Bank of England to warn recession will last far longer than Government's forecast
The Bank of England will this week come into direct conflict with the Treasury as it warns on recession.
By Edmund Conway and Angela Monaghan
Last Updated: 12:40PM GMT 09 Feb 2009
In its quarterly Inflation Report, the Bank's Monetary Policy Committee will slash its economic growth forecast to the lowest level since it was granted independence in 1997, and will indicate that it is now poised to start buying up securities directly in a bid to pump extra money into the economy.
It comes after the MPC voted to cut borrowing costs to an all-time low of 1pc, despite warnings from savings groups that such a move would undermine incentives to save money.
The Bank is expected to cut its growth forecast from the already-bearish projection that the economy would shrink by 1.3pc in 2009 made in November, to one which factors in a far steeper decline. It undermines the Treasury's assessment in the pre-Budget report that the economy would start growing again in the second half of the year.
The Inflation Report is the Bank's three-monthly opportunity to indicate its outlook for the economy, and economists will be watching the event closely on Wednesday to determine how much further it will cut borrowing costs.
They expect further rate cuts towards zero, as well as quantitative easing, whereby the Bank would increase the money supply by buying assets like corporate and government bonds, complementing the £50bn Asset Purchase Facility scheme already announced by the Treasury. The Governor, Mervyn King, will also indicate how soon the Bank will embark on this.
Despite better-than-expected data from the services sector last week, more gloom is in store next week in the form of labour market statistics, which could show that unemployment surpassed the two million mark in December.
Figures from the Office for National Statistics are also likely to show the number of people claiming unemployment benefits jumped in January, after a series of high profile failures including Woolworths.
"We are looking for a nasty surge of 110,000, the largest increase since March 1991," said Philip Shaw, economist at Investec. That would take the number of claimants to about 1.27m.
http://www.telegraph.co.uk/finance/financetopics/recession/4561002/Bank-of-England-to-warn-recession-will-last-far-longer-than-Governments-forecast.html
Tuesday 10 February 2009
Concern is mounting over the dramatic deterioration of public finances across the EU.
Europe ambushes Germany on debt bail-out
The European Union has called an emergency summit of national leaders this month to halt the drift towards protectionism and stem the risks of a debt crisis as the slump deepens.
By Ambrose Evans-Pritchard
Last Updated: 6:24PM GMT 09 Feb 2009
EU finance ministers are to discuss proposals over breakfast in Brussels today for some form of "debt-agency" or mechanism for the EU to raise bonds, a move seen by diplomats as a ploy to ambush Germany into accepting shared responsibility for EU debts – anathema to Berlin.
Concern is mounting over the dramatic deterioration of public finances across the EU. Ireland's deficit is heading for 12pc of GDP, and there are doubts over whether Italy and Greece can roll over some €250bn (£218bn) in state debt between them this year.
EU company debt is a worry too, now 95pc of GDP compared to 50pc in the US. "The amount of debt to roll over in the eurozone is huge, at a time when banks are tightening credit standards," said Gilles Moec, from Bank of America. "Spanish businesses are in a dire situation."
Mirek Topolanek, Czech premier and holder of the EU presidency, said the crisis summit was aimed at thrashing out a joint "recovery plan" and curbing the nationalist reflexes that are tearing the EU apart.
The Czechs are livid over comments by French president Nicolas Sarkozy, who threatened to withold aide for French car companies unless they spend it at home. " If we give money to the auto industry to restructure, we don't want to hear about plant moving to the Czech Republic," he said.
Mr Topolanek said the comments were "unbelievable" and could cause the Czech Republic to reject the Lisbon Treaty. "If somebody wanted to seriously threaten ratification, they couldn't have picked a better means," he said.
The French plan fleshed out yesterday offers €6.5bn in soft loans to Renault and PSA Peugeot Citroen on condition that they promise not to close any sites in France. The Brussels competition police said they will examine the details to determine whether the terms breach EU law.
http://www.telegraph.co.uk/finance/globalbusiness/4571850/Europe-ambushes-Germany-on-debt-bail-out.html
The European Union has called an emergency summit of national leaders this month to halt the drift towards protectionism and stem the risks of a debt crisis as the slump deepens.
By Ambrose Evans-Pritchard
Last Updated: 6:24PM GMT 09 Feb 2009
EU finance ministers are to discuss proposals over breakfast in Brussels today for some form of "debt-agency" or mechanism for the EU to raise bonds, a move seen by diplomats as a ploy to ambush Germany into accepting shared responsibility for EU debts – anathema to Berlin.
Concern is mounting over the dramatic deterioration of public finances across the EU. Ireland's deficit is heading for 12pc of GDP, and there are doubts over whether Italy and Greece can roll over some €250bn (£218bn) in state debt between them this year.
EU company debt is a worry too, now 95pc of GDP compared to 50pc in the US. "The amount of debt to roll over in the eurozone is huge, at a time when banks are tightening credit standards," said Gilles Moec, from Bank of America. "Spanish businesses are in a dire situation."
Mirek Topolanek, Czech premier and holder of the EU presidency, said the crisis summit was aimed at thrashing out a joint "recovery plan" and curbing the nationalist reflexes that are tearing the EU apart.
The Czechs are livid over comments by French president Nicolas Sarkozy, who threatened to withold aide for French car companies unless they spend it at home. " If we give money to the auto industry to restructure, we don't want to hear about plant moving to the Czech Republic," he said.
Mr Topolanek said the comments were "unbelievable" and could cause the Czech Republic to reject the Lisbon Treaty. "If somebody wanted to seriously threaten ratification, they couldn't have picked a better means," he said.
The French plan fleshed out yesterday offers €6.5bn in soft loans to Renault and PSA Peugeot Citroen on condition that they promise not to close any sites in France. The Brussels competition police said they will examine the details to determine whether the terms breach EU law.
http://www.telegraph.co.uk/finance/globalbusiness/4571850/Europe-ambushes-Germany-on-debt-bail-out.html
Monday 9 February 2009
Bond market calls Fed's bluff as global economy falls apart
Bond market calls Fed's bluff as global economy falls apart
Global bond markets are calling the bluff of the US Federal Reserve.
By Ambrose Evans-Pritchard
Last Updated: 7:22PM GMT 08 Feb 2009
Comments 80 Comment on this article
The yield on 10-year US Treasury bonds – the world's benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down.
This level will asphyxiate the US economy if allowed to persist, as Fed chair Ben Bernanke must know. The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay.
The "real" cost of capital is rising as the slump deepens. This is textbook debt deflation. It was not supposed to happen. The Bernanke doctrine assumes that the Fed can bring down the whole structure of interest costs, first by slashing the Fed Funds rate to zero, and then by making a "credible threat" to buy Treasuries outright with printed money.
Mr Bernanke has been repeating this threat since early December. But talk is cheap. As the Fed hesitates, real yields climb ever higher. Plainly, the markets do not regard Fed rhetoric as "credible" at all.
Who can blame bond vigilantes for going on strike? Nobody wants to be left holding the bag if and when the global monetary blitz succeeds in stoking inflation. Governments are borrowing frantically to fund their bail-outs and cover a collapse in tax revenue. The US Treasury alone needs to raise $2 trillion in 2009.
Where is the money to come from? China, the Pacific tigers and the commodity powers are no longer amassing foreign reserves ($7.6 trillion). Their exports have collapsed. Instead of buying a trillion dollars of extra bonds each year, they have become net sellers. In aggregate, they dumped $190bn over the last fifteen weeks.
The Fed has stepped into the breach, up to a point. It has bought $350bn of commercial paper, and begun to buy $600bn of mortgage bonds. That helps. But still it recoils from buying Treasuries, perhaps fearing that any move to "monetise" Washington's deficit starts a slippery slope towards an Argentine fate. Or perhaps Bernanke doesn't believe his own assurances that the Fed can extract itself easily from emergency policies when the cycle turns.
As they dither, the world is falling apart. Events in Japan have turned deeply alarming. Exports fell 35pc in December. Industrial output fell 9.6pc. The economy is contracting at an annual rate of 12pc. "Falling exports are triggering a downward spiral of production, incomes and spending. It is important to prepare for swift policy steps, including those usually regarded as unusual," said the Bank of Japan's Atsushi Mizuno.
The bank is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.
This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.
The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.
Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.
Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.
The ECB's obduracy has nothing to do with economics. It fears zero rates as a vampire fears daylight, because that brings the purchase of eurozone bonds ever closer into play. Any such action would usher in an EMU "debt union" by the back door, leaving Germany's taxpayers on the hook for Club Med liabilties. This is Europe's taboo.
Meanwhile, Eastern Europe is imploding. Industrial output fell 27pc in Ukraine and 10pc in Russia in December. Latvia's GDP contracted at a 29pc annual rate in the fourth quarter. Polish homeowners have had the shock from Hell. Some 60pc of mortgages are in Swiss francs. The zloty has halved against the franc since July.
Readers have berated me for a piece last week – "Glimmers of Hope" – that hinted at recovery. Let me stress, I was wearing my reporter's hat, not expressing an opinion. My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4560901/Bond-market-calls-Feds-bluff-as-world-falls-apart.html
Global bond markets are calling the bluff of the US Federal Reserve.
By Ambrose Evans-Pritchard
Last Updated: 7:22PM GMT 08 Feb 2009
Comments 80 Comment on this article
The yield on 10-year US Treasury bonds – the world's benchmark cost of capital – has jumped from 2pc to 3pc since Christmas despite efforts to talk the rate down.
This level will asphyxiate the US economy if allowed to persist, as Fed chair Ben Bernanke must know. The US is already in deflation. Core prices – stripping out energy – fell at an annual rate of 2pc in the fourth quarter. Wages are following. IBM, Chrysler, General Motors, and YRC, have all begun to cut pay.
The "real" cost of capital is rising as the slump deepens. This is textbook debt deflation. It was not supposed to happen. The Bernanke doctrine assumes that the Fed can bring down the whole structure of interest costs, first by slashing the Fed Funds rate to zero, and then by making a "credible threat" to buy Treasuries outright with printed money.
Mr Bernanke has been repeating this threat since early December. But talk is cheap. As the Fed hesitates, real yields climb ever higher. Plainly, the markets do not regard Fed rhetoric as "credible" at all.
Who can blame bond vigilantes for going on strike? Nobody wants to be left holding the bag if and when the global monetary blitz succeeds in stoking inflation. Governments are borrowing frantically to fund their bail-outs and cover a collapse in tax revenue. The US Treasury alone needs to raise $2 trillion in 2009.
Where is the money to come from? China, the Pacific tigers and the commodity powers are no longer amassing foreign reserves ($7.6 trillion). Their exports have collapsed. Instead of buying a trillion dollars of extra bonds each year, they have become net sellers. In aggregate, they dumped $190bn over the last fifteen weeks.
The Fed has stepped into the breach, up to a point. It has bought $350bn of commercial paper, and begun to buy $600bn of mortgage bonds. That helps. But still it recoils from buying Treasuries, perhaps fearing that any move to "monetise" Washington's deficit starts a slippery slope towards an Argentine fate. Or perhaps Bernanke doesn't believe his own assurances that the Fed can extract itself easily from emergency policies when the cycle turns.
As they dither, the world is falling apart. Events in Japan have turned deeply alarming. Exports fell 35pc in December. Industrial output fell 9.6pc. The economy is contracting at an annual rate of 12pc. "Falling exports are triggering a downward spiral of production, incomes and spending. It is important to prepare for swift policy steps, including those usually regarded as unusual," said the Bank of Japan's Atsushi Mizuno.
The bank is already targeting equities on the Tokyo bourse. That is not enough for restive politicians. One bloc led by Senator Koutaro Tamura wants to create $330bn in scrip currency for an industrial blitz. "We are facing hyper-deflation, so we need a policy to create hyper-inflation," he said.
This has echoes of 1932, when the US Congress took charge of monetary policy. We are moving to a stage of this crisis where democracies start to speak – especially in Europe.
The European Central Bank's refusal to follow the lead of the US, Japan, Britain, Canada, Switzerland and Sweden in slashing rates shows how destructive Europe's monetary union has become. German orders fells 25pc year-on-year in December. French house prices collapsed 9.9pc in the fourth quarter, the steepest since data began in 1936. "We're dealing with truly appalling data, the likes of which have never been seen before in post-War Europe," said Julian Callow, Europe economist at Barclays Capital.
Spain's unemployment has jumped to 3.3m – or 14.4pc – and will hit 19pc next year, on Brussels data. The labour minister said yesterday that Spain's economy could not "tolerate" immigrants any longer after suffering "hurricane devastation". You can see where this is going.
Ireland lost 36,500 jobs in January – equal to a monthly loss of 2.3m in the US. As the budget deficit surges to 12pc of GDP, Dublin is cutting wages, disguised as a pension levy. It has announced "Rooseveltian measures" to rescue the foundering companies.
The ECB's obduracy has nothing to do with economics. It fears zero rates as a vampire fears daylight, because that brings the purchase of eurozone bonds ever closer into play. Any such action would usher in an EMU "debt union" by the back door, leaving Germany's taxpayers on the hook for Club Med liabilties. This is Europe's taboo.
Meanwhile, Eastern Europe is imploding. Industrial output fell 27pc in Ukraine and 10pc in Russia in December. Latvia's GDP contracted at a 29pc annual rate in the fourth quarter. Polish homeowners have had the shock from Hell. Some 60pc of mortgages are in Swiss francs. The zloty has halved against the franc since July.
Readers have berated me for a piece last week – "Glimmers of Hope" – that hinted at recovery. Let me stress, I was wearing my reporter's hat, not expressing an opinion. My own view, sadly, is that there is no hope at all of stabilizing the world economy on current policies.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4560901/Bond-market-calls-Feds-bluff-as-world-falls-apart.html
IMF may run out of cash to fight crisis in six months
IMF may run out of cash to fight crisis in six months, Strauss-Khan warns
The International Monetary Fund could run out of cash to firefight the economic crisis in as little as six months, its managing director has warned.
By Edmund Conway, Economics Editor
Last Updated: 7:02PM GMT 08 Feb 2009
Dominique Strauss-Kahn said the Fund needed an urgent cash infusion if it was to continue bailing out troubled economies in the future. Mr Strauss-Kahn also indicated that the world's advanced economies were now tipping from recession into full-blown depression, cementing fears about the scale of the economic slump in rich nations.
The IMF head made the comments in Kuala Lumpur in Malaysia over the weekend, where he is attending a meeting of central bankers from Southeast Asia. The Fund has bailed out a number of countries including Iceland, Latvia and Pakistan but Mr Strauss-Kahn said there would be many others in need of help in the months ahead.
"Today, the IMF's resources are enough to face the situation but because we are facing a global crisis, the needs may be much bigger than previously," he said. "We have to intervene in Asia, Africa and Central Europe, Latin America, and maybe elsewhere. I can't promise that in six to eight months from now, we will have enough resources."
The Fund is seeking pledges from nations with large current account surpluses and foreign exchange reserves to donate it cash to help bolster troubled countries. At the World Economic Forum in Davos late last month deputy head John Lipsky is understood to have spent time meeting with various heads of state and of sovereign wealth funds for precisely this purpose. Japan has already offered to add $100bn to the Fund's resources, Mr Strauss-Kahn said.
"We need other countries to follow this generous example and provide funds with the means to address the challenges arising from this global crisis," he added.
He warned that the economic crisis would intensify unless the financial system was repaired, saying that although he hoped the world could avoid a repeat of the Great Depression, the "worst cannot be ruled out. There's a lot of downside risk."
The IMF recently slashed its world growth forecast to just 0.5pc - the weakest since the Second World War, and warned that the UK was facing the most severe slowdown of all developed economies. Although Mr Strauss-Kahn said that government spending packages and interest rate cuts would help, the health of the banking system was a far more important factor.
"All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector," he said. "And today it's not done."
The IMF has so far lent out $47.9bn to countries affected by the economic crisis - mostly those in Eastern Europe. Mr Strauss-Kahn said that the next victim could be Poland, which has said it does not need assistance now, but may well do in the future.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4560897/IMF-may-run-out-of-cash-to-fight-crisis-in-six-months-Strauss-Khan-warns.html
The International Monetary Fund could run out of cash to firefight the economic crisis in as little as six months, its managing director has warned.
By Edmund Conway, Economics Editor
Last Updated: 7:02PM GMT 08 Feb 2009
Dominique Strauss-Kahn said the Fund needed an urgent cash infusion if it was to continue bailing out troubled economies in the future. Mr Strauss-Kahn also indicated that the world's advanced economies were now tipping from recession into full-blown depression, cementing fears about the scale of the economic slump in rich nations.
The IMF head made the comments in Kuala Lumpur in Malaysia over the weekend, where he is attending a meeting of central bankers from Southeast Asia. The Fund has bailed out a number of countries including Iceland, Latvia and Pakistan but Mr Strauss-Kahn said there would be many others in need of help in the months ahead.
"Today, the IMF's resources are enough to face the situation but because we are facing a global crisis, the needs may be much bigger than previously," he said. "We have to intervene in Asia, Africa and Central Europe, Latin America, and maybe elsewhere. I can't promise that in six to eight months from now, we will have enough resources."
The Fund is seeking pledges from nations with large current account surpluses and foreign exchange reserves to donate it cash to help bolster troubled countries. At the World Economic Forum in Davos late last month deputy head John Lipsky is understood to have spent time meeting with various heads of state and of sovereign wealth funds for precisely this purpose. Japan has already offered to add $100bn to the Fund's resources, Mr Strauss-Kahn said.
"We need other countries to follow this generous example and provide funds with the means to address the challenges arising from this global crisis," he added.
He warned that the economic crisis would intensify unless the financial system was repaired, saying that although he hoped the world could avoid a repeat of the Great Depression, the "worst cannot be ruled out. There's a lot of downside risk."
The IMF recently slashed its world growth forecast to just 0.5pc - the weakest since the Second World War, and warned that the UK was facing the most severe slowdown of all developed economies. Although Mr Strauss-Kahn said that government spending packages and interest rate cuts would help, the health of the banking system was a far more important factor.
"All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector," he said. "And today it's not done."
The IMF has so far lent out $47.9bn to countries affected by the economic crisis - mostly those in Eastern Europe. Mr Strauss-Kahn said that the next victim could be Poland, which has said it does not need assistance now, but may well do in the future.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4560897/IMF-may-run-out-of-cash-to-fight-crisis-in-six-months-Strauss-Khan-warns.html
Allocations not reflecting investor sentiment
Allocations not reflecting investor sentiment
By Rita Raagas De Ramos 30 January 2009
Fund managers surveyed by Merrill Lynch are more optimistic about the economy, but fear of the unknown is driving them to stick to cash and bonds.
Investor sentiment has improved from the lows of 2008, but virtually none of that change is being reflected in actual asset allocations, according to Merrill Lynch’s survey of fund managers for January.
Among the 205 fund managers polled by Merrill Lynch from January 9 to January 15, only around 24% expect the global economy to weaken further over the next 12 months. That’s a sharp drop from 65% in October. In line with the better growth outlook, corporate profit expectations also improved.
Despite the improved sentiment, fund managers are now more overweight in cash, less overweight in bonds, and have generally scaled back regional equity exposure. The fund managers’ average cash balance remains high at 5.3%, albeit marginally lower than December’s 5.5% level. Cash positions reflect risk appetite, with many fund managers normally capping their cash at 5% of their portfolios when they are bullish.
“Investors are talking a more positive story especially with regards to the US, but the fear factor remains,” says Gary Baker, head of Europe, Middle East and Africa equity strategy at Banc of America Securities-Merrill Lynch. “They have the firepower to act, but are unconvinced by the modest recent equity rally, suggesting it is a bear market rally in both sentiment and markets. Global sector allocation remains resolutely defensive.”
Within a global equities portfolio, the US has slipped out of favour. Only 7% of the fund managers polled earlier this month were overweight in US equities compared with 25% in December.
“There has been a notable dip in the US equity market’s popularity and emerging market equities have been the new beneficiary of rotation away from the US,” says Michael Hartnett, chief emerging markets equity strategist at Banc of America Securities- Merrill Lynch.
US equity exposure has been cut in favour of global emerging markets, particularly China, and Japan. Europe is still seen as the least attractive region, reflecting a more hesitant government policy response to the financial crisis.
“China remains the big global growth wildcard in 2009,” says Hartnett. “Despite the announcement of huge fiscal stimulus packages in recent months, investors remain very sceptical about Chinese and Asian growth.”
China announced a Rmb4 trillion ($585 billion) stimulus package in November, aimed at combating the most serious economic threat to the mainland since the Asian financial crisis in 1997. Before the stimulus package was announced, China was riddled with worries over the impact of the global financial crisis on both domestic consumption and exports.
The stimulus package, with a life span that extends until 2010, covers key areas including affordable housing, rural infrastructure, railways, power grids, post-earthquake rebuilding in Sichuan, and social welfare to raise incomes. It also includes reforming the value-added-tax system to encourage investment in new technologies.
With foreign reserves and a budget surplus amounting to around $2 trillion, investors are confident that China has the capacity to further stimulate the economy if needed.
Meanwhile, sector-wise, fund managers are most overweight in pharmaceuticals, telecommunications and staples while most underweight in banks, industrials and materials.
The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS). The survey measures net responses of the 205 fund managers, whose assets under management totalled $597 billion, by taking the balance between the bullish and bearish views for each survey question.
© Haymarket Media Limited. All rights reserved.
http://www.asianinvestor.net/article.aspx?CIaNID=95130
By Rita Raagas De Ramos 30 January 2009
Fund managers surveyed by Merrill Lynch are more optimistic about the economy, but fear of the unknown is driving them to stick to cash and bonds.
Investor sentiment has improved from the lows of 2008, but virtually none of that change is being reflected in actual asset allocations, according to Merrill Lynch’s survey of fund managers for January.
Among the 205 fund managers polled by Merrill Lynch from January 9 to January 15, only around 24% expect the global economy to weaken further over the next 12 months. That’s a sharp drop from 65% in October. In line with the better growth outlook, corporate profit expectations also improved.
Despite the improved sentiment, fund managers are now more overweight in cash, less overweight in bonds, and have generally scaled back regional equity exposure. The fund managers’ average cash balance remains high at 5.3%, albeit marginally lower than December’s 5.5% level. Cash positions reflect risk appetite, with many fund managers normally capping their cash at 5% of their portfolios when they are bullish.
“Investors are talking a more positive story especially with regards to the US, but the fear factor remains,” says Gary Baker, head of Europe, Middle East and Africa equity strategy at Banc of America Securities-Merrill Lynch. “They have the firepower to act, but are unconvinced by the modest recent equity rally, suggesting it is a bear market rally in both sentiment and markets. Global sector allocation remains resolutely defensive.”
Within a global equities portfolio, the US has slipped out of favour. Only 7% of the fund managers polled earlier this month were overweight in US equities compared with 25% in December.
“There has been a notable dip in the US equity market’s popularity and emerging market equities have been the new beneficiary of rotation away from the US,” says Michael Hartnett, chief emerging markets equity strategist at Banc of America Securities- Merrill Lynch.
US equity exposure has been cut in favour of global emerging markets, particularly China, and Japan. Europe is still seen as the least attractive region, reflecting a more hesitant government policy response to the financial crisis.
“China remains the big global growth wildcard in 2009,” says Hartnett. “Despite the announcement of huge fiscal stimulus packages in recent months, investors remain very sceptical about Chinese and Asian growth.”
China announced a Rmb4 trillion ($585 billion) stimulus package in November, aimed at combating the most serious economic threat to the mainland since the Asian financial crisis in 1997. Before the stimulus package was announced, China was riddled with worries over the impact of the global financial crisis on both domestic consumption and exports.
The stimulus package, with a life span that extends until 2010, covers key areas including affordable housing, rural infrastructure, railways, power grids, post-earthquake rebuilding in Sichuan, and social welfare to raise incomes. It also includes reforming the value-added-tax system to encourage investment in new technologies.
With foreign reserves and a budget surplus amounting to around $2 trillion, investors are confident that China has the capacity to further stimulate the economy if needed.
Meanwhile, sector-wise, fund managers are most overweight in pharmaceuticals, telecommunications and staples while most underweight in banks, industrials and materials.
The survey was conducted with the help of market research company Taylor Nelson Sofres (TNS). The survey measures net responses of the 205 fund managers, whose assets under management totalled $597 billion, by taking the balance between the bullish and bearish views for each survey question.
© Haymarket Media Limited. All rights reserved.
http://www.asianinvestor.net/article.aspx?CIaNID=95130
Saturday 7 February 2009
Top 6 Most Common Financial Mistakes
Top 6 Most Common Financial Mistakes
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
It is indeed a material world. When it comes to spending, the U.S. is a culture of consumption. The result: rising levels of consumer debt and declining household savings rates. But in 2008, this culture was hit hard by economic reality. According to the Federal Reserve, U.S. household debt grew steadily from the time the Fed started tracking it in 1952. It declined for the first time in the third quarter of 2008. As a result of the credit crisis and ensuing economic recession, savings rates also rebounded. For those who had been living beyond their means for years, it suddenly got a lot harder to make ends meet. And, although the government tends to encourage spending during economic downturn and statistics may lead us to think that overspending is normal, it is often a risky choice. Here we'll take a look at seven of the most common financial mistakes that often lead people to major economic hardship. Even if you're already facing financial difficulties, steering clear of these mistakes could be the key to survival.
Mistake No. 1: Excessive/Frivolous Spending
Great fortunes are often lost one dollar at time. It may not seem like a big deal when you pick up that double-mocha cappuccino, stop for a pack of cigarettes, have dinner out or order that pay-per-view movie, but every little item adds up. Just $25 per week spent on dining out costs you $1,300 per year, which could go toward an extra mortgage payment or a number of extra car payments. If you're enduring financial hardship, avoiding this mistake really matters - after all, if you're only a few dollars away from foreclosure or bankruptcy, every dollar will count more than ever. (For more insight, see Squeeze A Greenback Out Of Your Latte.)
Mistake No. 2: Never-Ending Payments
Ask yourself if you really need items that keep you paying for every month, year after year. Things like cable television, subscription radio and video games, cell phones and pagers can force you to pay unceasingly but leave you owning nothing. When money is tight, or you just want to save more, creating a leaner lifestyle can go a long way to fattening your savings and cushioning your from financial hardship. (For more on this, see Get Your Budget In Fighting Shape.)
Mistake No. 3: Living on Borrowed Money
Using credit cards to buy essentials has become somewhat normal. But even if an ever-increasing number of consumers are willing to pay double-digit interest rates on gasoline, groceries and a host of other items that are gone long before the bill is paid in full, don't be one of them. Credit card interest rates make the price of the charged items a great deal more expensive. Depending on credit also makes it more likely that you'll spend more than you earn.(To learn more about credit cards, see Take Control Of Your Credit Cards and Credit, Debit And Charge: Sizing Up The Cards In Your Wallet.)
Mistake No. 4: Buying a New Car
Millions of new cars are sold each year, although few buyers can afford to pay for them in cash. However, the inability to pay cash for a new car means an inability to afford the car. After all, being able to afford the payment is not the same as being able to afford the car. Furthermore, by borrowing money to buy a car, the consumer pays interest on a depreciating asset, which amplifies the difference between the value of the car and the price paid for it. Worse yet, many people trade in their cars every two or three years, and lose money on every trade.
Sometimes a person has no choice but to take out a loan to buy a car, but how much does any consumer really need a large SUV? Such vehicles are expensive to buy, insure and fuel. Unless you tow a boat or trailer, or need an SUV to earn a living, is an eight-cylinder engine worth the extra cost of taking out a large loan? If you need to buy a car and/or borrow money to do so, consider buying one that uses less gas and costs less to insure and maintain. Cars are expensive. You might need one, but if you're buying more car than you need, you're burning through money that could have been saved or used to pay off debt. (To keep reading about this subject, check out Car Shopping: New Or Used?)
Mistake No. 5: Buying Too Much House
When it comes to buying a house, bigger is also not necessarily better. Unless you have a large family, choosing a 6,000-square-foot home will only mean more expensive taxes, maintenance and utilities. Do you really want to put such a significant, long-term dent in your monthly budget? (For more on buying a home, see Mortgages: How Much Can You Afford? and Downsize Your Home To Downsize Expenses.)
Mistake No. 6: Treating Your Home Equity Like a Piggy Bank
Your home is your castle. Refinancing and taking cash out on it means giving away ownership to someone else. It also costs you thousands of dollars in interest and fees. Smart homeowners want to build equity, not make payments in perpetuity. In addition, you'll end up paying way more for your home than it's worth, which virtually ensures that you won't come out on top when you decide to sell. (For further reading see Mortgages: The ABCs Of Refinancing.)
Living Paycheck to Paycheck
In 2007, the U.S. household savings rate fell below 1%, but other countries had considerably higher rates of personal savings. For example, the Netherlands, Italy, Norway, Germany and France personal savings rates average 10% or more according, to the OECD Factbook 2005. Clearly it is possible to enjoy a high standard of living without financing it with debt. Countries in Asia boast savings rates of as much as 30%!
The cumulative result of overspending puts people into a precarious position - one in which they need every dime they earn and one missed paycheck would be disastrous. This is not the position you want to find yourself in when an economic recession hits. If this happens, you'll have very few options. Everyone has a choice in how they live, so it's just a matter of making savings a priority.
Making a Payment Vs. Affording A Purchase
To steer yourself away from the dangers of overspending:
For more, check out Seven Common Investor Mistakes.
by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
by Investopedia Staff, (Investopedia.com) (Contact Author Biography)
It is indeed a material world. When it comes to spending, the U.S. is a culture of consumption. The result: rising levels of consumer debt and declining household savings rates. But in 2008, this culture was hit hard by economic reality. According to the Federal Reserve, U.S. household debt grew steadily from the time the Fed started tracking it in 1952. It declined for the first time in the third quarter of 2008. As a result of the credit crisis and ensuing economic recession, savings rates also rebounded. For those who had been living beyond their means for years, it suddenly got a lot harder to make ends meet. And, although the government tends to encourage spending during economic downturn and statistics may lead us to think that overspending is normal, it is often a risky choice. Here we'll take a look at seven of the most common financial mistakes that often lead people to major economic hardship. Even if you're already facing financial difficulties, steering clear of these mistakes could be the key to survival.
Mistake No. 1: Excessive/Frivolous Spending
Great fortunes are often lost one dollar at time. It may not seem like a big deal when you pick up that double-mocha cappuccino, stop for a pack of cigarettes, have dinner out or order that pay-per-view movie, but every little item adds up. Just $25 per week spent on dining out costs you $1,300 per year, which could go toward an extra mortgage payment or a number of extra car payments. If you're enduring financial hardship, avoiding this mistake really matters - after all, if you're only a few dollars away from foreclosure or bankruptcy, every dollar will count more than ever. (For more insight, see Squeeze A Greenback Out Of Your Latte.)
Mistake No. 2: Never-Ending Payments
Ask yourself if you really need items that keep you paying for every month, year after year. Things like cable television, subscription radio and video games, cell phones and pagers can force you to pay unceasingly but leave you owning nothing. When money is tight, or you just want to save more, creating a leaner lifestyle can go a long way to fattening your savings and cushioning your from financial hardship. (For more on this, see Get Your Budget In Fighting Shape.)
Mistake No. 3: Living on Borrowed Money
Using credit cards to buy essentials has become somewhat normal. But even if an ever-increasing number of consumers are willing to pay double-digit interest rates on gasoline, groceries and a host of other items that are gone long before the bill is paid in full, don't be one of them. Credit card interest rates make the price of the charged items a great deal more expensive. Depending on credit also makes it more likely that you'll spend more than you earn.(To learn more about credit cards, see Take Control Of Your Credit Cards and Credit, Debit And Charge: Sizing Up The Cards In Your Wallet.)
Mistake No. 4: Buying a New Car
Millions of new cars are sold each year, although few buyers can afford to pay for them in cash. However, the inability to pay cash for a new car means an inability to afford the car. After all, being able to afford the payment is not the same as being able to afford the car. Furthermore, by borrowing money to buy a car, the consumer pays interest on a depreciating asset, which amplifies the difference between the value of the car and the price paid for it. Worse yet, many people trade in their cars every two or three years, and lose money on every trade.
Sometimes a person has no choice but to take out a loan to buy a car, but how much does any consumer really need a large SUV? Such vehicles are expensive to buy, insure and fuel. Unless you tow a boat or trailer, or need an SUV to earn a living, is an eight-cylinder engine worth the extra cost of taking out a large loan? If you need to buy a car and/or borrow money to do so, consider buying one that uses less gas and costs less to insure and maintain. Cars are expensive. You might need one, but if you're buying more car than you need, you're burning through money that could have been saved or used to pay off debt. (To keep reading about this subject, check out Car Shopping: New Or Used?)
Mistake No. 5: Buying Too Much House
When it comes to buying a house, bigger is also not necessarily better. Unless you have a large family, choosing a 6,000-square-foot home will only mean more expensive taxes, maintenance and utilities. Do you really want to put such a significant, long-term dent in your monthly budget? (For more on buying a home, see Mortgages: How Much Can You Afford? and Downsize Your Home To Downsize Expenses.)
Mistake No. 6: Treating Your Home Equity Like a Piggy Bank
Your home is your castle. Refinancing and taking cash out on it means giving away ownership to someone else. It also costs you thousands of dollars in interest and fees. Smart homeowners want to build equity, not make payments in perpetuity. In addition, you'll end up paying way more for your home than it's worth, which virtually ensures that you won't come out on top when you decide to sell. (For further reading see Mortgages: The ABCs Of Refinancing.)
Living Paycheck to Paycheck
In 2007, the U.S. household savings rate fell below 1%, but other countries had considerably higher rates of personal savings. For example, the Netherlands, Italy, Norway, Germany and France personal savings rates average 10% or more according, to the OECD Factbook 2005. Clearly it is possible to enjoy a high standard of living without financing it with debt. Countries in Asia boast savings rates of as much as 30%!
The cumulative result of overspending puts people into a precarious position - one in which they need every dime they earn and one missed paycheck would be disastrous. This is not the position you want to find yourself in when an economic recession hits. If this happens, you'll have very few options. Everyone has a choice in how they live, so it's just a matter of making savings a priority.
Making a Payment Vs. Affording A Purchase
To steer yourself away from the dangers of overspending:
- Start by monitoring the little expenses that add up quickly, then move on to monitoring the big expenses.
- Think carefully before adding new debts to your list of payments, and keep in mind that being able to make a payment isn't the same as being able to afford the purchase.
- Finally, make saving some of what you earn a monthly priority.
For more, check out Seven Common Investor Mistakes.
by Investopedia Staff, (Contact Author Biography)Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.
MOST POPULAR - YOUR MONEY
MOST POPULAR - YOUR MONEY
Credit Scores: What You Need to Know
Estate Planning: What You Need to Know
Your Money: Nutritional Insights on Saving Money
Wealth Matters: It’s Not Just the Money, It’s the Mind-Set
Shortcuts: The Popular Practice of Putting Stuff Off
Home Insurance: What You Need to Know
Health Insurance: What You Need to Know
Income Taxes: What You Need to Know
One Fewer Credit Score Accessible to Consumers
Your Money: Doing the Right Thing by Paying the Nanny Tax
Credit Scores: What You Need to Know
Estate Planning: What You Need to Know
Your Money: Nutritional Insights on Saving Money
Wealth Matters: It’s Not Just the Money, It’s the Mind-Set
Shortcuts: The Popular Practice of Putting Stuff Off
Home Insurance: What You Need to Know
Health Insurance: What You Need to Know
Income Taxes: What You Need to Know
One Fewer Credit Score Accessible to Consumers
Your Money: Doing the Right Thing by Paying the Nanny Tax
Money flow into areas entailing more risk
Markets Rise Despite Report
Daniel Acker/Bloomberg News
By JACK HEALY
Published: February 6, 2009
Not even the loss of 598,000 jobs could dampen Wall Street’s soaring mood on Friday. In a second day of gains, stock markets surged as investors waited for the federal government to detail its latest plans to shore up the banking system.
With Friday’s rally, the major indexes posted their first winning week in a month, and the technology-heavy Nasdaq composite gained enough to recoup its losses from last month, ending in positive territory for the year.
But some analysts questioned whether the Treasury Department’s expected announcement on Monday would be enough to meet investors’ expectations and whether stocks would fall back if the government’s plans turned out to be disappointing.
“It’s clear investors want to see something bold, something dramatic and something that is viable,” said Quincy Krosby, chief investment strategist at The Hartford. “We’ve had all these ad hoc, partial solutions. They don’t work, and then the market gets depressed. We’ll see if this is the one. We’ll see.”
On Friday, the Dow Jones industrial average gained 217.52 points, or 2.7 percent, to close at 8,280.59. The broader Standard & Poor’s 500-stock index rose 22.75 points, or 2.69 percent, to 868.60, and the technology-heavy Nasdaq composite index rose 45.47 points, or 2.94 percent, to 1,591.71.
Crude oil prices fell a dollar to settle at $40.17 a barrel in New York.
Analysts said they were cheered that financial markets seemed to shrug off a government report showing that unemployment climbed to 7.6 percent in January as the recession deepened, a sign the job market was still far from hitting bottom.
“It’s a good sign that we’re trading up in the face of bad news,” said Ed Hyland, global investment specialist at JPMorgan Private Bank. “That’s one of the signs that you look for in the bottoming of a bear market.”
Although the statistics were grim, the so-called whisper numbers representing the most pessimistic estimates on Wall Street guessed that unemployment could have spiked to 8 percent last month, given the mass layoffs announced by employers.
“It’s this paradigm: not as bad as it could’ve been is the new good,” said Art Hogan, chief market analyst at Jefferies & Company.
Analysts pointed to another positive signal: Congress appears to be making progress toward passing an economic stimulus package after Senate negotiators pared down a nearly $900 billion package to about $780 billion.
Investors snapped up distressed bank stocks like they were items on a bargain table and bid up basic-materials companies and shares of General Electric, Home Depot and Caterpillar. Retailers, whose shares have been hit by falling profits and reduced outlooks for 2009, rebounded on Friday.
Depressed bank stocks surged. Citigroup, Wells Fargo and JPMorgan Chase each posted double-digit gains, and Bank of America rose nearly 30 percent, rebounding to $6.13 a share in regular trading.
The broad rally lifted even companies that reported pessimistic earnings forecasts. In New York, shares of Toyota rose slightly to $69.38 after the automaker said it expected to post a loss for the fiscal year ending March 31, its first ever.
Shares of the Ford Motor Company and General Motors were flat.
Carmakers in the United States and abroad have been hammered by plummeting sales as financing becomes more difficult and consumers curtail their spending. This week, the Big Three automakers reported that new-vehicle sales fell 37 percent in January, their worst month in decades.
The price of Treasury debt fell as investors looked for higher returns on their money and stormed back into equities. The Treasury’s benchmark 10-year note fell 22/32, to 106 12/32, and the yield, which moves in the opposite direction from the price, was at 2.99 percent, up from 2.91 percent late Thursday, well above its December low of 2.06 percent.
Treasury yields plunged last year as losses mounted in the stock and bond markets and shaken investors rushed to find safe investments, but interest rates on short-term and long-term Treasury debt have crept higher in the last few weeks as the credit markets recover and on anticipation of huge government spending and borrowing.
Other barometers of the credit market were stable.
The London interbank offered rate, a measure of how much banks charge each other to borrow money, was little changed at 1.2 percent. The so-called TED spread, which increases as investors become more cautious about lending money, was 0.97 points, unchanged from Thursday.
“It doesn’t sound like a lot, but that’s the beginning of a very significant shift in investor appetites,” said Marc D. Stern, chief investment officer of the Bessemer Trust. “We’re seeing money flow into areas entailing more risk. There’s fear out there, but I think it’s increasingly being mitigated by the sense that there’s money to be made.”
http://www.nytimes.com/2009/02/07/business/07markets.html?ref=business
Daniel Acker/Bloomberg News
By JACK HEALY
Published: February 6, 2009
Not even the loss of 598,000 jobs could dampen Wall Street’s soaring mood on Friday. In a second day of gains, stock markets surged as investors waited for the federal government to detail its latest plans to shore up the banking system.
With Friday’s rally, the major indexes posted their first winning week in a month, and the technology-heavy Nasdaq composite gained enough to recoup its losses from last month, ending in positive territory for the year.
But some analysts questioned whether the Treasury Department’s expected announcement on Monday would be enough to meet investors’ expectations and whether stocks would fall back if the government’s plans turned out to be disappointing.
“It’s clear investors want to see something bold, something dramatic and something that is viable,” said Quincy Krosby, chief investment strategist at The Hartford. “We’ve had all these ad hoc, partial solutions. They don’t work, and then the market gets depressed. We’ll see if this is the one. We’ll see.”
On Friday, the Dow Jones industrial average gained 217.52 points, or 2.7 percent, to close at 8,280.59. The broader Standard & Poor’s 500-stock index rose 22.75 points, or 2.69 percent, to 868.60, and the technology-heavy Nasdaq composite index rose 45.47 points, or 2.94 percent, to 1,591.71.
Crude oil prices fell a dollar to settle at $40.17 a barrel in New York.
Analysts said they were cheered that financial markets seemed to shrug off a government report showing that unemployment climbed to 7.6 percent in January as the recession deepened, a sign the job market was still far from hitting bottom.
“It’s a good sign that we’re trading up in the face of bad news,” said Ed Hyland, global investment specialist at JPMorgan Private Bank. “That’s one of the signs that you look for in the bottoming of a bear market.”
Although the statistics were grim, the so-called whisper numbers representing the most pessimistic estimates on Wall Street guessed that unemployment could have spiked to 8 percent last month, given the mass layoffs announced by employers.
“It’s this paradigm: not as bad as it could’ve been is the new good,” said Art Hogan, chief market analyst at Jefferies & Company.
Analysts pointed to another positive signal: Congress appears to be making progress toward passing an economic stimulus package after Senate negotiators pared down a nearly $900 billion package to about $780 billion.
Investors snapped up distressed bank stocks like they were items on a bargain table and bid up basic-materials companies and shares of General Electric, Home Depot and Caterpillar. Retailers, whose shares have been hit by falling profits and reduced outlooks for 2009, rebounded on Friday.
Depressed bank stocks surged. Citigroup, Wells Fargo and JPMorgan Chase each posted double-digit gains, and Bank of America rose nearly 30 percent, rebounding to $6.13 a share in regular trading.
The broad rally lifted even companies that reported pessimistic earnings forecasts. In New York, shares of Toyota rose slightly to $69.38 after the automaker said it expected to post a loss for the fiscal year ending March 31, its first ever.
Shares of the Ford Motor Company and General Motors were flat.
Carmakers in the United States and abroad have been hammered by plummeting sales as financing becomes more difficult and consumers curtail their spending. This week, the Big Three automakers reported that new-vehicle sales fell 37 percent in January, their worst month in decades.
The price of Treasury debt fell as investors looked for higher returns on their money and stormed back into equities. The Treasury’s benchmark 10-year note fell 22/32, to 106 12/32, and the yield, which moves in the opposite direction from the price, was at 2.99 percent, up from 2.91 percent late Thursday, well above its December low of 2.06 percent.
Treasury yields plunged last year as losses mounted in the stock and bond markets and shaken investors rushed to find safe investments, but interest rates on short-term and long-term Treasury debt have crept higher in the last few weeks as the credit markets recover and on anticipation of huge government spending and borrowing.
Other barometers of the credit market were stable.
The London interbank offered rate, a measure of how much banks charge each other to borrow money, was little changed at 1.2 percent. The so-called TED spread, which increases as investors become more cautious about lending money, was 0.97 points, unchanged from Thursday.
“It doesn’t sound like a lot, but that’s the beginning of a very significant shift in investor appetites,” said Marc D. Stern, chief investment officer of the Bessemer Trust. “We’re seeing money flow into areas entailing more risk. There’s fear out there, but I think it’s increasingly being mitigated by the sense that there’s money to be made.”
http://www.nytimes.com/2009/02/07/business/07markets.html?ref=business
Pu'er tea Bubble Bursts
A County in China Sees Its Fortunes in Tea Leaves Until a Bubble Bursts
Shiho Fukada for The New York Times
A statue in Menghai County, China, where Pu’er tea is processed.
By ANDREW JACOBS
Published: January 16, 2009
MENGHAI, China — Saudi Arabia has its oil. South Africa has its diamonds. And here in China’s temperate southwest, prosperity has come from the scrubby green tea trees that blanket the mountains of fabled Menghai County.
The New York Times
Menghai is in a lush, mountainous tea-growing region.
Over the past decade, as the nation went wild for the region’s brand of tea, known as Pu’er, farmers bought minivans, manufacturers became millionaires and Chinese citizens plowed their savings into black bricks of compacted Pu’er.
But that was before the collapse of the tea market turned thousands of farmers and dealers into paupers and provided the nation with a very pungent lesson about gullibility, greed and the perils of the speculative bubble. “Most of us are ruined,” said Fu Wei, 43, one of the few tea traders to survive the implosion of the Pu’er market. “A lot of people behaved like idiots.”
A pleasantly aromatic beverage that promoters claim reduces cholesterol and cures hangovers, Pu’er became the darling of the sipping classes in recent years as this nation’s nouveaux riches embraced a distinctly Chinese way to display their wealth, and invest their savings. From 1999 to 2007, the price of Pu’er, a fermented brew invented by Tang Dynasty traders, increased tenfold, to a high of $150 a pound for the finest aged Pu’er, before tumbling far below its preboom levels.
For tens of thousands of wholesalers, farmers and other Chinese citizens who poured their money into compressed disks of tea leaves, the crash of the Pu’er market has been nothing short of disastrous. Many investors were led to believe that Pu’er prices could only go up.
“The saying around here was ‘It’s better to save Pu’er than to save money,’ ” said Wang Ruoyu, a longtime dealer in Xishuangbanna, the lush, tea-growing region of Yunnan Province that abuts the Burmese border. “Everyone thought they were going to get rich.”
Fermented tea was hardly the only caffeinated investment frenzy that swept China during its boom years. The urban middle class speculated mainly in stock and real estate, pushing prices to stratospheric levels before exports slumped, growth slowed and hundreds of billions of dollars in paper profits disappeared over the past year.
In the mountainous Pu’er belt of Yunnan, a cabal of manipulative buyers cornered the tea market and drove prices to record levels, giving some farmers and county traders a taste of the country’s bubble — and its bitter aftermath.
At least a third of the 3,000 tea manufacturers and merchants have called it quits in recent months. Farmers have begun replacing newly planted tea trees with more nourishing — and now, more lucrative — staples like corn and rice. Here in Menghai, the newly opened six-story emporium built to house hundreds of buyers and bundlers is a very lonely place.
“Very few of us survived,” said Mr. Fu, 43, among the few tea traders brave enough to open a business in the complex, which is nearly empty. He sat in the concrete hull of his shop, which he cannot afford to complete, and cobwebs covered his shelf of treasured Pu’er cakes.
All around him, sitting on unsold sacks of tea, were idled farmers and merchants who bided their time playing cards, chain smoking and, of course, drinking endless cups of tea.
The rise and fall of Pu’er partly reflects the lack of investment opportunities and government oversight in rural Yunnan, as well as the abundance of cash among connoisseurs in the big cities.
Wu Xiduan, secretary general of the China Tea Marketing Association, said many naïve investors had been taken in by the frenzied atmosphere, largely whipped up by out-of-town wholesalers who promoted Pu’er as drinkable gold and then bought up as much as they could, sometimes paying up to 30 percent more than in the previous year.
He said that as farmers planted more tea, production doubled from 2006 to 2007, to 100,000 tons. In the final free-for-all months, some producers shipped their tea to Yunnan from other provinces, labeled it Pu’er, and then enjoyed huge markups.
When values hit absurd levels last spring, the buyers unloaded their stocks and disappeared.
“The market was sensationalized on purpose,” Mr. Wu said, speaking in a telephone interview from Beijing.
With its near-mythic aura, Pu’er is well suited for hucksterism. A favorite of emperors and imbued with vague medicinal powers, Pu’er was supposedly invented by eighth-century horseback traders who compressed the tea leaves into cakes for easier transport. Unlike other types of tea, which are consumed not long after harvest, Pu’er tastes better with age. Prized vintages from the 19th century have sold for thousands of dollars a wedge.
Over the past decade, the industry has been shaped in ways that mirror the Western fetishization of wine. Sellers charge a premium for batches picked from older plants or, even better, from “wild tea” trees that have survived the deforestation that scars much of the region. Enthusiasts talk about oxidation levels, loose-leaf versus compacted and whether the tea was harvested in the spring or the summer. (Spring tea, many believe, is more flavorful.)
But with no empirical way to establish a tea’s provenance, many buyers are easily duped.
“If you study Pu’er your whole life, you still can’t recognize the differences in the teas,” said Mr. Wang, the tea buyer. “I tell people to just buy what tastes good and don’t worry about anything else.”
Among those most bruised by the crash are the farmers of Menghai County. Many had never experienced the kind of prosperity common in China’s cities. Villagers built two-story brick homes, equipped them with televisions and refrigerators and sent their children to schools in the district capital. Flush with cash, scores of elderly residents made their first trips to Beijing.
“Everyone was wearing designer labels,” said Zhelu, 22, a farmer who is a member of the region’s Hani minority and uses only one name. “A lot of people bought cars, but now we can’t afford gas so we just park them.”
Last week, dozens of vibrantly dressed women from Xinlu sat on the side of the highway hawking their excess tea. There were few takers. The going rate, about $3 a pound for medium-grade Pu’er, was less than a tenth of the peak price. The women said that during the boom years, tea traders from Guangdong Province would come to their village and buy up everyone’s harvest. But last year, they simply stopped showing up.
Back at Menghai’s forlorn “tea city,” Chen Li was surrounded by what he said was $580,000 worth of product he bought before the crash. As he served an amber-hued seven-year-old variety, he described the manic days before Pu’er went bust. Out-of-towners packed hotels and restaurants. Local banks, besieged by customers, were forced to halve the maximum withdrawal limit.
“People had to stand in line for four or five hours to get the money from the bank, and you could often see people quarreling,” he said. “Even pedicab drivers were carrying tea samples and looking for clients on the street.”
A trader who jumped into the business three years ago, Mr. Chen survives by offsetting his losses with profits from a restaurant his family owns in Alabama. He also happens to be one of the few optimists in town. Now that so many farmers have stopped picking tea, he is confident that prices will eventually rebound. As for the mounds of unsold tea that nearly enveloped him?
“The best thing about Pu’er,” he said with a showman’s smile, “is that the longer you keep it, the more valuable it gets.”
Shiho Fukada for The New York Times
A statue in Menghai County, China, where Pu’er tea is processed.
By ANDREW JACOBS
Published: January 16, 2009
MENGHAI, China — Saudi Arabia has its oil. South Africa has its diamonds. And here in China’s temperate southwest, prosperity has come from the scrubby green tea trees that blanket the mountains of fabled Menghai County.
The New York Times
Menghai is in a lush, mountainous tea-growing region.
Over the past decade, as the nation went wild for the region’s brand of tea, known as Pu’er, farmers bought minivans, manufacturers became millionaires and Chinese citizens plowed their savings into black bricks of compacted Pu’er.
But that was before the collapse of the tea market turned thousands of farmers and dealers into paupers and provided the nation with a very pungent lesson about gullibility, greed and the perils of the speculative bubble. “Most of us are ruined,” said Fu Wei, 43, one of the few tea traders to survive the implosion of the Pu’er market. “A lot of people behaved like idiots.”
A pleasantly aromatic beverage that promoters claim reduces cholesterol and cures hangovers, Pu’er became the darling of the sipping classes in recent years as this nation’s nouveaux riches embraced a distinctly Chinese way to display their wealth, and invest their savings. From 1999 to 2007, the price of Pu’er, a fermented brew invented by Tang Dynasty traders, increased tenfold, to a high of $150 a pound for the finest aged Pu’er, before tumbling far below its preboom levels.
For tens of thousands of wholesalers, farmers and other Chinese citizens who poured their money into compressed disks of tea leaves, the crash of the Pu’er market has been nothing short of disastrous. Many investors were led to believe that Pu’er prices could only go up.
“The saying around here was ‘It’s better to save Pu’er than to save money,’ ” said Wang Ruoyu, a longtime dealer in Xishuangbanna, the lush, tea-growing region of Yunnan Province that abuts the Burmese border. “Everyone thought they were going to get rich.”
Fermented tea was hardly the only caffeinated investment frenzy that swept China during its boom years. The urban middle class speculated mainly in stock and real estate, pushing prices to stratospheric levels before exports slumped, growth slowed and hundreds of billions of dollars in paper profits disappeared over the past year.
In the mountainous Pu’er belt of Yunnan, a cabal of manipulative buyers cornered the tea market and drove prices to record levels, giving some farmers and county traders a taste of the country’s bubble — and its bitter aftermath.
At least a third of the 3,000 tea manufacturers and merchants have called it quits in recent months. Farmers have begun replacing newly planted tea trees with more nourishing — and now, more lucrative — staples like corn and rice. Here in Menghai, the newly opened six-story emporium built to house hundreds of buyers and bundlers is a very lonely place.
“Very few of us survived,” said Mr. Fu, 43, among the few tea traders brave enough to open a business in the complex, which is nearly empty. He sat in the concrete hull of his shop, which he cannot afford to complete, and cobwebs covered his shelf of treasured Pu’er cakes.
All around him, sitting on unsold sacks of tea, were idled farmers and merchants who bided their time playing cards, chain smoking and, of course, drinking endless cups of tea.
The rise and fall of Pu’er partly reflects the lack of investment opportunities and government oversight in rural Yunnan, as well as the abundance of cash among connoisseurs in the big cities.
Wu Xiduan, secretary general of the China Tea Marketing Association, said many naïve investors had been taken in by the frenzied atmosphere, largely whipped up by out-of-town wholesalers who promoted Pu’er as drinkable gold and then bought up as much as they could, sometimes paying up to 30 percent more than in the previous year.
He said that as farmers planted more tea, production doubled from 2006 to 2007, to 100,000 tons. In the final free-for-all months, some producers shipped their tea to Yunnan from other provinces, labeled it Pu’er, and then enjoyed huge markups.
When values hit absurd levels last spring, the buyers unloaded their stocks and disappeared.
“The market was sensationalized on purpose,” Mr. Wu said, speaking in a telephone interview from Beijing.
With its near-mythic aura, Pu’er is well suited for hucksterism. A favorite of emperors and imbued with vague medicinal powers, Pu’er was supposedly invented by eighth-century horseback traders who compressed the tea leaves into cakes for easier transport. Unlike other types of tea, which are consumed not long after harvest, Pu’er tastes better with age. Prized vintages from the 19th century have sold for thousands of dollars a wedge.
Over the past decade, the industry has been shaped in ways that mirror the Western fetishization of wine. Sellers charge a premium for batches picked from older plants or, even better, from “wild tea” trees that have survived the deforestation that scars much of the region. Enthusiasts talk about oxidation levels, loose-leaf versus compacted and whether the tea was harvested in the spring or the summer. (Spring tea, many believe, is more flavorful.)
But with no empirical way to establish a tea’s provenance, many buyers are easily duped.
“If you study Pu’er your whole life, you still can’t recognize the differences in the teas,” said Mr. Wang, the tea buyer. “I tell people to just buy what tastes good and don’t worry about anything else.”
Among those most bruised by the crash are the farmers of Menghai County. Many had never experienced the kind of prosperity common in China’s cities. Villagers built two-story brick homes, equipped them with televisions and refrigerators and sent their children to schools in the district capital. Flush with cash, scores of elderly residents made their first trips to Beijing.
“Everyone was wearing designer labels,” said Zhelu, 22, a farmer who is a member of the region’s Hani minority and uses only one name. “A lot of people bought cars, but now we can’t afford gas so we just park them.”
Last week, dozens of vibrantly dressed women from Xinlu sat on the side of the highway hawking their excess tea. There were few takers. The going rate, about $3 a pound for medium-grade Pu’er, was less than a tenth of the peak price. The women said that during the boom years, tea traders from Guangdong Province would come to their village and buy up everyone’s harvest. But last year, they simply stopped showing up.
Back at Menghai’s forlorn “tea city,” Chen Li was surrounded by what he said was $580,000 worth of product he bought before the crash. As he served an amber-hued seven-year-old variety, he described the manic days before Pu’er went bust. Out-of-towners packed hotels and restaurants. Local banks, besieged by customers, were forced to halve the maximum withdrawal limit.
“People had to stand in line for four or five hours to get the money from the bank, and you could often see people quarreling,” he said. “Even pedicab drivers were carrying tea samples and looking for clients on the street.”
A trader who jumped into the business three years ago, Mr. Chen survives by offsetting his losses with profits from a restaurant his family owns in Alabama. He also happens to be one of the few optimists in town. Now that so many farmers have stopped picking tea, he is confident that prices will eventually rebound. As for the mounds of unsold tea that nearly enveloped him?
“The best thing about Pu’er,” he said with a showman’s smile, “is that the longer you keep it, the more valuable it gets.”
Credit Crisis -- The Essentials
Credit Crisis -- The Essentials
Latest Developments: Updated: Feb. 7, 2009
The Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks and entice investors to purchase their most troubled assets. Feb. 6, 2009
Senate Democrats reached an agreement with Republican moderates on Friday to pare a huge economic recovery measure, clearing the way for approval of a package that President Obama said was urgently needed in light of mounting job losses. Feb. 6, 2009
With the economic downturn taking a toll on industries that employ more men, women are close to surpassing men on the nation's payrolls. Feb. 6, 2009
A plan backed by the Obama administration would help desperate homeowners stay in their houses while they renegotiate their debt. Feb. 6, 2009
Overview
By THE NEW YORK TIMES
In the fall of 2008, the credit crunch, which had emerged a little more than a year before, ballooned into Wall Street’s biggest crisis since the Great Depression. As hundreds of billions in mortgage-related investments went bad, mighty investment banks that once ruled high finance have crumbled or reinvented themselves as humdrum commercial banks. The nation’s largest insurance company and largest savings and loan both were seized by the government. The channels of credit, the arteries of the global financial system, have been constricted, cutting off crucial funds to consumers and businesses small and large.
In response, the federal government adopted a $700 billion bailout plan meant to reassure the markets and get credit flowing again. But the crisis began to spread to Europe and to emerging markets, with governments scrambling to prop up banks, broaden guarantees for deposits and agree on a coordinated response.
Origins
The roots of the credit crisis stretch back to another notable boom-and-bust: the tech bubble of the late 1990’s. When the stock market began a steep decline in 2000 and the nation slipped into recession the next year, the Federal Reserve sharply lowered interest rates to limit the economic damage.
Lower interest rates make mortgage payments cheaper, and demand for homes began to rise, sending prices up. In addition, millions of homeowners took advantage of the rate drop to refinance their existing mortgages. As the industry ramped up, the quality of the mortgages went down.
And turn sour they did, when home buyers had to leverage themselves to the hilt to make a purchase. Default and delinquency rates began to rise in 2006, but the pace of lending did not slow. Banks and other investors had devised a plethora of complex financial instruments to slice up and resell the mortgage-backed securities and to hedge against any risks — or so they thought.
The Crisis Takes Hold
The first shoe to drop was the collapse in June 2007 of two hedge funds owned by Bear Stearns that had invested heavily in the subprime market. As the year went on, more banks found that securities they thought were safe were tainted with what came to be called toxic mortgages. At the same time, the rising number of foreclosures helped speed the fall of housing prices, and the number of prime mortgages in default began to increase.
The Federal Reserve took unprecedented steps to bolster Wall Street. But still the losses mounted, and in March 2008 the Fed staved off a Bear Stearns bankruptcy by assuming $30 billion in liabilities and engineering a sale to JPMorgan Chase for a price that was less than the worth of Bear’s Manhattan skyscraper.
Sales, Failures and Seizures
In August, government officials began to become concerned as the stock prices of Fannie Mae and Freddie Mac, government-sponsored entities that were linchpins of the housing market, slid sharply. On Sept. 7, the Treasury Department announced it was taking them over.
Events began to move even faster. On Sept. 12, top government and finance officials gathered for talks to fend off bankruptcy for Lehman Brothers. The talks broke down, and the government refused to step in and salvage Lehman as it had for Bear. Lehman’s failure sent shock waves through the global banking system, as became increasingly clear in the following weeks. Merrill Lynch, which had not been previously thought to be in danger, sold itself to the Bank of America to avoid a similar fate.
On Sept. 16, American International Group, an insurance giant on the verge of failure because of its exposure to exotic securities known as credit default swaps, was bailed out by the Fed in an $85 billion deal. Stocks dropped anyway, falling nearly 500 points.
The Government’s Bailout Plan
The bleeding in the stock market stopped only after rumors trickled out about a huge bailout plan being readied by the federal government. On Sept. 18, Treasury Secretary Henry M. Paulson Jr. publicly announced a three-page, $700 billion proposal that would allow the government to buy toxic assets from the nation’s biggest banks, a move aimed at shoring up balance sheets and restoring confidence within the financial system.
Congress eventually amended the plan to add new structures for oversight, limits on executive pay and the option of the government taking a stake in the companies it bails out. Still, many Americans were angered by the idea of a proposal that provided billions of dollars in taxpayer money to Wall Street banks, which many believed had caused the crisis in the first place. Lawmakers with strong beliefs in free markets also opposed the bill, which they said amounted to socialism.
President Bush pleaded with lawmakers to pass the bill, but on Sept. 29, the House rejected the proposal, 228 to 205, with an insurgent group of Republicans leading the opposition. Stocks plunged, with the Standard & Poor’s 500-stock index losing nearly 9 percent, its worst day since Oct. 19, 1987.
Negotiations began anew on Capitol Hill. A series of tax breaks were added to the legislation, among other compromises and earmarks, and the Senate passed a revised version Oct. 1 by a large margin, 74 to 25. On Oct. 3, the House followed suit, by a vote of 263 to 171.
When the bill passed, it was still unclear how effective the bailout plan would be in resolving the credit crisis, although many analysts and economists believed it would offer at least a temporary aid. Federal officials promised increased regulation of the financial industry, whose structure was vastly different than it had been just weeks before.
The first reactions were not positive. Banks in England and Europe had invested heavily in mortgage-backed securities offered by Wall Street, and England had gone through a housing boom and bust of its own. Losses from those investments and the effect of the same tightening credit spiral being felt on Wall Street began to put a growing number of European institutions in danger. Over the weekend that followed the bailout’s passage, the German government moved to guarantee all private savings accounts in the country, and bailouts were arranged for a large German lender and a major European financial company.
And even as the United States began to execute its bailout plan, the tactics continued to shift, with the Treasury announcing that it would spend some of the funds to buy commercial paper, a vital form of short-term borrowing for businesses, in an effort to get credit flowing again.
Continued Volatility
When stock markets in the United States, Europe and Asia continued to plunge, the world’s leading central banks on Oct. 8 took the drastic step of a coordinated cut in interest rates, with the Federal Reserve cutting its two main rates by half a point.
And after a week in which stocks declined almost 20 percent on Wall Street, European and American officials announced coordinated actions that included taking equity stakes in major banks, including $250 billion in investments in the United States. The action prompted a worldwide stock rally, with the Dow rising 936 points, or 11 percent, on Oct. 13.
But as the prospect of a severe global recession became more evident, such gains were impossible to sustain. Just two days later, after Ben S. Bernanke, the Federal Reserve chairman, said there would be no quick economic turnaround even with the government’s intervention, the Dow plunged 733 points.
The credit markets, meanwhile, were slow to ease up, as banks used the injection of government funds to strengthen their balance sheets rather than lend. By late October, the Treasury had decided to use its $250 billion investment plan not only to increase banks’ capitalization but also to steer funds to stronger banks to purchase weaker ones, as in the acquisition of National City, a troubled Ohio-based bank, by PNC Financial of Pittsburgh.
The volatility in the stock markets was matched by upheaval in currency trading as investors sought shelter in the yen and the dollar, driving down the currencies of developing countries and even the euro and the British pound. The unwinding of the so-called yen-carry trade, in which investors borrowed money cheaply in Japan and invested it overseas, made Japanese goods more expensive on world markets and precipitated a steep plunge in Tokyo stock trading.
Oil-producing countries were hit by a sudden reversal of fortune, as the record oil prices reached over the summer were cut in half by October because of the world economic outlook. Even an agreement on a production cut by the Organization of the Petroleum Exporting Countries on Oct. 24 failed to stem the price decline.
Stock markets remained in upheaval, with the general downward trend punctuated by events like an 11-percent gain in the Dow on Oct. 28. A day later, the Fed cut its key lending rate again, to a mere 1 percent. In early November, the European Central Bank and the Bank of England followed with sharp reductions of their own.
Federal officials also moved to put together a plan to aid homeowners at risk of foreclosure by shouldering some losses for banks that agree to lower monthly payments. Detroit’s automakers, meanwhile, hard hit by the credit crisis, the growing economic slump and their belated transition away from big vehicles, turned to the government for aid of their own, possibly including help in engineering a merger of General Motors and Chrysler.
The leaders of 20 major countries, meanwhile, agreed to an emergency summit meeting in Washington on Nov. 14 and 15 to discuss coordinated action to deal with the credit crisis. The group agreed to work more closely, but put off thornier questions until next year, in an early challenge for the Obama administration.
The Crisis and the Campaign
The credit crisis emerged as the dominant issue of the presidential campaign in the last two months before the election. On Sept. 24, as polls showed Senator John McCain’s support dropping, he announced that he would suspend his campaign to try to help forge a deal on the bailout plan. The next day, both he and Senator Barack Obama met with Congressional leaders and President Bush at the White House, but their efforts failed to assure passage of the legislation, which went down to defeat in an initial vote on Sept. 29, a week before it ultimately passed.
The weakening stock market and growing credit crisis appeared to benefit Mr. Obama, who tied Mr. McCain to what he called the failed economic policies of President Bush and a Republican culture of deregulation of the financial markets. Polls showed that Mr. Obama’s election on Nov. 4 was partly the fruit of the economic crisis and the belief among many voters that he was more capable of handling the economy than Mr. McCain.
As president-elect, Mr. Obama made confronting the economic crisis the top priority of his transition. Just three days after his election, he convened a meeting of his top economic advisers, including the billionaire investor Warren Buffett; two former Treasury secretaries, Lawrence H. Summers and Robert E. Rubin; Paul A. Volcker, a former Federal Reserve chairman; and Eric E. Schmidt, the chief executive of Google. After their Nov. 7 meeting, he called quick passage of an economic stimulus package, saying it should be taken up by the the lame-duck Congressional session, and that if lawmakers failed to act, it would be his main economic goal after assuming office Jan. 20.
Mr. Obama also faced a host of other demands as president-elect, including calls to bail out the auto industry, particularly General Motors, which warned that it would run out of cash by mid-2009. And some economists and conservatives questioned whether, given the economic crisis, he could still meet some of his pledges from the campaign, like rapidly rolling back the Bush tax cuts, which some felt would hurt demand, and pushing ahead with his planned expansion of health care coverage, which could greatly increase a soaring deficit.
Deeper Problems, Dramatic Measures
With credit markets still locked up and investors getting worried about the big banks, Wall Street marked a grim milestone in late November when stock markets tumbled to their lowest levels in a decade. In all, the slide from the height of the stock markets had wiped out more than $8 trillion in wealth. The markets inched back in the weeks that followed as investors looked forward to a new administration and a huge economic stimulus package, but key indicators of the economy only got worse.
In December, an obscure group of economists confirmed what millions of Americans had suspected for months: the United States was in a recession. The economy had actually slipped into recession a year earlier, a committee of economists said, putting the current downturn on track to be the longest in a generation. Unemployment rose to its highest point in more than 15 years. Trade shrank. Home prices fell farther. As inflation virtually halted, economists began to worry about deflation, the vicious cycle of lower prices, lower wages and economic contraction.
Retailers suffered one of the worst holiday seasons in 30 years as worried consumers cut back, raising the likelihood that dozens more would join stores like Sharper Image, Circuit City and Linens 'n Things in bankruptcy.
On Dec. 16, the Federal Reserve entered uncharted waters of monetary policy by cutting its benchmark interest rate to nearly zero percent and declaring that it would deploy its balance sheet and essentially print money to fight the deepening recession and locked credit markets. Investors cheered, sending the Dow up more than 300 points, but many economists began to worry about the world's appetite for hundreds of billions of dollars in new Treasury debt.
Other countries followed the Fed with rate cuts of their own. Britain’s central bank a wave of refinancing that nevertheless skipped many homeowners.
But as Mr. Obama took office, investors were just as worried as ever, as evidenced by Wall Street’s worst Inauguration Day drop ever. The fourth-quarter corporate earnings season was marked by billion-dollar losses and uncertain outlooks for 2009. The economy showed no sign of turning around. And many lawmakers and analysts began to wonder whether the first $350 billion in bailout money had any effect at all. Banks that received bailout funds sat on their money, rather than lend it out to consumers or home buyers.
And bailout recipients such as Citigroup and Bank of America were forced to step forward for additional lifelines, raising one of the most uncomfortable questions a new president has ever had to address: Would the government nationalize the American banking system?
http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/index.html
Latest Developments: Updated: Feb. 7, 2009
The Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks and entice investors to purchase their most troubled assets. Feb. 6, 2009
Senate Democrats reached an agreement with Republican moderates on Friday to pare a huge economic recovery measure, clearing the way for approval of a package that President Obama said was urgently needed in light of mounting job losses. Feb. 6, 2009
With the economic downturn taking a toll on industries that employ more men, women are close to surpassing men on the nation's payrolls. Feb. 6, 2009
A plan backed by the Obama administration would help desperate homeowners stay in their houses while they renegotiate their debt. Feb. 6, 2009
Overview
By THE NEW YORK TIMES
In the fall of 2008, the credit crunch, which had emerged a little more than a year before, ballooned into Wall Street’s biggest crisis since the Great Depression. As hundreds of billions in mortgage-related investments went bad, mighty investment banks that once ruled high finance have crumbled or reinvented themselves as humdrum commercial banks. The nation’s largest insurance company and largest savings and loan both were seized by the government. The channels of credit, the arteries of the global financial system, have been constricted, cutting off crucial funds to consumers and businesses small and large.
In response, the federal government adopted a $700 billion bailout plan meant to reassure the markets and get credit flowing again. But the crisis began to spread to Europe and to emerging markets, with governments scrambling to prop up banks, broaden guarantees for deposits and agree on a coordinated response.
Origins
The roots of the credit crisis stretch back to another notable boom-and-bust: the tech bubble of the late 1990’s. When the stock market began a steep decline in 2000 and the nation slipped into recession the next year, the Federal Reserve sharply lowered interest rates to limit the economic damage.
Lower interest rates make mortgage payments cheaper, and demand for homes began to rise, sending prices up. In addition, millions of homeowners took advantage of the rate drop to refinance their existing mortgages. As the industry ramped up, the quality of the mortgages went down.
And turn sour they did, when home buyers had to leverage themselves to the hilt to make a purchase. Default and delinquency rates began to rise in 2006, but the pace of lending did not slow. Banks and other investors had devised a plethora of complex financial instruments to slice up and resell the mortgage-backed securities and to hedge against any risks — or so they thought.
The Crisis Takes Hold
The first shoe to drop was the collapse in June 2007 of two hedge funds owned by Bear Stearns that had invested heavily in the subprime market. As the year went on, more banks found that securities they thought were safe were tainted with what came to be called toxic mortgages. At the same time, the rising number of foreclosures helped speed the fall of housing prices, and the number of prime mortgages in default began to increase.
The Federal Reserve took unprecedented steps to bolster Wall Street. But still the losses mounted, and in March 2008 the Fed staved off a Bear Stearns bankruptcy by assuming $30 billion in liabilities and engineering a sale to JPMorgan Chase for a price that was less than the worth of Bear’s Manhattan skyscraper.
Sales, Failures and Seizures
In August, government officials began to become concerned as the stock prices of Fannie Mae and Freddie Mac, government-sponsored entities that were linchpins of the housing market, slid sharply. On Sept. 7, the Treasury Department announced it was taking them over.
Events began to move even faster. On Sept. 12, top government and finance officials gathered for talks to fend off bankruptcy for Lehman Brothers. The talks broke down, and the government refused to step in and salvage Lehman as it had for Bear. Lehman’s failure sent shock waves through the global banking system, as became increasingly clear in the following weeks. Merrill Lynch, which had not been previously thought to be in danger, sold itself to the Bank of America to avoid a similar fate.
On Sept. 16, American International Group, an insurance giant on the verge of failure because of its exposure to exotic securities known as credit default swaps, was bailed out by the Fed in an $85 billion deal. Stocks dropped anyway, falling nearly 500 points.
The Government’s Bailout Plan
The bleeding in the stock market stopped only after rumors trickled out about a huge bailout plan being readied by the federal government. On Sept. 18, Treasury Secretary Henry M. Paulson Jr. publicly announced a three-page, $700 billion proposal that would allow the government to buy toxic assets from the nation’s biggest banks, a move aimed at shoring up balance sheets and restoring confidence within the financial system.
Congress eventually amended the plan to add new structures for oversight, limits on executive pay and the option of the government taking a stake in the companies it bails out. Still, many Americans were angered by the idea of a proposal that provided billions of dollars in taxpayer money to Wall Street banks, which many believed had caused the crisis in the first place. Lawmakers with strong beliefs in free markets also opposed the bill, which they said amounted to socialism.
President Bush pleaded with lawmakers to pass the bill, but on Sept. 29, the House rejected the proposal, 228 to 205, with an insurgent group of Republicans leading the opposition. Stocks plunged, with the Standard & Poor’s 500-stock index losing nearly 9 percent, its worst day since Oct. 19, 1987.
Negotiations began anew on Capitol Hill. A series of tax breaks were added to the legislation, among other compromises and earmarks, and the Senate passed a revised version Oct. 1 by a large margin, 74 to 25. On Oct. 3, the House followed suit, by a vote of 263 to 171.
When the bill passed, it was still unclear how effective the bailout plan would be in resolving the credit crisis, although many analysts and economists believed it would offer at least a temporary aid. Federal officials promised increased regulation of the financial industry, whose structure was vastly different than it had been just weeks before.
The first reactions were not positive. Banks in England and Europe had invested heavily in mortgage-backed securities offered by Wall Street, and England had gone through a housing boom and bust of its own. Losses from those investments and the effect of the same tightening credit spiral being felt on Wall Street began to put a growing number of European institutions in danger. Over the weekend that followed the bailout’s passage, the German government moved to guarantee all private savings accounts in the country, and bailouts were arranged for a large German lender and a major European financial company.
And even as the United States began to execute its bailout plan, the tactics continued to shift, with the Treasury announcing that it would spend some of the funds to buy commercial paper, a vital form of short-term borrowing for businesses, in an effort to get credit flowing again.
Continued Volatility
When stock markets in the United States, Europe and Asia continued to plunge, the world’s leading central banks on Oct. 8 took the drastic step of a coordinated cut in interest rates, with the Federal Reserve cutting its two main rates by half a point.
And after a week in which stocks declined almost 20 percent on Wall Street, European and American officials announced coordinated actions that included taking equity stakes in major banks, including $250 billion in investments in the United States. The action prompted a worldwide stock rally, with the Dow rising 936 points, or 11 percent, on Oct. 13.
But as the prospect of a severe global recession became more evident, such gains were impossible to sustain. Just two days later, after Ben S. Bernanke, the Federal Reserve chairman, said there would be no quick economic turnaround even with the government’s intervention, the Dow plunged 733 points.
The credit markets, meanwhile, were slow to ease up, as banks used the injection of government funds to strengthen their balance sheets rather than lend. By late October, the Treasury had decided to use its $250 billion investment plan not only to increase banks’ capitalization but also to steer funds to stronger banks to purchase weaker ones, as in the acquisition of National City, a troubled Ohio-based bank, by PNC Financial of Pittsburgh.
The volatility in the stock markets was matched by upheaval in currency trading as investors sought shelter in the yen and the dollar, driving down the currencies of developing countries and even the euro and the British pound. The unwinding of the so-called yen-carry trade, in which investors borrowed money cheaply in Japan and invested it overseas, made Japanese goods more expensive on world markets and precipitated a steep plunge in Tokyo stock trading.
Oil-producing countries were hit by a sudden reversal of fortune, as the record oil prices reached over the summer were cut in half by October because of the world economic outlook. Even an agreement on a production cut by the Organization of the Petroleum Exporting Countries on Oct. 24 failed to stem the price decline.
Stock markets remained in upheaval, with the general downward trend punctuated by events like an 11-percent gain in the Dow on Oct. 28. A day later, the Fed cut its key lending rate again, to a mere 1 percent. In early November, the European Central Bank and the Bank of England followed with sharp reductions of their own.
Federal officials also moved to put together a plan to aid homeowners at risk of foreclosure by shouldering some losses for banks that agree to lower monthly payments. Detroit’s automakers, meanwhile, hard hit by the credit crisis, the growing economic slump and their belated transition away from big vehicles, turned to the government for aid of their own, possibly including help in engineering a merger of General Motors and Chrysler.
The leaders of 20 major countries, meanwhile, agreed to an emergency summit meeting in Washington on Nov. 14 and 15 to discuss coordinated action to deal with the credit crisis. The group agreed to work more closely, but put off thornier questions until next year, in an early challenge for the Obama administration.
The Crisis and the Campaign
The credit crisis emerged as the dominant issue of the presidential campaign in the last two months before the election. On Sept. 24, as polls showed Senator John McCain’s support dropping, he announced that he would suspend his campaign to try to help forge a deal on the bailout plan. The next day, both he and Senator Barack Obama met with Congressional leaders and President Bush at the White House, but their efforts failed to assure passage of the legislation, which went down to defeat in an initial vote on Sept. 29, a week before it ultimately passed.
The weakening stock market and growing credit crisis appeared to benefit Mr. Obama, who tied Mr. McCain to what he called the failed economic policies of President Bush and a Republican culture of deregulation of the financial markets. Polls showed that Mr. Obama’s election on Nov. 4 was partly the fruit of the economic crisis and the belief among many voters that he was more capable of handling the economy than Mr. McCain.
As president-elect, Mr. Obama made confronting the economic crisis the top priority of his transition. Just three days after his election, he convened a meeting of his top economic advisers, including the billionaire investor Warren Buffett; two former Treasury secretaries, Lawrence H. Summers and Robert E. Rubin; Paul A. Volcker, a former Federal Reserve chairman; and Eric E. Schmidt, the chief executive of Google. After their Nov. 7 meeting, he called quick passage of an economic stimulus package, saying it should be taken up by the the lame-duck Congressional session, and that if lawmakers failed to act, it would be his main economic goal after assuming office Jan. 20.
Mr. Obama also faced a host of other demands as president-elect, including calls to bail out the auto industry, particularly General Motors, which warned that it would run out of cash by mid-2009. And some economists and conservatives questioned whether, given the economic crisis, he could still meet some of his pledges from the campaign, like rapidly rolling back the Bush tax cuts, which some felt would hurt demand, and pushing ahead with his planned expansion of health care coverage, which could greatly increase a soaring deficit.
Deeper Problems, Dramatic Measures
With credit markets still locked up and investors getting worried about the big banks, Wall Street marked a grim milestone in late November when stock markets tumbled to their lowest levels in a decade. In all, the slide from the height of the stock markets had wiped out more than $8 trillion in wealth. The markets inched back in the weeks that followed as investors looked forward to a new administration and a huge economic stimulus package, but key indicators of the economy only got worse.
In December, an obscure group of economists confirmed what millions of Americans had suspected for months: the United States was in a recession. The economy had actually slipped into recession a year earlier, a committee of economists said, putting the current downturn on track to be the longest in a generation. Unemployment rose to its highest point in more than 15 years. Trade shrank. Home prices fell farther. As inflation virtually halted, economists began to worry about deflation, the vicious cycle of lower prices, lower wages and economic contraction.
Retailers suffered one of the worst holiday seasons in 30 years as worried consumers cut back, raising the likelihood that dozens more would join stores like Sharper Image, Circuit City and Linens 'n Things in bankruptcy.
On Dec. 16, the Federal Reserve entered uncharted waters of monetary policy by cutting its benchmark interest rate to nearly zero percent and declaring that it would deploy its balance sheet and essentially print money to fight the deepening recession and locked credit markets. Investors cheered, sending the Dow up more than 300 points, but many economists began to worry about the world's appetite for hundreds of billions of dollars in new Treasury debt.
Other countries followed the Fed with rate cuts of their own. Britain’s central bank a wave of refinancing that nevertheless skipped many homeowners.
But as Mr. Obama took office, investors were just as worried as ever, as evidenced by Wall Street’s worst Inauguration Day drop ever. The fourth-quarter corporate earnings season was marked by billion-dollar losses and uncertain outlooks for 2009. The economy showed no sign of turning around. And many lawmakers and analysts began to wonder whether the first $350 billion in bailout money had any effect at all. Banks that received bailout funds sat on their money, rather than lend it out to consumers or home buyers.
And bailout recipients such as Citigroup and Bank of America were forced to step forward for additional lifelines, raising one of the most uncomfortable questions a new president has ever had to address: Would the government nationalize the American banking system?
http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/index.html
How to Value Stocks
How to Value Stocks
By Motley Fool Staff May 23, 2008 Comments (3)
So just how do you value the shares of a company? Should you look at earnings, revenues, cash flow, or something else entirely? Do you need to apply one or several valuation methods to discern what the fair price for a share of stock would be?
In this series of informative articles, Fools can learn many ways to value a company's shares, as well as helpful methods to determine whether or not a stock is undervalued right now.
How to Read a Balance Sheet
These articles explore the mechanics of a balance sheet and define the items that go into one. Readers will understand how to use this knowledge most effectively to pick stocks.
Introduction to Valuation Methods
How do you value the shares of a publicly traded company? This helpful series details the many and varied ways one can understand the fundamentals about a company's business to value its shares. You can learn to use earnings, revenues, cash flow, equity, dividend yield, and subscribers to figure out how much a company is worth.
Return on Equity
Disarmingly simple to calculate, return on equity (ROE) stands as a crucial weapon in the investor's arsenal if properly understood for what it is. ROE encompasses the three main "levers" by which management pokes and prods the corporation -- profitability, asset management, and financial leverage. This series walks you through how to use ROE to value stocks.
A Look at ROIC
(Return on Invested Capital)It isn't profit margins that determine a company's desirability; it's how much cash can be produced by each dollar of cash that is invested in a company by either its shareholders or lenders. Measuring the real cash-on-cash return is what return on invested capital (ROIC) seeks to accomplish. This series is an introduction to how ROIC is calculated.
Read/Post Comments (3) Recommend This Article (76)
http://www.fool.com/investing/beginning/how-to-value-stocks.aspx
By Motley Fool Staff May 23, 2008 Comments (3)
So just how do you value the shares of a company? Should you look at earnings, revenues, cash flow, or something else entirely? Do you need to apply one or several valuation methods to discern what the fair price for a share of stock would be?
In this series of informative articles, Fools can learn many ways to value a company's shares, as well as helpful methods to determine whether or not a stock is undervalued right now.
How to Read a Balance Sheet
These articles explore the mechanics of a balance sheet and define the items that go into one. Readers will understand how to use this knowledge most effectively to pick stocks.
Introduction to Valuation Methods
How do you value the shares of a publicly traded company? This helpful series details the many and varied ways one can understand the fundamentals about a company's business to value its shares. You can learn to use earnings, revenues, cash flow, equity, dividend yield, and subscribers to figure out how much a company is worth.
Return on Equity
Disarmingly simple to calculate, return on equity (ROE) stands as a crucial weapon in the investor's arsenal if properly understood for what it is. ROE encompasses the three main "levers" by which management pokes and prods the corporation -- profitability, asset management, and financial leverage. This series walks you through how to use ROE to value stocks.
A Look at ROIC
(Return on Invested Capital)It isn't profit margins that determine a company's desirability; it's how much cash can be produced by each dollar of cash that is invested in a company by either its shareholders or lenders. Measuring the real cash-on-cash return is what return on invested capital (ROIC) seeks to accomplish. This series is an introduction to how ROIC is calculated.
Read/Post Comments (3) Recommend This Article (76)
http://www.fool.com/investing/beginning/how-to-value-stocks.aspx
Madoff Topples Zsa Zsa School of Investing
Madoff Topples Zsa Zsa School of Investing
By Selena Maranjian
February 5, 2009 Comments (1)
A few years ago, I spotlighted Zsa Zsa Gabor as a surprising source of investing insights. Now I'm having second thoughts.
Gabor, who's now almost 92, is in the news again. Why? Well, there's a summary of the situation on a website in her native Hungary, and although it reads like Greek to me, one word in particular stands out ... Madoff. Yes, Zsa Zsa's one of the many customers apparently duped by Bernie Madoff.
Avoiding scams
The glamorous Ms. Gabor has my sympathy, as do all of Madoff's victims. They were swindled, plain and simple. Still, some of them might have suffered less if they'd followed some basic investing rules. For example:
Diversify!
I'm not suggesting you should own hundreds of stocks. Heck, even eight might be enough, as long as they're distributed among different industries and maybe even a few different countries. It appears that many Madoff victims left the lion's share of their wealth in his hands. That's always risky, no matter how much you trust someone.
Tend to your asset allocation
If you have decades to retirement, you might want to be 100% in stocks, as they tend to grow fastest over the long haul. If you have only a few years, you might want to keep some money in bonds. Considering that Gabor is in her 90s, she might do well to keep a chunk of her money in conservative income-producing dividend payers. Here are some contenders -- companies with dividend yields above 3%:
Company
Recent dividend yield
Bristol-Myers Squibb (NYSE: BMY)
5.5%
ArcelorMittal (NYSE: MT)
5.1%
Consolidated Edison (NYSE: ED)
5.7%
Kraft Foods (NYSE: KFT)
4.4%
Titanium Metals (NYSE: TIE)
3.9%
Sysco (NYSE: SYY)
4.0%
Spectra Energy (NYSE: SE)
6.8%
Source: Motley Fool CAPS.
A free, no-obligation trial of our Motley Fool Income Investor service will give you dozens of researched recommendations, many yielding 8% or more.
Be skeptical
Finally, Gabor and others should have been wary of Madoff's relatively consistent returns. Know that the stock market has always gone up over the long haul -- but as we were reminded sharply in 2008, it can swing wildly from year to year.
Don't wait until you're 92 to brush up on your investing basics. They're your best defense against swindles, scams, and other Wall Street dangers.
http://www.fool.com/investing/dividends-income/2009/02/05/how-madoff-swindled-one-of-my-favorite-investors.aspx
By Selena Maranjian
February 5, 2009 Comments (1)
A few years ago, I spotlighted Zsa Zsa Gabor as a surprising source of investing insights. Now I'm having second thoughts.
Gabor, who's now almost 92, is in the news again. Why? Well, there's a summary of the situation on a website in her native Hungary, and although it reads like Greek to me, one word in particular stands out ... Madoff. Yes, Zsa Zsa's one of the many customers apparently duped by Bernie Madoff.
Avoiding scams
The glamorous Ms. Gabor has my sympathy, as do all of Madoff's victims. They were swindled, plain and simple. Still, some of them might have suffered less if they'd followed some basic investing rules. For example:
Diversify!
I'm not suggesting you should own hundreds of stocks. Heck, even eight might be enough, as long as they're distributed among different industries and maybe even a few different countries. It appears that many Madoff victims left the lion's share of their wealth in his hands. That's always risky, no matter how much you trust someone.
Tend to your asset allocation
If you have decades to retirement, you might want to be 100% in stocks, as they tend to grow fastest over the long haul. If you have only a few years, you might want to keep some money in bonds. Considering that Gabor is in her 90s, she might do well to keep a chunk of her money in conservative income-producing dividend payers. Here are some contenders -- companies with dividend yields above 3%:
Company
Recent dividend yield
Bristol-Myers Squibb (NYSE: BMY)
5.5%
ArcelorMittal (NYSE: MT)
5.1%
Consolidated Edison (NYSE: ED)
5.7%
Kraft Foods (NYSE: KFT)
4.4%
Titanium Metals (NYSE: TIE)
3.9%
Sysco (NYSE: SYY)
4.0%
Spectra Energy (NYSE: SE)
6.8%
Source: Motley Fool CAPS.
A free, no-obligation trial of our Motley Fool Income Investor service will give you dozens of researched recommendations, many yielding 8% or more.
Be skeptical
Finally, Gabor and others should have been wary of Madoff's relatively consistent returns. Know that the stock market has always gone up over the long haul -- but as we were reminded sharply in 2008, it can swing wildly from year to year.
Don't wait until you're 92 to brush up on your investing basics. They're your best defense against swindles, scams, and other Wall Street dangers.
http://www.fool.com/investing/dividends-income/2009/02/05/how-madoff-swindled-one-of-my-favorite-investors.aspx
Panic of 2008
The Wall Street Panic of 2008
By Todd Wenning
October 8, 2008 Comments (14)
Panic: In economics, acute financial disturbance, such as widespread bank failures, feverish stock speculation followed by a market crash, or a climate of fear caused by economic crisis or the anticipation of such crisis.
-- Britannica Online
Make no mistake -- by this definition, what we've witnessed so far in 2008 is nothing less than a global market panic.
Acute financial disturbance? Freddie Mac and Fannie Mae imploded. Bear Stearns got "rescued" along with AIG (NYSE: AIG), but somehow Lehman Brothers wasn't saved. Money markets "broke the buck," and there was a formal bank run on IndyMac.
Feverish speculation followed by a crash? Our housing bubble fueled excessive borrowing and risky lending practices, resulting in the credit crisis we're now dealing with. The S&P 500 is down 31% year to date, erasing the past five years of market gains.
Climate of fear? U.S. investor sentiment is at record lows, and the CBOE Volatility Index (the "fear index") has posted all-time highs in recent days. No one seems to know where the next shoe will drop.
The list, sadly, could go on.
Don't panic
Of course, no one wants to call this a market "panic." Instead, in most places it's been labeled a "crisis." In fact, the term "panic" hasn't been widely used to describe a market since the Panic of 1907 -- which is unfortunate, because understanding this as a panic has something to teach us.
In the 19th century (the high time for market panics), Yale professor William Graham Sumner defined a panic as:
... a wave of emotion, apprehension, alarm. It is more or less irrational. It is superinduced upon a crisis, which is real and inevitable, but it exaggerates, conjures up possibilities, takes away courage and energy.
In other words, the subprime and credit mess is the "crisis," and the "panic" is the exaggerations and doom-and-gloom language that come with it. We've seen plenty of that in recent months. Three of the world's major financial publications have likened our current economy to the Great Depression more than 250 times so far this year. So please, let's call this market by its proper name: the Panic of 2008.
Fortunately, "a panic," Sumner continued, "can be partly overcome by judicious reflection, by realization of the truth, and by measurement of facts."
Let us be judiciously reflective
So what do the panics of the early 20th century tell us about how we might overcome this one?
The last official panic -- the Panic of 1907 -- shook the U.S. economy to its core. Wall Street brokerages failed, depositors ran on banks, well-known companies went under, and the market's liquidity was in question. (Sound familiar?) In this instance, J.P. Morgan and friends famously put together $25 million to keep the market afloat -- a role now occupied by the Federal Reserve. By 1909, the Dow Jones index had more than recovered from pre-panic highs.
In 1914, the year the Great War began in Europe, the U.S. stock markets actually closed for nearly four months after foreign investors began pulling their money out of U.S. equities en masse to support the war effort. When it reopened, the market was devalued about 30%, but sustained rallies doubled that opening by the end of 1916.
Then, of course, came the Great Depression -- the single most important economic event in U.S. history -- which began with the Crash of 1929 and lasted arguably until the U.S. entered World War II in 1941. In 1932, unemployment hit 24.9%, and more than 9,000 banks failed during the 1930s. And there were no federally insured deposits until the Banking Act of 1933 created the FDIC, so when the bank failed, your money went with it. In fact, Wall Street's very future -- not to mention the economic model of capitalism -- was in question.
For those investors who had both the money and the courage to invest in the 1930s, it paid off. One man famously borrowed money to buy 104 U.S. stocks trading for less than $1 a share in 1939. Talk about investing at the point of maximum pessimism! Four years later, though, his money had quadrupled. His name, of course, was John Templeton.
OK, what's your point?
Judicious reflection, realization of the truth, and measurement of facts all say the same thing: We've seen markets like today's before -- and some far worse. And in every case, the point at which the market has turned irrational or overly pessimistic is precisely the time we long-term investors should have bought equities.
Despite the headlines proclaiming the next Great Depression, this is no Great Depression -- only a panic helped along by the short-term mind-set of the financial industry. Financial media's job is to attract readership by sensationalizing news events, and financial institutions, which are built on commissions and fees, want to keep money moving in and out in order to bulk up their own revenues. So both fan the flames of panic.
Individual investors like us do not have the advantage versus Wall Street when it comes to short-term trading, but we do have longer time horizons. Wall Street focuses on minutes, hours, and days, while we focus on years and decades. And that's what makes their panics a good time for us to buy.
Let's take the most modern example of market irrationality -- the dot-com bubble and subsequent burst -- and see what's happened to some quality names since the S&P 500 was near its low in September 2002.
Company
Returns (9/30/2002-Present)
Cisco Systems (Nasdaq: CSCO)
80%
Oracle (Nasdaq: ORCL)
113%
Schlumberger (NYSE: SLB)
264%
CVS Caremark (NYSE: CVS)
139%
Baxter (NYSE: BAX)
127%
Adobe Systems (Nasdaq: ADBE)
201%
Data provided by Capital IQ. Returns adjusted for dividends.
You didn't need to be a market genius to invest in these names in 2002. They were all well-known to both consumers and investors. All six had been beaten down considerably by the bear market, though, and that downturn presented investors with excellent opportunities to buy great companies at great prices.
Ironically enough, however, the third quarter of 2002 had the fewest equity-based mutual fund assets of the entire post-dot-com bust. Put simply, investors bailed on the market at exactly the wrong time.
It's still scary
Don't get me wrong -- some of the financial headlines we've seen over the past few months are downright frightening. But it's important to not join the panic and to keep a long-term perspective on market panics, booms, crises, and everything in between. In this market, that means you should keep investing, and make sure you're diversified.
At our Motley Fool Stock Advisor investing service, Fool co-founders Tom and David Gardner had a lot of success picking up great companies during the post-dot-com bust. Their long-term focus helped them add names like Amazon.com at a time when the market wanted nothing to do with them -- and their picks are subsequently beating the market by 30 percentage points on average.
They're taking a similar approach now, and count top brand names such as Starbucks among their "best buys" right now. To see what else they're recommending, take a free, 30-day trial. Click here to get started -- there's no obligation to subscribe.
This article was originally published on Sept. 4, 2008. It has been updated.
Todd Wenning panics at the sight of clowns, but at little else. He does not own shares of any company mentioned. The Fool, on the other hand, owns shares of Starbucks, which is a Stock Advisor and an Inside Value pick. Amazon is a Stock Advisor recommendation. The Fool's disclosure policy keeps a steady hand.
Read/Post Comments (14)
http://www.fool.com/investing/general/the-wall-street-panic-of-2008.aspx
By Todd Wenning
October 8, 2008 Comments (14)
Panic: In economics, acute financial disturbance, such as widespread bank failures, feverish stock speculation followed by a market crash, or a climate of fear caused by economic crisis or the anticipation of such crisis.
-- Britannica Online
Make no mistake -- by this definition, what we've witnessed so far in 2008 is nothing less than a global market panic.
Acute financial disturbance? Freddie Mac and Fannie Mae imploded. Bear Stearns got "rescued" along with AIG (NYSE: AIG), but somehow Lehman Brothers wasn't saved. Money markets "broke the buck," and there was a formal bank run on IndyMac.
Feverish speculation followed by a crash? Our housing bubble fueled excessive borrowing and risky lending practices, resulting in the credit crisis we're now dealing with. The S&P 500 is down 31% year to date, erasing the past five years of market gains.
Climate of fear? U.S. investor sentiment is at record lows, and the CBOE Volatility Index (the "fear index") has posted all-time highs in recent days. No one seems to know where the next shoe will drop.
The list, sadly, could go on.
Don't panic
Of course, no one wants to call this a market "panic." Instead, in most places it's been labeled a "crisis." In fact, the term "panic" hasn't been widely used to describe a market since the Panic of 1907 -- which is unfortunate, because understanding this as a panic has something to teach us.
In the 19th century (the high time for market panics), Yale professor William Graham Sumner defined a panic as:
... a wave of emotion, apprehension, alarm. It is more or less irrational. It is superinduced upon a crisis, which is real and inevitable, but it exaggerates, conjures up possibilities, takes away courage and energy.
In other words, the subprime and credit mess is the "crisis," and the "panic" is the exaggerations and doom-and-gloom language that come with it. We've seen plenty of that in recent months. Three of the world's major financial publications have likened our current economy to the Great Depression more than 250 times so far this year. So please, let's call this market by its proper name: the Panic of 2008.
Fortunately, "a panic," Sumner continued, "can be partly overcome by judicious reflection, by realization of the truth, and by measurement of facts."
Let us be judiciously reflective
So what do the panics of the early 20th century tell us about how we might overcome this one?
The last official panic -- the Panic of 1907 -- shook the U.S. economy to its core. Wall Street brokerages failed, depositors ran on banks, well-known companies went under, and the market's liquidity was in question. (Sound familiar?) In this instance, J.P. Morgan and friends famously put together $25 million to keep the market afloat -- a role now occupied by the Federal Reserve. By 1909, the Dow Jones index had more than recovered from pre-panic highs.
In 1914, the year the Great War began in Europe, the U.S. stock markets actually closed for nearly four months after foreign investors began pulling their money out of U.S. equities en masse to support the war effort. When it reopened, the market was devalued about 30%, but sustained rallies doubled that opening by the end of 1916.
Then, of course, came the Great Depression -- the single most important economic event in U.S. history -- which began with the Crash of 1929 and lasted arguably until the U.S. entered World War II in 1941. In 1932, unemployment hit 24.9%, and more than 9,000 banks failed during the 1930s. And there were no federally insured deposits until the Banking Act of 1933 created the FDIC, so when the bank failed, your money went with it. In fact, Wall Street's very future -- not to mention the economic model of capitalism -- was in question.
For those investors who had both the money and the courage to invest in the 1930s, it paid off. One man famously borrowed money to buy 104 U.S. stocks trading for less than $1 a share in 1939. Talk about investing at the point of maximum pessimism! Four years later, though, his money had quadrupled. His name, of course, was John Templeton.
OK, what's your point?
Judicious reflection, realization of the truth, and measurement of facts all say the same thing: We've seen markets like today's before -- and some far worse. And in every case, the point at which the market has turned irrational or overly pessimistic is precisely the time we long-term investors should have bought equities.
Despite the headlines proclaiming the next Great Depression, this is no Great Depression -- only a panic helped along by the short-term mind-set of the financial industry. Financial media's job is to attract readership by sensationalizing news events, and financial institutions, which are built on commissions and fees, want to keep money moving in and out in order to bulk up their own revenues. So both fan the flames of panic.
Individual investors like us do not have the advantage versus Wall Street when it comes to short-term trading, but we do have longer time horizons. Wall Street focuses on minutes, hours, and days, while we focus on years and decades. And that's what makes their panics a good time for us to buy.
Let's take the most modern example of market irrationality -- the dot-com bubble and subsequent burst -- and see what's happened to some quality names since the S&P 500 was near its low in September 2002.
Company
Returns (9/30/2002-Present)
Cisco Systems (Nasdaq: CSCO)
80%
Oracle (Nasdaq: ORCL)
113%
Schlumberger (NYSE: SLB)
264%
CVS Caremark (NYSE: CVS)
139%
Baxter (NYSE: BAX)
127%
Adobe Systems (Nasdaq: ADBE)
201%
Data provided by Capital IQ. Returns adjusted for dividends.
You didn't need to be a market genius to invest in these names in 2002. They were all well-known to both consumers and investors. All six had been beaten down considerably by the bear market, though, and that downturn presented investors with excellent opportunities to buy great companies at great prices.
Ironically enough, however, the third quarter of 2002 had the fewest equity-based mutual fund assets of the entire post-dot-com bust. Put simply, investors bailed on the market at exactly the wrong time.
It's still scary
Don't get me wrong -- some of the financial headlines we've seen over the past few months are downright frightening. But it's important to not join the panic and to keep a long-term perspective on market panics, booms, crises, and everything in between. In this market, that means you should keep investing, and make sure you're diversified.
At our Motley Fool Stock Advisor investing service, Fool co-founders Tom and David Gardner had a lot of success picking up great companies during the post-dot-com bust. Their long-term focus helped them add names like Amazon.com at a time when the market wanted nothing to do with them -- and their picks are subsequently beating the market by 30 percentage points on average.
They're taking a similar approach now, and count top brand names such as Starbucks among their "best buys" right now. To see what else they're recommending, take a free, 30-day trial. Click here to get started -- there's no obligation to subscribe.
This article was originally published on Sept. 4, 2008. It has been updated.
Todd Wenning panics at the sight of clowns, but at little else. He does not own shares of any company mentioned. The Fool, on the other hand, owns shares of Starbucks, which is a Stock Advisor and an Inside Value pick. Amazon is a Stock Advisor recommendation. The Fool's disclosure policy keeps a steady hand.
Read/Post Comments (14)
http://www.fool.com/investing/general/the-wall-street-panic-of-2008.aspx
Friday 6 February 2009
Investing for income: Dividend yield and Dividend cover ratio
Investing for income: Where savers can escape zero interest rates
As deposit accounts pay next to nothing, dividends on shares seem attractive. But you'll need to choose carefully.
By Richard Evans Last Updated: 3:06PM GMT 06 Feb 2009
The Bank of England's decision to cut interest rates to 1pc means that many savers will now receive virtually no return from their money. As a result, many will be looking for alternative homes for their nest eggs. Among the options are dividend-paying shares.
"Cash-rich individuals will be scouring the stock market in search of a decent income from their savings," according to DigitalLook.com, the private investors' website.
Many large companies pay decent dividends once, twice or even four times a year. The yield – the dividend expressed as a percentage of the share price – is often attractive by comparison with interest rates on savings. There are now a wide range of blue chip companies yielding 4pc or more, DigitalLook said.
When comparing a dividend yield with the interest rate on a savings account, however, certain warnings should be borne in mind.
As deposit accounts pay next to nothing, dividends on shares seem attractive. But you'll need to choose carefully.
By Richard Evans Last Updated: 3:06PM GMT 06 Feb 2009
The Bank of England's decision to cut interest rates to 1pc means that many savers will now receive virtually no return from their money. As a result, many will be looking for alternative homes for their nest eggs. Among the options are dividend-paying shares.
"Cash-rich individuals will be scouring the stock market in search of a decent income from their savings," according to DigitalLook.com, the private investors' website.
Many large companies pay decent dividends once, twice or even four times a year. The yield – the dividend expressed as a percentage of the share price – is often attractive by comparison with interest rates on savings. There are now a wide range of blue chip companies yielding 4pc or more, DigitalLook said.
When comparing a dividend yield with the interest rate on a savings account, however, certain warnings should be borne in mind.
- The first point is that your capital is not guaranteed; share prices can and do fall.
- Secondly, dividends can be cut drastically or axed altogether with little or no notice – and this can lead to a fall in the share price as well.
So just buying the shares with the highest dividend, without researching how safe that dividend is, can be a mistake.
"There are now a huge range of high yielding blue chips but it is best to look for a dividend that is less likely to be cut even if that company's profits fall," said Andy Yates of DigitalLook.
The long-established measure of a dividend's reliability is dividend cover: the ratio of net profits to the size of the dividend payout.
Generally, a cover ratio of at least two – meaning that the company has twice as much net earnings as the amount earmarked for dividend payments – is considered a strong indicator.
A high yield alone is not synonymous with a decent dividend.
Shares in Land Securities yield 9.5pc, for instance, but this reflects investors' concerns about the property market.
There are companies that analysts expect to have a good chance of sustaining their dividends. These include AstraZeneca, the drug maker, International Power and Sage Group, the software firm, according to DigitalLook.
Mr Yates pointed out that an increasing number of companies, including Xstrata, the miner, and JD Wetherspoon, the pubs group, have announced over the past few weeks that they are going to skip their dividends.
But careful research should enable investors to sidestep enough potential problems to build up a well diversified high-income investment portfolio, he added.
"If you carry out thorough research and pick the right shares, you will get better value for your cash than by leaving it in a savings account."
The table below is a selection of FTSE100 companies with a forecast dividend yield of at least 4pc and a dividend cover of two or more.
Source: DigitalLook.com. Based on averaged forecasts from analysts at over 20 investment banks and stockbroking firms as of Feb 5 – forecasts on dividends excludes all UK listed banks
Data as on 05/02/09 at 12.30
Forecast
Forecast
Name
Forecast Dividend Yield...Forecast Dividend Cover
Prudential
5.80% ...4.1
WPP Group
4.20% ...3.4
Next
4.70%...2.8
FirstGroup
7.40% ... 2.6
InterContinental Hotels Group
5.00% ... 2.6
International Power
4.80% ... 2.6
Thomas Cook Group
6.30% ... 2.4
AstraZeneca
5.60% ... 2.4
Rolls-Royce Group
4.60% ... 2.4
Whitbread
4.70% ... 2.3
Smiths Group
4.00% ... 2.2
Aviva
10.60% ...2.1
Reed Elsevier
4.20% ... 2.1
Sage Group
4.10% ... 2.1
TUI Travel
5.30% ... 2
Imperial Tobacco Group
4.20% ... 2
http://www.telegraph.co.uk/finance/personalfinance/investing/shares/4537565/Investing-for-income-Where-savers-can-escape-zero-interest-rates.html
Savings: Where should I put my money?
Savings: Where should I put my money?
Savers have had a rough time of late, but they really shouldn't despair.
By Harry Wallop, Consumer Affairs Editor Last Updated: 7:50PM GMT 05 Feb 2009
Yes, savings rates are the lowest since the 17th Century. But that doesn't mean you should not lock your hard-earned money into iron chests and place into your cellar, as Samuel Pepys did during the Great Fire of London.
For starters there is the stock market. Yes, really. Unless you genuinely believe capitalism is dead, the stock market should be considered. It has consistently outperformed every other asset class, including property during the last century.
Only last week, I topped up the Wallop children's child trust funds – confident that when they are allowed to touch the money, it will be worth a great deal more than if I put the money into Premium Bonds.
Shares are likely to tread water for the next year or two, but in the intervening period most companies should pay out a dividend to their shareholders.
BP, for instance, intends to pay a dividend of £7.70 for every £100 invested. Okay, it is conceivable in these unprecedented times that this oil giant will cut payments to shareholders, but it seems a risk worth taking.
If you don't have the luxury of time – a prerequisite for investing in shares – there are other options.
Most savings accounts pay out less than 1.5 per cent, but there are banks desperate for your money and prepared to offer unprofitable (for them) rates if you scout around.
Standard Life Bank's Easy Access ISA has a rate of 3.5 per cent – a remarkable rate of return, considering Bank rates have hit just 1 per cent.
Or you can always turn to the last refuge of the desperate: gold, which is proving an impressive, if volatile, performer during the financial crisis.
Either buy the stuff via gold exchange traded funds, which trade on the stock market, or pop down to a bullion dealer and buy a bar of the hard stuff.
You can then store it in your cellar.
http://www.telegraph.co.uk/finance/economics/interestrates/4528415/Savings-Where-should-I-put-my-money.html
Savers have had a rough time of late, but they really shouldn't despair.
By Harry Wallop, Consumer Affairs Editor Last Updated: 7:50PM GMT 05 Feb 2009
Yes, savings rates are the lowest since the 17th Century. But that doesn't mean you should not lock your hard-earned money into iron chests and place into your cellar, as Samuel Pepys did during the Great Fire of London.
For starters there is the stock market. Yes, really. Unless you genuinely believe capitalism is dead, the stock market should be considered. It has consistently outperformed every other asset class, including property during the last century.
Only last week, I topped up the Wallop children's child trust funds – confident that when they are allowed to touch the money, it will be worth a great deal more than if I put the money into Premium Bonds.
Shares are likely to tread water for the next year or two, but in the intervening period most companies should pay out a dividend to their shareholders.
BP, for instance, intends to pay a dividend of £7.70 for every £100 invested. Okay, it is conceivable in these unprecedented times that this oil giant will cut payments to shareholders, but it seems a risk worth taking.
If you don't have the luxury of time – a prerequisite for investing in shares – there are other options.
Most savings accounts pay out less than 1.5 per cent, but there are banks desperate for your money and prepared to offer unprofitable (for them) rates if you scout around.
Standard Life Bank's Easy Access ISA has a rate of 3.5 per cent – a remarkable rate of return, considering Bank rates have hit just 1 per cent.
Or you can always turn to the last refuge of the desperate: gold, which is proving an impressive, if volatile, performer during the financial crisis.
Either buy the stuff via gold exchange traded funds, which trade on the stock market, or pop down to a bullion dealer and buy a bar of the hard stuff.
You can then store it in your cellar.
http://www.telegraph.co.uk/finance/economics/interestrates/4528415/Savings-Where-should-I-put-my-money.html
IMF confident in ability to aid crisis victims
IMF confident in ability to aid crisis victims
By Chris Giles in Davos
Published: January 30 2009 13:37 Last updated: January 30 2009 13:37
The International Monetary Fund expressed confidence on Friday that its members would ensure the fund remains adequately funded and able to support any country that might be hit by the global financial crisis.
Speaking to the Financial Times at the World Economic Forum in Davos, John Lipsky, the deputy managing director of the IMF, said the institution was seeking to double its financial firepower to come to aid any country that needs its support in the downturn.
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HSBC pushes for G20-style business grouping - Jan-30
It has already received a pledge of $100bn of contingent reserves from Japan last November and is seeking another $150bn to enable it to lend to countries facing sudden capital flight.
“I am very confident our membership will not allow the situation to emerge where the fund has insufficient resources to fulfil its mandate and responsibilities,” Mr Lipsky said.
Predictions from the Institute of International Finance this week showed the net capital flows to emerging are likely to fall to only $165bn this year, less than a fifth of the level two years ago with banks making a net withdrawal of capital.
Such potential repatriation of cash will place many emerging economies in a vulnerable position, especially those countries with large current account deficits who rely on large capital inflows, Mr Lipsky said.
The IMF wants to make its finances bullet proof so that it can lend to any emerging economies that experience a sudden withdrawal of funds.
In recent weeks, attention has been drawn to the possibility of Southern European countries, Ireland and the UK being vulnerable to a sudden flight of international capital.
Although the IMF does not see signs of imminent need to get involved in any of these countries, officials are making contingency action plans should the need arise. It thinks that the better its finances, the more confidence it can bring to markets, making any intervention a much more remote possibility.
Mr Lipsky downplayed the possibility of the financial crisis morphing into an external financing crisis for large industrial countries. He continued to urge countries to act quickly with necessary reforms to remove uncertainty from financial institutions and to provide stimulus for their economies. “In current circumstances it is preferable to commit errors of commission rather than omission,” he said.
Mr Lipsky reiterated the fund’s pessimistic view of economic prospects in the world for 2009, which is likely to record the slowest rate for world output growth since the second world war.
But he stressed there were forces for recovery – lower energy prices, China’s expected growth, the continued spending of oil exporting countries even as energy prices fall, the lack of leverage of non-financial companies – which would help the world emerge from recession in 2010.
Refusing to discuss the aggressive comments of Tim Geithner, the US Treasury secretary, regarding the Chinese currency, he nevertheless pointed to the failure of all the world’s leading economies to address trade imbalances before they contributed to the current economic crisis. He said the policies agreed by the US, eurozone, China, Saudi Arabia and Japan, in 2006 and 2007 to deal with global imbalances “were applied with insufficient vigour”.
In this respect he praised the Chinese stimulus package as something the IMF was counting on to restore global growth. “The [Chinese] policies put in place are consistent with its long-term interests,” he said because they would encourage domestic expansion rather than the previous focus on exports.
http://www.ft.com/cms/s/0/f1c9c6d8-eed1-11dd-bbb5-0000779fd2ac,dwp_uuid=261fcad4-db24-11dd-be53-000077b07658.html
By Chris Giles in Davos
Published: January 30 2009 13:37 Last updated: January 30 2009 13:37
The International Monetary Fund expressed confidence on Friday that its members would ensure the fund remains adequately funded and able to support any country that might be hit by the global financial crisis.
Speaking to the Financial Times at the World Economic Forum in Davos, John Lipsky, the deputy managing director of the IMF, said the institution was seeking to double its financial firepower to come to aid any country that needs its support in the downturn.
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It has already received a pledge of $100bn of contingent reserves from Japan last November and is seeking another $150bn to enable it to lend to countries facing sudden capital flight.
“I am very confident our membership will not allow the situation to emerge where the fund has insufficient resources to fulfil its mandate and responsibilities,” Mr Lipsky said.
Predictions from the Institute of International Finance this week showed the net capital flows to emerging are likely to fall to only $165bn this year, less than a fifth of the level two years ago with banks making a net withdrawal of capital.
Such potential repatriation of cash will place many emerging economies in a vulnerable position, especially those countries with large current account deficits who rely on large capital inflows, Mr Lipsky said.
The IMF wants to make its finances bullet proof so that it can lend to any emerging economies that experience a sudden withdrawal of funds.
In recent weeks, attention has been drawn to the possibility of Southern European countries, Ireland and the UK being vulnerable to a sudden flight of international capital.
Although the IMF does not see signs of imminent need to get involved in any of these countries, officials are making contingency action plans should the need arise. It thinks that the better its finances, the more confidence it can bring to markets, making any intervention a much more remote possibility.
Mr Lipsky downplayed the possibility of the financial crisis morphing into an external financing crisis for large industrial countries. He continued to urge countries to act quickly with necessary reforms to remove uncertainty from financial institutions and to provide stimulus for their economies. “In current circumstances it is preferable to commit errors of commission rather than omission,” he said.
Mr Lipsky reiterated the fund’s pessimistic view of economic prospects in the world for 2009, which is likely to record the slowest rate for world output growth since the second world war.
But he stressed there were forces for recovery – lower energy prices, China’s expected growth, the continued spending of oil exporting countries even as energy prices fall, the lack of leverage of non-financial companies – which would help the world emerge from recession in 2010.
Refusing to discuss the aggressive comments of Tim Geithner, the US Treasury secretary, regarding the Chinese currency, he nevertheless pointed to the failure of all the world’s leading economies to address trade imbalances before they contributed to the current economic crisis. He said the policies agreed by the US, eurozone, China, Saudi Arabia and Japan, in 2006 and 2007 to deal with global imbalances “were applied with insufficient vigour”.
In this respect he praised the Chinese stimulus package as something the IMF was counting on to restore global growth. “The [Chinese] policies put in place are consistent with its long-term interests,” he said because they would encourage domestic expansion rather than the previous focus on exports.
http://www.ft.com/cms/s/0/f1c9c6d8-eed1-11dd-bbb5-0000779fd2ac,dwp_uuid=261fcad4-db24-11dd-be53-000077b07658.html
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