Europe's Crisis: Much Bigger Than Subprime, Worse Than U.S.
Posted Feb 27, 2009 08:00am EST
by Henry Blodget
John Mauldin, president of Millennium Wave Advisors, was among the few analysts whose forecasts for 2008 proved accurate. Mauldin, author of the popular "Thoughts from the Frontline" e-letter, joined us to discuss the economic situation in Eastern Europe.
Scroll down to read highlights from Mauldin's analysis, and click "more" to embed the video.
From The Business Insider:
If you think things are bad here, take a quick peek at what's going on across the pond:
The Telegraph: Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.
Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.
"This is the largest run on a currency in history," said Mr Jen.
In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.
Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets.
They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.
Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus.
A note from Strategic Energy, as quoted by John Mauldin:
"The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan -- and Turkey next -- and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country -- facing a 12% contraction in GDP after the collapse of steel prices -- is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5% in the fourth quarter. Protesters have smashed the treasury and stormed parliament.
"'This is much worse than the East Asia crisis in the 1990s,' said Lars Christensen, at Danske Bank. 'There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU.' Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4% in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9% before the end of this year. This is the sort of level that stokes popular revolt.
"The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc -- big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?"
This is why some folks think the dollar is going to remain strong over the coming months: Because the rest of the world is falling apart even faster than we are.
Just as the global economy wasn't "decoupled" at the beginning of 2007, however (when the majority of Wall Street strategists believed that it was), it's not "decoupled" now. So the collapse of Eastern Europe--and, with it, the Western European banks--would almost certainly jump across the pond.
John Mauldin summarizes:
Eastern Europe has borrowed an estimated $1.7 trillion, primarily from Western European banks. And much of Eastern Europe is already in a deep recession bordering on depression. A great deal of that $1.7 trillion is at risk, especially the portion that is in Swiss francs. It is a story that could easily be as big as the US subprime problem.
In Poland, as an example, 60% of mortgages are in Swiss francs. When times are good and currencies are stable, it is nice to have a low-interest Swiss mortgage. And as a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.
But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.
Austrian banks have lent $289 billion (230 billion euros) to Eastern Europe. That is 70% of Austrian GDP. Much of it is in Swiss francs they borrowed from Swiss banks. Even a 10% impairment (highly optimistic) would bankrupt the Austrian financial system, says the Austrian finance minister, Joseph Proll. In the US we speak of banks that are too big to be allowed to fail. But the reality is that we could nationalize them if we needed to do so. (And for the record, I favor nationalization and swift privatization. We cannot afford a repeat of Japan's zombie banks.)
The problem is that in Europe there are many banks that are simply too big to save. The size of the banks in terms of the GDP of the country in which they are domiciled is all out of proportion. For my American readers, it would be as if the bank bailout package were in excess of $14 trillion (give or take a few trillion). In essence, there are small countries which have very large banks (relatively speaking) that have gone outside their own borders to make loans and have done so at levels of leverage which are far in excess of the most leveraged US banks. The ability of the "host" countries to nationalize their banks is simply not there. They are going to have to have help from larger countries. But as we will see below, that help is problematical.
As John Mauldin explains, fixing the problem in Europe will be even more difficult than it is here:
This has the potential to be a real crisis, far worse than in the US. Without concerted action on the part of the ECB and the European countries that are relatively strong, much of Europe could fall further into what would feel like a depression. There is a problem, though. Imagine being a politician in Germany, for instance. Your GDP is down by 8% last quarter. Unemployment is rising. Budgets are under pressure, as tax collections are down. And you are going to be asked to vote in favor of bailing out (pick a small country)? What will the voters who put you into office think?
We are going to find out this year whether the European Union is like the Three Musketeers. Are they "all for one and one for all?" or is it every country for itself? My bet (or hope) is that it is the former. Dissolution at this point would be devastating for all concerned, and for the world economy at large. Many of us in the US don't think much about Europe or the rest of the world, but without a healthy Europe, much of our world trade would vanish.
However, getting all the parties to agree on what to do will take some serious leadership, which does not seem to be in evidence at this point. The US almost waited too long to respond to our crisis, but we had the "luxury" of only needing to get a few people to agree as to the nature of the problems (whether they were wrong or right is beside the point). And we have a central bank that could act decisively.
As I understand the European agreement, that situation does not exist in Europe. For the ECB to print money as the US and the UK (and much of the non-EU developed world) will do, takes agreement from all the member countries, and right now it appears the German and Dutch governments are resisting such an idea.
As I write this (on a plane on my way to Orlando) German finance minister Peer Steinbruck has said it would be intolerable to let fellow EMU members fall victim to the global financial crisis. "We have a number of countries in the eurozone that are clearly getting into trouble on their payments," he said. "Ireland is in a very difficult situation.
"The euro-region treaties don't foresee any help for insolvent states, but in reality the others would have to rescue those running into difficulty."
That is a hopeful sign. Ireland is indeed in dire straits, and is particularly vulnerable as it is going to have to spend a serious percentage of its GDP on bailing out its banks.
It is not clear how it will all play out. But there is real risk of Europe dragging the world into a longer, darker night. Their banks not only have exposure to our US foibles, much of which has already been written off, but now many banks will have to contend with massive losses from emerging-market loans, which could be even larger than the losses stemming from US problems. Plus, they are more leveraged.
(Subscribe to John Mauldin's newsletter here >)
http://finance.yahoo.com/tech-ticker/article/195065/Europe's-Crisis-Much-Bigger-Than-Subprime-Worse-Than-U.S.?tickers=ubs%20%20,cs,db,hbc
Thursday 5 March 2009
Even 'Dr. Doom' Is Scared: Economy Much Worse Than Roubini Predicted
Even 'Dr. Doom' Is Scared: Economy Much Worse Than Roubini Predicted
Posted Mar 02, 2009 01:35pm EST
by Aaron Task in Newsmakers, Recession
Fed Chairman Bernanke raised eyebrows (and, briefly, the market) last week when said there's a "reasonable prospect" the economy will bottom this year and be in recovery in 2010.
But Berkshire Hathaway's Warren Buffett disagrees: The economy "will be in shambles throughout 2009 and...probably well beyond," the Oracle of Omaha declared this weekend.
In sum, Buffett and much of the rest of humanity are just now coming around to Nouriel Robuini's way of thinking, the economist known as "Dr. Doom" is upping the ante on his longstanding bearish views.
A year ago Roubini was forecasting an 18-month recession with a U-shaped recovery; now, he's now expecting the downturn to last at least 24 months and possibly 36-months. He also sees rising risks of a Japanese-style L-shaped stagnation, i.e. a prolonged period with little or no economic growth.
"I was one of most bearish people [but] the economy has surprised the bears on the downside," says Roubini of NYU's Stern School and RGE Monitor. "What's happening in the world now is scary."
Indeed, while the U.S. economy contracted 6.2% in the fourth-quarter, Roubini's main concern is economic activity in much of the rest of the world is in much worse shape. And while he is often critical of U.S. policymakers - including over the stimulus package, Fed policy and bank bailouts - Roubini says "the rest of the world is way behind the curve," in terms of doing the "right things" to confront the worst economic crisis since the 1930s.
http://finance.yahoo.com/tech-ticker/article/197164/Even-'Dr.-Doom'-Is-Scared-Economy-Much-Worse-Than-Roubini-Predicted?tickers=%5Edji,%5Egspc,QQQQ,DIA,SPY
Posted Mar 02, 2009 01:35pm EST
by Aaron Task in Newsmakers, Recession
Fed Chairman Bernanke raised eyebrows (and, briefly, the market) last week when said there's a "reasonable prospect" the economy will bottom this year and be in recovery in 2010.
But Berkshire Hathaway's Warren Buffett disagrees: The economy "will be in shambles throughout 2009 and...probably well beyond," the Oracle of Omaha declared this weekend.
In sum, Buffett and much of the rest of humanity are just now coming around to Nouriel Robuini's way of thinking, the economist known as "Dr. Doom" is upping the ante on his longstanding bearish views.
A year ago Roubini was forecasting an 18-month recession with a U-shaped recovery; now, he's now expecting the downturn to last at least 24 months and possibly 36-months. He also sees rising risks of a Japanese-style L-shaped stagnation, i.e. a prolonged period with little or no economic growth.
"I was one of most bearish people [but] the economy has surprised the bears on the downside," says Roubini of NYU's Stern School and RGE Monitor. "What's happening in the world now is scary."
Indeed, while the U.S. economy contracted 6.2% in the fourth-quarter, Roubini's main concern is economic activity in much of the rest of the world is in much worse shape. And while he is often critical of U.S. policymakers - including over the stimulus package, Fed policy and bank bailouts - Roubini says "the rest of the world is way behind the curve," in terms of doing the "right things" to confront the worst economic crisis since the 1930s.
http://finance.yahoo.com/tech-ticker/article/197164/Even-'Dr.-Doom'-Is-Scared-Economy-Much-Worse-Than-Roubini-Predicted?tickers=%5Edji,%5Egspc,QQQQ,DIA,SPY
What Fuels The National Debt?
What Fuels The National Debt?
by Reem Heakal (Contact Author Biography)
First established in 1789 by an act of Congress, the United States Department of the Treasury is responsible for federal finances. This department was created in order to manage the expenditures and revenues of the U.S. government, and hence the means by which the state could raise money in order to function. Here we examine the responsibilities of the Treasury and the reasons and means by which it takes on debt.
Responsibilities of the Treasury
The U.S. Treasury is divided into two divisions: the departmental offices and the operating bureaus. The departments are mainly in charge of policy making and management of the Treasury, while the bureaus' duties are to take care of specific operations. Bureaus such as the Internal Revenue Service (IRS), which is responsible for tax collection, and the Bureau of Engraving and Printing (BEP), in charge of printing and minting all U.S. money, take care of the majority of the total work done by the Treasury. (For related reading, see Buy Treasuries Directly From The Fed.)
The primary tasks of the Treasury include:
The National Debt
A government creates budgets to determine how much it needs to spend to run a nation. Oftentimes, however, a government may run a budget deficit by spending more money than it receives in revenues from taxes (including customs duties and stamps). In order to finance the deficit, governments may seek to raise money by taking on debt, that is, by borrowing it from the public. The U.S. government first found itself in debt in 1790, after taking on the war debts following the Revolutionary War. Since then, the debt has been fueled by more war, economic recession and inflation. As such, the public debt is a result of accumulated budget deficits. (For more insight, read The Treasury And The Federal Reserve.)
The Role of Congress
Up until World War I, the U.S. government needed approval from Congress every time it wanted to borrow money from the public. Congress would determine the number of securities that could be issued, their maturity date and the interest they would pay. With the Second Liberty Bond Act of 1917, however, the U.S. Treasury was given a debt limit, or a ceiling of how much it could borrow from the public without seeking Congress' consent. The Treasury was also given the discretion to decide maturity dates, interest rate levels and the type of instruments that would be offered. The total amount of money that can be borrowed by the government without further authorization by Congress is known as the total public debt subject to limit. Any amount above this level has to receive additional approval from the legislative branch.
Who Owns the Debt?
The debt is sold in the form of securities to both domestic and foreign investors, as well as corporations and other governments. U.S. securities issued include Treasury bills (T-bills), notes and bonds as well as U.S. savings bonds. There are both short-term and long-term investment options, but short-term T-bills are offered regularly, as well as quarterly notes and bonds. When the debt instrument has matured, the Treasury can either pay the cash owed (including interest) or issue new securities.
Debt instruments issued by the U.S. government are considered to be the safest investments in the world because interest payments do not have to undergo yearly authorization by Congress. In fact, the money the Treasury uses to pay the interest is automatically made available by law.
The public debt is calculated on a daily basis. After receiving end-of-day reports from about 50 different sources (such as Federal Reserve Bank branches) regarding the amount of securities sold and redeemed that day, the Treasury calculates the total public debt outstanding, which is released the following morning. It represents the total marketable and non-marketable principal amount of securities outstanding (i.e. not including interest).
War Time
In times of war, a government needs more money to support the effort. To finance its needs, the U.S. government will often issue what are commonly known as war bonds. These bonds appeal to the nation's patriotism to raise money for a war effort. Following September 11, 2001, the U.S.A. Patriot Act was passed by Congress. Among other things, it authorized Federal agencies to initiate ways to combat global terrorism. To raise money for the "war on terrorism", the U.S. Treasury issued war bonds known as patriot bonds. These Series EE savings bonds hold a five-year maturity.
The U.S. Treasury has also become a key institution working with financial institutions to draft new policies aimed at battling counterfeiting and money laundering related to terrorism.
Conclusion
The public debt is a liability to the U.S. government, and the Bureau of Public Debt is responsible for the technical aspects of its financing. However, the only way to reduce debt is for the federal budget's expenditures to cease to exceed its revenues. Budget policy lies with the legislative branch of government, and thus, depending on the circumstances at the time of budget formulation, running a deficit may be the country's only choice.
For more insight, read Giants Of Finance: John Maynard Keynes.
by Reem Heakal, (Contact Author Biography)
http://www.investopedia.com/articles/04/011404.asp?partner=NTU3
by Reem Heakal (Contact Author Biography)
First established in 1789 by an act of Congress, the United States Department of the Treasury is responsible for federal finances. This department was created in order to manage the expenditures and revenues of the U.S. government, and hence the means by which the state could raise money in order to function. Here we examine the responsibilities of the Treasury and the reasons and means by which it takes on debt.
Responsibilities of the Treasury
The U.S. Treasury is divided into two divisions: the departmental offices and the operating bureaus. The departments are mainly in charge of policy making and management of the Treasury, while the bureaus' duties are to take care of specific operations. Bureaus such as the Internal Revenue Service (IRS), which is responsible for tax collection, and the Bureau of Engraving and Printing (BEP), in charge of printing and minting all U.S. money, take care of the majority of the total work done by the Treasury. (For related reading, see Buy Treasuries Directly From The Fed.)
The primary tasks of the Treasury include:
- The collection of taxes and custom duties
- The payment of all bills owed by the federal government
- The printing and minting of U.S. notes and U.S. coinage and stamps
- The supervision of state banks
- The enforcement of government laws including taxation policies
- Advising the government on both national and international economic, financial, monetary, trade and tax legislation
- The investigation and federal prosecution of tax evaders, counterfeiters and/or forgers
- The management of federal accounts and the national public debt
The National Debt
A government creates budgets to determine how much it needs to spend to run a nation. Oftentimes, however, a government may run a budget deficit by spending more money than it receives in revenues from taxes (including customs duties and stamps). In order to finance the deficit, governments may seek to raise money by taking on debt, that is, by borrowing it from the public. The U.S. government first found itself in debt in 1790, after taking on the war debts following the Revolutionary War. Since then, the debt has been fueled by more war, economic recession and inflation. As such, the public debt is a result of accumulated budget deficits. (For more insight, read The Treasury And The Federal Reserve.)
The Role of Congress
Up until World War I, the U.S. government needed approval from Congress every time it wanted to borrow money from the public. Congress would determine the number of securities that could be issued, their maturity date and the interest they would pay. With the Second Liberty Bond Act of 1917, however, the U.S. Treasury was given a debt limit, or a ceiling of how much it could borrow from the public without seeking Congress' consent. The Treasury was also given the discretion to decide maturity dates, interest rate levels and the type of instruments that would be offered. The total amount of money that can be borrowed by the government without further authorization by Congress is known as the total public debt subject to limit. Any amount above this level has to receive additional approval from the legislative branch.
Who Owns the Debt?
The debt is sold in the form of securities to both domestic and foreign investors, as well as corporations and other governments. U.S. securities issued include Treasury bills (T-bills), notes and bonds as well as U.S. savings bonds. There are both short-term and long-term investment options, but short-term T-bills are offered regularly, as well as quarterly notes and bonds. When the debt instrument has matured, the Treasury can either pay the cash owed (including interest) or issue new securities.
Debt instruments issued by the U.S. government are considered to be the safest investments in the world because interest payments do not have to undergo yearly authorization by Congress. In fact, the money the Treasury uses to pay the interest is automatically made available by law.
The public debt is calculated on a daily basis. After receiving end-of-day reports from about 50 different sources (such as Federal Reserve Bank branches) regarding the amount of securities sold and redeemed that day, the Treasury calculates the total public debt outstanding, which is released the following morning. It represents the total marketable and non-marketable principal amount of securities outstanding (i.e. not including interest).
War Time
In times of war, a government needs more money to support the effort. To finance its needs, the U.S. government will often issue what are commonly known as war bonds. These bonds appeal to the nation's patriotism to raise money for a war effort. Following September 11, 2001, the U.S.A. Patriot Act was passed by Congress. Among other things, it authorized Federal agencies to initiate ways to combat global terrorism. To raise money for the "war on terrorism", the U.S. Treasury issued war bonds known as patriot bonds. These Series EE savings bonds hold a five-year maturity.
The U.S. Treasury has also become a key institution working with financial institutions to draft new policies aimed at battling counterfeiting and money laundering related to terrorism.
Conclusion
The public debt is a liability to the U.S. government, and the Bureau of Public Debt is responsible for the technical aspects of its financing. However, the only way to reduce debt is for the federal budget's expenditures to cease to exceed its revenues. Budget policy lies with the legislative branch of government, and thus, depending on the circumstances at the time of budget formulation, running a deficit may be the country's only choice.
For more insight, read Giants Of Finance: John Maynard Keynes.
by Reem Heakal, (Contact Author Biography)
http://www.investopedia.com/articles/04/011404.asp?partner=NTU3
Wednesday 4 March 2009
Q&A: Should I buy into HSBC's rights issue?
From Times OnlineMarch 2, 2009
Q&A: Should I buy into HSBC's rights issue?
We answer the pressing questions for shareholders and borrowers as the bank announces plans to raise billionsKathryn Cooper
BANKING giant HSBC today asked shareholders to stump up £12.5 billion to help it through the economic downturn, but stockbrokers gave the rights issue a lukewarm reception.
Britain’s biggest bank announced the country’s largest-ever cash call alongside a 62 per cent fall in pre-tax profits to $9.3 billion (£6.5 billion). It also cut its dividend for the full year by 29 per cent.
However, the results contained some good news for mortgage borrowers: the bank said it would aim to lend £15 billion this year, double 2007’s total.
The announcement will raise hopes that the mortgage freeze that has prevented buyers getting into the property market could be starting to thaw.
Under the terms of the rights issue, shareholders will be offered five new shares for every 12 they already own at a reduced price of 254p, a discount of 48 per cent to Friday’s close of 491.25p.
Investors who do not take up their rights will see the value of their holding diluted because there will be more shares in issue.
We answer your questions.
Q: I’m a shareholder. Should I take up the rights?
A: HSBC shares are not as widely held as those of Halifax Bank of Scotland (now part of Lloyds Banking Group), but thousands of small investors will still have to decide whether to take part in the fund raising.
Expert opinion is divided on what they should do.
Jonathan Jackson, head of equities at stockbroker Killik & Co said: “The group says the rights issue enhances its ability to deal with the impact of an uncertain economic environment, and to respond to unforeseen events, whilst providing options in relation to opportunities for those with superior financial strength.
“However, we believe it is more a reflection of the sharp deterioration in the group’s markets and the prospect of continued weakness to come. Against this background, the market will continue to worry about the group’s capital position and we would continue to avoid the shares.”
However, Nick Raynor, investment adviser at The Share Centre, another broker, drew comfort from the fact that the issue will be ‘fully underwritten’ – in other words, investment banks will take up the shares if investors do not.
“If clients can afford to, they should take up the rights,” he said. “The issue should put HSBC in a strong position in that it should not need fresh capital from either the government, or Middle Eastern investors, as with Barclays.”
Q: What are my options?
A: The first option is simply to take up the shares. The second is to sell the entitlement, known as the nil-paid rights, in the market for cash (alternatively the investor could let the rights lapse, and receive a cheque at the end of the issue).
The third option is to 'tail swallow', or to take up as many rights as possible to leave the investor in a cash neutral position.
According to Richard Hunter of Hargreaves Lansdown Stockbrokers, you should ask if you are happy with how the company plans to use the money, and whether putting in more money would make your portfolio overly heavy in banks.
Q: Are rights issues a good thing?
A: It depends. A study by JP Morgan of rights issues between 1989 and 1994 suggested they are a signal to buy only if the economy is showing signs of a recovery.
On the other hand, a study by Morgan Stanley found that the bigger the rights issue, the better – which bodes well for HSBC’s huge cash call.
Q: I’m a borrower. Is this good news for me?
A: Yes, in the sense it shows some banks are still willing to lend. As well as doubling the amount of money available for new loans, HSBC said it lent £17.1 billion in 2008, up from £9.1 billion in 2007. Its share of the gross mortgage market also went up from 2.4 per cent to 7 per cent.
One of its big successes was Ratematcher, when it offered to match borrowers’ cheap two-year deals from rivals when they came up for renewal. This led to a 200 per cent increase in mortgage sales.
Q: I’m remortgaging. Is HSBC a good bet?
A: It has some market leading deals if you have a big deposit, although it is always worth shopping around.
It has a market-leading five-year fix at just 3.99 per cent with a £999 fee if you have equity of 40 per cent and want to borrow no more than £250,000. It also has a two-year fix at 2.99 per cent with a £599 fee on the same basis
http://www.timesonline.co.uk/tol/money/article5832350.ece
Q&A: Should I buy into HSBC's rights issue?
We answer the pressing questions for shareholders and borrowers as the bank announces plans to raise billionsKathryn Cooper
BANKING giant HSBC today asked shareholders to stump up £12.5 billion to help it through the economic downturn, but stockbrokers gave the rights issue a lukewarm reception.
Britain’s biggest bank announced the country’s largest-ever cash call alongside a 62 per cent fall in pre-tax profits to $9.3 billion (£6.5 billion). It also cut its dividend for the full year by 29 per cent.
However, the results contained some good news for mortgage borrowers: the bank said it would aim to lend £15 billion this year, double 2007’s total.
The announcement will raise hopes that the mortgage freeze that has prevented buyers getting into the property market could be starting to thaw.
Under the terms of the rights issue, shareholders will be offered five new shares for every 12 they already own at a reduced price of 254p, a discount of 48 per cent to Friday’s close of 491.25p.
Investors who do not take up their rights will see the value of their holding diluted because there will be more shares in issue.
We answer your questions.
Q: I’m a shareholder. Should I take up the rights?
A: HSBC shares are not as widely held as those of Halifax Bank of Scotland (now part of Lloyds Banking Group), but thousands of small investors will still have to decide whether to take part in the fund raising.
Expert opinion is divided on what they should do.
Jonathan Jackson, head of equities at stockbroker Killik & Co said: “The group says the rights issue enhances its ability to deal with the impact of an uncertain economic environment, and to respond to unforeseen events, whilst providing options in relation to opportunities for those with superior financial strength.
“However, we believe it is more a reflection of the sharp deterioration in the group’s markets and the prospect of continued weakness to come. Against this background, the market will continue to worry about the group’s capital position and we would continue to avoid the shares.”
However, Nick Raynor, investment adviser at The Share Centre, another broker, drew comfort from the fact that the issue will be ‘fully underwritten’ – in other words, investment banks will take up the shares if investors do not.
“If clients can afford to, they should take up the rights,” he said. “The issue should put HSBC in a strong position in that it should not need fresh capital from either the government, or Middle Eastern investors, as with Barclays.”
Q: What are my options?
A: The first option is simply to take up the shares. The second is to sell the entitlement, known as the nil-paid rights, in the market for cash (alternatively the investor could let the rights lapse, and receive a cheque at the end of the issue).
The third option is to 'tail swallow', or to take up as many rights as possible to leave the investor in a cash neutral position.
According to Richard Hunter of Hargreaves Lansdown Stockbrokers, you should ask if you are happy with how the company plans to use the money, and whether putting in more money would make your portfolio overly heavy in banks.
Q: Are rights issues a good thing?
A: It depends. A study by JP Morgan of rights issues between 1989 and 1994 suggested they are a signal to buy only if the economy is showing signs of a recovery.
On the other hand, a study by Morgan Stanley found that the bigger the rights issue, the better – which bodes well for HSBC’s huge cash call.
Q: I’m a borrower. Is this good news for me?
A: Yes, in the sense it shows some banks are still willing to lend. As well as doubling the amount of money available for new loans, HSBC said it lent £17.1 billion in 2008, up from £9.1 billion in 2007. Its share of the gross mortgage market also went up from 2.4 per cent to 7 per cent.
One of its big successes was Ratematcher, when it offered to match borrowers’ cheap two-year deals from rivals when they came up for renewal. This led to a 200 per cent increase in mortgage sales.
Q: I’m remortgaging. Is HSBC a good bet?
A: It has some market leading deals if you have a big deposit, although it is always worth shopping around.
It has a market-leading five-year fix at just 3.99 per cent with a £999 fee if you have equity of 40 per cent and want to borrow no more than £250,000. It also has a two-year fix at 2.99 per cent with a £599 fee on the same basis
http://www.timesonline.co.uk/tol/money/article5832350.ece
US banks may need more bail-outs, says Ben Bernanke
US banks may need more bail-outs, says Ben Bernanke
Stock markets across the world suffered a second day of turbulence as the Chairman of the Federal Reserve warned that the US Government may have to pour even more cash into the twin bail-outs of its financial and economic systems.
By Edmund Conway and Angela Monaghan
Last Updated: 9:37PM GMT 03 Mar 2009
Ben Bernanke said the White House would have to consider increasing the scope of its $750bn banking rescue package, as well as readying further aggressive measures to shore up the world's biggest economy. His warning to Congress came as shares in London slid to a new six-year low amid disquiet about the stability of Britain's banks following Monday's cash calls from HSBC and AIG.
The Fed Chairman also remarked that although the government had little choice but to rescue AIG with a further $30bn cash injection, the episode had made him "more angry" than any other episode in the past 18 months.
Until the financial system had been repaired the economy would not recover, he said, adding: "Without a reasonable degree of financial stability, a sustainable recovery will not occur. Although progress has been made on the financial front since last fall, more needs to be done."
The comments indicate that the US Treasury, which has put its weight behind a asset insurance scheme for bad assets much like the UK's asset protection scheme, will have to spend more than originally anticipated on rescuing the banks. The Obama administration has slated for up to $750bn in new support to be spent on the banking bail-out in its first budget.
"We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of stagnation," he said.
The comments saw the benchmark Dow Jones index of leading US stocks to drop 30 points, having dropped beneath the 7,000 mark on Monday for the first time in 12 years. It finished the day down 37.27 points, or 0.55pc, at 6726.02.
The FTSE 100 index closed down 113.74 points, or 3.14pc, at 3512.09.
A CBI study nevertheless showed that British companies were slightly more optimistic about their ability to obtain credit over the next three months in February. Their ability to place corporate paper also improved.
Stock markets across the world suffered a second day of turbulence as the Chairman of the Federal Reserve warned that the US Government may have to pour even more cash into the twin bail-outs of its financial and economic systems.
By Edmund Conway and Angela Monaghan
Last Updated: 9:37PM GMT 03 Mar 2009
Ben Bernanke said the White House would have to consider increasing the scope of its $750bn banking rescue package, as well as readying further aggressive measures to shore up the world's biggest economy. His warning to Congress came as shares in London slid to a new six-year low amid disquiet about the stability of Britain's banks following Monday's cash calls from HSBC and AIG.
The Fed Chairman also remarked that although the government had little choice but to rescue AIG with a further $30bn cash injection, the episode had made him "more angry" than any other episode in the past 18 months.
Until the financial system had been repaired the economy would not recover, he said, adding: "Without a reasonable degree of financial stability, a sustainable recovery will not occur. Although progress has been made on the financial front since last fall, more needs to be done."
The comments indicate that the US Treasury, which has put its weight behind a asset insurance scheme for bad assets much like the UK's asset protection scheme, will have to spend more than originally anticipated on rescuing the banks. The Obama administration has slated for up to $750bn in new support to be spent on the banking bail-out in its first budget.
"We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of stagnation," he said.
The comments saw the benchmark Dow Jones index of leading US stocks to drop 30 points, having dropped beneath the 7,000 mark on Monday for the first time in 12 years. It finished the day down 37.27 points, or 0.55pc, at 6726.02.
The FTSE 100 index closed down 113.74 points, or 3.14pc, at 3512.09.
A CBI study nevertheless showed that British companies were slightly more optimistic about their ability to obtain credit over the next three months in February. Their ability to place corporate paper also improved.
Dow Jones valuations are just getting tougher
Dow Jones valuations are just getting tougher
With the Dow Jones Industrial Average firmly under 7,000, the US stock market is now well below its early-1995 level, adjusting for changes in nominal GDP.
By Martin Hutchinson, breakingviews.com
Last Updated: 1:23PM GMT 03 Mar 2009
That suggests it is cheap, assuming growth prospects are as good as they were back then. But there is a risk to such a an analysis: too much fiscal and budgetary stimulus could bring on growth-stultifying inflation.
Fast back to December 5, 1996.
The Standard and Poor's 500 Index closed at 744.38. That evening, Fed Chairman Alan Greenspan decried the market's "irrational exuberance". On the S&P's close of 700.82 on Monday, the market is clearly exuberant no more.
It is not, however, exceptionally low. Greenspan announced a new easier monetary policy to Congress later in early 1995. That day, the Dow Jones average, which had been generally rising since 1990, first reached 4,000. Adjusting for the 95pc increase in nominal GDP since that time would give an equivalent Dow level today of around 7,800. That suggests that current levels are only somewhat below their long term trend, and that the 1996-2007 period represented a lengthy bubble.
As for the S&P 500, Standard and Poor's currently projects 2009 earnings on the index of $48.10. Over the 20-year period to 2008, it traded at an average of 19.4 times earnings. That would imply a current value of 933.14. That 20-year period however includes the 12-year bubble. Taking a longer-term average of around 15 times earnings gives a valuation of 721.5 - again, just slightly above the current level.
So, based on 1995 stock prices and long-term earnings considerations the market is just below a middling valuation. However that assumes US growth and earnings prospects are as good today as they were in 1995, or over the long-term average.
That's where doubts creep in. If the exceptional monetary stimulus since September produces inflation, which needs to be squeezed out, or the unprecedentedly large budget deficits in fiscal years 2009 and 2010 "crowd out" private investment, then growth and earnings prospects for the next few years would be below average.
In that event, the market as it stands today would be overvalued. Bailouts and stimulus can thus produce long-term uncertainty as well as short-term uplift.
For more agenda-setting financial insight, visit www.breakingviews.com
http://www.telegraph.co.uk/finance/breakingviewscom/4931436/Dow-Jones-valuations-are-just-getting-tougher.html
With the Dow Jones Industrial Average firmly under 7,000, the US stock market is now well below its early-1995 level, adjusting for changes in nominal GDP.
By Martin Hutchinson, breakingviews.com
Last Updated: 1:23PM GMT 03 Mar 2009
That suggests it is cheap, assuming growth prospects are as good as they were back then. But there is a risk to such a an analysis: too much fiscal and budgetary stimulus could bring on growth-stultifying inflation.
Fast back to December 5, 1996.
The Standard and Poor's 500 Index closed at 744.38. That evening, Fed Chairman Alan Greenspan decried the market's "irrational exuberance". On the S&P's close of 700.82 on Monday, the market is clearly exuberant no more.
It is not, however, exceptionally low. Greenspan announced a new easier monetary policy to Congress later in early 1995. That day, the Dow Jones average, which had been generally rising since 1990, first reached 4,000. Adjusting for the 95pc increase in nominal GDP since that time would give an equivalent Dow level today of around 7,800. That suggests that current levels are only somewhat below their long term trend, and that the 1996-2007 period represented a lengthy bubble.
As for the S&P 500, Standard and Poor's currently projects 2009 earnings on the index of $48.10. Over the 20-year period to 2008, it traded at an average of 19.4 times earnings. That would imply a current value of 933.14. That 20-year period however includes the 12-year bubble. Taking a longer-term average of around 15 times earnings gives a valuation of 721.5 - again, just slightly above the current level.
So, based on 1995 stock prices and long-term earnings considerations the market is just below a middling valuation. However that assumes US growth and earnings prospects are as good today as they were in 1995, or over the long-term average.
That's where doubts creep in. If the exceptional monetary stimulus since September produces inflation, which needs to be squeezed out, or the unprecedentedly large budget deficits in fiscal years 2009 and 2010 "crowd out" private investment, then growth and earnings prospects for the next few years would be below average.
In that event, the market as it stands today would be overvalued. Bailouts and stimulus can thus produce long-term uncertainty as well as short-term uplift.
For more agenda-setting financial insight, visit www.breakingviews.com
http://www.telegraph.co.uk/finance/breakingviewscom/4931436/Dow-Jones-valuations-are-just-getting-tougher.html
Gold: Warning for investors chasing short-term gains
Gold: Warning for investors chasing short-term gains
The scale of the recent moves in the gold price and the resulting publicity are reasons for caution.
Daniel Sacks of Investec Asset Management
Last Updated: 3:56PM GMT 03 Mar 2009
There is no doubt that gold is getting a lot of coverage in the media, among global macro investors and the real money community. The suggestion is that everyone is "long" – expecting the price to rise further – and that the move has become overextended on both an absolute and an historical basis.
However, while it is true that gold has reached record highs in most currencies, it is still $70 below its dollar high reached almost a year ago and, when adjusted for inflation (CPI), the high point reached in 1980 is the equivalent of over $2,500 an ounce.
The gold price may well continue to suffer further short-term falls as part of a general upward trend, as has already been the case during this rally. However, it does not appear that we are approaching the stress point that a market often reaches near the end of a sustained price move as the graph becomes parabolic.
Indeed, the positive gold price trend is being tempered by the drop-off in Indian and Middle Eastern jewellery demand flows. Conversely, as jewellery manufacturers’ stocks decline, their willingness to buy the dips may diminish the downward moves of gold.
Gold behaves like a currency – it can be traded globally at the same price and has adequate stocks to back it up – yet it cannot be printed. It must be mined at a cost. It is hence a real asset, which generally holds its value in inflationary conditions. Gold has typically done well during periods of rising inflation and negative real interest rates.
The only episode approaching the severity of the current recession and the accompanying shock to net worth came in the aftermath of the first oil shock of 1973-74. That led to negative real interest rates at the short end of the curve in the US for five years, to higher inflation and ultimately to a major bull market for gold. Encouragingly, the current gold price is still about 60pc below its mid-1980 peak in real terms.
Gold appears to be benefiting both from being the traditional hedge for inflation hawks (some of whom are now beginning to worry about the risk of hyperinflation) and from the mistrust of some investors towards cash assets and government obligations during the current financial crisis.
It would probably require only a minority of investors to believe that they need to continue to allocate more towards gold to have a significant price impact.
Even though inflation risks remain low in our view, we believe that these forces are likely to continue to support gold prices.
Daniel Sacks is co-portfolio manager, Global Gold and Precious Metals at Investec
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/4931336/Gold-Warning-for-investors-chasing-short-term-gains.html
Comment: A highly speculative asset for the uninitiated.
The scale of the recent moves in the gold price and the resulting publicity are reasons for caution.
Daniel Sacks of Investec Asset Management
Last Updated: 3:56PM GMT 03 Mar 2009
There is no doubt that gold is getting a lot of coverage in the media, among global macro investors and the real money community. The suggestion is that everyone is "long" – expecting the price to rise further – and that the move has become overextended on both an absolute and an historical basis.
However, while it is true that gold has reached record highs in most currencies, it is still $70 below its dollar high reached almost a year ago and, when adjusted for inflation (CPI), the high point reached in 1980 is the equivalent of over $2,500 an ounce.
The gold price may well continue to suffer further short-term falls as part of a general upward trend, as has already been the case during this rally. However, it does not appear that we are approaching the stress point that a market often reaches near the end of a sustained price move as the graph becomes parabolic.
Indeed, the positive gold price trend is being tempered by the drop-off in Indian and Middle Eastern jewellery demand flows. Conversely, as jewellery manufacturers’ stocks decline, their willingness to buy the dips may diminish the downward moves of gold.
Gold behaves like a currency – it can be traded globally at the same price and has adequate stocks to back it up – yet it cannot be printed. It must be mined at a cost. It is hence a real asset, which generally holds its value in inflationary conditions. Gold has typically done well during periods of rising inflation and negative real interest rates.
The only episode approaching the severity of the current recession and the accompanying shock to net worth came in the aftermath of the first oil shock of 1973-74. That led to negative real interest rates at the short end of the curve in the US for five years, to higher inflation and ultimately to a major bull market for gold. Encouragingly, the current gold price is still about 60pc below its mid-1980 peak in real terms.
Gold appears to be benefiting both from being the traditional hedge for inflation hawks (some of whom are now beginning to worry about the risk of hyperinflation) and from the mistrust of some investors towards cash assets and government obligations during the current financial crisis.
It would probably require only a minority of investors to believe that they need to continue to allocate more towards gold to have a significant price impact.
Even though inflation risks remain low in our view, we believe that these forces are likely to continue to support gold prices.
Daniel Sacks is co-portfolio manager, Global Gold and Precious Metals at Investec
http://www.telegraph.co.uk/finance/personalfinance/investing/gold/4931336/Gold-Warning-for-investors-chasing-short-term-gains.html
Comment: A highly speculative asset for the uninitiated.
HSBC's cash call provides reality check despite Asian promise
HSBC's cash call provides reality check despite Asian promise
HSBC'S awful results are an important reality check for everyone caught up in the global financial crisis.
By Damian Reece
Last Updated: 5:57AM GMT 03 Mar 2009
While our attention here has been focused on domestic trouble and strife to do with which bankers got paid what and when, the world economy continues to go to pot.
The bank's results are truly awful, even before the £17.5bn of write downs including its disastrous US business, but then so is the global financial system in case you'd forgotten.
A £12.5bn rights issue reveals a bank extremely worried about the future, but then so it ought to be.
Its senior executives are foregoing bonuses for 2008 but then so they should, having overseen a company that on the best measure saw an 18pc fall in profits and the worst a 62pc drop.
Stephen Green, HSBC's chairman, sought to explain the causes of the current crisis on Monday with reference to the triangle of Western consumer economies gorging themselves on debt supported by the surpluses of the Far Eastern producer nations and the oil and mineral rich resource nations.
Last year that once golden triangle fast became a Bermuda triangle with the likes of HSBC a piece of the wreckage bobbing around in the ocean – afloat at least and not completely sunk.
These results are no cause to sing out in celebration but neither are they a death knell.
This is a UK-based bank still going without government aid and able to raise a record £12.5bn from investors. It has at least a veneer of credibility left, enough for it to talk of opportunities to pick off acquisitions as competitors seek safe harbour.
The 19pc fall in its shares yesterday reflects the fact that, understandably, pessimists win every argument at the moment.
The outlook is bad enough that no one can be sure that HSBC won't need the financial help of at least one government in future. Markets have got used to expecting the worst only to see those expectations all too often surpassed so they are in no mood to give anyone the benefit of the doubt.
What is in no doubt, however, will be the shift in economic power from West to East as a result of this crisis, an axis that HSBC straddles.
Even now Asia, except Japan, is expected to grow 4.6pc in 2009, a terrible result for the region but at least it's in positive territory in these worst of times.
The region still has the surpluses to stimulate domestic and regional demand while retaining the firepower to buy up the West's distressed assets at knock down prices.
All this at a time when the likes of the UK and the US will have to pay off debt and right the wrongs of their credit binge, further limiting economic recovery here.
http://www.telegraph.co.uk/finance/comment/damianreece/4929190/HSBCs-cash-call-provides-reality-check-despite-Asian-promise.html
HSBC'S awful results are an important reality check for everyone caught up in the global financial crisis.
By Damian Reece
Last Updated: 5:57AM GMT 03 Mar 2009
While our attention here has been focused on domestic trouble and strife to do with which bankers got paid what and when, the world economy continues to go to pot.
The bank's results are truly awful, even before the £17.5bn of write downs including its disastrous US business, but then so is the global financial system in case you'd forgotten.
A £12.5bn rights issue reveals a bank extremely worried about the future, but then so it ought to be.
Its senior executives are foregoing bonuses for 2008 but then so they should, having overseen a company that on the best measure saw an 18pc fall in profits and the worst a 62pc drop.
Stephen Green, HSBC's chairman, sought to explain the causes of the current crisis on Monday with reference to the triangle of Western consumer economies gorging themselves on debt supported by the surpluses of the Far Eastern producer nations and the oil and mineral rich resource nations.
Last year that once golden triangle fast became a Bermuda triangle with the likes of HSBC a piece of the wreckage bobbing around in the ocean – afloat at least and not completely sunk.
These results are no cause to sing out in celebration but neither are they a death knell.
This is a UK-based bank still going without government aid and able to raise a record £12.5bn from investors. It has at least a veneer of credibility left, enough for it to talk of opportunities to pick off acquisitions as competitors seek safe harbour.
The 19pc fall in its shares yesterday reflects the fact that, understandably, pessimists win every argument at the moment.
The outlook is bad enough that no one can be sure that HSBC won't need the financial help of at least one government in future. Markets have got used to expecting the worst only to see those expectations all too often surpassed so they are in no mood to give anyone the benefit of the doubt.
What is in no doubt, however, will be the shift in economic power from West to East as a result of this crisis, an axis that HSBC straddles.
Even now Asia, except Japan, is expected to grow 4.6pc in 2009, a terrible result for the region but at least it's in positive territory in these worst of times.
The region still has the surpluses to stimulate domestic and regional demand while retaining the firepower to buy up the West's distressed assets at knock down prices.
All this at a time when the likes of the UK and the US will have to pay off debt and right the wrongs of their credit binge, further limiting economic recovery here.
http://www.telegraph.co.uk/finance/comment/damianreece/4929190/HSBCs-cash-call-provides-reality-check-despite-Asian-promise.html
The Case for Dumping Everything Now
The Case for Dumping Everything Now
By Dan Caplinger March 3, 2009 Comments (14)
By now, you must be tired of hearing about how, after witnessing the worst stock market losses in generations, you should simply have faith and keep investing. Common sense says it's ridiculous. Why should you throw good money into the market right now, when no one has a clue what the future will look like mere weeks from now, let alone in the years to come?
You don't need me to come up with reasons why you should get out now. Just take a look at the latest news:
All the government action we've seen over the past six months just seems to have made a bad situation worse, shaking the foundations of our capitalist system to the core.
Even after all the damage we've seen in the housing market, home prices could easily keep falling further than they have already.
Stocks fell Monday to their lowest levels in 12 years, and with November's lows broken, some believe that's just the start of another major downturn that could lop another 40% off the major indexes.
Given all that, the argument in favor of selling everything for whatever you can get basically boils down to three points:
Sounds reasonable. Sign me up.
Oh, come on! As a skeptic and a lover of conspiracy theories, part of me really sympathizes with this train of thought. Having dropped so far so quickly, there's no apparent reason why the market couldn't drop more. Plenty of investors have lost so much already that they may well not be able to afford to take any more risk with their life savings. Whether mere greed or a simple failure to understand the risk of the stock market got them into stocks, it's unfortunate that so many people have gotten hurt by these declines.
But all this pessimism really just looks like an amplified version of what you always see at market extremes. When stocks are flying, as they were in 2007, no one thinks they'll ever stop. Once they've crashed and burned, as they did in 1982 and 2002, people think they'll never come back.
Change does happen
That's not to say that every stock will survive. Countless firms went under during the Great Depression. Among the Nifty 50 stocks of the 1960s and 1970s, companies like Polaroid saw their huge rises turn to declines. Polaroid went nowhere for decades before eventually declaring bankruptcy.
Similarly, this time around, many companies will never see their former strength restored. I don't know whether big financial firms such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) will share Polaroid's fate. They might.
But like so many times in the past, they may well recover from the abyss and deliver great returns. Consider how some of these Nifty 50 stocks -- the same ones that did so badly in the 1973-74 bear market -- did when they finally bounced back:
Nifty 50 Stock
Return 1/1/1973 to 12/31/1974
Return 1/1/1975 to 3/2/2009
Coca-Cola (NYSE: KO)
(62.8%)
9,350%
IBM (NYSE: IBM)
(45.6%)
2,046%
3M (NYSE: MMM)
(44.4%)
2,216%
Procter & Gamble (NYSE: PG)
(24.2%)
4,732%
Disney (NYSE: DIS)
(82.2%)
4,621%
Source: Yahoo! Finance.
These stocks may again prove to be tomorrow's leaders -- or get replaced by others. But the important thing for investors is that some companies will survive to see their stocks flourish.
As attractive as the case for dumping everything now may seem, it's not the right move. Unless you truly believe the end of everything is nigh, betting on the long-term recovery of the world economy is the best choice -- and it's likely to pay off, given enough time.
For more on getting your portfolio back on track, read about:
The ultimate safe-haven investment.
Is it finally time to buy bank stocks?
Investing in the best companies on Earth.
Fool contributor Dan Caplinger is willing to go down with the ship -- at least with some of his money. He doesn't own shares of the companies mentioned in this article. 3M, Coca-Cola, and Disney are Motley Fool Inside Value selections. Disney is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy will never dump you.
Read/Post Comments (14)
http://www.fool.com/investing/value/2009/03/03/the-case-for-dumping-everything-now.aspx
By Dan Caplinger March 3, 2009 Comments (14)
By now, you must be tired of hearing about how, after witnessing the worst stock market losses in generations, you should simply have faith and keep investing. Common sense says it's ridiculous. Why should you throw good money into the market right now, when no one has a clue what the future will look like mere weeks from now, let alone in the years to come?
You don't need me to come up with reasons why you should get out now. Just take a look at the latest news:
All the government action we've seen over the past six months just seems to have made a bad situation worse, shaking the foundations of our capitalist system to the core.
Even after all the damage we've seen in the housing market, home prices could easily keep falling further than they have already.
Stocks fell Monday to their lowest levels in 12 years, and with November's lows broken, some believe that's just the start of another major downturn that could lop another 40% off the major indexes.
Given all that, the argument in favor of selling everything for whatever you can get basically boils down to three points:
- The cyclical nature of the economy has ended, and there's no hope that businesses can grow or even come close to their past glory.
- Everything that everyone has done to try to support the economy will ultimately fail.
- Once everyone figures out that the only thing holding up this house of cards is unsustainable government spending, people will abandon the current economic system, and all the financial assets that previously held so much value will become worthless.
Sounds reasonable. Sign me up.
Oh, come on! As a skeptic and a lover of conspiracy theories, part of me really sympathizes with this train of thought. Having dropped so far so quickly, there's no apparent reason why the market couldn't drop more. Plenty of investors have lost so much already that they may well not be able to afford to take any more risk with their life savings. Whether mere greed or a simple failure to understand the risk of the stock market got them into stocks, it's unfortunate that so many people have gotten hurt by these declines.
But all this pessimism really just looks like an amplified version of what you always see at market extremes. When stocks are flying, as they were in 2007, no one thinks they'll ever stop. Once they've crashed and burned, as they did in 1982 and 2002, people think they'll never come back.
Change does happen
That's not to say that every stock will survive. Countless firms went under during the Great Depression. Among the Nifty 50 stocks of the 1960s and 1970s, companies like Polaroid saw their huge rises turn to declines. Polaroid went nowhere for decades before eventually declaring bankruptcy.
Similarly, this time around, many companies will never see their former strength restored. I don't know whether big financial firms such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) will share Polaroid's fate. They might.
But like so many times in the past, they may well recover from the abyss and deliver great returns. Consider how some of these Nifty 50 stocks -- the same ones that did so badly in the 1973-74 bear market -- did when they finally bounced back:
Nifty 50 Stock
Return 1/1/1973 to 12/31/1974
Return 1/1/1975 to 3/2/2009
Coca-Cola (NYSE: KO)
(62.8%)
9,350%
IBM (NYSE: IBM)
(45.6%)
2,046%
3M (NYSE: MMM)
(44.4%)
2,216%
Procter & Gamble (NYSE: PG)
(24.2%)
4,732%
Disney (NYSE: DIS)
(82.2%)
4,621%
Source: Yahoo! Finance.
These stocks may again prove to be tomorrow's leaders -- or get replaced by others. But the important thing for investors is that some companies will survive to see their stocks flourish.
As attractive as the case for dumping everything now may seem, it's not the right move. Unless you truly believe the end of everything is nigh, betting on the long-term recovery of the world economy is the best choice -- and it's likely to pay off, given enough time.
For more on getting your portfolio back on track, read about:
The ultimate safe-haven investment.
Is it finally time to buy bank stocks?
Investing in the best companies on Earth.
Fool contributor Dan Caplinger is willing to go down with the ship -- at least with some of his money. He doesn't own shares of the companies mentioned in this article. 3M, Coca-Cola, and Disney are Motley Fool Inside Value selections. Disney is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy will never dump you.
Read/Post Comments (14)
http://www.fool.com/investing/value/2009/03/03/the-case-for-dumping-everything-now.aspx
Tuesday 3 March 2009
What's Next? Dow 5,000?
What's Next? Dow 5,000?
By Morgan Housel March 2, 2009 Comments (16)
Recs
35
Stock Advisor
Since 2002, Motley Fool Stock Advisor has outperformed the S&P 500 by 29 percentage points. Join David and Tom Gardner in Stock Advisor today.
If someone told you one year ago that Bear Stearns, Fannie Mae, Freddie Mac, AIG, Washington Mutual, Wachovia, Lehman Brothers, Merrill Lynch, and Citigroup (NYSE: C) would be either bankrupt or saved while en route to bankruptcy, most people wouldn't have taken you seriously.
And as recently as, I don't know, last month, if you told anyone the Dow would be on the path to some obscenely low number -- we'll call it Dow 5,000 -- most wouldn't take you all that seriously, either.
Well, Fools, meet insanity. It's quickly becoming the new reality.
What's notable about today's trip below Dow 7,000? Not that 7,000, or 5,000, is really of any significance. Other than being a psychologically painful barrier, the Dow's short-term fluctuations are of little importance.
What's notable is that the mood doesn't seem to be the panicky, 10% daily drops, sell-now-and-ask-questions later mood we saw last fall. Not that anyone's claiming to speak for Mr. Market, but the mood now seems to be based on coming to terms with the financial sector's insolvency. In other words, as markets keep falling, the selling is getting more and more rational.
Falling hardToday's big news, for example, was word that AIG (NYSE: AIG) was back at the trough, hoping another $30 billion of taxpayer dole will do the trick. This after reporting the largest quarterly loss in history -- any company's history -- of $61.7 billion. Do the math: that's $7,762 per second.
Problem is, this is AIG's fourth bailout in six months. Citigroup is on round three. Bank of America (NYSE: BAC) is hoping bailout part deux will be enough.
That's what's underscoring the market's plunge right now: Every "plan" so far has been a finger-in-the-dike attempt at plugging a hole that's getting exponentially larger. On the other end of the spectrum, Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) actually want to pay their TARP money back because -- surprise -- Uncle Sam, as it turns out, can be the ficklest of business partners.
The original idea was that by preventing systemic collapse, private capital would eventually be lured back into financial markets, hence paving the way for recovery. But since every few weeks the rules change, the strategy shifts, and the dilution gets bigger, no investor in their right mind wants to dip their toes in.
Can they handle the truth? General Motors (NYSE: GM), Chrysler, and Ford (NYSE: F) had to submit turnaround plans and a general strategy as to how they'll dig out of their hole. No one really takes these goals seriously, but at least there's a strategy. There are clear-cut rules and deadlines that need to be met. There's clarity, if you want to call it that.
Banks don't have anything remotely close. It's a free-for-all of, "A few billion here, a couple billion there. Change the rules here. Add more terms there." Investors, rightfully so, want nothing to do with it. No one wants to play until they know the rules.
Until there's a coherent plan, (which I think means nationalization of at least a few of the walking dead), investors will stay a million miles away from financial investments -- even if assets look undeniably cheap. As long as that's the case, banks will crumble; As long as that's the case, the economy will follow suit; And as long as that's the case, stock indices won't be far behind. And around and around we go.
Where to now? Last October, at the pinnacle of market hysteria, we ran a poll asking Fools how low the Dow might go. 66% of respondents didn't think it would dip below 7,500.
In the spirit of the wisdom of crowds, we'll try it again: How low do you think the Dow will go?
http://www.fool.com/investing/dividends-income/2009/03/02/whats-next-dow-5000.aspx
Related article: Mon, 2/9/09,
Stocks to fall AT LEAST another 40%! Here's why ...
By Morgan Housel March 2, 2009 Comments (16)
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If someone told you one year ago that Bear Stearns, Fannie Mae, Freddie Mac, AIG, Washington Mutual, Wachovia, Lehman Brothers, Merrill Lynch, and Citigroup (NYSE: C) would be either bankrupt or saved while en route to bankruptcy, most people wouldn't have taken you seriously.
And as recently as, I don't know, last month, if you told anyone the Dow would be on the path to some obscenely low number -- we'll call it Dow 5,000 -- most wouldn't take you all that seriously, either.
Well, Fools, meet insanity. It's quickly becoming the new reality.
What's notable about today's trip below Dow 7,000? Not that 7,000, or 5,000, is really of any significance. Other than being a psychologically painful barrier, the Dow's short-term fluctuations are of little importance.
What's notable is that the mood doesn't seem to be the panicky, 10% daily drops, sell-now-and-ask-questions later mood we saw last fall. Not that anyone's claiming to speak for Mr. Market, but the mood now seems to be based on coming to terms with the financial sector's insolvency. In other words, as markets keep falling, the selling is getting more and more rational.
Falling hardToday's big news, for example, was word that AIG (NYSE: AIG) was back at the trough, hoping another $30 billion of taxpayer dole will do the trick. This after reporting the largest quarterly loss in history -- any company's history -- of $61.7 billion. Do the math: that's $7,762 per second.
Problem is, this is AIG's fourth bailout in six months. Citigroup is on round three. Bank of America (NYSE: BAC) is hoping bailout part deux will be enough.
That's what's underscoring the market's plunge right now: Every "plan" so far has been a finger-in-the-dike attempt at plugging a hole that's getting exponentially larger. On the other end of the spectrum, Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) actually want to pay their TARP money back because -- surprise -- Uncle Sam, as it turns out, can be the ficklest of business partners.
The original idea was that by preventing systemic collapse, private capital would eventually be lured back into financial markets, hence paving the way for recovery. But since every few weeks the rules change, the strategy shifts, and the dilution gets bigger, no investor in their right mind wants to dip their toes in.
Can they handle the truth? General Motors (NYSE: GM), Chrysler, and Ford (NYSE: F) had to submit turnaround plans and a general strategy as to how they'll dig out of their hole. No one really takes these goals seriously, but at least there's a strategy. There are clear-cut rules and deadlines that need to be met. There's clarity, if you want to call it that.
Banks don't have anything remotely close. It's a free-for-all of, "A few billion here, a couple billion there. Change the rules here. Add more terms there." Investors, rightfully so, want nothing to do with it. No one wants to play until they know the rules.
Until there's a coherent plan, (which I think means nationalization of at least a few of the walking dead), investors will stay a million miles away from financial investments -- even if assets look undeniably cheap. As long as that's the case, banks will crumble; As long as that's the case, the economy will follow suit; And as long as that's the case, stock indices won't be far behind. And around and around we go.
Where to now? Last October, at the pinnacle of market hysteria, we ran a poll asking Fools how low the Dow might go. 66% of respondents didn't think it would dip below 7,500.
In the spirit of the wisdom of crowds, we'll try it again: How low do you think the Dow will go?
http://www.fool.com/investing/dividends-income/2009/03/02/whats-next-dow-5000.aspx
Related article: Mon, 2/9/09,
Stocks to fall AT LEAST another 40%! Here's why ...
Dow slides below 7,000 for first time in twelve years
Dow slides below 7,000 for first time in twelve years
The Dow Jones below 7,000 for the first time in twelve years on Monday after American International Group posted the largest quarterly loss in US corporate history.
By Telegraph Staff
Last Updated: 3:59PM GMT 02 Mar 2009
Dow Jones Industrial Average slides below 7,000 for first time in twelve years.
The blue chip index fell 144.8 - or 2pc - to 6918 points within minutes of opening after AIG reported a $61.7bn (£44bn) fourth-quarter loss and the US government said it would give the insurer another $30bn in loans. This is in addition to the $150bn it has already given the ailing insurer.
Wall Street's concerns about how governments around the world will fix the financial system and global economy have sent stocks to their lowest levels in 12 years.
The Dow Jones industrial average has dropped for six consecutive months, and is worth less than half of its October 2007 record high of 14,164.53.
Investors were also worried about European financial companies. HSBC, Europe's largest bank by market value, on Monday reported a 70pc drop in 2008 net profit and said it needs to raise £12.5bn and cut 6,100 jobs in the US.
HSBC and general gloom about banks and the global economy dragged down European stocks. Markets in London, Frankfurt and Paris was down between 2pc and 3.5pc just after trading started in New York.
Billionaire Warren Buffett wrote in his annual letter to investors on Saturday that he is sure "the economy will be in shambles throughout 2009 — and, for that matter, probably well beyond — but that conclusion does not tell us whether the stock market will rise or fall".
"As bad as things are, they can still get worse, and get a lot worse," Bill Strazzullo, chief market strategist for Bell Curve Trading, told AP.
Mr Strazzullo said he believes there's a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000, respectively.
http://www.telegraph.co.uk/finance/markets/4927959/Dow-slides-below-7000-for-first-time-in-twelve-years.html
The Dow Jones below 7,000 for the first time in twelve years on Monday after American International Group posted the largest quarterly loss in US corporate history.
By Telegraph Staff
Last Updated: 3:59PM GMT 02 Mar 2009
Dow Jones Industrial Average slides below 7,000 for first time in twelve years.
The blue chip index fell 144.8 - or 2pc - to 6918 points within minutes of opening after AIG reported a $61.7bn (£44bn) fourth-quarter loss and the US government said it would give the insurer another $30bn in loans. This is in addition to the $150bn it has already given the ailing insurer.
Wall Street's concerns about how governments around the world will fix the financial system and global economy have sent stocks to their lowest levels in 12 years.
The Dow Jones industrial average has dropped for six consecutive months, and is worth less than half of its October 2007 record high of 14,164.53.
Investors were also worried about European financial companies. HSBC, Europe's largest bank by market value, on Monday reported a 70pc drop in 2008 net profit and said it needs to raise £12.5bn and cut 6,100 jobs in the US.
HSBC and general gloom about banks and the global economy dragged down European stocks. Markets in London, Frankfurt and Paris was down between 2pc and 3.5pc just after trading started in New York.
Billionaire Warren Buffett wrote in his annual letter to investors on Saturday that he is sure "the economy will be in shambles throughout 2009 — and, for that matter, probably well beyond — but that conclusion does not tell us whether the stock market will rise or fall".
"As bad as things are, they can still get worse, and get a lot worse," Bill Strazzullo, chief market strategist for Bell Curve Trading, told AP.
Mr Strazzullo said he believes there's a significant chance the S&P 500 and the Dow will fall back to their 1995 levels of 500 and 5,000, respectively.
http://www.telegraph.co.uk/finance/markets/4927959/Dow-slides-below-7000-for-first-time-in-twelve-years.html
Money made easy for young adults
http://www.whataboutmoney.info/
Money made easy for young adults
A user-friendly website from the City regulator offers impartial help to financial novices.
By Chris Pond
Last Updated: 12:46PM GMT 02 Mar 2009
The FSA's new website has advice on subjects such as student finance and budgeting Photo: GETTY
With many people now feeling the pinch of the credit crunch, getting on top of your finances and maintaining a healthy bank balance has never been more important.
It can be a daunting prospect for young adults who may be managing their own finances for the first time, and might not know where to find unbiased financial guidance.
Struggling with the pressures of financial unease themselves, parents of young adults embarking on those first independent steps may have additional concerns about how their children will cope with managing their money.
Research by the Financial Services Authority (FSA) has revealed that 16 to 24-year-olds are the most at risk when it comes to money, particularly with regards to planning ahead and choosing financial products.
A helping hand is now available in the form of www.whataboutmoney.info, a website launched by the FSA in June last year to offer impartial financial information to young adults aged 16-24.
The site forms part of the FSA's National Strategy for Financial Capability, which aims to improve the financial capability of all consumers in the UK. The website encourages young people to take charge of money matters and aims to provide information on the money issues important to them now.
A key feature to help users find information relevant to them is the "life stage guides". These offer tips on getting to grips with money issues affecting young people during the life-changing events they will go through, such as leaving school or going to college, getting their first job or their own place.
Each easily digestible guide outlines the top five need-to-know tips, has a video case study and displays links to further information from other resources.
The site is also divided into pages examining the key financial concerns that young adults face. "Getting money" is split into sections that look at jobs, benefits, starting a business, ways to borrow and manage money responsibly. "Spending money" looks at parting with cash – from getting a phone to running a home.
"Keeping money" helps to make sense of bank accounts, savings and investments, while "Student money" covers the facts about student finance. The "Budgeting tools" section simplifies money management, with links to external resources and applications such as budget and loan calculators, to enable users to monitor and evaluate incomings and outgoings.
The website has also recently been enhanced with "Real life economist" blogs. The "Real life economists" are a group of 16 to 24 year-olds at various life stages that feature throughout the website, providing an insight into the financial lives of young adults in similar positions.
Robyn Cooper, for example, is self-employed – a part-time actress who owns and runs her own small business, while Ian Stuart is a 16-year-old college student. The interactive blog section allows them to share their views on money matters with the website's users, who are then free to post their own comments and responses.
The "Questions & Answers" section outlines the top 10 queries, covering topics such as tax and loans, for simple, quick advice. Users can also send through their own personal queries to which they'll receive a free and personal written response within three working days.
For young adults wanting to know more about current money issues they may face, the "In the spotlight" page provides an update.
The aim is to give users clear-cut information on current topics such as interest rate changes and payday loans and explain how they might affect them. Users will also find a link here to the latest news on firms or products that are regulated by the FSA.
Whataboutmoney.info is an evolving tool for young adults that is being continually improved with new and up-to-date content. The site is an accessible and, more importantly, impartial resource for young adults (and even parents) that could help them to understand better money matters and, in turn, to stand them in good stead for planning and investing in their future.
Chris Pond is director of financial capability at the Financial Services Authorit
http://www.telegraph.co.uk/finance/personalfinance/consumertips/4927132/Money-made-easy-for-young-adults.html
Money made easy for young adults
A user-friendly website from the City regulator offers impartial help to financial novices.
By Chris Pond
Last Updated: 12:46PM GMT 02 Mar 2009
The FSA's new website has advice on subjects such as student finance and budgeting Photo: GETTY
With many people now feeling the pinch of the credit crunch, getting on top of your finances and maintaining a healthy bank balance has never been more important.
It can be a daunting prospect for young adults who may be managing their own finances for the first time, and might not know where to find unbiased financial guidance.
Struggling with the pressures of financial unease themselves, parents of young adults embarking on those first independent steps may have additional concerns about how their children will cope with managing their money.
Research by the Financial Services Authority (FSA) has revealed that 16 to 24-year-olds are the most at risk when it comes to money, particularly with regards to planning ahead and choosing financial products.
A helping hand is now available in the form of www.whataboutmoney.info, a website launched by the FSA in June last year to offer impartial financial information to young adults aged 16-24.
The site forms part of the FSA's National Strategy for Financial Capability, which aims to improve the financial capability of all consumers in the UK. The website encourages young people to take charge of money matters and aims to provide information on the money issues important to them now.
A key feature to help users find information relevant to them is the "life stage guides". These offer tips on getting to grips with money issues affecting young people during the life-changing events they will go through, such as leaving school or going to college, getting their first job or their own place.
Each easily digestible guide outlines the top five need-to-know tips, has a video case study and displays links to further information from other resources.
The site is also divided into pages examining the key financial concerns that young adults face. "Getting money" is split into sections that look at jobs, benefits, starting a business, ways to borrow and manage money responsibly. "Spending money" looks at parting with cash – from getting a phone to running a home.
"Keeping money" helps to make sense of bank accounts, savings and investments, while "Student money" covers the facts about student finance. The "Budgeting tools" section simplifies money management, with links to external resources and applications such as budget and loan calculators, to enable users to monitor and evaluate incomings and outgoings.
The website has also recently been enhanced with "Real life economist" blogs. The "Real life economists" are a group of 16 to 24 year-olds at various life stages that feature throughout the website, providing an insight into the financial lives of young adults in similar positions.
Robyn Cooper, for example, is self-employed – a part-time actress who owns and runs her own small business, while Ian Stuart is a 16-year-old college student. The interactive blog section allows them to share their views on money matters with the website's users, who are then free to post their own comments and responses.
The "Questions & Answers" section outlines the top 10 queries, covering topics such as tax and loans, for simple, quick advice. Users can also send through their own personal queries to which they'll receive a free and personal written response within three working days.
For young adults wanting to know more about current money issues they may face, the "In the spotlight" page provides an update.
The aim is to give users clear-cut information on current topics such as interest rate changes and payday loans and explain how they might affect them. Users will also find a link here to the latest news on firms or products that are regulated by the FSA.
Whataboutmoney.info is an evolving tool for young adults that is being continually improved with new and up-to-date content. The site is an accessible and, more importantly, impartial resource for young adults (and even parents) that could help them to understand better money matters and, in turn, to stand them in good stead for planning and investing in their future.
Chris Pond is director of financial capability at the Financial Services Authorit
http://www.telegraph.co.uk/finance/personalfinance/consumertips/4927132/Money-made-easy-for-young-adults.html
Gold update: Sixth day of falls in New York
Gold update: Sixth day of falls in New York
Gold has fallen in New York for a sixth straight session as some investors sold the precious metal to cover losses in equity markets. Silver also declined.
By Bloomberg staffLast Updated: 4:30PM GMT 02 Mar 2009
Gold futures for April delivery fell $2, or 0.2pc, to $940.50 an ounce at 10.10am on the Comex division of the New York Mercantile Exchange. The metal dropped 6pc last week.
In London, gold for immediate delivery lost $1.88, or 0.2pc, to $940.47 an ounce in early afternoon trading. The precious metal has earlier risen by as much as 1.7pc.
In February gold climbed by 1.5pc, the fourth consecutive monthly gain, while the Standard & Poor’s 500 Index fell by 11pc. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, reached a record 1,029.3 metric tons on February 26.
“As things get a little uglier in the stock market, we might see some selling of gold for margin calls,” said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago. “There’s some weight on gold now.”
Silver futures for May delivery declined 20.5 cents, or 1.6pc, to $12.905 an ounce. The metal rose 4.3pc in February.
News, comment and analysis on gold on our new dedicated page
FTSE loses billions of pounds within hours
FTSE loses billions of pounds within hours
Billions of pounds have been wiped off the value of Britain's leading companies after losses at HSBC and AIG drove share prices to a six-year low.
By Graham Ruddick and Myra Butterworth
Last Updated: 5:37PM GMT 02 Mar 2009
HSBC Hldgs
The FTSE 100 index of top UK shares dropped after HSBC confirmed a £12.5 billion rights issue.
It fell by 5.3 per cent and below the 3,700 mark for the first time since April 2003, losing investors £47.7 billion.
The sharp decline took the FTSE 100 below the lows experienced last October as UK banks teetered on the edge of collapse and were bailed out by the Government.
It came as analysts expressed concerns about the state of the UK economy, saying the financial crisis could spill over into other industries.
Investors were spooked by HSBC's rights issue after the UK's biggest bank asked for extra cash from shareholders to boost its balance sheet.
The request was made despite HSBC being one of the British banks least affected by the credit crisis.
HSBC's share issue is the biggest ever in Britain, surpassing the £12 billion request by Royal Bank of Scotland last year before it was forced into state support.
HSBC said the rights issue should help its 'ability to deal with the impact of an uncertain economic environment and to respond to unforeseen events'.
The move sent shares in HSBC down almost 19 per cent and also pulled Standard Chartered, which like HSBC conducts a significant amount of business in Asia, down by a similar amount.
Other UK banks also saw their share price tumble, including Royal Bank of Scotland (which closed down 2.6 per cent), Lloyds Banking Group (down 15 per cent) and Barclays (down 6 per cent).
At the same time, one of the world's largest insurers AIG - which was first saved from collapse in September with a package that grew to $150 billion last year - has had to ask for help again after failing to sell enough assets to repay the US.
Simon Denham, managing director of spread-betting company Capital Spreads, said: "The slowly falling indices are dragging ever more of the total economy into the mire and there is a very real possibility of the problem accelerating into an absolute disaster as opposed to a problem mainly constrained to the financial sector at the moment."
The FTSE 100 has not closed below 3,700 since the outbreak of war in Iraq at the end of March 2003. It was at 3,625.83 at the close of play.
David Buik of BGC Partners pointed out that the FTSE 100 is now lower than when Tony Blair won the 1997 general election. "What a waste of a decade that was," he said.
http://www.telegraph.co.uk/finance/newsbysector/epic/hsba/4928648/FTSE-losses-billions-of-pounds-within-hours.html
Billions of pounds have been wiped off the value of Britain's leading companies after losses at HSBC and AIG drove share prices to a six-year low.
By Graham Ruddick and Myra Butterworth
Last Updated: 5:37PM GMT 02 Mar 2009
HSBC Hldgs
The FTSE 100 index of top UK shares dropped after HSBC confirmed a £12.5 billion rights issue.
It fell by 5.3 per cent and below the 3,700 mark for the first time since April 2003, losing investors £47.7 billion.
The sharp decline took the FTSE 100 below the lows experienced last October as UK banks teetered on the edge of collapse and were bailed out by the Government.
It came as analysts expressed concerns about the state of the UK economy, saying the financial crisis could spill over into other industries.
Investors were spooked by HSBC's rights issue after the UK's biggest bank asked for extra cash from shareholders to boost its balance sheet.
The request was made despite HSBC being one of the British banks least affected by the credit crisis.
HSBC's share issue is the biggest ever in Britain, surpassing the £12 billion request by Royal Bank of Scotland last year before it was forced into state support.
HSBC said the rights issue should help its 'ability to deal with the impact of an uncertain economic environment and to respond to unforeseen events'.
The move sent shares in HSBC down almost 19 per cent and also pulled Standard Chartered, which like HSBC conducts a significant amount of business in Asia, down by a similar amount.
Other UK banks also saw their share price tumble, including Royal Bank of Scotland (which closed down 2.6 per cent), Lloyds Banking Group (down 15 per cent) and Barclays (down 6 per cent).
At the same time, one of the world's largest insurers AIG - which was first saved from collapse in September with a package that grew to $150 billion last year - has had to ask for help again after failing to sell enough assets to repay the US.
Simon Denham, managing director of spread-betting company Capital Spreads, said: "The slowly falling indices are dragging ever more of the total economy into the mire and there is a very real possibility of the problem accelerating into an absolute disaster as opposed to a problem mainly constrained to the financial sector at the moment."
The FTSE 100 has not closed below 3,700 since the outbreak of war in Iraq at the end of March 2003. It was at 3,625.83 at the close of play.
David Buik of BGC Partners pointed out that the FTSE 100 is now lower than when Tony Blair won the 1997 general election. "What a waste of a decade that was," he said.
http://www.telegraph.co.uk/finance/newsbysector/epic/hsba/4928648/FTSE-losses-billions-of-pounds-within-hours.html
Irrational fears erode Buffett premium
Irrational fears erode Buffett premium
Berkshire Hathaway shares lost more than 30pc in 2008, and more since. The value of the investment group's investment portfolio fell just 10pc.
By Richard Beales, breakingviews.com
Last Updated: 10:38AM GMT 02 Mar 2009
Warren Buffett, chief executive, doesn't focus on the share price. But the Sage of Omaha says risks, formerly under-appreciated in the investment world, are now being overpriced. And as that corrects, shares of the billionaire's investment company could benefit.
Buffett admits he "did some dumb things", like buying billions of dollars of ConocoPhillips stock when energy prices were near their peaks.
Even so, the per-share book value, or assets minus liabilities, of Berkshire's holdings fell a smidgeon less than 10pc in 2008 - against a 37pc loss on the S&P 500 index and a near-20pc fall for the average hedge fund. In that context, the Nebraskan investor's worst performance since 1965 - and only his second annual decline in book value - doesn't look so bad.
Berkshire shares tell a different story. At the end of 2007, they traded at a premium to book value of more than 80pc. By the end of last year, the premium had shrunk to less than 40pc. Now, it's only just more than 10pc based on the year-end book value, admittedly now too high.
Buffett sees the economy in a "shambles" through 2009 and probably beyond. That affects both Berkshire's own businesses and those of companies whose stock it owns. But other potential worries look less rational. One centres on derivatives. Berkshire has written put options on global stock indexes and various derivatives on corporate credit.
These have generated $13bn-odd of paper losses between them so far. Yet not only is Buffett's record comforting as to the eventual outcomes, the exposure is scaled to Berkshire's capacity - unlike, say, that of the flailing American International Group. An improbable total loss on the credit derivatives, for instance, would absorb only half Berkshire's cash on hand.
A fearful market could be focusing too much on the unhappy keywords attached to Berkshire: finance, derivatives, investments and insurance, to name a few. When irrational fears start to subside, the Buffett premium could return. While it might be damped by the fact that the 78-year-old isn't immortal, that could still help Berkshire stock even before the underlying investments turn around.
http://www.telegraph.co.uk/finance/breakingviewscom/4926633/Irrational-fears-erode-Buffett-premium.html
Berkshire Hathaway shares lost more than 30pc in 2008, and more since. The value of the investment group's investment portfolio fell just 10pc.
By Richard Beales, breakingviews.com
Last Updated: 10:38AM GMT 02 Mar 2009
Warren Buffett, chief executive, doesn't focus on the share price. But the Sage of Omaha says risks, formerly under-appreciated in the investment world, are now being overpriced. And as that corrects, shares of the billionaire's investment company could benefit.
Buffett admits he "did some dumb things", like buying billions of dollars of ConocoPhillips stock when energy prices were near their peaks.
Even so, the per-share book value, or assets minus liabilities, of Berkshire's holdings fell a smidgeon less than 10pc in 2008 - against a 37pc loss on the S&P 500 index and a near-20pc fall for the average hedge fund. In that context, the Nebraskan investor's worst performance since 1965 - and only his second annual decline in book value - doesn't look so bad.
Berkshire shares tell a different story. At the end of 2007, they traded at a premium to book value of more than 80pc. By the end of last year, the premium had shrunk to less than 40pc. Now, it's only just more than 10pc based on the year-end book value, admittedly now too high.
Buffett sees the economy in a "shambles" through 2009 and probably beyond. That affects both Berkshire's own businesses and those of companies whose stock it owns. But other potential worries look less rational. One centres on derivatives. Berkshire has written put options on global stock indexes and various derivatives on corporate credit.
These have generated $13bn-odd of paper losses between them so far. Yet not only is Buffett's record comforting as to the eventual outcomes, the exposure is scaled to Berkshire's capacity - unlike, say, that of the flailing American International Group. An improbable total loss on the credit derivatives, for instance, would absorb only half Berkshire's cash on hand.
A fearful market could be focusing too much on the unhappy keywords attached to Berkshire: finance, derivatives, investments and insurance, to name a few. When irrational fears start to subside, the Buffett premium could return. While it might be damped by the fact that the 78-year-old isn't immortal, that could still help Berkshire stock even before the underlying investments turn around.
http://www.telegraph.co.uk/finance/breakingviewscom/4926633/Irrational-fears-erode-Buffett-premium.html
China built enormous stake in US equities just before crash
China built enormous stake in US equities just before crash
The Chinese government more than tripled its investments in the US stock market to $99.5bn (£70 bn) just months before the financial crisis, it has emerged.
By Malcolm Moore in Shanghai
Last Updated: 3:06PM GMT 02 Mar 2009
The People's Bank of China in Beijing. The shift into riskier investments was the result of a power-struggle between the central bank and the Ministry of Finance.
The Chinese government more than tripled its investments in the US stock market to $99.5bn (£70 bn) just months before the financial crisis, it has emerged.
By Malcolm Moore in Shanghai
Last Updated: 3:06PM GMT 02 Mar 2009
The People's Bank of China in Beijing. The shift into riskier investments was the result of a power-struggle between the central bank and the Ministry of Finance.
Provisional figures from the US Treasury department showed that Beijing was holding $99.5bn of shares in June 2008, up from $29bn in 2007. Two years ago, China only held $4bn in US equities, preferring to concentrate on Treasury bills.
However, economists said the latest figures suggested that China may have bought as much as $150bn of equities worldwide, or 7pc of its vast foreign exchange reserves.
Brad Setser, an economist with the Council on Foreign Relations, a US think tank, said the State Administration of Foreign Exchange (SAFE), a branch of the Chinese central bank charged with looking after the foreign reserves, was responsible for the buying spree.
Last year, a Sunday Telegraph investigation revealed that SAFE had built holdings of £9bn in companies listed in London. The new figures suggest that SAFE has now become one of the largest sovereign wealth funds in the world, although it is likely to have been badly burned by falling markets during the financial crisis.
The shift into riskier investments was the result of a power-struggle between China’s central bank and the Ministry of Finance, both of which wanted to show they were capable of managing China’s huge wealth.
The Ministry of Finance runs the $200bn China Investment Corporation (CIC), the country’s official sovereign wealth fund, but has been heavily criticised for taking loss-making stakes in Blackstone and Morgan Stanley.
Mr Setser estimates that only $8bn of the $99.5bn of US equities were bought by CIC, with the rest being purchased by SAFE. “SAFE wanted to show that it could manage a portfolio of 'risk’ assets,” he said, in order to make sure that more of its funds were not passed over to CIC.
However, an official from the China Banking Regulatory Committee said that SAFE had little idea of how to make overseas investments, and lacks a proper team of analysts and stock-pickers.
The head of SAFE, Hu Xiaolian, is one of the few women at the top of a major Chinese government department. However, she has little commercial experience, having spent her entire career at the central bank and graduated from the bank’s own university.
Nevertheless, Arthur Kroeber, an economist at Dragonomics in Beijing, said China is likely to continue buying equities despite the slumping markets.
“They would have seen a considerable erosion in value by now, but I think they are absolutely playing a long game. Fundamentally, what choice do they have? What short game is there that is making money these days?” he said.
“SAFE is saying: the market may be problematic, but if we buy now for the long-term, we’ll probably finish up.” He added that the Chinese public was relatively content with the management of the country’s wealth, since SAFE does not disclose any information about its buying activities.
“As long as they don’t build a big stake in a high-profile company that blows up, they will be ok,” he said, adding that he thought it was possible for the central bank to put as much as 10pc of its foreign reserve holdings into equities. “I would be surprised, however, if they were authorised to put more than 10pc into shares,” he said.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4927567/China-built-enormous-stake-in-US-equities-just-before-crash.html
Monday 2 March 2009
Warren Buffett loses billions
Warren Buffett loses billions
Berkshire Hathaway drops $10.9bn in investor's worst year since 1965.
By Richard Tyler
Last Updated: 8:07PM GMT 28 Feb 2009
Warren Buffett Billionaire Warren Buffett, the Sage of Omaha, has recorded his worst financial performance since taking over famed US investment group Berkshire Hathaway in 1965.
The group's net worth dropped by $10.9bn (£7.6bn) in the final quarter of 2008 to end the year at $109.2bn.
His investments and broad mix of insurance, utility, manufacturing and services businesses barely broke even, with quarterly net income sinking 96pc to $117m.
In his annual letter to shareholders, released yesterday, Mr Buffett pointed the finger at $4.61bn of pre-tax losses booked on falls in the market value of 251 derivative contracts that he had personally approved. These included 15-20 year bets that the FTSE 100 and S&P 500 would recover all their recent losses.
Mr Buffett described derivatives as "dangerous", but he remained convinced that they were a good bet. "I believe each contract we own was mispriced at inception, sometimes dramatically so. If we lose money on our derivatives, it will be my fault," he wrote.
Nineteen of top 20 stocks in Berkshire's US portfolio, valued at $51.9bn, fell last year. Coca-Cola, its top holding, dropped 26pc and American Express plunged 64pc.
Mr Buffett, 78, said he would maintain Berkshire's "Gibraltar-like financial position" during 2009 by retaining "huge amounts of excess liquidity, near-term obligations that are modest and dozens of sources of earnings".
But he offered a gloomy outlook, saying: "The [US] economy will be in shambles throughout 2009 – and probably well beyond."
He also upped his attack of the US government's bail-out of his insurance and banking rivals. "Though Berkshire's credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing," he wrote. "At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one."
He said he would continue to buy shares and bonds from companies. "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down," he quipped. However, he hinted that his focus this year would be in snapping up companies at bargain prices that had the potential for solid earnings growth in the future. "We like buying underpriced securities, but we like buying fairly-priced operating businesses even more," he wrote.
Despite his near-mythical status, Mr Buffett readily admitted that he was fallible. "During 2008 I did some dumb things in investments," he said, pointing to his decision to increase the fund's stake in oil and gas giant ConocoPhillips at peak prices as he did not anticipate the dramatic fall in energy prices in the second half of the year. It cost Berkshire shareholders several billion dollars.
Berkshire Class A shares closed on Friday at $78,600 (£55,138) and have fallen 44pc since the end of February 2008. Over the last 44 years, the value of Berkshire's net assets has rocketed from $19 to $70,530 a share, a growth rate of 20.3pc compounded annually.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4885828/Warren-Buffett-loses-billions.html
From The Sunday TimesMarch 1, 2009
Warren Buffett: ‘I was dumb in 2008’
‘Sage of Omaha’ admits his mistakes contributed to company’s worst year everDominic Rushe
WARREN BUFFETT admitted yesterday that he did “some dumb things” in 2008, as the world’s richest investor announced that Berkshire Hathaway, his company, had its worst year on record.
In his annual letter to shareholders, Buffett said his investments lost $11.5 billion (£8 billion) last year.
He also offered a gloomy outlook for the year ahead. “The economy will be in shambles throughout 2009 – and for that matter, probably well beyond,” Buffett wrote.
The firm was hit by the deteriorating economy, the collapse of the credit markets and share prices and the second-worst hurricane season on record.
Berkshire owns a wide portfolio of companies, including leading American insurers and has stakes in firms such as American Express, Coca-Cola, Goldman Sachs and Tesco.
This diversity and Buffett’s cautious approach saved the firm from further losses, but he admitted that he contributed to the fall through some “dumb” moves of his own.
The man known as the “Sage of Omaha” said he spectacularly mistimed his purchase of Conoco Phillips stock last year when oil prices were near their peak. They have fallen by $100 a barrel since last July.
“I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong,” he wrote.
Conoco Phillips shares closed at $37.35 on Friday, less than half the price they fetched last spring and summer when Buffett was buying.
Buffett also said he made a $244m investment in two Irish banks “that appeared cheap to me”. At the year end Berkshire wrote down the holdings to their market value of $27m, an 89% loss on the investment. The stocks have since declined further.
The measurement Berkshire uses to track its performance, book value per share, fell 9.6% in 2008, its biggest decline since Buffett took over the company in 1965.
Berkshire still beat the Standard & Poor’s 500-stock index, which fell 37% last year, including dividends. It was only the second year that Berkshire has posted negative results. In 2001 Berkshire’s book value per share fell 6.2%.
Buffett sees little hope of a quick recovery. While he argues that the American government was right to take “strong and immediate action”, he believes the short-term consequences are likely to be bad. Doling out economic medicine “by the barrel” is likely to trigger an “onslaught of inflation”, he wrote.
“Moreover, big industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”
But long term, Buffett remains bullish on the prospects for the American economy. “Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21.5% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years.
“America has had no shortage of challenges. Without fail, however, we’ve overcome them,” wrote Buffett. “America’s best days lie ahead.”
http://business.timesonline.co.uk/tol/business/markets/article5822125.ece
Berkshire Hathaway drops $10.9bn in investor's worst year since 1965.
By Richard Tyler
Last Updated: 8:07PM GMT 28 Feb 2009
Warren Buffett Billionaire Warren Buffett, the Sage of Omaha, has recorded his worst financial performance since taking over famed US investment group Berkshire Hathaway in 1965.
The group's net worth dropped by $10.9bn (£7.6bn) in the final quarter of 2008 to end the year at $109.2bn.
His investments and broad mix of insurance, utility, manufacturing and services businesses barely broke even, with quarterly net income sinking 96pc to $117m.
In his annual letter to shareholders, released yesterday, Mr Buffett pointed the finger at $4.61bn of pre-tax losses booked on falls in the market value of 251 derivative contracts that he had personally approved. These included 15-20 year bets that the FTSE 100 and S&P 500 would recover all their recent losses.
Mr Buffett described derivatives as "dangerous", but he remained convinced that they were a good bet. "I believe each contract we own was mispriced at inception, sometimes dramatically so. If we lose money on our derivatives, it will be my fault," he wrote.
Nineteen of top 20 stocks in Berkshire's US portfolio, valued at $51.9bn, fell last year. Coca-Cola, its top holding, dropped 26pc and American Express plunged 64pc.
Mr Buffett, 78, said he would maintain Berkshire's "Gibraltar-like financial position" during 2009 by retaining "huge amounts of excess liquidity, near-term obligations that are modest and dozens of sources of earnings".
But he offered a gloomy outlook, saying: "The [US] economy will be in shambles throughout 2009 – and probably well beyond."
He also upped his attack of the US government's bail-out of his insurance and banking rivals. "Though Berkshire's credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing," he wrote. "At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one."
He said he would continue to buy shares and bonds from companies. "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down," he quipped. However, he hinted that his focus this year would be in snapping up companies at bargain prices that had the potential for solid earnings growth in the future. "We like buying underpriced securities, but we like buying fairly-priced operating businesses even more," he wrote.
Despite his near-mythical status, Mr Buffett readily admitted that he was fallible. "During 2008 I did some dumb things in investments," he said, pointing to his decision to increase the fund's stake in oil and gas giant ConocoPhillips at peak prices as he did not anticipate the dramatic fall in energy prices in the second half of the year. It cost Berkshire shareholders several billion dollars.
Berkshire Class A shares closed on Friday at $78,600 (£55,138) and have fallen 44pc since the end of February 2008. Over the last 44 years, the value of Berkshire's net assets has rocketed from $19 to $70,530 a share, a growth rate of 20.3pc compounded annually.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4885828/Warren-Buffett-loses-billions.html
From The Sunday TimesMarch 1, 2009
Warren Buffett: ‘I was dumb in 2008’
‘Sage of Omaha’ admits his mistakes contributed to company’s worst year everDominic Rushe
WARREN BUFFETT admitted yesterday that he did “some dumb things” in 2008, as the world’s richest investor announced that Berkshire Hathaway, his company, had its worst year on record.
In his annual letter to shareholders, Buffett said his investments lost $11.5 billion (£8 billion) last year.
He also offered a gloomy outlook for the year ahead. “The economy will be in shambles throughout 2009 – and for that matter, probably well beyond,” Buffett wrote.
The firm was hit by the deteriorating economy, the collapse of the credit markets and share prices and the second-worst hurricane season on record.
Berkshire owns a wide portfolio of companies, including leading American insurers and has stakes in firms such as American Express, Coca-Cola, Goldman Sachs and Tesco.
This diversity and Buffett’s cautious approach saved the firm from further losses, but he admitted that he contributed to the fall through some “dumb” moves of his own.
The man known as the “Sage of Omaha” said he spectacularly mistimed his purchase of Conoco Phillips stock last year when oil prices were near their peak. They have fallen by $100 a barrel since last July.
“I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong,” he wrote.
Conoco Phillips shares closed at $37.35 on Friday, less than half the price they fetched last spring and summer when Buffett was buying.
Buffett also said he made a $244m investment in two Irish banks “that appeared cheap to me”. At the year end Berkshire wrote down the holdings to their market value of $27m, an 89% loss on the investment. The stocks have since declined further.
The measurement Berkshire uses to track its performance, book value per share, fell 9.6% in 2008, its biggest decline since Buffett took over the company in 1965.
Berkshire still beat the Standard & Poor’s 500-stock index, which fell 37% last year, including dividends. It was only the second year that Berkshire has posted negative results. In 2001 Berkshire’s book value per share fell 6.2%.
Buffett sees little hope of a quick recovery. While he argues that the American government was right to take “strong and immediate action”, he believes the short-term consequences are likely to be bad. Doling out economic medicine “by the barrel” is likely to trigger an “onslaught of inflation”, he wrote.
“Moreover, big industries have become dependent on federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”
But long term, Buffett remains bullish on the prospects for the American economy. “Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21.5% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15% and 25% for many years.
“America has had no shortage of challenges. Without fail, however, we’ve overcome them,” wrote Buffett. “America’s best days lie ahead.”
http://business.timesonline.co.uk/tol/business/markets/article5822125.ece
Stocks to fall AT LEAST another 40%! Here's why ...
On Mon, 2/9/09, Money and Markets <eletter@moneyandmarkets.com> wrote:
Argument #3
Based on Earnings, Stocks
Are Still FAR From Cheap
Let's start with the most widely followed fundamental indicator: P/E or the price/earnings ratio.
Right now the trailing 12-month P/E of the S&P 500 is 18. In other words, the average stock in the index is selling for 18 times its earnings of the past year.
That, in itself, is a very high multiple. It means that, on average, investors will have to wait a full 18 years before the investment they make in a company is matched by the accumulated earnings of the period (assuming the company can maintain its current level of profits).
Yes, 18 times earnings is much lower than it was in 1999 or 2000. But historically, 18 is still very high — even considering today's low interest rates.
See for yourself by taking a look at the following graph going all the way back to 1925. In this graph ...
The black line shows the S&P 500 Index ...
The red line shows how the S&P would have behaved if it had a constant P/E of 20, a level considered overvalued, and ...
The green line shows how it would have behaved if it had a P/E of 10, which is borderline undervalued.
For 70 long years, from 1925 to 1995, the S&P rarely reached the overvalued level and even more rarely exceeded it. In contrast, this graph makes it very clear that the period between 1995 and 2008 is an extreme aberration in terms of this all-important stock market fundamental. It leaves no doubt that ...
In the long history of the U.S. stock market, stocks have almost always been much more moderately priced. But in the current period, stocks have been, and remain, broadly overpriced.
That alone argues for lower stock prices. But the argument is even stronger when you look at these two-decade spans:
The 1930s and 1940s, plus
The 1970s and 1980s
These two periods included secular (long-term) bear markets. And as you can see, during those periods, the S&P 500 often fell to levels corresponding to a P/E of less than 10.
That was especially true when the cyclical downturns in the market were accompanied by severe recessions, similar to what we're already experiencing today. Indeed ...
The P/E of the S&P 500 dropped to 7 during the recession of the mid-1970s — and it did it again in the recession of the early 1980s.
Even if the economic contraction could somehow be less severe this time ... even assuming no decline in corporate earnings ... and even if the P/E only declines from its current level of 18 to about 10 ... that alone would take the S&P 500 Index to my target level of 500 or lower!
Thus ...
If the P/E of the average S&P stock were to plunge to 7 again, the market would fall to much lower levels, and ...
If you factor in falling corporate earnings, it could fall STILL further.
So you can see that 500 for the S&P Index is not just a reasonable target. It's actually a conservative target, erring on the side of predicting fewer adverse consequences than may actually be the case.
Argument #4
Based on Dividend Yields, U.S.
Stocks Are Equally Overvalued
The dividend yield of the S&P 500 stocks — how much you can earn in dividends per dollar invested — draws an equally bleak picture:
After being extremely depressed during the recent bubble years, the dividend yield of the S&P 500 has recovered somewhat to 3.39%. But despite this improvement, history tells us that the current level still signals a highly overvalued market.
Solid, long-term buying opportunities don't come until you can get a dividend yield of 6% or more. But to reach that level, the dividend yield on S&P stocks needs to rise by 2.61 percentage points (3.39 + 2.61 = 6.00).
Assuming no further dividend cuts or cancellations, to get those extra 2.61 points in yield, the price of the average S&P 500 stock would have to fall by 43.5%. (A stock selling for, say, $100 today and yielding 3.39% would have to fall to $56.50 to yield 6.00% — a stock price decline of 43.5%.)
In sum, the message from this fundamental indicator fully supports the conclusion I reached based on the P/E ratio: The market would have to fall by AT LEAST 40% or so — and that's assuming there are no further dividend cuts. But with dividend cuts inevitable, stocks will have to fall even further to match the 6% yield that might make them attractive again.
Argument #5
Earnings Are Falling, and
Doing So Conspicuously!
Earnings and earnings estimates are already down substantially since 2007, with no sign of let-up.
The following chart shows you the S&P 500 along with the GAAP-based earnings for its component stocks.
As you can see, the earnings are already down from $85 at the top of the cycle to $46 in the fourth quarter of last year. And earnings estimates for the first quarter 2009 are nearly 10% lower, at $42.
The dire situation we're in today: Companies' lack of pricing power — and a recession that leaves hardly any sector unscathed — virtually guarantees further declines in earnings, making the current market valuations even further out of line.
Source: http://www.decisionpoint.com/
Argument #6
Earnings Will STAY Depressed
Longer Than Usual!
Among S&P 500 companies, profit margins reached an all-time high during this cycle, meaning that they must now fall back to a more normal level. This is what has happened in every major recession, and it's what almost inevitably will happen this time as well.
Specifically ...
In 1966, profit margins hit a high of 6% and then fell back to 3.5% in 1970.
In 1978, they rallied back up to 6% and then came all the way down to 2% by 1986.
In 1997, they rose again to 5.5% and fell back to below 3% in 2002. And now ...
In 2006, propelled by the big debt and high leverage of the recent bubble, they reached a record high of more than 8%.
But now, having started on a downward path again, it's highly improbable that profit margins will recover anytime soon.
Argument #7
Debt and Leverage Are Gone!
The facts here are even more shocking:
At the top of this cycle, the profits of the financial sector reached up to 30% of all S&P 500 earnings — thanks to psychedelic leveraging and drunken risk-taking.
Now, nearly all the extreme leverage in the financial sector — and nearly all the leverage financial institutions were providing other industries through 2007 — is no more.
Without a doubt, the forced sobering of the banking industry will have a long-lasting impact, and there is no way we can expect an early comeback of the old greedy days of Wall Street.
Argument #8
The Undeniable History of
Speculative Bubbles
Throughout history, after the bursting of every speculative bubble, prices almost invariably revert back to the level corresponding to the beginning of the bubble. In other words ...
Whatever boost the bubble gives to prices and values ... the ensuing bust inevitably takes it ALL back.
This held true for the global stock market bubble that burst in 1929 and for the Japanese stock and real estate bubbles that burst in the early 1990s. And if you go all the way back to the South Sea bubble, which burst in 1720, you will see this very same pattern.
So our task is simple: To identify the price level of the S&P 500 at the juncture when this entire moon shot was first launched.
And based on objective measures like the S&P's dividend yield or P/E ratio, we know quite well where and when that was:
The U.S. stock market bubble began in 1995, when the S&P 500 broke above the 500 level ... and it reached its climax in 2000, when the P/E ratio of U.S. stocks reached nosebleed levels of 38 on the S&P 500 and more than 200 on the Nasdaq.
Plus, there can now be little doubt that ...
Ever since 2000, the U.S. stock market has been in a protracted bear market!
To be sure, after the first two years of the bear market in 2000-2002, the Fed engineered a real estate bubble, which, in turn, produced a parallel stock market rally that prevailed during most of the middle years of this decade.
But now we can look back at the entire mid-decade rally and see it for what it really was: A mere interlude in a nine-year bear market (so far!) that began at the turn of the millennium.
So, looking back at history and looking ahead, it would not be unusual in the least to see the S&P 500 fall all the way back to the original starting level of approximately 500 for the S&P, validating and revalidating my forecast.
Will This Bear Market and Recession EVER End?
Of course it will, eventually. And when it does, incredible bargain opportunities will abound. But to make sure you can buy them, you must do two things:
(1) Keep your assets intact and ...
(2) Wait patiently for that day.
Wait for the damage of the bust to play itself out. Wait for P/E ratios to come back down to their lower range, corresponding to deep recessions of the past. Wait for at least 6% dividend yields. Then, start thinking about investing in a recovery.
Plus, there's one more thing you can do: Starting right now, you can grow your assets significantly DURING the decline.
Later this month, I will show you precisely how I'm planning to accomplish each of those goals with a new million-dollar contrarian portfolio I am managing.
I will make the trek from Berlin to Palm Beach, join Martin in an online video seminar, and lay it all out for you piece by piece, step by step.
Stand by for the invitation via email. And in the meantime, I look forward to getting your personal and direct input into how you think a dream portfolio should be handled in these tough times.
Best wishes from Berlin,
Claus
Stocks to fall AT LEAST another 40%! Here's why ...
by Martin D. Weiss, Ph.D.
With the U.S. economy now reeling from the fastest job collapse since the Great Depression ...
With the Treasury Secretary ready to introduce yet another bank bailout plan this week ...
And as we suffer through the uncontrollable bust of the largest-ever speculative bubble of all time ...
You don't need a Ph.D. in economics to recognize that there's much more pain to come.
But how much pain? And precisely how FAR can the stock market decline? Not many people can provide that answer with precision.
But of all the analysts I know in the world today, one of those who provides the most reasoned — and most well-documented — answer is, not surprisingly, far away from Wall Street.
He is Claus Vogt, writing from Berlin.
Claus is the co-editor of Sicheres Geld, the German-language edition of our Safe Money Report.
He also edits the German edition of our International ETF Trader. And unlike nearly all his peers in Germany, Claus delivered overall gains in the high double digits last year, even as global markets tumbled.
Perhaps most impressive, thanks largely to Claus' input, the bank he advises was one of the very few in Europe that actually made good money for their clients last year.
The key to his success: The ability to watch the U.S. economy from afar, track it closely, and forecast it accurately.
A case in point: Well before the U.S. housing bubble burst, Claus Vogt and co-author Roland Leuschel wrote the book, Das Greenspan Dossier, in which they predicted:
"When the U.S. real estate bubble bursts, it will not only trigger a recession and a stock market crash, but it will jeopardize the whole financial system, especially Fannie Mae and Freddie Mac, the two U.S. — mortgage giants taking center stage in this huge bubble."
Amazingly, in that one short paragraph, they captured the full range of events unfolding today — a scenario that almost every Wall Street or Washington expert missed by a mile.
That's why I have asked Claus to contribute more regularly to Money and Markets. That's also why I have asked him to tell us how far the U.S. stock averages are likely to fall — and why.
The report below is his answer.
Why U.S. Stocks Could Fall
AT LEAST Another 40%
by Claus Vogt
Every major fundamental indicator relied upon by stock market analysts is unanimously pointing to a stock price plunge of at least another 40% from current levels. That would take ...
The S&P 500 down to the 500 level ...
The Dow Jones Industrials to below 5000, and ...
The Nasdaq to the low 900s.
Don't be surprised. To understand why, you need only step back from the trees and see the obvious chain of cause and effect:
You know that the major factor behind the current business cycle was — and is — a worldwide housing bubble and bust.
You also know that the bubble was driven by the speculative surge in mortgages and equity loans.
What you may not know is that, according to former Fed Chairman Alan Greenspan, that bubble accounted for 50% to 70% of GDP growth in recent years.
So it should come as no surprise that as soon as the mortgages and equity loans dried up, consumption and GDP growth began to take a huge hit.
Worse, the real estate bubble distorted the entire structure of the U.S. economy:
It created grossly misplaced investments — second homes nobody really needed, massive numbers of people drawn into the real estate business as brokers and lenders, plus a whole new industry built around mortgage-backed securities.
It created broad instability — too much consumption, too little savings, too many imports of goods from China and elsewhere — not to mention a huge current account deficit.
It fostered unsound risk-taking by the financial sector — from Bear Stearns to Lehman Brothers, from Washington Mutual to Citibank, from Merrill Lynch to the hedge fund industry. And ...
The end result was one of the largest, most unstable and most risky economic environments of modern times.
But now, with the bursting of the bubble,
The U.S. faces the monumental task of bringing this highly distorted economy back into alignment and putting the country back on a sound footing.
Investments that are not viable must be abandoned or aborted. A new equilibrium must be found. New price levels for stocks and all assets must be reached.
The two words commonly associated with this natural process? Recession and depression!
But you ask: Why so severe? And why must stocks fall so far?
For the simplest answer, consider the rule of thumb that has almost always held true concerning speculative bubbles: The bigger the bubble, the greater the distortions; and the greater the distortions, the graver the inevitable correction.
This rule alone leads me to expect a long, severe decline in the economy and the stock market; and this basic reasoning, in itself, supports my forecast for a 40%-or-more plunge in the broad stock market averages. But let's also take a look at the rest of my supporting arguments ...
Argument #1
U.S. Home Prices Continue to Fall
Consider the facts:
Despite the unprecedented home price declines to date, the median price of an American home (compared to the median income a family earns) is still 15% above its average level of recent decades. In other words, homes are still overpriced by 15% or more.
If you take the bubble years of 2002 — 2006 out of the equation, as any reasonable analyst would, then U.S. home prices are actually 20% out of whack.
But that assumes the median income of U.S. households will not go down. If you factor in declines in income, home prices can fall even further.
Moreover, once a bubble has burst, price corrections don't typically stop at some average statistical level; they overshoot to the downside.
Bottom line: You can expect home prices to continue to tumble. And you can expect all the ugly financial consequences of falling home prices to stay with us in the coming quarters — huge losses and bankruptcies in the banking sector.
by Martin D. Weiss, Ph.D.
With the U.S. economy now reeling from the fastest job collapse since the Great Depression ...
With the Treasury Secretary ready to introduce yet another bank bailout plan this week ...
And as we suffer through the uncontrollable bust of the largest-ever speculative bubble of all time ...
You don't need a Ph.D. in economics to recognize that there's much more pain to come.
But how much pain? And precisely how FAR can the stock market decline? Not many people can provide that answer with precision.
But of all the analysts I know in the world today, one of those who provides the most reasoned — and most well-documented — answer is, not surprisingly, far away from Wall Street.
He is Claus Vogt, writing from Berlin.
Claus is the co-editor of Sicheres Geld, the German-language edition of our Safe Money Report.
He also edits the German edition of our International ETF Trader. And unlike nearly all his peers in Germany, Claus delivered overall gains in the high double digits last year, even as global markets tumbled.
Perhaps most impressive, thanks largely to Claus' input, the bank he advises was one of the very few in Europe that actually made good money for their clients last year.
The key to his success: The ability to watch the U.S. economy from afar, track it closely, and forecast it accurately.
A case in point: Well before the U.S. housing bubble burst, Claus Vogt and co-author Roland Leuschel wrote the book, Das Greenspan Dossier, in which they predicted:
"When the U.S. real estate bubble bursts, it will not only trigger a recession and a stock market crash, but it will jeopardize the whole financial system, especially Fannie Mae and Freddie Mac, the two U.S. — mortgage giants taking center stage in this huge bubble."
Amazingly, in that one short paragraph, they captured the full range of events unfolding today — a scenario that almost every Wall Street or Washington expert missed by a mile.
That's why I have asked Claus to contribute more regularly to Money and Markets. That's also why I have asked him to tell us how far the U.S. stock averages are likely to fall — and why.
The report below is his answer.
Why U.S. Stocks Could Fall
AT LEAST Another 40%
by Claus Vogt
Every major fundamental indicator relied upon by stock market analysts is unanimously pointing to a stock price plunge of at least another 40% from current levels. That would take ...
The S&P 500 down to the 500 level ...
The Dow Jones Industrials to below 5000, and ...
The Nasdaq to the low 900s.
Don't be surprised. To understand why, you need only step back from the trees and see the obvious chain of cause and effect:
You know that the major factor behind the current business cycle was — and is — a worldwide housing bubble and bust.
You also know that the bubble was driven by the speculative surge in mortgages and equity loans.
What you may not know is that, according to former Fed Chairman Alan Greenspan, that bubble accounted for 50% to 70% of GDP growth in recent years.
So it should come as no surprise that as soon as the mortgages and equity loans dried up, consumption and GDP growth began to take a huge hit.
Worse, the real estate bubble distorted the entire structure of the U.S. economy:
It created grossly misplaced investments — second homes nobody really needed, massive numbers of people drawn into the real estate business as brokers and lenders, plus a whole new industry built around mortgage-backed securities.
It created broad instability — too much consumption, too little savings, too many imports of goods from China and elsewhere — not to mention a huge current account deficit.
It fostered unsound risk-taking by the financial sector — from Bear Stearns to Lehman Brothers, from Washington Mutual to Citibank, from Merrill Lynch to the hedge fund industry. And ...
The end result was one of the largest, most unstable and most risky economic environments of modern times.
But now, with the bursting of the bubble,
The U.S. faces the monumental task of bringing this highly distorted economy back into alignment and putting the country back on a sound footing.
Investments that are not viable must be abandoned or aborted. A new equilibrium must be found. New price levels for stocks and all assets must be reached.
The two words commonly associated with this natural process? Recession and depression!
But you ask: Why so severe? And why must stocks fall so far?
For the simplest answer, consider the rule of thumb that has almost always held true concerning speculative bubbles: The bigger the bubble, the greater the distortions; and the greater the distortions, the graver the inevitable correction.
This rule alone leads me to expect a long, severe decline in the economy and the stock market; and this basic reasoning, in itself, supports my forecast for a 40%-or-more plunge in the broad stock market averages. But let's also take a look at the rest of my supporting arguments ...
Argument #1
U.S. Home Prices Continue to Fall
Consider the facts:
Despite the unprecedented home price declines to date, the median price of an American home (compared to the median income a family earns) is still 15% above its average level of recent decades. In other words, homes are still overpriced by 15% or more.
If you take the bubble years of 2002 — 2006 out of the equation, as any reasonable analyst would, then U.S. home prices are actually 20% out of whack.
But that assumes the median income of U.S. households will not go down. If you factor in declines in income, home prices can fall even further.
Moreover, once a bubble has burst, price corrections don't typically stop at some average statistical level; they overshoot to the downside.
Bottom line: You can expect home prices to continue to tumble. And you can expect all the ugly financial consequences of falling home prices to stay with us in the coming quarters — huge losses and bankruptcies in the banking sector.
Argument #2
The Current Crisis Is GLOBAL, Hitting
The Whole World Simultaneously
And Providing No Outside Support
To Offset U.S. Domestic Weakness
In 1990, when Japan's real estate bubble burst, the rest of the world was booming, helping Japan's export industry.
Unfortunately we don't have that kind of a cushion today. Quite the contrary, instead of relief from exports to other countries, the U.S. export sector is getting slammed by falling overseas demand. And a rising dollar will only make U.S. goods more expensive abroad, depressing demand and aggravating this problem.
Additionally, as usual in bad times, there are already strong hints of protectionism emerging around the word; the same kind of beggar-thy-neighbour policies that aggravated the Great Depression are gaining traction globally.
The Current Crisis Is GLOBAL, Hitting
The Whole World Simultaneously
And Providing No Outside Support
To Offset U.S. Domestic Weakness
In 1990, when Japan's real estate bubble burst, the rest of the world was booming, helping Japan's export industry.
Unfortunately we don't have that kind of a cushion today. Quite the contrary, instead of relief from exports to other countries, the U.S. export sector is getting slammed by falling overseas demand. And a rising dollar will only make U.S. goods more expensive abroad, depressing demand and aggravating this problem.
Additionally, as usual in bad times, there are already strong hints of protectionism emerging around the word; the same kind of beggar-thy-neighbour policies that aggravated the Great Depression are gaining traction globally.
Argument #3
Based on Earnings, Stocks
Are Still FAR From Cheap
Let's start with the most widely followed fundamental indicator: P/E or the price/earnings ratio.
Right now the trailing 12-month P/E of the S&P 500 is 18. In other words, the average stock in the index is selling for 18 times its earnings of the past year.
That, in itself, is a very high multiple. It means that, on average, investors will have to wait a full 18 years before the investment they make in a company is matched by the accumulated earnings of the period (assuming the company can maintain its current level of profits).
Yes, 18 times earnings is much lower than it was in 1999 or 2000. But historically, 18 is still very high — even considering today's low interest rates.
See for yourself by taking a look at the following graph going all the way back to 1925. In this graph ...
The black line shows the S&P 500 Index ...
The red line shows how the S&P would have behaved if it had a constant P/E of 20, a level considered overvalued, and ...
The green line shows how it would have behaved if it had a P/E of 10, which is borderline undervalued.
For 70 long years, from 1925 to 1995, the S&P rarely reached the overvalued level and even more rarely exceeded it. In contrast, this graph makes it very clear that the period between 1995 and 2008 is an extreme aberration in terms of this all-important stock market fundamental. It leaves no doubt that ...
In the long history of the U.S. stock market, stocks have almost always been much more moderately priced. But in the current period, stocks have been, and remain, broadly overpriced.
That alone argues for lower stock prices. But the argument is even stronger when you look at these two-decade spans:
The 1930s and 1940s, plus
The 1970s and 1980s
These two periods included secular (long-term) bear markets. And as you can see, during those periods, the S&P 500 often fell to levels corresponding to a P/E of less than 10.
That was especially true when the cyclical downturns in the market were accompanied by severe recessions, similar to what we're already experiencing today. Indeed ...
The P/E of the S&P 500 dropped to 7 during the recession of the mid-1970s — and it did it again in the recession of the early 1980s.
Even if the economic contraction could somehow be less severe this time ... even assuming no decline in corporate earnings ... and even if the P/E only declines from its current level of 18 to about 10 ... that alone would take the S&P 500 Index to my target level of 500 or lower!
Thus ...
If the P/E of the average S&P stock were to plunge to 7 again, the market would fall to much lower levels, and ...
If you factor in falling corporate earnings, it could fall STILL further.
So you can see that 500 for the S&P Index is not just a reasonable target. It's actually a conservative target, erring on the side of predicting fewer adverse consequences than may actually be the case.
Argument #4
Based on Dividend Yields, U.S.
Stocks Are Equally Overvalued
The dividend yield of the S&P 500 stocks — how much you can earn in dividends per dollar invested — draws an equally bleak picture:
After being extremely depressed during the recent bubble years, the dividend yield of the S&P 500 has recovered somewhat to 3.39%. But despite this improvement, history tells us that the current level still signals a highly overvalued market.
Solid, long-term buying opportunities don't come until you can get a dividend yield of 6% or more. But to reach that level, the dividend yield on S&P stocks needs to rise by 2.61 percentage points (3.39 + 2.61 = 6.00).
Assuming no further dividend cuts or cancellations, to get those extra 2.61 points in yield, the price of the average S&P 500 stock would have to fall by 43.5%. (A stock selling for, say, $100 today and yielding 3.39% would have to fall to $56.50 to yield 6.00% — a stock price decline of 43.5%.)
In sum, the message from this fundamental indicator fully supports the conclusion I reached based on the P/E ratio: The market would have to fall by AT LEAST 40% or so — and that's assuming there are no further dividend cuts. But with dividend cuts inevitable, stocks will have to fall even further to match the 6% yield that might make them attractive again.
Argument #5
Earnings Are Falling, and
Doing So Conspicuously!
Earnings and earnings estimates are already down substantially since 2007, with no sign of let-up.
The following chart shows you the S&P 500 along with the GAAP-based earnings for its component stocks.
As you can see, the earnings are already down from $85 at the top of the cycle to $46 in the fourth quarter of last year. And earnings estimates for the first quarter 2009 are nearly 10% lower, at $42.
The dire situation we're in today: Companies' lack of pricing power — and a recession that leaves hardly any sector unscathed — virtually guarantees further declines in earnings, making the current market valuations even further out of line.
Source: http://www.decisionpoint.com/
Argument #6
Earnings Will STAY Depressed
Longer Than Usual!
Among S&P 500 companies, profit margins reached an all-time high during this cycle, meaning that they must now fall back to a more normal level. This is what has happened in every major recession, and it's what almost inevitably will happen this time as well.
Specifically ...
In 1966, profit margins hit a high of 6% and then fell back to 3.5% in 1970.
In 1978, they rallied back up to 6% and then came all the way down to 2% by 1986.
In 1997, they rose again to 5.5% and fell back to below 3% in 2002. And now ...
In 2006, propelled by the big debt and high leverage of the recent bubble, they reached a record high of more than 8%.
But now, having started on a downward path again, it's highly improbable that profit margins will recover anytime soon.
Argument #7
Debt and Leverage Are Gone!
The facts here are even more shocking:
At the top of this cycle, the profits of the financial sector reached up to 30% of all S&P 500 earnings — thanks to psychedelic leveraging and drunken risk-taking.
Now, nearly all the extreme leverage in the financial sector — and nearly all the leverage financial institutions were providing other industries through 2007 — is no more.
Without a doubt, the forced sobering of the banking industry will have a long-lasting impact, and there is no way we can expect an early comeback of the old greedy days of Wall Street.
Argument #8
The Undeniable History of
Speculative Bubbles
Throughout history, after the bursting of every speculative bubble, prices almost invariably revert back to the level corresponding to the beginning of the bubble. In other words ...
Whatever boost the bubble gives to prices and values ... the ensuing bust inevitably takes it ALL back.
This held true for the global stock market bubble that burst in 1929 and for the Japanese stock and real estate bubbles that burst in the early 1990s. And if you go all the way back to the South Sea bubble, which burst in 1720, you will see this very same pattern.
So our task is simple: To identify the price level of the S&P 500 at the juncture when this entire moon shot was first launched.
And based on objective measures like the S&P's dividend yield or P/E ratio, we know quite well where and when that was:
The U.S. stock market bubble began in 1995, when the S&P 500 broke above the 500 level ... and it reached its climax in 2000, when the P/E ratio of U.S. stocks reached nosebleed levels of 38 on the S&P 500 and more than 200 on the Nasdaq.
Plus, there can now be little doubt that ...
Ever since 2000, the U.S. stock market has been in a protracted bear market!
To be sure, after the first two years of the bear market in 2000-2002, the Fed engineered a real estate bubble, which, in turn, produced a parallel stock market rally that prevailed during most of the middle years of this decade.
But now we can look back at the entire mid-decade rally and see it for what it really was: A mere interlude in a nine-year bear market (so far!) that began at the turn of the millennium.
So, looking back at history and looking ahead, it would not be unusual in the least to see the S&P 500 fall all the way back to the original starting level of approximately 500 for the S&P, validating and revalidating my forecast.
Will This Bear Market and Recession EVER End?
Of course it will, eventually. And when it does, incredible bargain opportunities will abound. But to make sure you can buy them, you must do two things:
(1) Keep your assets intact and ...
(2) Wait patiently for that day.
Wait for the damage of the bust to play itself out. Wait for P/E ratios to come back down to their lower range, corresponding to deep recessions of the past. Wait for at least 6% dividend yields. Then, start thinking about investing in a recovery.
Plus, there's one more thing you can do: Starting right now, you can grow your assets significantly DURING the decline.
Later this month, I will show you precisely how I'm planning to accomplish each of those goals with a new million-dollar contrarian portfolio I am managing.
I will make the trek from Berlin to Palm Beach, join Martin in an online video seminar, and lay it all out for you piece by piece, step by step.
Stand by for the invitation via email. And in the meantime, I look forward to getting your personal and direct input into how you think a dream portfolio should be handled in these tough times.
Best wishes from Berlin,
Claus
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