Financial crisis: The banks are still sinking
Ministers plan a 'toxic bank’ to soak up bad debts and unfreeze the money markets. But will it work, asks Katherine Griffiths.
Last Updated: 12:08PM GMT 16 Jan 2009
Comments 9 Comment on this article
Hang on – didn’t we save Britain’s banks in October? That was when the Government gave £500 billion to inject capital into Royal Bank of Scotland (RBS), Lloyds and HBOS and pledged ongoing support to get high-street lenders back on their feet.
So, why are banks’ share prices still plummeting, while they refuse to lend to each other because they are suspicious about what hidden nasties are on their rivals’ balance sheets? Their chief executives privately warn the Government – they are reluctant to deliver this message in public – that they do not have the cash to provide mortgages and loans to individuals and businesses.
The reality is that, while the Prime Minister, the self-styled saviour of the world, rode high in public opinion in October and November for leading the charge to deal with the global banking crisis, in fact what the Government had done was to carry out emergency surgery to save the banks – and the entire financial system – from immediate collapse.
Now it is time for the more painful process of restoring the patient to health. For the banks the medicine is going to be unpleasant to swallow – it will mean shrunken salaries and no bonuses for many. For the rest of us it is going to be expensive and could take years to administer.
The Government is understandably unwilling to come out with this prognosis, but it needs to do so soon. The US has been ahead of Britain in preparing for a second round of emergency operations on its banks, with Citigroup set to be split into a “good” and “bad” bank so that investors can feel confident about owning its shares again.
Switzerland has also set up a special entity to swallow about £30 billion of toxic assets from its largest bank, UBS, so that it can begin the process of recovery.
In the UK, we have seen this week measures from Lord Mandelson’s department to help small businesses, but they will only have a marginal impact unless ministers can deal with the banking disease at the heart of the problem.
Now, the word out of Downing Street is that ministers are on the case and are preparing to announce the creation of a “toxic bank” to soak up more than £30 billion of British banks’ bad debts. The plan will form the centrepiece of a fresh bail-out designed to get them lending again, to each other and to their customers.
The difficulties the Government faces are immense.
The wholesale markets, which banks use for much of their funding so that they can lend to customers, remain frozen. This is because of a breakdown of trust between financial institutions: no one can be sure what problems banks are sitting on, so investors do not want to lend them money in case more difficulties emerge and they lose their cash.
What is needed most is clarity: what really is on the books of each bank? It is difficult to put a price on their troubled assets, many of which are based on the collapsed subprime loans sector in the US.
The Government is hoping that clarity is coming soon. In the next few weeks, the banks will report their results for 2008, and to do so they need to get their figures signed off by auditors. The auditing firms – such as PricewaterhouseCoopers, KPMG and Deloitte – will have to agree to the valuation of banks’ assets.
The accountants will want to get these values right because, if their banking clients should fail later, the first port of call for potential shareholders’ lawsuits will be the deep-pocketed auditors.
In anticipation, ministers are preparing the creation of that “toxic bank” to allow for a fresh start.
In theory, it will suck in all of the failing assets that have poisoned the banks’ balance sheets and destroyed confidence in the system. That would leave the remaining banks cleansed and able to attract both investors who want to put their capital in banks’ shares, and providers of funds so that the wholesale markets would be defrosted, and lending could be restarted.
Of course, if it was as simple as that, a bad bank would have been constituted months ago and Gordon Brown and Alistair Darling would be hailing it as part of their world-leading financial recovery plan.
As Sweden found when it had to take similar measures in the early Nineties, creating a bad bank is fraught with problems. As with this entire crisis, the main challenge is how to value the assets.
In order to take control of the toxic investments, the Government would have to give the banks some money in return.
If it sets the price too low, banks will either refuse to hand the assets over, thereby not solving the systemic problem of a lack of confidence, or will have to take new write-downs to recognise the lower value, further weakening their own books. If the price is too high, there will be an outcry that taxpayers’ money is being squandered to save bankers’ skins.
Ministers are keen to ensure that banks are not seen by the public as being let off the hook. Consequently, they are informing executives that we are entering a new world of lower bonuses, less risk-taking and smaller profits.
Rather than the “green shoots” of recovery suggested by business minister Baroness Vadera on Wednesday, the Government has to be prepared to come out with more bleak news.
RBS, until a year and a half ago Britain’s biggest banking success story, is now almost 60 per cent owned by the taxpayer and in its present state is essentially finished as a private institution. The problems at HBOS, comprised of Halifax and Bank of Scotland, are greater than anticipated, and its new owner – Lloyds TSB – will struggle to cope unless it receives more help from the public purse.
Northern Rock, which the Government had hoped to flip from its nationalised state back to the private sector for a quick profit, now looks like the most sensible home for the bad bank and so will have to spend many years in public hands.
And Barclays, the only major high street bank apart from HSBC to avoid participating in the October bail-out, looks increasingly as if it will have to accept government cash, either by using the bad bank or by being involved in a potential further round of cash injections into the banking sector.
It is not all doom and gloom. The Government can make a reasonable case that it is more sensible to create a bad bank than to inject more cash straight into banks, as the investments could simply be wiped out.
This would lead to complete nationalisation of the banking sector, which the Government is unwilling to do until it has tried other measures first.
But a bad bank alone will not kick-start the economy. The Government must get to work with other countries to rethink the “Basle II” banking rules that dictate how institutions lend. They contributed to the banks’ lending bubble, rather than preventing it, by enabling them to place large amounts of new types of debt off balance sheets and beyond the reach of regulators.
And it is clear that in Britain, the tweaks to VAT were inadequate: more tax cuts are required fast.
It is not difficult to see why ministers have taken their time: many, along with their advisers, have not lived through difficult economic times. While the Government had to react quickly last year to a succession of blow-ups, it says it now wants to get its policy right for the longer term.
To do otherwise will lead to lawsuits, such as the one going through the courts over Northern Rock’s nationalisation.
More importantly, spending billions of pounds more of taxpayers’ money on a policy that fails to hit the mark would be disastrous.
The Government has the critical next stage of its rescue of the banking system close to completion. An announcement is expected as early as next week.
All of us, consumers and bankers, had better hope it works.
http://www.telegraph.co.uk/finance/financetopics/recession/4250231/Financial-crisis-The-banks-are-still-sinking.html
Comment:
This is akin to Danaharta and Danamodal approach adopted by Malaysia in 1997-1998 Asian Financial Crisis.
Friday 16 January 2009
Using PE as a Guide
http://samltt88.blogspot.com/2008/12/v-thats-y-d-chinese-said-d-length-of.html
Sam, I am a silent reader of seng's blog & also your blog , I found that they are confuse with which PE to use for shares picking, mind to teach us which one to be used?
thanks in advance
Read the below:
random: and which PE should we use bb? TTM PE? Last year's PE? Forward PE? 10 Dec 07, 10:46
sasuka: andy.. I doubt syndicate will play the market... so just look at good timing 2 enter... 10 Dec 07, 10:46
random: even the PE stated on my HLE screen is sometimes wrong.. 10 Dec 07, 10:45
bullbear: For example, the simple PE. PE of KNM is quoted at around 27 in the Star, in the Financial edge it is 47. The price is the same, so the calculation of PE was definitely based on different EPS used by these 2 sites. This can be confusing for the average investors.
***First of all, who is seng ? Which blog u r referring to?
From d above posting, I can see some of them don’t 100% understand what is PE?
That's y Chinese said: - d length of our fingers r not d same, means: - why some one can be Doctor, lawyer, successful investor n bizman...N why some cant???
Why some can be rich n some r so poor?
Why same effort n guidance given by u but not all of them can be graduate?
As known to u , everyone know who is Warren Buffet N Benjamin Graham, n most of them read their investment skill n method also, why some can be so successful n some r so broke ?
Bcos:-D Length of our fingers r not d same! Some r smart some r not!
U know d formula of PE doesn’t mean u know what is PE!
U know what is PE doesn’t mean u understand what is PE!
U understand what is PE doesn’t mean u know how to apply it on share investment!
Why should u follow d press n broking hse’s PE when they r not d same? (this show they r either don’t understand or may be don’t know how to calculate PE )
Do it yrself by calculate its PE based on its earning lah ! what so difficult ?
Why there r differences of PE ? simple ! Some broking hse calculate based on last year earning, some calculate based on 1 or 2 or 3 qtrs earning !
of course they r different lah !
So which one to use ?
Last year PE take it as a guide, use current earning to estimate its PE for d coming year !
Example :
Last year PE giving u 8
If I see its Qtr earning improving ( minus out d one off earning if there any ) n its future earning looks bright ( Steel sector n oil sector ) , I am quite sure d PE for d coming year will definitely better or lower than last year ^V^
Masteel at 1.51
Based on last year earning of 22.47
PE = 1.51/22.47 = 6.7
Based current earning (3 Qtrs only )= 23.32 cts
PE = 1.51/23.32 = 6.4
BUT dont forget, PE 6.4 is based on 3 QTRS only !!
there is one more to come , therefore , we can expect lower n better PE for Masteel in year ended 2007 !
What is so difficult to get its PE yrself ?D
Do u know how to define mkt crash like 1997 n 1998 ? Mkt crash is when u can buy d below blue chips at PE < 10 :-
PBB , PPB, Maybank, IOIcorp, YTL, Genting , Digi ,SD , IJM , KNM ,Resorts.....
Once u can get d above blue chips at below PE 10, then u will understand better what actually PE is !?
Is low PE guaranteed u sure gain ? refer to my previous posting at :-
http://samgang.blogspot.com/2007/12/v-portfolio-as-at-30-nov-07-v.html
Posted by Samgoss at 7:54 PM
Comment:
Copied an old posting from the above blog to illustrate how PE is being used by this blogger. It is good of Samgoss to share this.
PE is only one of many market metrics one look at as a guide to investing in shares.
Also read:
Market metrics P/E and Intrinsic value
Sam, I am a silent reader of seng's blog & also your blog , I found that they are confuse with which PE to use for shares picking, mind to teach us which one to be used?
thanks in advance
Read the below:
random: and which PE should we use bb? TTM PE? Last year's PE? Forward PE? 10 Dec 07, 10:46
sasuka: andy.. I doubt syndicate will play the market... so just look at good timing 2 enter... 10 Dec 07, 10:46
random: even the PE stated on my HLE screen is sometimes wrong.. 10 Dec 07, 10:45
bullbear: For example, the simple PE. PE of KNM is quoted at around 27 in the Star, in the Financial edge it is 47. The price is the same, so the calculation of PE was definitely based on different EPS used by these 2 sites. This can be confusing for the average investors.
***First of all, who is seng ? Which blog u r referring to?
From d above posting, I can see some of them don’t 100% understand what is PE?
That's y Chinese said: - d length of our fingers r not d same, means: - why some one can be Doctor, lawyer, successful investor n bizman...N why some cant???
Why some can be rich n some r so poor?
Why same effort n guidance given by u but not all of them can be graduate?
As known to u , everyone know who is Warren Buffet N Benjamin Graham, n most of them read their investment skill n method also, why some can be so successful n some r so broke ?
Bcos:-D Length of our fingers r not d same! Some r smart some r not!
U know d formula of PE doesn’t mean u know what is PE!
U know what is PE doesn’t mean u understand what is PE!
U understand what is PE doesn’t mean u know how to apply it on share investment!
Why should u follow d press n broking hse’s PE when they r not d same? (this show they r either don’t understand or may be don’t know how to calculate PE )
Do it yrself by calculate its PE based on its earning lah ! what so difficult ?
Why there r differences of PE ? simple ! Some broking hse calculate based on last year earning, some calculate based on 1 or 2 or 3 qtrs earning !
of course they r different lah !
So which one to use ?
Last year PE take it as a guide, use current earning to estimate its PE for d coming year !
Example :
Last year PE giving u 8
If I see its Qtr earning improving ( minus out d one off earning if there any ) n its future earning looks bright ( Steel sector n oil sector ) , I am quite sure d PE for d coming year will definitely better or lower than last year ^V^
Masteel at 1.51
Based on last year earning of 22.47
PE = 1.51/22.47 = 6.7
Based current earning (3 Qtrs only )= 23.32 cts
PE = 1.51/23.32 = 6.4
BUT dont forget, PE 6.4 is based on 3 QTRS only !!
there is one more to come , therefore , we can expect lower n better PE for Masteel in year ended 2007 !
What is so difficult to get its PE yrself ?D
Do u know how to define mkt crash like 1997 n 1998 ? Mkt crash is when u can buy d below blue chips at PE < 10 :-
PBB , PPB, Maybank, IOIcorp, YTL, Genting , Digi ,SD , IJM , KNM ,Resorts.....
Once u can get d above blue chips at below PE 10, then u will understand better what actually PE is !?
Is low PE guaranteed u sure gain ? refer to my previous posting at :-
http://samgang.blogspot.com/2007/12/v-portfolio-as-at-30-nov-07-v.html
Posted by Samgoss at 7:54 PM
Comment:
Copied an old posting from the above blog to illustrate how PE is being used by this blogger. It is good of Samgoss to share this.
PE is only one of many market metrics one look at as a guide to investing in shares.
Also read:
Market metrics P/E and Intrinsic value
Country risk - Emerging economies caught in the storm
Country risk - Emerging economies caught in the storm
<<
- The global crisis is affecting emerging country risk
- The crisis has revealed their vulnerabilities, but with contrasting situations
- Analysis of risk in Russia, Turkey and India >>
Some countries are in a better position than others to face the crisis. Some countries have resources and structures that offer more shelter from the global crisis: Singapore (rated AA), Chile (A), Czech Republic (A), HongKong (A), Malaysia (A), Slovenia (A), Taiwan (A), Bahrain (BB), Botswana (BB),Brazil (BB), Israel (BB), South Korea (BB), Kuwait (BB), Mexico (BB), Oman(BB), Poland (BB), Qatar (BB), Saudi Arabia (BB), Slovakia (BB), South Africa(BB), Thailand (BB) and Tunisia (BB).
PARIS, Jan. 15 /CNW Telbec/ -
Euler Hermes has published its analysis of country risk in a global economic crisis. Country risk takes on another dimension in a recessionary environment. Emerging countries are faced with dwindling sources of external financing, the recession of the major economies and falling commodities prices. These difficulties have been exacerbated by bank liquidity problems, volatile exchange rates and the withdrawal of foreign capital. These economies' weaknesses, less visible during growth periods, have resurfaced. Countries that seemed perfectly safe a short while ago now represent a risk for the companies that do business with them.
Against this backdrop, Euler Hermes Country Risk Analyst David Atkinson said: "The present economic crisis is affecting all countries, with no exception. Although some countries are in a better position to resist the crisis, many are experiencing a rapid deterioration in their situation. It is essential that trade partners and exporters keep a close watch on these countries, on the reforms implemented and on future trends".
Emerging economies are slowing
Euler Hermes is forecasting growth of less than 1% for the global economy in 2009 with the large developed economies experiencing their first recession since World War II. At the same time, emerging economies are being severely hurt by a world crisis that does not correspond to a normal economic cycle.
The decoupling theory, whereby emerging economies would continue to grow, has
been largely invalidated. These countries now face numerous problems:
<< - Wide-scale withdrawal of foreign investment
- Drop in exports
- Tumbling commodities prices (oil, etc.)
Against this difficult background, Euler Hermes expects economic growth to slow sharply in emerging countries.
-----------------------------------------------------
Regional real GDP 2003-2006/ 2007/ 2008/ 2009
(% change) annual Euler Hermes Euler Hermes
average projections projections
-------------------------------------------------------------------------
Emerging Europe 6.8/ 7.0/ 5.4/ 2.0
-------------------------------------------------------------------------
Russia 7.1/ 8.1/ 6.1/ 1.5
-------------------------------------------------------------------------
Turkey 7.5/ 4.5/ 2.3/ 1.0
-------------------------------------------------------------------------
Emerging Asia 8.4/ 9.2/ 7.1/ 5.0
-------------------------------------------------------------------------
China 10.5/ 11.9/ 9.2/ 7.0
-------------------------------------------------------------------------
India 8.7/ 9.0/ 7.0/ 5.0
-------------------------------------------------------------------------
Latin America 4.6/ 5.5/ 4.6/ 1.9
-------------------------------------------------------------------------
Brazil 3.4/ 5.1/ 5.5/ 2.3
-------------------------------------------------------------------------
Mexico 3.3/ 3.3/ 2.0/ 0.0
-------------------------------------------------------------------------
Middle East & Africa 5.8/ 5.7/ 5.9/ 4.6
-------------------------------------------------------------------------
A growing number of high-risk countries
The overall trend in the risk ratings assigned by Euler Hermes to each country (see methodology) reflects the general trend in risk of international trade. With the risk ratings of 16 countries downgraded in 2008, international trade has entered a more turbulent period.
---------------------------
Net Country Grade Changes
---------------------------
2000 -1
2001 -5
2002 -8
2003 +3
2004 +11
2005 +1
2006 -1
2007 +3
2008 -16
---------------------------
At the individual level, each country's rating reflects its sensitivity to a downturn in its environment and its capacity to stand firm. In the present conditions, individual country risk ratings can change rapidly and should therefore be monitored closely by exporters and their partners. Since the economic crisis worsened, Euler Hermes has downgraded the country risk ratings of eleven countries:
----------------------------------
Grade Change
----------------------------------
South Korea A to BB
----------------------------------
Hungary B to C
----------------------------------
Romania B to C
----------------------------------
Bulgaria B to C
----------------------------------
Lithuania B to C
----------------------------------
Guatemala B to C
----------------------------------
Jordan B to C
----------------------------------
Iceland A to D
----------------------------------
Argentina C to D
----------------------------------
Pakistan C to D
----------------------------------
Vietnam C to D
----------------------------------
Euler Hermes has identified a group of more vulnerable countries:
- With a C rating: Hungary, Romania, Russia, Turkey, Lithuania, Bulgaria, Latvia, Kazakhstan, Indonesia, Dominican Republic, Honduras and Jamaica
- With a D rating: Iceland, Ukraine, Serbia, Bosnia Herzegovina, Vietnam, Argentina, Venezuela, Ecuador, Kenya, Lebanon and Pakistan
>>
Some countries are in a better position than others to face the crisis:
Some countries have resources and structures that offer more shelter from the global crisis: Singapore (rated AA), Chile (A), Czech Republic (A), Hong Kong (A), Malaysia (A), Slovenia (A), Taiwan (A), Bahrain (BB), Botswana (BB), Brazil (BB), Israel (BB), South Korea (BB), Kuwait (BB), Mexico (BB), Oman (BB), Poland (BB), Qatar (BB), Saudi Arabia (BB), Slovakia (BB), South Africa (BB), Thailand (BB) and Tunisia (BB).
Russia: liquidity crunch and tumbling oil prices
Russia's economic growth is expected to slow significantly, from 6.1% in 2008 to 1.5% in 2009 according to Euler Hermes estimates, after several strong years (7.4% in 2006 and 8.1% in 2007).
The rapid slowdown was visible in the fourth quarter of 2008 with a very sharp fall in industrial production.
The business slowdown has been accompanied by a slump in the share prices of listed Russian companies (down 70% in six months) and the weakening of the rouble, down 13% against the dollar, despite heavy intervention.
Foreign exchange reserves have decreased by more than 25% since August 2008 and the fall in the price of oil will have a significant impact on the fiscal and external current account balances.
Euler Hermes has left its C rating unchanged but notes the risks from banking and corporate foreign exchange illiquidity and lower oil prices.
Turkey: strong inflation and low foreign exchange reserves
Turkey's economic growth has slowed significantly since 2007 (6.9% in 2006, 4.5% in 2007). Euler Hermes is expecting economic growth to stand at 2.3% in 2008 and fall to 1.0% in 2009.
Inflation remains relatively high. Euler Hermes estimates that the inflation rate will have risen to 10.1% in 2008 and remain at a similar level in 2009 (10%).
The large current account deficit and reliance on short time capital flows is a key vulnerability and the Turkish Lira has fallen sharply.
Foreign exchange reserves have also fallen but currently still cover 3.5 months of imports, though only 60% of external debt due in 2009.
Euler Hermes has left its C rating unchanged but is closely monitoring the situation, including developments with regards to the IMF programme currently under discussion.
India: substantial foreign exchange reserves but limited possibilities
India recorded a sharp downturn in industrial activity in the fourth quarter of 2008.
The banking sector has been relatively sheltered from the global financial crisis directly though credit conditions have tightened noticeably.
The Indian stock market and exchange rates have also been affected. Economic growth has slowed significantly but remains relatively high in the global context (7.0% in 2008 and 5.0% in 2009 according to Euler Hermes forecasts).
Government support for the currency have significantly decreased into foreign exchange reserves but these still cover seven months of imports and the total stock of external debt.
However, the size of the fiscal deficit considerably constraints government action to offset the slowdown in economic activity.
Euler Hermes has maintained its B rating. Regional and political uncertainties will also need to be monitored.
#################################
Technical details
Methodology
Euler Hermes assigns each country a risk rating that reflects thecountry's economic and political risk. The economic factors taken into accountare the macroeconomic indicators (indebtedness, fiscal deficit, etc) andinstitutional and structural factors. The political factors taken into accountare the efficiency and stability of the political system in place. Thecombination of these two types of indicators are reflected in a rating - AA,A, BB, B, C or D; AA is the strongest rating. This classification constitutesa first filter for any credit limit request and influences the terms andconditions of cover extended by Euler Hermes.
Euler Hermes country risk analysis
Euler Hermes country risk analysisThree Euler Hermes specialists, two in London and one in Hamburg, arededicated to country risk. A country risk committee, which also includesrepresentative of group subsidiaries, meets every two months. The country riskspecialists' work is published in a weekly bulletin. Any change in a country'srisk results in an immediate, ad hoc review.
David Atkinson is one of Euler Hermes' three country risk analysts. Hejoined the group in 1999 and and has established a Group-wide framework forcountry risk analysis. Previously, David spent twenty-five years ininternational banking as an emerging markets and country risk analyst,specialising in Latin America, Eastern and Southern Europe and East Asiaincluding China. David is based in the United Kingdom and holds a degree inEconomics from the University of Nottingham.
-------------------------------------------------------------------------
Euler Hermes is the worldwide leader in credit insurance and one of theleaders in the areas of bonding, guarantees and collections. With 6,000employees in over 50 countries, Euler Hermes offers a complete range ofservices for the management of B-to-B trade receivables and posted aconsolidated turnover of (euro) 2.1 billion in 2007.
Euler Hermes has developed a credit intelligence network that enables itto analyse the financial stability of 40 million businesses across theglobe. The group protectsworldwide business transactions totalling(euro) 800 billion.
Euler Hermes, subsidiary of AGF and a member of the Allianz group, islisted on Euronext Paris. The group and its principal credit insurancesubsidiaries are rated AA- by Standard & Poor's. http://www.eulerhermes.com/
-------------------------------------------------------------------------
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of thestatements contained herein may be statements of future expectations and otherforward-looking statements that are based on management's current views andassumptions and involve known and unknown risks and uncertainties that couldcause actual results, performance or events to differ materially from thoseexpressed or implied in such statements. In addition to statements which areforward-looking by reason of context, the words "may, will, should, expects,plans, intends, anticipates, believes, estimates, predicts, potential, orcontinue" and similar expressions identify forward-looking statements. Actualresults, performance or events may differ materially from those in suchstatements due to, without limitation, (i) general economic conditions,including in particular economic conditions in the Allianz SE's core businessand core markets, (ii) performance of financial markets, including emergingmarkets, (iii) the frequency and severity of insured loss events, (iv)mortality and morbidity levels and trends, (v) persistency levels, (vi) theextent of credit defaults (vii) interest rate levels, (viii) currency exchangerates including the Euro-U.S. Dollar exchange rate, (ix) changing levels ofcompetition, (*) changes in laws and regulations, including monetary convergenceand the European Monetary Union, (xi) changes in the policies of central banksand/or foreign governments, (xii) the impact of acquisitions, includingrelated integration issues, (xiii) reorganization measures and (xiv) generalcompetitive factors, in each case on a local, regional, national and/or globalbasis. Many of these factors may be more likely to occur, or more pronounced,as a result of terrorist activities and their consequences. The mattersdiscussed herein may also involve risks and uncertainties described from timeto time in Allianz SE's filings with the U.S. Securities and ExchangeCommission. The Group assumes no obligation to update any forward-lookinginformation contained herein.
For further information: Press relations/Euler Hermes group: Raphaele Hamel, +33 (0)1 4070 8133, raphaele.hamel@eulerhermes.com; Agence Rumeur Publique: Salima Ait Meziane, +33 (0)1 5574 5223, salima@rumeurpublique.fr
EULER HERMES CANADA - More on this organization
http://www.newswire.ca/en/releases/archive/January2009/15/c8011.html
<<
- The global crisis is affecting emerging country risk
- The crisis has revealed their vulnerabilities, but with contrasting situations
- Analysis of risk in Russia, Turkey and India >>
Some countries are in a better position than others to face the crisis. Some countries have resources and structures that offer more shelter from the global crisis: Singapore (rated AA), Chile (A), Czech Republic (A), HongKong (A), Malaysia (A), Slovenia (A), Taiwan (A), Bahrain (BB), Botswana (BB),Brazil (BB), Israel (BB), South Korea (BB), Kuwait (BB), Mexico (BB), Oman(BB), Poland (BB), Qatar (BB), Saudi Arabia (BB), Slovakia (BB), South Africa(BB), Thailand (BB) and Tunisia (BB).
PARIS, Jan. 15 /CNW Telbec/ -
Euler Hermes has published its analysis of country risk in a global economic crisis. Country risk takes on another dimension in a recessionary environment. Emerging countries are faced with dwindling sources of external financing, the recession of the major economies and falling commodities prices. These difficulties have been exacerbated by bank liquidity problems, volatile exchange rates and the withdrawal of foreign capital. These economies' weaknesses, less visible during growth periods, have resurfaced. Countries that seemed perfectly safe a short while ago now represent a risk for the companies that do business with them.
Against this backdrop, Euler Hermes Country Risk Analyst David Atkinson said: "The present economic crisis is affecting all countries, with no exception. Although some countries are in a better position to resist the crisis, many are experiencing a rapid deterioration in their situation. It is essential that trade partners and exporters keep a close watch on these countries, on the reforms implemented and on future trends".
Emerging economies are slowing
Euler Hermes is forecasting growth of less than 1% for the global economy in 2009 with the large developed economies experiencing their first recession since World War II. At the same time, emerging economies are being severely hurt by a world crisis that does not correspond to a normal economic cycle.
The decoupling theory, whereby emerging economies would continue to grow, has
been largely invalidated. These countries now face numerous problems:
<< - Wide-scale withdrawal of foreign investment
- Drop in exports
- Tumbling commodities prices (oil, etc.)
Against this difficult background, Euler Hermes expects economic growth to slow sharply in emerging countries.
-----------------------------------------------------
Regional real GDP 2003-2006/ 2007/ 2008/ 2009
(% change) annual Euler Hermes Euler Hermes
average projections projections
-------------------------------------------------------------------------
Emerging Europe 6.8/ 7.0/ 5.4/ 2.0
-------------------------------------------------------------------------
Russia 7.1/ 8.1/ 6.1/ 1.5
-------------------------------------------------------------------------
Turkey 7.5/ 4.5/ 2.3/ 1.0
-------------------------------------------------------------------------
Emerging Asia 8.4/ 9.2/ 7.1/ 5.0
-------------------------------------------------------------------------
China 10.5/ 11.9/ 9.2/ 7.0
-------------------------------------------------------------------------
India 8.7/ 9.0/ 7.0/ 5.0
-------------------------------------------------------------------------
Latin America 4.6/ 5.5/ 4.6/ 1.9
-------------------------------------------------------------------------
Brazil 3.4/ 5.1/ 5.5/ 2.3
-------------------------------------------------------------------------
Mexico 3.3/ 3.3/ 2.0/ 0.0
-------------------------------------------------------------------------
Middle East & Africa 5.8/ 5.7/ 5.9/ 4.6
-------------------------------------------------------------------------
A growing number of high-risk countries
The overall trend in the risk ratings assigned by Euler Hermes to each country (see methodology) reflects the general trend in risk of international trade. With the risk ratings of 16 countries downgraded in 2008, international trade has entered a more turbulent period.
---------------------------
Net Country Grade Changes
---------------------------
2000 -1
2001 -5
2002 -8
2003 +3
2004 +11
2005 +1
2006 -1
2007 +3
2008 -16
---------------------------
At the individual level, each country's rating reflects its sensitivity to a downturn in its environment and its capacity to stand firm. In the present conditions, individual country risk ratings can change rapidly and should therefore be monitored closely by exporters and their partners. Since the economic crisis worsened, Euler Hermes has downgraded the country risk ratings of eleven countries:
----------------------------------
Grade Change
----------------------------------
South Korea A to BB
----------------------------------
Hungary B to C
----------------------------------
Romania B to C
----------------------------------
Bulgaria B to C
----------------------------------
Lithuania B to C
----------------------------------
Guatemala B to C
----------------------------------
Jordan B to C
----------------------------------
Iceland A to D
----------------------------------
Argentina C to D
----------------------------------
Pakistan C to D
----------------------------------
Vietnam C to D
----------------------------------
Euler Hermes has identified a group of more vulnerable countries:
- With a C rating: Hungary, Romania, Russia, Turkey, Lithuania, Bulgaria, Latvia, Kazakhstan, Indonesia, Dominican Republic, Honduras and Jamaica
- With a D rating: Iceland, Ukraine, Serbia, Bosnia Herzegovina, Vietnam, Argentina, Venezuela, Ecuador, Kenya, Lebanon and Pakistan
>>
Some countries are in a better position than others to face the crisis:
Some countries have resources and structures that offer more shelter from the global crisis: Singapore (rated AA), Chile (A), Czech Republic (A), Hong Kong (A), Malaysia (A), Slovenia (A), Taiwan (A), Bahrain (BB), Botswana (BB), Brazil (BB), Israel (BB), South Korea (BB), Kuwait (BB), Mexico (BB), Oman (BB), Poland (BB), Qatar (BB), Saudi Arabia (BB), Slovakia (BB), South Africa (BB), Thailand (BB) and Tunisia (BB).
Russia: liquidity crunch and tumbling oil prices
Russia's economic growth is expected to slow significantly, from 6.1% in 2008 to 1.5% in 2009 according to Euler Hermes estimates, after several strong years (7.4% in 2006 and 8.1% in 2007).
The rapid slowdown was visible in the fourth quarter of 2008 with a very sharp fall in industrial production.
The business slowdown has been accompanied by a slump in the share prices of listed Russian companies (down 70% in six months) and the weakening of the rouble, down 13% against the dollar, despite heavy intervention.
Foreign exchange reserves have decreased by more than 25% since August 2008 and the fall in the price of oil will have a significant impact on the fiscal and external current account balances.
Euler Hermes has left its C rating unchanged but notes the risks from banking and corporate foreign exchange illiquidity and lower oil prices.
Turkey: strong inflation and low foreign exchange reserves
Turkey's economic growth has slowed significantly since 2007 (6.9% in 2006, 4.5% in 2007). Euler Hermes is expecting economic growth to stand at 2.3% in 2008 and fall to 1.0% in 2009.
Inflation remains relatively high. Euler Hermes estimates that the inflation rate will have risen to 10.1% in 2008 and remain at a similar level in 2009 (10%).
The large current account deficit and reliance on short time capital flows is a key vulnerability and the Turkish Lira has fallen sharply.
Foreign exchange reserves have also fallen but currently still cover 3.5 months of imports, though only 60% of external debt due in 2009.
Euler Hermes has left its C rating unchanged but is closely monitoring the situation, including developments with regards to the IMF programme currently under discussion.
India: substantial foreign exchange reserves but limited possibilities
India recorded a sharp downturn in industrial activity in the fourth quarter of 2008.
The banking sector has been relatively sheltered from the global financial crisis directly though credit conditions have tightened noticeably.
The Indian stock market and exchange rates have also been affected. Economic growth has slowed significantly but remains relatively high in the global context (7.0% in 2008 and 5.0% in 2009 according to Euler Hermes forecasts).
Government support for the currency have significantly decreased into foreign exchange reserves but these still cover seven months of imports and the total stock of external debt.
However, the size of the fiscal deficit considerably constraints government action to offset the slowdown in economic activity.
Euler Hermes has maintained its B rating. Regional and political uncertainties will also need to be monitored.
#################################
Technical details
Methodology
Euler Hermes assigns each country a risk rating that reflects thecountry's economic and political risk. The economic factors taken into accountare the macroeconomic indicators (indebtedness, fiscal deficit, etc) andinstitutional and structural factors. The political factors taken into accountare the efficiency and stability of the political system in place. Thecombination of these two types of indicators are reflected in a rating - AA,A, BB, B, C or D; AA is the strongest rating. This classification constitutesa first filter for any credit limit request and influences the terms andconditions of cover extended by Euler Hermes.
Euler Hermes country risk analysis
Euler Hermes country risk analysisThree Euler Hermes specialists, two in London and one in Hamburg, arededicated to country risk. A country risk committee, which also includesrepresentative of group subsidiaries, meets every two months. The country riskspecialists' work is published in a weekly bulletin. Any change in a country'srisk results in an immediate, ad hoc review.
David Atkinson is one of Euler Hermes' three country risk analysts. Hejoined the group in 1999 and and has established a Group-wide framework forcountry risk analysis. Previously, David spent twenty-five years ininternational banking as an emerging markets and country risk analyst,specialising in Latin America, Eastern and Southern Europe and East Asiaincluding China. David is based in the United Kingdom and holds a degree inEconomics from the University of Nottingham.
-------------------------------------------------------------------------
Euler Hermes is the worldwide leader in credit insurance and one of theleaders in the areas of bonding, guarantees and collections. With 6,000employees in over 50 countries, Euler Hermes offers a complete range ofservices for the management of B-to-B trade receivables and posted aconsolidated turnover of (euro) 2.1 billion in 2007.
Euler Hermes has developed a credit intelligence network that enables itto analyse the financial stability of 40 million businesses across theglobe. The group protectsworldwide business transactions totalling(euro) 800 billion.
Euler Hermes, subsidiary of AGF and a member of the Allianz group, islisted on Euronext Paris. The group and its principal credit insurancesubsidiaries are rated AA- by Standard & Poor's. http://www.eulerhermes.com/
-------------------------------------------------------------------------
These assessments are, as always, subject to the disclaimer provided below.
Cautionary Note Regarding Forward-Looking Statements: Certain of thestatements contained herein may be statements of future expectations and otherforward-looking statements that are based on management's current views andassumptions and involve known and unknown risks and uncertainties that couldcause actual results, performance or events to differ materially from thoseexpressed or implied in such statements. In addition to statements which areforward-looking by reason of context, the words "may, will, should, expects,plans, intends, anticipates, believes, estimates, predicts, potential, orcontinue" and similar expressions identify forward-looking statements. Actualresults, performance or events may differ materially from those in suchstatements due to, without limitation, (i) general economic conditions,including in particular economic conditions in the Allianz SE's core businessand core markets, (ii) performance of financial markets, including emergingmarkets, (iii) the frequency and severity of insured loss events, (iv)mortality and morbidity levels and trends, (v) persistency levels, (vi) theextent of credit defaults (vii) interest rate levels, (viii) currency exchangerates including the Euro-U.S. Dollar exchange rate, (ix) changing levels ofcompetition, (*) changes in laws and regulations, including monetary convergenceand the European Monetary Union, (xi) changes in the policies of central banksand/or foreign governments, (xii) the impact of acquisitions, includingrelated integration issues, (xiii) reorganization measures and (xiv) generalcompetitive factors, in each case on a local, regional, national and/or globalbasis. Many of these factors may be more likely to occur, or more pronounced,as a result of terrorist activities and their consequences. The mattersdiscussed herein may also involve risks and uncertainties described from timeto time in Allianz SE's filings with the U.S. Securities and ExchangeCommission. The Group assumes no obligation to update any forward-lookinginformation contained herein.
For further information: Press relations/Euler Hermes group: Raphaele Hamel, +33 (0)1 4070 8133, raphaele.hamel@eulerhermes.com; Agence Rumeur Publique: Salima Ait Meziane, +33 (0)1 5574 5223, salima@rumeurpublique.fr
EULER HERMES CANADA - More on this organization
http://www.newswire.ca/en/releases/archive/January2009/15/c8011.html
Good fundamental stocks always give steady returns
Wednesday January 14, 2009
Good fundamental stocks always give steady returns
IN a stock market, there is a small group of investors who seem to have the wrong mindset on long-term investment.
Good fundamental stocks always give steady returns
IN a stock market, there is a small group of investors who seem to have the wrong mindset on long-term investment.
To them, long-term investment via the “buy and hold” strategy cannot give higher returns than short-term trading.
They feel that even though the former may provide higher returns, they need to wait for a long time before they can enjoy the good returns.
According to Peter L. Bernstein in his article The 60/40 Solution: “In investing, tortoises tend to win far more often than hares over the turns of the market cycle ... placing large bets on an unknown future is worse than gambling, because at least in gambling you know the odds.”
Good fundamental stocks always give good and steady returns over the long term.
However, investors need to hold them for long term.
Besides giving higher returns, investors will also face lower risks when they invest in these good fundamental stocks compared with speculative stocks.
In this article, we will look at the performance of Warren Buffett’s investment company, Berkshire Hathaway Inc versus the performance of S&P 500.
The table summarises the historical performance for Berkshire versus the S&P 500 from 1965 to 2007 (a total 43 years) based on the latest available 2007 annual report.
Based on the annual report, the yearly compounded gain for Berkshire was 21.1%, which outperformed the 10.3% returns generated from S&P 500 over the same period.
In general, in most periods, the returns from Berkshire were higher than those from the S&P 500. However, we need to understand that Buffett did not generate 21.1% every year.
There were 23 years in which his returns were lower than 20% (we used the nearest 20% as the benchmark).
Nevertheless, during the bull markets, Berkshire was able to generate annual returns of 40% to 60% for five years whereas there was not a single year in which S&P 500 charted above 40% returns per annum.
In terms of losses, Berkshire only reported one year of negative return versus S&P 500, which has 10 years of negative returns.
To quote one of Buffett’s most important investment principles: “If you want to win, you don’t lose.”
To Buffett, as long as you can reduce the losses incurred in the bear market and increase the percentage of high returns during the bull market, your performance should be higher than the overall market performance.
In short, we cannot expect to generate high returns every year. We have to accept that there will be certain years we need to protect our capital from incurring losses rather than thinking of how to generate high returns.
Almost all investment gurus or analysts say that 2009 will be a tough year. As long as we can avoid incurring losses and have the patience to wait for the next bull market, we should be able to outperform the overall market over the long term.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/1/14/business/3013544&sec=business
Comment: I agree. :)
Understanding Market Prices
Value investing works if stock prices fluctuate around business value. Only then can stocks be bought at discounts to business value (or sold at premiums to business value).Value investors believe that markets price stocks in ways that produce such gaps.
Numerous complex factors influence stock market prices. Graham identified two categories of factors: speculative and investment.
Numerous complex factors influence stock market prices. Graham identified two categories of factors: speculative and investment.
Control Value of Majority Interest
CONTROL’S VALUE
Value investing discussions invariably begin by noting that intrinsic worth is the discounted cash flows of an asset, without pausing to define the asset.
The process is relatively straightforward for assets such as government bonds, a family-owned pizza shop, or a gold mine. It is trickier for common stock.
In the case of common stock, the asset is either the company or the specific stock. The difference concerns the control value associated with owning 100 percent of the stock compared to a single share or other minority interest.
A medium-sized company with 1 million shares outstanding might spin off $100 million in excess cash this year. Each share is theoretically entitled to $100. That could be the basis of a valuation of ownership of that company for this year. But takeover investors interested in buying the entire company will often bid more than $100 million to buy it. In valuation disputes brought by minority shareholders, courts will often add an analogous premium.
Markets tend to price individual shares as if they are minority shares. To value a share of stock, therefore, requires valuing both the business as:
The result might be that the company valuation is $100 while the price is $90. That does not automatically mean the stock is underpriced and therefore a value investment option. A build-in discount arises in market trading.
Therefore a bigger margin of safety is warranted. This is one of many factors that drove Graham’s margin of safety principle. On the other hand, a well-developed takeover market emerged in the decades since Graham pioneered his method. Take over investors are willing to pay high market premiums and thus return to individual holders a sizeable control premium.
Some value investors treat takeover prospects as catalysts to realize value from investment.
For nonprofessional investors, however, betting on takeovers is even more difficult than the general habit of seeking franchise businesses at margin-of-safety prices.
Also read:
Value investing discussions invariably begin by noting that intrinsic worth is the discounted cash flows of an asset, without pausing to define the asset.
The process is relatively straightforward for assets such as government bonds, a family-owned pizza shop, or a gold mine. It is trickier for common stock.
In the case of common stock, the asset is either the company or the specific stock. The difference concerns the control value associated with owning 100 percent of the stock compared to a single share or other minority interest.
A medium-sized company with 1 million shares outstanding might spin off $100 million in excess cash this year. Each share is theoretically entitled to $100. That could be the basis of a valuation of ownership of that company for this year. But takeover investors interested in buying the entire company will often bid more than $100 million to buy it. In valuation disputes brought by minority shareholders, courts will often add an analogous premium.
Markets tend to price individual shares as if they are minority shares. To value a share of stock, therefore, requires valuing both the business as:
- a whole and
- the individual share.
The result might be that the company valuation is $100 while the price is $90. That does not automatically mean the stock is underpriced and therefore a value investment option. A build-in discount arises in market trading.
Therefore a bigger margin of safety is warranted. This is one of many factors that drove Graham’s margin of safety principle. On the other hand, a well-developed takeover market emerged in the decades since Graham pioneered his method. Take over investors are willing to pay high market premiums and thus return to individual holders a sizeable control premium.
Some value investors treat takeover prospects as catalysts to realize value from investment.
For nonprofessional investors, however, betting on takeovers is even more difficult than the general habit of seeking franchise businesses at margin-of-safety prices.
Also read:
The Anxiety of Selling
THE ANXIETY OF SELLING
A vexing question facing investors during market sell-offs is whether to join the pack. For value investors, the answer is no, but the more pertinent question is when to sell.
Value investors set selling criteria at the time of purchase. Their attitude in buying is to select stocks that are least likely ever to trigger the criteria for selling.
But businesses change, and when they deteriorate, their shares should be sold, just as the owner of a business sometimes must decide to close down. When selecting stocks, value investors specify what deterioration means for purposes of selling. The logic is simple: The same factors used to select and avoid stocks are used to decide which stocks to sell and when.
A vexing question facing investors during market sell-offs is whether to join the pack. For value investors, the answer is no, but the more pertinent question is when to sell.
Value investors set selling criteria at the time of purchase. Their attitude in buying is to select stocks that are least likely ever to trigger the criteria for selling.
But businesses change, and when they deteriorate, their shares should be sold, just as the owner of a business sometimes must decide to close down. When selecting stocks, value investors specify what deterioration means for purposes of selling. The logic is simple: The same factors used to select and avoid stocks are used to decide which stocks to sell and when.
Sales are indicated when the key factors supporting an original buy are gone. Here is a summary of such factors:
(1) Internal:
- dubious management behaviour,
- vague disclosure or complex accounting,
- aggressively increased merger activity,
- dizzying executive compensation packages.
(2) External:
- intensifying new competition,
- disruptive technological onslaughts,
- deregulation,
- declining inventory and
- receivables turns.
(3) Economic:
- shrunken profit margins;
- declining returns on equity,
- assets, and investment;
- earnings erosion;
- debt increased aggressively in relation to equity;
- deterioration in current and quick ratios.
Value investors avoid selling when bad news is temporary. Single-quarter profit margin slippage should provoke questions, but not sales orders. If investigation shows deeper problems, then the condition might be permanent and selling indicated. Permanent deterioration requires more evidence.
When in doubt concerning where deterioration is temporary or permanent, value investing might include a hedging strategy. This would call for selling some but less than all shares held.
Value investors never sell solely due to falling prices. They require some evidence related to the declining intrinsic value of the business to warrant a revision in the hold-or-sell calculus. Stock price fluctuations are far too fickle to influence such an important decision.
In the case of a preset policy to sell when price reaches a certain high level, many value investors follow the same mixed strategy adhered to when unsure whether a development is permanent or temporary: selling some, but not all.
Also read:
Rational Thinking about Irrational Pricing
RATIONAL THINKING ABOUT IRRATIONAL PRICING
Depressed investors caused depressed stock market prices. Selling pressure mounts and drives prices down. Investors possessing even modest degrees of aversion to loss capitulate quickly, and the less fearsome succumb soon after. A downward market spiral ensues.
Value investors avoid these scenarios by forming a clear assessment of their averseness to loss. Only having assessed this characteristic honestly do they brave the choppy waters of stock picking.
One way to grasp one’s own loss aversion is to recognize that most people experience the pain of loss as a multiple compared to the joy of gain. The average person greets losses with aversion on the order of about 2.5 times their reception of winnings. The greater one’s loss aversion, the greater value investing’s appeal.
For the most acutely loss-averse investors, pure value investing is most suitable (Graham was extremely risk averse).
Depressed investors caused depressed stock market prices. Selling pressure mounts and drives prices down. Investors possessing even modest degrees of aversion to loss capitulate quickly, and the less fearsome succumb soon after. A downward market spiral ensues.
Value investors avoid these scenarios by forming a clear assessment of their averseness to loss. Only having assessed this characteristic honestly do they brave the choppy waters of stock picking.
One way to grasp one’s own loss aversion is to recognize that most people experience the pain of loss as a multiple compared to the joy of gain. The average person greets losses with aversion on the order of about 2.5 times their reception of winnings. The greater one’s loss aversion, the greater value investing’s appeal.
For the most acutely loss-averse investors, pure value investing is most suitable (Graham was extremely risk averse).
Also read:
Market metrics P/E and Intrinsic value
DOING LITTLE WITH MARKET PRICE
The most-quoted metric in discussing common stocks is their ratio of price-to-earnings (P/E). This states the relationship between what a stock costs and what benefit it produces.
Many people wrongly believe that value investing involves finding companies boasting low P/E multiples, but:
The P/E ratio can be used as a screen.
Graham avoided buying stocks unless they were priced at their lowest P/E level during the prior five years.
He also required an earnings-return compared to price (current earnings divided by price = earnings yield) at least twice that prevailing on high-grade corporate bonds.
Other value investors follow these practices. The devices protect against the whims of the marketplace. The market might not be right, but this approach limits the value investor’s exposure from it being wrong.
Value investors resist the temptation to use P/E ratios as supplements to a traditional valuation analysis. This contrasts with devotees of pure DCF analysis in valuation exercises.
When the latter’s results show a wide range of plausible valuations, they often appeal to the P/E ratios of comparable companies as a way to narrow the range.
The approach compares the price of comparable companies to their respective cash flows (P/CF). Suppose a comparable company’s P/CF ratio is 10 (suppose a price of 20 and cash flows of 2). That ratio of 10 is then applied to the subject company. Say its cash flows are 3. Its implied comparables-based value is 30. How much this helps is uncertain. The effort relies entirely on the quality of market pricing for the comparable company. While many finance professionals employ the technique, most value investors do not consider it useful.
Value investors consider the income statement and the balance sheet as sources of information concerning business value. These are superior to market-oriented tools such as the P/E ratio for two reasons.
Market metrics (P/E) tell value investors more about Graham’s Mr. Market than about intrinsic value.
The most-quoted metric in discussing common stocks is their ratio of price-to-earnings (P/E). This states the relationship between what a stock costs and what benefit it produces.
Many people wrongly believe that value investing involves finding companies boasting low P/E multiples, but:
- not all low P/E stocks are good investments, and
- not all high P/E stocks are bad investments.
- Nor do value investors consider the P/E ratio as an insightful measure for valuation purposes, though it might be useful as a check against overpaying.
The P/E ratio can be used as a screen.
Graham avoided buying stocks unless they were priced at their lowest P/E level during the prior five years.
He also required an earnings-return compared to price (current earnings divided by price = earnings yield) at least twice that prevailing on high-grade corporate bonds.
Other value investors follow these practices. The devices protect against the whims of the marketplace. The market might not be right, but this approach limits the value investor’s exposure from it being wrong.
Value investors resist the temptation to use P/E ratios as supplements to a traditional valuation analysis. This contrasts with devotees of pure DCF analysis in valuation exercises.
When the latter’s results show a wide range of plausible valuations, they often appeal to the P/E ratios of comparable companies as a way to narrow the range.
The approach compares the price of comparable companies to their respective cash flows (P/CF). Suppose a comparable company’s P/CF ratio is 10 (suppose a price of 20 and cash flows of 2). That ratio of 10 is then applied to the subject company. Say its cash flows are 3. Its implied comparables-based value is 30. How much this helps is uncertain. The effort relies entirely on the quality of market pricing for the comparable company. While many finance professionals employ the technique, most value investors do not consider it useful.
Value investors consider the income statement and the balance sheet as sources of information concerning business value. These are superior to market-oriented tools such as the P/E ratio for two reasons.
- First, return on equity captures the full accounting picture, including debt and equity, whereas P/E severs earnings from the balance sheet.
- Second, return on equity is an intrinsic or internal valuation methodology, whereas P/E ratios are products of market or external or valuation processes.
Market metrics (P/E) tell value investors more about Graham’s Mr. Market than about intrinsic value.
Also read:
Stock Market Prices
MARKET PRICES
Value investing works if stock prices fluctuate around business value. Only then can stocks be bought at discounts to business value (or sold at premiums to business value).
Value investors believe that markets price stocks in ways that produce such gaps.
Graham’s metaphor described this behaviour as Mr. Market, viewing market action as the collective psychological behaviour of human beings prone to periods of excessive optimism and pessimism. The conception yields several insights for what value investing is.
FACTORS INFLUENCING MARKET PRICES
Numerous complex factors influence stock market prices. Graham identified two categories of factors:
Value investing works if stock prices fluctuate around business value. Only then can stocks be bought at discounts to business value (or sold at premiums to business value).
Value investors believe that markets price stocks in ways that produce such gaps.
Graham’s metaphor described this behaviour as Mr. Market, viewing market action as the collective psychological behaviour of human beings prone to periods of excessive optimism and pessimism. The conception yields several insights for what value investing is.
FACTORS INFLUENCING MARKET PRICES
Numerous complex factors influence stock market prices. Graham identified two categories of factors:
- speculative and
- investment.
Speculative factors are the jungle of the marketplace and include
- technical aspects of market trading as well as
- manipulative and psychological ones.
Investment factors relate to valuation, principally assessments of financial data, including
- earnings and
- assets.
Factors sharing traits of both the marketplace and valuations, which Graham called future value factors, include
- managerial qualities,
- competitive circumstances, and
- a company’s outlook for sales and profits.
All of these factors are filtered through the lens of the investing public’s attitude, which produces trading decisions and bids and offers in the market. The output is market price.
The idea that anyone can predict the outcome of this process, or that it works in a way that yields prices just equal to value, is far-fetched. Value investing considers trying to measure market sentiment a waste of time. Value investing focuses primarily on business value, not market price.
Emphasizing businesses over prices enables value investor to know that owning stock means owning an interest in a going concern. That mental quality promotes the discipline necessary:
- to define a circle of competence,
- do financial analysis, and
- assess value-price relationships.
Pervasive market price data makes it harder for equity investors to appreciate that they are part owners of a business, making disciplined analysis elusive.
The only reason to consider market sentiment is because in times of general economic despair and market malaise, the odds of successful stock picking rise. Three factors contribute:
(1) There are more companies likely to be price below value,
(2) There are fewer investment competitors likely to wade into the thicket, and
(3) The media and regulatory pressure tend to promote quality management and conservative accounting.
Also read:
Thursday 15 January 2009
The bond bubble is an accident waiting to happen
The bond bubble is an accident waiting to happen
The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever.
Ambrose Evans-PritchardLast Updated: 12:22PM GMT 12 Jan 2009
Comments 71 Comment on this article
They are betting too that debt deflation will overwhelm the effects of near-zero interest rates across the G10 and nullify a £2,000bn fiscal blast in the US, China, Japan, Britain, and Europe.
Above all, they are betting that the Federal Reserve chief Ben Bernanke will fail to print enough banknotes to inflate the US money supply, despite his avowed intent to do so.
Yields on 10-year US Treasuries have fallen to 2.4pc – a level that was unseen even in the Great Depression. This is "return-free risk", said bond guru Jim Grant.
It is much the same story across the world. Yields are 1.3pc in Japan, 3.02pc in Germany, 3.13pc in Britain, 3.26pc in Chile, 3.47pc in France, and 5.56pc in Brazil.
"Get out of Treasuries. They are very, very expensive," said Mohamed El-Erian, the investment chief at the Pimco, the world's top bond fund, in a Barron's article last week.
It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets.
These countries are themselves bleeding as exports collapse. Most face capital flight. The whole process that fed the bond boom from 2003 to 2008 is now going into reverse.
Woe betide any investor who misjudges the consequences of this strategic shift.
Russia has lost 27pc of its $600bn reserves since August. The oil and metals crash has left the oligarchs prostrate. China's reserves fell $15bn in October. Beijing has begun to fret about an exodus of hot money – disguised as foreign investment in plant. The exchange regulator is muttering about "abnormal" capital flows out of the country.
China's $1,900bn stash of foreign bonds is a by-product of holding down the yuan to boost exports.
This mercantilist ploy is no longer necessary, since the currency is weakening. Beijing needs the money at home in any case to prop up the Chinese economy – now in trouble. Even Japan has slipped into trade deficit.
Clearly, the US and European governments cannot rely on Asia to plug the $3,500bn hole in their budgets this year.
Asians are just as likely to be net sellers of their bonds. Which implies that central banks may have to "monetize" our deficits.
James Montier, from Société Générale, has examined US bonds back to 1798. Yields have never been this low before, except under war controls in the 1940s when the price was set by dictate.
That episode is not a happy precedent. The Fed drove the 10-year bond down to 2.25pc, much as it is doing today with mortgage bonds. It helped America win World War Two, but ended in tears for bond holders in 1946 when inflation jumped to 18pc.
Mr Montier said yields have averaged 4.5pc over two centuries, with a real return of around 2pc. By that benchmark, the market is now banking on a decade of deflation.
Investors have drawn a false parallel with Japan's Lost Decade, when bond yields kept falling, forgetting that Tokyo waited seven years before resorting to the printing press. Mr Bernanke has no such inhibitions. He has hit the nuclear button in advance.
"Today's yields are woefully short of the estimated fair value under normal conditions. There maybe a (short-term) speculative case for buying bonds. However, I am an investor, not a speculator," he said
Of course, we may already be so deep into debt deflation that bonds will rally regardless. Fresh data suggest that Japan's economy contracted at a 12pc annual rate in the fourth quarter of 2008; the US, Germany, and France shrank at a 6pc rate, and Britain shrank at 5pc.
If sustained, these figures are worse than 1930, though not as bad as the killer year of 1931. The UK contraction from peak to trough in the Slump was 5pc. Gordon Brown will be lucky to get off so lightly.
The Fed's December minutes reek of fear. The Bernanke team is no longer sure that stimulus will gain traction in time.
The Fed's "Monetary Multiplier" has collapsed, falling below 1. This is unthinkable. We are in a liquidity trap.
So yes, printing money is not as easy as it looks, but to conclude that the Fed cannot bring about inflation is a leap too far.
The Fed has only just started to debauch in earnest, buying $600bn of mortgage bonds to force home loans down to 4.5pc. US mortgage rates have dropped 150 basis points in two months.
My tentative guess is that Bernanke's blitz will "work" – perhaps later this year. Markets will start to look beyond deflation. They will remember that the Fed is boosting its balance sheet from $800bn to $3,000bn, and that it sits on an overhang of bonds that must be sold again.
"The euthanasia of the rentier" will wear off, to borrow from Keynes. That is when the next crisis begins.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4218210/The-bond-bubble-has-long-since-burst-investors-ignore-this-at-you-peril.html
The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever.
Ambrose Evans-PritchardLast Updated: 12:22PM GMT 12 Jan 2009
Comments 71 Comment on this article
They are betting too that debt deflation will overwhelm the effects of near-zero interest rates across the G10 and nullify a £2,000bn fiscal blast in the US, China, Japan, Britain, and Europe.
Above all, they are betting that the Federal Reserve chief Ben Bernanke will fail to print enough banknotes to inflate the US money supply, despite his avowed intent to do so.
Yields on 10-year US Treasuries have fallen to 2.4pc – a level that was unseen even in the Great Depression. This is "return-free risk", said bond guru Jim Grant.
It is much the same story across the world. Yields are 1.3pc in Japan, 3.02pc in Germany, 3.13pc in Britain, 3.26pc in Chile, 3.47pc in France, and 5.56pc in Brazil.
"Get out of Treasuries. They are very, very expensive," said Mohamed El-Erian, the investment chief at the Pimco, the world's top bond fund, in a Barron's article last week.
It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets.
These countries are themselves bleeding as exports collapse. Most face capital flight. The whole process that fed the bond boom from 2003 to 2008 is now going into reverse.
Woe betide any investor who misjudges the consequences of this strategic shift.
Russia has lost 27pc of its $600bn reserves since August. The oil and metals crash has left the oligarchs prostrate. China's reserves fell $15bn in October. Beijing has begun to fret about an exodus of hot money – disguised as foreign investment in plant. The exchange regulator is muttering about "abnormal" capital flows out of the country.
China's $1,900bn stash of foreign bonds is a by-product of holding down the yuan to boost exports.
This mercantilist ploy is no longer necessary, since the currency is weakening. Beijing needs the money at home in any case to prop up the Chinese economy – now in trouble. Even Japan has slipped into trade deficit.
Clearly, the US and European governments cannot rely on Asia to plug the $3,500bn hole in their budgets this year.
Asians are just as likely to be net sellers of their bonds. Which implies that central banks may have to "monetize" our deficits.
James Montier, from Société Générale, has examined US bonds back to 1798. Yields have never been this low before, except under war controls in the 1940s when the price was set by dictate.
That episode is not a happy precedent. The Fed drove the 10-year bond down to 2.25pc, much as it is doing today with mortgage bonds. It helped America win World War Two, but ended in tears for bond holders in 1946 when inflation jumped to 18pc.
Mr Montier said yields have averaged 4.5pc over two centuries, with a real return of around 2pc. By that benchmark, the market is now banking on a decade of deflation.
Investors have drawn a false parallel with Japan's Lost Decade, when bond yields kept falling, forgetting that Tokyo waited seven years before resorting to the printing press. Mr Bernanke has no such inhibitions. He has hit the nuclear button in advance.
"Today's yields are woefully short of the estimated fair value under normal conditions. There maybe a (short-term) speculative case for buying bonds. However, I am an investor, not a speculator," he said
Of course, we may already be so deep into debt deflation that bonds will rally regardless. Fresh data suggest that Japan's economy contracted at a 12pc annual rate in the fourth quarter of 2008; the US, Germany, and France shrank at a 6pc rate, and Britain shrank at 5pc.
If sustained, these figures are worse than 1930, though not as bad as the killer year of 1931. The UK contraction from peak to trough in the Slump was 5pc. Gordon Brown will be lucky to get off so lightly.
The Fed's December minutes reek of fear. The Bernanke team is no longer sure that stimulus will gain traction in time.
The Fed's "Monetary Multiplier" has collapsed, falling below 1. This is unthinkable. We are in a liquidity trap.
So yes, printing money is not as easy as it looks, but to conclude that the Fed cannot bring about inflation is a leap too far.
The Fed has only just started to debauch in earnest, buying $600bn of mortgage bonds to force home loans down to 4.5pc. US mortgage rates have dropped 150 basis points in two months.
My tentative guess is that Bernanke's blitz will "work" – perhaps later this year. Markets will start to look beyond deflation. They will remember that the Fed is boosting its balance sheet from $800bn to $3,000bn, and that it sits on an overhang of bonds that must be sold again.
"The euthanasia of the rentier" will wear off, to borrow from Keynes. That is when the next crisis begins.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4218210/The-bond-bubble-has-long-since-burst-investors-ignore-this-at-you-peril.html
Hedge funds suffer worst year on record
Hedge funds suffer worst year on record
Hedge funds had their worst year on record in 2008 with up to 300 funds worldwide closing down.
By Helia EbrahimiLast Updated: 8:55AM GMT 15 Jan 2009
Research by Hedgefund Intelligence also revealed an average 12pc fall in the value of hedge funds' investments.
By a median figure, hedge funds in Europe outperformed their American and Asian peers for the first time, down only 4.6pc in the 12 months, according to research based on data from 1,500 funds.
Although 2008 was the industry's worst annual performance, the results show the sector did not perform as poorly as has been suggested by some commentators. It also outperformed the FTSE 100, which fell 31pc, and the Dow, which plunged 34pc.
Some strategies were particularly hard hit, with emerging market equity funds crashing 31pc over the year, equity hedge funds down 13pc; and emerging market debt off 10pc.
In contrast, managed futures funds were the clear winners of 2008, up 16.17pc.
Some analysts believe institutional investors forced into redemptions will this year start to re-invest in hedge funds that are performing well. However, with many still forecasting industry assets could be wiped out by, there are likely to be many more casualties in the next 18 months.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4241934/Hedge-funds-suffer-worst-year-on-record.html
Hedge funds had their worst year on record in 2008 with up to 300 funds worldwide closing down.
By Helia EbrahimiLast Updated: 8:55AM GMT 15 Jan 2009
Research by Hedgefund Intelligence also revealed an average 12pc fall in the value of hedge funds' investments.
By a median figure, hedge funds in Europe outperformed their American and Asian peers for the first time, down only 4.6pc in the 12 months, according to research based on data from 1,500 funds.
Although 2008 was the industry's worst annual performance, the results show the sector did not perform as poorly as has been suggested by some commentators. It also outperformed the FTSE 100, which fell 31pc, and the Dow, which plunged 34pc.
Some strategies were particularly hard hit, with emerging market equity funds crashing 31pc over the year, equity hedge funds down 13pc; and emerging market debt off 10pc.
In contrast, managed futures funds were the clear winners of 2008, up 16.17pc.
Some analysts believe institutional investors forced into redemptions will this year start to re-invest in hedge funds that are performing well. However, with many still forecasting industry assets could be wiped out by, there are likely to be many more casualties in the next 18 months.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4241934/Hedge-funds-suffer-worst-year-on-record.html
Pound heads back to dark days of 1990
Pound heads back to dark days of 1990
By Edmund Conway, Economics Editor
Last Updated: 1:18AM BST 30 Mar 2007
Economists have raised the alarm over the future health of the pound, after new figures showed the current account has yawned to the biggest deficit since 1990.
They warned that sterling faced a significant fall in the coming years as investors realised that the UK is living well beyond its means.
The deficit on the balance of payments rose to a record high of £12.7bn in the final quarter of 2006, the Office for National Statistics said. As a percentage of Britain's gross domestic product, this is 3.8pc, the highest level seen since 1990.
Experts said that the increase in the shortfall was the latest sign of the North Sea's demise as an energy producer and warned that as Britain's oil and gas exports fell in the coming years, the current account would widen to worrying levels.
The increase in the gap was far bigger than economists expected, and they warned that this could have severe consequences for the long-term health of the UK economy. A country with a large current account deficit will often see its currency depreciate in the following years, they said.
However, analysts also warned that the numbers indicated that Britain was starting to lose its talent at earning an unusually high return on its assets abroad.
In previous years, Britain's current account has been supported by the fact that UK firms have tended to earn more on their overseas investments than foreign companies have in the UK.
Michael Saunders, chief UK economist at Citigroup, said this appeared to be changing. He said this rate of return was dropping, and warned that there would soon be "some pretty appalling current account figures", saying the deficit could pass 5pc within two years. This is still far short of the US, where some expect the deficit to surpass 7pc in the coming years, but is still extremely high by the standards of developed countries.
Furthermore, said Mr Saunders, the current flow of money into the UK from the Middle East, which is helping to support the pound, would not last forever.
"So far, the worsening current account deficit has not been a big negative for sterling," he said. "But, at the very least, the worsening current account suggests that the Monetary Policy Committee is unlikely to be able to rely on sterling strength as an alternative source of restraint, rather than higher interest rates.
"And, if sterling weakens (in the absence of UK economic weakness) then the UK's medium term upside inflation risks - and need for interest rates to rise - would be correspondingly greater."
A Treasury spokesman said: "Underlying growth in exports is expected to remain robust this year as growth in UK export markets strengthens on the back of stronger demand from the euro area."
The figures also revealed a sudden dive in the UK's savings ratio, indicating that many Britons are being forced to dig into their savings to finance their current spending. The ratio, which charts the amount of national income being set aside, was 3.7pc in the fourth quarter of 2006. This is the lowest level since 2004, and is far lower than the long-run average.
The drop in savings could prefigure a fall in consumer spending in the coming months as shoppers cut back on their purchases, experts predicted.
And in a further sign that households are tightening their belts, the pace of house price inflation started to slow last month, according to figures from Nationwide. It said this measure of annual property price increases dropped from 10pc to 9.3pc.
After a year of unexpectedly strong growth, many now think the property market is cooling noticeably, although in pockets of the country including London and the South-East, a shortage of supply and massive demand for prime housing have pushed prices higher.
http://www.telegraph.co.uk/finance/2806502/Pound-heads-back-to-dark-days-of-1990.html
By Edmund Conway, Economics Editor
Last Updated: 1:18AM BST 30 Mar 2007
Economists have raised the alarm over the future health of the pound, after new figures showed the current account has yawned to the biggest deficit since 1990.
They warned that sterling faced a significant fall in the coming years as investors realised that the UK is living well beyond its means.
The deficit on the balance of payments rose to a record high of £12.7bn in the final quarter of 2006, the Office for National Statistics said. As a percentage of Britain's gross domestic product, this is 3.8pc, the highest level seen since 1990.
Experts said that the increase in the shortfall was the latest sign of the North Sea's demise as an energy producer and warned that as Britain's oil and gas exports fell in the coming years, the current account would widen to worrying levels.
The increase in the gap was far bigger than economists expected, and they warned that this could have severe consequences for the long-term health of the UK economy. A country with a large current account deficit will often see its currency depreciate in the following years, they said.
However, analysts also warned that the numbers indicated that Britain was starting to lose its talent at earning an unusually high return on its assets abroad.
In previous years, Britain's current account has been supported by the fact that UK firms have tended to earn more on their overseas investments than foreign companies have in the UK.
Michael Saunders, chief UK economist at Citigroup, said this appeared to be changing. He said this rate of return was dropping, and warned that there would soon be "some pretty appalling current account figures", saying the deficit could pass 5pc within two years. This is still far short of the US, where some expect the deficit to surpass 7pc in the coming years, but is still extremely high by the standards of developed countries.
Furthermore, said Mr Saunders, the current flow of money into the UK from the Middle East, which is helping to support the pound, would not last forever.
"So far, the worsening current account deficit has not been a big negative for sterling," he said. "But, at the very least, the worsening current account suggests that the Monetary Policy Committee is unlikely to be able to rely on sterling strength as an alternative source of restraint, rather than higher interest rates.
"And, if sterling weakens (in the absence of UK economic weakness) then the UK's medium term upside inflation risks - and need for interest rates to rise - would be correspondingly greater."
A Treasury spokesman said: "Underlying growth in exports is expected to remain robust this year as growth in UK export markets strengthens on the back of stronger demand from the euro area."
The figures also revealed a sudden dive in the UK's savings ratio, indicating that many Britons are being forced to dig into their savings to finance their current spending. The ratio, which charts the amount of national income being set aside, was 3.7pc in the fourth quarter of 2006. This is the lowest level since 2004, and is far lower than the long-run average.
The drop in savings could prefigure a fall in consumer spending in the coming months as shoppers cut back on their purchases, experts predicted.
And in a further sign that households are tightening their belts, the pace of house price inflation started to slow last month, according to figures from Nationwide. It said this measure of annual property price increases dropped from 10pc to 9.3pc.
After a year of unexpectedly strong growth, many now think the property market is cooling noticeably, although in pockets of the country including London and the South-East, a shortage of supply and massive demand for prime housing have pushed prices higher.
http://www.telegraph.co.uk/finance/2806502/Pound-heads-back-to-dark-days-of-1990.html
Company profits slide as recession takes hold
Company profits slide as recession takes hold
Business profits are likely to dip by a third - more than in the early 1990s recession - experts warned after fresh figures underlined companies' declining fortunes.
By Edmund Conway, Economics EditorLast Updated: 6:39AM GMT 15 Jan 2009
The total amount of profits generated has fallen for a second successive quarter in the latest sign of the economy's deterioration.
Corporate profitability dropped in the third quarter of last year, despite a leap in takings from North Sea oil and gas groups as the crude price shot through record highs. Experts warned that the fall in profits only represented the beginning of a long series of declines during the current UK recession, which according to statistics released earlier this week is likely to be more severe than the slump of the early 1990s.
The net rate of return recorded by private non financial corporations dropped to 13.9pc in the third quarter of 2008, according to the Office for National Statistics. The rate is the lowest since early 2007, and is significantly down from the peak of 14.7pc recorded early last year before the full force of the economic crisis hit.
Roger Bootle, founder of Capital Economics and an economic adviser to Deloitte, said he expected profits ultimately to fall by around a third.
"The extreme cyclicality of profits means that in the early 1990s recession, profits fell, in real terms from peak to trough, by around 25pc. The more severe recession in the early 1980s is fast becoming the more relevant precedent. And back then, profits fell by about 37pc in real terms.
"I find it very hard to share in the general optimism that the recession will last for only a year. The economy will contract further in 2010 as well."
http://www.telegraph.co.uk/finance/economics/4240920/Company-profits-slide-as-recession-takes-hold.html
Business profits are likely to dip by a third - more than in the early 1990s recession - experts warned after fresh figures underlined companies' declining fortunes.
By Edmund Conway, Economics EditorLast Updated: 6:39AM GMT 15 Jan 2009
The total amount of profits generated has fallen for a second successive quarter in the latest sign of the economy's deterioration.
Corporate profitability dropped in the third quarter of last year, despite a leap in takings from North Sea oil and gas groups as the crude price shot through record highs. Experts warned that the fall in profits only represented the beginning of a long series of declines during the current UK recession, which according to statistics released earlier this week is likely to be more severe than the slump of the early 1990s.
The net rate of return recorded by private non financial corporations dropped to 13.9pc in the third quarter of 2008, according to the Office for National Statistics. The rate is the lowest since early 2007, and is significantly down from the peak of 14.7pc recorded early last year before the full force of the economic crisis hit.
Roger Bootle, founder of Capital Economics and an economic adviser to Deloitte, said he expected profits ultimately to fall by around a third.
"The extreme cyclicality of profits means that in the early 1990s recession, profits fell, in real terms from peak to trough, by around 25pc. The more severe recession in the early 1980s is fast becoming the more relevant precedent. And back then, profits fell by about 37pc in real terms.
"I find it very hard to share in the general optimism that the recession will last for only a year. The economy will contract further in 2010 as well."
http://www.telegraph.co.uk/finance/economics/4240920/Company-profits-slide-as-recession-takes-hold.html
Never mind the borrowers, savers are the solvent majority
Never mind the borrowers, savers are the solvent majority
Plans to ease the tax burden on savers could lay the foundations for a sustainable recovery and recognise that they, not borrowers, are the main victims of the credit crisis.
By Ian Cowie, Personal Finance Editor Last Updated: 3:40PM GMT 12 Jan 2009
Comments 8 Comment on this article
By Ian Cowie, Personal Finance Editor Last Updated: 3:40PM GMT 12 Jan 2009
Comments 8 Comment on this article
'Then I won the lottery and decided to live off the interest'
Millions of savers have suffered shrinkage of more than £22bn in their combined annual income as a result of interest rate cuts announced during the last year, according to figures from the Office for National Statistics (ONS). January’s half percentage point reduction by the Bank of England to 1.5pc – the fourth consecutive cut – really puts the tin lid on it.
Of course, it is an ill wind that blows no good. Borrowers will not be the only beneficiaries of the precipitous decline in interest rates. Burglars could be big winners, too, as more people decide there is no point leaving money in the bank.
If you are going to earn next to nothing on your savings, many may decide the mattress beats a deposit account because at least you won’t have to share the meagre proceeds with HM Revenue & Customs (HMRC).
Let me make plain straightaway, that this would be a very bad thing indeed; whichever way you look at it. But, as I have pointed out in this space before, savers have been used and abused for so long now that we can hardly be surprised that many have decided this game is no longer worth the candle – while others are quietly making alternative arrangements.
You only have to look at the way money is flooding into fine wine, antiques and almost any other asset that need not leave a paper trail – or, more currently, digital evidence of payments and profits. We avoided joining the euro more by luck than judgement but are becoming much more like our continental cousins in our attitudes toward the taxman. It took many centuries for Rome to turn into Italy but little more than a decade for the United Kingdom to turn into Little Britain.
The good news is that the opposition parties have at last started to put up a fight on behalf of savers. George Osborne, Shadow Chancellor, told me this week: “Many millions of people whose modest incomes depend on their savings are the innocent victims of this recession.
“We need to help them by simplifying and reducing taxation.
“Around 7m families have savings of £10,000 or more, according to the ONS. The average interest rate for £10,000 savings has dropped nearly three percentage points – from 4.4pc in December, 2007, to 1.53pc now. As a result savers are losing nearly £300 a year.”
That may not sound a huge amount until you consider that the National Pensioners Convention reckons 5m retired people rely on savings to provide more than half their income. So some of the poorest people in the country are involuntarily making some of the biggest donations to this Government’s increasingly desperate attempts to buy off a recession.
To make matters worse, many savers will pay more tax than they need to because of the way HMRC automatically bases bills that fall due this month on income that was received last year – unless it is told to do otherwise. David Rothenberg, of accountants Blick Rothenberg, said: “They must make a self assessment claim to reduce payments on account before January 31.”
So, after all the unkind things I have said over the years about timid Tories failing to fight their corner, it was a tonic to hear Mr Osborne say this week: “We are calling on Gordon Brown to cut taxes for savers and pensioners in the Budget, paid for by slower growth in public spending.
“This will help the innocent victims of Labour’s recession and, over the longer term, build a savings culture by ending Britain’s addiction to debt.”
Long overdue plans to ease the tax burden on savers could lay the foundations for a sustainable recovery from economic recession and recognise that savers – not borrowers – have been the main victims of the credit crisis so far.
Hard-pressed young homebuyers make more photogenic TV than pensioners struggling to survive on fixed incomes but the fact remains that savers outnumber borrowers by seven to one. While the Government has urged lenders to cut the cost of credit savers have suffered returns rapidly shrinking to vanishing point.
No wonder many have responded by concluding that saving is a waste of time. According to the ONS, the percentage of household income set aside as savings stood at more than 10pc in 1997 but had fallen to less than a 20th of that level – 0.4pc – by last year. This decade-long savers’ strike created a fundamental imbalance in the economy and helped to set the scene for the credit crisis.
Put simply, we were saving too little and borrowing too much for far too long. That combustible mix also encouraged the banks to increasingly rely for their capital on institutional money markets – which are now frozen by fear – rather than their traditional mainstay – individual savers.
Now, at long last, Conservative proposals seem to recognise that savers comprise the majority of the public – and offer a better hope of getting out of this mess than Government plans to borrow our way out of debt.
The Conservative plan to scrap the 10p and basic rates of tax on savings will boost bank and building society returns by a quarter for most people. Very few noticed the effects of the Government’s attempt to boost spending by trimming Value Added Tax from 17.5pc to 15pc, despite the massive cost to the Exchequer of reducing VAT. But savers who currently receive £80 of interest after tax at 20pc would certainly notice if this turned into £100 tax-free.
The same is true of the other Tory tax cut proposal to add £2,000 to pensioners’ personal allowances. People aged between 65 and 74 are currently allowed to receive £9,030 this year before they must pay tax, while the age-related personal allowance for those aged 75 or more is £9,180.
Both groups will be able to receive more than £11,000 a year before they need to pay any tax.
Of course, there is the small matter of a General Election to win before the Tory proposals amount to anything more than hot air. But a massive prize awaits the political party which can show it cares about savers.
According to HMRC, about 18m people pay tax on bank and building society deposits of nearly £900bn. Their income has plunged from £35bn a year ago to nearer £13bn today, according to Conservative calculations based on ONS and Moneyfacts figures.
These savers have been largely overlooked in much of the coverage of the economic recession, which has focused instead on the plight of the noisy minority who spent too much on credit cards and other forms of debt. It is high time politicians began to seek the votes of the solvent majority.
Of course, it is an ill wind that blows no good. Borrowers will not be the only beneficiaries of the precipitous decline in interest rates. Burglars could be big winners, too, as more people decide there is no point leaving money in the bank.
If you are going to earn next to nothing on your savings, many may decide the mattress beats a deposit account because at least you won’t have to share the meagre proceeds with HM Revenue & Customs (HMRC).
Let me make plain straightaway, that this would be a very bad thing indeed; whichever way you look at it. But, as I have pointed out in this space before, savers have been used and abused for so long now that we can hardly be surprised that many have decided this game is no longer worth the candle – while others are quietly making alternative arrangements.
You only have to look at the way money is flooding into fine wine, antiques and almost any other asset that need not leave a paper trail – or, more currently, digital evidence of payments and profits. We avoided joining the euro more by luck than judgement but are becoming much more like our continental cousins in our attitudes toward the taxman. It took many centuries for Rome to turn into Italy but little more than a decade for the United Kingdom to turn into Little Britain.
The good news is that the opposition parties have at last started to put up a fight on behalf of savers. George Osborne, Shadow Chancellor, told me this week: “Many millions of people whose modest incomes depend on their savings are the innocent victims of this recession.
“We need to help them by simplifying and reducing taxation.
“Around 7m families have savings of £10,000 or more, according to the ONS. The average interest rate for £10,000 savings has dropped nearly three percentage points – from 4.4pc in December, 2007, to 1.53pc now. As a result savers are losing nearly £300 a year.”
That may not sound a huge amount until you consider that the National Pensioners Convention reckons 5m retired people rely on savings to provide more than half their income. So some of the poorest people in the country are involuntarily making some of the biggest donations to this Government’s increasingly desperate attempts to buy off a recession.
To make matters worse, many savers will pay more tax than they need to because of the way HMRC automatically bases bills that fall due this month on income that was received last year – unless it is told to do otherwise. David Rothenberg, of accountants Blick Rothenberg, said: “They must make a self assessment claim to reduce payments on account before January 31.”
So, after all the unkind things I have said over the years about timid Tories failing to fight their corner, it was a tonic to hear Mr Osborne say this week: “We are calling on Gordon Brown to cut taxes for savers and pensioners in the Budget, paid for by slower growth in public spending.
“This will help the innocent victims of Labour’s recession and, over the longer term, build a savings culture by ending Britain’s addiction to debt.”
Long overdue plans to ease the tax burden on savers could lay the foundations for a sustainable recovery from economic recession and recognise that savers – not borrowers – have been the main victims of the credit crisis so far.
Hard-pressed young homebuyers make more photogenic TV than pensioners struggling to survive on fixed incomes but the fact remains that savers outnumber borrowers by seven to one. While the Government has urged lenders to cut the cost of credit savers have suffered returns rapidly shrinking to vanishing point.
No wonder many have responded by concluding that saving is a waste of time. According to the ONS, the percentage of household income set aside as savings stood at more than 10pc in 1997 but had fallen to less than a 20th of that level – 0.4pc – by last year. This decade-long savers’ strike created a fundamental imbalance in the economy and helped to set the scene for the credit crisis.
Put simply, we were saving too little and borrowing too much for far too long. That combustible mix also encouraged the banks to increasingly rely for their capital on institutional money markets – which are now frozen by fear – rather than their traditional mainstay – individual savers.
Now, at long last, Conservative proposals seem to recognise that savers comprise the majority of the public – and offer a better hope of getting out of this mess than Government plans to borrow our way out of debt.
The Conservative plan to scrap the 10p and basic rates of tax on savings will boost bank and building society returns by a quarter for most people. Very few noticed the effects of the Government’s attempt to boost spending by trimming Value Added Tax from 17.5pc to 15pc, despite the massive cost to the Exchequer of reducing VAT. But savers who currently receive £80 of interest after tax at 20pc would certainly notice if this turned into £100 tax-free.
The same is true of the other Tory tax cut proposal to add £2,000 to pensioners’ personal allowances. People aged between 65 and 74 are currently allowed to receive £9,030 this year before they must pay tax, while the age-related personal allowance for those aged 75 or more is £9,180.
Both groups will be able to receive more than £11,000 a year before they need to pay any tax.
Of course, there is the small matter of a General Election to win before the Tory proposals amount to anything more than hot air. But a massive prize awaits the political party which can show it cares about savers.
According to HMRC, about 18m people pay tax on bank and building society deposits of nearly £900bn. Their income has plunged from £35bn a year ago to nearer £13bn today, according to Conservative calculations based on ONS and Moneyfacts figures.
These savers have been largely overlooked in much of the coverage of the economic recession, which has focused instead on the plight of the noisy minority who spent too much on credit cards and other forms of debt. It is high time politicians began to seek the votes of the solvent majority.
Spanish-style catastrophe
Staying out of the euro has spared us a Spanish-style catastrophe
Half-built flats and soaring unemployment show that the boom has turned to gloom on the Costa del Sol. And it's a fate that could easily have befallen Britain.
By Jeff RandallLast Updated: 5:43AM GMT 09 Jan 2009
Comments 227 Comment on this article
Marbella
For a place that's called the Sunshine Coast, Spain's Costa del Sol was unusually wet and cold last week. Friday and Saturday were particularly miserable in Marbella, as the rain lashed across the main promenade, forcing restaurants to bring in tables and pull down shutters.
It was as though the weather gods had decided to reflect the country's economic outlook – which is becoming darker by the day. What many in Spain had regarded (foolishly) as an eternal summer of expansion, driven by a breakneck construction boom, has turned into a winter of plunging property prices, failing businesses and an epidemic of redundancies.
Spain's traditional new year greeting is próspero año nuevo. But even in this part of Andalucia, a favourite playground of wealthy sunseekers and golf fanatics, it is hard to find locals who are expecting prosperity in 2009. For a growing number of workers and small-business owners, anything better than a sharp decline in income will be greeted as a triumph.
Like the toros bravos that die in the corrida, Spain's bull market began with impressive vigour but ended up being dragged off through the dirt. Unemployment hit three million yesterday, about 13 per cent of the workforce (double the rate in the UK), the worst it has been for 12 years. Nearly one million of those without jobs have lost them during the past 12 months.
The speed of descent, from fiesta into crisis, has shocked the country's political class and commentariat. Inflation has dropped from 5.3 per cent to 1.5 per cent since the summer. According to the newspaper El Pais: "This situation was impensable [unthinkable] in July".
As historians begin to assess damage from the credit crunch, Spain will surely be singled out as a classic study for what can go wrong inside a monetary union when the policy requirements of its members become hopelessly misaligned. It is simply not possible to pursue the best interests of every participant when some nations are running trade and fiscal surpluses while others clock up huge deficits.
Ten years after it was launched, the euro is propelling Spain towards disaster. In giving up control of domestic interest rates to the European Central Bank, Madrid handed over a vital instrument of macroeconomic management. It is learning to regret that.
For the early part of this millennium, that loss of power seemed not to matter: Spain's outrageous (and in some cases illegal) construction frenzy hid a multitude of sins. At the peak, about 800,000 homes were being built annually on the basis that demand from foreign buyers was limitless.
That dream has vanished, along with the over-supply of cheap money that funded it. Drive down the E-15, the main motorway link between Malaga and Gibraltar, and you will see block after block of half-built apartments, connected neither to essential utilities nor to financial reality. They stand as temples to a religion that ceased to exist when the bubble popped.
The Spanish economy is weak; it needs lower interest rates and a softer currency. Such a prospect, however, doesn't suit Germany, the eurozone's dominant force, so Madrid has to sit and suffer while its people cry for help.
Discomfort is palpable in tourist centres where the purchasing power of British visitors and second-home owners has played a pivotal role in boosting local enterprise. Germans and Swedes have been important, also, but it is on the British that the leisure sector in southern Spain has depended most.
A quick scan of the exchange-rate charts explains why. In the summer of 2000, about 18 months after it was launched, the euro was out of fashion on the world's currency markets. At that time, £1 bought €1.75, making British travellers feel especially wealthy when holidaying in Spain.
Today, however, as the British economy sinks into recession, prompting the Bank of England to slash interest rates to 1.5 per cent (the lowest level in the central bank's 315-year history), it is sterling that looks like a six-stone weakling.
Many in the queue at Gatwick airport's Travelex desk last weekend were shocked to discover that the pound had fallen to below parity against the euro. For them, Spain has become an expensive experience. Old jokes about Costa Notta Lotta are no longer relevant, much less funny.
I was treated by a friend to a round of golf at Rio Real, a middle-ranking course, that is by no means among the priciest. He was charged £172 for two (no buggy). Dinner for three in a modest pizza joint came to £75. One must assume that hoteliers from Morecambe to Margate are cheering wildly.
Competing currencies invariably fluctuate on a daily basis, but not all in the City are expecting a swift recovery of sterling against the euro (even though it has picked up in the past few days). HSBC believes: "In the UK… a weaker currency seems desirable to policy makers… in our eyes all roads lead to a stronger euro."
If that analysis proves correct, parts of Spain will face devastation, and social policies that seemed generous during the go-go years will quickly become unaffordable. For example, in some instances the state pays 70 per cent of salary for up to two years when a worker is made unemployed. How will that be funded if, as some are predicting, Spain's jobless total reaches four million in 2010?
Adding to Madrid's woes is the extraordinary influx of five million immigrants, who boosted the population by about 15 per cent between 1998 and last year. It was always assumed that in tough times many would return home. But for penniless fruit pickers from Africa, life in Spain, even in the harshest economic climate, is often better than what they left behind. The number of foreigners claiming dole payments has doubled and there are mounting tensions as native job-seekers slip down the food chain.
Marbella is not used to life on a budget. Shopkeepers, newspaper vendors and bar staff seem baffled by the downturn in their fortunes. On Sunday, my family and I had dinner in a seafront bodega and were the only customers all night. "What has happened to los Ingleses?" asked the waiter.
The answer is that the United Kingdom never joined the euro. As a result, our government and monetary authorities are free to adopt policies that suit our needs. In today's circumstances, that means the freedom to live with a devaluing currency. This hurts those of us who can still afford to visit Spain, and is unfortunate for British pensioners living abroad, but is a small price to pay for the revival of our domestic industries.
Had Britain been locked into Europe's single currency, at an exchange rate far higher than today's, there is good reason to believe that we, too, would be suffering double-digit unemployment. You won't read this very often under my byline, but Gordon Brown played a blinder in keeping us out.
http://www.telegraph.co.uk/finance/comment/jeffrandall/4177828/Staying-out-of-the-euro-has-spared-us-a-Spanish-style-catastrophe.html
Half-built flats and soaring unemployment show that the boom has turned to gloom on the Costa del Sol. And it's a fate that could easily have befallen Britain.
By Jeff RandallLast Updated: 5:43AM GMT 09 Jan 2009
Comments 227 Comment on this article
Marbella
For a place that's called the Sunshine Coast, Spain's Costa del Sol was unusually wet and cold last week. Friday and Saturday were particularly miserable in Marbella, as the rain lashed across the main promenade, forcing restaurants to bring in tables and pull down shutters.
It was as though the weather gods had decided to reflect the country's economic outlook – which is becoming darker by the day. What many in Spain had regarded (foolishly) as an eternal summer of expansion, driven by a breakneck construction boom, has turned into a winter of plunging property prices, failing businesses and an epidemic of redundancies.
Spain's traditional new year greeting is próspero año nuevo. But even in this part of Andalucia, a favourite playground of wealthy sunseekers and golf fanatics, it is hard to find locals who are expecting prosperity in 2009. For a growing number of workers and small-business owners, anything better than a sharp decline in income will be greeted as a triumph.
Like the toros bravos that die in the corrida, Spain's bull market began with impressive vigour but ended up being dragged off through the dirt. Unemployment hit three million yesterday, about 13 per cent of the workforce (double the rate in the UK), the worst it has been for 12 years. Nearly one million of those without jobs have lost them during the past 12 months.
The speed of descent, from fiesta into crisis, has shocked the country's political class and commentariat. Inflation has dropped from 5.3 per cent to 1.5 per cent since the summer. According to the newspaper El Pais: "This situation was impensable [unthinkable] in July".
As historians begin to assess damage from the credit crunch, Spain will surely be singled out as a classic study for what can go wrong inside a monetary union when the policy requirements of its members become hopelessly misaligned. It is simply not possible to pursue the best interests of every participant when some nations are running trade and fiscal surpluses while others clock up huge deficits.
Ten years after it was launched, the euro is propelling Spain towards disaster. In giving up control of domestic interest rates to the European Central Bank, Madrid handed over a vital instrument of macroeconomic management. It is learning to regret that.
For the early part of this millennium, that loss of power seemed not to matter: Spain's outrageous (and in some cases illegal) construction frenzy hid a multitude of sins. At the peak, about 800,000 homes were being built annually on the basis that demand from foreign buyers was limitless.
That dream has vanished, along with the over-supply of cheap money that funded it. Drive down the E-15, the main motorway link between Malaga and Gibraltar, and you will see block after block of half-built apartments, connected neither to essential utilities nor to financial reality. They stand as temples to a religion that ceased to exist when the bubble popped.
The Spanish economy is weak; it needs lower interest rates and a softer currency. Such a prospect, however, doesn't suit Germany, the eurozone's dominant force, so Madrid has to sit and suffer while its people cry for help.
Discomfort is palpable in tourist centres where the purchasing power of British visitors and second-home owners has played a pivotal role in boosting local enterprise. Germans and Swedes have been important, also, but it is on the British that the leisure sector in southern Spain has depended most.
A quick scan of the exchange-rate charts explains why. In the summer of 2000, about 18 months after it was launched, the euro was out of fashion on the world's currency markets. At that time, £1 bought €1.75, making British travellers feel especially wealthy when holidaying in Spain.
Today, however, as the British economy sinks into recession, prompting the Bank of England to slash interest rates to 1.5 per cent (the lowest level in the central bank's 315-year history), it is sterling that looks like a six-stone weakling.
Many in the queue at Gatwick airport's Travelex desk last weekend were shocked to discover that the pound had fallen to below parity against the euro. For them, Spain has become an expensive experience. Old jokes about Costa Notta Lotta are no longer relevant, much less funny.
I was treated by a friend to a round of golf at Rio Real, a middle-ranking course, that is by no means among the priciest. He was charged £172 for two (no buggy). Dinner for three in a modest pizza joint came to £75. One must assume that hoteliers from Morecambe to Margate are cheering wildly.
Competing currencies invariably fluctuate on a daily basis, but not all in the City are expecting a swift recovery of sterling against the euro (even though it has picked up in the past few days). HSBC believes: "In the UK… a weaker currency seems desirable to policy makers… in our eyes all roads lead to a stronger euro."
If that analysis proves correct, parts of Spain will face devastation, and social policies that seemed generous during the go-go years will quickly become unaffordable. For example, in some instances the state pays 70 per cent of salary for up to two years when a worker is made unemployed. How will that be funded if, as some are predicting, Spain's jobless total reaches four million in 2010?
Adding to Madrid's woes is the extraordinary influx of five million immigrants, who boosted the population by about 15 per cent between 1998 and last year. It was always assumed that in tough times many would return home. But for penniless fruit pickers from Africa, life in Spain, even in the harshest economic climate, is often better than what they left behind. The number of foreigners claiming dole payments has doubled and there are mounting tensions as native job-seekers slip down the food chain.
Marbella is not used to life on a budget. Shopkeepers, newspaper vendors and bar staff seem baffled by the downturn in their fortunes. On Sunday, my family and I had dinner in a seafront bodega and were the only customers all night. "What has happened to los Ingleses?" asked the waiter.
The answer is that the United Kingdom never joined the euro. As a result, our government and monetary authorities are free to adopt policies that suit our needs. In today's circumstances, that means the freedom to live with a devaluing currency. This hurts those of us who can still afford to visit Spain, and is unfortunate for British pensioners living abroad, but is a small price to pay for the revival of our domestic industries.
Had Britain been locked into Europe's single currency, at an exchange rate far higher than today's, there is good reason to believe that we, too, would be suffering double-digit unemployment. You won't read this very often under my byline, but Gordon Brown played a blinder in keeping us out.
http://www.telegraph.co.uk/finance/comment/jeffrandall/4177828/Staying-out-of-the-euro-has-spared-us-a-Spanish-style-catastrophe.html
Ireland plans drastic cuts to prevent debt crisis
Ireland plans drastic cuts to prevent debt crisis
Ireland is to demand pay cuts for civil servants and public employees to prevent the budget deficit soaring to 12pc of gross domestic product by next year – becoming the first country in the eurozone to resort to 1930s-style wage deflation to claw back competitiveness.
By Ambrose Evans-PritchardLast Updated: 6:13AM GMT 15 Jan 2009
"We will take whatever decisions are necessary," said premier Brian Cowen. The Taoiseach yesterday denied reports that he invoked the spectre of the International Monetary Fund to terrify the trade unions into submission. But the threat – uttered or not – has been picked up nevertheless by labour leaders.
"The IMF's normal prescription in such situations involves mass dismissals and pay cuts, along with cuts in pensions," said Dan Murphy, head of the public service union, who accepts the need for draconian retrenchment.
The budget deficit will soar to 9.6pc of GDP this year as property tax revenues collapse. It is so far above the EU's Maastricht limit of 3pc that Brussels will have to impose sanctions. It is still rising fast.
"On the basis of existing policy, A General Government Deficit in the range of 11pc to 12pc of GDP is in prospect for each of the years to 2013. This is untenable," said the finance ministry in a fresh revision to its (already dire) Stability Programme. It has drafted a swingeing five-year plan, slashing spending by €16bn (£14.4bn) or 8pc of GDP by 2013.
The markets are watching nervously. Yields on Irish 10-year bonds have risen to 180 basis points over German Bunds. Standard & Poor's has issued a "negative outlook" alert on Ireland's AAA rating, noting that the bank bail-out has increased state liabilities by 228pc of GDP. This guarantee may be tested. While Dublin's "Canary Dwarf" has been a success story – leading a finance sector that makes up nearly 10pc of Irish output – it has also become an Achilles Heel.
Chris Pryce from Fitch Ratings said Ireland had shown great courage by facing up to the full implications of the global crisis earlier than others. "We're very impressed by the vigour of the Irish government," he said. Even so, the public debt will jump from 25pc of GDP in 2007 to 62pc by 2010.
It is a grim moment for the Celtic Tiger after achieving so much as a high-tech hub with an educated work-force and one of the most flexible economies in the world – all qualities that should help the country pull through in the end.
Dublin expects the economy to shrink by 4pc this year as the post-bubble hangover goes from bad to worse. Unemployment will hit 12pc by December, up from 4.9pc in early 2008.
Ireland is paying the price for letting wages spiral upwards during the long boom, eating away at competitiveness. The computer group Dell, Ireland's top exporter, has stunned the country by announcing plans to shift its EU manufacturing arm from Limerick to Poland, taking 4pc of Irish GDP with it. Workers in Eastern Europe are closing the technology gap, and they are much cheaper.
Dublin house prices have fallen 28pc from their peak. Professor Morgan Kelly from University College Dublin – the first to predict last year that Irish banks would need a state rescue – fears that prices will drop 80pc in real terms before the glut of unsold property is cleared.
"It has taken us 10 years to get into this situation. It will in all likelihood take us 10 years to get out of it. Construction will fall to zero for the foreseeable future," he told a Dublin conference. There may be net "demolition".
It is hot debate whether euro membership is making matters worse at this stage. The country has not been able to "get ahead of the curve" over the last year by slashing interest rates. Indeed, Frankfurt raised rates in July.
The euro has jumped almost 30pc against sterling in a year. This amounts to an "asymmetric shock" for Ireland, which depends on Britain for 21pc of its exports. John Whelan, head of the Irish Exporters Association, said the strong euro puts100,000 jobs at risk this year.
"Most companies cannot make money selling into the UK at an exchange rate above 0.80 pence and today the euro is worth 0.91 pence. Currency hedges will run out by March, and the small guys are feeling the full whack instantly," he said.
Mr Whelan said there was a feeling of betrayal that Britain did not join the euro alongside Ireland – or shortly after – despite Labour's pledge to do so.
"We thought Britain would join in 2003, but then Tony Blair lost his popularity in Iraq and never tried," he said.
Finance Minister Brian Lenihan has even accused Britain of pursuing a beggar-thy-neighbour strategy.
http://www.telegraph.co.uk/finance/4241720/Ireland-plans-drastic-cuts-to-prevent-debt-crisis.html
Ireland is to demand pay cuts for civil servants and public employees to prevent the budget deficit soaring to 12pc of gross domestic product by next year – becoming the first country in the eurozone to resort to 1930s-style wage deflation to claw back competitiveness.
By Ambrose Evans-PritchardLast Updated: 6:13AM GMT 15 Jan 2009
"We will take whatever decisions are necessary," said premier Brian Cowen. The Taoiseach yesterday denied reports that he invoked the spectre of the International Monetary Fund to terrify the trade unions into submission. But the threat – uttered or not – has been picked up nevertheless by labour leaders.
"The IMF's normal prescription in such situations involves mass dismissals and pay cuts, along with cuts in pensions," said Dan Murphy, head of the public service union, who accepts the need for draconian retrenchment.
The budget deficit will soar to 9.6pc of GDP this year as property tax revenues collapse. It is so far above the EU's Maastricht limit of 3pc that Brussels will have to impose sanctions. It is still rising fast.
"On the basis of existing policy, A General Government Deficit in the range of 11pc to 12pc of GDP is in prospect for each of the years to 2013. This is untenable," said the finance ministry in a fresh revision to its (already dire) Stability Programme. It has drafted a swingeing five-year plan, slashing spending by €16bn (£14.4bn) or 8pc of GDP by 2013.
The markets are watching nervously. Yields on Irish 10-year bonds have risen to 180 basis points over German Bunds. Standard & Poor's has issued a "negative outlook" alert on Ireland's AAA rating, noting that the bank bail-out has increased state liabilities by 228pc of GDP. This guarantee may be tested. While Dublin's "Canary Dwarf" has been a success story – leading a finance sector that makes up nearly 10pc of Irish output – it has also become an Achilles Heel.
Chris Pryce from Fitch Ratings said Ireland had shown great courage by facing up to the full implications of the global crisis earlier than others. "We're very impressed by the vigour of the Irish government," he said. Even so, the public debt will jump from 25pc of GDP in 2007 to 62pc by 2010.
It is a grim moment for the Celtic Tiger after achieving so much as a high-tech hub with an educated work-force and one of the most flexible economies in the world – all qualities that should help the country pull through in the end.
Dublin expects the economy to shrink by 4pc this year as the post-bubble hangover goes from bad to worse. Unemployment will hit 12pc by December, up from 4.9pc in early 2008.
Ireland is paying the price for letting wages spiral upwards during the long boom, eating away at competitiveness. The computer group Dell, Ireland's top exporter, has stunned the country by announcing plans to shift its EU manufacturing arm from Limerick to Poland, taking 4pc of Irish GDP with it. Workers in Eastern Europe are closing the technology gap, and they are much cheaper.
Dublin house prices have fallen 28pc from their peak. Professor Morgan Kelly from University College Dublin – the first to predict last year that Irish banks would need a state rescue – fears that prices will drop 80pc in real terms before the glut of unsold property is cleared.
"It has taken us 10 years to get into this situation. It will in all likelihood take us 10 years to get out of it. Construction will fall to zero for the foreseeable future," he told a Dublin conference. There may be net "demolition".
It is hot debate whether euro membership is making matters worse at this stage. The country has not been able to "get ahead of the curve" over the last year by slashing interest rates. Indeed, Frankfurt raised rates in July.
The euro has jumped almost 30pc against sterling in a year. This amounts to an "asymmetric shock" for Ireland, which depends on Britain for 21pc of its exports. John Whelan, head of the Irish Exporters Association, said the strong euro puts100,000 jobs at risk this year.
"Most companies cannot make money selling into the UK at an exchange rate above 0.80 pence and today the euro is worth 0.91 pence. Currency hedges will run out by March, and the small guys are feeling the full whack instantly," he said.
Mr Whelan said there was a feeling of betrayal that Britain did not join the euro alongside Ireland – or shortly after – despite Labour's pledge to do so.
"We thought Britain would join in 2003, but then Tony Blair lost his popularity in Iraq and never tried," he said.
Finance Minister Brian Lenihan has even accused Britain of pursuing a beggar-thy-neighbour strategy.
http://www.telegraph.co.uk/finance/4241720/Ireland-plans-drastic-cuts-to-prevent-debt-crisis.html
When Pessimism Prevails, It's Time to Get Rich
Robert Kiyosaki Why the Rich Get Richer
When Pessimism Prevails, It's Time to Get Rich
by Robert Kiyosaki
Posted on Tuesday, July 22, 2008, 12:00AM
If you're serious about getting rich, now is the time. We've entered a period of mass-produced pessimism, when bad news is everywhere, and the best time to invest is when optimists become pessimists.
The Weird Turn Pro
Journalist Hunter S. Thompson used to say, "When the going gets weird, the weird turn pro." That's true in investing, too: At the height of every market boom, the weird turn into professional investors. In 2000, millions of people became professional day traders or investors in dotcom companies. Mutual funds had a record net inflow of $309 billion that year, too.
In an earlier column, I stated that it was time to sell all nonperforming real estate. My market indicator? A checkout girl at the local supermarket, who handed me her real estate agent card. She was quitting her job to become a real estate professional.
As a bull market turns into a bear market, the new pros turn into optimists, hoping and praying the bear market will become a bull and save them. But as the market remains bearish, the optimists become pessimists, quit the profession, and return to their day jobs. This is when the real professional investors re-enter the market. That's what's happening now.
Pessimism vs. Realism
In 1987, the United States experienced one of the biggest stock market crashes in history. The savings and loan industry was wiped out. Real estate crashed and a federal bailout entity known as the Resolution Trust Corporation, or the RTC, was formed. The RTC took from the financially foolish and gave to the financially smart.
Right on schedule 20 years later, Dow Industrials and Transports struck their last highs together in July 2007. Since then, nothing but bad news has emerged. In August 2007 a new word surfaced in the world's vocabulary: subprime. That October, I appeared on a number of television shows and was asked when the market would turn and head back up. My reply was, "This is a bad one. The worst is yet to come."
Many of the optimistic TV hosts got angry with me, asking me why I was so pessimistic. I told them, "The difference between an optimist and a pessimist is that a pessimist is a realist. I'm just being realistic."
As we all know, things only got worse in early 2008, with the demise of Bear Stearns and the Federal Reserve stepping in to save investment bankers. In February, many of those optimistic TV (and print) reporters became pessimists -- and when journalists become pessimists, the public follows. By March, mutual funds had a net outflow of $45 billion as investors fled the market.
Surviving the Bad Times
Back in 1987, as savings and loans closed and investors' stock and real estate portfolios were wiped out, my wife, Kim, and I were living in Portland, Ore. Many people were depressed and hiding from the truth. The following year, I said to Kim, "Now is the time for you to begin investing."
In 1989, she purchased a two-bedroom, one-bathroom house for $45,000, putting $5,000 down and earning $25 a month in positive cash flow. Today, she owns over 1,400 units and -- because more people are renting than buying -- she earns hundreds of thousands a year in positive cash flow.
The period from 1987 to 1995 was a rough one, even for the rich. In his book "The Art of the Comeback," my friend Donald Trump writes about being a billion dollars down at the time. Rather than give up, he kept on fighting to survive. He and I often talk about how that period was great for character development.
Two-Year Warning
I believe we're through the worst of the current bust. I know there will be more aftershocks, and the news will continue to be pessimistic for at least two more years, possibly until the summer of 2010.
But the upside to this is that it gives us at least two years to do our market research and find the next big stock or real estate bargain. Before buying, I strongly suggest you study, read books, and take courses on your asset of choice. If your choice is stocks, take a course on stocks or options. If it's real estate, take a course on real estate. Now is the time to learn; not only will you know more than the average person and be in a good position when the market turns, but you'll also meet people with a similar mindset.
You have about two years to get into position. Opportunities this big don't come along often, so this is your time to get rich.
Climbing Bulls, Flying Bears
Am I optimistic for the long-term? Absolutely not. I still believe we're due for the mother of all market crashes, and that the U.S. economy is running on borrowed time -- and I do mean borrowed. I think most baby boomers are in serious financial trouble, and that oil will climb above $200 a barrel. Inflation will also increase, causing more pain for the poor and middle class.
The Fed is flooding the market with nearly a trillion dollars of liquidity, which is why I believe gold under $1,200 an ounce and silver under $30 an ounce are bargains. Gold and silver should peak and decline before 2020, completing two 20-year cycles. My exit is to sell silver around 2015. I plan to hold onto gold, income-producing real estate, oil wells, and stocks.
Most of us know the bull climbs slowly up the stairs, but the bear jumps out the window. I believe the bull is still climbing the stairs, and the bear hasn't jumped yet. But rest assured that it will.
481 Comments
http://finance.yahoo.com/expert/article/richricher/95198
When Pessimism Prevails, It's Time to Get Rich
by Robert Kiyosaki
Posted on Tuesday, July 22, 2008, 12:00AM
If you're serious about getting rich, now is the time. We've entered a period of mass-produced pessimism, when bad news is everywhere, and the best time to invest is when optimists become pessimists.
The Weird Turn Pro
Journalist Hunter S. Thompson used to say, "When the going gets weird, the weird turn pro." That's true in investing, too: At the height of every market boom, the weird turn into professional investors. In 2000, millions of people became professional day traders or investors in dotcom companies. Mutual funds had a record net inflow of $309 billion that year, too.
In an earlier column, I stated that it was time to sell all nonperforming real estate. My market indicator? A checkout girl at the local supermarket, who handed me her real estate agent card. She was quitting her job to become a real estate professional.
As a bull market turns into a bear market, the new pros turn into optimists, hoping and praying the bear market will become a bull and save them. But as the market remains bearish, the optimists become pessimists, quit the profession, and return to their day jobs. This is when the real professional investors re-enter the market. That's what's happening now.
Pessimism vs. Realism
In 1987, the United States experienced one of the biggest stock market crashes in history. The savings and loan industry was wiped out. Real estate crashed and a federal bailout entity known as the Resolution Trust Corporation, or the RTC, was formed. The RTC took from the financially foolish and gave to the financially smart.
Right on schedule 20 years later, Dow Industrials and Transports struck their last highs together in July 2007. Since then, nothing but bad news has emerged. In August 2007 a new word surfaced in the world's vocabulary: subprime. That October, I appeared on a number of television shows and was asked when the market would turn and head back up. My reply was, "This is a bad one. The worst is yet to come."
Many of the optimistic TV hosts got angry with me, asking me why I was so pessimistic. I told them, "The difference between an optimist and a pessimist is that a pessimist is a realist. I'm just being realistic."
As we all know, things only got worse in early 2008, with the demise of Bear Stearns and the Federal Reserve stepping in to save investment bankers. In February, many of those optimistic TV (and print) reporters became pessimists -- and when journalists become pessimists, the public follows. By March, mutual funds had a net outflow of $45 billion as investors fled the market.
Surviving the Bad Times
Back in 1987, as savings and loans closed and investors' stock and real estate portfolios were wiped out, my wife, Kim, and I were living in Portland, Ore. Many people were depressed and hiding from the truth. The following year, I said to Kim, "Now is the time for you to begin investing."
In 1989, she purchased a two-bedroom, one-bathroom house for $45,000, putting $5,000 down and earning $25 a month in positive cash flow. Today, she owns over 1,400 units and -- because more people are renting than buying -- she earns hundreds of thousands a year in positive cash flow.
The period from 1987 to 1995 was a rough one, even for the rich. In his book "The Art of the Comeback," my friend Donald Trump writes about being a billion dollars down at the time. Rather than give up, he kept on fighting to survive. He and I often talk about how that period was great for character development.
Two-Year Warning
I believe we're through the worst of the current bust. I know there will be more aftershocks, and the news will continue to be pessimistic for at least two more years, possibly until the summer of 2010.
But the upside to this is that it gives us at least two years to do our market research and find the next big stock or real estate bargain. Before buying, I strongly suggest you study, read books, and take courses on your asset of choice. If your choice is stocks, take a course on stocks or options. If it's real estate, take a course on real estate. Now is the time to learn; not only will you know more than the average person and be in a good position when the market turns, but you'll also meet people with a similar mindset.
You have about two years to get into position. Opportunities this big don't come along often, so this is your time to get rich.
Climbing Bulls, Flying Bears
Am I optimistic for the long-term? Absolutely not. I still believe we're due for the mother of all market crashes, and that the U.S. economy is running on borrowed time -- and I do mean borrowed. I think most baby boomers are in serious financial trouble, and that oil will climb above $200 a barrel. Inflation will also increase, causing more pain for the poor and middle class.
The Fed is flooding the market with nearly a trillion dollars of liquidity, which is why I believe gold under $1,200 an ounce and silver under $30 an ounce are bargains. Gold and silver should peak and decline before 2020, completing two 20-year cycles. My exit is to sell silver around 2015. I plan to hold onto gold, income-producing real estate, oil wells, and stocks.
Most of us know the bull climbs slowly up the stairs, but the bear jumps out the window. I believe the bull is still climbing the stairs, and the bear hasn't jumped yet. But rest assured that it will.
481 Comments
http://finance.yahoo.com/expert/article/richricher/95198
Subscribe to:
Posts (Atom)