Finance Weekly Updates
Is Leverage Dead?
The liberal use of leverage was a major factor in the current economic crisis.
However, use of leverage can sometimes be justified for short-term, technical traders,
provided it is paired with appropriate position size and a responsible, automated stop-losses policy.
Leverage, a euphemism for borrowing money to invest in risky ventures, was the turbo-charge behind outsize profits in the boom years. And it was the fuel that made the fires flare that much higher when investment banks crashed and burned.
Have we seen the last of heavily leveraged investment?
For the short term, it would seem so. Even if some investors are still brazen enough to play the leverage game, it appears that for the time being banks and other sources of capital are unwilling to be so free with their money.
There will not be money available to borrow for risky ventures in the same quantities as in the past.But in the longer term, we can expect to see leverage making a comeback. One particular area where leverage is very useful is in day-trading based on technical analysis. Technical analysis is notoriously unreliable as a determinant of long-term price movements. Yet without leverage, it is not realistic to use technical analysis for intra-day investment positions, because the fluctuations are far too small to generate returns that justify the investment of time and energy inherent in active trading.
By heavy use of leverage, investors can amplify the quantitative impact of small intraday technical fluctuations, which are actually the most reliable technical trading opportunities. The use of leverage per se should not be viewed as an inherently risky approach. The critical question is what percent of an investor’s available capital would be lost on a given position in a worst-case scenario. When heavy leverage is used, the investor should check to be sure that he could not lose more than 1 percent on the same position, or on parallel, concurrent positions, which are expected to act in concert.
Setting an automated stop loss and refusing to readjust it is critical to enforcing discipline in this regard; without it, an investor is risking all of his principal in every position.
Basics of Technical Analysis
Technical analysis is the evaluation of patterns in the historical price of a stock, currency pair,
commodity or other financial instrument in order to determine likely future moves.
This type of approach is distinguished from fundamental analysis, that focuses on studying the forces currently at play and likely to influence the value of the asset.
A fundamental analyst would examine the balance of payments and profitability of a corporation,
along with industry factors that appear likely to impact upon the sector in which the corporation is active.
In the case of a currency, a fundamental analyst would consider a far wider range of considerations impacting upon the viability of the state’s government and economic systems.
A technical analyst disregards all of these factors and studies the asset price alone.
A historical chart is generally the easiest format in which to make sense of price data.
While there are a number of elaborate theories about Fibonacci numbers, stochastic indicators,
and other mathematically complex approaches, some of the simpler technical analysis tools are much more intuitive and seem to reflect the basic elements of group psychology that are active in a trading environment made up of a large number of individuals.
For instance, technical traders consider certain price points to be support/resistance levels.
A price that has in the past been difficult to exceed, or to fall below, can function as a moment of reflection for the masses of traders.
So if a stock has risen repeatedly but failed to exceed $47, it is likely that when it touches that price, it will pause. Should it break through even a little, it will continue on rising until it encounters another resistance point. Support levels serve the same function for a falling price.
With the advent of automated trading, it became possible for investors to give an automatically triggered order that takes effect when a price exceeds a given level. This allows sellers to acquire an asset the moment it exceeds a resistance level, when it is strongly expected to continue its upward trajectory.
This is known as trading breakouts.
Oil prices are now above $91 a barrel, after hitting the eight months low because of significant global economic concern, this concern limits to growth and undermines the global demand for crude oil Space with a world financial crisis still going on animist suspect that oil prices will stay low. In the last three months we have seen that the investors expectations about oil demand have turned completely around as financial crisis and turmoil has sparked serious concerned and foreseen a recession that could have developed in the US and spill into Europe. Green energy enthusiasts are concerned that the lower the prices will go the less investment there will be to rid the US from dependency on oil.
What’s Next for the EUR/USD?
For the past three years, Americans have watched in shock and horror as their currency fell increasingly far behind the Euro, an upstart currency that seemed destined to supplant the greenback as the prime world currency. Indeed, some Europeans had even been clamouring for a reexamination of the status of the US dollar as a global reference currency for the international finance community, as established under the Bretton Woods agreements signed by the G8 after the Second World War.
But now it appears as though the trend is reversing itself. A number of factors related to the current financial crisis appear to strengthen this reversal.
US investors, shaken by the subprime crisis and unable to borrow as liberally as in the past,
are pulling their money out of investments in Europe and developing countries and bringing them home, converting them back to dollars.
The US, as a federal government, is also expected to be able to address the crisis more coherently than the fragmented EU, which shares a currency but not a government or a policy-making apparatus. Add to this the global fear of risk, and investors from all over the world are running to US Treasury Bills as a source of shelter in bad times. In doing so, they also convert their local currencies to dollars.
The US economy recovered far faster than Europe from economic downturns in the previous half century, and many assume that will be the case this time around as well. This means that what little investment capital now exists is headed for the states, an additional source of upward pressure on the value of the dollar against the Euro.
It may seem unfair that a crisis which originated in the USA should strengthen the dollar against other world currencies, but for the foreseeable future, that does appear to be the outlook.
Currency traders and individuals with holdings in multiple currencies should factor in this projection when determining their positions for the coming years.
Omaha-based investment guru Warren Buffet recently made a rare public proclamation.
In a New York Times editorial, he encouraged others to follow his suit and buy up US equities,
in the belief that the current panic has depressed their values far beyond fundamentally justifiable levels.
He revealed that he himself now has nearly 100% of his personal fortune invested in US stocks.
He admonished his readers to remember to be ‘fearful when others are greedy, and greedy when others are fearful’.
This seems like sound counsel, and fairly intuitive to committed contrarian investors.
But what Buffet didn’t emphasize in his editorial is the specific identity of the stocks he has recently picked.
Notably, he recently invested in two major banking powerhouses, Goldman Sachs and Wells Fargo. On reflection this investment is easy to understand.
Even as the public is disturbed and distracted by news of the falls of such titans as Bear Stearns and Lehman Brothers,that news has a silver lining. The field of investment banking, even as it narrows, will not disappear.
The fall of irresponsible brokerage houses means more opportunity and profits for their more prudent competitors who have weathered the crisis.
To put it differently, America will always have to bank somewhere, and it now appears that the somewhere will be with Wells Fargo and Goldman Sachs.
If shares of these banks are now depressed, it is only a result of irrational panic and fear.
This creates a rare opportunity to buy up shares at an artificially discounted price.
In short, for those who can get a grip and suppress the instinct to flee for cover,
now is an excellent time to follow Buffet’s example and load up on shares those investment banks
that appear poised to swallow up the market share left on the table when others failed.
One of the most powerful images of the Great Depression is of the tragic run on the banks. When depositors became panicked that banks could not cover all of their obligations, they stampeded to withdraw their money. They were correct- the banks could not pay back all of the depositors, and as a result they went bankrupt, taking the depositors money with them.
In the wake of that crisis, the current FDIC insurance system was established. This system allocates a federal guarantee of $100,000 per account.
It is intended to ensure that depositors can have full confidence that their savings will not be lost, even in the unlikely event that their bank should fail.
Under this system, US banks have been considered among the most reliable in the world.
However, as we enter a period of unprecedented financial turmoil, many depositors are wondering whether they are adequately protected in the event of a systemic failure of the banking community.
In order to examine this concern, we need to understand some of the distinguishing features which differentiate the current banking climate from the one which existed in the time of the depression.
The most prominent feature of the current system is the extent of integration and interconnectedness,
both within the US and on a global level.
This creates a situation where the entire nation and indeed the entire world are one large and interdependent system, so that a failing in any one area has the potential to bring the rest down along with it.
Gone are the days when one could avoid a local recession by investing in an overseas boom.
Second, much of the investment capital circulating today is managed electronically, which means that transactions happen at much greater speed.
Thus, a downward trend which might have taken months to play out can now occur within hours.
Both of these factors mean that a panicked sell-off today can have calamitous repercussions that far exceed those of the great depression both in extent and in speed.
Given this background, some more cautious investors raise two alarming issues.
First, even if depositors individual accounts are guaranteed by the government, how would the government possibly administer the distribution of funds in the event that the entire banking industry were to implode, and records were lost or inaccessible?
In an era of electronic records, couldn’t critical data be lost or distorted to the point where a reimbursement of depositors would become infeasible?
Second, is the US government’s own financial house in adequate order to serve as guarantor for the deposits of its entire citizenry?
During the Bush years, unprecedented government spending led to the accumulation of over ten trillion (yes, with a ‘t’) dollars of national debt, a staggering and unprecedented sum.
Add to that the hundreds of billions the government is pledging for various bailout and stabilization packages, and a troubling picture emerges. It appears that consumers have overspent and then left the banks holding the bill, the banks have done the same to their investors, and now, the investors are doing the same to the federal government. Passing along responsibility to a higher echelon does nothing to resolve the underlying lack of wealth.
In light of all these factors, some are beginning to doubt the realism of implementing FDIC insurance, should it ever be needed. When asked what is the best position in which to weather the current crisis, one clever analyst remarked, “either cash or fetal”. More Americans are beginning to wonder whether perhaps they will find themselves in the latter, wishing they had selected the former.
In the past couple months, the term Iceland has become synonymous with economic havoc. All of Iceland’s major banks, their currency, and their stock market, collapsed within a matter of weeks. The citizens of pastoral Nordic nation awoke one morning to find their savings evaporated, their salaries slashed, their homes and investments devalued. What led to this shocking calamity, and what can we learn from it?
1. Currency Bubble – Speculative investment in the Krona had reached bubble proportions. Having such a small currency so heavily over-invested invited an abrupt fall, as foreign investors, who held the vast majority of the currency, had no compunctions about unloading it at the first sign of trouble.
2. Outgrowing your Country – Banks in Iceland had outgrown themselves and their country. According to some estimates, they were endebted to foreign creditors and depositors at a level equivalent to €160,000 per individual Icelandic citizen! Clearly it was not realistic for the Icelandic government, whose budget derives from the collection of taxes, to provide meaningful insurance on these deposits.
3. Bad Fences Make Bad Neighbors – Icelandic banks operated branches in Europe that were not properly structured in order to be independent from their parent institutions. As a result, they were ineligible for insurance or assistance from the British or European banking authorities. A very acrimonious debate erupted between the British and the Icelandic governments when Iceland intimated that it would not guarantee the deposits of non-Icelanders, and Britain retaliated by seizing the assets of those branches which operated on English soil.
US consumers may be celebrating the recent fall of gas prices, but a number of disturbing fundamentals lie behind this seemingly positive development .
If we examine the underlying causes for the recent fall of oil from about $150 to under $70 a barrel, we will find some unsettling surprises.
First, we must understand that price is determined by the balance between supply and demand.
About a year ago, demand for oil exceeded supply for a number of reasons. First, the OPEC nations were limiting production to maintain high prices.
Second, a large amount of American capital was being invested in speculation on the continued rise of oil.
Investors were buying up ever more oil in the belief that its value would continue to appreciate.
This created bubble conditions in which the price escalated beyond an appropriate level, only to collapse at the first sign of trouble.
Third, US consumers were spending borrowed money freely, buying expensive gas and oil along with the large homes and vehicles that consume them. Once the US credit market tightened, the outlook was for consumer demand for oil to drop radically in the coming years.
All of this points to a disturbing conclusion: although the low price of oil may be convenient for the consumer in the short term, it reveals deep failings in the economy. Speculative investors have sustained massive losses on oil, and several hedge funds have lost all of their capital in this venture alone.
Consumers are curtailing their consumption of oil so abruptly that even substantial production cuts by OPEC cannot keep pace.
When investors are sustaining losses and consumers are unwilling or unable to spend, we are on the threshold of a major recession, if not a depression.
That Dream Home May Be in Your Reach
So many families in the US have watched over the past decade as house valued drifted further and further out of reach. While some borrowed astronomical sums at nearly usurious rates, getting into the home ownership game at any price, others were relegated to the sidelines, whether by choice or due to a lack of financial ability. As the real-estate market implodes, this may be the ideal time for those ‘benchwarmers’ to come on the field and play the game.
Home prices have now fallen more than 30% in some US markets, particularly in the so-called ‘exburbs’,
the more remote suburbs whose desirability has been hampered by the rise in the price of gas. Over-construction has also led to a surplus of unsold houses, making contractors desperate to unload homes at almost any price.
Of course, given that wages are stagnating or even dropping, and that banks are much tighter with credit, it is going to be harder for most buyers to find a mortgage for which they can qualify. But there is another factor which works in their favor. We are now seeing a sustained policy of cutting interest rates on the part of the federal banks.
The primary purpose of this move is to make bank depositing unattractive, and business borrowing appealing, thus spurring entrepreneurial activity that can stimulate a dormant economy. But it also works to the advantage of home loan borrowers – rates are so low as to substantially reduce interest payments over the course of the loan.
Borrowers would be wise to select a fixed-rate mortgage, where they are assured that they will only pay the current low rate even when the economy rebounds and interest rates rise. In short, if you have some cash for a down payment and can get a Fixed-Rate Mortgage this may be the ideal time to buy that house you thought you couldn’t afford just a year or two ago.
Coming out ahead of both Switzerland and Luxembourg, the American state of Delaware was ranked first as the most opaque tax haven by the Tax Justice Network. The TJN is an organization whose mandate is to promote transparency in international finance.
Although Switzerland received the highest score for secrecy, here called opacity, along with several other countries such as Malaysia and small Caribbean countries like Barbados, when calculated together with the country’s importance as a place of cross-border financial activity, Delaware outranked these other countries.
The outcome of the ranking is as follows:
Only 480 of the finest hotels and restaurants in the world have received entry into the exclusive association, Relais & Chateaux. Established in France in 1954, this association accepts outstanding properties with unique character and style. To stay in a hotel that is part of the Relais & Chateaux collection is to enjoy life just a bit more.
Hotel Blantyre – Hotel Blantyre, situated halfway between Boston and New York City in an elegant country Tudor-style house, offers a fantastic getaway. Enjoy a visit to the Normal Rockwell museum, a hot air balloon ride, horseback riding and more. Return to the Blantyre for their spa treatment and for a cooking class by the Grand Chef Christopher Brooks.
Planter Inn – For a trip down South, you simply must stop at the Planters Inn in Charleston, South Carolina. Overlooking the Old City Market, this hotel is surrounded by colonial houses and is in the heart of the Charleston historic district. Enjoy four poster beds, period-style furnishings and luxury accommodations. Dine at the Peninsula Grill for an award-winning culinary experience.
The Jefferson Hotel – The newly renovated 99 room Jefferson Hotel is the first Washington D.C. property to win entry into the Relais & Chateaux luxury hotel collection. Newly renovated by Ogden CAP Properties, LLC, with Principal and Co-Founder Connie Milstein, this exquisite hotel enhances any stay in the Washington D.C. area.
While the current recession certainly has an impact on most businesses, there are actually ways that some businesses can benefit from the current difficulties. As Dr. Mike Walden, the North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, says:
” When you have recession, people are going to change some of their spending habits. For example, typically we see during a recession people buy fewer new cars. That means they’re keeping their existing cars longer, and that probably means they’re going to need more repairs on those existing cars. Also look at construction. Construction often shifts during a recession from building new homes to people staying in their homes and perhaps remodeling. So remodeling may go up.”
College towns may find the economic downturns helping them as well. As VSU Associate Professor of Economics Cindy Tori points out, “If you have a business that can tap into that student population it’s going to help you position yourself for that recovery.”
Magazine subscriptions are big business. There are many companies on the market today that offer fantastic rates on your favorite magazines. The question then becomes – where should you get your magazine subscription? Is there even a better way to read your favorite magazines?
First, the cheapest way to read some of your favorite publications is to do so online. Most magazines today have websites where they feature some of their articles each month. You can browse through parts of O Magazine, for instance, at their online site. This is not, however, going to provide you with all of the information that you love in your magazines. It only offers a sampling. It’s also not the coziest way to enjoy reading, as sitting in front of the computer doesn’t lend itself to cuddling in bed or reading on the couch.
The library is another option. Certainly, you’ll be able to find some magazines at the library and can check them out for free. The problem with this approach is that the best and most popular magazines have usually been taken before you get there, and you’ll have to continually return to the library to get the magazines for the following month.
Another option is to get a subscription with the magazine company. If you know which magazine you want, you can fill out the form inside the magazine or call the number provided and sign up for a subscription. Another option is to use a discount magazines subscription company like National Magazine Exchange or Magazine Deals Now. The benefit of these companies is that you can often switch magazines mid-year if you decide that you’re tired of cooking magazines and want to read about animals instead. These registries offer flexibility while providing great rates.
Aetna announced that members who enroll in its 2010 Medicare plans will have access to enhanced services called medication therapy management (MTM) aimed at helping them safely and effectively take medications prescribed by their physician. MTM, which will be delivered by Mirixa Corporation, brings together pharmacists, patients, physicians and other health care professionals to help patients with their medications.
Wining a Rhodes scholarship is an incredibly prestigious honor and one that often marks future success. 32 American students are chosen each year out of 1500 applications. Winners exhibit exemplary service, academic achievement, and character.
Started by the estate of Cecil Rhodes in 1902, The Rhodes Scholarship program is the oldest international educational fellowship in the world. In his will, Cecil Rhodes wrote down four criteria by which applicants are to be evaluated. These include their literary and scholastic attainments; their energy to use their talents to their best capacity; their character as defined by their truth, courage, devotion to duty and sympathy for others; and their instincts to lead and think of the interests of others.
Certainly, the list of past Rhodes Scholars is extremely impressive. It includes musician Kris Kristofferson; Louisiana Governor Bobby Jindal; Hamed Wardak, one of the founders of the Campaign for a US-Afghanistan Partnership (CUSAP); and star football player Myron Rolle. These are people to look to for future success and for later accomplishments.
A recent article in the Wall Street Journal from November 10, 2009 points to a new, and quite interesting business trend. A number of businesses are seeing a new trend with former chief executives taking an active role in helping troubled companies. John “Jack” Krol, for instance, was named, in November as outside chairman of Delphi Automotive LLP. Retired from DuPont Co. as their CEO, he is now working on Delphi’s operating plans and strategies.
Dennis Carey, a senior client partner at Korn/Ferry International, explains this trend. As he says, “These chairmen are strategic equal partners of the CEO because they already demonstrated a successful ‘in the trenches’ style of management.”
This trend is certainly most pronounced at struggling companies, but it’s being seen at more big businesses as well. The Corporate Library, a governance research firm, says that 46 former CEOs are now chairmen of other companies. This statistic is up from 14 in 2004.
Edward Whitacre Jr., for instance, a former CEO of AT&T Corp., has recently made television commercials for GM and has played a key role in convincing fellow directors to keep GM’s Opel brand and European operations.
This should prove to be a very interesting trend to continue to follow in the business world.
Apple today introduced iPad, a revolutionary device for browsing the web, reading and sending email, enjoying photos, watching videos, playing games, reading e-books, and much more. Its high-resolution Multi-Touch display lets you interact with content — including 12 innovative new apps designed especially for iPad and almost all of the 140,000 apps. apple.com/ipad
One great way to get a bargain today is to buy a home that is under foreclosure. You should be careful, however, if you plan to buy a foreclosed home buy using these five tips. Many companies, such as Keller Williams Realty, Inc., Trammell Crow, Lincoln Property and Kirk Sanford and Sightline Acquisition Corp, can offer even more tips of this sort for benefiting from a depressed economy.
Just because something is foreclosing doesn’t mean it’s a great deal. Sometimes, even the banks overprice their properties. Hire a good realtor and know the market. Pay attention to location; don’t buy in the wrong area just because something is a good deal. Get an inspection and do a title search. Spending a bit of money now can save you a great deal later. Finally, make sure you hire a good attorney.
Just because a foreclosed property might be the best way to go, don’t close out all other options. You might find a better deal with a seller than you do with a bank. Keep all of your options open and be a smart buyer. Surround yourself with knowledgeable people including real estate agents, lawyers and more. Make sure to do all of your homework and to educate yourself about buying a foreclosed home before you sign on the dotted line.
According to the International Business Confidence Survey, Malaysia is seen as one of the top ten countries regarded as best able to deal with the global economic crisis. Surveying 7500 businessmen in 24 countries, this survey conducted by Servcorp intended to gauge international business moral. Certainly, Malaysian businessmen such as Taek Jho Low, Regional Development Authority (Irda) chief executive officer Harun Johar, MIDA chairman Dr Sulaiman Mahbob and others should take heart.
Australia received the #1 spot with the highest vote of confidence for their ability to weather the recent global economic crisis, while China and India earned the second and third spots respectively.
The Malaysian economy did register a 6.2 percent negative growth during the first quarter of 2009; however, they have a positive growth forecast in the fourth quarter of 2009 and for the coming year in 2010.
The results of another survey, carried out by accountancy body, CPA Australia, indicate that business leaders in Southeast Asia are optimistic about the end of the global economic downturn. Of the 300 business leaders in the region, including a number in Malaysia, who were questioned, most said that they expect the global economic issues to be over by the end of 2010.
The hedge fund community of New York has established an organization in conjunction with Habitat for Humanity whose mission is to help hard-working New York families fulfill their “once-in-a-lifetime” dream of home ownership.
These are families that without the intervention of Habitat and the support of hedge funds and private equity firms would not be able to compete for purchase of real estate in New York City.
Hedge Funds for Habitat-NYC is supported by some of the leading hedge fund and private equity firms in New York, including but not limited to:
Jason A. Press
The N.I.R. Group LLC, Corey Ribotsky, Managing Partner
PNC MultiFamily Capital
Tullett Prebon Holdings Corp