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International Money Game, Palgrave, 1988

      The Selected Essays of Robert Aliber (Economists of the Twentieth Century.) Edward Elgar, 2004

      The Multinational Paradigm, The MIT Press, 2003

      Manias, Panics and Crashes: A History of Financial Crises (Charles P. Kindleberger), Palgrave Macmillan, 2005

      International markets and capital flows

      1. All propositions about rates of return in financial markets are clichés.

      Market literature is full of rules about achieving above average returns. These rules are clichés rather than eternal truths. No scientific proposition about beating the market beats the market for an extended period.

      2. Financial markets are mean-reverting.

      Prices in financial markets always tend to move back toward equilibrium values when they are not moving away from these equilibrium values.

      3. Currency markets overshoot and undershoot and equity markets overshoot and undershoot.

      There are observable trend values in both the currency markets and the stock markets. The variations around these trends (overshooting and undershooting) reflect the variability of cross border flows of capital in the foreign exchange markets and changes in investor optimism and pessimism in the stock markets.

      4. Buy and hold strategies generally are less rewarding than trading strategies.

      The cliché that “markets can't be timed” may be right for some investors all of the time, and for all investors some of the time, but there are times when market prices are far above or far below their long run equilibrium prices.

      5. Watch the capital flows in and out of countries.

      An increase in the inflow of capital to a country is likely to be associated with an increase in the foreign exchange value of its currency and an increase in prices of stocks of firms headquartered in the country.

      6. An increase in the inflation rate in a country is likely to be associated with a depreciation of its currency.

      It is also likely to lead to a decrease in prices of stocks of domestic firms.

      7. The smaller the country, the larger the impact of capital flows on currency values and stock prices.

      Because of the positive correlation between changes in currency values and changes in stock prices, global investing is much more opportunistic than domestic investing.

      8. Many firms have ‘fifteen minutes of fame’.

      Few of the ‘Nifty Fifty’ firms that that were the market favorites in the 1960s are market leaders today.

      9. The national location of the low cost center of production of particular products shifts among countries.

      So does the national identity of the most profitable firms in an industry when viewed in a global context.

      10. The size of the investor’s domestic market matters.

      The strength of the case for global investing by the residents of each country is inversely related to the size of the domestic market and the growth rate for new companies. Investors resident in relatively small countries have a much stronger need to diversify internationally than investors resident in larger countries.

      11. U.S. investors may not need to invest internationally as much as investors from other countries.

      The share of rapid growth companies headquartered in the United States is disproportionately large relative to the U.S. share of global GDP.

      12. Currency hedging is not useful for all.

      The cost of hedging the foreign exchange exposure is likely to be positive for currencies with a tendency to depreciate and negative for currencies with a tendency to appreciate.

      ‘Stocks are unquestionably riskier than bonds in the short run, but for longer periods of time, their risk falls below that on bonds. For 20 year holding periods, they have never fallen behind inflation, while bonds and bills have fallen 3 per cent per year behind inflation over the same time period. So although it might appear to be riskier to hold stocks than bonds, precisely the opposite is true if you take a long-term view.’

      Jeremy Siegel

      David Andrea

      David Andrea is Director of the Forecasting Group at the Center for Automotive Research within the Environment Research Institute of Michigan, Ann Arbor, Michigan. His group focuses on forecasting the business operating environment (market demand, regulatory requirements, product technology) and associated risks to existing business models, invested capital base, and company technology portfolios.

      The auto sector

      1. Invest with the leading economic indicators.

      Industry profitability and cash flow all begin and end with vehicle sales. These sales are inversely correlated with unemployment and consumer lending rates, and are directly correlated with income levels and stock market performance. As sales slow, inventories build and manufacturers are attracted to margin (and brand) destroying incentives to push vehicles off the lots and maintain production schedules. Margin reductions lead to delayed new vehicle programmes and component price reduction programmes to suppliers.

      2. Invest as a utility model.

      Before deregulation, utilities were judged by their cash flows and dividend streams. Autos are still heavily regulated and, like utilities, have few substitutions. The manufacturers and the largest mechanical component suppliers offer significant dividend yield opportunities. Granted, the dividend streams are always at risk to the production cycle - however, 4% to 6% yields offered by these companies position them well for an income instrument in diversified portfolios. But you should continually question the quality of earnings supporting the dividend stream - as one seasoned analyst taught me: “buy on the dividend increases, sell on the dividend cuts”.

      3. Invest in value stories.

      It is not uncommon to see quality balance sheets and management teams selling at a 60% to 80% discount (P/E basis) to the overall market. However, these are not ‘dresser drawer’ stocks. Look to buy when the discount is high, and target an exit when the discount has fallen into the 20% to 40% range. Based on perceived business cycle risk, it is the rare auto stock that trades consistently with the overall market.

      4. Invest in growth stories.

      The industry offers opportunities to invest in stories of growth via increased content per vehicle produced. Look for electronics (which may or may not be automotive pure-plays) and new technologies (providing solutions to emissions, safety, and fuel economy concerns as well as improved consumer value). Combined with an overall improvement in the margins of booked business, increasing content per vehicle provides a growth opportunity in a mature industry.

      5. Invest in forward product.

      A hot coupe’s half-life is approximately 12 to 16 months. A supplier’s profitability is easily tied into a single hot vehicle segment. One informational advantage of the auto industry is that product development cycles are 2 to 4 years in length. This gives investors the ability to analyse manufacturer strategies

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