Monday, 30 November 2009

Doing Your Homework: Trend Analysis

The information in the financial statements (BS, IS or RE statement), the basic (per-share) financial metrics and the various ratios are snapshots of the company's financial condition at a point in time, but there are trends in motion that need to be identified so you can understand if the company's position is improving or deteriorating.

For example:
  • Company ABC's year-over-year trend analysis indicates a generally positive trend with an increasing growth in sales, earnings, cash flow, and dividends per share. 
  • The leverage, value, and dividend ratios are all positive or well within acceptable ranges, with the exception of the quick ratio. 
  • Based on analysis, the dividend looks to be secure and Company ABC would be a good buy.

Doing Your Homework: Basic Financial Metrics and Ratios Analysis

Ratios Analysis

Ratios are widely used not only to evaluate a company, but to compare a company's financial position with other companies'.  The data used to calculate ratios are readily available in each company's annual and quarterly reports.  You can concentrate your analysis in the following two areas.

Building Block One:  Basic Financial Metrics

These are formulas that allow you to view any company's results on a per share basis.  Once financial data are reduced to the shareholder level you can easily compare companies that might be very different in size or in different industries.

For example, trying to compare the annual sales of General Motors with the annual sales of a much smaller car company like Porshe might not tell you much, but by comparing sales per share (divide each company's sales by the number of shares outstanding), you have a more meaningful measurementGenerally, the company generating higher sales per share is going to be the better value. 

Some useful basic financial metrics you can use for your analysis are:

Sales per share
= Sales/Shares outstanding  (Source: IS; BS)

Earnings per share
=Earnings/Shares outstanding (Source: IS; BS)

Dividends per share
=Dividends/Shares outstanding (Source: RE; BS)

Cash flow per share
= (Net Income + Depreciation)/Shares (Source: IS, BS)

= Dividend per share/Price per share (Source: DPS; newspaper)

Building Block Two:  Ratio Analysis

Ratio analysis allow you to analyse a company's financial performance
  • against other companies in the same industry,
  • against all stocks in the market, or
  • against industry standards, which are sometimes known as "rules of thumb." 

Although there are a great number of ratios that you can use to analyse a company, below is a short list of ratios that will give you the information you need to pick good dividend-paying stocks.

Liquidity Ratio
Quick Ratio
= (Current Assets - Inventory) / Current Liabilities (Source:  BS)

Debt Coverage Ratio
Short-term Debt Coverage Ratio
= Operating Income/Short-term debt (Current Liabilities)  (Source: IS; BS)

Valuation Ratios
Price-to-Sales ratio
 = Stock price/Sales per share (Source: Newspaper; Sales per share)
Price-to-Earnings ratio
= Stock price/Earnings per share (Source:  Newspaper; Earnings per share)

Dividend Ratios
Payout ratio =
Dividend per share/Earnings per share (Source:  Basic metric formulas)
Dividend coverage ratio =
Cash flow per share/Dividend per share (Source:  Basic metric formulas)

Growth Ratios:
Revenue growth rate ratio
= Year over Year percent change in revenues (Source: IS)
Earnings growth rate ratio
= Year over Year percent change in earnings (Source: IS)

Doing Your Homework: Analysing Financial Statements to pick Great Stocks

How do you pick great stocks?

If you don't have a crystal ball or inside information, then the best way you can tell a winning stock from a loser is by analysing a company's financial statements.

Before you dismiss this simple answer because you find financial statements confusing or boring, you should know that you don't have to become an accountant or financial analyst.  Just a nodding acquaintance with the fundamentals will allow you to make better decisions about
  • which stocks you should investigate and
  • which stocks you should own as part of your (e.g. dividend-focused or growth-focused) portfolio.

Financial statements are an important source of information regarding a company's profits or losses, assets and liabilities, and sources of funds used to operate its business.  You should concentrate on the basics: 
  • the balance sheet,
  • income statement, and
  • statement of retained earnings.

The balance sheet
This gives you an overall picture of a company's assets, liabilities, and equity at the end of an accounting period (i.e. quarterly or year-end).

The Income statement and the statement of retained earnings
These tell you how much revenue, expense, and profit the firm generated over a specific period of time (e.g. its fiscal year).

Together, these statements provide you with all the financial data you need to perform a ratio analysis to determine if you would want to buy a stock.

Since financial transactions occur continuously, this information becomes rapidly dated.  Be sure you are looking at the most recent statements and continue to review the updated statements of those stocks you decide to hold.

Future expectations can be approached in two different ways: Qualitative or Quantitative approach

According to Benjamin Graham, the current price reflects both
  • known facts and
  • future expectations
was intended to emphasize the double basis for market valuations.

Corresponding with these two kinds of value elements are two basically different approaches to stock analysis. 

Every competent analyst looks forward to the future rather than backward to the past, and realizes that their work will prove good or bad depending on what will happen and not on what has happened.

The future expectation itself can be approached in two different ways, which may be called:

  • 1.  the way of prediction (or projection) and
  • 2.  the way of protection.


1. The way of prediction (or projection)

Those who emphasize prediction will try to anticipate fairly accurately just what the company will accomplish in future years - in particular whether earnings will grow rapidly and consistently.  These conclusions may be based on a very careful study of such factors as
  • supply and demand in the industry-
  • or volume, price and costs -
  • or else they may be derived from a rather naive extrapolation from past growth into the future. 
If these authorities are convinced that the fairly long-term prospects are unusually favourable, they will almost always recommend the stock for purchase without paying too much attention to its current price.

This first, or predictive approach, could also be called the qualitative approach, since it emphasizes prospects, management and other nonmeasurable, abeit highly important factors that go under the heading of quality.


2. The way of protection.

By contrast, those analyst who emphasize protection are always especially concerned with the price of the stocks at the time of study.  Their main effort is to assure themselves of a substantial margin of present value above the market price - a margin large enough to absorb any unfavourable developments in the future.  Generally speaking, therefore, it is not so necessary for them to be enthusiastic over the company's long-run prospects as it is to be reasonably confident that the enterprise will get along.

The second or protective approach may be called the quantitative or statistical approach, since it emphasizes the measurable relationships between selling price and earnings, assets, dividends and so forth. 

Incidentally, the quantitative method is really an extention into the field of common stocks of the viewpoint that security analysis has found to be sound in the selection of bonds and preferred stocks for investment.


Choosing the "best" stocks is a controversial one.

In Benjamin Graham's own attitude and professional work was always committed to the quantitative approach. 
  • From the first he wanted to make sure that he was getting ample value for his money in concrete, demonstrable terms. 
  • He was not willing to accept the prospects and promises of the future as compensation for a lack of sufficient value in hand.

This has by no means been the standard viewpoint among investment authorities; in fact, the majority would probably subscribe to the view that prospects, the quality of management, other tangibles, and the "human factor" far outweigh the past performance records, the balance sheet and all other cold figures.

Thus this matter of choosing the "best" stocks is a controversial one.

Buffett gambles £27bn on rail to get back on track

Buffett gambles £27bn on rail to get back on track
Warren Buffett has placed the largest single wager of his investing career, gambling on "the economic future of the United States" by taking control of the American rail giant Burlington Northern Santa Fe in a $44bn (£27bn) deal.

By James Quinn
Published: 8:53PM GMT 03 Nov 2009

Warren Buffett has bought Burlington Northern Santa Fe, the rail operator, in a $44bn deal. Burlington is America's largest railway by revenue, operating freight across large swathes of the west and mid-west. Its tracks are also used by a variety of passenger services.

Mr Buffett believes that Burlington will benefit as the US economy recovers.

The septuagenarian billionaire argues that railway operators cannot do well unless the businesses and consumers who use the products they transport are beginning to spend again. "It's an all-in wager on the economic future of the United States," said Mr Buffett. "I love these bets."

In typical Buffett style, the cash-and-shares deal was struck in a 15-minute conversation with Matthew Rose, Burlington's chief executive.

It is the largest single investment Mr Buffett has made since taking control of Berkshire Hathaway, the investment conglomerate he has run since 1965.

It contrasts with his more recent deals, which have been big bets on the financial services sector including multi-billion dollar gambles on the recovery of shares in General Electric and Goldman Sachs, both of which have repaid him handsomely.

However, not all of his financial gambles have paid off, with 2008 going down as Berkshire's worst financial year since Mr Buffett took the helm, following a 62pc fall in profits and a drop in net worth of 9.6pc.

Berkshire is offering $26bn for the 77.4pc of Burlington it did not already own, 40pc in shares and the balance – $16bn – in cash, drawn equally from existing reserves and a bank syndicate. Berkshire will still have $20bn of cash.

Including Berkshire's previous investment and the assumption of $10bn of debt, the deal is worth $44bn.

US to reduce Quantitative Easing as rates kept low

US to reduce Quantitative Easing as rates kept low
The Federal Reserve reiterated its desire to keep American interest rates “exceptionally low” for an extended period, but gradually reduce some of its quantitative easing as the US economy begins to recover.

By James Quinn, US Business Editor
Published: 8:51PM GMT 04 Nov 2009

America’s central bank, holding interest rates in a range of 0 to 0.25pc, did not signal when borrowing rates might rise, as it remains wary of knocking the US’s nascent recovery off course just a week after productivity figures signalled the country emerged from recession in the third quarter.

The decision comes ahead of the results of the Bank of England’s Monetary Policy Committee meeting, which is due to report its views on interest rates and quantitative easing on Thursday.

In a more upbeat assessment of the state of the US economy, the Federal Open Markets Committee (FOMC) said that it would begin to pull back on some of the extraordinary capital injections it made into the US economy during the crisis.

The Fed has completed its $300bn (£181bn) US Treasuries purchase programme, and reduced the fund for buying agency debt through the first quarter of next year from $200bn to $175bn. But it will continue with its $1.25 trillion purchase programme of agency mortgage-backed securities.

The FOMC’s unanimous decision to hold rates came as it noted that “activity in the housing sector has increased over recent months” and that businesses are beginning to slow the rate of cutbacks.

New data from the FOMC included the latest ADP payroll survey, which showed that the US private sector lost 203,000 jobs last month, ahead of tomorrow’s government unemployment figures, which could show the US unemployment rate hit 10pc in October.

Sunday, 29 November 2009

Dividend incomes do not depend on the kindness of strangers

The vast majority of stock transactions are simply investors selling the same stocks back and forth among themselves.  Prices change as their opinions change about what each share is worth to them.  They rise as a buyer tries to entice an owner to sell, and they fall as sellers try to attract a buyer.

Assuming that your stock has risen in price since the day you bought it, how do you benefit from this increase in your wealth? 
  • You could borrow against your shares, but then you're really using someone else's money, and the stock is just collateral.  You still have to repay the loan, plus interest, somehow.
  • If you ever want to spend the money, you have to sell the stock.  In order to sell your shares, you have to find someone to buy them.
Dividend incomes, on the other hand, does not depend on the kindness of strangers in the same way that appreciation does.  Dividends are driven primarily by the ability and willingness of the company to share its profits with its shareholder owners.  They are tied more closely to the business itself and are less subject to the emotional response of investors to world or market events. 

Investors holding stocks for the income they provide, on the other hand, enjoy an ongoing advantage that "pure growth" investors don't  - they get to keep their shares.  Obviously, once you've sold your shares, it's somebody else's stock.  You no longer have a stake in the fortunes of the company.  The benefits and profits that may follow - as well as the future appreciation in share price - are of no further value to you.  Of course, you don't necessarily have to sell all your stock at once and can therefore continue to enjoy some of the good fortune that may continue to visit the company whose shares you're selling. 

The simple fact remains, though, that as you sell your shares, you have less of an ownership interest than you did before.  By periodically liquidating your holdings, you are systematically reducing your ownership in the very thing that is your store of investment wealth.  Appreciation has its advantages too, and fortunately, dividend investors can enjoy the appreciation in the value of their shares while they continue to collect the ongoing income from their holdings.

When the time eventually comes to take income from your portfolio to support your lifestyle, either in retirement or to help defray major expenses such as education costs, the investments do not have to be sold to create cash flow.  The dividends are already flowing cash to you.  You simply have to adjust how much of it you're reinvesting and how much of it you can afford to spend.

What is Predictable? Market Cycles

You can count on Performance Bursts

Percentage Change*---- Cycle

-30.55%  Correction
95.89% Burst
1906 -1907 
-38.93%  Correction
68.60%  Burst
-37.89%  Correction
81.66%  Burst
-24.98%  Correction
44.17% Burst
-32.98% Correction
37.22% Burst
-80.02%  Correction
200.18%  Burst
-32.82%  Correction
28.06%  Burst
-28.30%  Correction
73.86%  Burst
-39.59%  Correction
63.03%  Burst

*Year over year percent change in DJIA Index, excluding dividends.

What most investors don't know is that market cycles are fairly predicatable (see above).  This is good news! 

The above exhibit shows the powerful performance bursts that have followed each market decline of 20% or more as measured by the year over year change in the DJIA Index. It's as if the markets understand Newton's law of physics, that for every action there is an equal and opposite reaction. Over the past 100 years there have been 9 year over year market corrections of 20% or more and after each correction a performance burst has helped to salvage investors' fortunes.

In April of 2003, the markets had already started to reverse the bear trend.  Unfortunately, many investors are still sitting on the sidelines because they were burned by losses incurred in the Y2K bear market.  Most investors, retail and institutional alike, were surprised by the uptrend, but once again a good working knowledge of market history would have allowed them to anticipate a significant move to the upside.  After every major market decline, markets have snapped back with a performance burst to the upside.  These uptrends tend to be very powerful, lifting investors' account balances and spirits at the same time.  

****The most insidious risk of all - Investor Risk

Investors are justifiably wary of the various risks that can beset a portfolio.  In addition to the eroding effects of volatility, there's
  • business risk,
  • currency risk,
  • market risk,
  • interest rate risk, and
  • inflation risk. 
Perhaps the most insidious risk of all, though, is the one that's the hardest to protect yourself from - investor risk.  Investor risk is the risk we face just by being human.

It is easy to understand the concept that to be successful as an investor you should buy low and sell high.  But if you invest over a long enough time period to see both rising and falling markets, you'll see just how hard it can be to actually bring yourself to do this. 

  • Buying at highs and selling at lows is the opposite of success and can cause yur portfolio irreparable harm, but it's .  extraordinarily common
  • Had you asked those investors who were rushing into Internet or other high-flying stocks in early 2000, after the Nasdaq had just jumped more than 85% in 1999, if they thought they were buying high, you probably would have heard all kinds of reasons why this time was different.  There was a "new paradigm"; the old rules of valuation no longer applied.  
  • Had you asked many of these same investors in early 2003 if they felt they were selling low after three years of crushing stock market declines, you would likely have heard that the market was going to keep falling, the world had changed, and prospects looked bleak for as far as the eye could see.

Investors were once thought to be "rational," efficiently processing all known market data and making decisions on the basis of the logical pursuit of their own best interests.  A whole branch of study called behavioural finance has sprung up to study the question of how investors really behave, and the short answer is that it's rarely rational. 
  • Nature has 'wired' us to react in certain ways so we can quickly process information, understand patterns (like those that occur in nature), and make good, quick survival decisions. 
  • Unfortunately, many of the same ways of thinking that have proven so helpful to our survival as a species can get us killed as investors.

Emotional responses, uneven reactions to risk and reward, looking for patterns where none may exist, believing our recent experience will persist, and overconfidence in our initial judgements are just some of the natural tendencies that can lead us astray.  Rather than trying to overcome our nature - to overcome the thinking processes and habits that have been woven into our very beings for millennia - we can try to invest in such a way as to reduce this investor risk and increase our odds of financial survival.

The markets will continue to rise and fall, but if your account doesn't fall so much that it triggers your primal urge to sell, you'll still be invested for the rebound. 
  • Even the most robust market recovery doesn't help the investor who has already sold everything before it starts. 
  • To reap the long-term performance advantages of being an investor, you have to find a way to stay invested for the long term. 

To the extent a lower volatility, dividend-based portfolio provides you with an investment experience you can live with in all kinds of markets, your portfolio is more likely to evolve into a fortune - and less likely to face extinction.

The Performance Illusion: Higher returns have long been associated with higher risks.

Which would you rather have, a portfolio with an average annual return of almost 34%, or one with an average annual return of just 5%?  Let's llok at a couple of examples that show why sometimes less is more.

Exhihit 1
The  Performance Illusion:  High Average Return

Year 1
Starting Value $100,000  Return 100%  Gain or (Loss) $100,000
Ending Value $200,000

Year 2
Starting Value $200,000  Return -99.00%  Gain or (Loss) ($198,000)
Ending Value $2,000

Year 3
Starting Value $2,000  Return 100%  Gain or (Loss) $2,000
Ending Value $4,000

Average Annual Return: 33.67%
Change in Value: ($96,000)
Percentage of Initial Investment Gained or (Lost) after 3 years: -96%

Exhihit 2
The  Performance Illusion:  Low Average Return

Year 1
Starting Value $100,000  Return 15%  Gain or (Loss) $15,000
Ending Value $115,000

Year 2
Starting Value $200,000  Return -15%  Gain or (Loss) ($17,250)Ending Value $97,750

Year 3
Starting Value $97,750  Return 15%  Gain or (Loss) $14,662.50
Ending Value $112,412.50

Average Annual Return: 5%
Change in Value: $12,412.50
Percentage of Initial Investment Gained or (Lost) after 3 years: 12.41%

Which return would you rather have? Of course, to illustrate the dangers of a high-volatility approach to investing, these two examples include an extreme case. Surely no one would ever face the kind of volatility shown in the 100 percent up and 99 percent down example ... but they might come close.

Exhihit 3
Nasdaq Composite Index

Year 1999
Starting Index Value 2192.69; Return 85.59%; Point Gain or(Loss) 1876.62
Ending Value 4069.31

Year 2000
Starting Index Value 4069.31; Return -39.29%; Point Gain or(Loss)(1598.79)
Ending Index Value 2470.52

Year 2001
Starting Index Value 2470.52; Return -21.05%; Point Gain or(Loss)(520.12)
Ending Index Value 1950.40

Year 2002
Starting Index Value 1950.40; Return -31.53%; Point Gain or(Loss)(614.89)
Ending Index Value 1335.51

Year 2003
Starting Index Value 1335.51; Return 50.01%; Point Gain or(Loss)667.86
Ending Index Value 2003.37

Average Annual Return: 8.74%
Change in Index: -189.32
Percentage of Initial Investment Gained or (Lost) after 5 years: -8.63%

Exhibit 3 shows the actual results of the Nasdaq Composite Index (Nasdaq) over five years beginning in 1999 and ending on December 31, 2003.

The truly remarkable 86% return posted by the Nasdaq in 1999 was followed by a truly gruesome bear market mauling over the three years. From the start of 2000 to the end of 2002, the Nasdaq shed an amazing 2,733 points - more than 67% of its value. The year 2003 brought welcome relief, but even after a 50% rise, the Nasdaq was still more than 8.6% below where it had stood five years earlier.

An investor unlucky enough to have missed out on the gains over this time span - either by coming late to the party or bailing out before the rebound - would have suffered a massive financial setback. As of the end of 2003, the Nasdaq remains more than 3,000 points, or 60%, below its all time closing high.

Exhibit 4
The Y2K Bear Market

Index Closing High 5048.62
Date Hit 03/10/2000
Index (On 12/31/2003) 2003.37
Decline -60.32%
Points from High 3045.25
Gain Needed to Recover 152.01%

S&P 500
Index Closing High 1527.45
Date Hit 03/24/2000
Index (On 12/31/2003) 1111.92
Decline -27.20%
Points from High 415.53
Gain Needed to Recover 37.37%

Index Closing High 11722.98
Date Hit 01/14/2000
Index (On 12/31/2003) 10453.92
Decline -10.83%
Points from High 1269.06
Gain Needed to Recover 12.14%

The Exhibit 4 shows the damage the Y2K bear market has visited on three major U.S. stock market indexes. The S&P 500 and DJIA did not soar nearly as high as the Nasdaq during the technology/telecom/Internet boom of the 1990s, and they suffered much less damage during the bust that followed.

The scenarios above are to illustrate, that there are consequences to taking risks. The easy success of the late 1990s bull market lulled many investgors, including many professional investors, into believing risk had lost its bite. Why not shoot for a 30 percent return? If you don't get it, you'll probably just have to settle for 20%. But that's not how it works in the real world - at least not in the long run. The experience of the Nasdaq versus the DJIA during the Y2K Bear Market wasn't a fluke. Higher returns have long been associated with higher risks.

Dividend stocks for Growth Investors

Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. 
If it don't go up, don't by it. 
Will Rogers

For many investors, current income is not an important consideration in building their portfolios. They may have sufficient income from other sources, including employment. For them, building and growing the overall value of their portfolios may be the primary focus of their efforts. Should these “growth investors” concern themselves at all with a strategy built around investing in dividend paying securities?

One of the classic advantages of dividends is their large contribution to the long-term performance that has made stocks so attractive to investors. (About 50% of the returns of your stocks are contributed by dividends.) Reinvesting those dividends can compound the growth of a portfolio. The attraction dividend-paying stocks hold for investors looking for a steady and rising stream of income to support their lifestyles is pretty clear.

The goal of a growth investor, is to increase the overall size of the portfolio so that it will be large enough to meet a future need. That need may be a lump sum to pay for college expenses, or a much larger account from which to draw retirement income. In either case, the object of the game is to make the pot of money bigger in the time available. The key to winning the game lies in understanding that total return is what counts.

Total return is made up of two parts: price appreciation and income. A security that goes up in price by 5% and pays 5% in income adds as much to the financial pot as one that goes up by 10% in value, but pays no income. Still, like the customer who insists on having his pizza cut into 6 slices because he doesn’t think he can eat eight, some investors want their returns delivered only as appreciation.

Stocks that pay dividends do tend to be more mature companies, with characteristically slower growth rates. This is sometimes taken to mean they have low total-return prospects. More accurately, they offer a different path to total return, and that path can lead to an excellent outcome. Flashy price gains are exciting; steady and reliable income can seem boring by comparison. To the extend those flashy gains come at the expense of increased volatility in annual returns, chasing them could lead you down the road to disaster.

Dubai bites the bullet on debt

Dubai bites the bullet on debt
Dubai has finally entered a treatment facility voluntarily.

By Una Galani,
Published: 6:12AM GMT 26 Nov 2009

Dubai World, one of the emirate’s biggest holding companies, has shocked creditors by asking for a standstill on the $60bn of debt attached to its entire portfolio, which includes ports operator Dubai Ports World, investment vehicle Istithmar and Nakheel – the property developer responsible for one of the Gulf’s most iconic sights: a series of man-made palm islands. If the emirate’s request is granted that would amount to a technical default.

Though Dubai’s troubles had been widely heralded, investors had been expecting a timely repayment of bonds. Sheikh Mohammed bin Rashid al-Maktoum even recently told critics of the emirate’s ability to meet its financial commitments to “shut up”. No surprise then that the request for a standstill from Dubai World until May 2010 sent the price of Dubai’s five year credit default swaps leaping to 420 basis points – up 100 basis points. That is still less than half the high Dubai’s CDS reached in February when confidence in the emirate was at an all time low.

Dubai has been smart to prove that it can still raise money. At the same time as asking creditors for more time, Dubai announced it had raised a further $5 billion tranche of its $20 billion emergency support bond from two government-owned banks in Abu Dhabi. Two weeks ago, the emirate also placed $2 billion worth of Islamic sukuk bonds with private investors, although those proceeds were not raised for distressed entities.

So why isn’t Dubai putting its hand in its pocket to help Dubai World meet its most pressing maturity, namely Nakheel’s $3.5 billion sukuk due mid-December? One reason could be because Dubai World faces at least a further $2.2 billion of maturities in the coming six months and more after that. Deloitte’s Aidan Birkett, who will lead the restructuring effort, will be one of the first outsiders to see the true scale of the problem that lies within.

Creditors might not like having to grant concessions, but anyone with a long term interest in Dubai should be pleased that the emirate is biting the bullet. Authorities last week took the decision to remove some of the key architects of modern Dubai from their positions. Now the debt laden emirate appears to have finally realised that it can’t pay off all of its debts without a serious financial restructuring. The first step to a cure is admitting there’s a problem.

Dubai: what the immediate future holds

Dubai: what the immediate future holds
Until last Wednesday, most investors saw Dubai as an attractive tourist destination, a regional financial centre and an example of what bold and visionary leadership can achieve.

By Mohamed A El-Erian
Published: 12:23AM GMT 29 Nov 2009

Some worried that Dubai's impressive achievements came with a debt burden that would prove difficult to sustain after last year's financial crisis.

This weekend, investors around the world are united in wondering "what does Dubai mean for me?"

Dubai has triggered local, national, regional and global forces that will play out in the weeks ahead.

At the local level, the standstill is an explicit recognition that the Emirate's debt and leverage levels cannot be sustained in what, at PIMCO, we have called the "new normal". The question for Dubai is now two-fold: can an orderly extension of debt payments be achieved; and how will this impact the risk premium that is attached to other economic and financial activities in the Emirate?

The key issue at the national level is how Abu Dhabi, the largest and richest of the seven UAE Emirates, will react. Here, it is a question of willingness. The leaders of Abu Dhabi must strike that delicate balance between using enormous wealth to support Dubai and ensuring appropriate burden sharing among those that repeatedly failed to heed Abu Dhabi's past warnings about the excesses in Dubai.

The regional dimension is captured by a word familiar to investors in emerging markets: "contagion". The immediate reaction of almost all markets (and too many commentators) is to lump together countries in the region that have very different characteristics. Witness how market measures of risk have surged for all the oil exporters in the region even though they share none of Dubai's debt and leverage characteristics.

At the global level, the Dubai announcement serves as a catalyst to take the froth off expensive financial markets. For the last few months, massive injections of liquidity (primarily by the US), aimed at limiting the adverse impact of the financial crisis on employment, have turbo-charged financial market valuations rather than make their way to the real economy. While many have worried about the generalised over-extension of equity markets, most have hesitated to take money off the table as there did not appear to be a catalyst to break the general "trend is your friend" mentality. Dubai is that catalyst.

So, what next?

First, it will take time to sort out the Dubai situation. Inevitably, this is an uncertain and protracted process that involves both on- and off-balance sheet exposures. It will cast a cloud not only on companies in the Emirate itself but also on institutions that have large exposures there, especially in the banking and real estate sectors.

Second, the immediate indiscriminate sell-off in regional (and emerging market) names will, over time, give way to greater differentiation based on economic and financial realities. Those with strong fundamentals will recover (including Abu Dhabi, Brazil, Kuwait, Qatar and Saudi Arabia) while others, including countries with large deficits and debt burdens in eastern/central/southern Europe, may come under more pressure.

Finally, and most importantly, Dubai serves as a warning to those that were quick to find comfort in the sharp market rally of the last few months. Since the summer, the appreciation of risk assets has been driven predominantly by artificial liquidity injections rather than fundamentals. The Dubai announcement is a reminder that a flood of government-induced liquidity cannot mask all excesses, all the time.

Investors should treat last Wednesday's announcement as an illustration of the lagged financial effects of the global financial crisis. The Dubai situation is no different than that facing commercial real estate in the US and UK.

Let Dubai be a reminder to all: last year's financial crisis was a consequential phenomenon whose lagged impact is yet to play out fully in the economic, financial, institutional and political arenas.

Mohamed A El-Erian is CEO and co-CIO of PIMCO, the investment management firm

Dubai: an emirate in crisis

DUBAI facts

Ruled by Sheikh Mohammed bin Rashid Al-Maktoum (above), who has embraced the extravagance of his emirate

16bn  Ruler's personal wealth – world's fourth-richest royal

1.7m Population

240,000 Oil production per day

State company is Dubai World, a property-focused investment group with a $59bn debt problem

Government holding companies bought large stakes in HSBC, Deutsche Bank and US retailer Barneys

Key London assets include the Adelphi, on the Strand, and the Grand Buildings in Trafalgar Square

The ruler's slogan is "Leader, equestrian, poet"


Ruled by Sheikh Khalifa bin Zayed al-Nahy (above), who has taken a reserved and anonymous stance in his
oil-rich state

$21bn Ruler's personal wealth – world's second-richest royal

1.3m Population

2.7m Oil production per day

State company is the Abu Dhabi Investment Authority, the world's largest sovereign wealth fund with assets worth more than $250bn

The company bought 4.9pc of Citigroup for £7.5bn in 2007 and is thought to be the world's second-largest institutional investor behind Bank of Japan

Key London assets include the ExCel exhibition centre in the Royal Docks and No1 Knightsbridge Green, close to Harrods

Its flagship project is the Gulf version of the Peggy Guggenheim Museum, which is set to open in 2011

Saturday, 28 November 2009

****The Investment Policy Statement

The purpose of the IPS is to put in writing exactly what you're trying to accomplish with your portfolio, how you plan to get the job done, and how you'll measure your progress along the way.  It should serve as the anchor that keeps you from drifting away from your plan to chase the latest hot tip or investment fad.  By helping you to stay focused on your long-term goals, it can also keep you from becoming so discouraged by the inevitable setbacks that you give up on investing altogether.  An IPS doesn't have to be a complex document, but it should include the following: 
  • Your risk tolerance
  • Your time horizon
  • Your need for current income
  • Your need for long-term growth
  • Your plan of action
  • Your schedule for measuring your progress


Your risk tolerance

A great way to measure your risk tolerance is to decide what percentage you're prepared to lose in any given year without abandoning your strategy.  Be honest with yourself.

Translate the percentage numbers into real dollar amounts.  It's one thing to tell yourself you can sit calmly through a 20 percent decline, and another to open an account statement that shows one out of every five dollars of your hard earned money seems to have disappeared.  Since the markets tend to spend about a quarter of the time falling, sometime during your lifetime as an investor it's virtually certain that you'll be facing losses in your account.

Big return targets, whether for growth or current income, tend to increase the likelihood of big dips in portfolio value.  Investors are infamous for selling at market lows in a panic, usually just before the market recovers.  The more harrowing the ride, the more likely you are to want to get off.  Be sure you don't put yourself on the path to surrender by choosing too dangerous a route.  If you're not prepared to accept any declines along the way, then you're not entitled to the superior gains that stocks have traditionally provided.  That's fine; just scale back your plans to match the steady but lower long-term returns you'll probably be able to get from fixed investments.

Your time horizon

Your time horizon is simply how long you plan to maintain your current investment strategy.  It's usually tied to some major expense or event, such as the arrival of college years for the kids or a planned retirement date.  For investors already in retirement, the time horizon for an income portfolio may be their life expectancy.  The shorter your time horizon, the more conservative your plan should be.  As we have just witnessed, markets can go down for several years in a row.  While they have always eventually recovered in the past, the markets may not follow your timetable, leaving you short of the necessary funds when it's time to write the check.  In general, money you absolutely need to spend within four or five years should not be a part of your investment portfolio.

Your need for current income

Your need for long-term growth

The total return your portfolio provides is made up of two parts:
  • income and
  • growth. 
If your portfolio is providing you with the cash you currently need to support your lifestyle, you need income.  We believe there are potential pitfalls in relying on the systematic liquidation of portfolio growth ("dollar lost averaging") to fund your current income needs and that these pitfalls are serious enough to offer a strong argument for basing your withdrawals on the cash income your investments can generate instead.

How much money do you need to take from your portfolio today?  How much will you need in the years ahead as the cost of living rises?  Is your portfolio big enough to produce that much cash?  An investor with an $800,000 portfolio can get $1,000 per month by taking cash at just a 1.5% annual rate, while someone with $150,000 invested needs to draw cash at an 8% rate to pocket $1,000 per month.  If prevailing rates are around 4% and you need to take 12% to make ends meet, you've got trouble.  Your choices are to cut your expenses or shop at the high yield end of the investment market where risks are greater.  As the spread between what's reasonable and what's necessary grows, so does the likelihood of depleting a portfolio.

Those investors who don't need to take current income from their investments, or who have more than enough invested to meet their needs, can focus on growing their portfolios.  You'll still need to know your required rate of return - the total return you'll need to achieve, on average, to take you from where you are right now to where you want to be.  Answering the following questions will help you to find your required rate of return. 
  • How much will your future goals cost once inflation is taken into account?
  • How much have you accumulated so far?
  • Where is the rest going to come from in the time you have remaining?
  • Is there a rate of return you can reasonably expect that will help you get the job done, and can you actually achieve that return while staying within your comfort level?
Without the pressure of monthly withdrawals, investment income can be reinvested to provide for future income goals, inflation protection, or generational wealth creation.  As part of your total return equation, the level of income you should be looking for can be matched to the distance in dollars you have to go to reach your goals, and risk you're prepared to assume to get there.

Your plan of action

The description of your plan of action can be as simple as "Invest primarily in dividend-paying stocks," or as comprehensive as a complete summary of the details of your investment process.  The key is to create a benchmark against which you can measure every investment decision you make to help you keep your plan on track. 

Your schedule for measuring your progress

Plan on reviewing your progress at predetermined intervals spaced at least one year apart.  This is not the same as the process of regularly monitoring your securities.  It's a chance to take a fresh look at your circumstances to see if there have been any material changes in your income needs, time horizon, or risk tolerance.  The purpose of this review is to make sure your plan of action still makes sense given any changes in your situation, and to help you keep your overall investment experience tied to the long-term context of what you hope to achieve.  This review is about you, not about the markets.  The investment environment is always changing, and your plan of action already takes that kind of change into account.  Be careful not to let what's going on right now in the investment markets alter your strategy.

Keep a historical perspective in mind.  Big bull market advances don't last forever, and neither do major bear market declines.  So long as your process is performing as you would expect under the circumstances and still meets your needs, your Investment Policy Statement should not require a major revision.

The concept and purpose of using Screen and Standards in Stocks Selection

As you begin the process of culling your universe of stocks down to a useful list, think about the qualities you find in your candidates in terms of screens and standards.


A screen is any element of a security that would eliminate it from further consideration, for example, the absence of a dividend.

The purpose of a screen is to limit your universe of stocks to a manageable list of candidates. 

The concept of using a screen to narrow our choices is a familiar part of daily life.  For example:
  • people with food allergies can't eat certain dishes, no matter how delicious they are.
  • we only read books written in languages we understand, and
  • when we shop for clothing we start by looking for clothes that will fit.  After all, it doesn't matter how nice an item is if it's not the right size.
Screens help us discard all the possibilities that, no matter what else they may have to offer, just don't meet our needs.  Any stocks that fails to meet one of your screens simply won't be on your list of candidates.



Standards are those criteria by which you will compare one security to another when both of them pass your screening process in order to select your perferred choice. 

The purpose of standards is to help you decide which stocks on your list of candidates to invest in. 

Returning to our shopping example, once we narrow our choices to those items that are the right size we can try them on to see which ones fit the best.  There are other clothing standards in addition to fit such as color, style, quality, and price that we can use to compare our finalists when deciding which ones to buy.

The stocks that pass through your screens will be ranked according to a variety of investment standards to help you find those candidates on your list that appear to offer the most promising fit for your dividend portfolio.

Sometimes a measurement you use as a screen to shorten your list will also be used as a standard to rank your choices. 

The most obvious screen you'll be running your universe through is the size of the dividend yield.  If you've set your minimum dividend yield at 2.25%, then a stock with a yield of 3% and another stock with a yield of 4% would both pass the dividend screen you've set and be added to your list of candidates. 

Later, when ranking your candidates to decide which ones to buy, you can use the dividend yield measurement again - but this time as a standard.  On the basis of the dividend yield standard, the 4% stock would rank higher than the one with a yield of 3%.

How high the dividend yield should be to pass through your screen depends largely on
  • how much income you need to take from your portfolio, and
  • how much risk you're comfortable assuming. 
If you haven't stopped to address these two important factors, now would be a great time to do so.

Choosing the Right Tools

You can't have everything.  Where would you put it?

Imagine walking into a home improvement superstore with only a vague idea of what you want to buy.  You could spend hours wandering up and down aisles looking for the right tools.

Investments are tools you use to achieve your long-term financial goals and choosing the right tools is critical to your success.  The universe of possible choices is huge.  There is a virtual superstore of more than 2,800 companies listed on the New York Stock Exchange, nearly 3,500 listed on the Nasdaq and thousands more listed on other exchanges in the US and around the world.  In addition to stocks, there are:
  • commodities,
  • real estates,
  • bonds,
  • annuities,
  • options,
  • hedge funds,
  • mutual funds,
  • futures contracts, and on and on.

One of the beauties of investing for dividends is that you can limit your search to just stocks - and to just those stocks that pay dividends.

How do you conduct your search?

How you conduct your search will play a large part in how many stocks you'll be able to choose from. 
  • If you're using a computer, you may be able to access, download, or process thousands of potential candidates. 
  • If you're conducting your search by hand, you may be looking through the stock listings in the newspaper with a highlighter. 
In either case, your goal is the same:  to find a manageable list of stocks that meet your initial criteria. 

Over time, these will become familiar friends.  By tracking their fortunes over the years, you can gain a solid understanding of their underlying value and potential future prospects.

Friday, 27 November 2009

Phenomenal surge in Coastal’s profit

Phenomenal surge in Coastal’s profit

Tags: Coastal Contracts | Kenanga Research

Written by The Edge Financial Daily
Wednesday, 25 November 2009 11:29

Maintain buy at RM1.95, target price at RM3.68: Coastal Contracts showed a phenomenal third quarter (3Q09) with another record quarter of RM48 million net profit. Nine-month FY09 revenue of RM315.2 million came in at 75% of our forecast but net profit of RM108.7 million was at 97%. Assuming a constant quarter into the year-end, net performance will most likely be 40% ahead of our forecast principally because of strong vessel delivery and higher margins fetched compared to our forecast which we had warned to be conservative.

Quarter-on-quarter, revenue was up 48% on the back of higher vessels delivered. 3Q saw a total of 11 vessels (nine tugs/barges and two offshore support) delivered compared to a mere four (two tugs/barges and two offshore support). No details were given on vessels delivered, but we suspect them to be the normal 5,000 bhp AHTS with market values of between RM45 million to RM50 million each.

Shipbuilding margins remained robust standing at 33.2% (2Q09: 33.4%). FY09 revenue is raised 9.4% with net profit by 39.1% due to a combination of higher margins and lower effective taxes being modelled in. FY10 revenue is also raised by 10.6% with net profit by 38.7% for the same reasons.

The new target price of RM3.68 is based on eight times FY10F (RM2.66 previously) with our buy call maintained. Farsighted management, strong visibility and a strong record of outperforming their guided numbers are key reasons behind our buy call. Trading at a mere 4.2 times 2010F is unjustified compared to the oil and gas sector which is trending at least in the teens.

The outlook for the company is improving substantially after the recent thawing of the credit crisis. Management is once again guiding very positively on the back of rising enquiries given a relatively more stable economic environment not to mention crude oil prices which are currently averaging at the high US$70s to low US$80s per barrel.

Verbal guidance of RM1.4 billion order book should sustain the group right up to 2011 provided there are no cancellations. Farsighted management which had focused their selling to major asset owners including some of the world’s largest offshore support players should help to mitigate cancellation risks.

Based on preliminary estimates, we suspect that the group could have another RM2 billion worth of inventory that could be offered into the market over the next few years. This is not confirmed by management but they did guide that enquiries have been building up very strongly with further sales likely over the course of the next few months. — Kenanga Research, Nov 24

This article appeared in The Edge Financial Daily, November 25, 2009.

Chief of I.M.F. Urges Continued Stimulus Efforts

Chief of I.M.F. Urges Continued Stimulus Efforts

Published: November 24, 2009

PARIS — The chief of the International Monetary Fund urged the world’s major economies on Tuesday to retain their economic stimulus programs until there were durable signs of a recovery, including an end to rising unemployment.

Dominique Strauss-Kahn, head of the International Monetary Fund, on Monday. He urged the world’s advanced nations to continue with their stimulus programs until they return to a solid economic footing.

“A premature exit is the main danger,” Dominique Strauss-Kahn, managing director of the I.M.F, said during an interview at the fund’s office here. “We have to be sure that the recovery is final, that domestic demand is self-sustaining and the peak in unemployment is on the foreseeable horizon.”

Mr. Strauss-Kahn, who was visiting Europe this week, added that “the bigger risk is of growth not coming back, a jobless recovery and to believe that we are out of the woods.”

The comments place the I.M.F. firmly on the side of the major Western governments, the primary backers of the fund, in calling for retention of state support like aid for banks and automakers and tax breaks for consumers.

The I.M.F.’s position contrasts starkly with the prescription it gave to Asian countries grappling with a different economic crisis a decade ago.

Then, the fund, which is based in Washington, lent money to countries including South Korea, Indonesia and Thailand. But it linked its support to harsh financial medicine like high interest rates and a restrictive fiscal policy aimed at balancing budgets. The conditions were blamed for prolonging the downturn in the region.

The I.M.F. has “learned a lot from the Asian crisis — that one-size-fits-all doesn’t work and that you have to adapt to the constraints of the country,” Mr. Strauss-Kahn said.

In the current context, continuing the stimulus entails risks, according to some economists and politicians, like impoverishing future taxpayers, creating excessive reliance on foreign creditors, keeping unproductive banks afloat and even stoking inflation.

Some economists are worried that the splurge in government spending could push the public finances of some countries close to the brink. Rising deficits have caused strains in bond markets, reflecting worries about the possibility of default and the ability of investors to digest the surge in supply.

In Europe, borrowers like Ireland and Greece have come under particular strain. There has been speculation that the government in Britain — where the budget deficit is projected to rise above 13 percent of gross domestic product next year — may face more severe balance of payments difficulties.

A recent report by Variant Perception, a research firm based in Charlotte, N.C., said the British fiscal situation was “already on a par with some of the worst financial crises in the postwar period that have precipitated currency crises.”

Mr. Strauss-Kahn acknowledged the dangers. “I understand the concerns about deficits and they are not unfounded,” he said. “Defaults, of course, are a concern, but they are not likely.”

He stressed that in the event of extreme strains in government bond markets, systemically important borrowers would find support either from multilateral lenders or central banks.

He also acknowledged concerns about commercial banks becoming too dependent on ultracheap financing from the major central banks.

Over all, he said, the fund was more confident about the global outlook than it was in September, when it last released economic projections. This suggests that, excluding a dip in activity in December, it would raise its key forecasts in the update in January. “The U.S. recovery appears to be stronger than we thought in September,” he said. “What I see in the global figures now is that things are moving faster than expected.”

Regarding currency adjustments, Mr. Strauss-Kahn said that the euro appeared “somewhat overvalued,” while the renminbi was “still undervalued.” A rise in the value of the Chinese currency would be a logical element in the country’s “shift from an export-driven economy to one that was more dependent on domestic demand,” he said.

The I.M.F. has been asked by the Group of 20 to study ways to allow banks to pay for their own bailouts. It is expected to report on the matter in April. One option it will examine is a tax on financial transactions.

Meanwhile, the announcement last week by Hungary that it would forgo the next installment of an I.M.F. loan was “the best news of the year,” Mr. Strauss-Kahn said. Other countries in the region — like Ukraine, Latvia, Romania and Serbia — still face “challenges,” he said.

After the crisis, the I.M.F. will continue to offer technical advice and training as well as taking “a more formal role linked to the G-20 as a kind of think tank and institution to help implement the follow-up to G-20 meetings,” he said. Further out, it may even become a lender of last resort.

Dubai’s Investment Troubles Leave Markets Unsteady

Dubai’s Investment Troubles Leave Markets Unsteady

Published: November 27, 2009

HONG KONG — Stock markets fell across Asia on Friday as investors were spooked by news this week that Dubai World, the emirate’s main investment vehicle, was seeking to suspend repayments on all or part of its $59 billion in debt.

Dubai, in debt from financing a building boom, is seeking to defer payments.

The Hang Seng index in Hong Kong fell 4.8 percent and South Korea’s key market gauge, the Kospi, dropped 4.7 percent. The Nikkei 225 index in Japan and the Taiex in Taiwan both sagged 3.2 percent.

European markets, however, were flat, with the CAC 40 in Paris and the FTSE 100 in London turning a few points higher. The three major European markets all fell more than 3 percent on Thursday. Wall Street is expected to open sharply lower as investors there try to play catch up. American markets will be open for a half-day, after being closed Thursday for Thanksgiving.

The dollar gained against the euro, and crude oil prices fell $3.68 to $74.28 in premarket trading in New York. Treasury prices rose.

In the Asian markets, banks and construction firms were among the biggest losers, even as many companies issued statements declaring they had little or no direct exposure to the Dubai World debt.

European banks may be hit hardest if Dubai World cannot meet its obligations, according to a research note Friday from Credit Suisse. The Swiss bank estimated that European banks could have a total exposure of 13 billion euros.

Bloomberg News, citing a report by JPMorgan Chase and Company, said that the Royal Bank of Scotland Group underwrote more loans than any institution to Dubai World, the state company seeking to reschedule debt, while HSBC Holdings had the most at risk in the United Arab Emirates.

RBS, the largest U.K. government-controlled bank, arranged $2.3 billion, or 17 percent, of Dubai World loans since January 2007, JPMorgan said in the report, citing Dealogic data.

The turmoil was touched off by Wednesday’s announcement from Dubai, one of the seven members of the United Arab Emirates, that it was asking banks to allow Dubai World to suspend its debt repayments for six months. European markets reacted negatively to the news Thursday.

Dubai’s move — the global high-finance equivalent of a homeowner asking the bank to allow six months of skipped mortgage payments, presumably because the homeowner was out of cash — sowed fear of a contagion of instability that could roil markets that are only now recovering from the near cataclysm of the last year.

“This has sent shockwaves through the markets, even though the problems in Dubai have been known about for two years,” Emil Wolter, a Hong Kong-based strategist the Royal Bank of Scotland, said by phone from Paris.

“But it is not the trigger for a brand-new crisis. Yes, the magnitude of the situation is dramatic for Dubai. But Dubai is not America — and a property crisis in Dubai will not cause the same global crisis as a property crisis in the States.”

Some market experts noted, for instance, that while banks that have lent money to Dubai World could suffer significant losses if the company were to default on all or part of its debt, worries about the sovereign debt of oil-rich Middle Eastern countries were unfounded.

Paul Schulte, head of multi-strategy research at Nomura in Hong Kong commented in a note on Friday: “Dubai was a carbon copy of Thailand’s disastrous foray as an ‘international financial center’ in the 1990s. Happily, the U.A.E. has oil. Thailand did not.”

Still, the news had companies scrambling Friday as their stock prices dropped.

In Hong Kong, HSBC and Standard Chartered — British banks that both have large operations in the Middle East — fell 7.6 percent and 8.6 percent, respectively. Both declined Friday to comment on what exposure they had to Dubai World. Standard Chartered said it would issue a statement “if there was anything material to disclose.”

Mr. Schulte said he believed the two banks had “insignificant exposure to Dubai.”

Chinese banking giants including ICBC, Bank of China and Bank of Communications said they had no exposure, Reuters reported, but their shares all dropped.

In Japan, Sumitomo Mitsui Financial Group fell 3.7 percent, Mizuho Financial dropped 3.9 percent and Mitsubishi UFJ 2.2 percent, though none would say how large their exposures were, according to Bloomberg News. Taiwan’s fourth-ranked Mega Financial said it had exposure to Dubai World loans and was trying to find out how much.

Real estate and construction firms of varying sizes were also scrambling to assess the impact. In India, for example, Reuters reported that the chairman of realty firm Omaxe said the company had an exposure of 450 million rupees, or $9.6 million, through a joint venture with Dubai World’s property developer unit Nakheel, and was looking to exit the project.

And the South Korean builder C&T Samsung said it had stopped work on a $350 million bridge in the city after a unit of Dubai World halted payments, according to Bloomberg News.

Like many Western consumers during the good times, Dubai gorged on debt and borrowed too much to finance a building boom that has gone bust in the downturn.

“Dubai was fairly much the worst example of overextension. It had the worst debt per capita in the world by far,” Christopher Davidson, an expert in Gulf politics at Durham University in Britain, said Thursday. “I would like to put it down as a really enormous white elephant that doesn’t have much in common with the regular economy of a regular state.”

When credit markets froze last year, Dubai, like Iceland, found itself overextended. But Dubai, which has little oil, was backed by its Arab emirate neighbors, especially oil-rich Abu Dhabi — or so investors had assumed.

Saud Masud, head of research at UBS in Dubai, said Thursday that negotiators would feel pressure to reach some kind of deal to present to the markets before trading in the region resumes next week after the Eid holiday. The Dubai government’s total debt is estimated at about $80 billion, of which, Mr. Masud estimated, about two-thirds is held by local investors.

Mr. Schulte of Nomura commented in his note that, in his view, “it is not a matter of when but at what price Abu Dhabi will bail out Dubai.”

Mr. Wolter of RBS said he too believed Abu Dhabi would have no choice but to ultimately come to Dubai’s rescue. Until that becomes clear, though, he said, markets would remain extremely nervous.

Asian Stocks Fall Amid Dubai Fears

Asian Stocks Fall Amid Dubai Fears

Published: November 27, 2009
Filed at 7:22 a.m. ET

LONDON (AP) -- European stock markets regained their poise Friday but Asia fell sharply as investors weighed the impact that Dubai's trouble with $60 billion in debt would have on the global financial and economic recovery.

Sentiment among investors has been hit hard by Wednesday's news that Dubai World, a government investment company, has asked creditors if it can postpone its forthcoming payments until May. That stoked fears, mainly in Europe on Thursday, of a potential default and contagion around the global financial system, particularly in emerging markets.

Asian stocks were particularly badly hit as they played catch-up following the big losses in Europe in the previous session. Hong Kong's Hang Seng closed 1,075.91 points, or 4.8 percent, lower at 21,134.50, while South Korea's benchmark plummeted 4.7 percent to 1,524.50.

In Europe, the FTSE 100 index of leading British shares was down 14.18 points, or 0.3 percent, at 5,179.95, while Germany's DAX fell 13.08 points, or 0.2 percent, to 5,601.09. The CAC-40 in France was 15.02 points, or 0.4 percent, lower at 3,664.21. On Thursday, Europe's main indexes slid over 3 percent, with banks, especially those thought to have exposure to Dubai such as Barclays PLC, HSBC PLC and Standard Chartered PLC, particularly badly hit.

All eyes in Europe will be on Wall Street, which was closed Thursday for the Thanksgiving Holiday. Expectations are that it will open down but that the selling won't turn into a rout -- Dow futures were down 236 points, or 2.3 percent, at 10,206 while the broader Standard & Poor's 500 futures slid 31.1 points, or 2.8 percent, at 1,077.80.

''It is likely to take at least a few days before the implications of the impact of a possible default from Dubai are properly digested but for the present it seems that the market is seeing this negative news as a blow to the global recovery but not one that will push it off course,'' said Jane Foley, research director at

Across all markets, there is a growing awareness that investors may use the upcoming year-end to lock-in whatever profits have been made over the last 12 months.

''Market cynics have been looking for a correction in the equity market, which has blazed the trail in the past seven months,'' said David Buik, markets analyst at BGC Partners.

''However they have been unable to find sufficient reasons to nail their flag to the mast, by taking profits, whilst alternative asset classes were unattractive options -- well they certainly found an excuse yesterday with the Dubai debt debacle,'' he added.

Investors were also keeping a close eye on associated developments in the currency markets after the dollar slid to a new 14-year low of 84.81 yen.

However, the dollar climbed back off its lows to 86.46 yen amid mounting expectations that the Bank of Japan may intervene in the markets by buying dollars or selling yen after Japan's finance minister Hirohisa Fujii said he was ''extremely nervous'' about the movements in the yen and that the ''market had moved too far in one direction.''

On Thursday, the Swiss National Bank reportedly intervened to buy dollars to prevent the export-sapping appreciation of the Swiss franc. That seems to have worked -- for now, at least -- as the dollar has moved back above parity, trading 0.9 percent higher at 1.0118 Swiss francs.

The British pound has also been battered amid fears about the exposure of Britain's banks to the region. The pound was down 0.9 percent at $1.6375.

Another currency losing some of its shine was the euro, which fell 0.8 percent to $1.4906 -- in times of uncertainty the dollar is considered to be more of a safe haven currency. Investors are also concerned about the exposure of European banks to Dubai.

Elsewhere in Asia, Japan's Nikkei 225 stock average fell 301.72 points, or 3.2 percent, to 9,081.52 while Australia's index dropped 2.9 percent. China's main Shanghai stock measure was off 2.4 percent.

Oil, meanwhile, tracked developments in stock markets and benchmark crude for January delivery fell $3.79 to $74.17 a barrel in electronic trading on the New York Mercantile Exchange.


AP Business Writer Jeremiah Marquez in Hong Kong contributed to this report.

Lloyds rights issue: what it means for shareholders

Lloyds rights issue: what it means for shareholders
Lloyds Banking Group outlined details of its proposed £13.5 billion fund-raising today in what is set to be Britain's biggest ever rights issue.

Published: 2:19PM GMT 24 Nov 2009

Lloyds Banking Group
The group's 2.8 million army of private investors – the biggest shareholder base in the UK – now have to make up their mind whether to support the cash call. Our Q&A should help them decide.

Q: How is the bank proposing to raise the money?

 A: Through a rights issue – the selling of new shares in the company at a discount. Existing shareholders will be offered the new shares in proportion to their holdings.

Any not taken up may be bought by other investors, or ultimately the investment banks underwriting the process, which have pledged to mop up any unwanted shares to ensure Lloyds gets its money.

This fund-raising comes in addition to an £8.8 billion debt conversion offer that did not need shareholder approval and already went through yesterday.

Q: Why is Lloyds raising this cash?

A: The bank, which is 43pc owned by the taxpayer, wants to avoid taking part in the Government's toxic asset protection scheme (APS).

Under the original terms, Lloyds would have paid £15.6 billion to insure £260 billion in loans under the scheme – raising the taxpayer stake to 62pc. Royal Bank of Scotland, which is taking part in the APS, will end up being 84pc owned by the Government after it puts risky loans up for insurance.

But Lloyds will have to pay the Government a fee of £2.5 billion in return for the protection already provided by the taxpayer since the announcement of the asset protection scheme earlier this year

Q: What is the offer on the table for shareholders?

A: Lloyds is offering 1.34 new shares for every existing share owned at a deep discount of 37p each – a 59.5pc discount to last night's closing price and a 38.6pc discount to the bank's theoretical "ex-rights" price when the extra shares will be taken into account.

Q: How much will this cost the average shareholder?

A: The typical Lloyds investor owns 740 shares and will be offered the chance to maintain their stake by buying 991 new shares at a cost of £366.67.

Q: What happens now?

A: Shareholders will attend a company general meeting at the NEC in Birmingham on Thursday to vote on 12 resolutions which enable the rights issue to go ahead.

Either 50pc or 75pc of votes cast need to be in favour, depending on the individual resolution.

Q: What happens if the rights issue gets voted down?

A: It is the second time that Lloyds has gone cap in hand to shareholders recently, after HBOS – now part of Lloyds after last autumn's rescue takeover – tried to tap them for £4 billion in 2008, although this was only taken up by 8.3pc of investors.

But the latest plan is unlikely to meet with resistance, given the unsavoury alternative of taking part in the APS and handing majority control to the Government.

The Government – the biggest stakeholder in Lloyds – has also already said it will back the move and Lloyds is likely to have canvassed other big institutional shareholders. If it is not given the go ahead then it will have to go back to the drawing board and seek alternative ways of avoiding the APS or take part in the insurance scheme.

Q: In the event of the rights issue going ahead, what options do shareholders have?

A: Investors can buy the new shares they are offered at the discount price, therefore maintaining the proportion of the bank they own.

They can let their rights lapse and receive a cheque – for an estimated £315.84 for the average investor – from the bank in return when they are sold on the open market. But in this case, the holding they own will be reduced.

Another possible manoeuvre is "tail swallowing", where investors sell enough rights to the new shares as to allow them to take up as many shares as they can without paying out extra money.

For a typical Lloyds investor, this would work by selling the rights to 529 new shares under the offer for £169.28, allowing them to take up rights to their remaining 54 shares, at a cost of around £169.46, not including any potential broker fees.

Q: What is the timetable after the meeting?

A: If the fund-raising is backed by shareholders, the "nil-paid rights" – the right to buy the new discounted shares – will begin trading on the London Stock Exchange the following day, November 27, for a period of two weeks.

There are various deadlines for shareholders, depending on whether they have share certificates or not and if they are taking up their rights in full or "tail swallowing".

The latest deadline for any shareholder to take up rights in full is December 11, but some will have earlier deadlines and Lloyds will be writing to each investor with full details after Thursday's general meeting. The new shares will start being traded on the open market on December 14.

The underwriting banks will sell rights on behalf of those investors who choose to do nothing and they will receive a cheque.

Q: How many shareholders are there?

A: There are 2.8 million smaller investors, many of whom are former HBOS savers who picked up stock when Halifax demutualised more than a decade ago. The remaining shareholders are institutions such as pension funds and investment firms and, of course, the taxpayer.

Q: What will it cost the Government to take part?

A: The Government – or taxpayer – will have to fork out £5.7 billion net of an underwriting fee to maintain its stake at 43pc, on top of the mammoth £17 billion already pumped into the group.

Dubai is just a harbinger of things to come for sovereign debt

Dubai is just a harbinger of things to come for sovereign debt

By Jeremy Warner
Last updated: November 27th, 2009

Watch out. This may be just the beginning. In the scale of things, the debt problems of Dubai are little more than a flea bite. Dubai’s sovereign debts total “just” $80bn, which counts for nothing against the trillions being raised by advanced economies to plug fiscal deficits.

Dubai has been a one-way ticket of economic expansion until recently

Small wonder, though, that this minor tremor has sent such shock waves around the wider capital markets. The fear is that threatened default in this tiny desert kingdom is just a harginger of things to come for government debt markets as a whole. According to new estimates by Moody’s, the credit rating agency, the total stock of sovereign debt worldwide will have risen by nearly 50 per cent between 2007 and 2010 to $15.3 trillion. The great bulk of this increase comes not from irrelevant little states like Dubai, but from the big advanced economies – America, Europe, and Japan.

Perversely, they are for the time being beneficiaries of the “flight to safety” that trouble in Dubai has sparked. Government bond yields in the major advanced economies have fallen in response to the crisis in the Gulf. If experience of the banking crisis, when investors removed their money from one bank only to find that the one they had put it into looked just as dodgy, is anything to go by, this effect will not last.

Up until now, markets have assumed that the ruinous fiscal cost of addressing the financial and economic crisis was probably just about affordable to the major economies. That view may be about to be challenged.

Dubai's financial crisis: a Q&A

Dubai's financial crisis: a Q&A
Dubai, the gulf emirate that has grown explosively over the last decade, is now at the centre of markets' attention on fears that it could struggle to repay its debt.

By Richard Spencer in Dubai
Published: 8:55AM GMT 27 Nov 2009

Comments 2 | Comment on this article

Towering high above the Dubai skyline, Burj Dubai, the world's tallest man-made construction, edges closer to completion

Dubai ruling family has moved to calm investors' fear over its economic stability after stock markets tumbled around the world. 

Q. Where did Dubai go wrong? I thought it was in the "oil-rich Gulf"?

A. Dubai is part of the United Arab Emirates, seven city-states which have separate ruling families, separate budgets, but security, immigration and foreign policies in common. Abu Dhabi has nearly all the UAE's oil. To keep up, Dubai from the 1950s on diversified its economy into ports, trade, services and finance, largely successfully. But its liquidity-fuelled real estate and tourism binge in the last decade may have been one step too far.

Q. What is the extent of its problems?

A. The emirate has said it has $80bn of debts, though some analysts say the true figure could be double that. Dubai World, the state-owned holding company whose bail-out plans triggered the current crisis, has liabilities of about $60bn, though only part of that is debt. The main problem is its real estate subsidiary Nakheel, which has huge bonds coming due, including an Islamic bond for $3.5bn in December. It appears to have little cash flow to meet payments - as well as relying on debt, it also sold most developments off-plan, with new developments now on hold.

Q. The big market crash after Lehman Brothers folded was more than a year ago. Why has Dubai only just been hit?

A. The property crash hit Dubai at the time - house prices fell 50 pc in six months. Nakheel was known to be in trouble. But investors assumed that as a state-owned company it would not default on its debt. The government refused to issue detailed statements of how it was to handle Dubai World's debt problems, and rounded on those who said that the crash had undermined Dubai's development model.

This encouraged a belief that a rescue package was already in place, probably funded by Abu Dhabi. The statement on Wednesday that the government was asking for a six-month standstill on repayments implied the rescue was in doubt.

Q. Why hasn't Abu Dhabi come to Dubai's aid? It has the world's largest sovereign wealth fund.

A. Abu Dhabi has, via the federal central bank, bought one $10bn bond issued by the Dubai government earlier this year, and, via its own banks, bought another $5bn bond this week. But the latter came with a rider that it was not to be used for the Dubai World bail-out. This raises two questions: what are the other debts for which it is to be used? And how is the Dubai World debt to be met, even after the six-month delay, if Abu Dhabi will not fund the rescue package?

Q. What about other Dubai companies? How are they doing?

A. Dubai World owns DP World, the successful ports operator which bought P&O. Other arms of the Dubai government, and the ruling family's directly owned holding companies, also own successful companies such as Emirates Airlines and Jumeirah Hotels, as well as stakes in buildings and businesses around the world, including the London Stock Exchange. But the emirate's lack of transparency and relatively untested financial legal system means that no-one knows if these can be demanded as collateral against Dubai World and other government debts.

Q. Nevertheless, exposure of western banks to the debt seems quite small compared to the trillions of dollars to which we have become accustomed. Why the panic?

A. At the most basic level, fears that exposed banks will have to write down losses, and that both Dubai and Abu Dhabi may have to sell worldwide assets, has hit prices everywhere. At an "animal spirits" level, the disclosure of significant unforeseen problems in Dubai has refocused attention on where else might have hidden "black holes". The health of sovereign debt worldwide, already seen as the major financial issue for the next decade, is also being reexamined.

Q. Can Dubai survive?

A. Dubai is still seen as the premier place to do business in the Middle East and beyond. It is a preferred base for not just Arab but Pakistani, Iranian and even Indian businesses, due to the wider region's political uncertainty. Its reputation for liberal attitudes helps. But events this week have damaged its reputation for economic competence, which the emirate's rulers will now have to work hard to restore.