Pondering the Important Issues

I actually bought a Sunday paper this past weekend, something I haven't done for a while. Reading about all the problems in the world just tends to detract from my retirement euphoria. A person can get a serious ulcer thinking about all of this stuff. I mean, the idea of a radicalized Iran with nukes isn't very comforting. Nor is the ongoing uncertainty about the price of oil. The election victory of HAMAS is kind of a bummer, and no one seems to have a clue about the economy. And I won't even mention the fact I've been afraid to check my stock market portfolio since January.

On the other hand, I do want to be responsible and keep track of what is going on the the world. Consequently, I will pick up another Sunday paper in about a year to see how this all turns out. I really don't see much point in reading the same stuff between now and then.

Besides, while I don't mean to trivialize these stories, I think there are other significantly more important issues to ponder. For instance, we all know that when dropped, a cat will land on its feet. We also know that if a piece of buttered bread is dropped, it will land butter-side down. These are both cosmic absolutes. But it does beg the question: what if you strapped a piece of buttered bread on the back of a cat and then dropped the cat??? To my thinking, that would be the ultimate paradox.

Certainly something would have to give; a known cosmic norm would have to be violated. Would such an experiment cause a rip in the fabric of space/time? Would the universe implode? Would the laws of physics be forever destroyed? The more I think about it, I find myself much more concerned with the idea of Iran obtaining cats and buttered bread than I do them getting nukes.

When I retired a few years ago I promised myself I would go fishing at least once a week. Here in Alabama where I live, we have gotten thunderstorms virtually every day for what seems like forever. That concerns me much more than the price of oil, especially considering I haven't been able to use my SUV to tow my boat to the Bay, in order to take out my 2GPH 200HP bassboat.

The past few months my garden has been beset with critters: squirrels, rabbits, deer, and just about every other variety of furry creature on four legs. I read in some of my garden books that putting certain unpleasant materials (garlic, certain oils, even urine) around the garden will keep them away. I also read that getting one of those fake plastic owls will do the job. None of it works of course. Unfortunately for me, the critters aren't able to read the same books as I do.

Even worse than that, the problem of the relentless heat down here has caused a shortage of Miller Lite beer. Now, you have to understand that Miller Lite is considered a staple in this part of the USA. In fact, there are known cases of people evacuating for hurricanes who forget to put their kids in the car but have a minimum of three cases of Miller. We do have our priorities afterall.

So as I sit here composing this article, sipping my Miller Lite slowly in order to conserve, I have to consider what is really important in life. Sure, our government is working hard to prevent some nutburger in Iran from getting nukes, but that doesn't get me on the water fishing. It doesn't get the critters out of my garden. And it sure doesn't help with the supply of Miller Lite.

Investing - A Beginners Guide

Managing the personal finances and to multiply it many fold needs prudent investment strategies. Without gaining adequate knowledge in investment, do not try your hand in various investment options, which can result in drastic and sometimes
disastrous results.

A new investor should first visit the local library and try to get various guides on personal finance. Issues relating to
personal finance includes basis for a budget, sticking to the budget, saving money for an easy retirement life, major purchases, and managing the accrued finances properly.

New investors should go through newspapers such as Wall Street Journal, which will familiarize the reader with insurance, stocks, investments etc. through their Friday Column aptly named "Getting Going" by Jonathan Clement.

A new investor should not barge into the stock market based on any half-baked advice by close relatives or friends. For getting
a proper idea about overall money management, study books such as The Intelligent Investor. For the sake of reference, this title is highlighted. If you browse in the bookstores or libraries, several other equally good guides might be available.

If excess cash is available immediately and if you are still going through the learning process, without wasting time, you can put the excess money in a mutual fund or even the bank.

Even though this learning process appears to be a daunting chore, it is better than relying on professional money market advisors
who will charge a hefty amount for guiding you in making money. Ultimately, you and you alone are responsible for your financial
situation - win win or no win.

Once a new investor gets a fair idea about personal finance management, further studies in mutual funds, stocks and bonds will be the next logical step.

A mutual fund is money pooled by a group of investors, which is used to buy stocks or bonds from various companies and strives to
achieve a specified target of growth. Many mutual funds set 1000 dollars as the minimum initial investment money. A closed ended
mutual fund is similar to a share issued by a company trading in the stock exchanges. It can be traded through a broker just like
any other stocks. Open-ended mutual funds assure a fixed annual income without any surprises.

Some of the popular mutual funds are money-market funds, balanced funds, index funds, pure bond funds, pure stock funds and tax-free bond funds.

The next logical step or the parallel step is investments in stocks.A certain amount of guesswork is needed for buying and selling them. To get some knowledge about the risks involved, try to play the investment games online, which simulates the practice of selling and buying stocks without losing money or facing any risk. After thorough familiarisation, a first trade in stock with
minimum investment can be tried.





Article written by Anastasia Phocas.

Efficient Market Hypothesis: Myth of Reality?

The efficient market hypothesis (EMH) was promoted by Eugene Fama in the 1960. In his classic paper Fama (1970) defined market in which prices always fully reflect available information as "efficient".While this definition reflects the main idea of the EMH it might be extended to explain the underlying assumption. For example Malkiel (1992) proposed the following definition:
A capital market is said to be efficient to if it fully and correctly reflects all relevant information in determining security prices. Therefore, more formally, the market is efficient with respect to some information set. ..if security prices would be unaffected by revealing that information to all participants. Moreover, efficiency implies that it is impossible to make economic profits by trading on the basis of the defined information set (Papers4you.com, 2006).

As it follows from the Malkiel (1992) definition if the market is efficient the company market value should be an unbiased estimate of the true value. Nevertheless it is important to stress that:
1. Market efficiency does not require that market price is equal to the true value
2. There is an equal probability that stocks over or under valued at any point in the time
3. And finally, investors should not be able to consistently identify under or over valued stocks using any investment strategy ( Damodaran, 2006).

What are the implications of the market efficiency from the individual investor perspective?
Firstly, equity research is costly and provides no benefits. Secondly strategies that have minimal execution costs such as randomly diversified portfolio or indexing to the market would be superior to any other investment strategy. Thirdly, a strategy that has minimum transaction costs should provide higher returns in the long run (Damodaran, 2006).

Nevertheless it is important to stress that markets are not efficient due to their nature, but they are driven to efficiency by the actions of the investors. Therefore Roberts(1967) distinguished among three forms of the market efficiency:
1. Weak form: the information set includes only historic data.
2. Semi strong: the information set includes publicly available information.
3. Strong form: the information set includes all information know to any market participant and includes private information.

Obviously in reality, investors have access to different information sets. While trading which is based on the insider information is prosecuted, analysis and interpretation of the publicly available information requires specific knowledge and skills (Papers4you.com, 2006). Therefore the efficient market should be seen as a self correcting mechanism, where inefficiencies appear at regular intervals but disappear almost instantaneously as investors find and trade on them.

EMH has wide applications in the financial markets, since it is easily extended to the valuation of companies , market failures such as an Enron Case, or performance analysis of the mutual funds. The traditional analysis of the market efficiency is based on the analysis of the anomalies such as Peso Effect in the foreign exchange market or devoted to the predictability of the stock returns.

References

Damodaran )nline (2006) "MARKET EFFICIENCY - DEFINITION AND TESTS", Available from: http://pages.stern.nyu.edu/~ADAMODAR/New_Home_Page/invemgmt/effdefn.htm [17/06/2006]

Fama E. F., 1970, Efficient capitalmarkets: Areviewof theory and empiricalwork, Journal of Finance, 25, 383�417.

Malkiel B (1992) Efficient market hypothesis. In NewMan P.M. Milgate ,and J Eawells (eds). The new Palgrave dictionary of Money and Finance.

Papers For You (2006) "C/F/94. Validity of the Efficient Market Hypothesis", Available from http://www.coursework4you.co.uk/sprtfina2.htm [17/06/2006]

Papers For You (2006) "E/F/38. Efficient market hypothesis: theory and implications", Available from Papers4you.com [18/06/2006]

Robersts, H. 1967. Statistical versus clinical predictions of the stock markets. Unpublished manuscript, Center for research in Security Prices, University of Chicago, May.

Are Hedge Funds Heading Into the Perfect Storm?

You are going to be seeing and reading a lot more about hedge funds in the coming weeks and months. Two loosely related disturbed fronts are moving towards each other that may yet converge into the perfect storm.

The S&P 500 Index, the proxy for the US stock market, is up only 1.97 percent for the year, and down 1.7 percent for the quarter. The Lehman bond fund index is down 1.5 percent for the year. US stocks and bonds comprise the overwhelming majority of assets in individual investor portfolios.

That means very little or no growth for pension fund and 401(k) beneficiaries. For mutual fund and pension fund managers that means skinny or no performance bonuses. In a word, the pressure is on to somehow make a silk purse out of the sow's ear of an underperforming US stock and bond market. That's being done. New filings with the SEC indicate that a growing number of mutual funds will adopt hedging strategies like short selling and option investing to keep investors from leaving the herd and taking their assets with them.

On the other side of the disturbed front, the real hedge funds, unregulated private investment pools with a $trillion plus to toss around, are getting some unwanted heat from the regulators. Although they were held off by a recent DC Circuit Court ruling in favor of the hedge funds, the SEC is hot to regulate the hedge funds and is lobbying hard for Congress to give it the laws to do so.

Hedge funds are not mutual funds. They are not bound by any investment strategy description in a Prospectus. A hedge fund can implement any investment strategy that you as a private individual who got together with a few friends could do. Other than the always applicable laws against insider trader and outright fraud that leaves lots of room for creativity and financial maneuvers.

For example, in 1994 the former head of Solomon Brother bond department and two future Nobel Laureates in Economics got together and started Long Term Capital Management hedge fund with a few friends and $1 billion in capital. Four years later LTCM was producing returns of 40% annually, and the hedge fund's off balance sheet positions totaled a gargantuan $1.25 trillion. There probably weren't a dozen people in the world who completely understood LTCM's enormously complex strategy, and not many more than that who even knew enough to ask an intelligent question.

The Russian government's bond default in 1998 created an international whirlpool of panic selling in other government's bonds that threatened to sink LTCM and suck the entire international financial system down with it. The ultimate disaster was averted but you can bet that the memory of what "that hedge fund could have done" is very much alive in Washington DC and among the veterans of the financial press.

How does this fit together to create the perfect storm? Negative stock market returns demand a cause, identifiable culprits whose evil deeds have shaken investor confidence and robbed people of their retirement. It doesn't matter if there is no actual connection if the story is compelling enough. Short selling hedge funds, fueled by the fallout from an insider trading scandal or two, make the perfect culprit. Hedge funds are not open to joe sixpack. The media and the public love villains.. The average hedge fund investor is a financial institution or a fabulously wealth individual. Who better?

Real Estate Finance Overseas

After the technology bubble burst back in 2000 the stock markets suffered a bleak period of decline and investors chose to place their focus on bricks and mortar rather than falling share prices and they began investing heavily into real estate.

As a result the second home and the buy-to-let real estate markets in many countries around the world such as in the UK, US and Australia boomed. However, as the real estate affordability gap continues to widen in these nations and fewer first time buyers can even get onto the first rung of the real estate ladder, property price increases have begun to cool off and the ability to generate impressive rental yields and strong capital appreciation has slowed right down for at least the short term.

At the same time the stock markets around the world remain volatile and so now many more investors are looking overseas for alternatives to cooling domestic housing markets and bumpy rides on the stock market. Many are finding that there's an abundance of real estate opportunity in emerging countries around the world which has created a strong demand for real estate finance overseas.

For those considering joining the jet-to-let real estate investment set here are the three main options available when it comes to raising real estate finance, loans or mortgages to buy property abroad.

1) In many of the nations that were the first to boom the property markets are now stagnant and because lenders have fewer customers to provide finance for they are actively targeting those who have yet to upsize, release equity or take out a second mortgage and offering them increasingly favourable terms, conditions and interest rates.

For anyone thinking about buying real estate overseas in a country where they believe it will be difficult for them to secure local finance or where interest rates are unattractive, the option may exist for them to re-mortgage their existing property or take out a loan secured against the equity in their primary residence.

The negative side of this option to raise real estate finance to buy overseas property is that the purchaser's primary residence will be the security against the loan and naturally this introduces an element of risk.

2) The second option available to buyers looking for real estate finance overseas is getting a mortgage locally in the country in which they want to buy. Some countries such as Spain, Germany and France for example offer attractive interest rates and payment schedules to buyers from other European nations and many countries offer mortgages to international purchasers who can provide a decent sized deposit.

Anyone thinking about buying abroad would do well to also research which banks and lending institutions exist in that country, whether they are allowed to lend to foreign buyers and if so, are the criteria for getting a loan and the terms and conditions of the loan favourable?

3) The final option available to the majority of real estate investors looking to finance the purchase of a property abroad is an international mortgage provided by an international lender who usually has experience in the country from which the borrower heralds and also in the country in which they wish to invest which can make the whole finance process so much simpler�but the downside is that arranging such mortgages can be far more expensive than the first two options available to those contemplating their real estate finance options.

The availability or applicability of any type of mortgage or finance raising scheme discussed in this article is something that needs to be determined on an individual basis therefore this article does not constitute advice. Anyone hoping to raise finance to purchase real estate overseas should seek expert financial advice.

"5 General Trends in the California Real Estate Market to Watch -- 2006"

"5 General Trends in the California Real Estate Market to Watch -- 2006"

Historically, the real estate trends of California have always been the precursors for the rest of the country. Which is why leading players of the real estate market keep a close watch on the Golden State's real estate market conditions.

And whether you are a first time homebuyer, debating the viability of building your dream house in San Bernardino, or a real estate investor looking to sell condominium units in Los Angeles, you certainly want to know: When is it the optimum time to buy or sell?

Purchasing a house is a major investment. With judicious planning, this valuable asset will appreciate with each year.

But how do you get the big picture? Fortunately, real estate trends are predictable because these develop over a long period, unlike the stock market, which is rather volatile.

The first thing you will need to do is to read and track real estate articles: the market reports of the California Association of Realtors or the California Building Industry Association, and the briefs created by housing analyst companies.

Once you have identified the following key indicators you will have a better grasp of the general trends in California's real estate market.

THE FIVE KEY INDICATORS TO WATCH

Interest Rates
When interest rates rise, buyers shy away. Conversely, lowered interest rates attract more buyers.

This year, interest rates in California are on an upswing. For example, thirty-year fixed mortgage rates, which averaged 5.71 percent in 2005, has risen to 6 percent levels in January 2006. And adjustable mortgage interest rates have moved up to 5 percent levels compared to 4.12 percent in 2005.

Building Permits
The higher the number of building permits issued, the higher the demand for houses.

Figures show that number of building permits issued for the year 2006, have fallen by 10 percent in comparison to last year's figures. In terms of houses, that's a decrease of 1,430 building permits compared to January 2005 figures, according to California Building Industry Association report.

Home Sales
This key indicator refers to the total number of homes sold. In the law of supply and demand, when there are few buyers, real estate prices fall.

The January 2006 figures of the California Association of Realtors reveal that the number of existing single-family detached homes sold, has gone down by 24.1 percent in comparison to sales for the entire year 2005.

Another factor to consider is the growing inventory of available houses in certain counties in California, which is changing the market dynamics. What was once a sellers market is slowly turning into a buyers market.

Loan Defaults
This refers to the failure of homeowners to pay their monthly mortgage fees. One downside to this is that many Californian homeowners are choosing to have a bad credit report, rather than to keep paying fees for a home whose value has been inflated by as much as 20 percent more.

Foreclosure Sales
Figures presented by DataQuick Information Systems, a housing analyst company, indicate that foreclosure activities in California have gone up by 19 percent in the last quarter of 2005. This is an increase of 3 percent compared to the third quarter of 2005, and is 4.6 percent higher when compared to 2004's last quarter figures.

When foreclosure sales are on an upswing, consumer spending is down and consumer debt levels have risen. In the real estate market, this has meant that many financially strapped homeowners are selling their homes at lower prices. The other contributable factors are inflation, the rising prices of gasoline, federal budget deficit, and interest rates.

Concurrently, these key indicators confirm that although home sales levels in California are falling, the demand for houses remains strong and steady. Always do your due diligence before undertaking a purchase of property in California.

The Dow Jones Industrial Average: Failing the Average Investor

In addition to a well thought out Investment Plan, successful Equity investing requires a feel for what is going on in the real world that we all refer to as "The Market". To most investors, the DJIA provides all of the information they think they need, and they worship it mindlessly, thinking that this time tattered average has mystical predictive and analytic powers far beyond the scope of any other market number. A cursory review of New York Stock Exchange (NYSE) Issue Breadth figures (93% of the Dow stocks are traded there) clearly shows how the Dow has neither been prescient nor historically accurate with regard to broad market movements for the past eight years. Additionally, this financial icon that investors revere as the ultimate "Blue Chip" Stock Market Indicator has lost its luster, with less than half its members achieving S & P ratings of A or better, and 20% of the issues ranked below Investment Grade.

Is the 120-year-old DJIA impotent? No, it's certainly helpful for Peak-to-Peak analysis right now, for example, to see if your Large Cap only Equity Portfolio is as high as it was six years ago. But it's based upon a seriously flawed Buy and Hold investment strategy and universally used as a market barometer, when its original role was as an economic indicator. This is not just semantics. It's Wall Street's rendition of "The Emperor's New Clothes". Possibly, a weighted average of investor perceived business prospects for thirty major companies is a viable economic indicator, but leading or lagging? Clearly, there is no conceivable way that any existing average/index can measure the progress of the thousands of individual securities (and Mutual Funds masquerading as individual securities) that, in the real investment world, are "The Market". And is there just "a" Market, when REITs, Index ETFs, Equity CEFs, Income CEFs, and even some Preferreds are all mixed together in such a way that most brokerage firm statements can't quite distinguish one from the other? Investors are dealing with multiple markets of different types. Markets that don't follow the same rules or respond to the same changes in the same ways. The Dow is dead, long live reality.

Feeling statistically naked? Don't fret Nell, here are a few real market statistics and lists that are easy to understand, easy to put your cursor on, and useful in keeping you up to date on what's going on in the multiple Markets of today's Investment World:

1. Issue Breadth is the single most accurate barometer of what's going on in the markets on a daily basis! Statistics for each of the Stock Exchanges are tracked daily, documenting how many individual issues have advanced versus how many have declined. Rarely are these important numbers reported, especially if they are painting a picture different from that being jammed down investors' throats by institutional propaganda. Would you believe, that in 1999 (when the DJIA and other indices) last achieved All Time High (ATH) levels, monthly Issue Breadth on the NYSE was positive only in April, followed by a 12 month paper bloodbath extending through May of 2000. Since then, Breadth has been positive for six consecutive years. Surprise!

2. Pay close attention to the number of issues hitting New Fifty-Two Week Highs (52Hs) and Lows each day: a) for trend corroboration, and b) to obtain a wealth of important information for daily decision-making and periodic performance understanding. The recent NYSE Bull Market (not a typo) is clearly evidenced by six consecutive years (from 04/00) with more issues hitting new 52Hs than new 52Ls... New Highs nearly tripled New Lows. So much for the standard market tracking tools... not to mention Wall Street manipulation of all the news that's fit to print for investors. Looking at the daily lists of 52Hs and 52Ls will help you determine: a) which sectors are moving in which directions, b) if interest rate expectations are pointing up or down, c) which individual issues are approaching either your Buy or Sell targets and, d) which direction your portfolio Market Value should be moving.

In recent months, REITs, metals, and energy stocks dominated the hot list while regional banks, utilities, and other interest rate sensitive issues were notsos (sic). These lists always indicate what's going on now, without any weighting, charting, or hype, making your job almost simplistic. Take your reasonable profits in the issues that have risen to new peaks (Sell Higher), and purchase the quality issues among those that are at 52Ls (Buy Lower). High prices often reflect high speculation with Bazooka potential, while lower priced value stocks often turn out to be bargains. Ishares, foreign Closed End Funds, Mining and Energy bloat today's 52H List while preferred shares and Utilities occupy the 52Ls... a bit more meaningful than "the Dow is near an All Time High", and a bit scarier as well.

3. Throughout the trading day, periodic review of three lists called "Market Statistics" will keep you current on individual issue price movements, active issues, sector developments, and more. How you interpret and use this information will eventually affect your bottom line, weather you are a Value Stock Investor or a Small Cap day trader. The Most Active and The Most Declined Lists describe individual and group activity, identify where some more detailed research might be appropriate, and provide potential additions to your Daily Stock Watch List. The Most Active and Most Advanced Lists will identify the hottest individual issues and sectors, identify areas where news stories may be worth reading, and instantly make you aware of profit taking opportunities.

I know you are tempted to shout "Blasphemy" at the top of your lungs, but the DJIA was developed in a pre-internet world (actually, pre-automobile) where the statistics discussed above were unavailable, only the wealthy cared about the stock market, there were no Mutual Funds, and, frankly Scarlet, 95% of the population just didn't care. Now here's some blasphemy for you: It is likely that not one person reading this article has an investment portfolio that closely resembles the composition of the DJIA. It is just as likely that nearly everyone reading this article will use the Dow to evaluate portfolio performance. I've never understood this phenomenon, and I know that change takes time... but really, the Dow (and the other averages) have had their day, and far too much of your nest egg, for you to ignore this reality any longer.

The Sky Is Rising � Buy Stocks Low Now!

Back in 1998 I wrote an article warning people that the stock market was extremely overpriced. I was seeing obvious signs of idiocy in the stock market. The first big sign was a rampant hype of how great the big stock opportunity was in the popular press. I was seeing new investing shows pop up on TV. I was seeing young attractive women that look fresh out of am MBA program and dumb as dirt � CNBC's "Money Honey" Maria Baritomo on the floor of the NYSE gave a daily blow by blow account of how everyone in the public was going to get rich if they just bought in.

It all reminded my of Bernard Baruch's account of why he sold out at the top of the market in 1929. On his way to work he stopped to have his shoes polished. The shoeshine boy said, "Mister, let me tell you a bout a great stock I just bought� I ain't gonna be shining shoes for long." Baruch immediately went to his office and sold all of his stock. Later he told a reporter that when an inexperienced stock market idiot of a shoe shine boy is giving recommendations it is time to get out. In 1998 airline stewardesses were bragging about their stock buys and counting the days to quit their job.

Nothing could have been farther from the truth. The inside corporate executive controlled media firms were pumping investment sewage into the minds of the public. Why were they doing this? Because they had enormous holdings of employee optioned stocks that they needed to dump on the public. That is exactly what they did and public investors jumped onto the insider Punji stakes. In late 1999 and early 2000 just six months before the great stock market crash every time a greedy inexperienced idiot in the public bought into the great American rip off and bought stock an insider sold out for extraordinary profits. The vast majority of all inside corporate executives sold out their holdings on a stupid, greedy, public whipped into a buying frenzy buy the U.S. media that is controlled and operated from behind the scenes by large U.S. corporate insiders.

I just read an article in Business Week entitled "Blue Chip Blues." The article discusses the fact that the companies that comprise the S&P 100 have had a stellar 200%+ increase in earnings but share prices have increased less than one percent. This says that the public is not paying any attention whatsoever to the market. It is kind of like in high school where most of the kids paid attention to the cool kids even if they were stupid and wrong and can barely hold a job as adults.

We know in financial economics that the public is right in the middle of a major market move where all you have to do is buy and hold on tight � no brain required. The public is dumb as dirt at the bottom and the top of the market however. We are at the bottom right now. I know this because of the articles I am seeing about how much the stock market sucks right now. I was treated like Chicken Little in 1998 when I told everyone to get out as I ran around screaming "the sky is falling!" I was right. Now I am running around screaming the sky has crashed so buy, buy, buy! Yes folks right now is the time to buy and the sky is about to rise again. Chicken Little is always right in the end!