, the author argued that if we had clear signs, the stock markets would have gone up a lot, and you would have missed the opportunity to make profits. Stock markets always anticipate economic recoveries. By the time the analysts are able to report clear signs, we would be more than halfway to the top. The author also claim that some of the "clear signs" could well be the fiscal and monetary policy actions undertaken recently by various governments of different countries.

Valid point again!

3) The recession will last for another 3 quarters!
For this reason, the author argues that assuming this is true, three quarters means the last quarter of 08 and the first two quarters of 09. Let’s budget another quarter and say it goes on till the end of 3Q 09. Stock markets always recover before the economy does. So if stock investors all thought that the global economy would recover by end of 3Q 09, we ain't that far away....

Lastly, the author points to the "I wish I had bought" syndrome. Many investors surely have experienced this before and regretted not buying when the market was heavily trashed! The author's reasons for optimism include Malaysia's current low market Price Earnings (PE) valuation, supported with growing population and successful regionalization of many local businesses, which means many businesses are less dependent on one country's economy alone.

Nevertheless, the author further advised that make sure one invests with money one can set aside for at least three years, so that one will not be caught short having to sell at the wrong time, as market needs time to realise its potential!

Here you are. Do you agree now is the time to re-enter equity investment?

The above article was written by Moh Hon Meng, the co-founder and executive director of iFAST Corporation.

For the full article, click here.

Five Personality Tips To Better Your Investment

First Tip: Save Money
Many people come to me and tell me that they have no money to invest. So i ask, " Do you spend money on buying unnecessary items each month?" Most responded by saying they do. Here lies the problem. People mindset are naturally tuned to spend but not to save!

Keep a diary of what you plan to spend versus the actual spending for each month. Make sure you spend within budget and only on necessities. If need be, you may also budget not more than 5% to 10% of your income on entertainment or something to pamper yourself each month. What's left over should be kept as savings. At the minimum, the savings should be at least 10% of your income.

Do not think the amount of savings is too small to begin with. Let's just say $200 a month. This will accumulate to $2,400 a year! Multiply that with compound interest year on year and you will get the picture...

2nd Tip: Invest Only Money You Can Afford To Lose
Try not to invest money that are to be used for emergency purposes or other purposes such as your children tertiary education fund! Reason is because this kind of funds tend to attract plenty of emotions during investing, i.e., one simply can't afford to lose it! Remember, one of the most fundamental rule of thumb in investing is that one must be able to control his or her own emotions. Emotions tend to lead to poor decision making and panic state!

That does not mean you absolutely can't invest your emergency funds. First and foremost, you should classify the risk profiling associated with the type of funds you have, prior to investing. You may place funds that have the lowest risk profile into cash instrument such as Fixed Deposit or capital guaranteed mutual fund or unit trust. Choosing the latter has the advantage in the sense that you have a chance to see the money grow but at the same time capital is guaranteed. However, bear in mind you should expect a lower rate of return for such capital guaranteed instrument.

3rd Tip: Invest Comfortably
One should adopt a systematic approach to investing, particularly for investments such as equity, derivative or currency. The key is model after what other successful traders have done, emulate their trading style and follow a systematic approach. Eliminate as much as possible the element of GREED, FEAR AND EMOTIONS from your investments so that investing is enjoyable and least stressful.

Where applicable, try adapting a particular trading style to suit your own needs and practice. However, bear in mind you should never deviate too far away from the successful trading principles and make sure the adaptations must make sense and workable.

4th Tip: Invest In What You Know Best and Stick To It!
In a nutshell, don't be a Jack of all trade and master of none! Given there are so many investment instruments out there, choose only the ones you know best and focus in perfecting your investment technique.

Trust me, it's easy to always think that the grass on the other side is always greener but the reality is that it's seldom true! When something work against you, don't just give up and jump onto another bandwagon! After all, there are so many instruments out there where you can invest, be it equity, derivative, bond, currency trading, various types of commodities, wine, etc.

Always find out the reasons for failure and learn from it. Don't simply give up!

5th Tip: Stay Current
Stay current and be up-to-date with latest happening, trends, economy and industry development. Knowing the latest trends will help you to unearth the next potential boom or burst! You can achieve this by reading the latest books or publications, attend workshops or seminars, or even through sharing with friends and peers.

What Does De-leveraging Mean To You?

In 2007, we had the the buzzword carry-trade, followed by sub-prime. Both have had devastating effects on global financial markets! The latest financial buzzword is "de-leveraging". In simple terms, it means that banks, consumers, companies, and the government need to reduce their debt.

From the early 1920s through 1985, the average level of debt-to-GDP in the U.S. was 155%. The highest peak in history (until the recent debt boom) was in the early 1930s, when debt-to-GDP soared to 260% of GDP. In the 1930s, the ratio then cratered to 130%, and it remained close to that level for another half a century.

In 1985, U.S. started to borrow, and last year, when U.S. finished borrowing, the country had borrowed 350% of GDP! To get back to that 155%, U.S. need to get rid of more than $25 trillion of debt!

For a start, U.S. banks have written off $650 billion of debt so far!

Global stock and asset prices in general have been the victim of the global de-leveraging exercise, pushing prices of equities and commodities to unrealistically low levels. This de-leveraging is being driven by the unwinding of over-leveraged positions, and compounded by fund redemptions and frozen credit markets.

The bottom of the markets will happen when this whole de-leveraging exercise ends - which for now is still uncertain. It is important to take note that Lehman Brothers reportedly has between US$40 billion to US$70 billion of assets belonging to hedge funds that are frozen in its UK arm - and negotiations are still ongoing with the administrator to release them.

When the time comes, prepare for another round of "de-leveraging" exercise!

To The American...It's Time For A Change

It's finally over! U.S has a newly elected president in the name of Barack Obama, ending the longest presidential campaign (21 months) in the history of America! Obama is also the first black African-American to become president of the states and what a victory it was, beating his counter part John McCain convincingly!

Let's hope the new leader will bring peace to the world (unlike the predecessors) and rekindle the past glory of the American economy, and indirectly helping the rest of the world to get rid of the current gloom and doom!

For detailed analysis on why Obama won, read here.

Here's a video of Obama's victory speech...."All Things Are Possible"!

Malaysia's Economic Stimulus Plan: What To Expect?

THE second phase of Malaysia's economic stabilisation plan to be unveiled by the Government later today is expected to focus on measures to restore consumers’ and investors’ confidence. The stabilisation plan could see the Government focusing on shorter-term projects with a higher multiplier effects on the economy, and ensure that the country’s banking system remains strong, while funding and credit lines remained open to small businesses and manufacturers. The expected major beneficiaries for these measures could well be the construction and oil & gas sector.

Besides, the Government could introduce new measures to boost consumer spending, perhaps in the form of optional reduction in employees’ contribution to the Employees Provident Fund, similar to what has been done in both 2001 and 2003.

The plan could also include income support programs to protect rural households, especially smallholders in the palm oil and rubber plantations, amid the plunge in related commodities’ prices.

In anticipation of the positive measures from the plan, KLCI rose 4.1% yesterday in active trade.

So, could we expect a sustainable stock market recovery going forward? Well, in my opinion, much will depend on the state of affairs and key performance data released from U.S., and how the rest of the world respond. One of the key data to watch out for this week is the employment data to be released on Friday. Besides, whether related or unrelated, the world will be watching over the choice of American's next President in tonight's U.S. Presidential election!

Can Rate Cut Work Its Magic In U.S.?

As expected, U.S. cut its interest rates by 50 basis point to 1%. Multiple central bankers followed suit thereafter, including China and Norway, who slashed rates respectively. The Bank of Japan is also considering cutting rates on Friday but will watch market conditions before deciding. More countries are expected to follow suit.

The interest rate cuts, sent the U.S. dollar plunging to its biggest one-day drop in 23 years yesterday!

It is widely expected that U.S may further reduce rates in December. If this happens, U.S. will be reminiscent of Japan, which has been maintaining a zero or sub-zero interest rate over the past decade. However, bear in mind that Japan failed to revive its economy despite slashing rates to zero in 1999! Also recalled that Japan became mired in a decade of lost growth in the 1990s after the real-estate prices collapsed, which is now happening in U.S! That caused a severe bout of deflation in Japan, which is a destabilizing drop in prices.

Will history again repeating itself, albeit this time in the U.S?

Is US Fed Likely To Cut Interest Rates?

U.S. Federal Reserve is expected to reduce interest rates today, in order to further increase banking liquidity, inter-bank lending and unfreeze credit markets. Question is what quantum of interest rate cut will be considered optimum?

Yesterday with the anticipation of further rate cuts, U.S markets underwent a strong rebound rally by rising almost a whopping 11%! The rally certainly took many by surprise! A "short squeeze" occurred when traders with short positions, betting on falling stocks, were forced to buy to avert heavy losses. The rally occurred despite U.S. consumer confidence index plummeted to a record low of 38.0, down from 61.4 in September, signaling more retrenchment by consumers.

Could this be a major turnaround or yet another sucker's rally?

Common sense tells me that the economy and consumer confidence will take a while to move its course and enable a sustainable recovery, even with a significant interest rate reduction.

The consensus rate cut is 50 basis point, bringing Fed interest rate to 1.0%.

Currency: Does US Dollar Deserve To Be Strong?

This article is written by Abd Ghani Hamat. He shares his view on why US Dollar remains strong despite a faltering economy and what the reality may potentially unfold.

"The poignant reminder simply won’t go away. Last week, investors bracing for a global recession traded the US dollar to two-year highs against major currencies except the yen. In fact, the British pound suffered its biggest one-day percentage drop on Friday since September 1992, Reuters reported.

It’s unsettling to note that the greenback had firmed up against the likes of euro and sterling even after the US financial system has hit the rocks, dragging down the world with it.

Why has the world continued to accept an artificially strong dollar and not let it slide? It’s untenable. Sooner or later, the dollar will find its true value.

The world will wake up one day and realise that the game is up; it cannot continue to prop up a currency whose country has run up a federal deficit of almost US$1 trillion (RM3.53 trillion) or 7.5% of GDP in a single year and national debts of US$10 trillion.

It’s not right for the world’s biggest debtor to have a strong currency. A time will come when the greenback will be subject to the same argument that resulted in Argentina, for example, devaluing its peso by 30% in 2002.

The only reason the dollar has remained strong — as the whole world is aware by now — is that too many countries have too much money to lose on a cheap dollar.

A sudden withdrawal of the foreign money, which had been a big contributor to the steady appreciation in US asset prices, would lead to massive writedowns and losses. But what is the point of holding on to assets and securities that have shrunk to a fraction of their values with no guarantee whatsoever of their restoration in the foreseeable future?

The situation in the US is truly dire.

Federal Reserve chairman Ben Bernanke, in explaining the US$700 billion bailout package last week, said: “If we don’t do this (bailout), we may not have an economy on Monday.”

The general consensus in the country is that the financial meltdown has not played out fully, and main street is bracing for the impact at any time.

“Wealth has eroded enough that you will see some changes in the US style of living,” reads a comment on a US investing website. Of course, there are also less savoury comments, like the one calling for a lynching of Wall Street barons.

But why is the world ignoring US economic fundamentals and continuing to have confidence in the dollar? After all, the writing has been on the wall for the longest time.

In March 2006, the UNDP’s International Poverty Centre issued a report saying “the growth of the US economy since the 1990s had relied on sucking in foreign savings at an alarming rate”.

Terry McKinley, the author of the report titled The monopoly of global capital flows: Who needs structural adjustment now?, said the inflows of capital into the US were almost twice as large as the amount needed simply to finance its current account deficit.

He said this implied that the corresponding capital outflows from the US were almost the size of the current account deficit itself.

“This suggests, in turn, that capital inflows are not only financing excess consumption by US citizens but also reciprocal investment by US private investors abroad.

“In other words, central banks in other countries are helping subsidise US foreign investment and profits.”

Sobering thought. The rest of the world had helped the US become a monster!

Now, the question is, are central banks the world over helping to keep the dollar artificially high to give themselves time to unwind their positions in the US? For, surely the world has realised that it is doing itself a lot of disservice by backing a declining world economic power. If that is the case, the dollar is due for a very rough ride.

But where do you put the money, or what’s left of it, that you pulled out of the US? Where ever it is, I suppose, it should be a major consideration in all this talk about a new global financial architecture.

It is important to note that the decline in US financial strength has coincided with the emergence of new global economic powers in the likes of China, India, Brazil and Russia. Not only have the new economic powers eroded the dominance of the US and Europe in world economy, they are also transforming the flow of trade and capital.

As we look to contain the impact of the looming global recession at home, we simply cannot ignore the changing economic landscape.

While we keep a close watch on commodity prices, we must note that the world post-recession will not be so West-centric as it is. Therefore, efforts to contain the immediate impact of a global financial turmoil should not be at the expense of finding our rightful place in world economy later on.

No doubt, with so many new economic powers about, it would be harder to carve a market niche. That’s why we should start ridding ourselves of the inefficencies and set proper goals now.

Fear Factor Catching Up With Asia

First it was the U.S, Europe follows. Question is....is the crisis fear factor finally caught up with Asia too?

In the past, major Asian countries had been perceived to be relatively insulated from the U.S. financial crisis, as both China and India were believed to be holding the fort and able to maintain the relative strength and growth of the economies among Asian nations. However, that seemed to have changed for the worst, following Singapore being the first major Asian country to have gone into recession. As business and consumer confidence take a tumble and collapsing by the day, serious doubts are now placed on the survival of the regional financial institutions and corporations. In addition, the continuous rise of Japanese Yen as a result of the unwinding of Yen-carry trades further weigh on the sentiment as major currencies such as USD and Euro (against Yen) continue to weaken.

After about a week of "calmness" among Asian bourses, major Asian stockmarkets started to tumble again last Friday and the panic state seems to snowball going into this week, as indicated by today's (Monday) dizzy falls in Hong Kong (12.7%), Philippines (12.3%), Thailand (10.5%), and Japan Nikkei closes at its lowest in 26 years! Both Singapore and Malaysia markets have escaped the rout as both markets are closed for observing a public holiday (Deepavali).

It appears the fear factor has reached another level, or shall i call it "despair"?!

Is Law of Supply & Demand Dead For Gold & Silver?

Spot gold prices fell below US$760 today during Asia trading, as the U.S. dollar rallied strongly against the euro to its highest level since February last year. Recall the price of gold was still trading above US$900 level in the early part of this month! So what is in store for gold prices? Isn't gold supposed to be an investment safe heaven? The article below shares an insight of the pattern of gold trading recently and why investors should beware.

This article is kinda long so be patient reading...

"During the recent gold and silver correction that began on July 14, 2008 and which perfectly coincided with the miraculous surge higher in the U.S. dollar, there was a massive story unfolding that should have been a lead story in every financial magazine, newspaper and website. Yet the media responded with silence. The story was so big, as a matter of fact, that every economics textbook should now have to remove the Law of Supply and Demand from their pages because if free markets still exist, the recent behavior in gold and silver markets strongly obliterates it.

Before I begin with that story, make no mistake that we have just experienced a steep correction and not the end of the gold and silver bull. Also make no mistake that this recent dollar rally is a miraculous rally because fundamentally nothing has changed about the U.S. dollar that could explain such a quick surge higher. In my last post, though I described calling the bottom of the gold markets a “sucker’s bet” that was a waste of time when markets are so blatantly manipulated, I foolishly took the bet anyway and was wrong about predicting the bottom (I’ve now learned my lesson about taking a sucker’s bet when I know it is one! Still, my subscription members well know my updated position about the short-term direction of gold and silver markets since this last public posting). But on to the meat of this article.

The Law of Supply & Demand is Broken: Demand Soars and Prices Plummet!

Consider the following. As gold and silver prices started to plummet on July 14th, surging physical demand for gold and silver continued to lead gold and silver prices markedly lower. For the first time in history, record demand in a commodity was helpless to stem plummeting prices and in fact, contributed to further price declines. In July, India bought 22 tonnes of gold. In August, according to Reuters, India increased its gold purchases by more than 350%, buying more than 100 tonnes of gold.

This figure also represented a 56% increase in purchases when compared to purchases during the same month from a year prior. In Dubai, demand surged as well.

“We are definitely witnessing a surge in demand for gold in Dubai and physical shortages have been reported by many dealers,” said Ian MacDonald, the Dubai Multi Commodity Center’s executive director for gold and precious metals. “We are also seeing demand being driven by currency concerns in the region as many investors perceive the precious metal as one of the few strong currencies.”

Gold jewelry sales in Abu Dhabi soared 300 percent in volume and almost 250 percent in value in August from a year earlier after the metal dropped to nine-month lows, the emirate’s industry group said on Monday.

“It was the best month the market has seen in almost 30 years and it compensated for any drops we have seen earlier this year,” Abu Dhabi Gold and Jewelry Group Chairman Tushar Patni told Reuters.“We had never expected (emphasis mine) that if gold fell below $800 an ounce we would see a 300 percent increase in volume and 250 percent in value, especially as many buyers are abroad on holiday.”

In the United States, the stories were the same. Many gold and silver bullion and coin dealers reported record sales in August and shortages of supply. I could quote fifty other stories similar to the ones above, but for the sake of brevity, I will not. Global sales of gold and silver would have to be at record levels in August for gold and silver prices to be pushed much higher for that month, and all preliminary indications are that global sales in August for gold and silver were indeed at record numbers. So how can it be that record demand and sales in the physical gold and silver markets would cause gold to plummet from a price of $910 an ounce at the beginning of August to less than $750 an ounce, and silver to plummet from a price of close to $18 an ounce at the beginning of August all the way down to almost $10 an ounce?

When this inexplicable anomaly was pointed out (at least inexplicable according to the supposedly irrefutable Law of Supply and Demand), gold and silver analysts employed by Wall Street to spread disinformation responded only to stories of shortages being reported in the United States and did not address record sales of physical gold in various countries in the Middle East and in Asia. They responded to reported U.S. shortages of bullion and coins by stating that dealers had supply but were simply not being honest about their supply numbers because they did not want to sell any more stock at such depressed prices. This certainly could have been a very reasonable and logical explanation that adequately explains some of the shortages that were reported by gold and silver dealers. However, this was not “mystery solved” as these demagogues employed by Wall Street claimed.

During this Correction, Gold & Silver Steady or Much Higher Many Days in Asia, Down Markedly Lower by Close of New York Markets

How can record sales, the strongest in 30 years, and shrinking supply in other regions of the world like the Middle East and India, cause prices of gold and silver to plummet steeply as well? Clearly, since price is a function of supply and demand, rising record demand for gold in India and the Middle Eastern markets should have stopped the downward slide in gold and silver markets dead in its tracks and led the price higher again. And indeed this is exactly what happened. But it happened only in the futures markets in Asia. Last week MarketWatch reported a story that gold experienced one of its worst months ever in this bull run because August had not one day where gold closed higher in price; however, this article only told half the story as the media so often does. Gold experienced many days in August were it closed higher in Asia and significantly higher, often piling on gains of $5 to $10 an ounce. These gains were only lost once London markets closed and New York markets opened; only then, were gains quickly sold off and then transformed into deep losses within a span of 24 hours.

If one constructs the 24-hour gold and silver charts for every day during this correction, one will discover an overwhelming amount of days when gold and silver were significantly higher in futures markets in Asia, but then were sold off harshly at nearly the exact same time (within a 30 minute time frame) when London markets closed and New York markets opened. How could this have happened? Simple. The price for gold and silver that you see plastered all over financial tickers everyday is established in the paper futures markets and not in physical markets where REAL gold and silver actually exchange hands. In the futures markets, only 1% of all futures contracts are closed out with actual delivery of the physical commodity. Instead 99% of all futures contracts are closed out with the purchase of another paper contract. In the case of gold and silver, futures contracts represent digital bytes of gold and silver flying around in a paper market, not real ounces of gold and silver that exist in the physical market. Thus it is entirely possible to utilize this discrepancy to create two entirely different prices for the same commodity. In other words, if not properly regulated, futures markets provide a gateway to manufacture massively fraudulent prices non-reflective of the buying and selling volumes that are occurring in the physical markets!

Two Parallel Markets For Gold & Silver: Paper Markets & Future Markets

Thus, the world can end up with two parallel markets that act differently: a papers market for gold and silver and a physical markets for gold and silver that establish significantly different prices for the same commodity over short periods of time, odd as this may seem (I say short periods of time because unless perpetually manipulated, free markets will eventually work out such massive distortions over time). The recent actions that were coordinated in the futures markets for gold and silver beginning on July 14th would most likely have been impossible to replicate in the physical world of gold and silver. To any veteran investor in gold and silver, the manufacturing of this correction was as plainly transparent as a two-ton boulder falling out of a clear blue sky. Though I won’t discuss the other mounds of evidence that explain how this correction was manufactured, these other specifics deal with large U.S. institutions that piled on huge short positions in the futures markets for gold and silver in an incredibly compressed period of time around July 15th.

Again, the gold and silver analysts paid by Wall Street to spread misinformation spoke out against the manipulation theories, simply stating that the dollar was overdue for a bounce and gold and silver markets were overdue for a correction. I have stated multiple times myself over the years that bulls never rise straight higher and will correct, and that bears never plummet straight downward and will experience bear market rallies. This much is true. Still, what transpired starting this past mid-July was far beyond the realm of a free-market inspired U.S. dollar bear market rally and a free-market induced gold and silver bull market correction. The meteoric rise of the U.S. dollar since July 15th and the panic inducing slide in gold and silver prices reeks of manipulation and not a natural free-market rally and correction for many reasons.

For instance, try explaining this. I know for a fact that certain gold coins that were selling in the low $700 range when the price of gold bullion was at $680 an ounce a couple of years ago were still being priced at more than $1,100 by gold coin dealers even when gold slid all the way down to $750 an ounce during this current correction. When I inquired as to why the prices of these gold coins had not also slid to $780 or so (as would have been dictated by the spot market price of gold), but were instead still selling for well over $1,100 a coin, the dealers answered that demand, not the spot price of gold in the futures market, was setting the prices of these coins. Since demand was off the charts, the prices did not reflect the monumental drops in price in the futures markets. When I checked the market for silver coins, I discovered the same massive disconnect between prices set in the physical markets for silver and in the silver futures markets (that only comprise “paper” silver). Silver coins were selling at prices sometimes 60% to 70% higher than what would have been indicated by the spot price of silver determined in the futures markets.

Last month it was clear that the Law of Supply and Demand was dead for gold and silver markets. Soaring physical demand for gold and silver were not factored at all into the prices set in the PAPER gold and silver futures markets. Incredibly, soaring physical demand created a greater acceleration of losses in the prices in the PAPER gold and silver markets. One way to interpret this disconnect between physical and paper gold and silver markets that clearly happened last month is this: If a bushel of corn were selling in the September futures market for $1.40, but if you were to go to a farm in Anytown, USA and had to pay $3.10 for a bushel of corn, what would you conclude was the REAL price of corn? This is how you can determine the real price of silver and gold today. Look to the physical markets, not the paper markets, for the real price of gold and silver. Who cares what the paper futures markets are stating as the spot price of silver, if I still have to pay 60% more than this price when buying silver coins in the real world? The price is simply what I have to pay for the real physical silver, period.

The Usual Suspects

The most likely culprits of this manipulation are all members of the U.S. President’s Working Group on Financial Markets (the SEC, the Commodities Futures Trading Commission, the U.S. Treasury, and the U.S. Federal Reserve). A massive disconnect between the price of gold and silver in physical markets and the price in paper futures markets, of the extent that happened last month, either means that the Law of Supply and Demand has just been proven to be invalid, or that massive fraudulent manipulation just occurred. I will let you make this conclusion. However, let me be clear that the evidence of manipulation was so overwhelming this time that it was not just the usual suspects, including yours truly, voicing these opinions. It must have greatly dismayed the mainstream analysts that try to cover up evidence of manipulation in commodity markets, particularly in gold, silver, and oil, that a member of the mainstream investment community attributed the recent gold and silver decline to manipulation.

It also must have dismayed these same analysts that four U.S. Senators who are key members of Congressional energy committees recently stated that the Commodities Futures Trading Commission “obviously knew that underlying data used to prepare the interim report was seriously flawed.” (emphasis mine) (The report referenced by the Senators was a key report distributed to U.S. Congress days before a legislative vote to close commodity trading loopholes that allow massive manipulation of commodity markets. The report stated supply and demand was solely responsible for the recent run up in oil prices to $147 a barrel. The seriously flawed data that was contained in the report, after it was corrected, demonstrated that manipulation was responsible for the run up in oil prices. Based upon the deliberately falsified data provided by the CFTC (the Senator’s words, not mine), Congress voted to keep the loopholes open. Read the whole story here).

Don Coxe, chairman and chief strategist of Harris Investment Management in Chicago, one of the top respected investment groups in the United States, called this recent manipulation of gold and silver markets that broke the Law of Supply and Demand a “brilliant” plan executed by the U.S. Federal Reserve and U.S. Treasury. My reply to Mr. Coxe? Let’s not get carried away. If I was in charge of the U.S. Treasury and could direct the CFTC, the SEC and various Wall Street firms through the President’s Working Group on Financial Markets, I could have pulled this plan off in my sleep. If the plan was executed in the manner that Mr. Coxe speculates, there was nothing brilliant about it. Let’s call the plan for what it was. Fraud and a shameful dismantling of free markets and capitalism. Plain and simple.

But in today’s world fraud is the name of the game. When the Law of Supply and Demand was broken in the gold and silver markets in August, for a comparable story of similar magnitude to exist in the scientific world, the Law of Gravity would have to be disproven. If it was reported that in California, a man ran down the street, threw his hands in the air and flew for a length of 200 meters while 10 meters from the ground, don’t you think that reporters would be scrambling to report this story? Yet gold and silver markets just proved the Law of Supply and Demand to be no longer relevant in August 2008, and ZERO members of the mainstream financial press deemed this story to be newsworthy.

Fannie Mae (FNM) and Freddie Mac (FRE) committed fraud for years and nearly triggered the collapse of the entire U.S. housing market. When their bailouts finally became necessary, people that ingested the force-fed spin that this bailout was “for their own good” and don’t understand the implications, cheered the fraud that allowed the Fannie Mae and Freddie Mac CEOs to retain their tens of millions in salary and bonuses they collected from engineering this fraud. Furthermore, for their roles as architects of this fraud, Freddie Mac CEO Richard Syron and Fannie Mae CEO Daniel Mudd are to respectively receive a severance payout of approximately $6.3 million and $7.3 million, respectively. When Stan O’Neal and Chuck Prince were respectively ousted from Merrill Lynch (MER) and Citigroup (C) for their terrible leadership and participation in creating the most massive financial crisis the U.S. has seen in decades, what were their rewards for leading investors of their stock into financial ruin? A $160 million and a $40 million golden parachute, respectively.

The reason this current story is so important is the following: The very acceptance and nonchalant reactions to this fraud by billions of people worldwide poses an equally serious threat to the health of the U.S. and global economy as the actual perpetrators of these fraudulent actions. Though I’ve never asked any of my readers to take action before, I urge you this time to email the link to this article at my investment blog, theUndergroundInvestor, to every single person that you know that has ever had so much as a ruble, a dollar, a peso, a real, a Swiss franc, a Euro or a pound invested in stock markets. Knowledge is power, and only knowledgeable persons can prevent these same shenanigans from happening in the future. As this financial crisis deepens and we have only seen the very beginning of it, the intensity of disinformation campaigns will increase at an exponential rate. To solve the crisis will require aware and knowledgeable investors, and masses of them. Thus, we must begin spreading awareness today and not a day later.

The Likely End Game: Re-Capitalization of the U.S. Financial Sector at the Expense of the Individual Investor

I’ll conclude this article with my theory of why this manipulative scheme was executed in the gold and silver markets, for I have not seen another analyst give any credence to this theory as of today’s date. This sell-off in gold and silver and the U.S. dollar rally wasn’t engineered just to stem the record rate at which foreign central banks were dumping U.S. Treasuries (another huge story that somehow the entire mainstream financial press somehow missed). Furthermore, this scheme wasn’t hatched solely because it was a necessary step to save the global financial markets as Don Coxe speculated. Both are fine reasons, but ultimately, unlikely to fully explain why this scheme was hatched in July. With the failure of Fannie Mae and Freddie Mac, the failure of Merrill Lynch (just announced Monday), the likely failure of Lehman Brothers (LEH), and the likely failure of a huge U.S. financial institution on the imminent horizon, all these failures are about to place a serious squeeze on the already hemorrhaging balance sheets of some of the world’s largest financial institutions. With foreign interest in increasing ownership in these institutions quickly dissipating and weak share prices unable to translate secondary offerings of stock into significant amounts of capital, some of the largest financial institutions were absolutely desperate to find a channel in which to raise significant amounts of capital (not hundreds of millions, but billions of dollars) very, very quickly. What just happened in the gold, silver and oil markets accomplished this goal, and thus may have been integral in preventing a global financial collapse.

Let me explain. During this recent gold and silver correction, gold and silver markets were higher, and significantly higher in Asia before drastically turning significantly lower in New York almost on a daily basis. The creation of these huge arbitrage opportunities could have been exploited by large financial institutions to reap billions in profits in an incredibly condensed period of time. The type of arbitrage opportunities that existed during this recent correction in gold and silver was absolutely enormous. Unprecedented 2% to 5% swings in the price of gold and silver bullion from their highs in Asian markets to their lows in New York markets happened time and time and time and time and time and time and time again during this recent correction (if you were unaware of this action or don’t believe me, simply search out the 24-hour charts for gold and silver for the entire month of August and you will be absolutely dumbfounded from what you will discover). These swings in prices were so enormous that daily swing trades in futures markets, given these arbitrage opportunities, could have produced hundreds of millions of dollars of profit in a single 24-hour trading day. During the past few weeks, these arbitrage opportunities may have produced profits in the tens of billions of dollars, if not more, for just a small handful of firms.

If I were a large financial institution with a critically hemorrhaging balance sheet due to massive losses created from insane foolish and risky bets on MBS (mortgage backed securities) and CDOs (collateralized debt obligations), and I wanted the quickest way to recapitalize my balance sheet, how would I do it? Through gross manipulation of commodity markets, in particular the gold, silver, oil and agriculture markets. Of course, I would need the help of certain regulatory agencies to achieve this and wouldn’t be able to accomplish this on my own, but I’m going to speculate that this is exactly what just happened. This correction was not only just about shoring up the U.S. dollar and U.S. Treasuries, but also about recapitalizing Wall Street and huge banking institutions. Though I haven’t covered the oil and agriculture futures markets, there is more than ample evidence that the same thing has occurred in these markets as of late as well (and again, the evidence is blatant enough that U.S. Senators have demanded investigations into much of the curious behavior I have delineated in this article)."

The above article was posted by JS Kim, founder of SmartKnowledgeU™ and the evolutionary MoneyPing™ investment strategies.

What are your thoughts about the views shared in this article?

It's Time To Be Greedy When Others Are Fearful?

The Master of value investing has to be no other than Warren Buffett himself. A couple of days ago, he made a personal call to suggest that now is the time to invest in the banished equity market. For the faithful fans of Warren Buffett, his statement carries a lot of weight and influence. Below is an extract of Warren's statement.

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 price.

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."

For the original article, please visit this link.

In the past, there were at least 2 similar calls made by Warren. Following his first call in year 1974, the Dow Jones Industrial Average and the S&P 500 soared by 86% and 70%, respectively, over the next two years. His second call came in 1979 and two year after that, the S&P achieved an annualized return of 17.3%, nearly twice the average 9.6% return for bonds.

Is It Important To Time The Market?

For a long term type of investor such as Warren Buffett, timing the market does not appear to hold much degree of significance. After all, this type of investor believes that an undervalued company (coupled with solid fundamentals, management, etc) will find its feet ultimately and investors will "recognize" its value one day. This group of investors are generally seen as the minority group, as most of the others generally prefer to go for short-term or medium-term type of investment. For this majority, they will most likely argue that timing the market is of utmost significance. After all, catching a falling knife is likely to hurt one, badly!

So, who is right, who is wrong?

Most long term investors will argue that volatility in equity prices is an inherent part of investing. It takes courage, discipline and foresight to remain invested in the market, especially when the urge to avoid financial pain is strong. Investors may be prone to sell in a volatile market because they think they can wait until the market settles lower and go back in when the market starts to recover. This strategy seems to make common sense". However, the problem with this strategy is that they may miss their chances of missing the major market movements that signal the start of a longer recovery. Many of these major upside moves can happen quickly, often in just a few days.

Interestingly, a study conducted by a local asset management group on Malaysia's equity market (KLCI) has the following analysis.

• Missing five of the best trading days results in negative returns of 17.39%.
• Missing the 10 best trading days and the loss almost triples to 49.13%.
• Missing the 30 best trading days and the loss soars to 83.07%. This represents just 30 days out of approximately 3,807 trading days in total, or merely 0.79% of the total trading days
• An investor who remained invested throughout the last 15 years enjoyed returns of 82.25 per cent.

Nevertheless, how about if we assume an investor manages to avoid the worst trading days? The results of the study reveals the following:

• Remaining invested through- out the last 15 years gives returns of 82.25 %.
• Avoiding just the five worst trading days results in positive returns of 260.15%.
• Avoid the 10 worst trading days and the gain jumps to 413.62%.
• Avoid the 50 worst trading days and the returns are a phenomenal 3,266.59 %.

The results are far better than than the first scenario. However, the most fundamental question is whether the investor is able to have the foresight and timing to perfection to avoid those worst trading days? Quite likely, the answer is No, likewise no one is able to aim buying at the cheapest price!

Does this mean that investors should never attempt to time the market at all and buy at whatever time, even if the market is expected to sink further?

Certainly not.

In my view, first and foremost, we need to understand that timing the market does not equate to trying to mark an entry at the best possible pricing. It just means a way to minimize one's risk or what we call risk management. The best way of gauging the timing of the entry is by using tools such as technical analysis, i.e., enter the market only when there is an appropriate buying signal. Sceptics will argue that technical analysis is no crystal ball. It may be true somewhat but the key here is risk management. By using technical analysis, one can reduce the risk of getting it wrong. Why invest when the market has shown little sign of recovery or a sustainable recovery? Catching a falling knife can hurt the most! The current global crisis is the best case of example. Cheap stock prices and undervalued companies are aplenty, but when sentiment is against you, no fundamental holds as fear factor will over power any positive mindset!

In addition, it may also take years before the market recovers. For instance, the Dot Com burst in Year 2001 took around 2 to 3 years for full market recovery.

While it may appear sensible for investors with plenty of cash to just ignore the timing, buy and then put aside without ever looking at if for several years, many investors are simply not in the same league financially. The fact is many investors also do not possess the right emotional state to handle large amount of paper losses.

As such, the "safest" route for many, is still timing.

"Its not about being right or wrong, rather, its about how much money you make when you're right and how much you don't lose when you're wrong" - Quote by George Soros

However, for those who are not active investors, perhaps leaving it to the professionals may be the better option. However, be prepared to see your investment values erode as market will most likely not recover so soon.

For more details on the study, please click this link.

Measure To Boosting Banking Sector and Confidence

Following the footsteps of Hong Kong, Australia, Ireland, Germany, Denmark and Greece to fully guarantee bank deposits, Malaysia Government likewise has announced that they will fully guarantee, with immediate effect, all ringgit and foreign currency deposits with commercial, Islamic and investment banks regulated by Bank Negara.

The Central Bank and the Ministry of Finance said in a joint statement the guarantee also extended to deposit-taking development financial institutions regulated by the central bank.

The deposits would be fully guaranteed by the government through Perbadanan Insurans Deposit Malaysia (PIDM) until December 2010.

The guarantee extends to all domestic and locally incorporated foreign banking institutions; and access to Bank Negara’s liquidity facility will be extended to insurance companies and takaful operators regulated and supervised by the Central Bank.

The above move will indeed shore up the country's banking sector in terms of consumer and business confidence. At the same time, this should prevent potential outflow of funds from the country to other countries (particularly Singapore) that offer the full guarantee.

In the same accord, the Singapore Government has also announced full deposit guarantee.

Related Story: How Safe Is Your Money In the Bank?

Fear For Recession Looms

True to my scepticism, global markets did not hang on to a sustainable recovery as the optimistic mood from the series of global banking rescue plan fizzles out. Investors' mood soured when the U.S. government report showed that sales at U.S. retailers last month slid by the biggest monthly drop in more than three years. For that matter, U.S domestic growth is heavily reliant on consumer spending as consumer spending accounts for two-thirds of U.S. economic activity.

Technically U.S is still not in recession but unfortunately most people in the streets already feel so many months ago!

With the ballooning debts in US ( i was told national debt has reached US$10 trillion!), it is certainly an extremely worrying course for the Americans and the rest of the world!

Switching to Cash May Feel Safe, but Risks Remain

Amidst the current global market weakness and the downward spiral performance of most asset classes, many people have advocated keeping cash as the best form of capital preservation. Recently I came across an interesting article that discusses the wisdom of liquidating one's investments and keeping cash. This article was written by Ron Lieber from The New York Times.

"It’s a question we’ve all asked in our darker moments of late: Why not just put all of our investments in cash, 100 percent, just for a little while, until things calm down?

Some people already seem to be acting on that instinct. In the first six days of October (through Monday), investors pulled $19 billion out of mutual funds that invest in United States stocks, matching the outflows for the entire month of September, according to TrimTabs Investment Research.

“What clients are looking for is safety,” said John Bunch, president of retail distribution at TD Ameritrade. “They are seeking solutions that are backed by the federal government. Specifically, F.D.I.C-insured money funds and certificates of deposit. All of it is under the umbrella of, ‘Am I safe and insured?’ ”

By fleeing for the comfort of safe and insured, however, investors with a time horizon beyond a few years may be doing real damage to their long-term finances. If you’re tempted to make a big move to cash right now, you’re doing something called market timing. It’s an implied statement that you’ve figured out the right moment to get out of stocks — and will also know the right time to get back in.

So let’s dispense with the first part straightaway. The right time to move out of stocks was a year or so ago, before various stock indexes the world over fell by one-third or more.

If you missed that opportunity, you’re hardly alone.

But if you sell now, you’ll be locking in your losses. And once you’re in cash, there isn’t much upside. In fact, with interest rates low, you’re likely to lose money in cash, because inflation will probably eat up the after-tax returns you earn from a savings or money-market account.

A guarantee of a small loss may sound good right now. But if you’re not bailing out of stocks once and for all, how will you know when it’s time to get back in? The fact is, any peace of mind you gain by being on the sidelines now will turn into a migraine once you see how much you can harm your portfolio over time by missing just a bit of any rebound.

H. Nejat Seyhun, a professor of finance at the Ross School of Business at the University of Michigan, put together a study in 2005 for Towneley Capital Management, where he tested the long-term damage that investors could do to their portfolios if they missed out on the small percentage of days when the stock market experienced big gains.

From 1963 to 2004, the index of American stocks he tested gained 10.84 percent annually in a geometric average, which avoided overstating the true performance. For people who missed the 90 biggest-gaining days in that period, however, the annual return fell to just 3.2 percent. Less than 1 percent of the trading days accounted for 96 percent of the market gains.

This fall, Javier Estrada, a professor of finance at IESE Business School in Barcelona, published a similar study in The Journal of Investing that looked at equity markets in 15 nations, including the United States. A portfolio belonging to an investor who missed the 10 best days over several decades across all of those markets would end up, on average, with about half the balance of someone who sat tight throughout.

So moving to cash right now is just fine as long as you know precisely when to get back into stocks (even though you didn’t know when to get out of them).

At some point, stocks will indeed fall enough that investors will remove the money from their mattresses and put it to work, causing prices to rise significantly. But, as Bonnie A. Hughes, a certified financial planner with the Enrichment Group in Miami, put it to me, there won’t be an e-mail message or news release that goes out when this is about to happen. It will be evident only afterward, on the few days when the market surges.

And it gets worse for those who think they won’t have any trouble investing in stocks again later. Medium- or long-term investors who are considering a big move into cash right now are probably making an emotional decision, at least in part. For those who follow through, the same instincts will probably hurt when trying to figure out when to reinvest in stocks.

“The emotional forces that drove them out of the market aren’t likely to let them back in ‘until things are better,’ ” Dan Danford of the Family Investment Center in St. Joseph, Mo., said in an e-mail message. “And for most people, things won’t feel better again until the market has already moved back up.” In fact, he added, plenty of people may not allow themselves to get back in until the market has already risen significantly. "

Do you agree with the views posted on this article?

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