AP
Giving in tough times balancing act for companies
Thursday December 25, 11:51 am ET
By Dan Sewell, AP Business Writer
Cost-conscious companies work to keep up charitable programs as need rises in tough times
CINCINNATI (AP) -- She sat patiently in her wheelchair, as scurrying volunteers gathered ham, a turkey, canned goods, bread, and bags of potatoes, apples and pungent onions in a storeroom with sporadic drafts of frigid air from outside.
But Patricia Jordan had a warm feeling as she considered the bounty that would help feed her cash-strapped household of 14, including her disabled-veteran husband, their children and her sister's family. She, like others who flocked to the FreestoreFoodbank this week, were concerned about companies reducing donations this year because of the economy.
"I think a lot of us were worried about everybody cutting back, but so far it's panning out," Jordan said. "You can't ask for any more than that, that they're still willing to help."
The food bank opened 90 minutes early Monday, at 6:30 a.m., after workers found 200 people lined up, some waiting in near-zero cold since 4 a.m.
Across the nation, the needs are growing as the recession deepens and leads to more families struggling each day just to put food on the table. Feeding America, the largest domestic hunger-relief organization, says some 25 million people are going to such food banks, and the number is rising. And at the same time, many usual donors are facing their own budget problems.
FreestoreFoodbank expects to serve 16,000 households here this holiday season, and says demand has jumped 55 percent in the past two years, as jobless numbers rise and household budgets get stretched. But companies such as grocers Cincinnati-based Kroger Co. and Minneapolis-based SuperValu Inc.; Northfield, Ill.-based food maker Kraft Foods Inc.; and St. Louis-based bakery-restaurant chain Panera Bread Co., among others, have helped keep filling bags here.
"They get it," said John Young, the food bank's chief executive. "They understand that we're serving many more people this year. It's touching their customers, their communities."
Not all businesses are reacting in the same way, though. The New York-based Committee Encouraging Corporate Philanthropy found that about a third of companies surveyed cut 2007 charitable giving in the slowing economy, and there are indications of more reductions this year. Sectors that showed declining giving in 2007 were financial, health care and utilities.
"It's a conflict, no question. How do you keep giving when you have laid off employees and are making other cost cuts?" said Charles Moore, the committee's executive director. But he stresses to corporate leaders the customer loyalty and connection to community they can build through giving -- benefiting business in the long run.
"You can be sure the community won't forget that the company stepped up," Moore said. "There is business to be gained at all levels by companies digging deeper in difficult times."
Companies have been hit by slower sales, volatile energy prices and higher raw materials costs, and some charitable organizations acknowledge that business leaders are under pressure to make profits, not give away money. Some ailing companies such as Ford Motor Co., which donates refrigerated vehicles to help get food donations to rural areas, have continued charitable programs, but at reduced totals.
Wal-Mart Stores Inc., the Bentonville, Ark.-based retail giant that has seen sales continue to grow in a discount-minded economy, has increased its giving of cash and food this year.
"We've made an extra effort to stand shoulder-to-shoulder with our community partners and our customers who maybe need some extra help," Wal-Mart spokeswoman Deisha Galberth said. She said the company, which donated nearly $300 million to charity last year, will top that this year. Wal-Mart last week gave $400,000 in hard-hit Ohio alone, to help feed families and pay utility bills this winter.
Ross Fraser, spokesman for Feeding America, said companies have been creative in keeping up donations such as by diverting holiday gifts and year-end bonuses to charities. Kroger encourages customers to "round up" their bills at checkout to donate, and grocers are coming up with more in gleaning efforts, in which food that would be pulled off retail shelves because it's at sell-by dates or for other reasons is donated because it's still good to eat.
Companies are encouraging more employee volunteer efforts and also enlisting celebrities. Members of the Stanley Cup champion Detroit Red Wings manned Salvation Army kettles outside Kroger stores in Michigan, while Cincinnati-based consumer products maker Procter & Gamble Co. has Tom Colicchio of Bravo TV's "Top Chef" in a meal donation program for its Cascade dishwashing brand, and Olympic gold-medal gymnast Shawn Johnson helped an effort to hand out more than 1.4 million tubes of Crest toothpaste to the needy.
Besides food, charities say there is also a big need for household items. P&G has a barrage of efforts involving its products, including Duracell battery donations and an Iams pet food pet adoption program at a time of rising abandonment of household pets. P&G also plans to provide millions of meals for children by tying consumer use of its coupons -- coupon-clipping has made a comeback during the recession --to company donations.
While cutting costs in other areas, P&G says it is keeping up charitable giving of well over $100 million a year.
"We are committed in good times and in bad," said Brian Sasson, global manager for P&G philanthropy. "We're proud to be helping families get what they need in these tough times."
http://www.feedingamerica.org/
http://www.corporatephilanthropy.org/
http://www.kroger.com/
http://www.walmart.com/
http://www.pg.com/
http://www.cascadefeedsamerica.com/
Source
http://biz.yahoo.com/ap/081225/still_giving.html
Friday 26 December 2008
5 Reasons Why the U.S. Economy Might Recover Faster Than You Think in 2009
U.S.News & World Report
5 Reasons Why the Economy Might Recover Faster Than You Think in 2009
Monday December 22, 10:01 am ET By James Pethokoukis
Let's all hope Barack Obama is wrong when he says that getting the U.S. economy straightened out "will take longer than any of us would like -- years, not months. It will get worse before it gets better." And let's pray that Joe Biden is way off when he says the economy is in danger of "absolutely tanking." But, to be honest, far more economists would pretty much agree with those pessimistic statements than the number that wouldn't. (Though that is a good contrarian sign.) Most regular Americans, too. Still, there are a numbers of reasons to think that the economy might, just might, shift back into gear faster than most of us think or hope:
1) Plunging oil prices.
It was only five months ago that oil prices hit a record high of $147 a barrel. Now they're below $40 thanks to slowing global demand. At the same time, gas prices have plunged from over $4 a gallon to around $1.67 nationally. (And some analysts think they're heading to a buck a gallon.) And just as high energy prices were a drag on the economy last summer, they're giving it a boost heading into 2009. JP Morgan Chase economist James Glassman estimates that the drop in oil prices represents "a boost equivalent to a $350 billion stimulus." To bring that down to the average consumer, Glassman explains, think of it this way: The typical household drives 15,000 miles annually. So a drop in gas prices to, say, $1.50 a gallon would represent a savings in their annual gas bill of $2,500 from when gas was at $4. This could boost GDP growth by as much as two percentage points.
2) Falling mortgage rates.
If there's anything falling as fast as energy prices it's mortgage rates. Rates for a 30-year, fixed-rate mortgage fell to a low, low 5.19 percent last week thanks to the Federal Reserve's pledged efforts to purchase mortgage securities. That should help housing affordability and the ability of current homeowners to refinance their mortgages. And even more good news could be on the way if you don't mind Uncle Sam borrowing billions more for yet another bailout: The Treasury Department is reportedly considering a plan to push mortgage rates to as low as 4.5 percent for new homebuyers and, perhaps, even for current homeowners who want to refinance. Investment strategist Edward Yardeni thinks if rates could get pushed down to 4 percent, either via the Fed or Treasury's efforts, the economic impact would be amazing. He figures that the average rate on the $10 trillion in outstanding mortgages is about 6 percent. A two-percentage-point drop would amount to a $200 billion annual tax cut for the 45 million American households with mortgages.
3) Actions by the Federal Reserve.
The nation's central bankers have basically said that they'll do whatever it takes to strengthen the economy. They've already pushed short-term interest rates to near zero percent and have made it clear that the Fed will buy various debt securities to unfreeze the credit markets. Brian Bethune of IHS Global Insight called the Fed's recent moves "exactly the kind of forceful medicine the economy needs as it plumbs the depths of the current recession. The Fed's actions will translate into much lower effective borrowing costs in the next few weeks." Certainly this is not your grandfather's Fed. The central bank is pouring money into the financial system. That's a big difference between now and the Great Depression. "In the Depression," notes economist Brian Wesbury of First Trust Advisers, " the real problem was that the Fed let the money supply collapse ... This is not happening now. The Federal Reserve ... is adding liquidity to the system as rapidly as it can."
4) Obama's stimulus plan, 2.0.
It now looks like Uncle Sam, under the direction of Obama and the new Democrat-controlled Congress, will spend somewhere between $750 billion and $1 trillion over the next two years to boost the economy. The money would be spent, according to analysts, mostly on infrastructure (everything from transportation to broadband to green technology investment) but also on aid to state and local governments and middle-class tax relief. This plan will probably create somewhat more jobs in the short term than if nothing were done. Obama optimistically hopes as many as 3 million. The real question is whether his spending plan is the best use of that amount of taxpayer money. Economists Susan Woodward of UCLA and Robert Hall of MIT are dubious. In their cowritten blog, the duo opine that "complicated projects take time to ramp up to high spending and employment levels." But, most promsing, there are rumors that Obama may be considering a payroll tax holiday. That would put money into the economy much faster than an infrastructure spending plan. Even better, many studies say, would be sweeping tax cuts on incomes, business and capital.
5) America's deep fundamentals.
Did you know that the World Economic Forum--the Davos people--for the second straight year judged the United States as possessing the most competitive economy in the world? (Then came Switzerland, Denmark, Sweden, and Singapore.) Among America's strengths: innovation, flexible labor markets, and higher education. Not surprisingly, though, our institutions ranked a dismal 29th. (Thanks, Wall Street.) Overall, the core U.S. economy is in far better shape than it was in the 1970s, with a higher productivity and a better tax and regulatory system. Even though the American economy finally succumbed to the oil shock and the credit crisis in 2008, it held up longer than many predicted thanks to its deep strengths. Who knows, maybe it will surprise the bears again in 2009.
http://biz.yahoo.com/usnews/081222/22_why_the_economy_might_recover_faster_than_you_think.html?.&.pf=banking-budgeting
5 Reasons Why the Economy Might Recover Faster Than You Think in 2009
Monday December 22, 10:01 am ET By James Pethokoukis
Let's all hope Barack Obama is wrong when he says that getting the U.S. economy straightened out "will take longer than any of us would like -- years, not months. It will get worse before it gets better." And let's pray that Joe Biden is way off when he says the economy is in danger of "absolutely tanking." But, to be honest, far more economists would pretty much agree with those pessimistic statements than the number that wouldn't. (Though that is a good contrarian sign.) Most regular Americans, too. Still, there are a numbers of reasons to think that the economy might, just might, shift back into gear faster than most of us think or hope:
1) Plunging oil prices.
It was only five months ago that oil prices hit a record high of $147 a barrel. Now they're below $40 thanks to slowing global demand. At the same time, gas prices have plunged from over $4 a gallon to around $1.67 nationally. (And some analysts think they're heading to a buck a gallon.) And just as high energy prices were a drag on the economy last summer, they're giving it a boost heading into 2009. JP Morgan Chase economist James Glassman estimates that the drop in oil prices represents "a boost equivalent to a $350 billion stimulus." To bring that down to the average consumer, Glassman explains, think of it this way: The typical household drives 15,000 miles annually. So a drop in gas prices to, say, $1.50 a gallon would represent a savings in their annual gas bill of $2,500 from when gas was at $4. This could boost GDP growth by as much as two percentage points.
2) Falling mortgage rates.
If there's anything falling as fast as energy prices it's mortgage rates. Rates for a 30-year, fixed-rate mortgage fell to a low, low 5.19 percent last week thanks to the Federal Reserve's pledged efforts to purchase mortgage securities. That should help housing affordability and the ability of current homeowners to refinance their mortgages. And even more good news could be on the way if you don't mind Uncle Sam borrowing billions more for yet another bailout: The Treasury Department is reportedly considering a plan to push mortgage rates to as low as 4.5 percent for new homebuyers and, perhaps, even for current homeowners who want to refinance. Investment strategist Edward Yardeni thinks if rates could get pushed down to 4 percent, either via the Fed or Treasury's efforts, the economic impact would be amazing. He figures that the average rate on the $10 trillion in outstanding mortgages is about 6 percent. A two-percentage-point drop would amount to a $200 billion annual tax cut for the 45 million American households with mortgages.
3) Actions by the Federal Reserve.
The nation's central bankers have basically said that they'll do whatever it takes to strengthen the economy. They've already pushed short-term interest rates to near zero percent and have made it clear that the Fed will buy various debt securities to unfreeze the credit markets. Brian Bethune of IHS Global Insight called the Fed's recent moves "exactly the kind of forceful medicine the economy needs as it plumbs the depths of the current recession. The Fed's actions will translate into much lower effective borrowing costs in the next few weeks." Certainly this is not your grandfather's Fed. The central bank is pouring money into the financial system. That's a big difference between now and the Great Depression. "In the Depression," notes economist Brian Wesbury of First Trust Advisers, " the real problem was that the Fed let the money supply collapse ... This is not happening now. The Federal Reserve ... is adding liquidity to the system as rapidly as it can."
4) Obama's stimulus plan, 2.0.
It now looks like Uncle Sam, under the direction of Obama and the new Democrat-controlled Congress, will spend somewhere between $750 billion and $1 trillion over the next two years to boost the economy. The money would be spent, according to analysts, mostly on infrastructure (everything from transportation to broadband to green technology investment) but also on aid to state and local governments and middle-class tax relief. This plan will probably create somewhat more jobs in the short term than if nothing were done. Obama optimistically hopes as many as 3 million. The real question is whether his spending plan is the best use of that amount of taxpayer money. Economists Susan Woodward of UCLA and Robert Hall of MIT are dubious. In their cowritten blog, the duo opine that "complicated projects take time to ramp up to high spending and employment levels." But, most promsing, there are rumors that Obama may be considering a payroll tax holiday. That would put money into the economy much faster than an infrastructure spending plan. Even better, many studies say, would be sweeping tax cuts on incomes, business and capital.
5) America's deep fundamentals.
Did you know that the World Economic Forum--the Davos people--for the second straight year judged the United States as possessing the most competitive economy in the world? (Then came Switzerland, Denmark, Sweden, and Singapore.) Among America's strengths: innovation, flexible labor markets, and higher education. Not surprisingly, though, our institutions ranked a dismal 29th. (Thanks, Wall Street.) Overall, the core U.S. economy is in far better shape than it was in the 1970s, with a higher productivity and a better tax and regulatory system. Even though the American economy finally succumbed to the oil shock and the credit crisis in 2008, it held up longer than many predicted thanks to its deep strengths. Who knows, maybe it will surprise the bears again in 2009.
http://biz.yahoo.com/usnews/081222/22_why_the_economy_might_recover_faster_than_you_think.html?.&.pf=banking-budgeting
Source of wealth affects nation's currency value
Source of wealth affects nation's currency value
CURRENCY MATTERS: Kathy Lien, GFT research director December 10, 2008
Article from: The Australian
OVER the past four weeks, we have discussed the three primary things that move currency markets -- politics, economics and monetary policy.
However, as you learn more about investing and trading currencies, you will quickly realise that the foreign exchange market is also intimately tied with commodity and equity markets.
Knowing this can help you predict movements in currencies or offer additional ideas for diversification.
When trading currencies, you are taking a view on a country. Therefore, the source of that country's wealth has a direct impact on its growth prospects and, by extension, the value of its currency.
For example, the lifeblood of Australia is gold and coal. As the world's third-largest producer of gold and fourth-largest producer of coal, the values of these commodities have a direct impact on the value of the Australian dollar.
When gold prices hit a record high above $1000 an ounce, the Australian dollar hit a 25-year high. Now that the price of gold has plunged 20 per cent, the value of the Australian dollar has declined 30 per cent.
Canada on the other hand has the second-largest oil reserves in the world, making the Canadian dollar sensitive to the price of oil.
Since this past northern summer, oil prices have plunged approximately 65 per cent from its record high of $US147.27 barrel.
During that same period, the Canadian dollar has fallen more than 20 per cent.
Similarly, when oil prices were soaring late last year, the Canadian dollar hit a record high, with one Canadian dollar worth more than one US dollar.
For countries that have well-developed capital markets, equities can also have a substantial impact on the value of their currencies.
Over the past few years, we have seen a positive correlation between the S&P 500 and US dollar/Japanese yen.
When US equities rally, the dollar has tended to rally against the yen. The same is true for the FTSE in Britain.
Generally speaking, when the FTSE sells off, we also see weakness in the British pound.
We must understand, however, that although these correlations are historically valid, like all things, they are not accurate 100 per cent of the time.
This is especially true if there are big surprises in politics, economic data or monetary policy.
However, these correlations generally have stood the test of time.
In fact, certain currency brokers allow you to track the price action of instruments such as the Australian dollar/US dollar and gold on the same chart so that you can see whether the correlation is holding on a day-to-day or even minute-to-minute basis.
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From here you can use the Social Web links to save Source of wealth affects nation's currency value to a social bookmarking site.
CURRENCY MATTERS: Kathy Lien, GFT research director December 10, 2008
Article from: The Australian
OVER the past four weeks, we have discussed the three primary things that move currency markets -- politics, economics and monetary policy.
However, as you learn more about investing and trading currencies, you will quickly realise that the foreign exchange market is also intimately tied with commodity and equity markets.
Knowing this can help you predict movements in currencies or offer additional ideas for diversification.
When trading currencies, you are taking a view on a country. Therefore, the source of that country's wealth has a direct impact on its growth prospects and, by extension, the value of its currency.
For example, the lifeblood of Australia is gold and coal. As the world's third-largest producer of gold and fourth-largest producer of coal, the values of these commodities have a direct impact on the value of the Australian dollar.
When gold prices hit a record high above $1000 an ounce, the Australian dollar hit a 25-year high. Now that the price of gold has plunged 20 per cent, the value of the Australian dollar has declined 30 per cent.
Canada on the other hand has the second-largest oil reserves in the world, making the Canadian dollar sensitive to the price of oil.
Since this past northern summer, oil prices have plunged approximately 65 per cent from its record high of $US147.27 barrel.
During that same period, the Canadian dollar has fallen more than 20 per cent.
Similarly, when oil prices were soaring late last year, the Canadian dollar hit a record high, with one Canadian dollar worth more than one US dollar.
For countries that have well-developed capital markets, equities can also have a substantial impact on the value of their currencies.
Over the past few years, we have seen a positive correlation between the S&P 500 and US dollar/Japanese yen.
When US equities rally, the dollar has tended to rally against the yen. The same is true for the FTSE in Britain.
Generally speaking, when the FTSE sells off, we also see weakness in the British pound.
We must understand, however, that although these correlations are historically valid, like all things, they are not accurate 100 per cent of the time.
This is especially true if there are big surprises in politics, economic data or monetary policy.
However, these correlations generally have stood the test of time.
In fact, certain currency brokers allow you to track the price action of instruments such as the Australian dollar/US dollar and gold on the same chart so that you can see whether the correlation is holding on a day-to-day or even minute-to-minute basis.
Share This Article
From here you can use the Social Web links to save Source of wealth affects nation's currency value to a social bookmarking site.
Dividends to be frozen as earnings decline
Dividends to be frozen as earnings decline
Katherine Jimenez December 18, 2008
Article from: The Australian
A FREEZE on dividends is set to sweep across parts of corporate Australia, as company earnings and cash flows come under pressure.
Tony McGrath, chairman of corporate advisory and insolvency firm McGrathNicol, said that few public companies had cut dividends so far, but that would change soon.
"We will see that because earnings will decline but, more importantly, cash flow will be under pressure," he said.
"With the challenge of managing your debt load, why do you want to leak some of your cash flow to your dividends at this moment?"
The large volume of corporate loans due to mature in 2009 will add to the pressure.
A recent report by rating agency Fitch Ratings showed that the 2009 calendar year would produce a "maturity hump" of $3.4 billion worth of maturing commercial-mortgage-backed securities.
"Cash flow isn't something that boards normally have too much focus on," Mr McGrath said.
"I would suggest to you that that focus on cash flow is now amplified."
There would be pressure on the payment of dividends among large public companies, he said.
They would need to juggle the option of paying a dividend "versus debt retirement, versus the dangers of undertaking capital raisings", he said.
"I think all those questions need be considered by the boards of companies facing refinancing deadlines."
Mr McGrath, who has nearly 25 years of experience ni restructuring and insolvency, has a better picture than most of the state of corporate Australia.
His firm is currently the receiver for ABC Learning and the administrator of Allco Finance Group.
The firm was also called in this year by Australian banks to prepare accounts on troubled shopping centre owner, Centro Properties Group.
Mr McGrath said the economic conditions would get tougher in the next six months and warned that there may be more corporate failures.
Property, retail and mining are all expected to come under pressure.
"We are going to see both commercial and residential property face downward adjustments, even more downward adjustments than they've had to date," he said.
"I think you will find the valuation community is probably one step behind where the market is at, at the moment, because they need evidence ... before they can change values."
The overall economic outlook would depend on how US reforms fed through. "If that starts to provide some bite to the US economy, I think it's quite possible that things could start to look at bit brighter in the next six to 12 months," he said.
"The problem at the moment is people don't quite know where the bottom is. Until we get to that point, it's a bit difficult to look forward."
Katherine Jimenez December 18, 2008
Article from: The Australian
A FREEZE on dividends is set to sweep across parts of corporate Australia, as company earnings and cash flows come under pressure.
Tony McGrath, chairman of corporate advisory and insolvency firm McGrathNicol, said that few public companies had cut dividends so far, but that would change soon.
"We will see that because earnings will decline but, more importantly, cash flow will be under pressure," he said.
"With the challenge of managing your debt load, why do you want to leak some of your cash flow to your dividends at this moment?"
The large volume of corporate loans due to mature in 2009 will add to the pressure.
A recent report by rating agency Fitch Ratings showed that the 2009 calendar year would produce a "maturity hump" of $3.4 billion worth of maturing commercial-mortgage-backed securities.
"Cash flow isn't something that boards normally have too much focus on," Mr McGrath said.
"I would suggest to you that that focus on cash flow is now amplified."
There would be pressure on the payment of dividends among large public companies, he said.
They would need to juggle the option of paying a dividend "versus debt retirement, versus the dangers of undertaking capital raisings", he said.
"I think all those questions need be considered by the boards of companies facing refinancing deadlines."
Mr McGrath, who has nearly 25 years of experience ni restructuring and insolvency, has a better picture than most of the state of corporate Australia.
His firm is currently the receiver for ABC Learning and the administrator of Allco Finance Group.
The firm was also called in this year by Australian banks to prepare accounts on troubled shopping centre owner, Centro Properties Group.
Mr McGrath said the economic conditions would get tougher in the next six months and warned that there may be more corporate failures.
Property, retail and mining are all expected to come under pressure.
"We are going to see both commercial and residential property face downward adjustments, even more downward adjustments than they've had to date," he said.
"I think you will find the valuation community is probably one step behind where the market is at, at the moment, because they need evidence ... before they can change values."
The overall economic outlook would depend on how US reforms fed through. "If that starts to provide some bite to the US economy, I think it's quite possible that things could start to look at bit brighter in the next six to 12 months," he said.
"The problem at the moment is people don't quite know where the bottom is. Until we get to that point, it's a bit difficult to look forward."
Australian dollar dips on US housing fears
Australian dollar dips on US housing fears
Sam Holmes December 24, 2008
Article from: Dow Jones Newswires
THE Australian dollar was weaker today as poor US housing data weighed on risk sentiment throughout the Asian session and pre-Christmas trading volumes remained extremely thin.The domestic currency is expected to hold relatively tight ranges in the offshore session tonight, however, analysts believe there is room for more pain trading if not before the end of the year, then at some time in January. Westpac chief currency strategist Robert Rennie said the Australian dollar has been "remarkably resilient" in the face of very weak Asian economic data and equities performance in the last few weeks. "This sort of improved price action that we've seen over the last two or three weeks for the Aussie will start to unravel and potentially quite quickly as we move into next year," Mr Rennie said. By late afternoon, the Australian dollar was trading at US67.91 cents, down from US68.37c late yesterday in domestic trade. Against the Japanese yen, it was trading at Y61.40 from Y61.72. US economic data released overnight showed new home sales fell a smaller-than-expected 2.9 per cent in November from October to its lowest reading since January 1991. However, existing home sales fell at a record monthly pace of 8.6 per cent. The data are yet another piece of the overall data puzzle confirming the dire state of the world's largest economy and weighed on US equities markets and higher-yielding currencies like the Australian dollar. Mr Rennie expects the Australian dollar to find some support around US67.50c in the offshore session tonight but said a break of this level will put support closer to US66c. More broadly, he said a more dramatic fall to US60c beckons in the March quarter of 2009 as investors consider a bleaker year ahead and the prospects of the US Government needing to provide more fiscal aid to shore up automakers. Australian bond futures were mixed with the domestic three to 10-year yield curve flattening, led by falls in longer-dated yields. The March three-year bond futures contract fell 3.5 ticks to 96.56 as Australian equities market shrugged off the negative Wall Street lead. However, 10-year bond futures contracts were 1.5 ticks firmer at 95.90, supported by the weak US housing data. The spread between the implied yields on the three and 10-year bonds fell to 67 basis points from a high of 74 basis points yesterday.
Sam Holmes December 24, 2008
Article from: Dow Jones Newswires
THE Australian dollar was weaker today as poor US housing data weighed on risk sentiment throughout the Asian session and pre-Christmas trading volumes remained extremely thin.The domestic currency is expected to hold relatively tight ranges in the offshore session tonight, however, analysts believe there is room for more pain trading if not before the end of the year, then at some time in January. Westpac chief currency strategist Robert Rennie said the Australian dollar has been "remarkably resilient" in the face of very weak Asian economic data and equities performance in the last few weeks. "This sort of improved price action that we've seen over the last two or three weeks for the Aussie will start to unravel and potentially quite quickly as we move into next year," Mr Rennie said. By late afternoon, the Australian dollar was trading at US67.91 cents, down from US68.37c late yesterday in domestic trade. Against the Japanese yen, it was trading at Y61.40 from Y61.72. US economic data released overnight showed new home sales fell a smaller-than-expected 2.9 per cent in November from October to its lowest reading since January 1991. However, existing home sales fell at a record monthly pace of 8.6 per cent. The data are yet another piece of the overall data puzzle confirming the dire state of the world's largest economy and weighed on US equities markets and higher-yielding currencies like the Australian dollar. Mr Rennie expects the Australian dollar to find some support around US67.50c in the offshore session tonight but said a break of this level will put support closer to US66c. More broadly, he said a more dramatic fall to US60c beckons in the March quarter of 2009 as investors consider a bleaker year ahead and the prospects of the US Government needing to provide more fiscal aid to shore up automakers. Australian bond futures were mixed with the domestic three to 10-year yield curve flattening, led by falls in longer-dated yields. The March three-year bond futures contract fell 3.5 ticks to 96.56 as Australian equities market shrugged off the negative Wall Street lead. However, 10-year bond futures contracts were 1.5 ticks firmer at 95.90, supported by the weak US housing data. The spread between the implied yields on the three and 10-year bonds fell to 67 basis points from a high of 74 basis points yesterday.
Thursday 25 December 2008
Poverty in the 20th Century
Poverty in the 20th Century
At the beginning of the 20th century surveys showed that 25% of the population were living in poverty. They found that at least 15% were living at subsistence level. They had just enough money for food, rent, fuel and clothes. They could not afford 'luxuries' such as newspapers or public transport. About 10% were living in below subsistence level and could not afford an adequate diet.
The surveys found that the main cause of poverty was low wages. The main cause of extreme poverty was the loss of the main breadwinner. If dad was dead, ill or unemployed it was a disaster. Mum might get a job but women were paid much lower wages than men.
Surveys also found that poverty tended to go in a cycle. Workers might live in poverty when they were children but things usually improved when they left work and found a job. However when they married and had children things would take a turn for the worse. Their wages might be enough to support a single man comfortably but not enough to support a wife and children too. However when the children grew old enough to work things would improve again. Finally, when he was old a worker might find it hard to find work, except the most low paid kind and be driven into poverty again.
In 1900 some women made their underwear from bags that grocers kept rice or flour in. Poor children often did not wear underwear. Some poor families made prams from orange boxes.
A liberal government was elected in 1906 and they made some reforms. From that year poor children were given free school meals. In January 1909 the first old age pensions were paid. They were hardly generous - only 5 shillings a week, which was a paltry sum even in those days and they were only paid to people over 70. Nevertheless it was a start.
Also in 1909 the government formed wages councils. In those days some people worked in the so-called 'sweated industries' such as making clothes and they were very poorly paid and had to work extremely long hours just to survive. The wages councils set minimum pay levels for certain industries.
In 1910 the first labour exchanges where jobs were advertised were set up.
Then in 1911 the government passed an act establishing sickness benefits for workers. The act also provided unemployment benefit for workers in certain trades such as shipbuilding, where periods of unemployment were common. In 1920 unemployment was extended to most workers although it was not extended to agricultural workers until 1936.
Things greatly improved after the First World War. A survey in 1924 showed that 4% of the population were living in extreme poverty. (A tremendous improvement from the period before 1914 when it was about 10%). A survey in Liverpool in 1928 found that 14% of the population were living at bare subsistence level. (That figure may not apply to the whole of Britain as Liverpool was a poor city). In 1929-30 a survey in London found that about 10% of the population were living at subsistence level.
A survey in 1936 found that just under 4% were living at bare survival level. Poverty had by no means disappeared by the 1930s but it was much less than ever before.
Pensions and unemployment benefit were made more generous in 1928 and in 1930. In 1931 unemployment benefit was cut by 10% but it was restored in 1934. Furthermore prices continued to fall during the 1930s. By 1935 a man on the 'dole' was about as well off as a skilled worker in 1905, a measure of how much living standards had risen.
However even in the 1920s in the poorest areas children played barefoot because they couldn't afford boots or shoes. There was a charity called the Boot Fund which provided shoes for poor children and by the end of that decade children normally wore them.
Even so in 1939 many children from cities were evacuated to the countryside to be safe from bombing. Many of them had never seen the countryside before. Worse some of them were used to sleeping in their parents bed or even under it. Some poor children were not used to sleeping in a bed at all.
After 1945 things improved when child benefit was introduced. By 1950 absolute poverty had almost disappeared from Britain. Absolute poverty can be defined as not having enough money to eat an adequate diet or afford enough clothes.
However there is also such a thing as relative poverty, when you cannot afford the things most people have. Relative poverty in the late 20th century and it increased in the 1980s. That was partly due to mass unemployment and partly due to a huge rise in the number of single parent families, who often lived on benefits. During the 1980s the gap between rich and poor increased as the well off benefited from tax cuts.
To read more about life in the 20th Century click here.
To read a history of rich people click here.
Home
At the beginning of the 20th century surveys showed that 25% of the population were living in poverty. They found that at least 15% were living at subsistence level. They had just enough money for food, rent, fuel and clothes. They could not afford 'luxuries' such as newspapers or public transport. About 10% were living in below subsistence level and could not afford an adequate diet.
The surveys found that the main cause of poverty was low wages. The main cause of extreme poverty was the loss of the main breadwinner. If dad was dead, ill or unemployed it was a disaster. Mum might get a job but women were paid much lower wages than men.
Surveys also found that poverty tended to go in a cycle. Workers might live in poverty when they were children but things usually improved when they left work and found a job. However when they married and had children things would take a turn for the worse. Their wages might be enough to support a single man comfortably but not enough to support a wife and children too. However when the children grew old enough to work things would improve again. Finally, when he was old a worker might find it hard to find work, except the most low paid kind and be driven into poverty again.
In 1900 some women made their underwear from bags that grocers kept rice or flour in. Poor children often did not wear underwear. Some poor families made prams from orange boxes.
A liberal government was elected in 1906 and they made some reforms. From that year poor children were given free school meals. In January 1909 the first old age pensions were paid. They were hardly generous - only 5 shillings a week, which was a paltry sum even in those days and they were only paid to people over 70. Nevertheless it was a start.
Also in 1909 the government formed wages councils. In those days some people worked in the so-called 'sweated industries' such as making clothes and they were very poorly paid and had to work extremely long hours just to survive. The wages councils set minimum pay levels for certain industries.
In 1910 the first labour exchanges where jobs were advertised were set up.
Then in 1911 the government passed an act establishing sickness benefits for workers. The act also provided unemployment benefit for workers in certain trades such as shipbuilding, where periods of unemployment were common. In 1920 unemployment was extended to most workers although it was not extended to agricultural workers until 1936.
Things greatly improved after the First World War. A survey in 1924 showed that 4% of the population were living in extreme poverty. (A tremendous improvement from the period before 1914 when it was about 10%). A survey in Liverpool in 1928 found that 14% of the population were living at bare subsistence level. (That figure may not apply to the whole of Britain as Liverpool was a poor city). In 1929-30 a survey in London found that about 10% of the population were living at subsistence level.
A survey in 1936 found that just under 4% were living at bare survival level. Poverty had by no means disappeared by the 1930s but it was much less than ever before.
Pensions and unemployment benefit were made more generous in 1928 and in 1930. In 1931 unemployment benefit was cut by 10% but it was restored in 1934. Furthermore prices continued to fall during the 1930s. By 1935 a man on the 'dole' was about as well off as a skilled worker in 1905, a measure of how much living standards had risen.
However even in the 1920s in the poorest areas children played barefoot because they couldn't afford boots or shoes. There was a charity called the Boot Fund which provided shoes for poor children and by the end of that decade children normally wore them.
Even so in 1939 many children from cities were evacuated to the countryside to be safe from bombing. Many of them had never seen the countryside before. Worse some of them were used to sleeping in their parents bed or even under it. Some poor children were not used to sleeping in a bed at all.
After 1945 things improved when child benefit was introduced. By 1950 absolute poverty had almost disappeared from Britain. Absolute poverty can be defined as not having enough money to eat an adequate diet or afford enough clothes.
However there is also such a thing as relative poverty, when you cannot afford the things most people have. Relative poverty in the late 20th century and it increased in the 1980s. That was partly due to mass unemployment and partly due to a huge rise in the number of single parent families, who often lived on benefits. During the 1980s the gap between rich and poor increased as the well off benefited from tax cuts.
To read more about life in the 20th Century click here.
To read a history of rich people click here.
Home
Your Friends Need Money. Do They Have References?
Your Friends Need Money. Do They Have References?
new_york_times:
http://www.nytimes.com/2008/12/25/fashion/25loans.html
By LAURA M. HOLSON
Published: December 24, 2008
AS a financial planner in Carlsbad, Calif., Candace Bahr tells clients to think twice before lending money to friends and family.
Jake Barnhill bought a truck with some personal financing from Josh Berry.
Melissa Pryor, left, is receiving help from Candace Bahr.
But when her manicurist, Melissa Pryor, asked to borrow $3,000 last month, Ms. Bahr couldn’t say no. Ms. Pryor was being evicted because bankers had foreclosed on the house she was renting in nearby Oceanside. Needing the money to hire a lawyer, she turned to Ms. Bahr, a client she had spoken with every other week for a decade though they were not friends socially.
“It was devastating, humbling,” Ms. Pryor said. “To be in that situation, with all the different factors involved, you are helpless.”
Ms. Bahr asked Ms. Pryor to sign a note promising to repay the loan in a year. Despite her professional skepticism, Ms. Bahr recognized that some decisions, even about money, can’t be judged on business alone.
“You can talk about it all day long,” she said, “but on an emotional level we are all still people.”
With the economy spiraling deeper into recession, friends, family and even unlikely acquaintances like the manicurist are increasingly turning to each other with a hand out. More often than not, these exchanges arouse feelings of guilt and worries that if anything goes awry, friendships and family bonds will be frayed.
In the best case, psychologists and financial planners say, giving money to a pal or a sibling in need can strengthen already close bonds. But there is inherent danger, too, that a loan will put an unspoken price tag on friendship. Then the lender feels guilty, no matter the decision, and the borrower chastened for having asked at all.
“The rules of friendship are tacit, unconscious; they are not rational,” said Steven Pinker, a professor of psychology at Harvard University who has studied language, relationships and human nature. “In business, though, you have to think rationally. The question is how do you switch over without feeling like you are keeping track?”
With bank loans harder to get and more Americans losing their jobs, such emotionally fraught transactions are only likely to become more common. Virgin Money USA, which administers loans among friends and family members, said the dollar value of loans outstanding has soared in the last 13 months to $370 million at the end of November from $200 million in October 2007. Credit counseling companies like InCharge Debt Solutions in Orlando, Fla., are seeing a sharp increase of customers interested in borrowing from friends and relatives.
And financial planners say some clients gave thousands of dollars as gifts this holiday season instead of Burberry jackets or big-screen television sets, to thwart relatives from asking for money later.
Few understand the benefits of sharing among friends as well as Elizabeth Dunn, an assistant professor of psychology at the University of British Columbia. She recently published the findings of a study that showed giving — buying a pal a cup of coffee or purchasing the occasional trinket — made people feel good about themselves and their relationships.
But when a friend asked Ms. Dunn if she would lend her several hundred dollars for expenses not long ago, the professor’s warm feelings turned cool. The loan stirred up feelings of guilt; Ms. Dunn wanted to say no. She knew if it was not repaid, it could damage the friendship forever.
“If you really need help and someone helps you, there is gratitude,’” said Ms. Dunn, 31, who ultimately declined to lend her friend the cash. “But at the same time, there is no shortage of stories about how relationships end or crumble over financial disagreements.”
In an effort to avoid such problems, some people making personal loans are using a middleman. In October, Josh Berry, a 32-year-old operations manager at Maxx Productions, an audio and lighting company for large events near Nashville, wanted to sell his 2004 Chevrolet Avalanche to Jason Barnhill, a colleague.
Mr. Berry’s only option was to finance the purchase himself because the buyer’s credit score made it hard to get a $14,000 loan from a bank. At first, Mr. Barnhill refused; a friend had failed to repay a loan several years ago. Mr. Barnhill lost the money and the friendship. “I could never trust him,” he said.
The two men spent afternoons debating different situations, like what would happen if Mr. Barnhill lost his job. Mr. Barnhill didn’t want to be beholden to his friend and Mr. Berry “didn’t want to beat down his door to get the money,” he said. Both agreed that a personal loan was a bad idea if they were to remain friends.
Finally Mr. Berry suggested the two use Virgin Money, the third-party service based in Waltham, Mass., that was started by the entrepreneur Richard Branson, to collect monthly payments from Mr. Barnhill and transfer them to Mr. Berry.
The distance was a comfort. If Mr. Barnhill defaults, the agreement states Mr. Berry gets his truck back. And if Mr. Barnhill can’t pay at all? “It would be them coming after me instead of him coming after me,” Mr. Barnhill said.
Mr. Berry was forced to face his own feelings about which friends were deserving. “I would not loan money to a person who has a low work ethic or simply is not responsible,” he said. “If they haven’t proved themselves in their personal life, I’m not going to extend my hand.”
The shifting power in a relationship — and feelings that ensue — can be particularly uncomfortable among family members who often have convoluted histories. In some cases, an older brother or sister unwittingly steps into the role of surrogate parent, bailing out siblings at the slightest hint of trouble. In other cases, unresolved childhood rivalries take center stage.
“If there is a way to keep money out of the family dynamic it should be considered,” said Charles Lowenhaupt, chief executive of St. Louis-based Lowenhaupt Global Advisors, which works with wealthy families on financial matters. A wealthy client recently approached Mr. Lowenhaupt about what how to handle a situation with a sister who had lost her job and was in jeopardy of losing her home. The brother wanted to help — she was asking for about $400,000 — and he could afford to give it. At the same time, Mr. Lowenhaupt said, “He knew that she’d come back for more.”
What the brother needed was a buffer. The brother told his sister that he would ask his lawyer to help her get a $400,000 loan at a local bank. What the brother did not say was that he would put up the collateral for the loan. The sister ultimately got the loan, saved her house and was none the wiser about her brother’s help.
“It was a screen between him and his sister so they could have Thanksgiving dinner without incident,” Mr. Lowenhaupt said. “The lender didn’t want to feel beholden to the other. And, if it was just a gift, it could affect the self esteem of the person getting it.”
Few people have an army of advisers to cloak their intentions. Instead, financial planners say, truthfulness is the best defense in dealing with friends and relatives, no matter how painful the conversation. “Someone without confidence may avoid the person or plead poverty,” said Myra Salzer, a financial adviser to wealthy individuals who is based in Boulder, Colo.. “That’s not the way to go.”
A wealthy lawyer from San Francisco said she and her husband have helped two family members in recent months. (She spoke anonymously because she did not want to embarrass her relatives.) In one case, the lawyer gave a family member who was going through a bitter divorce a gift of $100,000. In the other, a family member who lost a job was lent $25,000 in recent weeks with the proviso it would be paid back in three to five years.
In both cases, the lawyer laid out for both siblings exactly what was expected of them. And she did not feel compelled to treat them equally even though each knew what the other received. “Quite honestly, the amount was dependent on the degree of closeness I had with each,” she said. “It is difficult not to be judgmental when you see someone in need. We want to blame someone.”
Unlike Ms. Bahr, the financial planner, the lawyer did not ask the family member borrowing $25,000 to sign a note agreeing to repay it. “The person was in such a low state,” she said. “There was no reason to distrust. It would have added insult to injury.”
But that doesn’t mean she wouldn’t feel any less angry if her relative reneged on repayment. “If they are driving a big fancy car and can’t pay me, I’d be mad,” the lawyer said. “But if they are doing what they need to get their life in order and still can’t pay me, I guess that’s O.K. I just don’t want someone to think I have a blank checkbook.”
http://www.nytimes.com/2008/12/25/fashion/25loans.html?_r=1&ref=business&pagewanted=all
new_york_times:
http://www.nytimes.com/2008/12/25/fashion/25loans.html
By LAURA M. HOLSON
Published: December 24, 2008
AS a financial planner in Carlsbad, Calif., Candace Bahr tells clients to think twice before lending money to friends and family.
Jake Barnhill bought a truck with some personal financing from Josh Berry.
Melissa Pryor, left, is receiving help from Candace Bahr.
But when her manicurist, Melissa Pryor, asked to borrow $3,000 last month, Ms. Bahr couldn’t say no. Ms. Pryor was being evicted because bankers had foreclosed on the house she was renting in nearby Oceanside. Needing the money to hire a lawyer, she turned to Ms. Bahr, a client she had spoken with every other week for a decade though they were not friends socially.
“It was devastating, humbling,” Ms. Pryor said. “To be in that situation, with all the different factors involved, you are helpless.”
Ms. Bahr asked Ms. Pryor to sign a note promising to repay the loan in a year. Despite her professional skepticism, Ms. Bahr recognized that some decisions, even about money, can’t be judged on business alone.
“You can talk about it all day long,” she said, “but on an emotional level we are all still people.”
With the economy spiraling deeper into recession, friends, family and even unlikely acquaintances like the manicurist are increasingly turning to each other with a hand out. More often than not, these exchanges arouse feelings of guilt and worries that if anything goes awry, friendships and family bonds will be frayed.
In the best case, psychologists and financial planners say, giving money to a pal or a sibling in need can strengthen already close bonds. But there is inherent danger, too, that a loan will put an unspoken price tag on friendship. Then the lender feels guilty, no matter the decision, and the borrower chastened for having asked at all.
“The rules of friendship are tacit, unconscious; they are not rational,” said Steven Pinker, a professor of psychology at Harvard University who has studied language, relationships and human nature. “In business, though, you have to think rationally. The question is how do you switch over without feeling like you are keeping track?”
With bank loans harder to get and more Americans losing their jobs, such emotionally fraught transactions are only likely to become more common. Virgin Money USA, which administers loans among friends and family members, said the dollar value of loans outstanding has soared in the last 13 months to $370 million at the end of November from $200 million in October 2007. Credit counseling companies like InCharge Debt Solutions in Orlando, Fla., are seeing a sharp increase of customers interested in borrowing from friends and relatives.
And financial planners say some clients gave thousands of dollars as gifts this holiday season instead of Burberry jackets or big-screen television sets, to thwart relatives from asking for money later.
Few understand the benefits of sharing among friends as well as Elizabeth Dunn, an assistant professor of psychology at the University of British Columbia. She recently published the findings of a study that showed giving — buying a pal a cup of coffee or purchasing the occasional trinket — made people feel good about themselves and their relationships.
But when a friend asked Ms. Dunn if she would lend her several hundred dollars for expenses not long ago, the professor’s warm feelings turned cool. The loan stirred up feelings of guilt; Ms. Dunn wanted to say no. She knew if it was not repaid, it could damage the friendship forever.
“If you really need help and someone helps you, there is gratitude,’” said Ms. Dunn, 31, who ultimately declined to lend her friend the cash. “But at the same time, there is no shortage of stories about how relationships end or crumble over financial disagreements.”
In an effort to avoid such problems, some people making personal loans are using a middleman. In October, Josh Berry, a 32-year-old operations manager at Maxx Productions, an audio and lighting company for large events near Nashville, wanted to sell his 2004 Chevrolet Avalanche to Jason Barnhill, a colleague.
Mr. Berry’s only option was to finance the purchase himself because the buyer’s credit score made it hard to get a $14,000 loan from a bank. At first, Mr. Barnhill refused; a friend had failed to repay a loan several years ago. Mr. Barnhill lost the money and the friendship. “I could never trust him,” he said.
The two men spent afternoons debating different situations, like what would happen if Mr. Barnhill lost his job. Mr. Barnhill didn’t want to be beholden to his friend and Mr. Berry “didn’t want to beat down his door to get the money,” he said. Both agreed that a personal loan was a bad idea if they were to remain friends.
Finally Mr. Berry suggested the two use Virgin Money, the third-party service based in Waltham, Mass., that was started by the entrepreneur Richard Branson, to collect monthly payments from Mr. Barnhill and transfer them to Mr. Berry.
The distance was a comfort. If Mr. Barnhill defaults, the agreement states Mr. Berry gets his truck back. And if Mr. Barnhill can’t pay at all? “It would be them coming after me instead of him coming after me,” Mr. Barnhill said.
Mr. Berry was forced to face his own feelings about which friends were deserving. “I would not loan money to a person who has a low work ethic or simply is not responsible,” he said. “If they haven’t proved themselves in their personal life, I’m not going to extend my hand.”
The shifting power in a relationship — and feelings that ensue — can be particularly uncomfortable among family members who often have convoluted histories. In some cases, an older brother or sister unwittingly steps into the role of surrogate parent, bailing out siblings at the slightest hint of trouble. In other cases, unresolved childhood rivalries take center stage.
“If there is a way to keep money out of the family dynamic it should be considered,” said Charles Lowenhaupt, chief executive of St. Louis-based Lowenhaupt Global Advisors, which works with wealthy families on financial matters. A wealthy client recently approached Mr. Lowenhaupt about what how to handle a situation with a sister who had lost her job and was in jeopardy of losing her home. The brother wanted to help — she was asking for about $400,000 — and he could afford to give it. At the same time, Mr. Lowenhaupt said, “He knew that she’d come back for more.”
What the brother needed was a buffer. The brother told his sister that he would ask his lawyer to help her get a $400,000 loan at a local bank. What the brother did not say was that he would put up the collateral for the loan. The sister ultimately got the loan, saved her house and was none the wiser about her brother’s help.
“It was a screen between him and his sister so they could have Thanksgiving dinner without incident,” Mr. Lowenhaupt said. “The lender didn’t want to feel beholden to the other. And, if it was just a gift, it could affect the self esteem of the person getting it.”
Few people have an army of advisers to cloak their intentions. Instead, financial planners say, truthfulness is the best defense in dealing with friends and relatives, no matter how painful the conversation. “Someone without confidence may avoid the person or plead poverty,” said Myra Salzer, a financial adviser to wealthy individuals who is based in Boulder, Colo.. “That’s not the way to go.”
A wealthy lawyer from San Francisco said she and her husband have helped two family members in recent months. (She spoke anonymously because she did not want to embarrass her relatives.) In one case, the lawyer gave a family member who was going through a bitter divorce a gift of $100,000. In the other, a family member who lost a job was lent $25,000 in recent weeks with the proviso it would be paid back in three to five years.
In both cases, the lawyer laid out for both siblings exactly what was expected of them. And she did not feel compelled to treat them equally even though each knew what the other received. “Quite honestly, the amount was dependent on the degree of closeness I had with each,” she said. “It is difficult not to be judgmental when you see someone in need. We want to blame someone.”
Unlike Ms. Bahr, the financial planner, the lawyer did not ask the family member borrowing $25,000 to sign a note agreeing to repay it. “The person was in such a low state,” she said. “There was no reason to distrust. It would have added insult to injury.”
But that doesn’t mean she wouldn’t feel any less angry if her relative reneged on repayment. “If they are driving a big fancy car and can’t pay me, I’d be mad,” the lawyer said. “But if they are doing what they need to get their life in order and still can’t pay me, I guess that’s O.K. I just don’t want someone to think I have a blank checkbook.”
http://www.nytimes.com/2008/12/25/fashion/25loans.html?_r=1&ref=business&pagewanted=all
Wednesday 24 December 2008
Gas Producing Countries Try to Be More Like OPEC
With Russia’s Help, Gas-Producing Countries Try to Be More Like OPEC
new_york_times:
http://www.nytimes.com/2008/12/24/business/worldbusiness/24gas.html
By ANDREW E. KRAMER
Published: December 23, 2008
MOSCOW — With Russia’s support, a dozen large natural gas-producing countries founded an organization Tuesday that will study ways to set global prices for the fuel, much as the Organization of the Petroleum Exporting Countries does for crude oil.
The development seems likely to further unnerve European Union nations, already wary of their dependence on Russian energy and what critics say are efforts by Moscow to use oil and natural gas exports as leverage to reassert sway over former Soviet nations.
Russia’s foray into energy diplomacy affecting natural gas producers from the Middle East to South America also underlined its ambitions to assert itself on the world stage despite the slump in energy prices.
Initially, officials from member countries say, the group will focus on coordinating investment plans to dissuade countries from flooding the market with gas.
But if its longer-term goals are realized, the Forum of Gas Exporting Countries holds the potential to extend an OPEC-like model of price modulation to another basic commodity, even as natural gas is expected to play a larger role in global energy supplies.
The forum “will represent the interests of producers and exporters on the international market,” Russia’s prime minister, Vladimir V. Putin, told the gathering of energy ministers. “The time of cheap energy resources, and cheap gas is surely coming to an end.”
Formation of the group was a coup for Russia, the world’s largest producer of natural gas and oil. But most members also belong to OPEC, which has been at odds with Russia over its reluctance to reduce crude oil output in coordination with OPEC.
Shokri Ghanem, the oil minister from Libya, told the new group that Russia should first reduce oil output if it wants to support natural gas prices, which are linked to the price of crude oil. “We are still waiting for a declaration from the Russian Federation that they are cutting their production,” Mr. Ghanem said, referring to OPEC.
The countries in the forum have been meeting informally since 2001; what was new Tuesday was the group’s adoption of a charter that would establish a permanent secretariat. Doha was chosen as the group’s headquarters.
The Russian government, in a statement, said falling energy prices had impelled members to quickly formalize their organization. As in OPEC, the ministers in the new group espoused an ideology of defiance to the industrialized countries that are the primary customers, and stated the rights of commodity exporting nations to coordinate efforts to improve the terms of trade.
That Russia decided to join forces with the petroleum-dependent nations is a bellwether of Russia’s economic trends. As its Soviet-era scientific and industrial accomplishments fade, the country is relying more heavily on natural resources exports and associated boom-and-bust cycles.
Russia, which also belongs to the Group of 8 industrialized nations, said the group was not a cartel, like OPEC.
A deputy chairman of the Russian gas monopoly Gazprom, Aleksander I. Medvedev, said the natural gas business, which relies on long-term contracts, would make the use of production quotas, the backbone of OPEC’s pricing policies, impossible.
But the energy minister of Venezuela, the country that initiated the formation of the original OPEC in 1960, was not coy about his hopes for the new group as liquefied natural gas traded on spot markets is projected to become a more important fuel in the global energy mix.
“We see this organization as OPEC,” Rafael Ramirez said on the sidelines of the meeting. “We are producer countries and we have to defend our interests.”
But OPEC has not had a good track record of being able to control prices over the year. Despite pledges of cuts this year totaling 4.2 million barrels a day, or nearly 12 percent of OPEC’s capacity, oil prices, which topped $145 a barrel this summer, continue to fall. Prices settled Tuesday at $38.98 a barrel in New York.
A study that the group commissioned said natural gas prices would inevitably remain linked to the price of oil.
However, the study said that the environmental benefits of natural gas, including lower releases of greenhouse gases, are not priced into the fuel, offering room to negotiate higher prices.
The study also concluded that the market for shipborne natural gas is transforming the fuel into a global commodity, suggesting the industry will transform from one modeled as a utility serving pipeline customers to one built around trading.
The forum members include: Algeria, Bolivia, Brunei, Venezuela, Egypt, Indonesia, Iran, Qatar, Libya, Malaysia, Nigeria, the United Arab Emirates, Russia, Trinidad and Tobago and, as observers, Equatorial Guinea and Norway.
More Articles in Business » A version of this article appeared in print on December 24, 2008, on page B3 of the New York edition.
new_york_times:
http://www.nytimes.com/2008/12/24/business/worldbusiness/24gas.html
By ANDREW E. KRAMER
Published: December 23, 2008
MOSCOW — With Russia’s support, a dozen large natural gas-producing countries founded an organization Tuesday that will study ways to set global prices for the fuel, much as the Organization of the Petroleum Exporting Countries does for crude oil.
The development seems likely to further unnerve European Union nations, already wary of their dependence on Russian energy and what critics say are efforts by Moscow to use oil and natural gas exports as leverage to reassert sway over former Soviet nations.
Russia’s foray into energy diplomacy affecting natural gas producers from the Middle East to South America also underlined its ambitions to assert itself on the world stage despite the slump in energy prices.
Initially, officials from member countries say, the group will focus on coordinating investment plans to dissuade countries from flooding the market with gas.
But if its longer-term goals are realized, the Forum of Gas Exporting Countries holds the potential to extend an OPEC-like model of price modulation to another basic commodity, even as natural gas is expected to play a larger role in global energy supplies.
The forum “will represent the interests of producers and exporters on the international market,” Russia’s prime minister, Vladimir V. Putin, told the gathering of energy ministers. “The time of cheap energy resources, and cheap gas is surely coming to an end.”
Formation of the group was a coup for Russia, the world’s largest producer of natural gas and oil. But most members also belong to OPEC, which has been at odds with Russia over its reluctance to reduce crude oil output in coordination with OPEC.
Shokri Ghanem, the oil minister from Libya, told the new group that Russia should first reduce oil output if it wants to support natural gas prices, which are linked to the price of crude oil. “We are still waiting for a declaration from the Russian Federation that they are cutting their production,” Mr. Ghanem said, referring to OPEC.
The countries in the forum have been meeting informally since 2001; what was new Tuesday was the group’s adoption of a charter that would establish a permanent secretariat. Doha was chosen as the group’s headquarters.
The Russian government, in a statement, said falling energy prices had impelled members to quickly formalize their organization. As in OPEC, the ministers in the new group espoused an ideology of defiance to the industrialized countries that are the primary customers, and stated the rights of commodity exporting nations to coordinate efforts to improve the terms of trade.
That Russia decided to join forces with the petroleum-dependent nations is a bellwether of Russia’s economic trends. As its Soviet-era scientific and industrial accomplishments fade, the country is relying more heavily on natural resources exports and associated boom-and-bust cycles.
Russia, which also belongs to the Group of 8 industrialized nations, said the group was not a cartel, like OPEC.
A deputy chairman of the Russian gas monopoly Gazprom, Aleksander I. Medvedev, said the natural gas business, which relies on long-term contracts, would make the use of production quotas, the backbone of OPEC’s pricing policies, impossible.
But the energy minister of Venezuela, the country that initiated the formation of the original OPEC in 1960, was not coy about his hopes for the new group as liquefied natural gas traded on spot markets is projected to become a more important fuel in the global energy mix.
“We see this organization as OPEC,” Rafael Ramirez said on the sidelines of the meeting. “We are producer countries and we have to defend our interests.”
But OPEC has not had a good track record of being able to control prices over the year. Despite pledges of cuts this year totaling 4.2 million barrels a day, or nearly 12 percent of OPEC’s capacity, oil prices, which topped $145 a barrel this summer, continue to fall. Prices settled Tuesday at $38.98 a barrel in New York.
A study that the group commissioned said natural gas prices would inevitably remain linked to the price of oil.
However, the study said that the environmental benefits of natural gas, including lower releases of greenhouse gases, are not priced into the fuel, offering room to negotiate higher prices.
The study also concluded that the market for shipborne natural gas is transforming the fuel into a global commodity, suggesting the industry will transform from one modeled as a utility serving pipeline customers to one built around trading.
The forum members include: Algeria, Bolivia, Brunei, Venezuela, Egypt, Indonesia, Iran, Qatar, Libya, Malaysia, Nigeria, the United Arab Emirates, Russia, Trinidad and Tobago and, as observers, Equatorial Guinea and Norway.
More Articles in Business » A version of this article appeared in print on December 24, 2008, on page B3 of the New York edition.
For HSBC, Questions of Vitality
For HSBC, Questions of Vitality
By LANDON THOMAS Jr. and JULIA WERDIGIER
Published: December 22, 2008
LONDON — Through more than a year of giant bailouts and bankruptcies, HSBC was one of the few big banks to emerge with its reputation largely intact.
Related Times Topics: HSBC Holdings PLC. HSBC Finance Corporation Credit Crisis — The Essentials
HSBC, the global financial giant, did bet on subprime mortgages — and lost. But it nonetheless managed to maintain a robust market value compared with its diminished peers, lending it an aura of unrivaled durability.
So much so that during a recent parliamentary debate in Britain, where HSBC is based, an opposition politician scorned the government’s borrowing policies by asserting that Britain’s creditworthiness had fallen behind that of HSBC.
Now, as the bank faces a sharp slowdown in the emerging markets where it earns the bulk of its profit, many investors are questioning HSBC’s ability to maintain this exalted standing.
Last week, HSBC shares listed in London sank more than 17 percent, hit by several analysts’ reports contending that the bank would be required to raise money or to cut its dividend sharply. On Monday, HSBC shares in Hong Kong fell 3.3 percent, after falling more than 9 percent late last week. In addition, there was the acknowledgment that HSBC might have lost the $1 billion it had invested with Bernard L. Madoff, the New York money manager who authorities say has confessed to running a $50 billion Ponzi scheme.
As banks throughout the world face uncertain futures amid the worst financial crisis since the Depression, HSBC — which spans the globe from its original home in Hong Kong to the Middle East, Latin America and North America — offered a vivid counterpoint.
Its share price outpaced the main indexes and still trades near its book value. Its assets are growing, with the $2.3 trillion on its books expected to grow by almost 20 percent this year.
Not only has the bank spurned government money, it has been — at least so far — one of the few financial institutions of size not to be required to raise capital.
But with the recent drop in its shares, HSBC’s critics are raising questions about the bank’s globe-girdling strategy, particularly its insistence on sticking with its struggling consumer finance unit in the United States.
HSBC gets three-quarters of its profit from emerging markets, which have underpinned its recent success. But three-quarters of its loans are still exposed to the stricken markets of the United States and Britain, which some investors argue will hold it back, after the global economy recovers.
HSBC became the world’s top subprime lender when it bought Household International in the United States in 2003. According to Knight Vinke, a small asset manager in Monaco that owns less than 1 percent of the bank’s shares, the parent group has injected $60 billion into HSBC Finance — including the purchase price of $15 billion — in a so far fruitless bid to turn around this flagging business. According to its research, the money would be better deployed in faster-growing emerging markets.
A spokesman for HSBC disputed the figure, saying the total amount was about $20 billion.
Knight Vinke argues that HSBC should leave this business and focus on its core area of expertise in Asia.
“There are steps to be taken, but if all else fails, you may have to walk away from it,” said Glen Suarez, an executive at Knight Vinke.
“We see HSBC’s comparative advantage being in developing its business in Asia,” he said. “We have always felt that subprime and Household International was a problem.”
In a report produced this year, Knight Vinke said that HSBC had been overly optimistic in assessing the risk of its subprime exposure and that if the bank were to take a write-down reflecting the full reality of its potential losses, it could total as much as $30 billion — a number that would require the company to raise cash. (My comment: CAUTION!!)
HSBC declined to address Knight Vinke’s assertions publicly, saying the firm’s small investment position undermined its credibility.
Still, bank executives and board members have met with Knight Vinke as it pressed its position.
HSBC’s position is that its subprime loans, while substantial, are different from those of most other banks because they are not bundled into complex — and at this point nearly worthless — securities like those that forced Merrill Lynch, Citigroup and others to take large losses. As a result, management argues, HSBC is not obliged to write down these assets as long as they produce a cash flow.
The bank has also said that it is a global institution, with a need to be in markets from Shanghai to St. Louis, and that it considers the United States housing market to be a crucial part of its strategy. It also said that writing off its investment in HSBC Finance would do lasting damage to its reputation.
As its rivals took their lumps, HSBC maintained a healthy cushion against losses of about 8 percent, a conservative position compared with the greater leverage of other banks. But now that troubled institutions like Barclays, the Royal Bank of Scotland and Citigroup have raised large sums of equity to bolster their balance sheets and enjoy the explicit or implicit support of national governments, HSBC no longer looks so secure.
What is more, the advancing slowdown in HSBC’s core emerging markets franchise is putting additional pressure on its earnings.
HSBC has said that its capital position was strong, but declined to comment on the recent reports predicting that it would seek a capital increase, which would dilute the value of existing shares. It has been careful to leave open the possibility of raising new funds in conjunction with a deal, or a major investment in a business.
For all the new questions, Julian Chillingworth, chief investment officer at Rathbones in London, said HSBC remained a refreshing contrast to an industry that seemed to lose its head in the housing bubble.
“It may well be that they have to raise capital, but there’s a much better chance for them to get support,” he said. “They didn’t commit the sins of others of relying on the wholesale markets, and they’ve been quite prudent.”
HSBC executives are by and large an austere, conservative lot, compared with their more expansive counterparts. Their attitude toward the banking excesses has been one of polite disdain as they turned down opportunity after opportunity to buy into the American investment banking market.
It is an approach that conveys a degree of rectitude not often seen in bankers these days. The self-denying tone flowed from the top, conveyed by the bank’s former chairman, John Bond.
His successor, Stephen Green, spare and unobtrusive, carries on this tradition, serving as an ordained priest in the Church of England.
He is also the author of a book titled “Serving God? Serving Mammon?” that wrestles with the idea of being a man of faith in the City of London.
Still, the bank has not been immune to temptation — witness the $1 billion it is likely to have lost from extending loans to funds that invested with Mr. Madoff’s firm.
There are signs, too, that the bank may be on the verge of some major decisions — particularly with regard to its troubled American business.
John Thornton, the former president of Goldman Sachs and a man known for his aggressive strategic thinking, joined the group board this month. He will also serve as nonexecutive chairman of HSBC North America — a position that will require him to work two days each week and will pay him $1.5 million a year.
It is not clear what, if any decision will be taken. Even with its recent troubles, the firm’s position is strong enough to support a midsize deal, especially for a bank with a strong position in the American Hispanic market, an area that has long been of interest for HSBC.
And analysts say that even HSBC cannot stay above the troubles around it.
“I’m surprised the shares have done so well in relative terms,” said Daniel Tabbush, an analyst at Crédit Lyonnais Securities, who wrote one of the reports that precipitated the stock sell-off.
“Now, we’re looking at the exposure to commercial U.K. real estate, the unsecured loan book, credit cards. Many banks around the world said they don’t have to raise capital, and then they do.”
More Articles in Business » A version of this article appeared in print on December 23, 2008, on page B1 of the New York edition.
http://www.nytimes.com/2008/12/23/business/worldbusiness/23hsbc.html?ref=business
By LANDON THOMAS Jr. and JULIA WERDIGIER
Published: December 22, 2008
LONDON — Through more than a year of giant bailouts and bankruptcies, HSBC was one of the few big banks to emerge with its reputation largely intact.
Related Times Topics: HSBC Holdings PLC. HSBC Finance Corporation Credit Crisis — The Essentials
HSBC, the global financial giant, did bet on subprime mortgages — and lost. But it nonetheless managed to maintain a robust market value compared with its diminished peers, lending it an aura of unrivaled durability.
So much so that during a recent parliamentary debate in Britain, where HSBC is based, an opposition politician scorned the government’s borrowing policies by asserting that Britain’s creditworthiness had fallen behind that of HSBC.
Now, as the bank faces a sharp slowdown in the emerging markets where it earns the bulk of its profit, many investors are questioning HSBC’s ability to maintain this exalted standing.
Last week, HSBC shares listed in London sank more than 17 percent, hit by several analysts’ reports contending that the bank would be required to raise money or to cut its dividend sharply. On Monday, HSBC shares in Hong Kong fell 3.3 percent, after falling more than 9 percent late last week. In addition, there was the acknowledgment that HSBC might have lost the $1 billion it had invested with Bernard L. Madoff, the New York money manager who authorities say has confessed to running a $50 billion Ponzi scheme.
As banks throughout the world face uncertain futures amid the worst financial crisis since the Depression, HSBC — which spans the globe from its original home in Hong Kong to the Middle East, Latin America and North America — offered a vivid counterpoint.
Its share price outpaced the main indexes and still trades near its book value. Its assets are growing, with the $2.3 trillion on its books expected to grow by almost 20 percent this year.
Not only has the bank spurned government money, it has been — at least so far — one of the few financial institutions of size not to be required to raise capital.
But with the recent drop in its shares, HSBC’s critics are raising questions about the bank’s globe-girdling strategy, particularly its insistence on sticking with its struggling consumer finance unit in the United States.
HSBC gets three-quarters of its profit from emerging markets, which have underpinned its recent success. But three-quarters of its loans are still exposed to the stricken markets of the United States and Britain, which some investors argue will hold it back, after the global economy recovers.
HSBC became the world’s top subprime lender when it bought Household International in the United States in 2003. According to Knight Vinke, a small asset manager in Monaco that owns less than 1 percent of the bank’s shares, the parent group has injected $60 billion into HSBC Finance — including the purchase price of $15 billion — in a so far fruitless bid to turn around this flagging business. According to its research, the money would be better deployed in faster-growing emerging markets.
A spokesman for HSBC disputed the figure, saying the total amount was about $20 billion.
Knight Vinke argues that HSBC should leave this business and focus on its core area of expertise in Asia.
“There are steps to be taken, but if all else fails, you may have to walk away from it,” said Glen Suarez, an executive at Knight Vinke.
“We see HSBC’s comparative advantage being in developing its business in Asia,” he said. “We have always felt that subprime and Household International was a problem.”
In a report produced this year, Knight Vinke said that HSBC had been overly optimistic in assessing the risk of its subprime exposure and that if the bank were to take a write-down reflecting the full reality of its potential losses, it could total as much as $30 billion — a number that would require the company to raise cash. (My comment: CAUTION!!)
HSBC declined to address Knight Vinke’s assertions publicly, saying the firm’s small investment position undermined its credibility.
Still, bank executives and board members have met with Knight Vinke as it pressed its position.
HSBC’s position is that its subprime loans, while substantial, are different from those of most other banks because they are not bundled into complex — and at this point nearly worthless — securities like those that forced Merrill Lynch, Citigroup and others to take large losses. As a result, management argues, HSBC is not obliged to write down these assets as long as they produce a cash flow.
The bank has also said that it is a global institution, with a need to be in markets from Shanghai to St. Louis, and that it considers the United States housing market to be a crucial part of its strategy. It also said that writing off its investment in HSBC Finance would do lasting damage to its reputation.
As its rivals took their lumps, HSBC maintained a healthy cushion against losses of about 8 percent, a conservative position compared with the greater leverage of other banks. But now that troubled institutions like Barclays, the Royal Bank of Scotland and Citigroup have raised large sums of equity to bolster their balance sheets and enjoy the explicit or implicit support of national governments, HSBC no longer looks so secure.
What is more, the advancing slowdown in HSBC’s core emerging markets franchise is putting additional pressure on its earnings.
HSBC has said that its capital position was strong, but declined to comment on the recent reports predicting that it would seek a capital increase, which would dilute the value of existing shares. It has been careful to leave open the possibility of raising new funds in conjunction with a deal, or a major investment in a business.
For all the new questions, Julian Chillingworth, chief investment officer at Rathbones in London, said HSBC remained a refreshing contrast to an industry that seemed to lose its head in the housing bubble.
“It may well be that they have to raise capital, but there’s a much better chance for them to get support,” he said. “They didn’t commit the sins of others of relying on the wholesale markets, and they’ve been quite prudent.”
HSBC executives are by and large an austere, conservative lot, compared with their more expansive counterparts. Their attitude toward the banking excesses has been one of polite disdain as they turned down opportunity after opportunity to buy into the American investment banking market.
It is an approach that conveys a degree of rectitude not often seen in bankers these days. The self-denying tone flowed from the top, conveyed by the bank’s former chairman, John Bond.
His successor, Stephen Green, spare and unobtrusive, carries on this tradition, serving as an ordained priest in the Church of England.
He is also the author of a book titled “Serving God? Serving Mammon?” that wrestles with the idea of being a man of faith in the City of London.
Still, the bank has not been immune to temptation — witness the $1 billion it is likely to have lost from extending loans to funds that invested with Mr. Madoff’s firm.
There are signs, too, that the bank may be on the verge of some major decisions — particularly with regard to its troubled American business.
John Thornton, the former president of Goldman Sachs and a man known for his aggressive strategic thinking, joined the group board this month. He will also serve as nonexecutive chairman of HSBC North America — a position that will require him to work two days each week and will pay him $1.5 million a year.
It is not clear what, if any decision will be taken. Even with its recent troubles, the firm’s position is strong enough to support a midsize deal, especially for a bank with a strong position in the American Hispanic market, an area that has long been of interest for HSBC.
And analysts say that even HSBC cannot stay above the troubles around it.
“I’m surprised the shares have done so well in relative terms,” said Daniel Tabbush, an analyst at Crédit Lyonnais Securities, who wrote one of the reports that precipitated the stock sell-off.
“Now, we’re looking at the exposure to commercial U.K. real estate, the unsecured loan book, credit cards. Many banks around the world said they don’t have to raise capital, and then they do.”
More Articles in Business » A version of this article appeared in print on December 23, 2008, on page B1 of the New York edition.
http://www.nytimes.com/2008/12/23/business/worldbusiness/23hsbc.html?ref=business
Secrets of 6 top financial advisers
Secrets of 6 top financial advisers
Some of the financial planning profession's most respected veterans reveal their favorite strategies for tough times.
Strategies from those who know
• Send feedback to Money MagazineWhen you're paddling in rough financial waters, it helps to have an experienced guide. That's why we've taken some of the most pressing money questions you have and posed them to people who tackle these problems every day.
These half-dozen pros are among the most esteemed advisers in the field. Some serve only wealthy clients, some the merely affluent.
But whatever their outlook, they share wisdom based on years of experience - a grand total of 158 years - and thousands of hours working with people who, like you, want the best possible future for their families.
Let the learning begin.
By George Mannes, Money Magazine senior writer
The secret to staying cool in this market
Years in business: 23Client assets: $50 millionKnown for: Leading planner voice in the Latino community
• Send feedback to Money Magazine
Know what you can control
Louis Barajas - The coachLouis Barajas, Wealth Planning Santa Fe Springs, Calif.
Obviously, it's okay to feel upset. If you're really interested in helping yourself, think about what is within your control - and what isn't.
You can control how much money you're spending. You can control whether you're becoming more valuable at work. You can't control your office being shut down. You can control whether you put a résumé together and start looking for a job.
You're saying, "I've lost $50,000. I've lost $100,000." You can't change the event. What you need to focus on is the outcome you want. I've gone through this with a lot of clients: "What was the money for?" I ask. "For my retirement," they say. "I just wanted to play golf a couple of times a week and travel once in a while."
And we've sat down and looked at their portfolios. A lot of times they're still on target for that retirement. Or maybe instead of playing golf three times a week, they're going to be able to play twice a week. The feeling of having lost control of outcomes is what creates panic and fear. Don't forget that you do have options.
The secret to creating the right mix
Years in business: 39Client assets: $500 millionKnown for: Wrote the textbook "Personal Financial Planning;" teaches at Pace University
• Send feedback to Money Magazine
Tailor the averages to who you are
Lew Altfest - The teacherL.J. Altfest & Co., New York City
Start out with a portfolio that's 65% stocks and 35% bonds and cash. That's my clients' average asset allocation. That's moderate: It gives you the upside of stock with significant protection for times such as now.
Then you have to take into account your personality and your circumstances. How safe is your job, how much money have you accumulated, can you afford to take risks?
If you're young and have decent risk tolerance, you could go to 80% stocks. If a lot of your money goes toward debt repayment, shift more toward bonds. But if your portfolio is less than 50% stocks, be prepared to accept a lower standard of living in retirement.
You can make tactical moves too. I think you should be overweighted in stocks now because you have the potential for above-average returns. Pull back when everybody says, "Why did we ever doubt the market?"
People want to tilt a portfolio toward that which has performed well and away from the areas that have not performed well. You should be doing the opposite. The thing that you should do robotically is rebalance and get back to your original allocation every quarter or once a year.
The secret to saving more money
Years in business: 29Client assets: $120 millionKnown for: Former chairwoman, National Association of Personal Financial Advisors
• Send feedback to Money Magazine
Fund your goals before you spend
Peggy Cabaniss - The calm voiceHC Financial Advisors, Lafayette, Calif.
It's easy to fritter money away. What you need is a plan.
Let's say you make $10,000 a month gross. Write that down. Take out what your income tax is and what you pay for Social Security. Take out whatever is deducted from your paycheck for your health plan and your 401(k).Notice that I set out goals first. What 95% of people do is, money comes into their checking account, they spend it, and at the end of the month there's nothing left. Of course they don't accomplish their goals.
On the day that money hits your checking account, have a certain amount automatically transferred to a savings or brokerage account. The main thing is that it doesn't sit around tempting you to spend.
The secret making your money last
Years in business: 27Client assets: $650 millionKnown for: Former chairman, Certified Financial Planner Board of Standards
• Send feedback to Money Magazine
Keep two years in cash
Harold Evensky - The deanEvensky & Katz, Coral Gables, Fla.
In retirement, if you start taking money out of stocks at the wrong time, you're in trouble: "Gosh, the market's down, but I've got to sell because I need groceries." So I developed the cash-flow-reserve strategy.
We don't believe in investing in stocks or bonds unless we expect to hold on for at least five years. Problem is, carving five years' worth of cash out of a portfolio puts too big a chunk in money markets. There's an opportunity cost to not being in the market. Two years of cash provides a significant cushion.
So if someone has a million dollars and needs 5% a year - $50,000 - we have two portfolios: a $900,000 stock and bond portfolio, and a $100,000 cash reserve. Maybe put the first year in a money-market account and the second in a short-term bond fund.
We've never run out of cash, but if we did, we would simply sell short-term bonds in the investment portfolio. We wouldn't have to sell stocks or long-term bonds when they're in the tank. The system worked well in the crash of '87 and the tech crash, and it's working very well now.
The secret to avoiding a high tax bill
Years in business: 26Client assets: $150 millionKnown for: Helped establish the personal financial specialist designation for C.P.A.s.
• Send feedback to Money Magazine
Shelter your best investments
Jim Shambo - The tax cutterLifetime Planning Concepts, Colorado Springs, Colo.
You should always maximize tax-deferred 401(k)s and IRAs, but what assets do you hold in them? The usual argument is to keep stocks outside your 401(k) so that when you sell you're taxed on the capital gain, not ordinary income.
But most people ignore a fund's portfolio turnover to their detriment. Even if you don't sell a single share of your actively managed stock fund, you're going to have gains because the whole portfolio turns over every five years, maybe less. The longer you hold the fund, the better off you are having it in a tax-deferred account. If you're under 40, you've got maybe 40 years of tax deferral.
Outside an IRA you're paying capital-gains taxes every year. Turnover is why I like index funds. Their portfolios turn over maybe once every 20 years. If you invest only in index funds, keeping stocks on the outside of an IRA and a 401(k) and bonds inside makes sense.
Actually, it's important to have a blend of stocks and bonds inside and out of your retirement accounts so you have the flexibility to rebalance in the IRAs. You don't want to sell stocks in a taxable account and generate gains.
The secret to balancing goals
Years in business: 14Client assets: $40 millionKnown for: Wrote "The Young Couple's Guide to Growing Rich Together"
• Send feedback to Money Magazine
Make long-term targets No.1
Jill Gianola - The family's helperGianola Financial Planning, Columbus, Ohio
I start with clients' longest-term goals first - usually retirement - and see what it would take to fund those. Then I work backward. Their second-longest- term goal is often their children's college. The furthest goals are usually the big ones; if you don't start working on them now, you're not going to make it.
People are willing to rearrange their short-term goals - "Okay, we can't buy the house for another couple of years" - but they don't necessarily want to postpone retirement. You have to make progress on several fronts to make sure you get to the finish line.Start with the minimum. With a 401(k), the minimum is to get the match. For me the minimum on a credit card is what it takes to pay it off in three years. If you have enough to meet both goals, you're good to go.
More galleries
Some of the financial planning profession's most respected veterans reveal their favorite strategies for tough times.
Strategies from those who know
• Send feedback to Money MagazineWhen you're paddling in rough financial waters, it helps to have an experienced guide. That's why we've taken some of the most pressing money questions you have and posed them to people who tackle these problems every day.
These half-dozen pros are among the most esteemed advisers in the field. Some serve only wealthy clients, some the merely affluent.
But whatever their outlook, they share wisdom based on years of experience - a grand total of 158 years - and thousands of hours working with people who, like you, want the best possible future for their families.
Let the learning begin.
By George Mannes, Money Magazine senior writer
The secret to staying cool in this market
Years in business: 23Client assets: $50 millionKnown for: Leading planner voice in the Latino community
• Send feedback to Money Magazine
Know what you can control
Louis Barajas - The coachLouis Barajas, Wealth Planning Santa Fe Springs, Calif.
Obviously, it's okay to feel upset. If you're really interested in helping yourself, think about what is within your control - and what isn't.
You can control how much money you're spending. You can control whether you're becoming more valuable at work. You can't control your office being shut down. You can control whether you put a résumé together and start looking for a job.
You're saying, "I've lost $50,000. I've lost $100,000." You can't change the event. What you need to focus on is the outcome you want. I've gone through this with a lot of clients: "What was the money for?" I ask. "For my retirement," they say. "I just wanted to play golf a couple of times a week and travel once in a while."
And we've sat down and looked at their portfolios. A lot of times they're still on target for that retirement. Or maybe instead of playing golf three times a week, they're going to be able to play twice a week. The feeling of having lost control of outcomes is what creates panic and fear. Don't forget that you do have options.
The secret to creating the right mix
Years in business: 39Client assets: $500 millionKnown for: Wrote the textbook "Personal Financial Planning;" teaches at Pace University
• Send feedback to Money Magazine
Tailor the averages to who you are
Lew Altfest - The teacherL.J. Altfest & Co., New York City
Start out with a portfolio that's 65% stocks and 35% bonds and cash. That's my clients' average asset allocation. That's moderate: It gives you the upside of stock with significant protection for times such as now.
Then you have to take into account your personality and your circumstances. How safe is your job, how much money have you accumulated, can you afford to take risks?
If you're young and have decent risk tolerance, you could go to 80% stocks. If a lot of your money goes toward debt repayment, shift more toward bonds. But if your portfolio is less than 50% stocks, be prepared to accept a lower standard of living in retirement.
You can make tactical moves too. I think you should be overweighted in stocks now because you have the potential for above-average returns. Pull back when everybody says, "Why did we ever doubt the market?"
People want to tilt a portfolio toward that which has performed well and away from the areas that have not performed well. You should be doing the opposite. The thing that you should do robotically is rebalance and get back to your original allocation every quarter or once a year.
The secret to saving more money
Years in business: 29Client assets: $120 millionKnown for: Former chairwoman, National Association of Personal Financial Advisors
• Send feedback to Money Magazine
Fund your goals before you spend
Peggy Cabaniss - The calm voiceHC Financial Advisors, Lafayette, Calif.
It's easy to fritter money away. What you need is a plan.
Let's say you make $10,000 a month gross. Write that down. Take out what your income tax is and what you pay for Social Security. Take out whatever is deducted from your paycheck for your health plan and your 401(k).Notice that I set out goals first. What 95% of people do is, money comes into their checking account, they spend it, and at the end of the month there's nothing left. Of course they don't accomplish their goals.
On the day that money hits your checking account, have a certain amount automatically transferred to a savings or brokerage account. The main thing is that it doesn't sit around tempting you to spend.
The secret making your money last
Years in business: 27Client assets: $650 millionKnown for: Former chairman, Certified Financial Planner Board of Standards
• Send feedback to Money Magazine
Keep two years in cash
Harold Evensky - The deanEvensky & Katz, Coral Gables, Fla.
In retirement, if you start taking money out of stocks at the wrong time, you're in trouble: "Gosh, the market's down, but I've got to sell because I need groceries." So I developed the cash-flow-reserve strategy.
We don't believe in investing in stocks or bonds unless we expect to hold on for at least five years. Problem is, carving five years' worth of cash out of a portfolio puts too big a chunk in money markets. There's an opportunity cost to not being in the market. Two years of cash provides a significant cushion.
So if someone has a million dollars and needs 5% a year - $50,000 - we have two portfolios: a $900,000 stock and bond portfolio, and a $100,000 cash reserve. Maybe put the first year in a money-market account and the second in a short-term bond fund.
We've never run out of cash, but if we did, we would simply sell short-term bonds in the investment portfolio. We wouldn't have to sell stocks or long-term bonds when they're in the tank. The system worked well in the crash of '87 and the tech crash, and it's working very well now.
The secret to avoiding a high tax bill
Years in business: 26Client assets: $150 millionKnown for: Helped establish the personal financial specialist designation for C.P.A.s.
• Send feedback to Money Magazine
Shelter your best investments
Jim Shambo - The tax cutterLifetime Planning Concepts, Colorado Springs, Colo.
You should always maximize tax-deferred 401(k)s and IRAs, but what assets do you hold in them? The usual argument is to keep stocks outside your 401(k) so that when you sell you're taxed on the capital gain, not ordinary income.
But most people ignore a fund's portfolio turnover to their detriment. Even if you don't sell a single share of your actively managed stock fund, you're going to have gains because the whole portfolio turns over every five years, maybe less. The longer you hold the fund, the better off you are having it in a tax-deferred account. If you're under 40, you've got maybe 40 years of tax deferral.
Outside an IRA you're paying capital-gains taxes every year. Turnover is why I like index funds. Their portfolios turn over maybe once every 20 years. If you invest only in index funds, keeping stocks on the outside of an IRA and a 401(k) and bonds inside makes sense.
Actually, it's important to have a blend of stocks and bonds inside and out of your retirement accounts so you have the flexibility to rebalance in the IRAs. You don't want to sell stocks in a taxable account and generate gains.
The secret to balancing goals
Years in business: 14Client assets: $40 millionKnown for: Wrote "The Young Couple's Guide to Growing Rich Together"
• Send feedback to Money Magazine
Make long-term targets No.1
Jill Gianola - The family's helperGianola Financial Planning, Columbus, Ohio
I start with clients' longest-term goals first - usually retirement - and see what it would take to fund those. Then I work backward. Their second-longest- term goal is often their children's college. The furthest goals are usually the big ones; if you don't start working on them now, you're not going to make it.
People are willing to rearrange their short-term goals - "Okay, we can't buy the house for another couple of years" - but they don't necessarily want to postpone retirement. You have to make progress on several fronts to make sure you get to the finish line.Start with the minimum. With a 401(k), the minimum is to get the match. For me the minimum on a credit card is what it takes to pay it off in three years. If you have enough to meet both goals, you're good to go.
More galleries
Once-in-a-generation sales
Investments in the bargain bin
Once-in-a-generation sales have sprung up in this crazed market.
Closed-end blue-chip stock funds
Closed-end funds and regular mutual funds both invest in a portfolio of stocks, bonds and other assets. The key difference: Closed-end funds are bought and sold like individual stocks on public exchanges. Historically, shares of the average closed-end fund have traded at a price around 5% below the actual value of the portfolio's underlying assets. Thanks to the vicious bear, though, closed-end large-cap stock funds are trading at discounts four times as large.
By Janice Revell, Money Magazine senior writer
Inflation-protected bonds
Real TIPS yields, which are shielded from inflation, are at a seven-year high. Fears of inflation have been replaced by fears of deflation. So demand for Treasury Inflation-Protected Securities, or TIPS, has collapsed. The result: Inflation-protected yields on TIPS are soaring. Five-year TIPS, in fact, are actually yielding 0.42 percent age points more than Treasuries. That means as long as inflation is not less than -- 0.42% in the coming years, you'll make more with TIPS. That's a good bet, given the enormous amount of cash Uncle Sam is pumping into the economy. An easy way to buy TIPS: iShares Lehman TIPS Bond (TIP), a Money 70 recommended ETF.
Pfizer
(ticker: PFE)This drug giant hasn't been immune to what ails the market. Its shares plunged almost 30% in the past year. The silver lining: Pfizer's dividend yield now stands at a hefty 8%, more than double the average of the S&P 500. Of course, when a stock's yield is that generous, the market often believes the dividend will be cut or the share price will continue to fall -- or both. But Pfizer has some strong defenses, says Banc of America Securities analyst Steven Lichtman. The firm boasts a solid balance sheet and sits on $26 billion in cash. And though its blockbuster drug Lipitor is slated to go off-patent in 2011, Lichtman believes earnings from Pfizer's other drugs will hold up well.
Triple-A-rated municipal bonds
Normally, yields on Treasuries and munis are about equal after you factor in taxes. Today muni yields are much higher. With taxes likely to rise, you'd expect demand for bonds issued by city, county and state governments to grow -- thanks to their tax-exempt status. Think again. Things have gotten so out of whack in this credit crisis that 10-year triple-A munis are yielding 4.14%. Assuming you're in the 28% bracket, that's like getting 5.75% on a Treasury. Yet 10-year Treasuries are yielding only 3.33%. True, munis can default. But even in a recession, the threat is not nearly enough to justify this differential, experts say. Go with a diversified Money 70 fund like Vanguard Intermediate Term Tax-Exempt (VWITX).
Eaton
(ticker: ETN) As Warren Buffett is fond of saying, the best time to be a buyer of equities is when everyone else is selling. Well, one stock that certainly meets Buffett's criterion of being unloved -- and that the Oracle has been loading up on -- is an industrial manufacturer you may not have heard of: Eaton Corp. Its price has plummeted more than 50% over the past year, and it's now trading at a price/earnings ratio of 6, compared with 12.4 for the S&P 500. According to a recent filing, Buffett's firm, Berkshire Hathaway, bought 3 million shares in the six months ended in September. Many pros think Eaton's recent sharp price decline makes the stock extremely attractive relative to the firm's earnings prospects. For example, Goldman Sachs analyst Terry Darling, who rates the stock a buy, expects Eaton's earnings to soften a bit in the next two years as the economy struggles. But he says the cheap stock price more than reflects that weakness.
Investment-grade corporate bonds
The spread between yields on corporate bonds and Treasuries has ballooned this year -- signaling a big buying opportunity in investment-grade corporates.The bonds of high-quality firms normally yield one to two points more than the going rate of U.S. Treasuries to compensate you for added risk. But Wall Street is so spooked that investment-grade bonds are now yielding more than 8% -- five points more than 10-year Treasuries. That's just too good to pass up, experts say. In fact, the prices on corporates have fallen so far that their yields currently "compensate for default rates worse than the Great Depression," according to Citigroup. A simple way to get onboard: Vanguard Short-Term Investment-Grade (VFSTX), a Money 70 fund.
Once-in-a-generation sales have sprung up in this crazed market.
Closed-end blue-chip stock funds
Closed-end funds and regular mutual funds both invest in a portfolio of stocks, bonds and other assets. The key difference: Closed-end funds are bought and sold like individual stocks on public exchanges. Historically, shares of the average closed-end fund have traded at a price around 5% below the actual value of the portfolio's underlying assets. Thanks to the vicious bear, though, closed-end large-cap stock funds are trading at discounts four times as large.
By Janice Revell, Money Magazine senior writer
Inflation-protected bonds
Real TIPS yields, which are shielded from inflation, are at a seven-year high. Fears of inflation have been replaced by fears of deflation. So demand for Treasury Inflation-Protected Securities, or TIPS, has collapsed. The result: Inflation-protected yields on TIPS are soaring. Five-year TIPS, in fact, are actually yielding 0.42 percent age points more than Treasuries. That means as long as inflation is not less than -- 0.42% in the coming years, you'll make more with TIPS. That's a good bet, given the enormous amount of cash Uncle Sam is pumping into the economy. An easy way to buy TIPS: iShares Lehman TIPS Bond (TIP), a Money 70 recommended ETF.
Pfizer
(ticker: PFE)This drug giant hasn't been immune to what ails the market. Its shares plunged almost 30% in the past year. The silver lining: Pfizer's dividend yield now stands at a hefty 8%, more than double the average of the S&P 500. Of course, when a stock's yield is that generous, the market often believes the dividend will be cut or the share price will continue to fall -- or both. But Pfizer has some strong defenses, says Banc of America Securities analyst Steven Lichtman. The firm boasts a solid balance sheet and sits on $26 billion in cash. And though its blockbuster drug Lipitor is slated to go off-patent in 2011, Lichtman believes earnings from Pfizer's other drugs will hold up well.
Triple-A-rated municipal bonds
Normally, yields on Treasuries and munis are about equal after you factor in taxes. Today muni yields are much higher. With taxes likely to rise, you'd expect demand for bonds issued by city, county and state governments to grow -- thanks to their tax-exempt status. Think again. Things have gotten so out of whack in this credit crisis that 10-year triple-A munis are yielding 4.14%. Assuming you're in the 28% bracket, that's like getting 5.75% on a Treasury. Yet 10-year Treasuries are yielding only 3.33%. True, munis can default. But even in a recession, the threat is not nearly enough to justify this differential, experts say. Go with a diversified Money 70 fund like Vanguard Intermediate Term Tax-Exempt (VWITX).
Eaton
(ticker: ETN) As Warren Buffett is fond of saying, the best time to be a buyer of equities is when everyone else is selling. Well, one stock that certainly meets Buffett's criterion of being unloved -- and that the Oracle has been loading up on -- is an industrial manufacturer you may not have heard of: Eaton Corp. Its price has plummeted more than 50% over the past year, and it's now trading at a price/earnings ratio of 6, compared with 12.4 for the S&P 500. According to a recent filing, Buffett's firm, Berkshire Hathaway, bought 3 million shares in the six months ended in September. Many pros think Eaton's recent sharp price decline makes the stock extremely attractive relative to the firm's earnings prospects. For example, Goldman Sachs analyst Terry Darling, who rates the stock a buy, expects Eaton's earnings to soften a bit in the next two years as the economy struggles. But he says the cheap stock price more than reflects that weakness.
Investment-grade corporate bonds
The spread between yields on corporate bonds and Treasuries has ballooned this year -- signaling a big buying opportunity in investment-grade corporates.The bonds of high-quality firms normally yield one to two points more than the going rate of U.S. Treasuries to compensate you for added risk. But Wall Street is so spooked that investment-grade bonds are now yielding more than 8% -- five points more than 10-year Treasuries. That's just too good to pass up, experts say. In fact, the prices on corporates have fallen so far that their yields currently "compensate for default rates worse than the Great Depression," according to Citigroup. A simple way to get onboard: Vanguard Short-Term Investment-Grade (VFSTX), a Money 70 fund.
Tuesday 23 December 2008
Splitting between quantitative and qualitative easing
23-12-2008: Splitting between quantitative and qualitative easing
Special report by DBS Group Research
Email us your feedback at fd@bizedge.com
WHEN the Fed cut its interest rate target to between zero and 0.25% last week it marked the end of interest rate easing and the beginning of what most people refer to as quantitative easing - the outright purchase of assets to influence liquidity conditions in financial markets.
In fact, even an interest rate policy is really a quantitative policy when you get right down to it. The only way the Fed controlled its policy rate, Fed funds, was by buying and selling assets, mainly repos and reverse repos, in the market.
(The day-to-day conduct of monetary policy is not typically done via buying/selling US Treasuries in what are called open market operations but rather by buying repos or reverse repos. A repo (repurchase agreement) is a temporary loan to a securities dealer, often overnight and usually for a few days or less.
The Fed credits the dealer's bank with an increase in reserves at the Fed and the borrower places high quality collateral (government or agency securities) with the Fed. At the end of the period, the collateral is returned to the borrower and the bank's reserves are appropriately debited.
The repo is thus a temporary injection of liquidity into the market. A reverse repo works the other way. The Fed temporarily drains liquidity from the market by debiting the account (reserves) of a security dealer's bank and replacing the reserves a few days later.) Buying repos injected liquidity and lowered the Fed funds rate. Buying reverse repos did the reverse. By hook or by crook, quantitative policy has been the reality all along.
Still, there's a perception that with short-term rates at zero, we've now entered a new phase of monetary easing. A quantitative phase. The Fed is going to buy large quantities of assets and continue to expand its balance sheet.
Quantitative versus qualitative easing Isn't this expansion of the Fed's balance sheet - this quantitative easing - just printing money? The answer over the past year has been yes, mostly, but not entirely.
Fed purchases of troubled assets or loans to troubled firms injects liquidity into the system and raises the monetary base. But that rise could be offset by sales of other assets like government bonds.
How much offsetting (sterilising) the Fed does when it buys a chunk of dubious assets determines whether its purchases are translated into quantitative easing (monetary expansion), or qualitative easing - an extension of liquidity to a firm, which does not raise the monetary base but dilutes the assets' quality on the Fed's books.
In the past three months, the Fed's balance sheet has grown by US$1.25 trillion (RM4.38 trillion) or 2.5 times and the monetary base has doubled. With the Fed planning to buy another US$800 billion of assets, how it pays for these assets will influence the monetary base and could have important consequences for inflation and the value of the dollar. The quality/quantity split is key.
Splitting the cake How has the Fed chosen to split the cake so far? Very inconsistently. Between August 2007 (when the crisis erupted) and Sept 3, 2008, the Fed injected some US$339 billion into markets, sterilising 93% of its purchases of troubled assets with sales of government bonds. Seven percent (US$28 billion) was paid for with an increase in the monetary base. In September, though, the Fed's balance sheet grew by a whopping 50%, or US$428 billion.
About US$157 billion (37%) of that was financed by a rise in the monetary base. Then things went wild. Between Oct 1 and Dec 17, the Fed bought US$841 billion of troubled assets, growing its balance sheet by another two-thirds. Eighty percent of that expansion (US$672 billion) was financed by an expansion in the monetary base - by printing money.
Since Sept 3, the Fed's balance sheet has expanded 2.5 times thanks to US$1.6 trillion of new credit extended loans to illiquid firms. Some 53% (US$857 billion) has been paid for via quantitative easing (an expansion in the monetary base) and 47% via qualitative easing (sterilising, or swapping good bonds for bad).
Back to qualitative easing? The Fed's Dec 16 FOMC statement that large scale quantitative easing was on the cards raised a lot of eyebrows. After all, the monetary base has already doubled since September.
So at a subsequent press conference, "senior Fed officials" hastened to add that the split going forward would favour qualitative easing (sterilised asset swaps) over quantitative easing (money printing á la Japan).
But that would be a big U-turn after the past two months of rolling the printing presses. How can you know for sure? You can't. The best you can do is to watch the data week by week.
The Fed's balance sheet - up close and technical Below, we discuss the evolution of the Fed's balance sheet since August 2007 and the present. Amongst it is the mechanics of some typical and, more recently, non-typical Fed transactions so that readers may see their effects on the monetary base and the quantitative/qualitative split in Fed policy. Readers familiar with the Fed's balance sheet and its mechanics may wish to skip ahead to the final section.
The good old days and Fed funds: Back in the good old days, the Fed's balance sheet was a pretty simple thing. On the asset side, the Fed held a lot of government bonds and not much else. Repos and reverse repos, used to fine-tune monetary policy on a day-to-day basis, were small. On Aug 8, 2007, reverse repos outnumbered repos by US$13 billion. Use of the discount window was extremely tiny and the Fed held US$40 billion of miscellaneous assets.
On the liability side were two items: currency in circulation and reserve balances, or simply reserves. Reserves are the deposits that banks must hold at the Fed. Minimum levels must be maintained on a daily basis. Banks which hold excess reserves may lend to banks temporarily short. The interest rate on these loans is called the Fed funds rate. As most are aware, this rate is the Fed's policy rate and through it the Fed controls, or used to anyway, other short-term market rates.
Open market operations: The most generic way to increase the money supply is called an open market operation (OMO). The first step is not necessary but typically begins with the Treasury issuing say a US$100 bond to a securities dealer in return for cash that it uses to cover its deficit. The Fed purchases the bond from the dealer, crediting the dealer's bank's account at the Fed for US$100. The bank may withdraw the funds from its reserve account at any time and since, in the past, reserves did not pay interest, it would typically do so fairly quickly. The US$100 bond issue has led to a US$100 increase in currency in circulation. If the Fed wanted to tighten liquidity, it would do the reverse, selling a Treasury bond into the market. The Fed would debit the dealer's bank reserves for US$100 and this would soon result in a reduction in the amount of currency in circulation. As member banks may always demand currency for reserves, the monetary base is the sum of these two Fed liabilities.
Repo injection: The Fed would typically engage in open market operations when it had heavy lifting to do, such as when it had changed the target for policy rates, Fed funds. For day-to-day fine-tuning of the Fed funds rate, repos and reverse repos would typically be used. Repos are loans extended for very short durations, usually a few days or less, secured with high quality collateral (UST or agency debt). As one would expect, a syphoning of liquidity via reverse repos would simply reverse the signs in the balance sheet entries. Interest rates on Fed funds would rise and would be transmitted out to the rest of the market.
Term Auction Facility (TAF) injections: By June 25, 2008, the Fed had extended US$150 billion of loans via the Term Auction Facility, or TAF. Other things equal, those TAF loans would have increased the monetary base just like the OMO or repo injections shown. But the Fed was worried that the TAF loans (and other injections that, between August 2007 and June 2008, amounted to US$339 billion) would have inflationary consequences. The Fed decided to offset these injections with sales of government bonds. Total assets have remained the same, as have total liabilities. This is, in effect, a simple asset swap. Again, the purpose is to provide liquidity to the TAF party in need without increasing the monetary base. The Fed's balance sheet becomes too small? Contrary to much market talk back in October, there are no constraints on the size of the Fed's balance sheet. The Fed can print money, which means it can buy any amount of assets. The sky's truly the limit. But the Fed's balance sheet can be constrained if it tries to buy too many assets without printing money. Once the Fed runs out of Treasuries, the sterilised asset swap can no longer occur. By September 2008, the Fed's supply of Treasuries had fallen by nearly half, thanks to sterilised asset swaps. In fact, it had fallen far lower than that because the Fed had already swapped another US$250 billion of Treasuries more formally in its Term Securities Lending Facility (TSLF) which the Fed records as an off-balance sheet item. In reality, 70% of the Fed's supply of Treasuries had been swapped by Sept 3, 2008. Unless the Fed could come up with some additional Treasuries, its rapidly growing portfolio of loans made through the TAF, the Primary Dealer Credit Facility (PDCF) and eight other programmes listed in the balance sheet would soon have to be financed by printing money alone.
On Oct 7, the Fed and the Treasury announced the Supplementary Financing Programme. What this amounted to, in effect, was a joint effort whereby the Fed would purchase the dubious assets as it had been and, since it was out of Treasuries, the Treasury would do the mopping up. A sterilised asset swap still obtained the result of two agencies being better than one.
There are various ways of viewing this from a balance sheet perspective. The most transparent way is probably to view the joint transaction in three distinct steps.
In step 1, the Treasury sells US$100 of bonds directly to the Fed. The Fed pays for the bonds by crediting the Treasury's supplementary reserve account. The Treasury promises not to withdraw or lend these funds so they do not affect the monetary base or the Fed funds rate.
In step 2, the Fed loans US$100 to a primary dealer, as per before, which leads a monetary base increase of US$100. In step 3, the monetary increase is sterilised by the sale of the newly acquired government bond. In net terms, primary dealers have received US$100 of new liquidity but the monetary base has not changed. In this case, the Fed's balance sheet has grown by US$100 but there is no monetary impact.
A more straightforward way of accomplishing the same thing would be for the Fed to issue its own bonds. The Fed's US$100 loan to a primary dealer broker leads to a rise in the monetary base of the same amount.
The Fed sterilises this injection with the sale of a Federal Reserve bond. This would be a pure asset swap although new Fed bonds would be issued (the size of the Fed's balance sheet would grow). If the Fed needs to expand its balance sheet to finance the acquisition of "large quantities" of assets without monetary consequences, then, in practical terms, it would seem to make little difference whether the Fed issued its own bonds for sterilisation purposes or bought them from the Treasury for onward sale to the market.
Why the quantity/quality split? And will it work? Besides avoiding the monetary consequences of large purchases of troubled assets, the Fed's qualitative easing is aimed at lowering the spread of various interest rates over the risk-free Treasury rate.
The Fed apparently feels that risk-free rates are low enough (10Y UST yields are currently at 2.13%). The hope is that by buying troubled assets and selling Treasury's, the yields on the two securities would come closer together.
Whether it will work remains unclear. Many consider the spread to be a function mainly of the probability of default on the part of the troubled borrower, not on the relative amounts of the securities bought and sold.
On this view, unless Fed loans actually lower the probability of default, the credit spread will remain. What matters to the borrower, though, and for that matter to the economy more generally, is not the spread he has to pay over the risk-free rate, but the actual rate at which he can borrow.
If the Fed wants to lower that rate, it may have to content itself with lowering the risk-free rate, for example, pursuing quantitative easing over qualitative.
Second, one cannot not forget the adage that leading a horse to water does not make it drink. The Fed can buy assets and credit the reserves of the banks. But unless the banks withdraw those funds and lend them onward in the market, it's all for naught.
This is currently a problem. The monetary base on Dec 17 was US$1.67 billion but half of that comprised reserves. Banks are not withdrawing the funds and putting them to use. This may be good from an inflation perspective but plainly not from a get-the-economy-going perspective.
Finally, one must not forget that many financial institutions have reported large losses and it is reasonable to assume that some, perhaps many, are insolvent. In such cases, Fed easing will not solve the problem but only postpone the day of reckoning. When it comes to putting off until tomorrow what can be done today, there is no quantity/quality split.
http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_62478269-cb73c03a-53897400-a8659b88
Special report by DBS Group Research
Email us your feedback at fd@bizedge.com
WHEN the Fed cut its interest rate target to between zero and 0.25% last week it marked the end of interest rate easing and the beginning of what most people refer to as quantitative easing - the outright purchase of assets to influence liquidity conditions in financial markets.
In fact, even an interest rate policy is really a quantitative policy when you get right down to it. The only way the Fed controlled its policy rate, Fed funds, was by buying and selling assets, mainly repos and reverse repos, in the market.
(The day-to-day conduct of monetary policy is not typically done via buying/selling US Treasuries in what are called open market operations but rather by buying repos or reverse repos. A repo (repurchase agreement) is a temporary loan to a securities dealer, often overnight and usually for a few days or less.
The Fed credits the dealer's bank with an increase in reserves at the Fed and the borrower places high quality collateral (government or agency securities) with the Fed. At the end of the period, the collateral is returned to the borrower and the bank's reserves are appropriately debited.
The repo is thus a temporary injection of liquidity into the market. A reverse repo works the other way. The Fed temporarily drains liquidity from the market by debiting the account (reserves) of a security dealer's bank and replacing the reserves a few days later.) Buying repos injected liquidity and lowered the Fed funds rate. Buying reverse repos did the reverse. By hook or by crook, quantitative policy has been the reality all along.
Still, there's a perception that with short-term rates at zero, we've now entered a new phase of monetary easing. A quantitative phase. The Fed is going to buy large quantities of assets and continue to expand its balance sheet.
Quantitative versus qualitative easing Isn't this expansion of the Fed's balance sheet - this quantitative easing - just printing money? The answer over the past year has been yes, mostly, but not entirely.
Fed purchases of troubled assets or loans to troubled firms injects liquidity into the system and raises the monetary base. But that rise could be offset by sales of other assets like government bonds.
How much offsetting (sterilising) the Fed does when it buys a chunk of dubious assets determines whether its purchases are translated into quantitative easing (monetary expansion), or qualitative easing - an extension of liquidity to a firm, which does not raise the monetary base but dilutes the assets' quality on the Fed's books.
In the past three months, the Fed's balance sheet has grown by US$1.25 trillion (RM4.38 trillion) or 2.5 times and the monetary base has doubled. With the Fed planning to buy another US$800 billion of assets, how it pays for these assets will influence the monetary base and could have important consequences for inflation and the value of the dollar. The quality/quantity split is key.
Splitting the cake How has the Fed chosen to split the cake so far? Very inconsistently. Between August 2007 (when the crisis erupted) and Sept 3, 2008, the Fed injected some US$339 billion into markets, sterilising 93% of its purchases of troubled assets with sales of government bonds. Seven percent (US$28 billion) was paid for with an increase in the monetary base. In September, though, the Fed's balance sheet grew by a whopping 50%, or US$428 billion.
About US$157 billion (37%) of that was financed by a rise in the monetary base. Then things went wild. Between Oct 1 and Dec 17, the Fed bought US$841 billion of troubled assets, growing its balance sheet by another two-thirds. Eighty percent of that expansion (US$672 billion) was financed by an expansion in the monetary base - by printing money.
Since Sept 3, the Fed's balance sheet has expanded 2.5 times thanks to US$1.6 trillion of new credit extended loans to illiquid firms. Some 53% (US$857 billion) has been paid for via quantitative easing (an expansion in the monetary base) and 47% via qualitative easing (sterilising, or swapping good bonds for bad).
Back to qualitative easing? The Fed's Dec 16 FOMC statement that large scale quantitative easing was on the cards raised a lot of eyebrows. After all, the monetary base has already doubled since September.
So at a subsequent press conference, "senior Fed officials" hastened to add that the split going forward would favour qualitative easing (sterilised asset swaps) over quantitative easing (money printing á la Japan).
But that would be a big U-turn after the past two months of rolling the printing presses. How can you know for sure? You can't. The best you can do is to watch the data week by week.
The Fed's balance sheet - up close and technical Below, we discuss the evolution of the Fed's balance sheet since August 2007 and the present. Amongst it is the mechanics of some typical and, more recently, non-typical Fed transactions so that readers may see their effects on the monetary base and the quantitative/qualitative split in Fed policy. Readers familiar with the Fed's balance sheet and its mechanics may wish to skip ahead to the final section.
The good old days and Fed funds: Back in the good old days, the Fed's balance sheet was a pretty simple thing. On the asset side, the Fed held a lot of government bonds and not much else. Repos and reverse repos, used to fine-tune monetary policy on a day-to-day basis, were small. On Aug 8, 2007, reverse repos outnumbered repos by US$13 billion. Use of the discount window was extremely tiny and the Fed held US$40 billion of miscellaneous assets.
On the liability side were two items: currency in circulation and reserve balances, or simply reserves. Reserves are the deposits that banks must hold at the Fed. Minimum levels must be maintained on a daily basis. Banks which hold excess reserves may lend to banks temporarily short. The interest rate on these loans is called the Fed funds rate. As most are aware, this rate is the Fed's policy rate and through it the Fed controls, or used to anyway, other short-term market rates.
Open market operations: The most generic way to increase the money supply is called an open market operation (OMO). The first step is not necessary but typically begins with the Treasury issuing say a US$100 bond to a securities dealer in return for cash that it uses to cover its deficit. The Fed purchases the bond from the dealer, crediting the dealer's bank's account at the Fed for US$100. The bank may withdraw the funds from its reserve account at any time and since, in the past, reserves did not pay interest, it would typically do so fairly quickly. The US$100 bond issue has led to a US$100 increase in currency in circulation. If the Fed wanted to tighten liquidity, it would do the reverse, selling a Treasury bond into the market. The Fed would debit the dealer's bank reserves for US$100 and this would soon result in a reduction in the amount of currency in circulation. As member banks may always demand currency for reserves, the monetary base is the sum of these two Fed liabilities.
Repo injection: The Fed would typically engage in open market operations when it had heavy lifting to do, such as when it had changed the target for policy rates, Fed funds. For day-to-day fine-tuning of the Fed funds rate, repos and reverse repos would typically be used. Repos are loans extended for very short durations, usually a few days or less, secured with high quality collateral (UST or agency debt). As one would expect, a syphoning of liquidity via reverse repos would simply reverse the signs in the balance sheet entries. Interest rates on Fed funds would rise and would be transmitted out to the rest of the market.
Term Auction Facility (TAF) injections: By June 25, 2008, the Fed had extended US$150 billion of loans via the Term Auction Facility, or TAF. Other things equal, those TAF loans would have increased the monetary base just like the OMO or repo injections shown. But the Fed was worried that the TAF loans (and other injections that, between August 2007 and June 2008, amounted to US$339 billion) would have inflationary consequences. The Fed decided to offset these injections with sales of government bonds. Total assets have remained the same, as have total liabilities. This is, in effect, a simple asset swap. Again, the purpose is to provide liquidity to the TAF party in need without increasing the monetary base. The Fed's balance sheet becomes too small? Contrary to much market talk back in October, there are no constraints on the size of the Fed's balance sheet. The Fed can print money, which means it can buy any amount of assets. The sky's truly the limit. But the Fed's balance sheet can be constrained if it tries to buy too many assets without printing money. Once the Fed runs out of Treasuries, the sterilised asset swap can no longer occur. By September 2008, the Fed's supply of Treasuries had fallen by nearly half, thanks to sterilised asset swaps. In fact, it had fallen far lower than that because the Fed had already swapped another US$250 billion of Treasuries more formally in its Term Securities Lending Facility (TSLF) which the Fed records as an off-balance sheet item. In reality, 70% of the Fed's supply of Treasuries had been swapped by Sept 3, 2008. Unless the Fed could come up with some additional Treasuries, its rapidly growing portfolio of loans made through the TAF, the Primary Dealer Credit Facility (PDCF) and eight other programmes listed in the balance sheet would soon have to be financed by printing money alone.
On Oct 7, the Fed and the Treasury announced the Supplementary Financing Programme. What this amounted to, in effect, was a joint effort whereby the Fed would purchase the dubious assets as it had been and, since it was out of Treasuries, the Treasury would do the mopping up. A sterilised asset swap still obtained the result of two agencies being better than one.
There are various ways of viewing this from a balance sheet perspective. The most transparent way is probably to view the joint transaction in three distinct steps.
In step 1, the Treasury sells US$100 of bonds directly to the Fed. The Fed pays for the bonds by crediting the Treasury's supplementary reserve account. The Treasury promises not to withdraw or lend these funds so they do not affect the monetary base or the Fed funds rate.
In step 2, the Fed loans US$100 to a primary dealer, as per before, which leads a monetary base increase of US$100. In step 3, the monetary increase is sterilised by the sale of the newly acquired government bond. In net terms, primary dealers have received US$100 of new liquidity but the monetary base has not changed. In this case, the Fed's balance sheet has grown by US$100 but there is no monetary impact.
A more straightforward way of accomplishing the same thing would be for the Fed to issue its own bonds. The Fed's US$100 loan to a primary dealer broker leads to a rise in the monetary base of the same amount.
The Fed sterilises this injection with the sale of a Federal Reserve bond. This would be a pure asset swap although new Fed bonds would be issued (the size of the Fed's balance sheet would grow). If the Fed needs to expand its balance sheet to finance the acquisition of "large quantities" of assets without monetary consequences, then, in practical terms, it would seem to make little difference whether the Fed issued its own bonds for sterilisation purposes or bought them from the Treasury for onward sale to the market.
Why the quantity/quality split? And will it work? Besides avoiding the monetary consequences of large purchases of troubled assets, the Fed's qualitative easing is aimed at lowering the spread of various interest rates over the risk-free Treasury rate.
The Fed apparently feels that risk-free rates are low enough (10Y UST yields are currently at 2.13%). The hope is that by buying troubled assets and selling Treasury's, the yields on the two securities would come closer together.
Whether it will work remains unclear. Many consider the spread to be a function mainly of the probability of default on the part of the troubled borrower, not on the relative amounts of the securities bought and sold.
On this view, unless Fed loans actually lower the probability of default, the credit spread will remain. What matters to the borrower, though, and for that matter to the economy more generally, is not the spread he has to pay over the risk-free rate, but the actual rate at which he can borrow.
If the Fed wants to lower that rate, it may have to content itself with lowering the risk-free rate, for example, pursuing quantitative easing over qualitative.
Second, one cannot not forget the adage that leading a horse to water does not make it drink. The Fed can buy assets and credit the reserves of the banks. But unless the banks withdraw those funds and lend them onward in the market, it's all for naught.
This is currently a problem. The monetary base on Dec 17 was US$1.67 billion but half of that comprised reserves. Banks are not withdrawing the funds and putting them to use. This may be good from an inflation perspective but plainly not from a get-the-economy-going perspective.
Finally, one must not forget that many financial institutions have reported large losses and it is reasonable to assume that some, perhaps many, are insolvent. In such cases, Fed easing will not solve the problem but only postpone the day of reckoning. When it comes to putting off until tomorrow what can be done today, there is no quantity/quality split.
http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_62478269-cb73c03a-53897400-a8659b88
Maybe Investors Should Buy
Maybe Investors Should Buy, Buy, Buy and Hold
by Paul J. LimTuesday, December 23, 2008
What's the best way to recoup losses suffered in a bear market?
For most of the past quarter century, the answer was simple. All you had to do was hold stocks and wait for the next bull market.
But if investors need their portfolios to climb back to pre-bear levels anytime soon, just staying put may not be enough this time. In fact, painful as it may seem, it may be necessary to sock away more money, if the goal is to return to even in the next couple of years.
More from NYTimes.com: • A Reeling City Is a Snapshot of Economic Woes • In Move to Digital TV, Confusion Is in the Air • Staying Informed Without Drowning in Data
"The only way to erase the whiteboard and get back to where you were soon is to start contributing more to your portfolio," said Christine Fahlund, senior financial planner at T. Rowe Price.
For the last couple of decades, investors haven't had to step up their savings because the stock market did the work for them. Since 1982, the Standard & Poor's 500-stock index has recouped about 88 cents, on average, of every dollar lost in a bear market by the end of the first year of the subsequent bull market. By the end of the second year, that dollar would have been recovered, and then gone up an additional 18 cents.
But it may not make sense to plan on that timetable now. That's because 2008 was no ordinary year, and the current downturn may not follow the pattern of recent bear markets.
In 2008 alone, the S.& P. 500 has lost more -- about 40 percent -- than it usually does during an entire bear market, which historically lasts 16 months. And we don't know when this bear market will end, or when the next bull will begin.
Sure, it would be great if smart choices in asset allocation or purchases of stocks and funds could quickly get us back to break-even. But the math simply doesn't add up.
Say you were willing to be super-aggressive, especially now that stocks are trading at relatively cheap prices. And assume for the moment that this bear market has run its course. Even if you plan to be 100 percent in stocks, it may easily take another four years just to return to where you were at the start of this year.
Why?
Assume that you started 2008 with $100,000 invested in stocks, and, to keep the calculations simple, that you have about $60,000 left in your account now, roughly tracking the decline of the S.& P.
Let's be optimistic for a moment. Historically, the first year of a new bull market comes with a surge -- a 38 percent climb in the S.& P., on average, since World War II. That would bring your portfolio back to just under $83,000. In the second year of a bull market, stocks tend to rise by around 11 percent. So your account would recover to about $92,000. In Year 3, prices historically rise 4 percent. That would take your nest egg to just under $96,000.
Only in the fourth year, which takes you all the way to 2012, would you climb back above $100,000.
Of course, all of this assumes that you're fully invested in stocks, and uses the rosiest of scenarios: that the bear market is over and that stocks are on the verge of a multiyear rally.
Is it wise to embrace those assumptions? Given the state of the economy, maybe not. It could take years for the market to fully recover from the excesses that created the recent bubble.
Investors should keep in mind that "there's often a difference between the end of a bear-market correction and the beginning of a new bull-market phase," said Susan M. Byrne, chairwoman and chief investment officer at the Westwood Management Corporation, a registered investment adviser based in Dallas. "After the bear market ended in 1974, it wasn't until July of 1982 that I first started to think that we were really out of it."
What's more, investors don't seem to be in the mood to bet aggressively on stocks.
According to Hewitt Associates, the employee benefits consulting firm, only 52 percent of 401(k) money is currently held in equities, down from 69 percent last year.
More from Yahoo! Finance: • States in Worst Budget Trouble • On Wall Street, Bonuses, Not Profits, Were Real • Holiday Gifts That Cost Next to Nothing
Visit the Banking & Budgeting Center
Some of that shift occurred because stocks have fallen so much, but another reason is that retirement investors haven't been "rebalancing" their accounts to get back to their original weighting in equities. "I think the inclination is going to be to hunker down, move out of equities and reduce contributions to the plan," said Lori Lucas, defined-contribution practice leader at Callan Associates, an investment consulting firm based in San Francisco.
So far, 401(k) investors haven't altered their savings rate significantly. According to Hewitt, 401(k) participants contributed 7.8 percent of their pay, on average, to their retirement accounts this year. That's down marginally from 8 percent in 2007.
That is well shy of the 15 percent annual savings rate that financial planners often suggest as a safe target. "It's going to be a real uphill battle to convince people they need to save more now," Ms. Lucas said.
For those who are still well within their working years, their savings rate is likely to be the biggest determinant of whether they can reach goals like financing a long retirement, said Ms. Fahlund of T. Rowe Price.
That's not to say that asset allocation and market returns aren't important. But if you're years from retiring, the rate at which you save matters now more than ever.
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
http://finance.yahoo.com/banking-budgeting/article/106343/Maybe-Investors-Should-Buy-Buy-Buy-and-Hold
by Paul J. LimTuesday, December 23, 2008
What's the best way to recoup losses suffered in a bear market?
For most of the past quarter century, the answer was simple. All you had to do was hold stocks and wait for the next bull market.
But if investors need their portfolios to climb back to pre-bear levels anytime soon, just staying put may not be enough this time. In fact, painful as it may seem, it may be necessary to sock away more money, if the goal is to return to even in the next couple of years.
More from NYTimes.com: • A Reeling City Is a Snapshot of Economic Woes • In Move to Digital TV, Confusion Is in the Air • Staying Informed Without Drowning in Data
"The only way to erase the whiteboard and get back to where you were soon is to start contributing more to your portfolio," said Christine Fahlund, senior financial planner at T. Rowe Price.
For the last couple of decades, investors haven't had to step up their savings because the stock market did the work for them. Since 1982, the Standard & Poor's 500-stock index has recouped about 88 cents, on average, of every dollar lost in a bear market by the end of the first year of the subsequent bull market. By the end of the second year, that dollar would have been recovered, and then gone up an additional 18 cents.
But it may not make sense to plan on that timetable now. That's because 2008 was no ordinary year, and the current downturn may not follow the pattern of recent bear markets.
In 2008 alone, the S.& P. 500 has lost more -- about 40 percent -- than it usually does during an entire bear market, which historically lasts 16 months. And we don't know when this bear market will end, or when the next bull will begin.
Sure, it would be great if smart choices in asset allocation or purchases of stocks and funds could quickly get us back to break-even. But the math simply doesn't add up.
Say you were willing to be super-aggressive, especially now that stocks are trading at relatively cheap prices. And assume for the moment that this bear market has run its course. Even if you plan to be 100 percent in stocks, it may easily take another four years just to return to where you were at the start of this year.
Why?
Assume that you started 2008 with $100,000 invested in stocks, and, to keep the calculations simple, that you have about $60,000 left in your account now, roughly tracking the decline of the S.& P.
Let's be optimistic for a moment. Historically, the first year of a new bull market comes with a surge -- a 38 percent climb in the S.& P., on average, since World War II. That would bring your portfolio back to just under $83,000. In the second year of a bull market, stocks tend to rise by around 11 percent. So your account would recover to about $92,000. In Year 3, prices historically rise 4 percent. That would take your nest egg to just under $96,000.
Only in the fourth year, which takes you all the way to 2012, would you climb back above $100,000.
Of course, all of this assumes that you're fully invested in stocks, and uses the rosiest of scenarios: that the bear market is over and that stocks are on the verge of a multiyear rally.
Is it wise to embrace those assumptions? Given the state of the economy, maybe not. It could take years for the market to fully recover from the excesses that created the recent bubble.
Investors should keep in mind that "there's often a difference between the end of a bear-market correction and the beginning of a new bull-market phase," said Susan M. Byrne, chairwoman and chief investment officer at the Westwood Management Corporation, a registered investment adviser based in Dallas. "After the bear market ended in 1974, it wasn't until July of 1982 that I first started to think that we were really out of it."
What's more, investors don't seem to be in the mood to bet aggressively on stocks.
According to Hewitt Associates, the employee benefits consulting firm, only 52 percent of 401(k) money is currently held in equities, down from 69 percent last year.
More from Yahoo! Finance: • States in Worst Budget Trouble • On Wall Street, Bonuses, Not Profits, Were Real • Holiday Gifts That Cost Next to Nothing
Visit the Banking & Budgeting Center
Some of that shift occurred because stocks have fallen so much, but another reason is that retirement investors haven't been "rebalancing" their accounts to get back to their original weighting in equities. "I think the inclination is going to be to hunker down, move out of equities and reduce contributions to the plan," said Lori Lucas, defined-contribution practice leader at Callan Associates, an investment consulting firm based in San Francisco.
So far, 401(k) investors haven't altered their savings rate significantly. According to Hewitt, 401(k) participants contributed 7.8 percent of their pay, on average, to their retirement accounts this year. That's down marginally from 8 percent in 2007.
That is well shy of the 15 percent annual savings rate that financial planners often suggest as a safe target. "It's going to be a real uphill battle to convince people they need to save more now," Ms. Lucas said.
For those who are still well within their working years, their savings rate is likely to be the biggest determinant of whether they can reach goals like financing a long retirement, said Ms. Fahlund of T. Rowe Price.
That's not to say that asset allocation and market returns aren't important. But if you're years from retiring, the rate at which you save matters now more than ever.
Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.
http://finance.yahoo.com/banking-budgeting/article/106343/Maybe-Investors-Should-Buy-Buy-Buy-and-Hold
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