THE big momentum trade of 2008 is unwinding fast, helping to push battered banking shares upward while adding downward pressure to tumbling oil prices.
The trade, which bet that energy prices would go higher and bank stocks would crater, has created huge volatility on financial markets and helped wreak havoc on pocketbooks and retirement accounts around the world.
When trouble erupted last summer in the US market for home loans and related securities, investors bet the US Federal Reserve chairman Ben Bernanke would be forced to cut interest rates to ease a fast-developing credit crunch.
A lot of the buying seen from late August until early September was all predicated on Bernanke's "new transparency." - Reuters
They also thought lower rates would weaken the US currency and prop up the price of dollar-denominated commodities like oil. And investors bet the credit crisis would simmer for a long time, to the detriment of banks and brokerages.
The bet was dead-on – crude more than doubled from last August as it hit a record high of US$147.90 two weeks ago, and banking shares like Citigroup and Merrill Lynch tumbled 70%.
“A lot of the buying that we had seen from late August and until early September was all predicated on Bernanke’s “new transparency,” basically telling everyone he would cut interest rates early and often,” says Peter Beutel, president of Cameron Hanover, a trading consultancy in New Canaan, Connecticut.
The trade seemed linked; when oil increased, banking shares fell. But two events – one affecting oil; the other, banks – have come to the fore to snap the popular trade.
The first crack appeared after US government data began to show demand for energy was waning, a clear warning that oil prices could not climb forever.
Then on July 13, the US Treasury Department and the Fed moved to shore up Fannie Mae and Freddie Mac.
The trade started to unravel later that week after the Securities and Exchange Commission cracked down on short-selling in financial shares, causing bank stocks to soar.
An unexpected jump in US crude supplies also caused oil prices to fall sharply, forcing traders to reverse bets that oil prices would rise further.
The KBW bank index soared 17.3%, by far the biggest single-day gain since it was started in May 1992.
Brian Gendreau, an investment strategist for ING Investment Management Americas in New York, said the trade got “killed.”
A reversal of the trade has accelerated the recent increase in financial shares and the decline in oil prices, even in the face of some dismal bank results this week.
“A lot of hedge funds, particularly those involved in short trading, had the long-oil/short-financials trade for some time,” says Rick Meckler, president of the hedge fund LibertyView Capital Management in Jersey City, New Jersey.
“So once that trade started to reverse, it has provided particularly strong support even to banks that have had weak quarterly results.”
Crude prices have shed nearly 15% since the price for a barrel of oil peaked, while the KBW bank index of mostly big US banks has shot up more than 45% after sliding to a multidecade low.
The about-face can be seen in the amount of open interest in crude oil futures, which has tumbled to its lowest level since Jan 2, 2007. Open interest refers to contracts that have not been exercised, closed out or allowed to expire.
Open interest for all oil futures contracts on the New York Mercantile Exchange fell to 1.217 million on Tuesday, down from 1.36 million contracts on July 11, when crude oil hit its all-time high.
The drop came as prices for September crude oil settled down US$3.98 at US$124.44 a barrel on Wednesday, amid growing indications that high fuel prices are driving down US demand.
“It is a sure sign of long liquidation; certainly the unwinding of length is pretty obvious,” says Mike Fitzpatrick, vice president of energy risk management for MF Global.
Hedge funds have aggressively driven oil’s rise this year, but institutional investors have gone in the opposite direction, taking profits on equity stakes in energy when prices rose, says Saul Henry, head of US equity strategy at State Street Global Markets.
But in recent weeks, both hedge funds and institutional investors have seemed to anticipate the trend of higher oil prices and sliding bank stocks would reach a limit.
In the six weeks through last week, “hedge funds have not been very aggressively putting those shorts back on in financials,” Henry says. – Reuters
Saturday, July 26, 2008
Thursday, July 24, 2008
Solar cells - Guiding light
Jul 10th 2008
Another new way of turning sunlight into power
THE main impediment to the widespread use of solar power—clouds and nightfall aside—is the cost of the silicon cells that actually convert the sun’s rays into electricity. To keep the expense down, people have been searching for ways to minimise the size of solar panels relative to the amount of light they can harvest. Often, this is done using clunky pieces of kit called solar trackers, which tilt an array of mirrors so as to direct large amounts of sunlight onto small, high-performance cells.
Such trackers, however, are expensive to install and run, and are prone to heat the cells up too much, which reduces their efficiency and may damage them. That, in turn, means the cells have to be fitted with pricey cooling systems. An alternative now being tested is called the luminescent solar concentrator (LSC). Instead of focusing the sun’s rays on a cell, as a solar tracker does, an LSC first traps them, wherever they have come from, and then delivers them to the cell using what is known as a waveguide. No moving parts are involved.
Many researchers around the world are working on LSCs. The latest group to report, in a paper in this week’s Science, is led by Michael Currie and Jonathan Mapel of the Massachusetts Institute of Technology. They reckon they can triple the efficiency of such devices, and thus launch them on the path to success.
A standard LSC is made of a sheet of plastic containing molecules of dye and stretched within a frame that is, in effect, a single long, thin solar cell. The dye absorbs incoming sunlight, and then re-emits it. The re-emitted light is trapped inside the plastic sheet by a process called total internal reflection, which causes it to bounce between the sheet’s surfaces without being able to escape, and thus guides it towards the circumferential solar cell. (Optical fibres work in a similar way.)
Alas, this approach, too, has its limits. In particular, some of the light is reabsorbed as it bounces around, and is lost as heat. The more dye molecules there are, the more light is lost. On the other hand, you want a lot of dye molecules in order to absorb a lot of light in the first place. A difficult balance has to be struck.
Dr Currie and Dr Mapel think they have found a way round this problem and, as a bonus, one that will also make LSCs easier to manufacture. Their answer is to get rid of the plastic sheet. Instead, they spray a sheet of glass with a mixture of dyes combined with a substance called tris(8-hydroxyquinoline) aluminium. In combination, the dyes and the glass act as the waveguide, preventing light from escaping. Meanwhile, the interaction between the different dye molecules and those of the tris(8-hydroxyquinoline) aluminium allows a quantum-mechanical phenomenon, called Förster energy transfer, to come into play. This eliminates the reabsorption loss by ensuring that light is re-emitted at a frequency which the dye molecules cannot then reabsorb.
On top of this—literally—Dr Currie and Dr Mapel have come up with another trick: placing a second sandwich of dye and glass over the first. The upper layer of dye intercepts high-energy light, such as ultraviolet. The lower one captures longer wavelengths that have passed unperturbed through the upper, and also any lower-energy light that has been re-emitted within the top layer and somehow escaped. The upshot is a device that, even as a prototype, converts ten times more of the incident light into electricity than a conventional solar cell—and another contestant in the increasingly crowded race to replace old-fashioned power generation with electricity from the sun.
Another new way of turning sunlight into power
THE main impediment to the widespread use of solar power—clouds and nightfall aside—is the cost of the silicon cells that actually convert the sun’s rays into electricity. To keep the expense down, people have been searching for ways to minimise the size of solar panels relative to the amount of light they can harvest. Often, this is done using clunky pieces of kit called solar trackers, which tilt an array of mirrors so as to direct large amounts of sunlight onto small, high-performance cells.
Such trackers, however, are expensive to install and run, and are prone to heat the cells up too much, which reduces their efficiency and may damage them. That, in turn, means the cells have to be fitted with pricey cooling systems. An alternative now being tested is called the luminescent solar concentrator (LSC). Instead of focusing the sun’s rays on a cell, as a solar tracker does, an LSC first traps them, wherever they have come from, and then delivers them to the cell using what is known as a waveguide. No moving parts are involved.
Many researchers around the world are working on LSCs. The latest group to report, in a paper in this week’s Science, is led by Michael Currie and Jonathan Mapel of the Massachusetts Institute of Technology. They reckon they can triple the efficiency of such devices, and thus launch them on the path to success.
A standard LSC is made of a sheet of plastic containing molecules of dye and stretched within a frame that is, in effect, a single long, thin solar cell. The dye absorbs incoming sunlight, and then re-emits it. The re-emitted light is trapped inside the plastic sheet by a process called total internal reflection, which causes it to bounce between the sheet’s surfaces without being able to escape, and thus guides it towards the circumferential solar cell. (Optical fibres work in a similar way.)
Alas, this approach, too, has its limits. In particular, some of the light is reabsorbed as it bounces around, and is lost as heat. The more dye molecules there are, the more light is lost. On the other hand, you want a lot of dye molecules in order to absorb a lot of light in the first place. A difficult balance has to be struck.
Dr Currie and Dr Mapel think they have found a way round this problem and, as a bonus, one that will also make LSCs easier to manufacture. Their answer is to get rid of the plastic sheet. Instead, they spray a sheet of glass with a mixture of dyes combined with a substance called tris(8-hydroxyquinoline) aluminium. In combination, the dyes and the glass act as the waveguide, preventing light from escaping. Meanwhile, the interaction between the different dye molecules and those of the tris(8-hydroxyquinoline) aluminium allows a quantum-mechanical phenomenon, called Förster energy transfer, to come into play. This eliminates the reabsorption loss by ensuring that light is re-emitted at a frequency which the dye molecules cannot then reabsorb.
On top of this—literally—Dr Currie and Dr Mapel have come up with another trick: placing a second sandwich of dye and glass over the first. The upper layer of dye intercepts high-energy light, such as ultraviolet. The lower one captures longer wavelengths that have passed unperturbed through the upper, and also any lower-energy light that has been re-emitted within the top layer and somehow escaped. The upshot is a device that, even as a prototype, converts ten times more of the incident light into electricity than a conventional solar cell—and another contestant in the increasingly crowded race to replace old-fashioned power generation with electricity from the sun.
Another silicon valley?
Jun 19th 2008
The rise of solar energy, in one form or another
Illustration by Ian Whadcock
WIND power works, and will work better in the future. But wind is only an interim stop on the way to a world where electricity no longer relies on fossil fuels. The ultimate goal is to harvest the sun’s energy directly by intercepting sunlight, rather than by waiting for that sunlight to stir up the atmosphere and sticking turbines in the resulting airstreams.
Fortunately, inventors love that sort of problem. Ideas they have come up with range from using the sun to run simple heating systems for buildings, deploying “reverse radiators” painted black, to the sharpest cutting edge of that trendiest of fields, nanotechnology, to ensure that every last photon is captured and converted into electricity. The most iconic form of solar power, the photovoltaic cell, is currently the fastest-growing type of alternative energy, increasing by 50% a year. The price of the electricity it produces is falling, too. According to Cambridge Energy Research Associates (CERA), an American consultancy run by Daniel Yergin, a kWh of photovoltaic electricity cost 50 cents in 1995. That had fallen to 20 cents in 2005 and is still dropping. Not RE (see article), but heading in the right direction.
Photovoltaic cells (or solar cells, as they are known colloquially) convert sunlight directly into electricity. But that is not the only way to use the sun to make electrical power. It is also possible to concentrate the sun’s rays, use them to boil water and employ the resulting steam to drive a turbine. These two very different approaches illustrate an unresolved question about the future of energy: whether it will be generated centrally and transported over long distances to the consumer, as it has been in recent decades, or generated and consumed in more or less the same place, as it was a century ago.
A hot tin roof
The idea of solar cells is to keep things local. They are like wind turbines, only more so, in that even a single solar panel can produce power immediately. Put a few on your roof and, if you live in a reasonably sunny place, you can cut your electricity bill. Indeed, you may be able to sell electricity back to your own power company. The problem is that at the moment you may need to take out an overdraft to pay for the solar panels, and you will not get your money back for a long time.
Many engineers, however, are working to change that. One of them is Emanuel Sachs of MIT. Some engineers look for big, exciting technological improvements in the way solar cells work, but Dr Sachs prefers incremental change. As he sees it, it is such change that drives Moore’s law, that well-established description of the rapid improvement in the power of computer processors.
Moreover, the analogy is appropriate. Traditional solar cells are made of silicon, like computer chips, and for the same reason. They rely on that element’s properties as a semiconductor, in which negatively charged electrons and positively charged “holes” move around and carry a current as they do so. In the case of a solar cell, the current is created by sunlight knocking electrons out of place and thus creating holes. Dr Sachs’s first contribution to the incremental improvement was a technique called the string ribbon, which halved the amount of silicon needed to make a solar cell by drawing the element (in liquid form) out of a vat between two strings. That invention was marketed by a firm called Evergreen Solar.
His latest venture, a firm called 1366 Technologies (after the number of watts of solar power that strike an average square metre of the Earth’s surface), aims to follow this up with three new ideas that should, in combination, bring about a 27% improvement in efficiency. He and his colleagues have redesigned the surfaces of the silicon crystals on a nanoscale in order to keep reflected light bouncing around inside a cell until it is eventually absorbed. They have also managed to do something similar to the silver wires that collect the current. And they have made the wires themselves thinner as well so that they do not block so much light in the first place.
Dr Sachs says that these innovations will bring the capital cost of solar cells below $2 a watt. That is closing in on the cost of a coal-fired power station: a gigawatt (one billion watt) plant costs about $1 billion to build. The price, of course, is a different matter. As Paula Mints of Navigant Consulting, a firm based in Palo Alto, California, points out, price is set by market conditions. These—particularly the generous subsidies given to solar power in some European countries—have kept prices well above costs in recent years. Nevertheless, as chart 4 shows, the price of solar cells has fallen significantly, too.
Other researchers back a newer technology known as thin-film photovoltaics. Thin-film cells can be made with silicon, but most progress is being made with ones that use mixtures of metals, sometimes exotic ones, as the semiconductor. These mixtures are not as efficient as traditional bulk-silicon cells (meaning that they do not convert as much sunlight to electricity per square metre of cell). But they use far less material, which makes them cheaper, and they can be laid down on flexible surfaces such as sheets of steel the thickness of a human hair, which gives them wider applications.
At the moment, the commercial leader in this area is a firm called First Solar, which uses cadmium telluride as the film. But First Solar is about to be given a run for its money by companies such as Miasolé, a small Californian firm, that have gone for a mixture of copper, indium, gallium and selenium, known as CIGS. This mixture is reckoned to be more efficient than cadmium telluride, though still not as good as traditional silicon. And it has the public-relations advantage of not containing cadmium, a notorious poison—though First Solar’s films carefully lock the cadmium up in a way that renders it harmless.
At the moment thin-film solar cells are being packaged and sold as standard solar panels, but that could easily change. First Solar applies its films to glass, but Miasolé’s boss, Joseph Laia, points out that his steel-based products are flexible and lightweight enough to be used as building materials in their own right. Greener-than-thou Californians who wish to fall in with their governor’s plan for a million solar roofs, announced in 2006, currently have to bolt panels onto their houses—an ugly, if visible, show of their credentials. If Mr Laia has his way, they will soon be able to use sheets of his company’s CIGS-covered steel as the roofing material itself.
Supporters of solar-thermal energy tend to look askance at solar panels. Cadmium telluride and CIGS may be cheaper than silicon, but glass and steel, on which solar-thermal relies, are cheaper still. The technology’s proponents think big: square-kilometres big. They want to fill the deserts with steel and glass mirrors and use the reflected sunlight to boil water and generate electricity, then plug into the long-distance DC networks developed for wind power to carry the juice to the cities.
Desert song
Those who worry about the political side of the world’s dependence on oil will be less than delighted to find that one country thinking seriously about such systems is Algeria. With the power-hungry markets of Europe to its north, across the Mediterranean, and a lot of sunshine going to waste in the Sahara desert to its south, Algeria’s government is looking for ways to connect the two. It is now building an experimental solar-thermal power station at Hassi R’mel, about 400km south of Algiers, which if all goes well will open next year. In April work started on a similar project at Aïn Béni Mathar, in Morocco, and others are in the pipeline elsewhere in north Africa. Fortunately for people like Mr Woolsey, the ex-CIA man, America has deserts of it own which are about to bloom with mirror-farms too.
There are four competing designs: parabolic-trough mirrors, parabolic-dish mirrors, “power towers” which use an array of mirrors to focus the sun’s rays on to an elevated platform, and Fresnel systems, which mimic a parabolic trough using (cheaper) flat mirrors. All either heat up water to make steam, which drives a generator, or heat and liquefy a salt with a low melting point such as sodium nitrate that is used to make steam.
All four of these designs are now either operating commercially in the deserts of south-west America or are undergoing pre-commercial trials. Although the total capacity at the moment, according to CERA, is a mere 400 megawatts, this will grow tenfold over the next four years if all projects now scheduled come to fruition, and probably a lot more after that. Moreover, those plants that melt a salt are able to divert part of the heat they collect into a thermal reservoir that can keep the generators turning at night. The main objection to solar power—that it goes off after sunset—is thus overcome.
From little acorns
The engineers clearly think they can deliver the technology. But can the technology deliver the power? A back-of-the-envelope calculation suggests that it can. Two years ago a task force put together by the governors of America’s western states identified 200 gigawatts-worth of prime sites for solar-thermal power within their territory (meaning places that had enough reliable sunshine, were close to transmission lines and were not environmentally or politically sensitive). That is equivalent to 20% of America’s existing electricity-generation capacity: not a bad start.
Robert Fishman, the boss of Ausra, an Australian-American company based in Palo Alto, California, reckons that his firm’s Fresnel arrays combined with its proprietary heat-storage system can produce electricity for 8 cents a kWh. That matches GE’s wind turbines, and mass production should bring it down further. It is not cheaper than “naked” coal (Ausra will benefit from various state governments’ requirements that their power utilities buy renewable power)—but if there were a carbon tax of $30 a tonne, or a requirement to capture and bury CO2, Ausra would be able to match the coal-fired stations’ prices.
The most intriguing technology of all, though, belongs to SUNRGI, a firm based in Los Angeles. This uses mirrors to concentrate sunlight, but focuses it on a solar cell rather than a boiler. The system is said to turn 37% of the light into electricity. In April the firm claimed it would be able to produce electricity for the magic figure of 5 cents a kWh.
That claim has yet to be put to the test, and should be viewed with some scepticism until it has been. But it is a good indication of the way the field is going. Solar power now seems to be roughly where wind was a decade ago. At the moment it contributes a mere 0.01% to the world’s output of electricity, but just over a decade of 50% annual growth would bring that to 1%, which is where wind is at the moment. If SUNRGI is to be believed, and the point where RE is indeed is close, the rise to 1% might happen even faster. After that, the sky is the limit.
THE FUTURE OF ENERGY- Flights of fancy
Jun 19th 2008
From The Economist print edition
The world of energy must change if things are to continue as before
Illustration by Ian Whadcock
AS SAMUEL GOLDWYN wisely observed, you should never make predictions, especially about the future. As far as predicting the technological future is concerned, people almost always either overshoot or undershoot. Holidays on the moon by 2000, as forecast in the 1960s? Not exactly. A quick hop out of the atmosphere, courtesy of Virgin Galactic, is the limit of that vision for the moment. On the other hand, a seemingly boring way of linking computer files full of data on subatomic physics can turn into a world wide web of information in half a decade.
In retrospect, this special report will no doubt be proved to have been guilty of both over- and undershooting. It has begun from the premise that big changes are afoot in the energy field, and has tried to pick the technologies most likely to be important. Some outcomes are mutually exclusive. A truly electric car would eliminate the need for biofuels, except, perhaps, in aircraft. Truly cheap biofuels might price electric cars out of the market. A breakthrough in the capture and storage of carbon dioxide would bring coal back into play with a vengeance. Geothermal may be better than solar. Solar may be better than wind.
The report has ignored some technologies because they will not get anywhere. Fusion, that favourite of fantasists, is 30 years away, as it always has been and probably always will be. Giant satellites collecting sunlight and beaming the energy to Earth as microwaves are an idea of heroic proportions, but enough sunlight gets through the atmosphere to make them irrelevant. Other technologies may make a contribution, but only on a small scale. The idea of floating platforms that capture wave energy is technically feasible, but it seems more trouble than building wind turbines. Tidal power works but, even more than hydro, it depends on geography. And the idea of liberating hydro from geography with small, free-standing turbines may have local applications, but maintaining such turbines is far more trouble than taking a spanner to a windmill.
All sorts of wacky but intriguing ideas are being looked into, such as flying turbines that would exploit the high winds of the jetstream. And so are perfectly sensible ones, such as ultracapacitors for storing electricity, that are now niche products but might suddenly blossom, to the embarrassment of prophets. Maybe, too, the hydrogen economy will rear its head again—but only if a way can be found of storing the gas easily and at high density. That would require a material that can absorb large volumes of it. One for Dr Gerber’s materials genome project, perhaps.
This report has also ignored the question of efficiency, except in the special context of smart grids. The idea of “negawatts”, as improvements in efficiency are sometimes known, has always been a favourite of greens. But there is too often a gleeful hairshirtedness to their pronouncements, which helps to explain why high-profile changes such as the introduction of energy-efficient light bulbs are viewed cynically by so many people.
In any case, a lot of efficiency improvements just happen in the background, as part of most businesses’ continuous search for cost savings. Car engines, for example, are much more efficient than they used to be, and are likely to become still more so. The reason that American cars are such gas-guzzlers is not that their engines have got worse but that the cars themselves have got heavier.
Besides, as Robert Metcalfe, the networking guru, said at a recent conference: “You are not going to conserve your way out of the problem.” The need to keep doing the same thing—consuming energy in ever larger quantities—is a force for change. Price, political security and environmental pressures are all pushing in the same direction. How quickly that change will happen is hard to tell, but it is wise to remember the power of compound interest.
Sunlit uplands
In some fields, such as information technology, change happens suddenly or not at all. In others, such as energy, it can happen gradually to start with, but as the curve accelerates upward there comes a point where things move very fast. Ten years ago wind turbines were marginal. Now they are taken seriously, and in another decade they may contribute as much as a fifth of the world’s electricity.
The same could happen to solar energy, which is ten years behind wind, and geothermal, with a 20-year lag. Whether it would happen faster if carbon emissions were charged for at an honest price is a moot point. Certainly, that is the only way to bring about the widespread adoption of carbon-dioxide capture and storage. But for the rest, the best way might, paradoxically, be what exists now: a threat that is real enough for electricity generators to price it into their future calculations without affecting their existing plants.
The lack of new coal-fired capacity creates a real opportunity for alternatives, among them renewables. But the lack of an actual carbon price still keeps the cost of existing electricity down, and thus the necessary incentives in place to make Google’s cheaper-than-coal equation a reality.
If and when such cheaper alternatives arrive, the markets of Asia will open and Mr Khosla, an Indian-born American, will see the fruits of his adopted homeland roll out into his native country. It will be a long time before King Coal and Queen Oil are dethroned completely, but their reigns as absolute monarchs of all they survey are coming slowly to an end.
From The Economist print edition
The world of energy must change if things are to continue as before
Illustration by Ian Whadcock
AS SAMUEL GOLDWYN wisely observed, you should never make predictions, especially about the future. As far as predicting the technological future is concerned, people almost always either overshoot or undershoot. Holidays on the moon by 2000, as forecast in the 1960s? Not exactly. A quick hop out of the atmosphere, courtesy of Virgin Galactic, is the limit of that vision for the moment. On the other hand, a seemingly boring way of linking computer files full of data on subatomic physics can turn into a world wide web of information in half a decade.
In retrospect, this special report will no doubt be proved to have been guilty of both over- and undershooting. It has begun from the premise that big changes are afoot in the energy field, and has tried to pick the technologies most likely to be important. Some outcomes are mutually exclusive. A truly electric car would eliminate the need for biofuels, except, perhaps, in aircraft. Truly cheap biofuels might price electric cars out of the market. A breakthrough in the capture and storage of carbon dioxide would bring coal back into play with a vengeance. Geothermal may be better than solar. Solar may be better than wind.
The report has ignored some technologies because they will not get anywhere. Fusion, that favourite of fantasists, is 30 years away, as it always has been and probably always will be. Giant satellites collecting sunlight and beaming the energy to Earth as microwaves are an idea of heroic proportions, but enough sunlight gets through the atmosphere to make them irrelevant. Other technologies may make a contribution, but only on a small scale. The idea of floating platforms that capture wave energy is technically feasible, but it seems more trouble than building wind turbines. Tidal power works but, even more than hydro, it depends on geography. And the idea of liberating hydro from geography with small, free-standing turbines may have local applications, but maintaining such turbines is far more trouble than taking a spanner to a windmill.
All sorts of wacky but intriguing ideas are being looked into, such as flying turbines that would exploit the high winds of the jetstream. And so are perfectly sensible ones, such as ultracapacitors for storing electricity, that are now niche products but might suddenly blossom, to the embarrassment of prophets. Maybe, too, the hydrogen economy will rear its head again—but only if a way can be found of storing the gas easily and at high density. That would require a material that can absorb large volumes of it. One for Dr Gerber’s materials genome project, perhaps.
This report has also ignored the question of efficiency, except in the special context of smart grids. The idea of “negawatts”, as improvements in efficiency are sometimes known, has always been a favourite of greens. But there is too often a gleeful hairshirtedness to their pronouncements, which helps to explain why high-profile changes such as the introduction of energy-efficient light bulbs are viewed cynically by so many people.
In any case, a lot of efficiency improvements just happen in the background, as part of most businesses’ continuous search for cost savings. Car engines, for example, are much more efficient than they used to be, and are likely to become still more so. The reason that American cars are such gas-guzzlers is not that their engines have got worse but that the cars themselves have got heavier.
Besides, as Robert Metcalfe, the networking guru, said at a recent conference: “You are not going to conserve your way out of the problem.” The need to keep doing the same thing—consuming energy in ever larger quantities—is a force for change. Price, political security and environmental pressures are all pushing in the same direction. How quickly that change will happen is hard to tell, but it is wise to remember the power of compound interest.
Sunlit uplands
In some fields, such as information technology, change happens suddenly or not at all. In others, such as energy, it can happen gradually to start with, but as the curve accelerates upward there comes a point where things move very fast. Ten years ago wind turbines were marginal. Now they are taken seriously, and in another decade they may contribute as much as a fifth of the world’s electricity.
The same could happen to solar energy, which is ten years behind wind, and geothermal, with a 20-year lag. Whether it would happen faster if carbon emissions were charged for at an honest price is a moot point. Certainly, that is the only way to bring about the widespread adoption of carbon-dioxide capture and storage. But for the rest, the best way might, paradoxically, be what exists now: a threat that is real enough for electricity generators to price it into their future calculations without affecting their existing plants.
The lack of new coal-fired capacity creates a real opportunity for alternatives, among them renewables. But the lack of an actual carbon price still keeps the cost of existing electricity down, and thus the necessary incentives in place to make Google’s cheaper-than-coal equation a reality.
If and when such cheaper alternatives arrive, the markets of Asia will open and Mr Khosla, an Indian-born American, will see the fruits of his adopted homeland roll out into his native country. It will be a long time before King Coal and Queen Oil are dethroned completely, but their reigns as absolute monarchs of all they survey are coming slowly to an end.
I-Capital views - 24 Jul 2008
Psychological damage to US economy
While the current US housing contraction has caused plenty of fears and worries, its direct impact on the broad US economy has been rather limited. Much of the damage has been at the psychological level.
WHILE the current US housing contraction has caused plenty of fears and worries, not just in the US but throughout the world, most do not realise that the direct impact of the housing contraction on the broad US economy has been rather limited.
A lot of the damage has been at the psychological level.
This is due partly to the fact that house prices, which rose substantially, have been dropping recently.
Another factor has been the constant media attention given to scary forecasts that the current housing contraction is the worst since the 1930 Great Depression and that this time around, it could be heading that way.
Fortunately, the facts of the matter do not support such a negative view.
The chart shows that the single–family housing starts over the last 50 years, a period that covered all kinds of recessions and financial crises.
Some of these recessions and crises were as severe as the current economic situation, while some even more serious and frightening than the current global turbulence.
The 1973-75 recession was very severe and global in nature. All the major economies were very badly hit by the first oil shock. Inflation and interest rates skyrocketed globally.
The economic slump was very severe.
In fact, at that time, it was the worst economic recession since the 1930 Great Depression. Unemployment rate skyrocketed to nearly 9%. In 1973-74, the S&P 500 plunged around 50%. There were bank failures.
The 1980-82 recession was also severe and global in nature. Like the 1973-74 contraction, there were fears and panic everywhere. Mexico defaulted.
It was the start of a global disinflationary phase as the impact of then-US Federal Reserve chairman Paul Volcker’s severe monetary tightening bit. The S&P 500 plunged 30%. The US unemployment rate skyrocketed to double digits.
In contrast, i Capital thinks that what is happening at present is actually very mild.
The unemployment rate is at a healthy 5.4%. While inflation is rising, the cause is cyclical in nature. The S&P 500 cannot even stay in bear market territory.
The rise in oil price, while very substantial, has been spread over eight to 10 years. Of late, interest rate has dropped instead of rise.
US productivity growth has remained impressive unlike in the 70s and 80s.
The present decline in housing starts has been sharp but instead of fearing more declines to come, the plunge is very close to its end.
Most importantly, the recessions in 1973-74 and 1980-82 did not have a fast transforming and developing China. The world economy simply did not have any other major sources of economic growth, unlike nowadays.
i Capital is not even convinced that the US economy is in recession.
Sunday, July 20, 2008
THE FUTURE OF ENERGY - The power and the glory
The next technology boom may well be based on alternative energy, says Geoffrey Carr (interviewed here). But which sort to back?
Illustration by Ian Whadcock
EVERYONE loves a booming market, and most booms happen on the back of technological change. The world’s venture capitalists, having fed on the computing boom of the 1980s, the internet boom of the 1990s and the biotech and nanotech boomlets of the early 2000s, are now looking around for the next one. They think they have found it: energy.
Many past booms have been energy-fed: coal-fired steam power, oil-fired internal-combustion engines, the rise of electricity, even the mass tourism of the jet era. But the past few decades have been quiet on that front. Coal has been cheap. Natural gas has been cheap. The 1970s aside, oil has been cheap. The one real novelty, nuclear power, went spectacularly off the rails. The pressure to innovate has been minimal.
In the space of a couple of years, all that has changed. Oil is no longer cheap; indeed, it has never been more expensive. Moreover, there is growing concern that the supply of oil may soon peak as consumption continues to grow, known supplies run out and new reserves become harder to find.
The idea of growing what you put in the tank of your car, rather than sucking it out of a hole in the ground, no longer looks like economic madness. Nor does the idea of throwing away the tank and plugging your car into an electric socket instead. Much of the world’s oil is in the hands of governments who have little sympathy with the rich West. When a former head of America’s Central Intelligence Agency allies himself with tree-hugging greens that his outfit would once have suspected of subversion, you know something is up. Yet that is one tack James Woolsey is trying in order to reduce his country’s dependence on imported oil.
The price of natural gas, too, has risen in sympathy with oil. That is putting up the cost of electricity. Wind- and solar-powered alternatives no longer look so costly by comparison. It is true that coal remains cheap, and is the favoured fuel for power stations in industrialising Asia. But the rich world sees things differently.
In theory, there is a long queue of coal-fired power stations waiting to be built in America. But few have been completed in the past 15 years and many in that queue have been put on hold or withdrawn, for two reasons. First, Americans have become intolerant of large, polluting industrial plants on their doorsteps. Second, American power companies are fearful that they will soon have to pay for one particular pollutant, carbon dioxide, as is starting to happen in other parts of the rich world. Having invested heavily in gas-fired stations, only to find themselves locked into an increasingly expensive fuel, they do not want to make another mistake.
That has opened up a capacity gap and an opportunity for wind and sunlight. The future price of these resources—zero—is known. That certainty has economic value as a hedge, even if the capital cost of wind and solar power stations is, at the moment, higher than that of coal-fired ones.
The reasons for the boom, then, are tangled, and the way they are perceived may change. Global warming, a long-range phenomenon, may not be uppermost in people’s minds during an economic downturn. High fuel prices may fall as new sources of supply are exploited to fill rising demand from Asia. Security of supply may improve if hostile governments are replaced by friendly ones and sources become more diversified. But none of the reasons is likely to go away entirely.
Global warming certainly will not. “Peak oil”, if oil means the traditional sort that comes cheaply out of holes in the ground, probably will arrive soon. There is oil aplenty of other sorts (tar sands, liquefied coal and so on), so the stuff is unlikely to run out for a long time yet. But it will get more expensive to produce, putting a floor on the price that is way above today’s. And political risk will always be there—particularly for oil, which is so often associated with bad government for the simple reason that its very presence causes bad government in states that do not have strong institutions to curb their politicians.
A prize beyond the dreams of avarice
The market for energy is huge. At present, the world’s population consumes about 15 terawatts of power. (A terawatt is 1,000 gigawatts, and a gigawatt is the capacity of the largest sort of coal-fired power station.) That translates into a business worth $6 trillion a year—about a tenth of the world’s economic output—according to John Doerr, a venture capitalist who is heavily involved in the industry. And by 2050, power consumption is likely to have risen to 30 terawatts.
Scale is one of the important differences between the coming energy boom, if it materialises, and its recent predecessors—particularly those that relied on information technology, a market measured in mere hundreds of billions. Another difference is that new information technologies tend to be disruptive, forcing the replacement of existing equipment, whereas, say, building wind farms does not force the closure of coal-fired power stations.
For both of these reasons, any transition from an economy based on fossil fuels to one based on renewable, alternative, green energy—call it what you will—is likely to be slow, as similar changes have been in the past (see chart 1). On the other hand, the scale of the market provides opportunities for alternatives to prove themselves at the margin and then move into the mainstream, as is happening with wind power at the moment. And some energy technologies do have the potential to be disruptive. Plug-in cars, for example, could be fuelled with electricity at a price equivalent to 25 cents a litre of petrol. That could shake up the oil, carmaking and electricity industries all in one go.
The innovation lull of the past few decades also provides opportunities for technological leapfrogging. Indeed, it may be that the field of energy gives the not-quite-booms in biotechnology and nanotechnology the industrial applications they need to grow really big, and that the three aspiring booms will thus merge into one.
The possibility of thus recapturing the good times of their youth has brought many well-known members of the “technorati” out of their homes in places like Woodside, California. Energy has become supercool. Elon Musk, who co-founded PayPal, has developed a battery-powered sports car. Larry Page and Sergey Brin, the founders of Google, have started an outfit called Google.org that is searching for a way to make renewable energy truly cheaper than coal (or RE
Vinod Khosla, one of the founders of Sun Microsystems, is turning his considerable skills as a venture capitalist towards renewable energy, as are Robert Metcalfe, who invented the ethernet system used to connect computers together in local networks, and Mr Doerr, who works at Kleiner Perkins Caufield & Byers, one of Silicon Valley’s best-known venture-capital firms. Sir Richard Branson, too, is getting in on the act with his Virgin Green Fund.
This renewed interest in energy is bringing forth a raft of ideas, some bright, some batty, that is indeed reminiscent of the dotcom boom. As happened in that boom, most of these ideas will come to naught. But there could just be a PayPal or a Google or a Sun among them.
More traditional companies are also taking an interest. General Electric (GE), a large American engineering firm, already has a thriving wind-turbine business and is gearing up its solar-energy business. The energy researchers at its laboratories in Schenectady, New York, enjoy much of the intellectual freedom associated with start-up firms, combined with a secure supply of money.
Meanwhile, BP and Shell, two of the world’s biggest oil companies, are sponsoring both academic researchers and new, small firms with bright ideas, as is DuPont, one of the biggest chemical companies. Not everyone has joined in. Exxon Mobil, the world’s largest oil company not in government hands, is conspicuously absent. But in many boardrooms renewables are no longer seen as just a way of keeping environmentalists off companies’ backs.
Some people complain that many existing forms of renewable energy rely on subsidies or other forms of special treatment for their viability. On the surface, that is true. Look beneath, though, and the whole energy sector is riddled with subsidies, both explicit and hidden, and costs that are not properly accounted for. Drawing on the work of people like Boyden Gray, a former White House counsel, Mr Woolsey estimates that American oil companies receive preferential treatment from their government worth more than $250 billion a year. And the Intergovernmental Panel on Climate Change (IPCC), a United Nations-appointed group of scientific experts, reckons that fossil fuels should carry a tax of $20-50 for every tonne of carbon dioxide they generate in order to pay for the environmental effects of burning them (hence the fears of the power-generators).
So the subsidies and mandates offered to renewable sources of power such as wind turbines often just level the playing field. It is true that some subsidies amount to unwarranted market-rigging: examples include those handed by cloudy Germany to its solar-power industry and by America to its maize-based ethanol farmers when Brazilian sugar-based ethanol is far cheaper. Others, though, such as a requirement that a certain proportion of electricity be derived from non-fossil-fuel sources, make no attempt to pick particular technological winners. They merely act to stimulate innovation by guaranteeing a market to things that actually work.
If the world were rational, all of these measures would be swept away and replaced by a proper tax on carbon—as is starting to happen in Europe, where the price arrived at by the cap-and-trade system being introduced is close to the IPCC’s recommendation. If that occurred, wind-based electricity would already be competitive with fossil fuels and others would be coming close. Failing that, special treatment for alternatives is probably the least bad option—though such measures need to be crafted in ways that favour neither incumbents nor particular ways of doing things, and need to be withdrawn when they are no longer necessary.
The poor world turns greener too
That, at least, is the view from the rich world. But poorer, rapidly developing countries are also taking more of an interest in renewable energy sources, despite assertions to the contrary by some Western politicians and businessmen. It is true that China is building coal-fired power stations at a blazing rate. But it also has a large wind-generation capacity, which is expected to grow by two-thirds this year, and is the world’s second-largest manufacturer of solar panels—not to mention having the largest number of solar-heated rooftop hot-water systems in its buildings.
Brazil, meanwhile, has the world’s second-largest (just behind America) and most economically honest biofuel industry, which already provides 40% of the fuel consumed by its cars and should soon supply 15% of its electricity, too (through the burning of sugarcane waste). South Africa is leading the effort to develop a new class of safe and simple nuclear reactor—not renewable energy in the strict sense, but carbon-free and thus increasingly welcome. These countries, and others like them, are prepared to look beyond fossil fuels. They will get their energy where they can. So if renewables and other alternatives can compete on cost, the poor and the rich world alike will adopt them.
That, however, requires innovation. Such innovation is most likely to come out of the laboratories of rich countries. At a recent debate at Columbia University, which The Economist helped to organise, Mr Khosla defended the proposition, “The United States will solve the climate-change problem”. The Californian venture capitalist argued that if cheaper alternatives to fossil fuels are developed, simple economics will ensure their adoption throughout the world. He also insisted that the innovation which will create those alternatives will come almost entirely out of America.
As it happens, he lost. But that does not mean he is wrong. There are lots of terawatts to play for and lots of money to be made. And if the planet happens to be saved on the way, that is all to the good.
Fannie Mae and Freddie Mac - End of illusions
A series of articles on the crisis gripping the world economy and global markets starts where it all began—with America’s deeply flawed system of housing finance
Illustration by Bob Venables
THERE is a story about a science professor giving a public lecture on the solar system. An elderly lady interrupts to claim that, contrary to his assertions about gravity, the world travels through the universe on the back of a giant turtle. “But what supports the turtle?” retorts the professor. “You can’t trick me,” says the woman. “It’s turtles all the way down.”
The American financial system has started to look as logical as “turtles all the way down” this week. Only six months ago, politicians were counting on Fannie Mae and Freddie Mac, the country’s mortgage giants, to bolster the housing market by buying more mortgages. Now the rescuers themselves have needed rescuing.
After a headlong plunge in the two firms’ share prices (see chart 1), Hank Paulson, the treasury secretary, felt obliged to make an emergency announcement on July 13th. He will seek Congress’s approval for extending the Treasury’s credit lines to the pair and even buying their shares if necessary. Separately, the Federal Reserve said Fannie and Freddie could get financing at its discount window, a privilege previously available only to banks.
The absurdity of this situation was highlighted by the way the discount window works. The Fed does not just accept any old assets as collateral; it wants assets that are “safe”. As well as Treasury bonds, it is willing to accept paper issued by “government-sponsored enterprises” (GSEs). But the two most prominent GSEs are Fannie Mae and Freddie Mac. In theory, therefore, the two companies could issue their own debt and exchange it for loans from the government—the equivalent of having access to the printing press.
Absurd or not, the rescue package notched up one immediate success. Freddie Mac was able to raise $3 billion in short-term finance on July 14th. But the deal did little to help the share price of either company or indeed of banks, where sentiment was dented by the collapse of IndyMac, a mortgage lender (see article). The next day Moody’s, a rating agency, downgraded both the financial strength and the preferred stock of Fannie and Freddie, making a capital-raising exercise look even more difficult. As a sign of its concern, the Securities and Exchange Commission, America’s leading financial regulator, weighed in with rules restricting the short-selling of shares in Fannie and Freddie.
The whole affair has raised questions about the giant twins. They were set up (see article) to provide liquidity for the housing market by buying mortgages from the banks. They repackaged these loans and used them as collateral for bonds called mortgage-backed securities; they guaranteed buyers of those securities against default.
This model was based on the ability of investors to see through one illusion and boosted by their willingness to believe in another. The illusion that investors saw through was the official line that debt issued by Fannie and Freddie was not backed by the government. No one believed this. Investors felt that the government would not let Fannie and Freddie fail; they have just been proved right.
The belief in the implicit government guarantee allowed the pair to borrow cheaply. This made their model work. They could earn more on the mortgages they bought than they paid to raise money in the markets. Had Fannie and Freddie been hedge funds, this strategy would have been known as a “carry trade”.
It also allowed Fannie and Freddie to operate with tiny amounts of capital. The two groups had core capital (as defined by their regulator) of $83.2 billion at the end of 2007 (see chart 2); this supported around $5.2 trillion of debt and guarantees, a gearing ratio of 65 to one. According to CreditSights, a research group, Fannie and Freddie were counterparties in $2.3 trillion-worth of derivative transactions, related to their hedging activities.
There is no way a private bank would be allowed to have such a highly geared balance sheet, nor would it qualify for the highest AAA credit rating. In a speech to Congress in 2004, Alan Greenspan, then the chairman of the Fed, said: “Without the expectation of government support in a crisis, such leverage would not be possible without a significantly higher cost of debt.” The likelihood of “extraordinary support” from the government is cited by Standard & Poor’s (S&P), a rating agency, in explaining its rating of the firms’ debt.
The illusion investors fell for was the idea that American house prices would not fall across the country. This bolstered the twins’ creditworthiness. Although the two organisations have suffered from regional busts in the past, house prices have not fallen nationally on an annual basis since Fannie was founded in 1938.
Investors have got quite a bit of protection against a housing bust because of the type of deals that Fannie and Freddie guaranteed. The duo focused on mortgages to borrowers with good credit scores and the wherewithal to put down a deposit. This was not subprime lending. Howard Shapiro, an analyst at Fox-Pitt, an investment bank, says the pair’s average loan-to-value ratio at the end of 2007 was 68%; in other words, they could survive a 30% fall in house prices. So far, declared losses on their core portfolios have indeed been small by the standards of many others; in 2008, they are likely to be between 0.1% and 0.2% of assets, according to S&P.
Of course, this strategy only raises another question. Why does America need government-sponsored bodies to back the type of mortgages that were most likely to be repaid? It looks as if their core business is a solution to a non-existent problem.
However, Fannie and Freddie did not stick to their knitting. In the late 1990s they moved heavily into another area: buying mortgage-backed securities issued by others (see chart 3). Again, this was a version of the carry trade: they used their cheap financing to buy higher-yielding assets. In 1998 Freddie owned $25 billion of other securities, according to a report by its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO); by the end of 2007 it had $267 billion. Fannie’s outside portfolio grew from $18.5 billion in 1997 to $127.8 billion at the end of 2007. Although they tended to buy AAA-rated paper, that designation is not as reliable as it used to be, as the credit crunch has shown.
Sometimes the mortgage companies were buying each other’s debt: turtles propping each other up. Although this boosted short-term profits, it did not seem to be part of the duo’s original mission. As Mr Greenspan remarked, these purchases “do not appear needed to supply mortgage market liquidity or to enhance capital markets in the United States”.
Joshua Rosner, an analyst at Graham Fisher, a research firm, who was one of the first to identify the problems in the mortgage market in early 2007, reckons Fannie and Freddie were buying 50% of all “private-label” mortgage-backed securities in some years—that is, those issued by conventional mortgage lenders. This left them exposed to the very subprime assets they were meant to avoid. Although that exposure was small compared with their portfolios, it could have a big impact because they have so little equity as a cushion.
Both companies make a distinction between losses on trading assets (which they take as a hit against profits) and on “available-for-sale” securities which they hold for the longer term and disregard, if they think the losses are temporary. At the end of 2007, according to OFHEO, Fannie had pre-tax losses of this type of $4.8 billion; Freddie’s amounted to $15 billion.
The companies have also been unwilling to accept the pain of market prices in acknowledging delinquent loans. When borrowers fail to keep up payments on mortgages in the pool that supports asset-backed loans, Fannie and Freddie must buy back the loan. But that requires an immediate write-off at a time when the market prices of asset-backed loans are depressed. Instead, the twins sometimes pay the interest into the pool to keep the loans afloat. In Mr Rosner’s view, this merely pushes the losses into the future.
Adding to the complexity is the need for both Fannie and Freddie to insure their portfolios against interest-rate risk—in particular, the danger that borrowers may pay back their loans early, if interest rates fall, leaving the companies with money to reinvest at a lower rate. This risk caused the duo to take huge positions in the derivatives market, and was at the centre of an accounting scandal earlier this decade.
In addition, Fannie and Freddie have bought insurance against borrower defaults when the homebuyer lacks a 20% deposit. But the finances of the mortgage insurers do not look that healthy, which may mean the risk ends up back with the siblings. Just as the rescuers need rescuing, so the insurers may need insuring.
None of these practices seemed to dent the confidence of OFHEO in its charges. The regulator said as recently as July 10th that both Fannie and Freddie had enough capital. Indeed, their capital-adequacy requirement was reduced earlier this year so that they could make more of an effort to bolster the housing market.
Capital offence
By its own measure, OFHEO was right. At the end of the first quarter, the two companies exceeded their minimum capital requirements by $11 billion apiece, according to CreditSights. To fall to the “critical level”, which would require OFHEO to take the agencies into “conservatorship” (a fancy word for nationalisation), CreditSights says Fannie would have to lose $16 billion of capital and Freddie $14 billion. And because neither Fannie nor Freddie has depositors, there is no danger of their suffering a run, as Northern Rock, a British bank, did last year.
So why the crisis? Given the gearing in the businesses, things only need to go slightly wrong for there to be a big problem. Freddie lost $3.5 billion in 2007; Fannie reported a $2.2 billion loss in the first quarter, having lost $2.05 billion last year. Each had credit-related write-downs of between $5 billion and $6 billion last year. On a fair-value basis, which assumes that all assets and liabilities are realised immediately, Freddie had negative net worth of $5.2 billion at the end of the first quarter.
Illustration by Bob VenablesClearly, if the pair continue to lose money for much longer, their capital base will be eroded. And, of course, Congress wanted their businesses to expand—meaning that more, not less, capital would be needed. That would require shareholders to stump up more money. But investors tend to anticipate a big equity-raising by selling the shares, and a falling share price makes an equity issue less likely. The fall was sufficiently speedy in mid-July to prompt Mr Paulson to step in. The stockmarket had called the government’s bluff.
The rescue package may have reassured the creditors but it did not stop the share price of either Fannie or Freddie from falling. After all, the government is likely to extract a heavy penalty from shareholders in return for its support (creditors are another matter, especially as a lot of GSE paper is held by foreign central banks).
Nevertheless the hope is that, if confidence can be restored, Fannie and Freddie can survive without raising capital until market conditions improve. In the short term, as the success of the debt issue on July 14th showed, they should be able to go about their business.
The authorities are keen to avoid nationalisation, which would bring the whole of Fannie’s and Freddie’s debt onto the federal government’s balance sheet. In terms of book-keeping this would almost double the public debt, but that is rather misleading. It would hardly be like issuing $5.2 trillion of new Treasury bonds, because Fannie’s and Freddie’s debt is backed by real assets. Nevertheless, the fear that the taxpayer may have to absorb the GSEs’ debt pushed Treasury bond yields higher. That suggests yet another irony; the debt of the GSEs has been trading as if it were guaranteed by the American government, but the debt of the government was not trading as if Uncle Sam had guaranteed that of the GSEs.
If Congress approves this package, the Fed will have more authority over the agencies. But that will give the central bank another headache. If an institution is struggling, the normal answer is to shrink its activities and wind it down slowly. But that is the last thing that the housing market needs right now.
With the credit crunch, Fannie and Freddie have become more important than ever, financing some 80% of mortgages in January. So they will need to keep lending. Nor is there scope to offload their portfolios of mortgage-backed securities, given that there are scarcely any buyers of such debt. And if the Fed has to worry about safeguarding Fannie and Freddie, can it afford to raise interest rates to combat inflation? American monetary policy may be constrained.
The GSEs are not the only liability for the government. IndyMac’s recent collapse is the latest call on the Federal Deposit Insurance Corporation (FDIC). The FDIC has some $53 billion of assets, so it is better funded than most deposit-insurance schemes. But if enough banks got into trouble, the government would be on the hook for any shortfall. The same is true of the Pension Benefit Guaranty Corporation, which insures private sector benefits, but is already $14 billion in deficit.
In the end, the turtle at the bottom of the pile is the American taxpayer. But that suggests that, if Americans are losing money on their houses, pensions or bank accounts, the right answer is to tax them to pay for it. Perhaps it is no surprise that traders in the credit-default swaps market have recently made bets on the unthinkable: that America may default on its debt.
Turning panic into opportunity
How to tell when markets may have hit bottom
When all around are panicking, smart investors should be cooly asking whether it is time to buy. What signals should they be looking for?
One of the first measures is the VIX, or volatility index, which measures the variability of the American stockmarket. It is trading around the 30 level, or near its peak in March when Bear Stearns had to be rescued.
The theory is that, when volatility is high, markets are usually falling. That is because there is rarely such a thing as a “forced buyer” of shares. But there can be forced sellers, when investors need to dump their holdings to meet margin calls or repay debts. Faced with such selling, marketmakers adjust their prices sharply and that is what creates spikes in the VIX.
The VIX is well above its post-1990 average, according to the Chicago Board Options Exchange, which trades futures and options on the index. But it has yet to reach the heights seen in 2002, or when Long-Term Capital Management, a hedge fund, was being rescued in 1998. Both incidents, which pushed the VIX above 40, proved to be good moments to buy shares on a 12-month view.
A second signal may seem a bit parochial to international readers. It is when the dividend yield on the FTSE All-Share (the broad-based British index) is higher than the yield on ten-year gilts, or government bonds. In other words, investors get paid more to hold equities (with all their growth prospects) than stodgy government bonds. The market passed this threshold on March 12th 2003 for the first time since the late 1950s. To the day, it marked the end of the 2000-2003 global bear market. At the time some commentators said this signal did not matter, since dividends would probably be cut. In fact, the dividend income on the index has almost doubled in the five years since.
As of July 16th, the yield on the All-Share was 4.46% and the ten-year gilt yielded 4.95%. That suggests that a further 10% fall in the stockmarket would do the trick. There is, of course, the risk that dividends will be cut if Britain, or indeed the world, goes into recession. But this crossover is a signal of long-term value. It is highly likely that dividend income will increase by 2018. But it is certain, if you buy a ten-year gilt, that you will get the same nominal income in 2018 as you do now.
Another measure that could make shares attractive is a single-digit price/earnings ratio. Higher inflation tends to drive down p/es, because it leads to more volatile economic conditions. Investors may also be worried that profits are high, relative to GDP, and are thus due for a fall.
But single-digit p/es would compensate investors for those risks. Flip the ratio around and you have the earnings yield, the percentage of the share price that is represented by profits. If the p/e is in single digits, the earnings yield is above 10%. On the latest data, a number of European markets, including Belgium, France, Ireland, Italy, the Netherlands, Spain and Sweden fall into this category; with the DAX on a p/e of 10.6, Germany is not that far away. (Wall Street, by contrast, has still a fair amount to fall on this measure.)
On valuation grounds, therefore, investors should at least be thinking about opening their wallets. Of course, valuation is not the only factor that drives markets, as became clear during the dotcom bubble. Just as prices can be driven far above fair value in periods of euphoria, so they can be driven far below it in periods of fear.
And sentiment is pretty depressed. The latest Merrill Lynch survey of global fund managers, released on July 16th, found that a record number were overweight in their holdings of cash and underweight in shares, and most thought that profit forecasts were far too high. That poll suggests investors are already braced for a good deal of bad news.
What is needed to get markets out of their funk is a catalyst. It would help if the uncertainty cleared. In both 1991 and 2003, markets rallied as wars against Iraq began. That was not because the wars were good news, but because investors had been made so uncertain by the pre-war tensions.
The fundamental problem this time is economic and financial, rather than geopolitical. As well as the credit crunch, investors are worried by the combination of higher-than-expected inflation and slower growth, and the fear that central banks will be seduced into setting monetary policies that are too loose or too tight. So the best news of the week, buried under all the headlines about falling bank share prices, was the sharp drop in the price of oil. A belief that oil could soon be in double, not triple, digits really would be the catalyst for a rally.
When all around are panicking, smart investors should be cooly asking whether it is time to buy. What signals should they be looking for?
One of the first measures is the VIX, or volatility index, which measures the variability of the American stockmarket. It is trading around the 30 level, or near its peak in March when Bear Stearns had to be rescued.
The theory is that, when volatility is high, markets are usually falling. That is because there is rarely such a thing as a “forced buyer” of shares. But there can be forced sellers, when investors need to dump their holdings to meet margin calls or repay debts. Faced with such selling, marketmakers adjust their prices sharply and that is what creates spikes in the VIX.
The VIX is well above its post-1990 average, according to the Chicago Board Options Exchange, which trades futures and options on the index. But it has yet to reach the heights seen in 2002, or when Long-Term Capital Management, a hedge fund, was being rescued in 1998. Both incidents, which pushed the VIX above 40, proved to be good moments to buy shares on a 12-month view.
A second signal may seem a bit parochial to international readers. It is when the dividend yield on the FTSE All-Share (the broad-based British index) is higher than the yield on ten-year gilts, or government bonds. In other words, investors get paid more to hold equities (with all their growth prospects) than stodgy government bonds. The market passed this threshold on March 12th 2003 for the first time since the late 1950s. To the day, it marked the end of the 2000-2003 global bear market. At the time some commentators said this signal did not matter, since dividends would probably be cut. In fact, the dividend income on the index has almost doubled in the five years since.
As of July 16th, the yield on the All-Share was 4.46% and the ten-year gilt yielded 4.95%. That suggests that a further 10% fall in the stockmarket would do the trick. There is, of course, the risk that dividends will be cut if Britain, or indeed the world, goes into recession. But this crossover is a signal of long-term value. It is highly likely that dividend income will increase by 2018. But it is certain, if you buy a ten-year gilt, that you will get the same nominal income in 2018 as you do now.
Another measure that could make shares attractive is a single-digit price/earnings ratio. Higher inflation tends to drive down p/es, because it leads to more volatile economic conditions. Investors may also be worried that profits are high, relative to GDP, and are thus due for a fall.
But single-digit p/es would compensate investors for those risks. Flip the ratio around and you have the earnings yield, the percentage of the share price that is represented by profits. If the p/e is in single digits, the earnings yield is above 10%. On the latest data, a number of European markets, including Belgium, France, Ireland, Italy, the Netherlands, Spain and Sweden fall into this category; with the DAX on a p/e of 10.6, Germany is not that far away. (Wall Street, by contrast, has still a fair amount to fall on this measure.)
On valuation grounds, therefore, investors should at least be thinking about opening their wallets. Of course, valuation is not the only factor that drives markets, as became clear during the dotcom bubble. Just as prices can be driven far above fair value in periods of euphoria, so they can be driven far below it in periods of fear.
And sentiment is pretty depressed. The latest Merrill Lynch survey of global fund managers, released on July 16th, found that a record number were overweight in their holdings of cash and underweight in shares, and most thought that profit forecasts were far too high. That poll suggests investors are already braced for a good deal of bad news.
What is needed to get markets out of their funk is a catalyst. It would help if the uncertainty cleared. In both 1991 and 2003, markets rallied as wars against Iraq began. That was not because the wars were good news, but because investors had been made so uncertain by the pre-war tensions.
The fundamental problem this time is economic and financial, rather than geopolitical. As well as the credit crunch, investors are worried by the combination of higher-than-expected inflation and slower growth, and the fear that central banks will be seduced into setting monetary policies that are too loose or too tight. So the best news of the week, buried under all the headlines about falling bank share prices, was the sharp drop in the price of oil. A belief that oil could soon be in double, not triple, digits really would be the catalyst for a rally.
Thursday, July 10, 2008
Best Books On Investing
Stock Strategies and Analysis
The Intelligent Investor, by Benjamin Graham (Collins, 2005)
First published in 1949, this investment classic has sold millions of copies and is the bible for many value investors.
A quantitative investor at heart, Graham believed that all the qualitative aspects of a company would manifest themselves in the financial statements. By understanding the statements and trends therein, Graham could correctly assess a company's prospects.
The first 10 chapters cover investment basics like investing vs. speculation, stocks vs. bonds, inflation, advisers, "defensive" vs. "enterprising" investing and margin of safety. The last 10 chapters focus on securities analysis for the lay investor and include topics like financial statement analysis, per share earnings and assessing management. Lots of examples are used, and while some may be a bit dated, the key points are driven home. Warren Buffett calls it one of the best investment books ever written.
One Up on Wall Street and Beating the Street, both by Peter Lynch (Simon & Schuster, 2000 and 1994, respectively)
These gems by Peter Lynch, former manager of Fidelity's Magellan Fund (FMAGX), remain best sellers. It's easy to see why.
Well known for his commonsense approach to investing, Lynch believes you don't have to be a professional securities analyst to do well in the marketplace.
The key is to focus on what you know. Instead of investing in the latest Wall Street fad, look around you. Is there a new restaurant chain that's doing well? Is there a company building a new plant or warehouse in your area? Being alert for tipoffs like these can lead to "ten-baggers," stocks that appreciate 10 times.
Once you've found an idea, Lynch shows you how to research it. Know what you own--you should be able to explain a company's prospects to a 12-year-old in less than two minutes. Also, be patient: The big moves in a stock normally come in years three to five. An excellent read.
Common Stocks and Uncommon Profits, by Philip Fisher (Wiley, 2003)
Fisher's qualitative focus nicely complements nicely Graham's quantitative focus. You really need both.
Fisher is one of the original growth-stock investors, and his thesis for accumulating great stock market wealth is to invest in a small portfolio of companies that can grow sales and earnings over many years. If the investment is carefully chosen, you might hold it indefinitely, earning multiples on your investment.
But how does one find such gems?
Fisher provides the answer by listing 15 qualities a company should have to be considered a superior investment. For example: How big is the addressable market, and does the company have the products and infrastructure to capture a reasonable market share? How much does a company spend on research and development as a means of creating new demand once the current product line matures?
Fisher is well known for his "scuttlebutt" approach to answering these questions. This involves speaking with employees (or better yet, ex-employees), customers, vendors and competitors to obtain inside knowledge of a company's prospects. He teaches us the right questions to ask.
Fisher also provides a list of "10 don'ts for investors," which includes such nuggets as "Don't buy promotional companies" and "Don't follow the crowd." A worthwhile read.
Competitive Strategy, by Michael Porter (Free Press, 2004)
Those interested in learning about how to assess companies and industries, and the factors affecting the profitability of each, should read this book.
A Harvard Business School professor, Porter identifies two key sources of competitive advantage as cost leadership (economies of scale, proprietary technology, etc.) and product differentiation (focus on product attributes the buyer sees as most important).
Porter also examines key factors like bargaining power of suppliers, bargaining power of customers, competitive landscape, threat of substitute products/imports, barriers to entry and corporate culture.
His book provides a solid foundation for understanding why some companies create value and do well while others destroy it and fare poorly. It's chock-full of real-life examples that relate theory to real-life situations. Since initial publication in 1980, Porter's book has been used by managers and business students worldwide to help understand the forces behind competition and profitability.
Books on Buffett
Buffett: The Making of an American Capitalist, by Roger Lowenstein (Main Street Books, 1996)
Over 10 years old, this book is still the best biography on Buffett, one of the all-time great investors. Wall Street Journal reporter Roger Lowenstein provides a richly detailed portrayal of the legendary investor in a lively and amusing style that keeps the pages turning.
Lowenstein diligently traces the master's life from early Omaha, Neb., days to his highly successful partnership to his more recent forays into American Express (nyse: AXP - news - people ), GEICO, Cap Cities, Salomon Brothers and others. The man that emerges is smart, ethical, hands-on and has a sense of humor--all qualities Buffett looks for in his own managers.
This is the best type of biography. Lowenstein had no access to Buffett in writing it but overcame that hurdle with exhaustive research, including interviews with many Buffett friends, family members and business associates. Lowenstein then distilled this into a thoughtful, well-written and thorough portrayal of a remarkable man.
This is not a "how to become a better investor like Warren Buffett" book, and readers looking for that will be disappointed. However, the book offers glimpses into Buffett's methods (e.g., be fearful when others are greedy and greedy when others are fearful) and is a worthwhile read for novices and experienced investors alike.
The Money Game, by Adam Smith, aka George W. Goodman (Vintage, 1976)
First published in 1967, Smith's classic is another that has withstood the test of time. It's set in the late 1960s, and Smith portrays an era that's darn close to today's marketplace--markets at all-time highs, gunslinger portfolio managers and a cavalier attitude toward risk. It's fast, funny and very entertaining.
Smith covers such topics as mass psychology, fundamental analysis, technical analysis, equity valuations, mutual funds and more.
In Smith's game, money is how you keep score, and if you're making money, you're winning the game. History is a great teacher, and Smith's book provides many lessons that can be applied by each new generation of investors.
Smith's follow-up books, Super Money and Paper Money, are also very good and spent many months on the best-seller lists.
Reminiscences of a Stock Operator, by Edwin Lefèvre (Wiley, 2006)
For pure entertainment, this book is hard to beat. It was first published in 1923 as a novel. Lefèvre follows the life and times of Larry Livingston, a fictitious name for Jesse Livermore, one of Wall Street's shrewdest traders.
Hugely entertaining, this is an insider's view of the stock market in the wild, unregulated days of the late 1800s and early 1900s. Livermore was a speculator who made and lost several fortunes. He never considered himself an investor and didn't mind being long or short, so long as he was right. Correctly assessing that he would never catch the top or bottom, he would wait for a trend to develop and then jump in. In today's market he'd be called a momentum investor.
What keeps this book so popular after 84 years? Livermore's advice on exploiting fear, greed and the herd mentality are just as relevant today as they were then.
Market Masters
Money Masters of Our Time, by John Train (Collins, 2003)
In the only compilation book on the list, financial writer Train profiles several notable investors: Warren Buffett, Paul Cabot, Phil Caret, Ben Graham, Mark Lightbrown, Peter Lynch, John Neff, Richard Rainwater, Jimmy Rogers, Julian Robertson, George Soros, Michael Steinhardt, John Templeton, Ralph Wanger and Robert Wilson.
Among this list you'll find growth investors, value investors short-sellers, commodity experts and international players. You'll gain solid insights and knowledge from the experience of each and learn what makes them tick.
If you wish to learn more, most have been written about in other works--some included on this list. Train also provides a nice summary of common practices among the group, which is very useful.
The Bond Markets
Strategic Bond Investor, by Anthony Crescenzi (McGraw-Hill, 2002)
Crescenzi, a frequent media commentator, has written a fixed-income bible that merits a place on any serious investor's bookshelf. He really understands the bond market and in plain language provides illuminating explanations of different types of bonds and how they perform in different types of markets.
Crescenzi demystifies yield curves and other indicators that can be used to predict the direction of the economy. Economic reports are examined, including how they can influence bond prices and profit opportunities. Important topics like risks, credit ratings, liquidity and pricing are also covered.
The book makes liberal use of charts, tables and diagrams and provides investors with the tools they need to participate in today's bond markets. Very well organized, the book correctly conveys that bonds can be every bit as exciting as stocks these days.
The Intelligent Investor, by Benjamin Graham (Collins, 2005)
First published in 1949, this investment classic has sold millions of copies and is the bible for many value investors.
A quantitative investor at heart, Graham believed that all the qualitative aspects of a company would manifest themselves in the financial statements. By understanding the statements and trends therein, Graham could correctly assess a company's prospects.
The first 10 chapters cover investment basics like investing vs. speculation, stocks vs. bonds, inflation, advisers, "defensive" vs. "enterprising" investing and margin of safety. The last 10 chapters focus on securities analysis for the lay investor and include topics like financial statement analysis, per share earnings and assessing management. Lots of examples are used, and while some may be a bit dated, the key points are driven home. Warren Buffett calls it one of the best investment books ever written.
One Up on Wall Street and Beating the Street, both by Peter Lynch (Simon & Schuster, 2000 and 1994, respectively)
These gems by Peter Lynch, former manager of Fidelity's Magellan Fund (FMAGX), remain best sellers. It's easy to see why.
Well known for his commonsense approach to investing, Lynch believes you don't have to be a professional securities analyst to do well in the marketplace.
The key is to focus on what you know. Instead of investing in the latest Wall Street fad, look around you. Is there a new restaurant chain that's doing well? Is there a company building a new plant or warehouse in your area? Being alert for tipoffs like these can lead to "ten-baggers," stocks that appreciate 10 times.
Once you've found an idea, Lynch shows you how to research it. Know what you own--you should be able to explain a company's prospects to a 12-year-old in less than two minutes. Also, be patient: The big moves in a stock normally come in years three to five. An excellent read.
Common Stocks and Uncommon Profits, by Philip Fisher (Wiley, 2003)
Fisher's qualitative focus nicely complements nicely Graham's quantitative focus. You really need both.
Fisher is one of the original growth-stock investors, and his thesis for accumulating great stock market wealth is to invest in a small portfolio of companies that can grow sales and earnings over many years. If the investment is carefully chosen, you might hold it indefinitely, earning multiples on your investment.
But how does one find such gems?
Fisher provides the answer by listing 15 qualities a company should have to be considered a superior investment. For example: How big is the addressable market, and does the company have the products and infrastructure to capture a reasonable market share? How much does a company spend on research and development as a means of creating new demand once the current product line matures?
Fisher is well known for his "scuttlebutt" approach to answering these questions. This involves speaking with employees (or better yet, ex-employees), customers, vendors and competitors to obtain inside knowledge of a company's prospects. He teaches us the right questions to ask.
Fisher also provides a list of "10 don'ts for investors," which includes such nuggets as "Don't buy promotional companies" and "Don't follow the crowd." A worthwhile read.
Competitive Strategy, by Michael Porter (Free Press, 2004)
Those interested in learning about how to assess companies and industries, and the factors affecting the profitability of each, should read this book.
A Harvard Business School professor, Porter identifies two key sources of competitive advantage as cost leadership (economies of scale, proprietary technology, etc.) and product differentiation (focus on product attributes the buyer sees as most important).
Porter also examines key factors like bargaining power of suppliers, bargaining power of customers, competitive landscape, threat of substitute products/imports, barriers to entry and corporate culture.
His book provides a solid foundation for understanding why some companies create value and do well while others destroy it and fare poorly. It's chock-full of real-life examples that relate theory to real-life situations. Since initial publication in 1980, Porter's book has been used by managers and business students worldwide to help understand the forces behind competition and profitability.
Books on Buffett
Buffett: The Making of an American Capitalist, by Roger Lowenstein (Main Street Books, 1996)
Over 10 years old, this book is still the best biography on Buffett, one of the all-time great investors. Wall Street Journal reporter Roger Lowenstein provides a richly detailed portrayal of the legendary investor in a lively and amusing style that keeps the pages turning.
Lowenstein diligently traces the master's life from early Omaha, Neb., days to his highly successful partnership to his more recent forays into American Express (nyse: AXP - news - people ), GEICO, Cap Cities, Salomon Brothers and others. The man that emerges is smart, ethical, hands-on and has a sense of humor--all qualities Buffett looks for in his own managers.
This is the best type of biography. Lowenstein had no access to Buffett in writing it but overcame that hurdle with exhaustive research, including interviews with many Buffett friends, family members and business associates. Lowenstein then distilled this into a thoughtful, well-written and thorough portrayal of a remarkable man.
This is not a "how to become a better investor like Warren Buffett" book, and readers looking for that will be disappointed. However, the book offers glimpses into Buffett's methods (e.g., be fearful when others are greedy and greedy when others are fearful) and is a worthwhile read for novices and experienced investors alike.
The Money Game, by Adam Smith, aka George W. Goodman (Vintage, 1976)
First published in 1967, Smith's classic is another that has withstood the test of time. It's set in the late 1960s, and Smith portrays an era that's darn close to today's marketplace--markets at all-time highs, gunslinger portfolio managers and a cavalier attitude toward risk. It's fast, funny and very entertaining.
Smith covers such topics as mass psychology, fundamental analysis, technical analysis, equity valuations, mutual funds and more.
In Smith's game, money is how you keep score, and if you're making money, you're winning the game. History is a great teacher, and Smith's book provides many lessons that can be applied by each new generation of investors.
Smith's follow-up books, Super Money and Paper Money, are also very good and spent many months on the best-seller lists.
Reminiscences of a Stock Operator, by Edwin Lefèvre (Wiley, 2006)
For pure entertainment, this book is hard to beat. It was first published in 1923 as a novel. Lefèvre follows the life and times of Larry Livingston, a fictitious name for Jesse Livermore, one of Wall Street's shrewdest traders.
Hugely entertaining, this is an insider's view of the stock market in the wild, unregulated days of the late 1800s and early 1900s. Livermore was a speculator who made and lost several fortunes. He never considered himself an investor and didn't mind being long or short, so long as he was right. Correctly assessing that he would never catch the top or bottom, he would wait for a trend to develop and then jump in. In today's market he'd be called a momentum investor.
What keeps this book so popular after 84 years? Livermore's advice on exploiting fear, greed and the herd mentality are just as relevant today as they were then.
Market Masters
Money Masters of Our Time, by John Train (Collins, 2003)
In the only compilation book on the list, financial writer Train profiles several notable investors: Warren Buffett, Paul Cabot, Phil Caret, Ben Graham, Mark Lightbrown, Peter Lynch, John Neff, Richard Rainwater, Jimmy Rogers, Julian Robertson, George Soros, Michael Steinhardt, John Templeton, Ralph Wanger and Robert Wilson.
Among this list you'll find growth investors, value investors short-sellers, commodity experts and international players. You'll gain solid insights and knowledge from the experience of each and learn what makes them tick.
If you wish to learn more, most have been written about in other works--some included on this list. Train also provides a nice summary of common practices among the group, which is very useful.
The Bond Markets
Strategic Bond Investor, by Anthony Crescenzi (McGraw-Hill, 2002)
Crescenzi, a frequent media commentator, has written a fixed-income bible that merits a place on any serious investor's bookshelf. He really understands the bond market and in plain language provides illuminating explanations of different types of bonds and how they perform in different types of markets.
Crescenzi demystifies yield curves and other indicators that can be used to predict the direction of the economy. Economic reports are examined, including how they can influence bond prices and profit opportunities. Important topics like risks, credit ratings, liquidity and pricing are also covered.
The book makes liberal use of charts, tables and diagrams and provides investors with the tools they need to participate in today's bond markets. Very well organized, the book correctly conveys that bonds can be every bit as exciting as stocks these days.
In Memoriam - Sir John Templeton
Remembrance
Templeton: Sir Real to the End
Stephane Fitch 07.09.08, 12:17 AM ET
Sir John M. Templeton is gone. The 95-year-old investor and philanthropist died Tuesday at a hospital in Nassau, the Bahamas. For me, the news comes with a real touch of regret.
I’ve been coming to terms with a couple of Templeton’s powerful, simple ideas ever since I interviewed him in the Bahamas seven years ago. I keep a letter he wrote me near my desk. Occasionally I’ve thought about flying down to see him again. Too late now.
The old Tennessean came about as close as anybody can to figuring out the markets. Then he set out to making sense out the rest of life.
Unless you’re a religious scholar or an old-time investor, you may not know Templeton well. He was a mutual funds man. His flagship Templeton Growth Fund returned an average of 14.5% over four decades. And Templeton popularized the idea of overseas investing.
He sold the mutual fund company to Franklin Resources in 1992. He gave up his American citizenship, was knighted by Queen Elizabeth and spent his retirement writing books about spirituality and giving away a fortune to people who advanced our understanding of spiritual matters. Recipients of his respected annual Templeton Prize include Mother Theresa and author Charles Taylor.
I visited Templeton in his home in early October 2001. Thousands of innocent people had just been killed by terrorists in New York, Pennsylvania and Washington, D.C. It was a mad, mixed-up time. Yes, we’d all seen the heroics and humanity that followed the attacks. But there was so much heartbreak and anger. And there was the drumbeat of coming war. People were confused. I certainly was.
Now here I was venturing down to see this revered British knight to bother him for investing tips. The tech bubble had burst, and the rest of the market was plunging, too. Maybe Templeton, who’d always thrived in moments of what he called “maximum pessimism,” could figure out how to make a little money off all the misery.
Templeton and I sat together for perhaps a little over an hour. He sipped a Coca-Cola and talked quietly with me. Just like so many conversations at that time, ours turned to 9/11. He was dismayed by the murderous attacks, he said. But he didn’t hate the 9/11 terrorists. “For 80 years I've tried to train myself to feel unlimited love for every human being on Earth, with never any exception,” he said. Nineteen angry hijackers weren’t going to change that.
If Osama bin Laden and his people were behind the attacks, then they should face justice and perhaps even be executed. But we should pray for them, he said. He seemed genuinely troubled by the bombing in Afghanistan.
It was breathtaking. At a time when people wanted to see great swaths of the Middle East carpet bombed, Templeton was talking about praying for bin Laden and his sympathizers. He wasn’t confused, as I was, about his fellow man.
Then Templeton rattled off a half-dozen investment ideas that later proved to be among the best I’ve written about in a decade at Forbes. He suggested buying stocks in beaten-down developing markets like South Korea and Thailand. Don’t bother with picking them yourself, he said. Buy cheap mutual funds that focus on those markets instead.
Closer to home, he suggested buying U.S. Treasury Strips. These are bonds that pay no interest, just a single balloon payment in an amount equal to the face value of the bond when they mature.
Then came the master stroke: Buy Canadian Strips. In fact, buy them with money borrowed from Japan.
This advice was coming from a guy who was not fond of debt. His house in the Bahamas was paid off. Generally, he explained, going into debt is a bad move. But do it if you’re sure the reward is worth the risk. (It was: two years later, the margin-debt-fueled bet on Canadian Strips had produced an 80% annualized return. All the rest of Templeton’s ideas trounced the markets as well, rising 13% to 30%.)
What, I asked greedily, was his favorite investment metric? Did he have a magic formula, some obscure measure of value that would unlock the secrets of the market to the rest of us mere mortals? He sure did. “It’s the price-earnings ratio,” he said.
Huh? What about growth? Price-earnings ratios, which measure a stock’s price against past earnings per share, can be deceiving, Templeton admitted. So figure out what the company will earn this year or next year, he said. And look at the ratio of price to those future per-share earnings instead.
Then buy the stocks and bonds with the lowest P/E ratios you can. Less than 10 is good. Less than 5 is even better.
Templeton reportedly got his start buying $10,000 worth of stock in 1939, including 34 in bankruptcy. He was fond of buying investments at moments of maximum pessimism, as he called it.
Get that? Love all your fellow men infinitely. Buy your investments at very, very low P/E multiples. Both take courage. Both pay rich rewards.
An art director at Forbes, Steven Ramos, suggested we give my article about Templeton the title, “Sir Real.” After we printed it, Sir John wrote me to say that he was especially pleased with that title. “It will be a pleasure to have you visit me in the Bahamas,” he wrote, “in the future.”
It’s a trip I’ve made in my imagination many times.
Templeton Saw It Coming
Matthew Kirdahy, 07.08.08, 4:55 PM ET
Sir John Templeton
Right now, amid all the doom and gloom, is when John Templeton would've made his move.You might even say he saw it coming.
Templeton, a pioneer in global investing, died Tuesday at age 95. Four years earlier, he laid out a strikingly accurate prognosis for the U.S. economy for Forbes Magazine. (See "An Investment Legend's Advice")
In February 2004, Templeton, a true contrarian, told Forbes that his chief concern was the U.S. consumer. He said Americans had taken on too much credit-card and mortgage debt. Templeton even said home prices would fall and defaults rise. "When I was young, in the three years after 1929, a high proportion of people lost their homes in foreclosure," he said. "It's likely to happen again. It's not abnormal. It's cyclical, and it will put pressure on all prices."
It's also when opportunity knocks.
Templeton always looked for "maximum pessimism," according to a 2001 Forbes report. (See "Sir Real") He got rich by buying when everyone else was selling. He won big buying Ford Motor when the automaker's finances were reeling in 1978. He poured money into Peru when it was still awash in communists in the 1980s. He shorted dozens of technology stocks in 2000 when they were still strong.
Templeton was so good at what he did you'd think it was his one true love. Maybe not.
He started his career on Wall Street in 1937 and went on to create several successful international funds. In 1954, Templeton established his growth fund that invested in emerging markets. He ultimately sold the Templeton Funds empire in 1992 to Franklin Resources to devote his time and fortune elsewhere.
Away from being a market soothsayer and fund manager, Templeton was also a stalwart Presbyterian and philanthropist. In 1987, he started the John Templeton Foundation, the success of which made him an honorary knight bachelor by Queen Elizabeth II. The foundation was established to invest in spirituality. It was Templeton's mission to bolster spiritual thinking and research through donations to institutions that explored the laws of nature and the universe.
Templeton's philantrhopic endeavors and vast business knowledge gave people hope. He likely would've been able to give Wall Street some now
Templeton: Sir Real to the End
Stephane Fitch 07.09.08, 12:17 AM ET
Sir John M. Templeton is gone. The 95-year-old investor and philanthropist died Tuesday at a hospital in Nassau, the Bahamas. For me, the news comes with a real touch of regret.
I’ve been coming to terms with a couple of Templeton’s powerful, simple ideas ever since I interviewed him in the Bahamas seven years ago. I keep a letter he wrote me near my desk. Occasionally I’ve thought about flying down to see him again. Too late now.
The old Tennessean came about as close as anybody can to figuring out the markets. Then he set out to making sense out the rest of life.
Unless you’re a religious scholar or an old-time investor, you may not know Templeton well. He was a mutual funds man. His flagship Templeton Growth Fund returned an average of 14.5% over four decades. And Templeton popularized the idea of overseas investing.
He sold the mutual fund company to Franklin Resources in 1992. He gave up his American citizenship, was knighted by Queen Elizabeth and spent his retirement writing books about spirituality and giving away a fortune to people who advanced our understanding of spiritual matters. Recipients of his respected annual Templeton Prize include Mother Theresa and author Charles Taylor.
I visited Templeton in his home in early October 2001. Thousands of innocent people had just been killed by terrorists in New York, Pennsylvania and Washington, D.C. It was a mad, mixed-up time. Yes, we’d all seen the heroics and humanity that followed the attacks. But there was so much heartbreak and anger. And there was the drumbeat of coming war. People were confused. I certainly was.
Now here I was venturing down to see this revered British knight to bother him for investing tips. The tech bubble had burst, and the rest of the market was plunging, too. Maybe Templeton, who’d always thrived in moments of what he called “maximum pessimism,” could figure out how to make a little money off all the misery.
Templeton and I sat together for perhaps a little over an hour. He sipped a Coca-Cola and talked quietly with me. Just like so many conversations at that time, ours turned to 9/11. He was dismayed by the murderous attacks, he said. But he didn’t hate the 9/11 terrorists. “For 80 years I've tried to train myself to feel unlimited love for every human being on Earth, with never any exception,” he said. Nineteen angry hijackers weren’t going to change that.
If Osama bin Laden and his people were behind the attacks, then they should face justice and perhaps even be executed. But we should pray for them, he said. He seemed genuinely troubled by the bombing in Afghanistan.
It was breathtaking. At a time when people wanted to see great swaths of the Middle East carpet bombed, Templeton was talking about praying for bin Laden and his sympathizers. He wasn’t confused, as I was, about his fellow man.
Then Templeton rattled off a half-dozen investment ideas that later proved to be among the best I’ve written about in a decade at Forbes. He suggested buying stocks in beaten-down developing markets like South Korea and Thailand. Don’t bother with picking them yourself, he said. Buy cheap mutual funds that focus on those markets instead.
Closer to home, he suggested buying U.S. Treasury Strips. These are bonds that pay no interest, just a single balloon payment in an amount equal to the face value of the bond when they mature.
Then came the master stroke: Buy Canadian Strips. In fact, buy them with money borrowed from Japan.
This advice was coming from a guy who was not fond of debt. His house in the Bahamas was paid off. Generally, he explained, going into debt is a bad move. But do it if you’re sure the reward is worth the risk. (It was: two years later, the margin-debt-fueled bet on Canadian Strips had produced an 80% annualized return. All the rest of Templeton’s ideas trounced the markets as well, rising 13% to 30%.)
What, I asked greedily, was his favorite investment metric? Did he have a magic formula, some obscure measure of value that would unlock the secrets of the market to the rest of us mere mortals? He sure did. “It’s the price-earnings ratio,” he said.
Huh? What about growth? Price-earnings ratios, which measure a stock’s price against past earnings per share, can be deceiving, Templeton admitted. So figure out what the company will earn this year or next year, he said. And look at the ratio of price to those future per-share earnings instead.
Then buy the stocks and bonds with the lowest P/E ratios you can. Less than 10 is good. Less than 5 is even better.
Templeton reportedly got his start buying $10,000 worth of stock in 1939, including 34 in bankruptcy. He was fond of buying investments at moments of maximum pessimism, as he called it.
Get that? Love all your fellow men infinitely. Buy your investments at very, very low P/E multiples. Both take courage. Both pay rich rewards.
An art director at Forbes, Steven Ramos, suggested we give my article about Templeton the title, “Sir Real.” After we printed it, Sir John wrote me to say that he was especially pleased with that title. “It will be a pleasure to have you visit me in the Bahamas,” he wrote, “in the future.”
It’s a trip I’ve made in my imagination many times.
Templeton Saw It Coming
Matthew Kirdahy, 07.08.08, 4:55 PM ET
Sir John Templeton
Right now, amid all the doom and gloom, is when John Templeton would've made his move.You might even say he saw it coming.
Templeton, a pioneer in global investing, died Tuesday at age 95. Four years earlier, he laid out a strikingly accurate prognosis for the U.S. economy for Forbes Magazine. (See "An Investment Legend's Advice")
In February 2004, Templeton, a true contrarian, told Forbes that his chief concern was the U.S. consumer. He said Americans had taken on too much credit-card and mortgage debt. Templeton even said home prices would fall and defaults rise. "When I was young, in the three years after 1929, a high proportion of people lost their homes in foreclosure," he said. "It's likely to happen again. It's not abnormal. It's cyclical, and it will put pressure on all prices."
It's also when opportunity knocks.
Templeton always looked for "maximum pessimism," according to a 2001 Forbes report. (See "Sir Real") He got rich by buying when everyone else was selling. He won big buying Ford Motor when the automaker's finances were reeling in 1978. He poured money into Peru when it was still awash in communists in the 1980s. He shorted dozens of technology stocks in 2000 when they were still strong.
Templeton was so good at what he did you'd think it was his one true love. Maybe not.
He started his career on Wall Street in 1937 and went on to create several successful international funds. In 1954, Templeton established his growth fund that invested in emerging markets. He ultimately sold the Templeton Funds empire in 1992 to Franklin Resources to devote his time and fortune elsewhere.
Away from being a market soothsayer and fund manager, Templeton was also a stalwart Presbyterian and philanthropist. In 1987, he started the John Templeton Foundation, the success of which made him an honorary knight bachelor by Queen Elizabeth II. The foundation was established to invest in spirituality. It was Templeton's mission to bolster spiritual thinking and research through donations to institutions that explored the laws of nature and the universe.
Templeton's philantrhopic endeavors and vast business knowledge gave people hope. He likely would've been able to give Wall Street some now
Patience still key in bear markets
The Guardian, Wednesday July 9, 2008
Buy when there is blood on the streets, advised Sir John Templeton, the celebrated investor and philanthropist whose death at the age of 95 was announced yesterday. It is excellent advice, as Templeton proved time and again, and a few market shrewdies are asking whether current conditions are sufficiently bloody to be tempting.
Bad news arrives daily. Choose your own lowlight: the Marks & Spencer profits warning; the frantic attempts to refinance Bradford & Bingley; the desperate plight of the housebuilders, now cutting jobs by the thousand; the collapse in advertising revenues reported by Trinity Mirror; and the warning yesterday from Savills that the credit squeeze is now hitting property markets in continental Europe and Asia.
The bigger picture is equally gloomy. Business confidence, house prices and retail sales are falling. Even the UK manufacturing sector - the last bright spark in the economy - has turned downwards. And now the US Federal Reserve tells us that emergency lending facilities for Wall Street investment banks will remain open until 2009. A few might regard the Fed's action as good news (Wall Street was undecided yesterday), but the real message is surely that the financial emergency isn't over.
Those looking for light at the end of the tunnel have to squint very hard indeed. Their best idea is that the commodities boom may be about to end. You can see it in the miners' share prices: Rio Tinto, for example, was down 5.6% yesterday and is now 23% below its peak. Bad news for Rio, but maybe better news for everybody else if the implication is that the price of raw materials is set to fall.
That might relieve inflationary pressures, and so allow central banks to deliver the cuts in interest rates that the UK economy, in particular, would seem to need to avoid recession.
The problem with this call is that it feels terribly early. The price of oil may have fallen in the past few days but, at $138 (£70) a barrel, it is still blowing inflation through the global economy. A return to $100 seems a reasonable punt - after all, the price is now affecting demand - but it hasn't happened yet. Even if it does, it will take time to feed into the inflation numbers.
In the meantime, a lot can happen. It is too easy to imagine another round of write-downs and bad debts at the banks. Where are the credit card defaults? Hardly anybody has mentioned them, but they must be coming. The decline in property prices looks only to have begun. Will it be 10% in the UK or 20%, or even 30%?
It's encouraging that market analysts at Morgan Stanley can publish a piece called "the big snapback may not be far away". Closer inspection, however, reveals they are talking about rotation between sectors, not the market itself. Their model on market timing - which has had a splendid record over the past year - is not yet signalling a buying opportunity. Patience, as they say, remains key in bear markets.
1913 thesis
Could today's annual meeting of the London Stock Exchange be the last one at which the chief executive, Dame Clara Furse, can boast a market share of more than 50% of the shares traded in London?
A look at the LSE's own share price suggests a few people think the answer is "yes". From almost £20 at the turn of the year, the LSE stands at 671p. Bear markets are terrible for stock exchanges - flotations dry up and the value of the shares being traded falls - but a decline in value of two-thirds in six months suggests a serious loss of confidence.
This is strange in one sense. There has been plenty of time to assess the LSE's chances of retaining its current slice of the pie - about 70%. The arrival of competition has hardly been a secret. The fact that Turquoise, the venture backed by the big investment banks, is within a month or two of its launch should not have induced panic. The rival Chi-X platform is up and running and the LSE's volumes haven't gone into freefall.
Yet the revolutionaries will talk. At a presentation yesterday, Simon Brickles of Plus Markets, who has been sniping away at the LSE for years in small and mid-sized stocks, compared Europe's incumbent stock exchanges with Europe's royal families in 1913. They thought their privileged world would never change, and then it did.
The next year will reveal whether the 1913 thesis is correct. For Furse, the stakes could not be higher. Her critics say she should have sold the LSE when she could; that strategic partnerships overseas should have been struck; that the merger with Borsa Italiana was a sideshow. But the coming scrap in her backyard is the big one. The share price looks wrong - but which way?
You want a guess? Don't write off Clara yet. The revolution will take time.
Buy when there is blood on the streets, advised Sir John Templeton, the celebrated investor and philanthropist whose death at the age of 95 was announced yesterday. It is excellent advice, as Templeton proved time and again, and a few market shrewdies are asking whether current conditions are sufficiently bloody to be tempting.
Bad news arrives daily. Choose your own lowlight: the Marks & Spencer profits warning; the frantic attempts to refinance Bradford & Bingley; the desperate plight of the housebuilders, now cutting jobs by the thousand; the collapse in advertising revenues reported by Trinity Mirror; and the warning yesterday from Savills that the credit squeeze is now hitting property markets in continental Europe and Asia.
The bigger picture is equally gloomy. Business confidence, house prices and retail sales are falling. Even the UK manufacturing sector - the last bright spark in the economy - has turned downwards. And now the US Federal Reserve tells us that emergency lending facilities for Wall Street investment banks will remain open until 2009. A few might regard the Fed's action as good news (Wall Street was undecided yesterday), but the real message is surely that the financial emergency isn't over.
Those looking for light at the end of the tunnel have to squint very hard indeed. Their best idea is that the commodities boom may be about to end. You can see it in the miners' share prices: Rio Tinto, for example, was down 5.6% yesterday and is now 23% below its peak. Bad news for Rio, but maybe better news for everybody else if the implication is that the price of raw materials is set to fall.
That might relieve inflationary pressures, and so allow central banks to deliver the cuts in interest rates that the UK economy, in particular, would seem to need to avoid recession.
The problem with this call is that it feels terribly early. The price of oil may have fallen in the past few days but, at $138 (£70) a barrel, it is still blowing inflation through the global economy. A return to $100 seems a reasonable punt - after all, the price is now affecting demand - but it hasn't happened yet. Even if it does, it will take time to feed into the inflation numbers.
In the meantime, a lot can happen. It is too easy to imagine another round of write-downs and bad debts at the banks. Where are the credit card defaults? Hardly anybody has mentioned them, but they must be coming. The decline in property prices looks only to have begun. Will it be 10% in the UK or 20%, or even 30%?
It's encouraging that market analysts at Morgan Stanley can publish a piece called "the big snapback may not be far away". Closer inspection, however, reveals they are talking about rotation between sectors, not the market itself. Their model on market timing - which has had a splendid record over the past year - is not yet signalling a buying opportunity. Patience, as they say, remains key in bear markets.
1913 thesis
Could today's annual meeting of the London Stock Exchange be the last one at which the chief executive, Dame Clara Furse, can boast a market share of more than 50% of the shares traded in London?
A look at the LSE's own share price suggests a few people think the answer is "yes". From almost £20 at the turn of the year, the LSE stands at 671p. Bear markets are terrible for stock exchanges - flotations dry up and the value of the shares being traded falls - but a decline in value of two-thirds in six months suggests a serious loss of confidence.
This is strange in one sense. There has been plenty of time to assess the LSE's chances of retaining its current slice of the pie - about 70%. The arrival of competition has hardly been a secret. The fact that Turquoise, the venture backed by the big investment banks, is within a month or two of its launch should not have induced panic. The rival Chi-X platform is up and running and the LSE's volumes haven't gone into freefall.
Yet the revolutionaries will talk. At a presentation yesterday, Simon Brickles of Plus Markets, who has been sniping away at the LSE for years in small and mid-sized stocks, compared Europe's incumbent stock exchanges with Europe's royal families in 1913. They thought their privileged world would never change, and then it did.
The next year will reveal whether the 1913 thesis is correct. For Furse, the stakes could not be higher. Her critics say she should have sold the LSE when she could; that strategic partnerships overseas should have been struck; that the merger with Borsa Italiana was a sideshow. But the coming scrap in her backyard is the big one. The share price looks wrong - but which way?
You want a guess? Don't write off Clara yet. The revolution will take time.
Monday, July 7, 2008
Asia's exporters suffer as global demand weakens
Reuters, Sunday July 6 2008 By Alison Leung
HONG KONG, July 6 (Reuters) - Cliff Sun is hurting.
The 54-year-old chief executive of Kin Hip Metal Plastics had spent much of the past year grappling with rising labour and material costs in China and a strengthening yuan.
Now that the U.S. consumer juggernaut is slowing, he's throwing in the towel and relocating inland from coastal southern China.
"If we don't cut margins or even take small losses these days, we're just not able to get the same level of orders," said the former chairman of the Hong Kong Exporters' Association.
"We're facing a bitter, cold winter ahead."
Sun and others that collectively make up Asia's mighty export engine face a difficult second half with Asia's central banks now ready to sacrifice growth to combat food- and oil-based inflation and with Europe no longer taking up the slack amid downward-spiralling U.S. consumption.
The worst is yet to come. Exports make up 10 percent of China's gross domestic product and up to 30 percent for externally vulnerable economies like Hong Kong and Singapore.
Asia -- much of which had remained resilient in the face of the U.S. downturn -- and China are expected to decelerate with interest rates on the rise, inflation mounting and oil at $145 a barrel.
Toyota Motor <7203.T>, the world's top carmaker, said it could fall short of its U.S. sales target this year as high gasoline prices and a sluggish economy cut into demand.
Deutsche Bank estimates some 20 percent of China's low-end exporters will go belly-up this year.
Foxconn <2038.HK>, the world's top contract manufacturer of cellphones for Motorola and Nokia , lost two-fifths of its value in the past two months on fears that slowing global demand will hit its earnings.
And Japanese exports to the United States fell for a ninth straight month in May, while shipments to the European Union -- which had been holding up well -- recorded their first annual drop in more than two years.
"The Euro area and Japan are decelerating and that's really bad news for Asian exporters," said David Fernandez, Head of Economic and Sovereign Research at JP Morgan.
Hong Kong's exports to the United States -- much of which originates in China, the world's workshop -- fell 1.5 percent year on year in the first 5 months. Exports to the United States from South Korea shrank 0.3 percent in January to May.
"By the year's end and early next year, Asian demand should start to slow," said Daiwa economist Kevin Lai.
WHAT TO BUY?
Analysts and fund managers reckon firms with established brands, which own technology higher up the value chain or enjoy large cash balances -- such as Samsung Eelctronics <005930.KS> or Taiwan Semiconductor Manufacturing Corp <2330.TW> -- will fare better in this environment.
"Slowdowns are sometimes a double-edged sword that can benefit outsourcing. So for Taiwan tech this year, export growth is still in the double digits and the fundamentals remain quite solid," said Kevin Chang, an analyst at Yuantai Securities.
Old-economy exporters that need intensive labour, energy or raw materials, such as garment, car and cellphone makers, are more vulnerable to inflating costs and shrinking demand.
Other firms, far from fighting a holding action, might spot an opportunity to expand through acquisitions in a down market.
"If the company has net cash or low debt, they've got flexibility and will not be forced into making any foolish business decisions," said Hugh Young, Managing Director at Aberdeen Asset Management, which has $40 billion in Asian equities.
They "might have a golden opportunity to buy one of its competitors at rock-bottom price."
Energy-saving devices maker Computime Group Ltd <0320.HK>, which ships about half its goods U.S.-ward, has stepped up efforts to enhance technology with automation and by slashingh staff.
"We'll focus on our brand and outsource to Vietnam, Mexico and east Europe," said chief executive Bernard Auyang.
SHARES
Weak U.S. sentiment has knocked down many top Asian exporters in the past three months with U.S.-focused trading firm Li & Fung <0494.HK> plunging 23 percent. LG Electronics <066570.KS> dropped 16 percent and TSMC fell 8 percent in the same period.
But there's hope yet. Some economists say Asian countries are still posting good growth, surprising the market on the upside.
China, which became the top exporter to the United States alongside Canada in 2007, accounts for 8.8 percent of world exports. Its total exports rose 28 percent in May, beating forecasts of 20 percent.
But the question is how bad it will get.
Toyota expects U.S. vehicle sales, which plunged to a 15-year low in June, to bottom and foresees a modest recovery in 2009.
JP Morgan sees Euro zone growth sliding to under 1 percent by mid-year from 3.2 percent in the first quarter and Japan easing to 1 percent, with downside risk, in the second half.
And China, whose appetite for everything from oil to electronics has bolstered many Asian exporters, could hike rates several times more to curb inflation at a decade's high.
"I believe one-third or even half of the manufacturers in Guangdong will either close or relocate in the next few years to lower cost areas," said Kin Hip's Sun, who claims his "Kinox" brand can be found on 70 percent of U.S. coffee containers. (Additional reporting by Joseph Chaney in Taipei, Yoo Choon-sik in Seoul and Nathan Layne in Tokyo) (Editing by Edwin Chan & Kim Coghill)
HONG KONG, July 6 (Reuters) - Cliff Sun is hurting.
The 54-year-old chief executive of Kin Hip Metal Plastics had spent much of the past year grappling with rising labour and material costs in China and a strengthening yuan.
Now that the U.S. consumer juggernaut is slowing, he's throwing in the towel and relocating inland from coastal southern China.
"If we don't cut margins or even take small losses these days, we're just not able to get the same level of orders," said the former chairman of the Hong Kong Exporters' Association.
"We're facing a bitter, cold winter ahead."
Sun and others that collectively make up Asia's mighty export engine face a difficult second half with Asia's central banks now ready to sacrifice growth to combat food- and oil-based inflation and with Europe no longer taking up the slack amid downward-spiralling U.S. consumption.
The worst is yet to come. Exports make up 10 percent of China's gross domestic product and up to 30 percent for externally vulnerable economies like Hong Kong and Singapore.
Asia -- much of which had remained resilient in the face of the U.S. downturn -- and China are expected to decelerate with interest rates on the rise, inflation mounting and oil at $145 a barrel.
Toyota Motor <7203.T>, the world's top carmaker, said it could fall short of its U.S. sales target this year as high gasoline prices and a sluggish economy cut into demand.
Deutsche Bank estimates some 20 percent of China's low-end exporters will go belly-up this year.
Foxconn <2038.HK>, the world's top contract manufacturer of cellphones for Motorola and Nokia , lost two-fifths of its value in the past two months on fears that slowing global demand will hit its earnings.
And Japanese exports to the United States fell for a ninth straight month in May, while shipments to the European Union -- which had been holding up well -- recorded their first annual drop in more than two years.
"The Euro area and Japan are decelerating and that's really bad news for Asian exporters," said David Fernandez, Head of Economic and Sovereign Research at JP Morgan.
Hong Kong's exports to the United States -- much of which originates in China, the world's workshop -- fell 1.5 percent year on year in the first 5 months. Exports to the United States from South Korea shrank 0.3 percent in January to May.
"By the year's end and early next year, Asian demand should start to slow," said Daiwa economist Kevin Lai.
WHAT TO BUY?
Analysts and fund managers reckon firms with established brands, which own technology higher up the value chain or enjoy large cash balances -- such as Samsung Eelctronics <005930.KS> or Taiwan Semiconductor Manufacturing Corp <2330.TW> -- will fare better in this environment.
"Slowdowns are sometimes a double-edged sword that can benefit outsourcing. So for Taiwan tech this year, export growth is still in the double digits and the fundamentals remain quite solid," said Kevin Chang, an analyst at Yuantai Securities.
Old-economy exporters that need intensive labour, energy or raw materials, such as garment, car and cellphone makers, are more vulnerable to inflating costs and shrinking demand.
Other firms, far from fighting a holding action, might spot an opportunity to expand through acquisitions in a down market.
"If the company has net cash or low debt, they've got flexibility and will not be forced into making any foolish business decisions," said Hugh Young, Managing Director at Aberdeen Asset Management, which has $40 billion in Asian equities.
They "might have a golden opportunity to buy one of its competitors at rock-bottom price."
Energy-saving devices maker Computime Group Ltd <0320.HK>, which ships about half its goods U.S.-ward, has stepped up efforts to enhance technology with automation and by slashingh staff.
"We'll focus on our brand and outsource to Vietnam, Mexico and east Europe," said chief executive Bernard Auyang.
SHARES
Weak U.S. sentiment has knocked down many top Asian exporters in the past three months with U.S.-focused trading firm Li & Fung <0494.HK> plunging 23 percent. LG Electronics <066570.KS> dropped 16 percent and TSMC fell 8 percent in the same period.
But there's hope yet. Some economists say Asian countries are still posting good growth, surprising the market on the upside.
China, which became the top exporter to the United States alongside Canada in 2007, accounts for 8.8 percent of world exports. Its total exports rose 28 percent in May, beating forecasts of 20 percent.
But the question is how bad it will get.
Toyota expects U.S. vehicle sales, which plunged to a 15-year low in June, to bottom and foresees a modest recovery in 2009.
JP Morgan sees Euro zone growth sliding to under 1 percent by mid-year from 3.2 percent in the first quarter and Japan easing to 1 percent, with downside risk, in the second half.
And China, whose appetite for everything from oil to electronics has bolstered many Asian exporters, could hike rates several times more to curb inflation at a decade's high.
"I believe one-third or even half of the manufacturers in Guangdong will either close or relocate in the next few years to lower cost areas," said Kin Hip's Sun, who claims his "Kinox" brand can be found on 70 percent of U.S. coffee containers. (Additional reporting by Joseph Chaney in Taipei, Yoo Choon-sik in Seoul and Nathan Layne in Tokyo) (Editing by Edwin Chan & Kim Coghill)
Wednesday, July 2, 2008
The Three "Bedrock" Ideas Behind Warren Buffett's Billions
Tuesday, 27 May 2008
Posted By:Alex Crippen
Topics:Stock Market | Investment Strategy | Warren Buffett
Companies:Berkshire Hathaway Inc.
During his European tour last week, Warren Buffett held four news conferences in four days and answered a lot of questions.
While a few of his answers generated headlines, most did not.
There was, however, one answer in Madrid that stood out to me as I listened to all those questions and answers in a variety of languages.
It's not new, so it's not news. But this one, brief, answer is essential to understanding how Warren Buffett has been so incredibly successful with his investments over the decades.
Buffett was asked to name the most important lesson he learned from his mentor, Benjamin Graham.
Instead he listed three, using just 85 seconds to deftly describe the trio of "bedrock" ideas that have helped make him the world's richest man.
It all comes from this ....
Warren Buffett: The three most important lessons I learned were all from the same book, The Intelligent Investor. It was written first by (Benjamin) Graham in 1949. They appear in chapters 8 and chapters 20.
The first is, to look at stocks as pieces of businesses, not as little items on a chart that move around, not as ticker symbols, not as something that might split next week or next month or something of the sort. But, rather, to look at the business, value the business, divide by the shares outstanding, and decide whether you really want to own a piece of that business at that price.
The second one was his commentary about your attitude toward the stock market. That it is there to serve you rather than to instruct you, and he used the famous Mr. Market example of that. That attitude is fundamental to making money in stocks over time.
And the final item he talked about was margin of safety. When you buy a stock that you think is worth 10 dollars, you don't pay $9.95 for it, because you can't be that precise in estimating its value. So you leave a considerable margin of safety for both what you don't understand and for the vagaries of the future.
And those three ideas, which I learned when I was 19 years old, have been the bedrock of everything I've done since.
Posted By:Alex Crippen
Topics:Stock Market | Investment Strategy | Warren Buffett
Companies:Berkshire Hathaway Inc.
During his European tour last week, Warren Buffett held four news conferences in four days and answered a lot of questions.
While a few of his answers generated headlines, most did not.
There was, however, one answer in Madrid that stood out to me as I listened to all those questions and answers in a variety of languages.
It's not new, so it's not news. But this one, brief, answer is essential to understanding how Warren Buffett has been so incredibly successful with his investments over the decades.
Buffett was asked to name the most important lesson he learned from his mentor, Benjamin Graham.
Instead he listed three, using just 85 seconds to deftly describe the trio of "bedrock" ideas that have helped make him the world's richest man.
It all comes from this ....
Warren Buffett: The three most important lessons I learned were all from the same book, The Intelligent Investor. It was written first by (Benjamin) Graham in 1949. They appear in chapters 8 and chapters 20.
The first is, to look at stocks as pieces of businesses, not as little items on a chart that move around, not as ticker symbols, not as something that might split next week or next month or something of the sort. But, rather, to look at the business, value the business, divide by the shares outstanding, and decide whether you really want to own a piece of that business at that price.
The second one was his commentary about your attitude toward the stock market. That it is there to serve you rather than to instruct you, and he used the famous Mr. Market example of that. That attitude is fundamental to making money in stocks over time.
And the final item he talked about was margin of safety. When you buy a stock that you think is worth 10 dollars, you don't pay $9.95 for it, because you can't be that precise in estimating its value. So you leave a considerable margin of safety for both what you don't understand and for the vagaries of the future.
And those three ideas, which I learned when I was 19 years old, have been the bedrock of everything I've done since.
Buffett's Berkshire Feels the Bear's Bite
Posted By:Alex Crippen
Topics:Warren Buffett
Companies:American Express Co | US Bancorp | Wells Fargo and Co | Berkshire Hathaway Inc.
Shares of Warren Buffett's Berkshire Hathaway are down almost 20 percent from their all-time closing high of last December.
Wall Street's generally accepted definition of a 'bear market' involves a 20 percent drop from a recent high.
Yesterday, Berkshire shares dipped into bear territory on an intraday basis, before recovering to close at $120,100 .. a 19.5 percent drop from its all-time closing high of $149,200, set on December 10.
That's the lowest close for Berkshire since October 4.
Current Berkshire price: Berkshire Hathaway IncUS%3bBRK.A
118665.0 -1435.00 -1.19% NYSE
Quote | Chart | News | Profile
[US;BRK.A 118665.0 -1435.00 (-1.19%) ]
Bloomberg points out that Berkshire shares fell 14.7 percent during the first six months of the year, its worst first half in 18 years. It blames lower revenues for Berkshire's insurance companies and weakness for several stocks in Buffett's stock portfolio, including Wells Fargo WELLS FARGO & CO NEWWFC
23.59 -0.53 -2.2% NYSE
Quote | Chart | News | Profile
[WFC 23.59 -0.53 (-2.2%) ], American Express AMERICAN EXPRESS COAXP
39.62 -0.40 -1% NYSE
Quote | Chart | News | Profile
[AXP 39.62 -0.40 (-1%) ], and U.S. Bancorp US BANCORP NEWUSB
28.10 -0.30 -1.06% NYSE
Quote | Chart | News | Profile
[USB 28.10 -0.30 (-1.06%) ]. (The stock market's overall weakness during the first half of the year hasn't helped either.)
Buffett himself has said he doesn't get upset when a stock he's buying goes down in price, just as he doesn't get upset when he buys a hamburger one day and it's cheaper the next. Just an opportunity to pick up a bargain.
So, is Berkshire a bargain?
Related Warren Buffett Watch Posts
Kass Shorts Berkshire Hathaway Again, Citing "Bombs in Buffett's Book" (June 4)
Berkshire Hathaway at 12-Week High After 11% Rally Over 10 Sessions (May 30)
Short Seller Tells CNBC Why Warren Buffett Has Met His "Watergate" (May 19)
Bloomberg quotes Charles Hamilton of FTN Midwest Securities as saying it is "close to getting more fairly priced. I wouldn't say it presents a buying opportunity right now."
Frank Betz at Carret Zane Capital Management disagrees. "I'd put a new client in Berkshire right biw. It's probably the highest-quality collection of individual companies that's ever been assembled. Long slides are not in the Berkshire Hathaway lexicon."
And faithful Buffett bull Whitney Tilson sees Berkshire's "intrinsic value" around $157,000 a share .. and he argues that the shares reached that intrinsic value in 11 of the past 12 years. "I sleep well. It's not going to double overnight, but we we think it will in five years ... It's the stock you want to own," he tells Bloomberg. Especially if Buffett uses the current market weakness to find some solid bargains of his own.
Wednesday, 4 Jun 2008
Kass Shorts Berkshire Hathaway Again, Citing "Bombs in Buffett's Book"Posted By:Alex Crippen
Topics:Warren Buffett
Companies:American Express Co | Kraft Foods Inc. | Wells Fargo and Co | Coca Cola Co | Berkshire Hathaway Inc.
Short seller Doug Kass, as seen on TheStreet.com
--------------------------------------------------------------------------------
Short seller Doug Kass renewed his attack on Berkshire Hathaway, placing another bet against the stock by going short again yesterday and writing critically today about "some bombs in Buffett's book."
(For more on why Kass is negative on Berkshire, including a video clip, see the recent WBW post Short Seller Tells CNBC Why Warren Buffett Has Met His "Watergate.")
In a blog post on TheStreet.com today, Kass points to the "poor short-term and long-term charts of Berkshire's four largest equity investments."
They are:
Coca-Cola COCA COLA COKO
51.37 0.37 +0.73% NYSE
Quote | Chart | News | Profile
[KO 51.37 0.37 (+0.73%) ]
Wells Fargo WELLS FARGO & CO NEWWFC
23.59 -0.53 -2.2% NYSE
Quote | Chart | News | Profile
[WFC 23.59 -0.53 (-2.2%) ]
Kraft KRAFT FOODS INCKFT
28.72 0.32 +1.13% NYSE
Quote | Chart | News | Profile
[KFT 28.72 0.32 (+1.13%) ]
American Express AMERICAN EXPRESS COAXP
39.62 -0.40 -1% NYSE
Quote | Chart | News | Profile
[AXP 39.62 -0.40 (-1%) ]
Kass argues that the four Buffett biggies "continue to suffer" even as Berkshire shares advanced over the past two weeks. (Berkshire closed at a 12-week high last Friday, following an 11 percent rally over ten sessions.)
Kass' Four Buffett "Bombs"
May 20 Close June 3 Close Pct. Change
Coca-Cola 57.09 56.40 -1.2%
Wells Fargo 28.05 26.78 -4.5%
Kraft Foods 32.56 32.05 -1.6%
American Express 47.31 44.31 -6.3%
Berkshire Hathaway 123,300.00 134,000.00 +8.7%
And Kass is not just talking about the short-term. He writes, "Holding these four stocks 'forever' has not been value-additive to Berkshire over the last decade" although it has been a "particular drain" more recently.
His admittedly exaggerated characterization: "Warren Buffett, who has achieved a remarkable investment record over 50 years, has begun to morph from the 'Shakespeare of investing' into the 'Mozart of marketing.'"
Buffett: Recession Is Here For People on Main Street
28 april 2008
The US economy indeed has entered into a recession, even if the traditional indicators aren't showing it yet, billionaire investment guru Warren Buffett said.
Gerald Herbert / AP
Warren Buffett
--------------------------------------------------------------------------------
Economists generally pronounce a recession for an economy that has shown two consecutive quarters of negative growth in gross domestic product, but Buffett said on CNBC Monday that you can throw that model out.
"I think it's defined by the man in the street a little differently than whether there's been two quarters of reported (negative) GDP growth," the Berkshire Hathaway Chairman said. "We're in a recession, unless you want to stick strictly to the technical definition, which I think really doesn't have much meaning to the fellow who has lost his job or is facing a money market fund that isn't paying him out or whatever it may be."
He also said the recession could be more painful than some think.
"This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow.
"I think consumers are feeling gas and food prices, and not feeling they've got a lot of money for other things."
At the same time, he praised the Federal Reserve for its role in trying to keep the economy afloat as it faces myriad pressures from the credit crunch and skyrocketing fuel costs.
In particular, he said the central bank acted properly in its rule during the controversial bailout of investment bank Bear Stearns Basic Earth Science Systems IncBSC
1.32 -0.14 -9.59% Berlin Stock Exchange
Quote | Chart | News | Profile
[BSC 1.32 -0.14 (-9.59%) ]. The Fed helped broker a deal between Bear and JPMorgan Chase JPMORGAN CHASE & COJPM
34.60 0.58 +1.7% NYSE
Quote | Chart | News | Profile
[JPM 34.60 0.58 (+1.7%) ] that allowed Bear to avoid insolvency.
"I think that what the Fed did ... with Bear Stearns was a big line in the sand," Buffett said. "At that point, the world started looking different in the financial world."
Buffett: Recession may be worse than feared
(Agencies)
Updated: 2008-04-29 09:20
NEW YORK -- Warren Buffett, the world's richest person, said on Monday the US economy is in a recession that will be more severe than most people expect.
Buffett made his comments on CNBC television after his Berkshire Hathaway Inc (BRKa.N) (BRKb.N) agreed to invest $6.5 billion in the takeover of chewing gum maker Wm Wrigley Jr Co (WWY.N) by Mars Inc in a $23 billion transaction.
"This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow.
Warren Buffett, chairman and CEO of Berkshire Hathaway, on Capitol Hill in Washington, November 14, 2007. [Agencies]
"I think consumers are feeling gas and food prices," he added, "and not feeling they've got a lot of money for other things."
He was not immediately available for further comment. Known for his frugality, the 77-year-old Buffett has lived in the same 10-room Omaha, Nebraska, house for a half-century, despite being worth an estimated $62 billion.
On Wednesday, the US Commerce Department is expected to say how fast the economy grew in the first quarter. Economists on average have projected that gross domestic product grew at an annualized 0.2 percent rate in the quarter.
Two quarters of declining GDP is a traditional indicator of recession. That last happened in 2001. Economists expect the US Federal Reserve on Wednesday to cut a key lending rate for a seventh time beginning last September.
Berkshire is a $197 billion conglomerate best known for its insurance holdings, such as auto insurer Geico Corp, but it owns more than 70 businesses.
Many of those businesses are tied to the housing market, including Acme Brick Co, insulation maker Johns Manville, and the real estate brokerage HomeServices of America Inc.
Others depend on consumers to spend more on discretionary items, such as Ben Bridge Jeweler and Borsheims Fine Jewelry.
"In the retail businesses ... if anything, they've gotten a little worse," Buffett said. "Of course, things connected with housing, whether it's in brick or whether it's in carpet, those businesses have shown no uptick at all. Jewelry had a bad Christmas ... and it stayed that way."
Buffett sees no respite from the housing slump.
"I think this is going to be fairly long and fairly deep, but who knows," he said.
In March, Forbes magazine pegged Buffett's net worth at $62 billion, ahead of Mexican tycoon Carlos Slim's $60 billion and Microsoft Corp (MSFT.O) Chairman Bill Gates's $58 billion. Gates is a friend of Buffett and a Berkshire director.
Topics:Warren Buffett
Companies:American Express Co | US Bancorp | Wells Fargo and Co | Berkshire Hathaway Inc.
Shares of Warren Buffett's Berkshire Hathaway are down almost 20 percent from their all-time closing high of last December.
Wall Street's generally accepted definition of a 'bear market' involves a 20 percent drop from a recent high.
Yesterday, Berkshire shares dipped into bear territory on an intraday basis, before recovering to close at $120,100 .. a 19.5 percent drop from its all-time closing high of $149,200, set on December 10.
That's the lowest close for Berkshire since October 4.
Current Berkshire price: Berkshire Hathaway IncUS%3bBRK.A
118665.0 -1435.00 -1.19% NYSE
Quote | Chart | News | Profile
[US;BRK.A 118665.0 -1435.00 (-1.19%) ]
Bloomberg points out that Berkshire shares fell 14.7 percent during the first six months of the year, its worst first half in 18 years. It blames lower revenues for Berkshire's insurance companies and weakness for several stocks in Buffett's stock portfolio, including Wells Fargo WELLS FARGO & CO NEWWFC
23.59 -0.53 -2.2% NYSE
Quote | Chart | News | Profile
[WFC 23.59 -0.53 (-2.2%) ], American Express AMERICAN EXPRESS COAXP
39.62 -0.40 -1% NYSE
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[AXP 39.62 -0.40 (-1%) ], and U.S. Bancorp US BANCORP NEWUSB
28.10 -0.30 -1.06% NYSE
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[USB 28.10 -0.30 (-1.06%) ]. (The stock market's overall weakness during the first half of the year hasn't helped either.)
Buffett himself has said he doesn't get upset when a stock he's buying goes down in price, just as he doesn't get upset when he buys a hamburger one day and it's cheaper the next. Just an opportunity to pick up a bargain.
So, is Berkshire a bargain?
Related Warren Buffett Watch Posts
Kass Shorts Berkshire Hathaway Again, Citing "Bombs in Buffett's Book" (June 4)
Berkshire Hathaway at 12-Week High After 11% Rally Over 10 Sessions (May 30)
Short Seller Tells CNBC Why Warren Buffett Has Met His "Watergate" (May 19)
Bloomberg quotes Charles Hamilton of FTN Midwest Securities as saying it is "close to getting more fairly priced. I wouldn't say it presents a buying opportunity right now."
Frank Betz at Carret Zane Capital Management disagrees. "I'd put a new client in Berkshire right biw. It's probably the highest-quality collection of individual companies that's ever been assembled. Long slides are not in the Berkshire Hathaway lexicon."
And faithful Buffett bull Whitney Tilson sees Berkshire's "intrinsic value" around $157,000 a share .. and he argues that the shares reached that intrinsic value in 11 of the past 12 years. "I sleep well. It's not going to double overnight, but we we think it will in five years ... It's the stock you want to own," he tells Bloomberg. Especially if Buffett uses the current market weakness to find some solid bargains of his own.
Wednesday, 4 Jun 2008
Kass Shorts Berkshire Hathaway Again, Citing "Bombs in Buffett's Book"Posted By:Alex Crippen
Topics:Warren Buffett
Companies:American Express Co | Kraft Foods Inc. | Wells Fargo and Co | Coca Cola Co | Berkshire Hathaway Inc.
Short seller Doug Kass, as seen on TheStreet.com
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Short seller Doug Kass renewed his attack on Berkshire Hathaway, placing another bet against the stock by going short again yesterday and writing critically today about "some bombs in Buffett's book."
(For more on why Kass is negative on Berkshire, including a video clip, see the recent WBW post Short Seller Tells CNBC Why Warren Buffett Has Met His "Watergate.")
In a blog post on TheStreet.com today, Kass points to the "poor short-term and long-term charts of Berkshire's four largest equity investments."
They are:
Coca-Cola COCA COLA COKO
51.37 0.37 +0.73% NYSE
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[KO 51.37 0.37 (+0.73%) ]
Wells Fargo WELLS FARGO & CO NEWWFC
23.59 -0.53 -2.2% NYSE
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[WFC 23.59 -0.53 (-2.2%) ]
Kraft KRAFT FOODS INCKFT
28.72 0.32 +1.13% NYSE
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[KFT 28.72 0.32 (+1.13%) ]
American Express AMERICAN EXPRESS COAXP
39.62 -0.40 -1% NYSE
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[AXP 39.62 -0.40 (-1%) ]
Kass argues that the four Buffett biggies "continue to suffer" even as Berkshire shares advanced over the past two weeks. (Berkshire closed at a 12-week high last Friday, following an 11 percent rally over ten sessions.)
Kass' Four Buffett "Bombs"
May 20 Close June 3 Close Pct. Change
Coca-Cola 57.09 56.40 -1.2%
Wells Fargo 28.05 26.78 -4.5%
Kraft Foods 32.56 32.05 -1.6%
American Express 47.31 44.31 -6.3%
Berkshire Hathaway 123,300.00 134,000.00 +8.7%
And Kass is not just talking about the short-term. He writes, "Holding these four stocks 'forever' has not been value-additive to Berkshire over the last decade" although it has been a "particular drain" more recently.
His admittedly exaggerated characterization: "Warren Buffett, who has achieved a remarkable investment record over 50 years, has begun to morph from the 'Shakespeare of investing' into the 'Mozart of marketing.'"
Buffett: Recession Is Here For People on Main Street
28 april 2008
The US economy indeed has entered into a recession, even if the traditional indicators aren't showing it yet, billionaire investment guru Warren Buffett said.
Gerald Herbert / AP
Warren Buffett
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Economists generally pronounce a recession for an economy that has shown two consecutive quarters of negative growth in gross domestic product, but Buffett said on CNBC Monday that you can throw that model out.
"I think it's defined by the man in the street a little differently than whether there's been two quarters of reported (negative) GDP growth," the Berkshire Hathaway Chairman said. "We're in a recession, unless you want to stick strictly to the technical definition, which I think really doesn't have much meaning to the fellow who has lost his job or is facing a money market fund that isn't paying him out or whatever it may be."
He also said the recession could be more painful than some think.
"This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow.
"I think consumers are feeling gas and food prices, and not feeling they've got a lot of money for other things."
At the same time, he praised the Federal Reserve for its role in trying to keep the economy afloat as it faces myriad pressures from the credit crunch and skyrocketing fuel costs.
In particular, he said the central bank acted properly in its rule during the controversial bailout of investment bank Bear Stearns Basic Earth Science Systems IncBSC
1.32 -0.14 -9.59% Berlin Stock Exchange
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[BSC 1.32 -0.14 (-9.59%) ]. The Fed helped broker a deal between Bear and JPMorgan Chase JPMORGAN CHASE & COJPM
34.60 0.58 +1.7% NYSE
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[JPM 34.60 0.58 (+1.7%) ] that allowed Bear to avoid insolvency.
"I think that what the Fed did ... with Bear Stearns was a big line in the sand," Buffett said. "At that point, the world started looking different in the financial world."
Buffett: Recession may be worse than feared
(Agencies)
Updated: 2008-04-29 09:20
NEW YORK -- Warren Buffett, the world's richest person, said on Monday the US economy is in a recession that will be more severe than most people expect.
Buffett made his comments on CNBC television after his Berkshire Hathaway Inc (BRKa.N) (BRKb.N) agreed to invest $6.5 billion in the takeover of chewing gum maker Wm Wrigley Jr Co (WWY.N) by Mars Inc in a $23 billion transaction.
"This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow.
Warren Buffett, chairman and CEO of Berkshire Hathaway, on Capitol Hill in Washington, November 14, 2007. [Agencies]
"I think consumers are feeling gas and food prices," he added, "and not feeling they've got a lot of money for other things."
He was not immediately available for further comment. Known for his frugality, the 77-year-old Buffett has lived in the same 10-room Omaha, Nebraska, house for a half-century, despite being worth an estimated $62 billion.
On Wednesday, the US Commerce Department is expected to say how fast the economy grew in the first quarter. Economists on average have projected that gross domestic product grew at an annualized 0.2 percent rate in the quarter.
Two quarters of declining GDP is a traditional indicator of recession. That last happened in 2001. Economists expect the US Federal Reserve on Wednesday to cut a key lending rate for a seventh time beginning last September.
Berkshire is a $197 billion conglomerate best known for its insurance holdings, such as auto insurer Geico Corp, but it owns more than 70 businesses.
Many of those businesses are tied to the housing market, including Acme Brick Co, insulation maker Johns Manville, and the real estate brokerage HomeServices of America Inc.
Others depend on consumers to spend more on discretionary items, such as Ben Bridge Jeweler and Borsheims Fine Jewelry.
"In the retail businesses ... if anything, they've gotten a little worse," Buffett said. "Of course, things connected with housing, whether it's in brick or whether it's in carpet, those businesses have shown no uptick at all. Jewelry had a bad Christmas ... and it stayed that way."
Buffett sees no respite from the housing slump.
"I think this is going to be fairly long and fairly deep, but who knows," he said.
In March, Forbes magazine pegged Buffett's net worth at $62 billion, ahead of Mexican tycoon Carlos Slim's $60 billion and Microsoft Corp (MSFT.O) Chairman Bill Gates's $58 billion. Gates is a friend of Buffett and a Berkshire director.
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