Buffet predicted housing bubble since 2005.

The oracle speaks

Warren Buffett and Charles Munger warn of real estate 'bubble,' the risk of terrorist nukes. May 2, 2005: 9:22 AM EDT  By Jason Zweig

OMAHA (CNN/Money) - It was below freezing here early Saturday morning, with frost silvering the golf courses and rolling lawns of the city where Warren Buffett's Berkshire Hathaway Inc. is headquartered. But the atmosphere was warm inside the Qwest Center arena, where roughly 20,000 shareholders gathered from around the world to hear Buffett and his vice chairman, Charles Munger, answer questions for nearly six hours. Not a single individual shareholder asked whether Berkshire might be implicated in the widening scandal about alleged earnings manipulations at American International Group – and even the money managers in the audience whose questions touched on the subject approached it gingerly. (Buffett announced at the outset that, at the request of the investigators who are exploring the AIG case, he could not discuss what he or other Berkshire executives might have revealed about AIG to the authorities.) Buffett's shareholders are true believers; to them, the idea that he could have done (or known about) anything wrong is absurd. In his answers to shareholders' questions, Buffett made it clear that he remains concerned about the trade deficit and the U.S. dollar, although he is bullish on the long-term strength of the U.S. economy. But he and Munger issued stern new warnings about the residential real estate "bubble," the destabilizing effect of hedge funds on the financial markets, and the possibility of another terrorist strike against the United States. They also warned that they do not see a clear future for pharmaceutical stocks, that GM and Ford face severe trouble over pension and health costs, that hedge funds could wreak havoc in a market decline, and that the New York Stock Exchange is doing a disservice to investors by going public. On real estate Buffett: "A lot of the psychological well being of the American public comes from how well they've done with their house over the years. If indeed there's been a bubble, and it's pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices].... "Certainly at the high end of the real estate market in some areas, you've seen extraordinary movement.... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences." Munger: "You have a real asset-price bubble in places like parts of California and the suburbs of Washington, D.C." Buffett: "I recently sold a house in Laguna for $3.5 million. It was on about 2,000 square feet of land, maybe a twentieth of an acre, and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre." Munger: "I know someone who lives next door to what you would actually call a fairly modest house that just sold for $17 million. There are some very extreme housing price bubbles going on." The trade deficit and the value of the dollar Buffett: "That really is the $64,000 question. It seems to me that a $618 billion trade deficit, rich as we are, strong as this country is, well, something will have to happen that will change that. Most economists will still say some kind of soft landing is possible. I don't know what a soft landing is exactly, in how the numbers come down softly from levels like these.... "There are more people [like hedge-fund managers] that go to bed at night with a hair trigger than ever before, it's an electronic herd, they can give vent to decisions that move billions and billions of dollars with the click of a key. We will have some exogenous event, we will have that. There will be some kind of stampede by that herd.... "When you have far greater sums than ever before, in one asset class after another, that are held by people who operate on a hair-trigger mechanism, then they lend themselves to more explosive outcomes. People with very short time horizons with huge sums of money, they can all try to head for the exits at the same time. The only way you can leave your seat in burning financial markets is to find someone else to take your seat, and that is not always easy...." Munger: "The present era has no comparable referent in the past history of capitalism. We have a higher percentage of the intelligentsia engaged in buying and selling pieces of paper and promoting trading activity than in any past era. A lot of what I see now reminds me of Sodom and Gomorrah. You get activity feeding on itself, envy and imitation. It has happened in the past that there came bad consequences." Buffett: "I have no idea on timing. It's far easier to tell what will happen than when it will happen. I would say that what is going on in terms of trade policy is going to have very important consequences." Munger: "A great civilization will bear a lot of abuse, but there are dangers in the current situation that threaten anyone who swings for the fences." Buffett to Munger: "What do you think the end will be?" Munger: "Bad." Buffett: "We're like an incredibly rich family that owns so much land they can't travel to the ends of their domain. And they sit on the front porch and consume a little bit of everything that comes in, all the riches of the land, and they consume roughly 6 percent more than they produce. And they pay for it by selling off land at the edge of the landholdings that can't see. They trade away a little piece every day or take out a mortgage on a piece. "That scenario couldn't end well. And we, also, keep consuming more than we produce. It can go on a long time. The world has demonstrated a diminishing enthusiasm for dollars in the last few years as they get flooded with them – every day there's $2 billion more going out than in. I have a hard time thinking of any outcome from this that involves an appreciating dollar. [But, Buffett later added, he is not predicting an end to U.S. economic power.] "If you have a good business in this country that's earning dollars, you'll still do okay. Twenty years from now, a couple percentage points of GDP may go to servicing the deficit, but you'll do fine.... I don't think trade deficits will pull down the whole place; the country will survive those dislocations. I'm not pessimistic about the U.S. at all.... We have over 80 percent of our money tied to the dollar. It's not like we've left the country." The threat of terrorism Buffett: My job is to think absolutely in terms of the worst case and to know enough about what's going on in both [Berkshire's] investments and operations that I don't lose sleep. Everything that can happen will happen.... It's Berkshire job to be prepared absolutely for the very worst. A few years ago we did not have NBCs [nuclear, biological and chemical attacks] excluded from our exposure, but we do now.... "If you go to lastbestchance.org, you can obtain a tape, free, that the Nuclear Threat Initiative has sponsored, that has a dramatization that is fictional but is not fanciful. We would regard ourselves as vulnerable to extinction as a company if we did not have nuclear, biological and chemical risks excluded from our policies. There could be events happening that could make it impossible for our checks to clear the next day." The overall climate for investors Buffett: "If the [stock] market gets cheaper, we will have many more opportunities to do something intelligent with money. We are going to be buying things [like stocks and other financial assets] for as long as I live, just as I'm going to be buying groceries for the rest of my life. Would I rather have grocery prices go up or down? "The stock market works the same way: If I'm a net buyer, obviously I would rather have prices go down than up. Charlie and I spend no time talking about what the stock market is going to do, because we don't know. We're not operating on basis of a market forecast. We don't make a list of the good things that are happening, or bad things. "Overall, I'm an enormous bull on the country. This is the most remarkable success story in the history of the world. It does not make sense to bet against America. I do not get pessimistic about the country. The real worry is what can be done by terrorists or governments that may have access to nuclear or other weapons.... "If you had to make a choice between long-term bonds at around 4.5 percent and equities for the next 20 years, I would certainly prefer equities. But if people think they can earn more than 6-7 percent a year, they're making a big mistake. I don't think we're in bubble-type valuations in equities -- or anywhere close to bargain valuations. "If you told me I had to go away for 20 years, I would rather take an index fund over long-term bonds. You'll get a chance to do something extremely intelligent with your money in the next few years. But right now there doesn't seem to be a clear enough direction to conclude anything dramatic." The auto industry Buffett: "[GM boss] Rick Wagoner and [Ford chairman] Bill Ford have both been handed, by past managers, extremely difficult hands to play. They're not the consequences of their own doing, but they have inherited a legacy cost structure, with contracts put in place decades ago, that make it very difficult for them to be competitive in today's world. "Just imagine if they'd been made to sign contracts that made them pay several more tons per steel than their competitors have to, people would feel that's untenable. [GM and Ford] have to pay contracts that give them immense obligations for health-care and retirement annuities at high cost. Their competitors can buy steel and other commodities no cheaper, but the competitors don't have nearly the same level of costs for these [health-care and retirement expenses]. "Someone once asked Bill Buckley what he would do if he actually won his race for New York mayor back and the 1960s and he said, 'First thing I'd do is ask for a recount.' Well, that's what I'd do at GM. You've got a $90 billion pension fund, $20 billion set aside for health-care liabilities, and the whole equity value of the company is $14 billion. That's not sustainable.... Something will have to give." Munger: "Warren gave a very optimistic prognosis. Some people seem to think there's no trouble just because it hasn't happened yet. If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem. I would want to address the problem right now. They'd better face it." The NYSE's merger with Archipelago Buffett: "I personally think it would be better if the NYSE remained as a neutral, not-for-big-profit institution. The exchange has done a very good job over the centuries. It's one of the most important institutions in the world. The enemy of investment is activity.... I know the American investor will not be better off if volume doubles on the NYSE, and I know the NYSE will be trying to figure out how to do that if it is trying to maximize its own earnings per share. GM or IBM will not earn more money if their stock turns over more actively, but a for-profit NYSE will." Munger: "I think we have lost our way when people like the [board of] governors and the CEO of the NYSE fail to realize they have a duty to the rest of us to act as exemplars. You do not want your first-grade school teacher to be fornicating on the floor or drinking alcohol in the closet and, similarly, you do not want your stock exchange to be setting the wrong moral example." Whether pharmaceutical stocks have become bargains Buffett: "That industry is in a state of flux right now. It's historically earned very good returns on invested capital, but it could well be that the world will unfold differently in the future than in the past. I'm not sure I can give you a good answer on that." Munger: "We just throw some decisions into the 'too hard' file and go onto others."

How These 6 Simple Questions Have Made Warren Buffett Wealthy

By Steve Christ
Thursday, February 14th, 2008

Forget Coke. Forget McDonalds. And you can even forget the queen of talk Oprah Winfrey. That's because when it comes right down to it the best brand in the business belongs to Warren Buffett, that grandfatherly billionaire from Omaha, Nebraska.

That's true now more than ever up on Wall Street, where the investing classes hang on his every word these days as they continue to come to grips with the dangers of a sub prime contagion that was never contained.

Of course, to the set of value investors that have been following Warren Buffet's investment principles for years, all of this renewed attention probably comes as no surprise at all. There is a reason after all that he's called the Oracle of Omaha.

But with the mortgage related mess now threatening to take the markets even lower, and investors of every stripe looking for a savior, Warren Buffett's billions, and his stellar reputation, may be just the answer that the markets are looking for.

And while Saint Warren certainly isn't going to save the market from all of its excesses, (not even he has that much money) he may just be able to bailout the only portion of the bond insurance market that is worth saving. That alone would be likely be enough to bring the markets back from the current abyss.

Warren Buffett to the Rescue

In fact, just two days ago the mighty weight of the Buffett Brand was on full display, when he called Becky Quick and the gang on Squawk Box for a little chat. The Dow futures, by the way were solidly in the red at the time.

It was during this chat that Buffett revealed that the his company had approached the three largest bond insurers last week - Ambac Financial Group Inc. (NYSE:ABK), MBIA Inc.(NYSE:MBI) and FGIC Corp.--offering to reinsure about $800 billion in municipal bonds in order to allow them to maintain their triple "AAA" ratings.

Of course, at the very moment he uttered those words the futures staged a big comeback going green to the tune of 72 points in an instant.

That green tide, not surprisingly, carried on into the day's trade as the markets rallied on mere hope of a Buffett solution, even though it was nothing more than a proposal. And in fact, one of the three troubled insurers had already turned him down, which wasn't surprising considering that he was basically asking them to fall on their swords.

Nonetheless, investors were warm to the idea of a Buffett solution, hopeful that it could alleviate one of the major market fears that have weighed heavily on the financial markets. "This would just eliminate one major cloud from the market," said Buffett on the call, and the Street agreed.

It was, in short, just part of what might be the master stroke in a legendary career spent buying things on the cheap.

In fact, when it is all said and done, it wouldn't surprise me one bit if Buffett's newly found bond insurer is practically the only one left standing-that's how downtrodden the bond insurer have become and how decisively Buffet has acted.

Warren Buffet's Six Investment Principles

So how does he do it, buying companies and investing on the cheap?

Well in short, he keeps it as simple as possible and he's incredibly patient, moving only when the markets are so far in his favor that he can hardly lose. And of numerous books have been written about him, a few of his many tenets for successful investing stand out.

These are a few of them; investment questions that when answered properly have helped Buffet cement his reputation as the best in the business.

They are:

• Has the company's performance been consistently good?-Buffett's tool in this regard is return on equity or ROE. Return on equity is a company's net income divided by shareholders equity (book value). Buffett uses ROE as a measure of company has consistently performed over time vs. its peers. A good ROE in this regard would be a 5 yr. average between 15-17 percent.

• Does the company carry too much debt compared to its peers? ---The measure of debt Buffett uses in evaluation is the debt/equity ratio. Buffett, in general, frowns upon companies with high levels of debt. Instead he prefers that earnings growth is generated by shareholder equity as opposed to borrowed funds. In this case, the higher the ratio, the more debt that a company carries. And while this figure varies from industry to industry, a good way to measure it would be by looking for a ratio that is less than 80% of the industry average.

 

• Are profit margins high compared to its peers? Are they increasing?-Buffett looks for companies with above average profit margins. It's calculated by dividing the net income by the net sales. Companies with a strong history in this regard over an extended period of 5-10 years typically outperform. An above average performer will typically carry profit margins that are 20% above the industry average. Moreover, those same profit margins will tend to rise as the company becomes more efficient over time.

• How long has the company been public? -In general, Buffett typically only considers companies that have been around for at least 10 years. That gives them the historical track record to make a proper evaluation of the company's future prospects.

• Are the company's products vulnerable to "commodity pricing"?-Buffett is a strong believer in the economic moat. Therefore, if the company doesn't offer anything that is unique or substantially different from its competitors he's generally not interested.

• And finally, is the company cheap on a valuation level? This is the part of the Buffett magic that is hard to quantify because it deals with a company's intrinsic value. That's the value that goes beyond its liquidation value and includes all the many intangibles that are hard to put a figure on, such as the worth of a brand name. In general, Buffet will want to purchase a company that is available at a 25% discount to its intrinsic value.

These, of course, are just a few of the many ways that Warren Buffet has built up his massive portfolio over the years. That's because to a large extent, Buffet never buys stocks, he buys companies.

The difference between these two styles has not only made him wealthy, but has also made him the best brand on the market today.

When he speaks, the markets follow.

Value Investing Principles

How to Shop for Real Stock Market Bargains

By Steve Christ
Thursday, September 11th, 2008

Baltimore, believe it or not is the home to the famous streak.

And I'm not talking about Cal Ripken's famous run or Johnny Unitas' mark of 47 straight games with a touchdown pass.

Instead, I'm talking about the investment streak of a life time for Legg Mason's Bill Miller. His Legg Mason Value Prime (MUTF: LMVTX) mutual fund beat the S&P 500 for 15 straight years, making him a legend in the world of value stock investing.

But as impressive as Miller's run was, it ended just like all streaks do. Miller eventually came up short in 2006 with a 5.6% return while the S&P delivered 15.8%. And unfortunately for Miller and his investors, it has been downhill for his legend ever since.

In fact, Miller latest bungle was loading up on shares of Freddie and Fannie as late as this summer costing his shareholders big time. In 12 short months both of them have fallen by over 98%.

Miller's fund—not surprisingly—has fallen right along with them, as some other bad bets on "values" never materialized either. In fact, Miller's famous fund is down some 48% in the last 15 months.

That's not exactly easy to do in a diversified fund—especially one built on value.

But despite Miller's recent trials with this time-tested style, value investing lives on. The key however, as Miller has found out is sticking to the value plan. And doubling down like some desperate gambler isn't exactly part of it.

What are the Core Value Investing Principles?

And at is core, the plan is as simple as the man who devised it—Benjamin Graham. It is to buy companies at a deep discount to their intrinsic value.

That involves a fundamental analysis of a company's balance sheet. So typically, value investors select stocks with lower-than-average price-to-book or price-to-earnings ratios and/or high dividend yields.

The key here, of course, is the business model, and in that respect a true value investor is never interested in companies that lose money.

And while that may seem pretty obvious to some, the biggest mistake retail investors make is chasing companies that have never booked a profit. I see it all the time.

It's risky and it's wrong.

Not surprisingly, one of Graham's greatest students was none other than Warren Buffett himself.

His value legend is untarnished so far as he has racked up one terrific buy after another. And while there have been a few flubs, there is a lot to learn about investing by looking at the way "the Oracle" determines value.

Investing in Value Stocks with Warren Buffett

So how does he do it, buying companies and investing on the cheap?

Well in short, Buffet keeps it as simple as possible and he's incredibly patient, moving only when the markets are so far in his favor that he can hardly lose. And while numerous books have been written about him, a few of Buffett's many tenets for successful value investing stand out.

These are a few of them - investment questions that when answered properly have helped Buffet cement his reputation as the best value investor in the business.

They are:

• Has the company's performance been consistently good? A value investor's tool in this regard is return on equity or ROE. Return on equity is a company's net income divided by shareholders equity (book value). Value investors use ROE as a measure of how a company has consistently performed over time vs. its peers. A good ROE in this regard would be a 5 yr. average between 15-17 percent.

 

• Does the company carry too much debt compared to its peers? The measure of debt a value investor uses in this regard is the debt/equity ratio. Value investors like Buffett, in general, frown upon companies with high levels of debt. Instead they prefer that earnings growth is generated by shareholder equity as opposed to borrowed funds. In this case, the higher the ratio, the more debt that a company carries. And while this figure varies from industry to industry, a good way to measure it would be by looking for a ratio that is less than 80% of the industry average.

• Are profit margins high compared to its peers? Are they increasing? Value investors look for companies with above average profit margins. It's calculated by dividing the net income by the net sales. Companies with a strong history in this regard, say over an extended period of 5-10 years typically outperform. An above average performer will typically carry profit margins that are 20% above the industry average. Moreover, those same profit margins will tend to rise as the company becomes more efficient over time.

• How long has the company been public? In general, Buffett typically only considers companies that have been around for at least 10 years. That gives them the historical track record to make a proper evaluation of the company's future prospects.

• Are the company's products vulnerable to commodity pricing? Buffett is a strong believer in the "economic moat" and value investors need to be too. Therefore, if the company doesn't offer anything that is unique or substantially different from its competitors it true value is suspect.

• And finally, is the company cheap on a valuation level? This is the part of the Buffett magic that is hard for value investors to quantify because it deals with a company's intrinsic value. That's the value that goes beyond its liquidation value and includes all the many intangibles that are hard to put a figure on, such as the worth of a brand name. That's the gray area that separates the men form the boys. In general, Warren Buffet buys companies he believes are available at a 25% discount to their intrinsic value.

These, of course, are just a few of the many ways that a value investor like Warren Buffet has built up his massive portfolio over the years. That's because to a large extent, successful value investors never buys stocks, they buy long term values at an intrinsic discount to their earning potential.

That is the key to successful value investing. It's not always all about price.

USD will be kept as the key currency

Japan PM says dollar must remain key currency

Japanese Prime Minister Taro Aso said Tuesday that he and US President Barack Obama agreed the dollar must remain the world's key currency despite the US-bred economic crisis. Aso, the first foreign leader to visit the Obama White House, said he and Obama spent roughly half of their one-hour meeting discussing the deepening global economic woes. "In terms of finance, we said it is important to maintain confidence in the dollar as a key currency," Aso told Japanese reporters in Washington after his meeting with Obama. 

"If confidence in the dollar is damaged, it would cause significant effects," he said. Aso said, however, that the US side did not indicate any wish for Japan to increase its purchase of US debts. 

Secretary of State Hillary Clinton on a visit to Beijing last week called on China to continue buying US Treasuries. China last year overtook Japan as the United States' biggest foreign creditor. Japanese officials said that Obama called in the summit with Aso for major economies such as Japan and China to continue efforts to revitalize the international economy. "President Obama said that the United States has been working hard" to boost its economy, said a Japanese diplomat who attended the White House talks. "He then said he wanted other nations of the world to also take action, in particular for major countries such as Japan and China to stimulate their domestic demand," he said. 

Japan, the world's largest economy other than the United States, is suffering a worsening recession due to falling exports and slumping consumer spending. Aso, who is suffering rock-bottom approval ratings, has pushed a plan to give cash handouts to the public in hopes of helping revive the economy. Obama and Aso also agreed to coordinate efforts for the next Group of 20 meeting of developed and developing countries in London, slated for April, the Japanese diplomat said. 

Recession may cause Unemployment in SG (DBS Report)

SINGAPORE, Feb 25, 2009 (AFP) - Singapore could lose a total of 99,000 jobs during the current recession, with more than half of the cuts in the key manufacturing sector, an analysis by local bank DBS said Wednesday.

"There will be a net loss of about 99,000 jobs due to the current recession and we also expect this to stretch into 2010", the bank said in its report.

Unemployment is likely to hit 4.8 percent this year and peak at 5.0 percent by the middle of 2010, it said.

"Labour markets are expected to deteriorate further," DBS added.

"The manufacturing sector is expected to be the worst hit with job losses of about 58,000 as the global recession chokes up demand for our manufactured exports."

The bulk of output from Singapore's manufacturing sector ends up as exports to the world's major economies, but recessions in those markets have severely affected local factories.

DBS said it has also downgraded its growth outlook for the city-state to a contraction of 4.8 percent this year from 3.8 percent previously, due to the "sharp collapse in global demand and export sales."

An "aggressive" stimulus package totalling 20.5 billion Singapore dollars (13.4 billion US) will only cushion the blows from the recession, the bank said.

Latest official data in Singapore said the seasonally adjusted unemployment rate rose to 2.6 percent in December, and companies laid off 7,000 workers during the last three months of 2008.

Singapore's worst recession occurred in 1964, just before independence, when the economy shrank 3.8 percent.

Major stock market indexes fall to 1997 levels

Monday February 23, 6:31 pm ET 
By Tim Paradis, AP Business Writer

Dow, S&P 500 fall to 1997 levels as sagging confidence pulls stocks lower; Dow falls 251

NEW YORK (AP) -- Wall Street has turned the clock back to 1997. Investors unable to extinguish their worries about a recession that has no end in sight dumped stocks again Monday. The Dow Jones industrial average tumbled 251 points to its lowest close since May 7, 1997, while the Standard & Poor's 500 index logged its lowest finish since April 11, 1997. It's as if the decade's dot-com surge, collapse and subsequent recovery never occurred.

The Dow is just over 100 points from 7,000. Both indexes have lost about half their value since hitting record highs in October 2007.

"People left and right are throwing in the towel," said Keith Springer, president of Capital Financial Advisory Services.

Investors pounded most financial stocks even as government agencies led by the Treasury Department said they would launch a revamped bank rescue program this week. The plan includes the option of increasing government ownership in financial institutions without having to pour more taxpayer money into them.

Although the government has said it doesn't want to nationalize banks, many investors are clearly still concerned that this could be a possibility as banks continue to suffer severe losses because of the recession. They're also worried that banks' losses will keep escalating as the recession sends more borrowers into default.

"The biggest thing I see here is the incredible pessimism," Springer said. "The government is doing a lousy job of alleviating fears."

The Treasury and other agencies issued a statement after The Wall Street Journal reported Citigroup is in talks for the government to boost its stake in the bank to as much as 40 percent. Analysts said the market, which initially rose on the statement, wanted more details of the government's plans.

"It's only a very partial picture of what we may get," said Quincy Krosby, chief investment strategist at The Hartford. "This proverbial lack of clarity is damaging market psychology."

Meanwhile, technology stocks fell after The Journal reported that Yahoo Inc.'s new chief executive plans to reorganize the company. But the selling came across the market as pessimism about the recession and its toll on companies deepened.

"There's no where to hide anymore," said Jim Herrick, director of equity trading at Baird & Co.

The market's decline extends massive losses from last week when the major stock indexes tumbled more than 6 percent. While falling to their 1997 levels, the major indexes plunged through the lows they reached in late November, at the height of the credit crisis.

"There's no main driver of the down day," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research. "There's just so much skepticism in the overall market and (the question is) is the government doing proper things to get us out of this problem. Obviously the stock market is voting no."

The Dow dropped 250.89, or 3.41 percent, to 7,114.78. It last closed this low on May 7, 1997 when it finished at 7,085.65. The Dow hasn't traded below the 7,000 mark since October 1997. The index is down 14 percent over the past 10 sessions.

The Standard & Poor's 500 index fell 26.72, or 3.47 percent, to 743.33. It was the lowest close since April 11, 1997, when it ended at 737.65.

When the indexes were last at these levels, they were in their ascendancy, climbing amid the dot-com boom. But 1997 was also the year that saw stock prices later plunge amid a growing financial crisis in Asia. Far away from Wall Street, it was the year that the U.S. first heard the name Monica Lewinsky, whose relationship with President Bill Clinton led to his impeachment and trial. And it was the year that the world was stunned by the death of Britain's Princess Diana, on Aug. 31.

On Monday, the S&P 500 did close above its Nov. 21 trading low of 741.02. But the 14-month recession has decimated the major indexes: The Dow is down 49.8 percent from its record highs of October 2007, while the S&P 500 index is down 52.5 percent.

Detrick warned that a move below the S&P's Nov. 21 low could set off "violent selling" as even more confidence drains from the market.

The technology-laden Nasdaq composite index dropped 53.51, or 3.71 percent, to 1,387.72.

Investors looking for a bottom also dumped smaller stocks. The Russell 2000 index of smaller companies fell 16.38 or 3.99 percent, to 394.58.

Declining issues outnumbered advancers by more than 6 to 1 on the New York Stock Exchange, where consolidated volume came to 6.35 billion shares compared with heavy volume of 8.12 billion shares on Friday.

Morgan Smith, investment counselor for Burns Advisory Group, said investors are now pushing out their expectations for a recovery in the industry until after this year.

"Everyone is trying to grasp at some type of bottom," Smith said. "The market is just trying to figure out if it has priced in a worst-case scenario."

Among tech stocks, Hewlett-Packard Co. fell $1.96, or 6.3 percent, to $29.28, and Intel Corp. dove 70 cents, or 5.5 percent, to $12.08.

Other big losers included General Electric Co., which dropped to a 14-year low of $8.80, but ended down 53 cents, or 5.7 percent, at $8.85. Aluminum producer Alcoa Inc. tumbled 48 cents, or 7.6 percent, to $5.81.

Some financial stocks managed to gain, including Citigroup, which rose 19 cents, or 9.7 percent, to $2.14, and Bank of America Corp., which gained 12 cents, or 3.2 percent, to $3.91.

Bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 2.76 percent from 2.79 percent late Friday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.29 percent from 0.26 percent Friday.

The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude fell $1.59 to settle at $38.44 per barrel on the New York Mercantile Exchange.

Overseas, Britain's FTSE 100 fell 0.99 percent, Germany's DAX index fell 1.95 percent, and France's CAC-40 slipped 0.82 percent. Earlier, Japan's Nikkei stock average fell 0.54 percent.

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

We are still half way down.

Dow ends at lowest close in more than 6 years
Thursday February 19, 11:36 pm ET 
By Tim Paradis, AP Business Writer

Wall Street slides as Dow industrials finish at lowest level in more than 6 years

NEW YORK (AP) -- An important psychological barrier gave way on Wall Street Thursday as the Dow Jones industrials fell to their lowest level in more than six years.

The Dow broke through a bottom reached in November, pulled down by a steep drop in key financial shares. It was the lowest close for the Dow since Oct. 9, 2002, when the last bear market bottomed out.

The blue chips' latest slide dashed hopes that the doldrums of November would mark the ending point of a long slump in the market, which is now nearly halfway below the peak levels reached in October 2007.

The market's inability to rally signals that investors see no immediate end for the recession, which is already 14 months old and one of the most severe in decades. Investors also haven't been impressed with two major economic initiatives from the Obama administration this week, an economic stimulus package and a mortgage relief plan.

"It is definitely, definitely a blow to psychology," said Quincy Krosby, chief investment strategist at The Hartford, referring to the Dow's finish. "There is more pessimism in the market as to when the economy is going to pick up steam."

The Dow had been teetering close to November bottom since Tuesday, when the index tumbled 300 points on worries about the economy and the stability of banks in Eastern Europe. Stocks had barely finished above the November low on Tuesday and Wednesday.

On Thursday, worries about financial and technology stocks weighed on the market, with steep drop-offs in financial bellwethers like Citigroup and Bank of America leading the way downward. Both stocks tumbled 14 percent and closed below $4, less than the cost of a latte in some coffee shops.

"The Dow represents, to the average investor, the American economy," Krosby said. While professional investors often look at indexes like the Standard & Poor's 500 index, the Dow's slide is an unwelcome milestone. "It's a tenet of the market, selling begets selling. You're going to see the market on guard."

The Dow lost 89.68, or 1.2 percent, to end at 7,465.95.

The blue chips have fallen 9.8 percent in the last eight sessions.

Broader indexes also fell. The Standard & Poor's 500 index ended down 9.48, or 1.2 percent, to 778.94. The index finished above its Nov. 20 close of 752.44, which was its worst finish since April 1997.

The technology-heavy Nasdaq composite index suffered the biggest hit Thursday after Hewlett Packard Co. posted worrisome results after market close on Wednesday. The Nasdaq fell 25.15, or 1.7 percent, to 1,442.82.

The Russell 2000 index of smaller companies fell 6.47, or 1.5 percent, to 416.71.

Declining issues outnumbered advancers by more than 2 to 1 on the New York Stock Exchange, where consolidated volume came to 5.64 billion shares compared with 5.65 billion shares traded Wednesday.

Dan Cook, senior market analyst at IG Markets, said the Dow's move lower is unnerving because it forces many investors to reassess their expectations of how far the market could slide.

"It's kind of like if we're walking across a frozen pond. If that ice starts to crack a bit we're going to be very wary," he said.

The news of the day didn't offer much support. Hewlett-Packard gave up nearly 8 percent after the computer and printer company turned in disappointing fourth-quarter sales, hurt by tightening spending at many businesses.

Even the bright spots weren't enough to lift the market. Sprint Nextel Corp., the nation's third-largest wireless carrier, rose 20 percent after its fourth-quarter results came in better than forecast. And Whole Foods Market Inc. jumped 37 percent Thursday after earnings from the natural and organic grocer topped expectations.

Bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite to its price, rose to 2.86 percent from 2.75 percent late Wednesday. The yield on the three-month T-bill, considered one of the safest investments, fell to 0.29 percent from 0.30 percent Wednesday.

The dollar was mixed against other major currencies, while gold prices slipped.

Light, sweet crude rose $2.77 to settle at $40.18 per barrel on the New York Mercantile Exchange.

Economic news released Thursday offered investors little incentive to buy.

The number of workers receiving unemployment benefits hit a record high of nearly 5 million, and new jobless claims are at levels not seen since the early 1980s. A reading on wholesale prices, the Producer Price Index, jumped more than expected in January, the first increase in six months.

The Philadelphia Federal Reserve said conditions in the region's manufacturing sector weakened in February. There was some good news: An index of leading economic indicators logged a surprise increase in January, the second straight monthly gain.

Technology and financial stocks weighed on the market. H-P fell $2.69, or 7.9 percent, to $31.39.

Citigroup fell 40 cents to $2.51, while Bank of America fell 64 cents to $3.93.

Some investors turned to consumer staples stocks after drugstore operator CVC Caremark Corp. posted a better-than-expected 17 percent increase in earnings for the final three months of 2008. CVS rose $1.72, or 6.4 percent, to $28.71.

Sprint rose 54 cents, or 19.9 percent, to $3.25, while Whole Foods rose $3.46, or 37.2 percent, to $12.75.

Overseas, Britain's FTSE 100 rose 0.3 percent, Germany's DAX index rose 0.2 percent, and France's CAC-40 fell 0.1 percent. Japan's Nikkei stock average rose 0.3 percent.

(source: Yahoo Finance)

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Few experts in the field predicts that the Dow Jones Industrial Average will drop to around 6000 or lower. 

Below I have posted the past historical Dow Jones Index so far.

Considering that this recession is the worst recession since the great depression, the effect is predicted to be worse than the previous 2 recession (dotcom bubble burst and asian financial crisis.) 

Many believes that we are only halfway down. The worst has yet to come. That is the reason why taking long position in the stock market is not advised.

Warren Buffet's Words of Wisdom for 2009

We begin this New Year with dampened enthusiasm and dented optimism. Our happiness is diluted and our peace is threatened by the financial illness that has infected our families, organizations and nations.

Everyone is desperate to find a remedy that will cure their financial illness and help them recover their financial health. They expect the financial experts to provide them with remedies, forgetting the fact that it is these experts who created this financial mess.

Every new year, I adopt a couple of old maxims as my beacons to guide my future. This self-prescribed therapy has ensured that with each passing year, I grow wiser and not older.

This year, I invite you to tap into the financial wisdom of our elders along with me, and become financially wiser.

* Hard work: All hard work bring a profit, but mere talk leads only to poverty.

* Laziness: A sleeping lobster is carried away by the water current.

* Earnings: Never depend on a single source of income. [At least make your Investments get you second earning]

* Spending: If you buy things you don't need, you'll soon sell things you need.

* Savings: Don't save what is left after spending; spend what is left after saving.

* Borrowings: The borrower becomes the lender's slave.

* Accounting: It's no use carrying an umbrella, if your shoes are leaking.

* Auditing: Beware of little expenses; A small leak can sink a large ship.

* Risk-taking: Never test the depth of the river with both feet. [Have an alternate plan ready]

* Investment: Don't put all your eggs in one basket.

I'm certain that those who have already been practicing these principles remain financially healthy. I'm equally confident that those who resolve to start practicing these principles will quickly regain their financial health.

Let us become wiser and lead a happy, healthy, prosperous and peaceful life.
---- Warren Buffet

Updates on Japan Economy

BOJ meets as economy in worst slump since 1970s

Board of Japan's central bank likely to discuss extending loan scheme

By Chris Oliver, MarketWatch

Last update: 9:45 p.m. EST Feb. 16, 2009

HONG KONG (MarketWatch) -- The Bank of Japan's policy board will meet this week under pressure to come up with creative answers to the nation's deepening economic gloom, after the latest data revealed the country suffered its biggest quarterly contraction since 1974.

With most economists forecasting more deterioration ahead, the central bank is left with a dearth of conventional options.

"Effectively all the Bank of Japan can do is accelerate measures that have already been announced," said Glenn Maguire, SocGen's chief Asia economist in Hong Kong.

Preliminary data released Monday by the Cabinet Office showed Japanese gross domestic product shrank 12.7% on an annualized basis in the October-December period, or 3.3% from the previous quarter. The decline was the biggest since a 13.1% annualized contraction in the January-to-March period in 1974.

The contraction followed a 2.3% annualized drop in the July-September quarter, bringing the fall in activity to three quarters. That's the longest since the recession that ended in December 2001, which followed the collapse of the technology bubble. See full story on Japan's GDP contraction.

The BOJ's two-day policy board meeting is slated to begin Wednesday, and is expected to focus on actions geared towards easing corporate finance conditions.

At its January meeting, bank Governor Masaaki Shirakawa instructed staff to look into ways to purchase corporate bonds maturing within a year.

UBS says the BOJ is unlikely to cut interest rates from already low levels, but will instead consider extending the duration of its commercial-paper buying program.

Late last week Shirakawa indicated the BOJ would seek to consider extending the "extraordinary" measures it has take to help loose up credit conditions for Japanese companies.

About 3 trillion yen ($33 billion) has already been drawn down via the BOJ's special lending program which allows financial institutions to obtain low-interest loans by using bond and commercial paper issued by other companies as collateral.

Japanese media reports said demand has been strong for loans and the central bank is considering expanding the program to double its original size.

The Japanese financial system is widely regarded as in better shape than fellow banks in the U.S. and Europe, although it proved uniquely vulnerable during the financial crisis. The global deleveraging seen during the autumn transformed into an exodus of capital from Tokyo's equity market, sending shares sharply lower and undermining the capital base of banks, leaving them unwilling or unable to lend.

The BOJ's actions so far don't yet add to up to quantitative easing -- a program that entails dropping interest rates to zero and injecting new money into the financial system to boost the supply.

The central bank in fact may be unwilling to go that far amid concerns the policy could backfire, leading to decline in the balance of funds held in call-market deposits.

Barclay's Capital said there's some evidence the balance of funds has already declined, as happened when the BOJ unveiled its previous zero-interest-rate policy. That suggested monetary policy may already be at its limits in terms of interest rate cuts.

Broad plan to come?

SocGen's Maguire said the next move by the Bank of Japan, potentially as early as June, will be the unveiling of an interventionist policy in the economy wherein the central determines what companies will survive and which will fail, under a broad plan aided by central bank funding.

"It's a pick-winner policy and it effectively chooses which industries will remain," Maguire said. "Japan is so far into unconventional monetary policy at this point, there is little else they can really do."

Already, the central bank slashed interest rates to 0.1% from 0.3% in December, and introduced a program to purchase 3 trillion yen of commercial paper and asset-backed commercial paper through the fiscal year ending in March. But there's little to suggest Japan's economy is about to bottom anytime soon, and downward momentum appears to be gathering speed, in spite of the central bank's efforts.

The latest GDP data underscore why many believe radical measures are necessary.

Inventories remain at relatively high levels, suggesting companies are likely to roll out additional output cuts and layoffs, adding to the thousands announced in recent months by companies including Toyota Motor Corp. (TM:

65.45, -2.01,-3.0%) (JP:7203: news , chart , profile ) and Sony (JP:6758: news , chart ,profile ) (SNE:

18.50, -0.92, -4.7%) .

Analysts said household spending and business investment, which fell 0.4% and 5.3% in the quarter, look set for additional declines in coming quarters.

"It's painting quite a weak backdrop for the labor market and consumption in the second and third quarters," Maguire added.

Barclays Capital forecasts the Japanese economy won't bottom until the October-to-December period this year, and even then their outlook is for stabilization rather than a quick rebound.

"It will be more like an 'L' shaped development," said Barclays Chief Economist Kyohei Morita in Tokyo.

He said any rebound in Japan's economy would depend upon the success of fiscal stimulus packages in spurring growth in Japan's major trading partners. Most crucial would be any potential up tick in China's rate of GDP growth, which should be shadowed by a rebound in Japanese exports with a lag of about one quarter.

Barclays estimates Japan's economy will likely contract 9.8% annualized in the January-to-March quarter.

Japan's powerful export engine has been derailed by the global slump, leading to a decline in shipments and a reversal in the nation's normally bullet-proof trade surplus.

The knock-on effect of the slump has been dwindling capital expenditure. Data released last week showed orders for Japanese machinery orders fell 1.7% in December, the third straight month of declines. Against the year earlier period, December orders were down 26.8%.

Credit Suisse says the overseas economic stimulus plans currently being drawn up will help some basic materials companies but are unlikely to be much aid to the broader export sector "until overseas consumer spending and corporate capex start to recover." 

(Source: www.marketwatch.com)

The Next Bubble?

An interesting analysis I found recently. After the Tech bubble on 2000-2001 and the current housing bubble, it is predicted that the next bubble is predicted to occur on the alternative energy field.

By definition, a bubble is defined as an overflow of fund invested in a particular sector due to the nature of speculation. Some of the more well known bubbles can be found during the tech bubble in 2001 and the current housing bubble.

A bubble is generally considered to have a negative impact on the economy because they tend to cause misallocation of resources into non-optimal uses. In addition, the crash which usually follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise.

The full report for the analysis can be found here on http://www.harpers.org/archive/2008/02/0081908

US Real Estate Market Outlook for 2009

United States Real Estate Prospects for 2009

Overview

Despite all the bad press in 2008, the United States real estate market is expected to be a mixed bag in 2009, with new bubbles bursting for the first time, old bubbles continuing to burst, an increase in foreclosures, and a few pockets of actual growth. With crisis comes opportunity, and the U.S. housing crisis is still creating plenty of opportunities for international investors who know what their way around the market to snap up some great buys.

As usual the key variable is location. (Location, location, location!) Some parts of the United States are likely to remain depressed for years to come, so a long range plan is definitely in order for investors looking for a healthy return from investing in those areas. This applies to both personal and commercial U.S. properties, and will likely remain true for the next five years if not longer. Careful research and planning are in order for anyone planning to cash in on the U.S. housing crisis.

Personal real estate markets in the U.S. are heavily dependent on local conditions and will continue to vary wildly in the coming years, with New York City real estate continuing to appreciate (although much more slowly than in previous years), and real estate in other parts of the country (for instance, the industrial Midwest, California, and Florida) becoming distressed to the point of being almost worthless.

Best U.S. Housing Markets For 2009

Although most U.S. real estate will continue to depreciate in 2009 before stabilizing at some unknown future date, a few areas are expected to increase in value by as much as 1.8% to 3.6%. Housingpredictor.com recently released their annual list of best and worst U.S housing markets, with seventeen of the top 25 markets showing a likelihood of actual appreciation throughout 2009.

Topping the list of areas showing positive growth are Montana (with the cities of Billings, Bozeman, Great Falls, Livingston, and Missoula all making it into the appreciating top 17) and North Dakota (with Fargo, Minot, Bismarck, and Grand Forks on the list of positive growth ND cities). Both Montana and North Dakota are sparsely populated uncomfortably cold places that are currently experiencing major job growth in the energy sector because of rich coal and oil deposits.

North Dakota is experiencing such a severe shortage of viable employees (it seems few Americans want to live in North Dakota no matter how many jobs are up there), that the state has been forced to aggressively court unemployed workers in other states by offering incentives to accept employment and move there. Winter temperatures of 20 below zero with stiff winds and four to five feet of snow at a pop are common in these areas, but the area takes in a fair amount of money from tourism during better weather, and is an especially popular destination for hunters and fisherman. More information on tourism and other unique aspects of  the state is available at www.ndtourism.com.

Bloomington Illinois took the number one spot on the housingpredictor.com U.S. housing market list, a surprise winner given its location on a U.S. map. Bloomington can be found on the southwestern edge of the withering rust belt section of the formerly industrial midwest, however, the corporate offices of property and casualty insurance giant State Farm are located there, as are the claims departments of numerous other major multinational insurance companies. Also home to Illinois State University and all of its home offices, Bloomington real estate is expected to see a 3.6% appreciation in the coming year—pretty good considering the sorry state of much of the rest of the country. Homes there are selling more slowly than they did in the bubble days, but growth is still brisk.

Worst U.S. Housing Markets for 2009

California, Michigan, and Florida top the list of states where investing in real estate might not be a great idea this year. On the up side, some very, very low prices can be found. Detroit, which tops the list as the number one worst housing market in the United States in the coming year (no surprises there), is witnessing a mass exodus out of the city that worsens week by week.

Stately homes in formerly prestigious Detroit suburbs like Grosse Pointe and West Bloomfield Township have been vacated by redundant auto executives and are now unwanted at any price, their former hones languishing on a glutted market on the edge of a fallen empire that gets smaller with every passing day. Yes, homes can be had at a fraction of their actual value here, but the long term outlook for Detroit is so uncertain (and trending ever downward) that it could be decades before a foreign investor might see a turnaround.

Real estate across the rest of Michigan (and the surrounding states of Indiana, northern Illinois, and Ohio) suffers according to how dependent the closest metropolitan areas were on the now-failing auto industry. Most of this part of the country is severely depressed economically with even resort areas on Lake Michigan and Lake Superior see a loss in value due to the general economic downturn. Again, investors with a longer view have the potential off significant earnings should the area come back.

The central valley of California and the city of Miami Florida and its surrounding suburbs and satellites saw some of the worst excesses of overdevelopment and real estate speculation during the sub-prime boom years, and these areas now continue to see dizzying depreciation, with total deflation expected to hit as much as 70% before the housing crisis is finished.

Even in discouraging markets such as CA and FL however, opportunities do exist in niche segments, but these opportunities are difficult for foreign investors to exploit due to the extremely risky nature of investment right now. For instance, in the state of Florida, in many areas where real estate prices are artificially low and banks are eager to unload the homes and commercial properties on their books, property insurance cannot be obtained at any price and serious tax liens exist that must be cleared before a sale can occur. Plan to spend months negotiating short sales and the legal problems of attachment in these parts of the country. If you do find a deal, expect to be immediately faced with other major expenses for repair and rehabilitation once the sale is closed.

New U.S. Real Estate Bubbles for 2009

Two waves of new foreclosures are expected to hit the United States in 2009. The first will occur when a wave of interest-only nonconforming loans reset to include principle and (even higher) interest rates in early February. Most of these loans were sub-prime and alt-A mortgage vehicles offered to buyers who wanted to get into the housing market in the red hot areas of California and Florida and could only do so by taking advantage of a ‘creative’ loan.

These creative interest-only loans were underwritten on the premise that the home would appreciate at the same rate for the first five years, making it possible for the buyer to cash out and refinance before any principal actually had to be paid. Yes, that was crazy. But lots of buyers jumped at the chance to get in, and most of them will lose their (now severely depreciated) homes. Some already can no longer afford even the interest –only payments. Expect really good short sale terms when these foreclosures come on the market. When considering a short sale, banks generally look for 75% of the amount owed on a property, but things are so bad in the areas where these homes are located, you can safely just make an offer, any offer, and still have a chance.

Another big wave of defaults expected to occur in the coming year is in commercial real estate. The U.S. commercial real estate market is suffering badly in 2009 due to the credit crunch and the general downturn in the U.S. economy. By late February approximately 20% of the retailers located in U.S. malls are expected to vacate, with many big name big box stores, restaurants, small manufacturers, auto dealerships, boat dealerships, RV dealerships, and builders also expected to go belly up in the early part of the year, leaving prime commercial lots in major U.S. metropolitan areas open for tear-down and redevelopment by foreign investors.

Even in commercial real estate, however, there is reason for foreign investors to proceed with caution. In an article published in Harper’s in February of 2008, venture capitalist Eric Janszen speculated that the next big Wall Street bubble will most likely come from the alternative energy sector, one of the few (if small) American industries left with enough strength and promise to make hyperinflation possible. Keeping an eye on these industries and on where within the U.S. they choose to expand might be one good way to make decisions about which commercial properties are likely to appreciate and which will take years of patient waiting (and expenditure) to show a return.

How to Find and Buy U.S. Real Estate

Many easy to navigate websites will allow potential investors to search for properties and find realtors across the United States. One of the most extensive is www.realtor.com, but full Multiple Listing searches can also be done at the websites of separate real estate firms, such as www.century21.com, or through popular search engines such as Yahoo atwww.realestate.yahoo.com. Zillow maintains a website that provides lots of good general information about U.S. real estate and also has an MLS search feature. Finally, you can shop for commercial real estate, government surplus land, government foreclosures, and lots more at the federal website www.usa.gov/shopping/realestate.

To purchase real estate in the United States you will need to work with either a real estate agent or a real estate broker who is licensed in the state in which the property is located or an attorney. Considering the number of U.S. properties that are currently in foreclosure and the legal baggage that can be attached to foreclosure sales (fights over tax liens, clear title, insurance problems, etc.) it is probably a good idea for foreign investors to work with both groups of professionals: both an attorney and licensed real estate personnel.

Expect foreclosure sales to take up to six months or more to close (as opposed to about 30 days for other properties with no issues attached), and expect the property to be in substandard condition when you take possession. Even if a foreclosed property is in decent shape during a showing, it is not unusual for former owners or tenants to come back and vandalize it, and banks are notoriously reluctant to negotiate anything except price—In other words, the bank holding the property is not likely to make any repairs or upgrades for you. You will have to accept the property as is.

Make sure all documents are reviewed carefully by your attorney before signing, and do not rely on whatever financing arm you are using to protect you from complications or undesirable mortgage terms.

Summary

The United States is still, in many ways, the land of opportunity, even in this depressed and somewhat scary market. 2009 will bring enormous bargains for the savvy foreign investor, but as in all things concerning real estate in general, great care and careful research will be required to come out with the best deal and the fewest headaches.

Investors looking to buy and hold rental properties would be well-advised to fully understand the economic prospects of the city in which a property is located. For example, homes can be purchased in certain Detroit neighborhoods for four figures—some the U.S. will even sell at auction for as little as a dollar—but renting these properties quickly turns into a nightmare, especially for anyone living out of the U.S., because of the level of crime, vandalism, and poverty. Renters are scarce, problems are many, insurance rates are off the chart (for example, insuring an older auto to be garaged within the city of Detroit can run over $4,000 a year, and that’s for a person with good driving record), and liability issues are a nightmare. For this reason, price alone is not a good guide to determining what might be a real estate bargain and what might not.

A more measured approach for the foreign investor may be to watch for areas in the U.S. likely to experience gradual economic recovery first. This requires some research and more than a little luck, but for the investor willing to put in the time, the payoff potential is still huge.