The Investor and Inflation

Inflation, and the fight against it, has been very much in the public’s mind in recent years. The shrinkage in the purchasing power of the dollar in the past, and particularly the fear (or hope
by speculators) of a serious further decline in the future, has greatly influenced the thinking of Wall Street. It is clear that those with a fixed dollar income will suffer when the cost of living advances, and the same applies to a fixed amount of dollar princi-pal. Holders of stocks, on the other hand, have the possibility that a loss of the dollar’s purchasing power may be offset by advances in
their dividends and the prices of their shares.

On the basis of these undeniable facts many financial authorities have concluded that (1) bonds are an inherently undesirable form of investment, and (2) consequently, common stocks are by their very nature more desirable investments than bonds. We have heard of charitable institu
tions being advised that their portfolios should consist 100% of stocks and zero percent of bonds.* This is quite a reversal from the earlier days when trust investments were.

By the late 1990s, this advice—which can be appropriate for a foundation or endowment with an infinitely long investment horizon—had spread to indi-vidual investors, whose life spans are finite. In the 1994 edition of his influ-ential book, Stocks for the Long Run, finance professor Jeremy Siegel of the Wharton School recommended that “risk-taking” investors should buy on
margin, borrowing more than a third of their net worth to sink 135% of their assets into stocks. Even government officials got in on the act: In February 1999, the Honorable Richard Dixon, state treasurer of Maryland, told the audience at an investment conference: “It doesn’t make any sense for any-one to have any money in a bond fund.”restricted by law to high-grade bonds (and a few choice preferred stocks).

Our readers must have enough intelligence to recognize that even high-quality stocks cannot be a better purchase than bonds under all conditions—i.e., regardless of how high the stock market may be and how low the current dividend return compared with the rates available on bonds. A statement of this kind would be as absurd as was the contrary one—too often heard years ago—that any bond is safer than any stock. In this chapter we shall try to apply various measurements to the inflation factor, in order to reach some conclusions as to the extent to which the investor may wisely be influenced by expectations regarding future rises in the
price level.

In this matter, as in so many others in finance, we must base our views of future policy on a knowledge of past experience. Is infla-tion something new for this country, at least in the serious form it has taken since 1965? If we have seen comparable (or worse) infla-tions in living exp
erience, what lessons can be learned from them in confronting the inflation of today? Let us start with Table 2-1, a condensed historical tabulation that contains much information about changes in the general price level and concomitant changes in the earnings and market value of common stocks. Our figures will begin with 1915, and thus cover 55 years, presented at five- year inte
rvals. (We use 1946 instead of 1945 to avoid the last year of wartime price controls.)

The first thing we notice is that we have had inflation in the past—lots of it. The largest five-year dose was between 1915 and 1920, when the cost of living nearly doubled. This com
pares with the advance of 15% between 1965 and 1970. In between, we have had three periods of declining prices and then six of advances at varying rates, some rather small. On this showing, the investor should clearly allow for the probability of continuing or recurrent inflation to come.

Can we tell what the rate of inflation is likely to be? No clear answer is suggested by our table; it shows variations of all sorts. It would seem sensible, however, to take our cue from the rather con- sistent record of the past 20 years. The average annual rise in the consumer price level for this period has been 2.5%; that for 1965–1970 was 4.5%; that for 1970 alone was 5.4%. Official govern-ment policy has been strongly against large-scale inflation, and there are some reasons to believe that Federal policies will be more effective in the future than in recent years.* We think it would be reasonable for an investor at this point to base his thinking and decisions on a probable (far from certain) rate of future inflation of,say, 3% per annum. (This would compare with an annual rate of about 21/2% for the entire period 1915–1970.)

What would be the implications of such an advance? It would eat up, in higher living costs, about one-half the income now obtainable on good medium-term tax-free bonds (or our assumed after-tax equivalent from high-grade corporate bonds). This would be a serious shrinkage, but it should not be exaggerated. It would not mean that the true value, or the purchasing power, of the investor’s fortune need be reduced over the years. If he spent half
his interest income after taxes he would maintain this buying power intact, even against a 3% annual inflation.

But the next question, naturally, is, “Can the investor be reason-ably sure of doing better by buying and holding other things than high-grade bonds, even at the unprecedented rate of return offered in 1970–1971?” Would not, for example, an all-stock program be preferable to a part-bond, part-stock program? Do not common stocks have a built-in protection against inflation, and are they not almost certain to give a better return over the years than will bonds? Have not in fact stocks treated the investor far better than have bonds over the 55-year period of our study?

The answer to these questions is somewhat complicated. Com-mon stocks have indeed done better than bonds over a long period of time in the past. The rise of the DJIA from an average of 77 in 1915 to an average of 753 in 1970 works out at an annual com- pounded rate of just about 4%, to which we may add another 4% for average dividend return. (The corresp
onding figures for the S & P composite are about the same.) These combined figures of 8%
This is one of Graham’s rare misjudgments. In 1973, just two years after President Richard Nixon imposed wage and price controls, inflation hit 8.7%, its highest level since the end of World War II. The decade from 1973 through 1982 was the most inflationary in modern American history, as the cost of living more than doubled.per year are of course much better than the return enjoyed from bonds over the same 55-year period. But they do not exceed that now offered by high-grade bonds. This brings us to the next logical question: Is there a persuasive reason to believe that common stocks are likely to do much better in future years than they have in the last five and one-half decades?

Our answer to this crucial question must be a flat no. Common stocks may do better in the future than in the past, but they are far from certain to do so. We must deal here with two diff
erent time elements in investment results. The first covers what is likely to occur over the lo
ng-term future—say, the next 25 years. The second applies to what is likely to happen to the investor—both financially and psychologically—over short or intermediate periods, say five ye
ars or less. His frame of mind, his hopes and apprehensions, his satisfaction or discontent with what he has done, above all his deci- sions what to do next, are all determined not in the retr
ospect of a lifetime of investment but rather by his experience from year to year.

On this point we can be categorical. There is no close time con-nection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvi
ous example is the recent period, 1966–1970. The rise in the cost of liv-ing was 22%, the largest in a five-year period since 1946–1950. But both stock earnings and stock prices as a whole have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods.

Inflation and Corporate Earnings

Another and highly important approach to the subject is by a study of the earnings rate on capital shown by American business.This has fluctuated, of course, with the general rate of economic activity, but it has shown no general tendency to advance with wholesale prices or the cost of living. Actually this rate has fallen rather markedly in the past twenty years in spite of the inflation of the period. (To some degree the decline was due to the charging of more liberal
depreciation rates. See Table 2-2.) Our extended stud- ies have led to the conclusion that the investor cannot count on much above the recent five-year rate earned on the DJIA group— about 10% on net tangible assets (book value) behind the shares. Since the market value of these issues is well above their book value—say, 900 market vs. 560 book in mid-1971—the earnings on current market price work out only at some 61 ⁄4%. (This relation-ship is generally expressed in the reverse, or “times earnings,”manner—e.g., that the DJIA price of 900 equals 18 times the actual earnings for the 12 months ended June 1971.)
Our figures gear in directly with the suggestion in the previous chapter * that the investor may assume an average dividend return of about 3.5% on the market value of his stocks, plus an apprecia- tion of, say, 4% annually resulting from reinvested profits. (Note that each dollar added to book value is here assumed to increase the market price by about $1.60.)
The reader will object that in the end our calculations make no allowance for an increase in common-stock earnings and values to result from our projected 3% annual inflation. Our justification is the absence of any sign that the inflation of a comparable amount in the past has had any direct effect on reported per-share earnings. The cold figures demonstrate that all the large gain in the earnings of the DJIA unit in the past 20 years was due to a proportionately
large growth of invested capital coming from reinvested profits. If inflation had operated as a separate favorable factor, its effect would have been to increase the “value” of previously existing capital; this in turn should increase the rate of earnings on such old capital and therefore on the old and new capital combined. But nothing of the kind actually happened in the past 20 years, during which the wholesale price level has advanced nearly 40%. (Busi-ness earnings should be influenced more by wholesale prices than by “consumer prices.”) The only way that inflation can add to common stock values is by raising the rate of earnings on cap- ital inve
stment. On the basis of the past record this has not been the case.
In the economic cycles of the past, good business was accompa- nied by a rising price level and poor business by falling prices. It was generally felt that “a little inflation” was helpful to business profits. This view is not contradicted by the history of 1950–1970,which reveals a combination of generally continued prosperity and generally rising prices. But the figures indicate that the effect of all this on the earning power of common-stock capital (“equity capital”)
has been quite limited; in fact it has not even served to maintain the rate of earnings on the investment. Clearly there have been impor-tant offsetting influences which have prevented any increase in the real profitability of American corporations as a whole. Perhaps the most important of these have been (1) a rise in wage rates exceed- ing the gains in productivity, and (2) the need for huge amounts of new capital, thus holding down the ratio of sales to capital
Our figures in Table 2-2 indicate that so far from inflation having benefited our corporations and their shareholders, its effect has been quite the opposite. The most striking figures in our table are those for the growth of corporate debt between 1950 and 1969. It is
surprising how little attention has been paid by economists and by Wall Street to this devel
opment. The debt of corporations has expanded nearly fivefold while their profits before taxes a little more than doubled. With the great rise in interest rates during this period, it is evident that the aggregate corporate debt is now an adverse economic factor of some magnitude and a real problem for many individual enterprises. (Note that in 1950 net earnings after interest but before income tax were about 30% of corporate debt, while in 1969 they were only 13.2% of debt. The 1970 ratio must have been even less satisfactory.) In sum it appears that a signifi-
cant part of the 11% being earned on corporate equities as a whole is accomplished by the use of a large amount of new debt costing 4% or less after tax credit. If our corporations had maint
ained the debt ratio of 1950, their earnings rate on stock capital would have fallen still lower, in spite of the inflation.
The stock market has considered that the public-utility enter-prises have been a chief victim of inflation, being caught between a great advance in the cost of borrowed money and the difficulty of raising the rates charged under the regulatory process. But this may be the place to remark that the very fact that the unit costs of electricity, gas, and telephone services have advanced so much less than the general price index puts these companies in a strong strategic position for the future. They are entitled by law to charge rates sufficient for an adequate return on their invested capital, and this will probably protect their shareholders in the future as it has in the inflations of the past.

Investment versus Speculation: the Intelligent Investor

Investment versus Speculation

What do we mean by “investor”? Throughout this book the term will be used in contradistinction to “speculator.” As far back as 1934, in our textbook Security Analysis,we attempted a precise
formulation of the difference between the two, as follows: “An investment operation is one which, upon thorough analysis prom-ises safety of principal and an adequate return. Operations not
meeting these requirements are speculative.”

While we have clung tenaciously to this definition over the ensuing 38 years, it is worthwhile noting the radical changes that have occurred in the use of the term “investor” during this period.After the great market decline of 1929–1932 all common stocks were widely regarded as speculative by nature. (A leading author-ity stated flatly that only bonds could be bought for investment.)Thus we had then to defend our definition against the charge that it gave too wide scope to the concept of investment.

Now our concern is of the opposite sort. We must prevent our readers from accepting the
common jargon which applies the term“investor” to anybody and everybody in the stock market. In ourlast edition we cited the following headline of a front-page article of our leading financial journal in June 1962:


In October 1970 the same journal had an editorial critical of what it called“reckless
investors,” who this time were rushing in on the buying side.
These quotations well illustrate the confusion that has been dominant for many years in the use of the words investment and speculation. Think of our suggested definition of investment given above, and compare it with the sale of a few shares of stock by an inexperienced member of the public, who does not even own what he is selling, and has some largely emotional convi
ction that he will be able to buy them back at a much lower price. (It is not irrel-evant to point out that when the 1962 article appeared the market had already experienced a decline of major size, and was now get-ting ready for an even greater upswing. It was about as poor a time as possible for selling short.) In a more general sense, the later-used phrase“reckless investors” could be regarded as a laughable con-tradiction in terms—something like “spendthrift misers
”—were this misuse of language not so mischievous.

The newspaper employed the word “investor” in these instances because, in the easy language of Wall Street, everyone who buys or sells a security has become an investor, regardless of what he buys, or for what purpose, or at what price, or whether for cash or on margin. Compare this with the attitude of the public toward common stocks in 1948, when over 90% of those queried expre
ssed themselves as opposed to the purchase of common stocks. About half gave as their reason “not safe, a gamble,” and about half, the reason “not familiar with.”* It is indeed ironical

The survey Graham cites was conducted for the Fed by the University of Michigan and was pub
lished in the Federal Reserve Bulletin, July, 1948.People were asked, “Suppose a man deci des
not to spend his money. He can either put it in a bank or in bonds or he can invest it. What do you think would be the wisest thing for him to do with the money nowadays—put it in the bank, buy savings bonds with it, invest it in real estate, or buy common stock with it?” Only 4% thou
ght common stock would offer a “satisfactory”return; 26% considered it “not safe” or a “gamble.” From 1949 through 1958, the stock market earned one of its highest 10-year returns in history,

(though not surprising) that common-stock purchases of all kinds were quite generally regarded as highly speculative or risky at a time when they were selling on a most attractive basis, and due soon to begin their greatest advance in history; conversely the very fact they had advanced to what were undoubtedly dangerous lev-els as judged by past experience later transformed them into “invest-ments,” and the entire stock-buying public into “investors.”

The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an inst
itu-tion would be well advised to reinstate this distinction and to emphasize it in all its dealings with the public. Otherwise the stock exchanges may some day be blamed for heavy speculative losses,which those who suffered them had not been properly warned against. Ironically, once more, much of the recent financial embar-rassment of some stock-exchange firms seems to have come from the inclusion of speculative common stocks in their own capital funds. We trust that the reader of this book will gain a reasonably clear idea of the risks that are inherent in common
-stock commit-ments—risks which are inseparable from the opportunities of profit that they offer, and both of which must be allowed for in the investor’s calculations.

What we have just said indicates that there may no longer be such a thing as a simon-pure investment policy comprising repre-sentative common stocks—in the sense that one can always wait to buy them at a price that involves no risk of a market or “quota- tional” loss large enough to be disquieting. In most periods the investor must recognize the existence of a speculative factor in his common-stock holdings. It is his task to keep this component within minor limits, and to be prepared financially and psycholog-ically for adverse results that may be of short or long duration.

Two paragraphs should be added about stock speculation per se, as distinguished from the spe
culative component now inherent averaging 18.7% annually. In a fascinating echo of that early Fed survey, a poll conducted by BusinessWeek at year-end 2002 found that only 24% of investors were willing to invest more in their mutual funds or stock portfolios, down from 47% just three years earlier.

in most representative common stocks. Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and
unavoidable, for in many common-stock situations there are sub-stantial possibilities of both profit and loss, and the risks therein must be assumed by someone.* There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seri-ously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.

In our conservative view every nonprofessional who operates on margin† should recognize that he is ipso facto speculating, and it is his broker’s duty so to advise him. And everyone who buys a so-called “hot” common-stock issue, or makes a purchase in any way similar thereto, is either speculating or gambling. Speculation is always fascinating, and it can be a lot of fun while you are ahead of the game. If you want to try your luck at it, put aside a portion— the smaller the
better—of your capital in a separate fund for this purpose. Never add more money to this account just because the * Speculation is beneficial on two levels: First, without speculation, untested new companies (like or, in earlier times, the Edison Electric Light Co.) would never be able to raise the necessary capital for expansion.The alluring, long-shot chance of a huge gain is the grease that lubricates the machinery of innovation. Secondly, risk is exchanged (but never elimi-nated) every time a stock is bought or sold. The buyer purchases the primary risk that this stock may go down. Meanwhile, the seller still retains a residual risk—the chance that the stock he just sold may go up!

Investors who have given up on the gold market should realize

Investors who have given up on the gold market should realize
that now is a great time to get back in.

Primary wave c of cycle wave B is now in progress. Since it is a third wave, it should cause the price of
gold to rise substantially, because the third wave in any Elliott pattern is a powerful wave. Hence,
primary wave c will probably unfold in one of the following two ways:
• Primary wave c will rise to $633.78, the point at which cycle wave B will have retraced 0.618 of cycle
wave A.
• Primary wave c will travel a distance that is 1.618 times the length of primary wave a. Primary wave a
traveled for a distance of $195.95; primary wave c is likely to rise for a distance of $317.04 ($195.95
× 1.618), topping out at $662.29.
Investors who have given up on the gold market should realize that now is a great time to get back in.
Horatio Miller is editor and publisher of My Point of View, PO Box 27712, Philadelphia, PA 19118, Stocks & Commodities V. 9:4 (172-173): Elliott Wave And Gold by Horatio Miller

Elliott Wave And Gold

Ask any Elliott Wave analyst about the outlook for gold, and he will without doubt say that the
precious metal is on its way down to the $100-200 range. A divergent-Elliott Wave interpretation,
however, suggests that over the near term, gold will rally to the area between $633.78 and $662.29.

This hypothesis is supported by a wave count that classifies the 1980-90 drop in the price of gold as an unfinished zigzag correction. Within this interpretation, cycle wave A of the zigzag ended when London gold fell to $284 on February 25, 1985. Cycle wave B of the zigzag is still in progress. It is this wave that should carry gold over the $600 threshold.

A detailed look at London gold from 1980 to 1990 will confirm this forecast. Supercycle wave (II), the decline in the price of gold from the 1980 top, began in the typical manner of a zigzag, with five descending waves that formed cycle wave A . This wave finished on February 25,1985, the day that London gold dropped to $284. Cycle wave A is followed by cycle wave B, three ascending waves that are still in the process of unfolding. Cycle wave B started with primary wave a, five rising waves that ended at $479.95 on May 20, 1987 . Primary wave b, a correction, took the form of what R.N. Elliott called a double-three, and it terminated at $345.25 on June 14, 1990.

What are forex Trading strategies and Currency Trading Strategy?

Currency Trading Strategy Number One:

When you are just starting out, strive to carve out 20 pips per session, and that’s it. Then, turn it off, and study some more. When you get really good at it, you can then “graduate” to higher returns. So, set your goal at 20 pips and stick to it, until you are a grand master at this wonderful “business” called forex trading. I stress the word business. This is not a game, especially where your “hard-earned money” is involved.

Currency Trading Strategy Number Two:

Spend most of your time on the 15-min chart.

Currency Trading Strategy Number Three:

When you first start out in any particular session, look at the 1 hr chart to get an overall perspective on trend from one session to the next, and what it’s likely shaping up to be at the beginning of the upcoming new session.

Currency Trading Strategy Number Four:

Only look at the 5 min chart if you absolutely have to see what’s behind the current 15 min bar – especially where the bar is elongated, and may have just penetrated a pivot point; in other words, is price reversing course on the 5 min chart, which would obviously not yet be reflected on the 15 min chart?

Currency Trading Strategy Number Five:

Don’t dwell on the 5 min chart, as it contains a lot of “noise” that will whipsaw you to death.

Currency Trading Strategy Number Six:

MACD rules on the 15 min chart. Even if MACD is, say, trending up on the 1 hr chart, if it is trending down on the 15 min chart, that’s what you take your cue from. That’s not to say a shift in price direction is not in the works. It just means it’s coming, but not yet. In the meantime, you don’t want to miss what’s happening “in the now,” which is what is reflected in the 15 min chart.

Currency Trading Strategy Number Seven:

If MACD is trending down on the 15 min chart, and price is wanting to go north, price will sooner than later head south as it perhaps bounces off a pivot point, or gets turned around at a juncture caught by one of the other three “tools” you should be using (“reading bars,” MACD divergence, or trendline analysis). Same thing if MACD is trending up, and price is trying to head south.

Currency Trading Strategy Number Eight:

Only use MACD for divergence, not for buy or sell signals. It is a lagging indicator, and as such is useless as a trigger. It is too slow for that in the forex world.

Currency Trading Strategy Number Nine:

Again, MACD divergence on the 15 min chart is more significant than what you see on the 1 hr chart in the near-term. For those of you who don’t understand what divergence means, keep looking at my own personal forex trading examples on this page on a daily basis for examples of divergence. Basically, what it means is where you see MACD waves “waving” in the opposite direction to price action. That’s why I connect the top of the waves (in a downtrend) and the bottom of the waves (in an uptrend) to illustrate that the waves are “waving” higher in an uptrend and lower in a downtrend – in the opposite direction to where price is going.

Currency Trading Strategy Number 10:

Always “protect” your money by using 20-30 pip stops. Mental stops are okay, but not if you are dead serious about using a “disciplined” approach to managing your money. You will lose three out of ten trades. The three losses should be kept to 20-30 pips. Your wins will by far surpass your small losses, and that’s what stop-losses are all about. Don’t be afraid to lose. Even professional batters strike out six out of 10 times. Lions are only successful 20% of the time in their chase for the kill. Professional golfers lose 95% of the time. Professional poker players lose 50% of the time. So, your chances are better at trading the forex, using my system of course, than in any other venue. Even businesses have “bad inventory.” And, life in general is not always “100%” for sure.

Currency Trading Strategy Number 11:

That all said and done, if you entered a trade close to a pivot point, or a particular significant bar pattern (like a double top, for instance, or a trendline breakout), place your stop on the other side (but not too close to) the event that caused you to take action. This is because price has a tendency to snap back to that situation that caused it to bolt away from it in the first place. If you follow the 20-30 pip stop rule, but a 33 pip stop on the other side of that event would safeguard you against such a reaction, then so much the better. So, yes the stop rule is 20-30 pips, but within reason of course.

Currency Trading Strategy Number 12:

Stops (read “stop-loss”) are for insurance purposes only – not necessarily for taking profits. However, you can most certainly employ “trailing stops,” whereby you keep moving your stop up (or down, whichever the case may be) to protect your profits, as price advances, or declines.

Currency Trading Strategy Number 13:

Only use “reading bars,” MACD divergence, pivot points, and trendline analysis in your forex trading toolkit. That’s all you need for this market. Be a technical bigot. Focus on pure technical analysis, and avoid funnymentals. Even news is factored into price action, so you don’t need to be up on it each and every nanosecond. If you don't have my .pdf file on reading bars, please send me an e-mail, and I'll forward it to you: As was pointed out to me by a client, "reading bars" includes spotting double, or even triple, tops and bottoms.

Currency Trading Strategy Number 14:

And now for the tough part. I know my documentation says that the forecast low and high for the next trading session can be M1/M3 or M2/M4. However, trading is shades of gray. It is not a black and white business. If it were, the world would be paved in gold, and everybody would be rich. Now, we wouldn’t want that would we? The forex would be nothing more than a Church at the end of a road connected to a river bank at the other end with nothing in between. The point I am trying to make is that the “actual” low and high for the next session could very well be any combination of M1, M2, M3, and M4. It could be M1/M4, M2/M3, or combinations of the other five pivot points. The M1/M3 and M2/M4 calculations are just guideposts, but are not poured in concrete. Price is the number one indicator. It will determine what the low and high are going to be. And one other thing, you should use these forecasts in conjunction with the other three “tools” in your forex trading toolkit – “reading bars,” MACD divergence, and trendline analysis. In other words, if price has been trending down from the past session into the current one, price is trading at, say, M3, and price is still going down, then M3 may very well be the high for the new session, regardless of the fact that my system may have called for M4 to be the high. So, use the pivot points in conjunction with other three possible signals – “reading bars,” MACD divergence, and trendline analysis. I have seen it happen, as in the example just given, where price was trending down from one session to the next right through M3 at the open of the next session – simultaneous with the formation of a “double top” bar pattern. Well, there you have three indications that price was headed south for sure. And, I believe MACD was also trending down in that particular case. So, that was another clue that the high for the session had probably already been put in.

Currency Trading Strategy Number 15:

When you are first starting out, pick one currency of the four major pairs (EUR/USD, USD/JPY, GBP/USD, and USD/CHF) to trade, and become a specialist in it. I would personally recommend the Euro, especially if you are going to be asking me questions, as that's what I focus on with my clients around the world. Get to know its rhythm. When you are doing well with it, then move on, and trade the other three major pairs, as you see fit. When you are in learning mode, you will have your hands full trying to figure out what to look for, and how to manage your trades – enough so that you don't want to be skipping back and forth between currencies.

Currency Trading Strategy Number 16:

Keep a log of all your trades – both good and bad. Analyze where you went right and wrong, and vow not to repeat those situations that could have been done better. This is all part of being organized as a "professional" trader - with good habits. This is not about gun-slinging and winging it with "Hail Mary" passes.

Currency Trading Strategy Number 17:

Important point here: If price action opens in the upper end of the projected range for the session (all the way up to R2, and beyond) – in other words, in the sell area (that area above the central pivot point) – and there are other suggestions that price is too high (such as a particular bar reading, MACD divergence, or trendline breakout), then price has probably achieved the upper end of its price range for the session. The same holds true where price action opens in the lower end of the projected range for the session (all the way down to S2, and beyond) – in other words, in the buy area (that area below the central pivot point) – and there are other suggestions that price is too low (such as a particular bar reading, MACD divergence, or trendline breakout), then price has probably achieved the lower end of its price range for the session.

Currency Trading Strategy Number 18:

If there is nothing to do, then don't do it. Don't just do something because your "gut" tells you to. That can get you in a lot of trouble in this business. Only react to bona fide signals provided by the four indicators talked about above – "reading bars," MACD divergence, pivot points, and trendline analysis.

Currency Trading Strategy Number 19:

Only use an "industrial strength" market maker with the lowest pip spread in the industry.

Currency Trading Strategy Number 20:

Occasionally, you will see a huge spike up in price, as we did 11 May 03. This just happened to be on a Sunday, shortly after re-commencement of trading, after the weekend respite. Ordinarily, I would take the OHLC numbers from Friday, but given the nature of the wild swing up that evening on one of the 15 min bars, I would then use the OHLC numbers from Sunday night's session close to get a better reading on support and resistance levels for the next session. This is, of course, if you are using a market maker that delineates its break between trading sessions in the late evening - anywhere between 20:59:50 and 24:00 (midnight).

Eastern Europe Trade,Trichet Rate-Cut Resistance Empowered

March 3 (Bloomberg) -- Europe's expanding economy is helping buy Jean-Claude Trichet time to overcome the region's worst bout of inflation in a decade.

Signs are mounting that growth is holding up in the 15 nations that use the euro, fueled in part by demand for exports in eastern Europe and other emerging markets. That gives the European Central Bank's toughest inflation-fighters ammunition to block any push for lower interest rates.

Instead, pressure for higher borrowing costs may increase, with the European Commission forecasting inflation in 2008 at a nine-year high. ``The data is starting to favor the hawkish camp'' on the ECB council, says Elga Bartsch, an economist at Morgan Stanley in London.

Central banks around the world are split on how best to respond to the twin threats of a U.S. recession and a global inflation scare. While Ben S. Bernanke has slashed rates at the Federal Reserve, pushing the euro to a record against the dollar, policy makers in at least seven nations, including Sweden and Australia, have raised borrowing costs. ECB President Trichet and council members including Germany's Axel Weber have said the demand in markets such as eastern Europe and Asia is helping to compensate for the effect of the U.S. slowdown.

``Emerging markets are motoring on, and growth could well reaccelerate'' in the euro region, Bartsch says.

Staying Power

Among recent signs of the region's staying power, business confidence in Germany, Europe's largest economy, rose more than economists forecast in February and unemployment dropped to the lowest level since 1992. Meanwhile, growth in Europe's services industries accelerated.

``People still underestimate the strength and resilience'' of the European economy, says Kenneth Broux, an economist at Lloyds TSB Group PLC in London.

Those are all welcome developments for Trichet as his inflation concerns mount. Weber said last week investors are ``clearly'' underestimating the scale of the threat. The European Commission says prices will rise 2.6 percent in 2008, the most since the euro was introduced in 1999. The ECB tries to keep inflation below 2 percent.

To be sure, pressure for rate cuts hasn't evaporated because growth in some euro nations is faltering. Morgan Stanley says Italy may slip into a recession this year. Deutsche Bank AG forecasts that Spanish house prices, an engine of growth during the past decade, may drop 8 percent in 2008, the first decline on record.

Bets on Lower Rates

Investors, who reduced their expectations of ECB rate cuts early last month, have since replaced those bets as the euro's 15 percent appreciation against the dollar over the past year threatens to stall growth. The implied rate on the Euribor interest-rate futures contract maturing in December dropped 8 basis points, or 0.08 percentage point, on Feb. 29 after the euro rose to a record $1.5239.

Trichet himself stoked expectations of rate cuts just a month ago, when he spoke of ``unusually high uncertainty'' about growth. Now, as signs of price pressures multiply, he's been forced to tamp down investors' speculation that the ECB will soon cut rates.

German steel workers won a 5.2 percent wage increase this year, and Grandi Molini Italiani SpA, Italy's largest wheat miller, said last week it has tripled flour prices since July.

Sarkozy Worried

Even French President Nicolas Sarkozy, one of Trichet's strongest critics, said Feb. 21 that accelerating inflation in France ``worries me.'' Inflation in the euro region climbed in January to a year-over-year rate of 3.2 percent, the fastest in 14 years.

Trichet has stressed that the bank is in a neutral stance, unwilling to commit on policy until the economic outlook clears. The ECB, which all 54 economists surveyed by Bloomberg News say will keep its benchmark rate at 4 percent on March 6, will publish revised growth and inflation forecasts this week.

``Inflation will not slow as markedly as supposed,'' Weber said Feb. 27. Juergen Stark, who's in charge of the ECB's economics division, said last week he's ``highly dissatisfied'' with the current pace of price increases.

Buttressing the case of those who say this is no time for interest-rate cuts, the euro region's economy is getting a lift from the European Union's expansion since 2004 to include 12 mostly former Communist nations.

`Awash With Money'

Demand from eastern Europe ``buys the ECB time,'' says Andrew Bosomworth, a fund manager at Pacific Investment Management Co. in Munich. ``Growth is incredibly dynamic. The place is awash with money and booming.''

Sales to new member countries have more than doubled since 2000. Exports to Russia, which now sits on the European Union's eastern border, have almost tripled. By contrast, exports to the U.S. have expanded just 12 percent in the same period. The euro region now exports more to new EU members than to the U.S.

Sales to Poland and Russia jumped 22 percent in November from a year earlier, and exports to the Czech Republic rose 18 percent. By contrast, sales to the U.S. fell 1 percent.

The region's export boom is also cheering executives trying to shield their businesses from the U.S. slowdown.

Vienna-based Wienerberger AG, the world's biggest brickmaker, said Feb. 14 that growth in eastern Europe will help it cope with ``further weakness'' in the U.S. Deutsche Bank AG Chief Executive Officer Josef Ackermann said Feb. 7 that the bank's wealth-management businesses in eastern Europe and Asia are growing as much as 30 percent a year.

Euro's Rally

Trade with eastern Europe is also helping the euro region's exporters cope with the currency's rally against the dollar in the past year. All of the EU's newcomers have pledged to switch to the euro at some stage, meaning their currencies move in closer tandem with the euro than the dollar.

Some of their central banks are already raising rates. Trichet said Feb. 14 that policy makers around the world are ``doing what is necessary, each of us in our own environments, which are very different.''

Besides the central banks of Sweden and Australia, policy makers in Russia, the Czech Republic, Poland, Romania and Serbia have all increased borrowing costs this year. The Fed has slashed its benchmark rate five times since September. The Bank of Canada cut interest rates in January, and the Bank of England cut its key rate in February.

Weber argues that traders would be wrong to expect the ECB to follow the Fed and the Bank of England. Since the ECB's last forecasts Dec. 6, which projected inflation of around 2.5 percent this year, oil and wheat prices have touched records.

Investors expect euro-region inflation to average 2.24 percent annually during the next decade, yields on European bonds show. That's close to the highest rate since 2005.

``The ECB is facing genuine inflation risks and, unlike the Fed, it won't choose to ignore this threat,'' says Dario Perkins, senior European economist at ABN Amro Holding NV in London.

To contact the reporters on this story: John Fraher in London at Gabi Thesing in Frankfurt at .

In January Construction Spending in the U.S. Decreased 1.7%

March 3 (Bloomberg) -- Spending on U.S. building projects in January fell by the most in 14 years as the housing slump worsened and construction slowed on hotels and highways.

The 1.7 percent decrease, more than twice the fall economists forecast, followed a revised 1.3 percent drop in December that was steeper than initially reported, the Commerce Department said today in Washington. Construction spending has contracted for four straight months.

Homebuilding is in a third year of declines as sales weaken and builders halt new projects to lighten inventories. Stricter borrowing rules and lower demand are also restraining commercial developers, creating an even greater drag on growth.

``The collapse in non-residential building is the next shoe to drop,'' Joseph Brusuelas, chief economist at IDEAglobal Inc. in New York, said before the report. ``Right now we have a very weak investment environment.''

Economists forecast construction spending would fall 0.7 percent after a previously reported 1.1 percent decline in December, according to the median of 48 forecasts in a Bloomberg News survey. Estimates ranged from a drop of 1.5 percent to a 0.2 percent gain.

Private residential construction spending dropped 3 percent after a 2.6 percent decline the prior month.

``Ceaseless talk of a recession continues to dampen the mood of consumers,'' Robert Toll, chief executive officer of homebuilder Toll Brothers Inc., said in a conference call Feb. 27. ``This drumbeat, coupled with concerns over mortgages, the direction of home prices, and foreclosures, has kept pent-up demand on the sidelines.''

Plants, Offices

Weakness has spread from the housing market to other parts of the economy. That includes construction of plants and office buildings, which are affected by businesses' reticence to spend in slower economic times.

``After growing robustly through much of 2007, non- residential construction is likely to decelerate sharply in coming quarters as business activity slows and funding becomes harder to obtain, especially for more speculative projects,'' Federal Reserve Chairman Ben S. Bernanke said last week in testimony before Congress.

Non-residential construction, including public projects, fell 0.8 percent in January, compared with 0.5 percent decrease a month earlier. Public construction declined 0.2 percent, led by a drop in road-building projects.

Private non-residential construction fell 1.2 percent, reflecting a slowdown in hotels, hospitals and power plants, the report showed.

Some Optimism

Some builders have a more optimistic outlook on business.

``The run-up in non-residential construction has been very restrained and gradual and I don't see any likelihood of a sharp downturn,'' Frank MacInnis, chief executive officer of Emcor Group Inc., said in a Bloomberg Television interview Feb. 27.

Emcor, a construction and facilities management company, had a record amount of backlogs going into this year, MacInnis said. The company is helped by demand from clients in the oil and gas business, he said.

To contact the reporter on this story: Courtney Schlisserman in Washington

U.S. ISM Factory Index Decreased to 48.3 in February

March 3 (Bloomberg) -- Manufacturing in the U.S. contracted in February at the fastest pace in almost five years, pushing the economy closer to a recession.

The Institute for Supply Management's manufacturing index dropped to 48.3, the lowest level since April 2003, from 50.7 in January, the Tempe, Arizona-based group said today. Fifty is the dividing line between contraction and expansion.

The collapse in housing is rippling through the economy as consumers curb spending and factories reduce production of furniture, automobiles and appliances. Credit restrictions may continue to hurt economic growth, prompting Federal Reserve policy makers to lower interest rates again this month.

``The evidence is piling up that the economy is slipping into at least a mild recession,'' said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, who forecast the index would drop to 48. ``With the much higher food and energy prices and restricted credit, there are not a lot of avenues for consumers to continue to spend.''

Economists surveyed by Bloomberg News forecast the index would fall to 48, according to the median estimate of 68 economists. Economists' forecasts ranged from 45 to 51.

New orders decreased to 49.1 from 49.5, while a production measure dropped to 50.7 from 55.2, ISM said. A gauge of supplier deliveries fell to 50.1 from 52.8 in the prior month.

The group's measure of prices paid decreased to 75.5 from 76 in January. Economists had forecast the measure would fall to 73.

Fewer Inventories

The inventory index in today's ISM report slumped to 45.4 from 49.1. Figures less than 50 mean manufacturers are reducing stockpiles. ISM's employment measure declined to 46 from 47.1.

Today's factory survey corroborates other regional business polls in the past two weeks that showed factory activity, which accounts for about 12 percent of gross domestic product, contracted in February.

The National Association of Purchasing Management-Chicago reported Feb. 29 that business activity fell to the lowest level in more than six years. A Philadelphia Fed gauge showed the deepest contraction in seven years, while the Fed Bank of New York's economic index was the weakest in almost five years.

Government data also have pointed to a slowdown. Orders for durable goods excluding transportation equipment fell in January for the third time in the last four months, Commerce said last week. Factory production stalled in January, with car output falling, the Fed said Feb. 15.

Housing Slump

A third year of declining home construction will drag on growth again this year, costing jobs and undermining the consumer spending that accounts for two-thirds of the economy. As property values decline, Americans feel less wealthy and buy fewer televisions and cars.

Sales at General Motors Corp., Ford Motor Co. and Chrysler LLC, which account for about half of U.S. auto purchases, probably fell at least 14 percent in February from a year earlier, according to a Bloomberg survey of analysts before an industry report today.

Demand for cars is at the ``low end'' of the range forecast, said George Pipas, chief sales analyst for Ford, in Dearborn, Michigan, on a conference call last week.

The economy will grow at a 0.5 percent annual rate from January through March, capping the weakest six months since the last economic slump in 2001, according to the median estimate of economists polled by Bloomberg from Jan. 30 to Feb. 7.

The Fed, which has lowered the benchmark rate by 2.25 percentage points since September, is ready to continue cutting borrowing costs if needed, Chairman Ben S. Bernanke told Congress last week.

Growth Risks

He warned that risks to the outlook include ``the possibilities that the housing market or the labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.''

One of the few bright spots is record exports as a weak dollar and growing economies in countries such as China, Brazil and Mexico stoke demand for goods to modernize their infrastructure and production capacity.

The ISM's measure of export orders decreased to 56 from 58.5, showing foreign demand is still growing, though at a slower pace.

``We certainly have seen among some of our customers and even in our own business some benefits from a weaker dollar in terms of increased strength in an export capacity,'' Frank MacInnis, chairman of in Norwalk, Connecticut-based EMCOR Group Inc., a construction and facilities-management company, said in a Bloomberg Television interview last week.

To contact the reporter on this story: Bob Willis in Washington at

Irrational Pessimism Pummels U.S. Bond Market

March 3 (Bloomberg) -- What a difference a year makes.

Each year, Jim Reid and his colleagues at Deutsche Bank AG publish an influential analysis of credit markets that puts current yields and fundamentals in historical perspective.

If you buy a bond from a company that might go bankrupt, then you expect to receive a higher interest rate. In an efficient and well-functioning market, the higher yield in a diversified portfolio of such bonds should offset the losses you would incur over time because of defaults. If a 10-year Treasury is yielding 4 percent, then you should only buy a 10-year bond from a company with a good chance of defaulting if the yield is significantly higher than 4 percent.

How much higher? That is exactly the question addressed with impressive analytical precision by the Deutsche Bank report. It provides a great thermometer reading of the bond market. The report calculates how large the default probabilities must be to command the current yields on different classes of bonds.

A comparison of this year's report with last year's provides a striking and even startling view of how rough the credit crisis has become.

``Last year, spreads on high-yield bonds were so low, that you could have expected to lose money if you purchased them, even if they defaulted at the lowest rate in history,'' Reid, head of fundamental credit research at Deutsche Bank in London, said in an interview last week. ``This year, spreads are so high that you can expect to make money even if they default at the highest rate in history.''

Default Rate

That's one way to say that corporate bonds look like a good buy right now. If you think about it in terms of implied default probabilities, the analysis gets downright shocking.

Looking at the iBoxx Dollar Liquid Investment Grade Index, Reid and his colleagues estimate that current spreads imply that 19 percent of five-year bonds in the index will default during the next five years. This is an unbelievably high rate.

The highest default rate for these bonds was just 2.4 percent, and the average rate since 1970 was 0.8 percent.

From Citigroup Inc. to JPMorgan Chase & Co., financial firms have been particularly hard hit in this crisis. This is apparent in Reid's numbers as well.

Current prices suggest that 21 percent of five-year bonds in the financial industry are expected to default during the next five years. This places financial bonds -- the debt of some of the bluest of blue-chip firms -- smack dab between single A- rated bonds (which have an implied expected default rate of 20 percent) and BBB-rated bonds (which have an implied expected default rate of 22 percent.)

Historical Record

Those implied default rates are also way outside of historical experience. The highest five-year default rate for A- rated bonds was 2.5 percent. The most for BBB-rated bonds was 5.8 percent.

The mayhem, of course, hasn't just affected five-year bonds. Longer maturities have even more extreme default scenarios priced in. Current prices suggest that 29 percent of corporate bonds will default over the next 10 years. That rate is six times higher than any 10-year period since 1970.

It is worth noting that these default probabilities are probably somewhat inflated, as default risk isn't the sole consideration when looking at bond prices. Even so, the market is pricing in a bond-market catastrophe that's far worse than anything that has ever happened.

Expecting a Calamity

What should one make of these numbers? Even an optimist should be startled by what bond markets are saying. The market isn't just expecting a downturn; it's expecting a calamity. A University of Chicago-style believer in the absolute wisdom of markets should be loading up on canned goods and checking the fortification of his underground bunker.

A more rational response to this report might be to recognize that markets, while they are right on average, tend to overreact in both directions. A person with this sentiment would have looked at last year's prices and concluded that they were irrationally low. Now, panic has set in, and spreads are way too high, pricing in something close to the end of civilization.

The world economy has survived wars, oil embargoes and even a depression. That suggests it can survive this, too, even if things get worse before they get better. If you believe that, then a buy-and-hold strategy on bonds looks about as good as it ever will. If enough investors see that, then this credit crunch might finally begin to ease.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in his bid for the 2008 presidential nomination. The opinions expressed are his own.)

To contact the writer of this column: Kevin Hassett at

Northrop, EADS land $35 bln airborne tanker deal

NEW YORK (MarketWatch) -- In a major upset, the Air Force on Friday tapped Northrop Grumman Corp. and EADS to build 179 of its next-generation airborne refueling tankers, a deal worth at least $35 billion.

Aftermarket revenue for parts and maintenance could easily add another $60 billion to their coffers, making it one of the largest defense contracts on record. It could also grow to include eventual replacement of the Air Force's 500 Stratotankers, many of which are already more than 40 years old.

The contract was originally estimated to be worth $40 billion, but the deal Northrop and EADS finally agreed to was $5 billion less.

The first phase of the work calls for developing four test KC-45 aircraft for $1.5 billion. The plane had been dubbed the KC-30 through the bidding process.

Once the basic design has been hammered out, the contract calls for delivery of 64 more aircraft at a cost of about $10.6 billion.

The deal strengthens Los Angeles-based Northrop's chance of landing future airborne tanker orders and expands EADS' role in supplying the U.S. military. The partners have said the plane would be built at facilities in Mobile, Ala., creating 5,000 new jobs in the process.

Defense industry analysts had widely expected Boeing Co. to submit the winning bid, using a converted 767 commercial airliner as the platform for the new military tanker. The KC-767 is smaller than the converted A330 aircraft offered by Northrop and built by the Airbus unit of EADS (FR:005730) , the acronym for the European Aeronautic Defence and Space Co.

In after-hours trading following the news, shares of Northrop (NOC) fell rose 5.6% to $83. Boeing (BA) shares fell 3.2% to $80.11.

Boeing will be briefed on the decision on or after March 12. The Chicago-based company is likely to file a protest with the Government Accountability Office. The Air Force wouldn't provide details as to why Boeing was not chosen, but stressed its decision process was well documented.

"The records are clear and well documented, and Boeing has known all along where they stand in the process," said Sue Payton, assistant secretary of Air Force Acquisition in a news conference announcing the deal.

Once the protest is filed, the GAO has 100 days to either dismiss Boeing's complaint or find in favor of the company.

During the conference, Air Force General Arthur Lichte said the Northrop bid was chosen because its aircraft could carry more passengers, cargo, and fuel while also offering more flexibility and dependability over Boeing's offer.

"Overall, Northrop was strong in aero refueling and airlift, as well as in past performance, and offered great advantage to the government in cost," added Payton.

Later Payton added that the creation of American jobs was not a factor in choosing the Northrop, EADS offer.

The KC-45 is based on the Airbus A330 tanker that has already won four awards in Australia, Britain, the United Arab Emirates, and Saudi Arabia.

Dollar tumbles to three-year low versus yen Renewed risk aversion boosts Japanese currency, other low-yielders

LONDON (MarketWatch) -- Last week it was the euro; now it's the Japanese yen's turn to explore historic strength against the U.S. dollar.

The yen ended last week on a strong note, then extended gains in Asian and early European activity Monday to rally to its strongest level against the U.S. dollar in three years.

Foreign-exchange strategists linked the move mainly to renewed concerns about the U.S. economy and the prospect for further turmoil in the global financial sector.

The yen was 0.7% higher against the dollar at 102.99 yen in recent activity, after hitting 102.59 earlier in the session, according to data from FactSet. With the yen leading the way, the dollar was lower against most other major counterparts.

The dollar index, which measures the greenback against a trade-weighted basket of six major currencies, was quoted at 73.732 in recent action after dipping to its lowest level since the index was created in 1973.

Bouts of risk aversion have proven supportive to the yen in recent months as it leads traders to shun once-popular "carry trades." In a carry trade, a player borrows in a low-yielding currency, such as the yen or the Swiss franc, and then uses the funds to buy assets denominated in a higher-yielding currency.

Combined with underlying ideas the U.S. economy may already be in recession and expectations the U.S. Federal Reserve will continue aggressively cutting interest rates, the stage was set for further gains against the dollar by major currencies, analysts said.

Strong gains by the low-yielding Swiss franc indicated that risk aversion was the main theme of the day, said Roberto Mialich, a foreign-exchange strategist with UniCredit. The Swiss unit was trading near $1.0403 against the dollar, a gain of 0.1% on the day. Earlier, the dollar traded as low as $1.0305 against the Swiss franc.

Japanese stocks were hit hard as the yen rose. The stronger currency put pressure on Japanese exporters, analysts said. Tokyo's 225-issue Nikkei Stock Average dropped 3.6% to 13,114.30 and the broader Topix index sank 3.4% to 1,278.84. See full story.

Meanwhile, Japanese officials gave no indication of concern about the yen's gains -- a factor that further encouraged the currency's rally, Mialich said. If traders begin to perceive an attitude of "benign neglect" toward a stronger yen by Japanese officials, the currency could soon make a test of the 100-yen level against the dollar, he said.

The euro, which last week marched to record territory against the greenback, was slightly higher against the U.S. unit at $1.5166. The European single currency was 0.7% lower against the surging Japanese currency at 156.14 yen, and was holding a gain of around 0.2% against sterling at 0.7640 British pounds.

The pound, meanwhile, was on the defensive against the greenback, losing 0.2% to $1.9849.

The European Central Bank and the Bank of England both hold policy meetings Thursday. Both are expected to keep interest rates on hold for this month.

Stronger-than-expected European economic data, including last week's unexpected rise in Germany's Ifo index of business sentiment, have contributed to expectations the ECB will leave its key lending rate on hold, analysts said. More global coverage.

A preliminary estimate of consumer price inflation across the 15 nations that make up the euro-zone was in line with market expectations for a 3.2% rise in February, according to data released by European Union statistical agency Eurostat. That matched the record pace seen in January and remains well above the ECB's medium-term target of under 2%.

Bank of England policymakers, meanwhile, have acknowledged risks of an economic slowdown. But they've also emphasized near-term concerns about inflation, focusing on its potential impact on consumers' longer-term inflation expectations. The bank's Monetary Policy Committee is expected to leave its key rate on hold at 5.25% after cutting by a quarter-point in February.

"Markedly faltering U.K. growth and the very real risk of a sharp economic downturn mean that further interest rate cuts are clearly on the Bank of England's agenda," wrote Howard Archer, chief U.K. and European economist at Global Insight. "Nevertheless, [Thursday's] meeting of the Monetary Policy Committee is highly likely to prove too soon to yield the next 25-basis-point interest rate cut to 5.00% given current elevated inflationary pressures."

Meanwhile, the U.K. CIPS purchasing managers index for manufacturing posted a stronger-than-expected rise to 51.3 in February, up from 50.7 in January, news reports said. Market expectations were for a reading of 51.0.

Analysts said PMI data for the services sector due for release on Wednesday could have an impact on U.K. rate expectations.

"Sterling faces another volatile week, with the services PMI survey on Wednesday likely to trigger a very ... jittery 24 hours ahead of the BOE verdict on Thursday," wrote analysts at Lloyds TSB. "A sharp drop for the PMI and wider [spreads between the London interbank overnight rate, or Libor, and the central bank's base rate] could spark sterling selling," potentially pushing the euro to another round of new highs against the pound.

Diebold gets $2.63 bln bid by United Technologies

Proposed deal is $40-share; maker of ATMs had rebuffed earlier overture

NEW YORK (MarketWatch) - United Technologies Corp. proposed to acquire Diebold Inc., the producer of automatic teller machines, voting terminals, retailing systems and other technology, for $40 a share, or $2.63 billion.

In a statement late on Sunday, United Technologies (UTX) , the Hartford, Conn., industrial and technology giant, laid out its proposal to acquire Diebold, which is based in North Canton, Ohio.

It made the public proposal after Diebold's board rebuffed an earlier takeover overture from United Technologies.

United Technologies also has told Diebold that if it could conduct a due-diligence financial review, it might be prepared to boost the $40 deal price.

That $40 price is 66% above Diebold's (DBD) closing price Friday of $24.12. In premarket trading Monday, shares were up 65% to $39.83 while United Technologies shares remained unchanged at $70.51.

In the past year, Diebold's shares touched a high of $54.50 last July and a low of $23.07, on Jan. 23, 2008.

UTX says its proposal is fully financed. The deal would be conditioned on a due-diligence review of Diebold and on regulatory clearances, United Technologies said.

"Diebold represents an excellent fit with" United Technologies, UTX Chairman and Chief Executive Officer George David said in the Sunday statement.

United Technologies makes its case

In a letter dated Feb. 19, which United Technologies made public, David proposed to Diebold Chairman John N. Lauer a deal at "a significant premium to the current trading price."

David said that UTX's "resources and presence in markets globally would be significant assets" in helping Diebold expand worldwide and build profitability.

United Tech sees complementary characteristics between several of its businesses and Diebold. For one, UTX's Otis Elevator has a 400-location network of offices and service centers. And Carrier air conditioners and UTC Fire and Security have comparable business models, United Tech said.

United Tech also called itself "exceptionally technology intensive," spending more than $3.5 billion a year on research and development.

Financing would come from cash on hand and other "readily available" sources, the letter said.

In a Feb. 21 response, Lauer said Diebold's board took up United Tech's proposal "extensively" at a regular meeting. The directors voted unanimously that pursuing a combination with United Technologies "was not in the best interests" of Diebold or its holders, Lauer's letter said.

Eight days later, David told Lauer that after due diligence, United Technologies might be prepared to go beyond $40 a share. And he said that if UTX couldn't talk with Diebold's board, it would take the matter directly to Diebold's holders, which according to regulatory filings include mutual fund giant Fidelity Investments and Cooke & Beiler, a Philadelphia investment firm.

Early in February, Diebold estimated 2007 revenue at $2.95 billion, which would rise 6% to 8% in 2008. The company had said it was disappointed with the revenue growth it posted for 2007. And it also said it would cut about 5% of its global workforce to reduce costs.

Diebold also said then that the board's audit committee and regulators were continuing to review the company's accounting.

Morgan Stanley is advising United Technologies on the takeover proposal.

Gold and oil futures hit new highs as greenback slides

NEW YORK (MarketWatch) -- U.S. stocks on Monday fell ahead of manufacturing data likely to show industrial activity on the wane and as the dollar index declined to its lowest level since its inception in 1973.

The Dow Jones Industrial Average ($INDU) fell 79.05 points to 12,187.34, with 20 of its 30 components trading lower.

The S&P 500 ($SPX) declined 8.57 points to 1,322.06, while the Nasdaq Composite (COMP) shed 15.51 points to 2,255.97.

Shares of E-Trade Financial Corp. (ETFC) gained 2% on speculation the beleaguered online brokerage may be positioning itself for a potential sale. Read full story.

Diebold Inc. (DBD) shares jumped 61% on news United Technologies Corp. (UTX) had offered to buy the maker of ATM and voting machines.

Shares of United Technologies slid more than 3%.

Gold and crude-oil futures surged to new record highs, propelled by sharp weakness in the U.S. dollar. Gold for April delivery hit a record of $991 an ounce, while crude oil for April delivery soared to a record of $103.51 a barrel on the New York Mercantile Exchange.

"We anticipate holding a larger than ordinary exposure to bonds to cushion the wild equity markets," said Paul Nolte, director of investments at Hinsdale Associates.

Treasury prices on Monday were mixed to lower, with the benchmark 10-year note off 13/32 at 99.16, its yield ($TNX) up to 3.555%.

The Institute of Supply Management's manufacturing gauge for February may fall back under the 50% mark, indicating economic contraction, economists predicted, after regional polls in New York, Philadelphia and elsewhere indicated downturns.

Readings under 50% in the ISM index indicate that the manufacturing sector is contracting, but it takes a much weaker reading near 41% for a recession to be called, economists say.

The ISM data is due out at 10 a.m. Eastern.

U.S. stocks plunged on Friday, with the Dow industrials losing 315 points, the S&P 500 dropping 37 points and the Nasdaq Composite losing 60 points. American International Group led the downturn after posting its largest loss in almost 90 years of business.

Major world stock exchange expands investor access to

Tokyo Stock Exchange
Major world stock exchange expands investor access to include timely inancial news with Web-based system

In the fast-paced world of international invest-ment, time is money. Within minutes, billions
of dollars change hands over the Tokyo Stock Exchange (TSE), one of the world’s major stock
exchanges. To an outsider, the frenzied buying and selling of stocks might seem almost random.
Yet behind most stock sales and purchases is a well-thought-out investment strategy driven
in part by current inancial news. Recognizing this, the Tokyo Stock Exchange developed an
innovative system, called the Timely Disclosure Network (TDnet), that gives investors instant
access to Adobe Portable Document Format (PDF) iles with inancial information on TSE-
listed companies.

The Tokyo Stock Exchange launched TD net in 1998, and soon after it recommended to the
1,940 companies listed on the Exchange that they submit disclosure documents in Adobe PDF.
The reasons, according to Koji Yoshida, who oversees disclosure for the TSE, are simple:
“Compact Adobe PDF iles maintain the integ-rity of company information, deliver it in a format that is universally accessible, and can be distributed quickly over the Internet.” This rapid,ficient document distribution is critical, since the TDnet Web site can receive more than one million hits daily from viewers worldwide.

Speed, convenience with Adobe PDF
Each listed company on the TSE iles approxi-mately 20 pages of disclosure documents, such as annual and interim inancial reports and other press releases. Previously, these docu-ments were submitted on paper and stored at TSE ofices. Financial analysts and investors who wanted to review information had to come to the Exchange and read the papers, making infor-mation dificult to access for most people. By moving documents online in Adobe PDF, the TSE greatly expanded investor access to inancial information and streamlined the delivery of disclosure documents for companies.

Now, listed companies use Adobe Acrobat soft-ware to create Adobe PDF iles that the TSE dis-tributes over satellite and private networks and posts on TDnet for immediate viewing. During peak periods, the TSE can receive as many as 700 documents daily from listed companies. “TDnet is a powerful system that shortens the distance between investors and companies,” explains Yoshida. “With platform- and application-independent Adobe PDF iles, we know that inves-tors—no matter where they are and no matter what systems they are
using—can access essential inancial information.”

Easy conversion of any document
An important factor in the TSE’s decision to adopt Adobe Acrobat and Adobe PDF for online document delivery is the openness of both the application and the format. Because the TSE
does not dictate which application listed com-panies must use to create disclosure statements,

Stock Market and Market makers

A market maker is a broker-dealer who stands ready to buy or sell 100 shares of the stocks in
which it makes a market. When a transaction is proposed, the market maker will give a price at
which it would be willing to effect that transaction. The market maker’s price applies only to the first 100 shares. While the market maker system has been widely criticized (after all, how much of a commitment is it to buy 100 shares at a penny apiece?) the system does offer investors some
level of fairness. The more market makers there are in a given stock, the more likely they are to bid against each other, and the price will more likely move to a true “market” price. The names of the market makers of securities traded in the pink sheets are listed in the pink sheets.


Especially when there are few or only one market maker, penny stocks are susceptible to price ma-nipulation. A common and easy manipulation is for a broker-dealer to gather a large holding of a penny stock at a very low price. Through the use of high-pressure sales techniques, the sales force of the broker-dealer hypes the stock and stirs up demand, which seemingly justifies the continual rise in prices given by the broker-dealer (which is probably also the only market
The price continues to rise until there are no more investors who will buy, and then the bottom alls out and the price plummets. Sometimes the broker-dealer will buy back the
securities at the fallen prices to recapture the stockpile for a future revival of the stock; more often investors are sim-ply left holding the worthless stock.

Initial public offerings

The price and market discussion above relate to penny stocks already trading in the market. Stocks are introduced into the market through an initial public offering (IPO). In most cases, an IPO would need to be registered with the Securities Division, which applies a set of guidelines to the offering to determine whether the offering is “fair, just and equitable”. Although the “merit” system of applying those guidelines is not foolproof, fraudulent offerings are rejected and not granted registration. For this reason, Missourians are not usually victims of penny stock scams in an IPO,but lose their money in the secondary market. In the secondary market, there are broad exemptions in the law that allow many penny stocks to trade in Missouri without meeting the merit standards.

Legitimate penny stocks

Despite all of the problems with penny stocks and the millions of dollars of loss involved with them,there are legitimate companies whose securities trade in the pink sheets at very low prices. Strug- gling young companies just starting out are perfect examples. Investment in such a company, held through the company’s formative years, can pay off well. Such an astute investment requires three things: the ability to choose the right company, the capital to invest and hold the investment, and luck.
In order to choose the right company, you must know something about the business in which the company engages. You must be able to evaluate the feasibility of the company’s business plan and the company’s ability to compete in its field of en-deavor. You must be able to evaluate the ability of the company’s management to run the company.Finally, you must be able to evaluate the capital-ization and cash flow of the company.
If you find the right company, you must be able to hold the investment for years to allow the com-pany to mature and for the stock to appreciate in value. Investment in “growth” companies is long-term investment. Furthermore, you must have sufficient capital to be able to withstand total loss of your investment. Investment in emerging companies is always a high-risk investment.
Finally, there is simply an element of luck in any stock investment. Luck plays an even greater role in a market in which manipulation is so preva-lent. Some legitimate companies have had their stocks manipulated to such an extent that they were were forced out of business. Even without manip-ulation, the success or failure of a fledgling busi-ness is simply unpredictable.

Sources of information

Your broker can be a tremendous help in evaluat-ing an investment. However, in the penny stockarea, there are many unscrupulous brokers whose only goal is to sell. Be sure that the advice you receive is balanced and addresses your investment needs. When in doubt, avoid a penny stock invest-ment, especially if your broker “specializes” in penny stocks.
The prospectus is the most comprehensive source information about an IPO. It sets out where your investment money will be used, describes the capitalization, history and management of the company and describes the cash flow system of the company. If you need help interpreting the in-formation you find in the prospectus, the Division has another pamphlet in this series entitled “How to Read a Prospectus”.

Trade confirmations contain a wealth of infor-mation. The confirmation will show basic infor-mation, such as number of shares, but will also in-dicate whether the transaction was agency or prin-cipal, was solicited or unsolicited (it will say “un-solicited” if you called your broker to place the order without your broker having tried in any way to get you to place the order) and, in the case of most pink sheet and non-NASDAQ National Mar-ket trades, provide the bid and ask at the time of execution of the transaction.

Manuals such as Moody’s and Standard and Poor’s have current financial information about companies, and most penny stocks are listed in the manuals.
Periodic reports filed with the U.S. Securitiesand Exchange Commission have updated informa-0ption about companies that register with the SEC. The most common report is a “10-K”.

Bid / Ask

Penny stocks do not each have a single price at which they are bought and sold, but a number of
different prices. The first difference is between the bid price and the ask price. The bid price is how
much someone is willing to pay for the security, or the price at which you could sell your shares. The ask price is how much someone will sell their securities for, or how much you will have to pay.
The difference between the prices is the spread.

The spread

To most investors, the spread represents a built-in loss at the time of investment. For example, if you purchased a stock that traded at 1/2 cent bid, 1 cent ask, the bid would have to more than double in price for you to break even (the “more than dou-ble” comes from additional costs such as “ticket”charges and other miscellaneous costs). Many in-vestors buy penny stocks believing that “trading at 12½ cents” means that they can buy and sell at 12½ cents. This simply is not the case, and any salesperson who uses such a phrase is only telling half of the truth. The spreads in penny stocks are most commonly 25-33%, are often 50-100% and sometimes are over 100%.

Another factor to keep in mind when evaluating price information about penny stocks is that there are two “bid” and two “ask” prices, the inside and outside bid and ask. As a general rule, the price you will be interested in will be the outside bid and ask, or the lower bid and the higher ask, as those are the bid and ask prices to public customers.


The last pricing factor concerning penny stocks is called the mark-up. A broker-dealer who has held the security in its account and subject to the risk of market price fluctuation, may mark the price of the security it sells to you up by a certain percentage,on top of the spread. This is to compensate bro-ker-dealers for maintaining inventory sufficient to supply demand for an orderly and liquid market.What it means to the average investor is another cost that creates a built-in loss at the time of in-vestment. In other words, the instant your transac-tion is effected, your securities are worth less than you paid for them.
Although it is no guarantee of a good price, you are more likely to get a better price in an agency transaction using a broker-dealer that has no inter-est in the transaction, due to the pricing factors above. In the typical penny stock transaction, the broker-dealer buys from its customers at the bid and sells at the ask, capturing as compensation the
spread, plus any mark-up.

What are The “OTC”market

Penny stocks are not traded on a stock exchangebut are traded in the over-the-counter (OTC) mar-ket. Part of the OTC market is the NASDAQ Na-tional Market (NNM) of the NASDAQ Nation-al (Association of Securities Dealers Automa-ted Quotation) System, which does not include
any penny stocks.

There are also non-NNM NASDAQ securi-ties, including some penny stocks. The NASDAQ
system has listing standards that change from timeto time and, depending on the standards, there maybe more or fewer penny stocks on NASDAQ. If you purchase a low-priced security that is listed on NASDAQ, it will meet certain minimum stan-dards. In addition, many NASDAQ prices are quoted regularly in newspapers, allowing you to follow the price of your security instead of forc-ing you to rely on your broker for all price infor-mation.

The third major component of the OTC market is the National Quotation Bureau’s (NQB) service,commonly referred to as the “pink sheets”. The NQB’s securities lists and price information, print-ed on pads of long, narrow sheets of pink paper,have, for all practical purposes, no meaningful list-ing standards, and price information is sometimes difficult, if not impossible, for the small investor to obtain. Broker-dealers obtain their price infor-mation by calling the trading desks of three “mar-ket makers”. Obviously, small investors do not have access to those traders and must rely on their stockbroker for accurate price information.

What are a true penny stock?

There is no set, accepted definition of penny stock. Some people define it as stock priced under
one dollar, some under five dollars. Some people include only those securities traded in the “pink
sheets”, some include the entire OTC market. The Securities Division considers a stock to be a
“penny stock” if it trades at or under $5.00 per share and trades in either the “pink sheets” or on
NASDAQ. In addition, a true penny stock will have less than $4 million in net tangible assets and
will not have a significant operating history. (Inother words, if a company has real assets, such as
equipment and inventory, and is engaged in some real business, such as manufacturing, then the Division does not consider the stock to be pen-ny stock even though the shares are low-priced.)

World on a string,Is just one global fund all you need?

LOS ANGELES (MarketWatch) -- Investors who want to cover the globe often end up with a portfolio that looks like the United Nations -- a general assembly of mutual funds.

That's not a bad strategy for experienced investors who are capable of dealing with the complexity of multiple prospectuses, proxies and quarterly statements. But for newcomers or less-savvy savers, such an approach can be overwhelming.

Enter the global or world fund, an investment vehicle that gives you exposure to the whole world via a single fund investing in both U.S. and international stocks.

Such a fund can be just the ticket for savers starting out in the work force or for parents setting up IRAs for their children, folks who may have just $1,000 or $2,000 to initially invest and who will be adding a limited quarterly or monthly sum after that.

Elliot Herman, partner in charge of wealth management at PRW Associates, in Quincy, Mass., employs this strategy for younger investors, or those who want to keep their investments simple initially. He argues that the one-stop funds he recommends often hold their own against a larger portfolio.

"These are proven strategies that over the years have done well or better than a diversified portfolio," he said. Two he likes are American Funds' Capital Income
Builder (CAIBX:58.37, -0.98, -1.6%) and Capital World Growth and Income
41.36, -1.03, -2.4%)
. Both carry initial sales charges, or loads, and require a $250 minimum investment.

The growth-and-income fund, which has an annual average return over the last 10 years of 13%, invests around 72% overseas. The less adventuresome Income Builder fund puts just 39% in non-U.S. stocks and has returned 11% annually over the last decade.

"You have a team in American Funds that is made up of experts in both the international world and the domestic world, supported by a number of analysts who cover these funds," Herman said.

A bigger world

A few years ago few in the U.S. would have considered global funds as a one-stop investment solution, said Kai Wiecking, a Morningstar fund analyst. "It's good we've made that much progress to recognize that foreign equities belong in everyone's portfolio," he said.

The global funds allow even investors without much cash to have a stake in evolving world markets. While the U.S. currently commands the lion's share of the market capitalization in stocks worldwide, Wiecking and others assert that situation is likely to change as Asia continues to emerge as a market powerhouse.

Wiecking's favorite world funds include American Funds' New Perspective (ANWPX:31.71, -0.78, -2.4%) , for its experienced management and highly diversified offerings, and Oppenheimer Global (OPPAX:65.33, -1.78, -2.6%) , which zeroes in on themes of new technologies, mass affluence and the aging population. Both carry a load or initial sales fee.

Among the no-load funds, he likes Oakmark Global (OAKGX: 22.16, -0.58, -2.5%) , which offers small-cap and midcap stocks, unlike most global rivals that stick to better-known large-cap stocks, and T. Rowe Price Global Stock (PRGSX:23.07, -0.72, -3.0%) .

Adam Bold, founder and chief investment officer of The Mutual Fund Store, headquartered in Overland Park, Kan., advises investors who want to use just one global fund to seek those that have matched or outperformed their peers.

He also likes the Oakmark fund, but makes a couple of other no-load recommendations as well: Polaris Global Value (PGVFX:16.79, -0.29, -1.7%) , which has beaten the S&P Index (SPX:1,330.63, -37.05, -2.7%) year-to-date and in one-year and five-year periods; and Julius Baer Global Equity
40.68, -0.96, -2.3%)
, a newer fund headed by the team of Rudolph-Riad Younes and Brett Gallagher, who have already proven their mettle on the now-closed Julius Baer International Equity (BJBIX:40.39, -0.71, -1.7%) .

Bold says most people need between seven and 12 funds to achieve diversity, including "large-cap growth, large-cap value, small-cap growth and value, international, bonds of some sort and a couple of sector funds."

"For the person who doesn't do that, wants to get something and have exposure to both, these funds make sense if you have the reality that mutual funds are not buy and forget investments," he said, noting that even one fund should get a once-over twice a year, either by the investor or an adviser.

Phillips Ruben, president of Boston-based Vision Financial Planning, makes use of Dimensional Fund Advisor funds as one-stop solutions for those investing only a small amount initially, but notes they're available only through a financial adviser. "They offer very broad diversification, are very tax efficient and very cost effective," he said

He likes DFA Global 60/40 Portfolio (DGSIX: 12.28, -0.19, -1.5%) , which is a mix of fixed income and global equity, and DFA Global Equity Portfolio (DGEIX:13.73, -0.36, -2.6%) , which is a more aggressive portfolio investing only in stocks. The latter, he said, would suit a younger investor with a much longer time horizon.

Going with just a single fund to start out, Ruben said, can prevent rash decisions, such as following trends in a particular fund or sector.

"I think a lot of people don't have the expertise to make the decisions to put together an effective diversified portfolio and this takes that decision-making piece out of it and puts it in the hands of the experts."

Five global funds to consider
Name of fund Ticker Expense ratio, load 3-year return (annualized) 5-year return (annualized)
Capital World Growth & Income CWGIX 0.77%, 5.75%, 22.5% 10.3%
Oppenheimer Global OPPAX 1.15%, 5.75% 21.1% 4.6%
Oakmark Global OAKGX 1.26%, no load 24.6% 18.6%
Polaris Global Value PGVFX 1.48%, no load 25.4% 16.3%
T. Rowe Price Global Stock PRGSX 1.2%, no load 19.4% 2.6%

Source: Comstock

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