Why selling is a common problem

Why selling is a common problem

Published: 2009/02/04

Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.

* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.

So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.


Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.

http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html

The importance of having a good business plan

Wednesday February 4, 2009

The importance of having a good business plan
RSM EYE - By Girish Ramachandran

THE business plan remains the cornerstone in determining whether you can attract potential funders and investors.
However, statistics show that only 5% of business plans are read beyond the executive summary. And only 10% of proposals that pass the initial screening qualify for due diligence and receive funding.
That means on average, only six in 1,000 business plans get the funding they ask for.
Different types of funders look at business plans from different perspectives.
These individuals seek out businesses with good potential and sound strategies that will provide high financial returns, coupled with an option to exit the venture.
The 3Fs (founder, friends and family), angel investors and venture capitalists observe the highest risk levels as they gain entry into the business at its seeding points.
In contrast, to manage their risks, equity investors and commercial banks are more likely to look for entry points between the growth and maturity stages of the business.
The implication for entrepreneurs is that they must customise their business plan according to whether they are seeking funding from a bank or a venture capital fund.
A good business plan provides a clear roadmap to your corporate destination.
It may be your most important communication tool to investors. It will include a marketing plan, a management plan and financial projections for five years.
The financial projections are an integral part of the plan, since nothing speaks louder to bankers than numbers.
The marketing plan provides an overview of the business, its location and your marketing strategies. The management plan basically details the credentials and experience of those in the decision-making capacity.
To sum it up, you have to be prepared. Many people are unsure of what the bank can or cannot do for you, and why. Bankers expect you to know the basics before you walk in their door. Do your homework and set realistic assumptions.
A bank that wants to start a relationship with you will read your plan to know who you are and what you plan to do. Some things they are likely to look for:

The business background
You will have more credibility if you’ve had experience in the business and field you’re entering.
Attempt to show an overview of the market and highlight your advantages of your business over its competitors.
The business plan should detail strategies for breaking into the industry and show good potential for demand and further expansion.
People are an all important factor in a business, so describe the management team with short biographies of main managers.

Your financial projections
Bankers expect to see the three main financial statements – income statement, balance sheet and cash flow – projected monthly for the first year, and annually for four years after that. The cash flow is imperative.
These financial projections give bankers a sense of your profit and cash flow if they provide you with a loan.
You need to prove that you will have more than enough cash to cover the monthly loan repayments and any overheads.
The financial projections should mirror that of reality as much as possible. This implies that if you are able to obtain actual numbers (rents, insurance, equipments quotes and prices), use the actual numbers.
Some bankers like to say if they see too many zeros, they know the numbers aren’t reliable.
Take note, if you underestimate capital or operational expenses, you may end up overspending in the future and eating into your working capital.

Realism in your financials
Granted, you can’t really forecast your income or expenses. The temptation is to use over-optimistic assumptions to show strong projections.
That may work to your disadvantage in the long run. Over-optimism on your part will definitely come face to face with plenty of doubt on the banker’s.
The trick is to use conservative assumptions but still show strong projections. This is because bankers will compare your projections to industry reports on average performance of different kinds of businesses.
If you project margins way better than those, you’d better be able to explain why or how you’re going to accomplish that.
·Local alignment in the financials
Amounts have to logically match so that the amount you ask to borrow matches the financial gaps in your plan.
For example, don’t try to show you don’t need any money, because if you didn’t, you wouldn’t be borrowing. Don’t show that you need much more money than you can afford to borrow. Your cash flow should be realistic and show how much money you need and why.

A complete plan
A good banker will also expect to see a readable plan from executive summary through to the end. It should cover what you sell, your market, your company background, and specific dates and activities.
So the business plan is a two-way test.
Although most banks will require a plan, not all of them will really process the plan. Be grateful if they do. That means they are interested in your business and want to build a long-term relationship.

Girish Ramachandran is executive director of RSM Strategic Business Advisors. He is of the opinion that failure to plan is most certainly planning to fail. Feedback to this article is welcome. Please email starbiz@thestar.com.my

http://biz.thestar.com.my/news/story.asp?file=/2009/2/4/business/3188027&sec=business

High returns not sustainable in global crisis: Singapore GIC

Agence France-Presse - 2/2/2009 8:47 AM GMT

High returns not sustainable in global crisis: GIC

High returns obtained for 20 years by one of Singapore's sovereign wealth funds will not be seen during the global credit crisis, the firm's deputy chairman said in remarks published Monday.
The Government of Singapore Investment Corp (GIC), one of the world's largest sovereign wealth funds, announced in September that its nominal annual rate of return over the past 20 years was 7.8 percent in US dollar terms.
However, deputy chairman Tony Tan Keng Yam said the firm, which has bailed out international financial institutions hit by the economic turmoil, said the economic environment had made such profits very unlikely.
"I do not expect GIC or any other large investor to be able to reproduce the type of high returns which GIC was able to deliver in the last 20 years," Tan was quoted as saying in an interview with the Straits Times.
"It's now a completely different economic and financial environment which all investors, all companies have to deal with -- and this will last for quite some time," Tan said.
In late 2007 and early last year GIC injected billions of dollars into Swiss bank UBS as well as US banking giant Citigroup, which suffered massive losses from US subprime, or higher-risk, mortgage investments.
Subprime troubles later evolved into the worldwide financial slowdown.
Governments and central banks have stepped in with stimulus packages and other measures to confront the crisis. If these measures work, the world's economy could start to recover later this year, Tan said in the interview.
A recession that lasts into 2010, however, could be a sign of "systemic change in the world economy," he said.
In a weekend speech to the World Economic Forum of global leaders in Davos, Switzerland, Tan said sovereign wealth funds and other institutional investors will play an important role in the stabilisation and eventual recovery of asset markets.
"Such institutions, with their long-term investment horizons could be important sources of demand for undervalued assets.
"This would contribute to stabilising financial and household sector losses, thereby helping to restore both credit creation and demand in the real economy," said Tan, whose speech was released by GIC.

http://news.my.msn.com/regional/article.aspx?cp-documentid=2315533

2009 MARKET OUTLOOKS

Ignis: 'Double-digit returns by the end of next year are entirely achievable'
Increasingly attractive valuations in the stock market contrast with poor returns available from bank deposits, says asset manager.

Last Updated: 4:40PM GMT 19 Dec 2008
IGNIS ASSET MANAGEMENT – 2009 MARKET OUTLOOKS

UK: Ralph Brook-Fox, manager, Ignis UK Focus Fund
“The UK stock market over the next three months should trough as the poor economic data continues to flood in. Earnings estimates will continue to fall, which they must do before we can be confident that expectations have fully adjusted.
“Markets are forward-looking, however, and once the recovery gets under way, I expect the UK market to perform respectably. Indeed, given increasingly attractive valuations, I believe double-digit returns by the end of next year are entirely achievable, especially given the increasingly poor returns available from bank deposits.
“Investors will need to be brave to avoid missing the boat and we are looking to start rotating into more cyclical names early next year, as defensive stock valuations appear increasingly stretched. Rate cuts and falling inflation favour a move into the consumer sector, but with no guarantee that consumers will spend and not save their money, stock selection will be key. Selectively, we believe clothing retailers will do well but are steering clear of stocks related to the housing market where the overhang of negative equity and limited credit availability will drag for some years.
“Rotating into more cyclical stocks is not an immediate priority, however, as we expect the news flow in the first quarter to be poor. There is no point getting beaten-up by the market when you know the punches are coming. The middle of that gloomy period, however, could be an opportune time to start looking at companies that will do well for the rest of the year.”

Emerging Markets: Bryan Collings, managing partner, HEXAM Capital
“We believe emerging markets will come out of the global crisis stronger than developed markets. From a global perspective emerging markets still exhibit the best fundamentals from almost every angle. Corporate health is good and balance sheets are generally robust, significantly more so than in developed markets.
“2009 will be the year in which deflation plagues the developed markets. Most of these would, in their current state, fail to meet the original Maastricht criteria for entry into the euro. Many emerging markets, in contrast, would pass the tests with relative ease. Deflation is, however, unlikely to occur in emerging markets, where we see inflation coming in around 4pc per annum over the next three years.
“Emerging markets are particularly compelling in terms of valuations. At just seven times earnings, stocks are insanely cheap and have been brutally oversold, down almost 60pc year-to-date as a whole. Given this, it is well worth remembering that the bounce in the first five days after the market hits the bottom is usually vicious and can reclaim over 40pc of previous losses. This is a distinct possibility in 2009.
“Fundamentally, the next two quarters are likely to see bearish macro and micro news, with slowing economic and earnings growth. This clearly poses a threat to any sustained equity market rallies, if only because of the bearish mood of the market. The bad news, however, has been more than priced into emerging markets and we remain positive for 2009 given current levels.”

Corporate Bonds: Chris Bowie, head of credit, Ignis Asset Management
“Investment grade credit has never been better value – ever. Forced sellers of corporate bonds have created a situation where investors can achieve comfortable double-digit yields on household names. Sainsbury’s, for instance, has a 14pc yield while investors can secure 16pc with Barclays, HBOS or RBS. Aviva is yielding 15pc and Standard Life 12pc. Even away from financials and retailers, there are yields of 10pc with the likes of Firstgroup, BT and Imperial Tobacco.
“For perspective, a typical bank account would take seven years to achieve a return equal to the annual yield you can buy on a Sainsbury’s secured bond. Equities look more attractive, with dividend yields rising sharply, but this is because capital values are plunging over earnings fears and we believe companies will be cutting dividends in 2009. The outlook for property next year is equally bad.
“Bonds are not risk-free of course and the default risk is undoubtedly higher than in recent years. Some companies will fail in 2009 but these are unlikely to include high street supermarket chains or banks with a government guarantee for the next three years. This risk is more than priced into yields already.
“Inflation is, of course, the enemy of bonds, but in the near term the risk is deflation as a result of the drop in economic activity. Deflation may be destructive to the real economy, but it is a major positive for bonds.
“Admittedly, the lack of liquidity in corporates means that it is difficult to get out of the asset class cheaply, so a corporate bond investment has to be for the long-term, at least for a year. Corporate bonds have, however, been battered to such an extent in the last 18 months that this is the best buying opportunity in several generations.”

Europe: Adrian Darley, head of European equities, Ignis Asset Management
“After an incredibly volatile 2008, it is already apparent what many of the investment issues will be for 2009. At a stock level it is clear that consensus earnings expectations are still too high for many companies. The key question for investors is not where earnings will bottom but what is already priced into company valuations.
“There is a danger that a myopic focus on how bad 2009 may be, could lead to similar mistakes made in 2003. This resulted in a focus on difficult short-term news flow and investors missing out when European equity markets subsequently rose more than 37pc in just eight months – based partly on falling interest rates. This is not to underestimate the global challenges many companies presently face. It does, however, highlight that, as in previous cycles, policy-makers are reacting fast. This time they are spending money and cutting interest rates more aggressively than ever before. The credit crunch will slow the speed at which this feeds through into economic growth, but the policy-makers’ actions will undoubtedly make a difference. There have also been recent examples of shares rising significantly on so-called bad profit warnings, which is a clear sign that investors are starting to see through the fog.
“Predicting investor behaviour will be important heading into 2009 and it appears most investors will enter the year positioned defensively, with high cash levels and overweight positions in telecoms and pharmaceuticals. Any shift in this stance could trigger aggressive sector rotation, as we saw in 2003. At this stage it makes sense to enter 2009 with a more balanced and less defensive portfolio than was appropriate in 2008. This means slowly increasing cyclical exposure through financial and industrial stocks, with individual stock selection vitally important. After such large stock market falls there are always excellent investment opportunities.”

Asia Pacific: Andrea McNee, CIO international equities, Ignis Asset Management
“The economic news coming out of Asia is deteriorating quickly and this is likely to continue into 2009. The impact of global deleveraging has only just hit Asia’s real economies and it will take time to work its way though. Many Asian governments are cutting interest rates and bringing in fiscal stimulus packages, while commodity prices are lower than they were. These are all positives for the region. There is a question mark, however, over whether consumers, in a time of rising unemployment and global uncertainty, are in the mood to spend the extra money in their pockets.
“The main risk is the corporate earnings outlook. Earnings estimates for 2009 are still too high and have further to fall, with downgrades likely to continue. This will abate at some point and there are positive signs emerging, with analysts’ forecasts becoming more consensual and volatility coming down from an extremely high level. It is also worth noting that certain firms will profit from the downturn. Much of their competition could be wiped out and there is money to be made from identifying strongly-managed businesses able to ride out the current slump. Also, for Asia, unlike the West, this is cyclical rather than structural and Asia has the fiscal muscle and healthy foreign exchange reserves to cushion the impact of a deteriorating environment.
“The key for markets in 2009 will be visibility. Once markets see clear evidence that there is an economic recovery on the way and that company earnings could rise, there is the potential for a significant rally. Calling the start of this is difficult although visibility should improve in the second half of the year. It is unlikely we have seen the bottom just yet, with the upswing in mid-December looking like a classic bear market rally. Equally, now is not the time to sell out of Asia.”

Multi-Manager View: Simon Mungall, partner, Maia Capital
“UK retail investors seeking an income in 2009 are not spoilt for choice. The Bank of England’s base rate is at 2pc and is likely to be cut further. UK equity income funds, the traditionally popular alternative for fund investors, flatter to deceive.
“UK equity income funds perform well in an environment in which equity issuers can continue to pay dividends. Last year, many investors claimed bank stocks looked good value on the basis of their dividend yields. This, however, assumed that banks would continue to be able to pay their dividends and, at some point, the price of equity in banks would rise to reflect this. In fact, the price of bank stocks was a better guide to the future than their dividends, which are, of course, at the discretion of management.
“Coupon income on conventional bonds is contractually guaranteed and failure to pay it puts the issuer in default. In the event of a default, the claims of a corporate bond investor are senior to the equity holder, meaning the bond investor gets paid first.
“Corporate bonds can provide an attractive yield in a safer part of the capital structure than equities. There is also a medium-term prospect of capital gains if and when corporate bond valuations return to par. Not only is the corporate bond market offering an attractive income, it is currently offering rates of return more commonly associated with the equity market, and importantly at a lower level of risk.
“Economic fundamentals will be undoubtedly difficult in 2009 and financing will remain scarce and expensive. Consequently corporate defaults will rise significantly and will probably continue at high levels until well into 2010. Proper issuer analysis is therefore essential to successful corporate bond investing, and even funds run by the best corporate bond managers will suffer defaults in a market of this nature. In our experience, however, the default rates of these higher quality funds have been less than a quarter of the number of defaults in the market as a whole. The message for 2009 is, therefore, to choose carefully or entrust your money to specialist managers who will do it for you and that corporate bond funds could be an attractive option for 2009.”

US: Terry Ewing and Alison Porter, co-managers, Ignis American Growth Fund
“The downturn in the US stock market has been consistent with previous bear markets, but the speed of the fall has been very different. Even during the much milder recession of 2001, the market took two years to reach a bottom. The current downturn is less than a year old.
“US equity markets traditionally fare better under a democratic administration. The economy is, however, the more important factor and President-elect Obama will come to power following one of the worst quarters of economic performance in US history. US economic growth is likely to fall to between -2pc and -4pc in the first three months of the year and, as such, earnings expectations for US companies will have to come down significantly from current levels.
“Obama has, however, already impressed Wall Street with his economic appointments and a more strategic approach to dealing with the financial crisis will engender greater confidence. His approach to foreign affairs could also restore the standing of the US abroad in the longer term, which ultimately will help the valuation of the market by reducing risk premium.
“Additionally, US policy-makers have been quick to act in the face of the downturn. They announced more stimulus packages in the last six months than the Japanese government did in the first eight years of the Japanese slowdown. Base rates are likely to be cut to 0pc – part of the US Federal Reserve’s quantitative easing that appears to know no bounds.
“Following his forthcoming stimulus package, Obama is likely to bring in direct and immediate tax cuts in addition to Roosevelt-like infrastructure building plans aimed at getting Middle America back to work. This will aid the economy in the second quarter of the year and will be an investment theme for the Ignis American Growth Fund throughout 2009, as certain companies will benefit from infrastructure development.
“Deflation will also be a theme in 2009 with certain companies well-positioned to benefit from falling prices, either because of their balance sheet strength and ability to pay significant dividends, or because lower commodity prices will shrink their cost base. Increasing consolidation in the airline, insurance and retail sectors should also benefit those companies well-positioned to take market share from competitors, and therefore profit from a stronger pricing environment due to restricted capital flows.”

http://www.telegraph.co.uk/finance/personalfinance/investing/shares/3851888/Ignis-Double-digit-returns-by-the-end-of-next-year-are-entirely-achievable.html

WEF 2009: Global crisis 'has destroyed 40pc of world wealth'

WEF 2009: Global crisis 'has destroyed 40pc of world wealth'

The past five quarters have seen 40pc of the world's wealth destroyed and business leaders expect the global economic crisis can only get worse.

By Edmund Conway in Davos
Last Updated: 5:42AM GMT 29 Jan 2009

Steve Schwarzman, chairman of private equity giant Blackstone, said an "almost incomprehensible" amount of cash had evaporated since the financial crisis took hold.
"Business will be very different," he added.
His comments came on a day of the World Economic Forum characterised by the gloom of its participants and warnings that the crisis will endure for some time. News Corp chief executive Rupert Murdoch kicked off the meetings by warning that the atmosphere was worsening – despite global economic confidence plumbing the lowest depths on record.
"The crisis is getting worse," he said. "It's going to take drastic action to turn it around, if it can be turned around, quickly. I believe it will take a long time."
Executives participating in an economic brainstorming session said that despite the trauma caused by the economic and financial problems, another crisis at some point in the future was inevitable.
Sir Howard Davies, director of the London School of Economics and a former Bank of England policymaker said: "The outlook is pretty grim. Things are not good and business surveys are coming out showing they're getting even worse."

http://www.telegraph.co.uk/finance/financetopics/davos/4374492/WEF-2009-Global-crisis-has-destroyed-40pc-of-world-wealth.html

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Australia faces worse crisis than America

Australia faces worse crisis than America

By Ambrose Evans-Pritchard, International Business EditorLast Updated: 3:24PM BST 22 Sep 2008
Comments 51 Comment on this article

Many fear the economic party in Australia will end badly
The world's financial storm has swept through Australia and New Zealand this week amid mounting signs of contagion across the Pacific region.
Financial shares were pummelled in Sydney on Tuesday after investor flight forced National Australia Bank (NAB) to slash a £400m bond sale by two thirds. The retreat comes days after the Melbourne lender shocked the markets by announcing a 90pc write-down on its £550m holdings of US mortgage debt, an admission that it AAA-rated securities are virtually worthless. In New Zealand, Guardian Trust said it was suspending withdrawals from its mortgage fund owing to "liquidity difficulties in the market".

Global economy is at a danger point
More Ambrose Evans-Pritchard

Hanover Finance - the country' third biggest operator - last week froze repayments to investors. The company said its "industry model has collapsed" as the housing market goes into a nose dive. Some 23 finance companies have gone bankrupt in New Zealand over the last year.
It is now clear that the Antipodes are tipping into a serious downturn. Australia's NAB business confidence index fell to its lowest level in seventeen years in June. New Zealand's central bank began to cut interest rates last week on fears that the economy may have contracted in the second quarter, and is now entering recession. Housing starts slumped 20pc in June to the lowest since 1986.
Gabriel Stein, from Lombard Street Research, said Australia could prove vulnerable once the global commodity cycle turns down. It has racked up a current account deficit of 6.2pc of GDP despite enjoying a coal, wheat, and metals boom, effectively spending its resources bonanza in advance. Household debt has reached 177pc of GDP, almost a world record.
"It is amazing that in the midst of the biggest commodity boom ever seen they have still been unable to get a current account surplus. They have been living beyond their means for 10 years. What worries me is that productivity growth has been very low: they have coasting after their reforms in the 1990s," he said.
Australia's Reserve Bank has had to grapple with vast inflows of Asian capital, especially Japanese money fleeing near zero rates at home. Short of imposing currency controls, it would have been almost impossible to stop the inflows.
"The easy money went straight into real estate," said Hans Redeker, currency chief at BNP Paribas.
"Australia will now have to generate 4pc of GDP to meet payments to foreign holders of its assets," he said. This is twice as high as the burden faced by the US.
Both the Australian and New Zealand dollars have fallen hard in recent days and now appear to be breaking down through key technical support against major currencies, including the US dollar. "The Aussie is going down, big time," said Mr Redeker.
The picture is darkening across the Pacific Rim. The Bank of Japan's deputy governor, Kiyohiko Nishimura, said its economy may now be falling into a "technical recession". Household income dropped 2.1pc in June compared to a year earlier and manufacturers are the gloomiest since the deflation crunch in 2003.
The decision by National Australia Bank to make drastic provisions on its US mortgage debt could have ramifications in the US itself. It opted for a 100pc write-off on a clutch of "senior strips" of collateralized debt obligations (CDO) worth £450m - even though they were all rated AAA. No US bank has admitted to such fearsome loss rates.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2794032/Australia-faces-worse-crisis-than-America.html

Australia steps up recession fight with new stimulus plan and interest rate cut

Australia steps up recession fight with new stimulus plan and interest rate cut
The Australian government has unveiled a second multi-billion dollar stimulus package that it hopes will lift the country out of a deepening slowdown and protect-against a full-blown recession.

By Bonnie Malkin in Sydney
Last Updated: 8:37AM GMT 03 Feb 2009

Kevin Rudd, the prime minister, announced the $42bn plan just hours before the country's central bank, citing the grimmest global outlook in many years, cut interest rates by 1 per cent to 3.25 per cent - its lowest level in 45 years.
The stimulus package, which includes $28bn for infrastructure projects and school improvements, will send the budget into the red for the first time in nearly a decade.
Mr Rudd's government is mirroring the action of most across the world as politicians increase their collective efforts to prevent what's already a deep and global downturn getting worse.
The package comes on top of one launched late last year worth A$10.4 billion ($7.4 billion) and underscores the threat to Australia's resources-based economy, which has shuddered to a near halt since the worldwide financial turmoil began.
Many analysts believe the economy will enter a recession in the next quarter and not start to show signs of recovery until the end of the year. Mass job losses are expected, especially in the vulnerable mining sector.
"The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionaru forces coming from abroad, " Glenn Stevens, the Governor of Australia's central bank said in explaining the decision to lower the key interest rate to 3.25pc.
The news prompted the Australian dollar to rise against the US dolar and saw the benchmark S&P/ASX 200 Index clim almost 1pc to 3522.6.
Those gains were seem across Asian stock markets as news of Australia's new measures were added to by Japanese plans to buy shares held by Japanese banks. In Tokyo, the Nikkei 225 was up 2.3pc on the prospect that the Bank of Japan would help Japanese banks improve the state of their balance sheets. It said it would purchase up to one trillion yen worth of stocks through April 2010.
The Australian initiatives, spread over four years, include building thousands of new houses and school rooms, and environmentally friendly measures such as providing householders with free home roof insulation. It also features cash bonuses to low and middle-income earners that the government hope will be ploughed back into the economy, rather than saved.
In a move aimed at getting Australians to spend some money, more than half Australia's population of 21 million will be eligible for A$950 ($600) tax bonuses or grants. The spending will plunge the annual budget into a A$22.5 billion ($14.2 billion) deficit — 1.9 percent of gross domestic product — for the current fiscal year ending June 30, the prime minister said.
"Nobody likes being in deficit and I don't like being in deficit at all," Mr Rudd said. "This is not a question of choice. This is what we are required to do."

http://www.telegraph.co.uk/finance/markets/4443093/Australia-steps-up-recession-fight-with-new-stimulus-plan-and-interest-rate-cut.html

Let banks fail, says Nobel economist Joseph Stiglitz

Let banks fail, says Nobel economist Joseph Stiglitz
The Government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice, according to Joseph Stiglitz, the Nobel Prize-winning economist.

By Ambrose Evans-Pritchard in Davos
Last Updated: 8:29AM GMT 02 Feb 2009
Comments 40 Comment on this article

Let banks fail, says Nobel economist Joseph Stiglitz
Professor Stiglitz, the former chair of the White House Council of Economic Advisers, told The Daily Telegraph that Britain should let the banks default on their vast foreign operations and start afresh with new set of healthy banks.
"The UK has been hit hard because the banks took on enormously large liabilities in foreign currencies. Should the British taxpayers have to lower their standard of living for 20 years to pay off mistakes that benefited a small elite?" he said.
"There is an argument for letting the banks go bust. It may cause turmoil but it will be a cheaper way to deal with this in the end. The British Parliament never offered a blanket guarantee for all liabilities and derivative positions of these banks," he said.
Mr Stiglitz said the Government should underwrite all deposits to protect the UK's domestic credit system and safeguard money markets that lubricate lending. It should use the skeletons of the old banks to build a healthier structure.
"The new banks will be more credible once they no longer have these liabilities on their back."
Mr Stiglitz said the City of London would survive the shock of such a default because it would uphold the principle of free market responsibility. "Counter-parties entered into voluntary agreements with the banks and they must accept the consequences," he said.
Such a drastic course of action would be fraught with difficulties and risks, however. It would leave healthy banks in an untenable position since they would have to compete for funds in the markets with state-run entities.
Mr Stiglitz's radical proposal is a "Chapter 11" scheme for households to allow them to bring their debts under control without having to go into bankruptcy. "Families matter just as much as firms. The US government can borrow at 1pc so why can't it lend directly to poor people for mortgages at 4pc. ," he said.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/4424418/Let-banks-fail-says-Nobel-economist-Joseph-Stiglitz.html

How she owed more than her home was worth?

No Good Deed Goes Unpunished
by Laura Rowley

Posted on Wednesday, January 28, 2009, 12:00AM

Eve Pidgeon, communications director for a nonprofit credit counseling service in Michigan, says she'll never forget the day she realized she owed more than her home was worth.
"I was at work, saying, 'Can you believe I can't refinance my house?'" recalls Pidgeon, who had made timely payments on her 30-year mortgage for nine years and has a credit score over 800. "Then a [colleague] said, ‘You're upside down -- like our clients.' I thought, ‘My God -- I am?' I thought that happened to people who had $50,000 on credit cards and refinanced into adjustable-rate mortgages."
A Canadian immigrant who became a U.S. citizen, Pidgeon bought her home in 1999. Her mortgage broker said she qualified for a $240,000 loan -- on her then-salary of $33,000 per year and her husband's volatile income as a freelance photographer.
Passing Up the Big, Fabulous House
"Calculations for insurance, escrow for property taxes -- none of that was considered," recalls Pidgeon, who has two children. "Of course we wanted a big, fabulous house, but when I crunched the numbers, I thought, 'If the cost of any one thing in our [budget] goes up, we're going to be in a deficit every month.' It put a lot of pressure on my marriage because my husband said, ‘You're terrible at math; this is a professional who knows what he's doing, and we should get this house.'"Instead they bought a quaint 1918 Victorian for $135,000. Pidgeon, who eventually divorced and navigated a job layoff without ever missing a mortgage payment or accumulating high-interest credit card debt, has refinanced twice -- from 8 percent to 6.8 percent, and then again to 6.3 percent, always locking in for 30 years. She wanted to refinance again when rates slipped under 5 percent, but widespread foreclosures have depressed her home's value; comparable dwellings are selling at or below the $117,000 she still owes.
Pidgeon is emblematic of the financial insecurity afflicting millions of Americans who are being punished despite doing all the right things with their money. Hard work, steady savings, and thoughtful sacrifices haven't protected their jobs, nest eggs, or home values from an economy twisted by fraud and stupidity, coldly indifferent to responsibility and productivity.
Homeowners Underwater
By one estimate, 12 million homeowners -- one in six -- are underwater on their mortgages. In 20 major metropolitan areas, home prices dropped an average 18 percent in November compared to the year-earlier period, according to the S&P/Case-Shiller Index, released earlier this week.
Unemployment rose in all 50 states in December and surpassed 10 percent in two -- Rhode Island and Pidgeon's home state of Michigan. Moreover, in the year following October 2007 -- the stock market's peak -- more than $1 trillion of stock held in 401(k)s and other defined-contribution plans evaporated, according to the Center for Retirement Research at Boston College.
"The new insecurity doesn't look like the old insecurity -- grainy Dorthea Lange photos of Depression-era men and women, their weathered faces projecting despair and helplessness," writes Yale political scientist Jacob Hacker in his book ‘The Great Risk Shift'. "Those who experience it have homes, cars, families, degrees. They've usually tasted the fruits of success, if sometimes only fleetingly. They very rarely end up on the streets or in shelters. For most, insecurity is a private experience, hidden away behind closed doors, felt in quiet despair."
A Fair Question in Unfair Times
Consider a reader's comment last week following my column on the difference between optimism and magical thinking. The poster wrote that he was a computer programmer who had been employed for 25 years, worked hard, lived frugally, and was now laid off. His 401(k) had lost half its value and his home equity had declined sharply.
"Please tell me again why you believe I should be optimistic?" he wrote. "Is it that you expect folks (suckers) in my situation to get up, brush off, and once again toil to accumulate wealth that will be seized from me in one way or another?"
That's a fair question in unfair times. At the very least, we can mitigate the risks of having our hard-earned cash seized in the future by asking ourselves a series of questions:
1. Do you live within your means? How long could you live without your current income if you lost your job? Do you know exactly how much money comes in and where it goes each month? What areas of your budget could you slash immediately? What expenses can you cut back for the next year and reallocate toward a cash cushion?
2. If you consistently ratchet up your lifestyle to match rising income, can you divert half of any raise, bonus, or other increase you receive into savings instead?
3. Have you considered a strategy to obtain severance or other benefits in the event you're laid off? How up-to-date is your resume and network of contacts, and what would be the first five steps you would take to find a new position? Have you investigated your options for continuing or obtaining health insurance?
4. If you are living on two incomes, how can you shift your lifestyle and spending to rely on one for needs and the other for wants?
5. How well do your insurance policies protect you and the people you love? Have you shopped around for the lowest premiums?
6. If you carry high-interest, revolving debt, what is your plan for eliminating it, and how long will it take?
7. Do you have written goals -- short-, medium- and long-term -- for your money that reflect what you value most, with specific dollar amounts and time frames? Do you know how fast the cost of your goal is rising?
8. Do you understand how your money is invested, how much risk you're taking, and what expenses and fees you are paying? Do you understand the tax implications of your financial decisions (and your geographic choices)? If not, are you making an effort to learn about these critical areas of your portfolio?
9. Are you taking good care of your health to reduce the risk of financially devastating medical costs?10. Do you give as much energy to your family and friends as you do to your finances? (Losing your shirt is a lot more painful when you go through it alone.)
The Risks We Face
"Studies consistently suggest that we are good at some kinds of risk assessments and very bad at others," Hacker writes. "And unfortunately, the kinds of risks that we face today -- diffuse, interwoven, mounting, uncertain -- are precisely those we are most likely to overlook. Economic losses for families are often like system failures in engineering -- they cascade from seemingly small events into major crises. Yet few of us worry much about the small events that can set off the chain."
Pidgeon says she never imagined she'd be in her first home nearly a decade after she bought it, but she is focused on the positive. "If I could [refinance], I could gain a few hundred dollars in my monthly surplus and use it to stimulate the sagging local economy," she says. "But my priority was to move to the States and make the most of my education and my career, and raise a wonderful family in a safe, comfortable, and loving environment. Whether I'm paying 6.3 percent or 4.5 percent, I feel very proud that I accomplished that."

http://finance.yahoo.com/expert/article/moneyhappy/137398;_ylt=ArMJDpteaSKgQNT6eQGJXB27YWsA

How Wall Street Continues To Doom Itself

How Wall Street Continues To Doom Itself
Rick Newman
Friday January 30, 2009, 12:29 pm EST

We've arrived at an ah-ha moment.
Virtually everybody who butters their own bread is outraged that Wall Street, which is becoming a de facto government agency thanks to billions in bailout money, found $18.4 billion in bonuses for bankers who nearly wrecked the world's financial system in 2008. President Obama's criticism - "shameful" - is mild compared to what many of us think.
The bankers are bellyaching about a 44 percent decline in bonuses from 2007 levels. That's like complaining about being served a 40-ounce porterhouse instead of a 70-ounce one.
[See why "Wall Street talent" is an oxymoron.]
Here's a bit more perspective: Charles Payne, CEO of the research firm Wall Street Strategies, points out that in 1985, Wall Street bonuses totaled $1.9 billion. The average recipient got $13,970. Since 1985, inflation has run 97 percent in total, according to the Bureau of Labor Statistics. That means that something worth $1 in 1985 would be worth $1.97 today. So follow the math:

Wall Street bonus pool in 1985: $1.9 billion
Value in 2008, if indexed for inflation: $3.75 billion
Actual 2008 bonus pool: $18.4 billion
Amount by which bonus pool exceeded inflation: 490 percent

Average Wall Street bonus, 1985: $13,970
Value in 2008, if indexed for inflation: $27,580
Actual average bonus, 2008: $112,000
Amount by which average bonus exceeded inflation: 406 percent

So pay for top Wall Streeters has risen 4 to 5 times as much as the rate of inflation since 1985. Of course those bankers are worth it, because of all the great things they've done for America during that time, like engineer the Long-Term Capital Management meltdown in 1998, the tech bubble that burst in 2001, the housing bubble that's still bursting, a credit freeze that's producing hypothermia at hundreds of real companies that actually make stuff, and the near collapse of the financial markets.
[See why it was a good move to let Lehman Brothers fail.]
If there's a crowning absurdity, it's that Wall Street mustered any bonuses at all in a year when the industry lost $34 billion. Does anybody else in America get a bonus when their company tanks? "Rewarding cataclysmic failure like this has to be what led to the fall of the Roman Empire," Payne wrote in a recent note to clients.
It's worth pointing out that not all Wall Street firms are as wayward as big offenders like Citigroup, Merrill Lynch, AIG, and Bank of America. Many made money in 2008, and any firm that isn't asking for taxpayer handouts should be allowed to pay its people whatever it wants.
[See five pieces missing from Obama's stimulus plan.]
But the bonus brouhaha reveals so many disconnects in the financial industry that it could end up being a pivotal moment in the dismantling of the old Wall Street. Derivatives and "funding facilities" are hard for most people to understand. But gimme gimme gimme is a corruption we all understand. If the politicians didn't have a clear rallying cry for going after Wall Street before, they sure do now.

http://finance.yahoo.com/news/How-Wall-Street-Continues-To-usnews-14209399.html

Intervening to prop up pound is 'recipe for failure', says Brown

Intervening to prop up pound is 'recipe for failure', says Brown
PM expected to admit today that he should have been tougher with 'freewheeling bankers'
By Sean O'Grady, Jane Merrick and Brian BradySunday, 1 February 2009

'We do not target our exchange rate': Gordon Brown at the World Economic Forum in Davos yesterday
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Gordon Brown has indicated that he will not intervene to prevent the pound sinking still further against the dollar, the euro and other major currencies.
Speaking at the World Economic Forum in Davos, Switzerland, the Prime Minister suggested that the fate of sterling was a matter for the markets alone: "We do not target our exchange rate." That, he added, would be a "recipe for failure", as it had been when governments tried to "shadow the Deutschmark" and joined the European Exchange Rate Mechanism in the late 1980s and early 1990s.
Mr Brown's comments seem certain to push sterling lower, and may see it hit parity with the euro.
At the same time, Caroline Flint, the Europe minister, appeared to rule out British entry into the single currency, even in the long term. She told The Independent on Sunday: "We are prepared to look at the issues around the euro. This doesn't mean, in principle, that we think we have a journey to the euro. It's about whether it would work for the British economy." Her remarks appeared to be at odds with the position of the Business Secretary, Lord Mandelson, who he said this month that joining the euro remained a long-term policy objective.
Mr Brown will today take some responsibility for failing to get tough with freewheeling banks when he was Chancellor – but he will stop short of a full apology for his role in the recession. "We're toughening up the regulatory system," he will tell BBC1's Politics Show, a move No 10 hopes will tackle claims that he refuses to accept any blame for Britain's plight. "That is an acceptance that it wasn't strong enough to meet what was, effectively... a global financial freezing up."
Market fears centre on the scale of the Government's debts now being piled up, and the possibility that the Treasury will have to take on trillions of pounds-worth of liabilities if the banking system continues to falter. Many liabilities are in foreign currency and large in relation to the UK's GDP, prompting comparison with Iceland, which in effect went bust because of its overextended banks. Economist Willem Buiter has joked about London becoming "Reykjavik-on-Thames".
There are also worries about the state of the economy, and the accumulating bad debts that will accumulate as the UK enters its worst recession in 60 years. The IMF last week forecast that the British economy would shrink by 2.8 per cent in 2009, its worst showing since the Second World War, although Bank of England and Treasury officials seem relaxed about the decline of the pound, in the hope this will boost exports, although there is little evidence of that so far.
Showing considerable irritation about remarks from international investors such as Jim Rogers, who have sold sterling and declared the UK "finished", the Prime Minister said: "We are not going to build our policies around self-interested speculators."
Mr Rogers said recently that he has sold all his sterling assets. And on Tuesday, the billionaire investor George Soros, who "broke the Bank of England" during the 1992 ERM crisis, said he too had been selling, sterling over the past 12 months: "Sterling did fall from around $2 to about $1.40 and at that level the risk-reward balance is no longer compelling. I'm not saying it won't fall any more though – it will continue to fluctuate." Against a basket of currencies, the pound has lost about a third of its value in a year.
There are also concerns in some European circles that the British Government is using the hefty depreciation in the pound against the euro as a sort of stealth protectionism. Mr Brown and the German Chancellor Angela Merkel have warned in Davos about the "retreat to protectionism".

http://www.independent.co.uk/news/uk/politics/intervening-to-prop-up-pound-is-recipe-for-failure-says-brown-1522528.html

Rio in talks with Chinalco over £10bn cash injection

Rio in talks with Chinalco over £10bn cash injection
$40bn debt forces miner to consider link-up with China's state-owned giant
By Nick ClarkMonday, 2 February 2009

Rio Tinto is preparing for further talks with China's state-owned mining giant Chinalco over a potential £10bn cash injection to ease its mountain of debts.
FTSE 100-listed Rio, which admitted for the first time last week that it could consider a rights issue, has held negotiations over a potential investment from the Chinese in recent weeks. The group hopes that a deal could be announced as early as its full-year results next week as the latest step in its programme to reduce debts of $40bn. The group has pledged to cut that by $10bn this year.
It is understood that the talks have gone beyond preliminary negotiations, but nothing has been finalised. Details are unclear, but beyond lifting its existing stake, Chinalco could be issued with a convertible bond by Rio. Chinalco could also be interested in taking on some of its mines or take minority positions in some of its more valuable assets.
Rio declined to comment yesterday.
Chinalco has enjoyed a close relationship with Rio since it bought an 11 per cent stake in the group in a dawn raid last February, and it was thought to be keen to up its stake. Rio's boss, Tom Albanese, is interested in teaming up with the Chinese over iron ore projects, and there was talk of the two companies developing infrastructure in Australia last year.
The group is trying to raise funds to cope with its debts. Rio is the most highly leveraged of the mining giants on the London Stock Exchange's blue-chip index. The brunt of the debt was brought on with the $38bn acquisition of the US aluminium group Alcan at the top of the market in 2007. It has to refinance $9bn of debt in October.
Rio launched its planned asset fire sale last week as it offloaded two mines to Brazilian rival Vale in a deal worth $1.6bn. It announced on Friday that it had agreed to sell its Potasio Rio Colorado project in Argentina, and the Corumba iron mine in Brazil. Yet the group has struggled to raise enough interest for its assets as credit remains scarce and potential sellers have failed to come up with adequate offers. Insiders have said it is even willing to listen to bids for its 30 per cent stake in Escondida, the world's largest copper mine.
As well as the sale of "non-core" assets, the company is looking to bolster its savings with a dramatic cost-cutting plan and curb on spending. It intends to cut 14,000 jobs and reduce capital expenditure by $5bn next year.
On Wednesday, for the first time, the group announced it could raise money from shareholders. "In order to preserve maximum flexibility for the group, the boards do not rule out the potential to issue equity as one of the options it has available," it said.
The sector has been hit by the falling demand for commodities, especially from China. Rio's share price had been buoyed in the wake of a hostile takeover attempt by BHP Billiton in 2007, which would have been one of the biggest deals in corporate history. The $58bn merger collapsed in November when BHP walked away, blaming the worsening economic conditions and the fall in commodity prices. The shares plunged and are 76 per cent off their peak in May.
Rival Xstrata announced it would turn to shareholders to raise $5.9bn in a heavily discounted rights issue, to pay down its debts and buy a coal mine. Xstrata has $16.3bn of debt, but it does not need refinancing until 2011.

http://www.independent.co.uk/news/business/news/rio-in-talks-with-chinalco-over-16310bn-cash-injection-1523111.html

House prices 'could fall 40 per cent without loan boost'

House prices 'could fall 40 per cent without loan boost'
By Sean Farrell, Financial EditorMonday, 2 February 2009

House prices could drop by a total of 40 per cent unless the Government steps in to boost lending, a report says today. The extreme scenario painted by the Centre for Economics and Business Research (CEBR) would see prices plunge by a record 25 per cent this year after last year's 16 per cent slide.
If the Government's banking bailout is able to boost mortgage approvals to 50,000 a month from the current level of about 32,000, the price fall from peak to trough could be limited to 32 per cent with values bottoming out in the first quarter of 2010, CEBR said. But without effective intervention to increase lending, the total fall would be 40 per cent with prices stagnating until 2012 and not getting above 2003 levels until the following year.
As part of a range of measures to get banks lending again, the Government intends to guarantee mortgage-backed securities to restart the market for securitisation – packaging up of loans for sale to investors. Securitisation provided £200bn of finance for banks in 2007 before the market was paralysed by fears stemming from the sub-prime crisis in the US.
The plan was recommended by Sir James Crosby, the former chief executive of HBOS, who predicted in November that, without action, net lending for house purchases could fall below zero as fewer loans are made than are paid off. Bank of England figures on Friday showed a rise in mortgage approvals to 31,000 in December from 27,000 a month earlier. The surprise increase followed data from the Royal Institution of Chartered surveyors that showed new buyer enquiries beginning to rise.
Halifax, the country's biggest mortgage lender, has pointed out that prices for first-time buyers are now more affordable than for years but potential buyers remain wary of further falls while banks are limiting their lending as bad debts rise.
Benjamin Williamson, an economist at CEBR, said: "The glimmer of light at the end of the tunnel for the beleaguered housing market is that prices and interest rates are now at levels whereby any improvement in lending is likely to lead to substantially increased activity and at the very least a bottoming out in house prices. However, if lending remains close to current very low levels, the spectre of the biggest annual drop in UK GDP since post-war demobilisation in 2009, with concomitant rises in unemployment and collapsing confidence, will likely lead to an acceleration in house price falls."
CEBR said that the crisis in the housing market lay at the heart of the credit crunch and that direct intervention to shore up the supply of mortgages would stimulate activity. The research unit added that a recovering housing market might play a part in a broader boost to consumer confidence that would help revive the economy.
Interesting? Click here to explore further

http://www.independent.co.uk/money/mortgages/house-prices-could-fall-40-per-cent-without-loan-boost-1523110.html

Russia and China Blame Crisis on Debt Binge

Russia and China Blame Crisis on Debt Binge
Topics:Stock Market Banking European Central Bank Credit Economy (U.S.) Economy (Global)
By: Reuters 29 Jan 2009 02:20 AM ET

China and Russia blamed debt-fueled consumption on Wednesday for massive financial collapse and called for global cooperation to repair the world economy.

"The existing financial system has failed," Putin told business and political leaders holding their annual World Economic Forum in this Swiss ski resort.
Growth was based on greed where one center printed money without respite and consumed wealth, and another manufactured cheap goods and saved money, he said.
His clear swipe at the United States was echoed by Chinese Premier Wen Jiabao, who said the bad macroeconomic policies and unsustainable growth models of some countries "characterized by prolonged low savings and high consumption" were primary reasons for the crisis.
Wen also blamed the "blind pursuit of profit."
Despite the criticism of Western policies, both China and Russia pledged their support for open markets, refuted protectionism and called for the Group of 20 major economies to work swiftly toward a global regulatory system that would put world markets and financial institutions on a safer footing.
Certainly government solutions are in the driver's seat at meetings of business leaders and politicians in the Swiss mountain resort, a reversal from the usual gathering where Wall Street tycoons rule.
European Central Bank chief Jean-Claude Trichet joined the call for profound reforms to drag the economy back to health and said the G20, whose leaders hold a summit in April, was doing "good work" on policies.
"Everybody can see the present system is too fragile, and we have to reintroduce an element of resilience ... and we need to do that without any consideration of any kind of vested interest," he told Reuters Television.

Grim Mood
Crisis-hit bankers are thin on the ground at the meeting, and the few who did express concerns that governments would stretch too far on the regulatory front and stifle growth got scant hearing. They were promptly reminded that governments are bailing many of them out.
The mood among business people was grim. The International Monetary Fund forecast the world economy would slow to a near standstill this year, warning that deflation risks were rising.
A poll by PricewaterhouseCoopers of more than 1,100 CEOs found that just 21 percent of CEOs said they were very confident of growing revenue in the next 12 months, down from 50 percent a year ago.
Most business leaders said they expected no more than a slow and gradual recovery over the next three years.

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"There are no silver bullets. My sense is 18 to 24 months of a very tough economic environment," Maria Ramos, chief executive of Transnet, South Africa's rail and logistics company, told Reuters.
Stephen Roach, Morgan Stanley's Asia chairman, agreed it would be "a long slog" over the next three years.
"Forty percent of the world's wealth was destroyed in the last five quarters. It is an almost incomprehensible number," said Stephen Schwarzman, chairman of the leading private equity company Blackstone Group. "Business will be very different."

Currency Row
Before Wen's speech, a row intensified over Beijing's exchange rate policy after new U.S. Treasury Secretary Timothy Geithner branded China a currency manipulator last week, using a term the previous administration avoided for years.
A Chinese diplomat said Washington had enough evidence to know China does not manipulate its exchange rate.
"I don't think it's fair all of a sudden to change the position of the U.S. government," the diplomat said in London, one of the European capitals Wen will visit after Davos.
Wen did not address the row directly in his speech, although his comment on the low savings rate was an indirect reminder that China is financing the United States.
Slideshow: Who's Who in Davos
He expects China to post 8 percent growth this year -- not much different from 2008 but down from 13 percent in 2007. The China slowdown coupled with recession in the major developed economies has pushed the global economy into severe recession.
That grim scenario has left sovereign fund Dubai International Capital wary of making big long-term investments even though it sees asset prices at reasonable levels.
"We're still very nervous about making some big bets -- we see the financial crisis getting worse. There's not going to be a magic wand solution to the problem," Chief Executive Sameer al-Ansari told Reuters.
Copyright 2009 Reuters.

http://www.cnbc.com/id/28901277

Australian House Prices Fall, More Rate Cuts Coming

Australian House Prices Fall, More Rate Cuts Coming

Topics:Banking Interest Rates Inflation Economy (Global) Australia & New Zealand
Sectors:Banks
By: Reuters 01 Feb 2009 11:58 PM ET

Australian house prices fell last year as tightening credit conditions and a sharp downturn in the economy put paid to the double-digit growth enjoyed in 2007, dealing a further blow to household wealth and pointing towards more rate cuts.
Government data out on Monday showed prices of established houses fell 3.3 percent in the fourth quarter compared to the same period in 2007, when they were running hot at 14.0 percent.
The drop in wealth, already undermined by sliding equity and pension values, only added to expectations of another big cut in interest rates when the Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday.
Investors are pricing in a cut of 100 basis points in the key cash rate to a record low of 3.25 percent, bringing its easing since September to a massive 4 percentage points.
"The news has been so dismal that they almost have to cut by 100 basis points, and an even bigger move can't be ruled out," said Michael Workman, a senior economist at Commonwealth Bank. "That won't be the end either," he added. "The market's already pricing in rates under 2 percent."
The Australian government is also expected to announce a second package of fiscal stimulus measures, perhaps as soon as this week, in an attempt to limit any rise in unemployment.
Prime Minister Kevin Rudd on Monday told a news conference the government would "move heaven and earth" to support the economy even as the global recession blew a hole in its tax take.
Warning of a return to budget deficits after years of plenty, Rudd said tax revenues over the next four years were expected to be lower by a staggering A$115 billion ($73 billion). That is equivalent to over a third of annual tax revenues, or 10 percent of gross domestic product.

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"But this government will leave no stone unturned when it comes to taking all necessary measures to continue to support growth and jobs," he said.
The depth of the trouble was illustrated by a monthly survey of 200 manufacturers, which showed activity contracted for the eighth straight month in January.
The Australian Industry Group/PriceWaterhouseCoopers Performance of Manufacturing Index (PMI) edged up a seasonally adjusted 2.9 points to 36.6, but remained far below the 50 threshold separating growth from contraction.

Relatively Resilient
The steep cuts in interest rates seemed to be offering some support to house prices as the pace of decline slowed on a quarter-to-quarter basis.
Prices dipped a smaller-than-expected 0.8 percent in the fourth quarter, compared to the third quarter when they sank 2.4 percent.
In any case, the annual losses of 3.3 percent in Australia are relatively modest compared to declines of 15 to 20 percent suffered in the United States and Britain.
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This was partly thanks to still high levels of skilled migration and a rising population. There are also far fewer unsold homes in Australia, which had never gone though the huge building boom that left so much stock in the United States.
Monetary policy was having more of an impact as the main variable mortgage in Australia is benchmarked off the central bank's cash rate, unlike in the U.S. where the most popular fixed rate mortgages are tied to Treasury yields.
Rory Robertson, interest rate strategist at Macquarie, noted that the headline variable mortgage rate had fallen to around 6.85 percent, from 9.6 percent before the central bank began easing.
"Big RBA-driven mortgage rate reductions obviously have provided major support for local home prices through recent global gloom and doom," he said.
Should the central bank cut as expected on Tuesday, the mortgage rate could drop to 6.0 percent or less, near its lowest since 1970.
"House prices will come under further pressure as unemployment trends higher," Robertson added. "But mortgage rates will continue to be reduced to new generational lows, providing great support to most homebuyers."
Copyright 2009 Reuters.
http://www.cnbc.com/id/28971613

All Big US Banks Must Go to Fix Crisis: Economist

All Big US Banks Must Go to Fix Crisis: Economist
By: Kim Khan 30 Jan 2009 12:55 PM ET

The creation of a government bad bank to buy toxic assets is necessary, but then the government will need to take control of and restructure major banks to fix the system, one economist at the World Economic Forum in Davos told CNBC.com.
"They have to do a bad bank," Harvard Economics Professor Ken Rogoff said. But "if that's all they do then it's idiotic."
Institutions like Citi and Bank of America will have to go, boards will have to be fired and equity stakeholders will be wiped out, Rogoff said.
The plan could mirror the one Sweden implemented, where all troubled banks were nationalized, their balance sheets were cleaned up and the good parts of the businesses were sold to the private sector.
That solution was "much cleaner," he said.
Sweden’s banks were effectively bankrupt in the early 1990s, but the government pulled off a rapid recovery that actually helped taxpayers make money in the long run.

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The government placed banks with troubled assets into a so-called bad bank, where they could be held and then sold when market and economic conditions improved.
In the meantime, it used taxpayer money to provide enough capital to allow banks to resume normal lending, but wiped shareholders out in the process.
Officials from the Obama administration are holding around the clock meetings with senior Wall Street executives on how to create a new government bank to buy bad assets from major financial firms.
However, people with direct knowledge of the talks tell CNBC there is no consensus on how such an entity would work or whether a plan could materialize any time soon or possibly ever.

Jobs Won't Come Back this Year
Looking to the overall economy, it unlikely the job market will improve this year, Rogoff told CNBC.
"I'm afraid unemployment is going to keep rising until at least 2010," he said.
The US is in "a very deep financial recession" and in those situations unemployment rises for almost five years, he added.
US housing and jobless claims data on Thursday showed there was no end in sight for the gloomy economy, while Japan's industrial outlook plunged by a record pace in December, contributing to the bleak picture of the world slowdown.

Baccardax: Bad Banks Are Good ... Aren't They?
© 2009 CNBC.com

http://www.cnbc.com/id/28928650?__source=yahoorelatedstorytext&par=yahoo

The Market's Latest Victim: 'Buy-And-Hold' Strategy

The Market's Latest Victim: 'Buy-And-Hold' Strategy
Friday January 30, 2009, 1:25 pm EST

As traditional market signposts lose their relevance, so does the traditional "buy-and-hold" strategy that investors have followed for decades.

Market pros in increasing numbers are eschewing the usual investing strategies and watching technical levels as their guides for making money. They examine temporary market tops and bottoms as guidelines when to sell and buy, and are in many cases utilizing funds rather than individual stocks to make their plays.
Earnings and economic data have proven unreliable to gauge the long-term prospects for the market, which has become a trader's battlefield. Money that once stayed put for three to five years can now get moved in three to five days or sooner.
"What's happening is people have learned that if you don't take a profit it goes away," says Kathy Boyle, president of Chapin Hill Advisors in New York. "Even somebody who's really biased towards buy-and-hold is giving up."
The phenomenon has been on display markedly since earnings season kicked into gear this month.
More than half the company's in the Standard & Poor's 500 have beaten earnings expectations, yet the stock index has dropped nearly 7 percent.
The economic data, meanwhile, have been close to expectations.
Friday's report on fourth-quarter GDP was actually better than what Wall Street predicted-though at a 3.7 percent drop, the numbers were hardly encouraging.

But investors seem to be ignoring the data.
Instead, they've turned towards more of a trader's mentality, pushing the Dow back up when it approaches 8,000 and the S&P when it falls near 800. It's a trend that bucks the traditional long-term horizon most investors are supposed to take, but for many it's working.
"The idea of saying valuations are historically low so we're just going to buy and hold, that comes at great peril over the next year or two," says Lee Schultheis, founder and chief investment strategist at AIP Funds in Harrison, N.Y. "But also being overly bearish might also come at peril if the government's able to get ahead of the curve on the liquidity-credit issue. Once that gets solved equities will have the opportunity to advance."
Indeed, Boyle has moved nimbly in and out of positions in exchange-traded funds--these days mostly those with a bullish look on the market. She expects a run higher for the market to last into mid-February, when stocks will move lower and Boyle will quit or reverse her positions.
Dealing with the market's intense moodiness is all part of the job these days.
"People get hopeful and say, 'oh good,' and pile in, or they get depressed and they hit the support level," Boyle says. "It certainly makes for an interesting day every day."

A Better Mood-For Now
Even as the market was surrendering the gains it saw earlier in the week, there was plenty of enthusiasm for the market to go higher.
Ben Lichtenstein, a long-time bear who had been warning through much of 2008 about the pressures facing the market, reiterated on CNBC that he thinks stocks are in for a nice gain, with the S&P 500 flirting with the mid-900s if it breaks through 880.
"Everybody expected the worst to happen and it's slowly starting to fade out a little bit," he said. "I think the energy's only to the upside right now." See full comments in video.
Lichtenstein, of Tradersaudio.com, could be expected to follow technical levels.
But those with a traditional investors' horizon of 18 months and beyond are following suit, moving through positions in a way that would be discouraged in a normal market.

Some advisors are disturbed at the trend.
"If the time frame is 18 months to two years I'm very bullish. If the time frame is this afternoon your guess is as good as mine, but unfortunately that seems to be what people are looking at," says Randy Carver, president of Carver Financial Services/Raymond James in Mentor, Ohio. "I think the public is just kind of beat down, at the point of capitulation. People are just resigned to the fact that it's bad."

Some Companies Take a Hit
One case in point for the strange logic in trading is Caterpillar.
The Dow component and construction manufacturing behemoth would seem well poised for a good year considering President Obama's stress on infrastructure programs in his stimulus plan that the House recently passed.
Yet Caterpillar (NYSE:CAT - News) shares have been under intense pressure, dropping about 9 percent this week, as it announced 22,000 layoffs and
Goldman Sachs added the company to its conviction sell list
. Under other circumstances, such a stock might be considered a solid long-term hold, but with all the uncertainty in the economy it's being sold off aggressively.
"Everybody's afraid to trust the fundamentals. Everybody's afraid of what these numbers are going to mean," Boyle says. "You have this continued slew of layoffs as the earnings come out. Everybody's getting used to lowered expectations but at the same time they're throwing in 'we're laying off another 20,000 people.' That hurts the economy."
For protection against the whipsaw turns in the market while capitalizing on a long-term bullish philosophy, Carver is playing a battery of ETFs that follow individual sector movements as well as gains in the broad market.
He likes several of those in the iShares family: the S&P 500 Index (NYSEArca:IVV - News), the Russell Midcap Index (NYSEArca:IWR - News) and the S&P SmallCap 600 Index (NYSEArca:IJR - News), and outside that group, the Vanguard Total Stock Market (NYSEArca:VTI - News), which essentially is a play on everything, even Over The Counter companies not listed on the major exchanges.
Such enthusiasm isn't universal, with a level of caution also prevalent that accompanies technical trading.
With all of the obstacles facing the market, regaining investor confidence will be critical before buy-and-hold positions become popular again.
"You need that confidence, that psychology to be restored," Schultheis says. "We need to know government's ahead of the curve, that they're not playing whack-a-mole, that we can now act and spend in a more normal fashion because we have a more reasonable expectation of what we see coming down the road. Then and only then will there be an opportunity for a sustained advance in equities."

http://finance.yahoo.com/news/The-Markets-Latest-Victim-cnbc-14210150.html