Fortune Watch

In light of the current Keynesian-style government fiscal stimulus measures introduced to try to tackle the economic slowdown, the series looking at economic theories within the context of the present situation examines the work of Jean-Baptiste Say and classical economic theories.

Say’s Law, one of the core tenets of classical macroeconomics, states that “aggregate supply creates its own aggregate demand”. Classical economics emphasises the equilibrium between supply and demand as key for a balanced economy and suggests that recession and unemployment are caused by a mismatch between supply and demand rather than, for Keynesians, a lack of consumption.

Say (1767-1832) was a French economist who advocated saving rather than spending and a focus on production instead of consumption. In fact, he believed that  consumption destroyed wealth and only production could create it. Say’s Law makes supply a precondition for demand because, in order to buy something, he believed that you must first sell something.

This is crucial for economic growth, because the desire to generate purchasing power motivates productive effort and invention. It also has major implications for how governments respond to downturns and periods of high unemployment. While Keynes wrote that aggregate demand and the use of fiscal spending is the key to economic recovery, classical economists believe that spending capital on Consumption without saving and investing it in production could mean slower potential future growth.
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Risk is the probability of loss. It is best to estimate it and to adjust your purchase and sell strategies to it in order to control loss before the purchase is made. Correct timing of purchases, buying near support, limiting loss potential, and stopping the decline by using volatility stop losses are all ingredients of a good risk control system. Let’s look at a few of these loss control discipline components.

One method of controlling risk is by timing purchases so that they occur at or near support. That way, your stop loss can be a very small distance away from your purchase price. If you buy when the stock is 5% above its trendline, for example, it will mean little if the stock declines 5% to reach its trendline. Since stocks often return to support, why would you sell? You would sell only if it broke to the downside through its rising trendline. Therefore, your loss would be calculated by adding the distance the sell point is below the trendline to the distance the purchase price was above the trendline. Buying at the trendline instead of above it would eliminate that unnecessary 5% loss.

However, stocks often make a small temporary penetration through a support line and then resume their climb. When, precisely do you sell? Let us use the suggestions offered in Technical Analysis of Stock Trends by Edwards and Magee as an example. If you are using stops that are based on closing prices, they suggest a trendline penetration of 3% would warrant selling. If your stop loss is placed with a broker, they recommend that the stop be placed 6% below the trendline because of the possibility of inconsequential intra-day spikes. Therefore, if you buy when the stock is 8% above its rising trendline and place the stop loss 3% below the trendline, you will lose 11% before your stop is triggered. On the other hand, if you wait for the stock to return to its trendline before buying, you will lose only 3% if your stop is triggered. It is important to buy right so that you can sell right.
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The year 2008 has entered the record books for all of the wrong reasons; the Dow Jones had its worst year ever! So what about 2009, how will stock markets from around the world perform and which are the stocks to follow?

Well in reality you need a crystal ball to be able to answer these questions. 2009 may well be another tough year.

I am a person who enjoys investing on the stock markets and I have to say that I am a bit of a gambler; I am quite prepared to take a risk with my disposable income in the hope that I can increase it etc. Just a quick note however, I am a financial adviser and anything that I write or suggest in this article should not be seen as advice.

I personally believe in investing an amount of money (an amount that I can afford) on a monthly basis instead of investing lump sums. This way I am able to take advantage of what is commonly referred to as Dollar cost averaging in the United States. This is where when prices are high your monthly contribution may buy fewer shares or fund units but that when prices are low your investment buys more shares or fund units.

During these volatile times this method of investing may prove to be the most prudent. Even though stock markets had a very poor 2008 and is therefore quite low there may well be significant falls ahead.
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Some people consult astrologers and some don’t. Out of the ones that don’t, some believe that there aren’t any good astrologers around nowadays while others believe that it isn’t possible to foretell the future.

Out of the ones who believe that foretelling the future is impossible, some believe that the future can’t be foretold because there is no future yet. Meaning, the future is not preordained so there’s nothing to foretell. It happens when it happens.

Not just astrology, I find the equivalent of all these views among investment analysts. In investments, there are times when the one can forecast with some degree of confidence because the current trends can be expected to continue unchanged. There are often long periods when trends just extend themselves in a linear fashion.

There are other times, when there’s a break in the trend and the past stops being a good guide to the future. When trends are smooth, then these expectations are true and the forecasts are also true. However, when there’s a break then the future is not predictable. Which is exactly what is happening now.

Currently, there is no shortage of experts trying to predict when the economic crisis will end and growth will resume. I’ve seen predictions ranging from immediate (as in, the crisis has ended we just haven’t noticed yet) to one estimate that said it will ‘take a generation for things to be normal again’. Between the two extremes lie more frequent estimates like late 2009 or 2010 or early 2011. These ‘reasonable’ estimates occur with a greater frequency so they’ve started sounding reasonable.
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A judge decided today that the accused mastermind of what is allegedly the largest Ponzi scheme in history will remain free on a $10 million bond but will continue to be under house arrest at his posh Manhattan penthouse.

U.S. prosecutors had asked that Madoff be jailed while awaiting trial on a federal fraud charge. U.S. Magistrate Judge Ronald Ellis ruled that Madoff was not a flight risk and did not pose a threat to society.

Prosecutors had requested that his bail be revoked because Madoff had mailed more than $1 million in jewelry and heirlooms to people over the holidays and apparently had written, but not mailed, millions of dollars of checks to people.

The decision is sure to further outrage investors who have been clamoring for Madoff to be sent to jail for allegedly carrying out the largest financial fraud in history. Prosecutors said the gifts were grounds to have his bail revoked because what’s left of Madoff’s assets will have to be returned to burned investors.

According to the report, Madoff’s new bail conditions include an inventory of his personal property and searches of his mail. The judge ruled that federal prosecutors failed to prove their contention that Madoff posed risks sufficient to merit his incarceration pending trial.

The anxiously awaited decision does put further restrictions on Madoff, including forcing him to come up with a list of items at his apartment and allowing a security firm to check on the items. The security company will also be allowed to search all outgoing mail from Madoff to ensure that no property has been transferred.
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“Absolute Truth” well science maintains there is there is no such thing like that, but from the current global financial crisis it is evident that there is no absolute free market. Truth is always relative, just like freedom.

It is important to look for positive points to find a way out of the financial crisis, apart from philosophic controversy.

All countries, whether separately or collectively, are working hard to contain the crisis, or at least to reduce losses, despite the gloomy picture of the global economy and the pessimistic atmosphere blanketing the entire world.

Although it is difficult to speak about positive points while the entire world is facing such a crisis, there must be some positive aspects.

The first of these positive effects is that the financial crisis ushers in an end to the domination of the sole magnate in international financial relations, which was a major cause of the crisis.

Wall Street was the world’s most powerful investment house, just a few months ago, where investments used to pour from the East and the West. Now Wall Street means bankruptcy, and investors in fear of losing their money do their best to avoid it.

At present, there are regions in Europe and Asia, including the Gulf region, emerging as hubs of huge investments, which will bring about more stability to the world financial system. This shift is important for restructuring international relations in the post-crisis stage.
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The torrent of earnings releases set to hit this week could only exacerbate volatility moves, analysts say. Volatility has knocked around stocks on Wall Street in record ways. Buckle up for the coming week.

News and concern over inter-bank lending, credit spreads and declining oil prices, the major averages managed to piece together a strong week that built on the lowest levels in five years.

So far in October, each day the Dow in ranges of no less than 250 points. In fact, the index saw the first 1,000-point swing in its history just over a week ago on Oct. 10. Most of this volatility has been blamed on the liquidation of assets of hedge funds and mutual funds. Rumors of poor performance at major players intensified the effect.

“No doubt the indiscriminate selling we’ve seen has been liquidation, no doubt. Everything is for sale,” says Art Hogan, chief market analyst with Jefferies. Hogan points out that all the indexes have fallen by roughly the same percentage, which indicates that funds are not selling stocks in one industry to invest in another.

The news about the deleveraging of the hedge fund industry is already behind the event, to a certain extent. A lot of hedge funds have a very high level of cash right now. As we come into next week, the question now is whether cash levels are high enough for everyone’s comfort and is the indiscriminate selling is behind us or not, and can we start focusing on fundamentals.
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Here we consider the seven stages of monitoring investments throughout life.

The seven ages of man is a speech from one of Shakespeare’s plays and catalogues the stages we go through in life, from baby to old age. It is an excellent comparison to investing and how investors need to ensure their investments keep pace with them as they move through life. However, this doesn’t just apply to saving for retirement, it applies to any investment goal and portfolios need to be monitored to make sure they are on track to achieve their objective.

Baby to young adult: Although financial commitments are negligible at this stage in life, it is a good idea to encourage children to save for themselves and to understand the basics of money from an early age.

Under 25: Retirement is a long way and a bulk of an individual’s income may be earmarked to fund their current lifestyle – buying property or cars for example – rather than saving for later years. However it is still a good idea to get started in investing and understanding what it is all about. Now also might be a good time to develop a high risk, aggressive portfolio as there is plenty of time to recover from any capital losses.

25 to 35: Although retirement may still seem a long time away, the earlier someone starts investing, the greater chance they have of building a significant nest egg for later years. At this stage in life people may be able to afford higher risk and more aggressive growth strategies as there is more time for investments to recover from losses or market volatility.

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