The Continuing Drought

Before I vent out my frustration again about this season, I've read this from Piers, an Arsenal fan himself, whose weekly articles are great to read.



Piers Morgan - Time to join the big spenders, Wenger, or it will be time to say goodbye

Since the shocking, embarrassing, disgraceful capitulation of Arsenal's season at Wigan last weekend, I've been feeling so dangerously enraged that I didn't want to write about my team at all today - for fear I'd say something reckless and over-emotional again.

But having recently demanded that Rafa Benitez be fired (Liverpool should just get Roy Hodgson - he'd cost half the money, spend a tenth of the cash, play better football and desist from the incessant whining that 'Bizzo' persists in) and Sir Alex Ferguson stand aside for Jose Mourinho before it's too late (after Inter's sensational demolition of Barcelona, I'd say United have about two weeks to get him now before Real Madrid pounce), it would be journalistically remiss and cowardly of me to now avoid the yawning problems in my own manager's backyard.

Arsene Wenger is now facing the biggest crossroads in his Arsenal career, of that I am certain.

Five years without a trophy of any kind is simply too long for a 'Big Club' and everyone at the Emirates knows it, including Wenger himself, because he's not a stupid man. In fact, he's probably the smartest manager the Premier League has seen.

Year after year since he unceremoniously - and, in my opinion, way too speedily - dismantled the Invincibles team of 2004, we've heard the same excuses: the team's in 'transition', the young players are 'maturing', glory is 'very close now'. Yet here we are, half a decade after the youth experiment began and we've ended up with nothing again. Not a sausage. Not even a Carling bloody Cup.

Eighteen months ago, I suggested in this column that Wenger should stand down, sparking an unprecedented furore from Arsenal fans. It was like a devout Catholic calling for the Pope to stand down, you just don't do it. And anyway, Wenger deserved more patience than I'd given him until that point. But are we really any nearer a winning team now?

Part of me says that with a fullstrength team, we are. That inopportune injuries to key players like Robin van Persie, Andrey Arshavin, Cesc Fabregas, Alex Song and Theo Walcott kept us from fulfilling our potential this season. But another part of me isn't so sure.

I watched us getting hammered by Chelsea, Manchester United and Barcelona, with pretty strong sides out. Not just beaten, but thrashed.

Real men against boys stuff. And all this after a January transfer window when Wenger bought nobody apart from Sol Campbell. I've been saying for two years, like most Arsenal fans, that we needed a new goalkeeper, striker, and midfield hard-man. Wenger ignored us all, persisting with the hapless Manuel Almunia in goal, relying solely on the keen but naive Nicklas Bendtner up front throughout van Persie's lengthy absence, picking weak links like Denilson in the middle, and the clunk-footed dinosaur Mikael Silvestre at the back.

Either he did this because all the Arsenal boardroom chatter of £30 million to spend was nonsense. Or he did this because he's obstinate and believed he didn't need to.

One thing's for sure, though. This cannot go on. Something has to give. Are Arsenal's board misleading fans about the funds available, in which case they must now say so?

Or do we have the money and, if so, the board must now order Wenger to spend it this summer and spend it big. Because the reality is that to get the right players in the current market, he has to.

I'd break the bank for Fernando Torres and Steven Gerrard. Both will want the Champions League football that Liverpool can't offer them and both would be magnificently complementary partners for Van Persie and Fabregas. And in goal, I would go for Shay Given, consistently the safest pair of hands in the country.

It's time Wenger stopped priding himself on being Mr Prudence and played the game that all his biggest rivals are playing. Otherwise this great man, who has achieved so many amazing things in his 13 years at Arsenal, will reach the end of his contract in 2011 with six consecutive years of failure on the second half of his scorecard. And if that happens, I believe he will either walk away or he'll be asked to.

Article originally from Daily Mail

~deyao~

The Percentage Game

Person 1: Any tips on stocks?


Person 2:How about Rio Tinto.


Person 1:How much is it?


Person 2:About 80 dollars.


Person 1:80 dollars? That's too expensive.

The questions is...how can Person 1 tell it is expensive? Well, if Person 1 didn't know much about the stock, he/she is most probably wrong.

That example above is probably one of the most frequent situations I have encountered. There's this theory that large and 'expensive' stocks are priced at high absolute amounts. To a certain extent it is true most of the larger companies today have share prices that are well above $10 (In America or Australia). But in terms of value, what does that absolute share price tell us?

When 1 does not equal 1

I am very sure many people know this but there are through my experiences who still make the same statement which is most certainly not true. One example. Exxon Mobil today trades at $68 and Chevron trades at $82. Two companies which are in the same industry practically doing the same thing. Which stock is better valued? Many people will jump right into Chevron, well because it is "cheaper". Is Chevron better valued? The answer is you cannot make any conclusion at this point. Why? The share price itself tells you NOTHING! It is preposterous how people make conclusions from the share price itself.

First of all, Exxon is a larger firm than Chevron. This means if the share price does indicate the size of the firm, it is BY CHANCE. Secondly, which firm is more profitable? Does the share price tell you anything about this, absolutely not! Before I move on to my next point. What if I told you Exxon Mobil makes $1bil a year in net income? Does this tell you anything? Again the answer is NO.

Why not, isn't $1bil a LOT of money?Yes it is, but to Exxon, is that amount good? The answer is you need a COMPARABLE amount. Comparing to earnings of the last few years is a good start, but comparing it's rate of return to market/industrial estimates is what really matters (This will be discussed later).

Alright, the real story is Exxon is TWICE as huge as Chevron in market value, has a higher profit margin than Chevron. And also, Exxon made $19bil last year. So did you get fooled by the previous $1bil earnings? It does sound really good but it means nothing unless you make a meaningful comparison. Exxon is LARGER and is MORE PROFITABLE but yet it's share price is lower. A well-informed investor would know Exxon has a superior finances but it is not the only factor on choosing a stock.Lesson, the share price amount tells you NOTHING.

Hypothetical example (which is unlikely to happen in reality unless for a very good reason). Chevron has 2 bil outstanding shares and trades at $82. Let's say the firm does a stock split of 2 for 1. This means for every 1 share held, the shareholder will now own 2 shares. It will actually be called a bonus issue in reality but the "bonus" is free shares in numerical terms but not free money. This means Chevron now has 4bil number of shares outstanding which is double the amount. What will the new price be? Theoretically, the price will be halved to $41 because assuming the firm's value did not change overnight, the price of its shares should not be different. But due to the split (which does not affect a firm's value), 2 shares will equal to the value of 1 share before the split, thus being priced at $41.

Now after the split, Chevron is "cheaper" compared to Exxon in absolute share price. If you still haven't understood the fundamentals, you would have thought what a wonderful opportunity it is to buy Chevron because it has gone down in price by 50%. If you read the few paragraphs before this, you would have known $41 for 1 share now is NO DIFFERENT to $82 for 1 share before the split. This means in the world of finance terms $41 EQUALS $82. The value of each share before and after the split are the same although they are priced differently. From now on, when you look at share prices, just remember they mean NOTHING when compared in absolute terms.

Percentage Matters

Percentage allows us to make meaningful comparisons. You can own a huge company, but if it does not make money, no one wants to buy a stake in your company. We live in a percentage game. Percentage returns matters a lot more than absolute returns. Whether Chevron is priced at $82 or $41, if the share price falls/rises by a certain percentage, that is what matters. Whether the movement was $1 or $10, the percentage change is what you should be looking for. From the previous example above, had you used a percentage return for let's say return on assets. You would have known a $1bil profit for Exxon is actually a terrible return. $1bil sounds good but it's not.

So if you were interested in buying into a managed fund, what are the relevant questions for you to ask? Plain simple, what are the returns you would expect as a percentage of your your investment. If the fund has not been outperforming the market itself and it has high exposure to equities, that is probably a negative sign. As you can see I've created another question, what are the returns relative to the market? That is probably one of the most important questions.

I have not been particularly good when assessing fundamentals of companies. But just a few ratios that are important. Return on Capital, Dividend Yield, Operating Margin and Historical Earnings. These ratios will allow you to make meaningful comparisons when assessing a company's financial. On the technical investing side I am even less knowledgeable actually. But what technical analysis does is it goes beyond the fundamentals to assess a company. Analyst usually plots graph of historical prices and compares it to market's return, volume and other indexes to spot trends to determine target prices, resistance level or to time the market's trend. I'm not going through these techniques as I don't know much for now. Maybe in the future.

The main point is knowing what the share price means and ways to actually determine share price value.

Rio Tinto, Exxon Mobil and Chevron does not make you rich. It is the knowledge about Rio Tinto, Exxon Mobil and Chevron that makes you rich.

~deyao~

Conspiracy of the Rich

I came across this video and it probably gave the best unbiased explanation of the causes of the financial crisis apart from Robert's. The conspiracy is as clear as true and it is happening right at this moment. The US Congress is talking about a financial reform but the painful truth is you just can't rely on anything that has got to to do with politicians. It's up to you to educate yourself and not lose money to "scams" and "lies" of the govt.

Visit msnbc.com for breaking news, world news, and news about the economy

~deyao~

Is China all good?

China has been by far the fastest growing country in the world. A GDP of 8% during the financial crisis was just admirable. Everyone says it's the next big thing (well it already is), it will lead the world economy, it will overtake US one day? Well, I definitely won't doubt it may all happen. But when it comes to China we hear stories about its lack of transparency, pollution, human rights problem and it's absolute desire for growth at all cost. Will these problems catch up on them in the future? I came across this article which gives a brief highlight on the less rosier side of China.

The China Bubble - Greg Hoffman

Edward Chancellor, a member of the asset allocation team for Boston-based GMO and, interestingly, the author of a recent Financial Times piece on Australian property, is a financial historian and bubble expert.

His 1999 book, Devil Take the Hindmost: A History of Financial Speculation, examined past speculative manias. Perhaps you've read articles comparing the tech boom and 1990s' bull market to tulipmania in 1630s' Holland.

The difference is that Chancellor was making that comparison before the tech bubble burst, some years before Alan Greenspan claimed it was futile trying to predict bubbles at all.

Chancellor's timing may have been fortuitous. To accurately predict something once might mean little. To repeat the feat perhaps means something more.

His next major piece - Crunch time for credit: An enquiry into the state of the credit system in the United States and Great Britain - included this prescient paragraph:

''The growth of credit has created an illusory prosperity while producing profound imbalances in the British and American economies...When credit ceases to grow, the weakened state of these economies will become apparent.''

That report was written in 2005, years before the credit bubble burst. Chalk two up to Chancellor.

Third time lucky?

He's now turned his attention to China, a fertile ground for his fertile mind. Released last week on the GMO website, China's Red Flags is split into two parts.

Crisis checklist

Section one identifies speculative manias and financial crises, offering a checklist for those trying to identify bubbles in advance of their bursting. Chancellor offers 10 criteria for what he calls ''great investment debacles'' over the past 300 years (the report explains each in far more detail);
1. A compelling growth story;
2. A blind faith in the competence of authorities;
3. A general increase in investment;
4. A surge in corruption;
5. Strong growth in money supply;
6. Fixed currency regimes, often producing inappropriately low interest rates;
7. Rampant credit growth;
8. Moral hazard;
9. Precarious financial structures;
10. Rapidly rising property prices;

Although all these criteria need not be present in order for a bubble to be present, you can see where Chancellor's heading: not-so-subtly steering readers towards his own conclusion. In section two he takes each factor and applies it to the case of China.

Ponzi scheme

His conclusion is alarming; The very factors that have allowed China to grow so rapidly over the past few years despite the global slowdown - an investment boom, a credit boom, massive increases in money supply, moral hazard and risky lending practices - are all factors that investors and the mainstream press feel they can safely ignore because China is growing so rapidly.

After the past few years, we should all understand the potential negative implications of such major imbalances. But there seems to be general agreement that a ``build it and they will come'' approach is warranted in China because it keeps growing rapidly. There's a Ponzi-like element to the circularity.

Chancellor is concerned that China's high GDP growth is no longer a function of impressive natural growth. Instead, growth is being engineered to achieve high GDP numbers. It's producing a system that's unsustainable and prone to collapse.

This, in essence, is Chancellor's argument:
- Investors are adopting an uncritical attitude to China's growth forecasts;
- Because of the way local officials are incentivised, it's likely that migration of the population from country to city is much further along than the official numbers suggest. So when you hear of another 350 million internal migrants arriving in cities by 2025, many of them are actually already there;
- Hence, future productivity growth will be much more reliant on efficiency gains than urbanisation. China's record in this area isn't at all strong;
- Beijing imposes GDP growth targets on local governments. Thus, ``GDP growth is no longer the outcome of an economic process, it has become the object''. `When the allocation of resources, whether at the corporate or national level, becomes all about ``making the numbers'' then poor outcomes are to be expected';
- In 2009, Chinese fixed asset investment contributed 90% of total economic growth (an incredible statistic and a natural consequence of the previous point);
- Significant overinvestment is present in many areas. For example, capital spending in the cement industry increased by two-thirds despite capacity utilisation running at an estimated 78%;
- The efficiency of investment (incremental GDP growth for each additional unit of investment) is trending downwards towards wasteful levels;
- Interest rates have been kept way too low for decades, sparking economic growth but also imbalances and bubbles;
- China's enormous foreign exchange reserves are not necessarily a plus. As Michael Pettis pointed out recently, only two countries have previously accumulated such large foreign reserves relative to global GDP - the United States in 1929 and Japan in 1989. Oh dear;
- The Chinese stockmarket is in bubble territory. Last October, a new Nasdaq-style exchange opened in Shenzhen with 28 new listings. The minimum price rise (the laggard of the 28) rose 76% on the first day. Price/earnings ratios averaged 150;
- The residential property market also appears to be in a bubble. In Beijing, the house price to income ratio has climbed to more than 15 times, versus 9 times in Tokyo in 1990;

I've heard dozens of arguments on this matter. About half of them completely brushes of the bubble theory. Dr Doom Marc Faber predicts a high chance of an economic collapse for China this year. The fact the prices especially real estate has gone through the roof and the presence of dangerous lending practices could cause disaster. The lesson here is not about correctly predicting whether China takes a fall, but not to be completely certain about the future of China. Aussies take note.

~deyao~