Market Myths


Fairy Tales Mislead Investors of All Types


The world of investment is a hothouse of myths that belie the reality of the financial markets as well as the real economy. The billow of fairy tales pervades the entire landscape, ranging from stocks and futures to commodities and currencies.

The bluster of fiction serves to fuddle and stymie investors of all breeds. The players in a bind include newcomers dabbling in the market in their spare time as well as veterans bent on trading the whole day long.

The worst of the folklore can be traced to a pile of voodoo spawned by the high priests of financial economics. The tall tales spun by the hoary clergy run the gamut from the mystique of random walks to the impossibility of superior returns.

Not surprisingly, the heap of bunk confuses rather than enlightens the luckless investors. In fact, a host of shibboleths do not merely distort the reality but contradict the facts entirely. The hail of obfuscation feeds a quagmire that’s in many ways more slippery and treacherous than most people suspect.

On the upside, though, the financial forum is not as fickle or mystic as it appears to lots of folks, be they wild-eyed tyros or jaded pros. To approach the field in a cogent way, the earnest player can take concrete steps to sort out the wheat from the chaff, the signal from the noise. In thrashing out a sound trail through the thicket of hokum, the first task of the investor is to thresh out the solid facts from the mushy yarns piled high and wide throughout the landscape.

Read more on Market Myths.


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Forecasting the Next Crash of the Stock Market


 Timeline for the 2010s 


For the wordly investor, the main event of 2011 so far has been the crash of the stock market in the U.S. and elsewhere, along with the bedlam in kindred fields such as commodities and currencies. As is often the case, the mayhem caused by the actors – be they part-time amateurs or full-time professionals – was for the most part a premature and avoidable ordeal for the entire community.

The smashup of the markets was prompted by the specter of a full-blown recession in the global economy in the near future. One reason for the jitters stemmed from the fitful progress of the industrial nations such as the United States, Britain and Japan. Another factor lay in the brouhaha over the debt crisis in Europe, along with widespread fears of a breakup of the euro plus the collapse of the regional economy.

For a number of years, the politicians in the developed world went out of their way to prop up the distortions in the marketplace that emerged during the run-up to the financial crisis of 2008. Instead of prolonging the malady, the politicos should have allowed the economy to heal itself. Better yet, public policy could have helped to undo the damage throughout the entire meshwork of production and distribution. Thanks to the counterproductive moves of the pols, however, the economy was doomed to struggle and flounder.

On a positive note, the crash of the stock market this year popped up in sync with the long-range schedule of meltdowns. As a result, the sequence of bombshells appears to be back on track despite the partial derailing linked to financial crisis of 2008. As things stand, the next crackup of the bourse is likely to occur around 2017 in line with the running sequence of flaps in the modern era.


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According to a widespread custom in financial circles, a crash of the stock market refers to a breakdown in price of 15% or more in short order. The cutdown could occur within the span of a single day, or stretch out for more than a year.

By this criterion, the equity market in the U.S. has had a long-running habit of crashing a couple of times per decade. The nasty pattern has prevailed for generations on end.

From the vantage point of the late 1990s, we expected the first crash of the new millennium to occur around 2001. Moreover, the subsequent bombshell would show up sometime around 2007, followed by 2011.

As things turned out, the stock market has for the most part kept to the foregoing timetable. A case in point involved an upsurge of Internet ventures during the second half of the 1990s, followed by the burst of the bubble at the turn of the century.


Boom and Bust of Internet Stocks

The hoopla over online commerce led to a massive surge of the Nasdaq market that abounded with companies dabbling in digital technology. The bourse reached a peak in spring 2000 then crumbled in fits and starts over the next couple of years. Amid the tumult, the year 2001 straddled the middle ground during the drawn-out tumble from the summit to the bottom of the market.

The next spectacle in the marketplace built up in tandem with a frenzy in the housing sector. The motive force behind the ramp-up was a prolonged spell of loose money in the financial forum and the real economy.

In the wake of the Internet bust, the central banks of the industrial nations pumped a sea of money into the financial system. The purpose of the inundation was to lubricate the wheels of commerce and buoy the chains of production. In their zeal to stimulate the economy, the central bankers kept the basic rate of interest at abnormally low levels for half a decade.

On the upside, the global economy did regain its footing to some degree. On the downside, though, the deluge of money spewed out by the central banks led to a bubble of epic scale in the housing market.


Tizzy in Real Estate

After the bust of the Internet craze, the stock market struggled mightily over the next few years. As things turned out, the U.S. bourse touched a peak in October 2007 then ran out of steam.

Even so, the equity market did not break down all at once. The same was true of real estate.

On one hand, the housing sector began to falter in the United States in 2007. In March that year, the average price of new homes reached a zenith then drifted downward (Census, 2011b).

On the other hand, the hullabaloo was still in full swing in many other locales ranging from Europe and North Africa to Asia and South America. In Britain, for instance, the housing mania lasted until the first quarter of 2008 (Nationwide, 2011).

During the upswell of the housing bubble, a horde of punters had gobbled up gobs of financial assets built atop risky mortgages. The binge of bets on dicey rigs was led by an army of wildcats in the form of hedge funds. The punters of this stripe included boutique outfits standing on their own as well as cloistered groups lodged within larger concerns such as commercial banks.

Due to the complexity of the new-fangled assets in the financial ring, nobody could grasp the full extent of the dangers posed by the gimmicks. To make matters worse, the plungers took up humongous amounts of leverage, up to a hundred times or more of the sum put up as collateral. The lofty levels of gearing ensured that the principal would be wiped out at once when the house of cards came tumbling down, as it was bound to do sooner or later (Kim, 2011).

As the frenzy in real estate started to fizzle out in 2007, the windfall bagged by the speculators was bound to do likewise. Worse yet, the spree of profits scooped up on the upswing would duly turn into a spew of losses on the downstroke.

The pullback of mortgage-based assets turned into a rout in 2008, giving rise to the biggest blowup of the stock market since 1929. Moreover, the smashup on the bourse was followed by the worst recession in the global economy since the Second World War. In these ways, the bust-up of 2008 was a nightmare to remember.


Hazy Horizon

Looking to the future, the bedlam in the marketplace brought on a heap of uncertainty in sketching out the trail over the years to come. To begin with, the housing frenzy and its aftershock had knocked out the banking system and bashed in the real economy at large.

For a second thing, the blubber in the housing sector and the credit market had disrupted the price signals in the marketplace. As a result, the chains of production and distribution were bent grossly out of shape.

So severe was the mangling that the warpage was unlikely to unwind in earnest anytime soon. In that case, the economy would have to limp along for many years even after it had managed to crawl out of an outright recession.

To add to the distress, there was worse news still. In their boundless wisdom, the fearless leaders of the West decided to pander to the lobbyists from the banking industry. The starkest examples popped up in America and Europe. In these blighted locales, the politicans gave birth to a litter of deformed schemes meant to support the mauled banks and save the bludgeoned outfits from their self-inflicted wounds.

For this purpose, the first act of the politicos was to scrounge up trillions of dollars in order to bail out the pulped lenders. A second, and related, move was to take active measures to shore up the housing market.

The refusal to let the crushed banks die a natural death came to impose a whopping burden on the larger economy. By propping up the bettors in the banking industry and the housing sector, the pliant regimes consigned the entire economy to a slow and stunted recovery.


Gore Galore

The financial fiasco and the Great Recession in its wake had nuked millions of jobs and nixed trillions of dollars of wealth in each of the major countries round the world. Thanks to the woozy schemes of the government designed to sustain the rot, the population as a whole faced a future chock-full of hardship and frustration.

The flogging suffered by the body politic was spotlighted by the upsurge of unemployment as well poverty. As an example, the jobless rate in the U.S. soared from 4.4% in May 2007 to 10.1% by October 2009.

On a positive note, the recession came to end by the summer of 2009. On the other hand, the plight of the labor force scarcely improved for years to come. To bring up an example, the unemployment rate was still hovering at 9.0% in October 2011 (Labor, 2011).

The devastation was worse in terms of the millions of souls thrown into abject poverty. According to official figures, 15.1% of Americans were living in poverty in 2010. The proportion, which had risen from 14.3% the previous year, was the third consecutive rise in the annual survey (Census, 2011a).

In the meantime, the economy was saddled by a load of bloated banks that had scant interest in playing their proper role in the economy. In delving into this issue, it helps to keep in mind that the fundamental role of a commercial bank is to take in cash from thrify folks and lend out the dough to needy but creditworthy users.


Brazen Banks

In the world of commerce, certain parties need to borrow money as a matter of course while others do not. To start with a counterexample, large companies as a group drum up enough profits from their operations to fund their ongoing activities as well as finance brand-new ventures.

Moreover, a big and established firm has the wherewithal to obtain capital directly from the investing public by issuing stocks or selling bonds. For these reasons, giant concerns are rarely forced to borrow money from any type of bank.

By contrast, small and midsize firms are often obliged to set up a line of credit in order to finance routine operations as well as fund projects for expansion. A case in point is the cash required to obtain a letter of credit whose function is to back up a purchase from a foreign vendor.

Despite their mission, though, the recipients of the public bailouts had little or no interest in fulfilling their charter. Instead, the bankers found other uses for the money much better to their liking.

A fine example lay in the handout of billions of dollars to pay princely bonuses to favored employees. Another common ploy of the hustlers was to buy up weaker rivals in the marketplace, thus reducing the scope of competition within the banking industry. As for the rest of the moola, the banksters chose to hoard the cash wangled out of the public treasury.

To top it off, the cash infusion from the government enabled the banks to hold onto large stockpiles of properties rather than sell them off in order to whittle down their holdings and pay off their bills. If the market were left alone to do its job, the average price of homes would slim down to moderate levels following the massive buildup during the property bubble.

On the other hand, the tight grip on properties held by the banks acted as an artificial plug that kept real estate from losing its froth. As a result, the housing market could not cast off the blubber as a prelude to regaining its health.

Thanks to the chokes on real estate, myriads of homes stood empty for want of buyers and renters. At the same time, millions of souls lived in squalor because the newly destitute could not afford to secure decent quarters for their families.

As an example, 15 million housing units stood vacant in the U.S. in 2010. The figure was 44% higher than the vacancy rate from 2000 (Gopal, 2011).

Granted, some of these properties would require large dollops of cash if they were to be refurbished and transformed into swanky pads. On the other hand, a lot of folks in a state of privation do not insist on the trappings of luxury. Rather, the down-at-heel would be happy to live in presentable surroundings furnished with basic amenities such as clean water and dependable heating.

Given the mass of artificial props in real estate, however, the property market continued to be way overpriced in relation to the average level of income. In this and other ways, the housing sector was prevented by the government from shaking off the deadweight and regaining its mojo.

At first blush, the ham-handed program of support for the housing sector might seem like a blessing for the folks who already owned their homes. Granted, the rigidity in the marketplace might appear to be beneficial for the owners over the near term.

Yet the impact over the longer range was the direct opposite. The reason stems from the fact that the housing market can only flounder in the midst of an ailing economy.

On the other hand, the cost of living for the population as a whole is destined to climb higher for generations to come. The main driver lies in the groundswell of demand for natural resources from the emerging nations.

More precisely, the price of food, fuel and other commodities in the global marketplace is fated to clamber upward. In that case, the ogre of inflation will rule the roost even if a maimed economy ends up going nowhere.

What happens if the price of a property stays fixed in nominal terms in an epoch in which the cost of living rises by a handful of percent each year on average? The real value of the dwelling of course shrivels up due to the inexorable press of inflation.

From a larger stance, the property sector is a cornerstone of the economy at large. Given the fetters on real estate, though, the housing market has turned out to be a brake rather than an engine of growth.


Forecasting the Next Crash

Thanks in large part to the ill-formed schemes of public officials, the global economy was slated to flounder and stagger well into the 2010s. Meanwhile, the financial forum would also continue to wallow in the doldrums. For these reasons, there was scant room for a bubble of any sort to crop up in the marketplace.

Given this backdrop, it was unclear to us during the recession of 2009 just when the next bombshell would pop up in the stock market. According to the long-range timeline, the bourse was destined to break down in 2011.

On the other hand, neither the real economy nor the financial bazaar would have recovered sufficiently within a couple of years to justify a full-scale blowout. Rather, an additional stretch of a few years would be required for the bourse to claw back a hefty chunk of the losses suffered during the financial crisis. After recouping a goodly amount, the market would then be ready for another sideswipe and knockdown.

Despite our reservations, though, the subsequent crash of the stock market did show up right on time according to the long-range schedule. In 2011, the feeble state of the economy in the mature nations cast a pall over investors in America and elsewhere. As the grody numbers on jobless rates and economic growth trickled out of government agencies, the investing public was seized by fears of a fresh lapse into a full-blown recession.

In this edgy climate, the U.S. bourse hit a ceiling in the summer of 2011, then broke down shortly afterward. As a barometer of the stock market, the S&P 500 index – the yardstick of choice among professional investors – touched a high of 1,370.58 points in the month of May.

Then the benchmark thrashed around for a couple of months before plunging to 1,074.77 by October. From peak to trough, the index had flopped by a thumping 21.6%.

As usual, though, the stock market was shoved into the abyss by the madding crowd for no good reason. Apparently, the mob had not received the memo on mobility: a lame economy is not the same thing as a stalled one.

In line with earlier remarks, the chains of production and distribution had been twisted grossly out of shape by the monstrous geyser in the housing market and mortgage-based securities. Due to the mangling, the economy could only flail around and crawl along in fits and starts.

To compound the problem, the politicians had chosen to stretch out the misery by propping up a heap of dysfunctional banks and overpriced properties. The counterproductive moves of the government served to hamstring the natural process of healing and recovery throughout the economy.

In this cruddy environment, the economy was doomed to gnash and grind. Despite the stumpers, though, there was no reason why the chains of production and distribution should suddenly collapse en masse.

Even so, the lack of cause was not enough to keep the stock market from taking a nosedive. In any event, the first crash of the 2010s showed up right on time according to the longish timetable.

As a result, it appears that the sequence of blowups is back on track. In that case, the next bombshell is likely to crop up around 2017. Until then, the default forecast over the next few years calls for a spell of relative calm in the stock market.


Crackup without a Bubble

The crash of 2011 spotlights the fact that the stock market can blow up even in the absence of a newborn bubble. At that juncture, only a couple of patches in the marketplace were teeming with froth; namely, the portions that were prevented by the government from deflating properly after the previous puff-up.

In a host of countries round the globe, certain segments of the real and financial markets were still propped up by the numb hand of government. In particular, the blubber continued to saddle large swaths of the housing sector. The same was true of the financial sector, especially in the form of the comatose firms within the banking industry.


Crush of Debt

The rampant malaise in the housing sector and banking sphere in far-flung countries was attended by another bugbear in Europe. Since the turn of the millennium, a gaggle of reckless banks had bought up mounds of bonds churned out by the Greek government. The mindless quest of juicy yields was the handiwork of a bunch of big names located in France, Germany and other rich countries.

After feasting on fizzy bonds for years on end, the time had now come for the guzzlers to pay for their bacchanal. Once again, though, the wily banksters were not averse to calling on the taxpayer to come to their rescue.

In order to save the clodhoppers from their self-caused wounds, the European Union saw fit to lend even more money to the insolvent debtor. The pretext was that the bond market in Greece had to be propped up in order to save the local government.

Otherwise a simple and forthright act – namely, an official default on the bonds – would lead to the end of the world. The argument, such as it was, involved a series of amazing leaps of logic.

Suppose that Greece were to acknowledge its spendthrift ways and admit the obvious: the mountain of cash it had borrowed and squandered was far too big to ever pay back to any meaningful extent. If the government confessed to something that was obvious to the investing public, then Greece would be forced to leave the currency union. The latter move would be the first step on the icy road toward the total disintegration of the euro. The breakup of the common currency would then be followed by the implosion of the regional economy, and thence the demolition of the global economy.

Scary stuff, wouldn’t you say? Or maybe not.

Sadly for the prophets of doom, the throng of international investors found it hard to swallow the barrel of hogwash. Instead of calming the investing public, the bald attempts to mask the truth and stick the taxpayers with the tab for the bailouts stirred up even more angst in the marketplace.

With increasing concern, investors round the world wondered what other hellions the pols were keeping under wraps. If the tricksters were so fond of fudging the truth about bogeys that were plain to see, what else were they plotting with wraiths that were hidden from view? And how much more havoc would the perpetrators seek to wreak upon the financial markets and the real economy?

Amid the bluster and the muddle, investors on both sides of the Atlantic feared for the worst. As a result, the markets of the West stumbled and crumpled, and prompted the rest of the world to follow suit.

As we noted above, the housing sector makes up a hefty chunk of the economy at large. By adopting a course of ham-fisted support for the property market, the politicos were in effect going out of their way to buttress the distortions in the complex webs of production and distribution.

For starters, the dippy moves included direct ploys to prop up prices in the housing sector. A case in point was a heap of public guarantees for private loans. To add to the mischief, the indirect schemes were led by a pile of crutches for crippled banks that had gone overboard during the housing bubble and now continued to hold onto scads of distressed properties.

By this stage, the price tags for the dwellings held by the lenders were of course somewhat lower than the ditzy levels reached at the height of the housing craze. Even so, the puffy prices were still way out of whack in relation to the average level of income throughout the population.

As we noted earlier, the financial crisis had thrown millions of people out of work and wiped out trillions of dollars of household wealth in every major country round the world. In that case, the natural level for the housing market at this stage would be even lower than the hefty price prior to the huge run-up.

The phalanx of crutches designed to shore up the bloated markets and zombie banks hampered the process of adjustment and recovery throughout the economy. As is often the case in a financial crunch, the knee-jerk reaction of the demagogues served to exacerbate the problem and prolong the torment rather than cure the illness.

To sum up, the banking industry is too important for the economy as a whole to be gummed up and knocked about by a bunch of cloddish firms. It’s high time for the government to turn its back on the marauders that have a habit of stomping on the efficiency and stability of the financial sector.

At a minimum, the policymakers should leave the bunglers alone so that they can die a natural and well-deserved death. Better yet, public policy should be directed toward the nurturance of leanness and sobriety in the financial arena, along with innovation and growth of the healthy kind. To this end, the government has to level the playing field to ensure that responsible firms and progressive ventures can flourish in the banking industry.


Cloudy Skies over the Real Economy

The investing public was not the only segment of the population that was flustered by the willful choking of the economy by the politicians, along with their nutty antics in response to the debt crisis in Europe. As time went by, even the stalwarts in the business community began to wring their hands over the prospects for the economy at large.

A case in point was a survey of 1,500 senior executives in the late autumn. Among the respondents, only 14% expected to see an improvement in business conditions over the next six months.

Another way to gauge the mood of the top brass was to consider the overall level of confidence; that is, the balance of pollees who expected the global economy to improve versus those who thought the conditions world worsen. According to this gauge, the net tally of positive views in May 2011 was plus 19%. Sadly, the same yardstick turned distinctly negative by July, then dropped to minus 39% by October.

By way of comparison, the same type of survey placed the net percentage of upbeat views at minus 37 points in September 2008 (Economist, 2011). Based on the last two figures, the respondents in the latest poll were even glummer than the sample at the onset of the financial crisis.

A dire outlook can of course turn into a self-fulfilling prophesy. For instance, suppose that a large cohort of executives decide to batten down the hatches and hold off on outlays. An example in this vein is a moratorium on hiring new workers to replace oldsters who leave their jobs as part of the natural process of turnover in the labor market. If the purse strings are drawn tight across the board, then the economy is bound to shrivel up and keel over.

From the standpoint of the investor, however, the prospect of a modest recession had already been baked into the stock market. For this reason, even a pullback of modest scale in economic activity was unlikely to pummel the bourse much further.

To round up, the politicians of the developed world went out of their way to prop up the distortions in the marketplace that had cropped up during the run-up to the financial crisis of 2008. Instead of a clampdown meant to block the healing process, the politicos should have allowed the economy to cure itself.

Better yet, public policy could have sought to undo the warpage in the chains of production and distribution. Thanks to the counterproductive moves of the pols, however, the entire economy was sentenced to a long and grinding ordeal.


Groundswell of Unrest

On the downside, the voices of reform in the public sector have been far too few and feeble to face up to the challenges in a serious way. A dose of bitter pills would be required to heal the financial forum as well as the real economy in a timely fashion. As a group, though, the putative leaders were unable to muster the grit needed to mete out the medicine needed for the purpose.

Given this backdrop, the developed nations of the world are destined to stagger and struggle for many years to come. The quandary resembles the plight of Japan during the lost generation that began in the early 1990s and continues to this day.

The lack of willpower to revamp the system wholesale has condemned the nations of the West to a similar fate over the decades to come. On the other hand, though, it doesn’t have to be this way.

Luckily for the flailing nations stuck in the muck, large numbers of citizens have been unwilling to take the racket lying down. A plain example lies in the grass-roots campaign known as Occupy Wall Street, a movement which started off in New York in September.

A precursor to the movement was a rally by the incensed citizens of Malaysia, numbering around 20,000 participants, who poured into central Kuala Lumpur in July 2011. For the mass of the protesters, the purpose of the gathering was to overturn the electoral laws that conferred an unfair advantage to the ruling coalition within the country (Fernandez, 2011).

A couple of months onward, the protests in the U.S. against corporate handouts and financial inequity spread like wildfire throughout the nation and beyond its borders. By the middle of November, similar campaigns had sprung up round the world and taken root in 2,414 cities (Occupy, 2011).

Going forward, the key task of the firebrands in the popular campaign is to converge on a concrete set of measures for public policy. This might be achieved directly by the activists through their own efforts, or indirectly by inspiring others to stand up and be counted in other ways.

If the throng should succeed in pushing through a workable agenda, then the United States and other progressive nations can look forward to a brand-new era of reform and renewal, of innovation and upgrowth.


Streak of Hope

Another morsel of cheery news lies in the vitality of the emerging nations. Thanks to the vigor of the go-getters, the global economy as a whole will continue to press ahead and push higher.

The antics of public officials in the West have served to hamstring the financial sector and hobble the real economy. Moreover, the noxious schemes have rattled the investing public and outraged the hapless taxpayer.

In this light, the chief bungle lay in the policy of propping up a bunch of dysfunctional banks along with a slew of bloated properties. A second, and related, offense was to pay for the mischief by raiding the public treasury to the tune of trillions of dollars.

On a positive note, the witless schemes of the policymakers in the developed world have thus far managed to stymie only their own countries. Luckily, the baneful impact of the boondoggles on the spry regions of the planet has been muted thus far. With a bit of luck, the youthful nations of the world will continue to forge ahead despite the barrage of roadblocks and deadweights thrown up by the sometime leaders of the industrial nations against their own citizens.

The opportunities for growth in the emerging markets is a lifesaver for the global economy as well as the financial community. In this vibrant environment, the sage player can look to the emerging markets as the groundwork for a lusty program of investment – at least, until the next crash of the stock market in the U.S. along with knock-on effects throughout the world.


References

Census, Bureau of. “Income, Poverty and Health Insurance Coverage in the United States: 2010”. 2011a/9/13. http://www.census.gov/newsroom/releases/archives/income_wealth/cb11-157.html – tapped 2011/11/8.

Census, Bureau of. “Median and Average Sales Prices of New Homes Sold in United States: 2010”. http://www.census.gov/const/uspricemon.pdf – tapped 2011b/11/8.

Economist, The. “Global Business Barometer”. 2011/11/12, p. 109.

Fernandez, C. “Occupy Protests Spread to Malaysia”. 2011/10/15. http://blogs.wsj.com/dispatch/2011/10/15/occupy-protests-spread-to-malaysia – tapped 2011/11/14.

Gopal, P. “Meet Uncle Sam, Housing Contractor”. Businessweek, 2011/11/14, pp. 55-56.

Kim, S. “Wildcats of Finance”. http://www.mintkit.com/Wildcats-of-Finance – tapped 2011/11/22.

Labor Statistics, Bureau of. “Labor Force Statistics from the Current Population Survey”. http://data.bls.gov/cgi-bin/surveymost – tapped 2011/11/8.

Nationwide Building Society. “UK House Prices Since 1952”. http://www.nationwide.co.uk/hpi/historical.htm – tapped 2011/11/9.

Occupy Together. Self-organizing group at Meetup.com. http://www.meetup.com/occupytogether – tapped 2011/11/14.


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Market Cycles


Causes and Effects of Waves in the
Financial Forum and Real Economy


A host of market cycles crop up in the financial arena as well as the real economy. In fact, the two domains of the virtual and tangible are interlinked in lots of ways. As an example, the action in the stock market depends for the most part on events taking place in the external environment. In the opposite direction, the goings-on in the financial forum affect the vitality of the economy at large.

Looking at the bigger picture, the entire environment – made up of natural forces along with human factors – plays a crucial role throughout the marketplace. A showcase lies in the impact of the weather on concrete goods as well as virtual assets. For instance, the onset of winter kindles the demand for heating, the prospect of which prods merchants in the commercial sphere and traders on the financial front into bidding up the price of fuel in advance.

In these ways a mass of cyclic patterns show up everywhere, from stocks and bonds in the capital markets to crops and homes in the real economy. Moreover, the hardy motifs span the spectrum of time scales, from less than a month to more than a decade.


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Cycles of all sorts show up in the financial forum as well as the real economy. The two domains of the virtual and physical are in fact intertwined in diverse ways.

To begin with, the sphere of capital is driven in large measure by events in the world at large. A good example involves the impact of technical innovation or population growth on the vigor of the stock market over the long haul. In the converse direction, the financial bazaar affects the course of the economy in sundry ways ranging from the cost of capital for producers to the zest for spending by consumers.

Behind the whole lot, the natural environment plays a fundamental role across the board. To  begin with a plain example, the onset of winter kindles the demand for heating. In view of the impending surge in the energy sector, the traders in the futures market bid up in advance the price of crude oil as well as offshoot products such as gasoline.

To bring up another sample, the heat of the summer is wont to drive the actors in the stock market away from their trading desks. The exodus from the marketplace leads to a cutdown of demand for equities. As a result, the bourse has a habit of losing steam and thrashing around during the warm half of the year.

More generally, scads of recurrent themes hold sway over assets of all types, be they stocks or currencies, realty or commodities. Moreover, the cyclic motifs span the spectrum of time scales, from less than a year to more than a decade.

An example of a short-term template lies in the usual hop of the stock market around the turn of the month. Meanwhile, a pattern that plays out over the course of the year involves the seasonal change in the price of wheat in tune with the timetable for planting and reaping.

An instance of a larger scheme is found in the fluctuation of interest rates across the stretch of a business cycle that on average runs around half a decade. Moreover, the far end of the time scale is spotlighted by the long wave of natural resources, which tend to wax and wane over a span lasting more than three decades.

The upspring of waves in the marketplace belies the traditional theories of investment finance based on the notions of ideal assets and flawless traders. In a world of perfect efficiency and boundless rationality, there would be no reason for recurrent molds of any sort to pop up in the financial patch. Despite the far-fetched claims of the orthodox faith, though, cycles of diverse stripes and lengths do show up time and time again.

Moreover, the subject of hardy waves cuts across the panoply of human enterprise. As an example, a spate of foul weather can ruin the yield on the farm, which in turn drives up the price of food. The spike in the grocery bill leaves less money for each household to spend on tangible goods as well as financial wares. The resulting slump in sales throughout the economy ends up squelching the profits of the vendors. The slump in earnings then sparks an upset in the stock market. In these ways, the natural environment plays a primal role in the turnout of the tangible economy as well as the financial ring. 

From a pragmatic stance, the welter of loops and links in the marketplace affects every member of the society at large in their varied roles as consumers and producers, employers and hirees, investors and policymakers. For this reason, a working knowledge of market cycles deserves a place of honor amongst the basic set of skills for each participant in the real economy as well as the financial forum.


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Market Trends



 Large-scale Forces 
 for Investment Planning 



A host of trends play a central role in the global economy and financial markets, along with the consequences for investment planning. To take advantage of the hubbub, the first task of the investor is to identify the large-scale forces and their potent offshoots. From a pragmatic stance, the fields of application span the gamut from common stocks and foreign exchange to raw materials and emerging markets.

Another crucial task of the investor is to pick out a promising set of vehicles to ride the tidal waves in the marketplace. The vessels on the move must then be steered through the upheavals by a nimble set of investment strategies.

*    *    *

A slew of trends show up in the evolution of the global economy as well as financial markets. The drivers at work span the gamut from technical progress and cross-border trade to demographic change and cultural fusion.

More than ever before, the melange of tangible and virtual markets affect each other in complex ways. In spite of – and due to – the knotty nature of the interactions, the wily investor has to keep abreast of a host of vital factors and their weighty impacts. The large-scale forces reach across diverse domains ranging from common stocks and foreign exchange to natural resources and emerging regions.

Seeking out the vibrant trends in the marketplace is simply the first step in thrashing out a trenchant program of investment. The next task is to line up a roster of investable vehicles and promising tacks in order to exploit the forces in motion.

The standard notion of a trend is a stable pattern that endures over time. This viewpoint is of course perfectly valid from a conceptual stance.

From a pragmatic slant, though, the shrewd investor keeps in mind that nothing lasts forever. In other words, even a long-lived trend has to poop out at some point.

Moreover, the end of the surge or swoon could be abrupt rather than gradual. A case in point is a bubble in the stock market that goes poof in a flash, or a groundswell of gold bullion that goes splat without warning.

In this dicey setting, the investor has to assess the length as well as the strength of a trend in advance. Then the gamer makes plans to quit the ride long before it fizzles out. As a rule, it’s far better to jump off the bandwagon a little too early than too late.

To round up, a welter of engines power the transformation of the real economy as well as the financial forum over the long range. Amid the ferment, the first task of the investor is to iron out a profile of the epic trends from start to finish.

The next step is to pick out the assets and map out the moves designed to harness the tidal waves in the marketplace. The workout paves the way for a sound program of investment to cash in on the wealth of market trends.


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Analysis of Financial Markets



Fundamental and Technical Methods 
for Gauging Assets


The analysis of a financial market can be divided into two broad types: fundamental and technical. The former approach explores the prospects for an enterprise in the real economy in order to fathom its securities in the financial arena. In this light, prime examples of corporate assets are found in stocks and bonds.

By contrast, the technical mode examines the past and current behavior of a security in the financial forum. The object is to scrutinize the patterns in the market as a way to divine the future.

Myriads of investors swear by one form of analysis or the other. Depending on the choice, a player in the field may be pegged as a fundamentalist or a technician.

Each school of thought boasts a host of followers in the financial community. Given the difference in focus, though, the two camps are often viewed by the members themselves as well as outside observers to be distinct and opposing sects.

Upon closer inspection, though, the divergent methods are largely complementary rather than conflicting. As a rule, the fundamental mode is most useful in sizing up the direction of the market over the long haul. Meanwhile, the technical scheme shows its mettle in picking out the turning points in the market over the shorter range.

Read more on Analysis of Financial Markets.

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Valuation of a High Growth Business


Comparing a Dynamic Company 
to Similar Firms on the Stock Market
is the Simple Approach to Valuation



The valuation of a high growth business is a key concern for the owners of the enterprise as well as outsiders such as prospective investors. As an example, a corporate buyer that plans to acquire the high flyer has to figure out how much the business is worth. The same is true of a savvy investor who wants to buy a block of shares in a company listed on a stock exchange.

A simple way to gauge the value of a business is to compare it to similar firms in the equity market. The matchup against listed firms is directly relevant, for instance, in the case of a public offering of shares. However, the same analysis can serve as a point of reference in other settings. An example of the latter is a decision by the owners to sell the company, whether in whole or in part, by way of a private transaction.

Read more on Valuation of a High Growth Business.

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International Real Estate for Investment and Retirement


A Primer and Guide
to Top Resources for Investing
in International Real Estate


An investor in international real estate has to consider a host of issues in selecting a property. To this end, the crucial factors span the gamut from global trends in real estate to local conditions in the target neighborhood.

This article presents a lineup of large-scale trends in the marketplace as well as key issues for the investor. A second, and related, task is to lay out a palette of pointers for avoiding common mistakes. A third feature involves a review of the top resources for investing in the property sector in far-flung countries.

Read more on
International Real Estate for Investment and Retirement
.


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Best Broker for Online Stock Trading and More


 Choosing the Best Broker for Online Trading, 
 from Stocks and Options 
 to Futures and Forex 



The best broker for online stock trading – and handling other types of assets ranging from bonds and options to futures and forex – depends on the matchup between the offerings of the vendors and the needs of the investor. As an example, a novice in the stock market who deals only with equities ought to favor a simple system with a user-friendly interface. By contrast, a veteran who uses a rolling sequence of futures contracts to cut down the volatility of the common stocks within the same portfolio would require a system of greater versatility and efficiency.

Even in the case of a particular trader, the proper choice of platform will vary over time. The factors at work include the shifting mix of financial resources and the latest views on retirement planning.

As a backdrop, the brokerage industry relies heavily on the tools of information technology. Due to rapid advances in hardware as well as software, the trading platforms have a way of morphing over time. The same is true of the schedule of transaction fees.

In this roily setting, there is no single package that befits all investors. In fact, the best choice of platform may well vary from one year to the next even in the case of a particular person. As a result, picking a broker for online trading is not a one-off decision that remains forever fixed, but an ongoing task that evolves over time.


Read more on Best Broker for Online Stock Trading and More.

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Market Vista


 Panorama of Leading Benchmarks 
 and Index Funds 



Despite the huge strides in globalization over the past century and more, the world is far from being a homogeneous place. From an economic slant, the variations across the planet show up in the motley patterns of production and consumption as well as business and finance.

Since the 20th century, the United States has played a dominant role in the global marketplace. Even today, the domestic economy continues to grow at a measured pace in terms of the absolute level of production.

On the other hand, the share of world output claimed by the U.S. has been shrinking for half a century. The reason, of course, is that the budding nations have been blooming faster than the mature giant.

In spite of the dwindling lead, though, the U.S. still retains the top spot in terms of economic output as well as financial clout. For this reason, the nation continues to take center stage in global affairs. As an example, the America economy serves as the bellwether for the rest of the world.


Read more on Market Vista.


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Real Estate as a Prime Investment


 Realty as a Cornerstone 
 of Investment Planning 


From a purely financial stance, the bulk of assets owned by the human population takes the form of real estate. The role of the housing sector as the mainstay of wealth stems from a bunch of factors.

To begin with, just about everyone wants to live in safe and comfy surroundings. For this reason, most people are willing to pay a hefty sum for a desirable abode. As a result, the cost of housing – whether the property happens to be rented or owned – usually takes up the biggest chunk of the household budget.

Another factor lies in the economics of ownership versus rental. Since the value of real estate tends to climb over time, the net worth of the owner rises. By contrast, the only impact on the renter is the privilege of shelling out more money to the landlord.

In many cases, the value of real estate tends to grow faster than the upturn in the average level of income throughout the population. The competition for the choicest locales heats up over time as the denizens have more money to spend.

Read more on Realty.

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Top ETFs for the Frontier Markets of Turkey, Thailand and South Africa


 Review of TUR, THD and EZA as 
 the Best Exchange Traded Funds 
 for Frontier Markets 
 During and After the Financial Crisis 


The top vehicles for growth include the exchange traded funds (ETFs) for the frontier markets of Thailand, Turkey and South Africa. The time frame for evaluation covers a crucial stretch of three years spanning the financial crisis of 2008 and its aftermath. In sizing up the performance of the funds, the key factors include the return on investment, the volatility of the pool, and the cost of maintenance.

As a rule, the vital features are interlinked rather than independent. As an example, a vehicle on the fast track to growth is prone to be more flighty than a sluggish one which plods along at a modest pace. Another sample lies in the cost structure: an index fund with a heavy burden of maintenance fees is prone to lag behind its rivals that have leaner structures.

In sizing up the index funds, a straightforward scheme is to begin with a list of the high flyers. Then the other factors such as risk and cost can be brought to bear on the appraisal.

For the tally at hand, the total return – consisting of the capital gain and dividend yield – covered a stretch of three years ending in March 2011. By this reckoning, the index fund for Turkey earned the gold medal.

Meanwhile, the pool for South Africa turned in a solid return coupled with a lower level of volatility. As a result, the African fund won the trophy for risk-adjusted returns.

In sizing up the efficiency of operations, the funds for Turkey and South Africa boasted a slim advantage over the pool for Thailand. On the other hand, the difference in maintenance fees was too small to have much of an impact on the rankings.

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In order to identify the best choice of exchange traded fund in any market, an initial step is to compile a list of the top performers. In sizing up the candidates, the key criteria include the rate of capital gains, the level of price volatility, and the burden of maintenance fees.

In certain cases, additional concerns may come to the fore. A case in point is the yield from the dividends thrown off by an ETF.

On the whole, the features listed above are interlinked rather than independent. As an example, an exchange traded fund on a growth streak is apt to be more volatile than a sluggish one which plods along at a modest pace.

Another sample lies in the millstone of maintenance charges. Whatever the performance may have been in the past, an index fund with a heavy load is more likely than not in the future to lag behind its rivals with leaner structures.

In dealing with these issues, a sensible step is to begin with a muster of the leading funds in terms of growth. Then the other factors such as risk and cost can be brought to bear on the evaluation.


Length of History versus Number of Candidates

In preparing a roster of the leading funds, an obvious point of departure is the rate of return over the past several years. On the downside, though, a lot of exchange traded funds are relative newcomers to the financial forum.

The saplings of this sort do not have much of a track record. As a result, an investor who insists on a lengthy history will end up with a scanty pool of candidates.

Given this backdrop, the worldly investor has to trade off the length of the track record against the size of the candidate pool. At this early stage in the evolution of exchange traded funds, a reasonable compromise between the pair of opposing factors is a life span of 3 years or so.


Top 3 ETF List by Growth

One of the most popular sites on the Web is the multiplex hub maintained by Yahoo Finance. At this portal, a handy resource takes the form of a screening tool for exchange traded funds.

Thanks to the screener, a visitor to the site can readily obtain a list of the leading funds for the budding markets of the world. The geographic locales include frontier markets such as Egypt and Vietnam as well as emerging nations such as China and Brazil.

In picking out the winning funds, the period of evaluation covered a crucial stretch of three years ending in March 2011. During this period, the best performance was turned in by a trio of index funds dealing with far-flung countries round the globe.

The winning pools focused on the stock markets of Turkey, Thailand and South Africa. For these vehicles, the total return over the span of three years was 13.39, 13.05, and 13.03 percent a year on average, respectively (Yahoo, 2011).

Meanwhile, a sizable gap separated the triad of champions from the rest of the field. To be precise, the best turnout for the next tier of funds was an annual gain of 10.47 percent on average.

In the sections to come, we examine each of the leading funds in turn. In comparing the candidates, the main factors to consider include the degree of risk as well as the level of overhead and the amount of dividends.


Performance for Turkey

Based on the rate of capital gains, the winner of the ETF pageant was the iShares MSCI Turkey fund. The index fund trades in the U.S. under the ticker symbol of TUR. The goal of the vehicle is to replicate the performance, in terms of the price and yield, of the MSCI Turkey Investable Market Index before taking into account the burden of fees and expenses.

Meanwhile, the role of the target benchmark is to track the equity market as a whole in Turkey. The index fund invests at least 90% of its capital in the securities covered by the underlying index.

The assets under management may include a selection of the local shares listed on the Turkish bourse. In addition, the holdings may also take the form of depositary receipts of the original stocks; in the latter case, the offshoot securities are traded in foreign markets such as the U.S. bourse.

The exchange traded fund was launched in March 2008. As a result, the pool was just old enough to fall within the requirement of having a track record covering the past 3 years.


Growth and Risk

A popular measure of risk lies in the flightiness of an asset compared to the stock market as a whole. For this purpose, the standard benchmark of the overall market is the S&P 500 index which covers the heavyweights of the U.S. bourse.

The relative change in price for an asset compared to the market as a whole is known as the beta factor. For the fund based on Turkey, the value of beta over the course of three years was 1.36.

In other words, the index fund was prone to rise by 1.36 percent for every change of 1 percent in the S&P benchmark. By the same token, the vehicle was wont to fall by a similar amount during a unit change to the downside by the benchmark. In qualitative terms, the Turkish fund was moderately flighty compared to the market as a whole.

Another measure of risk lies in the payoff of an asset compared to its volatility. In particular, the Sharpe Ratio refers to the average gain divided by the dispersion of returns.

Over the latest stretch of three years, the Sharpe Ratio for the Turkish fund clocked in at 0.50 units. In other words, the vehicle offered the investor a gain of 0.50 percent each year for every percentage point of volatility.


Lean Machine

Yet another measure of performance lies in the efficiency of a fund. The stewards of the Turkish fund impose a maintenance charge of 0.61 percent each year of the assets under management.

On one hand, the fee has been baked into the value of the fund by the investing public. In other words, the price of the security on the open market takes the maintenance fee into account. For this reason, the administrative burden can be ignored in gauging the past performance of an ETF.

On the other hand, the maintenance charge is a measure of the efficiency of operations. For this reason, the overhead plays a role in the performance of the fund in the future.

Other things being equal, a lean vehicle is likely to outpace a bloated one. For this reason, a smallish fee is preferable to a biggish one from the standpoint of a canny investor.


Growth, Income, or Both?

A long-standing custom in the financial forum is the classification of stocks into two groups: growth versus income. This practice is an artifact of the financial forum in a mature economy such as the U.S.

In the developed regions of the world, the companies listed on the stock market tend to fall into two classes. In one camp lie the established firms, as exemplified by the titans of the S&P 500 index.

For an investor, a vital feature of a giant firm is a measure of stability. A whale is more likely than a shrimp to survive the rigors of competition, while its stock is apt to be less volatile.

A second, and related, appeal of the juggernaut lies in the prospect of cash payouts.  A colossus is more likely to provide its shareholders with a steady stream of dividends.

By contrast, the opposing camp contains the large cohort of bantam firms. The main appeal of a small or midsize concern is the potential for rapid growth.

A smallish company tends to plow most or all of its profits back into the enterprise in order to expand its business. For this reason, the stream of dividends is apt to be scanty or nonexistent.

Given this backdrop, the traditional investor in the developed world was expected to make a choice. The player could turn to the big fish for the sake of a stable income, or bet on the small fry while hoping for lusty growth.

On the other hand, a major transformation has been under way since the autumn of the previous century. The barrage of changes in the corporate environment, along with the upgrowth of the global economy, have blurred the lines between growth and income.

As the decades wore on, the heavyweights in the stock market took to whittling down the stream of dividends. Admittedly, the change in policy was fitful and halting rather than steady and gradual.

Despite the reversals from time to time, though, the general trend has been to the downside. At the dawn of the millennium, a representative payout for the companies in the S&P benchmark is a dividend stream that amounts to a couple of percent a year of the  value of the equity.

That level of payout is of course higher than the usual outlay from a smallish firm, which is apt to be little or nothing. On the other hand, the dividend yield of the corporate giants in the U.S. can be matched by the beefy firms listed on foreign bourses.

To cite an example, an investor in the index fund for Turkey would have enjoyed a stream of dividends in the same ballpark as the titans of U.S. market. Based on the latest price of the shares, the dividend yield over the previous year came out to an annual rate of 2.00%.

As a result, the investor in TUR could enjoy the boons of growth as well as income. In this way, the crumbling of the lines between capital gain and dividend yield is one of the hallmarks of the brave new world.

The makeover is simply another example of the plethora of changes which render obsolete a slew of assumptions and practices from the past. Many a precept which used to serve as gospel in the olden days has been trumped by a newborn truth spawned in the millennium.


Turnout for Thailand

Based on the total return, the runner-up in the global race was the iShares MSCI Thailand fund. The vehicle trades in the U.S. under the ticker symbol of THD. The objective of the pool is to replicate the price and yield, before fees and expenses, of the MSCI Thailand Investable Market Index.

Like the previous fund focused on Turkey, the pool dealing with Thailand was launched in March 2008. As a result, this rig also managed to squeeze in under the requirement of a price history of 3 years or more.

The dividend yield for THD came out to an annual level of 2.37%. The payout was somewhat better than the corresponding value of 2.00% for the Turkish fund.

As we saw earlier, a standard measure of risk lies in the jitter of an asset compared to the S&P benchmark of heavyweights in the United States. For the Thai fund, the beta factor amounted to 1.36. The level of volatility was the same as the figure for Turkey.

Meanwhile, the Sharpe Ratio for the Thai fund came out to 0.50 units. The latter value was identical to the level for the Turkish pool.

Another measure of performance involves the efficiency of an index fund. The stewards of the Thai pool impose a maintenance charge of 0.62 percent a year. The latter value is a tad bigger than the value of 0.61 for the Turkey fund.


Payoff for South Africa

From the standpoint of capital gains, the second runner-up in the worldwide pageant was the iShares MSCI South Africa fund, which flies under the banner of EZA. As the name suggests, the aim of the pool is to replicate the price and yield, before fees and expenses, of the MSCI MSCI South Africa Index. The benchmark covers stocks listed primarily on the Johannesburg Stock Exchange.

Unlike the previous two pools, the index fund for South Africa came to life in February 2003. As a result, the fund boasted a longer history than the other two contenders. For the sake of comparison, though, only the track record for the last 3 years was used in gauging the performance.

The dividend yield for EZA came out to an annual rate of 2.49%. The payout was higher than than the corresponding value of 2.37% for the Thai fund, and of 2.00% in the case of Turkey.

On the topic of turbulence, EZA featured a beta factor of 1.15 over the 3-year stretch. The outcome was lower than the corresponding value of 1.36 turned in by each of the funds for Thailand and Turkey.

In terms of risk-adjusted gains, the Sharpe Ratio for EZA came out to 0.53 units. The latter showing trumped the outturn of 0.50 for each of the two other pools.

We turn now to the efficiency of the vehicle. The stewards of the South African pool levy an administrative fee of 0.61% a year. The overhead is identical to the value of 0.61 for the Turkish fund. By contrast, the Thai fund had a slightly higher burden amounting to 0.62 percent.


Chart Action

Another way to compare the index funds is to plot their behavior on a single chart. The diagram below, adapted from Yahoo Finance (finance.yahoo.com), spans a period of 5 years ending in spring 2011.




The red line portrays the relative performance of the index fund for South Africa over the entire stretch. By way of comparison, the purple line depicts the trajectory of the S&P 500 benchmark.

The price action for the Turkish fund is shown in blue; and likewise for the Thai vehicle in green. In line with earlier remarks, these two vehicles sported a history of just over three years starting from the end of March 2008.

The period of evaluation is denoted in the chart by the area shaded in light blue. For the sake of comparison, the end of March 2008 serves as the baseline for each of the instruments; namely, the trio of index funds as well as the S&P benchmark.

A prominent feature on the chart is the turbulence whipped up during the financial crisis of 2008. The stormy passage is illustrated by the pounding taken by the S&P benchmark.

In line with the norm for dynamic assets, the funds for the frontier markets bounced around a lot more than the S&P index. On the bright side, though, the peppy vehicles recovered much faster than the market benchmark in the years to follow.

Moreover, each of the frontier markets recouped their losses and trudged higher by 2010. The chart also portrays the fact that EZA lagged somewhat behind TUR and THD around spring 2011.

On the other hand, the index fund for South Africa crumpled less than its rivals in the midst of the financial fiasco. Thanks to the greater level of stability, EZA edged out the competition in terms of risk-adjusted gains.


Final Tally for Frontier Markets

The top 3 funds for frontier markets displayed comparable levels of growth, risk and cost. Based on the performance over a span of three years, the best showing in each category was as follows.

  • Total Return: 13.39% a year on average for TUR
  • Dividend Yield: 2.49% for EZA  
  • Least Cost: 0.61% a year for TUR and EZA
  • Least Risk (Beta): 1.15 for EZA 
  • Risk-Adjusted Gain (Sharpe): 0.53 for EZA 

To sum up, the Turkish fund took the top prize for the total return on investment. On the other hand, the pool for South Africa offered the highest dividends as well as the lowest volatility. Thanks in good measure to the muted level of turbulence, the African contender won the cup in terms of risk-adjusted returns.

Meanwhile, the vehicles for Turkey and South Africa had a slim advantage over their Thai rival in the matter of maintenance fees. On the other hand, the edge was too small to have much impact on the relative performance of the funds.


Tips and Caveats

A vital issue that lies beyond the ambit of this article relates to the lack of a panacea in the financial forum. Given the absence of a universal solution, every investor has to size up the prospective choices in light of personal circumstances.

A prime example of a personal trait is the level of tolerance for risk. Another sample is the way in which a security complements the other assets within a larger portfolio.

Given the diversity of needs and wants, the best choice of ETF for one person could well be a lousy pick for someone else. For instance, a particular investor might decide that a high rate of growth is not worth the headache brought on by the violent thrash of prices.

Turning to a different topic, the prudent player is obliged to consult multiple sources of information in order to obtain a credible and rounded view of the candidate under review. A case in point is a confirmation of the past statistics as well as the current status of an ETF. Another instance is the long-range outlook for the target market tracked by an index fund.

The field of exchange traded funds is still in its infancy. Due to the jejune state of affairs, the information available on the Web – including the data provided by renowned and popular portals such as Yahoo Finance – is often beset by a raft of flaws. A case in point is a bunch of performance figures which turns out to be incorrect, inconsistent and/or misleading.

Given the welter of pitfalls, the mindful investor has to tread carefully before making a vital decision of any sort. The hazards of faulty information, along with a medley of remedial measures, are discussed at greater length in Kim (2011a).

This article has covered about a bunch of topics relating to frontier markets. Given the focus of the write-up, a detailed discussion of generic issues would have been inapt.

An example of the latter is a rundown of alternative ways to measure the volatility of the an asset. Another sample is a review of performance measures such as the risk-adjusted return.

Further information on the generic issues is available elsewhere. A good place to start is a case study dealing with the evaluation of exchange traded funds in general (Kim, 2011b).


References

Kim, S.  “Cruddy Information on Exchange Traded Funds.”  http://www.mintkit.com/cruddy-information-exchange-traded-funds – tapped 2011a/5/4.

Kim, S.  “Top 10 ETF List for Growth – Performance, Risk and Cost.”  http://w.mintkit.com/2011/02/top-10-etf-list-for-growth-performance.html – tapped 2011b/5/4.

Yahoo Finance.   “Exchange-Traded Funds (ETF) Center.”  Search results under the category of “Diversified Emerging” funds.  http://finance.yahoo.com/etf/browser/mkt – tapped 2011/5/4.

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Real Story behind Angel Investing



 Review of a Germinal Book 
 on Angel Investing 


Angel capital is a common source of funding for budding ventures. An example lies in the United States, where the level of financial support from business angels is comparable to the sum from venture capitalists.

Moreover, the practice of venture capital is still in its infancy in many other countries. For this reason, the business angel tends to play a larger role in the sponsorship of fledgling firms.

Despite its crucial function, though, the field of angel capital is obscured by a mantle of rumor and anecdote rather than fact and data. An exemplar lies in the U.S., where concrete data on angel capital is hard to come by. Not surprisingly, the scrappy state of affairs is even worse in the rest of the world.

On the upside, though, the dearth of knowledge has become less acute in recent years. A good example is found in an incisive program of research pursued in America. The probing has shown, for instance, that business angels have a penchant for investing in stable firms as well as newborn ventures. Moreover, the usual preference is to invest in a company that has attained a positive cash flow rather than a venture on the verge of bankruptcy.

As a group, business angels invest in a broad spectrum of industries in addition to the pacesetters in the technology sector. At the level of the individual, a cherub is apt to favor the industry they know best from their previous experience in the field.

The angels resemble other sources of informal capital in a number of ways. In particular, the cherubim usually have no more experience, expertise or capital than the friends and relatives of the entrepreneurs.

On the downside, the financial payoff for the cherubs is wont to be far from spectacular. A telling example involves the top tier of business angels. The players of this caliber boast a net worth of $10.9 million on average, participate in angel clubs, have founded an average of 2.7 companies, and are prepared to talk about their experiences. These heavyweights earn just 19.2% per year after taking into account the opportunity cost of the time they spend on their projects. Put another way, the archangels could have earned higher returns by entrusting their money to the leading funds in the field of venture capital.

The stunted payoff from angel investing is an indication of the scarcity of worthwhile projects rather than a deficit of funding on tap. In other words, too much money is chasing too few deals. In that sense, at least, angel capital happens to resemble venture capital as well as other niches in the financial arena.

In some cases, business angels flock together on a regular basis. The cherubs join clubs in order to share their trove of know-how and know-what. An example of the former lies in a technique for evaluating a project. Meanwhile, an instance of the latter is the legwork put into the due diligence prior to investing in a candidate firm. Given the advantages of collaboration, the members of angel groups tend to outperform their lonesome peers who work as lone rangers.

Read more on Real Story behind Angel Investing.

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Cruddy Information on Exchange Traded Funds


 Guide to Choosing Exchange Traded Funds 
 in Spite of Shifty Information 


The modern investor faces a raft of challenges due to the confounding nature of the information available on exchange traded funds (ETFs). One of the stumpers stems from the profusion of new-fangled vehicles for investing in a particular market. Another hurdle lies in the occasional outcrop of blighted information which may be incorrect, outdated, and/or misleading.

In the age of the Internet, one of the most popular resources for the investing public lies in the online portal maintained by Yahoo Finance. Another fount of information for the financial community is a rating agency named Morningstar, which has served for decades as a beacon on communal pools such as index funds.

Sadly, though, the stalwarts of this breed are known to serve up faulty data at times. To begin with, the information provided by two different sources may be incompatible with each other. Worse yet, the figures displayed at a single Web site are at times internally inconsistent.

For these reasons, the astute investor is obliged to mull over the data obtained before making any crucial decision. Due to the pitfalls in store, a sensible course of action is to compare a batch of figures against each other in order to assess their consistency.

Another safeguard is to give preference to elementary items of data over derived statistics. Starting from basic nubs of information, the target figures can at times be calculated manually with relative ease.

An example in this vein is to figure out the average return on investment for a particular security based on the initial and final values of the price record. Another ploy is to check a selection of numerical data against a graphic display in order to confirm that the figures appear to be compatible.

The knotty issues of this sort can be explored in depth by way of a case study involving the energy sector. The application deals with the selection of exchange traded funds focused on the market for crude oil. The standard bearer for each type of vehicle is presented, along with a review of its performance in recent years.

From a larger stance, the goal of the exercise is to uncover the problems posed by confounding data. A related task is to present a muster of guidelines for dealing with the stumbling blocks.

More on Cruddy Information on Exchange Traded Funds.

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Trends in Communication Networks and Optical Chips

 NeoPhotonics as a Showcase of Trends
in Communication Networks and Optical Chips 


Optical devices continue to play a growing role in communication networks. In the current setting, the upgrowth of the technology is spotlighted by the initial public offering (IPO) of NeoPhotonics Corporation.

The market for communication networks has enjoyed strapping growth for decades on end. In this environment, NeoPhotonics produces hardware modules which can be used to increase the capacity and reliability of high-speed networks while reducing the cost and size of the hardware. Due to the boons of optical devices on integrated chips, the technology is destined to to play a growing role in the industry.

The bulk of the hardware units to date rely on the hookup of discrete components in order to process the signals. The makeshift result is a clunky system marked by great complexity and high cost in tandem with low reliability.

A better approach is to combine a multiplicity of functions on a single slab of silicon. The benefits of a photonic integrated circuit (PIC) include high speed and high reliability.

More on Trends in Communication Networks and Optical Chips.


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Commodities



 Upgrowth of Natural Resources 


The commodities market has bloomed into a mainstay of investment planning in the modern economy. Furthermore, the mélange of raw materials is destined to flourish over the years and decades to come in spite of the inevitable run of setbacks from time to time.

On one hand, the market for natural resources will surge and swoon in tune with the long wave of the commodity cycle. On the other hand, the undulation will be superimposed upon an uptrend the likes of which has never cropped up before. The ascent of raw materials over the next couple of generations stems from the groundswell of industrialization in the emerging regions. A second engine of growth lies in the upswell of affluence, along with the influx of newfound consumers by the billions round the globe.

More on Commodities.

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Investing in Ventures


 Dynamos in Real and Financial Markets 


A program of investing for growth can be pursued through spry ventures in the real economy, the financial forum, or a combo of both. In certain cases, a single foray into the marketplace could end up spanning multiple modes of investment.

A case in point is a business angel who provides a loan to a brand-new venture. Based on an agreement set up at the outset, or by negotiation at a later date with the principals, the loan could be converted in due course into a stash of common stock in the company. The business might then list its equity on a stock exchange by way of an initial public offering (IPO).

More on Ventures.

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Volatility Slams the Return on Index Funds



 The Return on Index Funds 
 Rises with the Aloofness of the Investor 
 and Falls with the Volatility of the Market 


A high level of volatility in the market prods investors into fiddling with their portfolios, thereby slashing the return on investment for index funds. By trading in and out of the stock market at precisely the wrong times, the fidgety players end up shooting themselves in the foot.

Over the long haul, the sprightly segments of the market are apt to outpace the other branches. The dynamic niches include bantam firms, technology ventures, and emerging regions. On the downside, though, the spry markets tend to be more roily than the rest.

Unfortunately, the investing public has a way of dashing in and out of the market at just the wrong moments. As a result, the punters give up a great deal of the gains on offer in the lusty domains. The higher the volatility, the greater in general is the lag of the investor behind the target index.

On the upside, though, there is a straightforward way for the mass of investors to boost their earnings by a significant amount. The gamers could enjoy a plump increase in profits if they would stop meddling with their portfolios and simply ignore the goings-on in the marketplace. Moreover, the benefits of a laissez-faire policy grows with the turbulence of the market, along with the flightiness of the corresponding index fund.

More on Volatility Slams the Return on Index Funds.

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Risk Factors in Investment Planning



 Safeguards Against 
 Obvious as Well as Subtle Dangers 


The financial arena bubbles over with risk of all types. A prime example lies in the smashup of an asset caused by a bombshell in the external environment. Another showcase is the cutdown of a portfolio due to a rash move by a jumpy investor.

One way to classify the slew of threats is to rate them in terms of visibility. In that case, the bogeys span the spectrum from the subtle to the obvious.

Another approach is to gauge the threats according to the level of impact. At low end of the scale is a mild discomfort that leaves no permanent scar. By contrast, the high end of the range involves a mortal blow that wipes out an asset completely.

As a rule, the two traits of severity and visibility are interlinked. In most areas of life, we would expect the major threats to be highly prominent and the minor bugbears to be less so.

In the wacky world of investment, however, the situation is often turned upside down. In that case, a mild menace attracts scads of attention while the mortal danger is all but ignored.

More on Risk Factors.




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Sting of Hedge Funds



Unseen Threats to Investors and 
Proactive Measures by Policymakers 


PRESS RELEASE


FOR IMMEDIATE RELEASE


Over the past few decades, hedge funds have played a growing role in causing or aggravating blowups in the capital markets as well as banking systems. The latest fiasco was the financial crisis of 2008, which ended up crippling the financial complex and slamming the real economy.

The blowup gave rise to the worst recession in more than half a century. The debacle wiped out trillions of dollars from each of the major stock markets round the globe. Another offshoot was the rubout of millions of jobs along with the squelch of trillions of dollars in lost output in the global economy.

The carnage in the marketplace led to widespread calls by the general public for the government to step in and rein in the hedge funds. The targets in the crosshairs ranged from boutique funds standing on their own to coddled groups nestled within commercial banks.

In response to the clangor, governments across the globe scurried to draw up a raft of regulations. To date, though, the hasty response has only served to trammel the financial markets while doing little or nothing to wipe out the threat for real. The lawmakers have taken the facile approach by fiddling with the symptoms rather than dealing with the disease itself.

The roots of the ailment go far beyond the obvious signs of dysfunction. “The crux of the problem lies in the lopsided pattern of reward and penalty”, explains Steven Kim, author of a new book titled Wildcats of Finance. “The enabler is the leverage that comes from financial derivatives and commercial loans. The use of pumped-up schemes allows a tiny band of hedge funds to knock down the entire complex of finance and banking. Another impact is a breakdown of the chains of production and distribution in the real economy.”

Despite the hazards in store, myriads of moneyed investors have hankered after  hedge funds of all stripes. The prospective patrons are lured into the ring by the hazy aura of vast profits swirling round the wildcats.

The image of huge profits is stoked by the crude statistics of the market, which paint a false picture of the profits in store. The pith of the problem is the patchy nature of the data sets, which cover only the pacesetters in the prime of life. The front-runners flaunt their performance when the winds of fortune blow in their favor. Then the fumblers fall by the wayside and slip out of view when the tide flips around and runs in the opposite direction.

According to a number of in-depth studies by credible researchers, the half-life of the most successful players in the field is approximately three years or less. In other words, the fresh-faced investor who traipses into the arena faces even odds that their chosen fund will break down and go kaput within a few years.

Due to the slew of sinkholes in the land of hedge funds, a thorough cleanup of the quagmire will be no mean task. Is a clean sweep of the field even possible?

“It won’t be easy, but it could and should be done”, says the author. “The main hurdle thus far has been the near-total lack of meaty information about the true nature of hedge funds. Another roadblock is the opposition of the lobby groups against any meaningful change in regulations by the government. But there are no barriers at all in terms of technical feasibility, financial logic, or economic sense.”

So what’s the solution? “The lawmakers ought to tackle the crux of the problem and not just tinker round the edges”, says the researcher. “They need to root out the blight at the source rather than clip off a few sickly offshoots here and there.”

What’s keeping the lawgivers from grasping the real problems and taking proper measures? “For one thing, there’s a great deal of misunderstanding about what’s going on in the financial forum. That’s hardly surprising, since the bulk of the data released to investors comes from cherry-picked cases and lead to deceptive results. Then there’s the opposition from the vested interests against any meaningful stroke of regulation.”

For these reasons, a heap of initiative will be required to push through a wholesome set of reforms. In the current state of disinformation and muddling, though, it’s hard to see how lawmakers – along with the investors and voters at large – can muster the strength needed to put things right.

On one hand, legions of investors doubtless nurse a nagging suspicion that there is something rotten in the vale of hedge funds. Yet most people don’t have the concrete facts needed to put their finger on the source of the misgivings.

Part of the problem is that the whole can be less than the sum of the parts. For instance, it’s not obvious to most people how a seemingly benign scheme – such as a quirky form of profit sharing – can give rise to a host of toxic effects. At first glance, the matchup of gains and losses in the hedge fund game, lopsided as it is, appears to align the interests of the operators with those of their customers.

Unfortunately, most folks notice only half of the picture. It’s the other half, which hides in plain sight, that’s overlooked by the investors.
And it’s the hidden part that carries the venom. The impact of the warped setup is to pit the interests of the custodians against those of their clients.

As noted earlier, even the mass of statistics in the marketplace presents a twisted picture of the domain. In that case, it comes as no surprise that investors are unable to reconcile the so-called facts bandied about against the hunches and fears they come to harbor.

Given the custom of using highly biased samples, the reality looks nothing like the mirage of performance painted by the usual run of statistics. The novel book is designed to serve as a basic step in exposing the brass tacks lying behind the golden sheen. The primer debunks the myths, unveils the threats, and presents an agenda for reform.

As a capstone, the book profiles the advantage of sedate investing over frenzied trading in the long run. A related feature is a simple way for the mass of investors to beat the bulk of the competition – in the form of managed pools such as hedge funds as well as individual players such as private investors – without any effort to speak of.

The guidebook is designed mainly for mindful investors focused on nurturing their nest eggs, along with earnest policymakers interested in safeguarding the financial markets and the real economy. Other types of readers range from concerned professionals in the financial community to thoughtful members of the society at large.

Further information on the book is available at the online hub called MintKit Core (www.mintkit.com).


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About the Author

Steven Kim is the founder and head of the MintKit Group, a pioneer in radical innovation and investment strategy. Within the Group, the think tank conducts research on world markets and disseminates the findings through a series of publications. One initiative is an online hub named MintKit Core, which provides information and education on investing in a worldwide economy. The topics in focus span the gamut from market dynamics and financial forecasting to portfolio management and global strategy. The author has counseled and trained self-starters in diverse walks of life, ranging from novice entrepreneurs and senior executives to international investors and public officials.


About MintKit Press

MintKit Press is the publishing arm of the MintKit Group, an innovator in research, information and education on growth in a global marketplace. The programs of research span the spectrum from surveys and analyses to outlooks and guidelines for investing in world markets. While the results are published through a variety of channels, the main hub is a newly built site located at MintKit Core (www.mintkit.com).


Contact Information

A contact form is available at: www.mintkit.com/contact.





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