S&P downgrades US debt to AA+ - FT.com

S&P downgrades US debt to AA+ - FT.com

Wow!!! This has to be the most stupid decision made by any Rating Agency.

Reminds me of the time when rating agencies gave a country with a population of more than a billion, an army of more than two million, the world's largest producer of gold, the world's factory with one of the most entrepreneurial societies in the world - a risk rating significantly lower than for a country with a population of around 300,000 and whose only export was fish.... I'm sure we all remember Iceland!

Middle East and North African Socio-political Unrests. What Lies Ahead?

Here is a live link to an interview by Jayke Umarezz, the popular lifestyle commentator. The interview is titled Middle East and North African Socio-political Unrests. What Lies Ahead?

The interview covers some of the reasons behind the current unrest in the Middle East and North Africa (MENA) and explores how it may evolve over time.

Also covered in the interview is the important issue of how local and international companies who have prospered in the past will fare in the newly evolving MENA.

Please click here for the full text of the interview. LINK to Full Article

Using Whisper Numbers for Earnings Trades

There are a number of factors that affect post earnings price movement. Some are quantitative, some qualitative, some tangible, some intangible, some technical, and some fundamental. We consider 'investor expectations' to be the most influential and critical factor to understanding and anticipating post earnings price moves.

Let us first define what we mean by 'investor expectations'. Investors (professional, institutional, and individual) determine market direction. Some have more influence than others, but collectively, their expectations of stock price, stock direction, revenue, sales, etc. define the market. If investor expectations (real or perceived) of a company's future were bleak, the company stock price may suffer. If investor expectations (real or perceived) of a company's future were strong, the company stock price may surge.

It is the same with corporate earnings. When a company reports earnings that exceed investor expectations, the stock is rewarded. When a company reports earnings that fall short of investor expectations, the stock is punished. The simple fact is that expectations create surprises, surprises create volatility, and volatility creates opportunity.

How To Best Utilize Whisper Numbers: A number of investors have asked how to best utilize our data. First, in order to make the best trades investors need to be aware of as many factors as possible that can affect market moves. So aside from doing your own 'homework', it also means understanding investor expectations (whisper numbers). We'll restate something from a recent report: 'What we do know for sure is that company stock prices continue to react to beating or missing individual investor earnings expectations (whisper numbers) on a more consistent basis than analysts estimates.'

More often than not when a company misses the whisper number the stock is basically 'punished' and will see a decline in price over a one to thirty day period after earnings are released. And on average when a company beats the whisper the stock is rewarded and will see gains over a one to thirty day period after earnings are released. It is a simple process that should not be over thought.

Let's take a look at Research in Motion (RIMM) from the recent second quarter of 2009. They reported on April 3rd. Analysts expected 84 cents, investors had a whisper of 81 cents. If you expected (or hoped or guessed) that they would beat the low whisper you may have entered a long position prior to the release. You may just as well have expected (or hoped or guessed) that they would miss the expectations and enter a short position. Therein lies the 'risk'. You don't know whether or not they will beat or miss the expectations.

So how do you eliminate the additional risk of guessing or hoping the company will beat or miss the expectations? Simple, just wait until after earnings are released. RIMM reported earnings of 90 cents, topping both the analysts estimate and whisper number. Our data indicated that within thirty trading days following earnings, Research in Motion averages gains of 13% when they beat the whisper. If you waited until after the report you entered the market around 59. Within thirty trading days the stock was up 19% exceeding our expectation.

In fact, companies that exceed both the whisper number (from WhisperNumber.com) and the analysts estimate see a 2.5 times greater positive post earnings price move than companies that only exceed the analysts estimate but miss the whisper.

Does it always work this way? Absolutely not. But historically the data has proven itself more accurate in predicting stock movement than analysts estimates (which shows no definitive cause and effect).

Obviously knowing which companies are most likely to react to beating or missing the whisper number has added value. Having a target timeline, target price move, and advanced knowledge of this data with email alerts adds even more value.

You could spend years collecting and analyzing your own data, and coming up with an analysis of best 'whisper reactor' companies. (Anticipating price movement is not easy, and there can be no guesswork involved.)

An interesting website - WhisperNumber.com does this analysis and puts together those companies most likely to see price volatility according to whether or not they beat or miss the whisper in a service called the Whisper Reactors.

Of course members of Richman's International Millionaire's Clubs may get the real inside scoop from corporate insiders who are also club members...

The Toughest Investing Question is When to Sell?

Here is an article first published on the RAOMABO (Research and Analysis of Merger and Buyout Opportunities) Website that I think is interesting and relevant in these times:-

We considered various issues and decided on five signals that will warrant a reason to sell a Stock if you owned it or even sell short if you don’t own it...

As the sage of Omaha - Warren Buffet puts it, it’s often, “easier to figure out the losers.”

Referring to the automobile industry, WB points out that although it was one of the the most important inventions of the 20th century, it was very hard to make money as an investor in the industry. Thousands of upstart automakers failed. So the easiest money to be made was on the short side…

Today, we’ll concentrate about individual “loser” i.e. companies that are likely have more downside ahead of them than upside. We’ll see how it is often easier to spot these than the next winners, specially in a market with so much head wind against it ... like today’s markets.

We’ll also look at selling some of your former winners. These are stocks that may have made you good money but are beginning to show signs that you’re better off selling them than holding on to them.

Essentially it all boils down to the most important question in investing: When to Sell?

We’ve found that there are some major red flags you can use to get out of a long position… and go short a stock you don’t own, as well…

Red Flag # 1: High Valuations without High Growth

If you had the foresight to buy a small coffee chain named after an obscure literary character, you would have rode through some fantastic profits. All through the 1990’s and even through the tech-bust, it seemed like Starbucks would never cease to open more stores.
Around that time a Starbucks started opening across the street from another Starbucks, though, it was time to get out. Their growth prospects have been hammered. Other coffee chains are after their alluring market share. Even fast food chains have entered the business.

Today Starbuck’s balance sheet looks like a wreck. Let’s take a quick look. With a trailing P/E of 127, the company fails to pass an analyst’s first evaluation of a company’s value. The profit margin is less than 1% and the operating margin is 5%. Debt is three times cash. Return on equity, one of our preferred valuation measures, is 3.5%. Clearly, yesterday’s winners can become today’s losers.

Red Flag # 2: Technological Changes Taking Away a Former Competitive Advantage

Change is the only factor that’s constant in investing. Technological changes can make an entire company or industry’s products obsolete.

That doesn’t necessarily mean to go long the new technology. You should just avoid the obsolete one, or even short it as it dies off. Within the auto industry, we’ve seen technological changes that are partially responsible for the sad state of American automakers.

Toyota Motors was the first to market hybrid vehicles — namely its flagship Prius. The rest of the industry has been playing catch-up ever since. Sure, foresight is imperfect, and entrenched interests kept American automakers from fully adapting to this threat. But the solution wasn’t to go long Toyota; it was to stay away from General Motors, Ford, and Chrysler. Add in their uncompetitive cost structures, and it’s clear who the losers would be in this industry.

Red Flag # 3: The Company Begins to Use Questionable Accounting

Reading boring financial statements may tell you if you’re invested in the next Enron or Worldcom. Bad companies try to hide poor performance with financial gimmicks. One of the biggest things we’re looking at in the current investment environment includes companies reporting profits substantially in excess of reputed analyst expectations.

If such gains come from cutting costs, like firing employees, then the numbers being reported aren’t going to be sustainable over time. It’s the opposite of real sales growth and it’s a way of hiding a decline.

A lot of service-based companies are guilty on this count in recent quarters, from retailers to restaurateurs. Think of it as mold that people mistake for green shoots. It’s just too toxic to invest in.

The other major accounting areas to look at in this earnings environment are receivables and inventory. If Accounts Receivable is rising, there could be a problem with customer’s ability to repay... or there’s a problem with lax credit to customers to buy products. Either way, it’s one of the most obvious red flags you can see without. Eventually, toxic AR has to be written off. And the imaginary gains have to become real losses.

Rising inventories are even more problematic. A store offering this year’s fashions at 50% off may be able to post some good sales numbers, but over time it’s a recipe for disaster. Deeper and prolonged sales shorten the life of the business as lower margins choke off cash flow. Think Circuit City, Linens and Things, Mervyn’s and a host of other retailers. The retail industry’s problems are not over by a long shot.

Red Flag # 4: Divestiture to Meet a Cash Crunch or Burning the Furniture for Heat

Companies worth owning for the long- term don’t need to issue new debt right now. They certainly don’t need to go to the capital markets and issue stock to shore up reserves, either.

While this clearly applies to all the household-name financials, other companies have quietly been raising capital in the midst of this bear market rally as well. Any company that has to sell off assets or divisions right now is one worth reevaluating. Even in the absence of the worst credit crunch of all time, it would still be a very red flag.

Within this category insider selling is worth a mention. It’s a form of raising equity - only it benefits management and not the company. Certainly non insider the shareholders don’t benefit. Combined with other red flags, it’s the closest thing to a leading indicator we’ve seen that a stock is going to fall. Be especially aware of multiple insiders selling.

Red Flag # 5: Key Related Industries Are Suffering

There’s more than one way to make a profit. In investing, the term ‘pin action’, stolen from bowling, means that if one industry is on fire, related industries will share the heat as well. The same thing applies when it’s time to sell.

Watch the Flags...

Take a good hard look at the positions in your portfolio, and the major positions in any mutual funds you own. If your rationales for buying no longer apply or if any of the changes listed above are occurring, you might want to take some money off the table.

After a run-up, is the perfect time to re-balance your entire portfolio — to reduce risk by getting out of toxic assets and into better ones. When the market comes crashing down again, you’ll have more capital preserved to invest in companies that are innovative, growing, diverse, and ethical—and still have some left over to short the losers.

Nationalize all banks and permanently solve the Global Banking Crises!

Extract of interview by Jayke Umarezz as appeared in various publications. Please also read comments and related articles at the end of this extract.

In an exclusive interview by Jayke Umarezz, Dr A S Johan revealed his views as to how he believed the current global banking crises could be successfully and permanently solved….so that the global economy may allowed to prosper again.

Dr Johan made it clear that, in his opinion, the world’s current problems can be clearly defined as problems caused by banking industry excesses.

“As long as banking is privately owned and run as a business for the benefit of its shareholding investors, as it has to be, we will continue to have this problem of excesses over and over again” he said.

He went on to say “Banking like healthcare, water, energy etc. is an essential service industry that people need to survive in order to be productive and contribute to a country’s economy. They have an overriding social purpose that cannot be achieved through a private, for profit structure.

Don’t be mistaken, as an entrepreneur myself, I am in support of capitalism. I believe capitalism is the only system that encourages productivity and savings. However, I also believe that banking and other essential industries like healthcare, water, energy etc. just cannot properly and honestly serve society in a privatized form.

If banks are run as privately owned businesses, they cannot avoid taking on greater and greater levels of risks and eventually reach the excess we now know about. Because, in order to survive, banks must produce returns, expand and attract investment capital. The current banking crises is a direct result of competition among banks.

In all fairness, we cannot blame bank management for doing what they had to do to stay competitive. In our misguided belief that competition in a social service like banking is good and more is better, we have once again shot ourselves in the foot….and in the process almost wiped out the savings and wealth of millions.

Bailouts through equity injection and purchase of toxic assets only serves to support the excesses of management and the greed of shareholders….at the expense of innocent depositors.

I believe that In order to restore confidence once again and this time to keep it permanent, each country really needs just one credible national bank whose customer deposits are fully guaranteed by the Government.

I propose that all existing banks registered in a particular country be merged into one large Government owned bank. Pre-merger, all current shareholders of these banks will be bought out at net asset value per share by crediting them for the sales proceeds with deposits in the new nationalized bank. Such a state owned bank may expand its operations to other countries if it wants to but the host Government will make it known that only deposits received and registered at their home country will be guaranteed and not deposits taken in at a foreign subsidiary or branch. The Government of that foreign country may guarantee the deposits of its residents with this foreign bank if it so wishes.

Directors of these new nationalized banks will be appointed by Government and held accountable for their decisions just as other Government appointed heads of departments are. Management and staff will effectively become Government employees with salaries and benefits similar to other equivalent Government employees.

I do not see any issue of service efficiency. If other Government employees like the police, immigration etc. can provide reasonably efficient services, I don’t see why banking staff cannot.

The new nationalized bank’s checking (current), savings and deposit accounts will be 100% guaranteed by Government as to principal and contracted interest. These new state owned banks will also offer basic home mortgage and business loans to its domestic customers on a properly collateralized basis, in line with each Government’s policy.

State owned banks will therefore exist only to provide basic deposit and loan services and will not engage in investment management services, securities brokerage, private equity, venture capital etc. Their cash surpluses will be invested exclusively in National / Federal Government Bonds and profits if any paid to their respective Governments as dividends.

Non deposit taking services like investment management services, securities brokerage, private equity, venture capital etc. will be offered by licensed and regulated investment and brokerage firms who cannot call themselves banks.

Businesses, corporations and investors who need these services and can afford the costs and risks associated with dealing with these firms, may do so freely. However, they will be told, in no uncertain terms, that their accounts with these firms are not guaranteed by the Government.

It may however be a good idea to establish a credible clearing house funded by mandatory, dynamic contributions from all such investment management services, securities brokerage, private equity and venture capital firms.

National banks who wish to expand their banking services beyond their national borders will only be allowed to deploy their foreign country registered deposits (which will not in any case be guaranteed by their home country Government) to finance loans in that country.

If they try to fund such loans through inter - bank deposits they will find other banks reluctant to extend large lines of credit for long periods in view of the non guaranteed status of such inter – bank facilities.

Each country’s national bank will only enjoy a rating equivalent to their Government’s credibility and the amount of their guaranteed deposits. This will discourage banks from expanding overseas simply for the sake of expansion.

In fact the relationship by one country’s Government postal service with other country’s postal service regarding the international delivery of mail through the offsetting of stamp sale receipts could be a good example of how the future of international banking relationships could evolve.

The recommendations I’ve made here with regard to banking will apply to other essential services like water, power, healthcare etc. as well. So let’s get back to honestly and fairly providing the basic services that every citizen needs and can all rely on.

No doubt there may be many out there who could have issue with my proposal. If so, please let me know your views and together we can try and create a safer place for our savings”. END

Following is a response and a related article from L.M. Arndt of San Rafael California:-

Dr. Johan, I am ecstatic! I just found and read your essay, "Nationalize all banks and permanently solve the Global Banking Crises!"

I totally agree with your conclusions, which I'm delighted to find dovetail with my own. In the course of articulating a similar argument, I happened upon your comments – a breath of fresh air in an otherwise dismal miasma of foggy thinking. I make no claims to expertise as an economist, but I have lived a few years, and paid at least some attention, and it has become increasingly obvious that the current banking system is fatally flawed – for the reasons you so cogently articulate. You also analyze precisely how a nationalized banking system would function. Your knowledge of the internal workings of banks far outpaces my own, yet we have independently arrived at the same conclusion, that, as you put it, “Banking, like healthcare, water, energy etc. is an essential service industry that people need to survive in order to be productive and contribute to a country’s economy. They have an overriding social purpose that cannot be achieved through a private, for-profit structure."

I respectfully submit the following, all of which I wrote before reading your essay. I would greatly appreciate any comments you may have. Also, if there is any possibility of a face-to-face meeting and conversation, please so advise.

L.M. Arndt, San Rafael California

Why would it not be a good idea for our government, i.e., We The People, to own and operate the banks in our nation? By L.M. Arndt

The banking “industry,” as we know, is not an industry at all and creates nothing of real value. Moreover, it requires, indeed demands, a constant infusion of money in order to cover the interest it charges.

Nevertheless, it provides an essential service, very much like other governmental services such as streets and highways, police protection, food safety, environmental quality, a justice system, and national defense.

Contrary to popular belief, the Federal Reserve, the “central bank” of the United States, is not owned by the U.S. government, nor is it a single “bank” but comprises 12 regional Federal Reserve banks. The system is, at least theoretically, controlled by a governmental agency, its Board of Governors, but actual oversight power is held by the Federal Open Market Committee composed of the president of the Federal Reserve Bank of New York and presidents of 4 other Federal Reserve banks, serving on a rotational basis. The regional Federal Reserve banks issue shares of non-tradable stock to member banks, whose stock may in turn be held by banks in other nations, giving rise to the claim that foreigners own the system. The governmental web site describes the system as “independent within the government.” If the original intent was to create a banking system separate from and uncorrupted by politics, history has amply demonstrated abysmal failure.

Until 1933, collateral to back up the nation’s money supply was the gold stored at Fort Knox, but the real wealth of a nation lies in its land and its people, i.e., the common wealth. Forests can be managed to produce a sustainable yield – or they can be mismanaged, with clear-cutting that causes erosion, silting of streams, and destruction of fish stocks. No tourist ever traveled to California to see Big Tree stumps.

So it is with farmland, streams and rivers, towns and cities. Poor farming practices, polluted streams, deteriorating buildings, all reduce the nation’s common wealth. So it is with the citizenry. Well-educated citizens are able to fulfill higher-level jobs and therefore are of greater value. Healthy citizens have a longer working life and require fewer medical services. Responsible, creative and engaged people make wiser personal and political choices and are of greater benefit to the nation. People who are in dire economic straits, suffering poor health, ignorance and apathy will fill our prisons and overwhelm our welfare systems.

For a nation to increase its “common wealth” requires a sensible, operational basic economic system. That we do not have, nor do most nations in the world. In the current monetary system in the U.S., banks MAKE MONEY by lending and then use the debt as an asset to lend more, on and on, which is what has brought this economic crash, not the first, I might add – and coincidentally has sucked up even more wealth into the pockets of the already very wealthy. Year after year, this system has redistributed wealth upward.

We desperately need a REVERSAL of the entrenched wealth-redistribution system!

So here’s my concept: Suppose that our GOVERNMENT, i.e., We The People, OWNED THE BANKS! Government, using our common wealth as collateral, would issue our currency. Yes, “national banks” would be “NATIONAL” banks, taking deposits, making loans, managing credit cards, etc. All the interest currently being siphoned upward into the pockets of bankers would be used to operate our government. That’s a tremendous amount of money, and I’m wondering if it might not be enough to SERIOUSLY lower taxes or even eliminate taxes entirely!

Under an economic system of truly “national,” i.e., government-run, banks, corporations would continue in business (although limited in size so that NO such entity becomes “too big to fail”). Entrepreneurs could easily get loans to start new businesses. Small companies could get loans for operation of their businesses. Ordinary people would have money to spend or save, credit cards would charge a reasonable rate of interest, and usury would become only an unpleasant memory.

Estimates of the bailout now nears $3 trillion. Rather than throwing it at privately owned banks and lenders, our government could buy controlling interests in smaller banks, those otherwise likely to be bought up by banking behemoths. With ownership of these banks, government could immediately begin to make loans and thereby ease the current credit crunch. We wouldn’t need the likes of CitiCorp with its usurious interest rates, punitive fees and charges, and its inherent arrogance and irresponsibility.

In order to have a truly healthy economic system, one that does not continue to redistribute wealth upward, we’d need to make some other corrections as well:-

• Raise the minimum wage,
• End subsidies to corporations that offshore jobs,
• Ban the practice of avoiding taxes by setting up offshore offices,
• Require that our government fulfill its traditional obligations rather than out-sourcing and privatizing (which the Bush administration has done in many areas, up to and including our military),
• Eliminate the special Social Security tax and put Social Security into the federal budget.
• Impose any necessary taxes on an equitable, progressive basis. (Even Adam Smith wrote that “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”)

It seems to me that a fully nationalized banking system would introduce more freedom and more fairness into our society and that it would result in a truly healthy and sustainable economy.

An economy cannot continue to grow ad infinitum (nor can anything else, including population). If we humans want to continue our lives on Earth, we will have to begin to think about a sustainable future. End

An interesting article related to the subject....click here

HF strategy to improve China equity returns

RS Management Limited (RSM) has retained hedge fund guru Dr. A S Johan and his research team to develop an algorithm driven trading system to improve returns on Asian equities by trading equity index futures as an effective proxy.

RSM is in talks with prime brokerages in Asia to help establish dedicated institutional accounts that will trade benchmark equity index futures like the Hang Seng Index and the China H - Shares Index, based on RSM's trade and hedge signals.

"Extensive back tests with real and scrambled price data, exceeding the equivalent of seventy years of history, have shown the system to be capable of producing average, risk adjusted, liquidated returns of around 30% per annum" said a researcher involved in the development.

Algorithmic Trading Strategies (ATS) may be defined as securities trading systems that wraps trading formulas into automated order and execution systems. Advanced computer modeling techniques, combined with electronic access to world market data and information, enable traders using a trading system to have a unique market vantage point. Traders, investment firms and fund managers use a trading system to help make wiser investment decisions and help eliminate the emotional aspect of trading. A trading system can automate all or part of your investment portfolio. Computer trading models can be adjusted for either conservative or aggressive trading styles.

Trading systems are governed by a set of rules that do not deviate based on anything other than market action. Emotional bias is eliminated because the systems operate within the parameters known by the trader. The parameters can be trusted based on historical analysis and real world market studies, so that the trader who is familiar with the trading system and its operating characteristics can have confidence in a pre-determined trading strategy.

There are programming languages and trading system development platforms that allow traders to create their own custom systems. One such example of a trading system is the ACD Method, a quantitative application developed by Mark Fisher, a professional trader and founder of MBF Clearing Corp., one of the largest clearing firms on the New York Mercantile Exchange, and supports the trading of several hundred exchange members. Fisher is well known for his book The Logical Trader: A Method to the Madness, which is the dissertation to The ACD Method, a quantitative systems developed at the Wharton School of Business, and is based on extensive back testing that analyzes opening price trading ranges for stocks and futures contracts. http://www.thelogicaltrader.net/.

Another example is POSIT or Portfolio System for Institutional Trading, an electronic trading system serving institutional traders. It is run by the Investment Technology Group (NYSE:ITG). It attempts to match buy and sell orders between larger traders. POSIT is a type of crossing system, where a broker acts as agent on both the buy side and sell side of a given transaction. If the broker has a buy order and an equivalent sell order, he/she can "cross" the orders. This is a common situation in the case of large orders. END