I guess Lou Dobbs is going to have to change his rhetoric. Evidently we need not worry about illegal Mexican immigrants or Chinese world domination right now. After the deals announced earlier this week, it’s time to turn our xenophobic and protectionist attention to the Arabs!
Of course I am saying this partially tongue-in-cheek, but it is clear that some nations around the world reap the windfall of large trade surpluses, high oil prices and the foreign exchange that comes from currency transactions, many Asian countries and oil exporters hold more reserves than they need. Governments are putting pressure on their central banks to earn higher returns than those on the safe, liquid Treasury securities that most hold and as a result have established “sovereign-wealth funds” as a means to invest in a variety of assets across the globe.
The latest splash by a sovereign fund was the deal announced earlier this week between Citigroup and the Abu Dhabi Investment Authority (ADIA), the investment arm of the Abu Dhabi government. Citi, which has been suffering from subprime woes, received a $7.5 billion capital infusion from ADIA, in exchange for convertible stock in Citi yielding a rich 11% annually. The ADIA stake in the US’s largest bank will amount to 4.9%, exceeding the position held by Saudi Prince Alwaleed bin Talal, long known as one of Citi's largest shareholders and one of the key players in ousting Citi CEO Chuck Prince last month.
For paranoid types, it may be a little unnerving that 8% of Citi is now held by Arabs, but it is not the first institution to benefit from foreign investors. Beleaguered Bear Stearns cut a deal with Chinese investment bank Citis Securities to shore up liquidity; DIC, the investment arm of Dubai Holding (a conglomerate owned by Sheikh Mohammed bin Rashid al-Maktoum) plunked down more than $1 billion for a 9.9% stake in Och-Ziff Capital Management Group, a U.S. hedge-fund manager and this week bought a stake in Sony.
All of this activity is going to catch the attention of those who are already anxious about foreign investment in the US, but weren’t these the same people who were worried about Japan purchasing American assets in the eighties? It is clear that the world is shifting and the capital that is flowing is a natural extension of those changes. Assuming that there is no national security interest involved, I can’t see why investors would not want to see the trend continue.
To some extent, the genie is out of the bottle: according to the Financial Times, investment funds from the Middle East and Asia have invested an estimated $37 billion in shares of western financial companies this year and Morgan Stanley predicts that sovereign-wealth fund investments will grow to $27.7 trillion by 2022 from about $2.5 trillion today.
Friday, November 30, 2007
Thursday, November 29, 2007
I Can’t Protect you from Yourself
Remember way back on Monday? You know, when stocks fell by almost 2%, fulfilling the definition of a “correction”. It was on that day that “Jack” called the office and calmly directed us to liquidate all of the securities in his account. After begging and pleading for him not to take any action, he said, “I just do not want to lose any money. I know that I will probably regret it, but I just have to do it.”
There are times in my job when I just can’t protect people from themselves. Maybe the stock market will fall back to Monday’s lows, but on Tuesday, stocks recovered almost all of Monday’s losses. Then yesterday, the bulls ran wild on hopes for a rate cut, a recovery in the battered financial sector and sinking oil prices.
The Dow Jones Industrial Average surged 331.01 points, or 2.6%, to 13289.45. All 30 of its components ended the day higher, as the index enjoyed its second-biggest point gain of the year. The Dow's gains yesterday capped a two-day rally of more than 540 points -- the best two-day performance since October 2002. The broader indexes joined in the fun: the S&P 500 advanced 40.79, or 2.9%, to 1469.02, and the Nasdaq Composite Index jumped 82.11, or 3.2%, to 2662.91.
What can I possibly say to Jack now? That I am sorry that he couldn’t be reasoned with? That if he just let us do our job and manage his money proactively, we would prevent him from letting his emotions get the best of him? Jack can not afford to sit in cash for the balance of his retirement-he needs to grow his money to outpace inflation. Not only that, but the biggest problem with making a rash decision like selling every asset you own is that even if you are right for a day, a week or a month, what will make you want to get back in?
I know that market volatility can be difficult to absorb, especially when you are retired and need your nest egg. But Jack knew that he had a balanced portfolio, which could withstand far more grief than what we have seen this year. Somehow that didn’t matter in the heat of the moment and now, Jack is faced with a terrible decision: either admit that he made a mistake and get back into the market or significantly reduce his spending while he sits in a money market account. Those choices seem pretty stinky to me, but sometimes no matter how hard I try, I just can’t save some investors from themselves.
There are times in my job when I just can’t protect people from themselves. Maybe the stock market will fall back to Monday’s lows, but on Tuesday, stocks recovered almost all of Monday’s losses. Then yesterday, the bulls ran wild on hopes for a rate cut, a recovery in the battered financial sector and sinking oil prices.
The Dow Jones Industrial Average surged 331.01 points, or 2.6%, to 13289.45. All 30 of its components ended the day higher, as the index enjoyed its second-biggest point gain of the year. The Dow's gains yesterday capped a two-day rally of more than 540 points -- the best two-day performance since October 2002. The broader indexes joined in the fun: the S&P 500 advanced 40.79, or 2.9%, to 1469.02, and the Nasdaq Composite Index jumped 82.11, or 3.2%, to 2662.91.
What can I possibly say to Jack now? That I am sorry that he couldn’t be reasoned with? That if he just let us do our job and manage his money proactively, we would prevent him from letting his emotions get the best of him? Jack can not afford to sit in cash for the balance of his retirement-he needs to grow his money to outpace inflation. Not only that, but the biggest problem with making a rash decision like selling every asset you own is that even if you are right for a day, a week or a month, what will make you want to get back in?
I know that market volatility can be difficult to absorb, especially when you are retired and need your nest egg. But Jack knew that he had a balanced portfolio, which could withstand far more grief than what we have seen this year. Somehow that didn’t matter in the heat of the moment and now, Jack is faced with a terrible decision: either admit that he made a mistake and get back into the market or significantly reduce his spending while he sits in a money market account. Those choices seem pretty stinky to me, but sometimes no matter how hard I try, I just can’t save some investors from themselves.
Wednesday, November 28, 2007
Investors Stand Corrected
As readers of this column know, I like it when the market falls. Don’t get me wrong, I don’t relish other people losing money, but when any asset class moves up dramatically without taking a breather, it makes me wary. Well, my anxieties have been addressed this week, as stocks opened the week with quite a tumble.
On Monday, the Dow Jones Industrial Average fell 237.44 points to 12743.44, a full 10% below its October 9th record close of 14164.53. The S&P 500 index fell 2.3% on Monday and by the end of the day, was down 10.1% from its October 9th record. The magical 10% pull-back is known as a “correction,” which is half-way to a full-fledged bear market, usually defined as a 20% drop.
Investors have been spoiled over the past five years, in that there has only been one correction—at the beginning of 2003, when the US was preparing to invade Iraq. Since then, there has certainly been upside and downside volatility, but we have not seen a decline of 10% and that is an aberration. Until the bull market of the nineties, corrections were more commonplace and investors actually expected them to come along.
According to quick research that I conducted on line, there have been over 40 corrections since World War II. (Ned Davis Research says that there have been 43, while Bespoke Investment Group counted 45—suffice to say that there have been a bunch of them!) What seems clear is that the duration of the pullbacks has shrunk over time. Since 1990, corrections have lasted an average of 88 days from an average of 146 days between 1945 and 2007. The number of days that expire between reaching a 10 percent decline and the low point of the slide also has shrunk, to 43 days from 68 days.
With the 10% move, many are preparing for the worst: a continued slide that would make 2007 the first losing year for investors since 2002. But is that likely? To understand, let’s take a look at the last five times the Dow fell 10% from its previous high (January, 2003; June, 2002; February, 2000; October, 1999; and August, 1998). In all but one case (June, 2002), the Dow was higher at both six and twelve months later. Of course, past performance is no indication of future success, but sometimes it is helpful to consult the history books to assuage frayed nerves.
What is abundantly clear is that markets are likely to be volatile in the future, so if you have lost sleep over your portfolio’s performance, it’s probably a good sign that you need to adjust your allocation to a less aggressive stance. Seasoned investors understand that it is imperative to understand how much risk they can tolerate and model their portfolios accordingly. In my experience, some of the worst investment decisions are made after investors overestimate their risk tolerance, then find themselves in a state of high anxiety and sell when markets move against them, often throwing away months or years of gains during one episode of panic selling. Indeed, that is a far more painful correction than the market’s 10% pullback. Just imagine how sellers on Monday felt on Tuesday after the big snap-back rally.
On Monday, the Dow Jones Industrial Average fell 237.44 points to 12743.44, a full 10% below its October 9th record close of 14164.53. The S&P 500 index fell 2.3% on Monday and by the end of the day, was down 10.1% from its October 9th record. The magical 10% pull-back is known as a “correction,” which is half-way to a full-fledged bear market, usually defined as a 20% drop.
Investors have been spoiled over the past five years, in that there has only been one correction—at the beginning of 2003, when the US was preparing to invade Iraq. Since then, there has certainly been upside and downside volatility, but we have not seen a decline of 10% and that is an aberration. Until the bull market of the nineties, corrections were more commonplace and investors actually expected them to come along.
According to quick research that I conducted on line, there have been over 40 corrections since World War II. (Ned Davis Research says that there have been 43, while Bespoke Investment Group counted 45—suffice to say that there have been a bunch of them!) What seems clear is that the duration of the pullbacks has shrunk over time. Since 1990, corrections have lasted an average of 88 days from an average of 146 days between 1945 and 2007. The number of days that expire between reaching a 10 percent decline and the low point of the slide also has shrunk, to 43 days from 68 days.
With the 10% move, many are preparing for the worst: a continued slide that would make 2007 the first losing year for investors since 2002. But is that likely? To understand, let’s take a look at the last five times the Dow fell 10% from its previous high (January, 2003; June, 2002; February, 2000; October, 1999; and August, 1998). In all but one case (June, 2002), the Dow was higher at both six and twelve months later. Of course, past performance is no indication of future success, but sometimes it is helpful to consult the history books to assuage frayed nerves.
What is abundantly clear is that markets are likely to be volatile in the future, so if you have lost sleep over your portfolio’s performance, it’s probably a good sign that you need to adjust your allocation to a less aggressive stance. Seasoned investors understand that it is imperative to understand how much risk they can tolerate and model their portfolios accordingly. In my experience, some of the worst investment decisions are made after investors overestimate their risk tolerance, then find themselves in a state of high anxiety and sell when markets move against them, often throwing away months or years of gains during one episode of panic selling. Indeed, that is a far more painful correction than the market’s 10% pullback. Just imagine how sellers on Monday felt on Tuesday after the big snap-back rally.
Tuesday, November 27, 2007
Shop ’til you Drop
The early results are in and I am pleased to report that the patient is not just alive, but pretty darned feisty! The American consumer came through over the first big weekend of the holiday sales season, although experts are still on pins and needles to see how we will perform for the next 28 days until Christmas Day.
Perhaps you are wondering why there is so much fascination with this one weekend and why special terms, like “Black Friday” (named for the day on which retailers traditionally become profitable on the year, or “go into the black”) and “Cyber Monday” (the Monday after Thanksgiving when on-line shopping cranks up dramatically), have entered the American lexicon. Retailers’ performance over the Thanksgiving weekend is closely watched because it accounts for up to 8%, or roughly $40 billion, of all holiday sales, which are expected to reach $475 billion this year, according to the National Retail Federation.
While every holiday season is important, 2007 seems more crucial than usual. The reason is that uncertainty is shaking the confidence of investors and consumers alike, as the flow of concerns like the continuing housing recession; the credit fall out from the sub-prime mortgage fiasco; and spiking energy prices are fraying even the steadiest of nerves. As a result of all of those issues, it is expected that retail sales growth this season will be the weakest since 2002, the third year of a disastrous bear market.
When the early results came in, there were was some good news and some bad news. First the good news: according to the research firm ShopperTrak, retail sales rose 8.3% on Friday compared with last year, the biggest increase in three years. On Friday and Saturday combined, sales rose 7.2%, which was a nifty feat in the face of the negative news coursing through the mainstream media. However, it looks like this season consumers are not exactly splurging.
Shoppers sought bargains and spent an estimated $348 each over the 2007 Thanksgiving holiday weekend, down from $360 last year, a survey conducted for the National Retail Federation found. But here is something that you might not read about—the year before—2005, when the housing market was still booming, the average was $303. I don’t want to be too rosy, too early, but I am impressed that the news was as good as it was. With 28 days to go (and one Federal Reserve meeting sandwiched in between), it will be interesting to see whether consumers can maintain their early pace or succumb to the wall of worry they see ahead.
Perhaps you are wondering why there is so much fascination with this one weekend and why special terms, like “Black Friday” (named for the day on which retailers traditionally become profitable on the year, or “go into the black”) and “Cyber Monday” (the Monday after Thanksgiving when on-line shopping cranks up dramatically), have entered the American lexicon. Retailers’ performance over the Thanksgiving weekend is closely watched because it accounts for up to 8%, or roughly $40 billion, of all holiday sales, which are expected to reach $475 billion this year, according to the National Retail Federation.
While every holiday season is important, 2007 seems more crucial than usual. The reason is that uncertainty is shaking the confidence of investors and consumers alike, as the flow of concerns like the continuing housing recession; the credit fall out from the sub-prime mortgage fiasco; and spiking energy prices are fraying even the steadiest of nerves. As a result of all of those issues, it is expected that retail sales growth this season will be the weakest since 2002, the third year of a disastrous bear market.
When the early results came in, there were was some good news and some bad news. First the good news: according to the research firm ShopperTrak, retail sales rose 8.3% on Friday compared with last year, the biggest increase in three years. On Friday and Saturday combined, sales rose 7.2%, which was a nifty feat in the face of the negative news coursing through the mainstream media. However, it looks like this season consumers are not exactly splurging.
Shoppers sought bargains and spent an estimated $348 each over the 2007 Thanksgiving holiday weekend, down from $360 last year, a survey conducted for the National Retail Federation found. But here is something that you might not read about—the year before—2005, when the housing market was still booming, the average was $303. I don’t want to be too rosy, too early, but I am impressed that the news was as good as it was. With 28 days to go (and one Federal Reserve meeting sandwiched in between), it will be interesting to see whether consumers can maintain their early pace or succumb to the wall of worry they see ahead.
Monday, November 26, 2007
Giving Thanks
The stock market is down, oil is nearing $100, the US dollar is plunging and the world’s retailers are on edge as they calculate their take from “Black Friday” and “Cyber Monday”. I guess that we can all understand how the general anxiety about the economy can creep in and prevent us from doing what we should be at this time of year: giving thanks. Before you lose that thought, put down your leftover turkey sandwich so I can recount a story.
I was supposed to take off Friday, but after checking my voice mail, it was clear that I needed to make a quick call to a client who left a disturbing message. “Mike” was fearful that he would be let go from his high paying job at a large company in Boston and called me to develop a game plan if the worst were to occur. By the time I called back, he had found out that his job was secure and that the firm had even given him a retention bonus to stay through the end of the year.
“I can’t believe that they only think that I am worth an extra $250,000!” he said with equal parts of sarcasm and anger. I know that Mike knows that he is paid well compared to the vast majority of people in this country, but he fell prey to comparing himself to the tiny minority that earns far more than he does. Who among us has not thought, “I can’t believe that guy/gal makes so much money!” Maybe it was the realtor who caught a hot market, the doctor who went into radiology rather than primary care medicine or the lawyer who chose corporate work instead of becoming a public defender. In all walks of life, there are instances where we all know that the earning power of a particular professional has no bearing to merit or even achievement.
Sometimes people choose careers in areas of the economy that are rewarded far more lucratively than others. If you are a numbers person and you become a math professor, you are not going to make as much as the guy who sat next to you who is now an analyst for an investment bank. In my own life I have experienced this very feeling. I left the commodities exchange in the early nineties. Had I stayed, I would be making a fortune right now. But that was not how I wanted to spend my career. Is it fair that the dopes who worked along side me are now cashing in? I don’t really know, but who cares---I don’t want to be there.
To start the week after Thanksgiving and of course, the holiday bonus season, it would probably go a long way if we all remember the gifts in our lives. On balance, most of us are fortunate to have what we have. We live in the best country in the world, where we are free to dissent with those in power. Most of us have decent jobs that allow us to provide shelter, food and a pretty nice lifestyle. We may not be making a ga-zillion bucks in stock options or cashing out millions for being in the right job at the right time, but we are blessed. My advice for you as we enter the heart of the holiday season is to remember all that is good in your life, not what is lacking.
I was supposed to take off Friday, but after checking my voice mail, it was clear that I needed to make a quick call to a client who left a disturbing message. “Mike” was fearful that he would be let go from his high paying job at a large company in Boston and called me to develop a game plan if the worst were to occur. By the time I called back, he had found out that his job was secure and that the firm had even given him a retention bonus to stay through the end of the year.
“I can’t believe that they only think that I am worth an extra $250,000!” he said with equal parts of sarcasm and anger. I know that Mike knows that he is paid well compared to the vast majority of people in this country, but he fell prey to comparing himself to the tiny minority that earns far more than he does. Who among us has not thought, “I can’t believe that guy/gal makes so much money!” Maybe it was the realtor who caught a hot market, the doctor who went into radiology rather than primary care medicine or the lawyer who chose corporate work instead of becoming a public defender. In all walks of life, there are instances where we all know that the earning power of a particular professional has no bearing to merit or even achievement.
Sometimes people choose careers in areas of the economy that are rewarded far more lucratively than others. If you are a numbers person and you become a math professor, you are not going to make as much as the guy who sat next to you who is now an analyst for an investment bank. In my own life I have experienced this very feeling. I left the commodities exchange in the early nineties. Had I stayed, I would be making a fortune right now. But that was not how I wanted to spend my career. Is it fair that the dopes who worked along side me are now cashing in? I don’t really know, but who cares---I don’t want to be there.
To start the week after Thanksgiving and of course, the holiday bonus season, it would probably go a long way if we all remember the gifts in our lives. On balance, most of us are fortunate to have what we have. We live in the best country in the world, where we are free to dissent with those in power. Most of us have decent jobs that allow us to provide shelter, food and a pretty nice lifestyle. We may not be making a ga-zillion bucks in stock options or cashing out millions for being in the right job at the right time, but we are blessed. My advice for you as we enter the heart of the holiday season is to remember all that is good in your life, not what is lacking.
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