Friday, September 30, 2011

Among the top 3 articles I have ever read

Notes from the DoubleLine Lunch with Jeffrey Gundlach


    Yesterday Barry and I had the pleasure to meet Jeffrey Gundlach and attend the DoubleLine Luncheon at the New York Yacht Club.  Once we were all seated, it was a whirlwind through some of the most important charts and datapoints of the current market moment. I've got 5 pages of handwritten notes that I'll distill down for you guys below.

On Government Revenue: In 1902, the Government only took about 10% out of the economy in the form of taxes, now it's more like 35%. Debt Ceiling on the same upward trend as taxation as a percentage of GDP, a complete farce, it is regularly "raised on an as-needed basis" and has no meaning at all.

On the 2012 Election: "This will be the most important election of our lifetime," he says that there are two parties: The Taxes are Too Dam Low Party and the Spending is Too Damn High Party - if either of the two parties gets a mandate from voters next fall is could be "a disaster".

On Entitlements: Retirement age simply MUST be raised, probably to 70 years old. FDR originally set the retirement age (for Social Security benefit eligibility) at 65 years old - but at a time when the average life expectancy was 61! So rather than being a softie, he actually was being rather tough. Nowadays, our life expectancy is 79, if you were to do what FDR did, you'd be setting retirement 4 years later at 83 years old!

On Discretionary versus Mandatory Government Spending: "What they consider 'mandatory' today could become discretionary' tomorrow." Even if you cut the entire Defense budget slice (from 20% of total spending) down to zero, you still don't even come close to making a dent in the deficit so at some point, the social security and income security (unemployment) entitlements are going to get touched.

On Tax Hikes: Because Corporate Profits are not doing anything for much of the country, corporate income tax hikes are actually possible. Even muni bond tax hikes (at a certain income level) are currently being discussed. There is a precedent for our current situation, 1940. During that year, tax receipts as a percentage of GDP exploded from the 6-8% range up to a whopping 20%.

On Income Inequality: Reagonomics and the idea that you could use deficit spending to "prime the pump" took hold in the early 80's. One of the unintended (or perhaps intended) consequences has been a massive increase in the top .1% of earners' share of total income. When factoring in capital gains, the top 1% of earners in this country are now 25% of total income. This means that some kind of wealth tax is almost a certainty going forward.

On Asset Allocation for the Ultra High Net Worth: Jeffrey says his own assets are now 2/3rd's outside of the "financial system" other than his ownership stake in DoubleLine. This means fine art, gold, gemstones, rental property etc. He says the ultra wealthy should have 50% of their assets outside of the financial system.

On Bull Markets and Bear Markets: If you study history, you'll see that "bull markets are about cooperation, bear markets are about divisiveness." Jeffrey says the Euro common currency came about in 1999 at the very peak of global cooperation, the fact that asset prices peaked around then too is not a coincidence. Right now divisiveness is everywhere and a global bear market is underway.

On the Euro Crisis: "I don't know what's going to happen in Europe but there is one thing I am certain about - eventually, someone is going to take a big loss. As investors, the most important thing we can do is to make sure that we aren't the parties taking that loss." He says DoubleLine's portfolios have zero European stocks, zero European bonds, zero european currencies, zero assets denominated in euro currencies - also, zero exposure to US bank stocks.

On Volatility: There is nothing magical about the 40 level for the VIX, and whether we are trading above it or below it doesn't necessarily signify anything important for stocks.

On Stock Indicators: "The single most important stock market in the world right now is the Shanghai Composite". It is an "excellent leading indicator for the S&P 500. Shanghai needs to improve before we can be bullish on US stocks."

On Stock Dividends Being "Higher than the Yield on a Ten-Year Treasury": he says this is nonsense because there is no risk parity between a stock and a Treasury bond, he says you have to look at this comparison on a volatility-adjusted basis or not at all. For example, If the yield on the ten-year bond doubles overnight from 3 to 6%., you've lost about 20% of your principle - but if Microsoft's yield doubles from 3 to 6% overnight, you've probably lost 50% of your principle. Apples and oranges.

On Economic Indicators: The ECRI Growth Index is extremely important, as of the latest reading, this index is at negative 7.

On the US Dollar: While everyone is whining and crying about the falling dollar, the simple fact is that the dollar actually bottomed three years ago and is now strengthening. "The problems in Europe are wildly bullish for the dollar". "All of our assets are dollar denominated."

On Gold: "I understand the allure of gold but in a deflationary environment or a true liquidity crisis, there is serious risk to gold prices up here." he says around 1500 gold gets interesting again. Jeffrey showed us the pronounced daily volatility in gold prices (hi-lo chart) since the Debt Ceiling debate - he notes that "Increases in volatility almost always precedes a reversal in trend." Jeffrey bought gold personally in 1997 because he thought it looked cheap - "For five years it did nothing, I actually lost money, then I made five-fold on my investment."

On Natural Gas: The all-asset class portfolio is currently legging into a long natural gas position - slowly. Jeffrey says it probably goes nowhere in the short-term but in a decade or two could be a five-bagger just like his gold trade was. Natural gas is very cheap and has a lot of potential in the long-term.

On Copper and Commodities: Copper is still trading at 40% above the marginal cost of production so there is still risk to these prices. Commodities (other than gold) have been terrible over the last three years. Since September 19th 2008 through this week, the DJ UBS Excess Return Commodity Index is down 18.4%, it was up 12.72% during QE1 and 6.73% during QE2.

On Barry's Book Bailout Nation and My Upcoming Book: "It's raining books with you guys!" Jeffrey mentioned that he is meeting with Michael Lewis (Liar's Poker, The Big Short) this week about being the subject of a book (Gundlach's long-term track record and battle with ex-employer TCW would be fascinating). Let's all pray that this happens, you guys.

On Government Bonds: The big winner this year in asset classes is Government Bonds, up 9% year-to-date.

On Duration: Basically he says 'No, thank you." to anything with a yield under 1% - "this glass of water is more worthwhile than a government bond under 5-year duration". DoubleLine had been loading up on long-dated Treasurys since March in anticipation of the end of QE2. The trade is working right now obviously. Markets don't wait for some publicly known date and then adjust to something, they anticipate and game it in advance, which is what the end of QE2 trade was about. People looking at the 30-year bond lamenting the low yield forget that it is the price action that made the trade work - the long bond's price can move 20%. Says the 30-year has not yet "punched through" to the yield lows of 2008 although the 5 and 10-year bonds have. It definitely could but is short-term overbought.

On Corporate Bonds: Investment grade corporates have done extremely well but the below investment grade (junk) market "has absolutely fallen apart". Junk bonds will really hit the wall and face serious wave of defaults beginning in 2012 as all the refinancings of 2009 and 2010 vintage come due. Many of these companies have improved cash flow by lowering their interest expense with refis but they haven't reduced their indebtedness overall. That said, pension funds are still underfunded and will be forced to use investment grade corporates to make their assumptions, this will keep a "technical bid" beneath that market.

On Muni Bonds: "They've done well but can this market really stand up to a wealth tax" imposed on the income?

On Money Market Funds: Why would anyone own a non-government money market fund? "This is what we call 'Reward-Free Risk'."

On the Next Fund: Tomorrow DoubleLine is introducing a brand new fund to the stable, Jeffrey says he can't say much but that it will be a money market fund surrogate with yields approaching 2%.

On Housing: Way too high ownership level still - "Home ownership rate at 70% is still absurdly high". More foreclosures - five years worth - unavoidable and politically speaking no one is going to be bold before the election with any kind of sweeping forgivable or modification plan. The existing programs are all one-by-one which is why they are not helping at all. Expect more malaise in housing. he is very bullish on rental property for the foreseeable future.

On Mortgage Bonds and the Big Trade: This is where Jeffrey began his career and what he knows best. ratings agencies don't understand how to rate securitized mortgage pools and he takes advantage of what the the repayment risk that they misperceive as credit risk. He is pairing mispriced GNMA bonds with long-dated treasurys to put together a risk-offsetting bond position that offers both interest rate-risk protection and a higher yield than the other total return bond funds. There is no repayment of capital or leverage involved in getting a higher yield, just a better constructed trade than the next guy.

On Emerging Markets Fixed Income: "A secular improving credit story". G7 countries have 4 times the debt-to-GDP ratio of EM nations. He is blown away that EM Debt trades at "twice the yield of developed country debt and triple the fundamentals"

Two Final Rules:
- "The Bloodless Verdict of the Market" - In the end, he who gets it right wins, there are no points awarded for being smart but wrong - I love this.
- "Never, ever take counterparty risk." - It is the one risk you are almost never rewarded for taking. Unless you are running $800 billion dollars, there is no need to use swaps, synthetics or baskets - trade cash markets and avoid any trades that require a counterparty.

Dangers to trading within a range-bound market.

Peter Brandt
  • Getting chopped up within the morph can make you gun shy when the real breakout occurs.
  • Range bound markets tend to force a chartist into violating his or her trading rules.
  • A compulsion for being pre-positioned for the “next” big breakout can result in a trading becoming obsessed with a market. This is never good. You should never feel as though you have to have a position or you will somehow miss a move.
  • Being obsessed with a particular market can cause you to miss good opportunities in other markets.
  • Being obsessed with a particular market can force you start monitor-watching. Monitor-watching will play on your emotions and force you out of good decision making skills.

U.S. Tipping Into Recession

U.S. Tipping Into Recession, Achuthan Says

 

The world’s largest economy is showing signs of slumping, said the Economic Cycle Research Institute’s Lakshman Achuthan, citing leading indicators.

“The U.S. economy is tipping into a new recession,”Achuthan, the group’s chief operations officer in New York, said in a radio interview today on “Bloomberg Surveillance”with Tom Keene and Ken Prewitt. “You have wildfire among the leading indicators across the board. Non-financial services plunging, manufacturing plunging, exports plunging. That is such a deadly combination.”

The Federal Reserve’s efforts to support the economy, including holding its benchmark rate at virtually zero since December 2008 and expanding its balance sheet to a record $2.88 trillion -- have done little to reduce unemployment that has hovered around 9 percent since April 2009 or to revive the housing market.

The U.S. economy grew at a 1.3 percent pace in the second quarter after a 0.4 percent expansion in the first three months of the year, the Commerce Department reported yesterday. It earlier estimated that gross domestic product grew 1 percent from April through June.

Purchases of new houses fell in August to a six-month low as the biggest drop in prices in two years failed to lure buyers away from even less expensive distressed properties. Sales dropped 2.3 percent to a 295,000 annual pace, figures from the Commerce Department showed earlier this week.

“We at least have a couple of quarters of worsening economy in front of us,” Achuthan said. “So if you think this is a bad economy, you haven’t seen anything yet.”

Thursday, September 29, 2011

Big trouble in big China



Chinese Business Owners Disappearing as "Underground Loans" Come Due
UNDERGROUND CREDIT CRUNCH
 
As China tries to put the brakes on inflation, a tightening credit market has many businesses turning to what Reuters describes as the country's "vast and growing informal lending market."
But, with annual interest rates as high as 200%,
"many business owners who were believed to be having trouble paying back loans to underground banks have disappeared," according to Yu Ran of China Daily.

One of the "disappeared," Wenzhou eyeglass factory owner Hu Fulin, suddenly vanished on September 21.

"We've confirmed that Hu has disappeared, and we're still not sure whether the rumors saying he left more than 2 billion yuan in debts behind are true," a government official told Yu. "But current information has proved that he borrowed about 130 million yuan from private lenders."

Hu's suppliers in Wenzhou, which the People's Daily calls "the cradle of China's private economy," are in "a panic" and "gathered in his factory demanding payments." And angry employees protested to demand the two months' salary they are owed, as well.

But, like the 28 other debtors who have fled in the face of unpayable loans, Hu is now nowhere to be found.
Quoting a Wenzhou People’s Bank report from July, the Epoch Times says "around 90 percent of families and 60 percent of businesses are involved in the private lending market."

Perhaps unsurprisingly, much of the money circulating underground has been injected into the system by corrupt government officials.

As the Xinhua news agency reported (via Shanghai Daily, via China.org.cn) yesterday, "Money from government officials has been found to be involved in many cases of illegal loans to business owners who are now fleeing the area after finding they are unable to pay back the money."

"Those officials are now trying to get their money back while keeping a low profile to avoid too much attention," one unnamed underground lender said.

An editorial in China Daily has some stern words for the businesspeople involved in the Chinese grey financial markets:

All profitable ventures entail some responsibilities which company officials, especially bosses, are obliged to fulfill. Some businesspeople in Wenzhou have not done so and thus harmed overall economic development, although the local supervision department considers them "individual cases" of failure.

Regardless, the Financial News reports that the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank -- China's four largest state-owned financial institutions -- have "seen large outflows of deposits" during the first half of the month.

Withdrawals by cash-strapped businesses trying to pay down debt?

Nope.

Does this explain why Yuan has dumped in the offshore Hong Kong markets?



China: Chinese Banks Close to Collapse. Fears of zero growth


The Chinese Financial Index fell by 24%, more than that of European and American bank stocks. Chinese banks are plagued by insolvent debts due to loans to local governments and the stagnant property market. The country's growth, currently estimated at 9.5%, is at risk



Hong Kong (AsiaNews / Agencies) - The listings of Chinese banks have dropped to very low levels, raising fears that a collapse could wipe out the country's growth. This is what emerges from news announced today by Bloomberg, according to whom the MSCI index for the Chinese financial sector fell 4% this month, much more than all the European, American and Japanese banks.

The problem is very serious, even though in the last 12 months the index has recorded 104 billion in earnings. Chinese banks' troubles are being caused by insolvent bonds offered to local governments, as well as by loans made to support the building boom that has left 50 percent of newly-built houses unsold, and by slowing global economic growth, which penalizes Chinese exports to Europe and the United States.

In 2008, at the beginning of the U.S. credit crisis, China sustained its economy with a package of aid to banks, local governments and Chinese industry of about 4 trillion dollars. This has led to a major overexposure on the part of Chinese banks and high inflation in the country. Local governments have received funding, but in most cases it was only used to create jobs, without a real business plan, without hope of repaying the debt contracted.

According to Jim Chanos, of Kynikos Associates, the insolvent debts could cut China's growth to almost to zero (it is now estimated at 9.5%).The Chinese economy is also affected by the weight of sovereign debt in Europe and the stagnation in the United States. Both areas have diminished their purchase of Chinese products, undermining the volume of exports from Beijing.

Wednesday, September 28, 2011

The next great fraud (after 2G and mining). Has possibly already hit Indian shores.

Tuesday, September 27, 2011

Forget Europe. Keep an eye on the Chinese slowdown !

China Banks Shunned as Investors Eye 2003 Low in Credit Bust

Bloomberg- September 27, 2011, 6:30 AM EDT

 

By Michael Patterson and Stephanie Tong

(Updates with today’s trading in 24th paragraph.)

Sept. 27 (Bloomberg) -- The cheapest Chinese bank stocks since 2004 may drop further as the three-year credit boom that created the world’s most profitable lenders shows signs of turning into a bust.

The MSCI China Financials Index sank 24 percent this month, falling more than benchmark bank gauges for Europe, the U.S., Japan and emerging markets. Valuations in China dropped below levels reached during the global financial crisis for the first time last week, even after Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. said first-half profits hit a record and analysts raised forecasts for next year.

While banks in the MSCI index reported $104 billion of earnings in the past 12 months, bad loans to local governments, a fading real estate boom and slower economic growth are making some of the most successful investors bearish. Jim Chanos, the short seller who predicted Enron Corp.’s collapse, says Chinese banks will fall below the value of their net assets for the first time since December 2003, from an average premium of about 20 percent. Fund managers at Vontobel Asset Management Inc. and International Value Advisers LLC who beat 99 percent of peers this year are avoiding the stocks.

Five Times Faster

“China’s economy is very distorted, and the banks, as ever, are at the epicenter of the distortions,” Edward Chancellor, who helps oversee about $106 billion as a strategist at Grantham Mayo Van Otterloo & Co. in Boston and warned of a “sucker’s rally” in Chinese stocks three days before the benchmark index peaked in August 2009, said in an interview. “If China runs into problems with the banking system, which I think it will, I cannot see a situation in which foreign investors are the main priority of Beijing.”

The tumble in Chinese bank shares has surprised equity analysts, who have more positive recommendations on the Asian country’s financial stocks than in any of the world’s other 10 biggest markets. It contrasts with a Chinese economy that’s expanding more than five times as fast as Europe and the U.S.

Bad debts may cut China’s growth rate to near zero from 9.5 percent, hurting a global economy that’s already weighed down by Europe’s sovereign debt crisis and a stagnant U.S. job market, according to Chanos, founder of New York-based hedge fund Kynikos Associates LP.

‘Not Touching’ Banks

China has led the recovery from the worst recession since the 1940s, contributing more than 30 percent to global growth last year, after the central government ordered state-owned banks to increase lending and encouraged local governments to boost spending on infrastructure and housing. New loans in China since September 2008 totaled $3.8 trillion, while fixed-asset investment surged at an average pace of 28 percent during the period. Property prices have climbed about 60 percent since the end of 2006, according to the International Monetary Fund.

“The main concern we have, and the reason we’re not touching the banks, is we’re not sure that the Chinese economy is sustainable as it is,” said Charles de Lardemelle, whose $2.3 billion IVA International Fund slipped 5 percent this year through Sept. 23, compared with an 18 percent average drop for peers, according to data compiled by Bloomberg. Similar surges in credit and investment in Japan, Thailand and South Korea all ended with a collapse in economic growth, he said in a phone interview from New York.

Severe Outlook

Evidence is building that Chinese property developers and local government financing vehicles, used to get around laws prohibiting direct borrowing, are struggling to repay their obligations as the economy slows. About 85 percent of the government financing vehicles in China’s Liaoning province, on the border with North Korea, had insufficient income last year to cover debt-servicing payments, according to a July speech by the provincial auditor.

Chinese developers face an “increasingly severe” credit outlook, which may force them to cut prices and turn to costlier funding sources as sales weaken, Standard & Poor’s said in a report today after conducting stress tests of the nation’s real estate companies.

Developers are paying as much as 25 percent interest to borrow from private trust companies as banks withdraw credit, said an official at Beijing-based National Trust in May who asked not to be identified because he isn’t authorized to speak to the media.

Bonds of Guangzhou-based Evergrande Real Estate Group Ltd., China’s second-biggest developer by sales, fell to 76 cents on the dollar last week from 109 cents at the start of the year, sending yields to a record 24 percent, according to Bloomberg data.

‘Worst Isn’t Over’

A 30 percent decline in sales may leave many developers facing a liquidity squeeze, S&P said. Most developers would be able to “absorb” a 10 percent sales drop next year, the credit rating company said.

“The worst isn’t over for China’s real estate developers,” S&P analysts led by Frank Lu wrote in the report. “Developers are bracing themselves for slower sales and lower property prices ahead.”

A gauge of Chinese manufacturing compiled last week by HSBC Holdings Plc and Markit Economics showed the industry may shrink for a third month in September, the longest contraction since 2009. China’s nonperforming loans may rise as high as 30 percent of total debt, Fitch Ratings said in April.

Falling Valuations

Tumbling valuations for Chinese bank stocks signal increasing concern that bad debt will erode earnings. ICBC, the world’s most-profitable lender and the biggest bank by market value, dropped 17 percent in Hong Kong trading last week to 6 times reported profits, the lowest level on record. The stock trades for 1.3 times book value, or assets minus liabilities, an all-time low, according to Bloomberg data.

Agricultural Bank of China Ltd., the nation’s third-biggest lender by market value, and Bank of China, the fourth-largest, have record low price-to-earnings ratios, the data show. China Construction Bank Corp., the No. 2 lender by market value, and China Merchants Bank Co., the sixth-biggest, trade at the lowest valuations since the global financial crisis. All five banks are state-controlled.

Regulators have taken steps to curb risks from the nation’s record lending boom, and a repeat of the bad debts that led to a $650 billion bailout last decade is “impossible,” China Merchants Bank President Ma Weihua said in a Sept. 14 interview. Press officers for ICBC, China Construction Bank, Agricultural Bank of China and Bank of China declined to comment, as did an official from the China Banking Regulatory Commission.

Price-to-Book

The MSCI China Financials Index, which has a 63 percent weighting in bank shares and includes insurers and property companies, dropped to 1.2 times book value last week, the lowest since January 2004, according to Bloomberg data. The index is trading at a discount to the MSCI Emerging Markets Financials Index for the first time since January 2006.

The China gauge’s price-to-book ratio has fallen 47 percent this year, more than the 36 percent decline for Europe’s Stoxx 600 Banks Index, which trades at 0.6 times book value. European banks may face a 400 billion-euro ($540 billion) capital shortfall because of losses tied to indebted governments including Greece, according to Nomura International Plc.

The Stoxx banks index and the Standard & Poor’s 500 Financials Index both dropped 11 percent this month, while the MSCI Japan Financials Index lost 6.3 percent and the MSCI Emerging Markets Financials Index declined 20 percent.

‘Lot of Headwinds’

Shares of Chinese banks “can still go a lot lower,” said Chanos, who bet on a decline in Enron shares before the company filed for bankruptcy in 2001. Kynikos is selling short “virtually all of the large banks in China,” he said, without naming specific companies. In a short sale, an investor borrows a security and sells it, expecting to profit from a decline by repurchasing it later at a lower price.

For Chinese banks, “we don’t think valuations are clear- cut, even though they trade on cheap price-to-earnings and price-to-book ratios,” said Amit Mehta, a London-based senior vice president on the emerging-markets equities team at Pacific Investment Management Co., which is “underweight” Chinese bank stocks and oversees about $1.3 trillion worldwide. “There are a lot of headwinds for the earnings outlook,” he said.

The MSCI China financials index jumped 6.5 percent today amid a rally in global equities as European policy makers increased efforts to contain the region’s sovereign-debt crisis.

Buying Chinese bank shares near current valuations proved profitable in 2008 after Premier Wen Jiabao’s government unveiled a stimulus package and increased lending to spur economic growth. The MSCI China Financials Index jumped 96 percent in the 12 months after the plan was announced on Nov. 9 of that year, with shares of Bank of China climbing more than 120 percent.

Nonperforming Loans

China’s stimulus in any world economic slump is unlikely to be more than half the nation’s estimated 9.3 trillion yuan ($1.5 trillion) fiscal and monetary expansion from November 2008 through 2010, according to Ma Jun, a Hong Kong-based economist at Deutsche Bank AG. China has $3.2 trillion of foreign-exchange holdings, the world’s biggest hoard, according to data compiled by Bloomberg.

A growing Chinese economy will help limit the rise in nonperforming loans to between 3 percent and 4 percent of total debt by the end of 2013, up from the current level of 1 percent, said Mike Werner, a bank analyst at Sanford C. Bernstein & Co. in Hong Kong who has “outperform” ratings on ICBC and China Construction Bank. Profits in the MSCI China Financials Index will probably climb 12 percent in the next 12 months, according to analysts’ estimates compiled by Bloomberg.

‘Soft-Landing Scenario’

China maintained economic growth of at least 7.6 percent in the late 1990s, even after nonperforming loans jumped to more than 40 percent of the total, according to Bloomberg data and “Red Capitalism” authors Carl E. Walter and Fraser J.T. Howie.

“The chance of having a banking crisis in China is rather low,” Stanley Li, an analyst at Mirae Asset Securities (HK) Ltd. in Hong Kong, said in an interview. “If nonperforming loans shoot up, profit will fall, but we are likely to see a soft-landing scenario. The government will step in and won’t let the system collapse.”

Some Chinese lenders still have bad loans on their balance sheets from previous banking crises, and the debt the central government is “implicitly” backing through state-owned companies and local government entities has climbed to about 200 percent of China’s gross domestic product, on a par with some European nations, Chanos said in an interview.

The surge in Chinese debt exceeded credit expansions in the U.S. before its financial crisis, in Japan before its stock and property bubbles collapsed in 1990 and in South Korea before the Asian financial crisis of the late 1990s, according to Fitch.

Loans to Developers

Chinese lenders are exposed to a potential drop in real estate prices after the government cracked down on speculative purchases and restricted new credit to developers, according to Rajiv Jain, who oversees about $15 billion at New York-based Vontobel Asset Management Inc.

The CBRC told lenders in July not to extend the maturity of loans to developers and not to grant new credit to help developers repay maturing debt. The regulator is also looking into financing of developers through trust companies as part of a broader evaluation of real estate lending, a person familiar with the matter said last week.

China’s home prices were “basically unchanged” in August from a month earlier, according to SouFun Holdings Ltd., the nation’s biggest property website.

“There’s already a very frothy asset market with real estate,” Jain, whose $1.9 billion Virtus Emerging Markets Opportunities Fund outperformed the MSCI Emerging Markets Index by 15 percentage points this year, said in an interview. “They don’t have a lot of maneuvering room on the policy side.”

More Capital

Chinese banks may have to raise more capital to support their expansion of lending and increase their cushion against bad loans, according to Nicholas Yeo, the Hong Kong-based head of China and Hong Kong equities at Aberdeen Asset Management Plc, which oversees about $298 billion. That will add to the supply of shares and may weigh on prices, he said.

ICBC’s Tier 1 capital ratio, a measure of financial strength, was 9.82 percent as of June, down from 10.8 percent in 2008, according to data compiled by Bloomberg. Bank of China’s ratio fell to 10 percent from 10.8 percent.

Banks’ funding costs are rising in the short-term lending markets, with China’s seven-day repurchase rate climbing to 3.8 percent yesterday from about 2 percent a year ago. The rate surged to 9 percent in June, the highest level since October 2007, according to Bloomberg data.

“We’d rather stay away from the big four banks,” said Yeo. “There’s still a lot of overhang in the market.”

Saturday, September 24, 2011

Mutual Fund largesse and you

John Thomas-

Mutual fund have bloated expenses and spendthrift marketing costs. You can’t miss those glitzy, overproduced, big budget ads on TV for a multitude of mutual fund families. You know, the ones with the senior couple holding hands walking down the beach into the sunset, the raging bulls, etc. You are the sucker who is paying for these.

There were so many conflicts of interest it would have done Bernie Madoff proud. Any trainee assistant trader can tell you that more 90% of all mutual fund managers reliably underperform the indexes, some grotesquely so. Published performance is bogus, they show a huge survivor bias, not including the hundreds of mutual funds that close each year.

Thursday, September 22, 2011

Yield curves are flattening

Yield curves are flattening around the world, which with short-term rates already at zero means the long end is coming down, the markets do not fear inflation (yet) and growth, while meager, is still there. Until short-term yields - on two-year Treasury notes, for example - start to rise, the bond market will not be signaling a return to growth. If longer-term yields turn around and begin to rise without a pickup in growth, it will mean that inflation is returning as a concern. If, on the other hand, longer-term yields fall and growth picks up, the Fed will have threaded the needle and kick-started a recovery

Tuesday, September 20, 2011

Kress Cycle



Clif Droke

"Despite resisting the urge to raise prices in recent years in order to prevent a consumer backlash, midsize retailer and restaurant chains are starting to raise prices to consumers. According to a quarterly survey by Barlow Research Associates, 53 percent of companies with annual sales of $10 million to $500 million have lifted prices during the last 12 months, as reported in the Sept. 4 issue of Businesweek. In other words, more price increases are on the way for the consumer despite a weakened economy.

Many economists at the Fed also have a narrow view of inflation, which they believe can be healthy for the economy under the assumption that it encourages people to spend and invest rather than sitting on their cash. There's a reverse side to this coin, however, that economists don't seem to recognize. It's the fact that continuous price increases like the ones we've seen in the last few years can inhibit spending and investment as consumers recoil from paying out too much of their disposable income on necessary items like food and fuel."

"Although the Fed tries to fight the long-term cycles through its monetary policies it cannot ultimately prevail in reversing the deflation the long-term cycles will eventually bring. The closer we head to 2014, that fateful year when the dominant 40-year and 60-year components of the 120-year cycle will bottom, the more we'll see of deflation's terrifying appearance.

Consumers will continue to see high retail prices for the balance of 2011 and into the first half of 2012 but by the second half of 2012 the effects of the deflationary long-term cycle should be in evidence. The good news is that this coming deflation will be salutary for the economy and will cleanse it of the problem of high prices that has plagued consumers for years." 

Monday, September 19, 2011

More doomsday howling

Bill Bonner

"When the stock market crashed in ’29, people had no idea what it meant. They referred to it as a “break” or a “crash.” Almost everyone figured it was just a matter of time before things were back to ‘normal.’ They were more-or-less right. The Dow returned to its ’29-high 17 years later. In real terms, it was still around its ’29-high as late as the mid-’80s — 55 years later.

But in the early ’30s, it looked as though the economy was recovering; the stock market was soon to follow, they figured.

Then, after regaining about half their value, stocks fell hard again. And then banks failed. And companies went broke. Roosevelt began his Fireside Chats. And unemployment rose to 25%.

Still, people did not see it as the “Great Depression” until later.

Similarly, when the subprime crisis and the collapse of Lehman Bros hit the markets few people knew what to think. The feds were particularly dim; they thought it was just another typical post-war downturn. They thought they could fix it the way they fixed all of them — with more credit.

But more credit wasn’t the solution to this problem, it was the cause. And adding more just made it worse.

Little by little, month after month, commentators and analysts have opened their eyes. They realize that this is a balance-sheet problem...not an inventory, liquidity or interest rate problem. But that is only the immediate problem. Gradually, they are beginning to realize that there is more going on.

Our Daily Reckoning view of it was better than most — if we say so ourselves. We knew it was a Great Correction from the very outset. We knew debt was the problem.

But even we did not see the power of this correction.

Of course, we don’t have much experience with this sort of thing. There are only two examples in the last 100 years — the ’30s in the US. The ’90s and ’00s in Japan. Not enough data points to draw much of a conclusion. But at least these two have one genetic similarity — longevity. It took 2 decades to end the Great Depression. The Japanese de-leveraging episode has already lasted more than 20 years.

We should have taken it at face value. Instead, we figured the US de-leveraging would be shorter. We saw it as a battle between the forces of deflation (the markets) and the forces of inflation (the feds). We thought the feds would have won by now. After all, they’ve got a printing press. And Ben Bernanke told us that they would use it.
But it’s not that simple, is it? The feds turned on the printing press. They added trillions in cash and credit. But so what? It hasn’t had much effect. Inflation is low...and apparently going down. If the economy goes back into recession, the CPI could even turn negative.

To make a long story short, the Great Correction appears to be greater than we realized. It has frustrated the feds completely. It has sunk bond yields to their lowest levels in 6 decades. It has knocked the upper stories off every house in America. It has taken 7 million people out of the job force.
And it looks like it is just getting started.

So, what’s this correction aiming for?

..will it correct the housing bubble that began in 1997...and stop there?

..will it correct the stock market boom since ’01...or since ’82...and be done with it?

..will it correct the bull market in bonds that goes back to ’83...or the bull market in bonds that goes back to 1971?

..how about the post-1971 dollar-based monetary system?

..will it correct the credit expansion/consumer spending boom that began in ’49?

..or maybe it will correct the boom in US economic and military power that dates back to 1917?

..Who knows? Maybe it is going to take out the entire industrial revolution boom going back to the 18th century...

..or even the boom in the human species that goes back to the 17th century?

We don’t know where this correction is going...but we want to make sure we’re somewhere safe when we finally find out."

The next leaders

Mark Minervini

"Let the stocks lead you to the sectors; the best names will almost always move before the underlying sector is hot.

Leading industry groups can emerge even while other stocks continue to make new lows during the initial upswing. As a general rule, I buy strength not weakness. True market leaders will always show improving relative strength, in particular during a market correction. You should update your watch list on a frequent basis, weeding out issues that give up too much price, while adding through forced displacement new potential buy candidates that show divergence and resilience.

As the overall market is bottoming, your watch list should multiply over a number of weeks. The better stocks start moving into new high ground as the market rallies off its lows. This is a good sign that the market has either bottomed or is getting close to a bottom. This is a critical juncture."

Sunday, September 18, 2011

Market timing


William O' Neil

"January is the most common month of the year for a bull market to top. And April is the second-most common month. This year the market started going through a distribution process in January that extended through April. We are in year three of a bull market. In past bull markets, the averages might rise 2% or 3% or 4% in such a period.

The number of distribution days that signals a probable top has changed over the years. This is due to the markets being so much larger than before. Institutions are managing a lot more money these days.

A: It used to be that three, four, or five distribution days would occur before a top was signaled. Nowadays, it can be up to six distribution days. What most investors don't realize is that a market will undergo distribution as it is advancing."

Thursday, September 15, 2011

Truth behind the investment business


After the dotcom crash, less than 3% of broker reports came with “sell” or “hold/sell” ratings. If an investment bank’s analyst dislikes a stock, they will simply drop coverage rather than lose potentially lucrative business or risk potential law suits.



Wednesday, September 14, 2011

Insider buying !

Here's an interesting bullish chart to consider. It tracks the ratio of share sales to share purchases among company insiders. In the article, Mark Hulbert points out that the ratio hasn't been this low since the start of the 2009 stock market run-up.


Stock Psychology

Mark Minervini-


A bull market is always dominated by at least one sector and several sub-sectors.


Just as the leaders lead on the upside, they also lead on the downside. Why? After an extended rally or bull market, the market’s true leaders have already made their big moves. The smart money that moved into these stocks ahead of the curve will move out swiftly at the first hint of slowing slow. When the leading names in leading industry groups start to falter after an extended market run, this is a danger signal that should heighten your attention to the more specific signs of market trouble or possible trouble in a particular sector or industry group. 


There will come a point when leading stocks stop making new highs, start to churn, or, even worse, buckle and reverse direction. This often happens before the overall market tops and gets into serious trouble. 


Some of the market’s key leaders will start to top out, while the indexes may continue to accelerate higher. 


Just as market leaders are out front on the upside, they also tend to lead on the downside.


For example, the Tech stocks that led the 1998-2000 bull market were the biggest losers during the 2000-2002 bear market. Financials and housing stocks were market leaders during the 2003-2007 bull market and then took the biggest losses during the bear decline in 2008. 


Though, there is a caveat to this rough rule of thumb: If the leadership stocks or sectors started to emerge late near the end of the bull market cycle that preceded the subsequent bear market, then in some cases, they can lead during the bull market.


Very often, leaders of the "next" bull market, emerge from the most unlikely areas, but quickly reveal themselves through the application of sound price and relative strength analysis techniques. Keep an eye out for those stocks that hold up the best during this bear market correction; they could be the next cycle’s bull market leaders. 

Tuesday, September 13, 2011

A Field Guide to Active Management Styles- Morning Star

 
One of the key most important aspects of successfully investing in actively managed stock funds is to make sure you understand their strategies. Doing so will help you understand your holdings' performance (including the inevitable weak patches), employ funds that are complementary rather than redundant, and understand whether a manager has begun to drift from a strategy that served him well in the past.


What follows is a field guide to some of the key strategies that active managers employ.


Shades of Value Value strategies divide (roughly) into the relative-value and absolute-value camps. However, some value-oriented fund managers place a premium on companies with high dividend yields.



Relative Value Fund managers practicing relative-value strategies favor stocks that look cheap relative to some yardstick, including the stock's historical price, the historic valuation norms for the company's industry, or the broad market. For example, the team at Morningstar Analyst Pick  Sound Shore  (SSHFX) looks for companies that are trading cheaply relative to their historic price multiples.

Relative-value funds have a decent shot of delivering strong performance in a variety of market conditions--not just when truly cheap stocks are in demand. For example, although technology stocks soared in the late 1990s, leaving many value funds on the sidelines, certain relative-value funds actually performed reasonably well during that stretch because they had delved into tech names they considered cheap within that sector, which was pricey overall. The key drawback to the relative-value approach is that these funds might also have more exposure to volatile growth stocks.

Absolute Value Managers such as those in charge of the Oakmark family of funds,  Third Avenue Value's  (TAVFX) Marty Whitman and Ian Lapey, and the team at  Longleaf Partners  (LLPFX) follow absolute-value strategies and are typically considered stricter value practitioners than the relative-value set. Absolute-value managers don't compare a stock's price ratios with that company's historic norms, those of other companies, or the market. Instead, they try to figure out what a company is truly worth, and they want to pay less than that figure for the stock. Absolute-value managers determine a company's worth using several factors, often looking at the company's assets, balance sheet, and growth prospects. They also study what private buyers have paid for similar companies.

As a general rule of thumb, absolute-value managers often focus on companies in traditional value sectors, including financials firms, basic-materials and manufacturing companies, and energy firms. But some of these funds will also venture into traditional growth sectors--including technology, health care, and retail--if they find a company they think is selling at a discount to what it's truly worth.      

In general, if you own an absolute-value fund, be prepared to wait out some dry spells and don't expect your fund to move in lockstep with a broad market index such as the S&P 500. Managers who follow strict value strategies tend to be a determined lot, and they're generally not swayed by market fads. It can take a while for an extremely undervalued stock to pay off, particularly if it's in a segment of the market that's badly out of favor. Over long time periods, however, absolute-value strategies have often helped funds deliver strong long-term returns.

Income-Oriented Value Another subset of value funds are those that focus on companies with above-average or even high dividend yields. Such funds might also use absolute- or relative-value strategies in addition to seeking stocks with high income payouts. For example, Jim Barrow, who runs the largest share of assets at  Vanguard Windsor II (VWNFX), focuses on high-dividend-paying stocks with low price/earnings ratios.

Managers tend to look for stocks with high dividend yields for a few reasons. First, fund managers may consider a company's ability to pay out part of its earnings in the form a dividend to be an important sign of financial strength. Other income-oriented managers might consider a high dividend yield to be a good sign of a cheap stock. (A company's dividend yield is calculated by dividing its dividend by its stock price, so if a company's share price is declining, it's dividend yield will invariably be on the rise.) Finally, some value managers focus on dividend-paying stocks because they're catering to investors who are looking to their mutual funds for a regular income stream. This last group is a declining subset of stock funds, however, largely because most common stocks deliver little in the way of income these days.  

Shades of Growth In contrast with their value-oriented counterparts, most growth managers are more interested in a company's earnings or revenues and a stock's potential for price appreciation than they are in finding a bargain. In general, growth funds will have much higher price ratios than value funds. That's because growth managers believe that if a company has what it takes to create high-quality products and services, investors will be willing to pay a higher and higher price for it in the future.

Growth-style strategies generally work better when investors are concerned about economic weakness. Manufacturing and basic-materials stocks will suffer when economic growth slumps, but companies with steadier growth generally hold up better. That's because market participants usually believe that if a company has a nifty product or service, it has the potential to grow regardless of what the broad economy is doing.

It's worth noting that growth-fund managers, like their value-oriented counterparts, practice different styles. Those styles will affect how the fund performs--and how risky it is.

Earnings-Driven The majority of growth managers use earnings-driven strategies, which means they use a company's earnings growth as their yardstick for determining how quickly the company is growing. If a company's earnings aren't growing significantly faster than those of the average company in its sector or the market as a whole, these managers aren't interested.

Within this earnings-driven bunch, earnings-momentum managers are by far the most daring. You might say their mantra is "Buy high, sell higher." Momentum investors buy rapidly growing companies they believe are capable of delivering an earnings surprise, such as higher-than-expected earnings or other favorable news that will drive the stock's price higher. These managers will likely sell a stock when its net income (based on earnings that are reported every quarter) slows. That can be the harbinger of a later earnings disappointment--a negative earnings surprise--that will drive the stock's price down.

Earnings-momentum managers typically pay little heed to the price of a stock. Instead, they focus on trying to identify companies with accelerating earnings, as well as catching upswings in stocks that have already shown price gains. These funds, therefore, can feature a lot of expensive stocks as long as earnings continue to increase at a rapid rate. American Century's lineup has several funds that use earnings momentum as a component of their strategies.         

Revenue-Driven Not all growth stocks have earnings. In particular, stocks of younger companies such as Groupon might not produce earnings for years because they're spending more than they're taking in. Some growth managers will buy companies without earnings if the companies generate strong revenue. (Revenues are simply a company's sales; earnings are profits after costs are covered.) Because there is no guarantee when firms without earnings will turn a profit or if they ever will (think of the many Internet companies that went under in 2000), this approach can be risky, risky, risky.

Blue-Chip GrowthMore moderate earnings-growth-oriented managers look for companies growing in a slow but steady fashion. The slow-and-steady group has historically included such blue-chip stocks as  Wal-Mart  (WMT) and  Procter & Gamble (PG). As long as these stocks continue to post decent earnings, the managers tend to hold on to them. Steady-growth funds often have more modest price ratios than other growth-oriented funds and often fare relatively well in slow economic environments because they favor companies that aren't dependent on economic growth for their success. Funds known for following this moderate-earnings-growth strategy include  Aston/Montag & Caldwell Growth  (MCGFX) and  Dreyfus Appreciation (DGAGX).

Shades of Blend Although some of the best-known mutual fund managers use either growth or value approaches, a giant group of fund managers is content to split the difference between these two investment strategies. We say such managers are using blend strategies because their approaches combine both value and growth styles. The blend group is home to pure index funds and indexlike funds, but it's also home to bold stock-pickers' funds such as  Legg Mason Value  (LMVTX) and  Selected American (SLADX).

If you're not sure whether the value or growth style of investing appeals to you, most blend funds are a good way to hedge your bets. That's because value and growth investment styles tend to swing in and out of favor. But if you own a blend fund, you improve your chances of having something in your portfolio that's working well no matter what. That all-weather appeal is partly what makes blend funds such popular choices for the core holdings in investors' portfolios.

GARPWithin the blend category, the most common management style is the so-called growth-at-a-reasonable-price approach, or GARP. Managers who seek growth at a reasonable price try to strike a balance between strong earnings and good value. Some managers in this group find moderately priced growth stocks by buying stocks that high-growth investors have rejected. Often, these companies have reported disappointing earnings or other bad news, and their stock prices may have dropped excessively as investors overreacted by dumping shares. GARP managers also look for companies that Wall Street analysts and other investors have ignored or overlooked and that are therefore still selling cheaply. As with value investors, GARP investors try to find companies that are only temporarily down-and-out and that have some sort of factor in the works (commonly called a catalyst) that seems likely to spark future growth.

Dividend GrowthDividend-growth funds blend aspects of both growth and value investment styles. Like income-oriented value funds, their managers want their companies to pat dividend yields. However, they're not seeking yields that are high in absolute terms, which can be a signal that a company is struggling. Rather, they like it when a firm has a history of increasing its dividend over a period of a few years or more, because it's an indication that the company is fundamentally strong and has growth potential.  Vanguard Dividend Growth  (VDIGX) is a prime example of a fund that employs such a strategy.  

A Field Guide to Active Management Styles

Article from Morning star
 
Understanding an active fund's style is essential to using it successfully
 


One of the key most important aspects of successfully investing in actively managed stock funds is to make sure you understand their strategies. Doing so will help you understand your holdings' performance (including the inevitable weak patches), employ funds that are complementary rather than redundant, and understand whether a manager has begun to drift from a strategy that served him well in the past.

What follows is a field guide to some of the key strategies that active managers employ.

Shades of Value Value strategies divide (roughly) into the relative-value and absolute-value camps. However, some value-oriented fund managers place a premium on companies with high dividend yields.



Relative Value Fund managers practicing relative-value strategies favor stocks that look cheap relative to some yardstick, including the stock's historical price, the historic valuation norms for the company's industry, or the broad market. For example, the team at Morningstar Analyst Pick  Sound Shore  (SSHFX) looks for companies that are trading cheaply relative to their historic price multiples.

Relative-value funds have a decent shot of delivering strong performance in a variety of market conditions--not just when truly cheap stocks are in demand. For example, although technology stocks soared in the late 1990s, leaving many value funds on the sidelines, certain relative-value funds actually performed reasonably well during that stretch because they had delved into tech names they considered cheap within that sector, which was pricey overall. The key drawback to the relative-value approach is that these funds might also have more exposure to volatile growth stocks.

Absolute Value Managers such as those in charge of the Oakmark family of funds,  Third Avenue Value's  (TAVFX) Marty Whitman and Ian Lapey, and the team at  Longleaf Partners  (LLPFX) follow absolute-value strategies and are typically considered stricter value practitioners than the relative-value set. Absolute-value managers don't compare a stock's price ratios with that company's historic norms, those of other companies, or the market. Instead, they try to figure out what a company is truly worth, and they want to pay less than that figure for the stock. Absolute-value managers determine a company's worth using several factors, often looking at the company's assets, balance sheet, and growth prospects. They also study what private buyers have paid for similar companies.

As a general rule of thumb, absolute-value managers often focus on companies in traditional value sectors, including financials firms, basic-materials and manufacturing companies, and energy firms. But some of these funds will also venture into traditional growth sectors--including technology, health care, and retail--if they find a company they think is selling at a discount to what it's truly worth.      

In general, if you own an absolute-value fund, be prepared to wait out some dry spells and don't expect your fund to move in lockstep with a broad market index such as the S&P 500. Managers who follow strict value strategies tend to be a determined lot, and they're generally not swayed by market fads. It can take a while for an extremely undervalued stock to pay off, particularly if it's in a segment of the market that's badly out of favor. Over long time periods, however, absolute-value strategies have often helped funds deliver strong long-term returns.

Income-Oriented Value Another subset of value funds are those that focus on companies with above-average or even high dividend yields. Such funds might also use absolute- or relative-value strategies in addition to seeking stocks with high income payouts. For example, Jim Barrow, who runs the largest share of assets at  Vanguard Windsor II (VWNFX), focuses on high-dividend-paying stocks with low price/earnings ratios.

Managers tend to look for stocks with high dividend yields for a few reasons. First, fund managers may consider a company's ability to pay out part of its earnings in the form a dividend to be an important sign of financial strength. Other income-oriented managers might consider a high dividend yield to be a good sign of a cheap stock. (A company's dividend yield is calculated by dividing its dividend by its stock price, so if a company's share price is declining, it's dividend yield will invariably be on the rise.) Finally, some value managers focus on dividend-paying stocks because they're catering to investors who are looking to their mutual funds for a regular income stream. This last group is a declining subset of stock funds, however, largely because most common stocks deliver little in the way of income these days.  

Shades of Growth In contrast with their value-oriented counterparts, most growth managers are more interested in a company's earnings or revenues and a stock's potential for price appreciation than they are in finding a bargain. In general, growth funds will have much higher price ratios than value funds. That's because growth managers believe that if a company has what it takes to create high-quality products and services, investors will be willing to pay a higher and higher price for it in the future.

Growth-style strategies generally work better when investors are concerned about economic weakness. Manufacturing and basic-materials stocks will suffer when economic growth slumps, but companies with steadier growth generally hold up better. That's because market participants usually believe that if a company has a nifty product or service, it has the potential to grow regardless of what the broad economy is doing.

It's worth noting that growth-fund managers, like their value-oriented counterparts, practice different styles. Those styles will affect how the fund performs--and how risky it is.

Earnings-Driven The majority of growth managers use earnings-driven strategies, which means they use a company's earnings growth as their yardstick for determining how quickly the company is growing. If a company's earnings aren't growing significantly faster than those of the average company in its sector or the market as a whole, these managers aren't interested.

Within this earnings-driven bunch, earnings-momentum managers are by far the most daring. You might say their mantra is "Buy high, sell higher." Momentum investors buy rapidly growing companies they believe are capable of delivering an earnings surprise, such as higher-than-expected earnings or other favorable news that will drive the stock's price higher. These managers will likely sell a stock when its net income (based on earnings that are reported every quarter) slows. That can be the harbinger of a later earnings disappointment--a negative earnings surprise--that will drive the stock's price down.

Earnings-momentum managers typically pay little heed to the price of a stock. Instead, they focus on trying to identify companies with accelerating earnings, as well as catching upswings in stocks that have already shown price gains. These funds, therefore, can feature a lot of expensive stocks as long as earnings continue to increase at a rapid rate. American Century's lineup has several funds that use earnings momentum as a component of their strategies.         

Revenue-Driven Not all growth stocks have earnings. In particular, stocks of younger companies such as Groupon might not produce earnings for years because they're spending more than they're taking in. Some growth managers will buy companies without earnings if the companies generate strong revenue. (Revenues are simply a company's sales; earnings are profits after costs are covered.) Because there is no guarantee when firms without earnings will turn a profit or if they ever will (think of the many Internet companies that went under in 2000), this approach can be risky, risky, risky.

Blue-Chip GrowthMore moderate earnings-growth-oriented managers look for companies growing in a slow but steady fashion. The slow-and-steady group has historically included such blue-chip stocks as  Wal-Mart  (WMT) and  Procter & Gamble (PG). As long as these stocks continue to post decent earnings, the managers tend to hold on to them. Steady-growth funds often have more modest price ratios than other growth-oriented funds and often fare relatively well in slow economic environments because they favor companies that aren't dependent on economic growth for their success. Funds known for following this moderate-earnings-growth strategy include  Aston/Montag & Caldwell Growth  (MCGFX) and  Dreyfus Appreciation (DGAGX).

Shades of Blend Although some of the best-known mutual fund managers use either growth or value approaches, a giant group of fund managers is content to split the difference between these two investment strategies. We say such managers are using blend strategies because their approaches combine both value and growth styles. The blend group is home to pure index funds and indexlike funds, but it's also home to bold stock-pickers' funds such as  Legg Mason Value  (LMVTX) and  Selected American (SLADX).

If you're not sure whether the value or growth style of investing appeals to you, most blend funds are a good way to hedge your bets. That's because value and growth investment styles tend to swing in and out of favor. But if you own a blend fund, you improve your chances of having something in your portfolio that's working well no matter what. That all-weather appeal is partly what makes blend funds such popular choices for the core holdings in investors' portfolios.

GARPWithin the blend category, the most common management style is the so-called growth-at-a-reasonable-price approach, or GARP. Managers who seek growth at a reasonable price try to strike a balance between strong earnings and good value. Some managers in this group find moderately priced growth stocks by buying stocks that high-growth investors have rejected. Often, these companies have reported disappointing earnings or other bad news, and their stock prices may have dropped excessively as investors overreacted by dumping shares. GARP managers also look for companies that Wall Street analysts and other investors have ignored or overlooked and that are therefore still selling cheaply. As with value investors, GARP investors try to find companies that are only temporarily down-and-out and that have some sort of factor in the works (commonly called a catalyst) that seems likely to spark future growth.

Dividend GrowthDividend-growth funds blend aspects of both growth and value investment styles. Like income-oriented value funds, their managers want their companies to pat dividend yields. However, they're not seeking yields that are high in absolute terms, which can be a signal that a company is struggling. Rather, they like it when a firm has a history of increasing its dividend over a period of a few years or more, because it's an indication that the company is fundamentally strong and has growth potential.  Vanguard Dividend Growth  (VDIGX) is a prime example of a fund that employs such a strategy.  


Wilbur Ross formula


  1. Determine an industry that has staying power (i.e. will be around in 20 years) that is under severe stress
  2. Purchase the senior bonds of a company in that industry at distressed levels
  3. File the company, and convert your senior ownership to a majority equity share
  4. Clean up operations
  5. Wait
VLCC (Very Large Crude Carriers) rates - going from the Middle East to the Far East.
This is what specialists are looking at. Perhaps you need to pay some attention.