Prudence Is The Way To Go

The financial storm continues, albeit with less ferocity as compared to last week (eight consecutive sessions of losses). It is still a roller-coaster ride, so don’t plunge in and exhaust all your resources just yet.

1. UK government pumped £37bn into Royal Bank of Scotland, Lloyds TSB and HBOS.

2. Citigroup reports $2.8 billion loss.

3. Merrill Lynch Reports Fifth Straight Quarterly Loss

4. Switzerland provides UBS AG with $59.2 billion bailout.

The Federal Reserve reported that US production fell into a virtual tailspin in September, declining by the largest amount in nearly 34 years.

Recession fears have taken root in America, even though the word was conspicuously absent in Bernanke’s speeches. Production for all industries fell by a seasonally adjusted 2.8% from the previous month. The decline represented a far greater loss than the economists’ consensus estimate of a 0.8% decrease.

Singapore could be affected by restructuring of companies early next year, if it has not already happened. In this climate of uncertainty where it comes to retrenchments and paycuts due to a slowing global economy, many people have reduced their discretionary spending, not to mention huge commitments like purchasing stocks and properties.

My conservative estimate, if exports don’t pick up and the construction sector softens, the economy could be headed into marginal negative territory next year. Fiscal policies by the government to induce spending is necessary.

By the way, don’t you just love CEOs who talk about issuing options to align their interests with shareholders? They conveniently omitted that that they are aligned on the upside but without money committed like shareholders, they have virtually no risk and little downside.

Clearly, the best jobs available in the market are the CEOs; if the team performs well, he gets the credit. Even if the CEO is mediocre, there is no standard benchmark to pin down his failures. If you are a sales manager and you cannot perform as compared to your peers in terms of sales quotas, you could be out of job in no time at all.

But that does not apply to the CEOs. As Warren Buffet once mentioned, CEOs can fire off an arrow and then paint the bull’s eye around where it landed. Sometimes, there is even a perverse incentive to be sacked when the severance packages are so attractive.

By right, the board of directors should be questioning CEOs on their dubious operational, financing, mergers and compensation decisions but we know that directors lack a spine or are powerless to effect change, besides resigning.

Shareholders are often hurt when they invest in companies plagued by poor corporate governance. As owners of a company through our equities, the manager has a duty to look after our long-term interests. However, we have seen time and again that personal enrichment and greed take priority.

In the event that anything goes wrong, and there are lots of pitfalls in this treacherous environment, investors have little recourse. Turning to the government is futile. It is more likely that we have to thank our lucky stars for not being placed on the altar as sacrificial lambs to save the bigwigs from failing, as in the case of bailouts flurry in America, Europe, Japan, etc.

Investors should only enter the fray with our eyes open. Whether it is in the stock market or handing over our money to the “professionals” for investment/asset management, always trust our own instincts.

If you don’t feel comfortable or simply don’t know anything, ASK or don’t contemplate investment at all. Nobody will look out for you, when you are faced with a proposition, the person in front of you is no longer an advisor but a salesman.

Caveat emptor, buyers beware!!

Just a quick rant today. More rants later on the fate of prudent (or foolish) retail investors who depend too much on experts advice. Stay tuned for more updates.

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