Thursday, February 18, 2010

Don't Abandon Stocks. Invest for the Long Run.

In the 1930s, Benjamin Graham, the father of security analysis, likened investing in stocks to doing business with a manic-depressive. Little has changed over the decades.

Indeed, stocks have been wackier than usual lately. In October 2007, the stock market began its worst fall since the Great Depression. There was widespread panic when Lehman Brothers failed in September 2008. By the time the market bottomed, Standard & Poor’s 500-stock index had plunged 55% from its peak. Then, on March 9, 2009, for no readily apparent reason, the market abruptly reversed course and delivered one of its most rousing comebacks ever. Since then, the S&P 500 has rocketed 62%.

A perfectly understandable reaction to such zaniness is to flee, to find another business partner. Millions of Americans have done just that. They have yanked money out of stock funds and poured hundreds of billions of dollars into bond funds. Others remain paralyzed -- unable to move for fear of making a mistake.

That’s nothing new. After the 1929-32 crash, during which the stock market crumbled some 90%, most Americans shunned stocks for a generation. People behaved similarly after the 1973-74 bear market.
 Losing money hurts. Your investments are often the difference between a comfortable retirement and having to work until you drop. I lost a lot of sleep during the most-recent bear market. Although I’ve written about investing since 1991, this was the first bear market in which I had flesh-and-blood clients. Every day, I watched their nest eggs (and my own) shrink -- and I was partly to blame. I kept asking myself, why hadn’t I sold stocks, for both myself and my clients, after Lehman collapsed?
 I called my clients frequently to urge them to stay the course. But I sometimes doubted my own words. Were we on the verge of another Great Depression? If so, it would be years before my clients and I regained all of our losses.

What to do now?

When I write columns, it’s a lot less personal than talking to a client. But I want to speak to you now as personally as I can.

Please don’t abandon stocks. Without them, it’s unlikely that you’ll regain what you lost.

The long-term numbers deliver a clear message. From 1926 through the end of 2009, the stock market returned nearly 10% annualized. Long-term government bonds gained a bit less than 5.5% annualized. Inflation averaged about 3%. The returns were roughly the same for the hundred years before 1926. The pattern holds true in overseas markets as well.

If you find yourself paralyzed by fear, find someone you can talk to about your investments. This can be your spouse, a work colleague -- anyone who needs his or her money to grow, as you do, and in whom you feel safe in confiding. The stock market is simply too crazy to handle all on your own. Even Warren Buffett, the greatest investor of our time, never makes a move without talking to Charlie Munger, his right-hand man.

The first thing to ask yourself is, what is your target and when will you reach it. If you’re more than ten years from, say, retirement, you should invest 80% to 100% of your money in stocks or stock funds. If you’re closer to retirement, put between 60% and 75% in stock funds. In retirement, invest 40% to 60% of your money in stock funds. Put the rest in bond funds. The more you have in stocks, the better you’ll probably do over the long term. But the more you have in bonds, the easier it will be to sleep.

Unless you enjoy picking stocks and funds, stick with low-cost Vanguard index funds or exchange-traded funds. For your stock money, put 70% in Vanguard Total Stock Market Index (symbol VTSMX) or Vanguard Total Stock Market ETF (VTI) and the remaining 30% in Vanguard FTSE All-World ex-U.S. Index (VFWIX) or Vanguard FTSE All-World ex-U.S. ETF (VEU).

With your bond money, buy Vanguard Total Bond Market Index (VBMFX) or Vanguard Total Bond Market ETF (BND) in a tax-deferred account. In a taxable account use Vanguard Intermediate-Term Tax-Exempt (VWITX).

Once you decide what to buy, follow one of the oldest pieces of advice around: Put a little of your money into stocks every month. Take it from your paycheck, the bank or your bond funds. Aim to get fully invested in 12 months.

Avoid acting on the basis of market forecasts -- no matter who makes them. No one knows what the market or the economy will do -- especially short term. The overwhelming majority of market strategists failed to predict both the last bear market and the current bull market. Similarly, economists and the Federal Reserve didn’t realize how bad the economy was until it was almost out of control.

When to start investing? There’s no time like today.


PIIGS Go To Market.

Story Highlights:

•PIIGS countries Ireland, Spain, and Portugal held successful sovereign bond auctions this week—all were oversubscribed.

•Over and undersubscribed auctions are normal—the process of price discovery in primary markets is inevitably bumbling.

•Any reasonably credit-worthy issuer can sell bonds for the right price; the question is whether the debt cost will be more than the issuer can bear.

•Default by one or more of the PIIGS is still a possibility, but the fact folks are willing to buy long-term bonds at historically low rates seems to indicate investor confidence.

Just days after euro-jitters were whipped into a frenzy by a poorly priced (and thus undersubscribed) Portuguese bond auction, fellow PIIGS (Portugal, Ireland, Italy, Greece, and Spain) countries Ireland and Spain held successful sovereign bond auctions—raising €1.5 billion and €5 billion in 10- and 15-year bonds, respectively. Additionally, Portugal repriced its debt at another auction—this time easily selling the lot.

It’s becoming increasingly clear Portugal’s initial undersubscribed auction wasn’t an indication of imminent default; rather, the yield was simply below prevailing market rates and not commensurate with the debt’s risk. Somewhat ironically, Portugal’s follow-up bond sale offering prices above market interest rates was (surprise, surprise) massively oversubscribed. The process of price discovery in primary markets is inevitably bumbling—over and undersubscribed auctions are normal, typically resulting from too-high or too-low offered interest rates. In other times, when the spotlight’s not so blinding, such auction action would raise fewer hackles. Instead, nervous investors read too much into a mispriced auction.

But the real question at hand isn’t whether a country can sell its debt—any issuer can sell bonds for the right price. (PIIGS countries might be risky, but a higher yield can clearly still attract plenty of buyers.) The question is whether the debt cost will be more than the issuer can bear. It’s notable then that even though investors are demanding higher yields right now, those yields are still near all-time lows for the PIIGS. And that investors are willing to buy 10- and 15-year bonds at those relatively low rates registers, in part, a vote of confidence the PIIGS won’t default—or, perhaps more accurately, won’t be allowed to default. The EU has shown strength amid the drama—voicing strong support and approving Greece’s austerity measures, while simultaneously setting a tight deadline for action and revoking Greece’s voting rights for one EU meeting (a first for the EU, and a sign the union has teeth and is willing to use them).

And it wouldn’t necessarily be the end of the world should the EU decide against aid. Country defaults are hardly a new phenomenon—markets have survived wave after wave throughout history. And the PIIGS combined make up only 7.5% of world GDP.* Of course, a risk worth watching would be any knock-on effects a default would have on the EU and euro (a strong argument for EU intervention). Thankfully, the PIIGs’ fate is far from sealed, and increasingly it seems European policy flexibility and waning investor jitters may win the day—allowing these particular PIIGS to fly another day.

* IMF; based on 2008 estimates.

 Courtesy: Fisher Invesments.

Wednesday, February 3, 2010

Solar Growth: By the Numbers.

There's a lot of talk about solar growing pains, but there is still a lot of growth out there around the globe for photovoltaic players.

Recent data provided by Boston-based Lux Research shows some healthy growth profiles for solar around the globe. The growth of all the big publicly traded solar companies, from U.S. leaders First Solar(FSLR) and SunPower(STP), to the competition from China in the form of Yingli Green Energy(YGE), Suntech Power(STP) and Canadian Solar(CSIQ), is a market share struggle predicated on a growing solar capacity.

Recent reports of big cutbacks in solar incentives from Germany and Italy have showed how quickly the outlook can change for solar companies.

Ironically, the biggest growth also illustrates the biggest growing pains for solar. For the period between 2000 and 2013, the Lux Research shows Italy and California with the largest rates of growth. Italy will grow by 76.5%, while California's solar market grows by 72.6%.

However, Italy made news on Tuesday with its plans to implement a hard cap on solar by 2020, at 8 gigawatts (GW), upsetting long-term forecasts for Italy's big role in the long-term growth of solar.

Greece is expected to grow by 70% through 2013.

However, if the current political winds in Germany -- which have pitted its weak economy versus the favorable solar feed-in tariffs -- are any indication of a wider spread European pushback against solar support, this growth rate may have to be reset. Still, at a total expected capacity of 265 megawatts(MW) in 2013, Greece is sizable, but not a game-changing solar market.

Trina Solar(TSL Quote) announced a deal in Australia on Jan. 21 to provide 10 MW of solar modules to Australia's biggest distributor. Still, Lux Research sees Australia only growing by a total of 28% between the period of 2000 to 2013, and in 2013, will have an installed capacity of 70MW.

The Lux Research numbers do show the extent to which the biggest solar markets will continue to dominate growth prospects. Aside from the 11 countries -- and California -- detailed by Lux Research in the chart above, the rest of the world is only expected to account for 1.9 GW of solar capacity in 2013, versus a global total installation level in 2013 of above 17 GW

All the focus is on Europe these days when it comes to solar growth, and not always for bullish reasons.
The looming feed-in tariff cuts and hard solar caps from Germany and Italy, respectively, could be game-changing events for solar. Still, Europe is by far the largest player in the solar sector's growth, and new data from Cambridge, Mass.-based Emerging Energy Research details the solar consultant's growth trajectory for the Top Ten European solar markets in 2010.

There is a doubling of capacity -- and, in some cases, more than doubling of capacity -- in many of the big European markets.

Take the Czech Republic, where capacity is expected to spike from 234MW in 2009 to 634 MW in 2010. Solarfun Power(SOLF Quote) is one big Chinese solar player that has set its sights on the Czech Republic's growth.

The Czech Republic's total capacity growth year over year, from 234MW in 2009 to 634MW in 2010, is the largest in sheer mega wattage, after the biggest existing markets -- Germany, Spain and Italy.

Greece is poised to pop from just 54MW in 2009 to 354MW in 2010, according to the Emerging Energy Research data.

Of course, it's important to remember that these are just forecasts, subject to the current quickly changing political climate and, also, subject to varying levels of subjectivity.

While Emerging Energy Research sees Greece growing to the level of 354MW in 2010, the Lux Research projection is only for 200MW in Greece by the end of the year - even though Lux is projecting Greece's growth trajectory through 2013 at above 70%.

Lux' numbers do seem fairly conservative. Take Italy, where Lux sees the market growing to between 1.1GW and 1.2GW in 2010. That was also the projection of the Italian government, but it has more recently indicated that it expects to hit the 1.2GW mark in mid-2010.



As with everything in China, things are not what they seem at first glance. From now on, the new rules of the global economy will be made in China rather than the U.S., and that will create a fundamental shift in power and philosophy. Ten years from now, there may be a whole new set of textbooks on economics and political science that praises the Eastern approach more than the West. The story doesn't have to have a bad ending for the U.S. But we had better start looking at things through the eyes of China if we want to come out ahead.

The issue with Google is the perfect example of Westerners misunderstanding China's point of view. The Chinese don't really care whether Google operates in China or not. Google's threat to withdraw from China is empty. If Google left, China would simply have one less headache to deal with. The loss would entirely be Google's and its investors. Indeed, as we explain below, Chinese strategy is to assure the economic riches the country produces accrue, to the greatest extent possible, to domestic rather than foreign companies.

A similar misperception exists regarding China's excess capacity. As far as we can discern, all the excess capacity in China has either already been absorbed or soon will be. China's plan to develop alternative energy requires far more capacity than currently exists.

To take one example, the Chinese already buy more cars than Americans. By 2020, China intends to have 50% of those cars powered by electricity, which in rough terms would mean that at least 60 percent of new car sales would be electric – where copper use is twice that of a conventional car. We won't even go into the math on that one, but the implications are staggering. So there's really no bubble in China's industry.

As for the real estate bubble, that too is not what it seems.

Soaring real estate prices in China appear to originate from Chinese cities, such as Shanghai, auctioning off enormous tracts of land. The winning bids for many of these plots have been astronomical, and far ahead of the runners-up.

Who has been placing these winning bids? None other than state-owned enterprises. In other words, the Government of China. These state-owned enterprises (SOE) get their funding from the government via Chinese banks.

In America, if our government were paying above-market prices for land, we would protest the waste of taxpayer money. But in China, it's part of a master plan to develop the country while retaining government control over the economy.

You see, Chinese cities work quite differently from their U.S. counterparts. For instance, a recent article in the Shanghai Daily commemorated the opening of a $2 billion semiconductor plant, which was a joint-venture between the city of Shanghai and the manufacturer. These types of joint-ventures between cities and companies are the norm in China.

And it's not just Chinese companies that take part in these joint ventures. Foreign companies (such as autos) also operate facilities in China as joint ventures with the cities they are located in.

You might ask where cities get the money to invest in such projects. If a city wants to borrow from a bank, it usually must put up land as collateral. The borrowing would be limited to the fair value of the land. These valuations would not be nearly enough to satisfy the cities’ multi-billion dollar ambitions. So, the government helps cities by encouraging SOE’s to bid sky-high prices, which in effect transfers money from banks to cities. If the loans go bad then the whole transaction simply amounts to a transfer of cash from the central government to the city. If the SOE is able to earn a return on the property it’s so much the better.

The system gives city officials a bigger hand in the local economy, which helps decentralize power for greater efficiency. It is a system that helps China retain control over its economy, because the government winds up with a finger in every major enterprise. Keep in mind that city officials will in some way report to the honchos in Beijing. The key words are decentralization and efficiency.

China's methods are radically different from what our governments do. Can you imagine New York City entering into a joint venture with a semiconductor or automotive plant? (Well, perhaps Flint, Michigan wishes it had bought a big chunk of General Motors a few decades ago, in order to have had more of a say regarding plant closures.)

Bottom line here: China does not have a real estate bubble; it has a joint venture scheme between business and government. It has a vigorous marriage between socialism and capitalism that we would be foolish to bet against.

In the context of growing energy scarcity, do we really want to bet against a country that has turned a start-up oil company into the world's largest in just 12 years? A country that is now #1 in every form of alternative energy - electric cars, solar, wind, nuclear, you name it? Let me give you one more stock recommendation that could prove very profitable in a few years...

Rather than invest in Wal-Mart, may we instead suggest you take a look at the Chinese company, Wumart? That's not a joke; it's a $16 billion Chinese supermarket chain.

A lot of money will be made in China over the next few years, but most of it will be made by Chinese companies rather than foreign-owned ones. China will remain somewhat dependent on exports for some time, but that dependence is already weakening. China's exports fell dramatically in 2009, yet its GDP still rose 8.7%.

The apparent real estate bubble, while not an illusion, has been created by the government itself and will be managed by the government. Sure it has ramifications, but they will be far less damaging than our subprime crisis. Debt levels are very low in China's residential real estate market. And there are no subprime borrowers. So the bubble can be deflated very slowly, should it ever be a problem.

All that said, China remains a fierce economic rival to the U.S. Our government will make a big mistake to underestimate them. Asians know how to think very long term and stick with their plan.

To take a minor example, I met a Tibetan cab driver this morning, and when I told him I hoped his country achieved peace within the next ten years, he said to me, “No, ten years is too soon. Maybe in the next 2-3 generations.” Not too many Westerners think that far in advance, and the loss will be ours.

Meanwhile, as individuals, we can at least make a lot of money hitching our wagon to the rising economic powerhouse.

Courtesy: Stephen Leeb, Ph.D.