"Don't worry about the world coming to an end today. It's already tomorrow in Australia." - Charles M. Shultz
Well we have almost made it to the end of 2011 and certainly a year that most of us would like to forget. Others however would like it to continue on forever, but such is life; there is always someone that benefits at the expense of the rest and 2011 was definitely one of those years.
Heading into 2012 I like to look ahead to see how to position my investments and in all honesty I doubt that I will be making many changes. My private equity investments are all looking relatively solid and all should continue to prosper in 2012, and based on my outlook for the global economy, my fixed rate deposit investment is looking very good. So what is my outlook for 2012?
When I was a boy growing up in Cape Town we used to have a "fort" where our neighborhood gang of boys would congregate to plan our next attack on the neighborhood girls. We were very fortunate that we lived right next to the girls only high school so we could spend tons of time working on plans that usually included insects and mud. Little did we know that a few years later we would be begging them to take notice of us but at that time the fun was to scare them.
To get to the clubhouse you had to climb an eight foot high wall, balance along the top for about 10 paces and then climb up the A framed roof of the garage. The roof was made of metal so when there was due or a rain it could be very slippery. There were more than a few times that we would slip and would be saved by the gutter at the bottom of the roof! Once you had navigated the ascent you then walked along the pinnacle of the roof to the edge and swung yourself over the edge lowering yourself down until hopefully your feet touched the hole in the wall. From there you would swing yourself into the "fort" which was the attic above the garage. I am still amazed that none of us ever fell the 20 feet onto the concrete below and even more surprised that our mothers even let us use the place, but it was a great place to hide!
So why am I wasting your time with this story. I think that it is a perfect summary of the market and how 2012 will play out. The pitfalls are enormous with everything from a collapse in Europe (falling 20 feet from the roof) to another global scare (slipping down the roof to the be saved by the gutter). It is wrought with pitfalls and the upside is limited. Undoubtedly there will be massive rallies that will be fleeting and these will be followed by sharp violent reversals. I would not be surprised by weeks of five plus percent moves in either direction all ending the year either where we started or lower.
Fear is still very much present and Europe is more than likely already in a recession. Any more slips and it will destroy what little the United States has achieved in the way of a recovery. Interest rates will remain low and may even continue to contract and it is looking more and more likely that the United States congress will be stuck in no-mans land unable to make any decisions that have a lasting benefit to society.
Not a happy environment to end the year but all of us should give thanks that we missed the mess this year and that we are well positioned for next year. Remove the stress, stay in cash and enjoy 2012. All the best for the holiday season and the New Year.
Friday, December 23, 2011
Friday, December 16, 2011
The Dollar Breaks Out
"It's almost like seeing a guy show up at the soup kitchen in high hat and tuxedo. It kind of makes you a little bit suspicious." - Congressman Gary Ackerman
The above quote was said by Congressman Ackerman after Chrysler, Ford and General Motors executives went to capital hill with hat in hand to ask for a $25 billion bail out. While that in itself was not an issue at the time the problem was that they all showed up in their private jets!
Watching the dollar break out to the upside is similar in nature. The United States economy is hardly robust but when compared to the mess in Europe it looks like a great place to invest. The chart below shows how the dollar has recently surged to the upside and has broken through resistance. A longer tailed chart would show that it recently broke through its 50 week moving average for the first time since mid 2010 a significant achievement.
So what does all this mean to you and me? Well the first thing to realize is that a strong dollar normally points to a strong economy. This is not the case and this is troubling. In order for an economy to cure its ills it is normal for that country's currency to weaken thereby strengthening the export and local economy. The reason the local economy strengthens is that imports become more expensive making locally produced goods more affordable and with the added push of increased exports the economy recovers. This is a very basic analysis but for the purposes of this blog that will suffice.
As the dollar still remains the global currency of choice most commodities are traded in dollars. A strong dollar therefore makes the price of the underlying commodity weaken as it becomes more expensive in global terms thereby reducing demand for the commodity and forcing the price lower. A look at the chart below shows how the price of crude oil has recently rolled over (for those of you who read my last blog this will not be a surprise). A lower price of crude should result in a benefit to the United States economy as crude oil is one of the main drivers of inflation. Contain the price of crude and you have a good chance of containing the inflation rate.
Looking further it appears that the inflation and fear trade in terms of gold purchases has wained as depicted by the chart below. While gold serves as a gauge of fear it is also considered to be a hedge against inflation. Based on this chart and the one above it appears that the market is not anticipating inflation any time soon.
Typically in the situation as described above you would start to see a recovery in the United States however I do not believe that this is happening. Certainly all the pieces of the puzzle are there to ignite a recovery. You have low interest rates and limited chance of inflation in the near term as unemployment is high and there is masses of factory capacity. However the weakness in the United States persists due to a poor housing market that shows no sign of recovery for at least the next 12 months, a weak employment market, high levels of debt and a fragile global market. All a strengthening dollar is pointing to is that the United States is less weak than Europe not that it is recovering. In fact a strong dollar could be the final straw that breaks the back of the meager recovery that is in place.
The stock market is looking weak and any more poor news from Europe or China could derail that train in no time at all. Certainly not a place to be at present. Stay on the sidelines and if you must go into the market head for the large cap dividend players as they have the capacity to weather the impending storm. Furthermore with yields as low as they are (and I believe that they will remain low for far longer than anyone can imagine) you need to start to accept that your "safe" money will not earn anything north of one percent unless you are prepared to step outside the box. A number of you have turned to the fixed rate deposit investment that I have been touting for a year now but for those of you still thinking about it compare the rates at www.fixedratedeposits.com with what you can receive elsewhere and I think you will be very pleased at what you find.
The above quote was said by Congressman Ackerman after Chrysler, Ford and General Motors executives went to capital hill with hat in hand to ask for a $25 billion bail out. While that in itself was not an issue at the time the problem was that they all showed up in their private jets!
Watching the dollar break out to the upside is similar in nature. The United States economy is hardly robust but when compared to the mess in Europe it looks like a great place to invest. The chart below shows how the dollar has recently surged to the upside and has broken through resistance. A longer tailed chart would show that it recently broke through its 50 week moving average for the first time since mid 2010 a significant achievement.
So what does all this mean to you and me? Well the first thing to realize is that a strong dollar normally points to a strong economy. This is not the case and this is troubling. In order for an economy to cure its ills it is normal for that country's currency to weaken thereby strengthening the export and local economy. The reason the local economy strengthens is that imports become more expensive making locally produced goods more affordable and with the added push of increased exports the economy recovers. This is a very basic analysis but for the purposes of this blog that will suffice.
As the dollar still remains the global currency of choice most commodities are traded in dollars. A strong dollar therefore makes the price of the underlying commodity weaken as it becomes more expensive in global terms thereby reducing demand for the commodity and forcing the price lower. A look at the chart below shows how the price of crude oil has recently rolled over (for those of you who read my last blog this will not be a surprise). A lower price of crude should result in a benefit to the United States economy as crude oil is one of the main drivers of inflation. Contain the price of crude and you have a good chance of containing the inflation rate.
Looking further it appears that the inflation and fear trade in terms of gold purchases has wained as depicted by the chart below. While gold serves as a gauge of fear it is also considered to be a hedge against inflation. Based on this chart and the one above it appears that the market is not anticipating inflation any time soon.
Typically in the situation as described above you would start to see a recovery in the United States however I do not believe that this is happening. Certainly all the pieces of the puzzle are there to ignite a recovery. You have low interest rates and limited chance of inflation in the near term as unemployment is high and there is masses of factory capacity. However the weakness in the United States persists due to a poor housing market that shows no sign of recovery for at least the next 12 months, a weak employment market, high levels of debt and a fragile global market. All a strengthening dollar is pointing to is that the United States is less weak than Europe not that it is recovering. In fact a strong dollar could be the final straw that breaks the back of the meager recovery that is in place.
The stock market is looking weak and any more poor news from Europe or China could derail that train in no time at all. Certainly not a place to be at present. Stay on the sidelines and if you must go into the market head for the large cap dividend players as they have the capacity to weather the impending storm. Furthermore with yields as low as they are (and I believe that they will remain low for far longer than anyone can imagine) you need to start to accept that your "safe" money will not earn anything north of one percent unless you are prepared to step outside the box. A number of you have turned to the fixed rate deposit investment that I have been touting for a year now but for those of you still thinking about it compare the rates at www.fixedratedeposits.com with what you can receive elsewhere and I think you will be very pleased at what you find.
Friday, December 9, 2011
Oil Prices - Where To From Here
"Behind every great fortune there is a crime." - Honore de Balzac
If ever there is a commodity that has its fair share or more of crimes it must be oil. For the last few months oil prices have been spiralling higher from a low of around $74 a barrel in October to over $100 a barrel earlier this month. As such it is time to have another look at the commodity that shapes much of the global economy and has a great impact on global growth.
Sometimes I have the misfortune of tuning in to a news cast of the day's market activities and I always have a laugh when I hear the analysts crowing over how high the price of oil has moved that day, or week, or for the year. It is as if the upward movement in price is a good thing. Well in all likelihood it is a good thing for the trader if he is long the position. It is also a great thing if you are an oil producing nation, but what of the majority of countries that are oil importers? Furthermore is this not a massive sign of impending inflation?
The problem with oil prices is that they are based on very poor data. On the one side of the equation is the supply of oil. How much oil is there available and how easily is it accessible? These two questions are almost impossible to answer as most of the oil lies in fields that are governed by notoriously shady characters in parts of the world that are mired in violence and corruption. Furthermore as technology advances and techniques for extraction improve, places that were once considered inaccessible are suddenly viable and wells that were thought to be dry can now be re-drilled and provide additional supply. Finally it is never known exactly how much oil can be extracted from a given well even when the total supply is fairly well known. Some wells dry up well before they were supposed to while others continue to produce for years after they were supposed to be depleted. Adding all of this up to determine supply and adding to that an estimate of unfound reserves means that the amount of oil remaining is unknown.
The second problem is that while the oil may be accessible, it can be disrupted by a war or a coup. As very little of the oil comes from economies that are considered "stable" in western eyes, there is a fear premium attached to the price of oil.
On the supply side things are a little more quantifiable. A good and growing world economy would drain the supply of oil faster leading to an increase in the price of oil, however as the price creeps up so do the incentives to producing fuel efficient vehicles, machinery and equipment. This can create a situation where less oil is used even while the economy expands.
So why in this poor of an economy is the price of oil going up so fast and does this point to inflation and an expanding economy? With new fields being tapped in Brazil and others coming online in Canada and the United States it appears that there is more than sufficient supply to handle the current economy. Furthermore it is my opinion that with the technological advances in extraction and seismology that we will find massive oil fields dotted all around the world that will become accessible. It is also my contention that as the world turns "green" that consumers in developed economies will start to rely more and more on alternative energy sources and move away from the toxicity associated with oil burning options. So that leaves the developing world.
To the developing world the cheapest option is the most viable. That said the price of oil is rapidly becoming uncomfortably high again so I believe these economies will start to feel the pinch of high oil prices and will begin to reduce their consumption. Furthermore the current state of the global economy does not warrant the current price of oil and these price levels will start to affect growth as more and more money of an already strapped consumer is swallowed up by the oil monsters. As such the global economy will not be able to continue to support these price levels.
Looking forward I believe that the current price levels are unsustainable and are set to fall. Weak global fundamentals and a burgeoning supply of oil from places like Brazil will put a lid on this move and will stave off any concerns that these price levels will start to move inflation. On the flip side of this, if prices remain elevated for much longer then you will start to see a ratcheting down on economic growth rates as consumer spending will be impacted and company profits will become squeezed.
Oil companies have been a recent benefactor from the rise in the price of oil however their rise has not been in line with the price of oil as the share prices are under performing the commodity move. Furthermore the chart of oil company stocks is looking decidedly weak. So while this group of stocks has aided the stock market rise it signals a level of distrust for the recent commodity price rise. Going forward if the price of oil falls to a more manageable level these benefactors will be levelled and will put a drag on the stock market advance.
If ever there is a commodity that has its fair share or more of crimes it must be oil. For the last few months oil prices have been spiralling higher from a low of around $74 a barrel in October to over $100 a barrel earlier this month. As such it is time to have another look at the commodity that shapes much of the global economy and has a great impact on global growth.
Sometimes I have the misfortune of tuning in to a news cast of the day's market activities and I always have a laugh when I hear the analysts crowing over how high the price of oil has moved that day, or week, or for the year. It is as if the upward movement in price is a good thing. Well in all likelihood it is a good thing for the trader if he is long the position. It is also a great thing if you are an oil producing nation, but what of the majority of countries that are oil importers? Furthermore is this not a massive sign of impending inflation?
The problem with oil prices is that they are based on very poor data. On the one side of the equation is the supply of oil. How much oil is there available and how easily is it accessible? These two questions are almost impossible to answer as most of the oil lies in fields that are governed by notoriously shady characters in parts of the world that are mired in violence and corruption. Furthermore as technology advances and techniques for extraction improve, places that were once considered inaccessible are suddenly viable and wells that were thought to be dry can now be re-drilled and provide additional supply. Finally it is never known exactly how much oil can be extracted from a given well even when the total supply is fairly well known. Some wells dry up well before they were supposed to while others continue to produce for years after they were supposed to be depleted. Adding all of this up to determine supply and adding to that an estimate of unfound reserves means that the amount of oil remaining is unknown.
The second problem is that while the oil may be accessible, it can be disrupted by a war or a coup. As very little of the oil comes from economies that are considered "stable" in western eyes, there is a fear premium attached to the price of oil.
On the supply side things are a little more quantifiable. A good and growing world economy would drain the supply of oil faster leading to an increase in the price of oil, however as the price creeps up so do the incentives to producing fuel efficient vehicles, machinery and equipment. This can create a situation where less oil is used even while the economy expands.
So why in this poor of an economy is the price of oil going up so fast and does this point to inflation and an expanding economy? With new fields being tapped in Brazil and others coming online in Canada and the United States it appears that there is more than sufficient supply to handle the current economy. Furthermore it is my opinion that with the technological advances in extraction and seismology that we will find massive oil fields dotted all around the world that will become accessible. It is also my contention that as the world turns "green" that consumers in developed economies will start to rely more and more on alternative energy sources and move away from the toxicity associated with oil burning options. So that leaves the developing world.
To the developing world the cheapest option is the most viable. That said the price of oil is rapidly becoming uncomfortably high again so I believe these economies will start to feel the pinch of high oil prices and will begin to reduce their consumption. Furthermore the current state of the global economy does not warrant the current price of oil and these price levels will start to affect growth as more and more money of an already strapped consumer is swallowed up by the oil monsters. As such the global economy will not be able to continue to support these price levels.
Looking forward I believe that the current price levels are unsustainable and are set to fall. Weak global fundamentals and a burgeoning supply of oil from places like Brazil will put a lid on this move and will stave off any concerns that these price levels will start to move inflation. On the flip side of this, if prices remain elevated for much longer then you will start to see a ratcheting down on economic growth rates as consumer spending will be impacted and company profits will become squeezed.
Oil companies have been a recent benefactor from the rise in the price of oil however their rise has not been in line with the price of oil as the share prices are under performing the commodity move. Furthermore the chart of oil company stocks is looking decidedly weak. So while this group of stocks has aided the stock market rise it signals a level of distrust for the recent commodity price rise. Going forward if the price of oil falls to a more manageable level these benefactors will be levelled and will put a drag on the stock market advance.
Wednesday, November 30, 2011
Inequality Hurts
"For a greedy man even his tomb is too small." - Tajikistani Proverb
Ask any 9 year old and they will tell you the secret to winning. Stack your team with all the best players and then take on a weak team and crush them. It is obvious. Getting ahead in business is similar. Find an opportunity and fill it quickly. Once there draw up the gates, build protective walls and attack any competitors. Once you have forged a secure environment protected by legions of attorneys and scores of patents squeeze the life out of your employees so that the few at the top can reap all the rewards for their investment risk.
In a normal society those are basically the rules to the game and so long as you obey the rules of the law you have the opportunity to make a fortune. On paper this is fine, but in the real world most entrepreneurs reap a decent amount of reward and form the middle class. A few manage to break that mould and become the super wealthy while the majority of the population struggle to make ends meet. This inequality is normally healthy but as the spread between the haves and the have nots widens problems start to occur.
As with any business operating in a healthy economy the weaknesses in the company are hidden and the personalities of the owners are manageable until the proverbial fan starts to sling mud around the room. In society when things start to go wrong the divide opens up like a festering wound and society becomes restless. In severe cases riots break out and governments can be toppled. New regimes come in and with one swoop extract from those that have and give to those that supported their uprising. These lucky few then start the cycle again. Greed is a terrible thing to waste!
At present the divide between the rich and the rest is as wide as it has been since the great depression. There has been a slow creep since 1980 and has been covered over by the middle class taking on more and more debt to keep up with the Jones'. As the fat lady has finally stopped singing and this class of society is being squeezed the divide has increased. Over $650 billion has shifted from the middle class to the rich. The problem is this - societies that have a large divide suffer from weak recoveries and large economic slowdowns as the buffer of a large middle class is removed.
Furthermore the problem is exacerbated in political circles as deadlock ensues leading to lame duck sessions with no progress just when leadership is needed. As there is no resolution or guidance from the top people lose faith in their leaders and start to point fingers. A loss of confidence ensues and a generation of non-believers is born that forever shuns the markets. After the great depression it took the Dow Jones Industrial Average until 1954 to achieve its highs of 1929. A quarter of a century to recover.
When I look at the problems that face the world and see the lack of trust and the divide growing every day, it is clear to me that regardless of how much propaganda Wall Street dishes out via the media it is not enough to repair the damage that the past decade has inflicted on the average person. So even though the market rallies here and there I am still convinced that we are just setting up for a very poor outcome but hopefully one that levels the playing field for the next generation to enjoy.
Ask any 9 year old and they will tell you the secret to winning. Stack your team with all the best players and then take on a weak team and crush them. It is obvious. Getting ahead in business is similar. Find an opportunity and fill it quickly. Once there draw up the gates, build protective walls and attack any competitors. Once you have forged a secure environment protected by legions of attorneys and scores of patents squeeze the life out of your employees so that the few at the top can reap all the rewards for their investment risk.
In a normal society those are basically the rules to the game and so long as you obey the rules of the law you have the opportunity to make a fortune. On paper this is fine, but in the real world most entrepreneurs reap a decent amount of reward and form the middle class. A few manage to break that mould and become the super wealthy while the majority of the population struggle to make ends meet. This inequality is normally healthy but as the spread between the haves and the have nots widens problems start to occur.
As with any business operating in a healthy economy the weaknesses in the company are hidden and the personalities of the owners are manageable until the proverbial fan starts to sling mud around the room. In society when things start to go wrong the divide opens up like a festering wound and society becomes restless. In severe cases riots break out and governments can be toppled. New regimes come in and with one swoop extract from those that have and give to those that supported their uprising. These lucky few then start the cycle again. Greed is a terrible thing to waste!
At present the divide between the rich and the rest is as wide as it has been since the great depression. There has been a slow creep since 1980 and has been covered over by the middle class taking on more and more debt to keep up with the Jones'. As the fat lady has finally stopped singing and this class of society is being squeezed the divide has increased. Over $650 billion has shifted from the middle class to the rich. The problem is this - societies that have a large divide suffer from weak recoveries and large economic slowdowns as the buffer of a large middle class is removed.
Furthermore the problem is exacerbated in political circles as deadlock ensues leading to lame duck sessions with no progress just when leadership is needed. As there is no resolution or guidance from the top people lose faith in their leaders and start to point fingers. A loss of confidence ensues and a generation of non-believers is born that forever shuns the markets. After the great depression it took the Dow Jones Industrial Average until 1954 to achieve its highs of 1929. A quarter of a century to recover.
When I look at the problems that face the world and see the lack of trust and the divide growing every day, it is clear to me that regardless of how much propaganda Wall Street dishes out via the media it is not enough to repair the damage that the past decade has inflicted on the average person. So even though the market rallies here and there I am still convinced that we are just setting up for a very poor outcome but hopefully one that levels the playing field for the next generation to enjoy.
Friday, November 18, 2011
A Change Can Go A Long Way
"Know thyself." - Gnothi Seuton
In ancient Greece people would flock to the temple of Apollo at Delphi in the hopes that the Oracle would show them their destiny. The thought was that if their destiny did not look appealing that they could change it to a more favorable outcome. Obviously wealth and happiness were high on their agenda just as they are today. What a lot of them missed was that inscribed above the entrance were the words "Know thyself". These words really ring true today and I believe it is more important than ever to reflect on this.
Consider what is going on in the global economy right now; Europe is a complete disaster, the United States is mired in an economy that is slowly grinding forward, credit is hard if not impossible to come by, people are loosing their houses and their livelihood, the world has lost faith in their leaders and everywhere there are grim signs pointing to more of the same (if not worse) for years to come. It is very easy to become completely wrapped up and consumed with fear and believe me everywhere I look people are fearful. Worse still stress is written on every one's faces. This can lead to serious health problems. The body begins to creak and groan which adds to the problems we face. In the sports world it is well known that the body hurts when you are losing but the aches vanish as if by magic when you win. So too when your finances are in a wreck. It certainly is not easy to be positive.
But that is just what is needed. Think about it, there is nothing that you can really do about the mess that the world is in (unless you are a president or high ranking official in your country). Getting consumed by things that are completely out of your control is completely ludicrous. Not that you should not consider them and strategise, but it is clear to me that most people are overly panicked by the potential outcomes. Focus on what you can control and, in all reality, that is just yourself.
A great story that I am sure a lot of you have heard springs to mind. Two shoe salesmen arrive in a small town in Africa where no-one wears shoes. The first salesman sends a message back to head office saying this is a complete bust as no-one wears shoes while the second sends a message back saying it is the best opportunity he has ever seen as no-one has a pair of shoes! Same town, different attitude.
Changing your outlook from negative to positive can start to turn the tide for you personally. Once you are a happier person to be around it is amazing how things will follow. Your family becomes happier, colleagues become friendlier and people open up more. Helping others is also a great endeavour that can lead to opportunities that you thought were out of your reach. It is far easier to ask for that referral once you have helped the referring person with their problem. People want to do business with positive people so look at how you are projecting yourself.
The quote above goes deeper than this though. To know yourself is to know what really makes you tick, what it is that you love to do, what it takes to make you feel at peace within your soul. That is the best part of a poor economy - the ashes of despair clear the way for the seeds of innovation. The boundaries that used to exist melt away causing some consternation for those entrenched in the old societal realms, but for those who know themselves the fear evaporates and they retool themselves and take advantage of the void created. I have seen this first hand living in South Africa during the time when foreign businesses were divesting of their holdings. It was a time of fear and gloom in the country, but for a few nimble entrepreneurs it was the greatest opportunity ever presented to them as they filled the void and made huge profits. Those that sat with their head in their hands lost their way while those that saw the great opportunity reaped the rewards.
Fixing all the mess in the world will not be easy but you can start with yourself. Make a change this weekend and reap the rewards. If we can all do this then guess what, the small change that you make will go a long way.
In ancient Greece people would flock to the temple of Apollo at Delphi in the hopes that the Oracle would show them their destiny. The thought was that if their destiny did not look appealing that they could change it to a more favorable outcome. Obviously wealth and happiness were high on their agenda just as they are today. What a lot of them missed was that inscribed above the entrance were the words "Know thyself". These words really ring true today and I believe it is more important than ever to reflect on this.
Consider what is going on in the global economy right now; Europe is a complete disaster, the United States is mired in an economy that is slowly grinding forward, credit is hard if not impossible to come by, people are loosing their houses and their livelihood, the world has lost faith in their leaders and everywhere there are grim signs pointing to more of the same (if not worse) for years to come. It is very easy to become completely wrapped up and consumed with fear and believe me everywhere I look people are fearful. Worse still stress is written on every one's faces. This can lead to serious health problems. The body begins to creak and groan which adds to the problems we face. In the sports world it is well known that the body hurts when you are losing but the aches vanish as if by magic when you win. So too when your finances are in a wreck. It certainly is not easy to be positive.
But that is just what is needed. Think about it, there is nothing that you can really do about the mess that the world is in (unless you are a president or high ranking official in your country). Getting consumed by things that are completely out of your control is completely ludicrous. Not that you should not consider them and strategise, but it is clear to me that most people are overly panicked by the potential outcomes. Focus on what you can control and, in all reality, that is just yourself.
A great story that I am sure a lot of you have heard springs to mind. Two shoe salesmen arrive in a small town in Africa where no-one wears shoes. The first salesman sends a message back to head office saying this is a complete bust as no-one wears shoes while the second sends a message back saying it is the best opportunity he has ever seen as no-one has a pair of shoes! Same town, different attitude.
Changing your outlook from negative to positive can start to turn the tide for you personally. Once you are a happier person to be around it is amazing how things will follow. Your family becomes happier, colleagues become friendlier and people open up more. Helping others is also a great endeavour that can lead to opportunities that you thought were out of your reach. It is far easier to ask for that referral once you have helped the referring person with their problem. People want to do business with positive people so look at how you are projecting yourself.
The quote above goes deeper than this though. To know yourself is to know what really makes you tick, what it is that you love to do, what it takes to make you feel at peace within your soul. That is the best part of a poor economy - the ashes of despair clear the way for the seeds of innovation. The boundaries that used to exist melt away causing some consternation for those entrenched in the old societal realms, but for those who know themselves the fear evaporates and they retool themselves and take advantage of the void created. I have seen this first hand living in South Africa during the time when foreign businesses were divesting of their holdings. It was a time of fear and gloom in the country, but for a few nimble entrepreneurs it was the greatest opportunity ever presented to them as they filled the void and made huge profits. Those that sat with their head in their hands lost their way while those that saw the great opportunity reaped the rewards.
Fixing all the mess in the world will not be easy but you can start with yourself. Make a change this weekend and reap the rewards. If we can all do this then guess what, the small change that you make will go a long way.
Friday, November 11, 2011
The World Needs A Leader
"I can calculate the motion of heavenly bodies, but not the madness of people." - Sir Isaac Newton
The above quote comes from the South Sea Bubble of 1720 after Sir Isaac had lost a fortune. For those of you how have not studied the history of market bubbles, the South Sea Bubble was created in the 1700's when a company, the South Sea Company, convinced the United Kingdom government to give them the exclusive rights to all trade across the South Seas. In return they would shoulder all the government debt of roughly GBP 10 million. Not only would the merchants be given the rights to trade but the government would tax certain items to make the interest payments of 6 percent per year. It turned out that the company never performed on its side to the bargain as it never gained rights from the Spanish government to the ports in Chile and Peru. This did not deter the company from taking on more government debt and raising millions in stock sales by selling the public on the belief that the riches were just around the corner. Needless to say that after a magnificent run-up the stock collapsed after England declared war on Spain and left in its wake numerous victims. High ranking government officials who were involved with the company were tried and stripped of their worth.
Recently another large company MF Global the futures and commodities titan let investors down with a $600 million fraud. Outside of this Chinese stocks have been notoriously weak on the compliance side and have lead the auditors down the path to disaster time and time again. In Europe the news is terrible in that the Italian government could soon default on its debt which is the third largest debt load on the planet. This would be disaster for the global financial institutions.
Needless to say, the market rallied in the face of this adversity on the fact that the consumer confidence in the United States was higher than expected. You have got to like the madness of crowds. Certainly all bubbles have to have crowds to exist and run ever higher. In certain extreme situations frenzied crowds can change a government or support a dictator, just look at how Hitler swept to power.
Throughout the world there is a mild wind of resentment that is starting to stir. Small crowds have gathered around the globe to express their discontent of the current leadership and policies. People are fed up at the lack of leadership and they want answers. I am sorry to say that the crowds are not having enough of an effect as the leadership in the United States and around the world has brushed this off with little concern. The problem is that until the people find a leader that they can believe in there will be little in the way of forward progress. Negative sentiment needs to be reversed by someone the people can trust and there are very few of them left.
Today is Veterans Day in the United States and I must admit that having served in the South African Defense Force I can truly say that I take my hat off to the poor souls fighting in Afghanistan, particularly when the cause is being debated in congress and there is no hope of winning. Furthermore to know that huge cuts to the defense budget are coming that will lead to the loss of a job on their return must be terrible for morale. Despite that they preserver because of a high moral conduct even when they know that the end is in sight. Our "leaders" of the world would do well to look a battle worn soldier in the eye, gain an insight from that sense of duty and then turn and command their countries out of this malaise no matter what the political loss of capital.
The above quote comes from the South Sea Bubble of 1720 after Sir Isaac had lost a fortune. For those of you how have not studied the history of market bubbles, the South Sea Bubble was created in the 1700's when a company, the South Sea Company, convinced the United Kingdom government to give them the exclusive rights to all trade across the South Seas. In return they would shoulder all the government debt of roughly GBP 10 million. Not only would the merchants be given the rights to trade but the government would tax certain items to make the interest payments of 6 percent per year. It turned out that the company never performed on its side to the bargain as it never gained rights from the Spanish government to the ports in Chile and Peru. This did not deter the company from taking on more government debt and raising millions in stock sales by selling the public on the belief that the riches were just around the corner. Needless to say that after a magnificent run-up the stock collapsed after England declared war on Spain and left in its wake numerous victims. High ranking government officials who were involved with the company were tried and stripped of their worth.
Recently another large company MF Global the futures and commodities titan let investors down with a $600 million fraud. Outside of this Chinese stocks have been notoriously weak on the compliance side and have lead the auditors down the path to disaster time and time again. In Europe the news is terrible in that the Italian government could soon default on its debt which is the third largest debt load on the planet. This would be disaster for the global financial institutions.
Needless to say, the market rallied in the face of this adversity on the fact that the consumer confidence in the United States was higher than expected. You have got to like the madness of crowds. Certainly all bubbles have to have crowds to exist and run ever higher. In certain extreme situations frenzied crowds can change a government or support a dictator, just look at how Hitler swept to power.
Throughout the world there is a mild wind of resentment that is starting to stir. Small crowds have gathered around the globe to express their discontent of the current leadership and policies. People are fed up at the lack of leadership and they want answers. I am sorry to say that the crowds are not having enough of an effect as the leadership in the United States and around the world has brushed this off with little concern. The problem is that until the people find a leader that they can believe in there will be little in the way of forward progress. Negative sentiment needs to be reversed by someone the people can trust and there are very few of them left.
Today is Veterans Day in the United States and I must admit that having served in the South African Defense Force I can truly say that I take my hat off to the poor souls fighting in Afghanistan, particularly when the cause is being debated in congress and there is no hope of winning. Furthermore to know that huge cuts to the defense budget are coming that will lead to the loss of a job on their return must be terrible for morale. Despite that they preserver because of a high moral conduct even when they know that the end is in sight. Our "leaders" of the world would do well to look a battle worn soldier in the eye, gain an insight from that sense of duty and then turn and command their countries out of this malaise no matter what the political loss of capital.
Friday, November 4, 2011
Why Are We So Enamored With The Stock Market?
"It's only when the tide goes out that you learn who's been swimming naked." - Warren Buffet
In the United States in circa 1640 Wall Street and the surrounding area was a place where local merchants and traders would gather to buy and sell shares and bonds. Over time they divided themselves into two classes—auctioneers and dealers. In the late 18th century, there was a buttonwood tree at the foot of Wall Street under which traders and speculators would gather to trade securities. In 1792, traders formalized their association with the Buttonwood Agreement which was the origin of the New York Stock Exchange. The idea of the agreement was to make the market more "structured" and "without the manipulative auctions". Persons signing the agreement agreed to charge each other a standard commission rate; persons not signing could still participate but would be charged a higher commission for dealing. Since then the stock market has blossomed and now markets across the United States trade more than 2.5 billion shares a day.
The premise behind the stock market is a place for companies to gain access to capital. There are only two ways in which a company can gain capital; adding debt or selling equity. There are a myriad of methods tied into these two basic principles but essentially those are the only two possible ways. The stock market is a place where entrepreneurs can sell a portion of their equity in order to take some of their personal risk off the table or increase their capital base to expand their business. Furthermore equity can be used as financing to acquire companies. For this reason companies have a desire to find a liquid market that can provide them funds quickly, cheaply and easily.
Investors buy this stock for the purpose of profiting from the investment. Buy the stock at a low price and sell it at a higher price and the spread is profit. For these reasons they want a liquid market that provides them a sense of security by imposing stringent rules on the issuers. These rules try to protect the investors against fraud and other forms of trickery. Entrepreneurs that bend or break the rules are liable for their actions and can have their shares suspended or even serve a prison sentence.
In the past the idea was to buy a stock that you believe in and hold it for an extended period of time. Over time with the growth of the company the price of the stock would appreciate resulting in a profit for the buyer. In addition many stocks paid a good dividend so the holder of the stock was rewarded for his or her patience with dividend payments. If you could select the best companies you could make a fortune.
The word FORTUNE is the often the route cause of most investors' problems. Think of a gold rush or the mania associated with any other opportunity to garner a fortune and you get the idea. With the advent of the Internet amateurs and professionals alike could speculate in the market and make a fortune out of betting on a stock. This speculation or gambling was enhanced with the advent of derivatives that allowed small investors to increase the size of their bets while risking only a fraction of the collateral. Never before has this speculation been more rife than the current market. As the market languishes near the neutral line for the past decade, trading volumes have tripled. With the advent of cheap powerful computers trading has turned into a frenzy where milliseconds mean the difference between large profits and losses.
Into this frenzy come thousands of amateurs most of whom trade stocks that they know little to nothing about. They are driven like sheep to the slaughter by the incessant promotion of the markets on television in the newspapers and through the armies of stock sales people. They are blinded to the fact that the stock market has been a terrible place to invest for the past decade. The pitch is that you should always be in stocks as that is the place where fortune's are made. However no-one mentions that fortunes are also lost there every day. Our ego gets the better of us and forces us back to the well time and time again just so we can have some bragging rights at the water cooler or so that we do not feel left behind.
Take a favorite stock of almost every amateur investor Apple for example. Most people believe that they know all about Apple. They buy its products and believe that the company is bullet proof, but most of them have no idea about who the company's competitors are and how their technologies could strip Apple of its luster. In fact most investors do not even know the name of the current company CEO, but they believe that they know the company because they buy the products. It is a speculative investment based on flawed analysis. However what they do have on their side at present is that the euphoria surrounding the company has driven people in their thousands to buy the stock and drive it higher. What people forget is that Apple once was a high flyer but its product insulation almost caused its total demise until Mr. Jobs stepped back into the breach and turned the business around. As he is now dead there is no reason why the current product offering could not be undermined by other competitors. Just look at what Apple did to Research in Motion the maker of the Blackberry.
Take your head out of the sand and look at what the driving forces are behind stock gains - the global economy. See where that is headed and this will give you a better understanding why I believe that the stock market may not be the best place in which to invest at present. Companies rely on global growth in order to grow. If there is no growth then while the toughest companies will survive it will be at the expense of the rest. This is our current environment. If you hold a basket of stocks and some companies make a lot of money and their share prices increase but the majority either sink or struggle then overall you are losing. Rather take your pride and bury it and wait for there to be a signal that the global economic engine has fired back up. Once that has happened then get back into the market.
Certainly the market is forward looking, but believe me, having been in the market for decades I know that while it looks forward, there is enough speculation in it to provide you plenty of opportunity to reinvest once things start to turn. Even missing the first year of the next secular bull market will not have an impact if you capture the rest of a ten year move AND you have not suffered the losses that everyone else did during the downturn. Protect yourself now and wait for a clear signal before you return to the stock market.
In the United States in circa 1640 Wall Street and the surrounding area was a place where local merchants and traders would gather to buy and sell shares and bonds. Over time they divided themselves into two classes—auctioneers and dealers. In the late 18th century, there was a buttonwood tree at the foot of Wall Street under which traders and speculators would gather to trade securities. In 1792, traders formalized their association with the Buttonwood Agreement which was the origin of the New York Stock Exchange. The idea of the agreement was to make the market more "structured" and "without the manipulative auctions". Persons signing the agreement agreed to charge each other a standard commission rate; persons not signing could still participate but would be charged a higher commission for dealing. Since then the stock market has blossomed and now markets across the United States trade more than 2.5 billion shares a day.
The premise behind the stock market is a place for companies to gain access to capital. There are only two ways in which a company can gain capital; adding debt or selling equity. There are a myriad of methods tied into these two basic principles but essentially those are the only two possible ways. The stock market is a place where entrepreneurs can sell a portion of their equity in order to take some of their personal risk off the table or increase their capital base to expand their business. Furthermore equity can be used as financing to acquire companies. For this reason companies have a desire to find a liquid market that can provide them funds quickly, cheaply and easily.
Investors buy this stock for the purpose of profiting from the investment. Buy the stock at a low price and sell it at a higher price and the spread is profit. For these reasons they want a liquid market that provides them a sense of security by imposing stringent rules on the issuers. These rules try to protect the investors against fraud and other forms of trickery. Entrepreneurs that bend or break the rules are liable for their actions and can have their shares suspended or even serve a prison sentence.
In the past the idea was to buy a stock that you believe in and hold it for an extended period of time. Over time with the growth of the company the price of the stock would appreciate resulting in a profit for the buyer. In addition many stocks paid a good dividend so the holder of the stock was rewarded for his or her patience with dividend payments. If you could select the best companies you could make a fortune.
The word FORTUNE is the often the route cause of most investors' problems. Think of a gold rush or the mania associated with any other opportunity to garner a fortune and you get the idea. With the advent of the Internet amateurs and professionals alike could speculate in the market and make a fortune out of betting on a stock. This speculation or gambling was enhanced with the advent of derivatives that allowed small investors to increase the size of their bets while risking only a fraction of the collateral. Never before has this speculation been more rife than the current market. As the market languishes near the neutral line for the past decade, trading volumes have tripled. With the advent of cheap powerful computers trading has turned into a frenzy where milliseconds mean the difference between large profits and losses.
Into this frenzy come thousands of amateurs most of whom trade stocks that they know little to nothing about. They are driven like sheep to the slaughter by the incessant promotion of the markets on television in the newspapers and through the armies of stock sales people. They are blinded to the fact that the stock market has been a terrible place to invest for the past decade. The pitch is that you should always be in stocks as that is the place where fortune's are made. However no-one mentions that fortunes are also lost there every day. Our ego gets the better of us and forces us back to the well time and time again just so we can have some bragging rights at the water cooler or so that we do not feel left behind.
Take a favorite stock of almost every amateur investor Apple for example. Most people believe that they know all about Apple. They buy its products and believe that the company is bullet proof, but most of them have no idea about who the company's competitors are and how their technologies could strip Apple of its luster. In fact most investors do not even know the name of the current company CEO, but they believe that they know the company because they buy the products. It is a speculative investment based on flawed analysis. However what they do have on their side at present is that the euphoria surrounding the company has driven people in their thousands to buy the stock and drive it higher. What people forget is that Apple once was a high flyer but its product insulation almost caused its total demise until Mr. Jobs stepped back into the breach and turned the business around. As he is now dead there is no reason why the current product offering could not be undermined by other competitors. Just look at what Apple did to Research in Motion the maker of the Blackberry.
Take your head out of the sand and look at what the driving forces are behind stock gains - the global economy. See where that is headed and this will give you a better understanding why I believe that the stock market may not be the best place in which to invest at present. Companies rely on global growth in order to grow. If there is no growth then while the toughest companies will survive it will be at the expense of the rest. This is our current environment. If you hold a basket of stocks and some companies make a lot of money and their share prices increase but the majority either sink or struggle then overall you are losing. Rather take your pride and bury it and wait for there to be a signal that the global economic engine has fired back up. Once that has happened then get back into the market.
Certainly the market is forward looking, but believe me, having been in the market for decades I know that while it looks forward, there is enough speculation in it to provide you plenty of opportunity to reinvest once things start to turn. Even missing the first year of the next secular bull market will not have an impact if you capture the rest of a ten year move AND you have not suffered the losses that everyone else did during the downturn. Protect yourself now and wait for a clear signal before you return to the stock market.
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