18 months ago Las Vegas was one of the fastest growing areas of the United States. Now the economic downturn is hitting the city hard causing unemployment, abandoned casino projects and evicting people from their homes.

The economy collapsed and Las Vegas fells it. This 25 minutes long documentation shows various examples what happens in Sin City. The reporter interviews and joins several people living in the city, amongst them police men who throw people out of their homes. Some people are forced to leave their homes even if they have the money, but rented the place and unfortunately the actual owner can’t pay his mortgage, resulting in having only 20 minutes to pack their stuff and get out. Another example of radical life changes are women once working at mortgage firms and now dancing as a strippers. The city and state is also suffering from budget cuts for hospitals, universities and so on.

I recommend watching the video if you have no first hand experiences to know what’s actually going on down there. People clearly made the mistakes to thing that the boom will last forever and that real estate is a good investment which will always raise in value making it pay for itself.

The Black Swan by Nassim Nicholas Taleb is a book about randomness in life and economy, concentrating and explaining the Black Swan phenomenon. Basically the Black Swan is a highly improbable event with huge influence on it’s surroundings. Although not foreseeable, the book teaches the reader how to deal with randomness and gives valuable tips on how to live a life which is open to opportunity.

Throughout the first chapters of The Black Swan: The Impact of the Highly Improbable you get an introduction to randomness and Black Swans. The author describes various situations where randomness is a huge factor and unleashes some common mistakes in human thinking regarding this topic. Nassim Taleb explains why so called experts are wrong and why the future can not be predicted by looking at the past. Instead, the really important events are rare and unpredictable, he calls them Black Swans.

The book goes on until you can’t take it any longer and start to have the nagging question in your head: “Dear author, what the heck should I do then?” The answer is provided in the practical chapter with some simple rules to handle life better with the knowledge of random events and their effects.

The book ends with some chapters about formulas and theory. Although there is a technical part, this book is not at all technical. If you are not interested in formulas, just skip these chapters, the author himself recommends that.

All in all, the Black Swan highly influenced my thinking about randomness and I think you should read it, too.

Go get it at Amazon.com

In the book “The Snowball” - a wonderful biography of Warren Buffett’s life and absolutely worth reading in my opinion - Warren Buffett summed up the actual situation of the world’s economy in the last chapter “Coupons” using the words: “It’s a hard time. This is now another world, and nobody knows what will happen to the world.”
But let’s take a look on what happened in the last months. After the fall of Lehman a big shock wave spread over the financial markets inexorably. In the course of that shock wave, the Dow Jones fell from its all-time high of 14,000 Points to 8,000 Points and bank titles such as Bank of America or Citygroup have lost 85% of their former market capitalisation. The former chairman of the NASDAQ Bernard Madoff was able to dupe his investors to the tune of $50,000,000,000. Several personalities of the financial world have committed suicide, including the German investor and multibillionaire Adolf Merckle.

What will happen now? Will we really face a crisis just like the crisis in 1929? First of all, I want to say that nobody can predict the future but the similarities to the year 1929 are really frightening. The crash of 1929 for example had it’s roots in much too high stock values caused by the wide range of credit offers banks offered the people in order to achieve larger profits. Four years after the crash the U.S. government passed a sequence of central economic planning programmes called “New Deal” in order to stabilize the economy and above all regulate the completely runaway stock market. The deal worked and as banks weren’t allowed to spread credits to everyone in order to fund huge financial bubbles, governments did’t have to deal with the consequences of such enormous financial bubbles for more than 75 years - until now. But in the year 2000 bankers had a new exciting idea on how to offer  credits to the masses. Instead of giving direct credits to the people like in 1929 they now gave mortgages to nearly everybody. This had the effect of raising housing prices and when the price of your home is very high you are also more creditworthy. But of course this bubble also had to burst and now we are facing a huge credit-funded pile of fragments again. The story of Bernard Madoff has also already existed, albeit in a slightly weakened form: Richard Whitney, who was the chairman of the N.Y. stock exchange in 1929 was sentenced to 5 years prison in 1938 for embezzling millions of dollars from his clients between 1929-1930.

But let’s sum up the facts: The advantage this time around is that our governments know how to deal with recession much better than they did in 1929. Sir John Maynard Keynes developed his theories on fiscal policy and instead of making things more worse our governments know that they have to invest in order to get the economy going again. The disadvantage of this policy is that national debts have to be paid back one day, or governments have to abandon their currency.  But the economical supremacy of the U.S.A. can’t be defeated when the government will start to pay back their 14 trillion dollar debt. On the other hand, the disadvantage is that this crisis is a different type of crisis: This crisis has hit the economy at its weakest spot: its banks. The cash flow between banks and companies has been nearly zero for a long time. Many banks have securities which nobody knows how much they are worth - or better said if they are worth anything. Now the U.S. government finally created a “Badbank” worth $2,000,000,000,000 which should release the credit markets from their state of shock. Nevertheless it has to be said that the consequences of this “Badbank” on the international bank sector can’t be predicted yet. Another problem is that people often forget the past in times of crises. The “Buy American clause” for example would in my opinion be the first step into a catastrophe. Because when the first country starts to protect their markets, others will follow and that would have unpredictable consequences in our fully globalized world.

In conclusion it can be said that we are definitely facing a deep deep recession which will either hit quick and painful or slow and painful. Unemployment rates will be very high for a long time and the average rate of return for securities won’t be over 4% for many years. But if the crisis really turns into a depression like in the years 1929-1935 can’t be said, yet. In my opinion that depends on our governments now.

The Pilgrimage to Warren Buffett’s Omaha by Jeff Matthews is an enjoyable read for everybody who is interested in the insights of the Berkshire Hathaway Annual Meeting in Omaha and who seeks answers to investment questions from Warren Buffett.

Every year, they come to Omaha. Far from the stock market in Wall Street, in a place more known for cattle and corn, investors from all over the world gather for one purpose: Warren Buffett and his annual Berkshire Hathaway meeting. For the uninitiated, it’s an event wrapped in mystique and mystery. It’s a chance to have Buffett himself, the Oracle of Omaha, answer their questions.
In Pilgrimage to Warren Buffett’s Omaha: A Hedge Fund Manager’s Dispatches from Inside the Berkshire Hathaway Annual Meeting the reader gets an in-depth look at this unusual experience. The book covers the 2007 and 2008 meetings, a time when Bear Sterns was collapsing and more than 31,000 people came to seek advice from the investment guru.

The book is written by Jeff Matthews, a hedge fund founder and financial blogger. He got his own highly-coveted ticket to the Berkshire Hathaway meeting held only for shareholders and proceeded to post reports on his blog, offering tempting glimpses into the much-discussed meeting. Offering a thoroughly entertaining first-hand account of Berkshire Hathaway’s meeting, he answers questions investor’s are asking.

Personally, I liked the book and found it to be an enjoyable read. Jeff Matthews takes the reader into the world of Warren Buffet and his shareholders. You get a different point of view than usual and get a look at Buffet’s investing methods along with the way he interacts with his shareholders.
All in all, I can recommend this book to anyone who is interested in investing. If you want to learn even more about Warren Buffett, and you probably will after this book, you might also check out The Snowball.

Buy “Pilgrimage to Warren Buffett’s Omaha” now at Amazon.com

Today, history has been made. Barack Obama officially became the 44th president of the United States of America. In his inauguration speech he clearly points out that the country is in a recession and hard times must be faced. He stated various issues his administration is about to change and appealed to the people to not give up hope and get to work.

We will see what effects President Obama will have on the U.S. economy in a manner of time. The challenges America has to face for the next few years have to be met fast and precisely. As an investor you should now follow the news about significant changes the Obama administration is about to introduce, be it in health care or renewable energies. There will be companies which will clearly benefit from his presidency.

Barack Obama’s Inauguration Speech

You can read the full text of Barack Obama’s speech given before nearly two million watchers on Washington’s National Mall on the website of the Chicago Tribune. A short extract may be given here:

U.S. President Barack Obama:
“Today, I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America–they will be met.
On this day, we gather because we have chosen hope over fear, unity of purpose over conflict and discord.
On this day, we come to proclaim an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics.”

Video of Barack Obama’s Inauguration Speech

Cyclical companies are companies who are strongly tied to the business cycle and their stocks move sharply up and down when economy turns around. Because of this, they require special handling by the intelligent investor.

Definition of a cyclical company

During recessions and economical downswings the stock market as a whole usually goes down, but a special type of companies suffers most: the cyclicals. Examples for cyclical companies are Caterpillar, US Steel, General Motors and International Paper, all makers of products with a fairly flexible demand curve. Automobile manufacturers, airlines, steel, paper, heavy machinery and hotels are the best examples. Examples for non-cyclical companies are Coca Cola, Proctor & Gamble, and Quaker Oats, all makers of products with a fairly inflexible demand curve. In bad times, people still have to eat and buy stuff for the household. Getting a new car on the other hand, can be delayed for some time.

Marc Thomson, a friend of mine who works at a big bank here in Munich, Germany, said last week: “A lot of our clients feel it now, the recession is hitting them hard. We’ve seen that before in downturns, but as usual, industries like the steel and automobile industry suffer the most and request new credits. ”

Chart for aviation support company AAR Corporation

Great opportunities ahead

When you look at charts of cyclical companies like the one above, there are always big up and downs. But when economy turns around, cyclicals can outperform growth companies and be great turnarounds. The problem is to catch the right moment of the cycle to buy. Take a second and analyse the chart of AAR Corporation for yourself and you will recognise that after this recession great opportunities will come ahead.

There are two problems when it comes to investing in cyclicals: timing and selection.

When it comes to timing, no one really can predict the economy as a whole and additionally cyclicals tend to doing well many months before the economy comes out of a recession. Best indicators seem to be interest rates and the companies’ financial ratios which show when demand goes up again, but also insider buying. It also helps if you know the industry. But all in all it is quite difficult to catch the best moment for the ride.

When it comes to selection, it makes sense to pick an industry that is due for a bounce. Choose the biggest company for more safety and smaller companies if you want to take some risk. These companies who suffered the most can produce the most impressive returns, but you have to make sure, they also don’t go bankrupt. More than usually, you have to check the balance sheet. An indicators that the company is healthy is for example a strong cash position.

If you do your homework well, I’m sure you can find plenty of good opportunities.

How to invest successfully

So, successful investing in cyclicals requires careful timing and a good selection. At this point, it’s time to make a watchlist and be prepared to invest when the recession comes to an end which no one know how long it will take. When taking action, take advantage of cost-averaging by buying the stock for several months and building up your position. To be save, you should also set a stop-loss limit to protect you from loses.

Most of all, never forget the up-and-down nature of the economy. And be careful, some cyclical companies die when it finally comes to a economic slump, because of bad management which thought the good times will go on forever and building up a cash reserve is not necessary. When you decide to invest in a cyclical company, you have to follow the news about the global economy and the industry the stock is in. Also cyclicals are not suitable for long-term purposes because of no protection in recessions. Buy-and-hold doesn’t work here. Please keep that in mind.

Although I’m not an American I’m really happy to see that now for the first time in the history of the USA a man with Afro American roots became president. I think this decision has improved the image of the USA in the world very much. The image which has suffered under the government of George W. Bush, is now back with a new message “Change”. But what can the U.S. and the rest of the world expect from the new president and much more interesting which parts of the economy will benefit from him? First of all we shouldn’t expect too much from Mr. Obama, although he is a great speaker with fire in the eyes. The President-elect is facing some of the biggest problems the U.S ever had:

• The national debt has achieved the incredible amount of $1100.000.000.000

• The war in Iraq swallows up $5.000 per second, that’s $300.000 per minute and $432.000.000 per day
• The climate is in danger to collapse if the world and especially the U.S. won’t come to grips with their emissions we are in danger of loosing the planet as we know it

To say nothing about the financial crisis, new conflicts with Russia, the Iran or Venezuela or just the fact that we are facing a recession which consequences can’t just be estimated right now.

So above all these points it’s hard to imagine that Mr. Obama is able to spend any money for anything at all. But the promises Barack Obama made don’t have to be mutually exclusive. For example though investments and subventions of renewable energies new jobs can be created. That has the same effect like a stimulus package. Also it’s a good alternative for searching oil in far dessert countries. So I’m sure that Barack will make affords to support renewable energies, he also promised to spend $150 billion in the next 10 years in that industry. But which companies could benefit from that?

I picked out a few companies which could theoretically benefit from his plans, but before you buy these stocks now remember, just because a stock sounds interesting it doesn’t mean that it rises. If you want to buy these watch out for the right price.

The first one is First Solar [www.firstsolar.com (NASD: FSLR)], a producer of solar panels. Solar energy will have a lion’s share at the power supply of renewable energies. So First Solar will be the first address in the U.S.

The second one is Acher Daniels Midland [www.admworld.com (ADM)], a producer of food, fertilizer but also in bio fuels. Bio fuels will be very interesting for the government under Barack Obama because they can create jobs in the farming sector as well as they can make America independent of the so called pariah states.

Other interesting companies could be Repower, Solarworld, Nordex or Evergreen Solar.

The second promise senator Obama made is to make health care affordable for many of the 47 million Americans who are currently not insured. This point will be difficult because large health insurance companies like Aetna or UnitedHealthcare fear that they might suffer under lower profits. Also I don’t know if America is ready for so a social system, yet. Perhaps that’s why Obama didn’t say something concrete about this point, yet. But if a company would benefit from that it would definitely be Community Health Systems [www.chs.net (CYH)]. Community Health Systems provides hospitals and hospitals would be the direct winners of any health care plan. But you can of course disagree with me in this point.

So I hope that Barack Obama will be able to put his plans into practice. However I think many people believe in him and faith can be the beginning for “Change” also when it seems to be very difficult.

What’s your opinion? Do you know companies, that are likely to benefit from Mr. Obama’s plans? Please write a comment and let us know!