Bill Gross publish this newsletter regarding the investment implications in the environment with the features of high liquidity and low volatility. It seems he expects that current low risk premium paid by the investors cannot be sustained and risk spreads will be likely to increase in the looming future. It seems to me that the bond guru is calling for some warning alerts, like he is not very comfortable about the high asset price driven by the investors tolerance towards high risks. But I have no idea what exact investment actions an individual investor should take after reading this letter.
1. Bill Gross's Alpha & Beta Anemia

2. Bill Gross moves away from the index

11点在酒店和幾個MBA的同学见到亲爱的亚伦同学。一起聊天到2点，亚伦说索性就再聊到4点，再早上8点开公司的会。我们另外3个人都不行了，明天还要开在银行的最后3个会，还是回家继续准备吧。和亚伦也快一年没有见面了，可是聊天的话题永远还是那些话题。不过，今天的谈话和最近认识的一些i-banker帮我纠正了对于投行的偏见，以前自己太狭隘。必须得承认：在投行有很多非常优秀的talents。亚伦今日给失败又下了一个定义，既然今年中国的大市都double，如果我们的投资没有double，就是彻底的失败。问道他为什么从i-banker转到PE，他给的理由非常严肃，也让我意想不到。他觉得除了钱的因素以外，觉得做i-banker没有办法办法帮助到更多的人。他说内心里还是觉得做工程师最好，因为做出的东西让很多人都有benefits。发现了亚伦同学除了作为商人追求实际的一面以外，还有另外一面。在这样的场合，我基本上都是喜欢听别人的交谈，因为你不必担心冷场，这对于我是很好的学习机会，发现需要自己catch up的领域。亚伦有很多优点我需要学习，很重要的一点，他总是让人感觉到他真诚的兴趣，还有带给你非常正面的建设意见。现在有点明白，为什么他能有这么多的敬仰。有些人，你永远不希望和他一起compete，因为他是你敬仰的对象。

虽然这样的MBA聚会都会让自己很自卑，觉得自己behind，可是又有什么关系？反正是需要刺激自己不要太懒惰的机会。

Private-equity firms have been on a spending spree this year, and the ripples are reaching to even the smallest stock-market investors.

A year ago, many people had never heard of these firms, which use dollars raised from pension funds and other big investors to buy companies owned by public shareholders.

But lately, a rash of giant deals has cemented the role of private-equity firms as Wall Street celebrities. In just the last two weeks, the firms have announced agreements to buy real-estate giant Equity Office Properties Trust for $20 billion and radio behemoth Clear Channel Communications for $18.75 billion, as calculated by market researcher Dealogic. (Figures exclude any assumption of debt.)

So far this year, Dealogic says the firms have announced deals for 939 U.S. companies valued at $357.88 billion. That's more than the going-private deals announced in all of 2003, 2004 and 2005 combined.

While individuals generally can't invest in private-equity pools, here are four key ways that the transactions affect them and the stock market broadly:

Benefiting from a Buyout

A private-equity buyout is often considered a windfall for stockholders of the target company, because the purchase price is typically higher than where the stock had been trading. Clear Channel, for example, is being purchased at a 17% premium to its closing price Oct. 24, the day before the company signaled interest in a buyout. The Equity Office deal announced last week is at an 8% premium to the previous day's close.

Some investors are trying to capitalize on the going-private trend by buying stock in possible targets. Bad idea, says Arnie Berman, chief technology strategist at Cowen & Co., a research and investment banking firm. He warns that investors can get burned if they gamble on a takeover and disregard company fundamentals.

Charles Massimo, president of CJM Fiscal Management, adds that if a firm is rumored to be a buyout target, the stock has probably already moved up as a result. "The stock market is always a forward-thinking animal," he notes.

Are Premiums Too Low?

Although the premiums on Clear Channel and other stocks are an unexpected boon for many investors, some people on Wall Street gripe that holders are not getting paid enough when companies are taken private.

Consider Fairmont Hotels & Resorts, which earlier this year agreed to sell itself to Colony Capital and Kingdom Hotels International. Some investors protested that the firm, which manages 88 properties, was worth more than the $3.47 billion sale price. Complaints grew louder a few months after the takeover when Fairmont sold seven properties for $1.5 billion. Fairmont declined comment.

Now, some investors worry that Clear Channel executives may have pushed for deals that were good for them, but not ideal for shareholders. Two concerns are whether the company adequately considered proposals that were less friendly to the founding family, and whether it seriously weighed a break-up plan that might have garnered more money for investors.

Clear Channel executives couldn't be reached for comment.

Critics of recent deal prices note that premiums have gotten smaller. This year, the average premium on a buyout target has been 29%, according to Thomson Financial, compared to 44% in 2000.

The Justice Department has been looking into private-equity dealings, concerned about the possibility that some firms are colluding to keep purchase prices low.

Stockholders unhappy with a going-private proposal can vote against it, but probably won't be effective, says Dominick DeChiara, leveraged-buyout practice leader at law firm Nixon Peabody. The process is different from an open tender offer for a company's shares, which allows each investor to decide whether to accept the bid. In a buyout, a special committee appointed by directors makes the decision to sell. The agreement must then be approved in a shareholder vote.

Next Stop: Public Again

While private-equity firms are taking some companies out of public hands, they are responsible for some new public offerings of stock. For instance, car-rental company Hertz Global Holdings recently sold a 28% stake in a $1.32 billion public offering, just 11 months after three private-equity firms bought Hertz from Ford Motor.

On average, stock offerings of former buyout targets outperform other initial public offerings and the stock market as a whole, according to a recent study by Harvard professor Josh Lerner and Boston College's Jerry Cao.

Examples cited in the study include software company Amdocs, which tripled in value in the three years after it re-entered the market in 1998, and outsourcing company Alliance Data Systems, which gained 147% in the three years after its 2001 IPO.

Notable exceptions to the study's finding were some "quick flips," or companies that went public less than a year after going private. One such debacle: Refco, a New York commodities broker, went public in August 2005 and filed for bankruptcy two months later, after the board discovered $430 million in hidden debts.

Harvard's Dr. Lerner says private-equity-backed IPOs may do well because, when private, company managers are free from quarterly earnings pressure and can focus on long-term goals. Executives have also been pressured, typically, to aggressively cut costs.

Public Companies Respond

Private equity's focus on building stronger companies can have an even broader impact, says Fentress Seagroves, a partner with PricewaterhouseCoopers Private Company Services. That's particularly true as buyout pools have grown, expanding their reach.

"The bigger public companies that thought they might be safe are potential targets," Mr. Seagroves says. "They're having to be more disciplined."

Some analysts say buyout firms are considering companies with stock-market values as high as $50 billion for takeovers. Rumors have circulated on Wall Street that Home Depot, Dell and Texas Instruments could be possible targets.

Many managers who want their companies to stay public are being more careful about their investments, or more aware of the need to trim costs, Mr. Seagroves says. But cost cutting, of course, can be a negative for employees, when it involves layoffs.

據官方媒體週五報導﹐根據即將發佈的新規﹐中國大型國有企業將不再享有對其利潤用途的主導權。

據官方新華社(Xinhua News Agency)及其他媒體報導﹐中國正在為合理利用國有企業巨額利潤展開更廣泛的努力﹐上述舉措看來即是內容之一。

新華社援引中國總理溫家寶在國務院會議上的講話稱﹐應加快建立新的國有企業預算制度。

報導還援引國務院國有資產監督管理委員會(State-owned Assets Supervision and Administration Commission, 簡稱﹕國資委)主任李榮融的話稱﹐國資委將負責編制161家大型央企的資本經營預算﹐其他國資經營預算則由財政部(Finance Ministry)負責編制。

中國現有161家中央直屬企業﹐其中不少企業雄據著被視為具有重要戰略意義的行業﹐如通信、重工業及能源等。

新華社報導稱﹐上述企業2005年留存的稅後利潤總計達750億美元。

由於監管缺失﹐不少國企對手中闊綽的留存利潤進行了不明智的花費或投資﹐這在一定程度上可以說是剝奪了政府在教育、健康及社會保障等滿足國民基本需要方面的預算資金。

官方媒體《中國經濟週刊》在本週發表的一篇文章中表示﹐國企國有資本經營預算制度具體方案有望年內出台。

文章表示﹐隨著新方案的出台﹐被人戲稱為“央企吃肉﹐全社會喝粥”的國企傳統分紅體制也將徹底終結。

包括世界銀行(World Bank)經濟學家在內的一些國際專家也認為﹐政府應向國有企業徵收紅利﹐並用於公共事業。

一些經濟學家認為﹐這將有助於降低中國普通家庭強烈的存款欲望﹐刺激國內需求﹐從而有利於推動國內產業發展﹐並降低經濟增長對出口的依賴。

今天见到爸爸，和他一起吃花生，聊天。像每个生日一样，父亲总会谈起那个我出生的早晨。父亲说我出生后，就托关系为座月子的母亲买了半头牛，半头羊，可是父亲厨艺平平，只会一种做法，就是煮汤，所以后来母亲也吃腻了。不过，我却因此从小的身体基础很好，毕竟在那个年代吃猪肉可是要凭票供应的。父亲还说我去了一个新的行业，是国家政府都大力支持的，前途是光明的，还说如果做不下去了，就回家，他还能养我。父亲还讨论了他看电视看到的最新的一种从海水里提取一种石油替代能源的项目，我在一旁哈哈大笑。

03年冬天的时候，我还陪父母亲回到兰州那个我出生的医院去故地重游。对于这个我成长了3年多的西北城市，我自然一点印象全无。不过03年的时候，我还是被当地农民非常贫穷和艰苦的生活现状深深震撼，在非常寒冷的露天市场，土豆好像只需要0.2元/斤。

后来父亲转业到了成都，我们也就开始了成都人的生活。所谓的“少不入川”，而我却在那个安逸闲散的地方成长到了高中毕业。可惜，很多成都人的典型特征，我都没有天赋学习。比如麻将，比如开着车满世界找好吃的，或者农家乐。但是，我却有一样酷爱的，泡茶馆。还是初中的时候，就和同学逃课去泡茶馆，现在的中学生的早恋都是麦当劳什么的，我们那个时代就在杜甫草堂浣花溪旁边的茶馆，只需要0.5元，就可以坐一天，摆摆少年的龙门阵，也都是同学之间朦胧的八卦而已，现在想想很浪漫单纯的。后来，到高中就对泡茶馆更着迷，少城公园的茶馆更是我的最爱，前面是湖水，后面就是养鸟的，掏耳朵的，摆龙门阵的，想清静的，左右两边都是树林。经常逃课，就在那度过一个又一个发呆的半天，有时也看看爱情小说之类的。中午饿了，出了公园门，就有卖小笼包子，很好吃的。吃完饭，再磨磨蹭蹭去学校报到。
18岁的时候，怀着对小地方，小市民气息深深的不屑离开了成都，来到了大上海。一下就过去了许多年。才算有点了解，大小不在于城市的半径，而是在于心的forever young, 还有好奇心驱动的探寻。

对自己的愿望，对自己能更诚实一些，凡事少逃避一些，beautiful loser，这种成都人的特性我还要好好学习。认真过，失败过，也美丽过，就很好。

Joan Baez's "Forever Young"
May God bless and keep you always,
May your wishes all come true,
May you always do for others
And let others do for you.
May you build a ladder to the stars
And climb on every rung,
May you stay forever young,
Forever young, forever young,
May you stay forever young.

May you grow up to be righteous,
May you grow up to be true,
May you always know the truth
And see the lights surrounding you.
May you always be courageous,
Stand upright and be strong,
May you stay forever young,
Forever young, forever young,
May you stay forever young.

May your hands always be busy,
May your feet always be swift,
May you have a strong foundation
When the winds of changes shift.
May your heart always be joyful,
May your song always be sung,
May you stay forever young,
Forever young, forever young,
May you stay forever young.

昨天是感恩节， 毕竟在国内，没有什么气氛的。不过，却让我想起曾经陪伴我度过这个节日的一位朋友，还有那些在那个节日发生的事情，在我淡忘之前，还是想把有关的记忆片断保留下来。很可惜，那些在洛杉矶写的日记，都坏在了笔记本电脑里。

那是2004年的冬天，还在洛杉矶读书。还在10月份的时候，亲爱的渡边同学就提议在感恩节的时候一起到Las Vegas去过一个周末，问我是否有兴趣同去，虽然对于数学统计不在行，但是赌城的大名还是让我觉得很有吸引力。而且，渡边同学同学还慷慨的让我享受他免费的宾馆房间，于是又约好了一些同学，算是定下来。很兴奋的盼望，还告诉渡边同学那个周末也正好是我的生日，可以在赌城度过一个生日，真的是很特别。可惜，有些不巧，中间又发生一些状况，我开始对去赌城过感恩节提不起兴趣，就对渡边同学说，算了，我就不去了。没想到，渡边同学很坚持，劝说我哪怕是在那边一个人看看，走走也是对我有好处的。由于渡边同学要翘课提前开车去，他还很热心的发给我很多航班，当地交通的连接，说一旦我决定去了，就给他发信，他会在当地一个小小的casino等我。渡边同学出发前，我告诉他，我还是去的，而且运气好居然在感恩节的高峰期，还是买到了第二天的飞机票。渡边同学很高兴听说我也能成行，于是又给了我很多的日文的旅行手册，害怕我从机场没有办法找到他的旅馆，把我应该座的shuttle bus的车号，图片都发给我看，还标注上我下车的站名。其实，后来我很懒，直接叫了taxi就达到了酒店。

 

还记得那天是感恩节的前一天，下课以后我直接冲到了LUX，果然是人山人海，安检的前面大摆长龙，一切顺利，飞机准点起飞，其实人不多，所以一个人座了三个人的位子，好像过了1个多小时就到了。赌城的机场建设的很现代化，通勤方面设计的很便捷。不过为了不麻烦，我还是叫了出租车。司机是个老头，问我到什么地方？我是我要去一个什么什么酒店，我朋友在那个酒店旁边的casino等我。司机说，那个酒店他当然知道，还问我那个小casino的名字是不是***。我连忙说就是这个casino，司机说没有问题，沿途司机为了多拿小费，不停的给我介绍赌城的建筑和来历。到了那个casino，渡边同学果然在他说的那个位置上打老虎机。后来他告诉我，他不是随便玩其中的机器，他都是有备而来，事先已经选好了那台机器的。

进了那个酒店，才算知道赌城的酒店真的独树一帜，第一是人多，到处都是游客。第二，就是根本没有方向感，很难找到电梯，但是很容易找到赌场和娱乐消费的地方。渡边同学说，这是他们故意设计成这样的，有机会就让游客花钱。把行李放下来以后，渡边递给我两本研究赌博概率的指南，说我有空的时候可以研究研究，我差点没有笑断气，不过也算认识了所谓的认真。稍微休息一下，渡边提议说晚上还有几个他在哥大的日本同学，也刚到赌城，可以一起去吃晚饭。于是，我们就开车到了城中一个有名的牛排店。虽说也预约了位子，还是让我们等了一会。吃饭的时候，他们还是为了照顾我，尽量不说日文，用英文交谈两个商学院的趣事。其中一个渡边同学在政府部门的前同事，因为从小在英国长大，英文最流利，但是老家在京都。他对我说，我长得很像他在京都的爷爷喜欢的一个艺妓。渡边同学在旁边哈哈大笑。最后，怕我误会，还跟我解释其实在日本的文化中，艺妓和普通人认为的妓女是不同的。我连忙让他放心，说我理解的，因为我眼睛小，所以是很像唐朝那个时代的人。吃完晚饭，渡边同学又载我和这个京都同事到了城中心最繁华的地区，一个casino一个casino为我们介绍，那些景点是我们以后参观的时候不可以错过的。路上，不停的有人散发stripper的宣传单叶, 因为我在场的缘故，他们都没好意思接。

 

第二天，渡边同学开始脑力大战，而我背着背包，拿着日文的旅行指南开始一个人乱逛。沙漠的天气很晴朗，可是早上还是很凉的。我于是戴了一个黑色的贝雷帽，渡边在酒店门口分手的时候，他打趣说我看上去像个artist，再加上那个书包，就像一个photographer来给赌城照相来了。我一直觉得渡边同学是非常有趣的性格，只是语言沟通的问题，我还不能完全体会到他的一些幽默。赌城的每个大型的casino，都各自有各自的主题，以吸引游客来入住，很多娱乐活动和设施也是免费的，或者价格很低廉。我就每个casino都进去参观，累了，就坐下来喝喝咖啡，看看来来往往的各地的人们。在赌城也有很多大型的shopping mall，里面很多顶级的名牌，也有不少打折的商品，我当然也不会错过，好像买了一幅皮手套和一件运动衫，买好了我就把它穿在身上。我沿着Les Vegas Boulevard, 从一头逛到另一头，因为渡边有建议我去一个游人较少去的casino，说那里的室内灯光秀很棒，所以我就沿着内华达沙漠的腹地方向走，希望能找到这个casino。终于还是迷路了，马路两边零星的几个商店，他们都不知道我要找的casino，后来我知道其实大方向是没错，只是在好几个block之外。最后我决定碰碰运气，于是走进一家卖中国家具的商店。老板看我拿着日文的旅行指南，可能认为我是个日本游客，所以用英文来回答我的问路。后来，当然都用中文开始聊天了，老板说这是他在赌城开的第二家家具店了，别看平时客人流量不多，生意还不错。最后这个老板提议开车送我到前面的公交车站，又怕我担心安全，于是步行把我送到了离公交车站不远的地方。
回到城中心，到Mirage解决了晚饭，本来打算去看看show, 可是去了好几个著名的hotel，才知道票子已经订完了。正好，也让我有空能多一些时间看看Bellagio前面的喷泉灯光秀。好像灯光秀是每15分钟就进行一次，喷泉，灯光，音乐，在一片偌大的水池里集中呈现，想不浪漫都不可能。我捧着一杯热咖啡，看了一场又一场，不想离开。發絲上满是水珠，沙漠的夜晚是那样的寒气逼人，我伸出手抹去那些冷冷的水珠，这个动作却让我又想起了一个可爱的老头，黄永玉，在文革的时候写的那首长长的诗，“老婆啊，你不要哭”。其中的那几句：“我們有過悲傷，但我們蔑視悲傷，她只是偶爾輕輕飄在我們發尖上的游絲，不經意地又隨風飄去。”生活的安排有的时候如此的奇妙，在美洲大陆的沙漠里，带给我心灵安慰的，就是这样一个来自凤凰小城里的老画家写的非专业的小诗，想着他说过的：我深愛這個世界，包括它的悲苦。
就这样，自己也觉得很多命运的安排，或悲或喜，交替穿插，我们都是要看着它壮丽的落幕，如同眼前的这一汪池水，贯穿始终的也许只是爱的力量。虽然只是一个人伫立在美景之前，虽然还是一个卑微的我，对于很多事情都没有办法提供实质性的帮助，但是也真的在那个时刻相信诗里面讲的：靜穆而勇敢的心，让我可以吻你稚弱的但滿是裂痕的手。

 

第三天，打算下午开车回洛杉矶。约好了中午在酒店碰面以后，渡边带我去看昨天我没有找到的casino, 结果在酒店碰到了那个京都的同学，于是就3个人开了2部车，到了那个长长的casino，其实它位于整个Les Vegas Boulevard最尽头，远离那些声名显赫的大casino，主要光顾的都是美国本土的好赌之客。它的长形的天花板回廊是白色的，每20分钟左右上面就配合音乐投射出各种图案和造型，鬼魅多姿，也是值得一看的。我挽着渡边同学的胳膊，一起照了一张合影。看完了表演，本来以为与那位京都同学告别，跳上渡边同学的车一路开回洛杉矶。可是，渡边说那位京都同学说晚上很想吃Les Vegas中国城里的菜，刚好和我们回去的路顺道，所以不如我们3个人一起去吃中国菜，然后再各分东西。渡边说他们都听说有一家中国餐厅，特别有名，所以决定不要错过美食机会。好像开车离开Les Vegas城区有了1个多小时，才达到那个地方，居然还要排队等候，还是个广东的餐厅。又等了大半个小时，我们才有了位子，3个人已经在寒风中冻得不行。不记得点了什么菜，好像有豆腐之类的，还有云吞。因为我花了很长时间，才跟渡边解释清楚什么是云吞，应该还点了酒，不太记得了。我有些诧异，问他们喝了酒以后，开车还安全吗？渡边说今天一定是要丰盛一点的，而且他们请客，因为今天是我的生日。我当时应该有呆住，那是我一个多月前有偶尔提及这一天是我的生日，所以在赌城过会有特别的意义。可是以后，我就没有再说过这件事。渡边说他有问这个京都的同学到哪个餐厅比较好，所以才特意到了这个中国餐厅。我想当时我有笑着跟他们说谢谢，应该没有让眼泪掉下来。我自己都没有为自己过生日的打算，只是普通的同学和朋友，却特意为我做了这么多有心的安排。

 

吃完晚饭，也告别了回波士顿的京都同学，渡边开车载我回洛杉矶。天色已是很晚，渡边说我们必须keep talking, 否则他会担心一个人开闷车真的会睡着，因为前天晚上他是通宵在赌桌上奋战。这个时候，渡边有些措辞谨慎的问我是否愿意和他讨论一下中日两国互相仇视的问题。他说，他不愿意也不敢和其他中国同学讨论这个问题，所以想问问我的看法。其实，我也是第一次静静坐下来，听对方在这个问题上的看法和观念，也是非常新奇的了解了他们看这个问题的角度。我们都没有试图去说服对方，或者评判对方，只是想听听对方是如何看待和解读同一个历史的。这对于我来说，是非常有意义的体验，渡边也给我讲了很多政府内部又是如何根据政治利益制定相应的对华政策。车窗外，沿路的山顶上皑皑的白雪在月亮的反照下， 发着淡蓝的光芒。我们就一路淡淡的聊着，终于在凌晨时分回到了洛杉矶。
以后毕业，各自回国，和渡边同学的联系也很少了。只是后来他辞去了政府的工作，应聘一家美国的hedge fund的时候，写信问我是否愿意充当一个证明人，如果他的公司打电话来询问他的academic background，我回信说非常乐意。再后来，他写信说他太太生了一个女儿，终于功德圆满。

而今天，2年之后的感恩节，我有写下这些回忆的片断，用渡边同学并不认识的中文字，向他表达我的谢意。他并不算是我亲密的朋友，但是却在一段我脆弱的日子里给了我默默的，却是珍贵的帮助。还记得，在美国唯一的一次当着别人的面流下眼泪，就是在渡边同学的车上。他只是说：我知道你很难过，但是你要多保重, will be all right.

有些朋友间的缘份，淡淡的，也很短促，却是让人珍惜。

雨天，你会听什么歌？一遍一遍重复，Cat Power收录在“The Greatest”里面的最后一首歌"Where is my Love?".钢琴和Chan Marshall的声音已是全部。
http://www.youtube.com/watch?v=i8R0eoGO7Gw

 

WE CAN ALWAYS COUNT ON RICHARD ARVEDLUND to take a different tack. Independent and bold calls on the economy come easy to this longtime money manager, who's seen it all in his 30-plus-year career. But his balanced investment approach, with a focus on high-yielding, big-cap stocks combined with some bets on bonds, helps his clients preserve their capital as much as build it. The founder of Wilmington, Del.-based Cypress Capital Management, which has $450 million in assets and is now a unit of WSFS Financial, is at his best in troubled times. Trouble, the way he sees it, is straight ahead.

Barron's: It took a year, but the calls you made when we last spoke are looking pretty good now.

Arvedlund: Well, until midyear the economy was running much stronger than I had thought it would. However, a GDP [growth domestic product] slowdown has clearly begun. The GDP growth rate dropped to 1.6% in the third quarter from 2.6% in the prior quarter and 5.6% in the first quarter. We have not seen GDP growth below 2% for four or five years. We now have preconditions in place for a recession.

Preconditions?

The preconditions would be the following: Whenever housing starts and permits drop by the rates of decline that have been exhibited -- 10% to 20% -- it has always preceded a recession. What is remarkably different in housing than just about any other sector of the economy is that whenever housing cycles turn down, and that's happened twice in the last 30 years, once in the late 'Seventies and once in the late 'Eighties, the downturn tends to last much longer than people dream. The average cycle is three to four years.

From our perspective, this one began in late 2005, when housing starts and sales and permits peaked, and should last at least through all of 2008. The rate of price appreciation in this housing boom has been the highest we have seen. We had a string of five years where the compound growth in housing prices approached 15% a year. Whereas housing kept the economic recovery going much, much longer and stronger than expected, housing now will drag it down for a much longer period than people think.

The other area that will hurt the economy is that all the major domestic auto makers have announced double-digit production declines for the quarter and into early 2007. This has happened before but, again, only preceding recessions or very dramatic slowdowns. The third precondition for a recession is a flat to inverted yield curve. Flat to inverted yield curves only occur before recessions, not slowdowns. All rates from three months to two years are above long-term rates. The yield on short-term paper is over 5% and the yield of the long bond is 4.75%. Where we had been looking for a slowdown, we now think there's a 40% to 50% probability of a recession. Next year could be a very difficult time in the U.S. economy.

You have been concerned, too, about how the low-end consumer was holding up. Wal-Mart's numbers suggest they are not holding up well.

Wal-Mart [ticker: WMT] is my favorite economist. It is huge, reflects the low- to middle-income sector of the economy and it gives us monthly statistics. What has happened is a dramatic reduction in spending by low-end consumers. It is starting to impact not only Wal-Mart's outlook but, we presume, quite a few other retailers. Wal-Mart's reaction has been to become even more competitive, so I would suspect the retail-sales environment will be the next sector of the economy that we will start to hear less exciting news from.

How does the election play into your view?

We've had bull and bear markets with both Republicans and Democrats alike, so you can't make a case that one party in power is good and one party in power is bad.

What we are dealing with is possible change, and the most significant change would be if our tax policy were to be reversed by the Democrats. A major reason this stock-market cycle has done so well was because of the passage of lower capital-gains and lower dividend taxes, which took place in May 2003. The stock market bottomed in early 2003. Anything that would negatively influence the tax treatment on capital gains or dividends would be a serious negative now. The tax treatment is in place until 2010, but even any verbiage about changing it would be negative. Secondly, the Democrats plan to immediately raise the minimum wage by a meaningful percentage. That will raise unit labor costs throughout the economy, not just for the low-level workers but everybody else. It will impact profit margins. It will definitely have an impact on employment. It will definitely hurt job creation. If you raise the price of labor by a high percentage, business will figure out a way to use less of it.

The Democrats have also been making noises about a windfall tax on the oil companies.

That would be a major negative. Any windfall tax on anything would be a major negative. The last time that was implemented was by President Carter. It resulted in a serious blow to the oil industry, and it resulted in less exploration.

Are you worried at all about inflation?

No. Inflation will peak by the end of this year or early 2007, and the reason for that will be much lower economic activity and a significant drop in the price of oil. There'll be a meaningful contraction in the housing industries, other commodities will be declining in price, and then the job market will soften. The time to worry about inflation is over. Inflation numbers always lag both ways. The inflation numbers tend to peak after the economy has seen peak rates of growth, and the peak rates of growth were early-to-mid-2006 at 4% or 5% year-over-year. The worry about inflation is overstated, and for the next 18 months we will see good news on the inflation front, not bad.

I would remind you that inflation rates in just about every other part of the developed world are extremely low. Inflation always comes down when the GDP decelerates or you have a recession.

Will commodities peak if China and India continue their strong growth?

I don't buy that noise at all. We are the major user of commodities, and by my standards you have two areas of the world where growth rates are going to really take a beating: here and Europe. China and India might keep the declines in some perspective but not prevent them. Look at oil. We've seen a peak in the 80s or so. Oil is now in the 60s. Even with China and India using a lot of oil, we think the price of oil could drop to a range of $45 to $50 by this time next year. We've witnessed forecasts as high as $100 a barrel or more. Here we've had a drop of about $20 a barrel, and everybody I read or talk to tells me it has nothing to do with economics 101. My argument is that somewhere in the world the demand for oil is moderating, and I would pick this country for starters. You don't get a drop in oil from $80 to $60 without demand causing it.

This is exactly what happened in the last economic cycle. In 1998 the price of oil bottomed at $10, rose close to $40 by 2000 and then dropped to $20 by 2002. That drop in the last cycle correlated with the peak in the economy, and the same thing is going to occur here.

Is this good news for the fixed-income market, which you have been bullish on for the last few years?

Yes. The fixed-income market in 2005 was reasonably decent; there wasn't much volatility. Volatility in the fixed-income markets this year was enormous and bond yields rose for the first six months on the strength of the economy, which really undermined our bond positions.

Did you stick with them though?

We stuck with them. We feel the bond market peaked in yield in May or June of this year and that was totally coincident with the peak of GDP growth. It was coincident with the Federal Reserve finishing their rate hikes.

As far as the outlook, we think the Federal Reserve has finished raising short-term rates. Historically, they normally go on hold for six to nine months. In almost every cycle they've done that -- including the last one, I might add. This implies Mr. [Ben] Bernanke [Fed chairman] will keep rates flat here until the first or second quarter of '07, and by then he will see that the GDP has slowed down or dropped. Once he starts cutting rates, I see a 200- basis-point [two percentage point] drop from early '07 to early '08. This should bring the long bond yield to 4% or 4.25% by this time next year.

Bond markets always do well in recessions or slowdowns. I have never seen a slowdown or a recession where bond yields go up. The consensus for GDP growth is anywhere from 2% to 4% over the next two years.

Our argument is that 2% will be the high end next year, and you should consider the odds that some quarters will be zero. It wouldn't surprise me if the five-year Treasury, which is near 5% today, dropped to 3% in the next 18 months.

Do we have to worry then about the dollar?

Yes. The dollar is about to resume a fairly extended decline. And under that scenario, it obviously raises the attraction of foreign investments. It also significantly raises the attractiveness of precious metals. We remain very, very positive on gold and the precious metals, because in an economic slowdown, demand for the dollar will decline.

Have you stuck with your gold and silver positions?

We've stayed the course. It has been one of the most volatile situations I have ever been involved with. When I chatted with you last year, gold was about $475 or $500, then had a magnificent rally to $700-plus in May, and then began a magnificent correction -- I'm being Christian -- which drubbed the gold stocks.

Now, gold has rebounded above $600, and I would look for a very significant move in gold the next two years. I would hazard a guess that the gold market will appreciate by $200 to $300 an ounce over that time frame, and it will be driven by another decline in the dollar. We would recommend people would have a hedge position in precious metals using either the bullion directly or gold-mining stocks.

We're using a closed-end fund called Central Fund of Canada [CEF], which owns the physical metals, one half silver and one half gold, in bullion form. It trades totally in line with the price of the two metals and rarely is at a premium or a discount.

The two stock candidates we would recommend are Newmont Mining and also Barrick Gold. We are putting 3% to 5% of client assets in precious metals.

Moving on to the stock market. How will it hold up under this scenario?

The stock market is very, very related to GDP growth, and it has done extremely well over the last four years since the economy rebounded. We have achieved record levels of profit margins and we don't think that's sustainable. All of our valuation metrics imply that the P/E of the stock market today at 16 or 17 times is more than adequate.

We would argue that S&P earnings will flatten or decline in the next 18 months. So the stock market looks fully valued. Stay away from economically sensitive sectors, including anything to do with commodities such as energy, steel, copper, aluminum and you name it. Avoid industrial companies, and emphasize sectors that would benefit from declining interest rates.

Which would be?

I would highlight the insurance sector. We find this group dramatically underfollowed. These are stocks that have done little if anything for years. The major asset of any insurance company is a bond portfolio. Last time we mentioned St. Paul Travelers [STA]; we've hung onto it and would still purchase it here. We also like a smaller company, Delphi Financial [DFG], but the whole group looks attractive to us.

From Katrina to litigation to asbestos, the group has had its problems. They raised rates dramatically from late 2005 through now, and I would say that game is over. But the losses of yesteryear are going away and their capital reserves have improved, and from this point forward pricing will probably be flat.

This is not a high-growth industry, but the P/Es on these stocks are very low, 10-12. There is no reason why this industry should sell at such a dramatic discount. That would be our favorite interest-sensitive group. The second interest-sensitive group would be the telephone area.

What do you like there?

Verizon Communications [VC], because of its dividend yield and also because they will be able to refinance their debt at more attractive rates. We also like Windstream [WIN], a spin-out and subsidiary of the telephone company Alltel. They operate in the country's rural areas where people do not have high wireless concentration, and they are converting their client base slowly into wireless and broadband. In the meantime, it generates enormous cash flow and pays out a high proportion of their earnings in dividends. Windstream has a dividend yield of 7%.

How about another pick?

The supermarket Supervalu [SVU]. We were attracted by their purchase of Albertson's. We're very familiar with management and believe they can execute and make the merger work. It's a defensive name in a sector where unit growth will continue fairly steady and won't be impacted by economic trends.

What else?

We think the anti-oil outlook we've had the past year is a valuable theme. While oil prices stayed much higher for much longer than I expected, the price has clearly broken trend, and the most obvious beneficiary would be the airline sector.

Even in light of your economic outlook?

Well, the airline industry has consolidated. Some of them have crawled out of bankruptcy, and we think they are running their companies in a much more efficient manner. Our favorite candidate is JetBlue Airways. JetBlue has the most sensitivity to a decline in oil prices and rates.

What about the labor costs there?

Labor costs are OK and are going up in line with their growth. But the bogeyman for them was that they had no hedges on oil, and it scorched them. They are continuing to gain market share. They are watching costs. They have a very leveraged balance sheet, and so any reduction in interest rates would really help them.

Any other names come to mind?

Dow Chemical [DOW], which is also on the list of unloved companies. It sports a 4% dividend yield, and they raised the dividend for the first time in many years this year. They are repurchasing shares, and they sell at a fairly low multiple. They will benefit if, as we expect, raw-material costs come down.

What about your old favorites, the real-estate investment trusts and utilities?

We are paring back because the yields on REITs have really dropped as the stocks have done well. All our utilities are near highs. We can't make a case for further purchase here. We are running into a pretty fully valued stock market. There are isolated stocks but very few sectors that look attractive.

How does this compare with other periods?

To us, year end 2006 has a remarkable similarity to year end 2000. In 2000, there was a double peak in most equity indices and new highs in small-caps. There were peak rates of GDP in mid-2000 and this year. Oil prices peaked in late 2000 just as they have been peaking here. And there was a flat-to-inverted yield curve. It led to the making of a very difficult economic environment in 2001 and '02. The only area that stood out from that point forward was the bond market.

From an asset-class perspective, fixed-income is our best bet. The focus is on longer bonds. The 10-year Treasury yield could drop from 4.75% to 4%-4.25% by this time next year, for a return of 8% to 10%.

Thanks, Dick.

The stock market has been in a surprisingly strong rally since the middle of July -- so strong, that many experienced investors find it too good to be true.

Ironically, that very skepticism could be one of the reasons the market is doing so well.

"Some of the best market advances seem to be the ones that are the hardest to believe, and this one is hard to believe," says Paul Desmond, president of research service Lowry's Reports in North Palm Beach, Fla.

Mr. Desmond was one of many analysts who saw signs during the summer that stocks were running out of steam and heading for more declines. The decline that began in May looked like it could last a while.

But by mid-July, with broad stock measures down less than 10%, stocks suddenly turned higher. In August, Mr. Desmond says, he decided the rebound was for real and started sending alerts to clients, urging them to buy more stocks. Yet, many experienced investors remained doubters.

"We keep getting calls, especially from our older clients, saying, 'I am deathly afraid of waking up and getting a 30% decline.' We are telling them that we think there will be plenty of warning signs before something like that happens," Mr. Desmond says.

"It is taking a very long time for people to believe in the rally," says Phil Roth, chief technical market analyst at New York brokerage firm Miller Tabak. "It is just hanging on and hanging on."

The doubters, of course, could be right, and you would think that all this skepticism would be bad for stocks. If a lot of smart people don't believe in the rally, how can that be good?

That's where the irony comes in. Stock rallies often happen when the market is full of doubters. Those are times when money managers and individuals alike have pulled money out of stocks and are holding cash, bonds or other investments. If the market begins to turn up, these people start to feel left behind. They have money available to shift into stocks, and they do so.

As long as doubters remain to be converted, money can keep moving away from other investments and into stocks, pushing prices higher.

Once the great majority is bullish, however, things are different. Froth appears, as it did during the 1990s. Instead of holding money on the sidelines, people borrow against their homes or from their brokers in order to invest. That is when stocks can be at risk, because there is little free money left on the sidelines to move into stocks.

What interests some analysts is that the market still doesn't seem frothy, even though the Dow Jones Industrial Average is up 14.9% since July 14 and has racked up 18 record finishes since October began, and even though the Nasdaq Composite Index is up 21% since July 21 and near a six-year high.

"The reason the advance has persisted is that traders, especially hedge funds, just got very bearish in the summer. They have been very reluctant to reverse their opinion. Now they are getting carried, screaming, into the market," Mr. Roth says. What he means is that they are buying stocks against their better judgment, for fear of being left behind by competitors. Until more of them give in and turn bullish, he adds, the market is likely to keep rising.

Bearish investors -- short sellers -- are throwing in the towel. These are people who borrow stock and sell it in the expectation that they can profit by buying it cheaper later. After all the gains, they are "covering" their bets by buying the stocks back, often at a financial loss. "I am seeing short-covering every day," Mr. Roth says.

Gauging market mood isn't easy, but analysts have various ways to do it. The indicators they look at show a big swing from rank pessimism in the summer to more investor optimism today. In general, however, the indicators still aren't showing excessive optimism. With these indicators, investor doubts are considered positive for stocks, and excessive optimism is considered a sign of possible trouble ahead.

A measure of short selling on the New York Stock Exchange shows that the practice remains widespread, suggesting that plenty of pros doubt the recent gains -- not much optimism there. A survey by the American Association of Individual Investors shows the percentage of bulls has risen sharply since summer, but remains only a little over 50%, still in a range analysts consider neutral.

A survey of market newsletter writers by a newsletter called Investors Intelligence shows slightly more bullish results -- about 2.5 times as many bulls as bears. That is just on the threshold of trouble, in Mr. Roth's view, but not yet into worrisome territory. A poll of futures traders by Consensus Inc. has begun to flash a warning signal, with more than 70% bulls.

None of these numbers, with the possible exception of the futures-traders poll, is extreme enough to worry most analysts. They suggest that the rally is aging, but not that it is ending.

What's more, investors tend to get more bullish at year's end, because the period from Thanksgiving to New Year's historically has been one of the best for stocks. So a higher level of bullishness now is to be expected.

Not everyone is relaxed about the outlook. Merrill Lynch investment strategist Richard Bernstein, long a market skeptic, says he sees signs of froth. One of the best indicators of the market outlook, he says, is his measure of the bullishness of other Wall Street strategists. Currently, he says, the indicator is showing too much bullishness, and flashing a warning signal.

More generally, he says, professional investors are showing high appetites for risky investments and aren't using the kinds of hedging strategies he would expect to see if they were worried about the market outlook. He says the recent market gains are due, not to the conversion of market skeptics, but to the plunging price of gasoline, which has boosted optimism about inflation, interest rates, consumer spending and the economy.

"People are still risk takers," he says.

But that isn't the prevalent view right now.

Analyst Ned Davis, founder of Ned Davis Research in Venice, Fla., says he is "on the lookout" for a bear market, "but I doubt it will happen until sentiment gets to extreme optimism." And that, he says, hasn't happened yet.

Some once-skeptical analysts have been turned into believers. Louise Yamada, former head of technical research at Citigroup's brokerage arm, who now runs her own firm, saw the market heading lower earlier this year. Now the rally seems so strong that she sees the Dow industrials pushing above 13000, perhaps far above that level.

"The important thing is to look at the flow of money into and out of market," says Mr. Desmond of Lowry's. And there, he says, there is every sign that money is continuing to move off the sidelines and into stocks

I read this newsletter last night and got little under the weather afterwards. Probably some points in this article made me feel no good:). Very unique analysis. The author looks at the relationship b/w EPS, EPS and GDP. Based on this relationship, Easterling advises common-sense strategies for investors: row or sail depending on dividend yields and P/E ratios for the S&P 500. During bear markets, investors should row, or actively rebalance their stock holdings, and create bond ladders, so that a portion of the bond portfolio is maturing every year. Sailing refers to investors letting the portfolio go with the flow – letting the market carry returns higher. Simple as that. Currently, Easterling is bearish on the future and predicts that economy slowdown or recession may start in the end of 2007, thus advising the investor to apply for ROW strategy to prevent from losing money. If he is correct in this prediction, what impact will be for China stock market if U.S economy stalls?

---

By Ed Easterling

Earnings have increased at double-digit growth rates for almost five consecutive years--although many agree that earnings growth may be slowing, it's beyond almost everyone's foreseeable horizon that earnings might actually experience a decline.

Yet a look back at history provides insights about the earnings cycle and what is considered to be normal. Despite the statistics about average earnings growth, the business cycle drives periods of surge and stall. And the stall is generally a year or two of outright retreat, rather than smoothly slower growth. As reflected in Figure 1, earnings typically grow handsomely for three to five years, and then decline for a year or two before again growing. That's usually all that it takes to restore the balance.

Figure 1. S&P 500 Earnings Per Share Growth: 1950--2005

This choppy, irregular pattern has endured across periods of wars, technology, innovation, political issues, and change. Yet the business cycle is not short; it does not run its course within a year. To more accurately see the trends, we can extend the period a few years to present the cycle as a multi-year average. Figure 2 presents the three-year average growth rate for earnings. The cycle, while still somewhat erratic, begins to show its more cyclical nature--and the tendency for it to return to a baseline growth rate.

Figure 2. S&P 500 EPS 3-Yr. Average Growth: 1950--2005

Profits not only grow and decline in dollar terms; they also change in relation to the amount of sales that it takes to generate the profits. Described in more detail, profits are the portion of sales that companies keep after all costs and expenses. When profits are compared to sales, the resulting ratio is known as the profit margin. As economists will acknowledge, the business cycle tends to push profit margins around a base level. When the sales of all companies are consolidated together, the result is essentially Gross Domestic Product ("GDP"). Therefore the aggregate profits of all companies can be compared to GDP as a measure of profit margins and relative profitability.
Figure 3 presents the profit margin relationship since 1929, when the data was first readily available. The relationship has not been smooth, yet it has been fairly consistent. During the Great Depression, profit margins were low and negative. That underperforming period was followed by an extended era of above-average profit margins. Interestingly, the average for the entire period of almost eighty years is 9%. The average of the period before 1950, with its extremes, averages almost 9%.

The extremes in both directions during the early part of the last century counterbalanced each other as it would have been expected in order to achieve the "normal" average. Following 1950, the average has also been near 9%; yet with less extreme cycles. (Note: 1950 was used as an arbitrary cutoff as it seemed to delineate the extreme periods from the recent decades...and 1950, as the start of a decade, was a round cutoff. Had a year in the early 1950s been used, the averages for the early and late history periods would both have been even closer to the overall average.)
Figure 3. Corporate Profits As A Percent of GDP

Today, as highlighted in Figure 4, the average has moved well above the historical baseline and is vulnerable to being restored again toward the average. It does not necessarily have to happen immediately, as these cycles are slow moving. It is likely, however, to be forthcoming.

Other economic and market experts are beginning to anticipate this also. Standard and Poor's expects that the fourth quarter of 2007 will have lower earnings per share than the same period in 2006--reflecting the first decline of its kind since 2002 (following the last recession). Further, as discussed by economists at the Congressional Budget Office ("CBO") in The Budget and Economic Outlook: An Update (August 2006; pg. 31): they "...forecast that corporate profits will grow more slowly than GDP after this year. Profits are projected to decrease from about 13 percent of GDP in 2006 to about 9 percent in 2016."

Figure 4. Corporate Profits As A % of GDP: 1990-2006

SPECIFIC IMPLICATIONS

What does this mean for profits in absolute dollars? First, we start with economic growth. For many decades, GDP has fairly consistently increased at near 3% plus inflation. The vast majority of economists and financial professionals expect future growth to average in the range of 2.5% to 3.0% plus inflation for the next decade or more. Therefore, if the Fed can successfully control inflation, total economic growth including inflation (nominal GDP) is expected to average around 4.5%.

Next, we consider the relationship of profit margins to GDP. The CBO and others expect profit margins to return to the historical average baseline. So, if GDP grows at 4.5% and profit margins return to the baseline relationship, the dollar level of corporate profits in 2016 will be 8% higher than their lofty levels today. That represents less than 1% growth per year on average.

However, the CBO does not see this happening smoothly. They expect declines in three of the next four years, then modest growth out to 2016 (the end of their forecast period). By the way, this is what we saw in Figure 1: a run of profit gains, a decline or two, another surge, all resulting in a general business cycle that reflects the impact of capitalism and economic forces.

For some this may seem unrealistic; yet for the recognized economists, this represents the recurring and normal business cycle. This one has its own unique elements--they always do. This cycle, however, has delivered such strong growth that profit margins are now well above the historical baseline. The recent record run of corporate profitability may have been driven by the double-barrel stimulus of tax cuts and one percent interest rates as well as other economic and financial forces.

WHAT'S THIS TELLING US

Figure 5 presents the historical relationship between reported EPS and EPS adjusted for the business cycle. Adjusted EPS is based upon the long-term and highly-correlated relationship between EPS and the overall economy. The relationship and methodology were explored in layman's terms in Unexpected Returns: Understanding Secular Stock Market Cycles. As reflected in the left side of Figure 5, reported earnings per share (EPS) for the S&P 500 companies over the past century has cycled actively and repeatedly--reflecting the business cycle. On the right side of the figure, the cycle is more apparent when viewed since 1990. EPS exceeded, then regressed, as it cycled around the baseline. Keep in mind that the CBO economists are predicting that reported EPS will return only to the baseline over the next ten years, rather than considering that the cycle symmetrically rotates above and below that baseline.

Figure 5. The Business Cycle And The Impact On EPS

So let's translate this to terms that every investor wants to know...what does this mean for the stock market? Where might we be in ten years?

As discussed extensively in Unexpected Returns, we only need two factors to determine the future level of the stock market (S&P 500) in 2016: (1) EPS--earnings per share, and (2) P/E--price/earnings ratio. To forecast EPS, we can look to its relationship with the economy. On one hand, we have an EPS forecast based upon the CBO's (and other's) outlook for the historically average level of profitability: approximately $81. On the other hand, if EPS remains steady at the current historically-high relationship, the value would be $116. It's probably not realistic to consider even higher margin percentages for 2016; that would not be consistent with history or economic principles.

To forecast P/E, we can develop assumptions based upon the historical relationship of P/E to inflation (the fundamental driver of valuation for financial assets). If we are in a period of price stability, P/E can be expected to be 20-25x. For average inflation, 15-16x, and if we have higher inflation or deflation, P/E is likely to be 10x or less. Historically, inflation has not remained stable for very long; it tends to trend up or down. That cycle is a key driver of secular stock market cycles. From more than 100 years of history, we have seen that the market P/E tends to bottom below 10, finds 15 to be a passing point, and peaks in the low-to-mid 20s. Thus, ten years from now, any of the three P/E assumptions could be possible.
Now we have a series of basic scenarios using the EPS outlook and P/E alternatives. The annualized returns do not include dividends (currently less than 2%) or transaction costs. Obviously, these scenarios are only a subset of all the potential outcomes; yet they do begin to frame a picture of the future based upon the insights of history and the past consistency of financial and economic principles.

These scenarios are presented in Figure 6, The Outcome Matrix. The two assumptions for EPS are presented in the columns and the three assumptions for P/E are presented in rows. For each combination, we can see the S&P 500 Index value and the annualized rate of return from today (based upon the S&P 500 Index at 1,375).

None of the scenarios provide the base for historically average returns--after adding dividends to the best case, it still remains short of 10.4%. Keep in mind that the best case scenario for 2016 requires that P/E's remains fairly high at 23 and that EPS in 2016 will be at its currently high percentage level in relation to the economy. Yet, if inflation is contained while EPS adjusts to historical margin levels, the total return could be slightly above 5%. The negative scenarios reflect typical secular bear market conditions as P/Es decline and offset earnings growth. The historian would bet on the later scenarios; hope has its wager on the modest gains. Unfortunately, from today's valuation levels, there is not a rational scenario that provides historically average returns near 10%.

The results are consistent with the performance historically during secular bear markets--periods that start with relative high P/Es (valuations). As we see in Unexpected Returns and throughout the Crestmont Research website, above-average returns generally require rising P/Es (actually the recognized historical average of 10% includes significant P/E expansion and the benefits of starting at low valuations). The return profiles for the next decade may be disappointing for some, yet if inflation remains low, we do have the potential for reasonable real (after-inflation) returns. Since that has not happened in the past, most will recognize the challenges of the current environment and will position their portfolios to perform well beyond what the market will passively provide.

Figure 6. The Outcome Matrix

THE SOLUTION

As described in chapters 9 and 10 of Unexpected Returns, the goal is to use absolute return-oriented "rowing" investments, rather than more passive relative return "sailing" strategies. Although the stock market will provide shorter-term periods of solid returns over the next decade, it will also have offsetting periods of declines. Unlike secular bull markets where the upswings far outweigh the downdrafts, the current environment is set for a much more modest (and likely disappointing) result. Rather than acquiesce to the mediocre returns forecast by the analysis above (and supported by the CBO and others), investors can take action and develop their portfolios to profit regardless of the overall market direction. Although market timing may be an option for some, it is generally not a good option for most investors.

Very interesting analysis. I had to go back to textbook to find the defintion of Sharpe ratio. Still question remains:
1. In general, sharpe ratio is b/w 0.5-3, according to MorningStar. Over 1 is super good. But what is economical meaning in the slight differences like 0.7 vs. 0.8?
2. How the author calculates the sharpe ratio when taking into account margin applied to some hedge fund investment?
When i checked my text book, only one apparent answer. I am a lazy student and miss so many readings in the book. hahahah.

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Mebane Faber submits: Harvard University sits atop the academic world with a staggering $25.9 billion endowment fund, nearly twice the size of the next biggest endowment at Yale University. This war chest has accumulated over the years on the basis of donations and the stellar returns recorded by the investment management arm of the endowment, Harvard Management Company [HMC]. From 1983 through year-end 2004, HMC has realized returns of approximately 16% per year for the endowment vs. approximately 14.11% for the S&P500.

From Ft.com by 安邦集团(ANBOUND)研究总部高级分析师 贺军. Firstly, i will ask what is the definition of bubble? 有一点,不太同意就是那国内的financial market (both equity and bond)cap compares to the U.S & Japan? Given the finanical fundamentals, we can say that market value for these listed companies is set on the high end. But the question is that a. investors from domestic and internatinal market are very optimistic about the future growth and would like to pay the premium for that growth outlook;b. the liquidity from both U.S and china government. So I guess the high valuation for domestic assets incl. property and financial instruments will likely remain in the coming 3-5yrs, though the drivers are not because of the under-valuation in the domestic market. The interesting thing is that given 74% increase of domestic stock, how high it can reach next year? Is it a good idea to think about gold investment for the sake of diversification? 

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金融时报》中文网11月9日发表了陈旭敏撰写的题为《泡沫经济幽灵在中国徘徊》的分析文章，被许多中国网络媒体所转载。它的主要观点是，中国的资产价格正在出现急剧的泡沫化，股市、楼市都有明显的表现。而中国政策当局目前在全力以赴地致力于宏观经济调控，通过限制固定资产投资和贷款规模来抑制实体经济，对于经济泡沫化无可奈何。中国现行的紧缩政策不能改变银行、企业和居民的资产负债表，资金将直接或间接流进股市或其他资产市场。

这篇文章开篇还套用了马克思在《共产党宣言》的第一句话来点睛。可以肯定，它会受到国内政策部门的关注，如果得到认同，甚至还会影响到未来政策的制定。

陈旭敏这篇文章分析的主要理由，是中国资产价格出现了泡沫化倾向，如果任其发展下去，中国将会出现泡沫经济。按照这个逻辑，如果要抑制泡沫经济发展的势头，那么就要对中国的房地产市场，以及包括股市、债市、汇市在内的金融市场，都要进行抑制，中国的资本市场发展与金融开放也应该因此受到限制。

不过，在我们看来，这篇分析根本没有把握住目前中国经济阶段的主要特点，犯了基本的判断错误。随着中国经济的增长，出现局部的资产泡沫是肯定的，这种迹象还会越来越明显。但是，资产泡沫在中国是否已到了十分严重的地步？

首先来看股票市场。国内股市目前的总市值为6万亿人民币左右，约占GDP的33%。我们可以与美国进行比较。2006年5月，纽约股市的市值达18万亿美元，纳斯达克为3万亿美元，而美国GDP为11万亿美元，美国两市市值是GDP的190%。

再来看债券市场，可以发现中美的差距更加庞大。数据显示，截至2004年，全球债市总规模为44万亿美元，而美国债市的比重高达44%，日本债市的比重则为20%。而同期东盟十国加上中国和韩国等的债券市场，规模仅为全球债市总规模的3%。

虽然中美两国金融市场不具有可比性，但中国金融市场发展严重不足则是可以肯定的。中国现在的居民存款高达1.9万亿美元，银行中的存款总额达4.3万亿美元，居高不下的存款额从一个侧面反映了中国金融市场的不发达。

宏观一点来看，一个国家经济的泡沫化程度是否适中，一是要看实体经济的规模，经济泡沫要与实体经济规模相对应，二是要看这个市场的国际化程度，是否吸引了国际市场的资金参与。但从这两个因素来看，中国的“泡沫”程度都明显不足。随着中国金融市场的发展，这个泡沫还要继续发展。

房地产泡沫的问题较为复杂一些。各级地方积极的土地财政政策，的确导致了房地产价格的快速增长，导致房地产市场的泡沫程度较大。然而，地产泡沫化程度高的地方，毕竟只是局部；而这些泡沫程度高的市场，购买力往往来自全国甚至全世界。因此，泡沫不能只盯着房价看，主要还应该看供需。我们不否认中国房地产市场的长期泡沫以及面临的大幅调整，但至少在最近几年，这个泡沫还不会发展到全面危险的地步。

我们认为，中国经济的泡沫化在短期内根本不成为问题，即使有局部泡沫化的发生，也是在几年之后才有可能。随着中国经济的发展和结构调整，随着金融市场的开放与建设，最为关键的是，随着中国市场消费能力的发展和提升，中国经济规模将会稳定增长，结构也会更合理，那时不仅能承受的“泡沫”更大，还需要有更大的“泡沫”。因此，现在警告中国泡沫经济的来临，这实际上是一个赚取注意力的噱头，存在着严重的误导。中国的政策部门需要对此保持清醒。

20%-30% increase next year? everybody now looks so optimistic about that increase.

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中國股市主要股指昨天突破2000點大關﹐這是五年來的第一次。在這一漲勢的背後﹐有跡象顯示﹐中國人正在將越來越多的儲蓄投向股市。

中國的銀行儲蓄近期也是五年來首次出現下降﹐據中國央行的數據顯示﹐由於人們將更多資金投向股市﹐十月份的儲蓄額較前月減少了10億美元。投資股市意願增強是股市之所以能迅速上漲的一個重要原因。基準的上證綜合指數今年截至目前已上漲74%﹐較2005年7月創下的8個月低點的漲幅達99%。

昨天是上證指數自2001年7月以來首次突破2000點大關。當日收於2017.28點﹐漲2.31%。大型銀行股和煉油廠類股領漲。人民幣升值預期和原油價格走低的因素分別支撐了這兩個類股。

今年以來﹐中國股市就表現出十年來的最好狀態﹐分析師表示﹐股指接下來有可能朝著2001年6月創下的2242.42點收盤紀錄繼續上攻。在今年普遍強勁上漲的全球股市中﹐中國上海和深圳兩大股市稱得上出類拔萃。在世界證交所聯合會(World Federation of Exchanges)公佈的包括多個國家股市的59個指數中﹐至10月底中國股市的增幅僅次於秘魯和塞浦路斯。

JP摩根(J.P. Morgan)中國證券部董事長李晶(Jing Ulrich)表示﹐她認為上證指數明年還能上漲20%-30%。她說﹐之所以作此預期﹐是考慮到市場流動性增加、企業盈利改善且更重視股東價值等因素。

今年以來﹐中國新增個人股票投資帳戶近400萬﹐各證券公司簡直有點應接不暇。在中國監管當局去年5月走出冒險的一招、要求上市公司實施股票全流通改革以來﹐中國股市開始出現上漲﹐許多中國人都希望能抓住這股漲勢賺上一筆。

全流通改革是為改變以往中國上市公司通常都有三分之二股票不能流通的狀況﹐這些非流通股大多是國有股。全流通改革今年不大可能全面完成﹐但目前已進入最後階段。不過﹐由於對全流通改革涉及的那部分股票有禁售期限制﹐因此它們不會很快一下子大量涌入股市。

李晶說﹐全流通改革最關鍵的一個益處是﹐它讓企業管理層與股民在利益問題上站到了一起。她說﹐這是一個轉折點。

中國央行在上週的報告中稱﹐自2001年以來首次出現月度儲蓄存款下降的原因是﹐儲蓄存款一部分被分流到了股市。中國人的儲蓄率長期保持高水平﹐造成這一現象的原因一直被歸結為人們缺乏其他投資渠道可以選擇﹐而股市相對於整體經濟而言過去很長時間來一直發展緩慢﹐缺乏足夠的吸引力。

最近﹐有關部門頒佈了一系列旨在抑制房地產投資的新規定﹐房地產市場一時間陰雲籠罩﹐這也對推動股市投資起到了一定作用。

上海海富通投資管理公司(Fortis Haitong Investment Management Co.)基金經理鄭拓說﹐中國人現在手裡有很多錢﹐這些熱錢只有兩個地方可以投資﹕一個是房地產﹐一個就是股市。

中國工薪階層一般會將年收入的四分之一用於儲蓄。雖然10月份儲蓄額出現下降﹐但今年以來的儲蓄總額還在增加。而且﹐10月份減少的幅度還不到15.8萬億元（合2.01萬億美元）總額的萬分之一。

中國的居民儲蓄是一筆很值得關注的資金﹐其規模比其他任何一類市場資金（包括外國人的投資）都有過之而無不及。上個月居民儲蓄額減少的量就相當於外國人在中國股市允許投資額度（近100億美元）的十分之一。

中國股市目前的規模比2001年股市高漲期間擴大了30%﹐現在﹐股市總市值已達到大約6.4萬億元﹐上市公司總數為1,386家。

James T. Areddy

大哥的生日到了.周末的时候,大哥对我说,工作太忙,就不要特意跑到闵行,给他庆祝生日了.其实,说老实话,印象中没有大哥给我的生日礼物,我好象也不曾送礼物给大哥.难怪DD说我一点也不细致,不象一个女生.
对于大哥这个小店,我并没有付出什么,07年改正吧.而大哥却在整个的过程中,教会我太多课本里学不到的东西.
大哥,我希望你以后不再有泪水.
也希望你不要怕,我一定陪你去体检,最好以后能少抽烟.

下午请假去看医生，例行的每个月的复查。医生给了我很好的礼物，根据这次的结果，医生说以后我只需要每3个月去检查一下，就可以了。很开心。到了附近的季风书店，又买了一本妹尾河童的“窥视印度”和傅佩榮“解讀莊子“，作为厕所读物，很高雅吧？

Really like this guy's comments. 10年了，距离97年的亚洲金融危机，那是我记忆中第一次严重的经济倒退。唯一肯定的是，在以后我的人生岁月中还会要经历这样严重，或者更严重的经济危机。这也是每次听到人们谈论工资还不够高，房子还要再大，我都会有点紧张，有的时候也会嘲笑自己的神经紧张，毕竟现在还是在经济扩张的大环境下。

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东亚经济真的复苏？

作者：英国《金融时报》居伊•德•容凯尔(Guy de Jonquieres)

2006年10月13日 星期五
明年是东亚经济危机10周年纪念，而各种庆祝该地区经济恢复健康状况的活动已早早展开。世界银行(World Bank)的一项最新研究将其称之为一次“复兴”。各投资银行宣称，过去10年来，亚洲其它地区的光芒一直被中国所掩盖，而现在，它们将重新在发展中的亚洲占据一席之地。而就在这个时候，北朝鲜宣称进行了核试验，搅乱了这场盛宴。

 

然而，即使没有平壤来提醒我们，该地区在面临地缘政治风险时存在的弱点，也会有人怀疑这种“亚洲复兴”的说法。当灾难初发引起的慌乱宣告解除之后，保持警惕是一种明智的做法。就在1997年危机的4年前，一份银行研究报告还称赞亚洲的“奇迹”。大多数国际投资经理都坚信这一点，直到一切已为时太晚。

 

那么，今天的乐观态度是否有着更充分的依据呢？乍看上去，该地区的复苏给人留下了深刻的印象。从2000年起，年平均增长速度达到了7.6%，使得该地区以美元计算的名义收入至少已恢复到危机之前的水平。内部投资增长提速。在危机中遭到严重破坏的银行体系已得到重建，资产负债状况得到改善，过剩产能被削减。同时，外汇储备急剧上升的局面，取代了对短期外国借款的依赖——这种依赖是毁灭性的。从财务角度来说，东亚的状况远胜于10年之前。

有关增长的问题十分重要。如果将中国排除在外，情况就远没有那么乐观。亚洲开发银行(ADB)估计，发展中的东亚其它地区2000年到2006年的平均增长率为4.9%，低于1990年至1996年间的7.4%。而印尼、泰国这些前“小虎”经济体——甚至连这个速度都无法达到。当然，就在那次危机前出现的疾速增长是源于经济过热。但按照除欧元区以外其它任何地方的标准衡量，东亚地区近来的表现仍显乏力。相关的问题不是该地区增长如何恢复到先前的水平，而是它为什么没有比现在好得多。

主要的原因是：除中国以外，几乎所有地区都存在投资不足的情况，而中国面临的情况恰恰相反。瑞银集团(UBS)的乔纳森•安德逊(Jonathan Anderson)表示，即使将中国和印度包括在内，投资在亚洲国内生产总值(GDP)中所占的比例也处于40年来的低点。唯一的增长出现在出口驱动型活动。国内投资——其中最重要的建筑领域投资——仍然较为疲弱。加上人为造成的低汇率，这一切意味着，该地区仍在将巨额储蓄中的大部分送到海外。

认为该地区仍在逐步消除以往过度投资的观点正在逐渐消逝。实际上，对新的大规模国内投资的需求，从未像现在这样急迫。亚行估计，为继续保持增长，发展中的亚洲地区未来10年必须在基础设施领域投入3万亿美元。然而，除中国之外，很少有国家在这方面付出必要的努力。对于一个常常被称为未来全球增长引擎的地区而言，亚洲大部分地区似乎不愿意凭借自己的努力，这令人感到奇怪。

一个重要的原因是，各政府从金融危机中总结出了错误的教训。要么生死听天由命，要么受国际货币基金组织(IMF)的左右，这种痛苦的记忆，使得各国政府不顾一切地避免类似情况再次出现。其结果是采取了规避风险的政策和正统的财政措施，甚至比国际货币基金组织现在鼓吹的还要严格。

由于担心财政赤字的日益扩大会立即受到市场的惩罚，各国政府不考虑大幅增加公共基础设施方面的投资。但是，这种忧虑看起来是不对的。市场担心政府借款出现不可控制的增长，但更担心缺乏有效使用资金的信心。

由于项目已然失宠，对于那些涉及私人资本的方案而言，初期的热情已逐渐消退。由于未能建立健全的监管框架，或足以应对长期风险的本地债券市场，投资者的兴趣有所减退。在印度尼西亚和其它一些地方，政府受到了僵硬和碍事的官僚体制的束缚。世行最新的一份研究有力地指出，该地区普遍存在的腐败仍未得到控制。

许多缺陷需要数年时间才能弥补，这需要有深深植根于政治文化之中的强有力的机构。但亚洲的努力仍然不够一致，存在一些不足。随着金融危机的记忆渐渐淡去，不仅市场改革的步伐放缓；而且在许多国家，旨在提高公共部门治理和效率的改革尚未真正启动。在此之前，各经济体将始终无法发挥出它们的潜力。

对于又一次与1997年类似的危机而言，持续的惯性并非对策。相反，它相当于丧失一次机会。东亚的复苏得益于一个好得非同寻常的国际背景。世界经济已经受了一次又一次的挫折，这要感谢美国的扩张政策，以及充沛的全球流动性。在寻求艰难的改革时，这是近乎理想的条件。然而，这一时机并未被完全抓住。

住宅市场疲软引发的美国经济低迷所带来的威胁，意味着好时候可能已经快到头了。这将考验东亚地区的恢复能力。尽管其对出口西方的依赖程度正逐渐下降，但这仍是一个至关重要的需求来源。在该地区打下更为牢固的增长基础之前，谈论亚洲经济“复兴”或“猛虎”再度出笼咆哮，都还为时尚早。

 

From Ft.com at Nov17. As an under-grad majoring in Econ, I never read a book written by Milton Friedman cause I just need to remember the summaries of his theory for exam. I know, it is a shame.

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Milton Friedman, who has died aged 94, was the last of the great economists to combine possession of a household name with the highest professional credentials. In this respect he was often compared to John Maynard Keynes, whose work he always respected, even though he to some extent supplanted it.

Moreover, in contrast to many leading economists, Friedman maintained a continuity between his Nobel-Prize winning academic contributions and his current journalism. The columns he contributed to Newsweek every third week between 1966 and 1984 were a model of how to use economic analysis to illuminate events.

Both his admirers and his detractors have pointed out that his world view was essentially simple: a passionate belief in personal freedom combined with a conviction that free markets were the best way of co-ordinating the activities of dispersed individuals to their mutual enrichment.

看新闻说，雷光夏的新专辑《黑暗之光》已经在发行了，不知道在上海可以买到吗？就是光看这张专辑的封面已经是喜欢的不得了！在读书的时候，聆听爱乐电台是我最大的快乐，因此也深深的迷恋上这个女子，雷光夏。

1。她的歌词
http://www.xn--9cs77njzlbj4a.tw/CG/8.HTM

2。她的访谈
http://www.hgjh.hlc.edu.tw/~chenli/talk.htm

3。她的照片
http://m2.21cn.com/newdisc/pinlun/2003/12/10/1375162.shtml

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