STOCK BUBBLES

Swine Flu pandemic and impact on world stock markets

                                                                             SUNIL KEWALRAMANI

                                                                                     September 12, 2009

The correlation of gamma and ? was used by Wall Street financial engineers to calculate predicted loan “mortality” rates which some believe created the huge trouble in the securitization business (CDO, CLO, CPDO, SIV). It is interesting to note that the entire mathematical theory was lifted from epidemiology, i.e. the study of how communicative viral diseases spread.  Ironically, both securitization and swine flu pandemic are a matter of grave concern to the world today.

The provisional conclusion is that this latest pandemic is “moderate”: less severe than the 1918 Spanish flu, more in line with that of 1957, and perhaps up to four times as dangerous as a typical seasonal flu virus, which each year kills an estimated 500,000 people around the world.

In Mexico, which has had 14,800 cases and 138 deaths, swine flu may knock 0.3-0.5 per cent from GDP this year, according to the United Nations Economic Commission for Latin America and Caribbean.  The Ernst & Young Item Club, a forecaster, warns that swine flu could cost the UK up to 3 per cent of GDP this year and 1.7 per cent next. If everything goes reasonably well, the epidemic will probably knock around half a percentage point from World GDP. If things deteriorate, it could cause a 1.3 to 1.5 per cent drop.

 W.J. McKibbin and A.A. Sidorenko’s 2006 research paper on The Global Macro-Economic Consequences of Pandemic Influenza finds that “even a mild pandemic has significant consequences for global economic output”, costing close to 0.8 % of World GDP. World Bank estimates that the negative impact on GDP in South Asia as a result of the pandemic will be 0.6 %, if the epidemic is mild.

Pandemics compared – from the Spanish Flu to SARS.

The Spanish Flu unfolded in two waves over 1918-1919, killing  around 50 million people worldwide. An estimated 10-17 million died in India alone, contributing to a steep drop in economic activity. According to economic historian Angus Maddison, India’s GDP declined by 12.8 % in 1918.

  The Asian Flu of 1957-1958 also unfolded in 2 waves, killing 1-2 million people world wide. The SARS outbreak was mercifully less severe, lasting only several months and claiming an estimated 774 lives.  As traumatic as SARS was in terms of its human impact, the markets scarcely reacted to it.

The 1918 Spanish influenza pandemic, which killed tens of millions, descended with devastating virulence on a world ravaged by four years of war. The swine flu pandemic of 2009, by comparison, is arriving when the world is largely at peace but when the global economy is most vulnerable and what appears as green shoots could wither at any time.

Impact of SARS on the Asian economies :  Tourism (visitor arrivals) and retail spending growth dipped sharply into negative for 1-2 quarters during the SARS outbreak. The IMF estimated that East and Southeast Asia lost almost USD 18bn in demand and business revenue due to SARS.  At the height of the SARS panic in February 2003, Singapore and Hong Kong reported month/month declines in retail sales of -35% and -27.5% respectively.  In Hong Kong, retail sales in year/year terms did not return to positive growth until August 2003.   In response, Asian governments put together relief packages to prevent and contain the problem as well as to help businesses with cash flow problems. Malaysia, for instance, spent an additional 2% of GDP in May 2003.   Hong Kong and Taiwan spent roughly 1% and 0.5% respectively on similar aid packages.
 
Impact on equity markets

Despite the widespread social and human impact of SARS, there was scarcely detectable impact on the stock market recovery in 2003. Asian ex-Japan equities (using the MSCI Asia Pacific ex-Japan as a proxy) continued on their recovery off the lows of 2003 (please see chart below).  

Exhibit: MSCI Asia Pacific ex-Japan during SARS outbreak

 

 

 

… please find chart on next page …

 

To be sure, there are significant differences this time around – the global economy is clearly in a weaker state today than in 2003. The markets for risk assets are clearly more vulnerable today than in 2003. There is that crucial unknown – is this outbreak going to develop into a pandemic more severe than SARS in 2003 or resemble the 1918 Spanish Flu ?

I have done a worst-case scenario analysis to determine the impact the swine flu can have on world equity markets, by looking at past precedence.

1918 Spanish Flu and the Market

The 1918 Spanish Flu was a global flu pandemic that affected nearly half of the world’s population at the time (or up to one billion people).  The 1918 outbreak was the worst of the 20th century, and it fell under the H1N1 virus subtype, which is the same subtype as the current swine flu outbreak.  It’s estimated that the 1918 flu killed anywhere from 20 million to 100 million people, which would have equaled a mortality rate of 2.5%-5% of those infected.

Below is a chart on the 1918 Influenza that highlights deaths per 1,000 people infected with influenza and/or pneumonia, and overlayed is a chart of the Dow Jones Industrial Average.  There were three pandemic waves from 1918-1919, with the worst coming from October to December of 1918.  Following the first pandemic wave, the market sold off a little bit, but then rallied during the summer months before topping out prior to the second wave.  The market trended downward during the worst wave of the flu outbreak, but it only went down 10.9% from peak to trough, and then it rallied significantly during and following the third wave.  World War I was also coming to an end in late 1918, so the end of the pandemic and the war probably contributed to the subsequent rally in stocks.

 

 

The correlation between economic recession and a pandemic appears to be quite high. The last economic crisis hit in 2001 with the dot com and telecom bubble burst and that was instantly followed by 9/11 and then the SARS crisis in South East Asia and the Anthrax cases in USA.

 

 

 

As you can see in the chart of the MSCI World Stock Index below, there are similarities between the 2003 SARS epidemic and today’s flu outbreak.

 

 Source : www.socioeconomics.net

 

Below is a chart of Asian bird flu outbreaks plotted against the prices of Hong Kong’s Hang Seng stock index, a measure of Asia’s social mood.  As one can see, bird flu outbreaks have occurred during downturns in the stock market:

 

Source : Elliott Wave

So, is it a coincidence that the first cases of swine flu in Mexico were reported in early March, when global stock markets were hitting lows they hadn’t seen in years or decades?

If swine flu plays out like the SARS outbreak of 2003, the market’s focus is likely to remain on how the world will return into growth trajectory. And if this outbreak appears to be one that can be contained in a few months, the market is going to remain more focused on how Chinese and India growth story can save the world from a deep recession.  Or whether there is an Asian bubble in the making.

 

 

 

 

 

 

Sunil Kewalramani is a Wharton Business School MBA and Chief Investment Officer, Global Money Investor

 

 

 

 

 

 

 

 

History

The Union Stock Yards in Chicago in 1878

Before construction, tavern owners provided pastures and care for cattle herds waiting to be sold. With the spreading service of railroads, stock yards were created in and around the city. In 1848, small stockyards were scattered throughout the city along various rail lines. There was a confluence of reasons necessitating consolidation of the stockyards: westward expansion of railroads, causing great commercial growth in a Chicago that evolved into a major railroad center; the Mississippi River blockade during the Civil War that closed the north-south river trade route; the influx of meat packers and livestock to Chicago. To consolidate operations, the Union Stock Yards were built on swampland south of the city. A consortium of 9 railroad companies (hence the “Union” name) acquired a 320-acre (1.3 km2) swampland area in southwest Chicago for $100,000 in 1864. The stockyards were connected to the city’s main rail lines by 15 miles (24 km) of track. Eventually, the 375-acre (1.52 km2) site had 2300 separate livestock pens in addition to hotels, saloons, restaurants, and offices for merchants and brokers. Led by Timothy Blackstone, a founder and the first president of the Union Stock Yards and Transit Company, “The Yards” experienced tremendous growth. Processing two million animals yearly by 1870, the number had risen to nine million by 1890. Between 1865 and 1900, approximately 400 million livestock were butchered within the confines of the Yards. By the turn of the century the stock yards employed 25,000 people and produced 82 percent of the domestic meat consumption. In 1921, the stock yards employed 40,000 people. Two thousand of these worked directly for the Union Stock Yard & Transit Co. and the rest worked for companies such as meatpackers who had plants in the stockyards. By 1900, the 475-acre (1.92 km2) stock yard contained 50 miles (80 km) of road, and had 130 miles (210 km) of track along its perimeter. At its largest size, The Yards covered nearly a square mile of land, from Halsted Street to Ashland Avenue and from 39th (now Pershing Rd.) to 47th Streets.

Entry to the Union Stock Yards

At one time, 500,000 gallons a day of Chicago River water was pumped into the stock yards. So much stock yard waste drained into the South Fork of the river that it came to bear the name Bubbly Creek due to the gaseous products of decomposition. The creek bubbles to this day. When the City permanently reversed the flow of the Chicago River in 1900, the intent was to prevent the Stock Yards’ waste products along with other sewage from flowing into Lake Michigan and contaminating the City’s drinking water.

The meatpacking district was served between 1908 and 1957 by a short Chicago ‘L’ line with several stops, devoted primarily to the daily transport of thousands of workers and even tourists to the site. The line was constructed when the City of Chicago forced the removal of surface trackage on 40th Street.

Effect on industry

The size and scale of the stockyards, along with technological advancements in rail transport and refrigeration, allowed for the creation of some of America’s first truly global companies led by entrepreneurs such as Gustavus Franklin Swift and Philip Danforth Armour. The mechanized process with its killing wheel and conveyors helped inspire the automobile assembly line. In addition, hedging transactions by the stockyard companies was pivotal in the establishment and growth of the Chicago-based commodity exchanges and futures markets.

Numerous meatpacking companies were concentrated near the yards, including Armour, Swift, Morris, and Hammond. Eventually, meatpacking byproduct manufacturing of leather, soap, fertilizer, glue, pharmaceuticals, imitation ivory, gelatin, shoe polish, buttons, perfume, and violin strings prospered in the neighborhood.

Next to the Union Stock Yards, the International Amphitheatre building was built on Halsted Street in the 1930s, originally to hold the International Livestock Exhibition. However, the International Amphitheatre became a venue for many events and its use continued for years after the stock yards closed in 1971.

Fire

The Chicago Union Stock Yards Fire started on December 22, 1910, destroying $400,000 of property and killing twenty-one firemen, including the Fire Marshal James J. Horan. Fifty engine companies and seven hook and ladder companies fought the fire until it was declared extinguished by Chief Seyferlich on December 23. In 2004, a memorial to all Chicago firefighters who have died in the line of duty was erected at the location of the 1910 Stock Yards fire.

Decline and current use

The Union Stock Yards Livestock Pens, 1880

The prosperity of the stockyards was due to both the concentration of railroads and the evolution of refrigerated railroad cars. Its decline was due to further advances in post-World War II transportation and distribution. Direct sales of livestock from breeders to packers, facilitated by advancement in interstate trucking, made it cheaper to slaughter animals where they were raised and excluded the intermediary stockyards. At first, the major meatpacking companies resisted change, but Swift and Armour both surrendered and vacated their plants in the Yards in the 1950s.

In 1971, the area bounded by Pershing Road, Ashland, Halsted, and 47th Street became The Stockyards Industrial Park. The neighborhood to the west and south of the industrial park is still known as Back of the Yards, and is still home to a thriving immigrant population.

Gate

Main article: Union Stock Yard Gate

A remnant of the Union Stock Yard Gate still arches over Exchange Avenue, next to the firefighters’ memorial, and can be seen by those driving along Halsted Street. This limestone gate, marking the entrance to the stockyards, survives as one of the few relics of Chicago’s heritage of livestock and meatpacking. The steer head over the central arch is thought to represent “Sherman,” a prize-winning bull named after John B. Sherman, a founder of the Union Stock Yard and Transit Company. The gate is a designated U.S. National Historic Landmark.

In popular culture

In 1906 Upton Sinclair published The Jungle, uncovering the horrid conditions in the stock yards at the turn of the 20th century. The stockyards are referred to in Carl Sandburg’s poem Chicago: “proud to be Hog Butcher, Tool Maker, Stacker of Wheat, Player with Railroads and Freight Handler to the Nation.” Frank Sinatra mentioned the yards in his 1964 song “My Kind of Town,” and the stockyards receive a mention in the opening chapter of Thomas Pynchon’s novel Against the Day. The Skip James song “Hard Times Killing floor blues” refers to the nickname of the slaughter part of the stockyards during the great depression in the 1930s. The Yards were a major tourist stop, with visitors such as Rudyard Kipling, Paul Bourget and Sarah Bernhardt.

See also

Chicago Board of Trade

Chicago Mercantile Exchange

Notes

^ a b Pacyga, Dominic (2005). “Union Stock Yard”. Chicago Historical Society. http://www.encyclopedia.chicagohistory.org/pages/2218.html. Retrieved March 7, 2007. 

^ a b Sandburg, Carl (1916). Chicago “1. Chicago”. Bartleby.com. http://www.bartleby.com/165/1.html Chicago. Retrieved 2009-06-15. 

^ Wade, Louise Carroll (2004). Grossman, James R., Ann Durkin Keating and Janice L. Ruff. ed. Meatpacking. University of Chicago Press. ISBN 0-226-31015-9. http://www.encyclopedia.chicagohistory.org/pages/804.html. 

^ a b c “Chicago Landmarks”. Chicago Landmarks. http://www.ci.chi.il.us/Landmarks/U/UnionStock.html. Retrieved March 6, 2007. 

^ “National Historic Landmarks Survey: Listing of National Historic Landmarks by State: Illinois” (PDF). http://www.cr.nps.gov/nhl/designations/Lists/IL01.pdf. Retrieved March 7, 2007. 

^ “Old Stone Gate, Chicago Union Stockyards”. National Park Service. http://tps.cr.nps.gov/nhl/detail.cfm?ResourceID=1223&resourceType=Structure. Retrieved March 30, 2007. 

^ a b “1865 Chicago Union Stock Yard Completed”. Chicago Public Library. 1997. http://www.chipublib.org/004chicago/timeline/stockyard.html. Retrieved March 6, 2007. 

^ a b “The Birth of the Chicago Union Stock Yards”. Chicago Historical Society. 2001. http://www.chicagohs.org/history/stock.html. Retrieved March 9, 2007. 

^ a b c d “The Birth of the Chicago Union Stock Yards”. Chicago Historical Society. 2001. http://www.chicagohs.org/history/stockyard/stock1.html. Retrieved March 9, 2007. 

^ “Union Stock Yards”. University of Chicago. http://www.lib.uchicago.edu/e/spcl/centcat/city/city_img62.html. Retrieved March 7, 2007. 

^ a b c d Wilson, Mark R. (2004). Grossman, James R., Ann Durkin Keating and Janice L. Ruff. ed. Union Stock Yard & Transit Co.. University of Chicago Press. ISBN 0-226-31015-9. http://www.encyclopedia.chicagohistory.org/pages/2883.html. 

^ a b c “Meatpacking Technology”. Chicago Historical Society. 2001. http://www.chicagohs.org/history/stockyard/stock2.html. Retrieved March 9, 2007. 

^ a b “1865 Chicago Stories”. Chicago Public Library. http://www.wttw.com/main.taf?p=1,7,1,1,49. Retrieved March 6, 2007. 

^ Solzman, David M. (1998). The Chicago River: An Illustrated History and Guide to the River and its Waterways. Chicago: Loyola Press. pp. 226227. ISBN 0-8294-1023-6. 

^ “Stock Yards branch”. Chicago “L”.org. http://www.chicago-l.org/operations/lines/stockyards.html. Retrieved March 22, 2007. 

^ “Chicago & The World: America in 1889: The Gilded Age”. Auditorium Theatre of Roosevelt University. http://www.auditoriumtheatre.org/wb/pages/home/education/chicagos-landmark-stage/chicago-the-world.php. Retrieved 2009-06-15. 

^ Encyclopedia of Chicago-International Amphitheater

^ “1910, December 2223: Chicago Union Stock Yards Fire”. Chicago Public Library. 1996. http://www.chipublib.org/004chicago/disasters/stockyards_fire.html. Retrieved March 6, 2007. 

^ Barrett, James R. (2005). “Back of the Yards”. Chicago Historical Society. http://www.encyclopedia.chicagohistory.org/pages/99.html. Retrieved March 9, 2007. 

Bibliography

Anderson, John. “‘Hog butcher for the world’ opens shop.” Chicago Tribune, January 30, 1997, Chicago ed.: sec. 2, p. 2.

Barrett, James R. Work and. 3rd ed. Dubuque: Kendall/Hunt Publishing Company, 1982.

Grant, W. Jos. Illustrated History of the Union Stockyards. Chicago, 1901.

Halpern, Rick. Down on the Killing Floor: Black and White Workers in Chicago’s Packinghouses, 190454. Chicago: University of Illinois Press, 1997.

Hirsch, Susan, and Robert I. Goler. A City Comes of Age: Chicago in the 1890s. Chicago: Chicago Historical Society, 1990.

Holt, Glen E., and Dominic A. Pacyga. Chicago: A Historical Guide to the Neighborhoods: the Loop and South Side. Chicago: Chicago Historical Society, 1979.

Jablonsky, Thomas J. Pride in the Jungle: Community and Everyday Life in Back of the Yards Chicago. Baltimore: Johns Hopkins University Press, 1993.

Liste, J. G., and George Schoettle. Union Stockyards Fire Photo Album. CHS: 1934.

Mahoney, Olivia. Go West! Chicago and American Expansion. Chicago: Chicago Historical Society, 1999.

Pacyga, Dominic. Polish Immigrants and Industrial Chicago: Workers on the South Side, 18801922. Columbus: Ohio State University Press, 1991.

Pacyga, Dominic, and Ellen Skerrett. Chicago: City of Neighborhoods. Chicago: Loyola University Press, 1986.

Parkhurst, William. History of the Yards, 18651953. Chicago, 1953.

Rice, William. “City creates nation’s livestock center.” Chicago Tribune, July 16, 1997, Chicago ed.: sec. 7, p. 7b.

Skaggs, Jimmy. Prime Cut: Livestock Raising and Meatpacking in the U.S. College Station, TX: Texas A&M University Press, 1986.

Slayton, Robert A. Back of the Yards: The Making of a Local Democracy. Chicago: The University of Chicago Press, 1986.

Street, Paul. “Packinghouse Blues.” Chicago History 18, no. 3 (1989): 6885.

“Bibliography”. Chicago Historical Society. 2001. http://www.chicagohs.org/history/stockyard/stkbibli.html. Retrieved March 6, 2007. 

Chicago (Ill.). Fire Dept. Report of the Fire Marshal. 1910. pp. 2324.

External links

Wikimedia Commons has media related to: Chicago stockyards

Chicago Historical Society’s “History Files”

History of the Yards in A Biography of America

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Categories: Defunct agriculture companies | History of Chicago, Illinois | Landmarks in Chicago, Illinois | Meat processing in the United States | Defunct companies based in Chicago, Illinois

From Market Movement: If the real estate market declines how can you make money in it? The make a profit on any market (real estate, products, stocks and bonds) simply must be in motion. It must increase or decrease.

A stable market is one you do not turn a profit. The key is handle the procurement and sale of shares in both markets. For example, when the Nasdaq was experiencing its own bubble it there were people who made millions of dollars simply by adjusting their investment model adjustment on the current market.

 

Obviously investors who bought at the top rated and just hung over their stocks have lost a ton of money. The various types of knowledge and understanding of trade as well as risk management may be useful in the current real estate bubble.

 

Control Reality: No body can not predict the future. If a friend or even a financial adviser tells you a particular investment is one thing sure not. That is far more true in trying to predict market movements whole. It is easily seen if the value of stocks is diminuante or increasing and certainly it is obvious if the market shows the strange behavior. However, forecasting when the market will change, for better or worse, is more complicated.

 

Warren Buffet believed that the market was evaluated by years of surplus so before he finished the value has been corrected. Warren has an interesting approach because it was a value investor and therefore he stayed on key lines. However, most active traders are doing their money for a decrease in the market. One or the other approach can be successful once applied to the real estate bubble.

 

Correction market: There are several ways in which the surplus estimated launched on the market can be corrected. Many investors claims that the price to win the report on the real estate market is imbalanced. The price to win the report refers to the ration of rent collected for a year against the price of purchase. A report should be normal around 150.

 

However, currently there are some sectors were the ratio is 400. Outside the balance win the report can be corrected by dropping prices, rents increase, or the mating of the two. In addition to the true market may fails to correct anytime soon, some financial experts believe it may be 20 years.

 

Question: You want to change the market (20 years?) Or do you adjust your investment model and make money now? Remember financial advisors next phase of the currency that investment is about risk command regarding your potential gain.

 

For example, there are currently several cases where construction of a new real estate investor with little capital ($ 2000) or less can go down a salary of $ 40,000 or more. Obviously, if no investor is only out of the original investment. The bottom line is that if you follow these simple steps, you can also learn how to invest in markets that others perceive as dangerous bubbles!

 

 

 

Everyone keeps talking about the “real estate bubble.” They talk about it as if it were the same as the “tech bubble” we experienced in the stock market a few years back. There is no real estate bubble in Bend Oregon. Yes, prices are inflated and need adjustment but there is no bubble.

Bend Oregon is one of the most desirable places to live in the United States. Money Magazine ranks Bend as the 86th best town to live in the United States. Bend has two of the top 10 golf courses in Oregon, Broken Top Club in Bend and Crosswater in Sunriver.

Mount Bachelor has been said to have the best skiing powder in the Western United States. The Deschutes River that runs through the middle of Bend is a nationally famous trout stream.

The Bend job market remains in the spot light. A recent report from the Federal Deposit Insurance Corporation, or FDIC said that Bend was the 35th fastest growing job market in the country for the second quarter of 2006.

This easily places Bend as the top job market in Oregon. Oregon ranked sixth for its job market among all states during the same period. Tax wise Oregon has recently been named as one of the most “business friendly” places to start a business.

Many business owners looking to move their companies look to Bend for its great livability. There is an abundance of sunshine, clean air, many outdoor activities and it’s just a great place to live.

Supply and demand will always hold the value of Bend real estate up. It’s a matter of simple economics, when demand is larger than supply prices remain high. Luckily for some buyers now is a good time to buy.

Prices of homes in Bend are falling. One newer home that was listed in the Central Oregon Multiple Listing Service for $399,500 in December 2005 remains on the market today at a list price of $339,900. It is looking like a good buy and there are several like this one to choose from.

The tech bubble of the 1990s was fueled by speculation. Almost everyone was buying tech stocks. Sun Micro Systems, Microsoft, Intel, Apple computer, Cisco Systems, Applied Materials, Level 3 Communications, Yahoo, Dell Computers, Oracle, Juniper Networks and Qualcomm were only a few of the high fliers.

Some of these companies are still volume leaders on the NASDAQ today. They are selling for only for a small fraction of the all time highs they sold for in the late 90s. There were even grand mothers pulling money out of their savings accounts to buy stocks.

The tech bubble was caused by greed and a buying frenzy which can not be compared to the real estate market in Bend, Oregon. Yes, there have been investors in the past that would sign a sales agreement to buy a new home that had not started construction yet, wait the 6 to 8 months it would take to build it and then sell it for a nice profit. It’s easy to make a profit when values are rising 35% a year and there are not many choices for the out of state buyer’s that are moving to Bend to take advantage of its great life style.

Today there are many more homes on the market than there were this time last year. The Multiple Listing Service of Central Oregon shows a 19.32% decrease in the number of homes sold in the third quarter of 2006 as compared to the same quarter of 2005. Some investors and builders are stuck with inventory whose value is coming down. Homes are taking longer to sell and there are many more to choose from.

Considering the great job market in Bend, the fact interest rates are low and gas prices continue to fall points to a correction that will probably turn around next spring. Investors have stopped buying single family homes and builders are slowing down their construction.

Bend will be in a buyer’s market until next spring. People who can sell their property out of state are now in the driver’s seat when it comes to buying real estate in Bend. Sellers are willing to negotiate.

Some builders are throwing in upgrades for free. Appliances, hardwood floors, extra landscaping, granite counter tops and other construction items are sometimes free for the asking. This is giving buyers more value for their money.

When the tech bubble burst there were millions of shares sold driving the price down to realistic prices. The real estate market in Bend is going through a correction with prices gradually coming down. This is an excellent opportunity to buy real estate in Bend Oregon. There is no real estate bubble in Bend.

Are you afraid to invest in real estate because of a pending real estate bubble? The news has been filled with real estate troubles including too many houses on the market in some areas, a slow down in sales, and dropping prices.

 

What’s behind all this bubble talk?

 

Before you give any substance to warnings about a “real estate bubble,” look closely at the source. Many stock brokers jump on the bandwagon of real estate doom to get investors back into the stock market. Also, many negative reports originate from mortgage lenders who want to keep the mortgage insurance rates high and keep the insurance premiums coming in for loans on houses that have appreciated.

 

Early in 2005, I was invited to go to Philadelphia and participate in a “real estate bubble” discussion on Ch 8′s “Money Matters Today.” Television reporters, newspapers, and media hype love scaring you to grab your attention. On the TV show, I defended the real estate market.

 

So, what happened to the real estate bubble in 2005

 

I can’t speak for all investors. If my family had been scared into discounting our investments, selling out, and not buying more property in 2005, we would have lost a million dollars. We bought and held houses. All of our property increased by 20% – 35% and the ones we fixed increased in value even more. In particular, for one home we paid $120,000 and spent $10,000 in repairs – within the year it appraised for $325,000.

 

Who profits from the real estate bubble?

 

Besides media scaremongers, mortgage insurance providers, and stock brokers, real estate investors make even more money. <i>What’s that? How do real estate investors make money from the real estate bubble?</i> They take advantage of desperate home sellers scared by the media.

 

In January 2006, we bought an investment property that the home seller, in the midst of a divorce, discounted for a quick sale. The $340,000 property appraised for fifty thousand more than the purchase price. Now, we could quick sale the property for fast cash, but we’re in for the long haul. The property has great development potential. So, we’ll let the tenants pay for the mortgage and maybe tear the small house down in a few years. A half acre, one lot away from a future marina near new condos, has many possibilities.

 

Keep the bubble talk. People always need housing. The more you hear about the pending burst, the more money real estate investors CAN make.

 

 

 

A list of stocks from both the Nairobi Stock Exchange MIMS (large caps and mid-caps) and the AIMS (small caps) that had either outperformed or underperformed the benchmark index (the NSE-20) in all three periods was drawn up. The results revealed that stocks that either outperformed or underperformed the NSE-20 were diverse across size, sector and investment style.

 

The research also went on to derive fundamental data- PE ratios as well as book-to-market values -BV/MV ratios[1] for the list of stocks that had either underperformed or outperformed the benchmark index for all three periods. These revealed that a value strategy that would have picked stocks on the basis of high BV/MV ratios and low PE ratios would have been unable to outperform the benchmark index. These findings were in line with anecdotal evidence on value investing where superior returns of value stocks are normalised when adjusted for risk. The case is even stronger when agency costs of delegated investment management are considered. (Chan and Lakonishok, 2004).

 

Additionally, on the basis of the evidence gathered, a momentum strategy[2] involving picking stocks on the basis of high PE ratios would also have been unable to outperform the benchmark index during the periods under consideration.

 

To outperform the benchmark index, the fund manager or private investor would have had to select stocks across sector and size (involving time and research and hence considerable cost) as well as constantly vary his investment style in order to pick winners.

 

Data presentation

Table 1: Stock performance over three different annualised periods

 

Sector reclassification

% change (21/10/07 – 20/10/08)

% change (1/2/08 – 31/1/09)

% change (11/6/09 – 10/6/10)

STOCK

 

 

 

 

MIMS

 

 

 

 

      Agriculture

 

 

 

 

Kakuzi Ltd.

Agriculture

-15

-21

194

Commercial and Services

 

 

 

 

Car & General Ltd.

Automobile

-10

-20

48

Nation Media Group Ltd. *

Media

-55

-52

9

TPS (Serena) Ltd.

Leisure & Hotels

-25

-18

65

Finance and Investment

 

 

 

 

CFC Stanbic Bank Ltd.

Banks

-43

-53

16

Housing Finance Ltd.

Financials

-39

-59

29

Standard Chartered Bank Ltd. *

 

-12

-20

59

Equity Bank Ltd. *

Banks

54

19

66

Olympia Capital Holdings Ltd

Financials

-39

-33

-4

Industrial and Allied

 

 

 

 

Athi River Mining Ltd. *

Building & Construction

10

-7

56

Bamburi Cement Ltd. *

Building & Construction

-4

-21

67

E.A. Cables Ltd. *

Industrials

-32

-41

-8

Crown Berger (K) Ltd.

Industrials

-38

-46

21

KenGen Ltd. *

Utilities

-37

-44

21

 

 

 

 

 

STOCK

 

 

 

 

AIMS

 

 

 

 

Express Ltd.**

Transport

-39

-49

-4

Kapchorua Tea Co. Ltd.**

Agriculture

-17

-24

112

 

 

 

 

 

INDEX

 

 

 

 

NSE All-share index

 

-22

-23

40

NSE-20 index

 

-27

-32

44

 

 

 

 

 

Source: Bloomberg, 2010; myStocks!, 2010; NSE, 2010

 

*Large cap stocks and constituents of the NSE-20 index

** Small cap stocks

Figures in bold italic represent the performances of stocks that outperformed the NSE-20 index in the respective periods.

 

In all three periods the following stocks outperformed the benchmark index- the NSE-20 index

Athi River Mining Ltd.* (Building & Construction)Bamburi Cement Ltd.* (Building & Construction)Car & General Ltd. (Automobiles)Equity Bank Ltd.* (Banks)Kakuzi Ltd.(Agriculture)Kapchorua Tea Co. Ltd.** (Agriculture)Standard Chartered Bank Ltd.* (Banks)TPS (Serena) Ltd. (Leisure & Hotels)

 

In all three periods the following stocks underperformed the benchmark index- the NSE-20 index.

CFC Stanbic Bank Ltd. (Banks)Crown Berger (K) Ltd. (Industrials)E.A Cables Ltd.* (Industrials)Express Kenya Ltd.** (Transport)Housing Finance Ltd. (Financials)KenGen Ltd.* (Utilities)Nation Media Group Ltd.* (Media)Olympia Capital Holdings Ltd. (Financials)

*   Large cap companies

** Small cap companies

 

Table 2: Key Fundamentals for selected ‘value’ and ‘momentum’ stocks

STOCK

               Period I

              Period II

            Period III

 

Share

price

NAV/

share

PE ratio

Share

price

NAV/

share

PE ratio

Share

Price

NAV/ share

PE ratio

Athi River Mining Ltd.*

86.5

15

17

91

18

18

82.5

21

16

Bamburi Cement Ltd.*

196

38

22

190

42

22

120

46

14

Car & General Ltd.

50

40

5

50

40

5

33

51

3

CFC Stanbic Bank Ltd.

131

36

27

120

30

24

61

70

12

Crown Berger (K) Ltd.

44.75

32

37

41.5

35

13

24.75

35

21

E.A Cables Ltd.*

41.25

 

21

42

22

23

22.75

7

12

Equity Bank Ltd.*

121

24

113

131

41

122

14

53

13

Express Kenya Ltd.**

23

11

11

22.25

13

11

9

12

4

Housing Finance Ltd.

30.25

12

38

39.75

13

50

16.1

16

20

Kakuzi Ltd.

33

52

3

28

62

2

26

74

2

Kapchorua Tea Co. Ltd.**

90

182

5

90

183

5

65

179

4

KenGen Ltd.*

27.75

29

13

25

29

11

14

29

6

Nation Media Group Ltd.*

290

49

32

289

52

32

129

30

14

Olympia Capital Holdings Ltd.

17.95

20

35

13.55

 

27

8.9

17

17

Standard Chartered Bank Ltd.*

191

31

17

201

33

18

135

35

12

TPS (Serena) Ltd.

74.5

39

35

58.5

35

28

38.25

35

18

 

Source: myStocks!, 2010; NSE, 2010

*   Large cap stocks

** Small cap stocks

Athi River Mining Ltd.: Stocks that outperformed the NSE-20 in all three annualised periods

CFC Stanbic Bank Ltd.: Stocks that underperformed the NSE-20 in all three annualised periods

 

 

 

 

 

Table 3: Performance of selected ‘value’ stocks*

STOCK

Period I

 (BV/MV)

Performance

 

Period II

 (BV/MV)

Performance

Period III

(BM/MV)

Performance

Car & General Ltd.

 

 

 

 

 

     1.5

 

    48%

CFC Stanbic Bank

 

 

 

 

 

     1.1

 

    16%

Crown Berger (K) Ltd.

 

 

 

 

 

     1.4

 

    21%

Equity Bank Ltd.

 

 

 

 

 

     3.8

 

    66%

Express Kenya Ltd.

 

 

 

 

 

     1.3

 

     -4%

Housing Finance

 

 

 

 

 

       1

 

     29%

Kakuzi Ltd.

  

    1.6

  

   -15%

  

    2.2

   

     -21%

  

     2.8

 

    194%

Kapchorua Tea Co. Ltd.

 

    2.0

 

   -17%

 

    2.0

 

     -24%

 

     2.8

 

    112%

KenGen

  

    1.1

  

   -37%

  

     1.2

     

     -44%

     

      2.1

 

      21%

Olympia Capital Holdings Lt.

 

    1.1

 

   -39%

 

 

 

      1.9

 

       -4%

INDEX

 

 

 

 

 

 

NSE All-share index

 

  -22%

 

     -23%

 

       40%

NSE-20 index

 

  -27%

 

     -32%

 

       44%

 

Source: Bloomberg, 2010; myStocks!, 2010; The Financial Times Ltd., 2010

* Only book-to-market values equal to or above 1 are shown.

Figures in bold represent the performances of value stocks that outperformed the NSE-20 in the respective periods.

 

Although CFC Stanbic Bank Ltd., Crown Berger (K) Ltd., Express Kenya Ltd., Housing Finance Ltd., KenGen and Olympia Capital Holdings Ltd. showed positive BV/MV ratios in at least one period they all underperformed the NSE-20 index in all three periods. A value strategy in these periods would have been unable to outperform the benchmark index. Only Kakuzi Ltd. and Kapchorua Tea Company Ltd. showed positive BV/MV for the three periods and were able to outperform the NSE-20 in all of them. Both these firms are in the Agriculture sector.

 

Rea Vipingo Ltd. and Sasini Tea & Coffee Ltd. (both large caps) are also in the Agriculture sector but both underperformed the NSE-20 index in at least two of the three periods. Both firms trade in tea as Kakuzi Ltd. and Kapchorua Tea. This supports the posit that a successful trading strategy would have had to select stocks across size as well as discriminate between strong and weak companies within sector.

 

Table 4: Performance of selected ‘momentum’ stocks*

STOCK

Period I

 (PE ratio)

Performance

Period II

 (PE ratio)

Performance

Period III

 (PE ratio)

Performance

Crown Berger Kenya Ltd.

 

    37

 

    -38%

 

 

 

 

Equity Bank Ltd.

 

  113

  

      54%

 

  122 

 

    19%   

 

 

Housing Finance Ltd.

    

    38

 

     -39%

 

    50

 

  -59%

 

 

Nation Media Group Ltd.

 

    32

 

     -55%

 

    32

 

  -52%

 

 

Olympia Capital Holdings Ltd.

 

    35

 

     -39%

 

 

 

 

TPS (Serena) Ltd.

 

    35

 

     -25%

 

 

 

 

INDEX

 

 

 

 

 

 

NSE All-share index

 

  -22%

 

   -23%

 

  40%

NSE-20 index

 

   -27%

 

    -32%

 

  44%

                       

 

Source: Bloomberg, 2010; myStocks!, 2010

*Only PE ratios above 30 are shown

Figures in bold represent the performances of stocks that outperformed the NSE-20 in the respective periods.

 

Of the stocks that outperformed the benchmark index in all three periods, only Bamburi Cement Ltd., Equity Bank Ltd. and  TPS (Serena) Ltd. showed PE ratios of above 20 but only in two of the three periods (see Table 2). Despite showing very high PE ratios in periods I and II[3], Housing Finance Ltd. and Nation Media Group Ltd. underperformed the NSE-20 index in all three periods.

 

Crown Berger Kenya Ltd. and Olympia Capital Holdings Ltd. also showed high PE ratios in period I but underperformed the benchmark index in all three periods. Despite low PE ratios averaging 4, 2 and 5 respectively in the three periods, Car & General Ltd., Kakuzi Ltd. and Kapchorua Tea Company Ltd. outperformed the benchmark index in all three periods (see Table 1). Thus a momentum strategy involving picking ‘glamour’ stocks with high PE ratios would have been unable to outperform the NSE-20 index in the three periods covered.

 

From the observed data, a strategy to outperform a buy-and-hold strategy (based on the NSE-20 index) would have had to select stocks across sector and size[4]. Also such a strategy would have had to, ex-ante, discriminate between eventual strong and weak companies. In picking strong companies a strategy to outperform the benchmark index would have had to discriminate between companies within sector especially in the Banks, Financials and Agriculture sectors where some outperformed the benchmark index while others under-performed it[5]. And even among the strong companies[6] not all were able to outperform the benchmark index.

 

Analysis and Interpretation

Risk-return premia

Value investors seek to benefit by purchasing undervalued stocks and selling these once the prices move towards their intrinsic values. Momentum investors, for their part, expect recent stock price trends to continue and favour growth stocks- those which exhibit continued price increases whether or not the increases are justified by firm fundamentals.

 

The inability of the value investor to outperform the benchmark index stems from the fact that value stocks when adjusted for risk reveal at best average returns. Beta values for small caps like Kapchorua Tea may be exceedingly high meaning that their real return measured by the Treynor ratio (see below) is low or average.

 

Thus to get a true picture of the real return of stocks included in a value-seeking actively managed portfolio, the risk associated with the individual stock must be taken into account especially with regard to the small cap stocks which carry considerable risk. An additional risk premia for these particular stocks would have to be added.

 

However, on occasion, the actions of investors who collectively respond to price movements in a similar manner (or adopt a similar investment style) may still lead to pricing bubbles or excessive underpricing, pricing anomalies that may lead to abnormal returns for the value investor, even after adjusting for risk. (Morrin et al.; 2002)

 

Mean reversion

 

The ability of momentum stocks to outperform the benchmark index is confined by negative serial correlation of returns for holding periods of between three and five years. Mean reversion has the ability to return stock values to their mean or intrinsic values over time thereby halting correlative price movements in a particular direction[7]. Thus past winners become future losers and past losers become future winners.

 

Furthermore, active investors make their purchases or sales well into a rally or decline thereby missing the opportunity to maximise their return by buying cheap before the market peaks[8] or minimising total loss by selling the stock or making portfolio reallocations before the market troughs. (Chan et al., 1996)

 

When bubbles develop they correct overtime thereby limiting the gains of a momentum investor. However, bubbles usually overcorrect so that the market is selling well below fair value thereby presenting value investors with a buying opportunity. However, mean reversion and the actions of arbitrageurs halt excessive movements to the downside thereby limiting the benefits to the value investor.

 

Equity portfolio diversification

Diversification has the potential to reduce volatility without sacrificing risk-adjusted returns. Thus where increased returns can only be achieved by increasing the level of risk undertaken, a diversified portfolio (as exemplified in a wide-ranging benchmark index like the NSE-20) provides increased or at least similar returns without increasing the level of risk undertaken. However these allocations across different equities should be selective taking into consideration strong fundamentals and technical analysis.

Critically, portfolio diversification should not be seen solely from the view-point of numbers (number of stocks held or percentage of holdings in the top 10) but rather from the view-point of combining assets that have very little correlation with one another[9]. In that way, when one area is suffering e.g. Banks or Industrials another might hold up a little better e.g. Building & Construction[10]. However, cyclical stocks may be seen to all suffer at the same time and hence a fund that owns many non-correlated stocks might still be volatile where it makes big sector, style or market-cap bets.

Herd mentality

Following a spate of good or bad news investor irrationality leads to an overreaction either to the upside or downside respectively. This is accentuated by a herd-like mentality which influences stock valuations beyond their fundamental or intrinsic values thereby creating an ideal buying or selling opportunity. Both value and momentum investors see this as a window of opportunity to trade and outperform the benchmark index.

 

However, for both value and momentum investors, the question is that of timing. When is it time to buy oversold stocks or sell overrated stocks? For value investors, the question is what valuations represent the best buying opportunity[11]. In the case of momentum investors the pitfall of chasing ‘hot’ stocks is that these may have reached peak values making it difficult for performance-chasing investors to gain much if at all. Poor timing can thus have unintended consequences.

 

Behavioural risk

Apart from the transaction costs of an actively managed portfolio, there is also behavioural risk which may lead to badly timed decisions. Market corrections, in particular, are unpredictable in timing, duration and even magnitude and hence any attempt to benefit from such corrections requires precise timing and a bit of luck. Returns of an actively managed portfolio must reflect this behavioural (timing) risk.

 

Momentum investors may enter into investments that showed good returns but any subsequent volatility may lead to disastrous results. Thus active portfolio management may prove high-risk due to the tendency to time purchase or sale points wrongly. Additionally, momentum investors’ greater confidence levels (based on their reliance on past performance) may make them more susceptible to ‘knowledge miscalibration’- the mismatch between decision confidence and decision accuracy. (Morrin et al., 2002)

 

Selling only when there are big deviations in the portfolio mix versus targets[12]or selling part of the investment (rather than the entire stock(s) at once) may mitigate the risk of poor timing. The secret lies in avoiding the instinct of thinking there is this only one critical event or opportunity since this may cause one to make a bad decision. Alternatively a buy-and-hold strategy may be sought to minimise this behavioural or timing risk.

 

Lack of timely information and analyst attention

Large blue-chip companies receive a lot of investor and analyst scrutiny making it near impossible for price anomalies to develop. This is especially so in rapid information dissemination/assimilation environments[13].

 

Conversely and especially in frontier markets like the NSE, small-cap firms rarely produce timely reports[14] of their accounts and receive few analyst forecasts or recommendations. As a result the identification of value here is only achieved at great cost involving research and investigative work. This makes the process of identifying value small caps to outperform the benchmark index a difficult proposition.[15].

 

Volatility of small caps, however, may still offer great opportunities for those willing to take the time to carefully study both the technical and fundamental aspects of stock and market movements. Technical analysis, in particular, is important in determining ranges or trends in volatile markets.

 

Illiquidity

Illiquidity leads to large bid-ask spreads. Illiquidity in emerging markets is particularly caused by few trading days, shorter trading hours and relatively low volumes traded and relatively few company listings[16]. Furthermore, institutional investors who dominate frontier emerging markets like the NSE adopt buy-and-hold strategies of usually the large cap stocks. (Adjasi & Biekpe, 2006; Prather-Kinsey, 2006)

 

These factors combine to induce a forced buy-and-hold investment behaviour on investors as they are unable to attain their desired sell prices. Such a buy-and-hold investment behaviour is typified by holding a benchmark index like the NSE-20 index

 

Alpha and beta values

An active management strategy only makes sense if it can outperform a passive management strategy after adjusting for risk. For an actively managed fund to outperform a passively managed fund e.g. an index fund that tracks a benchmark index over time, its alpha must be less than that of a passively managed portfolio. This also means that the value added (positive returns achieved or losses minimised) by an actively managed portfolio must exceed that added by a passively managed portfolio on a risk-adjusted basis as well as a cost basis. (Timmerman and Granger, 2004)

 

Composite portfolio performance measures like the Sharpe ratio and the Treynor ratio measure the level of risk-adjusted portfolio returns relative to those of a benchmark portfolio. Thus:

 

   Sharpe ratio (S) = (Return portfolio – Return risk free) / αportfolio

 

Other factors held constant the selection of a portfolio based on the benchmark index will reduce the alpha denominator[17] (αportfolio) thereby increasing the Sharpe ratio.

 

and

 

Treynor ratio (T) = (Returnportfolio – Returnriskfree) / βportfolio)

 

A portfolio built around the benchmark index (usually large stocks that are more representative of the market) will show low volatility of returns and hence a low beta. Following on the equation above and assuming other factors are held constant, a low portfolio beta (βportfolio) will lead to a higher Treynor ratio. To achieve a similar Treynor ratio as the benchmark tracker fund, a riskier portfolio (for example one that includes more high-risk small caps as in a value strategy) must yield a higher return.

 

Transaction and other costs

Active portfolio management aims to earn a risk-adjusted portfolio return that exceeds that on a passively managed portfolio. The possibility of achieving this only comes at the expense of substantial transaction costs (including stamp duty), management and commission fees[18], additional risk-taking involving small cap stocks (and hence an added risk premium) as well as the added costs of studying both the technical and fundamental aspects of particular stock and market movements. This reduces the likelihood of an active management strategy outperforming a buy-and-hold strategy both in the short and long term. (Damodaran, 2002)

 

Following Barber and Odean (2000), investors who traded frequently earn a lesser annualised return than inactive investors mostly due to broker fees. Furthermore, regular reallocations under active management (involving regular purchases of securities each of which incurs stamp duty) adds further to overall costs. The converse is true of a passive buy-and-hold strategy.

 

Tax benefits

From a tax position a buy-and-hold strategy has better tax implications since unrealised capital gains are not taxed and the tax point is usually a one-off payment every so many years as the investor liquidates his assets. An active strategy, due to its higher rates of liquidation, has tax payable at every profit-taking event.

 

Caveats

However, in arriving at the best investment strategy consideration has to be made of the investment time horizon of any group of investors. Someone investing for the short-term (up to five years) should generally stay away from equities (or other equity-linked securities) as they run the risk of getting back less than they invest. For longer time horizons (five-year periods and beyond), equities do provide higher potential returns.

 

Fundamental analysis is a broad concept and is not confined to merely accessing value (discount stocks) through book-to-market valuations or accessing growth potential by merely deriving PE ratios. Other factors that would need consideration include, but are not restricted to:

leverage ratioscash generation and stabilitydividend policy (increases in dividends or share buybacks)other financial guidance indicatorsfirm costs (financial)capexinterest ratesdepreciation and amortisationcomparable salestax liability/ rate

going concern issuesimpending debt maturity   cost-cutting measures (operational)  contingency planning    effective management long-established business market share (growth)good internal controls environment adherence to corporate governance guidelinesrelevance of business model in a fast-changing environment (competition, globalisation, etc)broader market (macro-economic) indicatorsgeneral trend of benchmark indicesgeneral trend of exportsconsumer confidence numbersbusiness confidence numbersunemployment figures

industry/ sector analysis (trend- growth or decline or volatility)company risk profilemarket riskliquidity riskcredit risk exchange rate riskinterest rate riskoperational risk (internal to the business)compliance risktax issuesenvironmental issuesoperational issues (e.g. health & safety regulations, food & health standards)company law (director eligibility, financial statement disclosures, listing rules)

 

Limitations

The study considered investment periods of upto a year ignoring returns that could be earned over longer term horizons. In view of research evidence (Basu, 1977) that risk-adjusted returns on undervalued small caps outperform those of their larger counterparts in the long-term, a different set of results would have been seen had longer investment periods been considered.

 

In conducting a fundamental analysis of the quoted companies, only two factors were considered- the book-to-market values and PE ratios. This narrow purview ignored other equally relevant variables like dividend yield which is key in measuring the return over time and in determining the direction of investor allocations. Wider market (macro-economic) factors especially the impact of the 2008 financial crisis were also ignored. This latter may well have been a destabilising factor that influenced returns in a particular direction.

 

‘Out-of-sample’ testing may have also reduced the robustness of the study in that different results would have become apparent had a different era been considered. In particular, the severe market volatility following the 2008 financial crisis represented abnormal circumstances which may not hold true in the typical investment environment.

 

Critically, the lack of more up-to-date reporting in interim and/or quarterly reports may partly explain the divergence between book values (NPV per share) and market values (market price per share) seen.

 

Conclusions

Despite the apparent limitations of this research on the case for a buy-and-hold strategy on the NSE, the report uncovered the difficulties of adopting an active management strategy to achieve superior returns on a typical illiquid frontier market. Although price anomalies exist in these markets, the cost of taking advantage of these anomalies outways the derived benefit.

 

Investing in a benchmark index (tracker fund) of mostly large-cap stocks of long-established businesses with strong sales and cash positions brings with it steady but not significantly high returns. Investing in a portfolio of individually selected stocks – some of which carry significant risk requires great skill and cost to pick out winners that will bring about an above-average return[19]. This is especially so in the equity space where risk levels are higher than with other asset classes like fixed income securities and cash.

 

However, it’s not all bad news for those wishing to pursue a more involving active management strategy as great buying opportunities and significant returns can be achieved for those ready to apply considerable technical and fundamental analysis as well as having a portion of luck. Research has established that under-valued small cap stocks outperform the wider market in the long-term even when adjusted for risk. It may well be the management of agency costs that tips the scale in favour of an active management strategy.

 

In the final analysis, however, this study has shown that for an active management strategy to outperform the benchmark index- the NSE-20 it would have to select a diversified portfolio across size, sector and involve a multi-faceted investment style. This would however come at considerable cost in time, investigative work and risk analysis[20] for the fund manager. For the retail investor, the transaction (agency) costs of an active management strategy  add to the unattractiveness of such a strategy. Both  sets of investors would benefit greatly by simply adopting a buy-and-hold strategy based on a benchmark index like the NSE-20 index.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[1] The BM/MV ratio helps establish whether a particular stock is under- or overvalued.

[2] The argument here is that well-performing stocks will continue to perform well into the future since they represent firms with positive long-term forecasts of sales, strong resultant cash flows and non-financial information. Thus analysts continue to recommend such firms exhibiting strong recent performance. In addition, in inefficient frontier markets like the NSE short-run positive serial correlations tend to induce the spiral of price movements in a particular direction. (Morrin et al., 2002)

[3] The PE ratio for Housing Finance Ltd. was as high as 50 in period II

[4] Kakuzi Ltd. – a large cap stock and Kapchorua Tea Ltd. – a small cap both outperformed the NSE-20 index in all three periods. From Table 1 stocks that outperformed the NSE-20 index in all three periods were diversified across sector.

[5] While Equity Bank Ltd. and Standard Chartered Bank Ltd. outperformed the NSE-20 index in all three periods, CFC Stanbic Bank Ltd., Housing Finance Ltd. and Olympia Capital Holdings Ltd. underperformed the same index in all three periods.

[6] Despite improving year-on-year top-line and bottom-line figures during the three periods and having significant market shares, KenGen and Nation Media Group Ltd. underperformed the NSE-20 index in all three periods.

[7] Such moments are akin to a market peak or market trough

[8] In an over-rated market correct timing can prove very rewarding if after investing in ‘multiples’ stocks the investor pulls out of the market before the prices head south

[9] It is quite apparent from looking at the NSE-20 index that this is a wide-encompassing index involving a cross-section of stocks across different sectors.

[10] In the three periods studied while Banks and Industrials showed mixed and poor returns respectively, returns by Building & Construction were pretty impressive (see Table 1).

[11] Buying stocks before the market has bottomed may reduce potential gains.

[12] Long-term strategic asset allocations or matching asset allocations to a pre-determined investment time horizon.

[13] These are also environments of high share volume transactions and high analyst activity and participating firms are high share-turnover firms.

[14] Annual reports may be hard to come by and accounting treatments and disclosures may not conform to international standards.

[15] While Kapchorua Tea Co. Ltd. outperformed the NSE-20 index during all three periods, Express Kenya Ltd. and Williamson Tea Kenya Ltd. underperformed the index in at least two of the three periods. All these stocks are small cap stocks.

[16] For example, on 30th July 2010 the volumes of listed shares on the NYSE and LSE stood at 4,046,227,000 and 1,137,071,711 respectively while those on the Nairobi Stock Exchange stood at a mere 23,076,900. While there are 3000 listings on the LSE, only 55 companies are listed on the Nairobi Stock Exchange.

[17] Alpha is the difference between a portfolio’s expected risk-adjusted returns and its actual returns. It is the value that a portfolio manager adds, above and beyond a relevant index’s risk/reward profile. A portfolio that tracks the benchmark index like the NSE-20 comprises stocks that are most representative of the market since they are the largest companies by market capitalisation. Hence their beta values (volatility) are close to 1. Due to their low volatility there is little divergence between their risk-adjusted returns and expected returns leading to a low alpha.

[18] Management fees increase with regard to an actively managed portfolio as opposed to a passively managed one.

[19] Where the NSE All-share index was used as the benchmark index rather than the NSE-20 index, none of the small caps was able to outperform the NSE All-share index in all three periods. Kapchorua Tea in particular dropped out of the list of stocks that outperformed the benchmark index in all three periods. This suggests that small cap stocks on average underperformed the large and mid-caps in the three periods further supporting the premise that small caps carry considerable risk and their returns fall below average when adjusted for risk.

[20] Small caps in particular carry considerable risk. In addition to poor reporting most of these operate in the Agriculture sector which is dogged by volatility in weather, world demand and prices for tea, coffee and other cash crops as well as a volatile exchange-rate regime all contributing to a risky environment for stock evaluation.

Inflation will end to China’s real estate bubble, most of the benefits of real estate will fall into the government’s pockets. Maori, the developers would be able to get a quarter. However, the money will then be used to buy land “What else can I do? I do not make money the factory can only put money into real estate, the” Ningbo, an entrepreneur that answered my question on the allocation of his funds. “Speculative real estate, my thanks to 30%. If the market was to die, I big deal for the house to the bank. If the shares, and accidentally will be 70% -80% loss.” When I asked him why he does not hold cash, he replied: “My friend bought a house last year, or 11,000 square meters, now has 20,000 of the bank interest. Too low. I want to catch up with my friend.” This is not an isolated cases. Recently, I went several times in Zhejiang, there are entrepreneurs constantly told me similar stories. Factories do not make money. Workers are hard to find, the monthly board and lodging packages are easy to find 2,000 workers. Five years ago, so plenty of people rushing to the treatment of dry. Although raw material costs lower than in 2007, but at least twice as five years ago. The worst is that fewer and fewer overseas orders, customers still stop bargain. Now businesses are too many, too few orders. Outflow of capital from the manufacturing sector into the real estate, is to inflate the main cause of the current Chinese real estate bubble. The 2008 stock market crash. Year period, A shares from November 2007 had fallen by three-quarters of the high points. Next up, just a bear market rally, not a bull market. View the current bullish stock market, but desperate people want the stock market rebounded, so stop preaching optimism. Read more comments site everywhere. Some sites look like without a doctor’s psychiatric hospital. Real estate market is the biggest show field. Major real estate market this year, sales may be exceeding 4 trillion, more than half of the national fiscal revenue. Most real estate income, would fall into the government’s pockets. Land transfer tax payments and various real estate sales prices to account for more than half. Maori, the developers would be able to get a quarter. However, the money will then be used to buy land. Although the Chinese government’s revenue is divided into many categories, but about half and real estate. China’s financial situation and like Hong Kong in 1997. This is so difficult to suppress because the real estate bubble. Accompanied by a weaker dollar, the real estate market started to recover in 2002. At that time, overseas Chinese in China want to buy the property, to reduce the dollar assets. This has become is a major driving force for market recovery. And overseas Chinese coastal city is closely linked to the first wave of the beneficiaries. In late 2005, when the Federal Reserve to raise interest rates to 4% above, the Chinese real estate bull stopped short. Second wave of real estate bull market, from banks to promote lending, especially mortgages. Financing real estate companies in Hong Kong, and foreign investment in real estate, is the second round of a major force behind the housing boom. Capital city of the benefit. When the land reserve and decentralized distribution favored by the stock market, the listed real estate companies and access to foreign capital to support the real estate business in the capital city to take land off a wave. Their money has supported the economic growth has created demand for real estate. In a sense, financial enterprises also helped push the real estate recovery. However, real estate companies now hope to cash in Hong Kong to stock. China’s real estate market is still a moving story of selling. They want to come in the final settlement before the realization of departure. The wave of real estate from the current bull market began in March 2009. This was more caused by the China’s own policy. Only the weak dollar helped to prevent capital outflows, pushing the capital surplus of asset bubbles. Buy a house in China, foreign investors, through the sub-prime crisis, the real estate bubble has to avoid fear.

With the current financial crisis pervading stock markets in the global ecomony, real estate once again should be looked at as a serious, long-term investment strategy that can help investors further diversify their investment portfolios in the future. The reality is that the current stock market malaise that has decimated so many long-standing financial institutions and subsequently stock investments and 401Ks is not the only major stock market troubles we have seen in recent times. Arguably, there have been as many as three “bubbles.”

The dot-com bubble and decline of the stock market helped push investors into other markets where money was cheap and regulations loose. Because of lax oversight and inaction, the housing bubble was allowed to form. The oil market represents a bubble to many as the cost of a barrel of Brent crude went from $100 per barrel in February 2008, to a high of $145 per barrel by July 2008. Brent crude is now trading under $60 per barrel.

Going forward, there are two very real concerns for investors. First, many may be looking at the performance of stock investments over the past eight years and calculating what their true return from those investments has been. Second, many will be asking if their investments can sustain another severe market imbalance in the future. In effect, they are wondering as to where the ‘Fourth Bubble” will come from.

All of this gives credence again to having an even broader diversification of investment portfolios. As a result, real estate should once again be seriously looked at as part of an investor’s diversification strategy for several reasons.

First, property valuations have fallen considerably from market highs. Prices in some markets have dipped to 2004 levels. In some instances, prices have dipped to 2003 levels.

Second, real estate has intrinsic value. Unlike stocks and financial-related investments that can see depreciation in their worth down to zero, real estate has inherent value down to the land and will not experience a wholesale collapse in its value to zero.

Third, real estate is real. It can be seen and touched, and managed closely by the owner.

Fourth, real estate has certain tax benefits that can contribute to the overall performance of the property as an investment.

Fifth, a successful rental property as an investment presents an opportunity to create a revenue stream and/or create equity in the home as the renter indirectly is contributing to payment of the principal over time. Regardless of the market and whether appreciation or positive-cash flow rental income is preferred by the investor, the principal is being paid down on the property.

Lastly, based on proposals floated by President-elect Obama, we should expect additional legislation that puts guidelines, regulations and accountability in this industry that ensures proper lending practices and reduces the risk for rampant speculation that has battered the markets in recent times.

Of course, there are certainly risks to holding real estate as an investment in your portfolio. For instance, there may be unexpected property repairs, assessments, or other extraordinary costs that the investor has to incur. So, an investor has to look at real estate also as a business with income and regular and extraordinary expenses.

For those investors that are looking for a simpler way to be diversify without the additional headache, a REIT may be a logical avenue to investigate. A Real Estate Investment Trust is a company that invests in income-generating properties to drive returns for its investors. The income-generating properties may be apartment buildings, industrial and commercial properties. REITs allow smaller investors the ability to invest in larger real estate operations that they wouldn’t be able to otherwise. REITs also should be able to show their overall historical performance to investors.

Again, investors are faced with the question of how to protect and grow their assets in the future. The stock market’s high level of volatility in recent years has many investors questioning the percentage concentration of their portfolios in stocks and similar investments. As a result, the pressure to further diversify those portfolios will mean that other asset categories will have increasingly greater appeal and should be considered for investment.

Overall, real estate presents a great opportunity once again for the long-term investor as outlined above. In addition, the incoming administration has put forth numerous proposals to improve transparency, implement sound business and ethical practices to the industry with the singular purpose to eliminate the probability of a similar crisis ever occurring in the future. All of this will work to give investors options once again for a safer, more consistent and calculable return in the coming years.

In the world of trading there many different instruments to choose to trade. I’m going to talk about why I prefer index futures to most any other vehicle, especially stocks. I am a part time trader in my 40s, I also go to college part time and program software the rest of the time from home. I have been trading in the markets now for 15 years and much of what I have learned is based on personal experience and trial and error. I wish I had more guidance when I first started trading, either from personal mentors or video programs but I didn’t think to invest in those at the time. So my education comes from hard knocks which is actually a pretty good thing, a slower method of learning but good. When I first started trading I went with the method that seemed everyone did and that was to invest in stocks. Index futures was a term I heard of but I thought was only in the realm of the elite professional wall street trader. I had no idea what an index future was. So initially I traded stocks by only going long and hoping for the best. I started about the time the tech bubble began to grow and so it seems like things were really easy. I’d pick a random stock A that I saw on the news, and within a week or two it had practically doubled. In some cases I had one stock (BEOS) that double in one day. As my account grew I thought this was about the easiest thing in the world. Unfortunately the tech bubble burst and everything came down. I was stuck into trading only in one direction and that was to go long because my trading account was big enough yet to maintain the kind of balances required for a margin account that would allow me to trade stocks short. I hadn’t learned about index futures yet and now I was getting really frustrated because as the market tanked, people were still making easy money by just shorting everything. Yet I had to sit on the sidelines and only go long and of course, all my long trades were losers and my account began to shrink back down. Index futures are a vehicle that is a futures contract based on the average price of all the stocks that make up that index. Some index futures contacts contain thousands of stocks. One benefit of index futures is that the price doesn’t whip around so badly compared to the price of an individual stock which is subject to wild price fluctuation for things that have nothing to do with the stock’s fundamentals at all. Index futures absorb those price spikes of individual stocks into the total average of the index so you are not left at the mercy of one particular stock’s price, but instead the index future is a nice large average of many stocks. But the best thing that I liked about switching to index futures, is that I could now go short as easily as I could go long on a stock, but without having to maintain the extremely large account balances required to day trade stocks on margin. With just a small amount I could have the ability to short the market index futures as easily as I would go long and therefore be able to make profits no matter what direction the market was soaring. I am no longer on the sidelines and I don’t have to maintain large margin accounts for the privilege to do that. An excellent resource for learning more about index futures and various trading methods and even auto trading systems specifically for index futures, you can visit www.tradingindexfutures.info and get started learning about how you can profit easier from them than stocks.

Benefits of trading index futures compared to stocks

In the world of trading there many different instruments to choose to trade. I’m going to talk about why I prefer index futures to most any other vehicle, especially stocks. I am a part time trader in my 40s, I also go to college part time and program software the rest of the time from home. I have been trading in the markets now for 15 years and much of what I have learned is based on personal experience and trial and error. I wish I had more guidance when I first started trading, either from personal mentors or video programs but I didn’t think to invest in those at the time. So my education comes from hard knocks which is actually a pretty good thing, a slower method of learning but good.

When I first started trading I went with the method that seemed everyone did and that was to invest in stocks. Index futures was a term I heard of but I thought was only in the realm of the elite professional wall street trader. I had no idea what an index future was. So initially I traded stocks by only going long and hoping for the best. I started about the time the tech bubble began to grow and so it seems like things were really easy. I’d pick a random stock A that I saw on the news, and within a week or two it had practically doubled. In some cases I had one stock (BEOS) that double in one day. As my account grew I thought this was about the easiest thing in the world.

Unfortunately the tech bubble burst and everything came down. I was stuck into trading only in one direction and that was to go long because my trading account was big enough yet to maintain the kind of balances required for a margin account that would allow me to trade stocks short. I hadn’t learned about index futures yet and now I was getting really frustrated because as the market tanked, people were still making easy money by just shorting everything. Yet I had to sit on the sidelines and only go long and of course, all my long trades were losers and my account began to shrink back down.

Index futures are a vehicle that is a futures contract based on the average price of all the stocks that make up that index. Some index futures contacts contain thousands of stocks. One benefit of index futures is that the price doesn’t whip around so badly compared to the price of an individual stock which is subject to wild price fluctuation for things that have nothing to do with the stock’s fundamentals at all. Index futures absorb those price spikes of individual stocks into the total average of the index so you are not left at the mercy of one particular stock’s price, but instead the index future is a nice large average of many stocks.

But the best thing that I liked about switching to index futures, is that I could now go short as easily as I could go long on a stock, but without having to maintain the extremely large account balances required to day trade stocks on margin. With just a small amount I could have the ability to short the market index futures as easily as I would go long and therefore be able to make profits no matter what direction the market was soaring. I am no longer on the sidelines and I don’t have to maintain large margin accounts for the privilege to do that.

An excellent resource for learning more about index futures and various trading methods and even auto trading systems specifically for index futures, you can visit www.tradingindexfutures.info and get started learning about how you can profit easier from them than stocks.

For more information visit: Trading Index Futures

How can you make heaps of money from the stock market while keeping risks to the minimum?

I always believe that you should never put your money in something you do not know about eventhough everyone is dumping their money in this particular stock and prices are rushing like mad.. That would be speculating or gambling. Sounds weird. Remember the internet bubble where a lot of investors buy internet stocks like crazy just because they had been going up and up.

Warren Buffett would never gamble or speculate. He would not invest in something unless he is sure or certain of what he is investing in. The common theory is that higher risks = higher returns. However you can turn the situation to your advantage by doing research on the companies you are investing in, like warren buffett and yet make higher returns.

Warren Buffett once said ‘Rule number 1, never lose money’. This is the main concept for value investing. He also said that I would rather be certain of a good result than hopeful of a great one. Wise words for value investors indeed.

So what are Warren Buffett’s secrets? Below are some of his criterias

1. Identify companies with high and growing ROE

2. Identify companies with 15% growth or more in earnings

3. Identify companies with high profit margins

4. Identify companies with book value growing regularly

5. Identify companies with debt/equity ratio of 50% or lower

6. Identify companies with high intrinsic value

The criterias I have identified above can be easily identified nowadays on popular sites like moneycentral.msn.com or other popular investment software. The most important criteria of value investing is margin of safety… So how do you guarantee a margin of safety?

The secret is actually very simple. To invest in companies, sectors or industries that you are knowledgeable about. It is also known as your circle of competence. You will need to know about the relevant industries that affect the industries that these value companies are in. You will also need to know the safety, stability and tax rates of the country and which the company is in.

You should also have a well diversified portfolio, selecting stocks in industries which you specialised in.

It all boils down to the 2 simple rules of investing.

1. Never lose money

2. Do your research/homework before you invest

Check out more articles and tips at http://bewarrenbuffett.com