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?

For the full article, please read on this link.

Buying Opportunity of the Life-time Or Just Sucker's Rally?

Global markets rebounded handsomely today after some great uncertainties in relation to which direction the markets should move, as shown by the intra-day volatility of most Asian markets today.

Fundamental question is, is this a Buying Opportunity of the Life-time Or Just Sucker's Rally?

To recap, a number of financial measures or incentives were handed out by several countries yesterday. For instance:
- UK's £35 billion retail bank rescue funds for HBOS, Royal Bank of Scotland, Lloyds TSB and Barclays;

- A separate financial package included a £50 billion cash injection, guaranteeing interbank lending by £250 billion to help unfreeze wholesale markets, and extending a Bank of England scheme that swaps banks’ risky assets for government debt to provide £200 billion of cash to the system

- European central banks to temporarily guarantee inter-bank lending;

- Australia to fully guarantee all bank deposits

- Plans by U.S. Government to own stakes in U.S Banks;

According to Aaron Task, one should be cautioned the fact that there is still lack of a coordinated global policy response, and the U.S. continuing to lag other nations in taking the most dramatic steps like insuring all bank deposits and directly injecting capital into banks. Secondly, unemployment in U.S may hit 8.5% before the cycle turns. Last but not least, valuations tend to overshoot on the downside and bear markets historically don't end until P/E ratios hit single digits.

Here is a video report of the above discussion.

The Real Economy Tells The Story

This article posted by Down Jones Newswires probably sums it all up after last night's (another) Wall Street plunge and the latest confirmation that Singapore has entered into recession. Here's an extract of the article:

"The financial markets are sucking the oxygen from news headlines right now, but it's worth heeding an economic warning that has just come out of Singapore.

The island state is, like many others, heavily reliant on exports to support the economy, especially things like biotechnology and technology. It is also increasingly trying to be a financial services economy, a regional hub for key banks and brokerages.

Anyone living in Singapore would tell you that things haven't changed measurably. Restaurants are still busy, shops full and taxis impossible to find.

But it's clear that it may not stay this way. The recessionary data show that GDP fell 6.3% on the quarter, compared to a Dow Jones Newswires poll forecast for a 0.3% rise; GDP was down 0.5% on the year, versus a 0.8% rise expected.

Manufacturing output slumped 11.5% on the year; services output was 6.1% higher and construction output added 7.8%, though growth in both these sectors is slowing.

The authorities cut their 2008 growth forecast to 3%, from the prior 4%-5%, after the data were released, while the Monetary Authority of Singapore loosened monetary policy.

We've already had warnings from other parts of Asia. This week, data showed Taiwan exports fell 1.6% in September, the first decline since February 2007 on a fall in exports to China, Southeast Asia and the U.S.

That was a sharp turnaround from August's 18.40% export growth.

Readings on manufacturing meanwhile, via things like PMI data, are showing some weakness - not just in Asia, but in Europe, another key market for exporters.

And the recent monetary policy easing by China - along with other stimulatory measures - show Beijing is growing more concerned about the outlook for growth, even if the economy there is in no risk of falling in a hole.

This week we also had news that customers of iron ore from Australia's Mount Gibson Iron had asked the company to delay shipments in the fiscal second quarter ending Dec. 31.

Analysts called that an ominous signal that falling steel prices and growing iron ore stockpiles in China were set to impact miners.

Last week this column wrote about several economic canaries in the coal mine, including a drop in the Baltic Dry Index of shipping rates.

The Singapore data are enough example of that. The canaries are pretty much slumped at the bottom of their cage right now and gasping for breath - the question is if anyone will notice them amid the panic in the markets.

Of course the financial crisis is itself feeding into economic worries with investors, some of them sitting on major losses in pension and other retirement funds, knuckling down and cutting spending on discretionary items.

For policy makers that makes it ever more important to stop the rot in markets. So far there's been no silver bullet, as even the large, coordinated interest rate cuts made this week by many central banks failed to calm things.

Now there's the chance of even bigger-bang efforts from Friday's meeting of finance ministers and central bankers from the Group of Seven industrialized nations.

There's talk, for example, of officials agreeing to guarantee all interbank lending.

That's an extreme move but one, in the current climate, which may be needed to get liquidity pumping and markets back on their feet.

The downbeat signals coming now from various economies suggest officials can't afford to let the market rout continue, or the chances of a global recession will mount.

They've been deploying bazookas. Now they need to carpet bomb."

Above article is written by Rosalind Mathieson, Asia-Pacific Managing Editor for Market News at Dow Jones Newswires.

Unprecedented Interest Rates Cut

In an unprecedented move, the U.S Federal Reserve announced an emergency interest rate cut by 0.5% in both the Fed Funds rate and discount rate, along with other central banks. European Central Bank, Bank of England, Switzerland, Canada, Sweden and Hong Kong Monetary Authority all cut their official interest rates by 0.5%.

This move followed Australia's move to cut interest rates by 1.0% the day before.

Question is, will this be sufficient to lift the current gloom and doom?

Personally, it still doesn't rectify the fundamental flaw in the current financial systems. However, some small portion of confidence could be restored and hopefully this will strengthen both business and consumer confidence going forward.

How Safe Is Your Money In the Bank?

Given the current crisis surrounding many global financial institutions and their recent collapses and/or near collapses, question must be asked about how safe is it with your money deposited in your local and overseas financial institutions?

Well, for most of the advance and developing countries, the funds in the banks are most likely insured or guaranteed, but subject to a certain limit. In the case of Malaysia, all bank deposits in financial institutions licensed under the Banking and Financial Institutions Act 1989 are automatically insured under the Deposit Insurance Scheme administered by Perbadanan Insurans Deposit Malaysia (PIDM). All financial institutions are automatically registered with PIDM, thus the compulsory deposit insurance which members pay. This covers both commercial either conventional or islamic bankers.

Insurable deposits include:
- All deposit products including current, savings, fixed and investment deposits;
- Certified cheques, bank drafts and other similar payment instructions drawn or made against a deposit account

Non-insurable deposits include:
- Deposits not payable in Malaysia
- Foreign currency deposits

Please take note that the limit for the above guarantee is only up to RM60,000 (US$17,242) per depositor per member institution. This limit covers both principal amount and interests, and applies separately to both conventional and Islamic deposits.

The following financial institutions are however, not covered under the deposit insurance scheme:
- Merchant banks and discount houses (which do not accept retail deposits from the public)
- Overseas branches of domestic financial institutions
- Development financial institutions, including Bank Simpanan Nasional,
Bank Pertanian Malaysia and Bank Kerjasama Rakyat Malaysia Berhad
(which are either backed by Government guarantee or by their status as statutory bodies)
- Insurance companies (which are separately covered under the Insurance Guarantee Scheme Fund established by the Insurance Act 1996)
- All non-bank financial intermediaries such as provident and pension funds, co-operative societies, housing credit institutions and building societies, which are not supervised or regulated by BNM.

For more information on PIDM, please visit this link.

In U.S., the insurance deposit limit per depositor per FDIC-insured bank is US$250,000 for the period from October 3, 2008, through December 31, 2009. Normal coverage is up to US$100,000. For more information, please visit this link.

For European Union, the minimum bank deposit guarantee has just been raised yesterday to euro50,000 (US$68,160). However, not all European countries adopt the same policy.

Why Americans Oppose US$700billion Bailout Plan?

The revised US$700billion bailout plan may stand a chance of revival after all, as the bailout plan passed last night by the Senate and heading toward the House. However, it's pretty obvious to anyone paying attention a majority of Americans oppose the bailout plan. Here are a couple of videos that pretty much sum up why the Americans feel that way.





What do you think?