US probe takes aim at ratings agencies - and Buffett

US probe takes aim at ratings agencies - and Buffett
June 3, 2010 - 7:13AM

Credit rating agencies came under fire for their role in the global financial crisis on Wednesday, as senior industry figures -- including mega-investor Warren Buffett -- were grilled by US investigators.

Answering allegations that rating firms helped propel the sale of risky investments that poisoned the global financial system, senior officials from Moody's admitted mistakes were made, but denied any wrongdoing.

Buffett, who holds a major stake in Moody's, said the agency had "made the wrong call" in assessing some complex financial products but firms that failed after buying dodgy products should shoulder most blame.

"Financial institutions that have failed and have required the assistance of the federal government... the CEOs should basically go away broke, and I have said I think his spouse should go away broke," he said.

The powerful "big three" raters -- Moody's, Standard & Poor's and Fitch -- have been accused of blithely awarding mortgage-backed securities their lucrative "AAA" investment ratings simply to net more business.

These top ratings are often seen as a seal of approval by investors and a sign that a company, country or debtor will pay back borrowed cash on time and in full.

"The picture is not pretty," said Phil Angelides, the chairman of the Congress-appointed panel.

"From 2000 through 2007, Moody's slapped its coveted triple-A rating on 42,625 residential mortgage backed securities," he added. "Moody's was a Triple-A factory."

Raymond McDaniel, Moody's chief executive, told the commission it was "deeply disappointing" that the firm misjudged how risky mortgage-backed investments were, but said steps had been taken to improve the system.

"Moody's is certainly not satisfied with the performance of these ratings," he said, facing questions about why he had not resigned.

"There has been an intense level of self evaluation within our organisation," he said.

The rating agencies have come under fire from US lawmakers who are putting the final touches to financial reforms that would see stiffer curbs on how the firms do business.

Criticism has focused on the fact that agencies are paid by the same firms they rate.

Eric Kolchinsky, a whistleblower who once worked for Moody's, said the industry was largely unregulated and "given a blank check" to pursue profits over sound assessments.

"Rating agencies faced the age-old and pedestrian conflict between long-term product quality and short-term profits. They chose the latter," Kolchinsky said in prepared testimony.

He accused Moody's of lying about the influence that banks -- which packaged and sold the securities -- had over the ratings process.

"Banker requests to keep certain analysts off of their deals were granted," he said.

He also accused banks of concealing the worst-performing parts of bonds that banded together mortgage debt.

"I have had cases where bankers were, I believe, lying to me about where those were being placed and there's nothing that I could do about it. You know, there's no penalty for lying to a rating agency analyst," he said.

Moody's CEO McDaniel denied that "misleading or manipulative" information was used in ratings.

He also said that some proposals to regulate the market would "likely have a positive impact," but that other measures were "contradictory."

Rating agencies have returned to the spotlight in recent weeks as a string of European countries have seen their credit ratings downgraded, pushing the cost of borrowing ever-higher.

European Union officials on Wednesday called for a centralised monitoring of rating agencies, accusing them of sparking "attacks" by speculators.

Standard & Poor's and Fitch were not asked to testify, according to a panel spokesperson.

AFP


http://www.smh.com.au/business/world-business/us-probe-takes-aim-at-ratings-agencies--and-buffett-20100603-x05j.html

A quick look at Kenmark (2.6.2010)

A quick look at Kenmark (2.6.2010)
http://spreadsheets.google.com/pub?key=tyT8o3UdiCxgyUhc6ph3flg&output=html

Securities Commission probes Kenmark


Could I have predicted what would happen to Kenmark from its accounts?
Definitely NO

However, it is most unlikely that Kenmark will be a stock I would have in my portfolio based on my investment criterias.  Therein, lies my protection against buying such a stock.

Interestingly, here are the comments in the latest SPG (Dynaquest) in its recently released latest edition of March 2010 on Kenmark:

Kenmark is engaged in the manufacturing of wooden furniture which are mainly exported to the West.  In FY 08, it expanded from the LCD TV trading and distribution into the assembly of LCD TV.  Its 9M 10 results exceeded our expectations with earnings soared by 129.6% yoy.  We saw significant improvement in the Wood-based manufacturing segment although Trading segment is not doing so well.  Looking forward, improving business environment and better margin are going to fuel Kenmark's profit growth.

It was obvious that those in Dynaquest did not and could not forsee what was coming in Kenmark then.  ;-(

Padini versus Hing Yiap

From the above chart:
The EPS has grown from less than 10 sen to 40 sen since 2005. (3x)
Its dividend has increased from less than 5 sen to above 10 sen since 2005. (2x)
It share price has increased from about RM 1 to just below RM 4 since 2005. (3x)
Financial strength:  Excellent
Its PE is about 10.

Share price is RM 3.49 per share.
Its annualised EPS is 49.59 sen (est.)
Its dividend yield is 3.44%.
Its P/B is 1.9

----

From the above chart:

The EPS has grown from negative 5 sen to just below 25 sen since 2005. (5x)

Its dividend has increased from just above 0 sen to about 5 sen since 2005. (2x)

It share price has increased from just above RM 0.50 to RM 1 since 2005. (2x)
Financial strength:  Good

Its PE is about 4.

Share price is MR 1.09 per share.

Its annualised EPS is 37.29 sen (est.)

Its dividend yield is 7.64%. 

Its P/B is 0.49

----

The growth in EPS of Padini is due to its increasing revenue over the years.
The growth in EPS of Hing Yiap is due to its better profit margins with little increase in its top line revenue.
Padini is trading at higher P/E and higher P/B ratio compared with Hing Yiap.
Which company will grow its EPS at a faster rate in the future?
Which company will give a higher total shareholder return in the next 2 to 5 years?

Which company will you choose to invest into?

Would you invest into these companies today or wait for a more opportune time?

My subjective assessment:

Quality:   Padini > Hing Yiap
Management:  Padini (Great) > Hing Yiap (Good)
Value:  Padini is anticipated to grow its EPS at faster rate, therefore, it is not a surprise that its P/E is higher.  Hing Yiap may surprise on the upside, but it will need to be monitored.

20 Questions to Focus the Hold versus Sell Decision

Key to Investment Success
20 Questions to focus the hold versus sell decision
http://spreadsheets.google.com/pub?key=txuLCrK4TZX_7uR7KDlLE7A&output=html

Panic-Resilient Stocks

There are several groups of stocks that tend to act well in a post panic environment, especially if the crash itself drives prices to incredible levels.  Of course, the more unusual the values created, the quicker is the upside correction.  Some of the groups most likely to snap back are:

1. Recession-resistant industries (foods, drugs, utilities).
2. Noncyclical blue chips driven well down (oils).
3. Big names with corporate staying power (AT&T, Exxon, General Electric and General Motors).
4. Fortune 100 and similar companies with good yields.
5. Trade-down concepts like low-cost restaurants and discount retailers (recession "beneficiaries").
6. Companies with low P/Es or low price/cash flow ratios not in the first list here.
7. Companies selling below book value and with positive earnings estimates for the coming year (implying credibly sustainable book values).
8. Companies with low debt/equity ratios.
9. Unleveraged closed-end, non-junk bond funds.
10. Panic-trigger beneficiaries (e.g., oil-service and insulation stocks after OPEC raised oil prices in 1973).

All of these stocks are recession-resistant or perceived as among the most likely to survive hard times.  They retain market sponsorship and regain enthusiastic buyers soonest.  Related positively to the trigger event, they have high visibility because investors remember the concept vividly.

It is important to make hold/sell calls in the light of prevailing market expectation and not personal judgement of what may happen.  If the (correct) bet is no recession, the reward is smaller and slower than if the (correct) bet is market expectation of a recession (whether it comes or not).  The investor must subject his ego to the realities of the emotional climate.  It is better to be rich than to be vindicated slowly.

Stocks that don't fare well in a post-crash environment

Stocks that don't fare well in a post-crash environment

Stocks that tend to be sub-par performers in a post-crash environment are:

1. OTC issues
2. Low-priced stocks
3. Small total-capitalization issues
4. Thinly-traded, under- or non-covered stocks
5. Industry laggards
6. Recession-sensitive by industry
7. Discredited groups
8. Panic-trigger related groups

Because of fear, nervousness and lack of speculative appetite after a crash or panic, the first five groups (some of which overlap) lack sponsorship.  

In addition, because market panics generate immediate scare headlines in the media, there is talk of recession and parallels drawn with 1929.  So recession-sensitive stocks by industry do not bounce back much for a period of time.

There may, in fact, be no recession following the market's downmove (as in 1988), but perception and expectation drive prices near-term more than facts do.  So cyclicals like steels, chemicals, paper and capital-good producers are not solid choices for participating in the bounce.  Similarly, vacation and luxury stocks fare poorly.

The discredited groups vary from one market period to another.  Their identity depends on what was in the headlines in recent months.

• Basic industry stocks were taboo in the early 1980s, known as the 'rust-belt' period.  
• High-tech stocks suffered through a private, one-industry recession in the mid-1980s.  
• Banks were whipping boys in the early era of bad third-world loans.  
• Most recently, savings and loans have been in the doghouse due to bailout legislation and highly visible failures and scandals.

Again in a longer-term perspective, the facts may prove that the fear about leading companies in discredited groups was unfounded.  But in the short term after a crash there are few who have the courage to sponsor tarnished-image stocks with either money or written advice.  Such issues are early recovery laggards.

The final category should be off the hold list for similar reasons.  Sometimes there is an industry or category of stocks related to the news that triggers the panic selling.  

• In 1962, it was steel stocks sensitive to pricing confrontation with the Kennedy administration.  
• Brokerage stocks would have been poor choices to hold after the 1987 crash because of all the controversy surrounding program trading.  
• The 1989 crash was triggered by the collapse of the propose buyout of UAL, Inc., so airlines and other proposed leveraged buyout candidates were identifiable as the trigger-related group at that time.

Weathering a Panic

The central concept applicable to the 'buy and hold until fundamental changes' investor is the occasional need to play when it is painful.  But this concept specifically and only means to hold stocks that are being affected just by the overwhelming negative psychological forces that occasionally cause selling routs or panics in the whole market.

To put this very important limiting caveat another way:  when a crash or panic occurs, stocks should be 

• held only if they are going down because of market factors and 
• not if they are being affected by company factors.  

This should relate to only a few issues, however, because investors following a disciplined selling methodology (see related article below) already should have weeded out the bad performers and taken profits on the stellar performers well before a bear market reaches climax proportions.

So when appropriate selling has left an investor with only a few, high quality stocks, he can and should hold onto the gems and play through the difficult experience of a panic or crash.  He will be holding only a relatively small portfolio (having followed the other cashing-in suggestions well before the bottom nears), so his level of pain will be no worse than moderate.  And his cash holdings will give emotional comfort and provide the resources for acquiring stocks advantageously when prices get really low.

Some investors may see a contradiction in this advice because they were usually counseled that avoiding losses is the first priority and the best reason for selling.  But taking a short-term dose of paper losses in a crash - by holding quality issues - is a lesser risk than selling out during the fury, and hoping to have the courage and good executions to get back in at lower prices shortly afterward.

If an investor is down to just a few core holdings anyway, he is better advised to tough it out.   The very experience of playing in pain through a temporary crash (think of the October 1987 and October 1989 bashings) is of enormous instructional value despite the modest monetary cost involved.  The process of crisis-thinking and the need to make wrenching decisions that prove valid in short order will serve him well for the rest of his investment career.

Once he has successfully navigated the worst of the choppy investment seas, he will have learned survival lessons and will have internalized feelings and taken in an experience that will be forever his.  That experience deepens his understanding of the way the market works.  Probably most of all, having won at a different game, he develops the wisdom and courage to succeed in similar circumstances in the future.  And that provides the opportunity to make big profits in the handful of similar opportunities that will occur throughout the rest of his investing career.  He will know beyond any shadow of a doubt that the contrarian philosophy of investing works.

When caught in a panic, the central question is whether capitalism in the United States and major Western democracies will continue to function after the panic ends.  If the answer is yes, then there is no reason to sell at foolish levels.  In fact, the only rational thing to do is take courage and make buys.  Being gutsy enough to act on the contrarian test - refusing to sell good stocks cheap because Wall Street and Main Street have lost faith for a few days - insures appropriate selling.  It is difficult to buy in a panic.  Those who can do so are rational enough to sell with discipline as highs approach.

There is one more qualifier on whether to hold or sell after a panic has passed.  Once the panic subsides, there is a lift in the market.  But the effect is significantly different on various kinds of stocks.

• For some issues, there is a sharp snap-back rally; 
• for others, there is very little improvement.  

Just as it is not advisable to sell into the panic, it is prudent to reassess positions after the selling frenzy has subsided and the lift in prices has begun.

The object, as always, is to decide what to sell and what to hold.  Selling should not be urgent because pre-bear-phase tactics will have raised a lot of cash, so there's no need to sell to raise cash for margin calls or buying.  But because the goal is always to maximise return on capital and to take advantage of the time value of money, look closely at what to hold and what to sell after the panic has cleared.


Related:

To hold or to sell? Holding should occur only if no tests for selling are failed.

To hold or to sell? Holding should occur only if no tests for selling are failed.

To hold or to sell?

In any discussion of holding versus selling stocks, the circumstances under which it is best to sell should be outlined first.  Holding should occur only if no tests for selling are failed.

The company-related reasons to sell are:

1. Sell if the news cannot get any better.
2. Sell if things did not go as planned.
3. Sell when the broker's advice goes from 'buy' to 'hold.'
4. Sell if company fundamentals are getting sick.
5. Sell on the rebound in the aftermath of material, unexpected or discrete bad news.
6. Sell in certain cases when expected news is delayed.

The market-action reasons to sell are:

1. Sell when the stock reaches the target.
2. Sell on an unsustainable upward price spike on big volume.
3. Sell when a portfolio shows all gains.
4. Sell if the stock is lazy money and likely to stay that way.
5. Sell using above-market limit orders, letting the market come to the investor.
6. Sell with a stop-loss order, but never remove or lower it.

Investor-related reasons to sell are:

1. Sell if the stock would not be bought again today.
2. Sell after gloating or counting the chips.
3. Sell rather than hope against hope for a 'maybe' bailout.
4. Sell and step aside on a personal losing streak.

If an investor sells stocks in a disciplined manner using the signal above, he is likely to end up with a good deal of cash before the market moves into a bear cycle.  Relatively few of his holdings will fail to hit one of  the 16 triggers noted in those lists above.  Those stocks that do survive will tend to be high-quality growth issues that have continued to perform fundamentally and have not run up to unreasonable price levels.  Some experts refer to these as core holdings or 'businessman's risk' foundation stocks.  They are stocks that have given consistent indications they can be held through good and bad in the market.

All other stocks will have become sales before a panic bottom because:

1. They worked as planned.
2. They acted too well for a brief period of time.
3. They got unreasonably priced.
4. They were wasting the time value of money by going nowhere.
5. They developed significant fundamental problems. 

Very few stocks can escape all those screens for a long period.  So if an investor is cashing in as prescribed and if his buying discipline rejects new positions when valuations get too pricey, he ends up still holding very few stocks as the market get toppy.  That, of course, protects his capital.

There are two major price-driving forces:

• fundamentals (which control the long term) and 
• psychology (which rules the short and medium term).

The fundamental and psychological factors affect stocks in both directions.  And as an overlay, understand that they can affect a stock either

• directly (because of the company behind the stock itself) or
• indirectly (because the market trend is so strong that virtually no stocks can buck it).  

However, the indirect effect is much stronger on the downside than on the upside:  fear is a more powerful driver than greed.

A quick look at Tongher (1.6.2010)

A quick look at Tongher (1.6.2010)
http://spreadsheets.google.com/pub?key=t2X6FmxNNj1TdVzbILYWisw&output=html

Benjamin Graham Checklist for Tongher (1.6.2010)
http://spreadsheets.google.com/pub?key=tKx4P-KOukcZSbwh7AABKiA&output=html

Plantation workers’ permit extended for five more years

Plantation workers’ permit extended for five more years
May 31, 2010

KUALA LUMPUR, May 31 — The government has given the green light for the extension of the permit for foreign workers who have worked for five years in the oil palm plantation sector, Deputy Prime Minister Tan Sri Muhyiddin Yassin said.

He said the extension, for five more years, was to address the shortage of workers in the sector.

“The government is concerned over the shortage of workers in the plantation sector, especially in the oil palm sub-sector.

“The government is aware that if drastic measures are not taken to address the problem, it will affect the productivity and competitiveness of this sub-sector,” he said in a statement.

He said plantations were among the sectors which relied heavily on foreign workers due to the lack of interest among the locals workers. — Bernama

http://www.themalaysianinsider.com/malaysia/article/plantation-workers-permit-extended-for-five-more-years/

Capital Gains tax: buy-to-let investors must tear up retirement plans

Capital Gains tax: buy-to-let investors must tear up retirement plans

Britons relying on buy-to-let investments as their pension funds will have to tear up their retirement plans and start again, experts warned late last night.

By Myra Butterworth, Personal Finance Correspondent
Published: 12:01AM BST 28 May 2010



The tax rise is a fresh blow to more than a million Britons with buy-to-let mortgages who saw heavy falls in their investments amid the housing slump

The rise in tax paid on capital gains from its current level of 18 per cent will badly hit these investors when they come to sell their properties.

It means those near retirement will receive much lower returns than they were expecting if the Government increases the rate to 40 per cent or even 50 per cent, and will have to continue working later than they expected.

Jonathan Cornell, of mortgage brokers First Action Finance, said: “Clearly anyone that is hoping to fund their retirement from their buy-to-let portfolio would have taken capital gains tax into account. But they had better rip up those calculations and start again as their fund value will be decimated.”

It is a fresh blow to more than a million Britons with buy-to-let mortgages who saw heavy falls in their investments amid the housing slump.

Average values dropped more than 16 per cent during the financial meltdown in 2008, and even though they have since risen as Britain emerges out of the recession, current prices are still at 2005 levels, according to the latest house price index by Halifax.

Andrew Montlake, or mortgage brokers Coreco, said: “With the buy-to-let property boom during the past decade, many people switched their pension funds out of the stock market and into bricks and mortar. But with the rise in the capital gains tax, they will be hit hard and will no doubt feel let down by the Government.


“They’ll now have to be revisiting their retirement plans and considering their next steps. They made sensible investment decisions and are now being penalised.”

Accountants said it is “inherently wrong” to tax such investments at the same rates as income tax of up to 40 per cent or 50 per cent.

Mike Warburton, of accountants Grant Thornton, said: “It is one thing putting up tax rates, but it is fundamental unfair for inflationary gains to suffer tax at income tax rates.

If someone has invested in shares or property over a long period of time, a significant part of that gain is going to be inflationary. It is inherently wrong to tax that gain at income tax rates. Politicians need to be aware that this is an issue of fundamental fairness - as emphasized at the start of the Queen’s speech.”

Property investors are also suffering from a drought in mortgage finance with lenders restricting the best deals for those with a significant deposit.

The tough situation will force some investors to sell their properties while the lower rate is still in place.
Jeremy Leaf, a spokesman for the Royal Institution of Chartered surveyors, said: “The prospect of higher capital gains tax on the sale of property may in the near term encourage some existing landlords to take advantage of the current more benign tax regime.”


http://www.telegraph.co.uk/finance/personalfinance/capital-gains-tax/7773029/Capital-Gains-tax-buy-to-let-investors-must-tear-up-retirement-plans.html

Gold bulls claim price could double to $3,000 in five years

Gold bulls claim price could double to $3,000 in five years

Fears that American, British and other governments intend to inflate their way off the rocks of excessive debt prompted record inflows into gold this week.

By Ian Cowie
Published: 7:35AM BST 20 May 2010

Now some fund managers claim the price could more than double to $3,000 (£2,080) per ounce within five years.

Heavily indebted governments throughout the developed world are struggling to fill deficits of black-hole dimensions in public finances by imposing spending cuts and tax rises. Both are expected in Britain's emergency Budget on June 22 and neither will be popular.

But keeping interest rates lower than inflation and letting the currency take the strain is another way to reduce the real value of debt. You can see why politicians may feel that is the ''least worst'' option.

Stealthily robbing savers by eroding the purchasing power of money is less likely to cause riots in the streets than spending cuts, because inflation tends to hit older people hardest while unemployment hits the young.

Governments can devalue their own currencies, but it is harder for them to make more gold. That fact helped prompt record inflows of $484m (£336m) into gold exchange-traded commodities this week, while gold trading volumes peaked at $2.1bn (£1.45bn).

However, the precious metal is not a one-way bet and it slipped back below $1,200 (£830) on Thursday as some investors took profits amid anxiety about an unsustainable bubble in the gold price.

Graham French, manager of the M & G Global Basics Fund, was undeterred. He said: "In a scenario of rising sovereign risk, where government finances are hugely overstretched and central banks have been systematically devaluing paper money, gold's value as a safe haven and a stable physical currency can only increase over the medium term.

"Against this backdrop, the gold price could go much higher than these already elevated levels. It wouldn't be too far fetched to see it rising above $2,000, or even up to $3,000."

Mr French's strategy is based on the belief that things that emerging markets sell will fall in price over the next five years, while things that emerging markets buy will rise in price.

The explanation is that demand from the heavily indebted developed world may remain subdued, while demand from largely debt-free consumers in emerging markets will rise.

Rupert Robinson, chief executive of Schroders Private Bank, said: "Gold is setting record highs in almost every currency, despite headwinds including a strong dollar and monetary tightening in India and China, the main end markets for gold. Today's economic environment makes gold a must in any client portfolio.
"Interest rates are at historically low levels; central banks are bailing out the system; we have seen a huge amount of quantitative easing; currencies being debased and governments around the world are short of money.

Nothing goes up in a straight line, indeed there are signs that gold may be becoming over-owned and too fashionable in the short term, but I think that over the long term gold is a good asset to hang on to. It could easily reach $2,000 per ounce within the next five years," Mr Robinson said.

Richard Davis, of BlackRock's Natural Resources team, added: "Gold always does well in times of uncertainty, and this week is no exception. Lingering concerns over the Greek bail-out, uncertainty over global economic growth, and an inconclusive election result in Britain have all created nervousness in stock markets, and risk-averse investors are looking to gold as a store of value.

The fact that gold bullion is a real asset, which does not depend for its value on any company or government, makes it compelling as a 'safe haven' investment. Gold bullion is particularly popular in Asia and the Middle East and investors in these regions have continued to pile money into the asset class.

"It is worth noting that, adjusted for inflation, gold is still some way off its all-time high of $850 per ounce in 1980, equivalent to more than $2,200 in today's terms."

Adrian Ash, of BullionVault.com, said: "Inflation alone is not the driver. It's real interest rates that matter, because if cash is beating inflation, no one needs gold. Whereas when cash loses value, year after year – and if the major productive alternatives, such as bonds, shares and property, also fail investors as well – then gold really comes into its own.

"Cash is being actively devalued – and not just in Britain; the Eurozone crisis is only the latest prime mover. Underlying the decade-long upturn in gold is a repeated attack on the virtue of savings," Mr Ash said.

Gold's fundamental appeal remains that it is a store of value that is largely immune to government intervention.
Mr French observed: "The great Irish dramatist George Bernard Shaw said: 'You have to choose between trusting the natural stability of gold or the natural stability and intelligence of members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.' I have to say, I'm with Bernard Shaw on this."

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/7743787/Gold-bulls-claim-price-could-double-to-3000-in-five-years.html

MPC's Adam Posen warns Britain at risk of Japan-style deflation

MPC's Adam Posen warns Britain at risk of Japan-style deflation

Britain is at risk of sliding into a Japan-style episode of deflation, and may be even worse-equipped than the Asian country to escape, a Bank of England policymaker has warned.

By Edmund Conway
Published: 8:45PM BST 24 May 2010

Adam Posen, a member of the Bank's Monetary Policy Committee, said that although Britain and the US were unlikely to face repeated recessions, in many senses their plight was "scarier" than Japan's. The warning is of particular significance because Mr Posen - an American economist - was recruited to the MPC partly because he is a renowned Japan expert.

In speech at the London School of Economics, he said: "The UK worryingly combines a couple of financial parallels to Japan with far less room for fiscal action to compensate for them than Japan had."

Britain faces an uncomfortable trio of obstacles, none of which faced Japan in the 1980s or 1990s.

• Unlike Japan, Britain has to sell a large proportion of its debt to overseas investors, who are more likely to exit the market if they become scared of Britain's fiscal prospects. 
• The UK also faces the challenge of having to boost a troubled manufacturing sector if it is to recover sufficiently. 
• Unlike Japan, it does not have the luxury of having a worldwide market with a large and growing appetite for exports.

He also warned that the banking system's continued troubles would undermine companies' abilities to raise funds, and pointed out that businesses already appeared to be hoarding savings - something which happened in Japan.

Using a film analogy, Mr Posen said that it was possible that there could be UK "remake" of the Japanese episode.

"Unfortunately, the ironic twist for this upcoming film is that in some ways the remake might be scarier than the original. That risk arises not only because the original Great Recession was not quite so scary as previously thought on close viewing, but because Japan actually had various resources with which to manage its situation while the UK and other economies are not similarly endowed, even if some Japanese policymakers failed to take advantage of them."

The warning may come as a surprise to some, since last week the Office for National Statistics revealed that the Retail Price Index measure of inflation had risen to an 18-year high of 5.3pc. However, there is a growing number of economists who fear that the current relapse of financial stress could spark a global double-dip recession.

Andrew Roberts, credit strategist at RBS, said last week that the world could be heading for Great Depression II. Albert Edwards of Societe Generale expects some years of deflation, followed by hyperinflation as countries monetise their deficits.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7760827/MPCs-Adam-Posen-warns-Britain-at-risk-of-Japan-style-deflation.html

Euro crisis: how the experts are positioning their portfolios

Euro crisis: how the experts are positioning their portfolios

Markets have become more volatile in recent weeks, but many fund managers have ruled out any possibility of a full-blown stock market crash.

Published: 3:05PM BST 29 May 2010

However, the eurozone crisis is worsening and many analysts are predicting a double-dip recession and further market falls.

No one can predict what will happen but the best way to avoid boom-and-bust cycles is to make objective investment decisions that ignore fashions. We talked to the leading portfolio managers to see how they were mixing their assets.

JOHN CHATFEILD-ROBERTS, JUPITER
We fear that Greece is merely the canary in the coal mine and there is, sadly, considerable potential for more social unrest in some European countries. We therefore have very limited exposure to European equities right now; but while the West has suffered from over-indebtedness, developing countries such as China and India continue to produce impressive economic growth.

This is why our Jupiter Merlin portfolios have significant exposure to Asia and Latin America, via Findlay Park Latin America and First State Asian Equity Plus. In such an uncertain environment, we believe that we should retain an element of insurance in our portfolios.

All our portfolios have what we deem to be sensible exposure to both gold, through a Physical Gold exchange-traded fund (ETF), and the US dollar through Findlay Park US Smaller Companies and Jupiter North American Income funds.

MARK HARRIS, HENDERSON
Our central expectation is that markets will stabilise temporarily but that recent euro troubles will reassert themselves over the summer. We are taking a cautious approach. We have been at our minimum allowable weightings in European equities, using defensively positioned funds such as the Ignis Argonaut European Alpha Fund and the BlackRock European Dynamic Fund.

We have also been hedging our euro exposure back into US dollars to prevent potential currency losses together with tactically selling Euro Stoxx futures to reduce the underlying market exposures in our portfolios. The currency and market hedging reflects efficient portfolio management but, most importantly, helps to protect our clients' money.

But the volatility of the past few weeks need not be a cause for panic. Pullbacks present potential buying opportunities and the number of companies beating earnings expectations could help to balance concerns about sovereign debts.

Weakness in the euro is beneficial to European exporters and any further setbacks to markets will leave European equities attractively valued. We will look to buy funds with exposure to high earnings revisions, exposure to industrials and minimal weighting to peripheral Europe.

MARCUS BROOKES, CAZENOVE
We have been positioned for further malaise in markets. We felt that the backdrop for markets was deteriorating as valuations were reflecting a benign environment, whereas the weakness earlier in the year showed that there remained some stress in the financial system.


The Cazenove Multi-Manager Diversity fund has a cash position of 20pc and defensively positioned equity funds (Invesco Perpetual Income fund, JO Hambro UK Growth), and we have reduced the exposure to long biased hedge fund strategies in favour of funds where the manager was positioning for equity declines (Jupiter Absolute and the Eclectica Hedge fund).

Additionally, currency concerns relating to the euro saw us have a position in gold and other assets denominated in US dollars, as these typically do well in times of stress.

We are aware that markets have moved strongly, targeting the European equity market and the euro in particular. This will present an opportunity to buy cheap assets once the fear causes irrational selling, but we do not feel we are there yet.

http://www.telegraph.co.uk/finance/personalfinance/investing/7782871/Euro-crisis-how-the-experts-are-positioning-their-portfolios.html

Financial crisis has left China stronger, says HSBC head

Financial crisis has left China stronger, says HSBC head

The chief executive of HSBC in China has said the financial crisis has only made the country stronger, with its exporters becoming leaner and more efficient.

By Malcolm Moore and Adrian Michaels in Shanghai
Published: 7:30PM BST 30 May 2010

"As demand comes back, people are going to find that China has a better and more efficient export machine," said Richard Yorke, who has presided over a dramatic expansion plan for the bank on the mainland since 2005.

The Government's decision to pour an additional 7 trillion yuan (£70bn) of new bank loans into the economy last year, coupled with 4 trillion yuan of stimulus cash, allowed China's exporters to invest in new plants, many of them inland where costs are lower. The stimulus cash also paved the way for vast improvements to China's road, rail and port infrastructure, further cutting costs.

Mr Yorke said China's exports were poised to bounce back so strongly that the country could take an appreciation of the renminbi in its stride. "The currency can go up because costs have gone down.

Manufacturing inland means low or no housing costs and lower wages."

Chinese policymakers have remained cautious about the outlook for exporters, especially given the concerns over the eurozone, which is still China's biggest foreign market, accounting for 25pc of overall exports once the shipping routes through Hong Kong are factored in.

In March, China ran a $7.2bn (£4.9bn) trade deficit, although this was mostly due to the timing of the Chinese New Year holiday on factories and reversed to a $1.7bn surplus again in April. Mr Yorke said HSBC was continuing to build its China business, 70pc of which is presently made up of offering banking services to foreign multinational companies. However, he said that the mix of loans that HSBC is offering is shifting away from manufacturers and towards retailers, property developers and companies selling consumer goods as China moves into the next phase of its development.

He confirmed that HSBC is now looking for a joint venture with a Chinese partner that will allow it to trade securities. As Shanghai moves to become a major financial centre, Mr Yorke said the government would "continue to deregulate" the financial system "but sensibly". "The country is managed extremely well and has a very competent central bank," he said.

He also took a swing at the various Western banks, including Royal Bank of Scotland, which have sold down their stakes in Chinese financial institutions. "You cannot change your China strategy every quarter," he said.


http://www.telegraph.co.uk/finance/financetopics/recession/china-economic-slowdown/7786913/Financial-crisis-has-left-China-stronger-says-HSBC-head.html

Euro crisis: how will it affect me?

Euro crisis: how will it affect me?
What caused the European debt crisis, how long will it last, and how worried should Britons be?

By Paul Farrow
Published: 2:26PM BST 29 May 2010

Europe is in crisis. Austerity measures have been announced in several countries including Greece and Spain, the euro is under pressure and stock markets across the globe have fallen sharply from their recent highs – and it is all due mainly to sovereign debt.

But what is sovereign debt and why has it caused a crisis? And should people in Britain be worried?

We have spoken to the experts to help answer these questions.

Q I keep hearing about sovereign debt. What is it?
National governments issue bonds as a way of borrowing to help meet their spending on education, health, defence and so on. Just like any bond, a sovereign debt bond pays investors interest over its term and the bondholder gets his money back on maturity. In Britain, these bonds are better known as gilts.

Andy Howse, investment director for fixed income at Fidelity, said: "The promise to repay is not a guarantee. The strength of the promise is a function of the size of the debt compared to the economy in question and the cost of servicing that debt. This can change over time and between nation states."

Q What has caused the debt crisis?
In a word or two, over-borrowing. Sovereign debt is fine so long as the governments have no problem repaying the debt. But several countries have borrowed beyond their means – the ramifications of the financial crisis have left them struggling to repay their debt. This is why the IMF has agreed a financial package to bail them out.

"Greece and other countries will struggle to pay off these debts. This has led to a dramatic spike in borrowing costs for these countries, exacerbating the problems further," Mr Howse added. "Investors have begun to question the future of European Economic and Monetary Union and whether the crisis may spread beyond the peripheral European countries."

Q Which countries are affected?
Before last week the main countries that had been affected were Greece, Italy and Portugal. Last week it was the turn of Spain to announce austerity measures, while Ireland has problems too, although it is trying hard to cut its deficit.

Q Will it spread to Britain?
Only Rip van Winkel would be unaware that the UK also has a huge deficit, and so there are concerns that the crisis could spread to these shores. This was why the new coalition moved swiftly by announcing £6bn worth of cuts. This has assured investors, for the time being, that Britain will be able to reduce its deficit and repay gilt investors.

"We have more flexibility and it was very important for George Osborne to reassure global markets that our deficit is being tackled," said Azad Zangana, European economist at Schroders.

Mr Howse agreed: "A weaker pound should boost the economy by making exports more competitive, and interest rates should remain very low for an extended period. But we can't ignore this debt crisis in Europe because of the effect it may have on the level of global economic activity."

Q Should I be worried?
The good news is that Britain has some advantages over the likes of Greece and Spain. The main one is that it does not belong to the euro and so is able to manipulate the pound to try to boost our economy via interest rates. "We can devalue our currency, which makes the borrowing cheaper. Greece can't do that because it belongs to the euro," said Mr Zangana.

But don't get too complacent. Britain's position is still precarious – £6bn worth of spending cuts won't be enough to clear our £156bn deficit, and remember that our economy is reliant on its trade links to Europe. "The UK is in a relatively good position. It can set its own interest rates and has its own floating currency, which are important mechanisms for managing economic growth," said Mr Howse.

"However, the UK is not insulated from debt problems and it is in our interest that the crisis is contained and managed by the EU, IMF and other central banks."

Q How big an impact could the crisis have on the UK?
Half of all of Britain's exports go to the Continent, so if Europe's economy grinds to a halt we will feel the impact. Companies could struggle to increase sales, our economic recovery could hit the buffers and, ultimately, jobs could come under pressure.

Howard Archer, an economist at Investec, said: "There is increased pressure on Britain. The FTSE has been hit already, there are concerns of a double dip, and it's bad news for exporters, which could have a knock-on effect of the wrong kind on our domestic economy.

"The June 22 Budget is key. If the measures don't work there will be a loss of confidence in UK assets and that could store up other problems such as higher interest rates."

Q What about my investments?
You won't need reminding that every time a dark cloud hangs over our economy, or the economies of our trade partners, stock market investors run for the hills, causing share prices to fall. This is what has happened over the past fortnight or so – the FTSE100 has tumbled from 5,700 to under 5,000, although this week share prices recovered despite the eurozone crisis worsening.

But, again, don't be complacent. Most experts agree that markets are likely to be jittery for a while yet.

Q Is there a danger of a second banking crisis?
This is something that the markets have been speculating over during the past few weeks. Greek, Spanish and Italian bonds are widely held by governments, banks and institutions worldwide and this is why bank shares have been particularly hit in the recent turbulence.

Mr Howse said: "Central banks and governments have learned tough lessons from the financial crisis of 2008/09 and are very unlikely to let these problems go so far as to break the global banking system."

Q I bank with Santander. Should I move bank accounts?
Santander recently emphasised that its British operation is self-funding, raising cash from British savers to back loans to British borrowers, and does not require capital from its Spanish parent. Santander's British subsidiaries are regulated by the Financial Services Authority and individual savers are protected by the Financial Services Compensation Scheme.

The FSCS, a statutory safety net, can pay out 100pc of the first £50,000 lost per saver per bank or building society. Up to 90pc of pension and life assurance savings are also protected by the FSCS safety net.

A Santander spokesman said: "Customers need not be worried as both Santander and Santander UK are strong businesses focused on retail banking with no exposure to toxic financial products. Our UK business is strong and has a standalone credit rating of AA."

Q Will the crisis go on for much longer?
Most likely. The Greek bailout is over three years, which suggests there is no quick fix. "I think we will have a bumpy ride for a few years. There is a real sense of uncertainty on how this crisis will pan out," said Mr Zangana.

Mr Archer added: "It is very, very fragile and the eurozone crisis is deep-seated and so will not disappear overnight. We need the bailout package to be implemented as soon as possible and for the affected countries to get their act together."

Q I'm worried about losing money. What should I do?
Fund managers will talk about market blips throwing up buying opportunities while economists will make predictions that are wrong as often as they are right. It comes down to your attitude to risk and your financial goals.

It's your money and if you are of nervous disposition then invest in safe assets. The safest is cash, of course. Interest rates are low but ask yourself whether you would rather make 2pc or risk losing 10pc.

Review any investments and ensure that your portfolio is diversified for damage limitation reasons if markets implode.

http://www.telegraph.co.uk/finance/personalfinance/consumertips/7782558/Euro-crisis-how-will-it-affect-me.html

Kenmark shares halted as MD goes AWOL

Kenmark shares halted as MD goes AWOL

By Lee Wei Lian May 31, 2010
KUALA LUMPUR, May 31 — Shares of furniture maker Kenmark Bhd were suspended after they sank this morning as news that its managing director went absent without leave spread in the market.

In a response to a query from Bursa Malaysia, Kenmark said only two independent directors of the company were present during the company’s audit committee meeting on May 27 to discuss the company’s fourth quarter results and that managing director James Hwang, a Taiwanese, has not been contactable since last Tuesday.

Kenmark also said that the independent directors discovered at the audit meeting that key company executives, including deputy general manager Goh Kim Chon as well as the finance and administration manager, have also resigned.

The May 27 audit committee meeting could not proceed as there was no representation from the management, and the fourth quarter results that was to be discussed was not made available. The independent directors subsequently tried to contact the MD on his mobile phone but were unsuccessful.

Attempt to contact the Hwang and the other executive directors at the company’s Taiwan office via the telephone and fax also failed.

Kenmark shares had fallen 19 sen to 14 sen by 9.15am and dropped another 3.5 sen before being suspended at 10.10 am. Trading in the shares will resume tomorrow.

The independent directors, Zainabon Abu Bakar and Yeunh Wee Tiong, had on the morning of May 29 gone to Kenmark’s premises at Port Klang. There, they noted that the premises had been sealed and a security guard placed to secure the premises.

Former Kenmark executives informed the independent directors that EON Bank Berhad (EBB) has been notified of the situation and EBB had, on May 27, placed their security guard at the premises. EBB will also be appointing a receiver over the assets of the company.

Kenmark Paper Sdn Bhd, a wholly-owned subsidiary of Kenmark, received a letter today from EBB’s solicitors, dated May 28, advising of the appointment of a receiver.

Kenmark’s website states that the company was incorporated on Sept 15, 1988 and was listed on the Second Board of the KLSE on Nov 3, 1997, before transferring to the Main Board on Sept 3, 2001.

The website also states that part of the manufacturing facilities have been moved to Vietnam.

The independent directors will now make an appointment to meet with Bursa Securities today and said that they were willing to co-operate with all parties concerned.


http://www.themalaysianinsider.com/business/article/kenmark-shares-halted-as-md-goes-awol/

Capital Gains Tax: Uncertainty causing panic among private investors

Capital Gains Tax: Uncertainty causing panic among private investors

Stockbrokers are being "overwhelmed" with calls from worried and confused investors.

By Ian Cowie
Published: 12:05AM BST 30 May 2010

Stockbrokers are being "overwhelmed" with calls from worried and confused investors unsure what to do about the threat of a rise in Capital Gains Tax to 40pc.

The Coalition Government has said that it intends to increase the rate of CGT in line with income tax, but it has been scant on detail about which non-business assets will be caught in the net and whether there will be any relief to take inflation into account.

There are concerns that any tax rise and reduction in CGT allowances will hurt the small shareholder the most, rather than wealthy "fat cat" speculators. According to HM Revenue & Customs' own statistics, more than half, or 53pc, of all the people who paid CGT in 2008 – the last year for which HMRC has published figures – did so on gains of less than £25,000, a sum equivalent to the national average wage.

As a result, these 130,000 investors paid a total of £211m in tax or just 3pc of total CGT revenues from individuals that year. About 17,000 people declared gains of less than £10,000 before deduction of the current CGT annual allowance of £10,100 – and they accounted for 0.8pc of gains.

By contrast, more than 80pc of all individual CGT was paid by people declaring gains of more than £100,000 each. About 2,000 individuals declared gains of more than £1m each and paid a total of more than £2.9bn in CGT.

Charlotte Black of Brewin Dolphin, the private client investment manager, said: "We are being overwhelmed with clients calling for advice – particularly those approaching retirement, for whom this might destroy their plans to be self-reliant in their old age. We are deeply anxious that any rise in CGT is done without penalising small investors and savers and treating them like get-rich-quick merchants."

Gavin Oldham, the chief executive of the Share Centre, said: "We've had lots and lots of calls from worried small shareholders. Spread-betting is the mighty anomaly in this. This will take money out of the stock market and put it into the pockets of the bookies as gains on spread bets are not liable to CGT."

The Telegraph is calling on the Prime Minister to protect the savings of small investors and second home owners from the rise in CGT. While we support the Government's efforts to cut the deficit, we fear that changing the rules on CGT will hit those who have prudently saved by investing in property or shares.
Ms Black added that investors were confused and that the rise would damage their ability to manage their portfolios efficiently. She cited the National Grid rights issue as a case in point.

"Removing the annual exemption will hit small investors who put their money directly into shares, but choose to sell their holdings in one company and buy in another for portfolio management reasons e_SEnD or, for example, to take up the current rights issue at National Grid," she said.

"They will be effectively locked into holdings, making the market less fluid and reducing the ability of individuals to manage their investments. Or they may feel forced to use more expensive investment vehicles such as offshore bonds, which are not subject to CGT."

Amid rising concern about the unintended consequences of the proposed changes, the Association of Private Client Investment Managers & Stockbrokers (Apcims) has written to George Osborne, the Chancellor of the Exchequer, asking him to consider small investors before he acts in next month's emergency Budget.
The association said the proposals seemed to be "unfair and discriminatory against small shareholders".

In particular, Apcims has urged the Chancellor not to cut the CGT allowance. The Government proposes to raise the rate of CGT from its current fixed 18pc to a level closer to individual investors' top rate of income tax; this could raise CGT to 40pc or 50pc. The Liberal Democrat manifesto said the allowance or starting point for this tax should be cut from £10,100 to £2,000.

John Hall, Apcims' chairman, asked the Chancellor to balance any increase in the rate of CGT with reliefs to reflect the illusory element of gains comprised by inflation. He said: "The impact falls particularly heavily on the smaller individual investor who is more likely to be a longer-term investor than a professional.

He added that experience showed that higher rates of CGT resulted in lower revenues, as investors either used avoidance strategies or simply decided not to sell.

This is the conclusion from the Adam Smith Institute. Its study The Effect of Capital Gains Tax Rises on Revenues states: "Capital gains tax rates in the USA have changed considerably up and down in recent decades and provide a rich seam of data with which one can come to solid conclusions on the revenue effects of such changes.

"The current policy debate in the UK is being conducted amid a remarkable absence of facts. Policy-makers need to proceed carefully and ensure they take an evidence-based approach in order to avoid unforeseen negative consequences of rushed, ill-informed decision-making.

"The pattern shows that every time capital gains tax has been cut, CGT revenues have risen. Every time the tax has been raised, revenues have fallen."

Experts agree that while the pressure is on the new Government to come up with ways of squeezing extra tax revenue from all available sources, there is a danger that we will see a series of short-term decisions on CGT that could have unintended consequences for small investors, owners of second homes, buy-to-let landlords and business entrepreneurs.

Jayne and John Symons (pictured) own shares and a buy-to-let investment to help fund their retirement. Mr Symons said: "It is very difficult to plan ahead, but when the Government changes the rules so drastically, it is even harder. We could end up having to work forever."

Richard Mannion of accountants Smith & Williamson pointed out that CGT was never going to be a huge money spinner for the Government, so its main purpose was probably in completing the range of taxes in order to prevent leakage of income tax. He said: "The most difficult policy areas are arguably the treatment of business assets and the private home. Should business assets be liable at a lower rate of tax and if so how best to accommodate that policy?

"Should private homes be liable to tax? The lack of tax cases on the subject over recent years suggests that the present system for dealing with private homes works and so one would recommend the 'if it ain't broke, don't fix it' principle.

"We need to have a CGT system which is as simple as possible and which will last to provide certainty for all."

http://www.telegraph.co.uk/finance/personalfinance/capital-gains-tax/7782563/Capital-Gains-Tax-Uncertainty-causing-panic-among-private-investors.html

Beijing in a sweat as China's economy overheats

Beijing in a sweat as China's economy overheats

China is struggling to contain the threat of an overheating economy in the face of rising house prices, inflationary wage increases and a continuing surge in money supply, the head of the country’s second-largest bank has warned.

By Peter Foster and Adrian Michaels in Beijing
Published: 8:40PM BST 30 May 2010

China is contending with a continuing surge in money supply

Guo Shuqing, chairman of China Construction Bank, said that the latest figures for China’s M1 money supply – a key predictor of inflation – had raised concerns that the country’s vast stimulus and bank-lending was running too hot.

“I saw the figures for last month and M1 is still very high, increasing 31pc from last year, which is one per cent higher than last month,” he said in an interview with The Daily Telegraph.

“We are seeing a lot of money coming to China which is creating a current and capital account surpluses.”

China’s regulators have introduced a raft of measures in recent weeks in an attempt to cool down the economy, forcing banks to raise the capital adequacy ratios and hitting second home buyers with regulation designed to drive speculators out of the property market.

However, Mr Guo warned that the effectiveness of measures to cool house prices, which have risen by up to 40pc this year in some major cities, could be blunted by the massive reserves of cash still being held by private developers. “Sales are falling but prices are not,” he said.

“Developers have a lot of cash, so they’re not too concerned at the moment.”

“Property prices are definitely seeing something of a bubble, but it differs from city to city. You can see prices going very high on the coastline, but in the inland areas and western areas, even in provincial capitals, it’s still not so high.”

China has moved quickly to apply the brakes after first quarter figures showed the economy expanding at 11.6pc year-on-year, driving down sentiments on the country’s benchmark Shanghai index, which has fallen 27 per cent this year.

However, while loan growth is slowing from 2009, huge amounts of fresh loans continues to pour into the Chinese economy with the total outstanding loans still growing at a rate of 18pc this year.

After issuing 10 trillion yuan (£1 trillion) of new loans in 2009, Chinese banks are targeted to inject another 7.5 trillion yuan this year, a reduction but still nearly twice the 4.6 trillion yuan of the loans disbursed in 2008.

Mr Guo warned that the continuing splurge in lending also raises the risk of a sharp rise in non-performing loans among smaller Chinese banks that have funded local government infrastructure projects, often of dubious viability.

“I think that small banks last year newly issued loans grew even fast, some even doubled their liability and assets,” Mr Guo said.

“At the moment the banks seem healthy but I think that small banks, because we don’t know the structure of their assets, maybe have got more risk exposures because they are growing too fast and their risk management is not as good as big banks.

“And secondly because they are very small and their loans are going to a more concentrated number of customers, that also could definitely cause a problem.”

Mr Guo added that with such massive stimulus Chinese inflation, currently running at 2.8pc, was at growing risk of rising. Almost all the coastal provinces that make up China’s manufacturing heartland had granted wage increases averaging 20pc this year.

Analysts add there is an increasing anecdotal evidence to suggest that China’s official inflation figures do not reflect the true pace of price rises being felt by people on the ground. The price of some foodstuffs is up 20pc this year.

Tom Miller of the Dragonomics consultancy in Beijing said: “The Chinese government recently mooted that food subsidies be handed out to rural low-income families, which is a sure indication of the government’s true concerns on inflation.

“The last time the government took that kind of measure was in April 2008 when consumer price inflation hit 8pc for three months running, which suggests the government knows that real inflation is higher than the official numbers suggest.”

The growing inflationary strain has increased pressure in the country for a rise in interest rates, a tool that China’s central bankers have been reluctant to use for fear of damaging exporter competitiveness and piling more burdens on the loan bills of already over-stretched provincial governments.

However, Lu Feng, professor of economics at Beijing University, said that time was running out for China’s monetary authorities to act.

“Although the Chinese government’s efforts to control inflation are impressive, the prospects for fighting this inflation without effectively addressing the problems of loose money are not very encouraging,” he wrote this week on Forbes.com.

“In order to control inflationary pressures effectively, China needs to use the policy instrument of interest rates as a matter of urgency.”

http://www.telegraph.co.uk/finance/financetopics/recession/china-economic-slowdown/7786996/Beijing-in-a-sweat-as-Chinas-economy-overheats.html

Hoping for a debt crisis end

Hoping for a debt crisis end
May 29, 2010


After US stocks wrapped up their worst month in more than a year, investors will face next week with caution as things are unlikely to get better until the Europeans force their debt crisis to an end game.

A Fitch Ratings downgrade of Spain on Friday drove the three major US stock indexes down 1 per cent for the day. For some investors, Fitch's decision highlighted the need for the European Central Bank to come up with stronger response to the debt crisis before stocks will be able to rally.

The first wave of May US economic data next week could bring what investors fear most: signs that shock waves from Europe are crossing the Atlantic. That would probably show up first in the two monthly ISM surveys, seen as an early reading of the US economy's pulse.

If those reports - based on statements from purchasing and supply executives in the manufacturing and services sectors - are weak, it will come down to a strong May US nonfarm payrolls number on Friday to help investors keep their faith in the US recovery.

"All of the macro data is going to be seen through the prism of Europe," said John Praveen, chief investment strategist at Prudential International Investments Advisers in Newark, New Jersey. "You've had this huge problem in Europe. Is there any fallout from that on US economic data?"

Investors also need to watch for negative earnings pre-announcements. Shares of a tiny IT company called Blue Coat Systems Inc plummeted on Friday after it cut its outlook, citing Europe's turmoil, while retailer Guess Inc fell after it said the weak euro would hurt profits.

On the bright side, market technicals may favour a relief rally - providing there is no bad news.

Chart-minded investors say stocks are oversold, with the Standard & Poor's 500 Inde down below its 200-day moving average.

Carmine Grigoli, chief US investment strategist at Mizuho Securities in New York, also points to the widening spread between the number of S&P 500 stocks advancing and declining.

"The market (is) deeply oversold, actually almost the most oversold condition we've seen since the height of the (financial) crisis," he said.

In May, the S&P 500 fell 8.2 per cent in its worst monthly slide since February 2009, the month before the broad-based index hit a 12-year closing low. The Dow industrials lost 7.9 per cent in May, while Nasdaq tumbled 8.3 percent.

The sharp drop marked the worst May for the S&P 500 since 1962 - and the worst for the Dow since 1940. It also called to mind the old stock market adage: "Sell in May and go away."


Prudential's Praveen believes that despite slight gains in the last week of May, the US stock market won;t make significant progress until the European Central Bank steps up its purchasing of government debt as the US Federal Reserve did early last year.

"The end game in this European crisis, at least for the near term, is going to be if the ECB comes up with some kind of quantitative easing package," Praveen said.

After an initial bounce, stocks have fallen further in the three weeks since the EU approved a $1 trillion safety net for indebted nations, with financial markets unconvinced that the measures are sufficient to avert the spread of the crisis.

The export and new orders components in the Institute for Supply Management's surveys on the manufacturing and services sector could show early signs that weakness in Europe may be affecting the United States.

"There is a presumption that all the turmoil in Europe and the global financial markets is going to have a negative impact on the US economy," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut.

The ISM manufacturing index is due out on Tuesday, the first US trading day in a holiday-shortened week, with Monday a public holiday, while the ISM services index is due on Thursday.

"If the data hold up pretty well, it's going to be a bit of a challenge to the view that the US economy is going to falter, but probably won't convince the most skeptical of people," Stanley said.

The employment index in the ISM surveys can also be an indication of how Friday's payrolls number will shape up.

The headline number in the government's monthly jobs reports will be clouded by temporary Census workers and investors will likely focus on the ADP's private-sector payrolls number for a better indication of how underlying employment trends are shaping up.

"If that is north of 250,000, then the markets will react very positively," Praveen said. "If that number comes out on the weaker side, even though the headline number may be flattered by the Census number, then we will probably have some anxiety in the markets."

The payrolls report is due out. Economists in a Reuters poll expect the headline number to show the economy added 503,000 jobs in May.

Reuters

http://www.businessday.com.au/business/markets/hoping-for-a-debt-crisis-end-20100529-wm4l.html