Newspaper Thread: Post Good Articles Here!!!

Hitchhiker's Guide to...

There's a lot of good articles in the newspapers, and obviously we can't all read every paper. I'm going to sticky this thread so we can post good articles into it. If you come across good articles with investment advice, post them here.

Remember to include a copyright notice at the end of the pasted article.

Hitchhiker's Guide to...

The search for a bargain points to the S&P's prodigious Big 10

Chet Currier


IT TAKES no digging to find some of the most neglected stocks in the world nowadays. They're sitting on top of the heap.

Look at the 10 stocks that carry the greatest weight in the Standard & Poor's 500.

Each is big, famous, and unloved by investors.

While small company stocks, emerging markets stocks, real estate stocks and precious metal stocks have soared at one time or another in the early years of a new century, these global giants have sat around doing nothing.

Partisans of ultra-big stocks have been trumpeting them as bargains for the past two or three years, but with very little effect. The last market-timer who thought he could call the bottom in these blue-chips must have given up long ago.

Far be it from me, a confirmed non-believer in the possibilities of timing, to make any claim that we are at a turning point. But if it's cheapness you're looking for, well, the Big 10 of the S&P 500 paint an eyecatching picture.

The names in this rogue's gallery as of mid-May were, in order of prominence in the index: Exxon Mobil, General Electric, Citigroup, Bank of America, Microsoft, Procter & Gamble, Pfizer, Johnson & Johnson, American International Group, and JPMorgan Chase.

These stocks have produced a simple average total return of 2.3% over the past five years. They have been hard-pressed to beat a money-market fund such as the Vanguard Prime Money Market Fund, which has returned 2% over that stretch.

Using simple averages for the sake of convenience, the Big 10 recently traded at 15 times their most recent 12 months' earnings, against 18% for the S&P 500 as a whole. Their average dividend yield stood at 2.6%, compared with the index's aggregate yield of 1.8%.

Several of the Big 10 have had a bumpy ride in recent years. AIG's chief executive for almost 40 years, Maurice 'Hank' Greenberg, was ousted in 2005 amid a probe of accounting practices. Microsoft shares took a 15% hit in late April and early May after the company said it planned to step up spending to fight competitors such as Google.

Even so, all 10 are prodigious money-making machines with huge and varied operations well placed to benefit from global economic growth.

Collectively, the 10 stocks represent a diversified portfolio of consumer and capital goods and services, ranging over industries that include finance, energy, computers and health care.

A mutual-fund investor can get exposure to stocks of this type in any of a hundred large-cap value or large-cap blend funds.

Simplest of all, anybody who owns an S&P 500 index fund already has a meaningful stake, given that the Big 10 account for 20% of the index as a whole.

Buying shares of a relatively concentrated exchange-traded fund, such as the Ishares Global 100 Index Fund, offers another alternative. Seven of this fund's 10 largest holdings at last report were members of the S&P 500's Big 10.

The Global 100 fund is not one of the hot ETFs right now. Its recent market capitalisation of about $475m is about onesixteenth that of the Streettracks Gold Trust, a commodity-boom favourite that shot up 40% in the last six months.

If you're in the market for neglected bargains, then it's pretty late in the game for gold. With Ishares Global 100, on the other hand, there's no risk of getting caught performancechasing.

There is no way of telling when the Big 10 stocks might come back into favour. There's no guarantee they ever will.

Then again, those very same things were being said five or six years ago about the depressed gold market and despised emerging-markets stocks . . .

and just look at them now.

In no particular time schedule but its own, the investment cycle turns.


© All contents copyright The Sunday Tribune 2006.

Sunday, 21st May 2006

Hitchhiker's Guide to...

...interesting article from The Economist on how it is now possible to protect against a fall in house prices in the US by buying options


Homes with hedges

Apr 20th 2006 | CHICAGO

From The Economist print edition

*Applying modern finance to America's biggest asset class*

THERE are many ways to manage risk in America's markets, but the country's sophisticated web of financial products has a $21.6 trillion hole in it. That is how much wealth is tied up in residential property—far more than even the $15 trillion value of America's publicly traded equities. And unlike investors in shares, bonds and many other assets, those with a stake in housing do not have an easy way to hedge the risks. However, the Chicago Mercantile Exchange (CME) is planning to fill that gap.

In the next few weeks, the CME is likely to open trading in financial futures and options linked to American house prices. Investors who want to hedge the risks of residential property—or merely to speculate on the market's direction—will be able to bet on a rise or drop in a house-price index, without having to buy or sell bricks and mortar. With interest rates on the rise, prompting worries that the recent housing boom is about to give way to a downturn, the potential appeal of these new hedging products is easy to see.

Punters will be able to bet on price changes in ten cities from Boston to San Diego, as well on a national index that aggregates all ten. The indices will be part of the CME's Alternative Investment Products group, which fosters derivatives linked to economically important trends and events not directly related to underlying securities or commodities. The group already has products based on the weather and on economic data such as non-farm payrolls.

Creating a useful and reliable index of house prices is tricky, since no two homes are identical and the market is full of messy transactions.

But a pair of economists, Karl Case and Robert Shiller, have spent more than a decade sorting out many of the problems, and for several years have published proprietary indices that highlight trends in the market. (Mr Shiller, a tauricidal academic who has spent much of his career slaying bulls and their foaming theories, has a special interest in tracking American house prices, which he has claimed are ripe for a fall.) The Case-Shiller indices have now been tweaked a bit to create a version suitable for trading.

Because the new derivatives will allow bets up to only a year ahead, homeowners will not be able to use them to hedge long-term risks. That limits their usefulness for ordinary folk. For many companies in the property industry, however, they should be helpful. A property developer or contractor, for example, can start a housing project without worrying whether prices will fall sharply by the time it is completed. Monika Piazessi, an economist at the University of Chicago's Graduate School of Business, says that half the volatility in the price of individual homes is linked to city-wide changes in prices. So the CME's new city indices could go a long way towards lowering the risks.

Financial firms such as mortgage lenders will also no doubt find uses for the new derivatives. And so will investors with a view about America's residential property market—whether they expect a continued boom, or a bust.

Copyright © 2006 The Economist Newspaper and The Economist Group. All
rights reserved.

Hitchhiker's Guide to...

new forms of lending and borrowing, from the Irish Times (16th June 2006)

Lending website banks on the eBay generation

Zopa allows internet users to bypass the major financial institutions and buy and sell loans to one another, writes Robin O'Brien Lynch.

During a World Cup first round match this week, a soccer fan caught an official match ball booted into the crowd. As the camera zoomed in on the delighted fan clutching his prize, the commentator remarked that the ball would soon appear on "that website where you buy things".

Assuming he was referring to eBay, this episode highlights just how much the concept of the auction website has invaded our consciousness (the name still appears to cause some people trouble though). It is in this global climate that Zopa.com - an online service that allows people to buy and sell loans from and to each other, rather than the bank - has been slowly gathering pace.

The service works as you would expect: borrowers request loans online, and lenders agree to give them the money for a certain return. However, to minimise the risk of default, Zopa divides the lenders' money into small amounts and distributes it to potential borrowers.

All lenders and borrowers enter into a legally binding contract with their respective borrowers and lenders. The UK-based firm manages the collection of monthly repayments and if any of that money is not paid on time, it uses the same recovery processes as the high-street banks.

Zopa earns money by charging lenders and borrowers a 0.5 per cent fee, and if borrowers take out repayment protection insurance on their loan, it receives commission from its insurance provider.

So far, there are more than 77,000 members. Average gross returns to lenders since the launch has been 6.8 per cent and, in some markets, over 10 per cent, while bad debt levels remain less than 0.05 per cent. Zopa has also topped consumer watchdog lists for best buys.

Lenders can loan as little as £10 (€14.63) over a period of six months to five years, and from the beginning of next month, there is no maximum limit on the amount being loaned. Money is transferred into the lending account either by a regular bank transfer, or by PayPal. Borrowers pay off their loans by the same method or with direct debit, and there is no charge for early repayments.

The tone of the Zopa site is the same light-hearted, personal tone found on other peer-to-peer sites such as Flickr. This taps into the public perception that the service offered by high-street banks is artificially personal, impersonal or rude.

Zopa positions itself as an institution for the modern age. It utilises the social community aspects of the web that have proved so successful for internet giants such as Bebo, Amazon, eBay and Betfair.

And like any good web community, Zopa users are known only by their anonymous user names, eg warlock3000, kroonmeister and spiderwoman. There is a monthly newsletter, discussion forums and a blog.

But the "team" - not the "board of directors" or "management" - is keen to back up the jaunty graphics and jokey content with serious credentials. Zopa has its own credit referencing system, is authorised and regulated by the UK financial services authority and is backed by venture capital firms Benchmark Capital (which backed eBay's launch and has taken a stake in Bebo) and Wellington Partners. Even the term Zopa has the advantage of both sounding likea fresh, edgy brand name as well as being a financial acronym for '"zone of possible agreement'", the bounds within which both lender and borrower are prepared to work.

Immediately after its launch in the UK, Zopa was applauded for its ingenuity and even bravery, but many commentators felt that it was a bridge too far and doubted its longevity. However, 18 months later the model continues to function, and co-founder James Alexander believes Zopa is now in a position to prove the doubters wrong.

"We launched in the UK in the middle of March last year. It's a new model and people are still getting comfortable with the idea," he says.

"At the time of the launch, the press coverage was very much: 'Well, this is a great idea and all, but we'll have to wait and see'. At this stage, a year and a bit later, we're still here and we're doing well and we're in a position where we can share information. We can say why people are using it, we can say how people are using it, we can say what the default rates are and so on."

He continues: "It started when three people left the online bank Egg to start a business. We had no real specific idea, but we had done a lot of consumer work and the idea for Zopa began to grow.

"Firstly, we wondered why doesn't eBay do money? Instead of buying and selling stuff, it could buy and sell money. Secondly, why do companies borrow money at lower rates than consumers? Around 200 years ago, if a company wanted to borrow money, they went into the bank and haggled with the manager for a loan and then they went off to the West Indies to try and find nutmeg or whatever. Now they issue debt on a bond market, and we wondered: what if there was a bond market for individuals?

"And the third thing we thought of was family loans. When I went to college a few years ago, I needed some money, so I went into the bank and I asked for a loan and they said 'here's the money, you can pay it back at 10 per cent over three years'. So I grimaced at this, and thought about it, and then I went to my dad and asked him for a loan," Alexander recalls. "He offered me the money at a price lower than the bank but that would earn him more than his savings account. This kind of deal has been going on for hundreds of years and we wanted to explore the possibility of using the internet to increase the numbers of dads and families."

As well as cutting out the middleman, Zopa boasts it can benefit people with irregular earnings who may have the means to pay back a loan, but slip under the radar when it comes to credit rating.

It caters for people who earn good money but not necessarily into their bank account on the last Thursday of each month, and it allays the fears of those who worry that their savings are being invested by the bank in a manner that they would find unethical.

Of course, borrowers still have to go through a credit rating system, and Zopa is not run by a commune, but the appeal to the consumer is the personal choice and the minimal costs.

"Zopa puts people who want to lend in touch with creditworthy people who want to borrow and it cuts out the middleman, so everyone gets a better deal - it's better, fairer and more transparent," he says.

"For lenders, you're getting a better return for your spare cash. The banks will typically offer you 4-4.5 per cent while we are averaging 7 per cent gross and if you're prepared to take a punt on a bigger risk, you can earn up to 10 per cent. And it's not like you're loaning all your cash to one person; it's split up between at least 50 people."

Not everyone may feel kooky newsletters belong in a financial service, and there will always be those who have a basic mistrust of lending money to someone called mooseguy37, or indeed of conducting such arrangements online.

And no matter how badly you paint the image of "greedy fat cat bankers", it is hard to replace the face-to-face interaction with a trained professional.

The banks are hardly running scared at the moment, but if Zopa continues to grow, expansion and/or copycat firms would seem inevitable. So far it is only available to UK residents, but there have been approaches from firms in over 50 different countries looking to import the service.

There has been no specific interest from Ireland yet, but the Irish Financial Services Regulatory Authority has confirmed that as Zopa is already registered in the UK, it would only need to apply for a licence to be registered to trade over here.

For the moment, the international spread begins with Zopa's launch in the US, where a similar service, Prosper, is already running. And as Alexander admits, even if Zopa doesn't work out, the precedent has been set.

"Zopa is working and it's working well. We have 77,000 members and have transacted millions of pounds, cut out the banks and people are getting better deals. It's not just financial returns but also the social rewards," Alexander says.

"Regardless of what happens to Zopa, lending and borrowing exchanges will take a large chunk of the market, because it is a better and more efficient system that works for the consumer."




© The Irish Times

more info at www.zopa.com