Stocks are down about 20% from their highs, and even the bravest investors might be tempted to cut their losses. Here's why that's not a winning strategy.
By Stephen Gandel, Money Magazine senior writer
Last Updated: June 27, 2008: 6:55 PM EDT
NEW YORK (Money Magazine) -- Worst month for stocks since the Great Depression. A bear market. Oil blows past $140. These are the times that try long-term investors' souls.
Consider the response from Ram Ganesh, 31, who started investing in stocks only a year ago. Watching his portfolio rise for most of the year, Ganesh thought he had the market figured out. "All my readings about Warren Buffett were really paying off," said Ganesh, a software engineer who lives in Seattle.
But in the past few weeks, his portfolio is down $3,500, a significant hit to his modest $20,000 account.
Ganesh bought shares of General Electric earlier this week thinking he was getting a bargain. But the stock is down another $2 since then, and that has Ganesh thinking he should sell, not just GE, but his entire portfolio.
"Being in the market feels like gambling now," he said. "Not sure I believe in buy-and-hold anymore. I wish I had gotten out two weeks ago."
Of course, Ganesh's gut reaction - and probably your own - is the exact wrong one.
First of all, it is notoriously tough to get in just before rallies and out before selloffs.
For example, sell out now and you may miss the rebound. In 1974, the Dow Jones industrial average plunged 30% in the first nine months of year, only to rebound 16% in October. Similarly, stocks jumped 21% in 2003, after three years of big loses.
"When markets recover, they recover quickly," said Steve Bleiberg, in charge of investments for the global asset allocation program at Legg Mason.
Second, stocks are actually a better deal - maybe even "safer" - than they were a year ago. And they look exceedingly cheap compared to 1999, the height of the stock-market mania.
The price-to-earnings ratio of the S&P 500, based on corporate bottom lines of the past twelve months, is 20% lower than it was at the beginning of the year, and half of the 31 multiple it was back in 1999.
"In the 1990s, the market had a lot to drop," said Christopher Cordaro, a financial planner in Chatham, New Jersey. "This time we only started at a middle level and are already down."
Still, sticking to stocks can be tough in times like these. Here are four steps you can take to keep you finger off the sell button.
"In hindsight, this is likely to be a buying opportunity," said Harold Evensky, a Coral Gables, Florida financial planner. "What part of the worst case scenario is not already priced into stocks today?"
Remember your investing goals
The problem is big market drops like these make us forget the real goal of all our savings and investing. That's to stash away enough money to maintain your current standard of living in retirement.
Much more important than your monthly balance, is the one you see 10 or 20 or 30 years from now, when you actually need that money. In that time, stocks will go up and down and up again. So the fact that your 401(k) is down 20% from what it was eight months ago may not have much baring on what you will have in retirement.
Put today's economic peril in perspective
Before you panic over today's headlines, and how far stocks could fall, consider the relative health of today's economy.
In the early 1970s, economic output was falling. But today, despite the sluggishness, GDP is still inching ahead.
In the early 1980s, unemployment hit 10.8%. Today, the rate is 5.5%, or about half that.
Inflation topped 12% in the 1970s and 14% in the early 1980s. Today, it's at 4%.
Calculate how much have you really lost
Even if you have all your money in stocks - which probably is not, or shouldn't be, the case - the recent market downturn has really not hurt your savings that much, at least when it comes to how much you will have in retirement.
Consider someone in their 30s making $50,000 a year with that much in savings.
Before the market downturn, that person, with regular deposits in their 401(k) plan, was on track to have accumulated $1.6 million by the time of their retirement at 65.
How much will that person have now that the market has plunged 20% into bear territory? $1.5 million.
Of course, the closer you are to retirement the larger a market downturn hurts you. That's because the market may not recover by the time you need the money.
A recent study by T. Rowe Price showed that the chances of you running through your retirement savings rose from 13% to nearly 50% if the market increased less than 5% during the first 5 years of retirement. Still, we've been in a bear market for less than a year. So you still have four years to recover.
What's more, 5% over five years is not a high bar, and you don't have to sell all of your stocks to lower the ups and downs of your portfolio. T. Rowe recommends you hold 55% of your portfolio in stocks at retirement.
Find something to do
Want to feel like you're at least doing something? Strategist Robert Arnott of Research Affiliates in Pasadena, Calif., says you need to revisit whether you portfolio is really diversified.
And Arnott says diversification doesn't mean 70% stock and 30% bonds. He says you should consider shifting your new deposits into commodities and overseas investments.
He currently thinks emerging markets are a good play. T. Rowe Price International Discovery (PRIDX) invests in countries like Brazil and China, the economies of which are growing much faster than the United States is growing.
Harold Evensky agrees that commodities could be a good addition to your portfolio if inflation continues to rise. The iShares S&P GSSI Natural Resources Index (IGE), which is an exchange traded fund, can give you exposure to the commodities sector for a low management fee.
Another way to protect your retirement portfolio is to buy Inflation Protected Treasuries or TIPs. They are Arnott's preferred inflation defense. And had you bought TIPs a year ago, you would be already counting your gains. The iShares Lehman TIPS Bond (TIP) is up 14.4% in the past year.
Friday, June 27, 2008
Thursday, June 26, 2008
Economic muddle sinks stocks
High oil prices and a still-weak financial sector mean the economy - and the markets - face more pain ahead.
By Colin Barr, senior writer
Last Updated: June 26, 2008: 5:19 PM EDT
NEW YORK (Fortune) -- Thursday's stock market selloff reflects a sobering truth: Nine months of strong medicine have failed to cure the credit crisis and left the economy in a weakened state.
The Dow Jones Industrial Average plunged 3% to a 21-month low on Thursday, a day after the Fed held its key interest rate target steady for the first time following nine months of aggressive rate cuts and loans to financial firms. The central bank said it is concerned about rising inflation but is also watching for signs that tepid economic growth will slow further.
The economy is struggling to muddle through a period dominated by two powerful negative forces. The Fed has cut rates by 3.25 percentage points over the past year in an attempt to shore up a weak, undercapitalized banking system swimming in bad loans tied to the housing bubble, and to cushion the loss of consumer spending power tied to falling house prices. But at the same time, consumers and businesses have been laboring under an increasing burden of surging food and fuel prices.
The problem now, from the point of view of Fed chief Ben Bernanke, is that trying to tackle either problem risks exacerbating the other. So the Fed is probably on the sidelines for the balance of the year - which means investors can look forward to more ugly selloffs like Thursday's, which left the Dow down 20% from last fall's all-time high.
"The resilience of the U.S. economy has been remarkable over the past 12 months as the credit crisis spread beyond the subprime mortgage market and oil prices soared," economist Ed Yardeni wrote earlier this week in his daily newsletter. "Unfortunately, there may not be much more that the Fed can do to stimulate economic growth should the resilience of the economy continue to be tested by the credit crisis and oil prices."
Thursday's big losers included truckbuilder Oshkosh (OSK, Fortune 500), which lost a third of its value - costing shareholders some $830 million - after predicting high commodity costs will lead to a third-quarter loss. Other big decliners included automakers General Motors (GM, Fortune 500) and Ford (F, Fortune 500) the latter of which hit a low last seen back in 1985 as high gasoline prices swamp demand for sport utility vehicles. Also hit hard were financial firms Citi (C, Fortune 500) and Merrill Lynch (MER, Fortune 500), which dropped to new lows after analysts said additional mortgage-related losses could lead to more shareholder-diluting stock sales or, in Citi's case, possible dividend cuts. Bank of America, which dropped 7% and now trades at half its year-ago level, said it will cut 7,500 jobs in its purchase of Countrywide.
Soaring oil prices have led to massive losses at U.S. companies in energy-intensive businesses such as auto production and airlines, and have prompted some commentators to call for the Fed to start raising interest rates. But while consumers and many companies would surely benefit from lower food and energy prices, higher interest rates could put further pressure on growth, by reducing demand for goods and services. With May sales at General Motors, for instance, having plunged 30% from a year ago, lower consumer demand is not something struggling companies are looking for.
"The jury still is out as to whether consumer spending is out of the woods," writes Northern Trust economist Paul Kasriel. "The motor vehicle producers would say 'no.'"
Another factor that's hard to overlook is the ill health of the big U.S. banks. Citi dropped 6% Thursday after analysts at Goldman Sachs put the stock on their "conviction sell" list, predicting second-quarter asset writedowns of almost $9 billion. Analysts at Sanford C. Bernstein downgraded Merrill Lynch to sell as well, saying the firm should take $3.5 billion in writedowns in the quarter that's about to end. Analysts at both firms indicated they have been too optimistic up till now in forecasting a financial sector recovery.
"The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought," Goldman Sachs analyst William Tanona said. "We see multiple headwinds."
Headwinds are the least of it, though. As Bernstein analyst Brad Hintz wrote, the problem for big financial companies is that their most profitable businesses, those tied to the fast and furious debt markets of the earlier part of this decade, have essentially ceased to exist. Brokerage firms have shown some ingenuity over the years in exploiting new opportunities in the financial markets, but it will take a while for those to develop.
"We are not recommending investors buy canned goods and bottled water at this point," Hintz writes, adding that low short-term rates and a steeper yield curve will eventually lay the groundwork for a recovery. "But currently the trend lines of Wall Street's high-margin institutional businesses are pointing south."
Unfortunately, those aren't the only trend lines pointing in that direction.
By Colin Barr, senior writer
Last Updated: June 26, 2008: 5:19 PM EDT
NEW YORK (Fortune) -- Thursday's stock market selloff reflects a sobering truth: Nine months of strong medicine have failed to cure the credit crisis and left the economy in a weakened state.
The Dow Jones Industrial Average plunged 3% to a 21-month low on Thursday, a day after the Fed held its key interest rate target steady for the first time following nine months of aggressive rate cuts and loans to financial firms. The central bank said it is concerned about rising inflation but is also watching for signs that tepid economic growth will slow further.
The economy is struggling to muddle through a period dominated by two powerful negative forces. The Fed has cut rates by 3.25 percentage points over the past year in an attempt to shore up a weak, undercapitalized banking system swimming in bad loans tied to the housing bubble, and to cushion the loss of consumer spending power tied to falling house prices. But at the same time, consumers and businesses have been laboring under an increasing burden of surging food and fuel prices.
The problem now, from the point of view of Fed chief Ben Bernanke, is that trying to tackle either problem risks exacerbating the other. So the Fed is probably on the sidelines for the balance of the year - which means investors can look forward to more ugly selloffs like Thursday's, which left the Dow down 20% from last fall's all-time high.
"The resilience of the U.S. economy has been remarkable over the past 12 months as the credit crisis spread beyond the subprime mortgage market and oil prices soared," economist Ed Yardeni wrote earlier this week in his daily newsletter. "Unfortunately, there may not be much more that the Fed can do to stimulate economic growth should the resilience of the economy continue to be tested by the credit crisis and oil prices."
Thursday's big losers included truckbuilder Oshkosh (OSK, Fortune 500), which lost a third of its value - costing shareholders some $830 million - after predicting high commodity costs will lead to a third-quarter loss. Other big decliners included automakers General Motors (GM, Fortune 500) and Ford (F, Fortune 500) the latter of which hit a low last seen back in 1985 as high gasoline prices swamp demand for sport utility vehicles. Also hit hard were financial firms Citi (C, Fortune 500) and Merrill Lynch (MER, Fortune 500), which dropped to new lows after analysts said additional mortgage-related losses could lead to more shareholder-diluting stock sales or, in Citi's case, possible dividend cuts. Bank of America, which dropped 7% and now trades at half its year-ago level, said it will cut 7,500 jobs in its purchase of Countrywide.
Soaring oil prices have led to massive losses at U.S. companies in energy-intensive businesses such as auto production and airlines, and have prompted some commentators to call for the Fed to start raising interest rates. But while consumers and many companies would surely benefit from lower food and energy prices, higher interest rates could put further pressure on growth, by reducing demand for goods and services. With May sales at General Motors, for instance, having plunged 30% from a year ago, lower consumer demand is not something struggling companies are looking for.
"The jury still is out as to whether consumer spending is out of the woods," writes Northern Trust economist Paul Kasriel. "The motor vehicle producers would say 'no.'"
Another factor that's hard to overlook is the ill health of the big U.S. banks. Citi dropped 6% Thursday after analysts at Goldman Sachs put the stock on their "conviction sell" list, predicting second-quarter asset writedowns of almost $9 billion. Analysts at Sanford C. Bernstein downgraded Merrill Lynch to sell as well, saying the firm should take $3.5 billion in writedowns in the quarter that's about to end. Analysts at both firms indicated they have been too optimistic up till now in forecasting a financial sector recovery.
"The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought," Goldman Sachs analyst William Tanona said. "We see multiple headwinds."
Headwinds are the least of it, though. As Bernstein analyst Brad Hintz wrote, the problem for big financial companies is that their most profitable businesses, those tied to the fast and furious debt markets of the earlier part of this decade, have essentially ceased to exist. Brokerage firms have shown some ingenuity over the years in exploiting new opportunities in the financial markets, but it will take a while for those to develop.
"We are not recommending investors buy canned goods and bottled water at this point," Hintz writes, adding that low short-term rates and a steeper yield curve will eventually lay the groundwork for a recovery. "But currently the trend lines of Wall Street's high-margin institutional businesses are pointing south."
Unfortunately, those aren't the only trend lines pointing in that direction.
Tuesday, June 24, 2008
The Blame Game
Tuesday June 24, 6:00 am ET
It's a classic Wall Street “whodunit," complete with a collection of greedy investment bankers, slow-witted policymakers and numbskull Florida home buyers. But with so many suspects, how will Americans ever figure out who killed the once-vibrant and cheery U.S. economy?
"There were a lot of people who contributed to the real estate bubble and the easing of lending standards that led to the subprime debacle," says Ethan Harris, chief U.S. economist at Lehman Brothers. So many, indeed, that he and other pundits find it difficult to point the finger at any single player.
You can, though. Play the Portfolio.com brackets and pick your own culprit.
Real estate speculators took foolish risks because lax lenders such as Angelo Mozilo's Countrywide Financial let them; mortgage bankers and investment bankers allowed greed to override caution; credit-rating analysts and central bankers alike relied on risk-management models that proved inadequate to the task at hand.
"Bubbles grow because nearly every player pitches in to make them grow," argues Tobias Levkovich, market strategist for Citigroup.
Of course, at the core of any bubble is an apparently rational demand for a rational good or service that at some point tips over into irrationality. So the quest to assign blame should start with whomever it is that is demanding the free lunch—the purchasers of tulips, dotcom stocks, or, as is the case today, townhouses in Naples, Florida, or on the outskirts of Phoenix.
"The speculative fever that swept through the ranks of home buyers was quite astonishing," says Jason Trennert, co-founder of Strategas, a market-analysis firm. "Everyone wanted to cash in on what they saw as a one-way ticket to riches by buying real estate."
The problem wasn't just the greed of the buyers, however. Lenders were equally hungry for quick profits and all too willing to satisfy that buyer's need for immediate gratification, waiving the requirements for income or job verification in exchange, of course, for only slightly higher interest payments on the mortgage.
No down payment? No problem. Suddenly, there were few true obstacles to borrowing; after all, minimal percentage points of extra interest would compensate for the added risk of lending to these subprime borrowers, rationalized the banks and other lenders doling out the cash.
But perhaps those lenders wouldn't have been quite as eager to throw their traditional rules out the window if creative savants toiling at investment banks hadn't found a way for them to quickly remove any risk they were taking from their books and dump it into the laps of other investors. Some, like Merrill Lynch's ousted chief, Stan O’Neal, jumped headfirst into the risky business.
The folks who ran those portfolios, says the freshly indicted Ralph Cioffi of Bear Stearns, eagerly snapped up those securities without questioning their outsize yields, all too willing to accept the risks as benign and remote.
After all, analysts at the credit-rating agencies such as Moody's and Standard & Poor's were awarding these collateralized-mortgage obligation securities and other such packages far higher ratings than they ultimately deserved. No one was able or willing to delve far enough beneath the surface to realize how risky the investments actually were, or how much investors stood to lose if housing prices started to dip or interest rates started to climb.
Does the blame spread to Ben Bernanke and the Federal Reserve? Was a lack of vigilance on the part of policymakers responsible for the bubble and thus, ultimately, our current economic plight? What about Hank Paulson at the Treasury? Shouldn't the former Goldman Sachs boss have felt the ill winds blowing?
"Tighter monetary policy would have been helpful," concedes Lehman's Harris, before adding that "it's very hard to identify an asset market bubble, and frankly, this was a big problem that had a lot of participants." Ultimately, though, he's unwilling to pin too much blame on Fed chairman Ben Bernanke or his predecessor, the once-revered Alan Greenspan.
"Everyone was eager to take the risks when things were going well; it isn't until it all starts going wrong that we look for someone to blame," says Levkovich. "But if we're honest with ourselves, it's far easier to have perfect hindsight than it is to buck the trend when a bubble is taking shape."
It's a classic Wall Street “whodunit," complete with a collection of greedy investment bankers, slow-witted policymakers and numbskull Florida home buyers. But with so many suspects, how will Americans ever figure out who killed the once-vibrant and cheery U.S. economy?
"There were a lot of people who contributed to the real estate bubble and the easing of lending standards that led to the subprime debacle," says Ethan Harris, chief U.S. economist at Lehman Brothers. So many, indeed, that he and other pundits find it difficult to point the finger at any single player.
You can, though. Play the Portfolio.com brackets and pick your own culprit.
Real estate speculators took foolish risks because lax lenders such as Angelo Mozilo's Countrywide Financial let them; mortgage bankers and investment bankers allowed greed to override caution; credit-rating analysts and central bankers alike relied on risk-management models that proved inadequate to the task at hand.
"Bubbles grow because nearly every player pitches in to make them grow," argues Tobias Levkovich, market strategist for Citigroup.
Of course, at the core of any bubble is an apparently rational demand for a rational good or service that at some point tips over into irrationality. So the quest to assign blame should start with whomever it is that is demanding the free lunch—the purchasers of tulips, dotcom stocks, or, as is the case today, townhouses in Naples, Florida, or on the outskirts of Phoenix.
"The speculative fever that swept through the ranks of home buyers was quite astonishing," says Jason Trennert, co-founder of Strategas, a market-analysis firm. "Everyone wanted to cash in on what they saw as a one-way ticket to riches by buying real estate."
The problem wasn't just the greed of the buyers, however. Lenders were equally hungry for quick profits and all too willing to satisfy that buyer's need for immediate gratification, waiving the requirements for income or job verification in exchange, of course, for only slightly higher interest payments on the mortgage.
No down payment? No problem. Suddenly, there were few true obstacles to borrowing; after all, minimal percentage points of extra interest would compensate for the added risk of lending to these subprime borrowers, rationalized the banks and other lenders doling out the cash.
But perhaps those lenders wouldn't have been quite as eager to throw their traditional rules out the window if creative savants toiling at investment banks hadn't found a way for them to quickly remove any risk they were taking from their books and dump it into the laps of other investors. Some, like Merrill Lynch's ousted chief, Stan O’Neal, jumped headfirst into the risky business.
The folks who ran those portfolios, says the freshly indicted Ralph Cioffi of Bear Stearns, eagerly snapped up those securities without questioning their outsize yields, all too willing to accept the risks as benign and remote.
After all, analysts at the credit-rating agencies such as Moody's and Standard & Poor's were awarding these collateralized-mortgage obligation securities and other such packages far higher ratings than they ultimately deserved. No one was able or willing to delve far enough beneath the surface to realize how risky the investments actually were, or how much investors stood to lose if housing prices started to dip or interest rates started to climb.
Does the blame spread to Ben Bernanke and the Federal Reserve? Was a lack of vigilance on the part of policymakers responsible for the bubble and thus, ultimately, our current economic plight? What about Hank Paulson at the Treasury? Shouldn't the former Goldman Sachs boss have felt the ill winds blowing?
"Tighter monetary policy would have been helpful," concedes Lehman's Harris, before adding that "it's very hard to identify an asset market bubble, and frankly, this was a big problem that had a lot of participants." Ultimately, though, he's unwilling to pin too much blame on Fed chairman Ben Bernanke or his predecessor, the once-revered Alan Greenspan.
"Everyone was eager to take the risks when things were going well; it isn't until it all starts going wrong that we look for someone to blame," says Levkovich. "But if we're honest with ourselves, it's far easier to have perfect hindsight than it is to buck the trend when a bubble is taking shape."
Friday, June 20, 2008
Gates without Microsoft
Ah, retirement. Time to kick back, relax, and rethink philanthropy, learn biochemistry, eradicate malaria and develop drought-resistant crops.
By Brent Schlender, editor-at-large
Last Updated: June 20, 2008: 5:35 PM EDT
(Fortune Magazine) -- Let me tell you about Bill Gates. He is different from you and me. First off, the billionaire co-founder of Microsoft has always been something of a utopian. In his mind, even the world's knottiest problems can be solved if you apply enough IQ. Accordingly, Gates, who has been spotted on Seattle freeways reading a book while driving himself to the office, covets knowledge. It's as if he's still trying to make up for dropping out of Harvard, as he spends just about any spare waking minute reading, studying science texts, or watching university courses on DVD.
Some say his wealth and famous opportunism are reminiscent of the robber barons of yore. Yet here is a man who has set a goal to eradicate malaria. Rich as he is - his net worth is an estimated $50 billion - you can't call the man greedy when he has pledged to give back to humanity all but a tiny fraction of 1% of that fortune.
These traits only begin to explain why Gates, at 52, has chosen to redirect his efforts toward more altruistic pursuits. On July 1 he will step away from an operating role at Microsoft (MSFT, Fortune 500) to devote more time to philanthropy and other interests. The shift has been on his mind for nearly a decade, and it reflects some important experiences over his lifetime.
Much is expected
Like that seminal time back in 1968 when his mother, Mary, spearheaded an effort to install a used Teletype terminal in his school so that her already autodidactic junior high schooler could teach himself how to program a mainframe. There was his epiphany when he first met fellow billionaire Warren Buffett in 1991 - and realized that it quite literally pays to follow your curiosity beyond your own area of expertise.
And there's the poignant letter his mother wrote in 1993 to his fiancée, Melinda French, cluing her in to the Gates family credo: "From those to whom much has been given, much is expected." (Mary Gates would die the next year.) That letter, in turn, led to the self-conscious irony in the slogan he and his wife hit upon for the Bill & Melinda Gates Foundation: All lives have equal value.
The genes, the IQ, the life of privilege, and the noblesse oblige have always been there. Given that background, it makes sense that he would turn his attention and wealth to the greater good. But there is a more selfish motive in the "retirement" of Bill Gates, and one that no one should begrudge him. For the first time since he quit Harvard to start Microsoft 33 years ago, Gates is going to have the time to indulge what his father calls his "world-class curiosity."
Gates' closest friends wonder how he will exploit this new freedom. "He doesn't know for sure where his mind is going to go," says Buffett, who has donated the bulk of his own $45 billion fortune to the Gates Foundation, largely because he believes his money will be used wisely and effectively. "Not only will it be fascinating, but I think it's going to be, for me, very satisfying to watch."
"He is one of the greatest business minds of all time, and you don't just shut that off," adds Nathan Myhrvold, the former head of Microsoft's R&D labs, who still kicks around ideas with his former boss via e-mail almost daily. "My guess is we have not seen the last business idea out of Bill Gates."
Setting a curious mind free
Bill Gates 2.0 will have three offices: one at Microsoft in Redmond, a second about 15 miles away at the Gates Foundation in downtown Seattle, and a third almost exactly equidistant between the other two (and much closer to home). In typical hyper-systematic fashion, Gates has allocated blocks of time to each location: a day in Redmond, two at the foundation, and two at the personal office, which he suspects will be his real "center of gravity." There will be a lot of overlap among his three roles. That's because the guy's greatest pleasure seems to be in finding connections among things he's interested in.
The biggest change, of course, will be in his workload at Microsoft, which will drop drastically. He'll remain chairman and weigh in here and there. "Other than board meetings and consulting on projects like Internet search technology, the only things I'll do are some company visits when I'm in developing countries," he says. "Or if there's some special award for someone at a company meeting, I'll come and present it. But that's about it." (For more on how Microsoft is coping with Gates' retirement, see the accompanying story.)
The opposite will be true at the foundation. Gates' official title, which he shares with his wife and father, is co-chair, but his real role will be as the organization's chief strategic thinker. And Gates is teeming with ideas, especially about things scientific. Unlike most benefactors, he doesn't merely want to eradicate malaria and AIDS; he wants to understand the nuances of immunology. He wants to learn about what happens on a molecular scale when a plant's genes are altered to improve hardiness. He insists on knowing the precise legal reasons women in developing countries are robbed of their estates when they become widowed.
"Here's how Bill thinks," explains Myhrvold. "He is always interested in looking at big systems in the world and understanding them at every level that he can. As an example, I got this e-mail from him today as part of this whole discussion on corn prices and crop yields and shortages resulting from ethanol production, and at the end Bill says, 'I really need to understand phosphates more.'"
Another big part of his new job will be to make more public appearances and do more arm-twisting of governments and corporations to do more for the world's poor. "I'm uniquely able to reach out to the big companies, to ask them not just to write checks but to offer more of their innovative power," Gates says. "There's a big category of my time for talking to drug companies, cellphone companies, banks, and technology companies, as well as talking with other people who are lucky enough to have superbig fortunes about how they want to give those back to society."
That does not translate to fundraising - on the contrary, the foundation plans to exhaust its $100 billion endowment by the end of the century. Gates is talking about setting an example for the plutocracy. Jeff Raikes, the former Microsoft executive who was just appointed CEO of the foundation, thinks that effort could have as much impact on the world as the works of the foundation itself: "He has an incredible opportunity to help shape the thinking of other multibillionaires by getting them to think about the process, the structure, the best practices."
Gates takes pains to stress that even in his more active capacity, "I'm not the CEO of the foundation. Jeff will be the CEO." That's simply not what he wants to do with his time. "Even today people at the foundation get lots of e-mail from me, but after Sept. 1 they'll get a lot more, because now I'll be able to take courses, read more, meet more smart people, and have better ideas."
Mellowing with age
In his younger years, Gates' gimlet-eyed idealism manifested itself in stubbornness and self-righteousness, an unusual boldness, and a tendency not to suffer fools. Most people who have worked closely with him can recall more than one instance in which he reacted to a comment or idea by standing up and hissing, "That's the stupidest thing I've ever heard in my life."
He hasn't lost that inclination toward intellectual arrogance. But in his philanthropic work, the shoe is sometimes on the other foot. He's not, after all, a microbiologist or a geneticist. Moreover, with age and maturity, Gates has become much better able to acknowledge what he doesn't know or when he's wrong.
"The classic CEO needs to be right, or rather needs to appear to be right more than he needs to actually be right - and that's not Bill," says his pal Myhrvold. "Lewis and Clark were lost most of the time. If your idea of exploration is to always know where you are and to be inside your zone of competence, you don't do wild new shit. You have to be confused, upset, think you're stupid. If you're not willing to do that, you can't go outside the box."
And that explains the third dimension of Bill Gates' new life - giving that "world-class curiosity" some room to run. His reading and learning have always been systematic. It's his nature. His father and sisters recall how young Bill would refuse to leave his room to come to the dinner table because he was too busy "thinking." But for many years, as he built Microsoft, his field of vision was of necessity rather narrow. One of the most important experiences that jostled him out of his single-mindedness was his first meeting with Buffett, on July 5, 1991. As Gates tells the story:
My mom called me at the office to come out to Hood Canal for a Fourth of July barbecue because she wanted me to meet Warren Buffett. And I said, "Mom, I'm working." But she insisted. So I took a helicopter so I could spend my couple of hours there and then get back quickly and work on software.
Then I met Warren, and I thought, "Oh, wow, this guy isn't just about buying and selling stocks and businesses. He is thinking about how the world works." And he asked me questions that I always wanted somebody to ask me, about why hadn't IBM (IBM, Fortune 500) been able to do what we had done, and how software gets priced, and why does one company have a defensible position. He wanted to understand the dynamics of the industry. To me it was way far away from, "What is your company worth?"
Then he explained to me about how Wal-Mart (WMT, Fortune 500) had not only changed things in its business, but how it had an effect on newspapers because they thought of their advertising differently than individual local stores had. And he talked about how banking really worked in terms of credit risk. The whole time all I could think was, "Hey, I'll be smarter about running Microsoft after I talk to this guy." And so I stayed the whole day.
Ever since then, Gates has tried to make more time to broaden his knowledge, and his capacity to absorb ideas has served Microsoft and the foundation well. But now reading, learning, and blue-sky brainstorming will be considered an integral part of his job description, and no doubt they will yield something.
Think of his third office, the one equidistant from Microsoft and the foundation, as the billionaire-adult equivalent of his own room. It's a place for him to spend time exploring his own ideas, and occasionally trying to find an appropriate entity to pursue them, whether it be Microsoft R&D or someone at the foundation or one of the foundation's many corporate and nonprofit partners. He'll focus on ideas related to his philanthropy, but he also will spend a lot of time with the staff of Ph.D.s and inventors at Intellectual Ventures (IV for short), Nathan Myhrvold's Seattle-based skunkworks for discovering patentable new technologies. Previously IV hosted brainstorming sessions for foundation scientists, and Gates is an informal member of a group of IV partners and investors with more general interests that meets regularly. He plans to participate even more frequently after July 1.
"I'm not going to create a company," Gates vows. "The foundation is the top priority. But there are some other things that I might help along. The scientific brainstorming with Nathan's group has led to a new nuclear energy startup, and I'm a funder and advisor to that thing. It won't be a huge amount of time, but the truth is, cheap energy that's environmentally friendly is a breakthrough that is more important for the poor than the rich. And the poor need fertilizer, more reliable seeds, and better agriculture too. They can't cut back their eating, because that's called starvation. So I'm investing in that."
Myhrvold loves the irony of it all: "It's so funny: Here's a guy who never went to class when his poor dad was paying the Harvard tuition, and now the sheer love of learning has sucked him back in, hard-core. It's not like he needs a job. It's not like he's thinking, 'Oh, that would look good on my résumé.'"
His place in history
It's too early, of course, to judge the legacy of Bill Gates. He's only 52. His kids aren't even out of elementary school. And he has only just stepped away from Microsoft, a company that once put IBM in its place, and which some would say is the most significant company to come along since General Electric (GE, Fortune 500).
Nor do we really know what - or even whether - Gates thinks of his place in history. As outgoing Gates Foundation CEO Patty Stonesifer puts it, "The Gateses by nature believe that the unexamined life is the one that's worth living. They don't like to talk about themselves. It's all about rational responsibility, not grand idealism."
Buffett, who knows him as well as anyone, says the notoriously competitive Gates will have to find new ways to judge his accomplishments rather than by market share or in dollars. "He'll be competing with his own standards," Buffett says. "In the end, he is going to want people to look at the Gates Foundation 100 years from now and say, 'This guy did it the way it should have been done.'"
With all he did at Microsoft, Gates has a tough act to follow. "Bringing personal computing to billions has totally changed the world, and it's changed it, net-net, way for the better," says Myhrvold. "So even before you look at what his foundation has done for Africa or for the poor, he's already done more for the good of the world than essentially anyone else in our lifetimes."
Melinda Gates isn't at all surprised by Bill's transformation from feared empire builder to enlightened philanthropist. "I think the foundation, because it's not all about business and competition, allows other dimensions of Bill's personality to come out," she says. "He's incredibly funny and has an unbelievably wry sense of humor. He also can be very emotional when he sees the pathetic living conditions of so many people. He's a genuinely nice guy. I think more of what I see at home and what we see inside the foundation will come out. That will be a really nice thing for him and for the world."
To which her husband would likely say, "That's the stupidest thing I've ever heard in my life."
Just kidding.
By Brent Schlender, editor-at-large
Last Updated: June 20, 2008: 5:35 PM EDT
(Fortune Magazine) -- Let me tell you about Bill Gates. He is different from you and me. First off, the billionaire co-founder of Microsoft has always been something of a utopian. In his mind, even the world's knottiest problems can be solved if you apply enough IQ. Accordingly, Gates, who has been spotted on Seattle freeways reading a book while driving himself to the office, covets knowledge. It's as if he's still trying to make up for dropping out of Harvard, as he spends just about any spare waking minute reading, studying science texts, or watching university courses on DVD.
Some say his wealth and famous opportunism are reminiscent of the robber barons of yore. Yet here is a man who has set a goal to eradicate malaria. Rich as he is - his net worth is an estimated $50 billion - you can't call the man greedy when he has pledged to give back to humanity all but a tiny fraction of 1% of that fortune.
These traits only begin to explain why Gates, at 52, has chosen to redirect his efforts toward more altruistic pursuits. On July 1 he will step away from an operating role at Microsoft (MSFT, Fortune 500) to devote more time to philanthropy and other interests. The shift has been on his mind for nearly a decade, and it reflects some important experiences over his lifetime.
Much is expected
Like that seminal time back in 1968 when his mother, Mary, spearheaded an effort to install a used Teletype terminal in his school so that her already autodidactic junior high schooler could teach himself how to program a mainframe. There was his epiphany when he first met fellow billionaire Warren Buffett in 1991 - and realized that it quite literally pays to follow your curiosity beyond your own area of expertise.
And there's the poignant letter his mother wrote in 1993 to his fiancée, Melinda French, cluing her in to the Gates family credo: "From those to whom much has been given, much is expected." (Mary Gates would die the next year.) That letter, in turn, led to the self-conscious irony in the slogan he and his wife hit upon for the Bill & Melinda Gates Foundation: All lives have equal value.
The genes, the IQ, the life of privilege, and the noblesse oblige have always been there. Given that background, it makes sense that he would turn his attention and wealth to the greater good. But there is a more selfish motive in the "retirement" of Bill Gates, and one that no one should begrudge him. For the first time since he quit Harvard to start Microsoft 33 years ago, Gates is going to have the time to indulge what his father calls his "world-class curiosity."
Gates' closest friends wonder how he will exploit this new freedom. "He doesn't know for sure where his mind is going to go," says Buffett, who has donated the bulk of his own $45 billion fortune to the Gates Foundation, largely because he believes his money will be used wisely and effectively. "Not only will it be fascinating, but I think it's going to be, for me, very satisfying to watch."
"He is one of the greatest business minds of all time, and you don't just shut that off," adds Nathan Myhrvold, the former head of Microsoft's R&D labs, who still kicks around ideas with his former boss via e-mail almost daily. "My guess is we have not seen the last business idea out of Bill Gates."
Setting a curious mind free
Bill Gates 2.0 will have three offices: one at Microsoft in Redmond, a second about 15 miles away at the Gates Foundation in downtown Seattle, and a third almost exactly equidistant between the other two (and much closer to home). In typical hyper-systematic fashion, Gates has allocated blocks of time to each location: a day in Redmond, two at the foundation, and two at the personal office, which he suspects will be his real "center of gravity." There will be a lot of overlap among his three roles. That's because the guy's greatest pleasure seems to be in finding connections among things he's interested in.
The biggest change, of course, will be in his workload at Microsoft, which will drop drastically. He'll remain chairman and weigh in here and there. "Other than board meetings and consulting on projects like Internet search technology, the only things I'll do are some company visits when I'm in developing countries," he says. "Or if there's some special award for someone at a company meeting, I'll come and present it. But that's about it." (For more on how Microsoft is coping with Gates' retirement, see the accompanying story.)
The opposite will be true at the foundation. Gates' official title, which he shares with his wife and father, is co-chair, but his real role will be as the organization's chief strategic thinker. And Gates is teeming with ideas, especially about things scientific. Unlike most benefactors, he doesn't merely want to eradicate malaria and AIDS; he wants to understand the nuances of immunology. He wants to learn about what happens on a molecular scale when a plant's genes are altered to improve hardiness. He insists on knowing the precise legal reasons women in developing countries are robbed of their estates when they become widowed.
"Here's how Bill thinks," explains Myhrvold. "He is always interested in looking at big systems in the world and understanding them at every level that he can. As an example, I got this e-mail from him today as part of this whole discussion on corn prices and crop yields and shortages resulting from ethanol production, and at the end Bill says, 'I really need to understand phosphates more.'"
Another big part of his new job will be to make more public appearances and do more arm-twisting of governments and corporations to do more for the world's poor. "I'm uniquely able to reach out to the big companies, to ask them not just to write checks but to offer more of their innovative power," Gates says. "There's a big category of my time for talking to drug companies, cellphone companies, banks, and technology companies, as well as talking with other people who are lucky enough to have superbig fortunes about how they want to give those back to society."
That does not translate to fundraising - on the contrary, the foundation plans to exhaust its $100 billion endowment by the end of the century. Gates is talking about setting an example for the plutocracy. Jeff Raikes, the former Microsoft executive who was just appointed CEO of the foundation, thinks that effort could have as much impact on the world as the works of the foundation itself: "He has an incredible opportunity to help shape the thinking of other multibillionaires by getting them to think about the process, the structure, the best practices."
Gates takes pains to stress that even in his more active capacity, "I'm not the CEO of the foundation. Jeff will be the CEO." That's simply not what he wants to do with his time. "Even today people at the foundation get lots of e-mail from me, but after Sept. 1 they'll get a lot more, because now I'll be able to take courses, read more, meet more smart people, and have better ideas."
Mellowing with age
In his younger years, Gates' gimlet-eyed idealism manifested itself in stubbornness and self-righteousness, an unusual boldness, and a tendency not to suffer fools. Most people who have worked closely with him can recall more than one instance in which he reacted to a comment or idea by standing up and hissing, "That's the stupidest thing I've ever heard in my life."
He hasn't lost that inclination toward intellectual arrogance. But in his philanthropic work, the shoe is sometimes on the other foot. He's not, after all, a microbiologist or a geneticist. Moreover, with age and maturity, Gates has become much better able to acknowledge what he doesn't know or when he's wrong.
"The classic CEO needs to be right, or rather needs to appear to be right more than he needs to actually be right - and that's not Bill," says his pal Myhrvold. "Lewis and Clark were lost most of the time. If your idea of exploration is to always know where you are and to be inside your zone of competence, you don't do wild new shit. You have to be confused, upset, think you're stupid. If you're not willing to do that, you can't go outside the box."
And that explains the third dimension of Bill Gates' new life - giving that "world-class curiosity" some room to run. His reading and learning have always been systematic. It's his nature. His father and sisters recall how young Bill would refuse to leave his room to come to the dinner table because he was too busy "thinking." But for many years, as he built Microsoft, his field of vision was of necessity rather narrow. One of the most important experiences that jostled him out of his single-mindedness was his first meeting with Buffett, on July 5, 1991. As Gates tells the story:
My mom called me at the office to come out to Hood Canal for a Fourth of July barbecue because she wanted me to meet Warren Buffett. And I said, "Mom, I'm working." But she insisted. So I took a helicopter so I could spend my couple of hours there and then get back quickly and work on software.
Then I met Warren, and I thought, "Oh, wow, this guy isn't just about buying and selling stocks and businesses. He is thinking about how the world works." And he asked me questions that I always wanted somebody to ask me, about why hadn't IBM (IBM, Fortune 500) been able to do what we had done, and how software gets priced, and why does one company have a defensible position. He wanted to understand the dynamics of the industry. To me it was way far away from, "What is your company worth?"
Then he explained to me about how Wal-Mart (WMT, Fortune 500) had not only changed things in its business, but how it had an effect on newspapers because they thought of their advertising differently than individual local stores had. And he talked about how banking really worked in terms of credit risk. The whole time all I could think was, "Hey, I'll be smarter about running Microsoft after I talk to this guy." And so I stayed the whole day.
Ever since then, Gates has tried to make more time to broaden his knowledge, and his capacity to absorb ideas has served Microsoft and the foundation well. But now reading, learning, and blue-sky brainstorming will be considered an integral part of his job description, and no doubt they will yield something.
Think of his third office, the one equidistant from Microsoft and the foundation, as the billionaire-adult equivalent of his own room. It's a place for him to spend time exploring his own ideas, and occasionally trying to find an appropriate entity to pursue them, whether it be Microsoft R&D or someone at the foundation or one of the foundation's many corporate and nonprofit partners. He'll focus on ideas related to his philanthropy, but he also will spend a lot of time with the staff of Ph.D.s and inventors at Intellectual Ventures (IV for short), Nathan Myhrvold's Seattle-based skunkworks for discovering patentable new technologies. Previously IV hosted brainstorming sessions for foundation scientists, and Gates is an informal member of a group of IV partners and investors with more general interests that meets regularly. He plans to participate even more frequently after July 1.
"I'm not going to create a company," Gates vows. "The foundation is the top priority. But there are some other things that I might help along. The scientific brainstorming with Nathan's group has led to a new nuclear energy startup, and I'm a funder and advisor to that thing. It won't be a huge amount of time, but the truth is, cheap energy that's environmentally friendly is a breakthrough that is more important for the poor than the rich. And the poor need fertilizer, more reliable seeds, and better agriculture too. They can't cut back their eating, because that's called starvation. So I'm investing in that."
Myhrvold loves the irony of it all: "It's so funny: Here's a guy who never went to class when his poor dad was paying the Harvard tuition, and now the sheer love of learning has sucked him back in, hard-core. It's not like he needs a job. It's not like he's thinking, 'Oh, that would look good on my résumé.'"
His place in history
It's too early, of course, to judge the legacy of Bill Gates. He's only 52. His kids aren't even out of elementary school. And he has only just stepped away from Microsoft, a company that once put IBM in its place, and which some would say is the most significant company to come along since General Electric (GE, Fortune 500).
Nor do we really know what - or even whether - Gates thinks of his place in history. As outgoing Gates Foundation CEO Patty Stonesifer puts it, "The Gateses by nature believe that the unexamined life is the one that's worth living. They don't like to talk about themselves. It's all about rational responsibility, not grand idealism."
Buffett, who knows him as well as anyone, says the notoriously competitive Gates will have to find new ways to judge his accomplishments rather than by market share or in dollars. "He'll be competing with his own standards," Buffett says. "In the end, he is going to want people to look at the Gates Foundation 100 years from now and say, 'This guy did it the way it should have been done.'"
With all he did at Microsoft, Gates has a tough act to follow. "Bringing personal computing to billions has totally changed the world, and it's changed it, net-net, way for the better," says Myhrvold. "So even before you look at what his foundation has done for Africa or for the poor, he's already done more for the good of the world than essentially anyone else in our lifetimes."
Melinda Gates isn't at all surprised by Bill's transformation from feared empire builder to enlightened philanthropist. "I think the foundation, because it's not all about business and competition, allows other dimensions of Bill's personality to come out," she says. "He's incredibly funny and has an unbelievably wry sense of humor. He also can be very emotional when he sees the pathetic living conditions of so many people. He's a genuinely nice guy. I think more of what I see at home and what we see inside the foundation will come out. That will be a really nice thing for him and for the world."
To which her husband would likely say, "That's the stupidest thing I've ever heard in my life."
Just kidding.
Thursday, June 19, 2008
China Shocks With 18 Percent Fuel Price Rise
Thursday June 19, 10:50 am ET
BEIJING (Reuters) - China will announce a surprise increase of about 18 percent increase in retail gasoline and diesel prices effective from Friday, the first increase in eight months, two industry sources told Reuters.
"Yes it's real. They are going to raise the prices. We were told to wait in the office to receive the official notice," said a fuel sales official with top refiner Sinopec Corp (HKSE:0386.HK - News).
The sources said gasoline and diesel prices will rise by 1,000 yuan ($145.5) per metric ton.
China last raised pump fuel prices in November.
The move in November took many market watchers by surprise as Beijing has repeatedly vowed to rule out "near-term" price increases to fight decade-high inflation.
Oil prices fell $3 a barrel on Thursday on the news because demand from China has been one of the main factors driving oil prices to a record near $140.
BEIJING (Reuters) - China will announce a surprise increase of about 18 percent increase in retail gasoline and diesel prices effective from Friday, the first increase in eight months, two industry sources told Reuters.
"Yes it's real. They are going to raise the prices. We were told to wait in the office to receive the official notice," said a fuel sales official with top refiner Sinopec Corp (HKSE:0386.HK - News).
The sources said gasoline and diesel prices will rise by 1,000 yuan ($145.5) per metric ton.
China last raised pump fuel prices in November.
The move in November took many market watchers by surprise as Beijing has repeatedly vowed to rule out "near-term" price increases to fight decade-high inflation.
Oil prices fell $3 a barrel on Thursday on the news because demand from China has been one of the main factors driving oil prices to a record near $140.
2 surrender in subprime mortgage collapse case
Thursday June 19, 8:18 am ET
By Tom Hays, Associated Press Writer
2 former Bear Stearns managers surrender in collapse of the subprime mortgage market
NEW YORK (AP) -- Federal authorities say two former Bear Stearns managers have surrendered in New York City to face criminal charges in the wake of the collapse of the subprime mortgage market.
Authorities in Brooklyn are expected to give details later Thursday on the case against Ralph Cioffi and Matthew Tanin, who are ex-managers of Bear Stearns Cos. hedge funds that collapsed last year.
Officials have told The Associated Press that the former executives are suspected of misleading investors about the risky subprime mortgage market. They have been the target of the yearlong probe.
Tannin's attorney has declined to comment and Cioffi's attorney has not responded to a phone message.
By Tom Hays, Associated Press Writer
2 former Bear Stearns managers surrender in collapse of the subprime mortgage market
NEW YORK (AP) -- Federal authorities say two former Bear Stearns managers have surrendered in New York City to face criminal charges in the wake of the collapse of the subprime mortgage market.
Authorities in Brooklyn are expected to give details later Thursday on the case against Ralph Cioffi and Matthew Tanin, who are ex-managers of Bear Stearns Cos. hedge funds that collapsed last year.
Officials have told The Associated Press that the former executives are suspected of misleading investors about the risky subprime mortgage market. They have been the target of the yearlong probe.
Tannin's attorney has declined to comment and Cioffi's attorney has not responded to a phone message.
Tuesday, June 10, 2008
Stocks Could Be Hostage To Oil Prices All Summer
Tuesday June 10, 1:25 pm ET
For the stock market, this summer is going to be all about oil.
When once the two moved in tandem, equities and energy now are running in opposite directions, a trend most analysts expect to continue until oil finds a more comfortable trading range.
"At this point the market is almost held hostage to oil prices. It's very difficult to envision how the stock market moves appreciably higher with these huge swings we're seeing in oil prices now," says David Twibell, president of wealth management for Colorado Capital Bank.
The trend has been especially acute lately, particularly Friday when U.S. light, sweet crude surged more than $11 a barrel and the major stock indexes each fell about 3 percent. It repeated itself Monday when oil fell and the Dow posted a modest gain, and performed similarly Tuesday as oil lost ground through the morning and stocks gained.
"I think we're going to have, at least for the time being, an inverse relationship," Twibell says. "I don't think historically that's been the case or needs to be the case. But energy prices are so high and have gone up so rapidly that it's really a psychological influence for investors."
Volatility became a watchword in the market when the credit crunch began to take hold in September 2007.
The Chicago Board Options Exchange's Volatility Index (Chicago: VIX) gained about 32 percent from early September to mid-March 2008. But the VIX dropped considerably through April and May, falling well below 20, which is considered the benchmark for a volatile market.
But it is back up since then as oil has skyrocketed and stocks have given back much of their gains. At the same time, the VIX has moved back into volatility ground, and with questionable volume levels ahead for the summer the waters could be choppy.
"People keep saying that one of reasons that oil prices are so high is because global growth is so high, yet everybody seems to be looking for a slowdown in global growth. You can't have it both ways," says Brian Gendreau, investment strategist at ING Investment Management. "I think the market is having trouble sorting it all out. There are a lot of cross-currents."
Of course, not everyone thinks volatility is a bad thing, but investment advisors counsel caution when it comes to playing this type of market.
How to Play the Oil-Stocks Disconnect
Money managers typically like to find market stalwarts like Procter & Gamble during hard-to-predict economic times. The stock has been a favorite lately for market bears, including Rick Pendergraft, editor at Investor's Daily Edge online newsletter.
"Their products are everyday use items that people just don't change up that much," he says of the company.
But Pendergraft also favors a host of bear plays, including shorting an exchange-traded fund for long-term bonds, the iShares Lehman 20+ Year Treasury Bond (NYSE Arca: TLT) fund. He also advocates shorting stocks and buying inverse ETFs. Rydex offers a variety of inverse ETFs, including the ProFunds Bear Inverse (OTC Funds: BRPIX) which tracks S&P 500 movements.
Since oil has surged and caused havor through stocks, investment counselors are advocating traditional down-time sectors.
They include consumer staples and health care, while Pendergraft also thinks tobacco companies could do well now. Utilities also get some mention, particularly those that do business in foreign markets.
But some are looking directly to energy as a way to navigate the turbulent times, though not necessarily in the big producers.
"The energy area is going to be the primary area that is going to benefit," says Richard Sparks, senior analyst at Schaeffer's Investment Research. "Specifically, you want to look at the front end of the pipeline that benefits from that increase in price--exploration and production, rather than the refiners."
Sparks recommends two small-cap exploration firms: PetroQuest and Goodrich Petroleum.
Twibell takes a far more cautious approach to investing right now, and is in fact advising his clients to stay on the sidelines until the oil scenario plays itself out. The only areas he would play now are agriculture, due to soaring grain costs, and believes the community and regional banks will offer solid value over a longer time frame.
"If I had a cash reserve I'd be holding onto that, looking for some resolution one way or the other," he says. "Over the short run I don't even think you're really safe in energy right now."
While it may seem obvious, many analysts are simply counseling diversification and calm in the face of the wild oil and stock swings.
"Investors that have a well-diversified portfolio are probably best off right now hanging in tight," Twibell says. "If we can get some catalyst to move energy prices lower, I think the markets can do just fine."
For the stock market, this summer is going to be all about oil.
When once the two moved in tandem, equities and energy now are running in opposite directions, a trend most analysts expect to continue until oil finds a more comfortable trading range.
"At this point the market is almost held hostage to oil prices. It's very difficult to envision how the stock market moves appreciably higher with these huge swings we're seeing in oil prices now," says David Twibell, president of wealth management for Colorado Capital Bank.
The trend has been especially acute lately, particularly Friday when U.S. light, sweet crude surged more than $11 a barrel and the major stock indexes each fell about 3 percent. It repeated itself Monday when oil fell and the Dow posted a modest gain, and performed similarly Tuesday as oil lost ground through the morning and stocks gained.
"I think we're going to have, at least for the time being, an inverse relationship," Twibell says. "I don't think historically that's been the case or needs to be the case. But energy prices are so high and have gone up so rapidly that it's really a psychological influence for investors."
Volatility became a watchword in the market when the credit crunch began to take hold in September 2007.
The Chicago Board Options Exchange's Volatility Index (Chicago: VIX) gained about 32 percent from early September to mid-March 2008. But the VIX dropped considerably through April and May, falling well below 20, which is considered the benchmark for a volatile market.
But it is back up since then as oil has skyrocketed and stocks have given back much of their gains. At the same time, the VIX has moved back into volatility ground, and with questionable volume levels ahead for the summer the waters could be choppy.
"People keep saying that one of reasons that oil prices are so high is because global growth is so high, yet everybody seems to be looking for a slowdown in global growth. You can't have it both ways," says Brian Gendreau, investment strategist at ING Investment Management. "I think the market is having trouble sorting it all out. There are a lot of cross-currents."
Of course, not everyone thinks volatility is a bad thing, but investment advisors counsel caution when it comes to playing this type of market.
How to Play the Oil-Stocks Disconnect
Money managers typically like to find market stalwarts like Procter & Gamble during hard-to-predict economic times. The stock has been a favorite lately for market bears, including Rick Pendergraft, editor at Investor's Daily Edge online newsletter.
"Their products are everyday use items that people just don't change up that much," he says of the company.
But Pendergraft also favors a host of bear plays, including shorting an exchange-traded fund for long-term bonds, the iShares Lehman 20+ Year Treasury Bond (NYSE Arca: TLT) fund. He also advocates shorting stocks and buying inverse ETFs. Rydex offers a variety of inverse ETFs, including the ProFunds Bear Inverse (OTC Funds: BRPIX) which tracks S&P 500 movements.
Since oil has surged and caused havor through stocks, investment counselors are advocating traditional down-time sectors.
They include consumer staples and health care, while Pendergraft also thinks tobacco companies could do well now. Utilities also get some mention, particularly those that do business in foreign markets.
But some are looking directly to energy as a way to navigate the turbulent times, though not necessarily in the big producers.
"The energy area is going to be the primary area that is going to benefit," says Richard Sparks, senior analyst at Schaeffer's Investment Research. "Specifically, you want to look at the front end of the pipeline that benefits from that increase in price--exploration and production, rather than the refiners."
Sparks recommends two small-cap exploration firms: PetroQuest and Goodrich Petroleum.
Twibell takes a far more cautious approach to investing right now, and is in fact advising his clients to stay on the sidelines until the oil scenario plays itself out. The only areas he would play now are agriculture, due to soaring grain costs, and believes the community and regional banks will offer solid value over a longer time frame.
"If I had a cash reserve I'd be holding onto that, looking for some resolution one way or the other," he says. "Over the short run I don't even think you're really safe in energy right now."
While it may seem obvious, many analysts are simply counseling diversification and calm in the face of the wild oil and stock swings.
"Investors that have a well-diversified portfolio are probably best off right now hanging in tight," Twibell says. "If we can get some catalyst to move energy prices lower, I think the markets can do just fine."
Friday, June 6, 2008
Stocks fall sharply on surge in oil, jobs data
Friday June 6, 12:01 pm ET
By Tim Paradis, AP Business Writer
Stocks tumble after surge in crude oil prices, suprise jump in unemployment rate; bonds jump
NEW YORK (AP) -- Wall Street plunged Friday on two troubling economic developments: oil prices that surged more than $6 a barrel and a jump in unemployment that was much larger than the market anticipated. The Dow Jones industrial average gave up more than 250 points.
The decline in stocks also helped drive bond prices sharply higher as investors sought a more secure place for their money.
Crude oil has made an aggressive rebound this week, rising more than $7 a barrel in two days after falling amid a drop in demand for gasoline. The jump continued Friday. Light, sweet crude surged $6.37 to $134.16 a barrel on the New York Mercantile Exchange after reports that a Morgan Stanley shipping analyst predicted oil would surge to $150 a barrel by July 4 and as the dollar declined.
Oil's advance unnerved a market already anxious about consumers' willingness to spend; the higher that energy costs go, the more difficult it will become for consumers to justify spending on things that aren't necessities. That kind of reluctance could deal a big blow to the economy as consumer spending accounts for more than two-thirds of U.S. economic activity.
The spike in energy prices comes as the Labor Department said the nation's unemployment rate jumped to 5.5 percent in May from 5.0 percent in April. It was the biggest monthly increase since February 1986 and the rise leaves unemployment at it highest level since October 2004. Wall Street had predicted an uptick to 5.1 percent.
The number of U.S. jobs shrank by a smaller-than-expected 49,000, but that development offered Wall Street little solace given that May marked the fifth straight month of jobs losses. Signs that the U.S. job market is deteriorating more than anticipated could thwart investors' hopes that the economy is poised for recovery later this year. That notion has helped propel the stock market from its mid-March lows.
The sudden rise in oil prices appeared to weigh most heavily on Wall Street, however, as some investors attributed a portion of the rise in unemployment to a rush of teenagers looking for summer work.
"I think the biggest concern right now is oil and it's potential for a stagflationary environment," said Bill Knapp, investment strategist for MainStay Investments, a division of New York Life Investment Management. Stagflation occurs when stalling growth accompanies rising prices.
In midday trading, the Dow fell 252.81, or 2.01 percent, to 12,351.64.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 23.87, or 1.70 percent, to 1,380.18, and the Nasdaq composite index fell 42.16, or 1.65 percent, to 2,507.78.
Friday's pullback comes a day after the Dow jumped nearly 214 points, logging its largest daily point gain since April 18 following better-than-expected sales from retailers and a dip in jobless claims. The welcome economic news helped investors shrug off a more than $5-a-barrel spike in oil prices. But the further advance in oil on Friday was too much for investors to overlook.
Bond prices jumped after the weak jobs data sent investors scurrying for safety. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.94 percent from 4.04 percent late Wednesday.
The dollar declined against other major currencies -- a move that makes each barrel of oil more expensive. Gold prices rose.
Ethan Harris, Lehman Brothers' chief U.S. economist, contends that the employment report helped drive oil prices higher. He said traders are worried that the spike in unemployment would leave the Federal Reserve unwilling to raise interest rates. A notion of a Fed with few options combined with comments from the European Central Bank this week on the possibility of raising rates have hurt the dollar.
"The weaker dollar is pushing up oil prices because oil is denominated in dollars and oil sellers want to be compensated for the weaker dollar," Harris said, adding that he thinks the market's moves have been overdone.
"While I'm skeptical of the whole thing in terms of whether it makes sense logically, this is the way the market behaves. It's like a Pavlovian response. If the Fed looks soft, oil prices go up," he said.
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came 523.4 million shares.
The Russell 2000 index of smaller companies fell 13.47, or 1.76 percent, to 749.80.
Wall Street's pullback weighed on Europe. Britain's FTSE 100 fell 1.48 percent, Germany's DAX index fell 1.99 percent, and France's CAC-40 declined 2.28 percent. Japan's Nikkei stock average closed up 1.03 percent.
By Tim Paradis, AP Business Writer
Stocks tumble after surge in crude oil prices, suprise jump in unemployment rate; bonds jump
NEW YORK (AP) -- Wall Street plunged Friday on two troubling economic developments: oil prices that surged more than $6 a barrel and a jump in unemployment that was much larger than the market anticipated. The Dow Jones industrial average gave up more than 250 points.
The decline in stocks also helped drive bond prices sharply higher as investors sought a more secure place for their money.
Crude oil has made an aggressive rebound this week, rising more than $7 a barrel in two days after falling amid a drop in demand for gasoline. The jump continued Friday. Light, sweet crude surged $6.37 to $134.16 a barrel on the New York Mercantile Exchange after reports that a Morgan Stanley shipping analyst predicted oil would surge to $150 a barrel by July 4 and as the dollar declined.
Oil's advance unnerved a market already anxious about consumers' willingness to spend; the higher that energy costs go, the more difficult it will become for consumers to justify spending on things that aren't necessities. That kind of reluctance could deal a big blow to the economy as consumer spending accounts for more than two-thirds of U.S. economic activity.
The spike in energy prices comes as the Labor Department said the nation's unemployment rate jumped to 5.5 percent in May from 5.0 percent in April. It was the biggest monthly increase since February 1986 and the rise leaves unemployment at it highest level since October 2004. Wall Street had predicted an uptick to 5.1 percent.
The number of U.S. jobs shrank by a smaller-than-expected 49,000, but that development offered Wall Street little solace given that May marked the fifth straight month of jobs losses. Signs that the U.S. job market is deteriorating more than anticipated could thwart investors' hopes that the economy is poised for recovery later this year. That notion has helped propel the stock market from its mid-March lows.
The sudden rise in oil prices appeared to weigh most heavily on Wall Street, however, as some investors attributed a portion of the rise in unemployment to a rush of teenagers looking for summer work.
"I think the biggest concern right now is oil and it's potential for a stagflationary environment," said Bill Knapp, investment strategist for MainStay Investments, a division of New York Life Investment Management. Stagflation occurs when stalling growth accompanies rising prices.
In midday trading, the Dow fell 252.81, or 2.01 percent, to 12,351.64.
Broader stock indicators also declined. The Standard & Poor's 500 index fell 23.87, or 1.70 percent, to 1,380.18, and the Nasdaq composite index fell 42.16, or 1.65 percent, to 2,507.78.
Friday's pullback comes a day after the Dow jumped nearly 214 points, logging its largest daily point gain since April 18 following better-than-expected sales from retailers and a dip in jobless claims. The welcome economic news helped investors shrug off a more than $5-a-barrel spike in oil prices. But the further advance in oil on Friday was too much for investors to overlook.
Bond prices jumped after the weak jobs data sent investors scurrying for safety. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.94 percent from 4.04 percent late Wednesday.
The dollar declined against other major currencies -- a move that makes each barrel of oil more expensive. Gold prices rose.
Ethan Harris, Lehman Brothers' chief U.S. economist, contends that the employment report helped drive oil prices higher. He said traders are worried that the spike in unemployment would leave the Federal Reserve unwilling to raise interest rates. A notion of a Fed with few options combined with comments from the European Central Bank this week on the possibility of raising rates have hurt the dollar.
"The weaker dollar is pushing up oil prices because oil is denominated in dollars and oil sellers want to be compensated for the weaker dollar," Harris said, adding that he thinks the market's moves have been overdone.
"While I'm skeptical of the whole thing in terms of whether it makes sense logically, this is the way the market behaves. It's like a Pavlovian response. If the Fed looks soft, oil prices go up," he said.
Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came 523.4 million shares.
The Russell 2000 index of smaller companies fell 13.47, or 1.76 percent, to 749.80.
Wall Street's pullback weighed on Europe. Britain's FTSE 100 fell 1.48 percent, Germany's DAX index fell 1.99 percent, and France's CAC-40 declined 2.28 percent. Japan's Nikkei stock average closed up 1.03 percent.
Wednesday, June 4, 2008
Wachovia's mistake spotlights Countrywide deal
Wednesday June 4, 1:26 am ET
By Ieva M. Augstums, AP Business Writer
Wachovia's Golden West mistake focuses attention on Bank of America's deal for Countrywide
CHARLOTTE, N.C. (AP) -- It's the most basic rule of investing: Buy low, sell high. Former Wachovia Corp. chief executive Ken Thompson couldn't escape his disastrous decision to buy Golden West Financial Corp. for roughly $25 billion at the height of the nation's housing boom. He was pushed out Monday, the same day crosstown rival Ken Lewis was busy defending his deal at Bank of America Corp. to buy Countrywide Financial Corp.
The critical difference: Lewis is paying just $4 billion for his mortgage lending giant.
"I think Lewis might be more imperiled, actually, if he doesn't go ahead and complete the transaction," said Gary Townsend, president of Maryland-based private investment group Hill-Townsend Capital. "The deal has the same perils that Golden West had, except he's not buying Countrywide for nearly the premium that Wachovia bought Golden West at the top of the markets."
The price difference is a little less than $20 billion, if you take into account Bank of America's initial $2 billion investment last summer that helped stabilize the shaky balance sheet of the Calabasas, Calif.-based company. When completed later this year, the transaction will make Charlotte-based Bank of America -- the country's second largest bank by assets -- the nation's biggest mortgage lender.
"Nothing has happened that is out of the boundaries of what we contemplated when we did the deal," Lewis told investors in a conference call Monday.
Nothing could be further from the truth at Wachovia. As the nation's housing market began to stumble, Wachovia's executives continued to defend the purchase and began to incorporate Golden West's business practices into its own. Thompson only later acknowledged the timing of the deal was poor and he was forced to set aside billions of dollars to cover losses from problem loans.
In April, before Wachovia slashed its dividend 41 percent and reported what was to become a $707 million first-quarter loss, it said it would revise the underwriting policies in its mortgage loan business -- a step that could make it harder to take out a home loan at the bank.
At Bank of America, Lewis plans to keep one of his own executives in charge of consumer real estate once the deal for Countrywide is completed next month.
"What Ken Lewis did was look down the street at Ken Thompson and said: 'We ain't going there. We're not going to turn Bank of America into Countrywide. We're going to turn Countrywide into Bank of America,'" said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. "They're learning on North Tryon from what's going on down on South Tryon."
Wachovia ousted Thompson less than a month after the bank stripped him of his chairman title. The bank called it a "a step that was taken after very careful consideration" and one that was precipitated by no single event but rather a "series of previously disclosed setbacks."
Investors have pushed Wachovia's stock down almost 60 percent in the past year and it closed Tuesday at $21.92. Shares in Bank of America aren't doing much better. The bank's stock is down more than 37 percent in the past year, and traded at a new 52-week low Tuesday before closing at $33.31.
"Ken Lewis is vulnerable from a standpoint of watching his share price crater to the extent it has," Townsend said.
And there are concerns the ongoing struggles in the housing market and Countrywide's distressed loan portfolio could lead Lewis and Bank of America to costly write-downs and create a drag on earnings. Countrywide lost about $1.6 billion in the last six months of 2007, and the company faces numerous investigations and lawsuits related to its lending practices.
Bank of America has said it will tighten those lending standards, and Lewis predicted Monday that housing conditions will improve by early next year. He also said Countrywide and its professional sales force will give the bank a boost as it pushes to increase market share in the mortgage sector.
"There is a huge sales force already in place that I think could give us a huge head start at a time when the market is ripe for market share gains," he said. "So obviously there is a risk to it, but we are not paying $22 billion either. And so that is the offset."
But Lewis must also be wary of what happened across Tryon Street, and he acknowledged Monday he still has concerns that the housing market still has a "dramatic ways to go before you get to the bottom."
"And obviously we worry about that a lot," Lewis said. "I personally worry about that a lot."
By Ieva M. Augstums, AP Business Writer
Wachovia's Golden West mistake focuses attention on Bank of America's deal for Countrywide
CHARLOTTE, N.C. (AP) -- It's the most basic rule of investing: Buy low, sell high. Former Wachovia Corp. chief executive Ken Thompson couldn't escape his disastrous decision to buy Golden West Financial Corp. for roughly $25 billion at the height of the nation's housing boom. He was pushed out Monday, the same day crosstown rival Ken Lewis was busy defending his deal at Bank of America Corp. to buy Countrywide Financial Corp.
The critical difference: Lewis is paying just $4 billion for his mortgage lending giant.
"I think Lewis might be more imperiled, actually, if he doesn't go ahead and complete the transaction," said Gary Townsend, president of Maryland-based private investment group Hill-Townsend Capital. "The deal has the same perils that Golden West had, except he's not buying Countrywide for nearly the premium that Wachovia bought Golden West at the top of the markets."
The price difference is a little less than $20 billion, if you take into account Bank of America's initial $2 billion investment last summer that helped stabilize the shaky balance sheet of the Calabasas, Calif.-based company. When completed later this year, the transaction will make Charlotte-based Bank of America -- the country's second largest bank by assets -- the nation's biggest mortgage lender.
"Nothing has happened that is out of the boundaries of what we contemplated when we did the deal," Lewis told investors in a conference call Monday.
Nothing could be further from the truth at Wachovia. As the nation's housing market began to stumble, Wachovia's executives continued to defend the purchase and began to incorporate Golden West's business practices into its own. Thompson only later acknowledged the timing of the deal was poor and he was forced to set aside billions of dollars to cover losses from problem loans.
In April, before Wachovia slashed its dividend 41 percent and reported what was to become a $707 million first-quarter loss, it said it would revise the underwriting policies in its mortgage loan business -- a step that could make it harder to take out a home loan at the bank.
At Bank of America, Lewis plans to keep one of his own executives in charge of consumer real estate once the deal for Countrywide is completed next month.
"What Ken Lewis did was look down the street at Ken Thompson and said: 'We ain't going there. We're not going to turn Bank of America into Countrywide. We're going to turn Countrywide into Bank of America,'" said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. "They're learning on North Tryon from what's going on down on South Tryon."
Wachovia ousted Thompson less than a month after the bank stripped him of his chairman title. The bank called it a "a step that was taken after very careful consideration" and one that was precipitated by no single event but rather a "series of previously disclosed setbacks."
Investors have pushed Wachovia's stock down almost 60 percent in the past year and it closed Tuesday at $21.92. Shares in Bank of America aren't doing much better. The bank's stock is down more than 37 percent in the past year, and traded at a new 52-week low Tuesday before closing at $33.31.
"Ken Lewis is vulnerable from a standpoint of watching his share price crater to the extent it has," Townsend said.
And there are concerns the ongoing struggles in the housing market and Countrywide's distressed loan portfolio could lead Lewis and Bank of America to costly write-downs and create a drag on earnings. Countrywide lost about $1.6 billion in the last six months of 2007, and the company faces numerous investigations and lawsuits related to its lending practices.
Bank of America has said it will tighten those lending standards, and Lewis predicted Monday that housing conditions will improve by early next year. He also said Countrywide and its professional sales force will give the bank a boost as it pushes to increase market share in the mortgage sector.
"There is a huge sales force already in place that I think could give us a huge head start at a time when the market is ripe for market share gains," he said. "So obviously there is a risk to it, but we are not paying $22 billion either. And so that is the offset."
But Lewis must also be wary of what happened across Tryon Street, and he acknowledged Monday he still has concerns that the housing market still has a "dramatic ways to go before you get to the bottom."
"And obviously we worry about that a lot," Lewis said. "I personally worry about that a lot."
Tuesday, June 3, 2008
Soros sounds alarm on oil 'bubble'
By Joanna Chung in Washington
Published: June 3 2008 05:06 Last updated: June 3 2008 05:06
Billionaire investor George Soros is to tell US lawmakers on Tuesday that “a bubble in the making” is under way in oil and other commodities and that commodity indices are not a legitimate asset class for institutional investors.
He is expected to tell a congressional committee that rising oil prices are the result of a number of fundamental changes and factors in the market, but that the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble.
“I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987,” Mr Soros will tell the Senate commerce committee, according to a draft text seen by the Financial Times.
“In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash.”
The comments by Mr Soros, chairman of Soros Fund Management, a $17bn hedge fund, are likely to fuel a debate about the role of speculators – including hedge funds, pension funds and other institutional investors – in the rising costs of energy and food. The fund declined to comment on its specific market positions.
Regulators and other officials have said surges in oil and commodity prices are mainly due to fundamental supply and demand factors combined with a depreciating dollar, which is used to price and trade commodities.
However, some politicians believe that the new wall of money entering the asset class through commodity indices is a key factor. Tuesday’s Senate hearing into energy market manipulation and federal enforcement regimes is one of a series of held in Washington in recent months examining aspects of the market.
Mr Soros said index-buying was based on a misconception and commodity indices are not a legitimate asset class. “When the idea was first promoted, there was a rationale for it ... But the field got crowded and that profit opportunity disappeared,” his prepared remarks say.
“Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a misconception that is liable to be self-reinforcing in both directions.”
Mr Soros will say a crash in the oil market “is not imminent”. But he says it is desirable to discourage commodity index investing – or the “elephant in the room” in the futures market – though not with more regulation.
Published: June 3 2008 05:06 Last updated: June 3 2008 05:06
Billionaire investor George Soros is to tell US lawmakers on Tuesday that “a bubble in the making” is under way in oil and other commodities and that commodity indices are not a legitimate asset class for institutional investors.
He is expected to tell a congressional committee that rising oil prices are the result of a number of fundamental changes and factors in the market, but that the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble.
“I find commodity index buying eerily reminiscent of a similar craze for portfolio insurance which led to the stock market crash of 1987,” Mr Soros will tell the Senate commerce committee, according to a draft text seen by the Financial Times.
“In both cases, the institutions are piling in on one side of the market and they have sufficient weight to unbalance it. If the trend were reversed and the institutions as a group headed for the exit as they did in 1987 there would be a crash.”
The comments by Mr Soros, chairman of Soros Fund Management, a $17bn hedge fund, are likely to fuel a debate about the role of speculators – including hedge funds, pension funds and other institutional investors – in the rising costs of energy and food. The fund declined to comment on its specific market positions.
Regulators and other officials have said surges in oil and commodity prices are mainly due to fundamental supply and demand factors combined with a depreciating dollar, which is used to price and trade commodities.
However, some politicians believe that the new wall of money entering the asset class through commodity indices is a key factor. Tuesday’s Senate hearing into energy market manipulation and federal enforcement regimes is one of a series of held in Washington in recent months examining aspects of the market.
Mr Soros said index-buying was based on a misconception and commodity indices are not a legitimate asset class. “When the idea was first promoted, there was a rationale for it ... But the field got crowded and that profit opportunity disappeared,” his prepared remarks say.
“Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a misconception that is liable to be self-reinforcing in both directions.”
Mr Soros will say a crash in the oil market “is not imminent”. But he says it is desirable to discourage commodity index investing – or the “elephant in the room” in the futures market – though not with more regulation.
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