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Mutual Fund Strategies: How to Minimize the Risk
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Mutual Fund Strategies: How to Minimize the Risk
Before you can plan a mutual fund strategy, you need to have a clear picture in your mind of your goals as an investor. You also need to determine the amount of time you have to reach those goals. Investing is time-sensitive, so you will always need to factor time into any investing strategy.
Today, with more than 10,000 mutual funds to choose from, you can be sure there is a fund (or several) with your name on it. However, rather than seeking a fund or even a fund category, you should first determine how your portfolio should be set up. It is always much easier to start at the top, with your overall asset allocation plan, and then fill in the pieces, or funds, later. Too many investors go right to the fund selection, chasing the top funds as listed in magazines only to get burned when last year’s winner becomes this year’s disaster.
If you determine your overall investing position based on goals and timeframe, you can lay out a strategy. For example, a young couple, without children, who have a high combined income, can be aggressive in their choices. They may opt to put 80 percent of their investment dollars into riskier, aggressive funds and the remaining 20 percent into more conservative fund investments. They have time on their side and are not averse to taking some financial risk.
Conversely, an older couple, nearing retirement, may opt for the reverse calculations, looking for 80 percent of their mutual fund investments to be in income-generating, safer funds. They want income soon and are not in a position to take risks.
Of course, the above examples are broad generalizations. However, by creating your asset allocation blueprint you will then be able to select fund categories that fit appropriately and allow you to diversify. By diversifying across sectors, caps and fund categories, you lower your overall level of risk. In a sense, a good investor is doing at some level what a fund manager does by choosing diverse investments so that, if one does poorly, the others will more than make up for it.
In the late 1990s the technology funds were the rage. If you were willing to take the risk and bank on tech sector funds (and knew when to get out), you could have made a lot of money. While no one sector is flying at that level today, you can take a more aggressive approach by looking at overseas markets and small cap, mid cap and emerging growth funds. In the more conservative portion of the portfolio, you’ll want funds with the large cap blue chip stocks, large cap value funds, income funds and bond funds.
Generally, having five to eight funds in your fund portfolio should meet your investing needs. The key to your strategy is figuring out your timeframe, risk level andasset allocation first before looking at fund categories and finally plugging in the actual funds.
The best strategy, you should consider, is to build a diversified mutual fund portfolio. A properly constructed portfolio, including a mix of both stock and bonds funds, provides an opportunity to participate in stock market growth and cushions your portfolio when the stock market is in decline. Such a portfolio can be constructed by purchasing individual funds in proportions that match your desiredasset allocation or you can do the entire job with a single fund by purchasing a mutual fund that has "growth and income" or "balanced" in its name.
* Rss Feed
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Mutual Fund Strategies: How to Minimize the Risk
Before you can plan a mutual fund strategy, you need to have a clear picture in your mind of your goals as an investor. You also need to determine the amount of time you have to reach those goals. Investing is time-sensitive, so you will always need to factor time into any investing strategy.
Today, with more than 10,000 mutual funds to choose from, you can be sure there is a fund (or several) with your name on it. However, rather than seeking a fund or even a fund category, you should first determine how your portfolio should be set up. It is always much easier to start at the top, with your overall asset allocation plan, and then fill in the pieces, or funds, later. Too many investors go right to the fund selection, chasing the top funds as listed in magazines only to get burned when last year’s winner becomes this year’s disaster.
If you determine your overall investing position based on goals and timeframe, you can lay out a strategy. For example, a young couple, without children, who have a high combined income, can be aggressive in their choices. They may opt to put 80 percent of their investment dollars into riskier, aggressive funds and the remaining 20 percent into more conservative fund investments. They have time on their side and are not averse to taking some financial risk.
Conversely, an older couple, nearing retirement, may opt for the reverse calculations, looking for 80 percent of their mutual fund investments to be in income-generating, safer funds. They want income soon and are not in a position to take risks.
Of course, the above examples are broad generalizations. However, by creating your asset allocation blueprint you will then be able to select fund categories that fit appropriately and allow you to diversify. By diversifying across sectors, caps and fund categories, you lower your overall level of risk. In a sense, a good investor is doing at some level what a fund manager does by choosing diverse investments so that, if one does poorly, the others will more than make up for it.
In the late 1990s the technology funds were the rage. If you were willing to take the risk and bank on tech sector funds (and knew when to get out), you could have made a lot of money. While no one sector is flying at that level today, you can take a more aggressive approach by looking at overseas markets and small cap, mid cap and emerging growth funds. In the more conservative portion of the portfolio, you’ll want funds with the large cap blue chip stocks, large cap value funds, income funds and bond funds.
Generally, having five to eight funds in your fund portfolio should meet your investing needs. The key to your strategy is figuring out your timeframe, risk level andasset allocation first before looking at fund categories and finally plugging in the actual funds.
The best strategy, you should consider, is to build a diversified mutual fund portfolio. A properly constructed portfolio, including a mix of both stock and bonds funds, provides an opportunity to participate in stock market growth and cushions your portfolio when the stock market is in decline. Such a portfolio can be constructed by purchasing individual funds in proportions that match your desiredasset allocation or you can do the entire job with a single fund by purchasing a mutual fund that has "growth and income" or "balanced" in its name.
While there are certain diversification strategies that investors can undertake to minimize their risk, there is always the risk that the market as a whole is unhealthy and produces negative returns. The different types of risk inherent with investing and how to avoid them are outlined below:
Systematic Risk
This type of risk is impossible to reduce through diversification. Unfortunately, along with investing in capital markets comes the risk of an overall economic downturn. Since this risk is impossible to eliminate, mutual fund investors tend to focus on the next main type of risk: non-systematic risk.
Non-Systematic Risk
This type of risk is the risk associated with investing in any particular security. This can be a stock, bond, exchange traded fund etc. Fortunately, this risk can be reduced through diversification. As such, many mutual fund investors search to choose a wide variety of securities to include in the portfolio in order to diversify away from this non-systematic risk. However, it must also be noted that after a total of 32securities are added to the portfolio, the risk has been diversified as much as possible. Any securities that are added to these 32 will not serve the purpose of reducing risk in the portfolio.
Diverse Security Types
Now that we have covered the forms of risk and the need for diversification, we can cover some of the ways to expand proper diversification potential. The first is to invest in different types of securities. Depending on the business cycle, different securities will be most appropriate to the portfolio, however there should always be a mix of these securities so that the investor is not restricted to one particular market. Different security types that some mutual fund investors consider are: bonds (also called debentures in some cases), equities (stocks), exchange traded funds (these follow the performance of a certain market whether it is a stock market or the market for the price of a metal). More experienced investors may choose to invest in stock options or warrants which essentially give the right but not the obligation to purchase asecurity at a given price.
Diverse Industries
Another strategy to increase the diversification potential of a portfolio is to invest in a diverse number of industries. This will prevent you from being overly exposed to an industry which may experience an overall decrease in profits due to a certain global issue (i.e.: the real estate market). The key here is to invest in stocks that aren't correlated to one another. For example, rather than investing in a cruise company as well as an airline company (both subject to variance in the amount of travel); you should invest in an airline company as well as oil. Since the price oil is negatively correlated to the airline company's profitability (as one rises in value the other should fall), you will be well positioned to reduce the overall risk of your portfolio ofsecurities.
While there are other methods of diversification (i.e.: investing in foreign markets), these are the main ones, and by using this knowledge, you should be able to minimize the risk in your portfolio greatly.
Systematic Risk
This type of risk is impossible to reduce through diversification. Unfortunately, along with investing in capital markets comes the risk of an overall economic downturn. Since this risk is impossible to eliminate, mutual fund investors tend to focus on the next main type of risk: non-systematic risk.
Non-Systematic Risk
This type of risk is the risk associated with investing in any particular security. This can be a stock, bond, exchange traded fund etc. Fortunately, this risk can be reduced through diversification. As such, many mutual fund investors search to choose a wide variety of securities to include in the portfolio in order to diversify away from this non-systematic risk. However, it must also be noted that after a total of 32securities are added to the portfolio, the risk has been diversified as much as possible. Any securities that are added to these 32 will not serve the purpose of reducing risk in the portfolio.
Diverse Security Types
Now that we have covered the forms of risk and the need for diversification, we can cover some of the ways to expand proper diversification potential. The first is to invest in different types of securities. Depending on the business cycle, different securities will be most appropriate to the portfolio, however there should always be a mix of these securities so that the investor is not restricted to one particular market. Different security types that some mutual fund investors consider are: bonds (also called debentures in some cases), equities (stocks), exchange traded funds (these follow the performance of a certain market whether it is a stock market or the market for the price of a metal). More experienced investors may choose to invest in stock options or warrants which essentially give the right but not the obligation to purchase asecurity at a given price.
Diverse Industries
Another strategy to increase the diversification potential of a portfolio is to invest in a diverse number of industries. This will prevent you from being overly exposed to an industry which may experience an overall decrease in profits due to a certain global issue (i.e.: the real estate market). The key here is to invest in stocks that aren't correlated to one another. For example, rather than investing in a cruise company as well as an airline company (both subject to variance in the amount of travel); you should invest in an airline company as well as oil. Since the price oil is negatively correlated to the airline company's profitability (as one rises in value the other should fall), you will be well positioned to reduce the overall risk of your portfolio ofsecurities.
While there are other methods of diversification (i.e.: investing in foreign markets), these are the main ones, and by using this knowledge, you should be able to minimize the risk in your portfolio greatly.
Choosing a Real Asset
The entire category of real assets includes a range of potential investments, including real estate, gold and other commodities such as oil, minerals and agricultural products. Each of these, however, has its own return and volatility characteristics, and may or may not serve as an effective inflation hedge at any given time. Real estate, for example, is often subject to unique supply-and-demand or financing dynamics that are separate from other real assets and not always closely correlated with inflation.
“When choosing a real asset to invest in, it’s important to understand the real asset’s correlation with other investments in the portfolio, such as stocks or bonds, and the real asset’s direct correlation with inflation,” says Jim McDonald, chief investment strategist for Northern Trust. “For example, in 2008, commodities, as an asset class, went down every bit as much as stocks. So what’s important is making sure an investment is directly correlated with inflation, and not necessarily correlated with the performance of other portfolio investments.”
Whether real estate, gold, oil, minerals or Treasury Inflation Protected Securities (TIPS), real assets can deliver robust diversification benefits due to their often-negative correlation with stocks and bonds.
Get Real AssetsThe Real Value of Real Estate
One such real asset is, of course, real estate. Often considered attractive by investors for both its income producing and inflation hedging benefits, real estate as a broad asset class encompasses several different property types each with different risk and return characteristics.
The most accessible form of real estate investment is public real estate equities, although public and private debt investments (including mortgages) also provide investors with real estate investment exposure. Historically, the best real estate inflation hedge, however, has been available from private investments in those property types with the shortest lease terms such as hotels that can raise rates nightly. The potential inflation hedge benefit is lessened as you move to public real estate alternatives such as stocks issued by real estate investment trusts (REITs). Nevertheless, in an inflationary environment, REITs are likely to still outperform a broader equity universe as investors anticipate REIT operators’ ability to raise rents and pass through operating expenses when inflation accelerates.
An Inside TIPS on InflationReal assets also include inflation-protected financial securities, such as TIPS, that provide a total return tied directly to the actual inflation rate. Inflation-indexed bonds issued by the U.S. Treasury, TIPS’ principal value is regularly adjusted to reflect changes in the Consumer Price Index (CPI), the most commonly used measure of inflation. With TIPS, your portfolio benefits from owning U.S. government securities that offer protection from geopolitical turmoil or a financial system downturn like a traditional treasury security, while also preserving value if the inflation picture turns out worse than expected.
“The definition of real assets is that they have a high, positive correlation with inflation,” Skjervem says. “As a result, TIPS represent a good inflation hedge because their value is directly tied to changes in the CPI. That means when you add TIPS to your portfolio, you’re not buying them to maximize return, but rather to provide portfolio stability and inflation protection.”
The Value of Being PreparedWith the unemployment rate still rising, it seems unlikely that higher wages will generate serious inflation in the foreseeable future. And, as weak consumer demand continues to challenge corporate profits, the potential for higher prices for consumer goods is likely to remain muted until the recovery gathers steam and enters a full-fledged expansion. Nevertheless, real assets such as commodities, gold and real estate may continue to benefit investors as they seek quality investments in an economic downturn.
But if and when inflation returns, it’s important to be prepared, and real assets can provide an effective hedge against the adverse consequences of inflation. Taking steps now to protect your portfolio against inflation may prove to be a wise move down the road.
Dorstfontein Coal Mine
Dorstfontein Colliery
Dorstfontein is located east from Kriel in South Africa's Mpumalanga province and mines 1 Million run of mine tons from underground operations in the no. 2 seam. It produces high quality coal which is sought after by the international steam coal market and local ferrometal industry. Mmakau has export allocation through Richards Bay Coal Terminal and Total Coal markets the coal on behalf of Mmakau. Dorstfontein 2 seam produces 700 000 sales ton per annum for the export and domestic metallurgical market.
Dorstfontein is nearing the end of its production life Q4 2011 and will be replaced by the Dorstfontein West project in 2012.
Dorstfontein West
Dorstfontein West is currently in project phase and the plan is to mine the 4 seam with a combination of open cut and underground methods for the next 20 years. The project will make use of the existing process plant infrastructure and mine about 1 Million run of mine tons per annum. The plant will wash about 600 000 sales tons of a 5400kcal product for the export market and the plan is to transport the coal to the new Dorstfontein East mine which will have a rapid load out facility.
Dorstfontein EastThe Dorstfontein east project is currently in construction and commissioning phase and will be operational Q3 2011. Dorstfontein East is a Greenfield project that consists of a wash plant with a plant feed of up to 4 Million tons per annum, stockpile facilities and a 14 km overland conveyor to the rail loop with a rapid load out facility. The plan is to mine the 4 and 2 seam initially with open cut methods and later in the life of mine with underground sections. Access to underground blocks will be via adits established in the opencast high walls. The combined production rate will be about 3.2 Million run of mine tons per annum to meet sales of 2.0 Million tons per annum over 20 years for a 5400kcal export product. Mmakau Mining was awarded 350 000 tons export allocation in Richards Bay Coal Terminal's phase V expansion project and it will be allocated to the Dorstfontein East Mine.
Diversification Strategy - Less risk in stock trading
Are you looking to make and save enough cash for your retirement in the near future? Do you have money idly waiting in your desk drawer? Do you feel that bank rates are just too low to get a significant return on investment per year? Why not try something that is riskier, and at the same time, will give you higher returns? I am not talking about simple stock market trading. What I am talking about is using the diversification strategy in stock market trading. It is not as complicated as you may think.
Before I start discussing the diversified strategy for stock trading, here’s a saying that I would like you guys to keep in mind.
“Don’t put all your eggs in one basket”.
This strategy entails investing in different kinds of stocks that do not move together perfectly in the fluctuations of the stock market. Thus, you get a diversified portfolio. When I say, “stocks that do not move together”, I mean that the stocks that you should be investing in are stocks that both are rise in price in economic booms and in recessions. These stocks should be in different sizes and from many different industries.
You would probably tell me,
So that would mean that, even in normal markets or economic booms, you should also invest in stocks that are relatively low during these times. Why? Are you crazy?
These stocks serve as a buffer so that when recession strikes, just like what happened a couple of months ago, you won’t lose everything. By having a diversified portfolio, you decrease the variability of your stock and thus reduce risk.
Two types of risk
There are actually two types of risk when it comes to trading in the stock market. The first one is the market risk and the second one is diversifiable risk.
1. The Market Risk is the risk that is common to all of the firms. Such risks are recessions, when cost of goods rise, etc. This is the kind of risk that cannot be diversified away even if you have diversified portfolios.
2. The Diversifiable Risk is the risk that is unique to every firm. These risks include labor strikes, bankruptcy, the manager running away with the company’s money etc. This kind of risk can be diversified away when one has a diversified portfolio.
Some Benefits of having Diversified Portfolio
1. Less Risk! That is the best benefit I could think of. The more stocks in your portfolio, the more risk that is diversified away.
2. Assures you that even with the fluctuation in the stock market prices, your portfolio is more secure than if you are only investing in one particular stock. You are given more assurance that you are not wasting your money or are not throwing it all away.
Before I start discussing the diversified strategy for stock trading, here’s a saying that I would like you guys to keep in mind.
“Don’t put all your eggs in one basket”.
This strategy entails investing in different kinds of stocks that do not move together perfectly in the fluctuations of the stock market. Thus, you get a diversified portfolio. When I say, “stocks that do not move together”, I mean that the stocks that you should be investing in are stocks that both are rise in price in economic booms and in recessions. These stocks should be in different sizes and from many different industries.
You would probably tell me,
So that would mean that, even in normal markets or economic booms, you should also invest in stocks that are relatively low during these times. Why? Are you crazy?
These stocks serve as a buffer so that when recession strikes, just like what happened a couple of months ago, you won’t lose everything. By having a diversified portfolio, you decrease the variability of your stock and thus reduce risk.
Two types of risk
There are actually two types of risk when it comes to trading in the stock market. The first one is the market risk and the second one is diversifiable risk.
1. The Market Risk is the risk that is common to all of the firms. Such risks are recessions, when cost of goods rise, etc. This is the kind of risk that cannot be diversified away even if you have diversified portfolios.
2. The Diversifiable Risk is the risk that is unique to every firm. These risks include labor strikes, bankruptcy, the manager running away with the company’s money etc. This kind of risk can be diversified away when one has a diversified portfolio.
Some Benefits of having Diversified Portfolio
1. Less Risk! That is the best benefit I could think of. The more stocks in your portfolio, the more risk that is diversified away.
2. Assures you that even with the fluctuation in the stock market prices, your portfolio is more secure than if you are only investing in one particular stock. You are given more assurance that you are not wasting your money or are not throwing it all away.
Asian Investment Provide Diversification
Having looked at the possible developments in China, the latest news out of the rest of Asia is also not good. Factory output in Japan fell more than 8% in November, the biggest drop in 55 years. It is also expected that Toyota (TM) may report the first ever loss since WWII. According to a Bloomberg report:
Japan's economy will probably shrink at an annual 12.1 percent pace this quarter (ended Dec 08), the sharpest drop since 1974, as exports collapse…
“We expect negative growth will continue for a fifth straight quarter to the April-June period of 2009."
Companies surveyed said they planned to reduce output a further 8 percent this month and 2.1 percent in January. Exports slid an unprecedented 26.7 percent last month from a year earlier.
The data prompted other economists to revise their GDP projections. Bank of America Corp. now predicts an annualized 6.5 percent contraction from a 2.7 percent drop previously estimated.
The Yen at around 90 to a dollar is on a 13 year high and has accentuated Japan’s export woes.
As US and European consumers cut back on spending, it is hitting countries like Taiwan and Thailand apart from China & Japan. Excess capacities have been built and unless the situation in US stabilizes, the capacities in these countries are going to find it extremely difficult. If the US stimulus does not work for some reason then these countries are going to find it extremely difficult. As US moves from a leveraged and credit based society to a cash flow based, the absorption of the excess capacities may also take time.
Competitive devaluation may also start. Japan has already indicated that it plans to take steps to counter the rising Yen. It said:
Japan was ready to intervene in the foreign-exchange market for the first time in four years. With the nation’s economy already in recession along with the U.S. and Europe, the surging yen is adding to pressure on exporters…
Japan's economy will probably shrink at an annual 12.1 percent pace this quarter (ended Dec 08), the sharpest drop since 1974, as exports collapse…
“We expect negative growth will continue for a fifth straight quarter to the April-June period of 2009."
Companies surveyed said they planned to reduce output a further 8 percent this month and 2.1 percent in January. Exports slid an unprecedented 26.7 percent last month from a year earlier.
The data prompted other economists to revise their GDP projections. Bank of America Corp. now predicts an annualized 6.5 percent contraction from a 2.7 percent drop previously estimated.
The Yen at around 90 to a dollar is on a 13 year high and has accentuated Japan’s export woes.
As US and European consumers cut back on spending, it is hitting countries like Taiwan and Thailand apart from China & Japan. Excess capacities have been built and unless the situation in US stabilizes, the capacities in these countries are going to find it extremely difficult. If the US stimulus does not work for some reason then these countries are going to find it extremely difficult. As US moves from a leveraged and credit based society to a cash flow based, the absorption of the excess capacities may also take time.
Competitive devaluation may also start. Japan has already indicated that it plans to take steps to counter the rising Yen. It said:
Japan was ready to intervene in the foreign-exchange market for the first time in four years. With the nation’s economy already in recession along with the U.S. and Europe, the surging yen is adding to pressure on exporters…
Most Asian countries except Japan are expected to see a disinflation or a low inflation and not a deflation. According to a Morgan Stanley report:
...we highlight that Singapore and Indonesia lie at the two extreme ends of the inflation spectrum. The open nature of Singapore’s economy makes it most vulnerable to build-up of slack, and hence lower pricing power. Moreover, the correction in the real estate cycle is likely to show up in CPI as rental contracts reset with a lag. In the 1998 and 2001 recessions, when GDP growth was -1.4% and -2.4%, respectively, there were three to four quarters of deflation. We expect negative inflation toward 2H09.
...we highlight that Singapore and Indonesia lie at the two extreme ends of the inflation spectrum. The open nature of Singapore’s economy makes it most vulnerable to build-up of slack, and hence lower pricing power. Moreover, the correction in the real estate cycle is likely to show up in CPI as rental contracts reset with a lag. In the 1998 and 2001 recessions, when GDP growth was -1.4% and -2.4%, respectively, there were three to four quarters of deflation. We expect negative inflation toward 2H09.
Countries that have economies driven by deficits are the ones that will be most affected as global liquidity shrinks and flow of foreign capital reduces compared to the leveraged era gone by.
It appears that diversification strategies will not be easy to implement even in 2009.
Diversification and expansion of product line-up
Our future business development will be driven by the following four-pronged medium-term strategies:
1. Diversification and expansion of product line-up
2. Expansion of scope of services offered by the Group
3. Expansion of customer base
4. Overseas business development – beyond Japan to overseas markets
Of the above four strategies, priority will be given to the first and the second strategies, namely diversification and expansion of product line-up and expansion of scope of services, in order to secure focused application of management resources.
The third and fourth strategies will be mainly based on an inorganic approach through investment in, M&A of, or business tie-up with companies that have promising products or services in new areas.
Chinese Diversification Strategy
In a series of maneuvers, Chinese officials have revealed their strategy implementation in a very broad set of steps. Beijing leaders plan to establish the yuan currency as a global reserve currency. The process will be made more complete after issuance of a large volume of Chinese Govt debt securities, soon in coming. The number of policy actions is impressive. While the USGovt is busy stepping backwards with FASB rules enabling false bank accounting, gearing up Treasury programs to direct colossal elite welfare / confiscation to failed banks responsible for the crisis, covering up Wall Street fraud and regulatory lapses and debt rating agency collusion, and ordering pork like the $9 billion high speed train from Disneyland to Las Vegas, the Chinese are making important meaningful critical strides. Within a year, the Chinese will have established the yuan currency as a legitimate alternative to the USDollar for global trade, and later to some extent for global banking. The Chinese Govt has ordered monetary policy changes that have boosted their money supply by 25.5% over the last twelve months, with a giant stimulus program and relaxed bank credit rules. Since new maneuvers are being funded by incremental new surplus funds, they are exhibiting their financial power without upsetting their vast reserves accounts. The lost in the USCongress might talk about ‘Pay-Go’ measures to pay for programs as we go forward, but China does it in actual terms.
The Chinese are finally deploying alternative strategic plans in heavy volume, in open defiance, and even finger wagging at USGovt leaders. From their perspective, Beijing suspects that the US Federal Reserve is engineering a covert default on America’s debt by printing money on a vast scale. The Beijing leaders have reacted in a very noticeable profound comprehensive manner that has taken many analysts and observers off guard.
In my view, the Chinese will successfully serve as the spearhead for dethroning the USDollar from its primary global reserve currency position, called by me the catbird seat. The US has become a horrible steward, in recent years promoting massive syndicates that finally are being recognized. Both Bob Moriarity and Gary Dorsch have put forth articles in the last couple weeks pointing out Financial Coup d’Etat events and forces that reveal Obama in service to his Wall Street masters. The Wall Street Journal and London-based journals also have begun to cite endorsed and covered-up failure. This is unprecedented in journalism. After the Chinese spearhead does its work, the new partially gold-backed currencies can more easily be launched. One might say that Beijing leaders and their cast of economist and banking leaders are tilling the soil for planting the new currencies. At one time, my perception was that the yuan would follow the new hard asset launched currencies, linking to them with basket weightings. Now it is quite clear that China will lead and others will follow, benefiting from the heavy spadework, after dealing with geopolitical headwinds and interference.
SPECIFIC CHINESE STEPS TOWARD GLOBAL POSITION
The April Hat Trick Letter report for Gold & Currencies has been posted. Here are some outlined details on the important maneuvers recently made by China. They appear to be positioning themselves both to establish the yuan across the world and to fortify reserves with hard assets. Their steps are broad and effective upon examination. Their initiatives display coordination, planning, and research. Next they must deal with political backlash, unintended consequences, internal social problems, and hidden retaliation that will not be discussed (much precedent).
Since last December, China has signed deals with six countries, including Indonesia, South Korea, Hong Kong, Malaysia, Belarus, and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to pay for goods they import from China in yuan, bypassing the USDollar. This is an international settlement function.
Beijing is taking initiatives to use the yuan to settle trade accounts between some Chinese provinces and neighboring states, starting with Hong Kong. Shanghai and the four cities Guangzhou, Shenzhen, Dongguan and Zhuhai have been designated to use the yuan in overseas trade settlements, ordered by a State Council under the auspices of Premier Wen Jiabao. This Pearl River Delta region is the location of the biggest concentration of export oriented factories. The motive is to reduce the risk from exchange rate fluctuations, and to encourage their overseas trade in decline.
Chinese officials have called attention to the risks of an international monetary system that relies on the USDollar, seen as increasingly unstable and subject to further indirect devaluation. A broad campaign has been underway for a couple months that seems coordinated, with participation by many bank and economic leaders.
A plan to set up a $10 billion cooperation fund to support infrastructure projects in countries in the Assn of Southeast Asian Nations (ASEAN) has been hatched. The plan was announced earlier this month by Chinese Foreign Minister Yang Jiechi. The ASEAN member countries are Thailand, Malaysia, the Philippines, Singapore, Brunei, Vietnam, and Indonesia. The fund could morph into a regional development fund.
The Chinese have made gigantic purchases recently for soybeans, copper, iron, crude oil, and more. The Chinese companies have begun in earnest to scoop up raw materials at cheap prices. Also, Chinese companies invested $16.3 billion in foreign assets during January and February, a doubled tempo from last year. Target zones include Iran, Brazil, Russia, Venezuela, and Australia.
Ambrose Evans-Pritchard points out that Beijing might someday purchase buy gold on a grand scale. He jests on a copper standard for a global reserve currency, and overlooks that crude oil will also figure into the Chinese commodity formulas. Interpret these developments as a major initiative toward a hard asset currency positioning for the Chinese yuan. Ambrose said, “The beauty of recycling China’s surplus into metals instead of US bonds is that it kills so many birds with one stone:
a) it stops the yuan rising, without provoking complaints of currency manipulation by Washington;
b) metals are easily stored in warehouses, unlike oil;
c) the holdings are likely to rise in value over time since the earth’s crust is gradually depleting its accessible ores;
d) Above all, such a policy safeguards China’s industrial revolution, while the West may one day face a supply crisis.
GOLD REFLECTS USDOLLAR INSTABILITY
The gold cartel is gradually losing control. They can put out a ‘double down’ futures contract short attack. They can reduce gold lease rates to below zero. They can avert a COMEX default at the eleventh hour. The consolidation process continues with a carving of the right side handle to the Cup & Handle reversal pattern in the gold price chart, as patience is surely tested. Support has been good at the more stable 50-week moving average, aided by the May 2008 support, both at the 860-865 level. Today on Thursday, the gold price finally jumped over the 900 mark, and even silver enjoyed a big rise of 3%. Currencies are being ruined universally, as governments debauch their supply fundamentals with what they regard as impunity and zero cost, very mistakenly. The costs come later, from price inflation, lost stability in the monetary foundation itself, and new unforeseen bubbles. The gold price target remains 1250 to 1300 once the 1000 mark is cleared. Watch for the potential of a bullish stochastix crossover in the green oval in the next week, an event that technicians would notice. It would signal a substantial move up soon.
Desperate measures like the EuroCB action (d) and surging COMEX open interest (e) are difficult to repeat and to sustain. Exposure renders great harm to the confidence pillar of the major currencies. The extremely promising bullish factors behind gold are many:
a) negative real interest rates
b) shortage of physical gold, whether bars or coins
c) advent of price inflation next year
d) Euro Central Bank rescue to avert COMEX default by Deutsche Bank
e) Surge in Open Interest since mid-March in gold futures contracts
f) Howard Ruff loves silver due to shortages, to restore the gold/silver ratio.
EXPECT THAT THE GOLD PRICE WILL MAKE NEW HIGHS FAR EARLIER THAN THE USDOLLAR SUFFERS EXCHANGE RATE DECLINES ON ANY BROAD BASIS. The Competing Currency War will keep the US$ propped for a while longer, as other currencies falter. However, the uniform competing currency devaluations serve to give gold (and silver) strength. Behind the scenes, some nations are taking stern action to firm their gold positions before the next crises, like this summer and again this autumn. In particular the Germans have ordered the return of all gold bullion home from US shady custodial supervision, while the Arabs are purchasing every available gold bullion ingot from global warehouses in private sales. They want the IMF gold next.
HIDDEN CONFLICT AT THE G20 MEETING
It is my firm belief that the Chinese controlled the G20 Agenda totally, with direct coordination from the Russians, but made gentlemanly agreements not to reveal their control. My firm belief is that the Chinese and Russian leaders at the G20 Meeting in London had contentious private meetings. Premier Wen Jiabao and Dmitri Medvedev probably informed President Obama that the USDollar is dead as a uni-polar global reserve currency, that the Chinese yuan would expand its global function, that the Special Drawing Rights could fill a void until more specific new currencies could be launched in the future, but that the choreographed glitz of the London meeting could proceed on its carefully planned stage. Several nations, led by China and Russia, demand both respect and positions on global banking institutions. China is a major global creditor nation, funding $10.4 million in USGovt debt per second. What an incredible factoid.
The G20 Meeting exposed an important erupting rift with clear divisions having emerged. Three distinct global camps are clearly at work on the monetary stage, led by US-UK, Germany, and Russia-China.
1) The United States and Britain are alone in the monetary desperation camp. The US relies upon unbridled monetary stimulus, fiscal stimulus, employing the familiar type of failed devices that might push the limits on a potential USTreasury Bond default, in response to national insolvency on many fronts. Great Britain stands weakened in the US camp, harmed by big bank failures, a collapse of housing prices, and recently the UK Gilt auction failure.
2) The Europeans (led by Germany & France) object to uncontrolled federal spending. German Finance minister Peer Steinbruck accused the British of ‘Crass Keynesianism.’ The Germans openly oppose larger, broader, and continued stimulus packages. The German Govt will not embark on plans that repeat the mistakes of the past.
3) The Russians and Chinese push hard for a global reserve currency alternative to the USDollar. They permit the IMF device of Special Drawing Rights to serve as a Straw Man. Russian leaders boldly suggested in open court that gold should be included in whatever basket of currencies and commodities supported the new reserve currency.
CHINESE OFFICIALS REVEAL THEIR PHILOSOPHY
The Peoples Bank of China has been outspoken in its call for a new reserve currency. A new figure in international finance must be recognized in Zhou Xiaochuan, governor of the central bank of China. In future years, Zhou could become a very prominent person who is at the forefront to break the USDollar dominance in global finance, with full support from Russia. In a white paper ambitiously entitled “Reform the International Monetary System,” Zhou has called for the creation of an international currency unit that will require ‘extraordinary political vision and courage.’ He suggests an initial launch as a blend of the USDollar, British pound, Japanese yen and the Euro, as a super-sovereign currency. It is essentially the makeup of the so-called Special Drawing Rights (SDR) created by the IMF in 1969, in my view a Straw Man device for transitional purposes.
The Chinese are finally deploying alternative strategic plans in heavy volume, in open defiance, and even finger wagging at USGovt leaders. From their perspective, Beijing suspects that the US Federal Reserve is engineering a covert default on America’s debt by printing money on a vast scale. The Beijing leaders have reacted in a very noticeable profound comprehensive manner that has taken many analysts and observers off guard.
In my view, the Chinese will successfully serve as the spearhead for dethroning the USDollar from its primary global reserve currency position, called by me the catbird seat. The US has become a horrible steward, in recent years promoting massive syndicates that finally are being recognized. Both Bob Moriarity and Gary Dorsch have put forth articles in the last couple weeks pointing out Financial Coup d’Etat events and forces that reveal Obama in service to his Wall Street masters. The Wall Street Journal and London-based journals also have begun to cite endorsed and covered-up failure. This is unprecedented in journalism. After the Chinese spearhead does its work, the new partially gold-backed currencies can more easily be launched. One might say that Beijing leaders and their cast of economist and banking leaders are tilling the soil for planting the new currencies. At one time, my perception was that the yuan would follow the new hard asset launched currencies, linking to them with basket weightings. Now it is quite clear that China will lead and others will follow, benefiting from the heavy spadework, after dealing with geopolitical headwinds and interference.
SPECIFIC CHINESE STEPS TOWARD GLOBAL POSITION
The April Hat Trick Letter report for Gold & Currencies has been posted. Here are some outlined details on the important maneuvers recently made by China. They appear to be positioning themselves both to establish the yuan across the world and to fortify reserves with hard assets. Their steps are broad and effective upon examination. Their initiatives display coordination, planning, and research. Next they must deal with political backlash, unintended consequences, internal social problems, and hidden retaliation that will not be discussed (much precedent).
Since last December, China has signed deals with six countries, including Indonesia, South Korea, Hong Kong, Malaysia, Belarus, and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to pay for goods they import from China in yuan, bypassing the USDollar. This is an international settlement function.
Beijing is taking initiatives to use the yuan to settle trade accounts between some Chinese provinces and neighboring states, starting with Hong Kong. Shanghai and the four cities Guangzhou, Shenzhen, Dongguan and Zhuhai have been designated to use the yuan in overseas trade settlements, ordered by a State Council under the auspices of Premier Wen Jiabao. This Pearl River Delta region is the location of the biggest concentration of export oriented factories. The motive is to reduce the risk from exchange rate fluctuations, and to encourage their overseas trade in decline.
Chinese officials have called attention to the risks of an international monetary system that relies on the USDollar, seen as increasingly unstable and subject to further indirect devaluation. A broad campaign has been underway for a couple months that seems coordinated, with participation by many bank and economic leaders.
A plan to set up a $10 billion cooperation fund to support infrastructure projects in countries in the Assn of Southeast Asian Nations (ASEAN) has been hatched. The plan was announced earlier this month by Chinese Foreign Minister Yang Jiechi. The ASEAN member countries are Thailand, Malaysia, the Philippines, Singapore, Brunei, Vietnam, and Indonesia. The fund could morph into a regional development fund.
The Chinese have made gigantic purchases recently for soybeans, copper, iron, crude oil, and more. The Chinese companies have begun in earnest to scoop up raw materials at cheap prices. Also, Chinese companies invested $16.3 billion in foreign assets during January and February, a doubled tempo from last year. Target zones include Iran, Brazil, Russia, Venezuela, and Australia.
Ambrose Evans-Pritchard points out that Beijing might someday purchase buy gold on a grand scale. He jests on a copper standard for a global reserve currency, and overlooks that crude oil will also figure into the Chinese commodity formulas. Interpret these developments as a major initiative toward a hard asset currency positioning for the Chinese yuan. Ambrose said, “The beauty of recycling China’s surplus into metals instead of US bonds is that it kills so many birds with one stone:
a) it stops the yuan rising, without provoking complaints of currency manipulation by Washington;
b) metals are easily stored in warehouses, unlike oil;
c) the holdings are likely to rise in value over time since the earth’s crust is gradually depleting its accessible ores;
d) Above all, such a policy safeguards China’s industrial revolution, while the West may one day face a supply crisis.
GOLD REFLECTS USDOLLAR INSTABILITY
The gold cartel is gradually losing control. They can put out a ‘double down’ futures contract short attack. They can reduce gold lease rates to below zero. They can avert a COMEX default at the eleventh hour. The consolidation process continues with a carving of the right side handle to the Cup & Handle reversal pattern in the gold price chart, as patience is surely tested. Support has been good at the more stable 50-week moving average, aided by the May 2008 support, both at the 860-865 level. Today on Thursday, the gold price finally jumped over the 900 mark, and even silver enjoyed a big rise of 3%. Currencies are being ruined universally, as governments debauch their supply fundamentals with what they regard as impunity and zero cost, very mistakenly. The costs come later, from price inflation, lost stability in the monetary foundation itself, and new unforeseen bubbles. The gold price target remains 1250 to 1300 once the 1000 mark is cleared. Watch for the potential of a bullish stochastix crossover in the green oval in the next week, an event that technicians would notice. It would signal a substantial move up soon.
Desperate measures like the EuroCB action (d) and surging COMEX open interest (e) are difficult to repeat and to sustain. Exposure renders great harm to the confidence pillar of the major currencies. The extremely promising bullish factors behind gold are many:
a) negative real interest rates
b) shortage of physical gold, whether bars or coins
c) advent of price inflation next year
d) Euro Central Bank rescue to avert COMEX default by Deutsche Bank
e) Surge in Open Interest since mid-March in gold futures contracts
f) Howard Ruff loves silver due to shortages, to restore the gold/silver ratio.
EXPECT THAT THE GOLD PRICE WILL MAKE NEW HIGHS FAR EARLIER THAN THE USDOLLAR SUFFERS EXCHANGE RATE DECLINES ON ANY BROAD BASIS. The Competing Currency War will keep the US$ propped for a while longer, as other currencies falter. However, the uniform competing currency devaluations serve to give gold (and silver) strength. Behind the scenes, some nations are taking stern action to firm their gold positions before the next crises, like this summer and again this autumn. In particular the Germans have ordered the return of all gold bullion home from US shady custodial supervision, while the Arabs are purchasing every available gold bullion ingot from global warehouses in private sales. They want the IMF gold next.
HIDDEN CONFLICT AT THE G20 MEETING
It is my firm belief that the Chinese controlled the G20 Agenda totally, with direct coordination from the Russians, but made gentlemanly agreements not to reveal their control. My firm belief is that the Chinese and Russian leaders at the G20 Meeting in London had contentious private meetings. Premier Wen Jiabao and Dmitri Medvedev probably informed President Obama that the USDollar is dead as a uni-polar global reserve currency, that the Chinese yuan would expand its global function, that the Special Drawing Rights could fill a void until more specific new currencies could be launched in the future, but that the choreographed glitz of the London meeting could proceed on its carefully planned stage. Several nations, led by China and Russia, demand both respect and positions on global banking institutions. China is a major global creditor nation, funding $10.4 million in USGovt debt per second. What an incredible factoid.
The G20 Meeting exposed an important erupting rift with clear divisions having emerged. Three distinct global camps are clearly at work on the monetary stage, led by US-UK, Germany, and Russia-China.
1) The United States and Britain are alone in the monetary desperation camp. The US relies upon unbridled monetary stimulus, fiscal stimulus, employing the familiar type of failed devices that might push the limits on a potential USTreasury Bond default, in response to national insolvency on many fronts. Great Britain stands weakened in the US camp, harmed by big bank failures, a collapse of housing prices, and recently the UK Gilt auction failure.
2) The Europeans (led by Germany & France) object to uncontrolled federal spending. German Finance minister Peer Steinbruck accused the British of ‘Crass Keynesianism.’ The Germans openly oppose larger, broader, and continued stimulus packages. The German Govt will not embark on plans that repeat the mistakes of the past.
3) The Russians and Chinese push hard for a global reserve currency alternative to the USDollar. They permit the IMF device of Special Drawing Rights to serve as a Straw Man. Russian leaders boldly suggested in open court that gold should be included in whatever basket of currencies and commodities supported the new reserve currency.
CHINESE OFFICIALS REVEAL THEIR PHILOSOPHY
The Peoples Bank of China has been outspoken in its call for a new reserve currency. A new figure in international finance must be recognized in Zhou Xiaochuan, governor of the central bank of China. In future years, Zhou could become a very prominent person who is at the forefront to break the USDollar dominance in global finance, with full support from Russia. In a white paper ambitiously entitled “Reform the International Monetary System,” Zhou has called for the creation of an international currency unit that will require ‘extraordinary political vision and courage.’ He suggests an initial launch as a blend of the USDollar, British pound, Japanese yen and the Euro, as a super-sovereign currency. It is essentially the makeup of the so-called Special Drawing Rights (SDR) created by the IMF in 1969, in my view a Straw Man device for transitional purposes.
Precious metals and fixed income
We started the year with holdings in SLV, an exchange traded commodity fund for silver. In 2008 we bought gold and silver to in a bid to diversify our assets to reduce our portfolio risk. This diversification strategy did not help us as the price of precious metals fell together with stocks and commodities in 2008. I sold off our gold positions in May 2009 when I had a chance to get out at break even but decided to keep our silver position because at that time I was still undecided whether inflation or deflation would be a problem in the next few years. As precious metals are supposed to be the ultimate hedge for inflation, I thought we should still hold small position in this asset class while I continued my research on inflation vs. deflation. The more I understood about this topic, the more convinced I became that there is little risk of inflation in the near future and deflation was the bigger threat so I decided to sell our silver investments in October 2009 at a small loss. The price of gold and silver was still going up at the time as many big investors including some very clever fund managers like John Paulson and George Soros were piling into gold. However, I trusted my own research and once I was convinced of the threat of deflation, I adjusted our asset allocation accordingly.
It looks like the consensus for deflation is growing and in recent weeks there are many headline stories like these in the financial news:
Aug 2, 2010 – Big investors wary of deflation risk
Aug 4, 2010 – Defending yourself against deflation
Aug 4, 2010 – With deflation looming, even the top guys are flummoxed right now
If you are confused about how to invest if there is deflation, you are not alone – even the top investors are flummoxed right now! Most of us who are born after the Great Depression will have no idea what to do to prepare for deflation because inflation is something we have lived with all of our lives. If you want to learn more about deflation, I would highly recommend you learn from deflation experts like Robert Prechter who wrote about it in his best selling book Conquer the Crash which was first published in 2002. This book was republished with updates in 2009 and it gives a very detailed case for deflation and tells you how to protect yourself and maybe even profit from deflation. Do also read Deflation: First Step, Understand It, a recent article published by Elliott Wave International, Prechter’s investment advisory company.
With deflation, cash and cash equivalents are the best investments because cash becomes more valuable when prices of assets fall. Quality bonds are the best types of investments for deflation and US treasury bonds is one of the recommended investments. Investment advisers from the deflation camp like Gary Shilling and Yves Lamoureux have been advising their clients to buy the 30 year treasury bonds. David Rosenberg has been advising his clients to buy quality corporate bonds. Recently, Bill Gross who runs PIMCO’s $US239 billion Total Return Fund increased his allocation to treasuries to about 51 per cent of the portfolio, up from less than 33 per cent at the end of March 2010.
Treasury bondsWith some fear and trepidation, I proceeded to make our first investment in US treasury bonds last year. Even though my research tells me this is the right investment, the thought of buying bonds from a country with trillions of dollars of debt was still a little uncomfortable for me. Based on simple logic, it is hard to imagine why something like bonds that can be freely created from thin air can be more valuable than tangible assets like gold or property, but once you understand what causes deflation, you will understand why they can.
As usual, I looked to get our exposure to bonds through Exchange Traded Funds. In August 2009, I bought some shares in IEF, a US 7-10 year bond ETF together with protective put options, just in case. The bond yield for 10 year bonds was just over 3 percent at the time. The bond market remained pretty flat for a while but when the US stock market started to fall sharply in April 2010, bond ETFs shot up in price as investors rushed into bonds as part of the flight to safety. By June 30, we managed to get an unrealised gain of nearly 7 percent on our IEF position, giving us a total annual return of ten percent. Our bond investments have outperformed our Australian term deposit investments even though the interest rates for the term deposits were a lot higher.
Focus Dubai
The Arab-British Chamber of Commerce hosted a business briefing on the latest developments in Dubai, the second largest emirate in the UAE and its economic vision for the future.
The event was co-organised with the Government of Dubai Department of Tourism and Commerce Marketing whose Marketing Manager Fayha Sultan gave the main presentation.
The seminar was honoured with the presence of H E Abdulrahman Ghanem Almutaiwee, the UAE Ambassador to the UK.
A large number of UK business executives and investors attended the event to learn about the latest investment opportunities offered by Dubai as it continues to strengthen and diversify its economy.
Chairing the seminar, Abdeslam El-Idrissi, Director of Trade Services at the Arab-British Chamber of Commerce, began with a brief overview during which he reminded everyone of the major achievements undertaken by the emirate.
dubai
The event was co-organised with the Government of Dubai Department of Tourism and Commerce Marketing whose Marketing Manager Fayha Sultan gave the main presentation.
The seminar was honoured with the presence of H E Abdulrahman Ghanem Almutaiwee, the UAE Ambassador to the UK.
A large number of UK business executives and investors attended the event to learn about the latest investment opportunities offered by Dubai as it continues to strengthen and diversify its economy.
Chairing the seminar, Abdeslam El-Idrissi, Director of Trade Services at the Arab-British Chamber of Commerce, began with a brief overview during which he reminded everyone of the major achievements undertaken by the emirate.
dubai
HE Abdulrahman Ghanem Almutaiwee and Speakers
Dubai’s inspirational vision was influential right across the globe and its high level of services and infrastructure were continuing to attract the greatest talent from all over the world.
In the aftermath of the recent global financial downturn, Dubai continues to be a place where people increasing numbers wanted to live, work and learn.
“Dubai thinks big”, Mr El-Idrissi stated, pointing to its record beating projects such as the world’s tallest building and largest airport currently under construction.
Historically, Dubai has always thrived as a major trading hub bridging East and West.
Delegates to the seminar were given an insight into why Dubai continued to be the location of choice for an increasing number of companies seeking to launch business in the Gulf and further afield in the Asian and African markets.
dubai
Dubai’s inspirational vision was influential right across the globe and its high level of services and infrastructure were continuing to attract the greatest talent from all over the world.
In the aftermath of the recent global financial downturn, Dubai continues to be a place where people increasing numbers wanted to live, work and learn.
“Dubai thinks big”, Mr El-Idrissi stated, pointing to its record beating projects such as the world’s tallest building and largest airport currently under construction.
Historically, Dubai has always thrived as a major trading hub bridging East and West.
Delegates to the seminar were given an insight into why Dubai continued to be the location of choice for an increasing number of companies seeking to launch business in the Gulf and further afield in the Asian and African markets.
dubai
Dubai was home to over 30 free zones each designed to offer companies in specific sectors with all the services and facilities they required to conduct success business.
Fayha Sultan stressed that Dubai had a diverse economy and was about far more than the construction sector, whose fortunes had been hitting the news headlines recently.
She praised to creativity of the leadership of Dubai and the positive attitude that prevailed among the business community in the emirate.
Partnership between the public and private sectors had been a key to Dubai’s record of success over the years.
In particular, Dubai offered many opportunities for SMEs operating in a diverse range of sector activities, with the re-export trade being especially significant.
Ms Sultan described Dubai’s economy as 96% non-oil based with 74% based on services. Its GDP was $52.2 billion in 2009.
She listed Dubai’s recent successes including the opening on schedule of the Dubai Metro in 2009, the ongoing work on the new airport which will open for cargo in June as scheduled. In addition, Jebel Ali Free Zone had recently celebrated in 25 years.
Businesses were advised that future projects worth looking at were emerging in sectors like health, education, financial services, tourism and retail as Dubai continued to pursue its diversification strategy.
Retail was important given that the emirate boasted over 25 major malls and that malls represented the real “street life” of Dubai, Fayha Sultan said.
Tourism was also an important contributor to the economy, it had risen 5% already this year and Dubai had set itself an ambitious target of attracting 15 million tourists by 2015.
The next speaker, Phil Dowrick, Gulf business specialist with UKTI, said that he had been visiting Dubai for over 20 years and had witnessed its remarkable transformation during these decades.
He said that the population growth was a key driver of the economy and identified education, healthcare, transport, energy and utilities as the sectors that offered the most opportunities for doing business as Dubai invested to create more jobs and diversify its economy.
He expressed the hope that more UK firms would be able to take advantages of the emerging opportunities in Dubai and advised companies seeking inroads into the market to make use of the services provided by the British Business Group in the UAE and the UKTI.
Mr Dowrick said the key message was that Dubai remained open for business.
Oliver Cornock, the Regional Editor of Oxford Business Group, provided an overview of the Dubai economy in the global context and examined recent trends.
He said that despite the impact of the downturn on the construction market in particular, Dubai was a dynamic city where business goes on.
Although lavish properties remained central to Dubai’s image, property was not its only asset, Mr Cornock stated, echoing the references made by previous speakers to the developments in tourism, healthcare, financial services and transport.
Ammar Shams, Head of Business Development, HSBC Bank Middle East, said that he was proud to be from Dubai and was equally proud of Dubai’s record of achievement in emerging as a great metropolitan centre within just a generation.
Mr Shams spoke about the role of the HSBC in Dubai since 1946 and looked at the various services that banks can provide to support businesses and trade in the region.
The final speaker, David Church, International Development Partner with law firm DLA Piper, outlined the basic legal requirements for doing business in Dubai, explaining the various options open to companies seeking to set up operations.
The presentations were followed by questions from the audience after which the formal proceedings concluded with a networking reception.
Portfolio Diversification Strategies: Don’t Let One Country Dominate Your Investment Portfolio
The 2006 Winter Olympic Games in Torino, Italy may not have quite the suspense and viewer appeal of some past Olympics. But one thing they share in common with all Olympic games: patriotism – unbridled fervor for one’s home country.
I can still remember the chants of “USA! USA!” ringing in my ears as I watched the U.S.’s amateur hockey team upset the “unbeatable” hockey juggernaut from the USSR.
Such patriotic zeal can be fun – even exhilarating – when cheering on countrymen and women in athletic events. But many people unknowingly carry that same patriotic bent into their investing portfolio. And that can result in missing out on portfolio diversification strategies that include some the world’s strongest – and most profitable – markets.
Investing Outside the Good Old USA
Many portfolios carry only U.S.-based stocks and indexes. And this is understandable. Those are the investments that we understand best. But we ignore the rest of the world at our own peril when it comes to diversifying our portfolio.
The U.S. markets are superlative in many ways – the biggest, the busiest and among the most transparent in the world. But when it comes to performance, the U.S. markets have been laggards, not leaders. Take a look at the chart below that compares the relative performance of stocks representing different companies:
I can still remember the chants of “USA! USA!” ringing in my ears as I watched the U.S.’s amateur hockey team upset the “unbeatable” hockey juggernaut from the USSR.
Such patriotic zeal can be fun – even exhilarating – when cheering on countrymen and women in athletic events. But many people unknowingly carry that same patriotic bent into their investing portfolio. And that can result in missing out on portfolio diversification strategies that include some the world’s strongest – and most profitable – markets.
Investing Outside the Good Old USA
Many portfolios carry only U.S.-based stocks and indexes. And this is understandable. Those are the investments that we understand best. But we ignore the rest of the world at our own peril when it comes to diversifying our portfolio.
The U.S. markets are superlative in many ways – the biggest, the busiest and among the most transparent in the world. But when it comes to performance, the U.S. markets have been laggards, not leaders. Take a look at the chart below that compares the relative performance of stocks representing different companies:
In the last 12 months, the S&P 500 Index (a proxy for the U.S. stock markets) was up about 6%. After monster growth in 2003, the China Fund (NYSE: CHN) is only up 3% for the last 12 months.
But while China and U.S. stocks have been experiencing low growth, other markets have been booming. Germany, Japan and Canada are up between 23% and 38% percent for the most recent 12 months. During the same period, Brazil and India have been up 87% and 90% respectively!
Though not shown in the relative performance chart above, a little extra research reveals that of the seven countries represented above, three of them have exceeded their year-2000 highs (Canada by a little, and India and Brazil by a lot!).
Portfolio Diversification Strategies and Ancient Eastern Philosophy…
“When Testing the Depth Of the Water, Don’t Use Both Feet…”
The opportunities that spring up every year in some new foreign market might make you want to toss your whole portfolio into foreign markets. But bear in mind that these markets are very volatile. And they do go down as well as up. For example:
* In the first five months of 2004, the China Fund lost 50% of its value.
* In 13 months spanning 2001 and 2002, the Canada Index lost 60% of its value.
* From March of 2000 to October of 2003, the German index dropped 73%.
Almost every portfolio could benefit from some geographic diversification strategies. But putting too much weight in country-based funds, indexes or iShares can also introduce more volatility than you’d like to your portfolio.
Two Prudent Diversification Strategies for Your Portfolio
As much as possible, you might want to use the following two diversification strategies when broadening your portfoli
* Spread your risk geographically. Don’t just invest in countries from Asia Pacific or in European countries, or South American or North American countries. Try to add something from all the major economic regions. A lower volatility alternative might be to use regional funds or indexes that spread their investments across a whole region.
* Diversify among momentum- and value-based countries. India and Brazil have been on strong upward moves for more than two years. But only picking countries that have had long uptrends sets you up for getting in at or near the top. Momentum plays are very useful and should be part of a diversified strategy. But they should be balanced by a couple of value plays such as investing in China, which has had a strong pullback during all of 2005.
Conclusion: Minimize risk by giving yourself some geographic diversity in your portfolio strategies.
Great trading,
D.R.
Today’s Trader’s U Tips & Tricks
* If you like momentum plays like the India Fund and the Brazil Index have been over the last couple of years, you have to take a look at Alex Green’s Momentum Alert trading service. Alex is a sharp analyst whom I have known for several years. I personally looked at almost every one of his picks for 2005, and I know he was bringing big positive returns for his subscribers. Learn more about the Momentum Alert and catch a risk-free look at his latest newsletter here.
* If you haven’t taken advantage of Investment U’s free reports, now is the time to check them out. One worth some extra attention is: Stock Market Investment Advice: The 2 Most Profitable Secrets of the World’s Greatest Investors. You’ll get the two secrets shared by more than 99% of the world’s best investors – the key to letting you squeeze every cent of profit from your winners, and get out with your profits intact.
But while China and U.S. stocks have been experiencing low growth, other markets have been booming. Germany, Japan and Canada are up between 23% and 38% percent for the most recent 12 months. During the same period, Brazil and India have been up 87% and 90% respectively!
Though not shown in the relative performance chart above, a little extra research reveals that of the seven countries represented above, three of them have exceeded their year-2000 highs (Canada by a little, and India and Brazil by a lot!).
Portfolio Diversification Strategies and Ancient Eastern Philosophy…
“When Testing the Depth Of the Water, Don’t Use Both Feet…”
The opportunities that spring up every year in some new foreign market might make you want to toss your whole portfolio into foreign markets. But bear in mind that these markets are very volatile. And they do go down as well as up. For example:
* In the first five months of 2004, the China Fund lost 50% of its value.
* In 13 months spanning 2001 and 2002, the Canada Index lost 60% of its value.
* From March of 2000 to October of 2003, the German index dropped 73%.
Almost every portfolio could benefit from some geographic diversification strategies. But putting too much weight in country-based funds, indexes or iShares can also introduce more volatility than you’d like to your portfolio.
Two Prudent Diversification Strategies for Your Portfolio
As much as possible, you might want to use the following two diversification strategies when broadening your portfoli
* Spread your risk geographically. Don’t just invest in countries from Asia Pacific or in European countries, or South American or North American countries. Try to add something from all the major economic regions. A lower volatility alternative might be to use regional funds or indexes that spread their investments across a whole region.
* Diversify among momentum- and value-based countries. India and Brazil have been on strong upward moves for more than two years. But only picking countries that have had long uptrends sets you up for getting in at or near the top. Momentum plays are very useful and should be part of a diversified strategy. But they should be balanced by a couple of value plays such as investing in China, which has had a strong pullback during all of 2005.
Conclusion: Minimize risk by giving yourself some geographic diversity in your portfolio strategies.
Great trading,
D.R.
Today’s Trader’s U Tips & Tricks
* If you like momentum plays like the India Fund and the Brazil Index have been over the last couple of years, you have to take a look at Alex Green’s Momentum Alert trading service. Alex is a sharp analyst whom I have known for several years. I personally looked at almost every one of his picks for 2005, and I know he was bringing big positive returns for his subscribers. Learn more about the Momentum Alert and catch a risk-free look at his latest newsletter here.
* If you haven’t taken advantage of Investment U’s free reports, now is the time to check them out. One worth some extra attention is: Stock Market Investment Advice: The 2 Most Profitable Secrets of the World’s Greatest Investors. You’ll get the two secrets shared by more than 99% of the world’s best investors – the key to letting you squeeze every cent of profit from your winners, and get out with your profits intact.
Developing Organizational Objectives and Formulating Strategies
Developing Objectives
ObjectivesobjectivesWhat organizations want to accomplish (the end results) in a given time frame. are what organizations want to accomplish—the end results they want to achieve—in a given time frame. In addition to being accomplished within a certain time frame, objectives should be realistic (achievable) and be measurable, if possible. “To increase sales by 2 percent by the end of the year” is an example of an objective an organization might develop. You have probably set objectives for yourself that you want to achieve in a given time frame. For example, your objectives might be to maintain a certain grade point average and get work experience or an internship before you graduate.
Objectives help guide and motivate a company’s employees and give its managers reference points for evaluating the firm’s marketing actions. Although many organizations publish their mission statements, most for-profit companies do not publish their objectives. Accomplishments at each level of the organization have helped PepsiCo meet its corporate objectives over the course of the past few years. PepsiCo’s business units (divisions) have increased the number of their facilities to grow their brands and enter new markets. PepsiCo’s beverage and snack units have gained market share by developing healthier products and products that are more convenient to use.
A firm’s marketing objectives should be consistent with the company’s objectives at other levels, such as the corporate level and business level. An example of a marketing objective for PepsiCo might be “to increase by 4 percent the market share of Gatorade by the end of the year.” The way firms analyze their different divisions or businesses will be discussed later in the chapter.
Formulating Strategies
StrategiesstrategiesActions (means) taken to accomplish objectives. are the means to the ends, or what a firm’s going to do to meet its objectives. Successful strategies help organizations establish and maintain a competitive advantage that competitors cannot imitate easily. PepsiCo attempts to sustain its competitive advantage by constantly developing new products and innovations, including “mega brands,” which are eighteen individual brands that generate over $1 billion in sales each.
Firms often use multiple strategies to accomplish their objectives and capitalize on marketing opportunities. For example, in addition to pursuing a low cost strategy (selling products inexpensively), Walmart has simultaneously pursued a strategy of opening new stores rapidly around the world. Many companies develop marketing strategies as part of their general, overall business plans. Other companies prepare separate marketing plans. We’ll overview marketing plans here and discuss them more completely in Chapter 16, The Marketing Plan.
A marketing planmarketing planA document that is designed to communicate the marketing strategy for an offering. The purpose of the plan is to influence executives, suppliers, distributors, and other important stakeholders of the firm so they will invest money, time, and effort to ensure the plan is a success. is a strategic plan at the functional level that provides a firm’s marketing group with direction. It is a road map that improves the firm’s understanding of its competitive situation. The marketing plan also helps the firm allocate resources and divvy up the tasks that employees need to do for the company to meet its objectives. The different components of marketing plans will be discussed throughout the book and then discussed together at the end of the book. Next, let’s take a look at the different types of basic market strategies firms pursue before they develop their marketing plans.
Figure 2.12. Product and Market Entry Strategies
ObjectivesobjectivesWhat organizations want to accomplish (the end results) in a given time frame. are what organizations want to accomplish—the end results they want to achieve—in a given time frame. In addition to being accomplished within a certain time frame, objectives should be realistic (achievable) and be measurable, if possible. “To increase sales by 2 percent by the end of the year” is an example of an objective an organization might develop. You have probably set objectives for yourself that you want to achieve in a given time frame. For example, your objectives might be to maintain a certain grade point average and get work experience or an internship before you graduate.
Objectives help guide and motivate a company’s employees and give its managers reference points for evaluating the firm’s marketing actions. Although many organizations publish their mission statements, most for-profit companies do not publish their objectives. Accomplishments at each level of the organization have helped PepsiCo meet its corporate objectives over the course of the past few years. PepsiCo’s business units (divisions) have increased the number of their facilities to grow their brands and enter new markets. PepsiCo’s beverage and snack units have gained market share by developing healthier products and products that are more convenient to use.
A firm’s marketing objectives should be consistent with the company’s objectives at other levels, such as the corporate level and business level. An example of a marketing objective for PepsiCo might be “to increase by 4 percent the market share of Gatorade by the end of the year.” The way firms analyze their different divisions or businesses will be discussed later in the chapter.
Formulating Strategies
StrategiesstrategiesActions (means) taken to accomplish objectives. are the means to the ends, or what a firm’s going to do to meet its objectives. Successful strategies help organizations establish and maintain a competitive advantage that competitors cannot imitate easily. PepsiCo attempts to sustain its competitive advantage by constantly developing new products and innovations, including “mega brands,” which are eighteen individual brands that generate over $1 billion in sales each.
Firms often use multiple strategies to accomplish their objectives and capitalize on marketing opportunities. For example, in addition to pursuing a low cost strategy (selling products inexpensively), Walmart has simultaneously pursued a strategy of opening new stores rapidly around the world. Many companies develop marketing strategies as part of their general, overall business plans. Other companies prepare separate marketing plans. We’ll overview marketing plans here and discuss them more completely in Chapter 16, The Marketing Plan.
A marketing planmarketing planA document that is designed to communicate the marketing strategy for an offering. The purpose of the plan is to influence executives, suppliers, distributors, and other important stakeholders of the firm so they will invest money, time, and effort to ensure the plan is a success. is a strategic plan at the functional level that provides a firm’s marketing group with direction. It is a road map that improves the firm’s understanding of its competitive situation. The marketing plan also helps the firm allocate resources and divvy up the tasks that employees need to do for the company to meet its objectives. The different components of marketing plans will be discussed throughout the book and then discussed together at the end of the book. Next, let’s take a look at the different types of basic market strategies firms pursue before they develop their marketing plans.
Figure 2.12. Product and Market Entry Strategies
Product and Market Entry Strategies
The different types of product and market entry strategies a firm can pursue in order to meet their objectives.
Market penetration strategiesmarket penetration strategySelling more of existing products and services to existing customers. focus on increasing a firm’s sales of its existing products to its existing customers. Companies often offer consumers special promotions or low prices to increase their usage and encourage them to buy products. When Frito-Lay distributes money-saving coupons to customers or offers them discounts to buy multiple packages of snacks, the company is utilizing a penetration strategy. The Campbell Soup Company gets consumers to buy more soup by providing easy recipes using their soup as an ingredient for cooking quick meals.
Product development strategiesproduct development strategyCreating new products or services for existing markets. involve creating new products for existing customers. A new product can be a totally new innovation, an improved product, or a product with enhanced value, such as one with a new feature. Cell phones that allow consumers to charge purchases with the phone or take pictures are examples of a product with enhanced value. A new product can also be one that comes in different variations, such as new flavors, colors, and sizes. Mountain Dew Voltage, introduced by PepsiCo Americas Beverages in 2009, is an example. Keep in mind, however, that what works for one company might not work for another. For example, just after Starbucks announced it was cutting back on the number of its lunch offerings, Dunkin’ Donuts announced it was adding items to its lunch menu.
Market development strategiesmarket development strategySelling existing products or services to new customers. Foreign markets often present opportunities for organizations to expand. Exporting, licensing, franchising, joint ventures, and direct investment are methods that companies use to enter international markets. focus on entering new markets with existing products. For example, during the recent economic downturn, manufacturers of high-end coffee makers began targeting customers who go to coffee shops. The manufacturers are hoping to develop the market for their products by making sure consumers know they can brew a great cup of coffee at home for a fraction of what they spend at Starbucks.
New markets can include any new groups of customers such as different age groups, new geographic areas, or international markets. Many companies, including PepsiCo and Hyundai, have entered—and been successful in—rapidly emerging markets such as Russia, China, and India. As Figure 2.12, “Product and Market Entry Strategies” shows, there are different ways, or strategies, by which firms can enter international markets. The strategies vary in the amount of risk, control, and investment that firms face. Firms can simply exportexportSell products to buyers in foreign markets., or sell their products to buyers abroad, which is the least risky and least expensive method but also offers the least amount of control. Many small firms export their products to foreign markets.
Firms can also licenselicenseSell the right to use some aspect of the production process, trademark, or patent to individuals in foreign markets., or sell the right to use some aspect of their production processes, trademarks, or patents to individuals or firms in foreign markets. Licensing is a popular strategy, but firms must figure out how to protect their interests if the licensee decides to open its own business and void the license agreement. The French luggage and handbag maker Louis Vuitton faced this problem when it entered China. Competitors started illegally putting the Louis Vuitton logo on different products, which cut into Louis Vuitton’s profits.
Figure 2.13. Image
The front of a KFC franchise in Asia may be much larger than KFC stores in the United States. Selling franchises is a popular way for firms to enter foreign markets.
FranchisingfranchisingGranting an independent operator the right to use your company’s business model, techniques, and trademarks for a fee. is a longer-term form of licensing that is extremely popular with service firms, such as restaurants like McDonald’s and Subway, hotels like Holiday Inn Express, and cleaning companies like Stanley Steamer. Franchisees pay a fee for the franchise and must adhere to certain standards; however, they benefit from the advertising and brand recognition the franchising company provides.
Contract manufacturingcontract manufacturingWhen companies hire manufacturers to produce their products in another country. allows companies to hire manufacturers to produce their products in another country. The manufacturers are provided specifications for the products, which are then manufactured and sold on behalf of the company that contracted the manufacturing. Contract manufacturing may provide tax incentives and may be more profitable than manufacturing the products in the home country. Examples of products where contract manufacturing is often used include cell phones, computers, and printers.
Joint venturesjoint ventureAn entity that is created when two parties agree to share their profits, losses, and control with one another in an economic activity they jointly undertake. combine the expertise and investments of two companies and help companies enter foreign markets. The firms in each country share the risks as well as the investments. Some countries such as China often require companies to form a joint venture with a domestic firm in order to enter the market. After entering the market in a partnership with a domestic firm and becoming established in the market, some firms may decide to separate from their partner and become their own business. Fuji Xerox Co., Ltd., is an example of a joint venture between the Japanese Fuji Photo Film Co. and the American document management company Xerox. Another example of a joint venture is Sony Ericsson. The venture combined the Japanese company Sony’s electronic expertise with the Swedish company Ericsson’s telecommunication expertise.
Direct investmentdirect investmentOwning a company or facility overseas. (owning a company or facility overseas) is another way to enter a foreign market. For example, In Bev, the Dutch maker of Beck’s beer, was able to capture market share in the United States by purchasing St. Louis-based Anheuser-Busch. A direct investment strategy involves the most risk and investment but offers the most control. Other companies such as advertising agencies may want to invest and develop their own businesses directly in international markets rather than trying to do so via other companies.
Figure 2.14. Market Entry Methods
Market Entry Methods
Diversification strategiesdiversification strategyOffering products that are unrelated to other existing products produced by the organization. involve entering new markets with new products or doing something outside a firm’s current businesses. Firms that have little experience with different markets or different products often diversify their product lines by acquiring other companies. Diversification can be profitable, but it can also be risky if a company does not have the expertise or resources it needs to successfully implement the strategy. Warner Music Group’s purchase of the concert promoter Bulldog Entertainment is an example of a diversification attempt that failed.
Basic alternatives in rural livelihood diversification
Household and individuals can diversify livelihood portfolios in different ways. Several classifications of activities included in rural livelihood portfolios have been proposed (e.g. Hussein and Nelson 1999; Ellis 2000; Barrett, Reardon and Webb 2002), focusing on different criteria (farm vs. non-farm; on-farm vs. off-farm activities; local vs. migratory; self-employment vs. wage labor). All these classifications are useful to make sense of the nature of the choices entailed by rural livelihoods diversification processes. However, the juxtaposition between diversification through wage labor and diversification through development of self-employment enterprises is the one that better captures the basic socio-economic disjunction between:
i) reproducing and strengthening the profile of the (relatively) independent rural smallholder;
or
ii) assuming (at least partially) the connotations of a “semi-proletarian” rural wage earner (De Janvry 1981).
Additional distinctions between local and migratory wage labor and agricultural and non-agricultural self-employment enterprises are also important to capture the spatial and sectoral dimensions of livelihood diversification. This is reflected in the classification of basic alternatives in rural livelihood strategies presented in Figure 1 below.
Figure 1 - Basic alternatives in rural diversification strategies
i) reproducing and strengthening the profile of the (relatively) independent rural smallholder;
or
ii) assuming (at least partially) the connotations of a “semi-proletarian” rural wage earner (De Janvry 1981).
Additional distinctions between local and migratory wage labor and agricultural and non-agricultural self-employment enterprises are also important to capture the spatial and sectoral dimensions of livelihood diversification. This is reflected in the classification of basic alternatives in rural livelihood strategies presented in Figure 1 below.
Figure 1 - Basic alternatives in rural diversification strategies
In this classification, wage labor refers to the provision of work force to agricultural or non-agricultural enterprises owned by non-household employers. Though sometimes employment opportunities are available locally (local wage labor), in the majority of cases jobs are spatially distant from the places of residence and entail seasonal or long-term migration (migratory wage labor). If practiced as part of a rural livelihood diversification strategy, both types of wage labor seldom entail a fully “proletarization” of the rural workers. Rather, as pointed out twenty years ago by Alain De Janvry (1981), remittances of temporary or part-time rural wage labor very often complement an insufficient on-farm production in ensuring the satisfaction of household consumption needs. Moreover, in some instances, savings generated through wage labor (and in particular by migratory wage labor) can re-capitalize impoverished farms and create new opportunities for independent enterprise development
Rural self-employment enterprises refer to activities undertaken by mobilizing labor plus other household capital assets (savings, land, etc.). Rural agricultural enterprises are often based on innovative on-farm agricultural activities (in the form of independent commercial production or contract farming). On the other hand, rural non-agricultural enterprises focus on activities such as processing of agricultural or forestry commodities, petty-trading, handicraft, home-based piecework manufacturing, or delivery of particular services to the community or to outsiders. Such rural enterprises can develop within a single household or involve a wider social network, based on traditional or innovative forms of inter-household cooperation. The latter arrangement is particularly important to make enterprise development viable for household and individuals lacking the capital assets needed to start a self-employment activity on their own.
Rural self-employment enterprises refer to activities undertaken by mobilizing labor plus other household capital assets (savings, land, etc.). Rural agricultural enterprises are often based on innovative on-farm agricultural activities (in the form of independent commercial production or contract farming). On the other hand, rural non-agricultural enterprises focus on activities such as processing of agricultural or forestry commodities, petty-trading, handicraft, home-based piecework manufacturing, or delivery of particular services to the community or to outsiders. Such rural enterprises can develop within a single household or involve a wider social network, based on traditional or innovative forms of inter-household cooperation. The latter arrangement is particularly important to make enterprise development viable for household and individuals lacking the capital assets needed to start a self-employment activity on their own.
Opportunity Funds for Investing in Distressed Properties
Mission Statement:
To Provide Liquidity to Distressed Real Estate Brought About By the Credit Crisis, and Create a Lucrative Investment Opportunity for Assets that are Artificially Undervalued Due to Poor Economic Times and a Tight Credit Environment, with Transactions Structured with Maximum Flexibility to Fairly Allocate Returns Based Upon the Level of Risk Assumed by the Investor.
Investor Criteria:
In order to participate you must be an accredited investor, which by definition is a person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year, or a person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase.
Purpose:
Due to the mortgage and credit crisis of 2007, and the backlash from regulators regarding capital concerns, banks and other financial institutions have substantially tightened their lending guidelines. Many properties that were very “bankable” in previous years are now being turned away, creating a liquidity crisis in many sectors of the real estate market. This liquidity crisis is putting a huge burden on some borrowers, who are being forced to liquidate into a market with very few cash buyers, which is creating some very desirable purchase opportunities for buyers with cash.
Objectives:
Invest in distressed assets with 1) substantial value enhancement potential, or 2) assets with limited supply providing inherent value (such as waterfront, ski slope or golf course frontage, next tier commercial or other key sites), or 3) properties that can be acquired substantially below their economic value or replacement cost, and can be readily value enhanced or otherwise held and sold as the market recovers at a substantial profit to the Investors.
Sponsor/General Partner: WA Investment, LLC, as structured by Watson Advisors.
Investment Overview/Criteria
* A Buyer’s Market - Substantial returns are realized through buying assets during tight liquidity and credit markets, and rare periods when real estate asset investments are out of favor and are artificially undervalued. We have not realized such a strong buyer’s market since the mid to late 80’s, and substantial equity gains will be realized through troubled asset purchases during the next 12 to 24 months.
* Investing in Quality - Invest in assets with substantial value enhancement potential, assets with limited supply providing inherent value (such as waterfront, ski slope frontage, next tier commercial or other key sites) or properties that can be acquired substantially below their economic value or replacement cost, and can be readily value enhanced or otherwise held and sold as the market recovers at a substantial profit to the Investors.
* Optimizing Leverage - An analysis will be done to determine the optimal amount of leverage to maximize returns with an acceptable level of risk (i.e. Income properties with reasonably predictable income would carry a higher level than developed lots, which could carry more debt than raw land). Debt levels are anticipate at the following levels:
o Income Properties – 50% to 75%
o Developed Lots – 35% to 65% (depending on marketability)
o Raw Land – 25% to 50% (depending on cash available for interest & expense carry)
* Predefined Investment Criteria - Numerous properties will be analyzed as to price vs. economic or replacement value, cash required, market potential, risk involved, etc, and only the very best investments will be acquired. Specific criteria are as follows:
o Those properties with substantial upside, that have an IRR potential of 30% or more, and with minimal additional investment
o Properties that can be acquired at 60% or less of economic or replacement value
o Investments requiring a low level of cash investment with a fairly definable ability to carry through a reasonable disposition period
Investment Structure:
* Custom Investment Options -A tiered investment opportunity that provides a flexible structure to allow an investor to chose their desired level of risk and return.
* Limited Investors – A particular class of investor who will put up all of the required cash for the transaction, and will receive a cumulative, preferred return of 8%, a 1st out position, and 40% of the net profits.
* Financial Investors - Another investment class who will not be required to put up any cash, but will personally guarantee the debt for 40% of net profits. Some Investors will chose to be both a cash, (Limited Investor) and a Financial Investor willing to personally guarantee debt, in order to participate in a larger share of the returns.
* Limiting Liability Exposure - Debt will be negotiated to limit liability to 125% of the investor’s prorata portion of the debt, to quantify potential exposure and provide an efficient debt structure to not tie up a disproportionate share of the Investor’s credit on any one deal.
* Professional Management - The General Partner (GP) role will be fulfilled by Watson Advisors through WA Investments, LLC, and will receive 20% of net profits for putting the transactions together and managing the investment. The GP will have full responsibility and authority to execute the defined business plan established at the time of investment, and to develop, redevelop and dispose of the properties without further approval of the Limited or Financial Investors.
* Predefined Cost Structure - For purely speculative investments that require no further involvement, the GP will be compensated strictly through the net profits percentage. Value enhancement or management intensive projects will carry a development or management fee commensurate with the amount of work involved. Investors will have the ability to understand any fees prior to investing. All costs, such as legal, accounting, planning, etc. will be borne by the project.
* Structuring for Safety & Diversification - Each property will be acquired under a separate LLC (WA1, WA2, WA3, etc.), with the three Investment tiers outlined above, clearly defined within each entity. This will provide some legal protection in the event that a particular asset has a legal problem, and will prevent having the other investments infected by legal problems with one asset. In order to create diversification, investors are encouraged to spread their investment over multiples of these LLC’s and multiple geographic locations, rather than putting more money into just one investment or just one market. Investments will be highly insured to cover potential liabilities.
* Investment “Right Sizing” - Individual investments will be in the range of $250,000 to $1,000,000, unless related smaller investments can be pooled under one entity (such as buying multiple condos in the same project from different buyers and pooled under a single investment entity), and investment unit sizes will begin at $50,000 per investment, and all Investors must be Qualified Investors (income over $200,000, $300,000 if married, and/or a net worth in excess of $1 million).
* Predefined Business Plan - All development, redevelopment and carry costs will be outlined in advance in a defined business plan, and substantial changes to that plan will be reported and approved by the Investors. Otherwise the GP will have full authority to act on behalf of the LLC to maximize returns.
* Standardized Reporting - Quarterly reports will be prepared on each asset to keep investors fully informed as to the status and progress of the investment, and taxes will be filed and K-1’s delivered to Investors on or before March 31st of the following year.
* Lender Requirements - Financial Partners will commit to continue to provide financial statements and tax returns to keep the lenders informed as to their ongoing financial condition, and to provide the lenders the ability to keep their credit files current.
Below is a visual representation of the investment structure:
To Provide Liquidity to Distressed Real Estate Brought About By the Credit Crisis, and Create a Lucrative Investment Opportunity for Assets that are Artificially Undervalued Due to Poor Economic Times and a Tight Credit Environment, with Transactions Structured with Maximum Flexibility to Fairly Allocate Returns Based Upon the Level of Risk Assumed by the Investor.
Investor Criteria:
In order to participate you must be an accredited investor, which by definition is a person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year, or a person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase.
Purpose:
Due to the mortgage and credit crisis of 2007, and the backlash from regulators regarding capital concerns, banks and other financial institutions have substantially tightened their lending guidelines. Many properties that were very “bankable” in previous years are now being turned away, creating a liquidity crisis in many sectors of the real estate market. This liquidity crisis is putting a huge burden on some borrowers, who are being forced to liquidate into a market with very few cash buyers, which is creating some very desirable purchase opportunities for buyers with cash.
Objectives:
Invest in distressed assets with 1) substantial value enhancement potential, or 2) assets with limited supply providing inherent value (such as waterfront, ski slope or golf course frontage, next tier commercial or other key sites), or 3) properties that can be acquired substantially below their economic value or replacement cost, and can be readily value enhanced or otherwise held and sold as the market recovers at a substantial profit to the Investors.
Sponsor/General Partner: WA Investment, LLC, as structured by Watson Advisors.
Investment Overview/Criteria
* A Buyer’s Market - Substantial returns are realized through buying assets during tight liquidity and credit markets, and rare periods when real estate asset investments are out of favor and are artificially undervalued. We have not realized such a strong buyer’s market since the mid to late 80’s, and substantial equity gains will be realized through troubled asset purchases during the next 12 to 24 months.
* Investing in Quality - Invest in assets with substantial value enhancement potential, assets with limited supply providing inherent value (such as waterfront, ski slope frontage, next tier commercial or other key sites) or properties that can be acquired substantially below their economic value or replacement cost, and can be readily value enhanced or otherwise held and sold as the market recovers at a substantial profit to the Investors.
* Optimizing Leverage - An analysis will be done to determine the optimal amount of leverage to maximize returns with an acceptable level of risk (i.e. Income properties with reasonably predictable income would carry a higher level than developed lots, which could carry more debt than raw land). Debt levels are anticipate at the following levels:
o Income Properties – 50% to 75%
o Developed Lots – 35% to 65% (depending on marketability)
o Raw Land – 25% to 50% (depending on cash available for interest & expense carry)
* Predefined Investment Criteria - Numerous properties will be analyzed as to price vs. economic or replacement value, cash required, market potential, risk involved, etc, and only the very best investments will be acquired. Specific criteria are as follows:
o Those properties with substantial upside, that have an IRR potential of 30% or more, and with minimal additional investment
o Properties that can be acquired at 60% or less of economic or replacement value
o Investments requiring a low level of cash investment with a fairly definable ability to carry through a reasonable disposition period
Investment Structure:
* Custom Investment Options -A tiered investment opportunity that provides a flexible structure to allow an investor to chose their desired level of risk and return.
* Limited Investors – A particular class of investor who will put up all of the required cash for the transaction, and will receive a cumulative, preferred return of 8%, a 1st out position, and 40% of the net profits.
* Financial Investors - Another investment class who will not be required to put up any cash, but will personally guarantee the debt for 40% of net profits. Some Investors will chose to be both a cash, (Limited Investor) and a Financial Investor willing to personally guarantee debt, in order to participate in a larger share of the returns.
* Limiting Liability Exposure - Debt will be negotiated to limit liability to 125% of the investor’s prorata portion of the debt, to quantify potential exposure and provide an efficient debt structure to not tie up a disproportionate share of the Investor’s credit on any one deal.
* Professional Management - The General Partner (GP) role will be fulfilled by Watson Advisors through WA Investments, LLC, and will receive 20% of net profits for putting the transactions together and managing the investment. The GP will have full responsibility and authority to execute the defined business plan established at the time of investment, and to develop, redevelop and dispose of the properties without further approval of the Limited or Financial Investors.
* Predefined Cost Structure - For purely speculative investments that require no further involvement, the GP will be compensated strictly through the net profits percentage. Value enhancement or management intensive projects will carry a development or management fee commensurate with the amount of work involved. Investors will have the ability to understand any fees prior to investing. All costs, such as legal, accounting, planning, etc. will be borne by the project.
* Structuring for Safety & Diversification - Each property will be acquired under a separate LLC (WA1, WA2, WA3, etc.), with the three Investment tiers outlined above, clearly defined within each entity. This will provide some legal protection in the event that a particular asset has a legal problem, and will prevent having the other investments infected by legal problems with one asset. In order to create diversification, investors are encouraged to spread their investment over multiples of these LLC’s and multiple geographic locations, rather than putting more money into just one investment or just one market. Investments will be highly insured to cover potential liabilities.
* Investment “Right Sizing” - Individual investments will be in the range of $250,000 to $1,000,000, unless related smaller investments can be pooled under one entity (such as buying multiple condos in the same project from different buyers and pooled under a single investment entity), and investment unit sizes will begin at $50,000 per investment, and all Investors must be Qualified Investors (income over $200,000, $300,000 if married, and/or a net worth in excess of $1 million).
* Predefined Business Plan - All development, redevelopment and carry costs will be outlined in advance in a defined business plan, and substantial changes to that plan will be reported and approved by the Investors. Otherwise the GP will have full authority to act on behalf of the LLC to maximize returns.
* Standardized Reporting - Quarterly reports will be prepared on each asset to keep investors fully informed as to the status and progress of the investment, and taxes will be filed and K-1’s delivered to Investors on or before March 31st of the following year.
* Lender Requirements - Financial Partners will commit to continue to provide financial statements and tax returns to keep the lenders informed as to their ongoing financial condition, and to provide the lenders the ability to keep their credit files current.
Below is a visual representation of the investment structure:
/images/opportunity-funds-02.jpgRather than creating one entity to carry multiple investments, a new LLC is established for each investment, with WA Investments, LLC as the consistent general manager of the entities. Investors are encouraged to spread their investment across multiple properties and multiple markets to ensure a diversification of this Opportunity Funds investment. This also provides asset protection in the unfortunate event that any one asset has a legal issue arise, which is contained at that asset level and not allowed to “infect” the other assets or entities, or experiencing a catastrophic event in any one geographic market.
6 Top Pitfalls of Business Failure
As per a report, more than 50 percent of the new businesses fail in the first year itself and almost 95 percent of the businesses fail within five year of their inception. Most of the new businesses fail because of poor planning and not able to survive the market conditions. However, there are some key factors that if not avoided, may weight down a business.
Starting the Business for the Wrong Reasons
The purpose of starting the business should be pretty clear. Many of the entrepreneurs think that they can make a lot of money and become powerful if they have their own business. Merely having these purposes may lead to possible failure of your business. Instead a business started with these reasons has better chances of success.
* You strongly believe in your business idea and have a passion to make it successful. You also believe that your product or service has enough demand in the market and fulfill the need of customers.
* Attitude is a key factor to make a business successful. With strong determination and patience, a positive attitude keeps a businessman optimistic even in the odd conditions.
* Not giving up even if you see failure in your business. You take it as a learning process.
* You enjoy independently working and are capable of taking charge of accomplishing tasks to complete the most challenging tasks within time constraints.
* You like to interact with your subordinates and enjoy their work. Also, you can deal with all types of individuals.
Poor Management
Poor Management is cited as one of the most crucial factors for a business failure. The new entrepreneurs lack required expertise to manage different functions of a business such as finance, marketing, HR, sales, operations, etc. If all these functions are not properly handled, the business will see disaster sooner or later.
A regular study, planning and controlling all activities of the business should be done in order to know which areas are prone to risk. Market research and customer buying behavior should also be studied regularly to know the changing market trends. It helps in reconsidering the current strategies and taking required steps. The management team should be able to motivate the subordinates and create an encouraging climate across the organization. A good leader is one who is able to make his vision a reality and has the foresightedness to see the opportunities for the future.
Not Having Enough Capital
Insufficient operating funds are another key reason for the failure of a business. Many budding entrepreneurs fail to estimate how much capital is needed to run the business and so forced to close down their business in the initial phases itself. Also, they make unrealistic projections for future and if those are not met, they fail to continue business.
It is extremely important to correctly estimate the working capital and cost of staying in the business. Your venture may not run in profit for initial one or two quarters, you must have enough funds to keep it going. You also need to plan how the revenue generated through sales is going to meet all the costs occurred.
Bad Location
A good location can settle down a struggling business whereas a bad location may ruin even the best-managed companies. In the excitement of setting up a company, many owners ignore the location of their business and ends up founding himself in severe difficulties later. Therefore, before choosing a location for your new venture, proper research and study should be done. Some of the factors you can think of are-
* Where your target market is?
* Suppliers, transportation, other basic resources
* Where your chief competitors are?
* Safety and security of the company premises
* Local people and their receptiveness to a new venture
Lack of Planning
Starting the Business for the Wrong Reasons
The purpose of starting the business should be pretty clear. Many of the entrepreneurs think that they can make a lot of money and become powerful if they have their own business. Merely having these purposes may lead to possible failure of your business. Instead a business started with these reasons has better chances of success.
* You strongly believe in your business idea and have a passion to make it successful. You also believe that your product or service has enough demand in the market and fulfill the need of customers.
* Attitude is a key factor to make a business successful. With strong determination and patience, a positive attitude keeps a businessman optimistic even in the odd conditions.
* Not giving up even if you see failure in your business. You take it as a learning process.
* You enjoy independently working and are capable of taking charge of accomplishing tasks to complete the most challenging tasks within time constraints.
* You like to interact with your subordinates and enjoy their work. Also, you can deal with all types of individuals.
Poor Management
Poor Management is cited as one of the most crucial factors for a business failure. The new entrepreneurs lack required expertise to manage different functions of a business such as finance, marketing, HR, sales, operations, etc. If all these functions are not properly handled, the business will see disaster sooner or later.
A regular study, planning and controlling all activities of the business should be done in order to know which areas are prone to risk. Market research and customer buying behavior should also be studied regularly to know the changing market trends. It helps in reconsidering the current strategies and taking required steps. The management team should be able to motivate the subordinates and create an encouraging climate across the organization. A good leader is one who is able to make his vision a reality and has the foresightedness to see the opportunities for the future.
Not Having Enough Capital
Insufficient operating funds are another key reason for the failure of a business. Many budding entrepreneurs fail to estimate how much capital is needed to run the business and so forced to close down their business in the initial phases itself. Also, they make unrealistic projections for future and if those are not met, they fail to continue business.
It is extremely important to correctly estimate the working capital and cost of staying in the business. Your venture may not run in profit for initial one or two quarters, you must have enough funds to keep it going. You also need to plan how the revenue generated through sales is going to meet all the costs occurred.
Bad Location
A good location can settle down a struggling business whereas a bad location may ruin even the best-managed companies. In the excitement of setting up a company, many owners ignore the location of their business and ends up founding himself in severe difficulties later. Therefore, before choosing a location for your new venture, proper research and study should be done. Some of the factors you can think of are-
* Where your target market is?
* Suppliers, transportation, other basic resources
* Where your chief competitors are?
* Safety and security of the company premises
* Local people and their receptiveness to a new venture
Lack of Planning
A careful, methodological and strategic planning is required for success of any business. Most of the new ventures die before getting matured due to lack of a concrete planning. The key points which are included in the planning for a business are given below.
* Description of vision, mission, goals and success mantras for the business
* ed human resource for each function
* Identifying the possible problems and finding out their solutions
* Financial resources, income statement, balance sheet, cash flow analysis, sales forecast, expenses projection, etc.
* Competitors’ analysis
* Advertising and marketing strategies
Poor Diversification and Expansion Strategy
One of the leading reasons of business failure is poorly designed diversification and expansion strategy. Many entrepreneurs go for overexpansion of their business ignoring the status of the industry. The rapid expanding companies are often get bankrupted.
The expansion and diversification strategy should be adopted after a lot research and putting enough thoughts. Not going for expansion may repress growth and do not attract investors. A good cash flow management system will help you in setting your growth strategy. After all getting all research work done, you need to identify with whom and when you will have an alliance to grow your business. Right people for each job should be kept in place to avoid over dependency on you.
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