Let’s talk Japan.

Every year some analyst comes out with a variation of the story that Japan’s economy is about to rebound.

Usually the argument goes something like this: Japanese markets are impossibly cheap and the central bank will be there to prevent a catastrophe.

Or sometimes there is another variation of the Cinderella story.

Either way, don’t hold your breath. Japan’s economy posted its first trade deficit since 1980 last year and the big trade surpluses needed to drive the Nikkei back to its glory days are over.

At best, Japan’s economy is going to see balanced trade figures or a small surplus in the years ahead. It won’t be enough.

If you’re not familiar with what a trade deficit is, here’s what you need to know: Japan imported $32 billion worth of stuff more than it exported for the first time in 31 years.

Fighting the Demographic Tide

Critics say there are mitigating factors behind the figures and they’re right.

Against the backdrop of one of the world’s fastest aging populations, one of the lowest birth rates on the planet, a renewed reliance on foreign energy, and a yen that is so expensive that Japanese corporations are offshoring production, it won’t be long before the country eventually plows through its savings.

So $32 billion is just the beginning…

In fact, we are more likely to see Godzilla walk out of Tokyo Bay than we are to witness a return to Japan’s halcyon days.

Worse, I believe that within the next five years, Japan’s economy will long for the good old days when the trade deficit was merely $32 billion, instead of $100 billion, $200 billion or worse.

Not one of the things I’ve just mentioned – that the critics cite as short-term influences – are anything but continuations of much longer-term trends. Nearly all of them are being driven by Japan’s declining population.

You may not know this, but Japan’s population is projected to shrink by 30% by 2060. That means the total population will go from 128 million people today to only 87 million people in less than 50 years.

That’s hard to imagine since Japan is one of the most densely populated countries on the planet. But the effects are already visible.

In my neighborhood in Kyoto, for example, we see abandoned houses that fall in on themselves after people die and there are no longer any other family members to live there. We see schools that are shut down in the region because there are no kids to attend them.

We’re also seeing companies shuttered because there are no markets for their products, including my wife’s family kimono business, which closed after 300 years in existence.

Simply put, you just can’t grow a population or its stock markets without people.

Japan also has no immigration policy to speak of, so there is no means of replacing the “silvers,” or senior workers, who are leaving their productive years behind them.

By 2060 the number of people who are 65 or older is going to double. At the same time, the number of people in the workforce between 15 and 65 is going to shrink to less than 50% of the total population.

By 2050, there will be 75 retirees for every 100 workers. By comparison, in the United States in 2050 there will be about 32 retirees per 100 workers.

You’d think Japan could get “busy” and produce more children but even that’s problematic. The country has one of the lowest birthrates on the planet. Many young Japanese simply don’t want romance — let alone children.

In fact, many Japanese don’t even want sex.

As reported by CNBC, one AFP study reported that 36.1% of teenage boys between the ages of 16 and 19 have no interest in sex. That study in 2010 reflected results that were double the 17.5% reported only two years earlier. Girls are even worse, with more than 59% in the same age group reporting no interest.

Things are so bad according to one study I’ve seen, that at the current birth rate the last Japanese person will be born 953 years from now.

Game Over For Japan?

Critics challenge this assumption, arguing that somehow Japan’s hyper-aged will reinvigorate the economy in an orgy of retirement spending and consumption.

That depends on generous pensions and an intact financial system – neither of which Japan has at the moment.

Japan’s debt stands at 200% – 253% of GDP, depending on which studies you read, and is headed in the wrong direction. In fact, it looks like a ski jump that’s three times our own debt burden. Senior citizens I know are doing everything they can to hang onto their jobs for as long as they can.

As a result, there is literally nowhere for younger workers to go… except into low value “arubaito” or part-time work with no benefits, no promotions and very little economic value to contribute to Japan’s recovery.

My nephew, for example, struggled for years in such a job before getting training and finding work as a mechanic for Mazda.

To be fair, Japanese citizens purchase approximately 95% of Japanese debt. That’s why the country has been able to hang on and has not had its own Greek holiday.

By contrast, we borrow about 50% of our money as a nation from overseas, and we’re dangerously close to our own version of Greece’s meltdown.

But as the number of retirees rises and the number of workers falls, the Japanese government is going to have challenges maintaining this internal funding capacity.

At some point – either because there are not enough debt buyers or rates rise too high – they’ll have to turn to external creditors and interest rates that could easily be double the 1.5% the Japanese government pays lenders now.

At that point, debt payments would consume more than half of all government revenue according to The Atlantic.

And then it’s game over.

So what’s an investor to do? Well for one thing, I sure as hell wouldn’t invest in Japan on anything other than an extremely short-term basis.

Despite the fact that trade deficit numbers may ping-pong back into positive territory in the months ahead, there’s no reversing the current long-term trend.

The notion that the Nikkei is somehow undervalued is naïve if you do not take the population and its effect on debt into account.

While it is true there may be short bursts of growth, there’s no ignoring the fact that the bellwether index is trading at 8,802.51, or 77% below the high it achieved in 1990 and 12% below where it started in 1984.

With very few exceptions, money invested in Japan’s economy is going to get trapped there.

That’s why, unless you’ve got money to burn, you can say “sayonara” to Japan.

Keith Fitz-Gerald
Chief Investment Strategist, Money Morning (USA)

If you read the mainstream you probably think it’s bad news for Australia if house prices keep falling.

That it’ll be bad for the banks (which it will be). And that the entire Aussie economy will grind to a halt.

But what if that doesn’t matter?

What if falling house prices is actually a good thing?

In a moment we’ll explain why bad news for the housing market could mean good news for stocks…

But first, some in the mainstream still can’t accept what’s happening.

In today’s the Age, Ian Verrender writes:

“Rather than the much-heralded assault on the Australian residential housing market, as has been predicted for the past five years by an ever-increasing host of international and domestic doomsayers, we are instead witnessing an orderly retreat.”

Arguing against a house price crash is so 2009.

Perhaps Mr. Verrender should look at the latest press release from RP Data. Especially the following chart:

Tell buyers in Brisbane, Melbourne, Hobart, Adelaide, Perth and Darwin prices haven’t crashed. Remember it wasn’t so long ago the mainstream told you Aussie house prices can’t fall.

In reality, the crash started long ago and is in full flight now. It’s wreaking havoc on those who expected to make a killing buying a house two years ago.

But now they’re learning Borrowing 101 the hard way. They’ve found out leverage is a double-edged sword. You benefit when prices rise. But you lose when prices fall. For the poor souls who bought at the peak, using a 90-95% mortgage, they’re already in negative equity.

In fact, a buyer needs prices to rise at least 10% in the first year just to break even – after factoring in buying costs and mortgage costs. So when prices fall 8.7% (as they have in Brisbane), it’s a big deal.

Because now those buyers need the price to rise at least 20% to get back to square one. And the more time passes without prices going up, the worse it gets. The knock-on effect is others will fall into negative equity too.

This is something most of the so-called property experts don’t get. They’re too busy with their fancy spreadsheets and economic models to fathom the impact of falling credit.

But failure to understand credit isn’t their biggest mistake. Their biggest mistake is to think housing drives economic progress.

It doesn’t.

Housing is the reward for economic progress.

Or that’s how it should be.

Except the credit bubble distorted the market. Rather than working hard to achieve the reward, credit has allowed consumers to get the reward first with the promise they’ll earn it later with hard work.

Trouble is, with so much effort going into building the reward, they forget about the rest of the economy. We liken it to an athlete stuffing his face with cream cakes before the race because he’s so certain he’ll win. Only, when it comes to running the race, with a belly full of cake, the athlete is no longer in the right shape to win.

That’s what happened to the U.K and U.S. housing markets. And it happened to the Aussie housing market too.

With so many resources going into building houses and apartments… and so much bank lending going towards housing… real businesses miss out.

But now, with falling house prices, could this actually spell good news for Aussie businesses and stocks? If so, it could mean higher stock prices and bigger returns on your investments.

Think about it…

You could see a shift towards stocks if investors wake up to the idea that housing is an expensive investment and that returns aren’t guaranteed.

If you’re an investor who’s concerned about the future, do you really want to take out a six-figure mortgage and pay tens of thousands of dollars in buying and holding costs? Or would you rather stick cash in the bank and take a few speculative punts on the stock market?

And consider this: is it a coincidence that U.S. home prices keep falling even though the U.S. stock market has more than doubled since March 2009?

Of course, central bank money-printing and low interest rates have played a large part in boosting stock prices.

But why didn’t it boost house prices? Simple, because housing is expensive and investors lost faith in the ability to make a buck from it.

Now, “Australia is different”, you’re always told. Because, in Australia, the Reserve Bank of Australia (RBA) can lower interest rates to stop house prices falling, boost demand and push prices up.

So far that hasn’t happened. In fact, the latest home sales numbers show the RBA’s last two interest rate cuts haven’t helped the Aussie housing market.

As even the housing bulls at CommSec note…

“New home sales fell by 4.9 per cent in December and was holding just shy of the 11-year lows reached in September.”

If what happened in the U.S (and U.K.) is anything to go by, there’s a good chance the same pattern will repeat here: investors will stay clear of expensive housing and buy stocks instead.

Remember, interest rates are low because central bankers want to stimulate the economy… because investors, consumers and businesses are cautious.

And as long as that continues (and it seems set to) it’s unlikely consumers will borrow large amounts of money to buy risky, illiquid and over-priced housing…

Not when you can buy dividend paying stocks that pay an income stream and growth stocks that you don’t need to borrow a fortune to buy.

Already Aussie investors are unknowingly following the lead from overseas. They’re getting tired of falling bank deposit rates and are instead looking at the risky and liquid but not over-priced shares in the stock market.

As far as 2012 goes, there’s no argument. The more house prices fall, the better it is for stocks.

Cheers.
Kris.

via moneymorning.com.au

Turn your computer on and there’s one word I can almost guarantee you’ll see: Microsoft.

It’s the world’s top software company. For positively ages, the company’s Windows operating system has been the industry standard for the PC business.

So you’d think that Microsoft (Nasdaq: MSFT) shares would have been a rip-roaring success in recent years. Yet the complete opposite is true.

Since the dotcom boom at the turn of the millennium, the company’s stock price has halved. Many people now shun Microsoft as being at best a very boring investment.

The good news is, this could be about to change for the better…

January can be a pretty miserable month. But for US stock market watchers, it does have one redeeming feature. It’s the first quarterly ‘earnings season’ of the year. In other words, it’s when America’s finest companies update us on how business has been.

So far, the latest earnings season has gone pretty well. Most firms’ profits have beaten analysts’ forecasts. That in itself is no great shock. Managements have become very good at giving investors ‘guidance’ on future earnings which – surprise, surprise – they then succeed in beating.

But when one of the firms that’s growing sales faster than expected is US software giant Microsoft, it’s well worth taking notice.

Why? Because this is a company that’s widely viewed as being ‘past it’.

Windows is no longer the driving force that it used to be. As Preston Gralla says for Computerworld, Windows’ “glory days are clearly gone”.

On top of that, the PC market is having a tough time, due to the recent flooding in Thailand, which has disrupted supplies of equipment. And analysts are fretting, among other things, that Microsoft can’t compete with rival Google on web searching tools and smart phones.

Yet Microsoft’s overall revenues for the last three months of 2011 rose by 5% versus the same period last year. In other words, the firm must have found something else to take up the growth baton.

Looking at the details – I’ll keep it brief – Windows-related revenues dropped by 6% on last year. But the Online Services Division’s sales grew by 10% year-on-year. Sales at the Server & Tools unit rose by 11%. And the Entertainment and Devices Division enjoyed a 15% rise in sales thanks to its Xbox operations.

Not bad for a company that’s ‘past it’.

In short, Microsoft keeps on finding ways to deliver the goods when it comes to sales figures. As Laurence Latif says in The Inquirer, these numbers “are pretty impressive for a company that has been painted as being in crisis”.

Sure, the firms’ profits in the last quarter were down a fraction on 2011. But history shows that’s nothing to get too concerned about. Take a look at this chart.

This shows Microsoft’s earnings per share (EPS) from continuing operations over the last 20 years. Sure, there have been one or two hiccups. But broadly, we’re looking at a picture of a progressive profit growth. Since 2000, EPS has trebled.

And that’s where it gets interesting. Because normally, strongly rising EPS should boost a company’s value. But in fact, over that same period, as I mentioned above, Microsoft’s share price has fallen in half. That’s because rising earnings have been more than offset by gloomy investors becoming less willing to pay up for those earnings, which has driven down the price/earnings ratio.

That spells opportunity for canny investors.

Nowadays, Microsoft has become like a utility, rather along the lines of an electricity or gas provider. Windows has a virtual monopoly. It would be too costly for either computer suppliers or users to switch to anything else. So Microsoft’s operating system will be a ‘cash cow’ for the foreseeable future.

What’s more, the company isn’t standing still. Over the coming year, it plans to launch several new products, including the latest operating system Windows 8. And the management is optimistic about the future.

Yet despite this, the stock has fallen so far out of favour with investors that it’s now downright cheap. On a current year price earnings (p/e) ratio of just over ten, Microsoft shares now offer outstanding value for a business with such a vice-like grip over its own market.

And there’s another benefit here for new buyers of the stock. Like other utilities, Microsoft is now rewarding its shareholders with a decent income stream.

Since 2005, the company has hiked its dividend pay-out by 150%. While that only leaves the prospective yield at around 2.5%, there’s plenty of scope for future dividend growth. Not only is Microsoft producing oodles of cash, it’s already very well minted. At the end of last year, the balance sheet contained a cash hoard totalling $40bn.

Add it all up, and you have just the sort of solid defensive stock that makes complete investment sense in today’s tricky market.

David Stevenson
Associate Editor, MoneyWeek (UK)

via moneymorning.com.au

Yesterday the papers splashed the latest warning from the World Bank.

The Financial Times reported:

“Predicting significantly slower global growth in 2012 than it expected last summer even if the eurozone muddles through its crisis, World Bank economists said that if financial markets deny funds to eurozone economies, global growth would be about 4 percentage points lower than even these figures, with poorer economies far from immune.”

There’s no doubt there will be another downturn. The pieces are already in place for it to happen. The only unknown is when.

Of course, the knee-jerk reaction is to say, what would the World Bank know? It never gets things right. But it is worth remembering what the Bank wrote in 2007…

“A soft landing remains likely, but the global economy has reached a turning point and many factors could result in a more pronounced slowdown. A faster-than-expected weakening of housing markets in high-income countries could generate a much sharper downturn and even recession, with potentially significant effects for developing countries. Much slower growth would likely cause commodity prices to weaken more than already projected…”

But we won’t big-up the World Bank too much. After all, the guys over at our sibling newsletter The Daily Reckoning banged on about the economic meltdown as early as 1999.

Besides, it’s important to understand why the World Bank is making this prediction. It’s not to warn investors about the risks of investing. It’s not to admit that the world is now paying for the mistakes of the past. No. It’s simpler than that…

It wants more taxpayer dollars.

Or rather, it wants governments to give taxpayer money to the International Monetary Fund (IMF) so the IMF can give more cash to broken banks and corrupt governments.

If you needed any proof, right on cue the following report appeared in the FT yesterday:

“The International Monetary Fund has asked its member countries for an extra $500bn in firepower to combat the world’s spreading fiscal emergencies, which it estimates will generate demand for bail-out loans totalling $1tn over the next two years.”

Coincidence? No.

It’s the latest attempt by meddling bureaucrats to stall the inevitable: a full-scale economic collapse. Whether it’s a repeat of 2008 or something much worse is anyone’s guess.

That’s why it’s vital you have an emergency plan…

Cheers.
Kris.

via moneymorning.com.au

In 1971, President Nixon abandoned the US dollar’s link to gold.

From that point on the world was on a US dollar standard. The US dollar floated freely and other currencies floated against, or were fixed to, the US dollar.

For the first time in history the world was operating without any semblance of a monetary anchor.

The result? An explosion of debt, or credit creation.

The chart below chart shows ‘total credit market debt owed’ in the US. As you can see it began nudging higher during the 1960s before starting on its parabolic way after the link to gold was ditched in 1971.

Debt Supercycle: Debt growth goes parabolic after link to gold severed in 1971

The expansion of US debt markets represents an expansion of global liquidity. Or, an expansion of global debt.

That’s because the US dollar replaced the role of gold in the international financial system. Now, investors considered the dollar ‘as good as gold’.

But, unlike gold, the production of US dollars is limitless.

Before World War I, the world was on a classical gold standard. That was when currency values were defined by their weight in gold.

Today we use a ‘floating currency’ system. That means all currencies ‘float’ in value against each other. In contrast the gold standard was a fixed currency system.

When recession threatened the US economy, the Federal Reserve tried to avoid it and lowered interest rates. They wanted to encourage spending by encouraging people to take on more debt. Which led to more US dollar printing.

All this money printing is the exact opposite of how the gold standard applied its stabilising influence.

And because of monetary policy used by the Fed and other major central banks, they were able to resist every economic correction.

At the same time, central bankers transformed into central planners. They were able to heavily influence the cost of credit.

So within this supercycle there emerged a smaller cycle of expansion, recession and recovery. If you look at the chart, you’ll see there were fewer recessions (shaded areas) after 1980 than in the 1940s and 50s, which were under a stricter currency regime.

This desire by politicians to engineer the economy and soften the impact of recession caused the spectacular debt growth shown in the chart. The value of all outstanding US debt is now around US$54 trillion. It represents all household and business debt, state and local government and federal government debt, as well as financial sector debt and foreign borrowing in the US.

There are a few things I want you to think about when it comes to your investments.

Using debt to fund a real asset – one that produces cash flow – is good debt.

But when the amount of outstanding debt grows to such levels that it swamps the amount of real assets in an economy, things get ugly.

If you have a look at the chart again, you can see that debt growth continued its parabolic trajectory during the 2000s. This growth fuelled the US housing market bubble, but did nothing for the stock market.

Now, despite the bursting of the US housing bubble, total debt continues to grow.

The problem is that the debt growth is now almost exclusively Federal Government debt. This is the most unproductive debt of all.

The politicians and central bankers are doing what they have always done during the credit market supercycle. They are trying to avoid recession by creating more debt.

But this time is different.

Monetary policy is weak because the private sector is already too indebted.

And financial interference merely keeps the credit market from imploding. It does nothing to create productive investment.

However, lower interest rates – the central bankers ‘cure-all’ – to encourage debt is no longer a recession fix. And gone are the days where strong expansion would follow a shallow recession.

Instead, you should anticipate a weak expansion to come from a deep recession.

So thinking in terms of how things used to be in days of the ‘supercycle’ is pointless.

What you now need is an investment strategy for a cycle in reverse… The debt vacuum.

How do you deal with the end of the global supercycle in credit creation?

There are four things you can do to preserve your wealth and grow it.

Focus on preservation.

1. Get out of debt.. Mortgage debt, margin debt, and personal debt. Pay it back. Sell assets if you have to. The days of asset price appreciation from debt are over.

2. Have large cash balances as a part of your investment portfolio. You need to be flexible. Holding cash when interest rates fall has an opportunity cost. That is, what are you forgoing by holding cash?

3. Hold precious metals – both physical and equities – in your portfolio. They have taken a hit lately, but I firmly believe precious metals will benefit as the debt supercycle comes to an end

4. Look to add defensive, income-producing equities to your portfolio. This is something I focus on in Sound Money. Sound Investments and will continue to in 2012 as the monetary system breaks down.

After a 40-year experiments with floating currencies, linked to an anchorless reserve currency, the system has hit a wall.

You’re investing in unprecedented conditions. In fact, no one has been here before.

Use 2012 as the time to preserve your capital, reduce debt and accumulate precious metals.

moneymorning.com.au

In 1971, President Nixon abandoned the US dollar’s link to gold.

From that point on the world was on a US dollar standard. The US dollar floated freely and other currencies floated against, or were fixed to, the US dollar.

For the first time in history the world was operating without any semblance of a monetary anchor.

The result? An explosion of debt, or credit creation.

The chart below chart shows ‘total credit market debt owed’ in the US. As you can see it began nudging higher during the 1960s before starting on its parabolic way after the link to gold was ditched in 1971.

Debt Supercycle: Debt growth goes parabolic after link to gold severed in 1971

The expansion of US debt markets represents an expansion of global liquidity. Or, an expansion of global debt.

That’s because the US dollar replaced the role of gold in the international financial system. Now, investors considered the dollar ‘as good as gold’.

But, unlike gold, the production of US dollars is limitless.

Before World War I, the world was on a classical gold standard. That was when currency values were defined by their weight in gold.

Today we use a ‘floating currency’ system. That means all currencies ‘float’ in value against each other. In contrast the gold standard was a fixed currency system.

When recession threatened the US economy, the Federal Reserve tried to avoid it and lowered interest rates. They wanted to encourage spending by encouraging people to take on more debt. Which led to more US dollar printing.

All this money printing is the exact opposite of how the gold standard applied its stabilising influence.

And because of monetary policy used by the Fed and other major central banks, they were able to resist every economic correction.

At the same time, central bankers transformed into central planners. They were able to heavily influence the cost of credit.

So within this supercycle there emerged a smaller cycle of expansion, recession and recovery. If you look at the chart, you’ll see there were fewer recessions (shaded areas) after 1980 than in the 1940s and 50s, which were under a stricter currency regime.

This desire by politicians to engineer the economy and soften the impact of recession caused the spectacular debt growth shown in the chart. The value of all outstanding US debt is now around US$54 trillion. It represents all household and business debt, state and local government and federal government debt, as well as financial sector debt and foreign borrowing in the US.

There are a few things I want you to think about when it comes to your investments.

Using debt to fund a real asset – one that produces cash flow – is good debt.

But when the amount of outstanding debt grows to such levels that it swamps the amount of real assets in an economy, things get ugly.

If you have a look at the chart again, you can see that debt growth continued its parabolic trajectory during the 2000s. This growth fuelled the US housing market bubble, but did nothing for the stock market.

Now, despite the bursting of the US housing bubble, total debt continues to grow.

The problem is that the debt growth is now almost exclusively Federal Government debt. This is the most unproductive debt of all.

The politicians and central bankers are doing what they have always done during the credit market supercycle. They are trying to avoid recession by creating more debt.

But this time is different.

Monetary policy is weak because the private sector is already too indebted.

And financial interference merely keeps the credit market from imploding. It does nothing to create productive investment.

However, lower interest rates – the central bankers ‘cure-all’ – to encourage debt is no longer a recession fix. And gone are the days where strong expansion would follow a shallow recession.

Instead, you should anticipate a weak expansion to come from a deep recession.

So thinking in terms of how things used to be in days of the ‘supercycle’ is pointless.

What you now need is an investment strategy for a cycle in reverse… The debt vacuum.

How do you deal with the end of the global supercycle in credit creation?

There are four things you can do to preserve your wealth and grow it.

Focus on preservation.

1. Get out of debt.. Mortgage debt, margin debt, and personal debt. Pay it back. Sell assets if you have to. The days of asset price appreciation from debt are over.

2. Have large cash balances as a part of your investment portfolio. You need to be flexible. Holding cash when interest rates fall has an opportunity cost. That is, what are you forgoing by holding cash?

3. Hold precious metals – both physical and equities – in your portfolio. They have taken a hit lately, but I firmly believe precious metals will benefit as the debt supercycle comes to an end

4. Look to add defensive, income-producing equities to your portfolio. This is something I focus on in Sound Money. Sound Investments and will continue to in 2012 as the monetary system breaks down.

After a 40-year experiments with floating currencies, linked to an anchorless reserve currency, the system has hit a wall.

You’re investing in unprecedented conditions. In fact, no one has been here before.

Use 2012 as the time to preserve your capital, reduce debt and accumulate precious metals.

moneymorning.com.au

I’ve said it before, and I’ll say it again.

The markets are broken.

It’s not that they’re not functioning on a daily basis, pricing risk and assets and performing their price discovery duties. They are doing that – or at least trying to.

 

Those are the little, daily things that markets do, and there are things there that are broken. (I’ll get to those things another time.) Think of those little things as the “hows” or the “mechanics” of buying and selling.

Think of the big things as the “whys” or the “psychology of investing.” Those are the things that are broken. Until they are fixed, or “things” change, drastically, we are in for some really wild swings in the months, quarters, and years ahead.

 

 

First, there are two types of players in markets, stock traders and investors.

It used to be that investors dwarfed stock traders – by a huge margin.

Investors were the meat and potatoes and the vegetables, and stock traders were the gravy that made sure investors’ plates were liquid enough so that they didn’t choke when swallowing their meals.

But that’s all changed.

There aren’t that many truly long-term investors any more. It’s too dangerous to be an investor in the traditional sense. That’s why most investors, at least those that call themselves investors, are really all traders now.

I don’t mean traders in the high frequency sense, or even in the day trading sense. I mean they are stock traders because they invest for the future but can’t see beyond a few quarters, if that, so they have to get out of positions.

These traditional investors almost always have stop-loss orders down, or at least have stop-loss levels in mind as part of their investment “plans.” A lot of them now use profit targets, too. That hardly ever happened traditionally. Investors invested. They were buy-and-hold believers in a brighter future where, over time, assets appreciated, and they stuck with them.

Not anymore.

You can’t do that unless you have nerves of steel, tons of capital, and a generational approach to holding your positions. Even then, I say, good luck with that.

So, from the perspective of psychology, if it’s not safe to be an investor, but being in the markets is still a tremendous wealth-generating endeavour, stock trading will remain the tail wagging the old dog.

For me, that’s all well and good. I’m a stock market trader. I always have been. Sure, I used to have a bunch of long-term investments that I expected to always weather short-term trading and fluctuating economic cycles.

But those all ended up being a 50/50 proposition. Meaning I lost on about half of those investments and made money on the other half. I’m talking about maybe eight positions that I’d keep on the books for years.

Not anymore.

Why? Now I use that capital to trade bigger positions, because holding a diversified (I’m not including the few mutual funds that I used to own, that I jettisoned a long time ago) portfolio, even a well-constructed, concentrated one, didn’t work out.

My point is, think about how you look at the stock markets. Ask yourself if you are an investor or a stock trader. Ask yourself how much time you have, how much capital you have, and what kind of constitution you have… and do the math yourself.

Shah Gilani is a veteran US hedge fund trader and contributing editor to Money Morning (USA).

via moneymorning.com.au

When collateral for one loan serves as collateral for other loans as well, it is called cross collaterization. The most common example being the case when a person wants to buy a new residential investment property using the family home as the collateral security.
Note:The properties being used as collateral both need to valued by a registered valuer unless the Loan To Value Ratios are so low that an existing rates valuation will suffice.

For most people starting out in the investment world however it is a long wait before they have enough equity in their home so that they can cross collateralise into another property.

So whats the solution?

Stock Trading

How can this be useful for buying shares?

Borrowing against your home to buy blue chip shares is a great way to unlock some of the equity you have created over the years without having to take out too large a mortgage as you might if you were borrowing to buy another home.

It also allows you to invest in income producing assets sooner than you could if you waited until you could afford that next investment property. The reason this is possible is because banks will allow some assets (like property) to be borrowed against, up to a “Loan to Value Ratio,” or LVR of 90%. This is the relative amount of the sum loaned against a property with respect to its value, for example, a house that is valued at 500,000 with 250,000 debt has an LVR of 50%. That is, the owner has borrowed an amount which is 50% of the value of the property. Some or the entire remaining equity can be utilized as collateral for another mortgage.

Cross collateralization is usually used to acquire additional property however it is not unusual for more risk adverse investors to also cross collateralize their homes into the share market.

If you are the sort of investor who wants to follow a strategy like this remember that leverage is a double edged sword, the returns are magnified on the way up but they are also magnified on the way down.

2011 has been the year of market volatility.

The U.S. S&P 500 has traded between a high of 1,363 in April… to a low of 1,099 in October… That’s almost a 20% range from top to bottom.

The Aussie market tells a similar story: a high of 4,971 in April, through to a low of 3,863 in September… that’s a range of 1,108 points, or over 22% from top to bottom.

As for the Aussie dollar, the year has been just as eventful. As high as USD$1.10 in July… to as low as USD$0.95 in October.

Finally, we couldn’t review the year without looking at gold.

In Aussie dollar terms, gold traded as low as $1,321 in February, and climbed as high as $1,806 in August… almost a $500 range.

We could carry this list on. Almost any tradeable asset you look at has plumbed the depths and reached the heights at some point this year.

In short, this has been a market for two types of investor: the speculator and the spectator.

Volatile markets are a speculator’s dream. As it rises one day and falls the next… if you’re quick, smart and (dare we say it) lucky, you can make many times your money buying and selling.

Of course, the best markets are when it rises for several days and then falls. It gives you extra time to get set and then lock in the gains… if only it was that simple!

Top traders know speculating isn’t easy. And that you can’t win on every trade. Slipstream Trader, Murray Dawes had a terrific year buying low and selling high. But even he didn’t have a 100% perfect record.

The same goes for fundamental investors too. We haven’t gotten everything right in Australian Small-Cap Investigator. The important thing is to understand the risks… and know when to get in and when to get out.

Speculators understand these risks. They know they’ve got to take a small hit if they want the chance to clock up big gains.

And with the market staying volatile – up one day, down the next – the New Year looks set to be a great time to buy certain stocks while they’re cheap. Our preference is small-cap stocks, simply because they offer big rewards for a small amount of risk.

But what if you don’t want to speculate? The only other choice in this market is spectating…

You can keep your money out of the market and watch from the sidelines if you want to. Although, we’d advise against it.

Why? Because if you’re a spectator, the only place to stick your cash is in the bank. Trouble is, while we suggest you have a big bank account, you won’t earn enough interest to keep you ahead of the game… especially with deposit rates falling.

Look, cash is great as a safety net.

It provides stability and comfort in a choppy market.

But it’s not the path to wealth. And thanks to inflation, it’s not even the solution to maintaining your wealth.

So in order to get ahead you’ve got to take risks.

Sitting on the sidelines watching the markets won’t get you anywhere.

And neither will buy-and-hold investing. Remember, this year buy-and-hold investors have taken a big hit… especially those who bought near the top of the market.

We’ll admit, spectating is fine for short periods. After all, speculating takes more effort than spectating. Just as playing football is harder than watching football.

But if you’ve spectated waiting for markets to calm down, you’re set for disappointment. What you’ve seen in 2011 is set to repeat in 2012… and our bet is 2013 won’t be much different either.

So don’t get too comfortable watching from the sidelines. Because at some point you’ll need to speculate in order to get ahead… and the sooner the better.

Bottom line: if you wait and watch, the best you can expect to make is 4% on a savings account (perhaps less if bank interest rates fall further). With official inflation at 3% and real inflation much higher, bank interest rates aren’t high enough to keep you ahead of inflation.

Keep cash in the bank for security. But speculate to stay several steps ahead of the threat of inflation.

Cheers.
Kris

via moneymorning.com.au